Executive Magazine

Women march on

by Jeremy Arbid March 4, 2015

written by Jeremy Arbid

Joseph Kaï | Executive

Every March 8 the United Nations marks International Women’s Day to highlight the progress women have made towards equality with men and drawing attention to the challenges women continue to face across the world — the societal pressures, prejudices and violence subjugating them. Executive set out to mark the occasion by exploring the sadly inadequate engagement of women in the Lebanese workplace, and identifying some who have broken past discriminatory laws and prejudices to rise to the top of male dominated fields.

The societal expectations prevailing within Lebanon and across the region, as well as the subjugation and violence women face, underline women’s rights as a critical issue, but one that is not often a priority. What is clear is that the women of the Middle East continue to live in patriarchal societies where at one end, the violence — including harassment, assault, mutilation, rape and murder — that women suffer drives them to further dependence on male guardians for protection, while at the other it is the systematic discrimination of women via civil or religious law that undermines their march towards equality.

Even when women are free of blatant subjugation, more subtle biases take over. Oftentimes these prejudices manifest in the office, where employers continue to see marriage and domestic obligations as a hindrance to productivity that blocks women from decisionmaking positions. Statistics can tell only part of this story. In Lebanon, where available data is sorely lacking, the numbers do not paint a good picture, and even in Western countries where for decades movements have advocated gender equality, statistics still show gaps between males and females in terms of wages, the number of female executives and board members, and in political representation.

Data deficiencies aside, Executive’s investigation reveals the prevailing pressures women confront on a daily basis in Lebanon and the region. Interviews with gender policy experts and women’s rights advocates, as well as personal anecdotes and a broad review of the literature documenting gender based discrimination and violence, all indicate the existence of an anti woman cultural norm stemming from the patriarchal leadership in the household — where the uncompensated work of raising children, maintaining the house and catering to the patriarch are the defining burdens that women are expected to bear.

This article is the introduction to Executive’s special report on women in the workplace. Read more stories as they’re published here, or pick up March’s issue at newsstands in Lebanon.

March 4, 2015 0 comments

Editorial

Ladies first

by Yasser Akkaoui March 3, 2015

written by Yasser Akkaoui

Lebanon still has people, right? While this may sound like a dumb question, it was the only thing running through my mind after a 90 minute meeting with Parliament Speaker Nabih Berri on February 23. We were talking about Lebanon’s economic opportunities, but the speaker had a singular focus: natural resources. He talked about oil. He talked about gas. He even talked about exporting water. What he ignored was our most valuable asset: human capital.

Female Lebanese, for example, are being underutilized as agents of economic growth. Empowering them would boost both productivity and GDP. We know Lebanese women are well educated, so we simply must ensure they are better represented in the workforce for the benefit of the entire country. We have proof that, despite all the obstacles they face today, women can and do succeed in the Lebanese workplace. We need to help more women join the workforce by both offering them more legal protections such as laws against sexual harassment, in particular, and creating more job opportunities in the country, in general.

We’re a nation of creative minds and entrepreneurial spirits. We should have a larger and more dynamic knowledge economy in which both our men and women can prosper. Instead, we have an $80 million fiber optic backbone for internet traffic sitting unused. Simply turning on what we already have can spur innovation, growth and job creation. And it can be done quicker than waiting for politicians to agree on exploiting what may or may not be buried beneath the seafloor.

More than oil, gas or convoluted schemes to sell water we don’t even capture in a large enough quantity to meet our own demand, Lebanon needs hope and more investments in its human capital — things not even our politicians can steal.

Editor’s note: This article originally appeared under the title “It’s the people, stupid”.

March 3, 2015 2 comments

Finance

Aiming for alpha

by Livia Murray & Thomas Schellen March 3, 2015

written by Livia Murray & Thomas Schellen

For many years Lebanon’s national tree, Cedrus libani, has been designated a beleaguered species whose numbers are lower than they should be. No such danger has ever faced our country’s premium financial species: the Lebanese bank. If there was any existential problem that our banks may have faced since national independence, it was overpopulation — too many bankers for a small country.

[pullquote]“Cedrus Bank will be specialized in [serving] commercial and retail clients. And we have an organic growth strategy”[/pullquote]

But this month the Lebanese are presented with the debut of yet another commercial bank that vies for their deposits — and this institution has borrowed its name from their national symbol. “Cedrus Bank will be specialized in [serving] commercial and retail clients. And we have an organic growth strategy,” says Fadi Assali, just having been elected chair–general manager of the new bank.

Executive visited Assali at Cedrus Invest Bank, a Beirut based wealth management provider where he is cofounder and chief executive. Itself hardly four years old, Cedrus Invest operates under a specialized banking license and is majority shareholder in Cedrus Bank with an 85 percent stake. Participating in the new bank for the remaining 15 percent stake is Nicolas Chammas, the head of Beirut Traders’ Association. He will be board member and vice chair of the bank.

Although Cedrus Bank is just rising from the starting blocks, it is not a greenfield establishment. It enters the market with the existing branch network, systems, asset, deposit and lending portfolios, and almost all the employees of the Lebanon operation of Standard Chartered Bank. As Executive went to print, Cedrus Invest’s acquisition of Standard Chartered was set to close with a final shares transfer scheduled for February 27. The Lebanese central bank had approved the takeover in the last quarter of 2014.

As Assali and Cedrus Invest cofounder Raed Khoury tell Executive, the acquisition equipped Cedrus Bank with a client portfolio of 12,000 accounts, 6,000 credit card relationships, assets and deposits of about $90 million and $75 million, respectively, and a loan portfolio “in the $50 millions.”

“But the plan is to grow the business quite substantially,” adds Assali. To digest all aspects of the acquired bank and prepare Cedrus Bank for growth, “What we are doing now, [as a] first step, is raising the equity of the acquired bank to be around $60 million,” he says.

Shooting in the green

The current equity boost comes after previous increases that saw Cedrus Invest’s capital more than double from $52 million in 2011 to $110 million last year.

According to Assali, the capital increase in 2014 amounted to about $47 million because the initial capital was already boosted by retained earnings. The increase was supported by all existing shareholders, including several prominent Saudi investors, but also entailed the addition of new shareholders who were mainly Lebanese.

“Under an agreement with our historical investors, we wanted to introduce new blood to the structure. So the capital increase was done in a way whereby two thirds of new funds came from existing and one third from new investors,” Assali explains. He acknowledges that the capital increase diluted the shareholdings by Assali and Khoury “a little” from their initial combined 8 percent shareholding.

Tracking many details

According to Assali, the confidence of Cedrus Invest shareholders and management in the expansion was founded upon growth experiences of about 25 percent per annum since 2011 in both assets under management and profits. The plan for Cedrus Bank is to reach profitability after two years of operations.

In local banking history, the launch announcement of Cedrus Bank on March 3 is actually the repatriation of this financial institution in a third life. It had been founded as an independent local bank under the name Metropolitan Bank in 1979 and was acquired by Standard Chartered in 1998, marking a rare investment by a foreign bank via takeover of an existing license.

From Standard Chartered’s perspective, this investment came at a time when the UK based institution — with specialization in emerging markets — was on a drive to expand its global footprint. Its decision to divest of the Lebanese unit, which became public knowledge in the last quarter of 2013, was apparently triggered by underperformances of Standard Chartered in complex global endeavors and important Asian markets, and was sold by the bank as a refocus on “priority markets” that entailed withdrawals from several countries.

While Assali would not confirm how much Cedrus Invest spent on the acquisition because of an agreement with Standard Chartered not to divulge the price, he admits that the $24–27 million range quoted in local papers was “not far off.” Standard Chartered did not comment on its sales decision and future strategy for its Lebanon presence when contacted by Executive on several occasions.

Assali explains that Cedrus Invest is walking away with Standard Chartered’s entire retail banking operations as well as some private banking clients, while Standard Chartered will maintain a representative office in Beirut to service a small corporate portfolio that it retained.

The takeover was a somewhat drawn-out process, because Standard Chartered had concerns over the future of the employees, and also because of issues which Assali describes as “logistics,” related to the transaction, such as usage of Standard Chartered’s proprietary systems during a transition period. Assali also notes the seller has paid particular attention to Cedrus Invest’s strategy going forward and that both sides agreed on entertaining a post-acquisition relationship.

As the Cedrus brand previously only stood for private banking and wealth management operations, their venture into retail business constitutes not only an asset acquisition, but also a talent buy. Assali claims they intend to keep about 85 percent of the acquired bank’s staff and selectively add new people where it did not have capabilities, such as housing finance. By end of the year, Cedrus Bank will have a headcount of 100 to 105, he says, compared with about 30 current employees at Cedrus Invest.

[pullquote]“In terms of absolute [numbers] we will be building our balance sheet very slowly and can pick and choose our clients according to risk conditions”[/pullquote]

With an eye on the toughening of operational challenges for Lebanese banks and banking in general, Khoury acknowledges the presence of “clear pressure” on banking profitability in 2015, but argues that Cedrus Bank can take a long term approach because its shareholders are not seeking quick returns. “We will be happy to grow our balance sheet quickly in terms of multiples which will be very high, but in terms of absolute [numbers] we will be building our balance sheet very slowly and can pick and choose our clients according to risk conditions because we are starting from a small base,” he says.

