Hospitality & Tourism 2016Special Report

Broken financing

by Jeremy Arbid
written by Jeremy Arbid

From wellness to cherries, at hospitality clusters and beach resorts, Lebanon’s event organizers and business owners outside the capital agree on one thing: municipalities should do more to bolster their economies. While article 49 of law 118/1977 on municipalities says they can plan roads and other public works – projects like playgrounds, hospitals, sewage and water networks – in practice many are too cash strapped to build or upgrade infrastructure that could support local economic growth. Local business leaders running entertainment venues, restaurants, hotels and other ventures that benefit from an influx of event-goers complain of poor roadways connecting to Beirut and of inadequate public utilities linking businesses to the local grid. Why, asked one business owner before answering their own question, do some people, as anecdotal as it is seemingly commonplace, commute two hours each way to jobs in coastal urban centers? Because residents find few opportunities in rural villages.

What the complaints ultimately boil down to is a criticism of infrastructure investments at the municipal level: more is needed. The hospitality sector is not the only segment of the economy that might benefit from such infrastructure investments, including sanitation, health care and education facilities – public works projects could improve quality of life, boosting access to public services and driving new business growth and job creation in underdeveloped areas of Lebanon. But the municipalities are challenged to do so: they lack money, and a mechanism meant to distribute funding equitably amongst Lebanon’s more than 1,000 cities and villages is broken.

Closing the funding gap

Municipalities are caught in a vicious cycle says Sami Atallah, executive director of the Lebanese Center for Policy Studies, a think tank that has extensively studied the issue of local governance and its financing, lobbying for reform. “The idea is to get poorer and rural areas closer to the average in terms of infrastructure and level of development,” Atallah tells Executive. Cities simply do not have the financial means to implement development projects and maintain or upgrade existing infrastructure he says, pointing out that the problem is more nuanced than just not having cash. A system to distribute money to municipalities, the Independent Municipal Fund (IMF), was set up in 1979 but the mechanism has been plagued by irregular transfers from the pot to the cities.

A portion of the fees on mobile phone and internet service collected by the Ministry of Telecommunications are a large source of revenue meant for the fund, as are taxes collected by the Ministry of Finance. How much money should make its way into the IMF, in terms of assessing whether new taxes and fees are necessary, and whether money meant for municipalities actually goes to them, are entirely separate questions from that of disbursement. On the latter question, a 2011 study by the International City/County Management Association (ICMA), an association of local government administrators advancing professional local governance, in which Atallah was a lead researcher, found a number of unlawful diversions from the IMF to pay for government services at the national level. Between 1993 and 2007 the study found $72 million was transferred out of the municipalities’ trust fund to pay for civil defense. For the same period the ICMA study calculated all unauthorized deductions totaled some $246 million from the trust fund, an amount that, by law, should have gone to municipalities.

Distributing cash to the municipalities from the fund’s account at the central bank has its own challenges. For one, unpredictable timing of transfers makes it all but impossible for cities to think in the long term. Planning infrastructure development, investing, building, even a city’s branding as a place-to-visit or as business-friendly (for example a rural municipality that, because of a new or upgraded road, is now easier to reach) all require outlooks measured in decades rather than years. Compounding the problem of unpredictable transfers are, Atallah says, distribution rules that illogically favor wealthy cities over poorer ones. Just as citizens vote not in the town of their residence but where their family is registered so too do municipalities calculate a part of their share of IMF payments, counting the size of their tax base as registered citizens rather than residents. Municipalities’ share of IMF payments are also calculated based on a two-year average of the revenues they collect from their tax, instead of a municipality’s efficiency to collect taxes and fees.

This further exacerbates inequality between richer and poorer areas, Atallah says, giving more urbanized cities an underlying advantage. Taxes collected at the municipal level are made up mostly of real estate-related revenues like property taxes and fees on transactions, rentals and building permits, so cities with more built-up surface area have an edge in their two-year average of collected revenues. “The more urbanized [a municipality] the more likely it will be able to collect these taxes. So the rural areas where there is unbuilt areas – they don’t have rentals, building permits – that’s where you see the discrepancy taking place between rural and urban,” Atallah says.

Getting the money where it’s needed

Businesses in the hospitality industry wouldn’t be the only beneficiaries of municipal investments into infrastructure. “Infrastructure development is a critical enabler of economic activity,” wrote the for-profit consulting firm The Boston Consulting Group in a 2015 report focused on African infrastructure investment for the World Economic Forum. A crucial question that municipalities must ask when planning infrastructure projects is what economic returns can they expect to “buy” from the investment. Studies of rural economies show that job creation, expanding and attracting new businesses are typical returns from infrastructure investments. And studies on the installation of high-speed broadband internet connections to rural towns in Kentucky, and to other out-of-the-way cities in the United States, found positive growth in employment, property values and the number of businesses.

Atallah says there are intangible benefits of infrastructure development beyond returns to economic growth. Investments into roads and public utilities, as well as health and education infrastructures in rural Lebanon is a must because “there is a huge discrepancy between the poor and the rich,” he says. In terms of connecting the country and closing the gap Atallah adds that “you want the feeling that this discrepancy is closing, and the IMF can play the role by saying that poorer regions get more money, up to a certain percentage.”

But after years of studying municipal financing and lobbying for fixes to the law Atallah says Lebanon’s decision-makers have little appetite to pursue any reform. Without a change to the funding mechanism, and with no other structured frameworks, like issuing municipal bonds or entering public-private partnerships, as a way to raise money to build infrastructure, rural and poor cities have little prospect of bolstering their economies and improving the livelihoods of their residents.

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Hospitality & Tourism 2016Special Report

Hanging on

by Nabila Rahhal
written by Nabila Rahhal

In May 2016, a collective online call to action, under the hashtag #lawshumasar (whatever happens), was issued by key figures in the creative and productive sector to keep working in Lebanon no matter what happens.

It seems the Food and Beverage (F&B) subsector in Lebanon has heeded this call as its productivity continues to grow despite a challenging and ever changing playing field.

The good old days

Modern day operators in the hospitality sector consider the period between summer 2008 (following the Doha Agreement) and 2011 to be the “golden years” of tourism in Lebanon, wistfully recalling the thousands of visitors who used to flock to the country, mainly to the capital Beirut, annually filling up its hotels and the waiting lists of clubs and restaurants.

Jean Beiruti, head of Lebanon’s Touristic Firms Syndicate, says revenues generated by tourism in 2010 reached $9 billion, according to the World Tourism Council, while Tony Ramy, head of the Syndicate of Owners of Restaurants, Cafes, Night-clubs & Pastries in Lebanon, places the hospitality sector’s contribution to GDP during the period from 2009 to 2011 at 12 percent.

Faded glory

Four years into regional conflicts and internal instabilities (the most recent being the bombings of BLOM bank’s headquarters in Beirut and in the village of Qaa), these golden years are a distant memory, often evoked as validation of the hospitality sector’s potential under more favorable circumstances. Today, according to Beiruti, the sector’s direct contribution to GDP is eight percent, and it rakes in $3.2 billion in revenues, less  than half what it used to in 2010.

With access to Lebanon via land largely blocked, the country lost a main source of touristic revenue from those who used to visit by car. Beiruti estimates, for example, that 220,000 Jordanians used to visit Lebanon that way.

This, coupled with the ongoing sensitivities between Lebanon and the Gulf countries, which include a travel ban preventing nationals from some GCC countries from coming to Lebanon, have led to a decrease in the number of traditional tourists to the country and have thus negatively impacted the hospitality economy.

[pullquote]With inbound tourism at such a low for the past few years, the F&B sector’s main customers have become those residing in Lebanon[/pullquote]

The new tourists

While today tourists from Egypt and Iraq seem to have replaced tourists from the Gulf, Ramy explains that they are incomparable since Gulf nationals stayed for a longer period in Lebanon, often owning homes in the country,  while Iraqis and Egyptians stay for a few days only – judging by the length of their hotel stay – and generally have lower purchasing power than GCC nationals. Ramy estimates that on average, tourists from the Gulf used to spend $5,000 per week in Lebanon as compared to other nationalities, such as Egyptians, that spend around a $1,000 per week.

According to Beiruti, today the main market for tourism in Lebanon are the Lebanese expats who come to Lebanon to visit their families and homeland. F&B operators Executive spoke to attribute the increased activity in their venues during both summer and winter holidays to these expats who want to enjoy their time during their visits home.

