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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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Business

Dubai hotels boast double-digit 2013 growth

by Thomas Schellen March 4, 2014
written by Thomas Schellen

Dubai, the commercial hub of the United Arab Emirates, has reported a 11 percent increase in hotel guests to 11 million persons, according to a March 4 report by the Dubai Department of Tourism and Commerce Marketing (DTCM). In 2012, the number of guests across all hotel categories stopped just short of the 10-million bar, at 9.96 million.

The emirate has, in fact, hopped across two memorable achievement markers in one year – thanks to an 11 percent spike in the number of guest nights. With an average length of stay of 3.8 nights per guest, the total count of guest nights grew to 41.6 million. Due to higher average room prices at both hotels (+7 percent) and hotel apartments (+4 percent), hotel operators reaped $5.95 billion (AED 21.8 billion) in revenues, an impressive 16 percent increase from $5.1 billion in 2012.

Lebanese guests contributed to the increase with 112,000 visitors, up 12 percent from the previous year.

dubaihotelguests

The top source country for Dubai visitors and the biggest gainer in absolute numbers was Saudi Arabia, with 1.35 million citizens booking Dubai accommodations in 2013. That was up 20 percent from 1.12 million in 2012.

The emirate’s hotel operators recorded their biggest increase in percentage terms for Australians. The number of travelers from Down Under leapt 39 percent to 269,000, something which the DTCM attributed directly to a new partnership with Qantas that started on April 1, 2013.

Greater visitor inflows from China (up by 11 percent) were described in a DTCM statement to have come “partly as a result of the targeted marketing activities in China” by the organization. However, the release also noted that Chinese tourists generally have a growing appetite for international travel.

Besides Saudi Arabia, the top five countries from which Dubai’s tourists originated were India, the United Kingdom, the United States, and Russia. Between them, these five countries were home to more than 35 percent of Dubai’s hotel guests in 2013.

Only one country among the top 20 source countries of Dubai visitors was shown as having negative growth in 2013, and this was Iran – with a 14 percent drop to 278,000. DTCM volunteered no suggestion as to the reason.

dubaihotelguestsfigures

While the number of hotel rooms and short-least hotel apartments increased 5.1 percent to 84,500, occupancy rates improved to above 80 percent in both categories, suggesting that Dubai hospitality operators could flash hefty smiles for the second year in a row when tallying their growth in revenues, and presumably profits. According to data in the DTCM statistics the hotel sector’s revenues increased by almost 38 percent from 2011 to 2013.

In the opinion of DTCM, Dubai hotel operators have every reason to look optimistically into the future even as another 29,000 plus rooms are in the pipeline for 2014 to 2016. This is because the emirate has a target to welcome 20 million annual guests by 2020.

“In order to provide accommodation for our targeted visitor numbers for 2020, we estimate we need a total of between 140,000 to 160,000 rooms and will work closely with the investment industry to make this happen,” said DTCM Director General Helal Saeed Almarri. Dubai is actively pursuing investments into its hotel industry and has created incentives for developers of mid-range hotels.

March 4, 2014 0 comments
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The Buzz

Beirut traffic: The prisoner’s dilemma in action

by Joe Dyke March 4, 2014
written by Joe Dyke

The prisoner’s dilemma is a classic game theory example that is used to show how logical individual actions can be deeply illogical for a group and/or society as a whole. In it, two members of a criminal gang are arrested and held in separate rooms, with no information about the other. The cops have limited information, so if neither talks they will get only a lesser charge and serve a one year sentence — the best result for all.

Yet, the theory holds, they will both reason individually, rather than collectively, and therefore will betray the other — with both subsequently going to prison for two years each. This is because both know that if the other betrays them and they remain silent, they alone will serve a three year sentence and the other will walk free.

Now apply this to Lebanon. Lebanese people have long been aware of the country’s terrible traffic problems, with hours of gridlock the norm. But a new video published last week illustrates how it can be a case of logical individual choices creating collective carnage.