Moreover, he argues, the tough times already have proven fortuitous for Cedrus. “All conditions have a positive and a negative aspect and because the conditions in the region and in Lebanon represented a higher risk for Standard Chartered than they were comfortable with, the opportunity was created for us to step in. If conditions in the region would have been very good, they would not have thought of selling or the price would have been much higher,” he says.

The governance proposition

Cedrus Invest Bank and Cedrus Bank will be run by two different boards and operate as separate entities dedicated to commercial and retail business at the latter and investment and private banking services at the former. Assali says, “The private banking arm is the Cedrus Invest Bank, so we have a very clear separation between the lines of businesses and the way they are run. But with complete synergy; [it will be] separation with synergy.”

According to him, the assets-under-management portfolio at Cedrus Invest, plus a small addition of private banking business via the acquisition, has expanded to being currently “very close to $500 million.”

The current Cedrus Invest board that was elected in 2014 for a three year term includes cofounders Assali and Khoury, with the latter holding the position of chair–general manager, plus three shareholders as non executive members and two or three independent members, among them Ghassan Ayache, a former vice governor of the central bank and previous chair of Cedrus Invest Bank.

The board of Cedrus Bank is starting out with five members headed by Assali as chair and by minority shareholder Chammas as vice chair, Assali says, and will be expanded very soon by adding at least one new member.

[pullquote]In the short term, the bank aims to have two to three new branches running within 18 months[/pullquote]

It is not intended for the group to stay at this stage for a very long time. While Cedrus Bank is starting out with three existing branches previously run under the Standard Chartered brand, the plan is to quickly utilize two additional existing branch licenses that had become disused. In the short term, the bank aims to have two to three new branches running within 18 months.

The organic growth strategy will involve further developing their retail banking services, beginning with new delivery channels and including a roster of new credit card and lending offerings focusing on what Assali dubs the “middle market” clientele. “We see a need for that niche of market to be well served,” he says.

Reflecting the importance of expanded human advisory and automated service points such as electronic branches, the largest investment budgets of the rollout and refurbishing of the branches will be allocated to technology and human resources. The technology budget on its own will surpass $1.5 million per year for the next two years.

Strategizing for much more

In the medium to long term, however, Cedrus Bank is intended by both its investors and executive management to become a player that can benefit from the economies of scale required to make a mark in Lebanon’s banking sector.

Over the coming five to six years, the young Cedrus Bank thus envisions expansions that could well go beyond organic into what Assali calls growing “organically and opportunistically–inorganically.” This, he adds, is “because in commercial banking, size matters. And you have to have a certain size in order to be able to compete.”

Ultimately then, Assali and Khoury aim at joining the top of the size league, the alpha group of banks which hold customer deposits of above $2 billion by current reckoning. As Khoury insists, however, “we are not obsessed with being alpha or beta. Alpha is not a target by itself but will be [a] natural consequence of what we want to do.”

While the two declined to divulge any specific plans for future mergers and acquisitions, both confirm that the new bank will need inorganic growth to achieve such dimensions. Citing lower valuations experienced by local banks when compared with 10 years ago, Khoury sees three reasons for new takeover opportunities to arise. “We feel that there is a future possibility of banks being sold because they are not able to maintain a good [internal rate of return]. Next, the central bank promoting mergers and acquisitions and third, many bank owners are no longer young and face succession issues so some might be interested in selling,” he says.

Noting these ambitions, and evolving conditions for the banking industry, it appears quite possible that the entry of Cedrus Bank into the market could become a factor in sector consolidation rather than adding just a new brand for corporate and retail banking.

March 3, 2015 0 comments

Business

Guess who’s coming to dinner?

by Livia Murray March 2, 2015

written by Livia Murray

In every corporate narrative, some dates are noted as remarkable, while others less so. For the founders of Shahiya, a digital portal for Lebanese culinary secrets and cooking instructions, January 28, 2015 is one such memorable date. It is the day when NetSila, the holding company that owns the five year young Shahiya recipe site, completed the last step of handing over its entire equity to Japanese acquirer Cookpad for $13.5 million, as well as the date they had to evacuate the Cookpad team on only its second visit to Beirut.

Just as the ink was drying on the papers that would finalize the acquisition, a cross border exchange of fire, including rockets, erupted on the country’s southern border in what is considered the most significant military confrontation between Israel and Hezbollah since 2006. There is perhaps no better example of the Lebanese security situation taking its toll on business than the anecdote of having to evacuate the buyer.

For those of us used to these cyclical bursts of violent happenings, generally without escalation, it would be good to remember this is not necessarily something that falls within the comfort zone of your average buyer — and certainly not your average Japanese one. Tokyo was ranked the safest city globally by the Economist Intelligence Unit’s Safe Cities Index 2015, with third largest Japanese city Osaka also ranked high at number three.

[pullquote]Cookpad is a rare example of a Japanese company buying an Arab startup[/pullquote]

Perhaps not surprising, then, is the absence of significant Japanese investment in Lebanon. Cookpad, which operates in the same digital space as NetSila but with global ambitions, is a rare example of a Japanese company buying an Arab startup. Though the Japanese embassy in Lebanon could not confirm whether Shahiya was the first acquisition made by a Japanese company, they did assert that Japanese investment in Lebanon was marginal. Japan does not appear on the United Nations Conference on Trade and Development’s (UNCTAD) list of foreign direct investment into Lebanon by country, which includes 15 states.

The business of food

But while Beirut and Tokyo are very different in terms of lifestyle, security and culture, there is something that brings Lebanese and Japanese people together: food.

Food, that is, and the internet. In the increasingly digital world, where content perusing has shifted to the web and mobile platforms, the Shahiya team is still convinced that some things have remained the same, particularly people’s appreciation of, and fascination with, food. “The tools are changing, but the relationship, the need, is constant,” says Daniel Neuwirth, cofounder of Shahiya. The portal, created in 2010, was focused on food all the way. “We really wanted food, the best in food, only food,” says Hala Labaki, cofounder and CEO of Shahiya. Labaki and Neuwirth are two of the four cofounders of the platform, along with Carole Makhoul Hani and César Gemayel.

Cooking up the concept for Shahiya in a period when digital business in Beirut was very young and new startups could still find virgin markets, the four founders tell Executive that they specifically moved back to Lebanon to start the venture. Living abroad at the time, they saw promising signs that internet penetration in Lebanon, which had been lagging behind, would increase. “We sensed very positive growth signals in this industry in particular. And we thought, ok, let’s do something,” says Labaki.

Five years on, the numbers proved them right in so many ways. Usage of the new site roared along with roughly 100 percent annual expansion in user numbers and peak consumption during Ramadan, the Shahiya team says, citing a “smooth” progression to 3 million unique visitors per month at the time of acquisition. In terms of turning a profit from their advertising based business model, the team would not say more than claiming they are “almost there.”

But present operational profits should momentarily be a reward of very minor concern for the founders and NetSila’s two local financial investors, Middle East Venture Partners (MEVP) and the Building Block Equity Fund. By far the most dramatic growth ratio in the venture’s short history is its increase in valuation when you compare the $13.5 million sale price cited by MEVP to the valuation in 2012 when MEVP and the Building Block Equity Fund injected $500,000 ($250,000 each) into the company.

[pullquote]This is for Lebanese standards, an almost incredible valuation leap of 500 percent in under three years[/pullquote]

According to Walid Hanna, managing partner at MEVP, the two financial investors each took an 11.1 percent stake at the time, implying a valuation of $2.25 million. This translates into, for Lebanese standards, an almost incredible valuation leap of 500 percent in under three years. It also means that the two funds each walk away with close to $1.5 million and the cofounders with over $10 million shared between them. Labaki, however, would not go into those details and says the quartet did not wish to disclose the shareholding structure at the time of the exit.

For Shahiya, having no prior ties to Cookpad, it was a bit of a surprise when their eager Japanese colleagues contacted them via LinkedIn. Labaki acknowledges that while they hadn’t anticipated an exit so soon, when building a company that resembles companies in other more mature countries, the idea of an exit was not entirely far fetched. “You always think about what is the global player that can acquire you, because this is a big part of the game. You’re not obsessed about it, but you’re aware,” she says.

For Cookpad, the company had been waiting to sink its teeth into an Arabic language food portal. After investing in Indonesian recipe service DapurMasak in 2014 and acquiring American recipe apps provider Allthecooks and Spanish recipe provider Mis Recetas in 2014, the Shahiya acquisition was Cookpad’s fourth installment in their chosen quest of virtually conquering the food world.

While food appreciation remains a human staple, one thing the digital age has brought on is the appetite for user-based companies to expand globally. Tomoya Yasuda, head of international business development at Cookpad, had been busy scouring markets for potential buys, and settled on Shahiya because he claims they were the “largest in the region” in the domain of food. When Executive jokingly asked Yasuda if Cookpad was seeking world domination, his answer was short and to the point: “Yes.”

Big in Japan

Cookpad is listed on the Tokyo Stock Exchange (TSE) and has seen its share price grow by over 250 percent in the past two years, taking the closing of the NetSila deal on January 28, 2015 as a reference date at which the value of the Cookpad stock was JPY 5,000 (approximately $42). Coming after years when the Japanese stock market had been in slow-cook mode, the stock’s rise came in context of Japanese Prime Minister Shinzo Abe’s economic reform policy — coined Abenomics — initiated in 2012, which has consisted of fiscal stimulus, monetary easing and structural reforms that have led to a boom in the Japanese stock market overall.

