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10 Ways to Save LebanonEconomics & Policy

Strengthen the Lebanese Armed Forces

by Joe Dyke March 7, 2014
written by Joe Dyke

As part of Executive’s ‘10 Ways to Save Lebanon’ issue, we talk to leading experts to discuss ways to improve security in the country.

Any hopes that the formation of a new government would end Lebanon’s security woes were dashed almost before they were raised. On Wednesday February 19, just four days after the new government was announced, Beirut again awoke to the sounds of explosions as two car bombs rocked the city’s southern suburbs. The attacks were the ninth in the country since Christmas, with the Al Qaeda-affiliated Abdullah Azzam Brigades claiming responsibility.

Clearly any policy manifesto for Lebanon has to start by assessing ways to improve security. Economic development and fundamental reforms are only possible in the context of stability, and tackling this is a prerequisite to any other proposals suggested in a manifesto.

The deteriorating security situation has both short-term and long-term causes. The civil war in neighboring Syria — and the involvement of Lebanese actors on both sides — is clearly foremost among them, but wider regional political polarization and a weak state are also significant factors.

What is required to reverse this negative trend, experts agree, is a range of short-term and long-term responses to protect Lebanon from the Syrian crisis and the wider winds of turmoil across the region.

Nadim Shehadi from Chatham House — a British think-tank — points out that this should start by increasing the authority of the Lebanese Armed Forces (LAF) and the Internal Security Forces (ISF). “It is important to implement measures to increase the credibility and impartiality of the security establishment,” he says, in a common refrain from the experts Executive spoke to.

Sami Nader, an economist and professor at Saint Joseph University (USJ), agrees that the first priority for the new government is to create unity around the importance of the LAF. The body is one of the few genuinely cross-sectarian bodies in the country, and enjoys widespread support. A 2013 poll found that it was the most trusted institution in Lebanon across all sectarian groups.

“They need to form the necessary consensus to back the army and provide the political support for the army to do its mission. Then you have to provide it with the technical support to do so,” he says, adding that the $3 billion grant pledged by Saudi Arabia for the LAF in December could make a large difference to the operating capacity of the army.

As this magazine covered last month, that deal is far from a panacea to Lebanon’s woes. There are doubts about how fast the money will be made available, as well as a lack of clarity as to which areas would benefit from it.

But while the earliest that Saudi financial support will be seen in real terms is likely the second half of 2014, Aram Nerguizian, a senior fellow at the Washington-based Center for Strategic and International Studies, believes that the LAF is already making some of the necessary changes to reclaim security. In particular, he points out that attempts are being made to better manage the country’s porous border with Syria — the source of many of the explosive-rigged vehicles which are being smuggled into the country.

In 2013, for the first time, the armed forces inaugurated four fixed observation posts along the northern part of the border with Syria, while by the end of 2014 it aims to have opened another eight. “In the north the military is gradually building up its ability to manage and control the region. This is at least in part thanks to the establishment of the 1st and 2nd Border Regiments, and the construction of a series of well-manned, fixed sangar-style hardened observation posts,” Nerguizian said. “Each is equipped with electro-optical systems, anti-RPG netting, and other defensive countermeasures. Prior to 2011 you had neither a real nor a working border security regime between Lebanon and Syria in that area, and you did not have Syrian willingness to expedite border demarcation.”

Chatham House’s Shehadi agrees that in relative terms the military has succeeded in controlling the spread of violence from Syria. “Given the position the country is in, security is more or less under control. It could be a lot worse than it is, given the current climate.”

There have recently been a few minor victories. In mid-February the LAF captured a car that contained a quarter ton of explosives, which had been rigged inside Syria before being smuggled across the border.

There have also been positive signs that the new government is willing to provide the army with the necessary support. Following the February 19 bombings, new interior minister Nouhad Machnouk — a March 14 stalwart who has been accused of being allied with the Syrian armed opposition — pledged to support the army in their efforts. “There are Lebanese passageways sending stolen vehicles to Syria where they are being rigged with explosives. We should crack down in areas like the Bekaa Valley, and others where thieves live and where stolen vehicles are taken,” he said. A clear government-wide focus on keeping the troubles on the other side of the border would be a refreshing change.

Shehadi, however, issues a note of caution, that in the search for security, Lebanon runs the risk of becoming an over-militarized state. More powers to the army and ISF, he says, “is a double edged sword; in the long term you do not want Lebanon to turn into a state controlled by the security apparatus. What we are seeing in Lebanon is dangerous, as we are seeing a more powerful security apparatus, but less political freedom.” For many Lebanese, this may be a temporary compromise they are willing to make.

A few steps ahead

Yet while strengthening the effectiveness of the security services could make a short-term difference, it would be treating the symptoms rather than the primary cause of the crisis, namely region-wide political polarization.

