Executive Magazine

Guerilla entrepreneurship

by Yasser Akkaoui November 11, 2015

written by Yasser Akkaoui

Legislative paralysis is putting us at risk of losing much-needed loans for development projects from the World Bank. If we allow this to happen, we’re taking a potentially devastating risk. Other international institutions and past partners could very well reconsider financial facilities earmarked for Lebanon, triggering an isolation of our financial system. Once our uncooperativeness unplugs us from the international system, expect scavengers to impose their rule under the pretext of assistance. Sound familiar?

We can either remember how those who promised Lebanon help in the 1980s only bled us dry, and learn from that experience or keep living in denial, insisting our ever slowing economic pulse is still proof of life until we return to being simply a market for the East, deprived of any ambition or ability to produce. If history does repeat itself, we will have only ourselves to blame. We’ve invested nearly nothing to make this country more productive and are watching the traditional engines of our economy run out of gas while insisting we can make it just a few more kilometers before taking action.

Meanwhile, we have a guerilla army of well educated, creative and innovative individuals able to generate wealth and value in unconventional ways, making markets around the globe a click away. This small, dedicated and focused group has been working hard with few resources for too long. Two years ago, the central bank stepped in with support, and a more vibrant entrepreneurship ecosystem is emerging. Happily, they’re our last link to the productive global economy.

November 11, 2015 0 comments

Economics & Policy

Less than glossy

by Paul Cochrane November 11, 2015

written by Paul Cochrane

Earlier in the year the American journal Environmental Research ran an article on ‘Total lead concentration in new decorative enamel paints in Lebanon, Paraguay and Russia. It claimed that five leading Lebanese paint manufacturers had products with exceedingly high lead content, and in certain cases had misled customers through erroneously labeling paint as ‘lead free’. Is lead in paint another health worry on top of the garbage crisis and recent food contamination scandals?

White, yellow and red paint from four Lebanese brands – Tinol, Sipes, Noula, Omega as well as the US-affiliated Dutch Boy – were acquired by local activist organization IndyAct and sent to the United States for testing. The results showed that certain paints, particularly yellows and reds, had extremely high levels of lead, in excess of US standards of 90 parts per million (ppm). It stated that two of the brands, Tinol and Dutch Boy, were mislabeling products as ‘free of lead’ or ‘lead free’.

Lead was widely used in paint due to its density – covering more with less paint – durability and resistance to corrosion. However, direct and constant exposure to high levels of lead from paint chippings, contaminated dust and soil is a cause of mental retardation, especially in children. According to the World Health Organization (WHO), exposure to lead during childhood contributes to an estimated 600,000 new cases of intellectual disabilities per year. As a result, restrictions and outright bans on lead in paint have been put in place over the past 40 years, with the US banning lead in decorative paints in 1978. Jordan for example banned lead paint in 2013, while in April, 2015, the Global Alliance to Eliminate Lead Paint, co-led by the United Nations Environment Program (UNEP) and the WHO, announced the goal of eliminating lead paint globally by 2020. In Lebanon, lead in paint is not restricted or banned.

No lead here…

When the named manufacturers were interviewed by Executive (Noula refused) two out of the four were not aware of the study. Wajih Bizri, Chairman of Sipes Paints, was surprised at the article’s finding, and asked for a copy. He says there is no lead in his paint – the report states 135,000 ppm in yellow and 27,700 ppm in red – and that the company was not headquartered or affiliated with Sipes Egypt, as stated in the research. “All of the information is not true. We don’t use lead in our paint. Egypt has nothing to do with our factory and our shareholders are not the same,” he says.

Mohamad Ali Maatouk, Executive Manager of Omega Paints, was equally surprised when shown the results that its yellow paint had 83,800 ppm and the red 131,100 ppm. He also says that no lead was used in decorative paints, as Omega stopped using the ingredient four years ago due to the related health hazards.

That date is significant, as it turns out that despite the article being submitted to Environmental Research in November 2014, and published in 2015, all of the paints were purchased in October 2011. It is a point not lost on the manufacturers.

“This report is not fair to all the (named) manufacturers as it is outdated. It also doesn’t name the products – we have pages of varieties – and where it was bought from. The manufacturing date depends on whether it is from a factory or an agent, as these colors – yellow and red – are not common,” says Chaker Saab, Chairman of Tinol Paints. The report stated that Tinol’s yellow paint had 236,000 ppm and red 101 ppm.

“We never use lead in decorative paint. The test must have been on an industrial paint,” says Saab, adding that the company sourced from Western Europe and would not falsely label paint as lead free, as claimed. Lead is still widely used – and still allowed – globally in industrial paints due to its durability.

While manufacturers pointed out certain discrepancies with Environmental Research’s findings, such research has kept the companies on their toes to ensure they are lead-free. In the case of Dutch Boy, the report prompted the company to re-check the sourcing of raw materials.

On reading that Dutch Boy’s red paint had 32,400 ppm and yellow 1,360 ppm, the US licensor Sherwin-Williams contacted Chemipaint in Beirut to provide samples. “We had to search the market for samples from 2011,” says Chemipaint’s Bassam Bizri. “Tests were then carried out in the US, and the problem was the oxide (used as a pigment). We stopped using lead years ago, but we’d bought a titanium oxide (pigment) from China that was not supposed to have lead. It was contaminated and we didn’t notice. All paints have been re-tested, and have less than 90 ppm.”

The need for regulations

Dr Naji Kodeih, an environmental consultant and volunteer at IndyAct who contributed to the report, says he has prepared a draft proposal for an official standard for lead in paint to not exceed 90 ppm, but his requests for a meeting with the health and industry ministries have been rebuffed.

Sipes’ Bizri, also President of the Syndicate of Paint Manufacturers, says they have also been asking for standards to be adopted. “At meetings with the economy minister we’ve said we’re willing to back any regulatory decision.”

However, there are over 200 paint factories in the country while fewer than 30 are members of the Industrialists Association or the syndicate. “For big companies regulations are not an issue but a lot of smaller companies are unlicensed. Some are under residential buildings, it’s crazy. The government needs to regulate local manufacturers and importers, as nobody is looking at what is coming in. It’s a real problem,” says Bizri.

