Finance

Stunted growth

by Livia Murray
written by Livia Murray

As Lebanon’s banking sector continues to be as solid as a rock the financial sector is perhaps its deprived younger cousin. However, many financial firms and boutiques do stake it out from their headquarters in the heart of glossy downtown, adding to a space already crowded by investment units of commercial banks and financial advisory firms.

[pullquote]There seems to be a lot of Lebanese money lying around … merely gathering dust[/pullquote]

Crowded, that is, because there is not too much action in Lebanon on the financial services front, despite an estimated untapped offshore Lebanese wealth of $120 billion in assets, according to Philippe Sednaoui, chief executive officer of Audi Private Bank, in addition to our $150 billion in commercial banks deposits as of mid-Q3. In other words there seems to be a lot of Lebanese money lying around, which, at least concerning the money sitting in Lebanon, is not being propelled into investment ventures, but is merely gathering dust alongside its dues of roughly 3 percent annual interest, which it has a claim to by virtue of being a bank deposit.

Though the offerings in the financial service sector delve into wealth management, brokerage, advisory services, private placements, and even long and medium term deposits and lending to name a few, there is not much traffic in any of these financial lanes, and by all accounts, deals in this line of work in Lebanon frequently remain on the small and personal side.

Small and personal, however, is not something which even the brokers and wealth managers, so keen to see a pickup in deals for the financial sector, are able to quantify. Little data is available on the profits and turnovers of the financial sectors industries, which, unlike some of the big commercial banks listed on the Beirut Stock Exchange (BSE), are forced to be transparent.

Raed Khoury, General Manager of Cedrus Invest Bank, reflecting the general attitude of those working in Lebanese financial markets, says that he has “no idea” regarding the size of the market for financial services in Lebanon, as no statistics are made available, but that it certainly is “not a mature market.”

Missing in action

The fact that no financial firms are listed on the stock exchange is not only detrimental for our data collection purposes. In a life sized economy, not being listed on the stock exchange correlates to being small in size, whether in terms of revenue or turnover. Although in Lebanon the financial service business is unquantifiable but small from a macroeconomic perspective, the lack of listed companies in this sphere is due to a wider and more general trend among companies to not list. That is to say that in Lebanon there is little incentive for companies to list, making for rather inactive capital markets.

To get into details there are a grand total of 11 companies listed on the BSE, with a market cap of $11.3 billion as of October 31, 2014, up from $10.6 billion from the start of the year, according to EconoMena. The BSE’s average daily traded volume in the first 10 months of 2014 stood at 393,000 shares, up 80 percent from 218,000 shares in the full 12 months of 2013, according to calculations based on data provided by EconoMena on the Beirut Stock Exchange. The average value of traded shares was $2.7 million in the first 10 months of 2014, up 70 percent from $1.6 million in 2013, extrapolated from EconoMena’s data on the BSE.

[pullquote]Lebanon is far from having functional capital markets[/pullquote]

Though these may seem like impressive increases, the amounts under consideration are small compared to their regional stock exchange equivalents, and therefore likely to greatly fluctuate as far as year on year percentage increases go. Lebanon is far from having truly functional capital markets, something which is of great detriment to the financial industry. Capital markets, naturally the go-to place to buy and sell financial products, are an obviously necessary component of any healthy and booming financial services sector. As long as there are no serious capital markets, there will be little room for a financial services industry in Lebanon.

While the Capital Markets Authority (CMA), whose mandate is to regulate and oversee financial markets, has recently started to step up its game now that it has taken over regulation activities from Banque du Liban (BDL), it is not what you might call omnipresent and omnipotent. The Capital Markets law, passed in 2011, brought capital market activities under the control of an independent overseeing body, which was an upgrade from their former status as a peripheral activity of the BDL. But they are still facing enforcement and regulation issues as they have not yet established a sanctions committee.

Besides some enforcement issues, the problem with capital markets is still one of supply and demand. Investors and companies alike remain unconvinced of the stock exchange as a vehicle to list and to invest. Unsurprisingly, investors are largely unimpressed with Lebanon’s stagnant growth, whereas Lebanese businesses, for the most part family owned, largely rely on money from relatives, friends and bank loans, rather than capital increases for a percent of ownership.

Money managed

All in all, the financial services industry remains small. When Executive sat down with bankers for our wealth management special report at the end of Q3, none of them registered assets under management in Lebanon of over a few billion dollars, mere crumbs compared to global Lebanese wealth. And the total number remains an unknown quantity, even to those who would benefit from such knowledge. But though estimates of total Lebanese wealth are not clear, one thing that is clear is that wealth managers in Lebanon have not been able to capture a large slice of Lebanese wealth. Assets Under Managements (AuM) booked in Lebanon at Audi Private Bank, the largest Lebanese wealth management operation according to BankData’s Dany Baz, stand at around $3 million says Philippe Sednaoui, chief executive officer of Audi Private Bank, which has offices in several Middle Eastern and European cities.

Reeling more money in is a challenge that, beyond Q3 of 2014, continues to be an issue for your typical money manager with any concern for seeing turnover increase in the coming years. High net worth individuals (HNWIs) have yet to be wooed en masse to throw their money into wealth management. Bank deposit interests in Lebanon have been historically higher but still hover around 3 to 4 percent, and seem to be the preferred location for loose money.

But wealth managers interviewed in Q3 stated an increasing appetite among investors to diversify their placements, as well as an increasing general awareness of finances. According to Roula Habis, managing partner at Optimum Invest, HNWIs are beginning to better understand the advantages of riskier, long term investments with the potential of greater returns as an advantageous vehicle through which to store their wealth.

[pullquote]Private equity is another vehicle for HNWIs to make higher returns on their cash[/pullquote]

Investment ideas

Private equity is another vehicle for HNWIs to make higher returns on their cash. But without counting venture capital funds which fall into a different value and risk range, private equity firms in Lebanon, according to both Zawya’s private equity department and other sources consulted by Executive, can be counted by the loneliest number, one.

That is not to say that the one known firm managing private equity funds in Lebanon is lonely in the sense that its fund managers wish for friendly competition. On the contrary, the EuroMena funds belonging to Capital Trust Group, which are managed from Lebanon’s very own Starco, are benefitting from little competition at least at the local level by having a large deal flow at their disposal, according to Romen Mathieu, fund manager of the EuroMena funds.