Homecoming blues

On the other hand, Ramy sees that even expats who visited Lebanon on an annual basis before are nowadays decreasing the durations of their visit, preferring instead to divide their holidays between Lebanon and neighboring countries such as Cyprus, Turkey or Greece.

“When it comes to Lebanese expats, we have noticed in the last two years that outgoing tourism has become very high. These expats come to visit Lebanon for a few days to see their family and then head to the Greek islands or Cyprus or Turkey or Sharm El Sheik for a vacation. This is because these countries are passing through their own crises and so their prices have gone down and they are competing with us even over the Lebanese expats,” explains Ramy (for more on regional integration of tourism, here).

Counting on the locals

With inbound tourism at such a low for the past few years, the F&B sector’s main customers have become those residing in Lebanon, and F&B operators across the country tell Executive that 90 percent of their current customers are Lebanese. “Until the region calms down, we will always be affected by regional instability. But our focus is on the people who consume our products day in and day out, and we are working to win their loyalty and taste,” says Karim Miknas, managing partner of Miknas Food SAL, the licensee of McDonald’s Corporation in Lebanon.

Catering to Lebanese residing in Lebanon needs a different game book than catering to an influx of tourists and expats. “The local Lebanese are still going out but they have lower purchasing power and so are going out in a different manner than before,” says Ramy, giving the example of people ordering less than they did before in restaurants or drinking a bit at home before going out clubbing. He adds that in 2010 Lebanese generally spent three times more on their outings than they do today.

Out of Beirut

One of those differentiated strategies employed by F&B investors is finding new markets in Lebanon, but out of Beirut, which has become saturated with outlets and is more tourist dependent than other areas in Lebanon. “The year 2016 has been very challenging, and we can feel that Beirut is not [as] sexy as the previous years. This is due to two main factors, which are the political and economic situation, which meant no more extra flow of tourists, and also because you had a lot of new restaurants opening in Beirut for the same traffic. So, you have around 30 percent more restaurants and places to go to, but for the same number of people who go out,” explains Donald Batal, Founder of The Ministry of Food, a company which owns and operates  Classic Burger Joint and Tomatomatic.

[pullquote]“The year 2016 has been very challenging, and we can feel that Beirut is not [as] sexy as the previous years”[/pullquote]

Marwan Ayoub, co-partner in cluster development company Venture Group, says their experience with developing Uruguay Street back in 2010 (the hospitality cluster street located in Downtown was a success when tourism was at its peak but started suffering when tourist numbers declined) taught them to work on projects out of Beirut that would rely on the neighboring communities for their survival.

“We took a big hit in Uruguay but it won’t be the case with such a project [like The Backyard Hazmieh] because it’s not tourist based and instead attracts the community and surrounding environment, same thing for Dbayeh and our future projects. It’s not that tourists won’t visit the clusters, especially since they have become destinations in their own right and we will benefit more if tourists come, but we have learned in the past six years to develop projects that rely mainly on the local community,” explains Ayoub.

Outings for all

Another coping strategy employed by F&B operators is to make sure their offerings target a wide range of tastes and purchasing powers. Miknas gives the example of McDonald’s expanding its product line in Lebanon to include McCafé cakes and coffees: “Just because we don’t open new locations doesn’t mean that we are not growing; we grow in our sub extensions and product offerings, and have seen more growth in the past two years with fewer outlets.”

Boubess Group portfolio includes both hybrid café concepts, such as Cozmo Café or Café Hamra, and fine dining concepts, such as Metropole or The Butcher Shop & Steak House, which ensures they have the Lebanese market’s culinary needs covered. “In this situation, you either try to reduce costs so you can decrease the average cheque and attract the masses or you can go into the niche where the higher prices are more justifiable through the ingredients used, service provided, locations and the prestigious décor; in this case the lower footfall in such places is compensated by the higher average cheque,” explains Hady Fadel, marketing manager of Boubess Group.

Summer lovin’ 

Summer 2016 has been off to a slow start due to the Holy Month of Ramadan falling in June. Beach resort operators south of Beirut are most affected by this, explains Beiruti, in addition to those with outlets catering to nightlife.

Still, Ramadan ends the first week of July and those in the F&B sector are cautiously optimistic that they could benefit from a certain level of increased footfall and activity this season. “I still believe we are going to have a good summer and that people are going to come to Lebanon but we have to be realistic, they are not going to do so in droves,” concludes Miknas.    

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Hospitality & Tourism 2016Special Report

What’s on the tourism menu?

by Nabila Rahhal
written by Nabila Rahhal

Whether it’s summer resort towns like Bhamdoun, Aley, Zahle or Dhour Choueir which began to flourish in the 1940s – and were frequented by both local Lebanese escaping the heat of Beirut and international tourists from Egypt or Arab Gulf countries following the oil boom – or the coastal city of Beirut, which became a glamorous beach and clubbing destination for jetsetters in the 1950s and 1960s, tourism has traditionally been considered one of the main contributors to Lebanon’s GDP.

Downhill slump

One major prerequisite for tourism is internal stability and security, and whenever those two would be absent from Lebanon, so were the tourists. However, on every occasion, tourism would later bounce back with the first signs of security returning to the country. Currently, Lebanon is passing through its second longest tourism slump (following that of the Lebanese Civil War) starting with the onset of the conflict in Syria in 2011 and the inevitable security incidents that it has since brought to a number of Lebanese towns and villages.

According to figures from the Ministry of Tourism, 2010 – considered a record year for tourism in Lebanon’s recent history – saw 2,167,879 tourists enter Lebanon. The number of tourists who visited the country in 2015, 1,517,904, is down from the 2010 high but is still considered a minor improvement from the previous two years.

Decline of gulf tourists

While citizens from Gulf countries typically made up the lion’s share of tourists to Lebanon, in 2015 they constituted only 32 percent of total visitors, a fact which negatively impacted tourist expenditure in the country.

Pierre Achkar, President of the Association of Hotel Owners in Lebanon, told Executive in late May 2016: “There is an ongoing ban on citizens of the Arab Gulf visiting Lebanon. These tourists had the most capacity to spend money in Lebanon and usually stayed for a month here, whether in their own properties or in hotels, but either way they spent in the country and revived the local economy of cities they stayed in.”

The mayor of Bhamdoun Mhatta, Osta Abu Rjiely, recalls years – giving 2008 as an example – when the town’s main road was crowded with Kuwaiti families and retailers from Beirut would rent shops in the town for the summer to benefit from the flow of tourists.

So what’s new?

After almost five years of downturn, stakeholders in the hospitality and tourism industry are finally accepting that it will be a while before tourists from the Arab Gulf return to Lebanon.

Cities and towns that were traditionally reliant on tourists from the Gulf are now almost completely deserted. “Bhamdoun is very attractive; we have great weather, we have beautified the main street, we have a one of a kind children’s playground and a parking lot with capacity for 600 cars on the main street. But our customers, the people from the Gulf, are not coming to Lebanon, so what can we do?” asks Abu Rjeily.

Counting on Lebanon

Instead, those in the hospitality and tourism industry are trying to identify alternatives to Gulf tourists, be they local Lebanese looking for a staycation – a vacation in one’s own country – or expats returning to the country to visit their families.

Indeed, the Lebanese have become Lebanon’s new tourists. “Today we are working to compile statistics on expats coming to Lebanon because the UNWTO (United Nations World Travel Organization) considers expats as tourists when they are out [of the country] for more than three months,” Tourism Minister Michel Pharaon told Executive late last year.

[pullquote]Getting the Lebanese interested in discovering their country meant seeing old or commonly known sites through a new lens[/pullquote]

All those in the hospitality sector that Executive spoke to recently say the majority of their clients are Lebanese. “At the beginning, all of our guests were foreigners, mainly Westerners. Nowadays, half of them are Lebanese people residing in Lebanon,” says Orphee Haddad, founder of L’Hote Libanais, a network through which tourists make reservations for alternative lodgings, such as boutique guesthouses, in Lebanon.

Guests at their house

Catering to the Lebanese requires a different playbook than the one used with tourists from the Arab Gulf, who were attracted to conventional touristic activities such as beach outings and partying in Beirut or enjoying family time in breezy summer mountain resort towns such as Bhamdoun or Broumana.

Broumana makes the most of its mild summer temperatures (Photo: Greg Demarque)

Broumana makes the most of its mild summer temperatures (Photo: Greg Demarque)

Tourists from the Gulf had different lodging patterns than the Lebanese; even when vacationing in a summer resort type of village they would usually prefer to rent an apartment large enough to accommodate their family and staff than book a stay at a guesthouse, a type of accommodation prefered by those living in Lebanon and looking for a weekend escape. Tourists from the Gulf were also less likely to be interested in wine tourism than local Lebanese.