With no regulatory action expected from the government anytime soon, the larger companies state they are self-regulating by adopting international standards and bringing in external certifiers to ensure consumer confidence, and to have a competitive edge. “It is as if everyone needs a country administration within their company – you have to manage everything, the treatment, the dust collection, cleaning without solvents,” says Wafa Saab, CEO of Tinol.

November 11, 2015 0 comments

Economics & Policy

Industrial recycling

by Matt Nash November 10, 2015

written by Matt Nash

For all the talk of Minister of Agriculture Akram Chehayeb’s waste management plan including robust recycling initiatives, it actually lets municipalities decide how to treat and dispose of their waste with few guidelines and no fixed quotas. That is to say, there is no clear picture of what recycling will look like in Lebanon should the plan – approved by the cabinet on September 9 – actually be implemented. It calls for an 18-month interim period during which municipalities will prepare their waste strategies. During this time, municipalities are to sign any contracts that need signing and build any infrastructure that needs building. As cities and villages ready themselves for garbage duties, waste from Beirut and five surrounding districts will be distributed among newly built sanitary landfills in the northern district of Akkar, the Bekaa Valley and Bourj Hammoud. A small portion of the waste is also supposed to be taken to a new waste treatment facility in the southern city of Saida. During the 18 months, the limited amount of waste sorting done by Sukomi – the Averda company responsible for composting, recycling and landfilling much of the country’s trash – will stop. Neither the company – a sister of the far more well known trash collection firm Sukleen – nor the government have given precise figures on the amount of sorting and recycling Sukomi does. Minister of Environment Mohammad Mashnouk recently said the company landfills around 80 percent of the waste it collects, and an employee tells Executive, on the condition of anonymity because he is not authorized to speak with the press, that Sukomi recycles only the percentage it is contractually obliged to recycle. He declined to provide the percentage.

Prior to the July 17 closure of the Naameh sanitary landfill – which accepted around 50 percent of the country’s waste – the Ministry of Environment maintained Lebanon had a 9 percent recycling rate. Everyone directly involved in recycling Executive has interviewed in the past three months, however, scoffed at the figure as being too low. Several NGOs – including arcenciel and T.E.R.R.E. Liban – and one company – Contra International – have run recycling programs in Lebanon for years. Executive has not been able to ascertain whether the waste they collect and sell for reuse is included in the 9 percent. In late October, Sukleen said in a press release that the company collects recyclables from over 2,300 local businesses. Again, Executive is unsure if this activity is captured in the 9 percent. Finally, the informal network of recyclable material collectors is likely entirely off the radar. All that said, recyclables are a valuable raw material for local industry. Companies in Lebanon transform waste paper, cardboard and plastics into finished and semi-finished products for both the local market and export, explains Fadi Gemayel, president of the Association of Lebanese Industrialists and head of Solicar, a paper and cardboard recycler. Executive sat down with Gemayel to talk about the industry’s need for recyclables.

Fadi Gemayel

E Does 9 percent sound like an accurate figure for total recycling in Lebanon?

No. The Lebanese recycling capacity for paper is only 120,000 tons per year. Meaning you need at least 150,000 tons of raw material. That said, we still import 200,000 tons of raw material to make paper locally, so there is plenty of room for growth. Industry is very much aware of the value of waste as a raw material. Paper recycling started in Lebanon in 1929. Worldwide, 70 to 80 percent of all packaging material made of paper or cardboard is made of recycled material. In Lebanon, we are very close to that number. Also, there are targets for recovery, how much are you obliged to recover from your paper you put on the market. That rate is around 60 percent in Europe. We are not at this level yet in Lebanon. But recycling is important for the packaging industry. There are at least five major paper recyclers in Lebanon.

E Do you have any numbers or studies suggesting what the total industrial demand for recyclables is?

No.

E But industry does use paper, as you’ve noted, plastics and, to a lesser extent, glass and metal, correct?

Yes. I’ve explained paper. Plastics are also recycled. There are many small companies using scrap and bigger companies that create fiber from recycled plastic and export it to Denmark. For glass, Lebanon has been known for glass work since the Phoenician times. Today, we have sophisticated factories producing glass. We have two. The biggest, however, was bombed in the 2006 war and never rebuilt. I am not sure of our capacity for glass recycling, but glass is used as a raw material in Lebanon.

E What about metal? You often hear Lebanon has no foundries – which melt scrap metal to repurpose it for reuse. Do we have foundries?

There are two big firms and many smaller, more specialized ones. However, a huge amount of scrap gets exported because of the problems in costs. So the bulk of the raw material is exported. The big foundries have not been able to sustain. Export less and the foundries will be happy. The problem is a foundry is very energy intensive, and in countries around us, they have cheap, subsidized energy. Regional foundries can bid up the price for scrap. Here you are squeezed because of the high energy costs, so local foundries cannot pay as much for the raw material.

E Where does industry source recyclables?

There are sorting facilities, like the one operated by Sukomi. We, as Solicr, buy from Sukomi. There are also Zero Waste Act, T.E.R.R.E Liban and arcenciel. There is a network.

E What role does the informal sector play?

Some time ago, the informal sector was very strong. Nowadays it exists, but less and less as people are going and picking through the garbage. Today, supermarkets are selling used cardboard. And the more Sukleen got organized, the more scavenging was reduced from the bin itself.

E When did that happen?

I don’t have a clear idea of the timeframe, and I don’t know exactly what triggered it. Scavenging exists. The rate of recovery in Lebanon is high, but it is not perfectly organized.

E If there were to be more formal recycling in Lebanon, could industry absorb the additional volumes of recyclables?

Don’t worry. We have a problem when we don’t have enough recyclables. And we don’t have enough. Now with the crisis, we are very squeezed. Don’t worry about surpluses.

E Can you put a figure on the cost savings associated with using recyclables as a raw material?

It’s hard to give an exact figure because we’re dealing with a major constraint: the cost of energy. Recycling and the green industry are nice, but they come with a price tag. It is very energy intensive. Very. Energy costs account for as much as 35 percent of the selling price of paper. Energy costs are high for plastics and for glass. We have high energy costs, and we are surrounded with countries that subsidize their energy costs. The fact that Lebanese industry has been enduring for so long means there is an economic reason. But don’t think recycling is a huge money saver.

