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Editorial

Lebanon at a crossroads

by Yasser Akkaoui September 1, 2015
written by Yasser Akkaoui

There is nothing more humiliating than watching our political class continue with its usual dirty business while young people are being beaten and shot at in the street. The complete disrespect for our health, future and nation is so vulgar and in our face that we simply cannot, and should not, take it anymore.

What’s worse is seeing the media manipulated as the voice of these politicians. When newspapers can valorize waste management companies that everyone has for years accused of playing by the corrupt rules of the rotten game in this country, it is clear they are not even capable of minimal critical thought. They facilitated the manipulation trick that preceded the cancelling of the bids and communicated the wrong interpretation of the figures. We at Executive knew that the Akkar solution was being cooked up behind closed doors; the Minister of Agriculture clearly said it during his interview with us which took place four days before the announcement of tender winners. So why waste everyone’s time, then cancel the bids the next day and make it seem as if they are answering the calls from the street?

Cancelling the waste management tender was a colossal mistake. The solution being proposed by the intentionally booby trapped bidding process was certainly not the best the government could have come up with, but at least it was a solution. Prior to the July 17 closure of the Naameh landfill, some 26 percent of Lebanon’s garbage was simply dumped out in the open – despoiling our green valleys. There were 670 open dumps in this tiny country, and we don’t know how many more have sprung up since the chaos began. We could have been on the right path to turning our waste into energy. We could have significantly reduced landfilling. Instead, we have nothing but more dumps and the toxic, cancerous stench of burning trash.

Civil society members have finally decided to leave their desks and abandon their studious looks to take to the streets – excercising their constitutional right. I cannot help but see similarities between the frequency and intensity of events happening today and those that led to 1975. To avoid a repeat of past mistakes, those taking to the streets should come together with clear demands. Executive magazine has written a manifesto for all those wishing to change this country for the better to use and apply. What we need as a country is well-researched, critically analyzed solutions, not just another angry demonstration that lacks focus. For years we have been investigating this country’s many problems and proposing realistic solutions – even if they are not easy to implement under our current corrupt political system.

I said last month that the government’s handling of the waste management crisis would backfire and it did. I hope our calls for action in this magazine will be adopted to help drastically improve this country. We’re on a very bad path, and if we don’t push for change now, it will only get worse.

September 1, 2015 0 comments
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Special ReportWaste Management

Waste [mis]management

by Matt Nash September 1, 2015
written by Matt Nash

If there was a prize for bungling the award of state contracts, Lebanon’s solid waste management tender would win hands down. Lack of bidder interest pushed the round’s closure date back several times. Lack of information on waste in different proposed service areas delayed the announcement of winners. And lack of understanding of the expense of modern waste management technologies – or feigned ignorance of – scuttled the plan before it even began. Beyond that, what qualifies this as the country’s most mismanaged tender process – and what makes this tale a tragedy rather than a comedy – is that it only prolongs the environmental catastrophe it was initially envisioned to avoid.

Over 45 percent of Lebanon’s garbage is collected, treated and – until July 17 – largely disposed of at a sanitary landfill near the town of Naameh. The landfill received far more waste than originally intended (although it was consistently expanded and still is a sanitary landfill, as opposed to an open dump). Residents had long wanted it closed, and the government did just that on July 17 without identifying an alternative site to put the 2,500 tons of waste per day it was receiving. The solutions that municipalities now rely upon are limited to open dumping and waste burning. Having a solution before closing Naameh – as a ministerial committee has been studying since March 27, 2014 – would have avoided this stinky situation. Looking forward, whether there is a sustainable national solid waste plan in place next year or another emergency plan, rotting piles of garbage will be this government’s lasting legacy.

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With the contracting of solid waste management to the private sector off the table for now, the proposed solution for handling waste from the districts of Beirut, Metn, Keserwan, Baabda, Aley and Chouf floating around at time of writing calls for sending the refuse to a landfill in Akkar, which will reportedly be built to last three years. Ignoring the parallels of this emergency plan to the 1997 plan that led to Naameh’s creation, if policy makers do choose to implement this idea, be prepared for some serious traffic problems. On a tour of Naameh in mid-August, an official with Sukomi – the private company that operates the landfill – tells Executive that, when it was being used, 125 trucks per day were depositing waste there. They worked 24 hours. That’s around 5 trucks per hour, every hour, every day of the year. Cabinet has yet to publically disclose the environmental, social and financial costs of trucking waste about as far from Beirut as one can go. However, it seems unreasonable to expect Sukomi to transport the waste to the country’s northernmost district for the same fees it charged to move the garbage from its sorting facilities in Karantina and Amrousiyeh (south of Beirut) to Naameh (less than 20 kilometers from either facility).

On top of this, if the cabinet chooses to build a sanitary landfill in Akkar (as opposed to simply dumping the waste without any control of the toxic substances it leaks or the methane it produces as it decomposes), tendering the project, conducting the legally required environmental impact study to choose the landfill’s location and actually building it will all take time. Neemat Frem – CEO of Indevco, one of the companies that was in line to win one of the cancelled waste management contracts – tells Executive that once the land is secured, a sanitary landfill can be built in “two to three months.” He should know because Indevco partnered with a French company – Pizzorno – specialized in building sanitary landfills. All of the winning companies had foreign partners.

If the government chooses to try re-tendering, it is unclear who will bid. When asked what impact the tender cancellation would have on the willingness of international companies to participate in public sector bids in Lebanon in the future, Frem, a former head of the Association of Lebanese Industrialists, laughs. “Please don’t let me think [about that]. It’s horrible.” Policy makers will also have to lower their expectations of what waste management solutions should be provided if price is such an important consideration. Modern waste management technologies are expensive. For example, Saida operates a waste treatment facility which currently landfills only 15 percent of the waste it receives with a goal of zero waste landfilled by end-of-year. However, this facility has so far come with an investment price of $45 million and is not yet breaking even, charging $95 per ton with a daily waste load of 250 tons, says Nabil Zantout, the plant’s general manager.

