DesignSpecial Report

Beirut a fashion capital

by Nabila Rahhal
written by Nabila Rahhal

“It’s an exciting time to launch a fashion design program in Lebanon because of what is happening in design. Whether it’s Mar Mikhael’s little boutiques, or the designers who are just starting out with unpredictable, yet exciting futures ahead of them, or the young Lebanese designers whose names are shining abroad, there’s an energy and talent that is motivated,” enthuses Yasmine Taan, chair of the Department of Art & Design at the Lebanese American University (LAU).

Indeed, success stories of Lebanese designers have become more common over the past decade, and it seems the design industry is finally getting some of the recognition it deserves — although there is still a long way to go.

Carving a path

When it comes to fashion design, names like Elie Saab, Zuhair Murad, and Georges Chakra are role models for a younger generation, who through their international fame, saw fashion design as a viable and prestigious career path.

As such, interest in fashion design education rose with more universities introducing degree programs. “I would say that the ready-to-wear community in Lebanon is definitely growing. There are more fashion design programs being built: LAU just graduated their first class, you have ESMOD, you have ALBA (Académie Libanaise des Beaux-arts) starting its program, you have us … There is definitely a new generation of graduating fashion design students that are about to enter the design market in Lebanon, and its very interesting to see where it will go,” muses Sarah Hermez, co-founder of Creative Space Beirut, a free fashion design school.

Size matters

Starting out in the fashion design industry in a small country like Lebanon has an advantage in that one can quickly build a brand. “The positive thing about building a brand here is that if you have the right network, it’s an easier start because when you are in a small community and everybody knows everybody, you can work together to build your brands. You can reach out quickly to the market because it’s so small,” says Hermez, explaining that this culture of collaboration is rapidly growing amongst Lebanese designers.

But the downside of such a market is that it is limiting, especially in a highly competitive industry, such as fashion design, where one needs to be present in the world’s fashion capitals to succeed. “In the fashion world, a lot depends on who you know, and on being in the right boutiques, and reaching out to the right buyers; it requires a lot of international networking and PR. In order to do that, you have to be present there, which means you need to have a really big budget to travel; young designers mostly can’t afford it unless they find an investor,” explains Hermez.

Although Hermez feels there is an emerging interest among financial backers and investors to finance fashion designers, she says there is not enough yet to meet demand.

When budgets are tight

The majority of Lebanese fashion designers say their largest market is the Gulf, which is not surprising given the traditional wealth of those countries and their affinity for the Lebanese touch.

However, with the decrease in oil prices and political turmoil the Gulf has been witnessing, this purchasing power has decreased significantly, and most fashion designers Executive spoke with have noticed. Only two of the six designers interviewed continue to have a steady demand from the Gulf. The others say that instead of the usual 10 to 12 couture dresses per season, clients from the Gulf have downsized to just two or three.

Yet, with the current omnipresence of social media, names of Lebanese fashion designers continue to flourish, regionally and internationally.

Executive spoke to six fashion designers (two via email) to learn about their unique successes and challenges. From those who overcame the obstacles of a war to become international success stories, to those who have recently entered the market but have already made a name for themselves; their stories show what it means to be a fashion designer out of Lebanon.

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DesignSpecial Report

Questions of design

by Thomas Schellen
written by Thomas Schellen

Design is like Lebanese politics. These days, both are somehow involved in everything. And like good policy making, a dose of good design is needed in every nook and cranny of the Lebanese economy.

As opposed to most things political, however, stakeholders in design since 2010 have made valiant efforts to nurture an ecosystem of “design made in Lebanon.” Dedicated tertiary education programs have been developed on both the undergraduate and graduate levels, with recent additions being a Masters in Global Design at Balamand University’s Académie Libanaise Des Beaux-Arts (ALBA) and a Bachelors in Fashion Design at the Lebanese American University.

With the creation some six years ago of the non-profit duopoly of the MENA Design Research Center (MDRC) and the annual Beirut Design Week (BDW) — brainchildren of designer Doreen Toutikian and her collaborators — design found a non-profit institutional base. Also in the last few years, international support for creative industries in Lebanon has helped pour some European aid money into the design sector’s growth, with the European Union, notably Italy, sponsoring programs, projects, and exhibitions such as design training for jewelers in Beirut and furniture makers in Tripoli, or the Medneta program with an overall $200 million budget aimed at supporting creativity in the arts, crafts, and design in urban communities around the Mediterranean Basin. But how, and how much, does design contribute to the Lebanese economy in measurable form, i.e. in dollars and cents?

The appreciation of local design has improved by leaps and bounds, and today, is very different from 15 to 20 years ago, says BDW founder-director Toutikian. As evidence, she cites how sophisticated young people flock to local designs, as opposed to how in the 1990s, Lebanese fashion-conscious consumers did not want to wear local products, to the point that Hamra boutiques would pass domestically made ready-wear as Italian imports to be able to sell them.  When it comes to economic quantification, however, the picture is neither clear nor compelling. Based on research that MDRC undertook in recent years, Toutikian says that the advertising and hospitality sectors — both with players that created winning stories on national and regional terms — show the largest integration of design in their industries. Hard numbers that would measure the value of design content in these two sectors have not been compiled, she concedes. Moreover, she says that awareness of design in the industrial and business community is practically nonexistent, and that the overall contribution of design to GDP is in the low single digits. “When it comes to fashion design industry or furniture or product design industry, [the contribution to GDP] is minute.”

Other sources are also not of much help. A “MENA Design Outlook” report published in 2015 by an international consultancy under apparent commission of the UAE-based state-affiliated company that hosts the Dubai Design District (d3) puts the total value of MENA design markets at about $100 billion in 2014, with a projection that this will rise to just under $148 billion by 2019. Lebanon’s share of the $100 billion 2014 market is given in the report as $1.7 billion, which would indicate that imported and domestic design together account for just under 4 percent of the Lebanese GDP. 

[pullquote] The overall contribution of design to GDP is in the low single digits [/pullquote]

However, the report characterizes the majority of the design markets in MENA — in cases like fashion design in the Gulf up to 80 percent of market volume — as being fed by “imported design.” Under the report’s assumption that “locally produced design goods and services account for approximately 35 percent of the total market size” for design, “design made in Lebanon” would contribute about 1.4 percent to GDP.

Design standards

While saying that the United Arab Emirates and Saudi Arabia account for around 50 percent of regional design market volume, the report actually covers only three countries — Qatar, Egypt, and Lebanon — besides the UAE and Saudi Arabia. The report, which is also limited by its focus on sectors that may not play equal roles across the entire MENA, appears indeed to be the first of its kind in the region, but it leaves readers not only with an impression of much guesswork on the economic numbers in the various national design markets, it also admits that its criteria for consideration of design sectors in the Middle East and North Africa cannot be seen as conclusive. “While there is a growing consensus globally on the need to define, and classify the design sector, so it can be standardized, there is minimal coordination on an international scale as to what segments are included in the sector and how to account for their economic value. At present, there is no common framework or classification for the design sector across the MENA region,” it says. 

New definitions

As the economic numbers for design markets and industries in the Middle East remain foggy, local stakeholders widely agree that Lebanon and other Arab countries are still in early phases of economically measurable design appreciation — a sort of pre-economic stage. This notwithstanding, they are painting the future with general brightness, albeit in a palette of varying colors.  Toutikian perceives great potential for the Lebanese economy from design, if it is considered in a more global and holistic sense of design in technology and service. “I think there is no such thing as an economy without design. Everything is based on design, whether a space, a product, a service of any kind, or a business model. Design is something that no one in economy can live without, even if it is invisible,” she says.

“I don’t think we have a design identity now. Without discussing for the moment if we need a design identity in Lebanon, we are in the [process of] making one. I don’t know what the effect will be on the economy,” says Yasmine Nachabe Taan, chair of the Department of Design at LAU’s School of Architecture and Design.