November 10, 2015 0 comments

Economics & Policy

Blame it on Bassil

by Executive Editors November 10, 2015

written by Executive Editors

E What was minister Bassil’s plan to reach 24 hours of electricity by 2015?

[Bassil decided] that we needed barges imported from Turkey, a new [power plant to generate] 700 megawatts, to rehab Zouk, Jiyeh, Zehrani, Deir Ammar and Baalbek, and the implementation of 1,500 megawatts from [public-private partnerships]. [Bassil] talked to then prime minister Najib Mikati to send [$1.2 billion] as [a project of law] – from the [council of ministers]. Nabih Berri accepted it and when Nabih Berri accepts something it can [move] super fast – it went straight to the parliament. We said we needed the electricity today better than tomorrow – we have no problem with the politics of it – and it’s costing $6 billion of economic loss per year not having 24 hours of electricity.

E From your perspective what happened next?

We asked [that] the $1.2 billion [be] allocated to the government. Two, [that] the prime minister seek financing for the $1.2 billion instead of paying it from the treasury – we don’t have [the money and] because we know that donors insist on transparent terms of reference, supervise the spending and supervise [project] implementation. Three, appoint a new board of directors for Electricite du Liban. We cannot have Kamal Hayek who has failed, maybe he is not responsible, but there hasn’t been a board since 1998 – and appoint a regulator. The fourth condition is that the minister will have to show [cabinet] the work that has been done, the terms of reference and how he’ll approach the tender. These were the rules and conditions, [Bassil] got the waste basket and threw them in it.

E He did not comply with any of the parliament’s stipulations?

[Bassil] did not appoint neither the [ERA regulator] nor a board [EdL], and he came up with terms of reference for a tender for Deir Ammar 2 and for reciprocating engines [diesel engines].

E So the power plant at Deir Ammar was tendered but has not been built. You allege that contract negotiations were mishandled – what happened?

After opening the bids they found that the cheapest was [Abenor-Butec] – a cost per kilowatt hour of 13.6 cents and on natural gas 9.2 cents. After winning the tender [Bassil] said that Abenor’s offer was too expensive. It was $660 million, [producing] 560 megawatts. The cost per megawatt was $1 million – compared to the reciprocating engines at $1.35 million. [Bassil] said he would negotiate with them to knock off $100 million – they said they could not do that.

E But then the contract was canceled and retendered.

[Bassil] went back and took off work worth $68 million – the line that connects for gas and the chimney that was 120 meters [in height] became 60 meters. Given these new realities only two companies applied. J&P [a Cypriot company] when it had first applied wrote a letter saying it could not do the job within 30 months, but reapplied for the job that now had to be done in 25 months. Sepco [a Chinese company] refused to sign some of the conditions, saying it could not be done. The envelopes were opened and [the contract awarded] to J&P for $548 million. [Bassil] renegotiated with [J&P] and they accepted for $504 million.

E And there was also the additional ambiguity over who might be responsible to pay the Value Added Tax in the contract?

The contract did not specify who was to pay the Value Added Tax. We’re talking about $50 million. For a company that won the tender valued at $548 million, accepted at $504 million, it means they’d make some profit. [But] if they have to pay the $50 million [in VAT] they would lose. When this contract was reviewed by the Court of Audit they noticed the $50 million [needed to be paid].

Cesar [Abou Khalil, an advisor to the Ministry of Energy] says that the condition wasn’t placed on the company to pay the $50 million because at that time it was not decided whether or not to seek financing from an international donor. Only [donors] are subject to non-payment of VAT – they’re exempt.

E The current Minister of Energy Arthur Nazarian recently promised an additional three hours of electricity – is that realistic?

At Jiye the production capacity there is around 350 megawatts [but] actual production is 75 megawatts currently. The reason is that these are all Toshiba [engines] that don’t have spare parts – [staff] have cannibalized old engines [to make repairs]. The reciprocating engines that were put in Jiyeh will be operational by November. [In late September current Minister of Energy Arthur Nazarian] said we’[d] have three more extra hours of production because we’ll have two new productions units – he’s talking about the reciprocating engines, in Zouk and in Jiyeh. In Jiyeh it is true, it will start in a month and a half and will [generate] 84 megawatts. In Zouk, the 260 megawatts will not be ready until May 2016.

E Your criticism then is that the reciprocating engines were high priced backups that would not actually be as beneficial to the current need as investing the money into new generation capacity?

If Gebran [Bassil] wanted to be transparent he would have started with Deir Ammar 2 and by now we would have had 560 megawatts working. That was the priority and not the reciprocating engines. The engines became the priority because it was easier and more expensive and payoffs were paid out.

E Is there documentation of these commissions and payouts?

I don’t have anything on the commissions that were paid but one can review the cost per megawatt of reciprocating engines and we find a big difference between $1.35 million that was paid and what could be had for $1.1 – $1.2 million. We’re talking about $60 million.

E This $60 million, are you saying that Gebran Bassil was distributing it to his own interests – what’s the story?

We should, as politicians, all of us, give our financial bank accounts – everybody close to me [whether] first or second degree – [to show] what I’ve made over the last 10 – 15 years. Gebran ought to do the same, [from] 2005 until now. I know people who have paid him.

E Suppliers or bidders?

Suppliers who have paid. They’re not going to say it publicly but they’ve told me and they’ve told me how they paid. In cash or to a friend of his.

E What is the total amount of shady money connected to the electricity file?

I believe it is a minimum of $100 million, around $50–60 million in the reciprocating engines and $40 million for [consulting]. We asked Kamal Hayek [chairman of Electricite du Liban] and the minister to see the accounts – how much and where it was paid out of the $1.2 billion. We haven’t received a document as of today and it’s now been over a month.

E Are you accusing Gebran Bassil mainly of incompetence, wrong prioritizing, or corruption?

All of the above. First his incompetence because the priorities were not set properly. The notion of corruption is there when you pay more than what you have to pay for in the market. Corruption is when you allow firms to apply and win a tender when they are not supposed to be qualified, when you try to validate a company or lie about whether or not they have to pay the VAT, and when you sign a contract and maneuver the terms of payment after the signature to get preferential treatment for whomever won the tender. All of these combined [show] that there is incompetence and corruption.