Regionally, there have been about a dozen or so funds raised each year since 2009, according to data provided by Zawya, with 2011 and 2012 seeing the largest increase in the number of funds raised, with 20 in both years. Amounts of money raised, however, have stagnated close to $1 billion each year, with the exception of 2014, in which by October the eight funds had raised $1.9 billion, more than double 2013’s $859 million, according to Zawya.

Concerning EuroMena, their funds keep getting bigger and bigger. Their first EuroMena fund raised $63 million in 2006. In 2009 they launched EuroMena II which received $91 million of committed capital. Their EuroMena III fund had its first closing of $100 million in June, and is preparing for a second closing in Q1 of 2015 according to Mathieu.

EuroMena III will invest in six to eight investments if they close between $100–$150 million, and seven to nine investments if they close at $200 million, according to Mathieu, focusing on companies in the MENA but excluding the Gulf Cooperation Council (GCC), as well as a new regional addition that wasn’t covered in the previous funds: Africa. While the fund managers concede that the bigger reason for them operating in Lebanon is that they are Lebanese, they also noted advantages to being in a region that is central to their investors and ripe for their investments.

Beyond private equity, a more ordinary channel to funnel money for the future — and in this case not only reserved for the uber rich — is the investment component from life insurance policies. Here, life policy buyers at insurance firms can choose between a savings component to their life insurance policies, with rates above 4 percent as a standard in Lebanon for the initial years, or they can opt for unit linked products managed by the investment managers, which would have a higher return.

[pullquote]The financial service sector in many ways has yet to fully take off in Lebanon[/pullquote]

According to ACAL (Association des Compagnies d’Assurances au Liban), life insurance premiums with a saving component made up 65 percent of a total of $228.4 million worth of life premiums for the first six months of 2014, with the remaining 35 percent being premium-only policies. Out of these 65 percent, $59.5 million were in policies with a unit-linked saving component, and $89 million in protection with savings contracts.

If you are an institutional investor, a HNWI, or a regular middle class person with an appetite to save, Lebanon’s fine wealth managers, brokers, and insurance fund managers are more than happy to sell products catering to the needs of your category. However, the country’s talent in the global financial industry far surpasses local Lebanese demands for financial products — and despite the fact that there are many Lebanese working in finance around the world, the financial service sector in many ways has yet to fully take off in Lebanon.

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Towards energy independence

by Svein Aass
written by Svein Aass

The dictum ‘the Stone Age did not come to an end because the world ran out of stone’ still rings true. The transition to forms of energy other than oil, gas and coal will happen — and is happening — and therefore will continue to happen in 2015.

In fact, 2015 will serve to remind us that the world will not come off fossil fuels for many decades. Globally, we get a miniscule 0.3 percent of our energy from solar and wind power, and will only get 3.5 percent from them in 2035, according to the International Energy Agency. In 2015, the world will get a full 82 percent of its energy from fossil fuels.

Therefore, in 2015, Norway will continue to offer assistance to 15 developing countries in their efforts to manage petroleum resources in a sustainable manner. Oil and gas play an important role in an increasing number of developing countries, and have the potential to generate economic and social development in several cases. However, it has proven difficult to translate resource riches into improved well being for ordinary citizens. In over four decades of managing oil and gas resources, Norway has learned the importance of: strategic government stakeholdership; strong and competent institutions; a steady build-up of technical knowledge; an advanced regulatory system with high respect for the environment and safety; and perhaps above all, society’s determination to secure national control over petroleum resources.

Norway thus launched the ‘Oil for Development’ program to share this knowledge in 2005, and has been providing petroleum related development assistance to Lebanon since 2006 — with major achievements made in the development of a legal framework for the petroleum sector, as well as capacity enhancement in government institutions, such as the successful Lebanese Petroleum Administration (LPA).

Support through the ministries

In 2015 support will be flowing to the fields of resources, safety, environment, and revenue management through the relevant ministries. The main approach will be to support capacity development through institutional collaboration. Program activities will be targeting the LPA, the Ministry of Energy and Water, the Ministry of Finance, and the Ministry of Environment. Other relevant ministries and stakeholders may also be involved. The activities will be assisted by petroleum management experts in Norwegian public institutions, including the Norwegian Petroleum Directorate, the Norwegian Environment Authority, the Petroleum Safety Authority in Norway, the Norwegian Oil Taxation Office and the Norwegian Coastal Administration. The International Monetary Fund will provide support with revenue management.

[pullquote]In 2015, the quest for energy independence or diversity will once more come to the fore[/pullquote]

Furthermore, strengthening accountability and transparency, including providing support to civil society actors, can be foreseen in 2015. The program is expected to target the main transparency actors, such as decisionmakers, civil society organizations, the media, as well as public control institutions, including parliament. The LPA and related government institutions will benefit from a more informed and fact-based public discussion, enhanced from customized training courses, joint conferences and delegation visits to Norway. Accountability and transparency are important factors to ensure the success of the first offshore licensing round and the development of the petroleum sector in Lebanon. Transparency would allow national actors in the accountability chain to be able to hold the government to account for the management of national resources. Transparency is also an important factor in preventing corruption.

In 2015, we will see Lebanese stakeholders come together to launch the process of exploration that could speed up the petroleum era in Lebanon, as has already happened in neighboring countries.

In 2015, the quest for energy independence or diversity will once more come to the fore. This has been highlighted by the unwise use of the oil and gas ‘weapon’ by some exporting countries. New technologies, new petroleum provinces and new forms of energy will all play a role in increasing energy autonomy and reducing vulnerability. Norway will continue to play a constructive role in 2015 in this regard. Lately, Norwegian companies played a crucial role in helping Lithuania break the stranglehold of foreign control of its energy supply. Liquified natural gas and the required transport capacity were both provided. For Lebanon, the financial and energy independence that could result from the export of petroleum could reduce political influence from abroad — and 2015 could be the start of such a process.