Getting the Lebanese interested in discovering their country meant seeing old or commonly known sites through a new lens and, as such, Lebanon’s natural, historical and cultural assets were once again placed under the spotlight by promoters of the hospitality and tourism industry.

Discovering Lebanon

Even before the Ministry of Tourism officially adopted the ‘Live Love Lebanon’ campaign in 2014 – a social media campaign started by Live Love Beirut that highlights the different aspects of Lebanon, from nature to food to architecture through beautiful images shared by users – it seemed the Lebanese were waking up to what their country had to offer beyond Beirut and were keen to discover it.

Boutique hotels in rural areas such as Jezzine, Ehden, Beiteddine and Tyre began popping up on the local tourism map starting 2013, showing that private investors were already seeing the potential in rural escapes. Such logdings were soon reporting full occupancy, driven mainly by European and Lebanese tourists, and had waiting lists for the four months of summer, all the while many of Beirut’s five star hotels were bemoaning their empty rooms, as reported in an article published by Executive in 2013.    

Meanwhile, environmental tourism has been gaining momentum since 2005 with venues such as Eco Village and hiking groups such as Vamos Todos that were popularizing outdoor activities among the youth.

Wine tourism grew in parallel with the opening of new wineries in Lebanon. Chateau Kefraya and Chateau Ksara, considered the largest in Lebanon by production size, receive an average of 35,000 visitors per year to their respective wineries.

Wine tourism is more popular with locals than with people from the Gulf (Photo: Greg Demarque)

Wine tourism is more popular with locals than with people from the Gulf (Photo: D.R.)

Health and wellness tourism was also introduced to Lebanon through the Wellness Week at Edde Sands Hotel and Wellness Resort in 2009 and through similar efforts such as Zenotel’s retreats and yoga weekends (Zenotel is a wellness hotel which opened in Bhersaff, near Bikfaya, in 2013).

Riding the Wave

While alternative forms of tourism were already being practiced to some extent around the country, the Ministry of Tourism’s five-year rural tourism strategy, launched in 2014 with the support of international NGOs and governmental organizations such as USAID, provided them with a more structured framework. The strategy includes working with municipalities in remote areas of Lebanon to develop their natural touristic assets and infrastructure in a manner that would appeal to visitors.

“The emphasis we placed on [rural tourism] created a trend which worked incredibly in the summer, even more than we expected it would, but in fact it’s the young people who began to look at it,” Pharaon told Executive in 2015.

“All local social media pages are now promoting Lebanon as a beautiful place. What’s happening lately is an indirect positive brainwashing of society to stop focusing on negative things and to choose to love your country because it is a beautiful one whose value we don’t know of until we travel,” enthuses Anthony Rahayel, founder of No Garlic No Onion, Souk El Akl, The Box and Meshwar, initiatives which have helped promote rural Lebanon and local village food products. Rahayel adds that more youth are now eager to discover Lebanon, finding it a “trendy” thing to do. 

[pullquote]While alternative forms of tourism were already being practiced to some extent around the country, the Ministry of Tourism’s five-year rural tourism strategy launched in 2014…provided a more structured framework[/pullquote]

Religious tourism

Still under the umbrella of rural tourism, the Ministry of Tourism is now turning its attention to supporting religious and cultural tourism in Lebanon.   

As Nour Farra, consultant for religious tourism at the Ministry of Tourism, explains, this form of sightseeing is not new in Lebanon. Our Lady of Lebanon in Harrisa is one of the most visited attractions in the country, says Farra.

In fact, the Center for Religious and Cultural Tourism was developed to promote these forms of tourism in collaboration with the Ministry of Tourism back in 2010, but its work stopped due to political reasons, according to Farra. Today, Pharaon is reviving the center, taking the placement of “Our Lady of Mantara” in Maghdouche on the United Nations World Tourism Organization’s World Map of Religious Tourism on June 7 as an opportunity to announce the reopening.

Farra says the potential for religious tourism is huge and adds that there will be a conference in November to further grow the sector.

Mar Charbel is popular for religious tourism (Photo: Greg Demarque)

Mar Charbel is popular for religious tourism (Photo: Greg Demarque)

The Phoenician route 

June also witnessed the second meeting of the Working Group of the Phoenicians’ Route Cultural Tourism Programme. While still in its infancy stages, the program aims to connect the cities of the Mediterranean in terms of shared culture and history. “We are upon an unprecedented occasion to revive the identity of the Mediterranean and its tourism sector so that all societies in the region can capitalize on the immense opportunities that it brings to 18 participating countries and tourism destinations across more than 2,800 kilometers in terms of economic development and job creation,” UNWTO’s General Secretary Taleb Rifai said during the working meeting.

Although forms of alternative tourism are still in their early stages and currently based mainly on local tourism, there is real potential within each subset of the sector given the right development strategy and most important and inescapable of all: stability and security in the country.

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LeadersOpinion

A strategy, please

by Nabila Rahhal
written by Nabila Rahhal

Lebanon’s tourism stakeholders have learned the hard way that an over-reliance on one type or one nationality of tourists is akin to shooting yourself in the foot. One need only take a look at cities such as Bhamdoun or Aley – and even Beirut, to some extent, which saw a drastic drop in footfall once tourists from the Arab Gulf decreased their visits to Lebanon – to see the dangers of putting all our touristic eggs into one basket.

As such, private sector investors and civil society groups began developing elements of tourism that would rely more on local demand: one can see signs of these elements through the positive initiatives currently spearheaded by local municipalities across the country. From restaurants and guesthouses opening in rural areas, to wellness retreats and environmental activities, locals and expats have a lot to discover right in their own country.

But despite the flurry of activity, these diversifications are still very much at a grassroots level. If we, as a country, want tourism to truly prosper and be more than a mere internal redistribution of cash, then the government has to devise a national plan which would include the development of infrastructure that would make sure it does.

The Ministry of Tourism has supported rural tourism with a five year strategy and is currently supporting religious tourism initiatives – such as the placement of our Lady of Mantara on the World Religious Map – and cultural initiatives such as developing, alongside the UN World Trade Organisation, touristic experiences shared with neighbouring Mediterranean countries through the Phoenician Route.

[pullquote]Tourism was once the second largest contributor to the country’s GDP and it’s about time more structure and weight is given to it[/pullquote]

Municipalities, in collaboration with international NGOs, are looking at their individual towns’ territorial assets and exploring how they can develop them touristically to attract visitors and improve the local economy. While real potential exists in all those initiatives, they will remain little more than scattered efforts with minimal impact at the country level if there is no solid long term national plan guiding their development.

Tourism was once the second biggest contributor to the country’s GDP and it’s about time more structure and weight is given to it instead of letting it develop haphazardly. The government, along with relevant stakeholders from the private sector, civil society and NGOs, needs to develop a strategy that would incorporate all elements of tourism in Lebanon – from rural to environmental, from religious to wine – under one framework, complete with realistic deliverables, milestones and a clear delineation of responsibility.

Part of this national strategy must be the development of infrastructure to support tourism. Towns like Broumana, Ehmej or Hammana all cited ease of access through the wide highways connecting them to Beirut as one of the main drivers behind their increased footfall. Meanwhile, other towns may have beautiful forests or a significant cultural landmark, but without being fortunate enough to be next to a major highway – municipalities don’t have the authority to develop their own highways – most tourists find it too much of a hassle to get there. Infrastructure is a major consideration in developing tourism, and all areas of Lebanon should be able to benefit from this ease of access to the city.

Despite the security issues in Lebanon, which have unfortunately become almost a fact of life, the country has many beautiful elements to offer. We owe it to Lebanon to diversify our tourism and highlight these elements in a sustainable and organized manner.

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BrexitEconomics & Policy

A post-Brexit world

by Thomas Schellen
written by Thomas Schellen

After 43 years of – often rocky – togetherness, the United Kingdom is leaving the European Union. What sounds like a run-of-the-mill divorce is much more. It is an economic step that will have ramifications for many countries, including Lebanon, at least as far as tourists and traders, importers, investors, migrants and financial workers are concerned. It is a step of segregation that has implications for politics and decision making. It was a step that caused markets to stumble and politicians from the two largest political parties, Labour and Conservatives, to step down or, if they were exit proponents, ramble triumphantly.   