E The United Nations defines corruption as the use of public office or power for private gain. Do you think that Bassil achieved private gain from this endeavor?

I don’t have direct proof of it, but my feeling is he must have.

E You want to be taken to court by that kind of feeling?

If I’m taken to court I will lift my secrecy and let him lift his. And we’ll let the court decide. I believe he must have had some private gain.

E Who benefited from the $40 million consultancy fees – do you know who are the consultants?

No. [The ministry must] show us the receipts.

E Since we also exist within the context of a fragmented political environment do you think that political rivalries and power ambitions play into this?

This is a question I have been asked – why this late in the [process] you come in with the questions? Well we’re not late. First, [the Future Movement] came up with a booklet last year on the electricity. It took us two years to prepare it by looking at where the problems are in terms of the whole sector in energy and specifically in electricity. We said where we are not able to move ahead, how much was spent, the costs and the loss to society, and what has to be done. Even at that time we had questions for Gebran, to the current minister, for EdL – what have you done so far with the $1.2 billion.

E Are the minister’s advisors accountable to any oversight?

They’re not accountable to anybody, only to the minister. [On September 15] we were supposed to have a parliamentary committee meeting – we asked for the Ministers of Finance and Energy to be present because we wanted to see the results and numbers. He sent us Cesar Abu Khalil who is not an official of the government to represent the minister. So Mohammad Qabbani [chairman of the committee] said go home, there won’t be a meeting until the minister comes.

November 10, 2015 0 comments

Business Companies & Strategies

Coming Sukleen

by Thomas Schellen & Matt Nash November 9, 2015

written by Thomas Schellen & Matt Nash

After protests outside their Lebanon plant and activist allegations of corruption, the CEO of Averda gives his first ever interview to a media organization. Little known by name in Lebanon, Averda is a waste management company founded in 1993 by Lebanese engineer Maysarah Sukkar. It is the parent company of Sukleen and Sukomi. Maysarah’s son, Malek, has been a top manager since the company’s inception, and today leads the company as it continues an expansion abroad that began a few years ago. Contracted by the government to collect, treat and dispose of Beirut’s waste in the early 1990s, Sukleen and Sukomi – which even Sukkar refers to collectively as Sukleen, a play on the family name – the companies quickly took on more municipalities in Lebanon and have been handling waste in the capital and all of the Mount Lebanon governorate (except Jbail) for around 20 years. Previously media shy, Malek Sukkar sits with Executive to talk about the waste crisis and his reaction to Sukleen’s many critics.

E How do you respond to accusations that have been leveled recently in Lebanon against Sukleen and your family in context of the escalating garbage crisis?

The nicest way I can describe this is that we understand the need to find someone who can be held responsible. We are not responsible, but we are the easiest people who they can try to [blame]. We understand the frustration but [what Sukleen is being accused of] is unfair and unfounded.

E Have any of the organizations or parties with interests in this controversy reached out to you asking for your response or comments on this matter?

No. It is shocking, but no.

E Were you surprised that the emergency plan which was announced on September 9 has not seen the beginning of implementation within the seven weeks that have passed until the first literal garbage flood on October 25?

Honestly, I am surprised because I thought that the change of which minister handled the file would be based on some sort of agreement that had been reached in the Council of Ministers. I am not privy to what happened [with regards to] the actual execution but I am surprised by the delay because this is a critical service. It is not a nice-to-have service like superfast WiFi versus regular WiFi. Taking care of our garbage is a bare necessity and this has always been my worry as a human being, not as someone who is involved in this file.

E Can you be more specific about why the situation worries you personally?

I remember a story from Harvard Business Review from some years ago. It said that there is always a danger that your strength becomes your weakness. The Lebanese government relies on the resilience of the people. Every Lebanese has three different power sources and several different water sources. The resilience that this has built up is what I am afraid people will develop [because of] the waste issue. The scene that we [saw on October 25] of the floating garbage may become something that we are used to, and that would be the absolute worst outcome. We got used to mobile telephones where calls cut after about 20 seconds or so; we got used to not having electricity. People still get angry but there is a used-to-it-ness and it is my worry that the longer this thing takes to get sorted out, the more this resilience gene might come out where people would say we can also survive without waste management. That, to me, is the worst possible outcome.

E Do you think that the emergency plan has the potential for dealing with the issue at least for a year or two?

The emergency plan is fairly straightforward. What it [calls for] is a devolvement of the waste services [to municipalities] and for doing that over 18 months. That is a wise process because you can’t go from zero to 100 all at once. From a high-level view I think this makes sense. What I think worries people is the question if there is something that will happen within these 18 months, or will this be a period that will require another 18 months and then another 18 months [of emergency management]. This is probably the tougher question. Only the municipalities know because they will have to pick up the baton and run with it.

E You have not participated in the tender bids that were preceding the announcement of the emergency plan. How large a role did the Lebanese operation play in the overall activities of Averda up until the summer and the closure of the Naameh landfill?

Everyone in our organization is so proud of the work that has been done in different countries, but Sukleen and Sukomi are the mama. All that is good in the whole company has come from these two entities, all the genes and the DNA, the will, the pride and the resilience, talking in a positive sense. When we started this process in Lebanon in 1993, we came to a country that had been decimated and a population that had not been in a corporate setting for about 20 years. When you asked for someone who could use a word processor or for a specialized accountant, you couldn’t find them. From when we started, the gene was built one brick at a time. We created a school for training almost every skill set and we took the view that we were a meritocracy. It was a very small family [involvement], there was my father and myself and not a lot of Sukkars in the organization. We believe that you are as good as your performance, not as good as your last name. We put a lot of training performance-based management systems in creating the gene of the organization and this gene self-propagates.

E You have recently been much more responsive to questions about Sukleen when compared with a lack of answers that we observed over many years previously. Why the long-standing reluctance to talk?