However, Cookpad’s share price growth was unusual even when taking this positive environment into account as the stock outperformed the TSE’s broadest index — the TOPIX general index — almost four times over the same two year reference period.

According to Cookpad’s latest financial disclosures, the company achieved sales of JPY 6.7 billion ($56.4 million at current exchange rates) and net income of JPY 1.52 billion ($12.8 million at current exchange rates) in an eight month period ending on December 31, 2014. The company did not calculate percentage changes as the reporting period reflected a change in the financial year from April to December.

According to its full year financial statements for 2013 (ending in April 2014), sales increased 30.5 percent between 2012 and 2013 from JPY 5 billion ($42 million at current exchange rates) to JPY 6.5 billion ($54.7 million at current exchange rates). Their largest revenue is in premium services, which make up over half of their sales, with most of the remainder in advertising. By the end of Q4 they had 44.04 million monthly unique users, with 1,300,000 paid members for their premium services business, served by 181 employees. In addition to their acquisitions of the other food companies, they also acquired Coach United, a Japanese marketplace of private lessons, to diversify their business in Japan.

The crossover

NetSila will become Cookpad MENA, which is wholly owned by Cookpad and registered in Lebanon. The Shahiya team will stay on board as managers to guide the growth of Cookpad MENA.

[pullquote]“Cookpad only gives us more means to grow faster and more aggressively in our strategy”[/pullquote]

Both parties are understandably excited about the amalgamation. “Cookpad only gives us more means to grow faster and more aggressively in our strategy,” says Labaki. “More technology, more experience in a lot of things: data, technology, user behavior, [user interface]. They have maybe one of the best [specialists] in [user interface/user experience] in Japan.” Both companies spoke of staff exchanges between the MENA team and the Japanese team, though Yasuda, when asked how that will be affected by the security situation, acknowledged “I don’t know, to be honest.”

Cookpad is set on the steady growth of Cookpad MENA. An investment from the parent company will help fuel Cookpad MENA’s growth in the region. While the Shahiya founders would not disclose the amount, Neuwirth said “it’s easily at par with [venture capital] funding.” He adds, “We always had ambitions about growing much larger than we are today but the difference now is that the partnership with Cookpad just came to the table and it came out that with Cookpad, we will be growing faster.”

Cookpad MENA is to turn into a subscription based business in line with its Japanese parent, whose managers are staunch believers in that model. “In terms of financials, as of today, subscription business [brings] major resources, and I think that’s what we should do … whether we can deliver enough value for the users, that’s the key,” says Yasuda. Subscription is the most profitable line of business for Cookpad in Japan.

For the Cookpad MENA team, as well as their Japanese parent company, regional expansion is the way forward. But this begs the question: since Lebanon and the Middle East have so many obstacles stifling business — the lack of credible capital markets, for one — would the kind of growth that Cookpad MENA is looking for be possible without the help of a larger, parent company? While Labaki has seen her fair share of obstacles, she was confident in the capability of Lebanese bred business. “With the right financing we could have become a very serious and annoying player,” she says.

March 2, 2015 0 comments

Business

Automating the future

by Jeremy Arbid February 27, 2015

written by Jeremy Arbid

It is in Lebanon, of all places, that the tale of Technica unfolds. The company manufactures and customizes automated end of line solutions — those machines that prepare products after they’ve been individually assembled, or wrapped, for shipping. So, if you were to say, eat a Twix candy bar in Cairo, it would have been Technica’s machines that prepped the boxes of candy bars for shipping, separating products by the barcode number and sending them to the warehouse by automated conveyor belts. Or, for example, if you were to pour yourself a glass of milk bottled by Almarai — one of Saudi Arabia’s largest dairies — it would have been Technica’s machines that collected the milk bottles, sanitizing and sorting them before carrying them off to a refrigerator warehouse for shipping — all completed automatically with little human interface. And these machines are all designed and built in Lebanon, who would have thought?

Tony Haddad, Technica’s founder and general manager, is on a mission to transform the way other factories package and prepare their products. The family owned business and manufacturer of robotics and automated assembly solutions has completed expansion of its Bikfaya factory with an eye on further entrenchment in the GCC markets and new opportunities in Africa.

Robotic dreams

If adversity produces champions, then Technica is Lebanon’s poster child. Especially as in the world of industrial manufacturing big usually conquers small. But for firms operating in niche fields, such as robotics, small yet aggressive companies can thrive in even the toughest of environment. Technica is aiming to be the preferred partner for automated solutions in the Middle East and African markets by 2020. According to Technica’s survey of the Middle East market, the sales of automated solutions have reached $10 million annually.

[pullquote]Today, Technica is going head to head with large European players already entrenched in the business[/pullquote]

Today, Technica is going head to head with large European players already entrenched in the business, such as Krones (a large German conglomerate) and OCME (an Italian automation firm), as well as a few regional companies offering more niche solutions. Yet Technica has rooted itself in the Middle East market — its client list stands presently at 276 — serving local divisions of global corporations like Mars, Nestle, Procter & Gamble and Coca Cola, to name a few. And by 2020 Technica hopes its client base will reach 325, partly driven by further expansion in the GCC markets but also propelled by the push into African markets.

All of this started in a tiny garage during Lebanon’s Civil War. When the war became too intense to continue operations, Haddad packed everything on a boat and moved the business to Cyprus. When tensions eased in 1991 and the Syrian occupation lent some stability to the country, Haddad moved the company back and began construction of a new factory in Bikfaya — the site of their present operations. By this point one starts picking up on a recurring theme, and maybe Haddad took note from Warren Buffet — the American billionaire investor — who is famously quoted as saying “Be fearful when others are greedy and greedy when others are fearful.” That is to say that where others in Lebanon have found war and conflict to be insurmountable, Haddad has perceived them as mere “bumps in the road.”

Bumps in the road

In its first two decades Technica’s sales progressed steadily, the company was growing and revenues were roughly doubling every five years. By 2006, with the July War unsettling the country, Haddad set out to again expand operations, adding factory floor space to the existing facility with growth driven by entry into new markets in North Africa. By 2009 the company’s revenues had reached nearly $8 million.

[pullquote]There have been hiccups along the way[/pullquote]

There have been hiccups, Haddad points out, along the way. A broader look at gross revenues shows continuous growth apart from two years, 2009 and 2010, where Haddad admits that the company’s sales were stagnant. He links the issue more to the slowdown of the global economy and a slump in GCC markets — like the slowdown of Dubai’s economy in 2008 — as projects were put on hold or simply canceled. Likewise in 2013, the worsening of the Syrian conflict halted Technica’s transportation of goods across the territory for delivery to factories in the GCC. Now the company, like other firms in Lebanon, has to export by sea on routes that are just as expensive. But what at first was a negative for the business, Haddad describes, has turned into an advantage — Lebanon’s ports have expanded and the shipping companies have developed their maritime routes. For Technica, the costs of shipping by sea to the GCC are not substantially different — reliability has become the most important factor. And according to the company, shipping by sea to Jeddah, for instance, now takes only five days when transit times by land were 11 days — “We’re using faster shipping routes now and we’re saving on that in terms of the cost of time. It became an opportunity stemming from a problem,” Haddad explains.

By 2011 the company was again flush with cash and Haddad announced plans for another expansion of the factory — despite civil unrest budding to the east. With the war raging in Syria, Technica undertook capital expenditures totaling $1.5 million — the expansion was to double the size of the factory while creating an additional 18 technician and engineering jobs. This latest expansion phase was completed in 2014 and by the end of the fiscal year the company’s revenues had risen to nearly $16 million with exports amounting to 90 percent of the company’s sales.

Now Haddad is eyeing new markets in Africa — places like Ghana and Nigeria, which are themselves looking to develop value chains in the production of food products, providing big opportunities for companies like Technica to supply solutions to new and expanding factories. Ultimately, Haddad says Technica’s strategic vision is to double the size of the company by 2020, with a goal of increasing revenues by 15 percent each year. This, Haddad says, would give Technica greater capacity to build bigger, more complex automated systems and multiple projects simultaneously.

Into the future

And here’s where Technica’s story gets really interesting. The company has been built by the family from the ground up — yet Haddad has been the integral figure driving Technica’s evolution since its inception in a garage in the early 80’s. So after a 30-plus year career he is starting to think about easing his workload, and with this come questions about executive leadership. For all businesses, let alone a family owned one, this is an important issue — leadership drives the culture and defines the company’s strategic vision. Yet, if this idea of executive leadership were suggested to Haddad, he’d clarify that his style is to lead from behind. Technica subscribes to what is called servant leadership — a philosophy with its roots in the annals of history but adapted for modern application. In organizations employing the servant leadership philosophy, diffusing power through the organization and the development of employees into top performers are the priorities. The general notion is that top management serves the middle managers who serve the factory workers so that the entire organization can better serve its customers — similar to an upside down, pyramid structure. Indeed, it was from the factory floor and then the employee cafeteria that Haddad initially spoke with Executive.