Many of the economic consequences are unclear. Key central banks’ first reactions were tellingly subdued. The Federal Reserve of the United States said in an initial statement on Friday, June 24, the day after the referendum, that it was “carefully monitoring developments in global financial markets” and prepared “to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the US economy.”

The European Central Bank (ECB) commented on the same day and in the same worryingly reassuring tenor (the kind of speak a school principal uses when announcing that your child is unlikely to reach the next level). “The ECB is loosely monitoring financial markets and is in close contact with other central banks,” it said.

The ECB comforted that it would continue to fulfill its responsibilities of ensuring price and financial stability in the euro zone (as if we had suspected that they all had decided to escape to some tropical island) and declared that it has prepared for this contingency. It “stands ready to provide additional liquidity, if needed, in euro and foreign currencies,” it added.

The most elaborate first response was up to the Bank of England (BoE), whose Governor Mark Carney acknowledged in a video statement that “a period of uncertainty and adjustment” would follow the vote to terminate membership in the European Union and that “some market and economic volatility” was to be expected.

The BoE and the Treasury were engaged in extensive contingency planning, including on the night of the vote, Carney said. “The [BoE] will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward,” he stated, adding that the bank had done its homework in ensuring that the core of the financial system is “well capitalized, liquid and strong”. UK banks have more than GBP 600 billion of high quality liquid assets and the BoE “stands ready to provide more than GBP 250 billion of additional funds through its normal facilities,” he assured. The Bank of International Settlements (BIS) followed suit the next day, on June 25, and said that central bank governors at its Global Economic Meeting on that day “endorsed the contingency measures put in place by the Bank of England and emphasized the preparedness of central banks to support the proper functioning of financial markets.” 

Contingency planning, liquidity assurances and notions of collaboration. Central banks are mightily coordinating their responses, clearly reminiscent of the lessons of recessions past when liquidity posed a big problem. Of course it is nice that they are assuring us of liquidity. But honestly, one is used to the ECB and Fed as moving in discord. The fact that they stand ready to pull with all their power on the same rope, sounds disconcertingly alert of what?

Sudden shock

Earlier in June, the situation looked like it would be all cheers for the status quo. The Swiss had voted no in a referendum that would have mandated a universal basic income. The Fed’s open market committee – in what might prove to be its best move in the sense of stability and confidence support in quite a while – decided on June 15 to keep the prime rate unchanged, i.e. as low as in the past six months. But now this exit vote. Analysts were united in saying that nothing will ever be as before and agreed that Tory leader David Cameron pissed EU membership off by calling for a referendum and Labour leader Jeremy Corbyn delivered a perfect assist by scoring an own goal.

Most of the EU denizens, including the majority of voters in the UK where the average age is around 40, can have no personal history dating back to the days of the UK joining the European Union in 1973. Beginning with the premierships of Edward Heath and Harold Wilson, and lasting through the New Right era of Margaret Thatcher and John Major, and the pro-capitalist New Labour government of Tony Blair and Gordon Brown, it was the one-nation Conservatives Cameron and Boris Johnson who, for whatever reasons, unintentionally facilitated (the former) and championed (the latter) the change that will realign Europe at least in articulating its national identities and/or shared identity.        

The initial signs from the UK were concomitant with what one would expect in any market response to a bad surprise: a double-digit drop in the exchange rate for the pound Sterling from around $1.50 to the pound on June 23 to less than $1.35 on Friday and on Monday and a loss in the shares on the London Stock Exchange. British banks – like Royal Bank of Scotland and Barclays (30 and 33 percent down by Monday, June 27) – suffered harsh share price drops, as did airline stock like easyjet, which lost 500 pence or 33 percent of its share price between the referendum day June 23 and market close two sessions later, on June 27. By the same date, ratings agencies moved to lower their assessment of the UK’s credit worthiness.

Global repercussions

For the citizens of other nations there will be practical – financial, monetary, and lifestyle – consequences even though they had no voice in the decision. How they will be impacted is the first question in this regard that concerns Lebanese investors and local clients of private and investment banks who have invested in the UK or elsewhere in Europe. While the impact is varied and includes a currency shock due to the losses in the value of the Pound Sterling and then in the drop of equity values, Lebanese investors with typically diversified international portfolios face limited exposure as they are commonly “tilted towards the fixed-income space,” said the chief investment officer of Bank Audi Private Bank, Youssef Nizam.

Paul Donovan, economist at UBS and responsible for formulating and presenting the UBS Investment Research global economic view, said that the Brexit’s consequence is uncertainty on multiple levels from local to global. “Middle Eastern investors are no different from any other investors in this situation. They need to adapt to the a less certain environment, and one where political risk is higher,” he told Executive.

Nizam explained that Lebanese are generally more accustomed to investing in fixed income than in equities since local equity markets are not highly developed. “Fixed income is doing well,” he said, but noted that Lebanese investors on the European equity side would be exposed to hits not only because of the currency drop but also on asset valuations because of increased uncertainties translating into higher risk premiums. Lebanese banks with European subsidiaries would on their part “not at all” be experiencing the kind of pressure on their share prices that some British banks have seen in recent days because Lebanese banks are influenced by completely different profitability factors than their European peers.    

[pullquote]The initial signs from the UK were concomitant with what one would expect in any market response to a bad surprise: a double-digit drop in the exchange rate for the pound sterling[/pullquote]

Wealth advisors and asset managers from all over the world rushed to publish statements reacting to the Brexit and generally attempted to allay investor fears. The rate of published reactions from Beirut-based financial institutions was slow by comparison and Executive could not locally reach some private bankers and wealth managers in the days after the Brexit, given the summer season, regular business travels, and the time near the end of the fasting month Ramadan.

While the Lebanon representative of Julius Bär, a Swiss bank that maintains an office in Beirut, was not reachable for comment, the same bank’s chief investment officer Yves Bonzon described the Brexit in a phone conference for investors on June 24, which was uploaded on the bank’s website, as an “exogenous event” and as such not predictable. But the bank was prepared to take advantage of it, he said, pointing to an “intriguing opportunity” in subordinated bank debt and in buying of volatility. Banks in Europe will have pressure on equity and investors would not want to be in the equity structure of banks but will find subordinated debt rewarding as price pressure will create opportunities, he elaborated, and described “selling puts and buying reverse convertibles” as another opportunity, within an overall scenario of taking advantage of investors’ overreaction to the shock. 

Union Bancaire Privee (UBP), also a Swiss Bank with an office in Lebanon, said in a brief published on its website on June 24 that near-term uncertainty after the UK referendum’s outcome led to market anxiety but went on to say that “liquidity and falling discount spreads should make Asian equities an attractive asset class to hold”, mentioning equities in India and ASEAN countries.

Regional players were also quickly seeking to evaluate the Brexit’s impact. Emirates NBD Chief Investment Officer Gary Dugan commented on June 28, saying there was “no clarity at all on the magnitude of the impact on either the Eurozone or the UK economies”. He advised investors to watch out for stress amongst European banks and, for those persons willing to get back involved in trading in the markets, to “get a sense of the trading range in the markets before diving in”.

The National Bank of Kuwait comment on the outlook for GCC markets said, “We do not expect anything particularly big or special, barring persistent volatility in international financial markets.” It expects marginally weaker world growth to be “slightly less supportive of oil prices” and assumes that the Fed will be less prone to raise rates more than once this year, similarly for GCC central banks.

All this may be comforting to investors and wealth clients of banks but of less importance for average income earners who are feeling stuck lower on the wealth ladder. At a World Economic Forum event in China, New York-based economist Nouriel Roubini commented that it seemed unlikely for the Brexit to trigger a new recession in world markets but warned of backlash against globalization spurred by the fruits of growth not trickling down to all segments of society. “What we saw in the UK referendum was a division between rich and less rich, young and old, skilled and less skilled. This kind of pressure is becoming severe,” he said according to a WEF press statement.

In which isle is the single malt on sale?

Irrespective of the prospect (assumed by the UK government and many economists already before the Brexit vote) that the British economy could be contracting in the coming years, Lebanon has, macro-economically and in terms of consumption, not much to fear in the short term. Exporters of Lebanese wines to England will negatively feel the impact of lower British purchasing power but Lebanese tourists and entrepreneurs in the overseas programs of UK-Lebanon Tech Hub will sigh in relief that underground tickets will look, in dollar comparison, less overpriced than they actually are. Fans of Tate Modern (free admission but tempting coffee shop) and the British Museum (pricy special exhibitions) can plan more repeat visits. Looking at buyer accounts, less expensive British painkillers, hard liquors and marmalades will increase the margins of some local pharma importers and supermarkets (price drops are likely not going to be passed on in full). Cars made in UK will be more affordable.