We have no political aspirations, neither my father nor me. We always thought that if you speak to the press in Lebanon, you are making a bid for parliament or becoming a minister. Also, a lot of times when we answered in the past, we answered with 17 pages of documents and numbers and no one ever read them. And because we are highly technical people, we always assumed that whatever response we give, it will be twisted in the media, so let’s not say anything. In hindsight this was a humongous mistake.

E What has changed in this regard?

The attacks in recent weeks have been so personal, so wrong, that your blood boils and not answering has become impossible. Our doctrine now is that we answer, not by being rude or aggressive but by being factual and our facts speak for themselves. We believe in everything that we have done and we say that.

E From your perspective now, what is your strategy in going forward not just in responding to crises but in representing to larger audiences what Averda is?

I think for the first time in the history of the company we have a marketing budget and within that budget a very specific media marketing strategy that we are now applying.

E Which is to do what and why?

We do a lot of great things; we do life-changing things and to many people it is a shock when they see this. It shouldn’t be a shock and, to be honest, the people whom we hurt [with our silence when we were accused] probably more than our own family are the people who work in this great company. If you work for Sukleen today in Lebanon, you are not proud. They have made you feel small. The attacks we have received are not something that will make you feel that you can walk into a bar and wear a Sukleen t-shirt. So one of the reasons why we have taken what is for us a bold step is that these people who have been doing this work for decades deserve a response they can take to their friends and their neighbors and tell them, ‘what you are saying is not right. This is the truth.’ Working for this company should be a moment of pride, not a moment of shame. Having learned from the Lebanese condition, we will go forward with a positive view of media relations.

November 9, 2015 2 comments

Banking 2015 Business Finance

No time to cry wolf

by Thomas Schellen November 9, 2015

written by Thomas Schellen

In the Lebanese banking sector’s cherished game of claiming the deposit throne, month-on-month drops of private sector deposits are usually reserved for the January statistics, in what has become known as the annual correction of window dressing at the end of the business year. That is why, when the relevant central bank data is pulled up as a line graph, January 2011, January 2014, and January 2015 look like little potholes on a long, ever ascending highway to a heaven of private sector deposits.

Besides the January corrections, deposit dips in the past five years have been few and far between, such as February 2011, July 2012 and April 2013. None of downward moves lasted more than a month and none amounted to more than a few decimals in the sector’s deposit tally of billions of dollars. This fact alone was enough to make alarm signals sound in the news, that July was another of those months with a minute contraction in private sector deposits appears unseemly; namely a 0.2 percent fall from $148.58 billion in June to $148.39 billion in July according to Banque du Liban data released in mid-September.

In numbers based on central bank reporting, total private and public deposits at all commercial banks rose by $4.26 billion from $143.4 billion at the end of June 2014 to $147.6 billion at the end of last year and by another $4.15 billion to $151.8 billion at the end of June before receding to $151.5 billion in July. Total deposits are generally a few billion dollars higher than total private sector deposits. But looking at either data stream, the growth rate in H1 2015 has clearly slowed percentage wise when compared with six-month periods in recent years. However, this observation itself cannot be a precursor of the sky being about to crash down.

The picture of our banking activity also remains within bounds of normality when reviewing the performance of top banks in the first half of 2015. Market leader Bank Audi recorded very minor growth of assets and deposits. Both its domestic and foreign assets expanded by less than 1 percent in the first half of 2015. Domestic assets denominated in USD saw the largest increase, at 2 percent year to date. Loans in the bank’s foreign operations contracted when expressed in USD, domestic loans in the Lebanese Pound expanded by over 5.6 percent in the year to date but this increase could not keep the consolidated lending growth in the black; the overall loan portfolio shrank by 0.8 percent.

Growth and profit

At BLOM Bank, the growth rates looked stronger but not decidedly stronger. Assets edged up by 2.3 percent, deposits by 3.1 percent and loans by 1.6 percent. Domestic growth surpassed growth of BLOM’s foreign entities in all three categories, by about one percentage point in loans, two percentage points in assets and almost three percentage points in deposits. While Audi and BLOM’s combined market share of total deposits dropped by about 30 basis points when compared with mid-2014, combined, their position remained dominant with a 37 percent control of alpha group deposits.

Revenue stream components at the two largest banks showed an up-shifting of net interest income while trading and investment income and non-interest income declined. According to FFA Equity Research the year-on-year improvements in net interest income for H1 2015 were 8 percent at BLOM and 16.5 percent at Audi. Both banks improved their fees and commissions income; however, these gains were juxtaposed with year-on-year drops in trading and investment income of 43.1 percent at BLOM and 18.3 percent at Audi that contributed to the two banks’ contraction of non-interest incomes by 16.5 percent (BLOM) and 4.4 percent (Audi).

The first-half net profits of the two top banks amounted to $202.1 million for Audi and $190.4 for BLOM, followed by $70.1 million at Byblos Bank, the third largest Lebanese bank by assets and deposits. Year on year, Audi achieved a 6.5 percent profit increase, BLOM 6.2 percent. For Byblos Bank, the increase was 1.1 percent. The latter bank’s first-half performance, which was a mix of net interest income versus non-interest income, underwent a rather different development to that of Audi and BLOM. Byblos Bank’s fees and commissions income dropped 10.4 percent year on year, its trading and investment income, however, jumped 24.7 percent higher. Byblos Bank achieved improvements of 8.8 percent in net interest income and 8.7 percent in non-interest income.

Growth of deposits in different pockets, lending activity subdued across the ranks

The report card on profits is also coherent for the entire stratum of the 14 largest Lebanese lenders. Banking intelligence company BankData reported in early September that the combined net profits of banks in the alpha group, comprising banks with deposits above $2 billion, increased by 9 percent for the first half in 2015 when compared with end June 2014. Total alpha group profits for H1 2015 tallied at $993 million according to BankData, with the top five banks by profits – Audi, Blom, Bank of Beirut, Fransabank and SGBL – accounting for $648 million, or 65 percent of the total.

