Economics & Policy

Interview with a public servant

by Thomas Schellen
written by Thomas Schellen

As part of our quest for highlighting possible future avenues of progress in the Lebanese Republic, Executive discussed the issue and importance of the 2017 budget with Alain Bifani, director general at the Ministry of Finance. In the course of the interview, the general director also commented on the systemic aspects of the public administration’s work to draft the budget and diligently reconcile national accounts, on planned revenue measures and on the benefits that an efficient civil service can bring to Lebanon.

E   Is the Ministry of Finance, like all Lebanese public institutions, short of qualified manpower?

We are very short on manpower in general and on qualified manpower in this regard [for auditing]. One of the main things that was achieved [in reconstruction and reconciliation of national accounts] was to again provide the ministry with knowledgeable people. The function of the public accountant had disappeared, because it was not taken seriously in the past. So while people were on the job, we had to teach them how to be a public accountant and state of the art [practices] for handling public accounts.

E   So you created a subspecies of a very important profession?

Absolutely.

E   Was there any evidence from your work on the accounts that there was any large-scale corruption occurring in the years which you examined?

My job as a public servant is to provide Lebanon with proper accounts. I am not a judge to audit and I am not an MP to question. What matters to me has nothing to do with the political debate that is taking place. What matters to me is that when I am done, Lebanon will have proper accounts. It is mandated by law that we send the accounts to the Court of Accounts when we are done with them. Then they go to Parliament. It is up to them to decide if this was on purpose, if it was wrong or right, when mistakes happened.

E   What about suspicious contracts when amounts suddenly go up?

This should have already been [scrutinized]. When it comes to contracts, you have ex ante and ex post control from the Court of Accounts.What we are doing is reconciling and reconstituting accounts, for instance if you have a revenue that was not registered as a revenue but is still pending in a temporary account. Or say something was paid to enterprise A and has been registered as paid to enterprise B.

E   So you would not judge if something occurred because of incompetence, misinformation, or laziness as opposed to corruption, but you could say if there were incorrect numbers in the accounts?

Yes, I think everybody agrees that there is an enormous amount of incorrect [data] but it is not my job to determine why. My job is to correct and to flag [incorrect statements]. I have to say that the civil servants that we have, have done a fantastic job in reconstituting these accounts and this in itself should send a very positive message to the Lebanese and the whole world. We are improving the system and we mean business.

E   I recall that at the time of debating the introduction of value added tax (VAT), there was a lot of doubt among the Lebanese public and international observers that  the Lebanese Ministry of Finance could institute a VAT and supervise the implementation on time, but the ministry succeeded surprisingly fast.

I love this example because introduction of the VAT was my first main challenge at the ministry. We started working on the VAT system at the moment I joined and when we introduced it, I still remember that this was the first time the public had to acknowledge that civil servants in Lebanon accomplished this task alone and introduced a VAT, without consultants and huge outside teams. We also have been providing technical assistance to at least seven countries in this region on VAT, through  our civil servants, and even consultants have asked for assistance from our civil servants. This totally contradicts the story of the inability of the public sector in Lebanon.

E   My understanding is that the remuneration of Lebanese civil servants is not exactly at the top of the world.

No, it is not (smiles).

E   When Lebanese civil servants thus go to help with a VAT project in the region, is there some special remuneration or honorarium?

There are two formulas. When they are still civil servants and go somewhere [for such a project], they are not paid [anything outside their salary]. The only thing paid is ticket and hotel by the host country. The second way is for a civil servant to take a leave of absence and they are then taken on by the World Bank or similar institution on a short-term contract. But this doesn’t happen often. Most of the time we just send people because we want to strengthen our ties with those countries.

E    Would you say you are a model ministry of Finance for the Arab region?

In a few aspects, yes. Let’s not push it too far. We are aware of the fact that there is still corruption in our system and that there is still inefficiency. What I like to compare is where we are now and where we were a few years ago, and I do this comparison every year. Most taxpayers will tell you that it is amazing how different tax authorities have become. What we want in the end is not to be liked by people, but to be respected because we are doing our job properly.

E   Why in the world did you join the Ministry of Finance? Was it the money or reputation?

It was definitely not the money. I was not programed to be a civil servant. When the position was proposed to me, I was 31 and I thought that it would be a fantastic exposure at my age. I was not planning to stay for long when I joined, but you are caught up in the huge number of projects that you have to do and I see myself as a permanent project manager. On the other hand, I am very proud to be a civil servant. There is nothing wrong with coming from the public sector; one has to be proud of serving his country. The two facts – challenging projects and that you are serving your country – made me stay.

E   When I think of civil servants, they did not have the reputation of being the most industrious in mid-20th century Germany of the, but the Prussian work ethic of the duty-bound civil servant and their system of managing state accounts was in the background of success in building a national entity back in the time when Germany was an assembly of mini-states.

It is very interesting that you say that. To everybody who is telling me that “you cannot change this country and we have always been corrupt and inefficient”, I say, “Look at Europe in the 19th century”. Europe in the 19th century was basically about very corrupt administrations and weak states, and it was only this push towardspublic administration that made them what they are today. If it took them decades [to build an efficient administration], nowadays it can take less time and we really have to believe in that.

E   In hindsight then you don’t regret the length of time you have spent at the ministry?

I don’t regret the length of time. I only regret that everything that should not require a lot of time [to accomplish] takes a whole lot of time. For example, when we worked on the debt administration, I wrote the first law to create the debt management directorate in 2002. This was passed in 2012. The first draft law that I wrote after I joined the ministry was about insider trading, about which there was no law in Lebanon. It was finally voted upon in 2011. Sometimes it was very frustrating but all together, it was worth it.

E   There are many activities happening on the levels of cabinet and Parliament now after a long hiatus, for example with regard to the rent law. How do you adjust the planning when such a thing happens like adoption of a law with consequences on costs and finance?

Whether you have new expenditures or new revenues, it has to go through a law. Every time there is a new law, we immediately begin work to assess the impact of the law and propose the budgetary lines that come with it. Normally we would also try to find revenue with the law.

E    Are there proposals for new revenue measures then?

Yes, and many of them have already been approved by MPs but not been voted upon. This is because many were discussed when MPs were discussing the salary and wage rate of the public sector.

E   So this will be revenues in order to finance the public sector salary scale or the needs related to the rent law?

This is how the media and the politicians sometimes talk about it but there is no allocation for revenue in our system.

E   So it is fungible money all the way?

Everything is fungible and meant to finance the whole budget.

E    Can you specify some of the revenue proposals?

Yes. The public knows most of them. There is the story of taxing real estate capital gains for individuals. These are totally tax free, which is totally not logical. Then there is the increase of the 5 percent tax on interest rates and a slight increase on the income tax from 15 to 17 percent.

E   For individuals or corporations?

This is on corporations. Plus there are issues with [increasing] stamp duties.

E   VAT?

We don’t know yet if the government is going to be willing to talk about VAT, but for the time being it is not an approved measure. As far as I know, there is nothing yet in this regard.

E   How about treasury advances and arrears that need to be balanced in the accounts. Is that a problem?

No, we have already balanced all of this to the penny. There is legal action that needs to happen and that is to close the advances. It will happen either now or with the closing of the accounts.

E    Does the issue of the salary scale for public servants at this point give you still any headaches or sleepless nights?     

The salary scale is a distortion from the past. Had the government in those years [when salary increases were suspended] respected the law and given the salary increase every year, we would have never had this problem today. Now we have the problem of an administration that is not paid properly. This is a fact and if we want Lebanon to again become a leading country in this region, we have to fix the situation of the administration.

E   What makes you say this?

Because if the administration is of a lesser quality, then automatically the whole economy becomes of a lesser quality. It reflects on the private sector. What we need to do quickly is to provide Lebanon again with the means to become a hub and reference for the region. This has to start with the public sector. This does not mean we have to overpay people, or pay them to do nothing, or have bloated administrations. It means that people [in civil service] have to earn what allows them a proper and respectable life. It is unthinkable to tell civil servants “either you live on what you have and are miserable, or become crooks and take advantage of your position because you are not going to be paid a decent salary”.

E   It was the impression already in the early 2000s that there was not so much large-scale corruption as much as petty corruption stemming from putting civil servants in a position where they have to become enterprising in some way because they cannot survive on their salaries. How do you see this?

It is also true that it is in the culture and [thus it is also an issue of building a culture of honest and respectable public service]. When you have honest people, it is true that even if they starve, they remain honest, and if you have crooks, they remain crooks even if you pay them well. But [you have to take care of] the vast majority that is in between [perfect honesty and total corruption]; you have to reassure them. Once they are reassured [in their positions], they have the resilience to say no [to corruption] and declare “we want to be recognized as decent people”. It is so difficult to all the time be accused without reason, simply because you work as a civil servant. 

E   A fair wage for rank-and-file public servants is long overdue, but do you think that would drive reform for the larger structural changes Lebanon needs?

Take the whole problem of this country. Why has Lebanon not been able to reform itself? Why are we not able to change whatever needs to be changed? It is because typically the part of the population that [drives and implements reforms and change] is the middle income group. The poor are unable [to effect change]. The very powerful don’t need to change anything. The simple fact is that the whole public sector, which includes the military and all [similar agencies] makes up a huge chunk of the Lebanese population and is not paid according to what it should be paid. If we had a strong middle income [segment in the population] this would boost [both] the administration and the private sector. Recreating the middle class in Lebanon is absolutely critical for this country. One point of entry to [the process of] doing so, and also for the private sector to become vibrant again, is to correct the wages and salaries in the public sector. This is critical.