The situation is clearly larger than Lebanon, with the country once again becoming a key battlefield for regional powers. Conflicts that have their roots in Riyadh, Damascus, Tehran, Washington and Tel Aviv are being played out in Beirut.

Clearly a wider regional rapprochement is beyond the capacity of Lebanon’s politicians, but in the absence of such a deal, local reconciliation could help. Improved relations between the major Lebanese actors — so many of them satellites of regional powers — would at least provide a few defenses.

USJ’s Nader points out that Lebanese political parties are fighting on both sides of the Syrian conflict — with  the Shiite party Hezbollah backing the government of President Bashar al-Assad and other groups supporting the opposition. This, he says, blurs the distinction between Lebanon and its warring neighbor. “We need to have all sides withdrawing from Syria, that way we can protect the country,” he adds.

For the country’s economic future, a more conciliatory attitude between the politicians would be a huge step in the right direction. Nassib Ghobril, head of research at Byblos Bank, points out that the country’s economic fortunes are intrinsically linked with politics. As such, the very formation of a government is a positive move for the economy, but a new national pact would have a greater effect. He points to the 2008 Doha Accords, which saw rival actors agree to share power after years of animosity, as a key moment for the economy. “The months after the Doha Accords were the best for confidence in the history of our index,” he says, referring to the Byblos Bank/AUB consumer confidence index. A new national pact would, therefore, be a partial antidote to the country’s security woes.

None of these options are easy, and none will be achieved without significant efforts. But for the economic future of Lebanon, security must be the key tenet of any manifesto.

March 7, 2014 0 comments
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International Women’s Day: Equality through entrepreneurship

by Tara Nehme March 7, 2014
written by Tara Nehme

Tomorrow is International Women’s Day, which is dedicated to celebrating the economic, political and social achievements of women across the globe. Last month, in Lebanon, women were not so celebrated. Lebanese Olympic skier, Jackie Chamoun, underwent scrutiny when footage of her posing topless for an Austrian calendar in 2011 leaked onto the internet, with Lebanon’s Minister of Youth and Sports going so far as to call for an investigation. In response, a massive campaign dubbed ‘stripforjackie’ turned the young woman into a social media sensation as hundreds of people began doing exactly what the campaign title implies: taking ‘selfies’ wearing almost nothing in their support of Jackie’s right to pose in whatever way she chooses.

Also in February, two women, Manal Assi and Christelle Abou Shakra, were allegedly brutally killed by their husbands in two separate incidents in Lebanon. Both had suffered years of abuse at the hands of their spouses, and activists renewed their long-standing demand that the domestic violence law still pending in Parliament be passed. So people stripped off their clothes and disseminated photographs of the lost women in a short-lived battle for change and a cry for attention from the Lebanese government. So what can we take away from all this?

It has become clearer than ever that the rights of women in Lebanon are a long way from being properly acknowledged and an even longer way from being fiercely protected. The root of the problem can be debated endlessly but I’d rather focus on actions that bring us women closer to being treated as equals in the Middle East. For me, entrepreneurship is a powerful starting point; it is an avenue through which women can have a real chance of achieving immense success, the kind of success that forces our dreams to be respected. I believe that it is the duty of female entrepreneurs to represent women on a wider scale by constantly innovating and fighting for our rights to be leaders in whatever field we choose. My tips for the month, tailor made for women entrepreneurs, and those wondering if they should become ones, are dedicated to women everywhere and especially to Manal and Christelle.

1. Embrace the fact that you’re female. Women and men don’t look at the world in the same way. Put simply, we’re different, and the entrepreneurship scene needs us both.  So embrace the fact that you are a woman when working on or creating your next venture and channel your different thought processes in order to humanize your business and create something with the female touch.

2. Inspire by example. Imagine the number of people you can impact by setting up and operating a startup. There is much preaching about how women should be treated but not enough action. People like Zeina Saab of The Nawaya Network, Sara Helou of eTobb and Tamara Qiblawi of Knooz Room are prime examples of young female entrepreneurs who broke free from the corporate world to create businesses that are not only amazing but also have a profound social impact.

3. It doesn’t have to be a choice. I’ve always wondered how I would balance work and family in my future, being the career obsessed person that I am. I now feel I have found the ultimate solution. Women give birth and want to be there for their kids, it’s innate. What better way to handle the work-life balance then by creating something that is your own, something that allows you to make your own rules and break free from the confines of the corporate world.

4. It’s okay if you don’t know stuff. You can learn it. I talk to a lot of women who fear entering the world of entrepreneurship because they feel they don’t posses the technical know-how. Who cares? Like everything new in life, you’ll figure it out as you go along. When I compare what I knew two years ago in terms of technology (nothing) and what I know now (a lot) it’s an amazing feeling; there is no way faster way to learn than by doing.

