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 discuss the state of the industrial sector in the face of regional turmoil, high energy costs and the economic downturn in Lebanon.
Let’s start off with some statistics. Lebanese industry had five years of strong growth, but 2011 and 2012 were slower, reflected in lower exports, a drop in machinery imports and also fewer bank loans to the sector. What do you attribute the drop to?
No doubt the first half of 2011 was tough… basically, Lebanese industry doubled in size in five years. In 2011, it was not a slow down in growth but a complete stop and it was the second half of the year that did all the damage. This year we started to regress, about 6 percent below 2011 — I am using exports as an indicator. Now, what do I attribute this fall to? What happened with the flare-up of oil prices was a major handicap to the Lebanese economy, and I can’t stress enough the fact that our economy is inversely correlated to the price of a barrel of oil, as we have no other form of energy. This is number one. The second factor is the turmoil in the Levant today. Also, a loss of confidence by the Lebanese consumer, and this has affected patterns of consumption, no doubt about it, plus the fact we missed our tourism season, which affected our local market.
Are you optimistic about the rest of the year?
I think 2012 will end as a tough year and I am personally worried, not only for the situation of industrialists but also because of the condition of public finances and the pressure it puts on the private sector. Our indicators are not good, to say the least. I know there is a major struggle within the Cabinet on the level of taxation policy and strategy, but I tell you with such public financing it is hard not to expect that the economic environment will be [negatively affected].
What is your stance on the draft law for a 50% tax cut on exports?
It would help for sure but we asked for 100 percent as that would really change things and attract foreign capital while enticing non-Lebanese industrialists to relocate here. But we ended up with 50 percent. Again, the problem is overall profitability, and it is not easy to be profitable today and to feel the effect as (the tax reduction is based on) profit tax rebates. To tell you the truth, we are not looking today at incentives from the public sector, but are worried about what kind of handicaps we will experience in the coming years due to the level of deterioration in the public sector. What sort of problems are we going to have due to this changing situation? This is my worry today.
What contingencies are in place?
The only contingency Lebanese had for a long time was to relocate, but this time I think the Lebanese are intelligent enough to do it in a flexible way, to stay in Lebanon and have new deployments in emerging countries, like in Africa. I see it more than exports in the coming era. I see Lebanese industrialists having satellite operations to protect their export markets.
One contingency that could be prepared for is if the border with Syria is completely closed.
I doubt it will be completely shut. So far it hasn’t, despite everything. If it is shut, our research shows that the two countries that are the hardest and most expensive to reach are Jordan and Iraq, as [there are] major land freight costs. The others, well, [there will be] a delay in time but costs are almost the same, to Saudi Arabia, Egypt, the United Arab Emirates and Kuwait. Regarding Europe it will be open, and the Balkans, which we… export to by land, as we have a RORO (roll-on-roll-off) vessel to Turkey and from there continue north.
Is the RORO vessel between Mersin (in Turkey) and Tripoli running effectively?
It is already in operation, twice a week. Again, for Iraq that is a way to get there, Kurdistan especially, but it is expensive, double the price.
What prices are we talking about?
It is around $4,000 to $5,000 for a 40-foot container. The problem is the land cost, this is why Iraq and Jordan are the problem. The Jordanian market is up north, not in Aqaba, so you need to drive there.
If we look at the situation in Syria it is obviously affecting us here, and in Syria companies are lacking raw materials and workers. Could Lebanese companies step in to fill the gap?
They already are, first of all in the Lebanese market as competition from Syria is decreasing by the day.
So taking up that slack is primarily for the Lebanese market, not replacing Syrian goods say sold in the Gulf? Could you see that coming?
The Syrians were never big competitors with Lebanese products. I foresee however that once everything settles down there will be a construction boom and a big market for Lebanese cement and other products.
Yes, figures are already being thrown around of $15 billion to $20 billion needed for Syria’s reconstruction, and this could be good for Lebanese business…
No doubt about it. Since the start of the Arab Spring there have been a lot of opportunities the Lebanese could seize, but our history has shown we don’t know how to seize these opportunities. And we haven’t till today. Will we this time? Only time will tell.
Is this due to the divergence between the private and public sector, where the private sector is left to do its own thing?
Mostly because the political situation needs to [fit] an agenda to seize opportunities for economic growth. But today, the government has other priorities and this is a problem.
…such as industrial zones talked about for years and years?
Forget about it, there is a complete paralysis on the economic zones. Today we are talking about developing private industrial parks and have suggested creating private power plants, as industrialists, and selling to the grid at the same contract and conditions as the government signed with the Turkish power ships that are coming (a three-year, $390 million contract to provide 270 megawatts); this is nothing but fair. What the government gave to a Turkish company should be starting conditions for Lebanese industrialists on the ground to sell electricity to the grid. We have given this proposal to the Industry Minister to put it on the agenda of the Cabinet, but we’ve had no answer.
Where would you set up such zones?
The Zahle area, near Saida or Batroun. You can’t go further than this.
Are there any success stories you’d like to highlight?
We are still surviving in Lebanon, which is a success story and still importing machinery. Okay, machinery imports have decreased by 12 percent this year, which is a leading indicator of growth in the sector, but for me it is quite an achievement. In other terms, in 2012 the sector will import almost $180 million to $200 million of new machines, and this goes straight to the expansion of the sector.