Lee Frederix, an American designer who established himself in Lebanon several years ago and has recently been appointed as interim chair of the Department of Arts and Design (as Taan is slated for a sabbatical), sees Lebanon as a regional design hub — even if this is in the sense that a one-eyed person is king among the blind. In his opinion, Lebanon can be some sort of incubator for design thinking and education in the Middle East, but the path he describes does not necessarily sound quick or simple.  Lebanon’s historically fragmented culture is the substance of “what Lebanese design is, because that is what the whole country is,” Frederix tells Executive. In this context, he favors organic development in which a “Lebanese design” direction would be the outcome, if design departments, like the one in LAU, do their job to produce “educated, creative thinkers, who go into design fields.” Noting that art from the region was rewarded with a ballooning of interest (and prices) in the past few years, Frederix regards a similar potential for Lebanese design because of “the trendiness of all things from this region in the West.” While a fleeting phenomenon, he says that fashion writers in Paris and bloggers in New York “are obsessed with anything that is coming out of the Middle East.”

[pullquote] Lebanon and other Arab countries are still in early phases of economically measurable design appreciation [/pullquote]

Taan similarly sees many Lebanese designers’ most promising path to success in proving themselves in international markets before tackling domestic performance. “The Lebanese designer has to go abroad, prove himself in New York and Paris, and come back for the local people to say ‘we want their fashion.’ We can export, and that is what we do. We export designers and creativity,” she says when talking to Executive about the latest developments in regard to fashion design (see introduction page 22).    

The widening of older definitions of design to a newer concept of social design is where Marc Baroud, director of the design department at ALBA, sees the real growth potential for design made in Lebanon. “If you take social design, we think that this is a field where Lebanon is very prone for playing a greater role and contribute way more to than to product design,” he says. Like others in the Lebanese design community, he points to the lack of a strong manufacturing industry, and the small size of the domestic market as factors that put the country at a disadvantage when compared with industrial or product design cultures that other countries or design capitals from Denmark to Tokyo and Singapore have developed over the course of decades.

In the area of social design, however, he sees untapped global markets for design made in Lebanon. “I think that great things can come out [of this country] in terms of social design, and because the problem-solving experience of the Lebanese can be of [global] value. Today, everything is connected, whether it is service design or product design and social design, and we don’t need to produce things locally. This is why we [at the ALBA design department] think that design from Lebanon — to avoid the term Lebanese design — has great opportunities,” says Baroud who also has experience as a designer working in Lebanon. 

The latest horse in the stable of design-centered Lebanon is being saddled and prepared to debut next month [September 2017] through Beirut Design Fair (BDF), an exhibition that will present both contemporary local, and vintage international items, and thus presumably contribute to the creation of a market for collectibles.

Guillaume Taslé d’Héliand, the fair’s founder and director, explains that BDF will focus on exhibiting furniture and product design. Making regular visits to Beirut throughout recent years, he found that the local market did not provide the space that designers wished for. “Many designers told me that they were not satisfied with the commercial side of product design in Lebanon,” he tells Executive.

According to Taslé d’Héliand, BDF is a for-profit venture, but he does not expect to incur a positive bottom line for up to three years. He expects, however, that business in Lebanon will enter a phase of rapid growth “as soon as the Syrian question will cease to be a problem,” as he puts it. In his expectation, this explosive growth will apply to the economy in general, and therefore be beneficial to the design market. As for his specific interest in developing this market, he refers to numerous factors that make the country a candidate for playing a greater role in design, such as its “culture and Lebanese creativity, critical sense, and available training and schooling in design,” as well as well-developed craftsmanship, sense of hospitality, and other advantages.

Concepts that consideration of design in manufacturing or services can create better outcomes from the start of a manufacturing or services process have not yet been fully integrated in Lebanon, but it would be beneficial to do so as countries with an integrated design dimension are dynamic economies, he argues. To help advance Lebanon, he and his local collaborators, therefore, think it will be prudent to “push design in this country more to the forefront,” to which end they plan beyond the creation of BDF to make partnerships with local organizations — examples include the Business School ESA and the Association of Lebanese Industrialists — as well as linking Beirut to international networks of “design capitals” and regional design councils.

“I think it’s legitimate to say for Beirut that we want this city to become the design capital of the entire region. That is our vision and what we want. You need money to move things, but the vision is not a business vision. The fair is one means among other means in reaching the vision [of having Lebanese design established as something that is recognized around the world],” he emphasizes. Beirut by his consideration is already today the de-facto only viable design capital of the Middle East and should be internationally recognized as such. “If you’re a real designer, you can change the world,” he adds.

The question over the value of design is not made any easier by the fact that definitions of design have been, are, and probably will remain, fluid. For Toutikian, “People tend to formulate design as just design which one sees in magazines, and thus, often perceive it as fashion, furniture, or product design. When we talk of design, we talk of the process of design that creates all of these things.”

Creative counterweight

The descriptions that are offered as wholesale explanation for design today see designers as driven by a general state of presumed dismay at our world’s imperfection. Positively phrased, contemporary design definitions gyrate around terms like “mindset,” “problem-solving,” “human-centric,” and “making the world a better place.”

As such, it appears that the current ideology of design thinking is positioning itself as the creative counterweight to the harshly analytical and profit-driven parts of social sciences that go under the label of economic science.

Structuring the creative process into a teachable discipline might well amount to the squaring of circles, but equally the exercise seems inevitable, given that human behavior, and the straightjacket of economic priorities, need to be reconciled through some process. Design appears to be the current thought on this process, mirrored in the shift that over the past 30 or 40 years gradually moved design from an afterthought of the production process — make a product look good to make it easier to sell — to a concern at the beginning of the process. This concern presumably is focused on the compatibility of the things, services, and even social processes, with the human need and consumption that Adam Smith denoted as “the purpose of all production.”

In the opinion of ALBA’s Baroud, the design ecosystem in Lebanon is set to grow on the strength of the intangible, but real social heritage of problem-solving and conviviality that exists in this country, and also because there are increasing numbers of like-minded people in the design community that are pushing the ecosystem forward. In this regard, he also expects that the new BDF project will promulgate greater understanding and appreciation of design, and help in clearing up confusion over different subspecialties in designing, such as the relationship between producing gallery pieces that will be prototypes and collectibles, and creating designs for production on a larger scale “in the hope that they can one day be produced in meaningful numbers to have an impact or improve things in society.”

Confessing to having initially been skeptical about the project of a fair, he accepted an invitation to be on the BDF’s screening committee for entries, and says that the fair might deliver aspects of a design market that people might expect, but not find at the differently purposed Beirut Design Week, “I guess that collectible design has a real market, and that this market can grow.” 

Appealing to some ever-hungry members of the monied crowd who are looking for passion investment opportunities might help gradually build the design market in Lebanon, but even in the best case, will not instantaneously embed appreciation and viability of design in the local business sphere.

However, there are additional indications for what were called green shoots after the global financial crisis. One such green shoot in Lebanese entrepreneurship with tech and design connotations could emerge just now in form of MAD, a catchy (but historically over-occupied) abbreviation for Music.Arts.Design.

Looking forward

MAD, as founder Rima Yacoub tells Executive, is a digital marketplace incorporated in Beirut and in Paris. More specifically, Yacoub describes it as “the marketplace to meet, discover, and launch artists in the music, arts, and design scene.” The startup has recently completed its first round of funding, with $360,000 that was provided by private investors and by the Seeders network of business angels in Lebanon, with matching funds added by IM Capital and Kafalat’s iSME program.

Yacoub, who is Lebanese with experience of working in Paris, says she and two partners — one French and one other Lebanese, her sister — created MAD in Lebanon because of their existing network that they had built by operating a marketing agency, and because the country is an “important location for artists and designers in the Middle East.” In attempting to remove traditional walls that hinder collaboration of artists, musicians, designers, and also ease their communication with corporations seeking them for projects related to their products or brands, MAD aims to grow out of its Lebanese-French base into an international platform, with offices in several countries within a few years, and is already planning to conduct a next funding round 18 months from today.   Besides such examples for synergies between the knowledge economy pushed by Lebanon’s central bank and the country’s creative industries, signs of promise for the growing viability of design made in Lebanon exist in local collaborations, such as new partnerships of the Association of Lebanese Industrialists with design stakeholders that have been struck on one level with BDF and on another level with ALBA (for internships).