5. Be yourself. Make sure your business embodies your personality. If you fail, then you’re lucky: you’re an entrepreneur and you can just try again. I’ve never been prouder to be an entrepreneurial woman and I hope this piece inspires female readers to join the exciting ship I’m currently on.

March 7, 2014 0 comments
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Finance

Rymco securitizes inventory for more growth

by Thomas Schellen March 6, 2014
written by Thomas Schellen

Private and corporate Lebanese investors showed faith in future domestic demand for cars by underwriting a new $15 million securitization deal for Rasamny Younis Motor Company (Rymco), the company announced this week.

The deal, in conjunction with BankMed Group and its subsidiaries MedInvestment Bank and SaudiMed Investment Co, gives Rymco access to off-balance-sheet funding. An additional innovative aspect is the fact that the company this time did not securitize its receivables, as it and other Lebanese automotive dealers have in the past, but rather securitized part of its new car inventory.

Flanked by two pieces of inventory in the company’s showroom – a white $80,000 SUV and a silver $80,000 convertible, both from the same Japanese luxury marque – Rymco and BankMed Group officials told a handful of business and automotive journalists in a March 5 press conference that the deal would help the company grow.

“Inventory securitization for us is a new way of purchasing cars from suppliers, whether Nissan or Infinity. This is not only for cash flow purposes but also for financial gains because we have gotten some tax benefits out of it,” said Rymco Chairman and CEO Fayez Rasamny. The benefits for the company also include diversification of its funding sources and access to a new investor base, he added.

Securitization is a method to transfer risk, such as credit risk, from an originator to an investor and provide the originator of the securitized asset with improved financial liquidity. The typical structure of a securitization deal involves a two-step process that entails establishment of an issuing agent company often called a ‘special purpose vehicle’; meaning the entire affair is rather complex.

Investors had generally responded well to the new securitization product, “because the transaction was structured in a way that gives investors a lot of comfort,” said Mohamad Ali Beyhum, the executive general manager of BankMed and MedInvestment Bank. “The yield is very attractive and the riskiness is pretty low, so as a package it makes sense for local investors.”

He added that the investors in the transaction were all Lebanon-based as international investors would be likely to require such an instrument to be assessed by a ratings agency. “So we consciously decided that the investors should be local,” Beyhum said.

The first decision by Rymco to tap into securitization was taken several years ago and the company has used the financing tool since 2009 in three or four rounds of securitizing receivables through deals structured by Bemo Securitization, a unit of Beirut-headquartered boutique Banque Bemo.

The new inventory securitization deal, dubbed Rymco Sec 1, took two years to conclude from start to finish, according to Abdallah Nassif, head of structured finance at SaudiMed Investment Co. The $15 million paper, which offers investors a return of 7 percent, can translate into total financing volume of $250 million for Rymco over its four-year lifespan. Nassif explained, “During this period investors receive only interest and we use the principal to purchase additional assets through a finance subsidiary that we have created. The number [$250 million] is based on assumptions related to historical turnover of the inventory, which adds up to [about that amount] over the four-year replenishment period of the transaction.”

March 6, 2014 0 comments
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The deepest of ironies

by Yasser Akkaoui March 6, 2014
written by Yasser Akkaoui

As we prepared to launch our new website last Thursday morning, the tranquility of the Executive office was disrupted by a gruff man clutching a bunch of papers. He was, he assured us, from the judicial palace. Gebran Bassil, Lebanon’s former energy minister and new foreign minister, was suing us.

The article of concern — from our special report on oil and gas in the October 2013 issue — focused on allegations that Bassil was seeking to monopolize control over the oil and gas sector. As hydrocarbons are a rare bright spot in a depressing period for Lebanon’s economy, we felt it was right to discuss allegations of malpractice in a sector that could be worth tens of billions of dollars.

In the article, we asked Bassil directly to clarify what had happened to $33 million made through the sale of seismic surveys. His response: “You are asking questions I am not really aware of, about details that are not really important.” As Bassil thought these questions were unimportant at the time, it is with deep irony that we now face meeting him in court.

For clarification, it is worth stating what happened following publication of the article. At the end of November, nearly two months after it was printed, a representative of the energy ministry contacted us to say that they felt we had misrepresented the facts. We politely disagreed, but after a conversation we agreed to publish — in full, both online and in print — Bassil’s response to the article, under the principle of the right to reply.

As it was by then the final days of November, it was too late to put it in the December issue but we offered to run it in January. The minister’s team asked if we could put it online immediately and then publish it in print in January, a request which we agreed to. We felt there was a gentleman’s agreement that the matter was dealt with. It appears we may not be dealing with a gentleman.

We did not want it to come to this, but now that it has we see this a chance rather than a curse — a great opportunity for the Lebanese public. A trial will provide us with a rare opportunity to question Bassil on his practices as a minister, a politician and a businessman going back many years.