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[pullquote]The solutions that municipalities now rely upon are limited to open dumping and waste burning[/pullquote]

National solutions could be even more expensive. According to a presentation about waste in Lebanon prepared by the Ministry of Environment, building three waste-to-energy plants in the country would cost $950 million. It is therefore unclear how the costs proposed by bidders surprised the cabinet’s 24 ministers when 8 of them – representing all of the main political parties in the government – have been preparing for this tender since early 2014. Unlike the general public, the committee did not have to wait until August 24 to know the various financial offers being tabled, (which ranged between $104 and $134 without street sweeping, according to a document obtained by Executive.) The committee evaluated the financial offers which broke those prices down into collection, treatment, investment cost and so on prior to the announcement.

Beyond that, at least some of Lebanon’s political class have been interested in waste management best practices for a few years now. Riad al-Assad – CEO of South for Construction, which was slated to win one of the contracts – tells Executive that his company only got interested in waste management at the prompting of Walid Jumblatt. The Druze politician was so interested in finding sustainable solutions for Lebanon’s trash that his sons formed a company – EcoParks Holding – with Assad in mid-2014. Assad explains that this was supposed to in turn be the parent company for special purpose vehicles (SPVs) that would have bid and managed different parts of the proposed waste treatment process. Jumblatt lost interest, Assad says without elaboration, but EcoParks is still listed in Beirut’s commercial registry with Jumblatt’s sons, Taymour and Aslan, who are listed as board members (but not shareholders). Further corroborating Jumblatt’s interest in waste solutions, Maysarrah Sukkar – CEO of Averda, the parent company of Sukleen and Sukomi, which collected and treated, respectively, the waste of Beirut and most of Mount Lebanon since the 1990s – said in a July interview on Kalam an-Nas that he and Akram Chehayeb, a Jumblatt confidant who is on the waste management ministerial committee, toured Germany in 2008 or 2009 to see waste-to-energy plants. With all of this interest in and, presumably, knowledge about trash technology, it seems very strange that Jumblatt was one of the first politicians to slam the tender bids as too costly.

Assessing the cost of waste disposal

When announcing the winning bidders less than 24 hours before the entire tender was trashed, Environment Minister Mohammad Mashnouq explained that, while the tender documents did not specify what technologies the companies had to use, there was a stipulation that in the first three years, winners could only landfill 40 percent of the waste they collected. In the final four years of the contract, that percentage was scheduled to fall to 25 percent. Sukleen and Sukomi, he noted without naming the companies, were landfilling 80 percent of the waste they collected. The tender documents, therefore, necessarily required bidders to invest in technologies that would keep garbage out of landfills, the least expensive of modern waste disposal solutions. The cheapest method of waste management is collection and open dumping which, according to a 2015 presentation by the Ministry of Environment, was the fate of around 26 percent of the trash generated in Lebanon – and that was prior to Naameh’s closure.

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With an open dump, investment costs are zero. The problem with open dumping, of course, is that it damages the environment, poses risks to human health (each of which no doubt have their own associated costs) and kicks the cost of cleaning up to the next generation, much like the war-time dumps in Normandy and Bourj Hammoud. Actually treating waste has an investment cost, whether it is building sorting facilities to recover recyclables, a composting plant or incinerators. That said, assessing that cost and trying to compare one place to another is not as straightforward as it might seem. A 2001 report on the costs of handling garbage in Europe written at the behest of the European Commission notes that one of the many hindrances in trying to compare the costs of one system to another is private sector involvement as “commercial confidentiality is also frequently cited by private companies as a reason for not revealing detailed costs.” Additionally, when making comparisons, the report explains that the full system needs evaluation so like is held up against like.

Bringing this principle home, the cost of trucking waste from Karantina to Naameh is significantly lower than transporting it from Karantina to Akkar, which will impact the cost the operator charges the client (a municipality, or the Council for Reconstruction and Development, for example). And trying to compare Lebanon to Europe is particularly difficult given the differences in economic baselines, differences in who pays for trash collection (some households in Europe pay direct fees) and in how waste is collected, to name just a few. Further, the 2001 report explains European countries have legally mandated sorting-at-source (i.e, home separation of waste) and each individual type of trash has a different collection fee associated with it. On top of that, in Lebanon Sukleen collects from curbside locations on a daily basis. In European cities, collection is sometimes door-to-door, curbside or “brought in” (meaning households take things like recyclables to specific drop off points). Collection frequency in Europe also varies.

What we’re paying now

Comparing old and new in Lebanon is equally challenging. What are Sukleen and Sukomi charging? There are a variety of figures in different reports and media accounts ($130/ton; $140/ton; $147/ton; $150/ton; $160/ton; $174/ton). More often than not, sources for the figures are not provided, nor is it explained what that price includes (i.e., only collection and treatment; collection, treatment, landfilling; street-sweeping, collection, treatment and landfilling). In a 2010 report on the environment in Lebanon produced by UNDP, the Ministry of Environment and Ecodit, a local environmental consultancy, some figures are presented and sourced to a council of minister’s decision from 2010. The report states that waste collection is $26.60 per ton in Beirut for ordinary waste and $17.60 per ton for bulky items. Collection in Mount Lebanon is listed as higher at $34.60 per ton. Landfilling in Naameh, meanwhile, is listed as between $38 and $54 per ton, without explanation of why there is a range. It is unclear if collection prices include street sweeping or not. This is all to say that even assessing the current situation is no easy task. With different components of a waste management system having different costs, quoting those costs in one, per-ton price is arguably meaningless as a base for comparing between different systems.