[pullquote]Rejection of joining the EU by electorates is nothing new, starting with Norwegians and Swiss in the 1970s and 1990s[/pullquote]

The euro, which is of greater importance for Lebanese trade than the pound Sterling, will by all signs not be losing as much of its value. Importers will react in ways that reflect their business models: some will take advantage to gain market share from competitors which are importing dollar-based goods, some will import more from euroland than they could already in recent times because the euro to dollar rate of summer 2008 (1:1.50) or spring 2012 (1:1.30) will not make a reappearance anytime soon, if ever. If the current range of 1.06 to 1.15 dollar per euro will weaken further (early last year it had been predicted to happen by the fourth quarter of 2015 but didn’t) and move to parity, that we shall see but it will probably not change our consumption habits.

Birth defects of institutions?

Finally there is the question of what this means for the concepts of trade blocks and even for the concept of democracy. In the days of the 1960s and early 70s when the block was still understood as the European Economic Community and moved from a puny six member countries to nine (1973) and 12 European Community members (1986) before the fall of the Iron Curtain in 1989, the program behind the European pact was “no more war”. The EEC was rooted in a European idea that previously gained political weight after World War I thanks to a few thinkers such as the people behind the Pan-European Union (PEU) in the 1920s. The PEU was headed by two aristocrats for most of the 20th century, its founder Count Richard von Coudenhove-Kalergi and then Otto von Habsburg. While Coudenhove-Kalergi liked to speak of nobility of the mind and not of the blood (he believed, in line with his own Japanese-European DNA, that the future European would be of mixed ancestry), his movement was not one of the masses.

The European idea was driven further onward in the middle of the century by the experience of two devastating European wars that turned into world wars. Its drivers were a few visionaries and politicians – usually cited are Robert Schuman of France, Konrad Adenauer of Germany and Alcide de Gasperi of Italy, plus personalities such as Winston Churchill, Paul-Henri Spaak, Sicco Mansholt, and Joseph Bech – meaning one or two visionaries per country. 

Rejection of joining the EU by electorates is nothing new, starting with Norwegians and Swiss in the 1970s and 1990s. From the treaties of Paris and Rome to the treaties of Maastricht and Lisbon, the EU was described by its critics as an elite creation. It was supported by many, myself included, but the treaties were not expressions of popular will. Yours truly covered the first European Parliament direct elections in 1979 from Germany and was enthusiastic about the prospect of growing citizens’ participation. The election turnout at the time was 62 percent even as the European Parliament was notoriously described as empowered to do nothing but vote on its own budget.

However, since 1979 in every successive election for the Strasburg Parliament’s five-year terms, the election participation dropped and eroded to 42 percent by 2014 (of course the total voting populations of the nine countries voting in 1979 are numerically different from the 28 countries that were eligible to vote in 2014). But also when the project of a European constitution was on the table in 2004, the project proved less inspirational than administrational and was rejected in referenda before it resurfaced in the Lisbon treaty. Last month’s referendum in the UK brought over 72 percent of eligible voters to the polling stations (despite flooding in some towns) and more than 17 million people voted for an exit from the union.

Masses of people, entire countries, followed their political leaders and thinkers into the union but there were always many who demonstrated indifference and others who remained active Eurosceptics. The skeptics, of which there were many in Europe at all times over the past century, even included people who signed (albeit with procrastination) the treaty of Lisbon, like then Czech President Vaclav Klaus, who described the often cited European democratic deficit “as a chronic disease” and the European institutions’ inability to convince the people as incorrigible “birth defects”. He argued in a speech in 2010 that it would be impossible to create a continent-wide European citizenship. The system-related question posited with renewed intensity by Brexit is if the skeptics are right. This issue is worth considering in Lebanon as a society with a high share of expatriates living abroad, such as Lebanese living in Europe. 

In economic terms, the UK exit creates the question of whether or not trade blocks are as good for the people in them as globalists thought. The European Union was studied by the GCC when they researched the road map for their own monetary and political union, which never happened. Turkey, which was the scape goat of populist anti-EU opinionators in the UK for allegedly being on the brink of accession, according to The Guardian, had its deputy prime minister Nurettin Canikli tweet “The European Union’s disintegration has started”, and say that his country was now less likely than ever to pursue the EU membership route.

It will be several years at least, in which article 50 of the Lisbon treaty (which regulates withdrawals from the EU) will be applied to the UK and this period will show what direction Europe will take. Economically, there (most probably) will be much time for Lebanon to ponder its options.

[pullquote]What does it mean for democracies when diffuse fears and anti-foreigner campaigns trump economic predictions and statements by top professionals?[/pullquote]

Does Lebanon, which has been perched on the edge of its chair regarding WTO membership, want to draw conclusions as to if it wants to join any block (like last year’s talk about Jordan and Morocco to accede to the GCC)? Is there merit to the European neighborhood project or any sort of Mediterranean partnership? Or will Lebanon be faced with economic surroundings of rising national interests, in which discussions over a French exit, Dutch exit, Greek exit, or the separation from the EU by other states only grow in the post-Brexit world?   

The continent’s final countdown

Europe has, in the views of union advocates, a chance to pull together after the UK vote and prove the benefits it brings. Or, as others argue, there will be more referendums about this unloved central bureaucracy that the EU has become. For a country like Lebanon that is a historic stakeholder in trade, the question over the viability of trade blocks is worth taking an interest in, not only in Europe but in three continents. 

The second question that seems worth looking into is the role of democracy in interstate blocks. According to different media reports, the UK voters were divided, as the opinion editor of The Telegraph newspaper put it, into tribes within camps. The amazing thing is that, according to the newspapers, two thirds of people who left school at age 16 voted for the exit and two thirds of people with a university education voted to stay. What does it mean for democracies when diffuse fears and anti-foreigner campaigns trump economic predictions and statements by top professionals? It is hardly filling one with confidence in the wisdom of the crowds when premier Cameron steps down with a statement on the need for fresh leadership after admitting failure to convince of his best assessment that, “I was absolutely clear about my belief that Britain is stronger, safer and better off inside the EU.”

The EU was built by visionaries but its appeal is not democratic. In a world where changes of power have limited consequence because the choices are so similar, it has worked to proclaim democracy as the worst form of state management except for all others. Europe may be in the paradox that it only can remain viable when it can mobilize mass support for what has historically been nursed as an elite project. But the Brexit ultimately raises this question: when it comes to matters that are of such economic consequence, do we want to entrust decisions over supranational developments to popular votes?

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EditorialOpinion

Banking on our self-reliance

by Yasser Akkaoui
written by Yasser Akkaoui

The first rule of business ethics is: if you’re not proud enough of your work to talk publicly about it, something must be wrong. That the government once again cancelled a waste management contract without even naming the winner proves something dirty is going on. Worse than the implementation, of course, is the actual plan. We’re going to landfill our garbage in the sea. Waste is poisoning and disfiguring this country, whose natural beauty and rich history should instead be drawing tourists from around the world.

Of course, foreign tourists are no longer coming in large numbers for more reasons than just uncontrolled garbage dumps. Our tourism industry is now relying on the increasing number of locals who choose to leave the beach to discover the wide variety of picturesque landscapes and new hospitality venues this country has to offer. The private sector is fighting tooth and nail to spur growth in this country. And more and more municipalities are waking up to the fact that they too have a role to play in developing their local economies. This self-reliance is empowering and should be encouraged. Yet with summer set to kick off in earnest after the end of Ramadan, another reminder of the cyclical risks facing this country awaits.

Back in the 1970s and 80s, my father loved weekend road trips, no matter the security situation at the time. I can still hear him telling anyone willing to listen how we watched the news in the morning, knew bombs were falling and bullets flying, but hit the road anyway. He would end every tale with a smile from another fond memory: “We took the risk and had a great weekend. It was worth it.”

This is how the Lebanese think. We always aim to defy the odds.

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Hospitality & TourismSports

Your dream of the stadium, Fly-Foot assists you there

by Lynn Soubra
written by Lynn Soubra

It was over their mutual love of football that Rayan Ismail, Georges Batrouni and Firas Arab hatched their plan to create Fly-Foot, the first football game travel company in the region.