In the video (shown below) dozens of cars arrive at an intersection at the same time. Each pursues the logical individual choice — to try and sneak through and get to their destination quickly. The result is collective gridlock.

In an email with Executive, the publisher Moophz Himself — who preferred not to give his real name — said the film was made at an intersection in the Bauchrieh suburb in northern Beirut.

He said he chose to publish it to make a point about Lebanese society. “The video is a slight projection for our society in terms of selfishness and short term intelligence. The majority of drivers are not aware that waiting in line helps them reach destinations with less pain — resulting bottlenecks, noise pollution and mental health injuries.”

March 4, 2014 2 comments
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Business

ArabNet Beirut 2014: Five things to look out for

by Livia Murray March 4, 2014
written by Livia Murray

As ArabNet kicks off it’s fifth conference in Beirut today, we assess the agenda which offers events for a wide variety of online business geeks. Here are our top trends to watch out for this year.

 

Online advertising: Does it work? Or do companies spend too much money on advertising online? Chahe Yervenian, CEO of real estate company Sayfco Holding, will be discussing the company’s experience in advertising on Facebook. Having the largest Facebook presence among Middle Eastern real estate companies, you’ve probably seen Sayfco’s ads sandwiched between posts. Yervenian will be discussing the resources they put into online advertising versus the sales they get from it. Catch his talk after lunch on Wednesday.

If you are still hungry for more in the online advertising department drop by the twin panels on The State of Growth of Digital Advertising, by global market research company Ipsos and online advertising monitoring company OOX. Catch them on Wednesday afternoon and Thursday morning, respectively.

 

De-bunking Circular 331: Marianne Hoayek, head of executive office at Banque du Liban (Lebanon’s central bank), will be taking questions mid-day on Wednesday on the central bank’s $400 million stimulus to increase investments in the knowledge economy. Hoayek will hopefully shed some light on some of the issues revolving around the circular, particularly addressing the concern that Lebanon does not have enough deal flow to effectively utilize the amount of money being pumped into the ecosystem. (See our coverage on the issue here.)

 

[media-credit name=”Greg Demarque” align=”alignnone” width=”560″]omar[/media-credit]

Founder Omar Christidis launched the event on March 4, read our interview with him.

 

New ways to pay: Two panels on the last day of the event will discuss emerging methods for alternative payments and alternative commerce platforms. These new innovative business models will be discussed by panels of companies on the younger side. The first on alternative payment methods will feature mobile payments methods, PinPay and Bitcoin, and the second on e-commerce will bring together up-and-coming fashion, luxury and gift e-commerce sites to talk about their experiences.

 

Speed networking and creative combat: Both have one thing in common: intensity. After lunch on day two of the event, speed networking gives participants an opportunity to connect and grow their contacts in a structured networking activity. Participants sit in two rows facing each other, and the rows shift every three minutes. And voila: 20 new connections in the space of an hour.

Creative combat is a competition that aims to highlight young talent in regional advertising, communication and media. Teams of two-to-three members had a week to come up with a plan for effective digital marketing, and they will pitch it to a panel of judges who will stand on stage and give them direct feedback. The panel includes judges from Exotica, Silkor and Patchi. The competition is the last event before the closing awards ceremony.

 

Web design and development: Catering to the geek in all of us, the first day of the conference will be dedicated to workshops on web design and development. Topics include Typography in Web & Mobile, Developing for Windows, and Publishing and Monetizing Android apps on Nokia. Techies, don’t miss the chance to sharpen your skills.

 

Stay tuned for Executive’s coverage of the event and in the meantime check out our interview with ArabNet’s founder Omar Christidis here. Also take a look at the agenda of the event and let us know what you are most excited about in the comments below.

March 4, 2014 1 comment
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Leaders

Lebanon’s new government: Get to work, gents (and lady)

by Executive Editors March 4, 2014
written by Executive Editors

Having spent the best part of a year trying to form a government, when the new Prime Minister Tammam Salam visited President Michel Sleiman in his Baabda Palace to announce the new Cabinet, he may have been feeling more pressure than excitement.