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In fact, some of the bidders even accuse Environment Minister Mashnouq of distorting their offers when announcing the lump-sum prices. Indevco’s Frem argues the price per ton in his joint venture’s offer of $171.60, as announced by Mashnouq, was misleading. Those responsible for the JV bid, which covered Jbail, Keserwan and Metn (minus a few suburbs that were part of the Beirut service area), told Executive that their price offered for collection, treatment and disposal of waste was $120 per ton. While two of the three districts are part of Sukleen and Sukomi’s service area, Sukleen does not do street sweeping in Metn or Keserwan like it does in Beirut. Frem explains that as part of the tender rules, the JV also included an estimated price for street sweeping (which is calculated by kilometer of streets swept, not tons as the amount of trash collected is usually very small) as well as an estimated number of kilometers in the service area. He insists that street sweeping would have been a service municipalities could choose to have, not something that would have been forced on them. When Mashnouq said the JV offered a cost per ton of $171.60, this was inclusive of the optional street sweeping, and made the quoted cost some 40 percent higher than for only collection, treatment and disposal. It also made the cost seem “high” compared to the unverified prices attributed to Sukleen and Sukomi.

And this is not the only accusation of mismanagement or misinformation concerning the tendering process. In an early August press release, Averda explained that it would not bid in part because “the prerequisite diversion from landfill and recycling rates required by the tender can only be achieved with a complete re-configuration of the existing composting and sorting plants, building additional facilities and completing the requisite environmental impact assessment studies. This cannot be achieved as indicated by the tender within six months due to the volume of work needed.” South for Construction’s Assad, who insisted the tenders were rigged to keep the incumbent in place during an interview in late July, sharply criticized their 7-year lifespan. He argued that the investment in waste management technologies could not possibly be recouped in such a short timespan. Nabil al-Jisr – president of the Council for Reconstruction and Development, which would have been the contractual partner of the winning bidders – told Executive the day the winners were announced that companies were allowed in their bids to suggest longer time spans for operating big-ticket investments.

Finding truth, given that even the tender documents were not made public, has not been possible. Not that it matters now that our country is slowly becoming a stinking dump.

September 1, 2015 1 comment
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DesignSpecial Report

ACID pushes forward in a stumbling market

by Jeremy Arbid August 26, 2015
written by Jeremy Arbid

If wayfinding alone were any indication of architectural and industrial design prowess, then Karim Chaya would definitely top the list of Lebanon’s finest. Navigating Lebanon’s chaotic thoroughfares often requires steely resolve, and the signs guiding hapless drivers to Chaya’s Debayeh factory do more than just provide direction. They offer a first clue to his design philosophy – sophisticated simplicity, creative spontaneity, precise design, and, as Chaya puts it, consistency in the pursuit of quality.

“The most important thing that we offer is the service. From that stems design quality and our main goal to constantly deliver very high quality,” says Chaya – the managing partner and cofounder of Abillama Chaya Industrial Design (ACID), a local firm that custom builds products for a niche clientele. The firm designs and manufactures everything from furniture to staircases. You name it, ACID can make it, all in Lebanon.

The company today employs 180 people, 30 of whom are architects, engineers and designers. 10 are administrators, and the rest are technical workers splitting duties between the factory floor and onsite installation. Chaya spends much of his time as a consultant to other designers. “A lot of architects and designers come to us to study the feasibility of their design – we’re very specialized in what we do. We assemble all the knowhow that they might need under one roof.”

While the company’s financial performance remains robust, Fouad Matta, managing director of ACID, told Executive that exports over the past few years have suffered. This is largely due to regional and global trends – the fluctuation in the strength of the Euro against the US Dollar has diminished profits in the European market, their main export destination. Likewise, uncertainty surrounding Lebanon’s security situation in light of the spillover from the war in Syria has dissuaded some new potential clients, who fear the company might not be able to deliver, from contracting ACID. Syria’s civil war has also disrupted traditional trade routes, forcing ACID to turn to the sea, where shipping to the GCC markets can take a month compared to a week overland. Matta points out that this substantial increase in delivery time has cost ACID several contracts in Dubai.

Founding partner Raed Abillama has stepped back from ACID to set up his own architecture firm, Raed Abillama Architects, leaving Chaya to oversee the company by himself. Formally he is the head of sales at ACID, but he is also an accomplished furniture designer and artist. This range of experience enables him to take on the dual role of ensuring quality within the firm and engaging with clients.

But the creative vision instilled by Chaya and Abillama is still what guides the company – and the factory itself is a testament to this. From the grass covered rooftop picnic area that doubles as an open air corridor to the can of Spam, an American brand of canned meat, decorating Chaya’s office, every aspect of the company is cultivated. Chaya’s philosophy is truly reflected in the culture of the company; industrial design is architecture for objects, and seeing that unabbreviated approach applied to the physical layout of the facility could very well be the metaphorical bucket used to draw from the well of creative inspiration.

August 26, 2015 0 comments
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DesignSpecial Report

Amatoury’s Design for the Future

by Jeremy Arbid August 21, 2015
written by Jeremy Arbid

Zig zagging through the gentrified neighborhood of Furn el Hayek under a glaring Beirut sun,  Executive found itself on a quest for furniture design nirvana, and maybe a cold glass of water. Searching out the gallery of Georges Amatoury was the mission of the day and, after sneaking a peek at his collection of furniture from past decades, we met Amatoury in his showroom.

“By collecting, refurbishing, buying and selling iconic pieces from the 20th century, my DNA has been transformed and fashioned by these famous styles. I decided to start my [furniture] line to pay tributes to these aesthetics, but with contemporary techniques and knowhow,” said Amatoury, describing his design philosophy to Executive.