[pullquote] There are increasing numbers of like-minded people in the design community that are pushing the ecosystem forward [/pullquote]

A third and final note of promise might be in taking Lebanese design to local markets. In recent years, design could be found in small workshops and boutiques either operated by the designers themselves or sponsored under EU or UNIDO programs like the Creative Lebanon sales rooms that were in Gemmayze a year ago. But now, design presence is growing also in posh places, such as the new urban shopping hub of ABC Mall Verdun.

Frank Kuntermann, deputy CEO of ABC, tells Executive on the sidelines of the mall’s lavish opening party on July 27 that the new ABC department store will feature Lebanese designers including established names like Nada Debs and Sarah’s Bag, but also newcomers in perfume design and rising stars in jewelry design. “With all these people, we have basically 20 percent of our offer in the department store as Lebanese design,” he explains and continues, “This is not enough. I would like to have a big space dedicated to [Lebanese] fashion design, where we could welcome young designers and present [their creations]. I would like [Lebanese design] to be [given] more [room] because there is talent in Lebanon, and ABC has to also be the face of Lebanese talent and design.”     

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DesignLuxurySpecial Report

The power of tourism

by Nabila Rahhal
written by Nabila Rahhal

Prior to 2012, it was a common sight to see wealthy tourists — mainly from the Gulf — and even some Lebanese shopping in Beirut’s luxury brand stores that dot the expansive streets of Downtown Beirut and the high-end sections of Lebanon’s malls.

During the past five years however footfall in many of these international luxury brand stores has been languishing due to the political instability and regional insecurity that have affected Lebanon. The decrease in tourists from the Gulf, as well as the dwindling purchasing power among local Lebanese, has had a large negative impact on these agents.

With Lebanon enjoying more stability now — following the election of President Aoun in late 2016 — it is hoped that the luxury retail market will also pick up. Executive Life spoke to importers of luxury brands to get their perspective on the market in summer 2017 and their expectations for the upcoming few years.

Touring luxury

Although no exact figures were provided, the importers of luxury brands that Executive Life spoke to say that tourism has always been a key driver for luxury retail in Lebanon. This is especially true during the summer or winter holidays seasons, according to Ziad Annan, owner of A&S Chronora, the exclusive retailer of Rolex and Tudor watches in Lebanon.

Khalil Noujaim, the chairman of Level 5 Holding, which is the exclusive agent of French luxury brand Eden Park in Lebanon, also believes tourism impacts retail. “There has always been a positive correlation between tourism and businesses in general, and this year is no different. However, the size of the impact differs from one industry to another. For instance, normally tourism affects the hospitality sector most, with retail coming in second place,” he explains.

Simone Tamer, chief commercial officer of Tamer Freres sal, believes that tourists favor shopping in the luxury brand stores owned by the group because of the customer service provided. “Tourists compare our first class service with all the flagship stores they visit around the world. We follow the guidelines and offer a modern Eastern touch to our selling approach, as our culture is known for high standards of service and hospitality,” she explains, but adds that a missed opportunity associated with Beirut as a luxury shopping destination is that Chinese and other Asian tourists are still not interested in visiting Lebanon.

Brighter horizons?

With tourism having such a strong impact on the luxury market, it was no wonder the luxury retail industry in Lebanon generally suffered over the past six years when the number of visitors to the country was low.

Today, tourism is on the rise again in Lebanon, with Beirut’s five star hotels reporting up to 80 percent occupancy, the best it has been in the past six years, although not up to the level of 2010. However, it seems that this has not yet translated into more tourists from the Gulf coming to shop in Lebanon as they used to in the past.

The luxury brands Executive Life spoke to say Lebanese, whether expats or residing in Lebanon, continue to be their main clientele. “Our performance is mainly driven by local Lebanese residents who highly appreciate our designs and their French quality, especially since the brand has been in the market for almost 16 years now. Lebanese expats and Arab tourists started appreciating our brand more a few years back following the international expansion of Eden Park, mainly across the GCC markets,” explains Noujaim.

Annan also says the majority of their clients are Lebanese. “The majority of Rolex enthusiasts in Lebanon are Lebanese living inside and outside the country. Complementing our local faithful clientele, the brand in Lebanon attracts an interest from many enthusiasts living in the region,” he says.

Tamer says expats make it a point to shop in the luxury brands store in Lebanon when available, as opposed to the same brand internationally, as they believe they are helping the economy that way. “Expat visits are increasing, thanks to the airline packages and services provided to them. Our loyal expat clients refuse to buy from abroad, mentioning to us that they want to purchase from the Beirut stores as they believe that they are helping the economy of their country,” she says.

Meanwhile Maher Atamian, managing director at Est. Hagop Atamian (a distributor of luxury and medium-end watches in Lebanon) says their imported luxury watch brands continue to rely on local Lebanese and expats, and have not yet felt an impact from the increase in Gulf tourists to Lebanon. “We are still relying on the Lebanese expats who visit Lebanon during the summer and holiday periods,” he says. 

Downtown luxury

Downtown Beirut has all the makings of a luxury retail area and indeed it was almost overflowing with visitors prior to 2012. “Downtown Beirut is the destination in Lebanon that offers the biggest choice of monobrand luxury boutiques, a wide array of high-end restaurants, and a marina to complete the shopping experience. The presence of five star hotels also helps in the positioning of the city as the luxury retail destination in Lebanon and creates organic traffic to luxury shops based in Downtown,” explains Annan.

In agreement, Tamer says, “Tourists are interested in visiting this area as a luxury shopping destination in Lebanon.  All services are easily provided to them, and the access to the city is convenient, valet parking service is available at every corner, streets are equipped with park-meters for those who rent cars, cab services are all over the city, and most of the shops provide them with tax free refund slips upon purchase or free delivery to hotels for heavy or expensive items. Other areas, such as Dbayeh with ABC and Le Mall, also experience tourist footfall, but the only issue is that big brand names are not available in these destinations for high-end luxury clients, so as a brand mix today, Downtown remains the only destination in Lebanon providing the best service for high-end luxury brands.”

But most say the activity in the Downtown area has decreased with the drop in number of tourists, and this has affected the luxury retail sector in the area. “Downtown is the only true luxury destination in Beirut. All major cities have their luxury in their ‘downtown’ areas, and Lebanon is no exception. It’s very important to have it, since tourists target the center of the city when they visit. However, again, Downtown today is suffering because of lack of tourists,” explains Atamian.

Noujaim also speaks of the decreased activity in Downtown Beirut, saying that this is because the area attracts mainly tourists when it comes to shopping, while the Lebanese seek out luxury brands in malls. “Today tourist numbers are not enough alone to sustain a business in Downtown Beirut. This area should be revived to attract more locals and become the main destination for shopping in Lebanon,” says Noujaim.

Taking action

2017 is not over yet. Summer is still on full blast mode, and the potential profits from the end of year holiday period are still unknown, so a lot might change for luxury retail in Lebanon before the year ends.

In the meantime, luxury brand importers, such as Atamian are asking for continued political stability so things can get back on track and luxury brands can enjoy growth in Lebanon.

Noujaim asks for a reconsideration of rental fees, which would help retailers overcome this tough period. “The main support should be in adjusting the rents in line with the overall economic situation the country and the region is going through. This will benefit both the real estate sector, as well as the retail industry, and will provide a boost until the situation normalizes,” says Noujaim.

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Economics & PolicyQ&A

Moving parts

by Matt Nash
written by Matt Nash

Beirut Mayor Jamal Itani offers two words when asked about his vision for city spending: “investment projects.” During a brief interview in late July, Itani explained a variety of the city council’s plans, from making Beirut more pedestrian-friendly to balancing private and public interests along the city’s contentious coast.