The challenges facing the country are greater than at any time since the civil war ended in 1990. Since the start of the year, there has been a string of suicide bombings, killing dozens and injuring hundreds. Economically, the country is stagnating — with scores of young people desperately seeking a route out. If Salam is to defuse the crisis, he will need a strong Cabinet around him with a clear plan.

The initial signs are not wholly positive. Shortly after the Cabinet was announced, it became clear that many of them had not been selected purely on merit. Ali Hassan Khalil, the new finance minister, admitted in public that he knows very little about finance, while he speaks far from perfect English and French — a major stumbling block when presenting the country internationally.

Elsewhere, Ashraf Rifi and Nouhad Machnouk’s appointments to justice and interior ministries respectively raised more than a few eyebrows — both are seen in some quarters to be partial in ongoing clashes in Tripoli and elsewhere. Whether they can be fair brokers, taking on armed militants on both sides for the sake of the country’s security, is yet to be seen.

There were also gifted people being seemingly misused. For example, new agriculture minister Akram Chehayeb seemed much more suited to the role of environment minister — he was previously chairman of the Parliament’s Environment Committee — than Mohammed Machnouk, whose background is more in cultural activities. And while Gebran Bassil has many talents, charming people and making friends (a prerequisite for any successful foreign minister) are not among them.

Perhaps the most obvious omission was the least surprising one — the lack of female representation. Just one of the 24 new ministers is a woman. Indeed those cruel enough to joke suggested that her isolation was such that Alice Shebtini’s title should really have been Minister for the Misplaced, rather than Displaced.

More fundamental doubts about the government’s mandate abound. In theory their term could be up as early as the end of May, when they will select a new president. If this proves to be the case, then they will have little time to implement meaningful changes.

But while there may be something of a collective sense of ambivalence towards the Cabinet, this is no time for indifference.

What we present we will be presenting over the coming days online are a wide series of reforms — from short-term responses to the security situation to a fundamental restructuring of the institutions of the state to better represent the country’s wishes. In each field we have asked leading experts to put forward the case for change.

No longer can the government fail to grapple with the Syrian refugee crisis, with rival ministries implementing contradictory policies.  No longer can the political classes allow the security situation to slide out of control. And no longer can the country continue with an unfair tax system or allow our politics to remain dominated by outside interests.

If implemented, these changes would make a major difference to the country, both stabilizing the situation and giving people a say in their society again. Many of them are not rocket science — this magazine has advocated for some of these policies since its inception in 1999 — but they require a political resolve to change Lebanon’s bankrupt system once and for all.

So far we have seen little sign that this government will be made of stronger stuff than its predecessors, but we call on those newly empowered to stand up for their compatriots, and take the right steps for the country.

Lebanon can no longer muddle through, for as it lunges from crisis to crisis it slides ever further towards a return to civil war. This government has a rare chance to take major steps to defuse this crisis. For the future of all Lebanese, it is time for them to get to work.

March 4, 2014 0 comments
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Economics & Policy

Further oil and gas delays ‘likely’

by Thomas Schellen March 3, 2014
written by Thomas Schellen

Despite the appointment of a new government last month, Citi Group’s research unit has commented cautiously on Lebanon’s outlook for oil and gas exploration. “Despite the formation of a government, we believe the prospects for the implementation of an oil and gas strategy remain low,” the group said in its latest Middle East Macro Monthly report published on Friday.

While the researchers emphasized that they see domestic oil and gas exploitation as a potential game-changer that could “spur a major transformation in the country’s economic fortunes,” they were skeptical that the already thrice delayed tendering process for offshore exploration blocks would progress in the current political climate. “We believe it is likely to be delayed yet again,” the researchers wrote.

The researchers also said there was likely to be “great continuity” under the new government as the energy ministry had remained in the hands of Michel Aoun’s Change and Reform Bloc – with Arthur Nazarian replacing Gebran Bassil. They added that Bassil, now the foreign minister, would still retain “some responsibilities within the energy ministry.”