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Floating an idea

by Mona Sukkarieh
written by Mona Sukkarieh

The Eastern Mediterranean is a complex environment for gas producers and countries aspiring to become gas exporters in the next few years. Not only do they have to deal with the usual industry challenges, but also with an even tougher factor: geopolitics.

A recent report commissioned by the Norwegian government highlights such difficulties by indicating, among other things, that Israel faces a high risk for exporting gas. The report anticipates that the country — which boasts the most developed oil and gas sector and the largest proven reserves among newcomers in the Eastern Mediterranean — will have more difficulty exporting its excess gas than, say, Brazil, Angola or Mozambique. Cyprus faces similar difficulties. Its plans to build a liquefied natural gas (LNG) plant in Vasilikos are in doubt since such a plant would require more gas than has been discovered so far in the Aphrodite field to justify the construction of this multibillion dollar facility, although ongoing exploration in the island’s exclusive economic zone could result in the discovery of new gas fields.

[pullquote]Floating LNG is rapidly becoming a viable solution for offshore gas development[/pullquote]

On paper, the most reasonable way to monetize gas from Aphrodite (and parts of Israel’s much larger Leviathan field) is through a pipeline to Turkey, a large market seeking to diversify its gas supplies. But this option is not feasible unless significant progress is made in the negotiations between Greek and Turkish Cypriots. A pipeline to Greece is not an easy feat and carries an exorbitant price tag. Egypt, with its large market and two underused LNG plants in Damietta and Idku, could be an option, either to supply the local market or to liquefy the gas and export it to world markets. Both Israelis and Cypriots are negotiating potential deals with Egypt, sugges-ting there will be little capacity left for others to use if these deals are confirmed.

 

A choice of options

In addition, and besides the network of regional pipelines connecting countries in the Eastern Mediterranean, two other options deserve to be highlighted.

Floating LNG (FLNG) is rapidly becoming a viable solution for offshore gas development, with four projects already in the construction phase and 10 more in the design phase. The first examples — Petronas’ PFLNG1, off the coast of Malaysia, and Shell’s Prelude, off the coast of western Australia — are expected to be operational by 2015 and 2017 respectively. Construction costs have not been disclosed but industry experts put the price of Prelude between $10 and $12 billion, more costly than a land based facility. However, costs are expected to be slashed with experience, and subsequent models are expected to require significantly less investment than an onshore LNG plant. When Australia’s Woodside Petroleum attempted to acquire a stake in Leviathan, it did not hide its preference for a floating LNG facility. Negotiations collapsed in part because the Leviathan partners have changed their plans for the development of the field, focusing on supplying regional markets via pipelines during the first phase of the development. Studies are being conducted for the second phase of development which, according to operator Noble Energy, is anticipated to be a floating LNG system.

New horizons

Whereas the main advantage of LNG, floating or otherwise, is the flexibility it offers producers in terms of markets — allowing exports to further, sometimes more lucrative destinations — a new technology currently being tested restricts exports to regional markets but offers producers a major benefit: the ability to develop offshore gas fields, which would have otherwise remained stranded for economic, geographic or geopolitical reasons.

[pullquote]FCNG could be viewed as an economical option to monetize offshore gas fields that are too small[/pullquote]

Floating compressed natural gas (FCNG), or marine transport of CNG, can be up to 40 percent less expensive than FLNG, compression being much simpler than liquefaction and thus much less costly. In 2006, the American Bureau of Shipping approved construction of the first Coselle ship, a proprietary CNG transport technology developed by Canada’s Sea NG. But as with every new technology, the main challenge was to find a first client willing to make use of it. In July 2014, the Indonesian state owned electricity company PT PLN ordered the first ever CNG carrier, which will be built in China, to transport gas produced in East Java to the island of Lombok. In August, Reuters reported that Morgan Stanley is looking to build and operate a compression and container loading facility, which will have the capacity to ship 60 billion cubic feet a year of compressed natural gas and export it to countries in Central America and the Caribbean. The project is in doubt, due to increased hostility towards banks’ involvement in physical commodities, but the idea of marine transport of CNG seems to be making headway. 

For Eastern Mediterranean countries, FCNG could be viewed as an economical option to monetize offshore gas fields that are too small to justify costly investments and where pipelines are difficult to implement. The compressed gas can be transported to markets within a 2,500 kilometer distance. From the Eastern Mediterranean, this puts markets in southern Europe within range.

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Economics & Policy

Unexplored potential

by Matt Nash
written by Matt Nash

A political decision is needed in 2015 for Lebanon to begin exploring for offshore oil and gas reserves. Until the government passes decrees delineating the offshore blocks and approving model exploration and production sharing agreements — which have been drafted and ready for debate and approval since early 2013 — we simply will not know what lies beneath Lebanon’s share of the eastern Mediterranean. Despite suggestions to the contrary — most notably Bank Audi’s prediction in early 2014 that Lebanon has $600 billion worth of gas — it is impossible to know what, if any, hydrocarbon resources the country has. Knowledge comes from drilling, and drilling only happens once contracts with international oil and gas companies are signed.

If Lebanon does indeed have oil or natural gas reserves large enough to be commercially viable, there is still much work that needs to be done on the policy level. For example, the 2010 law on offshore exploration says that any revenues earned from hydrocarbon resources must be placed in a sovereign wealth fund. A new law is needed to define how the fund works, as well as if and when money can be taken out of it, to name just a few things policymakers need to consider when drafting it. Like many other countries around the world, Lebanon may also want to write a new tax law specifically for the oil and gas sector. The Lebanese Petroleum Administration (LPA), in fact, is pushing for this. However, a sovereign wealth fund and a new tax law will not be necessary if there are no hydrocarbons to bring in revenues.

Since being formed in 2012, the LPA has spent most of its time putting the cart before the horse by drafting recommendations on issues that will need to be dealt with once resources are found. Such forward thinking is laudable, but again, most of what the LPA is trying to do ends up getting stonewalled by a parliament and government that barely function. The LPA will no doubt continue to do as much preparation as they can, but without the decrees that make signing contracts possible, 2015 will be another year of waiting.

