Economics & PolicyLebanese Armed Forces

The LAF – Militarized Welfare

by Executive Staff
written by Executive Staff

If you had a chauffeur driven car with free petrol, bodyguards at your side 24 hours a day, seven days a week, free babysitting and rides to school for the kids, as well as school fees for your children and health care for the family thrown in, you could be a Hollywood starlet; or, you could be a high-ranking officer in the Lebanese military cashing in on the regular package of benefits offered to you.

Addressing the costs associated with this type of spending is but one of the tasks facing the Lebanese Armed Forces (LAF) on its path to reform. “The waste in the Army is not the [number of people in the] Army — the waste is in the five or six cars following a Brigade Commander and in soldiers driving kids to school,” complains former General Elias Hanna.

The LAF is overseen by the Ministry of Defense, which enjoys the largest allocation of funds of any ministry, receiving $1.2 billion in the 2012 Draft Budget. The Lebanese defense budget ranks ninth globally in terms of military expenditure as a percentage of gross domestic product, with Lebanon spending 4.2 percent of its GDP on the military in 2010, according to the World Bank. Regionally, Lebanon was outspent in 2010 by Jordan, with 5.2 percent of GDP dedicated to military spending, the United Arab Emirates (5.4 percent) and Israel (6.5 percent), but surpassed Syria (which spent 3.9 percent that same year).

Even so, “the budget [the LAF] gets for an army in the 50,000s [of personnel] is nothing, it’s sad,” says Riad Kahwaji, chief executive officer at the Institute for Near East & Gulf Military Analysis (INEGMA) think tank.

According to internal army documents, it is estimated that the LAF need at least $1.3 billion for essential force development, including communication equipment, training and weapons.

There are two causes for the lack in funding, says former Brigadier General Amine Hotait. “The first is the poverty of the state; we have a public debt approaching $60 billion.” The second, he says, is politicians  don’t see the point of adequately funding the army as they know it is impossible to compete militarily with Israel, with whom Lebanon is still officially at war.

“Why give money without use?” asks Hotait.

Paying the troops

The LAF, including the navy and the air force, comprise 59,000 personnel, 57,000 of whom serve in the Army. At least 85 percent of the Lebanese defense budget is allocated for the salaries, amenities and allowances for these men, according to the 2010 military budget — the latest approved by the cabinet. This has left the LAF largely reliant on foreign donors for their equipment, as the breakdown of the budget shows.

Israel, the region’s top military spender relative to GDP, spent 60 percent of its military budget on personnel in 2010, while arms acquisition comprised 30 percent. Neighboring Jordan, which also allocates 85 percent of its military spending to salaries, still managed to spend $1.6 billion on equipment orders between 2005 and 2008, according to a study by the Center for Strategic International Studies, a Washington-based think tank. Over the same period, Lebanon spent $90 million, mostly on spare parts and logistics.

According to the latest available information published by the Beirut-based research firm Information International in 2010, a regular soldier receives $437 per month in his first year, which increases on average $20 a month for each year of active service. A starting salary for a junior officer, such as second lieutenant, is $683, with average yearly increases of just more than $25 per month.

In 2011, parliament approved a pay increase of $76 million for the military and security forces, while in the same year military salaries, indemnities and allowances amounted to $1.64 billion, according to the Ministry of Finance. This number includes wages for the Internal Security Forces (ISF), General Security Forces and State Security Forces, though the Army received the bulk (almost 70 percent) of this money: $1.1 billion. The actual expenditure on salaries thus exceeded the budgeted salaries significantly. The 2010 budget allocated $838 million for salaries, indemnities and allowances, while in practice such costs were $1.18 billion over the period from January to November 2010 alone, according to Ministry of Finance’s wage and salary statistics.

A significant percentage of last year’s wages, $191 million (17 percent), were paid in indemnities and allowances, which also provide a social security network for soldiers’ dependents through a variety of allowances for their schooling and healthcare. These include hospital treatment expenses ($65 million), school benefits ($63 million) and illness and maternity benefits (almost $14 million).

This system has led to a ‘militarization of welfare’, say both Aram Nerguizian, an expert on the LAF and a senior associate at the Center for Strategic and International Studies (CSIS) in Washington, and Yezid Sayigh,  senior associate at the Carnegie Middle East Center.

“When you can’t give welfare to everybody, you have to distinguish between population groups to justify providing only for one group,” says Sayigh. “Here they distinguish through institutions; through the military.”

Some 500,000 people, roughly 10 percent of the Lebanese population, rely on the military hospitals, and coffers, for their healthcare, according to a general responsible for a military hospital [As Executive lacked military clearance for this article, despite numerous requests, he asked to remain anonymous]. Less than 10 percent of patients treated in military hospitals are active service members, the general explained.

The Army and the Ministry of Defense did not respond to repeated requests for comment over a three-month period.

The highlife of the officer corps

For Lebanon’s 3,400 commissioned officers, amenities include chauffeur driven cars, unlimited free fuel, free cell phones, bodyguards and follow cars for the officers and their family, according to Information International’s salary breakdown and former General Hanna. Hanna is concerned that this is not only a waste of financial capital, but also human capital, as soldiers are tasked with running errands for their superiors. “Why should soldiers be driving officers’ kids to school? How is that soldier protecting the nation?” asks general Hanna.