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LeadersOpinion

Dashing our hopes for reform

by Executive Editors
written by Executive Editors

Back in 2013, Parliament extended its own mandate in part to allow it more time to agree on a fair and representative electoral law. Instead of spending four years working toward this goal, the legislature did very little with the four extra years in office it granted itself. From the second the ink dried on Parliament’s second term extension (remember, the four years were granted in two chunks), it was clear a new law needed to be agreed prior to February 21, 2017– the date on which the current law says voters must be welcomed to the polls scheduled for May 21.

Missing that deadline is inexcusable. When President Michel Aoun assumed office in late October 2016, it was clear the government formed as a result of his election would be short-lived, with a very narrow mandate: choosing a new electoral law. Instead of immediately getting to work on agreeing to a more fair and representative electoral law during cabinet sessions, this debate has been held in secret among political parties. While some of the work cabinet and Parliament have done since December is important and helps build confidence (such as passing the oil and gas decrees and legislating the right to information), political life in this country is once again seemingly grinding to a halt, evidenced by deadlock over not only a new electoral law, but over the country’s first budget in more than 10 years.

At the moment our economy needs confidence more than anything. Even if the political class had passed a “reformed” electoral law, there is no doubt it would have been fine-tuned to best serve the parties in power. So while we defend and still hope for the actual implementation of the constitution (including elections free of sectarian quotas and creation of a Senate), we realize getting there will be a slow process. In the immediate term, we simply need the government to meet the minimum requirement of holding parliamentary elections as soon as practicable.

Parliament Speaker Nabih Berri recently set April 17 as a new deadline by which a decision on an electoral law must be made. Our politicians cannot miss another deadline. We want the process of drafting a new electoral law to be transparent. We want that law to be fair and representative. We are, however, realistic and reluctantly accept that reform might not materialize this year. No matter which law is used, we demand elections in 2017. We’ve waited long enough.

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EditorialOpinion

Recourse to reform

by Yasser Akkaoui
written by Yasser Akkaoui

I can remember hiding from the bullets and bombs in the bathroom with my mom and brother. My father was out trying to earn a living, and the worry that he would not make it home made me sick to my stomach on a daily basis. We lived in hell as militias destroyed this country and its once-strong economy and currency. When we finally escaped, we headed for Canada. Arriving as immigrants, we were graciously welcomed and provided with every right the developed country had to offer. Except one. The most precious right. The right to vote. We were told that only after we proved worthy would that right be granted to us.

The men who literally destroyed this country were somehow entrusted with rebuilding it. They have unequivocally failed. This country is a crumbling mess, when it has the potential to be a regional economic powerhouse. The gross mismanagement is shameful. We have the drive and the talent, what we need now are elected officials who will take immediate action to improve Lebanon’s physical and legal infrastructure.

Take the national approach to cybersecurity, for example. We don’t have laws to protect citizens online, much less laws to enable and nurture business development on the web. Hell, we don’t even have the infrastructure for modern internet connections. Passing laws and investing in infrastructure are low-hanging fruit the people have been begging for over the last ten years. This is simple, but our politicians are deaf. Instead of a booming digital economy, we have broken promises and draft laws ignored by an arguably unconstitutional Parliament.

The failure to find a fair and representative electoral law is unacceptable. I’m sick  to death and angry, but sadly, not surprised. In the 1980s, our politicians were combatants who did not respect our right to live. Why would they respect our right to vote 30 years later?

Let’s not lie to ourselves, there is no real opposition to the ruling class in this country. We call ourselves a democracy, but our election results are no different than those in dictatorships. People took to the streets to protest during the garbage crisis in mid-2015. Today, as our most precious right is being stolen AGAIN, the streets are silent.

We must begin to fight back. We deserve a standard of living that is very easily within reach. It will not take a generation to pull us out of the mess we are in, if we take the work seriously. Our problems are very well understood. Solutions are literally on the table. We need parliamentarians willing to work for Lebanon, and no matter which electoral law our princes decide on, we must stand against them.

Stealing back just a few parliamentary seats at a time would be a win. We need unity and focus. We have the ideas as well as the solutions. Let’s make sure our grandchildren do not end up hiding in a bathroom or queuing in an immigration line.

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Hospitality & TourismSpirit Industry

Of spirits and whiskies

by Nabila Rahhal
written by Nabila Rahhal

Whether it’s a vodka cocktail while dancing at a club, a glass of wine over dinner, a single malt paired with a cigar after a long day, or even arak to go with the Sunday mezze spread, alcohol is often a significant aspect of the lives and habits of many Lebanese.

And while every individual has a preferred poison, the global drinks market still promotes popular spirits and creates worldwide trends that will eventually make their way to Lebanon’s consumers.

Executive met with some of Lebanon’s major spirits distributors to learn more about their achievements the past year as well as the latest trends and consumption habits in the world of booze.

Toasting to a good year

While acknowledging that 2016 had been a tough year in general for the economy in Lebanon, all the distributors Executive spoke to reported double digit growth in their spirits sales in spite of national and global market stagnation.

The managing director of Etablissements Antoine Massoud (EAM), Anthony Massoud, attributes the company’s growth to “good dynamics in the spirit’s category”.

Two years ago, EAM launched The Malt Gallery, a specialized whiskey and premium spirits retail outlet that sells EAM’s brands as well as those of other distributors. Massoud says the liquor store has contributed to EAM’s growth, explaining, “In our spirits portfolio, we have two components, which are the distribution stream and the retail stream (The Malt Gallery). They are both growing.”

Gabriel Bocti and Diageo Middle East North Africa (MENA) say growth in their companies was in part due to security stabilization in Lebanon toward the second half of 2016 that led to an increase in expatriates and tourists visiting the country. Ziad Chami, head of marketing at Diageo explains, “When a lot of people are coming into the country it is better for our industry in terms of on-trade consumption as most venues were fully booked. This is positive for the tourism economy, and, as a result, positive for us as well.”

Meanwhile, Carlo Vincenti, CEO of G. Vincenti & Sons, ascribes increasing growth in spirits to their acquisition of six major brands. In addition to acquiring the distribution rights for No. 3 Gin and Angostura Rum (the brand was already present in the Lebanese market but with another distributor and in its bitters category only), Vincenti took over the distribution of The Edrington Group’s national portfolio, which includes the blended whiskey Famous Grouse, the single malt Highland Park and the high-end single malt The Macallan.

Usually spirit distilleries have long term relations with their local distributors, this has been changing recently.According to Vincenti, The Edrington Group switched distributors because they felt their brand vision aligned with that of G. Vincenti & Sons. Vincenti confirms, “Knowing the capabilities of Vincenti in marketing and distributing brands, they see it as more fitting their own vision and perception of their brand.”

The fallen spirits

However, this growth in 2016 was not across the board, and some spirit categories in fact declined in market performance. According to Vincenti, national sales of standard and non-premium blended whiskey consumption have been slumping for the past four years, with consumers being more in favor of bourbon or malt whiskey. While some distributors reported a growth with their vodka brands, others said sales were dropping because vodka consumption is largely associated with nightclubs as opposed to at home or cocktail bars, which was still a growing trend in Lebanon in 2016.

Division Manager at NeoComet, KFF Food & Beverage’s spirits distribution arm, Tony Mazloum, told Executive that although standard blended whiskey continues to outsell other whiskey categories, the company has started to invest more in high-end and premium brands. Malzoum explains, “Our goal is to stabilize the existing business, which is the standard whiskey. [Those brands] still [represent] the biggest share of the market although their share is decreasing as people are shifting to premium, and this is where we are spending our budget for marketing and communication.”

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The fastest growing segment of whiskey is single malt

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Gin growth

With the world becoming more of a village, global trends in spirits are finding their way to Lebanese consumers a lot faster than ever before, says  Jeanine Ghosn, managing director of Gabriel Bocti. Mazloum agrees, explaining that young Lebanese are consuming more gin as they buy into a global trend that sees this spirit as a healthier option due to its botanical ingredients.

Ghosn believes that in parallel to its global popularity, the rise of gin consumption in Lebanon is a result of an increase in cocktail bars across the city. These bars create a lot of gin-based cocktails and as a result “the bartenders became our brand ambassadors,” she explains, adding that their gin brand, Hendrick’s – which they introduced in 2012 – has seen triple digit growth.

Chami also reports that Diageo has seen growth in their gin sales, but adds that this growth is measured from a nationwide low baseline. He confirms, “Gin is of a much smaller base when compared to whiskey or vodka, but it is growing. We do see gin being a fast growing segment, driven by cocktails such as gin basil.”

The malt revolution

With the success of specialized retail stores such as The Malt Gallery, boutiques such as The Cask and Barrel or even events such as Whiskey Live (a whiskey tasting event that took place on December 2016 at Le Yacht Club that was attended by approximately 2,000 consumers), it is easy to believe that the biggest market growth of 2016 was in the sales of premium and single malt whiskey.

All distributors Executive spoke with reported significant growth in their single malt brands. While Massoud says they started to notice an increase in single malt consumption as of 2008, the category truly spiked two to three years ago. “The fastest growing segment of whiskey is single malt, but it is also coming from a much smaller base. Single malt consumption in Lebanon represents 1 percent of the whiskey market but there is increasing demand on it as whiskey drinkers become more discerning in their tastes,” explains Chami.