 

Read Executive’s oil and gas special report published in October 2014

 

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Economics & Policy

Reality sets in

by Matt Nash
written by Matt Nash

The chances of Lebanon signing offshore exploration and production sharing contracts with oil and gas companies in 2015 are slim, but that does not mean that all work in developing the emerging sector will grind to a halt. New legislation is in the works on tax rates for oil and gas companies as well as onshore exploration and production, and the Lebanese Petroleum Administration (LPA) — a body with some regulatory powers that makes policy recommendations for the sector — seems determined to do as much work as it can despite the fact that decisionmakers are in no rush to pass the two decrees necessary to close the licensing round.

[pullquote]The reality is that companies still cannot actually submit bids as the offshore blocks have not been officially delineated, nor have model exploration and production sharing agreements been approved[/pullquote]

Momentum was building in early 2013, and it seemed like Lebanon was on the cusp of answering an important economic question: what, if any, hydrocarbon resources does the country have? Parliament passed an offshore oil and gas law in 2010, opening the door to exploring for resources that seismic surveying suggests could be significant. However, for two years following the approval of the law, not much more happened. Then in late 2012 the government appointed the six member board of the LPA and developments began anew. The LPA drafted recommendations for a prequalification process for oil and gas companies interested in bidding in the first licensing round, and the Ministry of Energy — to which the LPA reports — approved the suggestions, as did the cabinet — which, according to the 2010 law, has final say on setting oil and gas policy in Lebanon. With all of the requirements approved, the LPA held a prequalification round for potential bidders between February and April 2013. A total of 52 companies applied, and 46 prequalified, including big international players such as Shell, Total, Chevron and ExxonMobil. 

The plan — approved by the cabinet in December 2012 — was to open the first licensing round in May 2013, less than one month after the prequalified companies were announced. The LPA and the Ministry of Energy wanted the licensing round to close in November 2013 and envisioned contracts being signed in February 2014. While the ministry and the LPA held a day long event to celebrate the May 1, 2013, opening of the bid round, the reality is that companies still cannot actually submit bids as the offshore blocks have not been officially delineated, nor have model exploration and production sharing agreements been approved. The Ministry of Energy wrote decrees concerning these two issues in early 2013, based on a recommendation from the LPA, but the cabinet has still not approved them. Without the decrees, the licensing round is frozen. Former Energy Minister Gebran Bassil delayed the close of the licensing round three times, each time choosing a specific new date in the future. His successor and political ally, Arthur Nazarian, shifted tack when facing an August 14 deadline he set in April, and delayed the close of the round “to a maximum period of six months from the date of the adoption of the two decrees.”

On its website, the LPA estimates that, once the decrees are passed, companies will need “up to” six months to bid. After bids are submitted, the LPA estimates it will need “up to” two months to review the bids and “up to” another four months to negotiate and sign final contracts. At the longest, therefore, it will take a year between passing the decrees and signing contracts. 

[pullquote]The delay in the bid round will affect competitiveness, resulting in less favorable commercial conditions for the state[/pullquote]

The impact of inaction

Oil and gas companies are notoriously media shy when it comes to discussing strategy and future investment plans. Executive contacted the 12 international companies prequalified to act as operators in Lebanon’s offshore, but not a single one agreed to an interview. While some local news outlets have cited unnamed sources claiming that international players are losing interest in Lebanon, none have said anything publicly about their intentions to bid or not. That said, Wissam Chbat — head of geophysics and geology at the LPA — told Executive in August that “the delay in the bid round will affect competitiveness, resulting in less favorable commercial conditions for the state and diminishing Lebanon’s regional presence and position in the regional gas market.”

Delays have had an impact on the local commercial conference market. The Lebanon International Petroleum Exhibition and Conference and the Lebanon International Oil and Gas Conference — both sponsored by the Ministry of Energy and the LPA — as well as the Lebanon Oil and Gas Summit — an event first held in 2013 without the input of the Ministry or the LPA — were cancelled in 2014. Instead, the LPA organized “Lebanon Petroleum Day” in October, which Middle East Strategic Perspectives, a local consultancy focused on oil and gas in Lebanon, described as having “[drawn] a large crowd, but few companies.”

New sector, new laws

In January 2014, LPA president Nasser Hoteit announced via Twitter that the body had written a new tax law for the sector and “transmitted [it] to competent authorities for review.” That was the year’s only news on the tax law, but existing Lebanese legislation says the Ministry of Finance must propose new taxation rules. It is unclear how closely the two are working together on the issue, but amending the tax law is an LPA priority. Taxes will be a component of state revenues from the sector, and as the corporate income tax is today capped at 15 percent, the LPA is pushing to have that rate raised for the oil and gas sector, as is common around the world. Whether a new tax law for the sector will see the light of day in 2015, however, is an open question.

Also on the LPA’s legislative agenda is an onshore exploration and production law as the 2010 law deals only with offshore. Again, the LPA wrote a draft law and began sharing it with relevant ministries in 2014, but it is unclear when parliament will begin discussing the draft. At the Lebanon Petroleum Day in October, LPA board member Gaby Daaboul briefed attendees on the LPA’s draft of the law. The onshore draft law, he said, would allow single companies to bid for licenses, unlike the offshore law, which requires at least three companies to bid together in a consortium for each license. Daaboul said the draft onshore law would also create a special committee to compensate landowners whose property would need to be expropriated if commercially recoverable hydrocarbon discoveries are made.

[pullquote]When oil and gas activities do actually start in Lebanon, the country will need a large pool of skilled and semi-skilled laborers[/pullquote]

Focus on education

While 2013 saw new oil and gas engineering programs launch at some of Lebanon’s major universities, the LPA in 2014 turned its attention to vocational training. The LPA told Executive in October that the Lebanese University, the country’s public institution of higher education, would soon sign an agreement with an unnamed European institution to “train technicians in several upstream trades and to deliver degrees and certificates internationally recognized” by the industry. LPA President Nasser Hoteit reiterated that commitment at Lebanon Petroleum Day, and while he told Executive the initiative “will be announced officially before the end of the year,” no such announcement had been made by the time Executive went to press. When oil and gas activities do actually start in Lebanon, the country will need a large pool of skilled and semi-skilled laborers since the exploration and production sharing agreements as currently drafted call for international companies operating in Lebanon to have a workforce that is 80 percent local. 