E   What is the city’s financial situation?

When we took over [on June 1, 2016], we got a statement from the central bank [Banque du Liban] saying that, in the account, there’s in the range of $495 million.

E    Most will be spent on…?

Investment projects, [for example the council recently decided to redevelop a plot of land in Medawr] plot 385 is a big plot owned by the municipality. Part of the land is occupied by the municipality, part leased to different entities, and the purpose is to redevelop this piece of property. It’s approximately 80,000 square meters of property that is [in a] very important location at the entrance to Beirut; we believe that this property needs to be developed and can have a great return for the municipality. Financial return.

E   Will it be developed as a residential or mixed use project?

Mixed use.

E   What is the size of the city’s land bank?

[Exhales and smiles] We have good land. Some of it is misused. Some of it is used by other entities. We’re trying to get it all back and use it and invest in it.

E   Speaking of land, the council decided to cancel the purchase of privately-owned plots along Ramlet al Baida, that the past council was rumored to be set to buy for $130 million. Why?

We believed that the price that was agreed on was unfair to the municipality. This is why we cancelled it. It should be much lower. And before we move on, we have the coastal line of Ramlet al Baida [where we have] identified sites that we want to protect and prevent any construction on. So, we took two decisions; one decision is to put all those properties, all the area [from the Movenpick Hotel to the Summerland Hotel], under study. And this is a long process.

E   It will take two years, correct?

It takes a year just to put a lien on the property. That’s why we took another decision that those properties will be publicly used, so the owners can’t make any application even for a construction, or put [up] any other structure.

E   So, it will be strictly public use from now.

Well, they are publicly used now, and this will prevent the owners from starting any development during the course of the study. They won’t even be able to apply for building permits.

E   What is the purpose of the study?

Two parts, the legal part and the engineering part. We want to make sure that the coastal line will continue to be for the people and no construction will happen there. That’s the main purpose. In order to do that, we want to identify each property and see how much of the coastal line is part of this property, what can we do to make this coastal line free of any construction.

E   The coastal line is defined in the law as the furthest point onshore that the waves reach in winter. On the sea-facing side of the coastal line, no ownership of land or construction is permitted. Some of the privately-owned Ramlet al-Baida plots are completely within the coastal line, while others are large and the coastal line might cut through the plots, correct?

Yes.

E    Cutting the sand in two. What does this mean for the beach resort, once branded Eden Rock ,near the southern limits of the city?

This is a special case. The President of the Republic has requested an investigation into the project, it’s in the hands of the Shura Council. We have to wait until their decision.

E   Why not include Dalieh? Your predecessor told Executive that he was in contact with the owners and would “soon” announce a development project in that area.

We’re not in talks with the owners. We’re going to take a decision after we make sure we identify all of the properties … The whole coastline of Beirut will be under study. That’s the next step.

E   The city has been doing a lot of tendering in the past year since the new council took power (and now officially has a working website that contains information on council decisions and open tenders). Recently, the city approved tenders for reflectors in the streets, what’s the plan there?

We want to identify all the pedestrian crossings in Beirut and install proper lighting, street marking, and signage, [including reflectors called cat eyes, which help drivers identify pedestrian crossings at night]. We also want to do signage for pedestrian crossings, and this is part of the tender already issued for street names and directional signs.

E   There are new green signs around the city reminding people to clean up after their dogs. Does the city have a large enough workforce to enforce things like responsible pet walking and the non-vehicular blockade of pedestrian crossings?

No.

E   What’s your enforcement strategy?

We currently have the municipal guards. We’re involving them.

E   How many?

We have approximately 600 people. But we have also requested our own police department. The Minister of Interior is studying it to make sure that there’s no conflict between us and the [national] police of Beirut. Once it’s done, we’ll have police patroling around the city and enforcing the laws of the municipality.

E   Will you be sticking to former council’s plan for rehabilitating the city’s parks?

Because of the specificity of the characteristics of each area, we’re discussing with each community in each area, the possibilities we have. For some parks, we have the possibility to create parking underneath. Some people disagree with this idea.

E   I’ve covered this, and many residents were opposed to the idea. It sounded like lack of trust was the biggest problem; people I spoke to didn’t trust the park would ever come back.

Exactly. Some of them. It’s the same thing with the [waste-to-energy] plant, it’s the same thing with a lot of things. We’re working hard to gain the trust of the people.

E   Speaking of waste, does the city still plan to do it’s own waste collection and treatment?

We have some options, but I don’t wish to declare them now. We’re still studying them. We need to do a feasibility study and environmental impact assessments for the locations before we announce the locations.

E   But the city is decided on waste-to-energy?

Yes, yes, yes. We have nothing to hide.

E   Do you have a timeframe for when studies will be done?

Hopefully before the end of the year.

E    That will only be treatment. What’s the plan for collection and street sweeping?

We requested from the Council of Ministers that we manage the tender ourselves, [as opposed to letting the Council for Development and Reconstruction handle tenders, as they did for other former Sukleen service areas]. We had an issue with the tender [launched last June], we retendered, and the opening date will be August 14.

E   Can you update us on the status of Beit Beirut, the city’s long-awaited museum in the Sodeco area?

It will open end of August, early September. We have events all year round.

E   And you’ve found a curator?

We have several options we’re working on. We’ll assign someone soon.

E    They’ll be ready by end of August?

Yes.

E   And the artifacts and everything already in the museum?

There won’t be a set collection.

E   Finally, one campaign promise was to appoint an auditor to look at city’s books going back to 2015. I noticed the council recently approved appointing an auditor, when will we see the results?

We took the decision, and everything takes a long time to get done. The process is: we make the decision, it goes to the Governor, the Governor checks it, makes sure the money is available, and then it goes to Ministry of Interior, which has to approve. After the ministry, we sign the contract, then the Court of Audit (Diwan Al Muhasabi) must approve. Once they approve, then we can start to work

E    So it will be a bit of time.

Yes, but we insisted we wanted an auditor to do a gap analysis, due diligence, and the closing of accounts.

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Economics & PolicySanctions

The rumors were true

by Jeremy Arbid
written by Jeremy Arbid

In late July, the latest round of American legislation targeting Hezbollah arrived, despite Lebanese government and banking officials downplaying rumors of it just a few months ago, as Executive reported. The Hizballah International Financing Prevention Amendments Act would supplement a 2015 law curbing the group’s access to banking systems, and is the latest legislative effort to freeze Hezbollah’s finances.

The United States alleges that Hezbollah operates global terrorism networks and engages in criminal activities, including drug trafficking and money laundering. The Party of God, said President Donald Trump in remarks after a White House meeting with Lebanon’s Prime Minister Saad Hariri on July 25, “is a menace to the Lebanese state, the Lebanese people, and the entire region.[…], threatens to start yet another conflict with Israel, …[and] is also fueling the humanitarian catastrophe in Syria.”

The Americans seem to be ratcheting up the pressure on Hezbollah through law enforcement actions and vis-á-vis Iran. But it is Lebanon’s banking sector, and thus its economy, that has local government and banking officials concerned. The forced closure of the Lebanese Canadian Bank in 2011 is a not so distant memory and the question now is what will President Trump, whose behavior is viewed as erratic and impulsive, do with regard to this “menace”?

Tightening legislation

The new legislation arrived on Capitol Hill as an amendment to 2015’s Hizballah International Financing Prevention Act (HIFPA). HIFPA was aimed at curbing Hezbollah’s ability to access the international financial system and disrupt foreign financing to Hezbollah, that the Americans believe flows through Lebanese banks.

The amending legislation would further restrict Hezbollah’s ability to raise funds and recruit, increase pressure on banks to not do business with Hezbollah, and punish foreign states for supporting Hezbollah. The legislation was only introduced to House and Senate committees at the end of July, but in its current form it gives the president wide latitude to sanction any person or entity he deems supportive of Hezbollah, financially or otherwise, to deny individuals entry to the United States, revoke already-issued travel permits and visas, and to sanction key figures within Hezbollah, or anyone deemed affiliated to Hezbollah.