According to Massoud, the single malt’s popularity is part of a global trend toward the “premiumization” of spirits. “Worldwide there is a trend in alcohol toward premiumization, meaning drinking alcohol which is perceived to be better. While in vodka it is translated into visual details such as the bottle design or texture of liquid, in wine or malt whiskey you have history, craftsmanship and variety of production that is astounding. As such, single malt, because of premiumization, was the natural evolution of whiskey drinkers,” explains Massoud.

Vincenti believes that malt whiskey is causing an uproar because of its complexities when compared to other spirits rather than simply being a new market trend. “While there are different spirit trends going on, they don’t stimulate interest as much as single malts because the single malt category is so rich in history, production and education. You would rarely see this hype over gin, for example, although premium gin is a category that is increasingly consumed in Lebanon.”

Breaking the ice

In the past, drinking single malt whiskey was somehow seen as stuffy, but Ghosn explains that distillers such as those of Glenfiddich have worked to create new niche markets. “We tried to break the ice with the consumer and communicate the message that you drink malt the way you like it. It’s true that there are ways to make malt consumption more enjoyable but in the end you drink it the way you like it and there are no rules,” she says, adding that this has led to more young adults discovering the pleasures of drinking whiskies such as Glenfiddich. Vincenti agrees, explaining, “Today, young consumers are looking for an alternative whiskey choice and don’t want to drink the whiskies of their fathers and grandfathers. They want a whiskey that is more identifiable to their lifestyle and image, which is the bourbon category since it is much smoother and easier to drink, and opens a wide variety in that you have different tastes for different moods.” He gives the example of Jim Beam premium bourbon that comes in different flavors such as Jim Beam Honey or even Jim Beam Apple, which is particularly suitable for summer and easier to drink.

Capitalizing on young adults’ desire for new experiences, Mazloum says Fattal is introducing innovative ways to promote their premium whiskey brands that would appeal to their age group. “To win over new consumers, keep up with the trends and grow the business of Scotch, we moved over to mixology. We are introducing cocktails that use single malt and premium whiskey through initiatives that bring it closer to millennial consumers,” enthuses Mazloum, giving the example of their Scotch Egg Club, where food is paired with whiskey at an event to which they invite young bloggers and influencers.

Setting the scene

According to Massoud, the wide variety of single malt whiskies at the Malt Gallery means consumption is reliant on the mood of the moment and specific brand names have therefore become less important. “While it is important to have brands, and we do so, single malts are like wine in that they are more about the mood and the moment. It is interesting because we get to see consumer habits, and we noticed that when it comes to whiskey, the consumer is all about variety. They rarely stand by just one brand, because taste evolves as the drinker matures in age and experience,” explains Massoud.

For Vincenti, premium whiskey consumption mostly takes place at home, adding that,“Because 50 percent of malt whiskey consumption happens at home, presence in off-trade through specialized shops or displays in supermarkets is important. Single malt is really strong in social home gatherings as it’s a sign of prestige where you honor your guests by sharing a special single malt with them.”

Similarly, Ghosn says gifting premium and malt whiskies accounted for a big percentage of their sales in December 2016, highlighted by their presence in specialized retail shops. “We don’t cater just for on-trade, the big chunk of the business for us is in retail. The developments in the upper trade (specialized retail shops) are a great vitrine for us, especially now that there are a lot of events at home, due to the fact that purchasing power among locals is low,” says Ghosn, explaining that a bottle of premium whiskey at a retail shop would cost less than it would at a restaurant or bar.

The malt’s future

All distributors Executive spoke with believe there is big potential for malt consumption to grow even further in Lebanon, but such growth depends on educating the consumer.

Both Vincenti and Massoud say that the main reason they opened their specialized whiskey venues is to promote the single malt world through master classes and tastings. “There is a growing interest among Lebanese consumers for single malt, and although their percentage remains small, it is our mission is to make it the biggest possible through education,” says Massoud, explaining that while in distribution they focus on their brands, in The Malt Gallery, their aim is to enhance the single malt category in Lebanon as a whole.

Although The Cask and Barrel has only been open since September 2016, Vincenti says they have been “overwhelmed with feedback” about the boutique, which only showcases Vincenti’s spirits. “Consumers are receiving a lot of education right now, which is what they need. Through our Cask and Barrel premium boutique we have been holding weekly master classes and whiskey tastings. We have different formulas for people to come in and learn more about the single malt world. It’s a huge diversified world that the Lebanese are eager to discover,” enthuses Vincenti.

Still, whether it’s savoring a glass of single malt, sipping a glass of wine or enjoying a cold beer, one thing is for certain: you will surely find what suits your tastes in Lebanon.

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Hospitality & TourismSki Season

The power of a snowflake

by Nabila Rahhal
written by Nabila Rahhal

Someone must have been smiling down at Lebanon this past December. For the first time in at least five years, it snowed early enough in the year that the Cedars Ski Resort –  home to Lebanon’s highest accessible peak at an altitude of 2,870m – began welcoming skiers on December 4 with the country’s remaining ski resorts following suit a few days after (all ski resorts were open by December 19).

The slopes were in full swing over the winter break and therefore able to benefit from the increased activity brought on by locals, expats, Lebanese on holiday and some tourists, launching the 2016-2017 ski season on the right foot.

The snow economy

If the weather continues to bring in snow, this could be one of Lebanon’s best ski seasons in a while. This means that not only will resort operators reap in the profits of a full season, but so will the various businesses surrounding the resorts that range from the small grocery store owner to the five star hotel operator.

During the winter season, the economy of the resort towns is snow-centric. As a spokesperson for  Kfardebian’s renowned French restaurant Le Montagnou puts it: “It’s very simple: when there is snow, we all – the village and all the restaurants – work extremely well and are busy. When there’s no snow, we suffer.” But with the ski season lasting two months at best in recent years, resort owners have realized that for them to remain in business, they have to promote themselves as a summer destination as well.

With these dynamics in mind, Executive took a closer look at some of Lebanon’s leading ski resorts to discuss their achievements to date and their expectations for the rest of the season and the summer.

Skiing among the Cedars

The Cedars Ski Resort is Lebanon’s oldest ski destination. As the owner of Cedars’ Alpine hotel Joseph Rahme recalls, wealthy Palestinians used to visit Lebanon in the 1920s and enjoy winter activities such as snowshoeing in the Cedars even before a proper ski resort was set up.

The first téléskis – or T-bar ski lift – was installed in 1959 by Les Teleskis Des Cedres (Cedars Ski Resort), a company formed by four friends (from the families Fakhry, Keyrouz, Rahme and Sukkar) who rented the land where the resort currently stands from the municipality under a long-term contract. Today, their children have taken over management of the company.

In 2004, the company invested $20 million into a complete modernization of the ski resort, including installing three new chairlifts and other modern equipment. A five star hotel, a few restaurants and a baby ski area were part of the second phase of renovation plans, but this all came to a halt with the onset of the 2006 July War.

Ever since the war, the low level of activity in the resort along with the internal instabilities and regional insecurities that surround Lebanon have discouraged the company from further investment or completing their plans. “As partners, we work in the resort and somehow make ends meet, but we have not returned our 2004 initial investment and are now investing only in the basic operational needs,” explains Elie Fakhry, one of the current owners, adding that it is all the more difficult to consider spending more on such a project when it is only seasonal.

Yet, Fakhry sees hope for the resort and the area for several reasons. To begin with, he believes there is renewed interest in the Cedars and speaks of the increased activity in the area during the summer due to the Cedar Music Festival, which was brought back by Strida Geagea in July 2016 after a long absence. Indeed, Alpine’s Rahme says his hotel was fully booked during the nights of the festival.

Also, a 150,000 square meter chalet resort project – rumored to be a joint venture between Saradar Group and Carlos Ghosn – already broke ground and has Fakhry hoping it will help attract other investors to the area once complete, thereby increasing the land value.

Finally, the election of a president and the stability that Lebanon seems to have been enjoying since could encourage tourists to return, many of whom frequented the Cedars given its nearby attractions such as the Cedars of God forest or the Gibran Khalil Gibran museum.

However, should these tourists flock to the resort to ski it would require a major upgrade in infrastructure. The roads leading to the resort are narrow, so the company has already worked with the municipality on rerouting them to allow for better traffic flow. While the resort can accommodate 8,000 skiers, the parking lot can only fit a few hundred cars and would need expanding.

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Standing at the slopes overlooking the Qadisha Valley and the Cedar’s Forest, one is struck by the sheer beauty of the area

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As such, Fakhry says they are now looking for potential investors to help them complete their plans for the resort. “We are talking to investors from the area and there are some who are interested in large scale projects like this. We don’t have a problem partnering up with another company if it means that the resort and area will be revitalized. Projects like this can increase the economic activity in the area a lot and that’s what we want for Bcharre,” explains Fakhry.

The majority of those who frequent the Cedars Ski Resort today are from the surrounding areas. While skiers do sometimes come from Beirut, Fakhry says the two hour drive somewhat obliges them to sleep in the area. He also adds that only around ten of the hotels and motels in the area are considered to be good quality, with prices ranging from $170 to $250.

Besides skiing, other winter related activities that can be enjoyed in the Cedars include snowshoeing, cross country skiing and snowmobiling ($30 for a 30 minute ride).