Protecting the environment

The LPA made a strategic environmental assessment for the oil and gas sector public in 2014, nearly two years after it was written. The assessment found, among other things, that Lebanon lacks baseline data on its offshore environment, meaning that if the data is not collected before drilling begins, it will be difficult for Lebanon to track the environmental impact oil and gas activities have. In response to this, the LPA announced at a media forum in early September that international companies that win rights to drill in any of the country’s offshore blocks will first have to carry out detailed environmental assessments to establish a solid baseline before beginning any work, thus putting the work of data collection into the hands of the oil and gas companies.

Uncertainty continues

While the LPA is working to do what it can behind the scenes to prepare for an oil and gas industry, most progress is still subject to political approval. Despite the fact that Bank Audi, one of Lebanon’s largest banks, declared in early 2014 that Lebanon has upward of $600 billion in gas wealth, the truth is that no one will know for sure until wells are drilled and resources discovered in commercially recoverable amounts. If 2013 was a year for hope in the emerging oil and gas sector, 2014 was the year Lebanese reality set in. As the year ends with a parliament again having extended its mandate and a void in the presidential palace, there may well be more important issues to address in 2015 than the search for hydrocarbons and the wealth they promise.

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Hell’s angels

by Marwan Tarraf
written by Marwan Tarraf

Can any trade sector survive without governing laws? In Lebanon yes, it is possible, yet some business owners struggle to keep their companies as legitimate as needed. It does sound ironic, but at all times in this country you have to fight your way into legality. Legal and governmental institutions have been formatted to accept and contain illegitimate businesses and offer them the same privileges — or perhaps even more — as those offered to business owners who took the choice of investing in an institution that naturally contributes to the growth of the local economy.

Over the past few years, motorcycle trade in Lebanon has grown beyond expectations, following global growth in this specific automotive sector. International brand names like Harley-Davidson, Piaggio, Kawasaki, KTM, Suzuki, BMW and many others have partnered with local franchisees and worked on introducing a new trend of responsible motorcycling in Lebanon. On the other hand, however, a number of individuals sniffed out opportunities to manipulate the import and trade laws in order to practice the worst form of unlawful competition. Small motorcycle vendors have made their way into the city, and container loads of cheap products that are banned from importation into most countries have flooded the market. The lack of homologation standards and the incompetence of border authorities have served to facilitate the process for any individual trader who sees an opportunity for an easy buck in this particular sector.

Lebanon welcomes everything, from expired foods to counterfeit medicine, and just like the motorcycle import process, their sales process will follow suit. Most gray importers use fake documentation and invoicing to reduce their import taxes and duties, and they don’t like keeping import records, so why would they want to keep sales records? The bottom line is that those motorcycles end up on the streets without registration, legalization or even proof of ownership in the hands of unknown owners, some of whom are pickpockets, thieves and even terrorists.

Curbing the gray dealers

A recent statistic released by the ISF counted 609 robberies in Lebanon throughout 2014. Some 226 were carried out on motorcycles, of which, none were purchased through an authorized brand dealer. Subsequently, the governor of Mount Lebanon ordered a night curfew on motorcycles, a decision taken in an attempt to limit the crime rate, although it mainly affected legitimate dealers. Customers of legal traders make up the majority of lawful citizens who own motorcycles, for either commuting to work or as a hobby. Meanwhile, gray dealers are still importing junk and providing for law-abusing motorcyclists.

Last September, representatives of all recognized brands rallied their groups and headed to the departure point at the Beirut Waterfront, where the Beirut Bike Festival organizers and the ISF called for a thunder parade in an effort to raise their collective voice against the negative stereotypes of motorcyclists. Over 1,400 lawful bikers hit the streets of Beirut, led by 50 police motorcycles under the banner “In recognition of the Lebanese Traffic Police’s efforts”.

The local bikers’ community has also matured in the past five years. Groups have become larger and more organized, although only a few have obtained legal licenses from the Ministry of Interior, such as the Harley-Davidson Owners Group, operating as MTCL, and A.N. Boukather for the Vespa and Piaggio group. Recently, an association for importers was founded under the banner of the Lebanese Association for Motorcycle Agents (LAMA) and is acting as the governing body for all brand name motorcycle importers. LAMA has taken the initiative of raising awareness towards enforcing laws governing imports and traffic safety. The association has sided with NGOs who are lobbying for the new traffic law to be implemented immediately, after it was unconstitutionally put on hold for political reasons despite passing the parliament vote and being published in the Official Gazette two years ago. This sets another example of how governing laws are dismissed and, while trade gremlins flourish, the national trade industry suffers; limiting the possibilities of growth for any legitimate business.

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Business

Two wheels a go-go

by Paul Cochrane
written by Paul Cochrane

Two wheelers have never been an overly popular mode of transport in Lebanon. There are, at one end of the spectrum, the cheap runaround bikes favored for day to day use and by delivery men, and at the other end, motorbike enthusiasts who prefer the saddle to a car seat. But the middle ground of motorbikes, as a convenient yet socially acceptable mode of transport, is somehow missing.

The anarchic driving on the roads in Lebanon has certainly been a major factor in the low sales of new motorbikes, but it is the perception of riders — be it as dangerous, criminal or economically disadvantaged — that has been a big drawback to developing the sector. Only over the past few years, and 2014 in particular, have motorbikes become more popular, encouraged by the worsening traffic congestion and lack of parking in the capital. 

“Before we were selling very few bikes, but it is becoming a business and we now have dedicated sales people,” says Pierre Heneine, financial manager at Bassoul-Heneine, a dealer for BMW motorbikes.

Increased sales of premium bikes like BMW and Harley-Davidson, which expects sales up 18 percent on 2013, are indicative of the growing demand for bikes. But the low and middle range models are selling well too, with A.N. Boukather — which has 45 percent of the market through brands Piaggio, Aprilia, Moto Guzzi, Vespa, Gilera, Derby, KTM and Bajaj — reporting strong sales across its portfolio ranging from $800 to $25,000. 