Despite noting this stable hold of authority in the energy ministry, the report shows no optimism on the potential for progress in the oil and gas tenders or for economic policy progress in general. It argues that the cabinet of new prime minister Tammam Salam is an “interim government in all but name” and would be preoccupied with two main tasks: first, keeping the country out of greater sectarian strife and second, management of the presidential succession and parliamentary elections. As such there is unlikely to be major steps forward in the oil and gas sector.

March 3, 2014 0 comments
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Leaders

Entrepreneurship: Beware a bubble

by Executive Editors March 3, 2014
written by Executive Editors

Last August, after much speculation Banque du Liban – Lebanon’s central bank – released Circular 331. The $400 million plan aimed at encouraging the country’s start-up sector by guaranteeing 75 percent of commercial banks’ investments in fledgling companies. The long-term aim was to boost Lebanon’s ‘knowledge economy’.

Many in the startup world greeted it with enthusiasm as a move that could potentially revolutionize the ecosystem, but others were more skeptical of how banks would go about investing in startups.

In recent months, as the mechanisms have become clearer, banks have begun to make deals with venture capital firms that will invest the money into startups on their behalf. Several funds already have money pledged from banks and are waiting to invest (see full article).

While documents structuring the funds are still waiting for approval from the central bank, Lebanese startups are faced with a lot more money than ever before. Yet a large injection of capital is not necessarily the best thing for the ecosystem.

As Executive reported in November, potential investors were already concerned about a weak deal flow: not enough exciting startups worthy of investment. The increase in available finance has done nothing to change this. If the increase in capital is not paired with a concomitant increase in the number of investment opportunities, there will be too much money chasing too few deals.

This could create an inflationary pressure on valuations, with companies able to play different funds against each other. This would in the short run be good for Lebanese entrepreneurs to a certain extent; many have complained of low valuations and having to relinquish large equity stakes for relatively little money. With more bargaining power, they can fight to retain more ownership over their companies.

But too much inflationary pressure could also create a bubble, which could lead to riskier investments. Funds with plenty of capital but few enticing companies to invest in could end up paying inflated prices or making bad deals. Inflated valuations could also lead to the funds not deploying their money.

While many in the entrepreneurship sector admit the possibility of a bubble down the road, they do not seem overly concerned. Venture capital funds already have a number of companies earmarked for investment, and each seems confident they will deploy all of their share of the $400 million and beat the market.

It is important that this confidence does not turn into complacence. The issue of Lebanon’s weak deal flow must be addressed and some venture capital firms are already making efforts to boost the pipeline. These efforts should be given the utmost priority, no matter how comfortable the funds feel with their potential investments. Lebanon needs a dramatic and timely increase in startups over the next couple of years for the central bank’s incentive to have the desired impact on the ecosystem.

Circular 331 is a great opportunity for Lebanon’s startup ecosystem, but it is equally important that the right measures are taken to prevent a bubble.

March 3, 2014 1 comment
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Business

Let the investment games begin

by Livia Murray March 3, 2014
written by Livia Murray

Lebanese venture capital firms (VCs) could not be more pleased. Following Circular 331 passed last August by Banque du Liban (BDL), Lebanon’s central bank, to ‘de-risk’ commercial banks’ investments in startups, the banks have opted to invest handsome sums into VCs.

Banks considered this the ideal way to benefit from Circular 331, which guarantees 75 percent of their investment either directly into startups or into startup funds. According to Stephane Abichaker, head of investment banking at Blominvest Bank, 70 percent of alpha banks are choosing to invest in funds.

Incentivizing investment
As VCs await the central bank’s approval of legal documents determining the structure of the funds, it is clear that the incentive has the potential to create dramatic change in the sector.

Investments that benefit from Circular 331 are to be in Lebanese joint-stock companies that contribute to the national knowledge economy — a term loosely used to describe any sector that makes use of creative and intellectual skills.