Standing at the slopes overlooking the Qadisha Valley and the Cedars Forest, one is struck by the sheer beauty of the area – and the very real potential that exists among its snow covered mountains.

The modern resort

Zaarour Club lies on 2.5 million square meters of privately owned land in the Metn area of Zaarour (just under Mount Sannine).

The company, which originally was mainly owned by Michel and Gabriel el-Murr, operated the ski resort until being forced to close down when it was badly damaged with the onset of the Lebanese Civil War in the late 1970s. While the resort reopened in the 1990s, it only had basic facilities and primarily attracted customers from the nearby community.

In 2012, Gabriel bought his brother’s shares in the resort and became the majority owner of Zaarour Club, the company that today owns and operates the ski facilities and related activities in the resort. New construction work began in 2013, and to date more than $40 million has been invested into turning Zaarour Club into a state of the art ski resort complete with modern amenities and conveniences, explains Carol el-Murr, chairperson and CEO of Zaarour Club.

The clubhouse itself – the building that skiers enter to access the slopes – gives off a modern and fresh vibe with elements ranging from the elevators and escalators that take skiers directly to the skiing area to the spacious food court that includes Classic Burger Joint and a snack booth serving healthy options such as salads and wraps.

The slopes themselves include four chairlifts which Murr describes as “detachable” (meaning they slow down enough for the skier to comfortably get on or off) and a rolling carpet that helps young skiers safely access the baby ski area.

Since the highest peak in Zaarour Club is at an altitude of 1,800 meters, Murr explains that they invested in the sole snow-making machine in Lebanon that produces artificial snow to supplement the natural snow when patches begin to show.

  The resort also features a 16-room boutique hotel, Le Grand Chalet, which Murr says has been fully booked on weekends ever since they opened for the season, two fine dining restaurants – one in the hotel itself – and La Cabine Du Chef, a French restaurant.

The Zaarour Club also created an artificial lake surrounded by a promenade, where the Zaarour Summer Festival was held last year. Murr says it will be used for similar events this summer in an attempt to make the resort a year round destination and build up a sense of community.

A full day of skiing for adults on weekends in Zaarour Club costs $42, with children under 12 charged $30. As well as strapping on the skis, other snow related activities on offer include tubing and sledding. Murr describes this as their first full season and says it has been very successful with an average of 1,500 skiers on an average day.

Perhaps the biggest challenge for Zaarour Club is that the surrounding area is still largely underdeveloped. The land itself has some privately owned chalets from the 1990s on the lower half (which is not part of the club) and Murr says Zaarour Club is constructing 40 chalets – half of which have already been sold – but few properties or construction sites can be seen on the road leading up to Zaarour. Also, there are only around a dozen restaurants or cafes in proximity to the resort.

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To date, more than $40 million has been invested into turning Zaarour Club into a state-of-the-art ski resort

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Murr explains that since the resort has only recently been renovated, it will take some time for the area to pick up when it comes to après ski, but that there are already investors developing such destinations.

“There is a future for the area seeing as the renovated resort has only been functioning for a year or two. This will slowly develop with time and there are already six to seven residential and hospitality projects being built around the resort area,” says Murr.

Murr sees Zaarour Club’s proximity to Beirut through the Metn highway as an advantage, making it an accessible option for those who don’t want to get stuck in traffic. “There is an opportunity or place for everyone, given the number of people who like to ski in Lebanon,” she concludes.

The larger than life resort

With more than 100 kilometers of ski runs and 20 chairlifts, Mzaar Ski Resort in Kfardebian is Lebanon’s largest and most developed ski resort. As such, it is also the busiest, with Nicole Wakim, marketing and development manager for the Mzaar  Ski Resort operating company, saying they get up to 7,000 skiers on a sunny weekend (the resort can accommodate up to 8,000 skiers).

This year, the resort added another ski run, The Falcon, at an altitude of 2,111 meters above sea level. “Its purpose was to alleviate the whole domain so that if it doesn’t snow enough at the bottom slopes, we will compensate with the higher up slopes. But so far this season there was no need and we opened them all,” says Wakim.

Mzaar Resort is also the most expensive among the ski resorts Executive spoke to, with a weekend day of skiing costing $66 for adults and $52 for children. For those that don’t want to ski, snow mobiles are a popular activity, with prices starting at $40 for a 30 minute ride.

Some don’t indulge in any winter activities, but instead visit Kfardebian to enjoy the ambiance and play with the snow. This has added to the traffic flow problem, “I believe our biggest problem today is the heavy traffic leading to and from the resort on weekends and holidays, which is due to the many buses and minivans as well as cars unequipped to drive on snow or ice. This causes a lot of frustration for all visitors to Mzaar ski resort,” says Joost Komen, general manager of the InterContinental Mzaar.

This issue was also discussed by Josephine Zgheib, spokesperson for the municipality of Kfardebian, who says they are working with the municipal police and the Internal Security Forces to organize traffic and prevent large, ill-equipped busses from accessing the road.

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There is an opportunity or place for everyone, given the number of people who like to ski in Lebanon

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The après ski life is also well developed in Kfardebian, with the resort itself including a five star hotel, The InterContinental Mzaar, which boasts 140 rooms (29 of which are suites) and a few restaurants including Olio Igloo, an Italian restaurant-lounge bar.

The resort aside, Kfardebian has around 50 hospitality outlets including hotels, restaurants and cafes, according to Zgheib. For those who wish to rent a chalet for the season instead, Zgheib says there are around 20 chalet complexes in the area.

To further develop the après ski life, Mzaar Resort has developed a full calendar of events that include their annual winter festival and a fashion show on the snow, explains Wakim. “The events help us keep the vibes strong continuously. We are working on Mzaar as a [tourist] destination and although winter is our champion horse, we are working toward making it a summer destination as well.” Wakim says that their summer festival has become a widely popular event that brings life to the area over a several days in August, but they are planning to organize more summer activities to have a sustainable season beyond these few days.

The ski season’s early start this year has benefitted the resort and Kfardebian itself, with Wakim saying that the resort’s hotel and many surrounding restaurants were fully booked on the days leading up to New Year’s Eve, despite the poor weather over the holiday period.

Although it is still too early to speak in terms of concrete tourist numbers, Wakim believes that more Arab Gulf nationals were on the slopes this year than last year. While Komen agrees, he is still holding out for even more tourists in February, when schools around the world take time off to go skiing. “I believe it is still too early to tell the percentage rate of foreign tourists compared to local tourists as the season has just started. Moreover, we have seen many Lebanese living abroad coming to visit their home country, and they are considered foreign tourists. But to give a first impression of foreigners compared to Lebanese nationals, I would say 15 percent of the visitors are foreigners and 85 percent are Lebanese or of Lebanese descent,” elaborates Komen.

Only time can tell whether this winter season will be able to enjoy the arrival of foreign tourists, or whether it will continue to be dependent on the local community. But one thing is for sure: the snowcapped Lebanese mountains are breathing much needed hope and positivity into the country’s ski resorts and surroundings.

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Book ReviewEconomics & Policy

Yossi Alpher, No End of Conflict

by Riad Al-Khouri
written by Riad Al-Khouri

Yossi Alpher, a veteran of Israel’s intelligence services, starts “No End of Conflict” with a personal and emotional account of his role in an attempt to reunite two sisters from the Holy Land, separated since 1947 – first by their choosing different paths in life and later because of the new borders imposed on Palestine post-1948. Alpher describes attempts to bring the siblings back together; the messy details of the story seem unimportant compared to the grand political and diplomatic themes of the book, but even though a physical meeting between the sisters seems rather easy to arrange, the reunification never materializes. Heavy fears on both sides and actual threats made stand in the way – a metaphor for the lack of real peace and durable long-term relations between Israel and her neighbors, especially the Palestinians. Though not related directly to the core content of No End of Conflict, the tale of the two women sets the tone for the rest of the book, painting a dark picture.

After his description of several failed peace initiatives, Alpher argues that renewed attempts to achieve full-fledged final status peace agreements are merely symbolic dances that only show the ignorance or disingenuousness of the initiators, with the actors directly involved not serious about making peace and in some ways preferring the status-quo. If anything, these Oslo-style rituals are seen as actually deepening the conflict.

Israel is facing increasing international pressure over its occupation of the Palestinian territories, its treatment of Palestinians and its attitude toward human rights, as well as recent undemocratic tendencies within Israeli politics. This is further fueled by the growing influence of right-wing ideological, messianic and settler movements within the government, security agencies and state bureaucracy, making any possible peace deal that includes settlement withdrawal increasingly unlikely.

Alpher describes an overall situation emerging of an Israel-Palestine heading toward a binational state, in one form or another, with several unwanted and likely negative consequences. The author refuses to call the current situation apartheid but warns that this is the direction Israel is heading toward, with several actors  advocating racist, apartheid or quasi-apartheid policies. As key to integrating Arabs into a singular state, many on the Israeli right advocate a colonialist approach that includes “Westernizing” and “civilizing” the Arab population and improving their lives economically to encourage them to perceive their situation as superior to any alternative, even though the history of Israel-Palestine shows no indication that economic prosperity determines Palestinian attitudes.

  Alpher is highly skeptical of further attempts for all-encompassing peace talks, deriding them as pathetic and unrealistic. According to him, it is time for a more pragmatic approach to managing the conflict and mitigating some of its most damaging effects, rather than trying to solve it altogether. As such, in the second part of the book, Alpher describes some ideas to muddle through, among which include the international community taking charge, the Arab Peace Initiative, and a stable, long-term ceasefire with Hamas in Gaza.