The three banks with the strongest first-half deposit growth rates were Lebanon and Gulf Bank (LGB) with 7 percent, followed at some distance by Credit Libanais and BBAC, each showing growth in the mid four percent range. The three banks together represent about 9.5 percent of alpha group deposits. While Credit Libanais and BBAC each reported growth of domestic deposits that was above 5 percent in conjunction with drops in deposits in entities abroad, LGB derived its growth more from units abroad than from domestic operations, showing year-to-date deposit growth rates of 22.5 percent from entities outside of Lebanon and 6.9 percent within the country. Of the two banks that experienced negative year-to-date growth of deposits, First National Bank (-1.7 percent) and Banque Libano-Francaise (-0.4 percent), FNB saw outflows from foreign currency accounts in the domestic market while BLF achieved a small gain in domestic deposits and reported lower deposits in foreign entities. FNB’s and BLF’s combined market share in alpha group deposits is 7.7 percent.

The strongest loan growth was represented by CreditBank at 7.7 percent, followed by BBAC at 5 percent. On the balance, however, the overall evolution of the alpha group’s loan portfolio was unsettlingly flat for the first half in 2015, at 0.1 percent growth. Six of the 14 alpha group banks showed year-to-date drops in the loan portfolios, with contractions going up to 5 percent. The lending growth that occurred was, with a few exceptions such as CreditBank, concentrated on Lebanese Lira-denominated loans while the alpha group’s portfolio of foreign currency-denominated loans regressed mildly.

In short, developments of assets, deposits, and loans since the start of 2015 have varied in the customary fashion from bank to bank and often differed notably between H1 2015 and H2 2014, and also within individual institutions.

The most striking commonality in the sector’s performance numbers is related to deposit growth when comparing year-to-date growth in the first six months in 2015 with the year-on-year growth between end June 2014 and end June 2015. With the single exception of BLF, whose small contraction of deposits was wider year on year than in the year to date, all banks in the alpha group by end of June 2015 had seen significantly stronger deposit growth rates in the past twelve months than in the past six months. More specifically, for the bottom half of the alpha group banks, the growth percentage of the 12-month period was three times or more what they had achieved in the first half of 2015. On average across the alpha group, the year-to-date deposits growth rate was 2.2 percent as opposed to 6.9 percent year on year.

Deposit doubt

This slowing in the ability to attract deposits is the hidden, or not so hidden, worry that lurks beneath the floorboards of the Lebanese economy. Consistent and significant growth in deposits is needed to sustain the financing of the public sector deficit and of the private sector. This growth necessity does not chime all that well with the information in the BankData report for H1 2015 that “deposits rose by 2.2 percent over the first half of 2015, with domestic deposits growing by 3.0 percent while foreign deposits decreased by 1.4 percent over the period. Out of domestic deposits, [LBP] deposits grew by 4.6 percent while foreign currency deposits increased by 2.1 percent.”

While it is certainly worth keeping in mind that deposit growth in such low percentage ranges could cause the Lebanese economy serious pains after few short years, the detailed numbers for the first half of 2015 and the headline numbers for July present a nuanced picture of banking sector performance, showing a reality that does not lend itself to broad-brush predictions of doom.

Expectations voiced by BDL Governor Riad Salameh in the September monthly meeting between the central bank and the Association of Banks in Lebanon are that banks will achieve 6 percent growth in deposits and 5 percent growth in lending this year according to a brief report in Byblos Bank’s Lebanon This Week (LTW) publication for the third week of September. According to LTW, Salameh also affirmed the stability of the currency regime and the sufficiency of market liquidity in Lebanon and told bankers that BDL will continue to issue its financial stimulus package in a 2016 edition. (Minutes of the meeting or even a summary were not offered online by ABL or BDL as neither organization appears to have yet put on the mantle of transparency when it comes to keeping the business community in the loop about these important conversations).

For the moment, the analysis of year-to-date sector data and the presence of central bank assurances suggest that now is not the time to cry wolf over any new, vicious imbalance in our banking sector. Lebanese bankers will also act at their own peril if they ignore recent warning flashes of downward adjustments in 2015’s GDP and the change in the ratings outlook from stable to negative. It is indubitable that the banking business, along with the entire country, is in for new challenges and one cannot shout loud enough to alert all “concerned parties” that the political paralysis of the state must be overcome constructively.

A Federal winter is coming

Finally, it is an inescapable insight that, today, global scenarios are just as obscure as the domestic outlook. The past weeks of Federal Reserve soul-searching over interest rate decisions have affirmed the understanding that hiking of the federal funds rate in the United States has certain implications of uncertain direction and magnitude outside the US. This was reflected clearly in references to “developments abroad” and “international developments” in the Federal Open Market Committee’s September 17 statement on the decision to maintain the current rate a little while longer. The potential for a growing dichotomy between US and global interests was immediately highlighted by divergent responses from market participants after the recent Fed announcement and the need to calm moods with a speech by Fed Chair Janet Yellen on September 24 to reassure her compatriots that the return to “normal” levels of the federal funds rate is likely to be initiated before the end of this year.

If anything is more certain than that the Fed’s decisions will impact markets and economies all over the world, it is that these impacts will bring many surprises and give analysts years of work opportunities to formulate hindsight explanations why such events were logical. A safe assumption for any Lebanese observer is therefore that our bankers will have to be at their nimblest, smartest, and most responsible in order to preserve health and growth of their institutions in this emerging global financial environment.

November 9, 2015 0 comments

Leaders Opinion

Rivers of corruption

by Executive Editors November 9, 2015

written by Executive Editors

In late October the streets of Beirut filled with water. A torrential downpour, common for this time of the year, washed the garbage accumulations on various empty lots and roadside spots onto the city’s streets, turning what was solid waste into a disgusting viscous soup. After six weeks of disagreement over the emergency plan, the garbage crisis is now even more in our streets than ever. This shows how the garbage crisis in its essence always was a political battle between self-interested parties and was impaired by a huge presence of corruption.

The same actually is true for the electricity crisis where accusations and counter-accusations of corruption were exchanged between Speaker of Parliament Nabih Berri’s Amal Movement and former Prime Minister Saad Hariri’s Future Movement against the Free Patriotic Movement (FPM)’s Gebran Bassil. In short, Amal and Future officials charge Bassil and the FPM of incompetence in the tendering and implementation of contracts for projects from Bassil’s 2010 electricity plan (see table below) and the misspending of some $1.2 billion. For their part, Cesar Abou Khalil – an advisor to the Ministry of Energy and Water and a FPM candidate for parliament in the 2009 elections – said on talk show Kalam el Nas in late October that the Ministry of Finance did not release the needed funds for the projects because special interests wanted to see the electricity sector sink so low so as to force privatization, with plans to manage it with a company similar to Sukleen in the garbage sector.