[pullquote]The important question is whether Technica, and manufacturers in a similar position, can continue in such a hostile local environment[/pullquote]

By 2018, Haddad reaffirms he’ll no longer be Technica’s general manager — and similar to most family businesses, the assumption is that one of his children will take over when Haddad steps back. Yet it is not only the GM position that will need to be filled — Haddad is also Technica’s sales manager. There are four children in the Haddad family, each owning a 24 percent stake in Technica (Haddad retains a 4 percent minority stake in the company), three of whom work in the family business — Cynthia Haddad Abou Khater as stategy management officer, Cyril Haddad working in customer service, and Michel Haddad in multinational account sales. While being a family member has been a prerequisite to own shares of the factory and receive a dividend, having the same blood has never guaranteed a job in the factory. “If you have something to bring to the table we want you to work in the company — being a family member is not a guarantee,” Haddad says, somewhat sidestepping the question of who will run the company when he gives up the reins.

Technica has no formal board of directors. Its top management team sets the strategic vision of the company — its managers of operations, finance, human resources, sales and strategy. So while Haddad fills both the role of general manager and sales manager, his daughter, Abou Khater, is the company’s strategy manager. Currently the team is working internally — Haddad says they might bring in a consultant at a later stage — to develop its corporate governance to formalize succession plans by refining the descriptions for each managerial position while cultivating the leadership attributes desired for the top position. Haddad says his plan is to continue grooming his replacement so that in three to four years he might be able to step out of daily operations and assume a more strategic advisory role. “I’ve already put the right people in place,” he adds. When reached by telephone Abou Khater tells Executive that the process of succession planning began last year to formalize Technica’s corporate structure — job descriptions were drafted and key attributes to be honed were identified. But Abou Khater was also vague when discussing who might lead Technica in the years to come, “We would prefer an internal candidate and have shortlisted maybe two or three individuals.” But Abou Khater also rationalized that the company just isn’t yet in a position to say who will take over when the elder Haddad steps down — some three to four years from now. “We also don’t want the rest of the factory finding out who our next GM might be from a magazine — the candidates names will be announced on our terms.”

Succession planning aside, the important question is whether Technica, and manufacturers in a similar position, can continue in such a hostile local environment. There is support from the government but it remains limited to plans executable over the long term. The rehashing of policies toward mitigating production costs, the introduction of new industrial zones, and the promotion of links to education have helped manufacturers little in the short term. According to data published by the World Bank, manufacturing has been contributing less than 10 percent to national GDP in each year since 2005. For some, long term plans sometimes become indefinite.

February 27, 2015 0 comments

Economics & Policy

Israel’s cold shoulder

by Jeremy Arbid February 26, 2015

written by Jeremy Arbid

In December 2014, the United Nations General Assembly endorsed a request to Israel to compensate Lebanon for environmental damages to the latter’s coastal and marine territories following an oil spill. While the endorsement does not provide binding measures, it is the first time that the General Assembly has included a compensation figure — eight previous resolutions had not. In reaching this point, Lebanon has worked to identify its legal options justifying Israel’s responsibility for the spills — its next step will be to determine the scope of its argument and in which jurisdiction to pursue it.

Resolutions and politics

The first such decision, asking Israel to compensate Lebanon for an interim figure of $856 million, resulted in the General Assembly voting 170–6 in favor of the resolution — Israel, the United States, Canada, Australia, Micronesia and the Marshall Islands all voted no. The compensation request is in regard to oil spills from Israeli Air Force attacks on oil storage facilities during the 2006 war. The resolution also acknowledged comments from an August report by UN Secretary General Ban Ki-moon, noting “The Secretary General expressed grave concern at the lack of any acknowledgment on the part of the government of Israel of its responsibilities vis-à-vis reparations and compensation.”

[pullquote]If a binding resolution were reached, it would open a can of worms to all compensation liabilities for the damages caused by Israeli aggression against its neighbors[/pullquote]

According to a statement released by Lebanon’s Permanent Representative to the UN, Nawaf Salam, “Lebanon considers this to be a major progress, especially [since] a figure has been put forward as a basis for compensation using a clear and legal method of calculation.” Though General Assembly resolutions are not legally binding — UN Security Council decisions are — they do generally reflect world opinion says Nasri Diab, a lawyer studying Lebanon’s legal recourse. As such, a statement obtained by Executive from the Israeli Mission to the United Nations rejected the resolution, stating that it “has long outlived the effects of the oil slick, and serves no purpose other than to contribute to institutionalizing an anti-Israel agenda at the UN.”

Politics aside, the environmental effects of the spill are not to be trivialized. The destruction of seaside oil storage tanks in Jiyeh, some 30 kilometers south of Beirut, spilled oil into the Mediterranean which then spread up the coastline of Lebanon and into Syrian waters, suffocating marine life, destroying fishing, breeding grounds and fauna and flora, both onshore and off.

Yet what does Lebanon hope to achieve from these legal proceedings? Is it in pursuit of a moral judgement against Israel or does the government of Lebanon actually expect Israel to provide financial compensation for environmental damages? What does seem clear, as indicated by Israel’s staunch reaction to each decision reached by the General Assembly, is that if a binding resolution were reached, it would open a can of worms to all compensation liabilities for the damages caused by Israeli aggression against its neighbors dating all the way back to the country’s inception in 1948.

Environmental damage

Just a few days into the July War of 2006, Israeli air force planes swooped into Lebanon, bombing the Jiyeh power station and its oil storage facilities, spilling more than 15,000 metric tons of heavy fuel oil into the sea. Another 55,000 tons stored onsite burned, causing a plume of black smoke reportedly visible from 60 kilometers away. It was a “major disaster” according to a 2009 paper for the National Council for Scientific Research — a public research institute in Lebanon. The oil extended nearly 3,100 square kilometers shortly after the spill, reaching the northern coast of Lebanon — “from both volume and geographic perspectives, most of the Eastern Mediterranean basin was affected,” the research concluded. In the months following the spill, surveying by the Italian Coast Guard of oil sinking to the sea bottom off the Jiyeh coast was measured to cover an expanse of 50,000 square meters, and that oil “occupied every space between the rocks.”

Green Line, a local environmental NGO, described the oil spill as catastrophic with “tremendous negative environmental, social and economical [effects] both [in] the short term and long term,” adding, “It damaged marine ecosystems, destroyed fishermen’s livelihoods and rendered coastal areas lifeless.” The United Nations Environmental Program’s 2007 report had a similar conclusion, saying that the “spill resulted in significant contamination of the shoreline.”

Marine life suffered as a consequence; invertebrates such as crustaceans and algae were covered in oil and population recovery is expected to take several years. No significant losses were reported among sea birds, but fauna for the birds was smothered, affecting migratory patterns. Lebanon’s coastline — a breeding sanctuary for sea turtles to nest and hatch their offspring, such as the Green Turtle species — was heavily affected as were breeding waters for sharks and Bluefin Tuna. In addition marine plant life suffocated where the oil spill blocked sunlight.

Richard Steiner, an environmental consultant with Oasis Earth, described the environmental damages caused by the spill to be quite serious. Though Steiner has not studied the long term effects of the spill since his initial research for a 2006 report commissioned by Lebanon’s Ministry of Environment and the International Union for the Conservation of Nature, he acknowledges that, “We know that large marine oil spills can have very long term ecological effects. And human health was certainly affected by the smoke plume from the burning oil.” Steiner also concluded that damage can take time to show, citing the Exxon Valdez spill in Alaska as an example, “Some fish population collapses did not occur until 3 years after the initial spill.”

[pullquote]“The people who could have mitigated the spill could not do their job at that time because of the blockade”[/pullquote]

For Diab, the compounding factor of the spill was due to Israeli negligence — their naval, land and air blockade of the Lebanese territory intensified the damage, “The people who could have mitigated the spill could not do their job at that time because of the blockade. For long weeks the spill was there without the possibility to clean it up.” Steiner, corresponding with Executive via email, added, “Certainly, if there had been a prompt and full scale response to the spill, far less damage would have occurred.”

Indeed, as Steiner wrote in his report published one month after the spill, the Israelis would not allow even aerial observations. “I asked the French Embassy in Beirut for support to conduct an aerial survey with their relief helicopters along the coast, to ascertain the extent of remaining offshore oil, and to better guide what response options might be necessary. After several attempts by the French ambassador as well as [the] European Union to secure clearance from Israel for this flight, Israel refused to grant clearance at that time.”

Donor support

In the immediate aftermath of the spill, funds to aid Lebanon in its cleanup were relatively miniscule. As part of a previous resolution Lebanon had agreed that the Lebanon Recovery Fund — a fund to aid Lebanon in its recovery and reconstruction — would host the Eastern Mediterranean Oil Spill Restoration Trust Fund that would receive any funds earmarked for the cleanup. The former fund received nearly $46 million in contributions from 2006 to 2008 with roughly another $6 million added in 2013 by Germany. After factoring in another $3 million for interest, total contributions amounted to just over $54 million — the latter fund received zero.

Secretary General of the United Nations, Ban Ki-moon, had urged donors in previous resolutions to provide funding specifically to clean up the spill and monitor the recovery, but to date no contribution has been made to the fund according to comments received by Executive from Rony Gedeon, Monitoring and Evaluation Officer at the UN Resident Coordinator’s office in Beirut. Gedeon did point out that the resolution highlights bilateral contributions, “A project is currently under development by the Government of Lebanon for funding by the European Union that will include a component on the sound management of recovered wastes.” Gedeon added that from 2006–2009 the UN mobilized support for the cleanup which saw contributions of some $3 million; additional money, expertise and specialized equipment for the oil spill cleanup effort was obtained by Lebanon from various other international donors. However, Steiner argues that the “International response to this intentional environmental damage was terribly insufficient.”