The final part of the book deals with the ramifications of Israel’s current course and the consequences if it remains unchanged from moving toward a single, openly apartheid or a binational Arab-Jewish state, or some blurry area in between. Some proponents of West Bank annexation and apartheid-like policies are confident that it will not be sustainable and that the world will cope with that reality as long as Israelis stay “united and confident”. There is also a sense that as relations with the West worsen, new economic and security relations can be found with the East – including through the idiotic “Sunni alliance,” surely a peak in the political foolishness of some Israelis. Yet on the other hand, many wiser Israelis – including the author himself – believe that some progress toward a peace agreement with the Palestinians must be made to save Israel and preserve its standing in the world. Alpher, for his part, sets out all these arguments and points of view fairly and succinctly in a book that is well worth reading.

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Economics & PolicyMobile Smuggling

Shedding light on a black market

by Jeremy Arbid
written by Jeremy Arbid

This past November Lebanese authorities disrupted a smuggling operation that had evaded detection for over a decade. The items trafficked were mobile phones to the tune of 2.5 million devices valued at some $45 million during the network’s lifespan, local media reported. The trafficking network’s alleged mastermind? Kamel Amhaz.

The name might sound familiar. Just a few years back, in July 2014, the United States placed financial sanctions on Amhaz, his businesses and several associates. The US accused Amhaz of using Stars Group Holding (whose subsidiaries together form one of the larger distributors of mobile phones in Lebanon, with retail branches throughout the country) to buy sophisticated electronics for Hezbollah. “Items obtained by Hizballah using the Stars Group Holding network have directly supported the group’s military capabilities,” a statement announcing the sanctions read.

The sanctions came just months after Lebanon lifted a regulation meant to curb mobile smuggling. Last November, Ahmaz was arrested on smuggling charges. His release on $10,000 bail in December indicates the government does not really care about an underground market that costs the treasury tens of millions of dollars in lost tax and tariff revenues every year, distorts the competitive landscape and negatively impacts consumer welfare.

Whitelisting

In 2013 the Ministry of Telecommunications attempted to control the mobile phone market, implementing a software system intended to curb smuggling by verifying a device’s International Mobile Equipment Identity (IMEI), a 15-digit serial number unique to the phone. The IMEI number was used by the government to verify the phone, a process known in industry terms as whitelisting. IMEIs that were not imported through proper channels were blacklisted and blocked from connecting to the cellular networks of Lebanon’s two publicly-owned but privately managed operators, Alfa and touch.

The new regulation added an extra layer of bureaucracy, but whitelisting was, in theory, a relatively simple process. All importers had to do was register their shipment’s IMEIs with customs; upon import, traders were to clear their shipment with the customs Directorate of the Ministry of Finance, paying a 10 percent value added tax (VAT) for each device imported and a 5 percent customs duty on the total value of the shipment. After receiving payment, customs forwarded the IMEIs to the Ministry of Telecommunications for whitelisting. Travelers from abroad had to register their device’s IMEI upon arrival at the airport. Local subscribers were grandfathered in and users looking to trade in their mobiles, or switch their SIM card between phones, first had to send one text message to release the number from the initial phone’s IMEI.

The IMEI block had two intentions: to prevent mobiles that were not whitelisted from connecting to the country’s cellular networks, and requiring importers to trade above the table. It’s not clear how effective the system was because figures are not public and government officials would not discuss the matter with Executive. But the IMEI block did have an impact, Lebanese customs data shows. For less than a year it turned a mostly black and gray market into one that was nearly as clean as the sullied snow along the road to Faraya.

In 2014, with Boutros Harb at the helm, the Ministry of Telecommunications did an about-face, cancelling the IMEI block. Harb agreed to an interview with Executive for this article, but did not commit to its scheduling. In a statement from 2014, Harb cited a number of reasons for cancelling the system but offered little evidence to support his claims. According to Harb, the IMEI block forced mom-and-pop shops out of business, eliminated jobs, delayed imported mobiles from reaching the market to the benefit of other traders and had no effect on revenue collection or in curbing smuggling. At the ripe age of ten months the IMEI block was no more.

Regardless of the motive, Harb’s arguments do not appear to have actually been measured; there are no figures published online and the Ministry of Telecommunications, now led by Jamal Jarrah, did not grant an interview.

Lack of data

Nicolas Sehnaoui, the minister of telecommunications who implemented the IMEI block, who also was not available to comment for this story, said back in 2013 that it was meant to curb mobile phone smuggling, as his administration estimated the market to be 70 percent black.

Implementation of the IMEI block uncovered not only the black market, but also dimensions of the market that industry players estimate to be at least 20 to 25 percent gray (see explainer below on black versus gray markets), leaving legitimately imported phones to account for as little as 5 percent by quantity, if both estimates are correct. 

Lebanese customs data does show that the IMEI block made the market more transparent. In 2012, before the IMEI block was put in place, customs recorded imports of almost 150,000 mobiles with a declared value of nearly $31 million. Implementation of the IMEI block got underway in the middle of 2013 and end-of-year records show nearly 1.4 million phones were imported with a declared value of $193 million. In 2015, the first full year of data after the IMEI block ended, the figures dropped off a cliff: 263,000 devices at a declared value of $21 million.

A comparison of UN Comtrade Database, a depository of international trade data reported by countries, with Lebanese customs data suggests a much larger black market than the government thought and shows a total market size by quantity larger than industry insiders project. The IMEI block was not in place for a full calendar year, only the second half of 2013 and the first quarter of 2014. The 2.3 million devices officially imported over 2013 and 2014 is only 30 percent of the 7.6 million that trade partners reported leaving their countries with destination Lebanon. The database is not specific enough to make any conclusions for intra-year changes and neither global market fluctuations nor reported Lebanese exports explain the discrepancy between imports from one period to another. What the UN’s data does suggest is that smuggling is much more rampant than the government thought and shows a market size 2 times larger than industry projections.

In terms of revenues, it is not clear how much in VAT and tariffs the IMEI block helped catch because the financial data is not public, and government officials would not discuss the matter with Executive. What is available are overall figures on VAT and customs revenue that flow to the government’s coffer. But those figures do not give an indication of what is collected from mobile phone imports because there are too many variables to isolate – the data combines all duties assessed on the total value of imported shipments where the flow of trade can fluctuate from month to month, and it lumps together VAT collections on goods and services at points of sale, which might fluctuate due to consumer behavior, with VAT collected on each product imported.

For the treasury, the removal of the registration system meant lost revenues that the Ministry of Telecommunications estimated in its 2013 annual report to be upwards of $40 million annually, though Sehnaoui placed the loss at no less than $60 million per year when he announced the IMEI block that year. But if the UN data were the measure, treasury losses might be above $100 million every year.

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New regulation added an extra layer of bureaucracy, but whitelisting was a relatively simple process

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The Ministry of Finance declined to comment on the impact on VAT collection and the amounts that were received before, during or after the IMEI block was in place. Customs, which falls under the purview of the Ministry of Finance, was also not available for comment on the flow of revenue to the treasury from the collection of duties on mobile imports.

Rita Khairallah, then a project manager at the telecoms ministry, told The Daily Star in 2013 that the IMEI block was an impressive success. An assessment conducted by the ministry after the first three months of implementation claimed that customs and VAT revenues on mobile phone imports multiplied by more than ten times, she said. Khairallah, now a customer experience manager with network operator touch according to her LinkedIn profile, did not respond to Executive’s requests for comment.

The lack of data and the unwillingness of government officials to discuss the issue might suggest an undercurrent to this story that publicly available sources alone cannot tell.

The losses for industry

Industry players had long wanted the government to crackdown on smuggling and parallel imports. Eddy Cherfan, CEO of Cherfan, Tawil & Co. (CTC) – the one market player that agreed to speak on the record with Executive – argues at least 90 to 95 percent of phones on the market before the IMEI block were, and are now again, black or gray devices.

The IMEI block provided what Cherfan thought was a golden opportunity. With it in place, he moved to aggressively expand CTC, updating stores and adding new ones, increasing the payroll and growing the distribution line, where the company does the bulk of its business, with a new warehouse.

Cherfan was thinking strategically. He saw opportunity in a retail market he viewed as unorganized, offering little to customers in terms of service and guaranteed quality, and in return, he believed the IMEI block would level prices. Before and after the IMEI block, Cherfan cited smuggling, parallel imports and the misinvoicing (see explainer below on misinvoicing) of imported shipments as reasons why CTC could not compete on price. He guessed that with more importers paying taxes and tariffs, the number of cheaper black and gray phones in the market would shrink. “We thought we had a fair chance competing in mobile phone sales. Consumers would come to our shop and find well-trained salespeople offering a full-fledged service, with original accessories and warranty at a fair price,” he tells Executive.

It’s not clear how much market share CTC grabbed while the IMEI block was in effect, and Cherfan wouldn’t say. CTC doesn’t have exclusivity on Samsung mobile phones (it does for other Samsung consumer electronics), but the company is the only authorized distributor in Lebanon. He calculates the country’s mobile phone market size to be above 1.5 million devices annually, a much smaller estimate than UN data shows. But given the aggressive expansion plan, it’s a fair guess that CTC projected an increase of market share by healthy margins.

