The aim of the EU Small and Medium Enterprise Support Program (SMESP) in Lebanon is to offer young entrepreneurs guidance and better access to financing. To do so, it donated 2.8 million euro to establish the country’s first business incubators and 4 million euro to a Kafalat-run lending scheme. However, as the SMESP reaches the end of its mandate in October, people wonder to what extent these initiatives are self-sustainable and, indeed, if they have a future.
Situated on the 9th floor of the Ministry of Economy and Trade, the SMESP was founded and funded by the European Union in April 2005. With a total budget of 17.8 million euro, the program aimed to improve the Lebanese business environment for small and medium enterprises in three primary areas: policy, business development and financial access.
According to Senior Enterprise Development Advisor Declan Carroll, the program first of all aimed at identifying the main barriers to entrepreneurship in Lebanon. Two surveys were conducted. The first concerned the country’s legal and regulatory environment, which is, to put it mildly, overdeveloped. The second was a market survey among SMEs to identify their main concerns.
It concluded that, in addition to political and economic instability, access to financing and business support access and the high cost of resources, including electricity, were mentioned most often. “Nearly everyone complained about electricity being too expensive, especially seeing the fact that it is cut half of the time, forcing companies to rely on generators,” Carroll said. “As a result, it is hard to remain competitive.”
It speaks for itself that solving the domestic power situation fell outside the EU mandate, yet improving business support and access to finances did not. Regarding business development and support, SMESP donated 2.8 million euro to help establish the country’s first business incubators in Tripoli, Tanayel (Bekaa), Saida, and Beirut.
An incubator is an organization that aims to support the entrepreneurial process by offering start-up companies an affordable physical space, as well as help in drawing up a sound business plan or marketing strategy, management coaching and training programs. An incubator differs from a classic consultant in offering a more active participation.
“A consultant generally is hired for a very specific job, while the incubator is involved from the start and may offer advice in every aspect of the business operation,” said Carroll.
There are 4,000 incubators worldwide, about half which are based in the United States. According to Tania Mazraani, Director of Business Development and Communication at Berytech (see box), a European survey showed that “50% of newly established companies fail to make the 5-year-mark, but 85% of businesses make it through the first five years when guided by an incubator.”
The four Lebanese incubators were not randomly chosen, but proved to be the winners in a national tender issued by SMESP. According to Carroll, they were judged on their business plan whereby sustainability and contacts with the local business and academic environment played a crucial role.
So, the incubator of Tanayel has a structural partnership with both American University of Beirut and Saint Joseph University. As it is situated in the Bekaa Valley, it will mainly focus on agro-industrial activities. Its counterparts in Saida and Tripoli are both located in the Chamber of Commerce and are supported by the Rafik Hariri Foundation and Rene Mouawad Foundation respectively.
Still, one of the main concerns regarding Lebanon’s incubators is that they will not be economically sustainable once the SMESP is terminated in October 2007. One thing is certain: Lebanon’s Ministry of Economy and Trade is both unable and unwilling to financially continue the European initiative.
“There is always a chance that an incubator fails,” Carroll admitted. “The reality is that even in Europe and the United States some 70% of incubators receive some form of federal support, and even then, some fail. That’s why, from the start, we have stressed on sustainability. Personally, I expect the EU to continue some form of support in the future.”
Lebanon’s incubators are expected to generate most of their revenue from rent income and the fees they charge for their services. To get an idea about future revenue, let us have a closer look at the Tripoli incubator, which opened April 26. Part of the new Chamber of Commerce, it consists of 22 executive offices and eight freelance desks that are meant for IT professionals and graphic designers.
“First of all, we receive rent and invoice our services,” said Fawaz Hamidi, Executive Director of the Business Incubation Association Tripoli (BIAT). “Currently, as part of the pilot program we offer up to a 100% discount, but in the future prices will be 10% to 20% below market prices. Secondly, we will gain revenue from the training and courses we give and thirdly we aim to take equity shares in start-up companies.”
Still, well aware that this may not be sufficient for long term survival, Hamidi pointed at donations it received from the Chamber of Commerce and the Rene Mouawad Foundation, and strategic partnerships with, among other institutions, the municipality, Balamand University and IDAL.