The accusations come after a statement war between the Ministry of Energy and the Ministry of Finance in early September, followed by a squabble and pissing contest over which politician was less corrupt in an October energy committee meeting in parliament. The entire debacle is not a comedy, and it is not a tragedy in the classic Greek sense of avoiding bad fortune – which politicians are yet to try. It is, instead, downright insanity. The call for action is once again only to cry and say pack up and leave – to the politicians, not our youth.

Civil society vs politicians

The YouStink movement continues its campaign despite a momentum busting month that saw many of its activists facing criminal charges by military tribunal. Non-governmental organizations – like the Lebanese Transparency Association and Sakker el Dekkane – have helped shed light on illicit activity, but their lobbying efforts to pass legislation – access to information and whistleblower protection laws – to mitigate corruption have so far not borne fruit. Politically-backed organizations, such as Kataeb’s newly established MALAF, may not support non-partisan headway toward anti-corruption.

Unfortunately, civil society’s efforts to cleanse Lebanon have not achieved much in the way of systemic reform. But will the coalescence of corruption driven crises actually create real change? As Lebanon’s leading political leaders gather in national dialogue, the calls to root out corruption in delivery of basic public services – including waste management, water, electricity – by civil society and opportunistic politicians seemingly fall on deaf ears. Business will carry on as usual in the parliament as committees re-elected its members in October, despite the legislative body’s inability to elect a president or pass laws to address any one of the numerous economic or social challenges facing the country. At the executive level, the council of ministers remains paralyzed because decision-making stipulates a consensus vote – an impossible requirement given the political polarization.

What Lebanon has been facing is a lack of transparency in political supervision and a lack of accountability to the electorate. The world over, basic public services are delivered through two models, state-owned enterprises or privatization, neither being particularly more efficient than the other and both proven as failed models for Lebanon. What model is the appropriate vehicle to deliver a given service is an important debate that should ensue a overhaul of the system of accountability at three levels: political, institutional and economic.

Political accountability means citizens must have access to elected officials, who need to be able to answer questions with proof, and all ministry-related institutional accountability must be transparent. There are various instruments that can be employed – like public hearings and open committee meetings, or at least the full publication of the minutes of those forums – to make the process more accessible so that the constituency can hold politicians and government officials more accountable.

Economic accountability refers to those who have the authority for economic decision-making. That many of Lebanon’s economic drivers – institutions and business leaders and investors – are co-opted, married to the destiny of the political class, is concerning. This co-option has gone on far too long, so irrespective of any crony capitalism in banking or other sectors of the economy, the economic decision-makers have to accept responsibility for having contributed to the disaster we are in and draw the consequences. Moving forward, the economy still needs to be an active partner of the state and having a public-private partnership law can help further productive collaboration.

Not to mention this magazine’s warnings and calls for reforms, global institutions have pointed out time and again that transparency and accountability are key criterion for efficient functioning of economies, for their growth, and for social well-being. The enduring challenge in Lebanon, however, is that, even with legislation enacted and coupled with ministerial decrees for implementation, laws do remain unenforced.

November 9, 2015 0 comments

Comment Opinion

Lebanon’s failing grade

by Nadim Houry November 5, 2015

written by Nadim Houry

Lebanon’s seasonal rains brought with them more than the usual road chaos this year. Trash that had been left on sidewalks as a result of the government’s self-inflicted garbage crisis floated down the streets, sending a stark reminder of the impending health disaster.

Despite the multiple emergencies, Lebanon’s problems – like its garbage – are mounting while the government and the country’s political leaders while away the time. Lebanon’s political class seems to have turned procrastination into a governance strategy. Parliament can’t agree on an electoral law? No problem; its members have extended their own terms twice. No president? Let’s wait until the regional conflicts sort themselves out. Garbage piling up? Maybe the rain will just wash it away to the sea.

The lack of progress in the country will be clear in the outcome after Lebanon appears on November 2 for its second Universal Periodic Review (UPR) at the UN Human Rights Council in Geneva. Think of the UPR as a rather friendly exam session where a country’s human rights record is reviewed by other states that are members of the Human Rights Council. At Lebanon’s first UPR, five years ago, it made a commitment to carry out various reforms, and it will need to show this time around the progress it has made since then. Unfortunately, there won’t be much to show for.

In its 2010 UPR, Lebanon agreed to establish a National Commission on Human Rights and to improve the fight against torture by criminalizing all forms of torture and ill-treatment. Five years later, the draft law for such a commission is still stuck in Parliament, alongside many other initiatives to improve the country. As for torture, security forces continue to ill-treat and abuse detainees amid a general climate of impunity. At best, when videos of abuse by security forces surface and create a scandal – such as the videos that emerged this summer showing several Internal Security Forces officers beating inmates in Roumieh prison – officials promise accountability and announce investigations that seem to fade away as soon as the media attention shifts to other scandals.

When confronted with their failure, many local officials will politely agree about the need for reform but disagree on the timing, arguing that no progress can be made due to a never-ending series of local or regional crises. Lebanon is facing a number of challenges, but these excuses ring hollow and the countries reviewing Lebanon’s record in Geneva should recognize them as such.

The failure to prosecute human rights abusers, like the failure to find a solution to the garbage crisis, is not due to external crisis but rather is deeply rooted in the country’s culture of impunity. It is a culture that received an official seal of approval at the end of the civil war, when the warlords agreed on a general amnesty. This approach has since metastasized to all parts of the administration, making the struggle to end impunity a difficult one.

The challenges ahead were evident in the recent effort to hold security officers accountable for excessive violence against protesters demanding an end to the garbage crisis. Despite the opening of a judicial investigation into excessive use of force, two months later there is no indication that any judicial measure have been taken. For now, the only action seems to be light disciplinary measures against six security officials for acting without checking with their superiors.