Football (or soccer) is the world’s most popular sport with an estimated fan-following of 3.5 billion people. The 2014 FIFA World Cup held in Brazil reached a total of 3.2 billion viewers, with 1 billion fans tuning in for the final between Argentina and Germany. Football is also tightly interwoven with the lives of people from the Middle East, being the region’s most popular sport. However, the Middle Eastern football fan community remains underserved. While Lebanon is host to numerous football fan clubs such as the Manchester United Supporters’ Club and Chelsea FC Lebanon, not many people get the opportunity to travel abroad to watch their favorite players in action. With the upcoming UEFA European Championship in France, Fly-Foot, a local startup, is geared up to get their own piece of the action.

Self-funded, self-taught

In 2011, Ismail, Batrouni and Arab, who are based in Lebanon, London and Barcelona respectively, all pitched in from their personal savings to fund their project. “We had no salaries and we used to only get paid from sales commission,” remembers Ismail. The business partners saved all their earnings in the first two years in order to fund growth. “The team stood together from the very beginning until today and managed to run a company out of nothing,” he adds. 

While most start-ups research their market in order to gain perspective on their clients before launching, the team at Fly-Foot found no competitors in the region to compare their business to and instead opted for the trial-and-error strategy in the first two years of operation. “We felt that we were not only promoting our product but also creating the market for it, and that was our main challenge,” explains Ismail.

It was with that leap of faith and a strong will to share the live football experience with fellow fans that the partners embarked on their venture, selling their first package to their friends for less than $1000. “There was no business or marketing rationale behind [the pricing of the tickets] but we considered it as a first challenge,” says Ismail. Five years later, Fly-Foot has a more structured pricing system.

The company offers two types of products: the semi-packages that include accommodation, stadium seats and Fly-Foot on-spot services, starting at $300 and the full packages that include round-trip flights, accommodation, stadium seats, airport pick-ups and Fly-Foot on-spot services, starting at $700. The majority of package sales are in the $1000 – $1500 category.

Fly-Foot started by serving Lebanese fans and later expanded its services to cater to fans in Dubai, Amman and Jeddah, among other cities. Today, the company flies more than 2000 clients a season (including the World Cup and the European Championship) from the Middle East to stadiums in eight cities across Europe.

Business model and new teammates

The Fly-Foot squad, consisting of 12 fixed full-timers in the starting lineup and various reserves (such as drivers), expanded their initial model of football travel to sell clients more than just a match when visiting new cities. The team builds on-the-ground relationships with football clubs, local boutique hotels, nightclubs and other attractions in Europe to give clients who want to make an entire vacation out of their trips a variety of options. “We have an on-spot service if [the customers] need anything, if they want to ask where they can go shopping, book a restaurant or get on our guest list for certain clubs,” says Ismail.

Fly-Foot is also incorporating business-to-business sales into their model by working with travel agencies to maximize profit and efficiency for both players of the game. “We provide the service to the agents but leave it up to them to set the final price to their customers,” explains Ismail. Travel agents can buy semi-packages from Fly-Foot at discounted partner rates, add them to flight tickets and sell them to their customers. “We position ourselves as providers or suppliers to these agencies,” explains Ismail. The company gives its partners special rates on each game and trusted partners get priority on ticket availability and prices.

The business trio does not depend on advertising to generate new business leads but instead relies on social media and word-of-mouth. “Fly-Foot has been growing organically since we began,” explains Ismail. They plan to develop an app. While Ismail prefers not to talk exact revenue figures, he tips that Fly-Foot is expecting to grow its turnover to $1 million this year.

Looking to grow

The company is also expanding into the region. “We are attracted by cities with low setup costs since we’re still a self-funded company. We opened an office in Amman in January 2016 and are trying to serve the region out of there in order to mitigate the risks present in Lebanon,” he explains. Next on the list is growth into the Gulf Cooperation Council (GCC) market by opening offices in the United Arab Emirates and Saudi Arabia. The expansion comes with added payroll and operations expenses to the tune of $500,000, and the business partners are cautious about raising capital. “We are being careful with the equity financing as we believe that an investor willing to finance the growth in the GCC should also be able to provide a business added value, or else we can go for debt financing especially since the needed amount is below $1 million,” he says.

Exits?

And while they may be looking to expand beyond Lebanon, the business partners are not yet ready to part ways with the company they created. Asked if they are seeking a potential buyout or looking to go public any time soon, Ismail explains that Fly-Foot is currently not for sale. “We are registered in Lebanon, and going public in such an immature financial market is not an option,” he says, adding that the team is “adding value to our brand by the minute.”

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Banking 2016Special Report

Investment decisions

by Matt Nash
written by Matt Nash

Investing in a venture capital (VC) fund is a bit like betting on a horse. The gambler can choose a horse carefully, looking at the animal’s past performance and even evaluating the jockey, but once the race starts and the money’s laid down, all the gambler can do is sit back, watch the race and hope for a big payday. Risk is high, but promise of a windfall is higher. Georges Hajj does not look like a gambler. Nor does he talk like one.

Hajj is the head of the CEO’s office at Banque Libano-Française (BLF) and speaks to Executive about the bank’s VC bets under central bank circular 331. He says BLF invested $8 million each into Berytech’s Fund II, Middle East Venture Partners’ Impact Fund, and Leap Ventures’ first fund, commonly referred to as the “Leap fund” (although the company doesn’t mention a name for the fund on its website). He says the bank also put a total of $4 million into the Cedar Mundi fund (a joint-venture between Kuwait’s International Financial Advisors KPSC and Spain’s Mundi Ventures SL) the Division I fund managed by B and Y Venture Partners and the Azure fund, the latter two of which do not seem to have yet publically launched. In industry parlance, BLF is a limited partner (LP) in each fund in which they’ve invested. The managers of each fund are its general partners (GPs). Outside of Lebanon, the horse betting analogy is apt. Limited partners have no influence on how general partners make investments. They put up the vast majority of a fund’s capital and then sit back to watch the race (which can last 10 years or more), hoping their investments come back in multiples. In Lebanon though, that’s not exactly the case.

[pullquote]Unlike most other markets, bank representatives sit on the boards of the funds into which they’ve invested[/pullquote]

A dozen or so commercial banks are taking advantage of circular 331 (which guarantees 75 percent of their investments into VC funds and startup companies) and are currently LPs in one or more of the local VCs. (As no database tracking 331 money exists, specificity is difficult.) Unlike in most other markets, bank representatives sit on the boards of the funds into which they’ve invested. Hajj explains that, because some funds have many banks as LPs (Berytech boasted 19 when it launched Fund II), not every LP has a seat, but all of the funds managing 331 money have bankers on their boards. He doesn’t specify how many boards BLF sits on, but does note it offers the bank at least a voice in decision making (a no-no in other markets, see PE law article). “We, as BLF, believe that being part of the board of directors is good for us to follow [up] on all these investments,” he says, noting that while a fund’s investment committee takes final, independent investment decisions, the board approves and can influence a fund’s general investment strategy. Not exactly as passive as our gambler. Nor, Hajj says, does the bank hope for a big profit. Asked what return BLF is anticipating, Hajj explains that a return of the initial investment makes it a successful venture for the bank. Though he points out that should the investment prove profitable, gains are split 50-50 with the central bank, not 25-75 the way the risk is divided. 

Off to the races

IN THE PIPELINE

Of the handful of projects in Lebanon’s startup ecosystem that have received a 100 percent guarantee from Banque du Liban (BDL), Lebanon’s central bank, only the UK-Lebanon Tech Hub (UKLTH) lacks a revenue model (i.e., they are not taking equity in the startups they assist nor charging any fees). That, however, should soon change, according to Marwan Kheireddine, chairman of Al-Mawarid Bank, which is invested in the UKLTH. Asked if taxpayers will end up paying for the UKLTH, Kheireddine says: “We’re changing the model exactly for that. The original intent of the UKLTH [when it opened in June 2015] was to serve the space for two years.” The new plan is to ditch the two-year timeframe. “Our decision is for it to continue,” he explains. “We are re-visiting the model and saying, ‘Ok, now, if we’re going to continue that effort and make sure UKLTH has enough funds to go forward, we cannot rely 100 percent on the funding from the central bank.’ Obviously, we can expect that the central bank will continue to support UKLTH somehow, but UKLTH needs to look at other sources of funding, and we are. We’re looking at funding from the European Union, from interested entities, be it NGOs or companies that have a budget within their CSR to contribute to UKLTH, and, obviously, we have to turn to the companies that we are accelerating and say, hey guys, we can really be of service to you, we have been of service to you, we can’t do it for free. You have to give us something in return somehow. And this whole re-visiting is being done as we speak, so I cannot confirm now exactly how and what we’ll be doing, but I can confirm we’re looking.”