Calculating compensation

“The General Assembly and the Secretary General in his reports have asked for a figure of what Lebanon is claiming from Israel,” says Diab who has been an integral figure in preparing Lebanon’s legal case. Working with a number of stakeholders — the Ministry of Environment, UNDP and the Ministry of Foreign Affairs — Diab has laid out which avenues Lebanon might pursue to obtain compensation from Israel for the damages caused by the oil spill. The first step, though, was calculating a figure that would hold up under legal scrutiny. “For eight years, the General Assembly had already said that Israel is liable and responsible for the damage. Now a figure has been put [down] and this is the most important thing,” Diab says.

[pullquote]The conflict had a devastating effect on Lebanon with significant impacts to the economy[/pullquote]

Ban Ki-moon, in an October 2013 report to the General Assembly, advised UN bodies to build on the World Bank’s initial economic assessment of the environmental degradation resulting from the spill. The 2007 report concluded that the conflict had a devastating effect on Lebanon with significant impacts on the economy, environment and public health. The report cites degradation due to the oil spill amounting to $240 million, but Diab says this figure was incomplete and omitted the passive use value (value on public goods not in use, like the monetary value of a national park) of the coastal resource — for this Diab calculates an additional amount of $218 million since 2006, totaling $458 million.

Adjusting for global inflation and lost opportunity in terms of an interest rate, Diab explains, leads to a compensation valued at $856.4 million by 2014 as requested in the resolution, but the figure might continue to climb. “There is no limitation. As long as you have damage that will appear in the future and which you can prove is linked to the oil spill, it should be covered. That’s why it is an interim figure and not definitive.”

In the months following the spill, Steiner, the environmental scientist, tells Executive that “The spill, and of course the war, had profound negative effects on local businesses, including fishing and tourism. Most were shut down for a time period during the spill, and lost considerable economic value during that time.” He adds that in meetings in the months after the spill with both the governments of Israel and the United States he had, “Proposed a $1 billion restoration and compensation fund, to be paid by Israel.” By December 2006, the Israeli ministry of justice had rejected this proposal.

Legal recourse

Diab, alongside a team of experts at Lebanon’s ministries and UN bodies, is ‘writing the book’ on legal compensation in relation to war and environmental damages — it is an area of law with limited precedence. Sure, Diab may not have as high a profile as another international legal expert with marital ties to Hollywood but, “If this decision will be translated into legal texts — whether environment or war — it will be important,” Diab blushes.

But the legal justification is not there yet. It has taken several years to obtain these decisions — nine General Assembly resolutions, and a resolution by the United Nations Human Rights Council — yet all are nonbinding. Diab has explored every option available to Lebanon through two reports including what he terms the “dead-ends” — the non-available options that seem plausible but for one reason or another are not. These would include many international conventions, for example the United Nations Convention on the Law of the Sea. “In Lebanon, we already have a problem in that we do not recognize the existence of Israel, so it is very difficult to invite Israel to join Lebanon before some international forums devised by certain treaties and conventions,” Diab explains.

Diab now is in discussions with the other stakeholders to begin preparing a third report looking at which legally binding option is most viable to pursue. “Lebanon now has a nonbinding resolution rendered by the highest institution of the United Nations after the Security Council. What Lebanon needs to do at this stage is see what it can do with it in order to have it enforced somewhere. We have other avenues but I’m not sure yet, it still needs to be studied.”

When pressed, Diab suggests the next step will define the scope of Lebanon’s legal argument, “The International Court of Justice would be a reasonable forum for the next stage, especially in its advisory jurisdiction.”

February 26, 2015 0 comments

Real Estate

(De)sign of the times

by Nabila Rahhal February 23, 2015

written by Nabila Rahhal

“We gradually noticed a few abandoned commercial venues being renovated and then new tenants moving in. They were mainly little boutiques owned by young adults and at first we felt a sense of pride that people were recognizing our neighborhood as a place for creative business activities but now, with all the bars and the traffic and the noise, it’s just too much!” says Agop Barberian, an old time resident and electronics repair shop owner in Mar Mikhael. He recalls how his once almost forgotten neighborhood emerged as a destination for designers less than a decade ago, and how it rapidly turned into what he now compares to an insatiable monster.

Mar Mikhael’s urban fabric

While districts such as Monot and Gemmayze have roared with nightlife since the 1990s, Mar Mikhael was considered a low to middle income, mainly industrial area where many car services outlets, metal workers and workshops could be found. These venues generated reasonable activity during the day, often noisy or smelly, especially when involving car repairs, but the evenings were always calm, recalls Barberian. The area, with its narrow streets and architecture dating back to the 1940s, retained a somewhat charming mode of urban life that was fading away in other areas of Beirut.

Speaking about what makes people appreciate an urban area such as Mar Mikhael, Mona Harb, associate professor of urban studies and politics at the American University of Beirut, explains that it is more than just the old buildings. Rather, according to her, the appeal lies in the very fabric of the district, such as the narrow streets signifying a time before the introduction of private cars to Lebanon, the little gardens in front of buildings where the neighbors gathered, and the stairways facilitating a climb over a steep hill. All of these elements gave the neighborhoods that had developed on the then-outskirts of central Beirut — such as Furn El Hayek, Zokak El Blat, Ain El Mreisseh and Gemmayze — a human side.

Designers move in

This charm was one of the main factors that first attracted those in the arts, crafts and design (ACD) industries to Mar Mikhael. “I fell in love with the wide space when I first saw it and I loved the industrial feel of the area,” says Maria Halios, interior architect and founder of MHD Designs, who transformed an abandoned chocolate factory in Mar Mikhael off Armenia Street into her office and design showroom early in 2009, when there was only Liwan, a contemporary design boutique, on that street.

Rania Naufal, owner of the arts and architecture bookstore Papercup, has been living in Mar Mikhael since 2005 and cites the “vibrant charm” of the area as the reason she opened her bookstore there, a few months after Halios.

Today there are approximately 71 commercial venues rented out to the ACD industry in Mar Mikhael including boutique retail stores, design studios and offices, according to the Mar Mikhael Creative District map developed by Georges Zouain, principal of GAIA-Heritage, with financial assistance from the European Union under the MEDNETA project. GAIA-Heritage is a Beirut based company founded by Zouain in 2002 which provides consultancy services to manage cultural and natural heritage. As part of the EU funded MEDNETA project, GAIA-Heritage launched on January 16 a week long conference entitled “In Mar Mikhael” aimed at regenerating Mar Mikhael and reinforcing creativity in the area.

Harb explains that ACD professionals were attracted to Mar Mikhael because of several factors: its central location, its urban features, its proximity to Bourj Hammoud — where many of the craftspeople are located — and because the rents were low when they first moved in. They did not fundamentally disrupt the social and economic life of the neighborhood.

As Mar Mikhael began to blossom as a “hip” neighborhood where the ACD industry could be found next door to mechanics in an industrialized yet artistic environment, it caught the eye of real estate developers, who saw an opportunity to use the area’s contemporary feel as a marketing tool to develop and sell their properties there. “The designers somehow participated in the promotion of residential real estate as we were used in their promotional brochures. People find it nice to live in a hip area,” says Halios.

[pullquote]With this rapid real estate development, Mar Mikhael has become unrecognizable[/pullquote]

And hospitality venues move in

Around the same time, towards the end of 2010, hospitality developers who were fed up with the high rent costs or overcrowding of places such as Downtown’s Maarad street or Hamra were looking for a new area to expand into and found Mar Mikhael to be perfect for their needs. Like the designers, they were enticed by its proximity to Gemmayze, its low rents and urban heritage charm. Very quickly, two or three pubs on Armenia Street progressed into more than 40 hospitality venues, with more slated to join the mix in 2015.

With this rapid real estate development, Mar Mikhael has become unrecognizable to its long time residents who complain of not finding anywhere to park, of the intense traffic, of the loud noise at night and of having to pick up broken bottles and debris from their doorsteps every morning.

Commercial rental prices were driven up by the boom in the area and landlords who were charging a mere $600 per month for a 50 meter square commercial venue back in 2009 are now asking for, and getting, $3,500 a month, a 483 percent increase. While part of this increase is due to normal market inflation, part is also due to opportunism among landlords.

It’s all about the money

Concentrations of hospitality venues tend to be transient in Lebanon: they have migrated from Monot to Gemmayze to Hamra to Uruguay Street and now to Mar Mikhael, with many already moving now to Badaro. All of these destinations became intensely popular for an average of three years, before the customers and operators moved on. Many landlords are seizing the narrow time frame to maximize their profits and are asking for significantly increased rent from their commercial venue tenants, evicting them when they can’t pay and their rental agreement is up, or paying them the key money they owe them, if they are on the old rental agreement, and giving them a month’s notice to pack their bags.

Victor Hamdjian is standing in front of the small garage where he now works as an employee. He points to the larger garage down the street which he used to operate himself on a property he rented, but has now been rented to a restaurant. Hamdjian names seven other industrial businesses, all in just two alleys off Armenia Street, which have closed down in the past two years to make way for a restaurant or bar. Hamdjian explains that it is not only the increased rents which have driven these businesses away, but says the whole area is changing and there is no room for them anymore.