Amatoury is amongst a talented class of Lebanese designers that proud compatriots point to when asked for examples of local innovators. In his own words he is a second generation designer – his father being a professional architect. During Amatoury’s formative years, the family collected art deco pieces – a decorative art style from the 1920’s – and this mixed influence of architecture and art collection dominates his approach to design.

In many instances Amatoury’s furniture is driven by the ideas of his clients who commission him to design furniture for their villas, penthouses and modern offices. Pieces from past collections now furnish the Qasr al Sanawbar, the French ambassador’s residence at the Beirut hippodrome. Amatoury is also the exclusive producer of Hugues Chevalier – a French furniture designer – in Lebanon.

Producing his furniture is not a one man show – he employs between 8 and 12 workmen, depending on the amount of projects, at his artisanal workshop in Adonis, with two designers contributing to the creative vision for each piece. He also delegates management of his Achrafieh gallery, freeing himself from the more tedious administrative tasks. All told, Amatoury employs 15 full time and contractual employees in Lebanon to design, produce and sell his furniture.

As with most Lebanese businesses, the past several years have been challenging for Amatoury. “When we can end up with a 20 percent net profit we are happy but that’s not always the case. If the market is performing well we’re doing 20-plus [percent] net margin. But if the market is slow and overhead is almost the same, then we drop to between 5 and 10 percent.” According to him, previous years had seen record highs in requests before a more recent lull in commissions – “2008 through 2011 were just perfect [but] for us the two bad years were 2013 and 2014,” in which Amatoury says his revenues declined, with 2012 being only an average year. He says the slowdown of the past few years came at a somewhat convenient time as it refocused his attention on designing new furniture for his current collection, which was introduced at the end of 2013. In addition to showing this collection in his Beirut galleries, Amatoury’s pieces are shown in Dubai and Paris, with plans to showcase his collection in London and New York in the next year.

August 21, 2015 0 comments
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DesignSpecial Report

Turning a passion into a business

by Jeremy Arbid August 21, 2015
written by Jeremy Arbid

Beirutis often think that Gemmayze is solely a place to relax or catch a late night drink after a long day at the office. But if revellers walked around this affluent Achrafieh residential district during daylight hours, they would find one of Lebanon’s finest custom furniture designers tucked away in the back streets of the neighborhood.

It seems everybody in the furniture business today is mixing contemporary features with styles from past eras, but Karina Sukar does it differently. Her approach to designing luxury furniture is defined by features that are less abstract than they are precise. Sukar’s personality is that of a perfectionist with a strict eye for detail, qualities she may have picked up as a student of interior architecture. She acknowledges these attributes as core elements of her design approach – “I try to confine my ideas and designs to something that I can execute very well with perfect detail and a perfect finish,” she says – as Sukar’s showroom manager unabashedly nods in agreement.

Her gallery, Karina Sukar’s Store, is meticulously organized with furniture dotting the showroom floor. At a first glance, this all seems strictly prearranged. But as she describes why a certain divan fits in a certain place under complementary lighting, it implies a flexibility that allows her to improvise with the arrangement of pieces from her collection to fit a client’s taste.

Over the last few years business has not been bad, but Sukar says that the country’s deteriorating economy and the regional turmoil have had an impact on her bottom line. “If we were in a better situation in Lebanon, my profits would have been better,” she says. Having featured her designs abroad in galleries in New York, Ibiza and Dubai, Sukar’s visibility is rising and driving more commissions and sales her way, but she says she has no near-term plans to open her own gallery outside of Lebanon. “It costs a lot and I don’t want to overstep my financial capabilities. And honestly I don’t want the hassle – you have to be everywhere.” Scaling up would tie her down with all the tedious administrative duties that are demanded by an expanding business. She prefers, for the time being, to focus on the creative aspects of the business.

Sukar’s main occupation is leading her other company, Karina Sukar Interior Architecture & Design. She maintains that designing furniture is only a hobby and passion – one that she has been able to transform into a business. “I only look at the bottom line at the end of the year. I know I’m not losing money, but I am also not designing to become rich.”

August 21, 2015 0 comments
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DesignSpecial Report

The Jewelry design for the 21st century

by Executive Editors August 19, 2015
written by Executive Editors

Tucked away in one of the many narrow alleyways in Bourj Hammoud is Ralph Rizk’s jewelry prototype 3D printing store. While the 3D Matrix and Diamond office space appears small and unimpressive, the technological work that gets done there cuts the jewelry manufacturing time by more than half and increases the precision in the end result immensely, according to Rizk.

Rizk says he started learning about the jewelry making business at the young age of seven as both his father and grandfather were jewelry designers. Gradually he began finding ways to modernize the business, moving from purely handmade to incorporating more technology and opening his own jewelry prototype making business in 1997 with no partners or other investors.

Rizk experimented with various technologies, including laser cutting, to increase the efficiency of his prototyping. He hit the jackpot with his purchase of Matrix, a 3D computer program and printer for wax prototypes, in 2004. Rizk says the cost of the machine starts at $54,788 – going up according to size – aside from the taxes and transportation fees of bringing it to Lebanon; its operational costs reach up to $30,000 to $40,000 annually depending on the volume of work.

Rizk explains that he essentially takes any design, be it hand drawn or photographed, runs it through a series of Matrix’s computer programs where he sets the stone dimensions, draws other details and checks for errors before finally printing the prototype. The whole process takes a maximum of seven hours, whereas the manual designing of the same prototype would take up to four days and would be much less precise and detailed.