The move to discontinue the IMEI block halted any ambitions Cherfan had planned. The company immediately lost $1.2 million, he says. Retailers stopped buying, content to wait for cheaper mobiles to flood the market. “As soon as minister [Harb] went on TV to announce the cancellation of the IMEI block, the market stopped buying, and we had a large stock [left] in our warehouse – thousands of phones,” Cherfan says.

In the months that followed the IMEI block’s removal, CTC losses added up to millions of dollars. Stores were closed and 80 employees were let go. Cherfan was forced to change tack, shifting much of the company’s mobile trading business, due to regulatory uncertainty and lower investor confidence, outside of the country.

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In the months that followed the IMEI block’s removal, CTC losses added millions of dollars. Stores were closed and 80 employees were let go

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“The cancellation of the registration system cost our company dearly,” he tells Executive. Tallying stock losses, compensation to employees that were laid off, the closure of five shops that had been renovated, rental fees that were paid upfront, IT infrastructure and a new warehouse built for mobile phone distribution, Cherfan says the total losses approached $4 million.

Adding insult to injury was the speedy shut down of the IMEI block. Before its implementation, the government allowed a grace period of several months for traders to clear their stock. Importers that had smuggled phones into the country by not paying VAT or duties were forgiven, able to avoid financial losses and join the market above the table. But when the government decided to cancel the IMEI block, “They gave us only three days. They gave six months to the smugglers and gave us three days,” Cherfan recounts.

State of affairs

That the mobile phone market is openly recognized as a mostly black and gray market raises concerns. The governing element of the story is that the state is giving up revenue due to the treasury, potentially in the hundreds of millions of dollars annually, and acting to its detriment for unknown reasons. The removal of the IMEI block allows some competitors to have a better cost position, because the data shows some importers continue to evade taxes and duties, resulting in a distortion of the competitive landscape. Because of the opacity of decision making, one is left with the conclusion that the government condones smuggling.

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The removal of the IMEI block allows some competitors to have a better cost position

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Explainer: Black versus gray

A black market is one that functions below the radar of the state. Smuggling is an underground activity where the demand or profit margin for controlled products like weapons, or illegal ones like narcotics, or counterfeit goods create a supply incentive too juicy to pass up despite risks. Tax evasion is another form of smuggling, even when the product imported is a legitimate one. Smugglers might also, knowingly or not, import stolen devices whose data has been wiped, updated with a new operating system and reboxed with new accessories and portrayed as a new or used phone.

A gray market, sometimes called parallel imports, differs in that the product is not illegal but is brought into a country through distribution channels that may be unintended by the manufacturer. The driving force behind parallel imports can be due to price variation between versions of the phone meant for different markets, currency fluctuations where the device may be cheaper when traded in a currency that is stronger than that of the country of origination or of destination, or simply due to consumer demand for a mobile in a market that has not yet officially launched. While consumers may gain by paying lower prices, their experience with a parallel import product can be compromised. The mobile they purchase may be a version of the device localized for another market, so the consumer might not receive the appropriate accessories, or might not qualify for the manufacturer warranty, or it may even be a refurbished phone described as new.

Gray markets often come about because of certain rules in a given market. The gray market definition requires two conditions: “(1) The existence of the agreement of exclusive rights to sell a certain product in the territory, (2) The existence of a strong registered trademark, which is recognized in a territory where a potential grey marketing activity may occur,” reads a 2011 research paper on gray markets.

Lebanese law allows for exclusivity rights for companies, and the economy is often described as laissez-faire. But, the “Lebanese economy is largely oligopolistic”, a slideshow presentation hosted on the Ministry of Economy website (it’s not clear when the presentation was prepared or published) points out, adding that a new competition law is necessary to level the economic playing field. The “ultimate objective of competition policy in general, and competition laws in particular, is consumer welfare that is served by lower prices, better quality products and, eventually, by a more efficient and dynamic economy”, reads a 2002 report prepared by a local consultancy for the Ministry of Economy.

Explainer: Misinvoicing 

Importers can skirt customs duties and VAT taxes by mislabeling, intentionally or not, the shipment’s Bill of Lading (BoL) – what is written on the label may not be exactly what is in the box. At its simplest, mislabeling affects the shipment by misstating its content, downgrading its number of units or their total value.

According to Global Financial Integrity (GFI), a Washington D.C.-based nonprofit researching illicit financial flows, misinvoicing could result in the direct evasion of taxes and customs duties by under-reporting the value of goods, an outcome that would easily be measurable if Lebanese customs data on mobile phone imports, the UN’s data on mobile phone exports to Lebanon and the Ministry of Finance’s figures on VAT and customs revenues for those imports could all be cross-checked. However, the latter is not available and officials with knowledge of government finances were not cleared to discuss the matter with Executive.

Mislabeling the invoice is as simple as it is sophisticated, with the shipment passing through potentially one or more intermediaries between the exporter in Country A and the importer in Country B. The shipment could pass through one of four major distribution points for mobile phones – Hong Kong, Dubai, Amsterdam or Miami – before reaching the country where the units will ultimately be sold. So while the exporter in Country A may declare the actual value of the shipment, intermediaries may alter the BoL at points along the distribution path before forwarding the shipment to Lebanon where the importer might again obscure the true value of the shipment.

Sometimes the opposite might occur and the value of the shipment might be inflated. Intermediaries that are subsidiaries owned by the importing company, or companies working with the importer, might raise the value of the shipment to skim cash off the top, sending the proceeds to offshore bank accounts, where taxes can be dodged and the cash laundered. Because of the volume of trade and the sheer number of and speed at which containers move between ports “trade misinvoicing has become a fairly low-risk endeavor for criminals – especially those who only moderately misinvoice their transactions by, say, 5 to 10 percent”, GFI says.

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Economics & PolicyInterview

Putting meat on the skeleton of the state

by Thomas Schellen
written by Thomas Schellen

Walking through the center of Beirut, Nejmeh Square, to the steps leading up to the Lebanese Ministry of Finance (MoF) is even more eerie today than it was 19 years ago. Back then, Downtown was still riddled with brokenness – with scarred streets and uninhabitable buildings that showed the results of the years of conflict. Passing through the district evoked pity and a longing for reconstruction.

Traversing Downtown in January 2017 means wiggling in between concrete barriers while empty store windows stare back at you. The last international chain coffee shop in the area recently shut down, and all that the expensively restored buildings evoke are memories of restaurants and shops that thrived here in the more vibrant times of ten years ago.   

Up in the welcoming office of MoF Director General Alain Bifani however, there is some cheer and confidence. One of the most crucial issues for Lebanon’s future is the adoption of a state budget. “We stand a very good chance of having a budget this year. I think that everybody means business. It is clear that the political level is very aware of the importance of having a budget,” he says.

According to Bifani, the draft budget for 2017 was prepared in August of last year in line with the same schedule that the MoF follows every year and sent to the Council of Ministers by end of that month. In a normal year, the council would then send the budget as a draft law on to Parliament where it would be examined, debated and voted into law by end of the year – but normalcy in Lebanese politics has been quite the exception.

Budgeting for tomorrow

Bifani is therefore not troubled by the fact that the budget might not reach Parliament until late 2017, calling this “an acceptable delay”, especially when taking into account that the budget draft was prepared under the previous cabinet. “Now that we have a new government, the draft of course needs to be revisited, and my understanding is that it is going to follow a fast track, which means reviewing mostly at the level of the Council of Ministers, after which the [revised] draft will be sent to Parliament for discussions and approval. There will be arbitrage about many issues, the usual stuff, but altogether there is no doubt that we have momentum and I really hope that we will be able to build on that and finally get out of this very long period of unorthodox managing of public finances,” he tells Executive. 

The budget is one of the top concerns for advancing Lebanon to a future of greater stability, bankers and business leaders told Executive upon the appointment of President Michel Aoun in late 2016. Lebanese state budgets have generally over the years been bones of discontent. The last time that a budget was adopted by Parliament was in February 2006, when the 2005 budget was voted upon and passed. Since then, failures to adopt a budget had been associated by critics with a wide variety of issues, from political discrepancies to dysfunctional administrations and the need to complete national accounts for most of the years since the end of the Lebanese conflict over a quarter century ago.

When talk turns to the recent years and the sorry state of the area around Nejmeh Square, Bifani agrees that Beirut’s Central District has become a nightmare for the reputation of Lebanon, a hole in the tax base and a burden for the people who invested heavily into the reconstruction of the center’s business venues. But this is not the only heritage that weighs on the Ministry of Finance, in addressing still unsolved issues in the financial past, Bifani explains. “Of course there is the issue of closing the accounts from the beginning of the 1990s until now. This remains a valid issue, but nevertheless, it is better to have a budget while waiting for proper accounts to be finalized than not to have either.”

In his update regarding the progress of closing accounts for the years between 1993 and 2015, Bifani elaborates that of the 11 accounts worked on vertically by the MoF team, eight have been reconciled and reconstructed completely, up from four completed in late 2015 when Executive last interviewed the general director. A ninth account is currently being finalized. “Hopefully we will be done within a month. There remain two accounts of which the work is between 70 and 80 percent complete. We are really reaching the last phases,” Bifani says.

Reiterating that it was once considered mission impossible by international experts to complete this work, he insists that the effort’s most important aspect is not how many man hours were invested by MoF staffers. “I don’t have an accurate figure but it was huge. We mobilized civil servants from all our directorates. These people worked in dust, in humidity, in horrible places. They found enormous amounts of papers that were thrown [into storage indiscriminately]. You had 2012 [mixed] with 2001 with 1993 all thrown together. To reconstitute and classify this took an amazing amount of time,” he says.