The move is considered an incentive for the generally conservative and risk-adverse banking industry to invest in the economy. According to Lebanese law, it is not possible for the central bank to invest in equities directly. Therefore, it has implemented a creative mechanism to advance capital to the commercial banks that would then be invested in startups.

The mechanism behind the stimulus consists of three parts, all of which happen simultaneously — a slight alteration from the one originally proposed in the basic circular. First, a bank gets an interest-free loan from the BDL. Second, using this loan the bank buys treasury bills. Finally, the bank sells back the treasury bills to the BDL at a discounted rate, which increases the present value and from which the commercial bank derives a profit. The profit is calculated to amount to 75 percent of the bank’s investment in the knowledge economy.

Total participation of a bank cannot exceed 3 percent of their capital. This amounts to a maximum of roughly $400 million of guaranteed investments being injected into the ecosystem.

Circular 331 stipulates that commercial banks must pay BDL 50 percent of profits accrued through the selling of shares or dividends.

Capital injection

Most parties hailed the stimulus as a bold move, since the incentives, if implemented properly, could potentially have a large impact in developing Lebanon’s startup ecosystem. VCs jumped at the occasion of garnering investment that they would otherwise have trouble finding, particularly in the current unstable political and security situation that is hampering demand for long-term investments such as equities.
Circular 331 saw existing VCs fundraising amounts much higher than their previous funds. After a mostly successful batch of startups in their first round, venture capital darlings of Lebanon, Berytech and Middle East Venture Partners (MEVP), are coming back for a second helping.

Berytech has already raised $26-27 million in capital pledged from the banks for Berytech Fund II, according to fund manager Paul Chucrallah. They hope to close at $30-35 million, a handsome sum compared to their first fund of $6 million.

MEVP is aiming for a $50 million fund, compared to their previous two funds MEVF I and Build Block Equity Fund which deployed a total of $17.5 million. They currently have $43.5 million pledged, all from the banks. Blom Bank, Bank Med, Banque Libano-Francaise and Bank Audi invested $10 million apiece, with another three or four banks pledging smaller amounts.

Both funds are waiting on the approval of the BDL to formally receive the money from the banks. Habib Haddad, CEO of Wamda, announced at BDL’s startup workshop on December 19 that Wamda was raising a regional fund of $75 million to be invested in Lebanon, Jordan, Egypt and Dubai. Wamda was not ready to speak about the fund, and it is not yet known how much they will invest in Lebanon. Their previous regional funds reached $20 million between the Wamda Fund and MENA Ventures.

While these three existing funds are making a comeback, several new funds that did not exist prior to the circular have emerged. A new fund has come to life to raise sums above and beyond what was possible before Circular 331. Hala Fadel, fund manager at Comgest, and entrepreneurs Henri Asseili and Herve Cuviliez are fundraising for a $100 million fund under Leap Ventures. Fadel admitted that this number was ambitious, and pegged their first objective at $50 million. The fund will mostly be made up of banks’ money, with a couple percentage points of the partners’ own investments.

Stakeholders revealed that a fifth fund specializing in fashion was on the horizon as well, but kept the details confidential.

Inflationary pressure

The artificial injection of cash raised concerns that there was too much money and not enough investment-worthy startups in the ecosystem. Stakeholders have been complaining for a long time about the ecosystem’s weak deal flow. But the increase in dollars has not been followed by a concomitant increase in deals. “It is true that there is too much money chasing too few good deals. And the risk here is that we might end up competing seriously with other funds and other investors to grab the best deals available and there are too few of them in this tiny market,” says Walid Hanna, managing partner at MEVP.

Artificial appetite for startups’ equity will likely create an inflationary pressure on valuations, as VCs outbid each other to get the few good deals.

“This is a major risk in Lebanon,” says Hanna. “Valuations are going to go up because there will be a lot of money, a lot of investors chasing very few deals. So we might overpay.”