RYMCO, dealer for Kawasaki and, as of 2013, Peugeot scooters, has also seen sales increase. The biggest seller is the Kawasaki Ninja 250cc model, due to its engine size and price. Like the car sector, the bike sector has been affected by Lebanon’s sluggish economy. “It is not as easy to get a client to buy since purchasing power is down, as $10,000 for a bike is more for leisure use — a big engine bike is not something you go to work on. Around 90 percent of clients buy because a bike is essential,” says RYMCO’s Makram Rasamny.

According to the newly formed Lebanese Association of Motorcycle Agents (LAMA), about 1,500 new motorbikes will be sold this year, up 20 percent on 2013. This pales both in comparison to the 35,000 new cars sold per year, but especially to the estimated 50,000 used motorbikes and scooters imported annually.

The need for regulation

A new traffic law, which has been passed but not yet implemented, would ban the importation of bikes over three years old and those with engines under 125cc. Dealers are keen to get the law implemented, as it would better regulate the sector — concerning issues such as registration, new driving tests, fines — and improve safety on the roads, thereby driving up motorbike sales (see Q&A page 144). 

“If the law was implemented it would drastically reduce sales of imported second hand bikes and you would start seeing a lot of people buy new motorbikes,” says Anthony Boukather, General Manager of AN Boukather.

Outside of LAMA and the used bike sector, it is Akkad bikes that are the big sellers, much to the association’s chagrin. The 125cc bike is Chinese made, but with a local twist. Despite being newly manufactured, Tripoli-based dealer Wassim Akkad imports the motorbikes second hand to pay lower taxes, and has created an eponymous brand by sticking his surname on the bike’s fuel tank. Akkad opposed the new traffic law, and it is such importers that LAMA wants to curtail in order to defend the legitimate sector.

As Marwan Tarraf, Owner of Bikers Inc., the agent for Harley-Davidson, puts it, a motive for setting up LAMA was to “introduce a new way of owning, selling and riding bikes.” The motivation was not just to bolster new bike sales, but to have a united voice for the sector’s very survival. “If the sector is not controlled ASAP, it could lead to a situation where the authorities have a reason to place restrictions or ban the most efficient [mode of] transport in Lebanon. Motorbikes are the future, but it needs the implementation of the traffic law,” says Tarraf.

With such regulation unlikely to be enforced soon, Harley-Davidson organized the first Beirut Bike Festival to promote motorbiking in the country, attracting 1,434 bikers one Sunday in September 2014. “It was massive, I didn’t expect that many people,” says Tarraf. “There were two reasons for it, one it was official, in support of the traffic police and the law, and two, to counter the recent attempts to ban motorbikes, so we made it clear that there is a huge number of people who ride bikes and respect laws.”

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Business

Hit the road

by Paul Cochrane
written by Paul Cochrane

Every month the Automobile Importers Association of Lebanon (AIA) sends out its Registration Report, showing the year-to-date breakdown of new car sales per brand. Over the course of 2014, the attached president’s letter has ended with: “We hope that Lebanon soon finds peace, stability and prosperity.”

Such a repeated aspiration is indicative of what is missing in the country for the automotive sector to thrive. Not that car sales are in the gutter though, despite the lack of peace, stability and prosperity. 

As of the end of October 2014, 34,002 new cars had been sold compared to 31,092 units in the same period in 2013, although the month’s sales were down 5.2 percent compared to September, and year-on-year sales of new and used models had dropped by 7 percent and 12 percent respectively, compared to 2012 and 2011. 

Overall sales are projected to surpass 35,000 units, similar to previous years and over one-third above the figures from a decade ago. What is keeping sales buoyant are smaller cars priced at less than $15,000, which account for 90 percent of sales, according to the AIA. 

[pullquote]To dealers, the market in 2014 was not overly different compared to previous years, with the country experiencing the same struggles[/pullquote]

However, cars in the smaller segment range have lower profit margins for dealers, and sales of medium to larger models are being hit by lower purchasing power and weak consumer confidence; those that can spend are sitting on their wallets, awaiting some good news before parting with $30,000 plus for a new set of wheels. As Michel Trad, general manager of Saad & Trad, dealer of Fiat, Jaguar, Bentley, Lamborghini and Abarth, puts it: “People may buy a $20,000 watch instead of a car as it would be easier to move [it out of the country if the security situation deteriorates].”

That said, to dealers, the market in 2014 was not overly different compared to previous years, with the country experiencing the same struggles, albeit this year the political-security situation was worse than before. “I’d say it’s been a couple of years that we’ve been facing the same challenges, and this year with the escalation in the [political] situation, it doesn’t allow you to have a clear plan, to set your forecast and targets,” says Farid Homsi, General Manager of IMPEX, distributor for Chevrolet, Cadillac and Isuzu. “Small cars are still the best sellers, and that is what’s allowing the industry to have some small portion of increases.”

Across the board, dealerships have had to market heavily to draw customers in, offering zero percent interest, five year warranties and even the chance to win trips abroad. “It was the automotive year for consumers. They were getting the best deals since all dealers lowered their prices and were fighting a price war,” says Rachid Rasamny, general manager at Century Motor Company, distributor of Hyundai and Genesis. “At one point there were so many offers we were close to doing a campaign joking about free giveaways, but decided against it.”

Such deals have kept sales moving, and are what have driven people away from the used car market in favor of new cars instead. “The overall sector trend is continuing compared to 2013. People are still shifting to the new from the old car market, and all distributors are being aggressive in offering services, warranties and good financing. This has driven sales,” says Cesar Aoun, general manager of Mercedes at T. Gargour & Fils, which also sells Smart, Jeep, and Chrysler. 

However, to some, low prices and easy bank financing have artificially stimulated sales over the past few years, masking the underlying malaise in the economy and the fact that the worst may be yet to come. “Everyone is switching to survival mode, which is to only spend on what is a necessity,” says Marwan Naffi, general manager at Gabriel Abou Adal & Partners, distributor of Volvo. “We thought 2013 was a difficult year, but 2014 proved to be even more difficult, so we don’t want to think too long term, as when you think you’ve seen the worst, there is often worse to come.”