A Brigadier General will initially earn $1,560 monthly in wages. He also receives a housing allowance, a personal budget for military equipment such as uniforms, a rank allowance, field service indemnities and a chauffeur allowance worth $1039. In addition to this, he will receive free health care and education for his family. “The benefits are why people join, not the salary,” says Brigadier General Amine Hotait, adding that this is true for all ranks. “If they cut the benefits nobody can stay in the army.”

Benefits for officers are especially costly due to the high number of top brass (see diagram). According to the 1981 New Defense Law Lebanon is supposed to have 80 generals, yet the LAF currently has 420. In comparison, Britain has 46 for a force of 109,500, almost twice the size of Lebanon’s.

“The number has accumulated due to the need to reward combat during war time,” says another former Brigadier-General who spoke on the condition of anonymity. Hotait confirmed that the situation is illegal, but says efforts are being made to reduce the size of the officer corps by offering lucrative retirement packages.

Due to the promotional structure of the LAF, which does not have an exit policy for its employees, personnel costs are unlikely to decrease in the future. “There hasn’t been a policy of stop-gaps in promotion,” says CSIS’ Nerguizian. “There are no mechanisms to weed out the incapable officers; everybody gets a B even if they are an F student.” A European diplomat who has intensive contact with the LAF, but cannot be identified due to the sensitivity of the matter, was more explicit: “Anybody who does not commit criminal errors will be promoted; you will become a general someday.”

The New Defense Law of 1978 stipulated that the Military Council, consisting of the heads of all the departments within the Defense Ministry, should advise on all promotions. However, top appointments require political backing and approval by the Council of Ministers.

“The last five years [the Military Council] have been trying to get the number of generals down to 150, but it has been politically very divisive,” says Nerguizian. “The officers are there as clients [of political figures], and as long as they are there, you have access.”

The appointment of Jean Kahwaji as Commander of Forces (COF) in 2008, at the relatively young age of 54, was supposed to be a step in the right direction, according to the European diplomat, as it is customary for generals who are more senior than the COF to retire as they no longer stand a chance of occupying the top spot; in this case however, none of the senior generals chose to retire, added the diplomat.

Lacking arms, and aim, for the army

The high personnel costs have taken their toll on arms procurement. Since 1990, the Lebanese government has not allocated more than 1 percent of the Lebanese Defense Budget for arms procurement. As a result of this lack of funds, the LAF has been mostly reliant on equipment it acquired from militias after the civil war, as well as donations.

The United States has been the largest military aid provider since Syria withdrew in 2005; until recently it provided up to $100 million annually. France, Britain, Belgium, the United Arab Emirates and the Netherlands have also donated trucks, anti-tank missiles, helicopters and border patrol equipment.

More recently Russia and Iran have offered their own military supplies to Lebanon. Such donations are not done entirely selflessly, as the maintenance of equipment is very costly, and requires reliance on donors, especially concerning specialized equipment whose spare parts are not freely available.

“The LAF isn’t hooked,” says Sayigh from the Carnegie center, “rather it has been obliged for many years to rely on donations and perhaps this is a good thing, since it partly means that the LAF has not sought to buy high-tech, high-cost prestige items that it doesn’t really need, can’t really use, and can’t afford to maintain.

Even if the LAF had the money to spend, Lebanon still lacks a national defense strategy that stipulates what mission it should be procuring weapons for. Although the Taif accord, signed in 1989 near the end of the Lebanese Civil War, stipulates the LAF’s primary responsibility is to protect the country against Israel, this role has been usurped.

“The external threat [Israel] is taken care of by Hezbollah, they are the reason Israel fears Lebanon now,” said the former Brigadier General who asked not to be named. “However, it is a partnership with the army; they are the ‘hand’ of the army. It is a partnership of the citizens, the army and the Resistance.”

Thus the LAF has effectively been pushed into the role of guaranteeing internal security, he says, which was originally the primacy of the Internal Security Forces (ISF).

 

A new target?

The ambiguity of the LAF’s actual task further complicates the consolidation of the military’s weapons arsenal, as taking out armed groups in a civilian area requires different gear and training than defending borders to protect the country’s sovereignty. A national defense strategy, and a clearly defined role for the LAF, may yet materialize, however, given that it was among the matters up for discussion last month at the National Dialogue sessions.

“The Army executes the policy of the government, it is not the role of the army to set its own policy,” says Kahwaji of INEGMA. “The politicians have to set a national defense policy which defines the role for the LAF, when that is done, the LAF has to fulfill its mission.”

Such a policy will also allow for a clearer assessment of personnel needs and a more streamlined policy of arms acquisition. But this is only possible if the politicians will choose to fund the institution beyond providing salaries, or enforce oversight to ensure these funds are well spent.

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Economics & PolicyLebanese Armed Forces

The LAF – In Need of a Target

by Executive Staff
written by Executive Staff

Lebanon’s military spending, relative to the size of its economy, is among the highest in the world. Given this, it is only right and proper for` the Lebanese to ask: What am I getting for my tax dollars?

The skirmishes in North Lebanon recently did well to highlight what the Lebanese are not getting from their money, with the commander of the Lebanese Armed Forces (LAF) stating that he would not deploy his forces in Tripoli until he was certain they would not have to exchange fire with gunmen in the area.