Nor is the most important aspect the timescale of its implementation, Bifani emphasizes, under the often asked question of whether the MoF has finished this work yet. Instead, it  is the proper framework that he and his team are building. “That is not the point. We are building on [the reconstruction and reconciliation of the accounts], giving the republic the means and procedures for proper accounting; it is a base and a very important milestone and we have to do it properly,” he emphasizes.

Beyond the job of reconciling the creative fiscal history of Lebanese administrations with the reality of  sorting out records at various ministries, agencies, and municipalities, Bifani’s focus is on Lebanon’s ongoing budget process. This involves consultations with all 24 line ministries, the presidency of the Republic and the Council of Ministers as well as the agencies that are included in the budget, which according to him, means practically every entity in the public administration. “All together there are about 45 units that we need to integrate,” he says.

The draft process entails reviews and modifications by the Minister of Finance after which the budget proposal is sent to the Council of Ministers by the end of August. From there it enters as a draft law decree to Parliament. “What usually takes time [at Parliament] are discussions at the Budget and Finance Committee where the whole budget is scrutinized after the Council of Ministers has approved it. Then it goes to the plenary to be voted upon, ideally by end of the year,” Bifani explains.

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Now that we have a new government, the draft [budget] of course needs to be revisited

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Budget administration

On top of this regular process, the MoF has to incorporate new legislative decisions into the budget, such as implications of the rent law or parliamentary discussions over waiving municipal obligations to pay outstanding dues to solid waste removal companies. Asked about the issue and what amounts could be involved in having the payment responsibility taken by the treasury, Bifani says the problem resulted from a misguided redistribution practice that created huge liabilities and translated into massive distortions, but he would not provide an estimate for the amounts in question. “This is a story that started in 2002 and was very poorly managed. We as an administration have been raising [this issue] and been flagging it forever,” he says.

He adds that the ministers of finance in two recent administrations made significant progress in alleviating the problem by adjusting the percentages taken by the government from municipalities but declares that it still was not yet possible implement the solution, “which is to have municipalities themselves decide on what they can contract and what they cannot”.

His overall approach to the reality of getting decrees and laws implemented in Lebanon is reminiscent  of the Realpolitik paradigm that politics is the art of the possible. When people inquire as to why he would accept imperfect measures, or not insist on laws that cover all imaginable issues, for example, in legislation on oil and gas and the creation of a sovereign wealth fund for the management of revenues from this national asset, he says he accepted such legislation because “otherwise, it would not have passed at all. As long as we fight to the last moment, we are making this system better and better and have the best we can”.

On the question of Parliament’s readiness to examine the draft budget law after a long period without the chance to discuss state budgets, he declares that he is not worried about Lebanese parliamentarians and radiates confidence that it will all go “very smoothly”.

“Despite everything that people say, our parliamentarians are educated people. I know that the work will be done seriously in the [Budget and Finance] committee,” he says, citing evidence from prior debates over budgets in the committee even if these budgets in the end were not sent to the plenary. As to broad discussions in the plenary budget debates, which have been customary in earlier years, he describes this as reflection on the fact that the budget is “the translation into money of the government’s whole policy”.

“Thus it is normal that everything is raised during the budget [debate],” he concludes. “I am not worried about it. I think our Parliament has shown the ability to react very quickly to legislative texts and in a very efficient manner. And I have to tell you that while the finance part is our job at the ministry, we learn a lot from discussions at Parliament.”

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Civil ServiceEconomics & Policy

The administration’s missing cogs

by Thomas Schellen
written by Thomas Schellen

Try driving an aged Mercedes 280 of W123 vintage all the way from Tyre to Tripoli with a faulty gearbox or without a fan belt. Possible? It might be. Temporary fixes such as a pair of tights have been famously used to keep many old engines running when the fan belt has been destroyed. A very skilled driver might be able to upshift from first to fourth gear when the second and third gears can’t be accessed. But your transmission suffers, and it sure makes for risky driving – if you get very far at all. For your vehicle to run smoothly, safely and at its optimal efficiency, its wheels and cogs all have to be in place and well lubed. To drive a broken car is dangerous. Everyone knows this.

Now imagine an organization where important decision making positions, like vice presidents or department heads, are not occupied. The organization might still run, but the transmission of decisions from the top will be slower than it should be, and many intermediate level decisions will not be taken. In the bottom up direction, decision requests will be passed on to the senior-most decider, such as the president or chief executive, and create an overload of work for top management. Erroneous decisions will accumulate and mistakes will be harder to spot if important positions are not filled.

This is not a theoretical vision, take a look at senior administrative positions in Lebanese government entities. According to a list compiled by Lebanese research company Information International and provided to Executive after the latest updates in January, there are 27 administrative “grade-1” posts in Lebanon’s public sector entities vacant as of the beginning of February 2017, all of which are reserved for members of specific religious communities. What is more, at least five of these positions have been vacant for more than a decade.

Some additional positions that were recently introduced, or are not specified in terms of communal identity of the office holder, have also not been filled. When accounting for all these vacancies at public sector entities in Lebanon, and moreover adding in senior positions that would need filling at state-owned enterprises, the void in qualified decision makers is huge. This arguably causes a very large sinkhole in public entities that could undermine the government’s integrity even though a president and cabinet have been put into place.

A Long road to reform

Grade-1 positions are the top tier of the five-tiered civil service network in Lebanon. They comprise positions such as a general director in a public entity and judges in the judiciary. According to sources that include the Office of the Minister for Administrative Reform (OMSAR), the United Nations Development Programme (UNDP) and private researchers, the structure and competence building in Lebanon’s civil services has been marred by problems that were diagnosed as far back as 2001. OMSAR noted in a paper back then for the Strategy and Reform of Lebanon’s Public Administration that the Lebanese civil service “recruitment and testing system is outdated and cannot reliably help in detecting necessary skills and abilities in various jobs, especially in the absence of a job description and classification system”.

Even earlier than that, a study on Public Services Accountability was undertaken at the American University of Beirut in the 1990s on the back of several academic papers by local and international researchers and high-ranking civil servants in Lebanon. This study said that the Civil Service Council (also known as Civil Services Board or CSB) – an institution established in 1959 with extensive powers over practically all aspects of personnel administration in every ministry and autonomous agency, and a mandate to protect and modernize the civil services – was hampered before and directly after the Lebanese conflict through an erosion of powers. Drafted in 1996, the study said: “Despite repeated statements by the government about the need to re-activate and strengthen central control agencies in order to enable them to play an active role in rehabilitating and reforming the public administration, we have been witnessing during the past three years a disturbing trend to circumvent and weaken these control agencies, especially the Civil Service Council.”

Understaffing of higher ranks in the civil services hierarchy has also been entrenched for many years and seems to have only increased over time. In a 2004 public administration country profile for the United Nations, the authors quoted OMSAR’s 2001 paper saying that 10,000 of 22,000 positions were vacant at that time. Citing a CSB report from 2010, a private researcher said in 2013 that the number of vacancies in all categories exceeded 15,300 out of some 22,000 full-time civil service employees.

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The problem [is] in qualification. Having qualified people take administrive positions will reduce the harm of wasta

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The CSB seems not to have published new figures since 2010 (at least none were to be found on its website) and OMSAR likewise has not uploaded an annual report in the last few years. The last annual report on its website, containing scores of plans and project descriptions related to anything from efforts to streamline administrative procedures to completed projects in tourism and municipal solid waste, only covers the years 2010-2012.

It is an established fact in the story of Lebanese administrative reform efforts that initiatives to move appointments of grade-1 civil servants toward a purely merit-based selection process fizzled out within a few years after they were initiated in 2005. In the last five or six years, not much seems to have be done in taking administrative reform forward, and the public debate over the problems of the civil service by all appearances has slowed considerably as threats to Lebanese security and regional problems came to the fore.

The present administrative malaise

In this sense, it is only the tip of the proverbial iceberg that is visible in the list researched by Information International and categorized by the religious affiliations for each position. The list indicates that the 27 vacancies affect positions that are associated with “ownership” by Sunnis, Shia, Druze and various Christian communities in the Lebanese game of politics. This practice is entrenched and reflective of the fact that all across the country’s communal spectrum, groups are vying for shares of the national power pie. According to the advisor to one of Lebanon’s top political figures who had agreed to speak with Executive on condition of anonymity, it was a stipulation of the Taif Accord that the president of the republic should form a committee with the task of overcoming sectarianism in the allocation of administrative posts.

This did not happen, however, and posts are still handed out along sectarian lines to maintain the current confessional balance, according to the advisor. In his view, this pattern is not a problem in itself. Allocation of administrative jobs to political associates is an accepted practice in other countries, he argues, pointing at the United States as an example. “The problem [is] in qualification. Having qualified people take administrative positions will reduce the harm of wasta [nepotism],” he added.

It is arguable if the persisting practice of aligning grade-1 level positions in the Lebanese civil service with a specific religious identity can be anything but detrimental for discovering the most qualified candidates, restricting as it does the candidate pool by a non merit-related selection factor. It would certainly appear as a factor that makes seeking a position in the Lebanese public sector less enticing for the most qualified candidates, on top of the – fairly universal – fact that top jobs in the private sector come with better governance environments and much better remuneration packages, at least for ethically minded candidates. The ones that do apply perhaps do so out of a sense of patriotism, not because they are seeking to convert political power into economic benefit.