There is, in Lebanon, an old (but seldom used) law on unlawful fortunes. Needless to say we are dusting it off.

Our message to Bassil, therefore, is thank you. You have given us the opportunity to interrogate you on all your practices over the past five years in power. We will see you in court.

March 6, 2014 34 comments
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Business

A wish list for Lebanon’s new startup accelerator

by Livia Murray March 6, 2014
written by Livia Murray

According to stakeholders in Lebanon’s startup ecosystem, plans are in the making for a nation-wide accelerator. This could have a major effect – currently there are incubators for entrepreneurs operating companies at a more advanced stage, but for those just starting out there is no organized support. One previous attempt – Seeqnce – had some success in graduating a batch of eight startups but disbanded shortly after.

Though the country’s entrepreneurs have over the past couple of years become more serious, competent and supported, this lack of early-stage support is limiting the ecosystem. The anticipated accelerator is desperately needed to boost the pipeline of startups. Particularly in the wake of Banque du Liban’s Circular 331, which will lead to $400 million more capital in the ecosystem, Lebanon needs a parallel increase of Series A investment-worthy deals.

This will be a challenge for those involved, particularly to ensure both quantity and quality of startups to create enough companies that succeed. Executive spoke to startups at ArabNet and put together this wish list of five things the accelerator could help them with:

Ensure follow-on investment: When a startup graduates from an accelerator, after grueling months of mentoring and coaching, they need to work rigorously to keep growing. Ensuring that startups are well equipped to do so with follow-on funds that will propel them to the next stage is essential for the budding company to stand a chance.

Access to mentors: One of the largest added values of an accelerator is the access they provide to a network of international mentors. Entrepreneurs can’t make assumptions on how to scale their business, they need to talk to people who have been there and have done it on an industry-specific level, ideally from the global market.

Coaching: Startups need to receive guidance through a hands-on approach as they go through early stages of development. This includes technical advice and help in developing products, branding, and pricing strategy. Entrepreneurs need coaches who will bring experience and know-how, to guide them through the process of putting an idea into application, validating the concept, and building and scaling the business.

Access to experienced and enthusiastic teams: Startup founders need teams that are as enthusiastic and determined as they are. They need people who are both experienced and committed. Good talent is often difficult to find as they are usually sucked up by the big names in their industry. Outfitting startups with solid teams that will stick to the project will be a challenge for accelerators to tackle.

Networking opportunities: Access to markets and access to investors is of course crucial to any startup, and accelerators should provide opportunities for startups to interact with and pitch to investors. These investors will have to be willing to take a risk on them, but that is the nature of the startup business.

March 6, 2014 0 comments
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10 Ways to Save LebanonEconomics & Policy

10 Ways to Save Lebanon

by Joe Dyke & Thomas Schellen March 6, 2014
written by Joe Dyke & Thomas Schellen

At the start of 2014, Lebanon faces two existential crises so severe that they threaten the very functioning of the state. The first is an onslaught against internal peace and the security of every citizen through terrorism and violence. The second is the growing risk of a socioeconomic meltdown under the weight of decades of ineffective politics, along with the pressures of an imported but inescapable refugee crisis.

In this dire context, the political response has been to divide, rather than unite. Until last month, infighting saw the country go nearly a year without a government. Every single challenge the country faced was made worse by this collective failure of duty from the political class.

The formation, then, of a new national unity government is to be applauded. Yet what matters now is whether this Cabinet is braver than its predecessors. Will they think first of the wellbeing of Lebanon and try to design practical solutions to the country’s problems? Or will they continue to neglect the public interest and work for their regional and global patrons? So far, the signs are not positive — several key appointments appear to be the result of political bargaining, rather than being based on merit.

But if, by chance, this government is open to real change and meaningful reform, Executive has sought to make it easy for them. What we are presenting online over the coming days online are ten major policy changes that could save the country’s economy from collapse and in the long run facilitate meaningful, sustainable growth. This will inevitably involve a reorientation of the economy away from speculative sectors toward real growth and a fairer distribution of resources — a new deal for Lebanon.

They are range in urgency and scope — from the most pressing issues to the equally significant but secondary targets. Sadly, for what is ostensibly an economic manifesto, it starts by looking at security. No matter what other reforms are done, the country cannot grow unless it cracks down on the surge in violence that has wrecked havoc on people’s lives, while economically destroying thousands of businesses and scaring away investors.

To do this the political classes need to get behind the military, the one truly popular institution in the country. This should involve increased financial support and new strategies to control the country’s porous border with Syria (see article).

Engaging better with society

On the related topic of Syria, the previous government’s attempts to deal with the Syrian refugee crisis and its impact on society were little short of woeful. While there were some notable exceptions — new health minister Wael Abou Faour did, for example, an honorable job as Minister of Social Affairs — there was no collective response to the crisis. Too often ministries worked against each other rather than for the common cause. As Ninette Kelley, the head of UNHCR in Lebanon, argues this must change.