This policy of ‘soft action’ throws in doubt the image the LAF fosters for itself as a cross-confessional entity that is the single most important unifying force in the country, the ‘heart of the nation’ with no sectarian affiliation, loyal only to mother Lebanon. Were this the case, though, shouldn’t the army be able to intervene when sectarian divisions begin tearing parts of the country apart?

The Lebanese defense establishment accounts for nearly 15 percent of government expenditure. The LAF is accorded the lion’s share of the defense budget, at least 85 percent of which is spent on salaries and allowances for staff. A large part of this spending has no military application; officers enjoy extensive perks ranging from free gasoline to soldiers acting as personal drivers to take their kids to school. Meanwhile, the LAF’s own internal estimates report that it needs at least $1.3 billion for essential force development, including communication equipment, training and weapons; between 2005 and 2008 only $90 million was spent  in this regard, mostly on spare parts and logistics. This has left the army with out-dated equipment, most of which was procured through donations.

The LAF’s battle against Fatah Al Islam insurgents at Nahr El Bared Palestinian refugee camp in 2007 painfully exposed the inadequacy of the Army’s equipment, with media reports that soldiers were dropping hand grenades from helicopters. The battle could not have been won without emergency United States and Gulf military support; the LAF nearly ran out of ammunition a few weeks into the three-month conflict. In 2010 the situation was so dire that then-Minister of Defense Elias Murr appealed to civilians to contribute money into a Central Bank account to buy the army arms.

While all this suggests the LAF is underfunded, evaluating whether funds are adequate is difficult when it is unclear what the Lebanese Army is actually supposed to do. A strategic plan for the LAF is non-existent, as politicians have failed to create a National Defense Strategy to articulate its mission. The recent resumption of the National Dialogue could, potentially, solve this problem.

According to the Taif Accord, the LAF mandate is to protect Lebanon against external foes, specifically Israel, with its secondary task to support the ISF. In terms of external security, however, Hezbollah has usurped the LAF’s role, being vastly better armed and trained to face the threat over the southern border. The army has, de facto, been relegated to supporting the ISF. But when the army stands aside as Sunni and Alawite militias battle it out in the north, how effective can it be in ensuring internal security?

The reason the LAF cannot intervene is because it is staffed with Lebanese: While warring with Fatah Al Islam was an easy choice — given that the militants were largely non-Lebanese — the army is loathe to move against any sect in the country, lest the army itself begin to fracture along sectarian lines.

Thus, it would seem that the LAF’s main function is as a conduit for financial support for a large portion of the nation, a ‘militarization of welfare’ if you will. The LAF and Internal Security Forces (ISF) are some of  Lebanon’s largest employers — with the LAF employing 59,000 soldiers, while some 10 percent of the Lebanese population is reliant on military affiliation for healthcare, according to military sources, not to mention education for their children and pensions. This situation is not uncommon in the region; Jordan and Egypt are both examples where a heavy reliance on the military has entrenched loyalty to the state.

But is that what the Lebanese want their army to be?

Without a National Defense Strategy to end the ambiguity surrounding the LAF’s role in the country, there can be no progress. Only with an articulated mandate can reforms be given direction, training and equipment acquisitions made purposeful, and standards set against which the army’s competency can be measured. Then perhaps, the Lebanese will know what their money is buying, and salute the protectors of the country for their service.

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Real Estate

Culture Vultures

by Jeff Neumann
written by Jeff Neumann

The endless struggle over what constitutes a cultural heritage site and what real estate developers can build over continues to spur heated debates in Lebanon. There are many sites at issue. Beirut’s Ottoman and French colonial-style homes, or at least the ones that survived the civil war and reconstruction efforts, are under constant threat. Several remnants of the area’s ancient past as a center for global commerce and culture are also at risk of being lost in the name of profit.

Land scarcity only heightens property developers’ appetite for demolition of sites that may or may not be under protection. Weak government regulations, mostly holdovers from the French mandate-era, have left countless loopholes open for exploitation.

The onus to protect these sites, by protesting against great odds, has fallen on a loose affiliation of activists, archaeologists and everyday citizens. And in many ways, real estate developers are simply taking advantage of rights set aside for them by previous governments, most notably that of former Prime Minister and real estate mogul Rafiq Hariri, although other governments did their part as well.

An ancient past discarded

One of the most controversial heritage issues of late is the Venus Towers project in downtown Beirut. The original plan calls for three luxury residential towers with the promise of “recapturing the traditional context of Lebanese housing in a new modern style”. After ground was broken what appeared to be an ancient Phoenician-era port was discovered, spanning some 7,000 square meters of prime real estate. The project developer, Venus Real Estate Development Company, says the site’s significance has been overblown. But archaeologists not associated with Venus Real Estate say the alleged port is a cultural heritage site that should have been preserved at all costs.

A fierce public debate over the site ensued, followed by at least five archeological reports, which were submitted last year to then Culture Minister Salim Warde. Last spring, Warde told Executive, “It might be a port, a shipyard, or even a quay, but it is surely something very interesting, and we are seeing how we can work with the owners of the land to save this site.” An official from Venus Real Estate told Executive in late June that the archaeologists and experts contracted by the company had recently finished their assessment and submitted a report to the Minister of Culture Gaby Layoun, and were waiting on a response. “It’s in the minister’s hands now,” the official said.