Ending impunity should dominate Lebanon’s review at the UPR in Geneva. If Lebanon’s political class dismisses the demands for more transparency by local protesters, perhaps they will feel the need to respond to questions from peer states in Geneva. In the meantime, get ready for more garbage floating along a street near you.

November 5, 2015 0 comments

Entrepreneurship

Time to talk it up a notch

by Executive Editors November 1, 2015

written by Executive Editors

Lebanon is at a crossroads. It has been two years since the announcement of Circular 331, and the
murmurings of a revitalised golden age brought about by our startup and entrepreneurial system. Whilst it might be too early to speak of the clear tangible benefits to the Lebanese economy, there is obvious traction within the sector which in 2015 witnessed a growth in the number
of acceleration programs and non-financial initiatives that complemented the large input from Lebanese venture capital powerhouses. Executive’s special report on the entrepreneurship profiles several of these accelerators, and discusses the current impact circular 331 is having
on the ecosystem. Though money is needed and has been well received, deployment has been slow and the central bank should create a centralized database of 331-related
investments to keep spending as transparent as possible.
How long will entrepreneurs have to wait in line to get the investments and tickets they need, before they gain access to ‘Club 331’? We stand on the edge of the investment cliff, because the
viability and survival of our startup and entrepreneur system in the long run is in question. Though every initiative within the ecosystem need not survive, an overarching sustainability
is key, which will see investments feed back into our country to develop a strong and robust asset class which is attractive to the private sector. Whilst the future is bright, and opportunities
present themselves with the current financial enthusiasm, it will only remain so if Lebanon as a country chooses to tread the right path, and ensure opportunities are not squandered.
This in turn must be coupled with a strong adherence to clear governance that regulates without restricting growth.
PART OF THE SOLUTION
There are many positive initiatives at present to encourage the growth of the Lebanese entrepreneurial ecosystem. The Banque du Liban Accelerate conference is one
such example of a positive step encouraging collaboration for a more harmonious sector. Lebanon For Entrepreneurs (LFE), an initiative which works both to inform the diaspora on the current status of the Lebanese startup system and to promote sharing of global expertise, is another.
However, in order to make this ecosystem successful all players within the sector must contribute and commit themselves to the fullest, which means that whilst competition between funds is beneficial, effective communication across the board is essential to ensure a cohesive
ecosystem. More can be done to ensure that all within the ecosystem are in sync with one another, especially here in Lebanon. This is extended to institutions, banks and universities bodies which are on the periphery and which feed individuals into the Lebanese economy. At time of press there was no unique central portal for the exchange of knowledge, and LFE’s database of private and academic entrepreneurship support organisations was last updated over a year ago. Whilst individual programs are trying to target the gaps within the system, an independently
regulated umbrella platform with up-to-date information would undoubtedly facilitate understanding, cooperation and ultimately growth, and potentially promote healthy competition. Though initiatives such as the Global Entrepreneurship Week encourage relations between players,
more can be done to improve and centralise collaboration.
This includes prioritising the development of an electronic stock market, a central ‘location’ to provide much needed liquidity to companies, and identifying areas in the infrastructure
which could be improved and leveraged to attract young talent, such as relaxing required capital for
registering companies.
A great deal of money has been poured into, and is earmarked for, the entrepreneurship ecosystem. But if Lebanon wishes Circular 331 to be a success, and ensure the money is not wasted, improvements must be made at the macro and micro level. There is an inherent amount
of volatility that cannot be avoided; risks which cannot be mitigated; as our special report will outline, venture capitalists and private equity firms must overcome the steady security of being risk-averse and spend the money raised through Circular 331 without exercising undue caution.
We must accept that there is no mathematical financial instrument that can price a startup akin to the way the Black-Scholes equation prices European options; there is no accurate prediction instrument for the future value of a Lebanese startup system. All eyes should be focussed
on trying to make the space we have as accessible as possible for the next generation of innovators, improving inter-player communication, and pressurising the government for better infrastructure, internet and entrepreneur- friendly policies is key. Many would argue that this is a fruitless task, seeing as our streets are now swimming with garbage thanks to the rain and the political puppet
show playing out in the Grand Serail. However, the beauty of the entrepreneurship sector is its ability to develop solutions which are innovative and effective, which defy imagination even in the face of overwhelming odds, and there is no reason that this cannot extend to macro issues.
To ensure our system doesn’t dwindle and fall by the wayside in seven years time, we need to realise that Circular 331 is only part of the framework needed to hold up our ecosystem. The time to act is now, so we ensure foresight, rather than hindsight, is our ally.

November 1, 2015 0 comments

Editorial

EASTERN PROMISES

by Executive Editors November 1, 2015

written by Executive Editors

That our politicians got us into an absolutely avoidable waste crisis they have been unable to extricate us from for over three months is simply embarrassing. It’s not about garbage
any more. It’s about turning Lebanon into a distressed asset.
It has become obvious that our institutions, which have been running on an ad hoc basis for 25 years now, are headed for a complete meltdown. The state is not successfully providing
even one basic service. Our politicians have made this country a joke, and today
it looks like things will only get worse.
Legislative paralysis is putting us at risk of losing much-needed loans for development projects from the World Bank. If we allow this to happen, we’re taking a potentially devastating risk. Other international institutions and past partners could very well reconsider financial facilities armarked for Lebanon, triggering an isolation of our financial system. Once our uncooperativeness unplugs us from the international system, expect scavengers to impose their rule under the pretext of assistance. Sound familiar? We can either remember how those who promised Lebanon help in the 1980s only bled us dry, and learn from that experience or keep living in denial, insisting our ever slowing economic pulse is still proof of life until we return to being simply a market for the East, deprived of any ambition or ability to produce. If history does repeat itself, we will have only ourselves to blame. We’ve invested nearly nothing to make this country more productive and are watching the traditional engines of our economy run out of gas while insisting we can
make it just a few more kilometers before taking action.
Meanwhile, we have a guerilla army of well educated, creative and innovative individuals able to generate wealth and value in unconventional ways, making markets around the globe a click away. This small, dedicated and focused group has been working hard with few resources for too long. Two years ago, the central bank has stepped in with support, and a more vibrant entrepreneurship ecosystem is emerging. Happily, they’re our last link to the productive global economy.

November 1, 2015 0 comments