Culturally, the practice of aligning office and religious identity might have its merits for keeping the peace in a religiously defined society, even if it flies in the face of the prevalent ideology in western countries that – often enough wrongly – define themselves as liberal democracies, but are in reality driven by special-interest groups and their narrow ideological and political agendas. Political democracy is not the universal pursuit of all stakeholders after the greater good or the nation’s benefit, but the more or less unfair competition between any number of groups seeking after their respective partisan interests.

More than with systemic political debates, however, Lebanon’s political class seems preoccupied with power issues. In discussing those, it appears to be somewhat under-concerned with the economic and social impacts associated with the different jobs that lie vacant or are managed – for example by incumbent position holders beyond expiry of their term – without a clear mandate that meets all legal requirements.

Barriers to economic growth

Arguably not all the vacant positions are equally critical and urgent in their direct or indirect importance toward the Lebanese economy. Some are also occupied by more or less qualified office holders who stayed on beyond their term, so they are not vacant in the strictest sense of the term. However, rotations of office, term limits and durations of tenure are tools designed to help in supervising the efficiency of a position and guaranteeing that a public office does not deteriorate into a personal fiefdom or license for exploitation for private gain. The high number of vacancies, even if some positions are vacant pro forma and not in reality, is alarming from the perspective of governance.

When one further correlates some vacant posts with their impact on the economy, combined with the recent track record of the concerned institutions, the importance of presently vacant grade-1 posts is simply staggering from an economic perspective. This can be said because of the nature of the positions, even if the economic loss for Lebanon from having such posts empty is impossible to assess and so is the cost-benefit ratio that would come with each position.

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The high number of vacancies, even if some positions are vacant pro forma and not in reality, is alarming

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Examples that jump out at first glance are the role of urban planning for Lebanese urban productivity and the importance of the Beirut Stock Exchange in the national economic context. The position of director general for Urban Planning has been vacant since 2005 and the position of head of the Beirut Stock Exchange Committee vacant since February 2009.

The largest hole in a single institution that has to be filled is at the Council for Development and Reconstruction. Fourfold gaps in the CDR’s senior leadership have existed theoretically since 2009 and 2011 – for the Greek Orthodox secretary general, the Shiite vice president, the Maronite vice president and the Sunni president of CDR, although according to the list the Shia vice president and the Sunni president of CDR both continue to “assume their functions” beyond expiry of the council’s term back in 2009.

Other institutions of economic importance where vacancies wait for qualified office holders are the Investment and Development Authority of Lebanon (IDAL) and the Social and Economic Council where director general tenures expired in 2009 – even as IDAL’s general director continues to hold his position – and in 2011. At the Higher Council for Customs, two seats need to be filled and vacancies appear also at the Office of the President of the Republic and at the Office of the Prime Minister (for the entire list, see page 34).

In the judgment of Information International, the Lebanese public is not sufficiently aware of the number of vacancies and the importance of filling these positions for upgrading the functionality of important administrative entities and public bodies. As the saga of insufficiency, political sectarianism and the perpetual lingering of corruption goes back further than many Lebanese can remember in their own lifetimes, solving the issue of civil service appointment methodologies, upgrading civil service efficiency and filling the many vacancies could be as important for the systemic revitalization of Lebanon as addressing the more obvious problems in infrastructure and economy.

In an interview with Executive, the new Economy and Trade Minister, Raed Khoury, says that the problem of modernizing the civil service and finding a solution to the non-merit-based political appointment process is on the new government’s agenda. Acknowledging that the problem is huge, as “key positions have been vacant for a long time and civil service cannot function,” Khoury says there is a clear will among political parties for coming up with a solution for filling these vacancies, as “every party is now rethinking their positions and we will put them to a round table and try to come up with a conclusion.”

In past attempts of the 1990s and 2000s to reform the civil service, resistance against innovation was apparently too strong and could not be overcome. Given the gravity and duration of the civil service problem, 2017 would seem a good time to try again – but perhaps with a multipronged approach that seeks in the longer term to engrave Lebanese society with a stronger awareness of good governance. While in the short term, vacant positions need to be filled, and better selection methodologies and supervisory mechanisms installed, in the public administration.

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CommentEconomics & PolicyOil and gas

A roadmap for the first licensing round

by Mona Sukkarieh
written by Mona Sukkarieh

On January 4 2017, the Lebanese government approved what many observers have been waiting for since March 2013: two oil and gas decrees, without which the country’s first licensing round could not proceed. One delineated offshore blocks, another detailed the model exploration and production agreement and set out the tender protocol.

To signal its determination, the government passed the decrees on the first meeting since gaining Parliament’s confidence. This was a remarkable achievement on the surface, and marketed as such by the government. For others, it was perceived as a long overdue fix.

Roadmap

With the decrees ratified in late January, the Ministry of Energy (MoE) announced which blocks will be open for bidding, as well as a roadmap outlining the steps for Lebanon’s long-delayed offshore licensing round. Block one in Lebanon’s northern waters, block four in the center, and blocks eight, nine and ten in the south will be open for exploration companies to bid on.

According to the roadmap, as Lebanon moves toward accepting bids it will first allow new companies to pre-qualify. That process will take around 60 days, from the beginning of February to the end of March 2017. Companies that had already pre-qualified back in 2013 remain eligible. By mid-April, all eligible companies will be announced. Bids are due in mid-September, and by mid-November 2017, the cabinet is scheduled to sign exploration and production sharing agreements with the winning bidders.

The government is also expected to examine the petroleum tax law and submit it to Parliament for final approval. Hopefully, the political class will not be tempted to drag the process out. It should be noted that Parliament is only in session until March 20. Actual gas or oil production will depend on how successful the companies’ exploratory work is. In case of a commercial discovery, the consortium must submit a development plan that is subject to approval by the government. If granted, the consortium can proceed with production.

Regaining confidence

The pre-qualification round in early 2013 exceeded all expectations. Fifty-two oil and gas companies sought to pre-qualify for Lebanon’s first licensing round. Forty-six of them were successful. But the tender has been postponed five times and was on hold since it was launched in May 2013, due to an incomplete framework. This has affected the initial enthusiasm witnessed in early 2013.

It is essential now to do things right, even if that means taking the time needed. The entire legal and regulatory framework must be complete before inviting companies to place bids, so as not to repeat the same mistakes made in 2013. A competitive fiscal regime, in addition to regulatory and fiscal stability, are key to gain back investors’ confidence.

This must be coupled with targeted campaigns to promote Lebanon’s potential among investors, including  organizing roadshows and official participation in major oil and gas events around the globe.

Lebanon retains an interesting energy potential. This largely explains the success of the pre-qualification round in 2013. Future interest will depend on two things: global market conditions and what we offer investors. There isn’t much we can do to affect the first, but there are some things we can do to attract investors – finalize our legal and regulatory framework, offer a competitive fiscal regime, and actively and aggressively promote our energy potential where it matters.

Beyond the sector, it is important for the government to address and at least contain – if tangible progress is too ambitious at this stage – two impediments that have long hindered investments in Lebanon: corruption and the difficulty of doing business. Currently, Lebanon ranks poorly on both fronts, but the government is determined to improve the conditions for doing business in Lebanon. A new portfolio has been created in the current cabinet charged with combating corruption, and an anti-corruption institution is also being considered. The government has also announced its request to join the Extractive Industries Transparency Initiative, a global standard promoting transparency. Time will tell how effective these measures will be. At times, country risk might be high, but that does not entirely conceal Lebanon’s energy potential. Oil and gas companies are used to operating in areas where political and country risks are high.

Industry context

After a few difficult years for the industry, with a sharp decline in oil prices that has affected appetite for exploration in certain areas, including the Eastern Mediterranean, a soft price recovery is generally expected by analysts in 2017. Although exploration and production spending is expected to increase by seven percent in 2017, according to a report by Barclays, offshore exploration and production will still suffer (though on a smaller scale compared to 2016) ahead of a more positive outlook for 2018. On the other hand, with more and more Liquified Natural Gas (LNG) projects coming online, the LNG surplus is expected to continue until the early 2020s, likely keeping gas prices low – a challenge for companies operating costly and complex projects.

Regional context

Lebanon will also have to compete with other players in the Eastern Mediterranean that are several steps ahead. The third licensing round in Cyprus attracted six bids from eight companies, drawing some of the biggest names in the industry – no doubt lured in by the discovery of the Zohr gas field in Egyptian waters, not far from the three Cypriot blocks on offer. A consortium made up of Eni and Total was preselected for negotiations for explorations rights in block six, with Eni alone selected for block eight and ExxonMobil and Qatar Petroleum selected for block ten. An exploration license will be awarded if negotiations are successful, and final results are expected in the first quarter of 2017.

Israel’s first offshore licensing round, which opened in November 2016, is also an opportunity to assess foreign companies’ interest in being involved in the region at this stage. Twenty-four blocks are on offer. They do not include northern blocks running along the Lebanese-Israeli borders. The bid round will close in April 2017 and results are expected three months later. Beyond assessing foreign oil and gas companies’ interest in the Eastern Mediterranean, the Israeli tender might also be of relevance to Lebanon, as, in principle, companies operating in Israel cannot operate in Lebanon.

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