The next day, Venus Real Estate completely demolished the remnants of the site after gaining approval from Layoun.

Joseph Haddad, founding member and secretary of the Association for the Protection of the Lebanese Heritage, called the action “illegal” and promised to continue with protests. Announcing the decision, Layoun said in a statement, “The entire case involves no proof that points to the presence of a Roman or a Phoenician port and the trenches within the rocks could not have been used as dry docks for ships or their maintenance.” Media reports later stated Layoun had distanced himself from the decision and his office was not avaliable for clarification as Executive went to print. 

A similar dispute has arisen over a Roman-era hippodrome, also in the heart of downtown Beirut. Solidere built luxury homes directly on top of much of the site, one of which is owned by former Prime Minister Saad Hariri. The hippodrome is one of two in Lebanon, out of only five of its kind in the Levant. The second hippodrome in Lebanon is in Sour, and was added to the United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage list in 1979, long before the construction craze took hold across the country.

Solidere has proposed moving the remnants of the hippodrome to a site nearby, where a former Roman-era bath was also moved. However, this will do little to appease preservationists. “It is very easy to protect something,” says Jeanine Abdul Massih, professor of archaeology at the Lebanese University, and a proponent of keeping the hippodrome in its original location. “The problem is, it is also very easy to move it.” For its part, the Culture Ministry seems more intent on using the episode to publicly attack Hariri on television than to preserve the site.

Outreach efforts by preservation groups such as the Association for Protecting Natural Sites and Old Buildings in Lebanon (APSAD) have proved moderately successful, at least in attracting awareness. In late May the group held a ‘National Heritage Day’ with assistance from the Ministry of Culture, and with a focus on cultural heritage sites in Sour and Hermel.

Despite its efforts, APSAD says it is up against powerful real estate companies that are tough to counter. “Anything is better than nothing,” says Mona El Hallak, architect and executive committee member of APSAD. “Really it is in that desperate a state. They do everything to make buildings fall apart and then lobby to be able to pull it down.” 

LU’s Massih echoes that sentiment, saying, “We are all used to it. For 25 years we destroyed all of the history. The problem is patrimonial. Maybe the money at stake is too much, I don’t know. There must be something to do because the people cannot enjoy any of these sites.”

Foreign elements

While most preservation efforts are focused on specific buildings and historical sites in Beirut and surrounding areas, the sale of large swaths of land to foreigners across the country is also attracting the ire of activists and citizens. One example is a brewing fight over the sale of some 7,700 square meters of land near the Keserwan village of Dlebta to Saudi Prince Muqrin bin Bdul Aziz, allegedly without consultation with the local municipality. As Executive went to press, repeated attempts to contact the municipality went unanswered. A presidential decree, #7983, approved the sale in April and residents say they only learned of it once an announcement was made in the Official Gazette.

A campaign to revoke the sale has attracted attention, and local residents have mobilized. But some elements involved in protesting the transaction show hints of xenophobia rather than a genuine concern for the land. As it stands, a petition is circulating demanding the revocation of the sale and it appears that this, like other land issues, will not be resolved soon.

Past attempts at historical and cultural preservation have shown mixed results. A senior advisor to Minister Layoun, Michel de Chadarevian, touts the Sour hippodrome as a preservation success story. “The hippodrome in Tyre has been handled with great care and this is something that Lebanese should be proud of,” he says. But that effort was undertaken more than 30 years ago, and nothing approaching the level of UNESCO protection has happened since.

 

This article was published as part of a special report in Executive's July 2012 issue

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Real Estate

Facing a squeeze

by Jeff Neumann
written by Jeff Neumann

Reading through our special report, you probably have a good idea of the challenges faced by the real estate sector over the past year. Data shows that demand for residential property is weakening across Lebanon and developers are coping with higher operating costs than before. How they adapt will determine how well they weather what some expect to be a prolonged downturn.

Overall construction costs in Lebanon were up in the first few months of 2012, due in part to the mandatory wage increase approved by the government in March. However, material costs have for the most part stayed at the same levels through the first five months of 2012. For instance, steel in Lebanon has remained at $750 per ton through June; Portland cement cost $102 per ton over the same time period.

permits


Shaving the fat

When asked about what is being done to cut costs, most developers declined to go into detail. The one exception, Karim Bassil, founder of BREI Real Estate Investment, offered a brief insight into his company’s operations. “The main thing is we’re reducing our overhead, we’re reducing our margins. We have already reduced our margins by 50 percent this year,” he says, describing the return generated from new income on a project. “We’re just not making the same kind of money that we were making before,” adds Bassil. “In Lebanon, when you plan something for, let’s say, 30 percent ARR (average rate of return), you end up with 20 percent of 70 percent ARR.”

Cement deliveries are also down this year by 4.2 percent — another obvious indicator of a slowdown in construction. This stings developers even more due to the fact that between 2005 and 2010, average annual deliveries increased by 11.2 percent. As an example of the many factors listed coming to a head, Bassil says that “on one of my projects in Beirut, instead of putting it around 20 percent ARR, we put it at 8 percent. This is because of politics, war and project delays — they all play a role in [reducing ARR].”