It is not clear when Congress will vote on this amendment, and we do not yet know what sanctions might result. If the legislation is passed and signed into law by President Trump, his administration could issue sanctions against Lebanese financial institutions.

The notion stokes fear of past American actions, as one vice president of investment banking at a local bank, who spoke on condition of anonymity because he was not authorized to comment publicly, wrote to Executive in an email. “Other than the effect of lower confidence in the banking system, which would probably be external rather than internal, will we have more cases like the Lebanese Canadian Bank which was closed following similar sanctions?” A senior official at Lebanon’s central bank (Banque du Liban), who also insisted on anonymity, told Executive in June  that he feared a unilateral severing of banking relations. “What really scares me is banks and central banks chickening out. When you’re hit with sanction after sanction they begin to ask, ‘Why should we do business with Lebanese banks?’”

When it comes to Hezbollah’s finances, the United States believes the group manipulates the international financial system to move money between Lebanon and other countries. Hezbollah uses that money, the US alleges, in part to finance its military excursions in Syria, its terrorism activities globally, and to fund its political agenda and social welfare programs at home.

In 2015, Hassan Nasrallah, Hezbollah’s leader, vehemently denied American allegations that the organization was awash with drug money and dared the United States to “show me the evidence.” In another speech in June 2016, Nasrallah said the organization was financed purely through the aid of its patron, Iran. “Hezbollah’s budget, its income, its expenses, everything it eats and drinks, its weapons and rockets, come from the Islamic Republic of Iran,”  he said, according to remarks published by Al Arabiya English.

Building pressure

Despite Hezbollah’s denials, American law enforcement have tied the group to illicit activities. In February 2016, the US Drug Enforcement Administration (DEA), alongside European counterparts, dismantled a global drug trafficking and money laundering network that it alleged was responsible for washing hundreds of millions of dollars in drug proceeds overseen by Hezbollah, as Executive reported. And this past June, it was Hezbollah’s External Security Organization (the Islamic Jihad Organization, a named entity in the proposed legislation) that the US Justice Department accused of backing two naturalized American citizens plotting terrorist attacks on US soil.

The US might also be attempting to pressure Iran and build international support for action against Hezbollah. On July 19, US Ambassador to the United Nations Nikki Haley accused Hezbollah of a weapons buildup on the border with Israel, according to an AFP story cited in Al-Monitor. The ambassador’s remarks followed a resolution by Congress in late June urging the European Union to designate Hezbollah, in its entirity, as a terrorist organization. In 2013 the EU designated Hezbollah’s military wing a terrorist entity, but not the organization as a whole.

Also in June, the US House of Representatives introduced the Iran and Hizballah Western Hemisphere Prevention Act of 2017. The bill is a continuation of the policy set in 2015’s HIFPA law, and builds on a 2012 law limiting Iran’s ability to penetrate into the Western Hemisphere. In late July, congress voted for new sanctions that would rollback the financial relief Iran received as part of the nuclear deal it agreed to during the Obama Administration. With billions of dollars from sanctions relief, a late-July statement from the House’s Foreign Affairs Committee read, “Iran is strengthening the terrorist group Hezbollah.”

These developments came as Hariri arrived in Washington for his meeting with Trump. Following their meeting, Hariri said Lebanon and its central bank had always cooperated with American sanctions imposed on the country’s banks, and always would. The US president, for his part, said he would be deciding on his anti-Hezbollah strategy very soon. And so we wait for the law and for the President’s answer.

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Editorial

Growing pains

by Yasser Akkaoui
written by Yasser Akkaoui

As they campaign for re-election, our politicians are trying to capitalize on the economic mess we’re in, which they created. We need growth, the leaders of various parties keep insisting. We need jobs. We need support for the youth. Seriously? Do they have a target based on a comprehensive economic policy? Have they devised key performance indicators to measure progress toward that target? Perhaps our politicians should learn about inflation and fiscal policy before making decisions and promising a better future.

The new taxes agreed in mid-July prove that policy is one item absent from the government’s overcrowded agenda. The fact that there still isn’t a detailed list of which new taxes are coming even after cabinet endorsed them, proves these new revenue streams will not flow into a long-term vision for true economic revival. They’re opportunistic grabs at cash to appease voters before an election.

Political rhetoric aside, this country needs economic growth and a long-term economic vision — or it really does risk collapse.

Back in 1966, when Intra Bank crumbled, our banking sector didn’t come down with it. In fact, by May 1975 non-resident private sector deposits in Lebanese commercial banks had not only recovered from a brief fall immediately after Intra collapsed, but had more than doubled to around $554 million compared to the month before Intra fell in October 1966. If this memory is fueling hope among our politicians that we can weather any storm, they had better think again. Money meant to support militias during war will stay during a crisis. The non-resident deposits flooding banks’ coffers since 1992, however, are hard-earned savings that will disappear as soon as real country risk begins to manifest.

So what is growth? It’s the result of a properly functioning and sufficiently supported private sector. This month we highlight yet another opportunity for kick-starting growth in the local design sector. Our deepest pool of capital in the country is our talented men and women. Our designers need support. They need an ecosystem that can help them add value, scale, attract investment, and cement Lebanon as a regional design hub. We’ve missed so many opportunities, we can’t let this one slip away too.

Companies around the world have used design to create global brands worth hundreds of billions of dollars. Meanwhile, in Lebanon, we cannot even dream of birthing such a success if we continue pushing our talent abroad. We need a realistic and achievable economic vision. And we need it fast.

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Real estate

The real estate bubble has burst

by Matt Nash
written by Matt Nash

In the absence of hard data, anecdotes and speculation become the basis of analysis. Take, for example, the question of whether or not there is a real estate bubble in Lebanon. From the results of a Google search for the terms “Lebanon real estate bubble,” the sector seems like it is in real trouble. The alleged bubble has a Wikipedia entry, and plenty of news reports — both local and regional — over the past couple years have claimed that disaster is on the horizon. Some even drew parallels between Lebanon and the United States circa 2007 (when banks in that market were handing out housing loans like candy to unqualified borrowers, who unsurprisingly began to default en masse, decimating both the US housing market, and the global financial sector in one fell swoop).

The undeniable truth is that between 2005 and 2010, the prices of built property in Beirut — and, anecdotal evidence suggests, the rest of the country — rose significantly. Exact numbers are difficult to find, but current asking prices in Beirut have not changed much since 2010. The average Lebanese young couple looking for their first home cannot dream of raising kids in the capital. The latest price-per-square-meter for residential units in the ground floor of a Beirut apartment building ranges from $2,180 surrounding the Beirut Arab University in Tarik al-Jadideh to $8,500 along the coast in Manara, according to Ramco Real Estate Advisors, which has been releasing price and units-under-construction data since 2013. Many advocates of the bubble theory point to these exclusionary prices as proof they are correct, although this aspect of the bubble argument often rings more of ideology than economics. Developers with exposure to Beirut — such as Michel Georr, CEO of GCI — argue London and New York (or any other major global metropolis) are similarly exclusive and that the scarcity of available land in Beirut (with a surface area around 20 square kilometers) means higher prices are normal, if not natural.

Bubble-backers pivot from Beirut prices to unsold units in justifying their cries of coming calamity. Again, numbers are elusive. Developers readily admit that sales have taken a serious hit since 2011, but quantifying this is difficult. Masaad Fares, president of the Real Estate Developers Association — Lebanon (REAL), told Executive in November 2016 that, a few years ago, he thought there were around 1,000 unsold units in the capital. However, he now estimates the total value of unsold units at between $3 and $3.5 billion (or around 3,000 to 3,500 units if the average new apartment costs $1 million, as Ramco reported in 2014). Both REAL and Banque du Liban (BDL), Lebanon’s central bank, conducted in-depth market studies on the subject, Fares said at the time, adding that the research will be available publically sometime soon. BDL did not respond to an interview request for this article. The Ministry of Finance published the number of real estate transactions, however, this figure includes property sales (residential and commercial) as well as inheritances, without any breakdown in figures. Further, “sales” are registered with the ministry when the built property is delivered, meaning that units “purchased” (i.e., buyer pays project owner) off-plan in a building that takes five years to be delivered can be recorded years after the physical transaction. Those caveats aside, 2016’s 64,248 transactions are down compared to the boom years (over 75,000 transactions at the peak in 2010), but still up compared with 2005 (48,847).