Zouain explains that a market only thrives by the agglomeration of trades that complement each other, which was the case with the industrial workers in Mar Mikhael and also with the ACD industry today. However, unfortunately this is slowly fading from the area in favor of hospitality venues.

Many of the designers feel that the area is changing in terms of what first attracted them to it and worry that they will not be able to compete rent-wise with the wealthier hospitality venue owners in the long run. “Two years ago, the hospitality investors began moving into the area and so now you see fewer designers opening up here. Restaurants are paying more in terms of rent so commercial real estate owners prefer them as clients as opposed to us designers,” explains Halios, adding that her rent contract will end in June. While she is not sure if her landlord will increase the rental fee, she is confident that her landlord will not rent the venue to a pub as she wants to preserve the street’s quality.

Naufal says her rent has increased since her contract was first issued but is still “viable and realistic.” She adds: “However, I did hear of other landlords in the area who are being extremely greedy at the risk of losing their current tenants and changing the spirit of the neighborhood.”

Halios wishes new young designers would open shops in Mar Mikhael but knows that this is unrealistic at this point and fears that the sense of community that was created among designers in the area is being destroyed. “It’s a pity though because we really built a connection with this area and helped shape it. We have good energy and good communication between us in the neighborhood and organize events among each other for the street,” she says.

[pullquote]Gentrification is not necessarily harmful and there is often a gain for the city and its residents[/pullquote]

Balancing act of gentrification

Gentrification is not unique to Mar Mikhael or even new to Beirut, as Harb explains. Monot and Furn El Hayek went through it in the 1990s, but with less intensity than Gemmayze and Mar Mikhael.

However, adds Harb, gentrification could bring economic opportunities for the city and its residents if it is managed in a way that takes into account public interests. Halios says that some of the restaurants in the area, especially those that open on Saturdays for lunch, compliment their ACD venues and generate some added business for them. “Since the restaurants opened, we have had increased footfall to the area and in our businesses. I am seeing some new faces that are not my usual clients. The positive effect of the presence of such restaurants in Mar Mikhael is that a crowd of potential clients are discovering the area because of them,” says Halios.

As one landlord, who is currently using his property as an electronics repair shop for cars, puts it, “I am asking for $150,000 annual rent for my shop because it is big. If I get it, I will gladly rent it and retire: who keeps on working like this when they can just relax and have money delivered to their doorstep?”

“The challenge is how much one wants to develop an area economically without destroying its heritage. It is a balancing act,” says Zouain, explaining that GAIA-Heritage doesn’t want to prevent construction or harm the economy. Rather it wants to do what should be done in any city that grows in an organic and harmonious manner: balance the interests and needs of the community with the need of the investors. This is what the “In Mar Mikhael” conference is attempting to illuminate.

Harb also speaks of the importance of balancing private economic interests and public interests when it comes to development of a neighborhood with remarkable urban heritage such as Mar Mikhael where gentrification risks are high. “The problem is that we lack a strong public agent, such as the municipality, willing to implement existing urban planning regulations that can protect the public good, of which urban heritage is a key element, and to restrict the freedom of private real estate developers who will always look for ways to enrich themselves,” says Harb.

This lack of regulation applies to residential real estate as well. Real estate developers have been obtaining several small lots, which, by themselves, are not big enough for huge developments, but when joined form a big piece of land which they can then build high rises on, as is evident by the three towers already protruding awkwardly amidst the short buildings of Mar Mikhael. While this is not illegal, not regulating it could lead to Mar Mikhael becoming a jungle of towers and losing its urban identity, says Harb.

The ironic aspect, explain both Zouain and Harb, is that commercial and residential real estate developers, through their unregulated growth and the rising rents they bring to the area, end up destroying the very elements that first attracted them to it, namely its authentic charm. “What is going to happen if we leave the market totally free is that all those who want to buy the developers’ condominiums in Mar Mikhael because the neighborhood has a charming flair will end up living in a place that is as dull as any other place in Beirut and will move on,” says Zouain, adding that this, in the long run, will lead to the rental prices going down again for both the commercial and residential projects.

Through the “In Mar Mikhael” conference, Zouain is hoping to initiate dialogue between the residents, the ACD industry and the investors on how they are all sharing and shaping the Mar Mikhael of today and what their common needs are. His next aim is to make the municipality of Beirut, the Ministry of Culture and the real estate developers aware of the importance of protecting Mar Mikhael’s urban fabric before it is too late. “We are fighting it but I don’t know if we can really do anything: we are trying with our goodwill, the tools and knowledge we have. We will see what will happen but it is very long term,” concludes Zouain.

February 23, 2015 0 comments

Comment

Our small, dependent economy

by Jad Chaaban February 20, 2015

written by Jad Chaaban

Lebanon is a small dependent economy, built on a quasi-complete consumerist system where we import more than 80 percent of our energy, food and most consumed products and services. The country also relies on financial inflows to finance its public debt and domestic consumption, with foreign inflows per year into the Lebanese economy reaching more than 50 percent of gross domestic product in the past few years. As a result, we now have an oversized banking sector, with the consolidated balance sheet of commercial banks in the country growing from 188 percent of GDP in 1997 to 360 percent of GDP in 2013.

Where does all this money coming into Lebanon originate? Remittances from emigrants largely finance domestic consumption. With petrodollars and remittance income increasingly available (but not for long, given the recent fall in oil prices), Lebanon has become extremely reliant on this abundant source of capital. This dependency also manifests itself in economic relationships among various groups within the country: civil servants depend on government salaries and pensions, the state relies on funding from local banks to finance its oversized and inefficient public sector and local banks balance their accounts by relying on constant foreign inflows of capital. This has created a system of economic linkages that is highly fragile and subject to volatility.

The dangers of dependence

Overreliance on foreign capital has anchored profound abnormalities in the local economy. Dependency has had deep impacts on development strategies. While rebuilding infrastructure after the war was essential, the choice of all groups in society (and not only the government) was to develop an import dependent services sector. The banking, real estate and tourism sectors all rely on foreign transfers. In parallel, the society is mainly consuming and not saving, with most families and enterprises in debt. The agricultural and industrial sectors have been falling into backwardness, and dependency has even impacted educational curricula, which are now geared towards training individuals to work in the dependent services sectors, both in Lebanon and abroad.

With an over reliance on incoming financial flows, the system has created monopolies around these sources of economic activity. Powerful lobbies have formed around the financial flows into Lebanon: if you control the pipelines of commodity, monetary and human flows into the country, then you hold the true economic and political power. Proof of this hegemony is apparent in the corruption and nepotism in the Customs Administration, the concentration of the dealership and distribution sectors under sole dealership privileges, the big banking lobby not investing enough in the local economy, the powerful lobbies of petroleum imports and construction, and the continuing control of human flows of migrant workers by the security and intelligence apparatus. At least half of the markets in Lebanon may be considered to have monopolistic or oligopolistic structures. Even at the community level the balance of power is concentrated in the hands of the groups controlling economic flows into and out of the community. Political and religious leaders of nearly all communities excel in maintaining and strengthening a dependent relationship with their followers, denying them massive development that would otherwise undermine the leaders’ authority.

Khalil Gibran wrote in the early 1900s: “Pity the nation that wears a cloth it does not weave, eats a bread it does not harvest and drinks a wine that flows not from its own wine-press”. More than 100 years later, nothing has changed in this small country.

February 20, 2015 2 comments

Business

Raise your spirits

by Nabila Rahhal February 19, 2015

written by Nabila Rahhal

Whether enjoying a glass of single malt whiskey after a long day, celebrating a special occasion with champagne, or simply catching up with friends over a couple of cocktails carefully prepared by a mixologist, it seems that alcoholic beverages constitute a part of life for many of us. While some other industries, such as the hospitality or retail industry, saw a decrease in their overall revenues in 2014 when compared to 2013, the spirits industry saw a growth in that period, aided by an active end of 2014.

2014 versus 2013 in terms of sales and growth

According to Naji Hmouda, business manager at Neo Comet, the spirits distribution company which is part of Fattal Holding and distributes Bacardi, Martini and Dewar’s, among others, 2014 started out even worse than 2013 for the spirits industry from a macro perspective, due to the assassination of former Finance Minister Mohamad Chatah. The attack occurred a few days before New Year’s Eve 2013 and caused many people to cancel their celebrations, which in turn led to an accumulation of stock for many spirits.

[pullquote]The Lebanese consumer has become almost the sole client of the hospitality sector[/pullquote]

Carlo Vincenti, owner of G. Vincenti & Sons who says his spirits portfolio includes Poliakov vodka and Label 5 whiskey, also considered the market at the start of 2014 to be tough. This was due to the continuing effects of the economic and social difficulties that have affected Lebanon, including a combination of the repercussions of the Syrian crisis and the dwindling economic capabilities of the Lebanese consumer, who has become almost the sole client of the hospitality sector given the lack of tourists, according to Vincenti.

Yet, Vincenti says his company added the Beam Group — which includes Jim Beam bourbon and Teacher’s whiskey, among others — to their portfolio in 2014. The company managed to double Beam Group’s volume of sales in Lebanon from 2013, making 2014 a good year overall for the Vincenti Group.