Through May, the total number of construction permits issued in Lebanon was down 9.3 percent from May 2011, according to data compiled by InfoPro. Also of note, construction area authorized by permits were down 12.5 percent from the same time last year.

Indeed, times are tight for the sector, forcing developers and contractors to consider all options. As Bassil puts it, “Personally, we’re doing everything to keep our business alive for better days to come.”

 

construction cost

 
This article was published as part of a special report in Executive's July 2012 issue

 

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Real Estate

Q&A – Solidere’s Mounir Douaidy

by Maya Sioufi
written by Maya Sioufi
The company the Lebanese love to hate is Solidere, Lebanon’s largest developer tasked with rebuilding the Beirut Central District (BCD) after the civil war. While many enjoy sipping coffee by the yachts in Zaitunay Bay, Lebanon’s Porto Fino, and walking around in the Souks, still undergoing further expansion, and even jogging by the newly built marina, there are fears the company has gone beyond its mandate and is now competing with, instead of supporting, businesses and developers. For a better understanding of how the BCD operates, Executive sat with Mounir Douaidy, the general manager of Solidere. 
Solidere has signed contracts for several projects on the Waterfront district, among which are KidzMania and The One. These have been criticized as being illegal as they do not seem to be temporary structures as per the law? 

For 10 years, there was only BIEL (Beirut International Exhibition and Leisure center). A few years ago, we looked at one particular area starting from the entrance of BIEL all the way to the sea. We started with the Beirut Exhibition Center and along the same line, there will be The One (a night club owned by Skybar’s Sky management) and KidzMania (indoor theme park for children). These are temporary activities with seven-to eight-year contracts to create movement and attract people. We only receive rental income and have not taken stakes in the projects. Down the line, all these areas will be sold and developed. 

What will the waterfront district look like once permanent structures start being implemented? 

All the buildings on the frontline facing the park and the sea will be 40 meters high. There will be one or two towers there similar to the ones on the Corniche, such as the Four Seasons or the Platinum Tower. Heights on every lot will be different: some with heights of 52 meters, some with 75 meters and others even a little higher. Concentrations of high-rise buildings will be mainly in the central part of the reclaimed area and not the outside edges, which will be composed of low-rise buildings to catch the views. 

In a context of regional turmoil and lack of domestic stability, Solidere’s recently reported 2011 results saw revenues drop by 23 percent year-on-year to $296 million. How is 2012 looking so far?  

Last year, we did not sign a land sale deal until the fourth quarter when we signed four deals for $220 million, which constituted the main part of our revenues. So for 2012, I don’t know yet because we still have six months. All I can tell you is we are on the right track for sales because there is demand.

What changes have you seen in terms of demand? 

The negotiations to materialize a transaction are taking longer than usual. We have also had to break up bigger blocks into smaller units so that it becomes easier to sell these units. Finally, most of the investors looking to acquire land are, more and more, coming from Lebanon as opposed to the region. 

Solidere’s strategy has been to reduce its reliance on land sales by increasing rental income. Where do you stand on this? 

Our rental income, which stood at $50 million in 2011 up from $42 million 2010, is expected to reach $65 million by 2015 after the completion of several projects, namely the remaining component of the Souks with a cinema complex by the end of the year and a department store by 2015. Land sales will continue to be the main source of revenue over the next 10 to 15 years because we still have a significant inventory of land, mainly on the waterfront, valued at $7 billion at today’s prices. 

Given Solidere International (SI)’s exposure to countries in turmoil, where do you stand with your expansion plans outside of Lebanon? 

We were not impacted [by the turmoil] as we had not spent on anything yet because of the financial crisis. All we had to do was to restructure the projects. For example, Al Zorah project in the United Arab Emirates was reduced in size and changed from a mix used development to a touristic project. SI is now concentrating on identifying new markets and we think there are lucrative opportunities in Saudi Arabia where we already started one project for a tower in Jeddah and we have two to three projects in the making in Riyadh. 

Solidere is venturing into the restaurant business. Is this another way to reduce your reliance on land sales?

Any revenue from the restaurant business is immaterial relative to our activities. The whole idea [behind venturing into this line of business] is to allow the creation of outlets and restaurants of a certain caliber that we felt did not exist and would support the overall real estate development activity. We did it with Stay (fine dining restaurant) and Momo’s (Moroccan restaurant and bar). We brought in an operator and created an entity — a cooperation between Solidere and the operator — that would rent out the space and pay us rent. The operator runs the concept and Solidere co-manages with the operator. Solidere is not in hospitality: We don’t know how to do restaurants. We also did this with The Venue, the 1,000 square meter space used for exhibitions.

Your critics say that you are competing with the restaurant business. 

People keep saying Solidere is competing. We created these two ‘unique’ concepts that didn’t exist before so they will not compete with anything else that exists. Our intention is not to expand into this and step into the shoes of people doing this kind of business. We did this to give a push to the area, attract more people and promote cultural and artistic activities, and these restaurants came as part of this objective. If you look at the city center, there are tens of restaurants and outlets that have nothing to do with us. 

Are you also co-managing outlets in Zaitunay Bay? 

No. Zaitunay Bay is a little bit different. It is a joint venture with Stow Waterfront Development. Together we are executing Zaitunay Bay as a project made up of two parts. First is the restaurant part, only for lease, and the other part is a building composed of fully furnished small-to-medium sized apartments, which will be up for sale. 