The SMESP also aimed to help SMEs find easier access to funding. With Kafalat it established the “No Collateral Guarantee Scheme.” Both SMESP and Kafalat brought in 4 million euro to create a fund for innovative start-ups and existing SMEs worth 40 million euro. Due to the 2006 war with Israel, the program only started in September 2006.
“To get a business loan in Lebanon,” Carroll explained, “one generally has to bring in a personal or collateral guarantee, which is often a building. It speaks for itself that most young entrepreneurs do not have a building. Through the fund set up with Kafalat we hope to introduce sound risk analysis into Lebanese banking.”
Anyone with a new product or service can approach Kafalat and ask for a loan. If the latter thinks the project is feasible, an innovative start-up can receive up 90% and existing SMEs up to 85% of the loan, without providing collateral or personal guarantee. The loan can amount up to LL600 million ($400,000). Kafalat will charge a commission of 2.5% of the loan, while the Lebanese Central Bank has subsidized a 7% interest rate.
Although most people welcome the EU-initiative, some wonder if the 17.8 million euro could not have been spent in a better, more economical way. As one critic said: “Probably half of the money flew back to Europe in the pockets of experts and consultants.”
Carroll however, made no secret of the money trail. “5.5 million euro went to the European Lebanese Center for Industrial Modernization (ELCIM), 2.8 million euro to the incubators, 4 million euro to the Kafalat fund, while 700,000 euro could not be spent, due to the war with Israel,” he explained, which leaves 4.8 million euro for daily operations of the SMESP unit, consisting of 10 employees.
“Indeed, we flew-in foreign experts,” Carroll concluded. “But let me ask you: How do you build an entrepreneurial support system in a country that doesn’t have one? What choice do you have other than flying them in? Which doesn’t mean, we did not use local experts; on the contrary.”
Berytech Technology & Health aims to build business for Beirut and beyond
Following the success of Berytech Technology & Health’s first business development center in Mar Roukoz, the non-governmental organization in December 2006 opened a second “business incubator” facing the Saint Joseph University (USJ) in Beirut. The goal is to help start up young entrepreneurs and turn innovative ideas into successful business models.
Berytech Technology & Health (BTH) is a non-profit organization that aims to create a dynamic business environment, in which small and medium enterprises active in the field of technology and health can flourish. The idea to establish Lebanon’s first incubator was born at the USJ in 2000.
“We realized that for students, once graduated from university, the future in Lebanon was essentially twofold: get employed or leave the country,” said Berytech Chairman and CEO, Maroun Chammas. “We want to offer a third way, by helping young entrepreneurs turn their ideas into a working business model and create employment in Lebanon.”
USJ offered $5 million for Berytech to open, while a core of bankers and private institutions coughed up another $1 million. Last year, it obtained a 700,000 euro grant from the EU-funded SME program. BTH also nurtures strategic partnerships with, among other institutions, the Georges Frem Foundation, Foundation Saradar and the Sophia Antipolis Science Park in France.
Berytech offers the physical infrastructure a young company needs to start working. “Normally, it takes up to 35% of one’s time to actually set up a business,” said Chammas. “Here you can start immediately. Even if you do not have a laptop, we can provide you with one.”
Young entrepreneurs pay a rent of some $13/m2 per month in Mar Roukoz, and some $350 per month per person in Beirut, which includes all facilities, including Internet, electricity and telephone, as well as access to conference halls and meeting rooms. “In the United States you pay at least 3 to 4 times more,” said Chammas. “We also have special grants program of $8,000 each. Each year seven grants are given to the most original ideas, in which case the entrepreneur essentially pays nothing for the first year.”
Since 2002, some 70 companies were established and have operated in Berytech Mar Roukouz, creating a total of 250 jobs. Some 45 companies are still based there, mostly software development, Internet marketing and multimedia firms. So far, six organizations set up shop in Berytech Beirut, including a branch of the British Council and BADR, an association for young entrepreneurs.
As all incubators, Berytech offers more than physical premises and facilities. It offers anyone business counseling, which may include a SWOT analysis of ideas and products, developing a plan of action, as well as marketing and accounting. Berytech also offers help in gaining access to funding and offers training and courses.