According to the spirits distributors Executive spoke to, the summer season was also somewhat sluggish in terms of sales but took a sharp upward turn during Eid El Fitr. Sales peaked during the holiday season in November and December 2014, which usually accounts for 40 percent of a spirits distributor’s annual sales. Hmouda explains that, once a sense of security and stability was restored in Lebanon towards the last quarter of 2014, they felt the positive effects in their profits and were able to make up for most, if not all, of their losses of the first half of the year, calling December 2014 a “phenomenal and amazing” month, comparable to some of the best Lebanon has seen in the past 10 years.

Etablissements Antoine Massoud (EAM), distributor of SKYY vodka and Jose Cuervo tequila, saw a growth of 15 percent in spirits sales in 2014 as compared to 2013. This was thanks to a strategy where EAM let go of some brands in their portfolio and added new ones, all the while “capitalizing on a few but bigger and better brands than we used to represent in the past,” says Anthony Massoud, managing director of EAM.

Diageo, the multinational alcoholic beverages company and spirits producer with a $73.3 billion market capitalization, is mainly known for Johnnie Walker, which held 31.6 percent of the market share in whiskey consumption in Lebanon in 2013, according to the International Wine and Spirit Research (IWSR). With their regional offices now in Lebanon, Diageo considers the country to be “the showcase of the Middle East and the leader of nightlife in the region,” according to Ziad Karam, MENA corporate relations director for Diageo.

In fact, the company witnessed solid growth of slightly more than 15 percent, according to Jad El Osta, IMC general manager at Diageo. “We basically followed the consumers’ taste and location, offering them a Diageo brand for every income level and every new drinking trend and location,” says El Osta.

[pullquote]“Consumers are looking for more complexity in what they drink”[/pullquote]

What the Lebanese are drinking

Not all spirits are created equal and some types had a better year than others, according to the brand representatives and owners Executive spoke to. After skyrocketing for the past five years and increasing by 13.4 percent between 2008 and 2013 according to the IWSR, vodka consumption among the Lebanese in 2014 either stagnated with some brands or increased at a normal pace with others. “Consumers are looking for more complexity in what they drink and, whatever you do, vodka will always be considered a mixer,” says Vincenti.

The exception to this trend seems to be the vodka brand Grey Goose, with Hmouda saying that, “Fattal had excellent double digit growth in the vodka category in 2014 driven by the deals we did and the brand Grey Goose, but I cannot say it is the same for everyone.”

Whiskey, the third most consumed alcoholic beverage in 2013 after beer and mixed drinks according to the IWSR, remained the most consumed spirit in Lebanon by far with 471,000 nine liter cases purchased in 2013, almost double the second largest category of spirits consumed that year, vodka. Within that category, there was growth in the single malt whiskey consumption, though the volume remained small when compared to overall whiskey consumption, according to Hmouda.

This increase was driven mainly by the global trend towards single malt consumption and by more maturity and awareness regarding the quality of spirits among the Lebanese consumer. Vincenti saw double digit growth in their single malt categories and Diageo, which owns 28 malt distilleries in Scotland, believes they managed to attract many consumers in this category through their strong market presence and wide portfolio of malts.

EAM took the single malt trend to another level by opening the Malt Gallery in December 2014, a high end spirits concept store with a focus on malt whiskey. “We saw that there are a lot of wine stores but no conceptual liquor stores. Our aim is to educate the Lebanese consumer on this trend and develop the premium category in Lebanon through whiskey classes, dinners and trainings” says Massoud.

Closely related to the growth of single malt is the rising popularity of mixology, i.e. mixing cocktails using premium spirits, another global trend that Lebanon is now embracing. “The trends are moving towards cocktails and the good thing is that many of the bar owners are taking it very seriously and are training their staff in presentation and mixing,” says Hmouda, adding that such premiumization brings a better, more specialized type of business to the distributor, while also lending diversity and more complexity to the spirits sector in Lebanon.

Marketing the liquor

Capitalizing on these trends and on spirits consumption in general necessitates that each distributing company develop a competitive growth strategy which plays on their brand portfolios’ strengths. “We players try to find where we are competitive and where we can add value based on these trends. We at EAM are reorganizing our strategies and portfolio and implementing this with our trade partners,” says Massoud.

Sustaining a strong market share and ensuring annual growth of a company’s brand consumption requires targeted and specialized marketing such as visibility in venues, sponsorship deals with venue owners and special activities and events — referred to as below the line advertising — as opposed to mass media marketing through traditional media channels or above the line advertising, explains El Osta. “We only began to spend on above the line marketing last October but in marketing below the line, we are very strong and present, considering such activities volume generators. Instead of reaching the consumer through TV ads, we reach them directly in the venue through the bartenders or shop owners whom they trust. The market is moving from the bulk towards the differentiated and specialized,” elaborates El Osta.

Other distributors are also focusing on below the line marketing, with Massoud attributing 25 percent of what he calls their trade marketing budget to secure their brands’ visibility in hospitality venues through sponsorship deals and quality presence in places such as Skybar where they are the main vodka partners.

According to Hmouda, Fattal’s marketing budget is mainly being spent on below the line marketing. “In a better situation, half of that budget should be on advertising, but today with all the pressure on maintaining relatively reasonable prices, some of our marketing investment is going behind that. Until such times when we have steady growth, we will look back at our strategy of spending to have more consumer and image communication rather than below the line marketing,” he says.

Challenges in the on trade and off trade sectors

Despite 2014 being a relatively good year for spirit vendors, alcohol distributors do not operate in a vacuum and the challenges facing the Lebanese economy certainly had an effect on their business.

Regarding the on trade sector, or the hospitality venues, Vincenti explains that one issue they had to deal with a lot more in 2014 was delays in payment from hospitality venues, which were having a difficult couple of years due to the economic situation in Lebanon. Hmouda says Neo Comet has also had to deal with more deferred payments over the past three years, calling the situation “dangerous” but saying that this year was better than the two preceding it.

[pullquote]“New venues open at a very fast rate in Lebanon and close at an equally fast rate as there is no regulation”[/pullquote]

“New venues open at a very fast rate in Lebanon and close at an equally fast rate as there is no regulation or study into their financial feasibility. We [spirits distributors] end up losing the most as we deal with these operators who can close down anytime if their business fails, sometimes still owing us money,” complains Massoud, explaining that they have become cautious in who they deal with and are focusing on the big operators in Lebanon who they know are sufficiently reliable.

Such a situation has led to low morale both among hospitality venue owners and their distributors, who themselves have their payments to make and their quotas to maintain with the companies they represent.

The off trade sector, or the retail stores, according to the distributors interviewed, account for the bulk of their sales and generally constitute a more significant market for them as opposed to the on trade sector. The off trade sector saw an increase in their spirits sales, according to Vincenti, because people consumed more alcohol at home in 2014, especially around the New Year which saw many celebrations held at home. “This is a good thing for us because when people consume alcohol at home, they consume more,” says Vincenti, adding that reaching the consumer is easier in the off trade division as all the brand choices are right on the shelf, as opposed to a bar which is influenced by exclusivity deals with distributors.

The off trade still represented challenges to the spirits distributors, namely due to the fact that the number of retail outlets increased significantly in 2014. “Supermarkets in Lebanon are cannibalizing each others’ business through prices which are eating away at their profit margins. Their businesses are not operating in a healthy way and when this happens, I am the one with the supplier who has to pay for this in one way or another, by either delaying payments or granting them additional requested terms such as discounts or marketing incentives,” says Vincenti.

Whether in the on trade or off trade sector, Lebanese will continue wanting to have a good time and so, as long as this attitude prevails, spirits distributors and producers in Lebanon will always have a reason to toast.

February 19, 2015 0 comments

Economics & Policy

Running on empty

by James Haines-Young February 18, 2015

written by James Haines-Young

We were all completely shocked,” says Shams, a Syrian refugee and mother of two from north of Homs province, commenting on December’s announcement by the UN World Food Program (WFP) that it had suspended payments of food aid to Syrian refugees. “It really bothered us because everything we get, we get from the UN,” she explains.

After months of warnings, the WFP simply ran out of money and was forced to delay the payment of vital assistance to 6.35 million Syrians displaced by this nearly four year long conflict. Suddenly, refugees across the region who rely on aid handed out by the international community had to go without this vital lifeline.

[pullquote]Funding troubles for the Syrian crisis appear unlikely to be a short blip, but part of a downward trend[/pullquote]

When one of the world’s largest providers of fundamental emergency aid starts to experience major funding issues — potentially leaving millions of people in six countries without assistance — it causes concern for both refugees and the region as a whole. Unfortunately, funding troubles for the Syrian crisis appear unlikely to be a short blip, but part of a downward trend, which in the coming months and years could also cause problems for many other agencies reacting to the crisis. In October 2011, just seven months after the start of the Syrian crisis, the WFP started an emergency operation inside that country. At the time, the response was localized and relatively small scale, initially only targeting 50,000 individuals for a period of three months with a total budget of $1.9 million. As the conflict rapidly expanded, so did the operation of the WFP: by the start of 2013, they were targeting 1.5 million people; by October 2013, this had increased to 4 million, and on the eve of 2014, 4.25 million Syrians were receiving assistance across the Middle East. Today, nearly 6.3 million Syrians receive food packages or assistance to buy food in Syria, Jordan, Lebanon, Turkey, Iraq and Egypt — a project with a total budget of $2.2 billion.