Doesn’t this divert from Solidere’s strategy of focusing on rental income only?  

All the properties in our real estate portfolio so far were up for lease because the idea was to generate rental income and keep increasing it over the years. For this building, it was agreed with the partners that the apartments would be put up for sale as there would be higher ownership demand given the high prices, and we also wanted to recuperate our investment in the project and keep the restaurant leases to generate rental income. The building will also host a members club like the Automobile et Touring Club du Liban [ATCL] or the Golf Club, which will generate annual income.

Are you considering moving into the sale of apartments going forward? 

Until last year, the decision was not to sell any assets but going forward we are considering to slowly sell some assets. We started selling some of the Saifi apartments that were leased for the past 12 years. We are eventually offloading some of the stock of apartments as we have other apartments in Zokak El Blatt and Wadi Abou Jamil that are leased. Our new projects will come to replace some assets that we are selling. 

So the new projects will only be for lease? 

We recently got the permit to start another 20,000 square meter project in Saifi consisting of three small residential and one office building. We intend to sell the apartments of this project. We will not start offloading a huge quantity of assets. 

With demand moving to smaller sized apartments, aren’t developers having to adapt and provide smaller sized apartments too? 

All the stock on the market came from developments that started a few years ago. Future developers will be looking to smaller sized apartments but this will come after Solidere has finished selling these apartments. 

Wouldn’t the sale of apartments place you in competition with developers? 

We are not doing anything to compete with anybody in the market. We want to support other developers, complement their activities and not go in competition with them. We want developers to do well and become repeat developers. We are doing this on a very small scale and the size of the apartments we have been putting up for sale are small to medium sized, whereas developers have been selling medium- to-large sized apartments, so we are not competing with them.

 

This article was published as part of a special report in Executive's July 2012 issue

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The formula to fill football seats

by Thomas Schellen
written by Thomas Schellen

The Lebanese love for football warms my heart. The colors flying from windows, cars and street-corner stands during big tournaments like the Euro 2012 give me an emotional lift. The friendly coexistence of so many football allegiances — from England to Italy, France, Spain, Portugal and my native Germany — displayed this summer has a great pull on me. And what makes it even better is if you sit in a pub in Hamra, or a mall café in Ashrafieh, and fever with the action of your team while on the next table someone roots for the Dutch or Danes with the same enthusiasm. Great fun, happy competition.

But why do the public and private sector in Lebanon get the football economy so wrong?  By football economy, let it not mean the exploitation of the occasion by marketers with buy-this, win-that strategies. I am talking about the primary needs of the fan: A totem (flag, scarf) and a place to watch and eat.

Now, in a small redemption for the Lebanese private sector one has to say that today it is no problem to find a big screen — unlike the days when the over-sized Sports Café in Burj Al Ghazal was about the only place that sported them (and was unhealthily empty except during big games, which is likely why it eventually closed down). The supply of Beiruti venues where you can watch Euro 2012 today ranges from 10-foot screens in comfortable restaurants to a plasma in your nearest pasta joint.

Regrettably, these choices are not all real deals. When I sat with my black-red-gold-wearing son in one cozy restaurant on the day before the Euro opener, the friendly waitress volunteered an invitation to come back for the Euro, “but there is a LL25,000 cover charge.”

Then there was the eatery on the corner near my abode. They had hired a few 24-inch screens and had the place decked out by stringing up little flags. Pity that their stroke of decorative genius was marred by hanging the German flag upside-down, but they showed even greater foolishness when they demanded a minimum bill of LL20,000 per person. Fifty bucks for munching manakeesh while bearing with a case of football culture callowness?

So I stomped my German family fan legion of four up to the rooftop of ABC and hunkered down at a restaurant that had a giant screen, sharp-enough resolution, a fair crowd, and perfectly regular prices. Guess what? At the end of the first win by unserer Nationalmannschaft, or ‘our National Team’ as the Al Jazeera commentator yelled several times, I (expectedly) not only spent more than $50, I also decided to come back for the next two games — and happily consumed more as the German game kept improving.

What’s the moral of this musing? Simply, for you restauateurs, freedom stimulates consumption. Especially at a time when the insane cost-of-living spiral forcibly converts hordes of us average Joes into penny pinchers. Learn from the football economy that fair offers and a good atmosphere open up the most paranoid of pockets.

Now to the Lebanese football public sector economy. If the country ever wants to host a big tournament, it needs to invest now. No, not into refurbishing the stadia built for the Asian Cup finals that somehow happened here in 2000. Invest in the Lebanese team and in the national sports infrastructure of training and developing youngsters — and invest in building a culture of fair competitiveness through sports. It will do wonders for the economy overall.

Lebanon made it to the fourth round of the 2014 World Cup qualifiers, proving that the country has football talents, and the team can still claw farther. And being die schoenste Nebensache der Welt, roughly translated as ‘the nicest unimportant thing in the world’, football is an opportunity to think the unthinkable.

Poland and Ukraine have co-hosted Euro 2012, despite the challenges each of them faced. Half a century before the 2002 World Cup, it was exactly unthinkable for Japan and Korea to ever co-host a dinner party, let alone the world’s greatest spectator event.

