Lebanon’s financial and economic collapse – and failure of the economy’s institutional pillars – present an opportunity to rethink the country’s economic model and raison d’être, repair the causes, and modernize the way we think about and do business. Putting this within the context of Lebanon’s private sector, and in light of the challenging, unstable and negative environment in which private enterprises operate, there is an urgent need to explore alternative operating models, funding options, and business strategies that gear companies for growth while de-risking the operation. In order to do that, private enterprises will have to initiate a qualitative transformation that embeds sustainability at the core of their values and decision making: sustainability to ensure economic viability; improve institutional resources and capacity; respond to the ecosystem in which the business operates; and satisfy consumer-led demand.
Fundamentally, the private sector in Lebanon has always had the right ingredients for success: commercial wit – possibly inherited from our ancestors and facilitated by our geographic positioning – agile businessmen & business acumen, highly skilled labor or potential to produce the skilled workforce, and a business community that survived in doing business under harsh conditions despite the continuous absence of a business conducive environment and supportive policies and policymakers. Whilst fundamentals are there, challenges are numerous. Two crippling challenges have emerged for private enterprises following the financial collapse. The first is the absence and complete stoppage of funding from traditional commercial banks, considered to be a main inhibitor for growth and threat to private sector survival. The second is the scarcity of foreign currency in the local market, a necessary resource for obtaining raw material, and preserving income and value.
From family to partnership
With the absence of lending from commercial banks, other channels will have to be tapped for access to capital, such as local or foreign private investors, development banks, or funds, which – on top of their commercial incentives – may have developmental & social incentives. Moreover, capital may not be restricted to loan-based products, but can include a whole array of simple or blended products from equity to senior debt. Funding may be in local dollars, in which case there is ample supply but less demand, or ‘fresh’ dollars, in which case there is ample demand but less supply. Investors, particularly institutional ones, offer important networking, technical assistance, synergies, opportunities for reaching out to other markets, connections to potential customers and suppliers – but most importantly offer long term value and position the company for growth, modernization and better resiliency.
Most institutional investors nowadays are responsible and socially conscious investors, who will require the companies in which they invest to comply with their environmental, social and governance (ESG) standards. Therefore, to be able to access capital from such investors, family-owned businesses in Lebanon must transition to an institutional mindset and embed ESG standards that reflect their own values and those of their potential partners. Owners will have to understand that their decisions must not only create value for their family, but also their employees, value chain, community and other stakeholders. Sustainability issues will be at the core of decision making for institutional investors when considering investing in any company.
What does that mean for most Lebanese companies? It means that the issue is not only to have a convincing story about the company’s economic feasibility and viability; owners must go beyond. To transition from a family mentality to an institutional one, it implies that family members must accept to institute a functioning and effective board of directors that provides discipline, accountability, and objective and expert opinions from independent members. Lebanese enterprises that wish to access capital are advised to develop written policies and procedures to ensure transparent decision making based on the company’s values and principles, integration of checks and balances, a code of conduct that clarifies rules and standards, and very importantly transparent and accurate reporting. Written policies and procedures ensure commitment and adoption across the firm. New partners would be looking at a corporate governance structure that promotes trust between stakeholders, better risk management, and sound decision making to ensure long term sustainability.
Companies are required to understand the impact of their decisions on the community in which they operate, and manage their environmental and social impacts to support sustainable value creation. Energy use and their implications, proper waste management and disposal of hazardous waste, toxic emissions, natural resource conservation, adequate working conditions, health and safety measures, diversity and inclusion, engagement with community, among other issues are ones that must be understood, assessed and addressed.
The earlier Lebanese companies incorporate ESG concerns into their framework and decision making, the better they are positioned to access capital, overcome the credit constraints in the local market, and ensure smoother onboarding of new partners and long-term value creation.
Most Lebanese companies cannot operate without access to foreign currency, a scarce resource nowadays. Foreign currency is used to import raw material, make required investments, and preserve value in an environment with a depreciating currency. To access foreign currency, Lebanese companies must focus on an export-led recovery. Are we ready for exports?
Despite the devaluation, there generally does not seem to be an opportunity for Lebanese products to compete on account of price – because economies of scale are lacking – but rather to compete on quality, uniqueness and sophistication. This comparative advantage is important because it not only positions Lebanese enterprises for exports into more sophisticated markets, but also creates more highly skilled jobs, opportunities for economic growth, and prospects to transform the economy into a more modern one.
Additionally, exports help Lebanese enterprises de-risk by dissociating them from a contracting economy and a volatile currency. The key is to understand what products can make breakthroughs by understanding what consumers in offshore markets are looking for; then work on modifications, required certifications, and consistency.
There is no reason why Lebanon’s private sector recovery cannot be export-led. Trade has been a pillar for prosperity for all people who have occupied our land many centuries ago. It all goes back to our history and geography. Lebanese are culturally diverse, having inherited aspects of different cultures and civilizations. Geographically, our land is unique in being accessible to the GCC, Europe and North Africa, with a Mediterranean that has made openness possible, and that has made trade our skill. We have a huge diaspora with a reach to all continents. Sometimes we forget our potential. Sometimes we need a crisis to be reminded. Sometimes we need to look at our history – not our present – to build a future.