Our third point may initially appear incongruous; to make the argument for a new census right now might seem ludicrous when, for political reasons, the country has not had one since 1932.  But, as leading pollster Kamal Hamdan argues, the country can no longer continue to stagger forward. It is impossible to do even the most basic planning without better statistics. If a full census is politically impossible, then improving the country’s statistical base would be a very good start.

Once there is more information about who the Lebanese really are, it becomes possible to better engage them in society. One easy way to do so would be through the tax system. As the American University of Beirut’s economics professor Jad Chaaban argues, Lebanon’s tax regime is fundamentally unfair — a system designed by those in power to benefit themselves. To make people feel more engaged in Lebanon, they need to have the impression they are getting a fair deal. This need for fairness extends beyond merely taxes into all areas of society. As Zafiris Tzannatos, senior advisor to the International Labour Organization, and regional pensions expert Ibrahim Muhanna, argue (here and here) the need to develop a new deal for the Lebanese people is great.

Taking the country forward

Beyond this, perhaps the best way for those in power to fundamentally change their relationship with the people they claim to serve would be a newfound honesty and transparency. It is little surprise that the country’s political classes are so widely reviled when they have such a long record of wasting (and often pillaging) public coffers. In this vein, it is important that the concept of truly independent regulatory authorities is introduced in the country (read the article here). These bodies could work in conjunction with new public-private partnership funding mechanisms to revitalize the country’s infrastructure. Ziad Hayek, secretary general of the Higher Council for Privatization, makes the case for these reforms.

Whether it be electricity, water or any other crisis to which the Lebanese are subject, the cures for so many of the country’s woes are not beyond us. With sensible, planned development, the country could move forward rapidly. Yet for decades, a lack of willingness to tackle political interests has held back the forces of reform.

This leads us to the most potentially exciting issue on the list: the nascent offshore oil and gas sector. These resources have the capacity to transform the country over the coming decades, allowing governments to offer the services citizens deserve. But they could just as easily get lost in corruption, and many politicians are secretly looking to the country’s hydrocarbons as an opportunity to maintain the status quo. A fundamentally bankrupt system can, they reason, be held up by petrodollars.

But as Sami Atallah, director of the Lebanese Center for Policy Studies, argues, it is vital that these resources are used in the right way to facilitate growth. This requires the same principles as all sectors of the economy: sensible planning, honesty and transparency. These alone can ensure the country’s offshore wealth is not squandered away by corrupt politicians.

Perhaps all these arguments lead to one conclusion — Lebanon needs a new way of doing politics and a new deal for its people. The system is broken and the chances of fixing it are slim. As former Tripoli MP Misbah Ahdab argues, too many of Lebanon’s actors take their orders from outsiders. What the country really needs is a powerful independent movement, pushing forward moderation and unity across all segments of society. This may be beyond the remit of this current compromise government, but it is a hope for the coming years. With new parliamentary elections due by the end of the year, the chance to build new coalitions is real.

No Lebanese government in the past two decades has successfully managed to implement real, transformative reforms of the kind outlined in these pages. Economic growth has often come in spite of the government, rather than because of it. The changes presented in this manifesto, if implemented, would change the country’s economy and its future. Now it’s over to the politicians to do it.

March 6, 2014 0 comments
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10 Ways to Save LebanonComment

Rewrite Lebanon’s unfair tax laws

by Jad Chaaban March 6, 2014
written by Jad Chaaban

As part of Executive’s ‘10 Ways to Save Lebanon’ issue, we asked leading experts from a range of fields to put the case for one major policy for the country. In this article, economist Jad Chaaban makes the case for rewriting the country’s tax laws.

 

Lebanon’s current tax rules are both deeply unjust and ultimately counterproductive. They are unfair primarily because they rely so heavily on indirect taxation — mostly Valued Added Tax and taxes on consumption. On average, when you buy goods in Lebanon, 18 percent of the cost is tax. These indirect taxes make up 70 percent of the government’s revenue and equate to around 12 percent of gross domestic product.

In contrast, direct taxation — income tax and other levies paid directly by individuals and companies — represent just 6 percent of GDP, compared to 15-20 percent in most western European economies. This is vitally important as indirect taxes are deeply regressive. With VAT and other indirect taxes, the rich pay less as a percentage of their income than the poor. Consider, for example, the country’s phone tariffs — the highest on average in the Middle East. Of the average 15 cents per minute phone call, around 65 percent is indirect taxes. These taxes are exactly the same for a millionaire banker as they are for a local shopkeeper, but will cost the shopkeeper far more as a proportion of their income.

Even the direct tax system is often unfair. While income tax is at least partly progressive (though there is still only a 15 percent top rate), the same can’t be said for company taxes.