It is unthinkable so think: If Lebanon were ever to succeed in co-hosting the World Cup in this century, it will not only make bigger history than even Qatar. It will absolutely need a team that is a result of long-term public sector investment in a competitive culture and great sports. Invest in the National Team today, yallah, government. Because nothing could be more embarrassing than hosting a World Cup and not make it, at least, to the second round.

 

THOMAS SCHELLEN is Executive’s MENA business editor

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Finance

Iraqi intrigue in Lebanon

by Mohanad Hage Ali
written by Mohanad Hage Ali

Lebanon’s propensity to host political, media and financial players from around the region and beyond is well know. Its weak government, strict banking secrecy laws, open media landscape and plethora of rival political movements provide a welcome embrace for all and sundry. Among those to have set up shop here recently is an Iraqi outfit with an intriguing network of connections trailing back into the quagmire of Iraq’s troubled contemporary history.

The operations in question are a nascent TV station, Asia TV, and Al Bilad Islamic Bank, which opened a branch in Hamra in recent years. The lynchpin that joins the two enterprises is one Mr. Aras Karim Habib who is the chairman of the TV station and sits on the board of the bank (and was responsible for the opening of its Beirut branch). 


A shady past

Habib was chief intelligence officer for the Iraqi National Congress (INC) — the umbrella organization of opposition groups set up with American assistance after the 1991 Gulf War — as is documented in investigative journalist Aram Roston’s book, “Ahmad Chalabi; The Man Who Pushed America to War.” Roston also outlines how Habib was one of three principals for Boxswood Inc, a company established in the US by Chalabi through which the INC received funding from the American Defense Intelligence Agency.

It didn’t take long for Chalabi and Habib to fall from grace among certain elements of the US establishment after the 2003 invasion of Iraq, with a US intelligence official accusing Habib of passing intelligence to Iran, as was reported by the British daily the Guardian. In 2004 an arrest warrant was issued for Habib relating to his intelligence activities with the INC. Habib was not available for comment despite numerous requests by Executive.

Habib is now living in Beirut, and his connection to the Chalabi family continues; Al Bilad Islamic Bank was incorporated in Iraq in 2006 with Chalabi’s nephew, Issam al-Uzri as chairman. Issam’s son, Hussein al-Uzri, was the former chairman of the government-owned Trade Bank of Iraq (TBI), which was accused of corruption by the Iraqi government in June 2011, leading to the former chairman to flee the country, while his father left his position as chairman of Al Bilad two years ago.

The link between the two banks came to the fore following the award for “deal of the year” given by a trade magazine to Al Bilad in 2008 for being allocated a $100 million letter of credit by TBI. 
Habib set up the Beirut branch for Al Bilad, the bank’s 15th branch and the only one outside of Iraq, in Hamra in December 2010. “Habib was involved directly in establishing the bank in Lebanon and he is the coordinator between Iraq and Lebanon,” says Talal Kaissi, head of the Al Bilad’s Beirut branch.

The bank is set on expanding its operations in Lebanon, according to Kaissi, it has acquired a building in downtown Beirut facing Starco for $32.5 million. The building, which is still under construction, will be the new bank headquarters and the Hamra office will remain as a retail branch.

From banking to television

More recently Habib has ventured into Lebanon’s media mosaic with the establishment of Asia TV, which according to Kaissi “is a private business” of Habib’s (which Executive confirmed banks with Al Bilad). Entifadh Qanbar, Asia TV’s general manager, goes further saying Aras Karim Habib is the chairman of the station and explains, “I run the day to day operations and [Habib] sets the general direction.” Asia TV started broadcasting on March 5 and Qanbar says, “We are a pan-Arab TV station. We cover the Arab, Muslim world with an Iraqi taste. I want English, Persian, Turkish and perhaps Kurdish news broadcasts.”

The station is one of several new media enterprises in Lebanon that endeavour, in the words of Qanbar, “to counter the Gulf invasion in the region.” The coverage of the Arab uprisings, and in particular the Syrian crisis, has severely polarized the journalistic community in the region and the coverage from outlets that enjoy support from the seemingly bottomless pockets of the Gulf, such as Al Arabiya, Al Jazeera, Al Mustaqbal, Asharq Al Awsat, Al Hayat, An Nahar and many more has created a backlash. 

Among those providing an alternative discourse are several new TV stations such as Al Etejah, Al Maseera, Al Mayadeen, Iran’s Press TV and Asia TV. However, with the schisms running throughout the Middle East increasingly characterized by the rivalry between the Sunni monarchies in the Gulf and the Shia theocracy in Iran, charges have been made that these new outlets are nothing more than an Iranian-backed push into the Lebanese media landscape, thus further exacerbating tensions. 

The hand of Tehran?

Aletejah and Asia TV are members of the Tehran-based Islamic Radio and Television Union, Aletejah is connected to an Iraqi military outfit call the Hezbollah Brigades (not linked to the Lebanese militia-cum-political party), Almaseera is connected to the Shia Houthi rebels in Yemen and a recent report on France 24 created waves by bringing into question the independence of Al Mayadeen from the interests of the Iranian and the Syrian regimes. Asia TV’s Qanbar says that his station receives no support from Iran and asserts further, “We have never been told what to say on our station.”