What’s in a bubble?

Real estate bubbles are inflated by unsustainable demand. Typically, economists blame bubbles on speculators. Speculation seems to have played a large role in the rise and rapid decline in prices in Dubai nearly a decade ago. In the US, it was arguably a mix of speculation and the abovementioned extension of loans to the unqualified (some of whom were also paying off multiple properties). When that demand disappears, prices plummet. Looking back on real estate market developments in Beirut over the past decade, it seems clear there was at least some unsustainable demand, even if it is impossible to pinpoint where it came from — speculators, Gulf Arabs turning a cold shoulder to Lebanon, Lebanese expatriates who saw wealth erased in the Great Recession, or some combination of the three. While asking prices in Beirut have only come down 1.8 percent according to the latest Ramco figures, developers are offering 20 percent discounts, the organization wrote in Executive at the end of 2016.

[pullquote] Developers readily admit that sales have taken a serious hit since 2011, but quantifying this is difficult [/pullquote]

Georr, of CGI, says that the Beirut upmarket is certainly hurting. CGI — a real estate investment company founded by Mario Saradar in 1998, which counts Bank Audi, the country’s largest lender, as a 20 percent owner — recently delivered one of the capital’s more troubled assets — the three-tower Abdel Wahab 618 in Ashrafieh near the ABC Mall. Georr says that CGI has a set development model: identify land and strike a deal with the owner to purchase it on-option; draw up plans for a project and secure investors; seal the land deal once investors are lined up, with the land owned by a special purpose vehicle (an sal company with shareholders reflecting the project’s’ investors). He admits investors will have to accept a decreased ROI from what they signed up for on projects that are completed but remain unsold (he doesn’t divulge the exact ROI, but uses 20 percent as a theoretical example), and says a planned mixed-use tower in Karantina is on hold (CGI will sit on the land until market conditions make moving forward with pre-sales and construction more appealing).

The increasingly loud talk of discounts in Beirut suggest the bubble has burst, with a price correction of 20 percent or more in the capital — even if the only semi-official index, Ramco’s, says asking prices have barely budged. What remains unclear and largely un-indexed is the price situation in the rest of the nation.

Will the country collapse?

Assuming the bubble has now burst in Beirut, what will be the impact to the market overall and the country’s future? The quick answer: Who knows?

Since the slump began in 2011, BDL has issued several initiatives aimed at helping the sector. Perhaps the most welcome was a recurring stimulus package launched in 2012, with an initial amount of $1 billion. Not all of the stimulus money was utilized, and the remainder rolled over for another gross $1 billion in stimulus available for 2013. That stimulus money is still available, but the total amount on offer (not to mention the total amount deployed to date) is not published on BDL’s website. What BDL officials have said publicly is that 75 percent of the stimulus money went to housing loans. There are stipulations on these loans, however. They must go to first-time home buyers and come with caps that developers interpret as meaning the middle-income market. BDL loans are largely being used on properties in the range of $250,000-$350,000 — which is what many are building outside Beirut.

Sacrificing on margins

These housing loans are clearly not meant to help developers struggling in Beirut. For real estate companies with too much luxury stock on their hands, BDL offered to let banks restructure their debt with local banks (circular 135 of 2015). The circular laid out in detail what a hat-in-hand developer needed to do in order to renegotiate “a new repayment schedule based on the client’s cash flow” if the client had loans from more than one bank. The request for clemency requires that banks must have “Identified the weaknesses that led to the deterioration of the client’s financial situation and the way to address them.” Two years on, developers say the circular is all but unutilized (despite a sweetener allowing banks to take ownership of built property that they can keep for 20 years instead of the legal two), and, with buyers getting 20 percent discounts on listed apartment prices in the capital, one guesses refusing to budge on margins that grew a reported 400 percent between x and y might have been one of the primary “weaknesses that led to the deteriorations of the client’s financial situation.”

No one knows if developers with too much exposure to Beirut are on the brink of bankruptcy. What is even less clear is how first-time home buyers who bought outside of Beirut are faring after the price correction in the capital. Without solid figures on prices, or the number of outstanding loans, it is uncertain how many people now own property worth less than they paid. What is clear is that while Beirut may be left with urban scars from the boom years (the abandoned Bab Beirut project in the heart of downtown, for example), evidence to support the notion that Lebanon is on the brink of a civil war sparked by the popping of a real estate bubble is seriously lacking.

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Economics & PolicyWater

The big Lebanese thirst

by Paul Cochrane
written by Paul Cochrane

Not many consumer product segments have steady year-on-year growth regardless of the economic environment. Nor are there many products that are the same price as they were a decade ago. But as the marketing saying goes, water is life, and there is plenty of competition for consumers of bottled water.

“You can consider bottled water in Lebanon as a basic good. You don’t have any alternative for drinking water, so we’ve never really been affected by the political situation, nor the economic situation,” says Merched S. Baaklini, deputy general manager of Bev Holding, producer of Rim.

According to a 2016 Blominvest Bank report, the sector grew in volume by 2 percent in 2013 and 2014, and 5 percent in 2015. In value terms, it averaged 6 percent growth in 2013, 10 percent in 2014, and 6 percent in 2015. 

Sector players attribute the rising demand for bottled water to both the healthy lifestyle trend, with consumers increasingly opting for water over soft drinks, and government mismanagement of the water sector. This ranges from health scares related to the lack of oversight of water companies — especially unlicensed bottlers, — to shortages in government supply. When the taps run dry, consumers are left unsure about the quality of water delivered by truck to their apartments.

The trash crisis of summer 2015 caused another spur in business according to bottlers, fueled by mounting public concern about the government’s inability to deal with waste and environmental degradation. Tests carried out by the Lebanese Agriculture Research Institute (LARI) showed that, in March 2016 — nine months after the trash crisis started — leachate from dumpsites across the country entered the groundwater, with bacteria levels reaching 2,000 trillion per milliliter (ml) the accepted norm being less than 200 per ml.

The Class A bottlers — established brands licensed by the Ministry of Public Health (MoH) — account for an estimated 30 percent of the market, according to industry insiders, valued at around $160 million a year. The remaining 70 percent are more localized in distribution terms and unregulated, with just 42 out of some 1,000 bottlers licensed.

The surge in bottlers is most evident in the supply of 10 liter containers, which, other than the water stores typically found in the suburbs and countryside that fill up 10 and 20 liter jerry cans, are the most economical, costing from LL1,000 to LL1,750. “The big companies never had the 10 liter bottles as part of their portfolio, typically having the 330ml, 500ml, and the 1, 1.5 and 2 liter bottles, then jumping to the 18.9-22 liter size [known as the ‘gallon’]. Today, these companies are tackling the 10 liter market, as it’s an attractive and growing market,” says Roy Hage, manager of Petform, one of the country’s top three manufacturers of consumer grade plastic bottles. Petform produces some 70,000 bottles per hour, and Hage estimates that there are over 250,000 10 liter bottles produced in Lebanon each day.

The water knife

While bottlers have largely dismissed concerns about depleting water tables and the unreliability of snow melt (the source of over 50 percent of the country’s water) Roland Riachi, visiting assistant professor at the Political Studies and Public Administration department at AUB, says that demand will rise due to the depletion of water resources, and that the number of wells has risen from 3,000 in 1970 to 80,000 today, or eight wells per square kilometer. “This will lead to a drop in tap water supply, so there’ll be more demand for water delivery, for drinking, and domestic use,” he adds. LARI estimates that the average depth of groundwater across the whole country has dropped on average by 70 to 80 meters, and projects it will fall further.