While Rizk taught himself to use Matrix, today he offers a series of twelve courses for $1,500, where he teaches the basic techniques of using the 3D printer, leaving the design, sense and style up to the individual designer. Still, Rizk says there are only a handful of designers who have the same machine as him in Lebanon.

When the situation in the region was stable, Rizk sold his prototypes to jewelry factories, ateliers and stores in Lebanon and several other countries in the region, such as Syria, Saudi Arabia, Egypt, Qatar, UAE, Jordan, as well as countries such as Australia and France, who he says prefer Lebanese prototypes because they are cheaper.

Today, he says business is down by 80 percent, and his plans to expand his business into Syria, where the majority of his non-Lebanese clients used to come from, have been shelved until better days.

August 19, 2015 0 comments
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BusinessFinance

Number crunching the first quarter

by Thomas Schellen August 18, 2015
written by Thomas Schellen

At a time when the observation of global banking remains as interesting as ever, the first quarter of 2015 has seen Lebanese banks stay their course, at least as far as growth of profits of the country’s six publicly listed banks, which between them reported over $279 million in net profits for the period that ended March 31, 2015.

Leader in unaudited Q1 profits was Bank Audi whose round $100 million figure put Blom Bank’s $91.2 million into second place. Audi claimed not only the top share of almost 36 percent in the group’s cumulative net income, but also led the pack in terms of profit growth at 17 percent when compared with the first quarter in 2014.

Audi and Blom, Lebanon’s top banking pair, accounted for $191.2 million in net profits, or nearly 70 percent of the reported cumulative amount. Each bank’s results exceeded the combined profits of the other four reporting banks, which together achieved $88 million during Q1.

Quarterly reporting, a standard behavior in responsible banking operations, is to date not an established practice by commercial banks in Lebanon. Only the six banks with listed shares on the Beirut Stock Exchange have been publishing quarterly financial updates for the past few years. The vast majority of banks, including most of the 28 institutes in the top tier (alpha and beta groups) that represent over 90 percent of the Lebanese banking market in terms of deposits, have so far not adopted the quarterly reporting habit, thereby limiting the information value on economic health that the publication of banking sector results can provide to the public.

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Profit growth rates at listed banks stretched from Audi’s 17 percent to 2.49 percent at BLC Bank. The combined results of the six banks improved 9.6 percent year on year, said the Credit Libanais Economic Research Unit in a compilation of results.

Divergence drives profits

Drilling into the next layer of information, the six banks showed continued divergences in terms of where they generated their profits. In the split between interest and non-interest sources of profits, net interest incomes’ contributions to total operating incomes were crucial quarterly profit drivers at Bank of Beirut (BoB) and Byblos, but this growth was juxtaposed with contractions in net fees and commissions incomes at either bank.

BoB’s 16.5 percent growth in net interest income was opposed by a 6.9 percent contraction in net fees and commissions income; the respective year-on-year changes at Byblos were 12.8 percent up on net interest income and 13.1 percent down on net fees and commissions income. At 18.1 percent BEMO reported particularly strong growth in its net fees and commissions income and a minor expansion of 3 percent in its net interest income. BLC achieved 5.1 percent growth in net fees and commissions income, but inversely to the other reporting banks showed a 5 percent contraction in net interest income.

On the P&L sheets of Blom and Audi, net interest incomes and net fees and commissions incomes both improved, and the growth in the former at both banks outpaced the latter. The numbers are 6.2 percent and 3.5 percent for Blom, and 18.6 percent and 13.7 percent for Audi.

When it comes to first quarter net gains on financial instruments as contributors to total operating income, quarterly performance numbers represented year-on-year improvements of 25.2 percent at Audi, 22.1 percent at Bank of Beirut, and 6 percent at Byblos, but a 16.9 percent contraction at Blom.

In the assessment of the $14.2 million jump in Audi group’s profits, constituting about 58 percent of the combined profit growth of the six listed banks, the bank pointed to consolidation of its positioning in the three main countries where it is present: Lebanon, Turkey and Egypt. More distinctly, the bank noted that 52 percent of its Q1 profits were generated by “entities outside Lebanon.”

As analysts tracking the bank at FFA Private Bank clarified in a research note, “Bank Audi’s Q1/15 financials still show a significant increase in revenues (+ 19 percent) translating into stronger net profits (+17 percent), driven by the positive contribution of Odeabank to consolidated results vs. losses in Q1/14.” Whereas Odeabank, Audi’s Turkish unit, was still slightly in the debit column in Q1 2014, it reported $11 million in net profits for Q1 2015.

FFA pointed to currency pressures in Egypt (Blom and Audi) and Turkey (Audi) as negative factors weighing on these banks’ consolidated balance sheets, in addition to a quarter-on-quarter “tepid performance” at Blom for assets, deposits and loans. With Byblos, the analysts described balance sheet developments as disappointing for the second consecutive quarter and, as with Blom, cited subdued growth in the domestic banking sector as the likely culprit.bank2

With regard to the operating environment for the Lebanese banking sector, the FFA research notes said that for each of the top three Lebanese banks under coverage the prevailing low interest rate environment in the country limits both the banks’ potential to improve yields on earning assets and their capability to reduce costs of funds.

Room for improvement

According to the central bank, the consolidated balance sheet of commercial banks in Lebanon edged up 0.7 percent from yearend 2014, to $177 billion at the end of March. Private sector deposits reached $145.5 billion, likewise representing a 0.7 percent expansion. Loans to the private sector saw an even lower rate of increase of 0.5 percent and stood at $51.1 billion at the end of March.

According to Byblos Research this QoQ lending growth rate was by far the lowest for any first quarter since 2010. Bank Audi’s research team opined that within the banking sector’s “modest” activity growth in the first quarter, its deposit growth remained favorable because it was better than in the same quarter of 2014, but also took note that lending was “quite weak.”