As an individual starting your own business, you pay a progressive tax rate ranging from 4 to 21 percent, but as a limited liability company or corporation you pay a flat 15 percent rate. That means that if you are a tailor or a web developer and you set up your own company making $200,000 a year, you pay 21 percent tax. But if you are a bank making $200 million a year, you pay 15 percent. This is deeply unfair.

This is also counterproductive as it is polarizing Lebanese society economically. In 1974, the share of families on middle incomes was around 60 percent. By 2004, this had dropped to 20 percent. The civil war and the ensuing decades have created a system where the richest 20 percent of the population has 50 percent of the wealth, while many more live on or below the poverty line. The middle class has largely disappeared.

Building on broad shoulders

This matters not just for social cohesion but for economic growth — an innovative and hard-working middle class is vitally important for both job creation and democracy. Study after study has shown how important it is for economic development that the population feels invested in the system.

The first priority is the reform of direct taxes to make them both fairer and more numerous. Increasing direct taxation for those in the higher income brackets would generate vital revenue for a government that faces a spiraling public debt and little to no growth in the coming years. Asking the rich to pay more in direct taxes, while keeping taxes low for those with lower incomes, would begin to make our society fairer.

Likewise, we have to start to close the loopholes that allow some of Lebanon’s most powerful businesses to avoid paying their fair share. Hugely profitable companies often use various techniques to pay very little tax, such as registering as a holding company, which allows for taxes as low as 4 percent. Taxes paid by the hugely profitable (but low job creating) real estate sector, for example, constitute just 2 percent of GDP, while real estate transactions constitute 25 percent of GDP. Even a small rebalancing of this would have a major effect on the deficit.

With this extra revenue, indirect taxes could be scaled back over time, making the system fairer for all. We need to provide more support to the poor and ask more from those with the broadest shoulders.

Critics will argue that the state’s deep inefficiency means increasing taxes will just increase corruption. But this attitude exacerbates an already vicious cycle; as the middle class flees and the rich opt out of the system altogether, the state slides ever further toward economic and political collapse.

These reforms would require a strong political consensus, which looks hard to achieve given politicians’ close ties with the wealthiest Lebanese class. In fact, many of those in the new government either have significant economic empires or are allied with them. Yet a stable and thriving Lebanese economy can only be reached with more equity and economic justice, and this has to include a reform of our tax system.

March 6, 2014 3 comments
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Business

‘This is the next industrial revolution’

by Livia Murray March 5, 2014
written by Livia Murray

Mike Butcher is the editor-at-large of TechCrunch, the world’s largest online source for technology and startup news, while he is also invested in numerous educational initiatives in the UK that teach youth how to code. Attending his third ArabNet in Beirut, Executive caught him at the informal startup pitch-off TechCrunch Meetup (co-hosted by Bader Young Entrepreneurs) where he served on the judging panel. Hosted at Coworking +961, eight startups competed for tickets to attend TechCrunch Disrupt NYC.

 

You’ve been coming to ArabNet in Beirut for a couple of years. What is it about the Lebanese startup scene that is making you come back?

Well, I think the enthusiasm, and there’s clearly credible talents coming from this region even under obviously difficult circumstances. There’s an interesting marriage between creativity and design, and technical capability and technical execution. That’s something that’s really Lebanon actually. There’s a long heritage here of media and culture and arts and engineering as well. These are some of the key elements why we’re seeing some really interesting technical products appear from this region.

What developments have you seen in the Lebanese ecosystem in the last couple of years?

Everyone is getting a lot more professional, the pitches are getting better, the presentations are getting slicker. People are obviously watching what’s going on outside in the rest of the world and the way that the technology world is moving and taking queues from that. You can see it everywhere you go.

Based on the startups that you saw tonight and maybe other startups that you’ve talked to in Lebanon, what are some of the strong points across the board?

I think the strong points are slightly out-of-the-box thinking – thinking about things in a different way than you might in another part of the world. I think also there’s some interesting executions of existing ideas which we’re all familiar with such as market places or dating, and then adapting those business models to the region, often in quite a clever way. Those are the kinds of differences we see.

What about ways the entrepreneurship sector can improve?

Things to work on would be the fact that there is a lot of copying, a lot of clones. This is something that you see a lot in emerging markets. But sometimes you can learn some things when you clone something.

Lebanon lacks coders. You support many programs in the UK which teach youth to code, some teaching children as young as 9. What is the advantage of learning how to code at such a young age and would you recommend replicating this in other places?

Absolutely, totally. This is the next industrial revolution and if we don’t get our kids to learn how to program and do computing and design and that kind of thing then they’re going to miss out in the future because all the high value jobs will have to do with technology. So it’s desperately important that governments and society get on board and make education systems understand the importance of technology.