The problem is the lack of regulation in the water sector, be it from agricultural use, to tapping wells for drinking water. By law, water companies pay the government LL1,000 for every 1,000 liters extracted, and are limited to withdrawing 100,000 cubed meters a day from a depth of less than 150 meters. Most water companies stated that they pay according to a metered system, but others, such as Tannourine, said the water was free.

The lack of oversight of the overall sector and depleting water resources are already causing logistical issues for companies. Some bottlers concede that they stockpile during the winter months due to shortages in the summer, and even buy water off other bottlers when supplies run low.

“Most water companies are seeing a reduction in water availability. The illegal bottlers are about to cause a catastrophic disaster, as they’re drilling near the shorelines and emptying aquifers,” says Marcel Hage, chairman and CEO of Talaya. “If more people favor natural drinking water, and the supply is short, prices will eventually go up. But if the situation continues as it is now, of ‘water as water,’ no matter where from, prices will remain stable.”

Economics 101 teaches us that with demand outstripping supply, prices should go up. But the theory does not yet apply to local bottlers due to the low cost of extraction, the lack of government oversight, and high competition. “Prices haven’t changed because the price is the cost of the bottle, not the water inside. This is why you see different brands with the same price,” says Reine Berbery, marketing manager at Tannourine.

The number of new entrants into the market is difficult to quantify due to the number of unlicensed bottlers. But, at the higher end, there are still new entrants, such as a $7 million bottling facility in Bekaa’s Yammouneh, announced in May.

Just as Nestle shook up the sector when it bought Sohat and introduced Nestlé Pure Life, Pepsi’s launch of its global brand Aquafina in July 2015 has triggered what players call a price war. “Aquafina has made it harder for everyone, as they have the distribution model, and gave it out for free with Pepsi when they launched,” says Alain Tabourian, chairman and CEO of Interbrand, which owns Sannine.

According to SMLC Pepsi-Cola’s Executive General Manager, Bassem Ali, Aquafina has had “strong double-digit growth” due to the “largest distribution network in the country.” The top seller is the 500ml bottle, but the company is mulling entering the gallon market, which industry insiders estimate at around 25 to 30 percent of the licensed market.

Diversification

Competition to get on supermarket shelves is fierce, as that is where consumers have the most choice, and the best prices for licensed brands. This is down to distribution costs, with home delivery costing more, albeit ensuring more consumer loyalty. Industry players estimate distribution at 30 to 40 percent of operating costs. 

“As long as consumers can easily switch brands, and can’t tell the difference between one water brand and another, the higher the competition,” says Riwa Daou, a research analyst at Blominvest Bank.

Such competition extends to imported and sparkling waters. Nestlé had dominated the sparkling water segment with brands Perrier and San Pellegrino, but Rim introduced its own sparkling water brand in 2016, and Tannourine introduced San Benedetto earlier this year. The brands have also ventured into glass bottles to appeal to higher-end consumers, especially at restaurants.

“We consider selling under cost as part of marketing. This is the competition in the market, even to give the bottle for free (to restaurants) as it’s good for our image,” says Tannourine’s Berbery.

Other brands have also introduced glass bottles, but  only market newcomer Talaya has glass gallons, one of only three companies worldwide to do so. Talaya’s CEO and Chairman, Marcel Hage, says glass gallons have reached 25 percent of their overall sales in less than six months, with overall growth of 50 percent compared to 2016.

Glass gallons are only expected to appeal to a small number of consumers due to the high costs, at LL7,500 for 15 liters, and a $15 deposit fee, compared to LL6,000 for 18.9 liters in plastic gallons, and a similar deposit. Costs are high due to the cost of glass itself, imported from Europe, with the 300,000 gallons estimated to cost over $3 million. 

Bad mouthing

Competition is so acute that nearly every bottler had something negative to say about their competitors, ranging from illicit practices and mislabeling, to exposing plastic bottles to the sun, to burning trash during the 2015 crisis.

Sannine was accused of requesting the removal of the manufacturing date on gallon bottles to not be constrained by longevity issues. Tabourian denies this. “There’s no law that states you have to put the date on the container, only for production. We were asking to amend our traceability code in case there’s a problem with a specific lot of orders. It has nothing to do with the consumer, but was blown out of proportion,” he stated in an interview with Joe Maalouf on LBC.

Nestlé Pure Life was accused of not being correctly licensed, but Nestlé says that both Sohat and Nestlé are licensed by the MoH under the name Société des Eaux Minerales Libanaises, under Natural Mineral Water and Drinking Water respectively.

Such competition among players will continue as consumer demand continues to rise amid ongoing mistrust and mismanagement of public water sources. What may happen is consolidation, whether or not the government clamps down on the several hundred illegal bottlers. “There are enough players in the market, so there will be consolidation. The name of the game is distribution, and moving a lot of product at a low cost,” says Tabourian.

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Economics & Policy

Fit for Growth

by Thomas Schellen
written by Thomas Schellen

Breaking out of stasis is neither easy nor instantaneous. Examples of temporarily suspended existence and reemergence in popular fiction range from space travel to medical miracles. Nobody has ever tried it of course, but in theory it makes sense to suspend a body in some sort of stasis for the duration of an interplanetary flight and revive it upon arrival — at least according to countless movie scripts and Hollywood logic.

Much rarer than a cold sleep sci-fi movie plot is the condemnation and rescue of an entire economy from stasis. Economic stagnation and revival has been associated with a single fairytale trope — Sleeping Beauty — many times since the tale was first committed to paper in 17th century France, and further popularized 100 years later as Dornröschen by the German Brothers Grimm. The falling of a whole kingdom’s economy into a deep sleep is only a collateral effect of the young heroine’s affliction, the solution as simple as a kiss that breaks the curse.

In this magic story, the economy-wide reawakening is portrayed as a seamless return rather than as a slow and gradual process of reanimation. This is indubitably more charming than depicting a struggle through a complicated and lengthy recovery, but leaves unresolved the intriguing matter of how one would actually go about reviving a dormant economy.     

Lebanon’s society and economy has not been comatose in recent years, nor has its government been fully paralyzed. Still, it seems that the economy urgently needs to wake up. This makes it prudent to consider the perils that companies will face from an administration that has been stuck for several years in the closest thing to a freeze imaginable in the warmth of the Beirut sun, while the world around kept moving.

While the first Cabinet debates after the adoption of the new electoral law did not hint at a uniform position on economic policy, signs point to a rise in government activity with regard to budgetary decisions and taxation.  Thus, the question is not whether there are new pressures on the horizon, but merely to what extent these pressures will be caused by new taxation, international economics and interest rate environments, increased energy costs and other factors. 

For local companies, this means that new cost pressures will be compounded with existing pressures on profits, which they have felt from domestic and international markets for the past six or seven years. In parallel, the Lebanese body politic, with all its administrative organs, must — if the functioning of state entities is to improve at all — engage in some serious body building, from the activation of dormant fiscal policy muscles to the detoxification of corrupted cells.

These challenges have been on the table since the beginning of the year, piquing Executive’s interest in sustainable business solutions. Cost-cutting is one avenue that companies tend to take when pressures build. But while cost-cutting is a necessary measure  under the capitalist mandate of competition, it also is one of the thorniest undertakings in an economy in need of job creation. It involves taking steps made no nicer by the various euphemisms employed — corporate restructuring, workplace rationalization, personnel efficiency enhancement — and their implied result: redundancies and involuntary separations.    

While considering the prospect that many Lebanese companies may soon face higher taxes and other cost pressures, we were attracted by a new book by Strategy&, a PWC consulting arm known in an earlier incarnation as Booz & Co. Subtitled a “Guide to strategic cost cutting, restructuring and renewal,” we wanted to find out if a book with the title Fit For Growth (FFG) could offer answers to Lebanese companies that might soon face the need to cut costs.