An increase in valuation would be beneficial to the entrepreneur to a certain extent. It would change the power dynamics and give them a higher bargaining power vis-à-vis the VCs. Entrepreneurs in Lebanon have complained of low valuations and high dilution of their shares. VC funds in Lebanon usually take strong minorities in equity, with Berytech taking up to 40 percent and MEVP up to 49 percent.
It would also force VC funds to be more competitive in what they offer. MEVP is already looking to increase their competitiveness by adding non-financial services such as advice on business plans and better access to markets. “Entrepreneurs in Lebanon are going to have a blast. It’s the best time ever for them. Good for them. And may the best VC win,” says Hanna. But inflationary pressure on valuation could also lead to a crash if the companies are not investment-worthy.

Throwing darts

Stakeholders are banking on the fact that at least some companies will succeed. “You cannot miss on every investment you make,” says Berytech’s Chucrallah. “Even if you throw darts on the stock exchange pages, you still recover some of your money.”

Investing in startups is inherently risky, and there are always some investments that will fail. As a loose average, only 1 or 2 startups out of 10 succeed. In Lebanon, the success rate has been a bit higher because of the conservatism of investors. Overvaluations compound the risk of investing in startups that aren’t worth very much.

“I’d rather not invest the money than lower the standard,” says Fadel.

Earmarked for investment

Despite obvious warning signs, VCs do not seem particularly concerned, and are eager to deploy their money.

“We are competing for transactions — some people will go and talk to many funds. I don’t think it’s unhealthy,” says Chucrallah. “The danger would be if you have 5 to 6 funds totaling $500 million and they want to invest $120 million per year.” These numbers, however, match the potential injection of cash quite closely. Whether or not funds can raise this much money will only depend on banks’ appetite for investment, which already seems significant.

Chucrallah is “100 percent” confident that he will be able to deploy all of the money, and thinks Berytech can already invest between $7 and 10 million in the first year. They expect to deploy over a period of three to four years and make 10 to 20 investments in total. Their ticket size would be between $1 million and $3 million, which is significantly larger than their previous ticket size of $300,000 to $500,000, a logical increase considering the stage of growth that many Lebanese startups have attained thanks to going through the ecosystem.

“We are an ecosystem, not just a fund manager. That provides us with privileged access to a lot of things,” says Chucrallah, referencing Berytech’s role as an incubator. Besides scouting for new companies, Berytech also has opportunities in those companies they invested in from the first fund needing further rounds of funding.

“There’s no doubt that we will have the deal flow. I don’t know if there is the deal flow for $400 million, but there is the deal flow for $30 million over 4 years,” says Chucrallah.

MEVP is equally confident that they will be able to deploy their fund. MEVP plans to invest $10-15 million in their first year. They are looking to invest $43 million in 20 deals over four and a half years, with the rest going to expenses and management fees. Their average ticket size increased from their previous two funds, MEVF I and Build Block Equity Fund, from $500,000 to $900,000 to beyond $2 million.

Hanna claims that MEVP will have an advantage based on their proprietary deal flow — startups that came to them, as well as existing portfolio companies that will go to their second fund.

Comgest’s Fadel, too, says that they have 10 companies earmarked for their larger ticket sizes of $5 to 15 million, adding, “We think that there are a few companies in Lebanon that need that.”

“There could be a bubble if all of the money is invested in the same stage,” says Fadel. She claims that the Leap Ventures fund, with larger ticket sizes than the rest, would complement the ecosystem rather than compete with it. The fund will focus on companies in the “last mile before an exit.”

Other VC funds are concerned that there might not be enough larger-ticket deals, and that all of the VCs will be fighting for deals on the same level.

Avoiding the bubble

VCs have realized that they can’t only bank on chance. Awareness has grown among all stakeholders that measures need to be taken to either boost the flow in the pipeline of startups, or limit competition between funds.

“Deals come and go,” says Chucrallah, admitting that deals can easily slip through their fingers. “Things disappear, they are a function of time,” he says. Deals can easily end up in the palms of other VCs.

In order to boost deal flow, MEVP has hired Lebanese recruiters in San Francisco and Dubai to convince entrepreneurs, both Lebanese and foreign, to come to Lebanon to build their business. He admits that these would not necessarily be top deals, which are generally sucked up by big VCs, but still had the potential to be regional leaders.