This, albeit somewhat grudging, attention to short-term reality deserves to be correlated with the latest opinion and advice which the International Monetary Fund offered to Lebanon in the 2015 Article IV Mission’s concluding statement, published after the IMF staff visit last month. While the statement acknowledged the country’s historic ability to attract sizable deposit inflows, which have in turn helped fund large budget and current account deficits, the Mission cautioned that the growth rates of deposits is slowing. It advised that Lebanon needs a decisive change in policies and an overall more balanced policy mix in order to strengthen confidence. “Lebanon’s economic model rests on confidence,” the Mission said, in a statement dripping with more or less veiled appeals for urgent action on long-known problems.

When taking in the larger picture of first quarter banking numbers around the pretty patch of flowering profits at the six reporting banks, the pale developments of sector assets, deposits and loans, in combination with the diplomatically screaming advices of global multilateral institutions, should perhaps be reason for financial policy makers in Parliament to don those thinking caps. But one suspects they will not make haste.

In the meantime, several top banks have announced how they will take care of their shareholder needs through dividends. For the top three banks, total gross dividends for 2014 amounted to $190.1 million at Audi, $153.6 million at Blom and $107.2 million at Byblos as approved by the respective general assemblies in April and May. According to calculations by Byblos Bank’s economic research department, gross dividend yields on common shares were 3.2 percent at Bank of Beirut, 5.1 percent at BLC, 6.7 percent at Audi, 7.5 percent at Blom and 8.3 percent at Byblos itself.

August 18, 2015 0 comments
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DesignSpecial Report

Family heirlooms

by Executive Editors August 18, 2015
written by Executive Editors

Jewelry making has long been an artisanal tradition in Beirut’s working class suburb of Bourj Hammoud. Clustered together near the Beirut River, many of these businesses stretch back generations.

After mingling with gallerists and shopkeepers dotted around the bustling Armenian neighbourhood of Bourj Hammoud – and taking a quick detour for a shawarma sujuk, a local delicacy – Executive came across Hadidian Jewelry, a neighborhood cornerstone. The family owned business was established in the mid-1940s, says Levon Hadidian, a junior family member working in the business.

Their gallery is a fixture on Armenia Street – the main thoroughfare connecting Bourj Hammoud to Beirut’s Mar Mikhael neighborhood – where shoppers can peruse the jewelry displays in search of the perfect bling. Just a few blocks away from the showroom is where Hadidian’s jewelry is designed and manufactured.

Hadidian is a full scale jewelry manufacturer doing everything from designing to setting rare stones and diamonds. On the factory floor, technicians use computer software to design new jewelry concepts and create wax prototypes using 3D printers. Lasers cut the materials – often gold or silver, but also precious stones – to specific sizes before they are engraved and polished.

Their main clients, Hadidian tells Executive, come from the wholesale side of the business. The jewelry maker sells his pieces to many local clients including other showrooms concentrated in Bourj Hammoud as well as other parts of the capital. He also exports his designs, primarily to Gulf countries.

August 18, 2015 0 comments
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Banking 2015BusinessFinance

Working with and against financial sanctions

by Thomas Schellen August 17, 2015
written by Thomas Schellen

It has never been easier to be branded a financial pariah. You wake up one morning and when you check your correspondence you find that you have been given the ominous title of “specially designated national” (SDN) by the Office of Foreign Assets Control (OFAC) at the United States Department of the Treasury.

This designation means that, according to “evidence” which can range from classified information of US intelligence services to reports in your local newspaper, you have been found to be a perpetrator of terror, narcotics, weapons of mass destruction or other threats to the national security, foreign policy or economy of the United States. As of this moment, you are a financial outcast with whom no US citizen or corporation with American interests will do any business. If you have assets in the US, these will be frozen.

International criminals, but also people with ties to organizations such as Hezbollah and persons doing business with sanctioned countries such as Iran and previously Cuba, are frequently added to the SDN list without much public attention, except for rare cases when big names in business are concerned. In one such recent case, Lebanese magnate Kassem Hejeij (Middle East and Africa Bank) was listed by OFAC on the grounds of “direct ties to Hezbollah organizational elements”. His alleged misdeeds also included investing “in infrastructure that Hezbollah uses in both Lebanon and Iraq.”

The worst thing for economically active people hit by the SDN hammer is that their businesses are just as ostracized as they themselves are. This was the implication for Hejeij when he was placed on the SDN list in early June. His business interests, most importantly the Middle East and Africa Bank (MEAB) under his chairmanship and majority ownership were in acute danger of being crippled. Hejeij, despite protesting and declaring his determination to fight the SDN label foisted upon him, eventually stepped down from his position, sold his shareholdings in MEAB, and overnight became a thoroughly private individual as far as business is concerned. Within one month, MEAB had presented a new management team, gotten busy on new business plans and started communicating its intended future.

Is there a defense?

The good news about the case of Kassem Hejeij and MEAB is that it cannot be compared to the notorious dismantling of the Lebanese Canadian Bank on the basis of money laundering allegations by the US treasury more than four years ago, says Paul Morcos, a Beirut-based lawyer and consultant specialized in banking. “It is not realistic to compare the two cases of LCB and Kassem Hejeij since the [Middle East and Africa] bank was not listed on OFAC but rather the name of the chairman,” he explains.

In the LCB case, the bank was sold and its identity dissolved to control the damage. According to Morcos if MEAB itself had been accused, it would also in the Hejeij case have led to “catastrophic results” beginning with a total shutdown of all correspondent banking relationships. “This distinction is to differentiate between listing the juristic person of the bank, which was not the case, versus listing the natural person. This is why I think that there was a chance to handle the situation differently than other cases when banks are listed,” he says.