You’ve been involved in the UK startup scene for some time now. Based on your experience, what degree of change can a startup ecosystem have on the economy?

There are a lot of benefits to a startup ecosystem. For every technology job that is created, about four other jobs are created; whether it be in urban regeneration, in manufacturing, in terms of the fact that you create a product and then you have to employ people to make that product, factories employ more people because you have to create more hardware. So there are a lot of uplifts. It’s not just a few guys in the corner coding. There are a lot more benefits.

I’ve seen for myself how whole areas of London have been regenerated because people moved in and started creating technology companies. And that’s led to all sorts of stuff, such as better housing, that didn’t exist before. So there’s a lot of things that can be said for it.

March 5, 2014 0 comments
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10 Ways to Save LebanonComment

A unified strategy for the refugee crisis

by Ninette Kelley March 5, 2014
written by Ninette Kelley

As part of Executive’s ‘10 Ways to Save Lebanon‘ issue, we asked leading experts from a range of fields to put the case for one major policy for the country. In this article, UNHCR Representative in Lebanon Ninette Kelley urges different ministries to work together to develop a unified strategy for Syrian refugees, including making a decision about establishing formal refugee camps.

 

In early June 2011, I visited Wadi Khaled, the small mallet-shaped piece of land that juts out of the northeast corner of Lebanon, bordering Syria on its three sides. It was here that over the course of the preceding three months some 2,000 refugees from Syria had entered.

Most had come from Tal Kalakh — fleeing a swift and firm response to growing unrest which was slowly starting to spread throughout Syria. The refugees had left their battered village, fallen homes and even family members, seeking safety across the nearest border. The majority were staying with Lebanese families in villages throughout Wadi Khaled and in other parts of the northern region of Akkar. When asked when they thought it would be safe to return home, both refugees and hosts were quick to reply that it was just a matter of weeks or at most months.

On that particular day, Naji Ramadan, then mayor of Machta Hamoud, told me of his worry that the water supply in the village could not keep pace with increasing demand. Already shortages were being felt. He asked for the UN to help and we provided water trucking to the village: a temporary solution for what many predicted was a temporary problem.

Worse than predicted

Today the refugee population in Akkar has grown to 94,244, while nationally it has risen from just over 125,000 at the close of 2012, to over 930,000 and is growing by some 12,000 persons every week.  Refugees are spread throughout 1,600 localities in the country — and in many the Syrian population now outnumbers Lebanon’s own.

The frequent refrain is that Lebanon cannot cope. What is astonishing is that it has so far, but the cost has been high. It can be measured in many ways: loss of trade, tourism, consumer confidence and investment, as well as falling wages and the rise in government expenditure, all while the demand on public services and subsidised goods increases. Public services, which were challenged before the crisis, are particularly impacted — as schools struggle to accommodate tens of thousands of refugee children, and primary and secondary health services buckle under the strain of additional demand. Fragile water, sanitation and waste management systems simply cannot cope with the increased pressure the arrival of so many refugees has wrought. Missile strikes, car bombs and suicide bombers within Lebanon have increased in frequency — fraying nerves as the fear of the spread of the Syrian conflict looms near.

Many lament the lack of sufficient international assistance to help Lebanon deal with a crisis not of its making and far out of proportion to its size.  While more international assistance is indeed critical, the government must take steps to attract humanitarian and development aid, and give confidence to donors that the assistance will have the desired impact.

Responding to the crisis

Looking over the considerable achievements in the past three years, as well as the gaps, one can point to three important areas which will need to be focused on to help Lebanon cope with the crisis.

Firstly, Lebanon cannot be expected to carry the cost of meeting the enormous humanitarian needs of refugees from Syria.  Most flee after having been displaced more than once within Syria.  They arrive having endured great deprivation for sustained periods of time, with few personal belongings and having suffered enormous personal losses.  Last year the international community donated over $881 million for the humanitarian response in Lebanon, including funds to help meet the most urgent needs of refugees (food, shelter, health, protection and services for women, children and the disabled), as well as backing to Lebanese institutions at the front line of the crisis and support to hosting communities (wells, water, sanitation and waste management facilities, community centres, etc).  This year they have been asked to do the same and more. This support is crucial — the lives of refugees depend on it and Lebanon cannot manage without it.

Secondly, now that a government has been formed, Lebanon must decide how best to manage the current crisis in the near and immediate future.  In 2012, the Prime Minister set up an inter-ministerial committee, with the Minister of Social Affairs as the coordinator.  Yet for most of last year, when over 700,000 refugees fled to Lebanon, different ministries for the most part coped relatively autonomously — as the political differences that pulled the government apart in April 2013 made coordinated action between them impossible.