Berytech and MEVP will both be investing alongside others in a community-wide incubator/accelerator, for which they are raising a combined $5 million. They plan to have two cycles of startups per year, each of which would include 5 to 10 companies. Upon graduation, the investors would own 20 percent of the company.

To limit competition, VC funds have toyed with the possibility of co-investments, though this would not be their ideal scenario. “We’re not really interested in co-investing with Lebanese banks or funds, but we might have to going forward,” says Hanna.

Whether this will be enough to prevent a venture capital bubble is still to be determined.

March 3, 2014 5 comments
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Society

Rana Salam – Lebanon’s mistress of Pop Art

by Nathalie Rosa Bucher March 3, 2014
written by Nathalie Rosa Bucher

Rana Salam’s studio is a maze of colors, a veritable smorgasbord of Middle Eastern trinkets, icons, logos and visuals, ranging from old movie posters to funky packaging that bursts with creativity. In her shop on Abdel Wahab al-Inglizi, Abdel Nasser’s profile features on a retro tabletop and Um Kulthum adorns button pins. What Campbell’s tomato soup was to Warhol, Chiclets chewing gum is to Salam, a great fan of pop art who masterfully celebrates and elevates local cult brands and paraphernalia.

“Lebanon today is a mix of old and new, infused with nostalgia. It’s a mishmash. I’m trying to create it all the time … In London you have the [red] bus, iconic brands such as Marmite … I adapted the same formula to our culture, and made them into products.”

Since starting out in London where she obtained degrees from Central St. Martins and the Royal College of Art, Salam is considered one of the most celebrated designers who utilize Middle Eastern popular art and culture.

Asked what she considered the source of success for Rana Salam Design, she argues passion and her determination to change the perception of the Middle East. “It was very important to me to create something from the Middle East that spoke about [our] culture in a modern way. I put myself and my own investments in this brand. It’s not work, work is being with the kids, this [the studio] is where I come and play — it’s effortless,” she adds with a hearty laugh.

Salam has worked on a great variety of projects, including branding a children’s shop (Lola et moi, Beirut). She counts Bank Med among her clients, as well as musician Natasha Atlas, chocolatier Cocomaya, the Victoria and Albert Museum in London and the National Museum in Beirut. She created and executed the theme for local NGO Skoun’s 2010 gala: Plastik Fantastik. She has designed various cafes (such as Laziz in Hamra), created textile designs for Nada Debs’ Floating Stools, worked for local furniture designers Bokja Design, and designed invitations and a look book for Dubai’s Boutique 1.

Window to the future

Straight out of college, she was commissioned to create windows for Harvey Nichols’ summer collection. The vibrant colors and art works she’d commissioned by Armenian cinema poster artists back in Beirut mesmerized passersby as well as Paul Smith, who in 2000 asked her to design his Spring/Summer show invitation.[media-credit name=”Executive” align=”alignnone” width=”640″]rana-salam1[/media-credit]

Salam has since then managed to achieve what she had set out to do, namely to change the perception of the Middle East through the power of design. Her studio in Abdel Wahab al-Inglizi specializes in art direction, design and consultation for retail, product, print, hospitality and exhibitions, besides other commercial activities.

“The Harvey Nichols windows were the beginning of my visual identity. I did not know that it was going to anchor me in that look and feel,” Salam points out. “Only 10 years later did I realize that that’s what people want. I worried I’d be stuck in this style, but people love it. I do need to let people know that I do other things, that I’m also a good designer, good at branding.”

Salam started her label Mishmaoul six years ago. It consisted of 10 items, among them cushions, puffs, tea towels, aprons, place boards and paper cups. Ambivalent about the name, she is gradually phasing it out, replacing it with her own name.

“I had zero start-up capital and experienced a lot of pitfalls, made many mistakes and cash flow disasters,” she says, recalling the early days. “I didn’t know you had to market things up — you buy something, you sell it. I hadn’t even seen an Excel sheet at school. I advise the young generation to get some business acumen, to learn the lingo and the know-how even if you are an artist or creative.”