A closer look at FFG showed very quickly that it does not propose a new or revolutionary solution. Rather, the FFG framework is something that Strategy& has talked about for quite some time. Karl Nader, a partner in the company’s Beirut office who leads the FFG practice in the Middle East, quickly confirms that the book was authored by three of the firm’s principals to describe the result of “an evolution” in their work.

The book does not offer — even by the standards of books on management — a particularly gripping narrative. In short, it is a reference guide in three parts (a brief introduction to the concept, a manager’s guide, and a few afterthoughts on the “human element” and keeping up morale) that offers decision-makers access to insights and practices which Strategy& developed over years of strategic consulting. “What we realized over the last couple of decades is that you can’t cut costs independently. We have been doing a lot of work on strategy and on cost, and when the two come together, you get the most value,” Nader says.

The baseline proposition is simple: The book argues that contenders in the globally connected and disintermediated marketplace need to focus on managing cost as much as on growing revenue. “Companies across industries and geographies are realizing that the only way to unleash profitable growth is to cut costs,” it claims.

The trick, however, is how to do this right. Cost reductions are often done under duress, in undifferentiated fashion, and driven by reduction targets or benchmarks focused on matching the competition. In contrast to this blind slashing of numbers, the FFG approach is backed by a strategy; it “protects ‘good costs’ and reduces ‘bad costs.’”

Good costs in this framework are those that strengthen a company’s ability to differentiate itself. All other costs are either “lights-on” costs (needed to keep the company in operation, but that do not distinguish it from the competition), or costs which are not related to the company’s priorities. According to the authors, companies that embark on cost-cutting often focus too much on cost reduction targets, and too little on the development of “differentiating capabilities,” while a better path lies in achieving a balance between the two.

In defining and developing their differentiating capabilities, organizations need to understand what they are really good at, or what they want to be really good at, Nader explains. This is where consultants can help companies with complex organizations and many stakeholders to prioritize and work through the opportunities they identify.

“The role of a consultant is [to put together] an unbiased view of what is the best model for you as an organization,” he says, citing several examples of large companies in the Arab region that have come under pressure from dropping profits, in areas from luxury retail to distribution. “Across the entire region there are retailers, distributors, and manufacturers who are under pressure.” 

While conceding the existence of economic pressures across the Middle East and the need to cut costs, Nader reiterates that cost-cutting can mean things other than laying off employees. “The economy here is challenged, and companies are challenged, so it’s very easy to conclude that you have to cut costs or optimize operations, but there’s a need to really understand what I’m good at, and what [I’m] not good at, or not so good at, [to ask], ‘Where do I need to further invest to differentiate myself?,’” he says.

The FFG approach emphasizes that such a transformation is not immediate. “With FFG the journey is very long. Working on restructuring is not a one-day event,” Nader confirms. Moreover, it certainly does not appear to be painless, given the book’s references to the need to cope with organizational fears and affirmations that “a Fit for Growth transformation asks a lot from all the employees in the company.”

Finally, the question remains how far the concept is applicable in a small economy in the Middle East. While hiring a large consulting firm to help seems to be the more feasible road for companies in the Gulf region — according to Nader, some 50 percent of Strategy&’s FFG activities are with organizations in Saudi Arabia, and another 25 percent with organizations in the United Arab Emirates — he says SMEs in a smaller economy like Lebanon can apply the FFG approach on their own initiative and do it in-house.

Nader points to a Fit For Service (FFS) advisory practice that is parallel to the FFG approach. According to him, the method is designed to reduce headcounts and improve efficiencies in organizations that are part of public administration (see box).

Executive sadly did not find any evidence of a magic-kiss solution to revive the fortunes of the country’s private or public sector stakeholders, but it seems that available lessons clearly hint that approaches that cut costs in conjunction with the development of productivities and competitive capabilities are preferable.

Explainer:

Fit For Service components

According to comment text by Strategy& partner Salim Ghazaly, the public administration in Lebanon could engage in a four-step process to improve performance and enhance efficiencies:

1) Develop a national socio-economic plan to identify national priorities and mobilize government efforts and expenditures accordingly. This exercise should be structured around the competitive positioning of the Lebanese economy (such as in professional services, tourism, and potentially a new oil sector) and dropping sectors in which the country is not competitive.

2) Focus the role of the government on policy making, regulation and enforcement, and transition its other operations to the private sector — this could be achieved through implementing a national private sector participation program (privatization and PPP). This could result in a leaner and more efficient government, while spurring growth within the private sector. It could also result in Capex and Opex savings, and potential revenue from the sale of selected existing assets. The Lebanese government is well positioned to do this, as it already has a regulatory framework through the Higher Council for Privatization and a PPP law (currently being revised).

3) Launch a culture/management change program across ministries to instill a citizen-service culture — a good example is General Security.

4) Implement cross-sector enablers that contribute to higher efficiency and economic growth, such as digitization.

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Book ReviewEconomics & Policy

Explaining Middle East Insecurity

by Riad Al-Khouri
written by Riad Al-Khouri

The Middle East faces an increasingly complex and fragile security situation. The region (defined by authors Swain and Jägerskog to include all Arab countries in Asia, plus Egypt and Occupied Palestine — though I personally might also add Iran and Anatolia) suffers from strained water supplies and limited arable land, along with increasing populations, stagnant agriculture and lacking food supplies. Another issue is large-scale labor migration, along with the huge numbers of forced migrants and refugees coming from the region (not to mention millions of internally displaced persons). The book analyzes such emerging challenges comprehensively and systematically, looking at these Middle East issues from a security perspective, as well as their global context.

Security is increasingly on people’s minds after the Western reaction to the September 11 attacks on the United States exacerbated violence across many parts of West Asia and North Africa, of which the Middle East is the strategic heart. Following 9/11, the US attacked Afghanistan and Iraq, and abetted or otherwise became involved with fighting in Yemen, Libya, and Syria. The legacy of intervention was several failed wars and a lot of other meddling that inflamed an already troubled region, intensifying problems such as forced migration and food insecurity. In their wake, the uprisings of the Arab Spring swept across the Middle East  from late 2010, leading to political transformation.

All of this further eroded stability throughout the Middle East, exacerbating existing long-term security problems. In turn, as the authors note, outside forces, including globalization and climate change, are interacting with this mess, leading to even greater insecurity in a vicious circle. Subtitled ‘The Impact of Climate Change and Globalization,’ the book’s strength is in its linking of the region’s woes with wider international themes. Climate shifts and the impact of globalization are examined in some depth and with critical evaluation. An interesting example of this is the purported connection between the crisis in Syria and that country’s drought of the last decade, given that the Syrian problem now has a strong geopolitical dimension.

The book was published last year, and so it does not account for recent international policy developments on climate change and globalization, such as the US withdrawal from the Paris climate agreement. The new American course cannot bode well for the Middle East, if only because unchecked climate insecurity combined with war may lead to more famine in broken states (as is already the case of Yemen today), with mass migration from and through warzones exacerbating global tensions. The post-9/11 wars led by America took scant account of local interests, with few serious plans for what to do once the fighting ended — ultimately letting chaos reign. In a curious parallel, the new US climate policy also seems to invite chaotic events, which could be problematic for the region.

Globalization has also had a major impact in the Middle East. Global forces have unsettled established politics, altered labor markets, and created more international economic connectedness, shifting the costs and benefits of established socio-economic policy. These problems, some of which are considered by the authors, cannot be solved by any one country alone, but need collective and collaborative action — something that the countries of the neighborhood need to work on if these issues are to be addressed.

The West’s global dominance has been halted with the failure of American economic and security policy over the last two decades or so. The trend regionally, as elsewhere, is toward multipolarity, with the West no longer ascendant. Meanwhile, the integration of refugees and asylum seekers on both sides of the Mediterranean, and the specific barriers such people face, represent a growing challenge. I for one look forward to seeing more on such topics from Swain and Jägerskog.

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