While Executive did not interview every bank making use of 331, BLF’s approach seems to be industry standard. Indeed, only three of the country’s banks are either known in the market to be direct investors or have publicly announced such equity participations. (Again, the lack of a database means these figures are based on Executive’s open source research and interviews, meaning there may be a direct bank investment or two we missed). Of those three, Executive was only able to arrange an interview with Al-Mawarid Bank, which got the 331 party started back in June 2014 by making the first compliant investment into Presella, an “online e-ticketing platform,” according to its website. Since then, Mawarid has made eight more direct investments (the value of which the bank did not disclose). Seven of them basically fell into the bank’s lap, explains Marwan Kheireddine, the bank’s chairman. In addition to being active in directly deploying 331 money, Mawarid has its fingers in a few more pies. Banque du Liban (BDL), Lebanon’s central bank, is giving 100 percent guarantees to Mawarid investments into the UK-Lebanon Tech Hub (UKLTH) – the result of a partnership between the central bank and the UK Government – as well as Bootcamp (which describes itself as the place “where ideas become startups”). Kheireddine explains that seven of the young ventures Bootcamp has worked with could not find the small ticket investments they were seeking, so Mawarid stepped in. (The bank provided a list of the companies it invested in but not the exact ticket sizes.)

These Bootcamp opportunities, however, may not be around for very long. Two new funds – Division I from B and Y Ventures, which Executive covered in April – and the Phoenician Fund I, managed by Phoenician Funds, will be focusing on seed investments. Phoenicia, however, will generally only invest in companies dealing with financial technology (FinTech), health care and e-government, explains Jad Salame, one of the fund’s five GPs. He notes the managers are open to opportunistic investments larger than seed and in other sectors. In addition to the two soon-to-launch funds, Kafalat is running an equity investment program (iSME) that is funded via a World Bank loan to the Lebanese government. Part of the program includes giving $15,000 grants (with no equity participation) to entrepreneurs directly as well as startups, explains Bassel Aoun, the project manager. Aoun says that since iSME began disbursing grants in Q3 2015, 46 were given as of May 24. While iSME’s website is not up to date (less than 30 grantees are listed), many grant recipients have also passed through Bootcamp, the UKLTH or Speed@BDD, an accelerator run out of the Beirut Digital District.

Outside looking in

[pullquote]Three of the country’s banks are either known in the market to be direct investors or have publicly announced such equity participations[/pullquote]

Raed Khoury, chairman and general manager of Cedrus Invest Bank, is taking a conservative approach to making use of 331 money. He says the bank generally would prefer doing a direct investment as opposed to investing in a fund, but notes he has not had the time to find the right opportunity. Khoury admits that lack of centralized data on new companies being created and deals being signed makes the task of finding a good investment more difficult, but he has no fear of missing out. Instead of rushing to enter promising companies as soon as possible (with the associated risk), he says he’d rather let the ecosystem develop more before jumping in. “I’d rather go at a later stage with a higher valuation and more visibility,” he explains. 

This article was amended on October 27, 2016. Executive misspelled the name of Phoenician Fund I and manager Phoenician Funds. We regret the error. 

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Banking 2016Special Report

A law for building wealth

by Thomas Schellen
written by Thomas Schellen

Lebanon is being blessed with another proposed law, and several serious voices are intonating praise of the type of a minor doxology to the deities of capital. The new private equity draft law is designed to boost the – currently lacking – ability of fund operators to incorporate commercial entities that are best suited as establishments offering private equity and venture capital avenues. These establishments have hitherto been forced to function with difficulty because they had to rely on holding companies or other conventional formats instead of incorporation as firms with a general partner/limited partner structure.

Mohamed Alem, managing partner of the law firm Alem & Associates in Beirut, explains to Executive how and why his firm has approached the project of drafting the law. “Lebanon is not known to have an infrastructure on the legal level that encourages the creation of Lebanon-based private equity funds,” he says. “The purpose [of introducing the law] is to allow room in Lebanese legislation to permit the structuring of private equity funds, which are typically funds structures, obviously companies, in which you have a general partner and limited partners.”

According to Alem, Lebanon’s dated Code of Commerce, or legal framework for corporations and businesses offering the well-known société anonyme Libanais (sal) or société à responsabilité limitée (sarl) company forms, is not optimally suited to the tasks of giving investors enough minority shareholder protection, the fund managers the flexibility to make decisions, and provide the whole corporate structure with what he describes as “tax transparency”. This is an extremely important issue to address, he says, as for companies using the private equity funds structure “there should be no penalization from a tax point of view.”   

Whereas the common formats of incorporation such as sal and sarl according to the central bank  both limit shareholder liability to their capital contribution, they also give shareholders duties and rights that allow them to influence corporate decisions on the board level. Converse to that, the European continental format of the société en commandite simple (known as SECS or SCS in francophone countries and as KG in German speaking ones) distinguishes two classes of participants in the company, which according to Alem corresponds to the general partner/limited partner structure commonly used by private equity companies.

In private equity (PE) parlance, the general partner (GP) of a fund is the decision maker regarding the investments and manager of day-to-day operations. The limited partners (LPs), on the other hand, supply the fund with its ammunition – the cash needed for investments – and have certain expectations, namely to make a healthy return on their money.

The law is being commissioned by the Office of the President of the Council of Ministers – the prime minister’s bureau. The main driver behind the initiative is Lebanon for Entrepreneurs (LFE), a nonprofit organization that was established in 2013 and that, in the words of its managing director Abdallah Jabbour, supports legal reform and other measures that would be beneficial to the business community, with special emphasis on entrepreneurs and members of the Lebanese diaspora. “We started with 16 laws on our list in 2014, three of which we were able to pass successfully. We have been drafting several laws in conjunction with the prime minister’s office and advocating for adoption of some laws that have been sitting in various drawers,” Jabbour says.

The Lebanese private equity draft law will benefit the country’s economic community and more specifically, the group of financial actors that spend their time with the structuring and operations of private equity and venture capital funds. This funds industry is a highly skilled and specialized profession, with a handful of practitioners who contribute to wealth creation – firstly their own.

Confidence in confidence

What makes this a macro-economically interesting discussion is the disproportionately large growth of entrepreneurial companies that are taken forward by PE and VC funds. This is also the argument of Firas Safieddine, executive board member of the Capital Markets Authority. “As regulator we believe that the private equity law is a requirement to complete the ecosystem as regards to equity and capital markets,” he tells Executive.

Under this mandate, the CMA became a stakeholder in reviewing and assessing the draft law, which according to Safieddine was “beautifully written” but would need a further round of drafting and review. He expects that the law, once it is passed, would deliver a component to make the Lebanese scene more inviting for investors.

[pullquote]Firas Safeddine, executive board member of the Capital Markets Authority, expects that the law, once it is passed, would deliver a component to make the Lebanese scene more inviting for investors.[/pullquote]

He also admits that it is an “ambitious undertaking” to attract investment funds to base their operation in Lebanon, but chooses to see the cup as having room. “Optimistically, the private equity law is a major step forward in terms of creating more confidence in the market,” he says.

Building the ecosystem from a legal point of view will not only require the PE law but “many laws that need to be addressed and attended to,” he says, naming the bankruptcy law as an example for other needed legislations.

Since Lebanon does not have a setup where such funds could be incorporated, the law would close this gap, and the CMA would further contribute to building trust and developing capital markets. “We will be proving very soon that the CMA is a major source of confidence,” he states.

Safieddine’s belief extends beyond the PE law into a trust of being able to remedy a more fundamental disequilibrium: as general agreement goes, banking dwarves the financial markets, and he emphasizes that capital markets are so tiny in Lebanon that they are “negligible”. That needs to change and he points to the case of the United States’ post-recession recovery after 2008/9 as an indicator that equity-based economies recover more quickly from economic weaknesses. “We are heading towards shifting our economy from a debt-based banking reliant economy towards capital markets, an equity-based economy.”

Whereas Safieddine claims to have read studies that show how equity markets and growth of GDP are correlated one-to-one, the story according to other studies is more complicated and it is an open question if debt or equity are suitable as magic keys for economic growth. Post the Great Recession, academic opinions and empirical indications are against one-key solutions and more tending towards combinations, meaning that the financial secrets to best-possible growth scenarios will likely be different for different countries and economies.