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Being based, as Beirut observers are, far outside the Beltway, it would be idle speculation to wonder why the treasury department’s officials chose this particular time to target Hejeij, or why the department’s top man in the Office for Terrorism and Financial Intelligence, acting (and according to President Obama to be fully appointed) under-secretary Adam Szubin, would last month issue a fiery press release specifically attacking Hezbollah and declaring that his office would “pursue all of Hezbollah’s revenue sources, whether charitable fundraising, criminal proceeds, or state sponsorship.”

Hopeful news from the de-risking front

The good news is that de-risking and other impacts of greater compliance pressures are perceived as manageable by banks across the Arab world. A recently released joint study by the Union of Arab Banks and the International Monetary Fund shows that the region’s bankers noted increased costs related to correspondent banking due to stricter AML/CFT enforcement. However, “wholesale de-risking by global banks does not appear to have taken place so far,” the report said. On the other hand, regional banks did not indicate that they had taken several measures to improve their immunity to ML/FT risks.

The study was conducted in spring 2015 via a survey sent to 471 banks in 20 MENA countries. The response rate of about 25 percent was not very high and further research is warranted according to the study’s authors, but the exercise provided useful indications on the business impacts of AML/CFT measures, Foreign Account Tax Compliance Act (FATCA) and Basel 3.

The highest impact was perceived in the area of correspondent banking where 40 percent of responding banks indicated that these relationships were becoming “more demanding, more time-consuming, more complex, and expensive to maintain.” Impacts on remittance flows were seen as minor, and so were business impediments related to FATCA and Basel 3.

Impacts were more pronounced for banks in countries classified by the Financial Action Task Force (FATF) as having strategic deficiencies in AML/CFT regimes that are however in the process of being addressed under “high-level political commitment”. In the four MENA countries in this category – Iraq, Sudan, Syria and Yemen – banks’ responses indicated higher negative impacts on business due to the introduction of FATCA and significantly higher impediments of remittances but lower cost impacts due to the stricter AML/CFT regimes.

When compared with banks in the non FATF designated countries, banks in the four designated countries showed significantly less eagerness to take measures that would reduce ML/FT risks or to enhance their FATCA compliance. The study pointed to a possible reason for this underwhelming implementation of new compliance measures – a paltry 3 percent of banks in sanctioned countries enhanced their customer due diligence to lower ML/FT risks versus 33 percent in the other countries – in the fact that their nation’s inclusion on the sanction list nullified any individual efforts for achieving greater compliance. Over one third of the banks that responded to the survey – 41 out of 117 – were based in sanctioned countries.

Also a counter-intuitive result of the study was the situation of regional de-risking. Whilst the study did not directly identify the countries whose banks undertook regional de-risking, it said that about 10 percent of the survey respondents had closed some correspondent banking relationships with banks in sanctioned countries and/or weak AML/CFT policies – meaning that “de-risking of regional correspondent banking relations by MENA banks”, as the study termed it, is a subject which warrants attention.

Statements of this sort are well-worn in the American repertoire, as was the name of Hezbollah’s Mustafa Badreddine who was highlighted in the July 21 dispatch. In past scenarios, such sanctions messages were interpreted to be warnings, or threats, demanding good behavior from Lebanon.

Whatever the hidden sticks-and-carrots in the current American strategy may be, it remains possible that the last word has not yet been spoken on whether the potential threat to MEAB has been solved with the intra-familial transfer of chairmanship at the bank. In more general terms, however, all signals suggest that Lebanese and Arab banks cannot relax their attention when it comes to compliance with the US agenda.

One problem, Morcos says, is the American insistence on publicly confronting alleged financial facilitators of terrorism without giving these entities a chance to cooperate. He recalls how Arab participants in a 2006 workshop with officials from the Federal Reserve Bank of New York were asking the US entities not to expose Arab banks in public statements immediately after having discovered a concern, but first to employ information channels such as the financial intelligence units that exist in all countries of the region.

As Morcos remembers, this request was brushed aside by the official in question, with a reference to the victims of the 9/11 Twin Towers attack who had been murdered without any consideration. The single-minded US desire to fight terrorism finance in the sharpest way possible has kept relationships problematic since that time, Morcos says, and argues, “Now is another occasion to reemphasize that any subpoena and any suspicion should be channeled through official channels, i.e. the financial investigative units and through the central bank of Lebanon, especially since it works efficiently. Why not adhere to this channel instead of spreading the word as news, which has a dramatic impact on depositors’ interests and even on the sector here?”

No alternative to compliance

Financial institutions need to abide by anti money-laundering (AML) and combating the finance of terrorism (CFT) rules, and have had to learn their lessons in this regard as even top international banks changed their processes only after being hit with multi-billion dollar fines for having facilitated financial transactions with sanctioned countries such as Sudan, Iran, and Cuba, says the secretary general of the Union of Arab Banks (UAB), Wissam Fattouh.

“In my opinion, penalties for non-compliance with AML and CFT or also with [Foreign Account Tax Compliance Act] regulations are very good. Banks need to behave and this is not only about issues related to AML and CFT but also about corporate governance and violations of rules such as exchange rate manipulations,” he says.

While the strengthening of international regulations and enforcement of penalties against rule-breaking banks comes with general questions about the proportionality and effectiveness of such penalties, Arab banks in Fattouh’s view struggle with a different set of challenges that are grounded in the presence of economically powerful terror organizations, namely ISIS.

In order to deny these organizations an increase in power because of their ability to provide jobs, populations in ISIS-affected countries need to be offered economic opportunities and better jobs. In this context, Arab banks have a major role in developing employment structures through the financing of small and micro businesses.

