Q&A – Neemat Frem

Neemat Frem is the president of the Association of Lebanese Industrialists, chief executive officer at INDEVCO Group and founder of technology service provider Phoenix Machinery. He recently sat down with Executive to look back at Lebanese industry since the 2006 war and to discuss the sector’s future needs.

E: It has been five years since the 2006 war. How has the sector fared since suffering so much damage?

If you look at the numbers over the last five years, the industrial sector was able to grow at a rate of 20 percent per year despite the2006 war. This is something exceptional. This growth was due mainly to the entrepreneurial craft of the Lebanese and relative stability since 2006, and probably a sense of optimism.

The number one exporters have traditionally been the printing sector and then it moved towards food products, and then lately, in the last two years, we have been witnessing a pick up in the electro-mechanical sector, with steady growth in what has always been number two, the jewelry sector. So the number one today is the electro-mechanical sector, in terms of exports.

E: Has the government assisted in reconstruction efforts?

No, actually this is the problem. We have more than 50 cases of plants completely bombed out and up to now we still don’t have the right support. On the contrary, we are having a lot of problems. Even tax holidays we don’t have. Really we have not seen any support for industrialists.

E: And was there support promised?

Yes, it has been promised. We have had special laws being worked on in this direction but nothing has materialized. At this minute, we have not yet had any support.

E: With the new minister, do you think this might change?

We hope so. I am demanding this with a louder voice more and more. But still, maybe it is dependent on the environment we were living in the last few years where we had a freeze basically of any decision because of this paralysis in government.

E: On that note, what should be the priorities of the new minister?

I have been working very closely with this minister because he is an industrialist and a close friend. The priorities for us will always be creating the proper industrial cities in Lebanon where we will have enough land and enough infrastructure in areas where we can develop and grow — where we will have cheap lands, availability of water, of roads and of labor. So we have been demanding these zones this last year and now will be even more. And today there is enough awareness of this issue. In the ministerial statement, it has been noted about the importance of making industrial cities.

E: What does that entail?

Industrial cities are locations in the five muhafazas (regions); these lands will be first of all cheap and will have proper development. As you make housing developments or tourist developments, we would like industrial developments for those lands where you would have local power generation, where you can create a microcosm for industrialists in Lebanon instead of waiting for the development of the rest of the country, because you know that we are suffering mainly from the fact that the industrial sector has been growing but infrastructure is not following. The whole country did not follow; the administration did not follow; even our laws did not follow. They need to be rejuvenated.

E: And how far along are these efforts?

There are two tracks on this. Track one: public administration. There is a law for forming the body to administer the industrial areas. This is what is meant in the ministerial statement. I hope this will be formed very quickly and headed by an industrial or an experienced engineer. When established, this body will have the duty to come up with geographical zones where you need to have the right infrastructure. So it’ll be a development exercise. Lebanon is known to have a slow pace for public administration so we need to also create another track that has a private initiative with the right investment to create these zones, and possibly have a private-public initiative where maybe you would have freehold lands to be developed by the private sector. But again, all of this is tied somehow to stability and the degree of optimism in Lebanon.

E: Lebanon’s industry is very concentrated in Mount Lebanon. Have the outside areas been neglected?

No, I would say that instability has been traditional in the south and other parts of Lebanon and is one of the biggest reasons for this. Also, the infrastructure availability has been ahead in Mount Lebanon compared with other areas. Now, what you are seeing in the last 15 years is that Mount Lebanon is having infrastructure problems whereas you have power plants in the south and the north, along with land availability in the south, north and Bekaa. So I foresee that if we are able to have enough stability in these areas they will be very promising for the industrial renaissance of Lebanon. At the same time, we should not forget about Mount Lebanon.

E: Growth in exports has stagnated so far this year. Are you concerned about the decline?

I am concerned, for sure. The whole economy in Lebanon is a reason for concern. I’m very much worried that we won’t achieve the growth that we want to achieve.  Lebanon needs to grow at a rate of 6 or 7 percent a year; it’s not a luxury. We’re not a country that can grow at 1 or 2 percent and consider that acceptable. The focus of the whole cabinet should be on re-stimulating growth, especially that the area had all these problems. This could have been an opportunity for us. We should have been able to provide the needed stability.

E: Related to that, how has the regional upheaval affected Lebanese industry?

To tell you the truth, it has affected it as shown in the exports but not to a high extent. I consider the problems coming from a major consumer confidence issue in Lebanon. Today there is a slow-down in consumption. The countries that are still being effected — Libya and Yemen — we don’t sell much to. The Syrian market is affecting us, as we sell 5 percent to Syria.

E: The industrial sector doesn’t benefit from tax incentives as do others in Lebanon. Is this a problem?

Our tax laws need to be revised to incentivize the industrial sector. We need to have special tax holidays. This is how you attract foreign direct investment. Now we have a decree issued by [former Finance] Minister Rayya Hassan when she was a caretaker where we would have a 30 percent tax exemption for five years, which is quite an interesting initiative. We would like to see it implemented. All profits generated from exports should be tax exempt. If we do this, we will stimulate exports and hence increase the goods leaving the country. Right now we have a flat rate of 15 percent on profit. And another 10 percent as a distribution tax. I would think that is high compared to what we are receiving as services. The value proposition is wrong. I tend to agree with those schools that say that we should increase consumption taxes and decrease profit taxes. I think it’s easier to control and better for creating growth.

E: How do you feel about efforts to join the World Trade Organization (WTO)?

I think we’ve done much more than we should have done. I think we implemented it in the wrong way and it affected our productive sector. I don’t see any advantage in joining the WTO. We need to make sure that our productive sector isn’t hurt. In 2001, we did destroy our productive sector in the name of reducing all kinds of customs duties and opening at large our markets without providing the right manufacturing costs and providing the right environments to be productive.

E:  So you don’t see liberalization as such a bad thing as long as the infrastructure is there?

This is the issue. Lebanon is so liberalized, more than any country I know of in the world, including the United States. This is not acceptable when you have such high manufacturing costs. We need to improve our manufacturing competitiveness in line with improving our manufacturing costs.

E: Small industries dominate the market. Do you see a decline in economies of scale as a problem in Lebanon?

What we see in Lebanon is a shifting from heavy to lighter industries. But this does not mean we should only have small industries. I believe large industries have a role to play. I think there are sectors that need to have more large industries. This is why we as an association have been working on making special laws to incentivize mergers of small companies. I believe personally that in the food sector it warrants to have one or two big entities which would allow the opening of new markets in the world, developing new products, strong marketing, to claim back the hummus, the falafel, you see? I would like to see the Nestle of Lebanon. Imagine Switzerland without Nestlé —without their food industry. We need this in Lebanon and we can have it and it is imminent. I tell you, this is a sector that needs to be developed.