[pullquote]The BDL circular certainly came out of left field for dealerships, who have generally opposed the measure and believe it will lead to a drop in sales[/pullquote]

Reining in lending

What may be worse for the sector’s health is not the political situation, the lack of a president, the neighboring Syrian conflict, or the threat of the Islamic State. While all of the aforementioned are major concerns that have a deleterious effect on car sales, what is slated to have the biggest impact — unless things get really out of hand — is a new Banque du Liban (BDL) circular, number 369, inked in August 2014, that requires down payments for loans to be a minimum of 25 percent.

“In 2015 I don’t think the market will grow. It will at best be stable. Why? BDL wants to control consumer credit. Until October you could have 85 percent, sometimes even 100 percent credit,” says Pierre Heneine, financial manager at Bassoul-Heneine, dealer for BMW, Mini, Renault, Dacia and Rolls Royce.

The BDL circular certainly came out of left field for dealerships, who have generally opposed the measure and believe it will lead to a drop in sales, particularly for cheaper cars, with the president of the AIA telling Executive in the November edition that sales could drop by up to 30 percent. The move is considered a preventative measure, prompted by what a Bank Byblos reported noted was “a relatively high ratio of household debt to disposable personal income,” and that according to the BDL, “An average of 50 percent of household income is going towards debt servicing.”

“I am surprised at this resolution, as even during the Civil War, BDL was never so cautious about lending. I see it as a preventative action, because when meeting with banks, the rate of default is almost zero. In our case, at Mercedes, we used to [require] a minimum 25 percent down payment, so for us we don’t see a negative. But for smaller cars, maybe [it is],” says Aoun.

With small cars dominating overall sales, it is the sales of volume cars that are slated to be the most hit. This is expected to be a particular concern for Korean brands Kia and Hyundai, currently number one and two respectively, with 42 percent of the market. The circular will certainly take out one of the three advantages of buying a new car that enabled people to go beyond their budget. 

“In our marketing we were saying to customers they can buy a premium car and pay approximately the same price as a volume car because of three things: low interest, good after-sales and thirdly, fuel consumption,” says Anthony Boukather, CEO of A.N. Boukather Group Holding, dealer for Mazda.

Such an approach led to a 25 percent spike in sales at Mazda as of the end of September. Nonetheless, Boukather thinks that despite low interest being taken out of the equation, the BDL diktat will have less impact on the premium sector. “It is going to impact volume but not the premium brands. Banks will become pickier, and only lend to those that can afford it,” he says. Other dealers think the requirement will have a broader impact as there is also an economic correlation between income and luxury brands. For instance, consumers buying the cheaper models of a luxury brand often require financing, and will consequently have to down-shift to a more affordable vehicle instead. Furthermore, more affluent consumers may hold off buying to better balance cash flow. 

“The BDL circular can have a negative impact on the upper luxury segment, as there are buyers that don’t have a trade-in, yet want to buy a third or a fourth car for their household, so an extra say 5 percent on payments can have a nasty impact. While they can afford it, they don’t necessarily want to pay a lot of cash upfront in the current situation,” says Homsi.

Time will tell the impact of the BDL circular on all levels of the market, as ultra luxury cars, at above $100,000, did remarkably well in 2014, albeit representing only 3.5 percent of the overall sector with two Rolls-Royce, two Lamborghinis, three Ferraris and 10 Bentleys sold, while in the luxury segment, 54 Maserati, 411 Land Rover, 243 Porsche, 678 Mercedes, 461 BMW, 96 Cadillac and 607 Audi cars were sold by the end of October. Indeed, in many ways the sector has muddled through the year despite the challenges, and will continue to do so, driven by the lack of public transport. 

“I am not surprised the market has done so well, as the Lebanese have always found solutions to difficult conditions. On the other side, don’t forget that we need cars because there’s no public transportation, so a car is not a luxury but a need,” says Nabil Bazerji, managing director of G.A Bazerji & Sons, distributor of Suzuki, Lancia and Maserati.

Staying visible

Despite such a constrained market, dealerships continued to invest in 2014. A new Volvo showroom was launched in September, and in October, Bassoul-Heneine opened a new Renault showroom, both pioneer facilities for the Middle East. However, one dealership intending to expand by introducing a new Chinese brand to the market recently changed its mind, despite signing a memorandum of understanding, due to national and regional instability. With it taking at least two years for a return on investment on the showroom, inventory, marketing costs and the like, concentrating on core business seems a prudent move. 

Dealerships are also continuing to market heavily, evidenced by the plethora of billboard and TV adverts for cars. “In general the industry is struggling. So to keep on doing the same volume as before, you have to invest even though you don’t want to spend too many marketing dollars as you’re not doing well on profits. But you still have to fight for market share and remain present in the market, otherwise consumers forget about you; it is harder to restart if you are out [of the public eye] for some time,” says Homsi.

Downward consolidation

The BDL circular and the constrained economic environment is making for even more competition among dealers. There is also growing pressure to offer a wide segment of vehicles that cater to all demands, with Lebanon reflecting the global move towards smaller vehicles in the A, B and C segments, instead of larger cars. What has really heated up the competition is the Japanese brands which have become more cost competitive due to the devaluation of the yen. 

“The Japanese brands are recapturing some market share, [and] reducing the gap with the Koreans with new models and better prices, but the Koreans are quite competitive and have new models, which helps them,” says Homsi. 

[pullquote]”People are looking at cars differently, as people are now talking more about safety and fuel consumption”[/pullquote]

In the past, the high value of the yen had been advantageous for the Korean brands and gave the nascent Chinese brands a boost. In 2014, the Korean brands have felt the competition — with their market share down 4 percent compared to 2013 — while Chinese brands have not continued to make the inroads they were making in 2013, when sales jumped by 60 percent on 2012. In 2014 they grew by less than 5 percent. 

“Basically the Koreans are being downgraded to the A and B segments, with low margins and a lot of competition, whereas the C segment and upwards have healthy margins, and that is the shift in the market going forward,” says Fayez Rasamny, CEO of Rymco, dealer of Nissan and Infiniti. 

While dealers are clearly keen to push C segment and above sales, outside of the cheaper brands, it is higher end small models that are also doing well, such as the Mini and the Fiat 500. 

“People are looking at cars differently, as people are now talking more about safety and fuel consumption. So for example, the top of the range smaller models are selling well and are a way to differentiate from cheap smaller cars,” says Trad.