[pullquote]“Advancing financial inclusion and job creation are priorities…in the war against the sources of terrorism.”[/pullquote]

“Advancing financial inclusion and job creation are priorities where banks play a role in the war against the sources of terrorism, [namely] the economic distresses that enable terror groups. It is my opinion that banks have to play a large role in economic growth through SME finance, housing and real estate finance, infrastructure lending, etc,” Fattouh tells Executive.

However, this is exactly where the emphasis on AML and CFT compliance clashes with the banks’ responsibility to expand their national economies. As Fattouh points out, micro entrepreneurs and small business owners more often than not run ventures where compliance checks on their customers are nearly impossible to enforce and financing of SMEs with a dedicated lending program may turn out to be too risky for banks purely from a compliance perspective.

Risks of fixation on AML-CFT

Extreme AML-CFT compliance pressure is counterproductive to the overall global targets of achieving greater financial inclusion and universal access to finance, which have been highlighted most recently in the United Nations’ Addis Ababa Action Agenda, which was globally adopted by UN member states last month at the Third International Conference on Financing for Development in the Ethiopian capital. The agenda noted [in article 38] without being more specific that “some risk-mitigating measures” in finance could create barriers against access to formal financial services by micro, small and medium enterprises.

Risk mitigation, or rather risk deflection, is another AML-CFT induced challenge for the relationships between Arab banks and international banks, as well as among Arab banks themselves. This is because of a temptation for banks to sever correspondent banking ties when compliance requirements make these relationships too cumbersome. Called de-risking, the practice potentially impedes international finance for smaller partners and according to Fattouh is generally ill-advised and not the intention of US stakeholders. “From the point of view of the regulator and the treasury, banks have to continue to understand risk and manage it, not talk about de-risking, and I agree with them. But we are witnessing some international banks cutting their relationships with Arab banks,” Fattouh explains.

De-risking is an economy 101 decision; banks compare the rewards of doing business with individuals and institutions with the cost of compliance attached to having those relationships. This positively implies that decisions on correspondent banking are non-ideological for the vast majority of commercial banks and financial institutions, supporting the assumption that current occurrences of de-risking are a temporary phenomena and will not impede global financial structures in the longer term.

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However, Fattouh is concerned that the region’s bankers could lose something much more precious than correspondent banking relations or even licenses: their risk cultures. “My impression is that law enforcement is changing the hearts and minds of bankers, which is very dangerous,” he says. “Banks are by themselves conservative. When they feel the pressure of law enforcement upon them, it changes the spirit and this is my worry, as it could impact the role of banking negatively.”

Practical tools for making the burdens of AML-CFT compliance less costly for Arab banks could include an authoritative regional entity empowered to carry out compliance checking as intermediary for all banks in the region, Fattouh suggests, noting that such an initiative is not currently feasible for the UAB and could be initiated perhaps by the Arab Monetary Fund acting as the secretariat of Arab central banks. However, to facilitate dialog between Arab and international bankers the UAB will expand its private sector dialog program on combating the financing of terrorism from a US-MENA dialog to a EU-MENA dialog, which will be inaugurated on September 3 in Brussels.

[pullquote]“My impression is that law enforcement is changing the hearts and minds of bankers, which is very dangerous.”[/pullquote]

To help Arab banks with the cost and behavior challenges of the many sanctioned waters they have to operate in, UAB is currently working on compiling a code of ethics which, according to Fattouh, will guide banks in their approach to four central points, namely a) rules and regulations, b) corporate governance, c) financial inclusion and universal financial access and d) financing of the economy. The parameters for the project have been assembled and he hopes for publication of the Code of Ethics as guidebook for Arab banks by November, Fattouh says.

In the meanwhile, the American crusade against the financing of terrorism will continue and implicated persons will have to struggle if they want to contest their pariah status. Comments shared by US law firms suggest that even proving one’s innocence has not been the most successful approach for removal from the SDN list – delisting was more often achieved by offenders for admissions of guilt rather than protestations of innocence.

Another option of interest to the region and of great potential business value for Lebanese banks, although not in any way likely to benefit people accused of Hezbollah affiliations, is the change of US political views. As Cuba was finally allowed to hoist its flag over its recently reopened embassy in Washington D.C., it was no surprise that a single OFAC update had already announced the deletion of more than 50 Cuba-related names from the SDN list. What the US calls “sanctions relief” vis-à-vis Iran will take at least several more months to gain momentum, but the prospects for new opportunities from the Iran deal are infinitely more promising than making any attempt to change minds across the Atlantic about the status of people who act as open bank accounts for alleged Hezbollah operatives or invest in mysterious infrastructures that can be used by the organization.

August 17, 2015 0 comments
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DesignSpecial Report

Saving money one sunbeam at a time

by Matt Nash August 17, 2015
written by Matt Nash

The problem could not have been more standard: how can ABC’s department store in Ashrafieh reduce overhead to maximize profits? In 2012, the company began doing some research on electricity consumption with an energy audit. A solution soon followed: use that glowing orb which gives us life. In June, the department store went solar – partly.

Mohammad Abou Rich, the mall’s technical director, told Executive that a system consisting of 4,000 square meters of photovoltaic panels on the mall’s roof will supply 21 percent of the department store’s yearly energy needs, saving ABC $100,000 per year in dual energy bills. While the amount paid to design and build the system is “confidential,” Abou Rich explains that because of the way the panel layout was designed – with the sun-suckers oriented east-west instead of north-south, as many of the other contractors who bid for the project proposed – the investment will be recouped in only five years because of the extra power supplied. Panel orientation east-west (in line with the path of the moving sun, for the astrophysically challenged) means the system produces “10 to 15 percent” more electricity than a north-south orientation, he says.

August 17, 2015 1 comment
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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