The Bank for International Settlements (BIS) indicated as much in a research paper two years ago, finding wide diversity. “First, financial structure differs considerably between countries. The relative importance of banking ranges from less than 20% in the United States to over 60% in Austria, Hungary and New Zealand. Second, financial structure is not static. Market-based intermediation has gained ground over the past two decades,” it said in a paper published in March 2014.

Noting that market-based financial intermediation tends to increase as per-capita GDP rises, the BIS paper found that some industries in emerging markets tend to benefit from capital markets while others – like small firms and sectors with tangible and transferable capital (such as agriculture), as well as those where output is easier to pledge as collateral (such as construction), are more amenable to bank debt finance.

[pullquote]Recessions in countries with bank-oriented systems are three times more severe than in those with a market-oriented financial structure[/pullquote]

“The results of this paper confirm the widely accepted view that both banks and markets are very important for economic growth,” it said. “We also find that banks provide services which differ from those offered by financial markets and that such services prove to be particularly beneficial for less developed countries […] Finally, our evidence suggests that banks and markets differ considerably in their moderating effects on business cycle fluctuations. Banks are more likely to supply loans during a ‘normal’ downturn, thus smoothing the impact of the recession. But their shock-absorbing capacity is impaired when the downturn is associated with a financial crisis. In this case, recessions in countries with bank-oriented systems are three times more severe than in those with a market-oriented financial structure.”

A few hurdles yet to clear

Given the near two decade-long dormancy of the Beirut Stock Exchange in combination with the dominant role of bank debt in the domestic market, plus the inertia in the political and legislative class, it seems moot to debate whether the Lebanese migration toward capital markets will be a “shift” with rapidity, as the CMA’s Safieddine contends, or slow and gradual, or even more hesitant and not actually tangible, as some economists suspect. But the drafting of the PE law has already been remarkable, says Alem. Besides helping local companies, which previously had no choice but to take on debt, to tap into capital markets, the law in future “can attract foreign private equity managers to base themselves in Lebanon because of the modern legal framework,” he says.

The draft law for private equity was accomplished by a team at Alem & Associates that comprised two partners and two associates. By researching existing laws in Luxembourg and France and by adapting the draft from suitable European codes – a job that required about 240 hours of legal research and writing and was supported by three PE companies as sponsors which LFE could mobilize – the team developed a draft law that is at the forefront of such legislation for the entire Middle East and writs forth the pioneering business legislation in the same tradition by which Lebanon introduced the offshore corporate structure in 1983, Alem says.

LFE’s Jabbour agrees, emphasizing there is “no modern law for private equity funds in any country of the Middle East. If our law passes, it will be the most modern one in the region.” According to him, adopting such a law comes with positive implications not only for tech-oriented funds and investors in the knowledge economy but also for real estate funds and any area where separation of investors and managers of funds is desirable.

He acknowledges the pitfalls of acceptance by Parliament, such as the fact that no law of any sort is passed when the assembly does not gather. But once that barrier is removed, the private equity draft law stands a good chance of being adopted, he says. “Usually, passing a law faces little opposition when it does not affect the vested interests of politicians or groups,” he reasons. A combination of proper advocacy (he doesn’t like to use the word ‘lobbying’) and the absence of vested interests will help the draft pass into law at one (not yet determined) point, he hopes.

“We need a law that is flexible, that follows global standards and makes any investor feel comfortable,” he emphasizes.

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Lebanese film industry 2016Special Report

Streaming hits big in the Middle East

by Natascha Schellen
written by Natascha Schellen

It’s a sunny afternoon in Beirut and you’re sitting in a café, waiting for a friend who is running fashionably late as usual, but it doesn’t bother you because now you have time to catch the latest episode of The Big Bang Theory on your smartphone. This is the attraction of video on demand (VOD): the convenience of watching whatever you want, at any time and on any device. Provided there is internet, of course.

In the Middle East, millennials are increasingly turning to online for entertainment and internet usage has been exploding in recent years. Saudi Arabia and the United Arab Emirates rank among the top countries for YouTube views per capita in the world. With the introduction of American VOD provider Netflix to 130 countries, including inside the Middle East, at the beginning of this year as well as regional and local players that already exist in the market, online streaming has nowhere to look but up. And although it’s taking them a while, advertisers are slowly catching on to this. Members of the advertising industry in Lebanon agree that spending on digital advertising is rising, albeit from a low base, with estimates for 2015 ranging between 8 and 10 percent of total advertising spent in the country.

The challenges of VOD in the Middle East

There are other advantages to advertising online. “The targeting is so efficient that you can really target who you want. It’s much cheaper [than TV] and it’s more efficient, especially when you’re targeting millennials,” says Daniel Habib, co-founder of Iron Heyoka, an online production house that creates corporate videos for clients in addition to original web series. “I don’t know any millennials who still watch TV,” he adds.

On the consumer side, it also makes sense to pay for this content, according to Nasri Atallah, managing director of media and publishing at Keeward, a digital production company that partners with a number of brands including Iron Heyoka. “I think what’s shifted over the last few years is people just aren’t willing to pay stupid amounts of money to see a film or to download a piece of music, but Spotify and Netflix [work] because it seems like the right amount to pay to do something legally and have a nice experience,” Atallah says. A Netflix subscription can set you back as little as $7.99 a month for the basic package, which is less than the average price of a cinema ticket in Lebanon today.

Regional VOD platform Cinemoz, however, argues that online payment is still a challenge as many Arab users don’t own credit cards, which is why the company has chosen to rely on advertising for revenue. Cinemoz founder and Chief Executive Officer Karim Safieddine explains that “advertisers are addressing the millennials by a landslide. The only reason why we’re generating very sexy revenues is because we cater to that demographic; they are the new consumers.” The company, which started in 2011, is hoping to close the year with more than $1 million in revenues.

Another challenge has been the notoriously unstable internet connection in Lebanon and other countries in the region, but tech-savvy VOD service providers take this into account when they develop their software. Eli Khoury, the chairman of Lebanon-based content provider M Media, addresses this issue: “We have spent a lot of time on the back engine. Today you could watch it even on the weakest internet [connection] without cuts.” The M Media website is currently in beta mode – with all videos available for free – and plans to launch fully once they have reached their targeted amount of content.

The potential of the internet

VOD requires considerable financial investment as well, particularly when it comes to purchasing rights from major Hollywood studios. Starz Play Arabia Chief Commercial Officer Danny Bates says that the Middle East and North Africa (MENA) service, which was launched in 2015, has invested a significant amount so far, though he is unable to reveal the exact figures at this time. Starz Play Arabia announced on May 23 at a press conference in Dubai their partnership with Samsung TV, banking on the popularity of their smart TV range in the region, particularly in the Gulf. The majority of their 720 hours of Arabic content was in fact produced in the Gulf,  but they are looking to expand with Syrian and other Levantine content in the near future.

This has implications for the Lebanese film industry. As the road to distribution remains unclear (see story page 68), the fast-rising VOD segment is one that Lebanon has the opportunity to exploit. Most film producers and distributors that Executive talked to agreed that there are fewer barriers to bringing a film to an online platform when compared to the struggles of securing a theatrical release. Although the latter currently offers much greater financial gains, online prospects are looking good, with new platforms springing up annually that are thirsty for Arabic-language productions to feed the demand.

The Middle East market is avid for content, attests Cinemoz’s Safieddine, whose site currently boasts an average of 2 million views per month. Finding enough Arabic content is proving to be a main challenge for Cinemoz. “It’s improving, but today the volume of Arab films released yearly is not enough to sustain the viewership that we are reaching today,” says Safieddine.

Following in the footsteps of global VOD giants, Cinemoz is co-producing several original series to be released in early 2017 on their new brand TVmoz. “With the help of our analytics, we have a much better idea of what our audience wants,” says Safieddine, adding that the web series line up includes a zombie show and a sci-fi comedy, among others.

Internet speed notwithstanding, Lebanon has achieved some success online. Shankaboot, which according to As-Safir aired as the world’s first Arabic web-based series, ran from 2010 to 2012 and won a Digital Emmy Award. In recent years a number of players have ventured onto the field, among them Iron Heyoka. The progress has been slow, but the future looks bright. Referring to their rapidly increasing business in producing corporate videos, Iron Heyoka’s Habib enthuses, “It’s like Lebanon woke up two days ago and figured out there’s internet; it’s crazy.”

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