The effects of the July 2006 war are still being felt by the country’s industries, and by export orientated businesses in particular. Nizar Raad, managing director of Universal Metal Products (UMP) — a leading manufacturer of collapsible aluminum tubes for pharmaceutical and cosmetic companies that exports 85 percent of its products — said his major customers panicked during the conflict and started looking for alternative suppliers.
“Tubes are an important component in the production system, so if we could not deliver it was a problem for our customers. We lost some market share, around 25 percent since 2006, and have been fighting to get it back,” he said. “We are clawing back, slowly, regaining 10 to 15 percent.”
Tinned and preserved food company Cortas, which also exports 85 percent of its produce, had a rough time during the war as well, but “didn’t really lose clients,” said Ramzi Cortas, its chairman and general manager. “But if the war had not happened we would have progressed more, it was certainly a set back.”
Lights off
In the immediate term, industries have other, more pressing concerns, namely electricity, transportation and customs.
“Energy is the most important issue for us, and our highest expense at 13 cents per kilowatt compared to just 3 cents elsewhere,” said Raad. “Only 50 percent of electricity is provided by the government, and four hours on, four hours off. It would at least help if they were very punctual so we could turn off machines and have a timetable.”
Generators have become essential for everyday business, doubling energy costs when compared to most industrialized nations and placing an extra financial burden on businesses. Private generators provide an estimated 38 percent of electricity generation in Lebanon, a figure comparable to Bangladesh.
“We’ve requested special rates many times but the government hasn’t helped. Many small industries cannot afford generators. How many businesses can’t take off because of a generator?” asked Raad.
Hauling heavy transport costs
Transportation costs are a further gripe, with a container truck costing $2,500 to go from Beirut to Riyadh, and $900 to $1000 to Damascus.
“If you ship a container from Hong Kong to Dammam it costs $1,000,” said Raad, adding that 1,000 liters of gas in Saudi Arabia costs just $54 compared to a dollar a liter in Lebanon. While Gulf countries have an immediate competitive advantage due to low energy costs, reducing taxation on imports and exports could help Lebanese competitiveness and would take advantage of one value added aspect of the workforce: its higher skill level.
“I’ve said to ministers, ‘Think about exports being tax deductible,’” said Raad. “‘There’s a tax on income, so give a rebate of 50 percent on exports.’ But the government wants to grab everything. It should help by lowering overheads to make us more competitive.”
Cortas wants Lebanon to move towards a more free-market economy to lower import duties.
“Historically, Lebanon has never supported industry and there has always been a very strong lobby from importers to prevent the government from interfering in making it a level playing field,” he said.
Under Lebanese law companies can claim a 10 percent rebate on exports if using imported products. However, Cortas said bureaucratic obstacles make it hard to claim the money back.
“In practice, paperwork is too cumbersome and we can’t take advantage of these savings,” he said.
Customs at the ports are a further bane for Lebanese industrialists. Every week UMP receives a container at the Beirut port, but every time containers have to go through the red and green zones to be checked for a week.
Breakdown of imports ($millions)
According to customs
“It’s a waste of time, especially as we are a registered and legal company receiving goods from a reputable source, importing just one product, and there is a letter of credit opened against it. So why do we always have to go through the red zone?” lamented Raad. “They know us, but say the product needs to go for analysis, and when we are short on raw material we ask for one or two drums, they can keep the rest, but I can’t get even one drum. Inventory blocks a lot of capital and we’re paying high interest on it.”
But while Raad criticized the customs authority, he said the port was better than ports in Europe in terms of stability. “We’ve had containers arriving three weeks later from France due to strikes,” he said.
Both companies have weathered the financial storm, although credit lines were strained in late 2008 and the first half of this year due to delayed payments and orders by companies. Raad said the financial situation has stabilized, and the “outlook for 2010 is positive, as long as no one drops a bomb on Tehran.”
Cortas felt the pinch in the first half of the year but has turned sales around, although not their margins as the distributor was asking for lower prices.
“We will finish the year with sales growth, but profits have not been projected,” said Cortas. “Bar any political surprises, we should have a reasonably good 2010.”
