The year 2004 was one of mixed feelings for Lebanese industrialists. The global energy crisis sent crude prices rocketing to a record $55.17 on the New York Mercantile Exchange, battering a local industry already groaning under prohibitive production costs – considered the highest in the region – making them even less competitive. Lebanese industrialists were forced to pay $400 for the ton of diesel, while their regional counterparts were paying a shade under $200 for the ton.
Nonetheless, despite all this, 2004 was the year in which Lebanese industrialists were still able to increase exports by 43.5% during the first nine months of 2004 compared to the same period in 2003 – marking a new export era for the sector.
However, the government has, yet again this year, persisted in believing that the service and tourism sectors were the only engines of economic recovery and has once more refused to set a clear an effective industrial policy, reduce infrastructure costs and ease labor laws.
A prime example was its inefficient handling of Electricité du Liban (EDL), forcing local industry to pay a hefty 13 cents per kilowatt hour, compared to 3 cents in Egypt, 3.2 cents in Saudi Arabia, 3.7 cents in Syria, 5 cents in the UAE, 6.4 cents in Jordan, and 6.5 cents in Turkey. Add this to the high costs of labor, land, industrial components and energy, and the reasons why Lebanon’s industrial sector is still the most uncompetitive in the region are clear. This is reinforced when statistics from the Lebanese Industrialists Association (LIA) point that the cost of production, including the cost of energy, has increased by more than 37% since 2000. And to make matters worse, because of the continuously spiraling debt, local banks’ high interest rates on loans has once again made it difficult this year for industrialists to access much needed money to invest in productivity.
To help relieve the pressure caused by the energy crisis, in the second quarter of 2004 the government promised industrialists to lower their electricity bill by reducing the utility’s price from 13 cents per kilowatt hour to 6.6 cents. As of today, this promise has still not been kept.
Export growth
According to figures from the ministry of industry, industrial exports totaled $1.087 billion for the first nine months of the year compared to $757 million and $624.4 million for the same periods in 2003 and 2002, respectively – a 43.5% increase over 2003 and a 74% increase over 2002 (see box). The main reasons for this substantial increase in industrial exports, which represents approximately 95% of total national exports, can be attributed to the ever-strengthening euro versus the dollar – making Lebanese products more attractive to Europe – and the opening of the American fueled Iraqi market.
But these reasons are not solid enough to anchor a future success of the country’s industrial sector since they are neither orchestrated by the Lebanese government nor controlled by the Lebanese industrialists. However, these events have opened a narrow window of opportunity for the industrial sector in 2004.
Raising quality
Industry in Lebanon, which represents approximately 20% of the gross domestic product, can never produce in large quantities, due to the restricted manpower and the high costs of production, and thus can never compete with regional and Asian countries. However, the potential behind Lebanon’s industry lies within its ability to produce quality products, with a high added value such as agro-food, wine, software, jewelry, furniture or high-end garment, in order to target regional and international niche markets. And if there is one main element to be remembered for 2004, it would be the industrialists’ sudden awareness to raise the quality of its products through quality control mechanisms.
Economists agree that the competitive advantage of an industry comprises two-thirds of macro-economic reasons and one-third on the ability of industrialists to adapt to its environment. And since the government of Lebanon has not yet shown signs of its willingness to counter-balance the disadvantageous macro-economic factors, 2004 was the year in which industrialists started to talk about the cost of not having quality controls or conformity assessment.
Conformity assessment is a tool that has been used by many industrial nations worldwide not only to cut the hidden costs of industrial rejects and increase efficiency through vocational training of employees, but also to penetrate markets with high product regulations and standards. And with the emergence of regional free trade agreements, such as the Euro-Med Agreement and the Greater Arab Free Trade Agreement (GAFTA), as well as Lebanon’s expected accession to the World Trade Organization, it has become essential for local industrialists to demonstrate the conformity of their products if they want to sell worldwide, or even keep a decent local market share.
The EU Association agreement with Lebanon, signed in June 2002, calls for the gradual reduction in Lebanese tariffs on EU industrial products over a twelve-year period. This period started following the entry into force of the agreement trade provisions with a five-year grace period. Thus, tariffs will be reduced from six years to twelve, when they will all be zero. On the other hand, EU markets have been duty and quota free to Lebanese industrial products since the 1977 Cooperation Agreement.
Regarding agricultural processed products (agro-industry), Lebanon received a special treatment that no other EU-Mediterranean partner enjoyed: a total exemption on the industrial element of all exported agricultural processed products in addition to a total exemption on the agricultural element of 77 similar products as well as a quota free system. In return, Lebanon will benefit of a five-year grace period after which it will progressively reduce its custom tariffs on the European processed agricultural products imported over a twelve-year period. This dismantling will be complete as regards the products that are subject to a 5% tariff and will be reduced to 30% for the other products. Such an agreement would, in normal cases, be very beneficial for Lebanon since the 500 million strong European markets is completely open to Lebanese produce.
However, one problem emerges: very few Lebanese producers can export towards Europe since an overwhelming majority cannot meet the European standards. And this brings along another problem: if Lebanese producers cannot secure new markets, and tariffs on similar imported products from EU or Middle Eastern countries are to be decreased, then industrialists will soon be facing one of the fiercest competition on their home turf, and many will lose. However, if the quality of products is raised and international standards are met, then not only would Lebanese products be able to enter into the European market, but they will also be more attractive regionally and locally.
This concept has been known by local industrialists for some time now, but very few have undertaken the difficult task of raising the quality of products.