Given such market trends, dealerships are banking on strong offerings in the smaller sized segments to carry sales forward. “Suzuki only exists in the A, B and C segments. This is to our advantage, as our sales increased this year. And we are looking to double in 2015, because there is demand in the market for these segments and the yen depreciated,” says Bazerji.

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Editorial

Resigned to failure

by Yasser Akkaoui
written by Yasser Akkaoui

The Investment Development Authority of Lebanon is in a unique position. It has autonomy to make many decisions on its own and is more or less immune from having its work disrupted by a political class that cannot make decisions. IDAL does not sit for years with its hands tied, awaiting a government decree to move forward with its plans. Nor does IDAL have its strategy reworked every time a new minister comes to power. It ought to be the most successful and properly functioning state institution this poorly governed country has. That it is not is outrageous.

In October of last year, IDAL turned 20. We should be celebrating 20 years of steady job creation and increasing foreign direct investment. This magazine should have an investigative report detailing years of IDAL’s direct contributions to GDP growth by slashing through red tape to help investors boost the economy. Instead, we have an account of how political influence and incompetent leadership have made IDAL an embarrassment.

We need more jobs. We need more investment. But attracting them requires a well thought out strategy, a strategy that navigates our weaknesses and the threats to our economy in order to draw on the extraordinary human capital this country has. Beyond baskets of incentives, IDAL requires a basket of skilled, hardworking and incorruptible leaders to serve on its board of directors.

In the corporate world, board members who don’t deliver and CEOs who fail repeatedly either step down or get thrown out by angry stakeholders. Looking at IDAL’s performance since 1994, one cannot help but conclude its leadership is, and has been, incompetent. It is hard to imagine that someone leading such an organization for over 10 years — as Nabil Itani has — can have any pride in himself or his work given how little he has done in that time.

There is no shame in admitting you are not the right person for a job. But there is shame in collecting a paycheck you didn’t earn and squandering opportunities the country so desperately needs to exploit. Itani and the board behind him are embarrassing themselves and this country. It is beyond time they all resign.

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Leaders

Just go

by Executive Editors
written by Executive Editors

When the Investment Development Authority of Lebanon was first created in 1994, hope for the economy to flourish was not such a wild concept. Lebanon was being rebuilt after the war. Times were changing. There was enthusiasm for a reconstructed Lebanon with shining new infrastructure. IDAL was to be one of the institutions spearheading the project of rebuilding the economy by marketing Lebanon abroad and attracting foreign investment.

Twenty years later, it has become obvious that the hope couldn’t have been more misplaced. As our investigation reveals, IDAL has abjectly failed to deliver (see “Shattered dreams“). Foreign direct investment has been middling at best; at some $2.8 billion in 2013, inflows were roughly the same as a decade earlier, and that’s without adjusting for inflation.

This failure can be attributed to a number of reasons. Economic decisions, decreasingly a priority for the cabinet, were ultimately relegated to the back burner. Institutionally, IDAL began to deteriorate. With a wage freeze that made it impossible to make new hires, the number of staff waned over the years, cutting IDAL’s manpower which resulted in the UNDP stepping in and appointing staff to give the authority technical assistance. The situation also hindered IDAL’s ability to update its laws and get new decisions passed through the cabinet. The same factors resulted in a board of directors that expired in 2009. Moreover, Lebanon’s government failed to come up with a global vision of the economy.

[pullquote]Much more can be done at IDAL, and its leadership needs to stop using the political situation as an excuse to fail[/pullquote]

But it is only too easy to blame the deteriorating situation for the lack of foreign direct investment. Yes, the entire Lebanese political establishment needs to change. But this is a utopian hope — are we really going to wait around for a notoriously indecisive government before we start building our country? Much more can be done at IDAL, and its leadership needs to stop using the political situation as an excuse to fail.

Currently, IDAL’s board has no strategy that would enable the authority to fulfill its legal mandate, nor is there any sign they are drafting one. This is dereliction of their responsibilities. And since the people that were put on the board have shown that they are not up to the challenge, there is no reason to keep them there.

Looking at their accomplishments, even those achieved in good times, it is clear that they have not lived up to their mandate — what is required of them by law. The role of an investment development authority is to promote investment into a country by marketing it abroad. Mandated in IDAL’s case by investment law 360, this includes conducting economic research to provide investors with information, diagnosing and promoting competitive sectors, and understanding Lebanon’s competitive advantages when marketing the country abroad. Just as they didn’t have a strategy in good times, IDAL did not brace for bad times, and the Lebanese economy suffered the consequences. It is dangerous to leave our economy at the mercy of such incompetence.

The incompetence begins with the fact that the board is expired and should have been replaced. Appointed in 2005, while Lebanon was still under Syrian hegemony, the current board has overstayed its term since 2009. Since then, the cabinet has failed to pass a decision to either change it or renew its mandate.

Moreover, the board was also appointed before there was a proper mechanism to make high level appointments in the Lebanese public sector. Before this mechanism existed, appointments were made by the cabinet, a system that failed to provide checks to make sure that qualified people — rather than friends and vassals of ministers — were appointed to important positions.

[pullquote]IDAL could have achieved much more if it had been guided by competent, visionary people with a real strategy and plan[/pullquote]

It’s time for new blood at the board level. IDAL could have achieved much more if it had been guided by competent, visionary people with a real strategy and plan. If they are not delivering, they need to go — and there should be no excuses for promptly dumping them. All it takes is a decision from the cabinet. This is the smallest change that could make the greatest impact.

There is too much at stake for our economy to be put on the backburner, and the relatively simple task of turning IDAL into a functioning institution should be a no brainer. Lebanon is in dire need of jobs and economic stimulus. The capital a competent investment development authority should attract is not only in the form of cold hard cash, but should be focused on greenfield projects that create jobs and bring in foreign expertise. This is badly needed, and a properly functioning investment development authority guided by a serious strategy could make it happen, having an important impact on the economy and the livelihoods of the Lebanese.

The cabinet must stop neglecting the economy. The very simplest way to start is to replace IDAL’s board, and ensure that this is done through the proper committee-led process that will give us qualified leaders.

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