What the WFP provides

Inside Syria, the WFP has been buying and distributing food directly to roughly 4.25 million internally displaced persons (IDPs) through 27 partner organizations that work in all of Syria’s 14 governorates. However, unlike many of the countries in which the WFP works where food itself is scarce, local markets in many of the host countries for Syrian refugees had the capacity to supply the necessary food; the issue for most refugees was simply paying for it. Therefore the WFP moved from its traditional method of distributing food parcels to a printed voucher system. This allowed people to exchange the vouchers for food of the same value, at a number of shops.

But by October 2013, the refugee population had swelled so much that the printing, distribution and reconciliation of the printed voucher system had become incredibly inefficient. In its place, the WFP introduced cash cards. The card acts, and looks, the same as any other debit card — it is even issued by MasterCard. The only distinguishing feature is that it has the words ‘humanitarian aid’ written across the top. The WFP credits the account monthly, allowing families to shop as they need throughout the month. As with the voucher system, refugees are still tied to shopping at particular participating stores. However, the main advantage of the cash card over vouchers, for the recipients, is that families can now shop when they want and need to rather than having to receive all their food in two installments when they cash in a printed voucher. It is also more secure as lost cards can be cancelled and refugees need to show proper identification and their UNHCR registration certificate (which has a unique number that is also stamped onto the card) in order to use it to purchase food. According to the WFP, about 88 percent of those the WFP assists outside of Syria and Iraq are now on the cash card system. In parts of Iraq the WFP and partners still provide direct food distribution as, due to the ongoing security situation, the market is unable to provide the food needed.

[pullquote]”Donors were very generous in the early years of the Syrian crisis but we are nearly in the fourth year now”[/pullquote]

What went wrong

Despite these improvements, the WFP has run into a major problem. At the beginning of December, the WFP announced that it would be suspending operations due to a lack of funding. “Donors were very generous in the early years of the Syrian crisis but we are nearly in the fourth year now. Since August we have been starting to run out of funding and we started warning [donors] when we saw this coming. Despite this, in December we had to cut funding completely,” says Joelle Eid, communications officer for the World Food Program’s Syria response. Luckily, after a mass appeal to the public, as well as private and national donors, the money to cover December was raised and cash cards were recharged on December 9. However, as winter storms and heavy snow hit the region, including Lebanon and Jordan, conditions worsened for many and a huge question mark hung over what would happen after January.

The WFP has assessed the basic level of subsistence in Lebanon at $30 per person per month. While the cash cards give individual families autonomy on how they use this to feed their family, there are rules about what can be bought. The WFP restricts the money to buying food items, while clothing and cleaning products for example are not permitted. This is enforced through a contract with shopkeepers whereby they agree to a set of terms — including making sure that the rules on what’s purchased are followed and not hiking up prices for refugees — in order to continue being an eligible partner; the WFP and its partners then check up on shops to ensure this is followed. Upon receiving the card, families are given a seminar on nutritional value and how to make the most nutritious food possible with the available budget and ingredients. “I go and buy oil, stock, rice and macaroni,” says Hamda, a Syrian mother of two from Yarmouk who has been in Lebanon nearly two years. Although Hamda says that she has been getting by, she insists that things are far from easy. “Ninety dollars for a month just doesn’t buy anything for three people,” she says, adding that she doesn’t buy any meat as it is expensive and she is very skeptical of the quality and age of the meat on sale in her local shop that takes WFP cash cards.

Where the issues came from

The WFP relies fully on voluntary donations from national governments, international organizations, companies and private individuals. While private donors made up the 11th largest funding source in 2014, the scale of the organization’s Syria response necessitates donations on a scale that is hard to find outside of direct government funding. The WFP needs approximately $120 million a month in order to adequately provide basic food assistance to 4.25 million people in Syria and 2.1 million outside of Syria. According to Eid, when funds ran dry in December, the WFP was $64 million short of what it needed to fund operations until the end of 2014. After a major emergency funding campaign, which included a social media push with the hashtag #ADollarALifeline, almost 14,000 individuals and private sector donors in 158 countries contributed $1.8 million dollars. A further $52 million of the final $88 million funds raised in December were a direct donation from Saudi Arabia. The World Food Program entered the new year with just $20 million, which had already been earmarked for operations in Syria.

[pullquote]”People are more likely to assist with natural disasters like floods, tsunamis or volcanoes.”[/pullquote]

The WFP budget summary at the end of 2014 highlighted that the “WFP received $365.8 million, or 40% of the requirements, for its food assistance programme [inside Syria] in 2014. Late and insufficient resources forced WFP to adjust the composition and size of its GFD food basket [General Food Distribution basket] almost every month, and resulted in lower calorie food baskets than had originally been planned.”

“It’s always different if it’s a man made disaster rather than a natural one,” explains Marc-André Hensel of World Vision, one of the WFP’s partner organizations that manages food aid in the midwestern areas of Lebanon’s Bekaa Valley. “People are more likely to assist with natural disasters like floods, tsunamis or volcanoes. Syria is this big confusing monster [and] we are all, including the international community, just clueless what to do [about it],” he continued.

Eid is stoic about the current situation, “It’s quite clear now that funding for the region will not be as generous as last year or the year before. The more the conflict is prolonged, the more there are other issues that require donor attention — the Ebola response, for example. Funds are coming in at a slower pace and are less … ‘driven’. This is something we have to get used to and we’re forced to respond as per the status quo. So if we get 70 percent funding, then we can plan for the next period accordingly. There are difficult choices we all have to make.”

Funding gaps have resulted in massive delays in aid (World Food Program)

What the WFP is dealing with now

The funding crisis highlights one of the biggest challenges now facing the program: forward planning has become almost impossible. In the early phases of the response, the WFP could plan months in advance, preplanning for acute emergencies and, crucially, ensuring a constant supply of food to Syria and Iraq where physical food parcels are still distributed. In Syria, it can take up to six weeks from purchase to supplying warehouses across Syria before aid reaches the IDPs and refugees, as transport is slow and there can be delays. This means that a funding gap of even a few weeks can cause substantial delays in people receiving food in Syria.

In mid January, the WFP announced its basic needs for the next three months. For the period of January to March 2015, the WFP will require $300 million to distribute 70 percent of the aid it had previously been disbursing. The latest figures show that at the moment the WFP has about $257 million, 86 percent of this funding requirement. While it will endeavor to continue to provide for all 6.35 million refugees they have been assisting with aid, the amount each person will get will have shrunk by at least 30 percent. In Lebanon, this translates as a reduction from $30 per person per month to just $19 per person per month.

The knock-on effect upon refugees is the most pressing issue for the WFP, but funding problems also impact the organization as a whole. Shortages force the WFP to make revisions to the entire organization, from staffing levels to offices. It constantly has to balance operating costs with delivery to make sure that as much as possible goes to helping people on the ground, but if it is forced to cut back staff and centers too much, it risks not being able to respond to the needs of the people it is trying to help. The operational costs of the WFP last year were approximately 5.4 percent of the total budget for the Syria mission, with staff salaries the most significant single cost.

A more stable solution

Neither Eid nor Hensel believe that a more stable funding situation is possible under the current systems. The way that aid is given means that it is not possible to ensure future funding as it is completely reliant on the generosity of donors, and at a time when many Western nations are undergoing government cutbacks and austerity, foreign aid budgets are a tempting thing to cut.

[pullquote]The amount [of aid] each person will get will have shrunk by at least 30 percent[/pullquote]

At the start of 2015, the UN formed the Regional Refugee and Resilience Plan (3RP), its latest annual outline of the crisis that brings together the national plans in Lebanon, Jordan, Iraq, Turkey and Egypt into a single unified regional response. The 3RP states that there is a need for $5.5 billion to help 3.4 million Syrian people outside of Syria in 2015, as well as 2 million members of the host communities. The 3RP is just one way that agencies, including the WFP, are trying to ensure that the Syrian crisis does not fall off the radar of international donors. While today the WFP is having funding issues, it is by no means the only organization experiencing a more difficult working environment.

January and beyond

January’s reduction in cash card payments was not the first cut refugees had seen, although previous shortfalls had been made up in a second payment. Such remuneration seems unlikely in this case. “The prospects are not too good this year,” explains Hensel. Means testing is almost impossible, Hensel points out, in part because the needs and situations of individuals can change on a weekly or even daily basis.

There are now basically two options for the WFP and partners, like World Vision, in the short term. The first option, as has happened this month, is to reduce the amount paid out to all recipients so that they can continue to give everyone at least something. The second option is to highlight vulnerable groups and then prioritize assistance to these over others. Hensel believes that groups such as children under five, the elderly and the disabled are likely to be prioritized over other groups during the next year. There are also programs underway to identify the most vulnerable areas and groups, although this will take several months to have an effect.

Other organizations are looking for options to fill the gaps. “This is not such a good situation because if per month we’re looking for $30 million, what does $1 million or so mean? It’s a drop in the ocean. [At World Vision,] we have not agreed on any one-off payments because our supporters want something more sustainable, what happens the next month or after that?” says Hensel.

February 18, 2015 0 comments