Financing and investments
Nevertheless, when the statistics for imported industrial machinery and equipment are analyzed, one can see that a new trend is taking place. Up to September 2004, some $106.8 million worth of industrial machinery and equipment was imported into Lebanon – a 36.5% increase compared to the same period last year when only $78.2 million was imported. Out of the total industrial machinery and equipment imports, 27.3% came from Italy, 25.8% from Germany, 6.4% from China, 4.8% from the USA, 4.1% from Taiwan, 3.8% from France and 3.4% from Switzerland.
The relative improvement in industrial investments has contributed to the value added creation over the first nine months and fits within the context of the significant needs for enhancing the output and quality of the productive sector.
But when other statistics show that Lebanese banks have granted just a trivial $34 million in loans to the industrial sector in the first six months of 2004 because industrialists are afraid to borrow money at the current high interest rates, then how can the industry sector modernize to survive? How can the comparative advantage of the Lebanese brainpower put its thoughts into action without having quick access to liquidity?
A survey conducted in early 2003 by the Chamber of Commerce, Industry and Agriculture of Beirut and Mount Lebanon (CCIAB) to reveal industrialists’ perception of problems and hurdles that impair their activity shows that a striking 54% of respondents ranked expensive bank credit at the top of the list of financing problems industrialists have to contend with. 29% of the respondents believed that limited access to subsidized financing was the main financing problem, while 15% believed the main financing problem to be that bank credit requires excessive collateral.
It is true that industrialists have been very creative in finding new sources of financing and that there are many new financing programs that banks have implemented with the help of the European Union Commission in Lebanon and the European Investment Bank, but one of the biggest problems that exists today is the fact that there are very few investors which are willing to risk investing in a sector that is not on the top of the government’s agenda and in a country without an independent judicial system that fosters investments.
Over the last 10 years, local manufacturers have invested just over $1 billion to improve output – a figure which is inconsequential when the sector’s potential is put in perspective.
At the same time, statistics from the Investment Development Authority of Lebanon (IDAL) also show how the government’s view of a Lebanon that caters only to services and tourism has hurt the industrial sector: out of the $1 billion investments that went through IDAL between the 2003-2004 period, only 0.3% was invested in industry, 0.4% in the agro-industry and 1% in the technology industry.
Prospects
The potential behind Lebanon’s industrial sector lies within its ability to create high added value products fit for export. For this reason, industrialists’ quest to raise the quality of products will speed up throughout 2005 due to targeted programs initiated by the EU Commission (see box). However, the productive sector will not be able to maximize its returns to the national economy without a long-term industrial plan set by the government. The government has to realize that controlling Lebanon’s spiraling national debt doesn’t only depend on cutting expenditure costs, but also by boosting productivity. According to the latest industrial figures from the Central Administration of Statistics, there were 824 newly registered establishments in 2003, with a working capital of LL178,902 million, creating 6,721 new jobs. It is anticipated that some 10,000 new jobs will be created by the industry sector in 2004. The Lebanese Industrial Association is confident that if the government sets up an equipped industrial park, where infrastructure and natural gas is available and where one can obtain a building permit in adequate time, then industrialists can easily create some 15,000 to 20,000 jobs per annum and increase exports to $3 billion within three years.
(Box) The question of the EU
To help fill a gap and speed up banks’ loaning activity to the industrial sector’s thirst to raise quality, the EU Commission in Lebanon began a new 15 million euro program in October 2004 called Quality Project and will re-activate another one – the European Lebanese Center for Industrial Modernization (ELCIM) – in the first quarter of 2005.
The four-year quality project will seek to start the development of the conformity assessment institutional chain in Lebanon and aims to improve competitiveness and access to Lebanese products to international markets and ensure an improvement of consumer protection. The project includes three main components: to support the government in the definition of a legislative and regulatory framework; support the development of institutions which have an essential role in analyzing the quality and conformity of products; raise the awareness of enterprises to make them adopt better practices for improving product quality.
The ELCIM project, which will be known as ELCIM II, is a program initiated for the support of small and medium sized industrial enterprises and hotels in order to develop their performances and promote their products to achieve international standards. Their services involve Technical Assistance and Financial Assistance. The Technical Assistance begins with a free diagnosis and could go as far as the action plan and the implementation phase.
As for the Financial Assistance, ELCIM provides advice on long-term financing and capital investment, and facilitates the financing process through its prominent contacts with the relevant bodies. The European Investment Bank has set up a 60 million euro investment fund with ELCIM, which will be distributed, under certain terms, via 11 local banks.
(Box) A good year for the export 2004
The industrial sectors that gained the most ground during the first nine months of 2004:
Prepared foodstuffs producers with a 3.8% increase to $108 million.
Mineral products producers with a 107.5% increase in export to $83 million.
Optical instruments and apparatus producers with a 100% increase to $10 million.
Base metals and articles of base metal producers with an 89% increase to $163 million.
Machinery and mechanical appliances producers with a 76% increase to $214 million.
Fats and edible fats and oil producers with a 71.4% increase to $12 million.
Stone, plaster and cement goods with a 66.6% increase to $40 million.
Plastic producers with a 55.55% increase to $42 million.
Wood and articles of wood producers with a 54.54% increase to $17 million.
Miscellaneous and manufactured articles with a 44.8% increase to $42 million.
Footwear, headgear and prepared feather producers with a 42.85% increase to $10 million.
Chemical products producers with a 26.5% increase to $105 million.
Textile and textile articles producers with a 24.4% increase to $56 million.
Transport equipment producers with a 23% increase to $16 million.
Paper and paperboard producers with a 21.6% increase to $73 million.
Raw hides and skins, leather and fur skins producers with a 10% increase to $11 million.