And while individual ministries were critical in managing the situation, crucial policy issues, which required a coordinated government response, were left undecided. Determining an appropriate mix of shelter options, including modest but more formal settlements, is becoming more and more urgent.  Planning across ministries in case of a greater influx or internal displacement is very much needed. Improving border processes, and provision and renewal of residency coupons is key to ensuring the government is able to know who is in the country and who is returning. An empowered administrative structure to coordinate across ministries, with the international community alongside it, would improve the response, mitigate the negative impact and engender more confidence in donors.

Finally, as the World Bank assessment last year made clear, the large and growing negative impact of the Syria crisis on Lebanon needs to be promptly addressed, and this goes far beyond what can be expected from humanitarian funds.  The subsequent Lebanese government’s ‘Roadmap of Priority Interventions,’ which built on the findings of the assessment, deserves to be supported.  With its combination of immediate, medium and longer-term measures, the Roadmap provides a critical starting point for developing and supporting the interventions that Lebanon so badly needs.

March 5, 2014 0 comments
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10 Ways to Save LebanonComment

Plan an oil and gas sovereign wealth fund

by Sami Atallah March 5, 2014
written by Sami Atallah

As part of Executive’s ‘10 Ways to Save Lebanon‘ issue, we asked leading experts from a range of fields to put the case for one major policy for the country. In this article, Sami Atallah from the Lebanese Center for Policy Studies discusses ways to protect the country’s offshore oil and gas wealth.

 

In the coming years, Lebanon could begin to reap the benefits of its offshore oil and gas reserves. These resources could be worth tens of billions of dollars in a country where annual gross domestic product is little more than $40 billion.

This new source of wealth has the potential to completely transform the country’s economy and society. But the dangers are also clear; almost every society that discovers resources ends up less competitive in other key sectors of the economy — the so-called ‘resource curse.’ Whether Lebanon can avoid this or not depends on how it manages sustainable development.

One absolutely key decision will be how the oil money will eventually be spent. Article 3 of the 2010 offshore petroleum resources law stipulates that the net proceeds of oil and gas will be deposited in a sovereign wealth fund (SWF). The law, however, stops short of dictating how the fund will be run, instead saying it would be governed by a “specific law” which will be passed later. This article alone, one of 77 in the 2010 law, dominated the debate in Parliament when the law was voted on. This is hardly a surprise — Lebanese politicians have a habit of focusing on where the cash will go.

This fund is key to Lebanon’s development. How well it is managed will depend on the institutional arrangement that the government puts in place to govern it. It must be said that Lebanon’s record in managing funds is pretty dismal. Take, for instance, the Fund for the Displaced, which has recently been marred with corruption charges, or the Council of the South, which is supposed to help develop one of the country’s poorest regions, yet the money often seems to evaporate before reaching its target.

There is one example of a country avoiding the resource curse: Norway. This was because of the country’s exemplary and powerful SWF — a product of a long and ongoing process of reform. With an eye on sustainable growth, Norwegian governments have given the fund significant independence, while also keeping it modern. It has gone through three major reforms and experimentations to become the leading SWF in the world.

Clear principles

To learn the lessons of the Norwegians and get the best deal for all, Lebanon’s sovereign wealth fund must adhere to four basic principles:

1. It must adopt clearly specified objectives and investment strategies. This provides the mandate of the fund in terms of what it should be investing in, such as bonds, stocks, or real estate in local or international markets.

2. It must abide by clear fiscal rules to access the funds. A fundamental issue that ought to be addressed is the conditions under which the government can use the earnings of the fund. Without having clearly specified criteria, politicians will be tempted to resort to the fund to finance their personal or electoral needs.

3. It needs a proper governance structure that clearly identifies the role of the government, the governing bodies and the managers of the SWF. It must state the role of the managers in making investment decisions.

4. The fund must be transparent and accountable to the public. It must show how it conducts its investment strategy i.e. what its investment categories are and how it decides where to invest. It must also regularly post the size of the fund, its rate of return, location of investment and its currency composition. It must regularly publish status reports and independent audits.

These conditions are necessary but not sufficient. For the fund to be effectively managed it must be properly integrated into the public finance, otherwise even a well-managed fund will be undermined by a weak budgetary system. Politicians will use it to further mismanage the budget and avoid necessary reforms, and the SWF could even end up as a second or a parallel budget that the government could implicitly borrow against. This would lead the country straight to the resource curse.

Lebanon’s record in managing its public finance is poor. Not only has there been no budget since 2005, the weak budgetary institutions, which include multiple budgets, inadequate auditing and lack of transparency, undermine the prospects of properly managing the fund. Without these conditions in place, Lebanese citizens will not reap the benefits of the resource.

Many Lebanese politicians are pretending that the country’s oil and gas will solve the country’s problems but that is far from certain. In fact, if badly run, it could make corruption worse. If we want to avoid the resource curse, we need to start reforming the fiscal institutions now, to ensure that the SWF will serve sustainable development.

March 5, 2014 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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