Salam’s friend Abed Bibi advised her on her business, urging her to triple her rates. “That’s when I started to make money and was able to hire people.” Bibi was the one business consultant she could call on and still advises her now, most recently about retainers. “Thanks to him, I was taught the art of business. You have to know your value, pricing, getting rid of the cronies.”

At present Salam employs two designers and an account manager, which, in her words, has transformed everything: “I don’t have to speak money with clients all the time, she has freed me up.”

“I’m a tough task master but good at motivating,” she says of her leadership style. “I encourage them to wander outside, to put music on and I am flexible about 9-to-5.”

Salam, who recently set up a Sarl, underlines the risk her business faces when employees move on and take work with them. “Copyright infringement is an issue for small and big brands,” she says. “I set a style, a trend that’s never existed; 20 years ago, I started a visual language for the Middle East that became electric. A lot of people capitalized on it.”

[media-credit name=”Executive” align=”alignnone” width=”640″]rana-salam3[/media-credit]

Salam’s current range includes cushions, place boards, cutting boards, paper cups, button pins, puffs, kitchen towels, iPhone 4 covers and more, available at her shop and in Jeddah, Dubai, Kuwait and Qatar.

Partying through the pain

Sales in Lebanon in 2013 amounted to 40 percent of the total, compared to sales abroad. Salam concedes that she needs to expand, particularly into the GCC, Australia, the US, and Europe, to tap into the Lebanese and Arab Diaspora.

When asked about the company’s performance in the past two years, Salam refers back to her time in London. “The show must go on, when things are bad that’s when you have to party! I threw an office party for £400 in my London office years ago. The time to be creative is when things are slow. It’s the best test for fear — you shouldn’t let it take over.” Besides a bad start to 2014, Rana Salam Design incurred a loss of 4.5 percent over the 2012/2013 year.

“The shop came out of this present situation — it’s the £400 party revisited,” she explains. “It’s our best form of marketing; instead of a billboard, the shop front is the billboard. I decided to spend the rent and use the exterior to put wild graphics and eye-catching visuals up. Then during Beirut Design Week it became a design museum and the actual space inside eventually became a permanent shop. It was an idea that grew into a real shop but first really it was just to promote the name.”

In addition, Salam makes extensive use of social media, notably Instagram but also Facebook, Twitter and her website, as well as her iconographic yellow Vespa that she uses to get through Beirut traffic. “I sell myself,” she says laughing.

With her former ties to England, she sources some materials there. “The fabric is printed there, shipped over and sewn together here. Our paper cups are done here. I’m all for using local production so when it’s possible to do it here, I will have it made here. I would love to expand but my weakness is distribution. I wish to do iPhone 5 covers but that will require an order of 10,000 … Quality and cost always are a concern.”

“We’re in an ongoing process of innovation, it’s an immediate process,” the designer explains. “I don’t really do prototypes — that requires money. You have to believe that you are spending forward, believe in slow rewards.”

The first collaboration between Bassem Fattouh and Salam has created Nostalgie d’Orient by Bassam Fattouh, to be launched in April.

She is unequivocal about her most  successful project to date: the book “The Secret Life of Syrian Lingerie — Intimacy and Design.” Salam teamed up with writer  Malu Halasa with whom she co-authored the book consisting of photo-essays and interviews after having received funding from Prince Claus Foundation. Though published five years ago it still draws wide and renewed interest given the situation in Syria. “There were many hidden results, it was a huge success.”

 

Correction: A previous version of this article incorrectly asserted that Salam started her Mishmaoul label 20 years ago instead of six and implied that the name had already been phased out — a continuing process. It also misidentified Skoun’s 2010 gala theme as ‘Shaabi Chic’ instead of ‘Plastik Fantastik’. Finally, it incorrectly placed Salam’s studio in Furn al-Hayek; it is located in Nasra. Our apologies.

March 3, 2014 0 comments
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