The station’s output is guided by a particular Iraqi vision of the Middle East that is perhaps best encapsulated by one of their flagship shows, Qalb al Aalam, or Heart of the World. The program focuses on the historical, cultural, political and economic relationships between Turkey, Syria, Iraq and Iran. Qanbar expands on the relationship with Iran saying, “We are in the camp of the Iraqi’s. The Iraqi establishment, including Sunnis, Shias and Kurds, now all have good relations with Iran. What’s more, we have a strategic relationship with the United States. That is very disturbing to the countries of the Gulf.”


The ties that bind

The relationship between Habib and Qanbar is a long one and is entwined with their involvement with the INC and Ahmad Chalabi. Qanbar says that, “[Chalabi] is a good friend and I ask him for advice on some issues and he will give me very good advice that I will consider but I will not follow in the steps of Chalabi.” However, Qanbar has served as his long-term spokesman and his personal account on LinkedIn, the professional networking Internet site, lists his current status as “Advisor to Dr. Ahmad Chalabi.”

With the long-standing links between the three men it begs to be asked if Chalabi has any involvement in either the bank or the TV station. The Wall Street Journal recently quoted Chalabi as saying that he is considering joining the editorial board of Asia TV but Qanbar denies he has any role at the station, saying, “We get our funding from Iraq, from a group of businessmen and a group of individuals that want to counter the Gulf invasion of Iraq but Ahmad Chalabi is not one of them.” Furthermore Kaissi at Al Bilad also denies Ahmad Chalabi has any direct involvement in the bank’s affairs.

In any case as the media war in the region intensifies the Iraqi challenge to the “Gulf Invasion” has set up shop in Lebanon and looks set to stay.

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Economics & Policy

Beirut’s secret garden

by Nabila Rahhal
written by Nabila Rahhal

Many older residents of Lebanon’s capital have fond memories of the Horsh Beirut, of childhood games and family picnics in one of the city’s most beautiful parks. The current generation has no such memories. While the Horsh Beirut, also known as Horsh el Snawbar or Horsh El Eid, accounts for some 77 percent of the city’s green space, the municipality has kept it closed to the public for more than two decades; but if a growing number of civil society organizations are successful in their efforts, the gates may soon be open again. 

Among the many victims of the civil war was the Horsh, whose ancient pine trees were burned to cinders during an Israeli assault on the city in 1982. In 1992, the municipality of L’Ile De France, working with the Beirut municipality, funded the restoration of 90 percent of the park at a cost of $191,000, according to Bilal Hamad, president of Beirut Municipality, with the remaining 10 percent picked up by the municipality. Once completed, the municipalities of L’Ile De France and Beirut decided the park would remain shut for 10 years to allow the newly planted pine trees time to grow and mature, says Hamad.

Today — 20 years later — only 10 percent of the Horsh Beirut is open to the public; the remaining 90 percent is closed to all Lebanese citizens less than 35 years old, and even those older than 35 must hold an authorized permit from the municipality to access the park. This classification, says Hamad, is one he inherited from the previous municipality and does not “necessarily agree with.”

Nizar Sayghieh, a lawyer who has worked to reopen the park, says that according to common law, closing a space created for public use is illegal, and people have a right to access the park.

Hamad acknowledges that the park is a public space and that “it shouldn’t be closed.” He claims he wants to give it back to the people of Beirut but says he wants to be confident it will not get ruined by opening it haphazardly. Sayghieh counters that if the safety of the park is the concern, the municipality should use the ample funds it has to hire and train security guards.

Civil society in action

To obtain answers for the delay in reopening of the park, an NGO named Nahnoo organized a debate in February 2011, between Hamad, Nahnoo founding member Mohammad Ayoub, Sayghieh and Eric Bouvard, a representative of the municipality of the L’Ile De France in Beirut.

During the debate, says Ayoub, Hamad asked for a policy paper that would outline how best to manage the opening and maintenance of the park. Provided this was presented, continues Ayoub, Hamad promised that he would open the park by the end of 2012. While Hamad confirmed asking for the policy paper, he said that he didn’t mention a specific date but that he would love to open the park by the end of the year, provided that the necessary arrangements exist.

Nahnoo took up the president of the municipality’s challenge and, two months after the debate, provided him with a detailed policy paper outlining specific solutions to the possible obstacles preventing the park’s opening, such as security issues and fire hazards, says Ayoub.

Hamad praised the quality of the paper, adding that he had sent it to a committee within the municipality that will study it and give recommendations this month. Hamad also sent it to  L’Ile De France representatives for their input and, pending both, he will be calling for “a brainstorming workshop in his office within the next few weeks.”

“The purpose of this workshop is to come up with one final plan to be presented to a private company that will manage, protect and maintain the park,” says Hamad.

When asked if the municipality cannot afford to maintain the park themselves, Hamad said they can but if they could get a company to do it for them, then “why not?”

Questionable outsourcing

This has led others to cry foul, given the ample examples — such as the Beirut Central District — where private management of public land has proved controversial, to say the least.  “Giving the park to a private company could risk turning it into a resort of sorts where its very purpose of being a public and free space will be defeated, just like what is happening with our beaches,” says Sayghieh.

Hamad says this will not be the case as the municipality will retain ultimate authority over the park. He does admit, however, that there might be a nominal entry fee to make the people using it “feel a sense of responsibility.”

Hamad also mentions providing park users with access cards to the park so security catching people misusing the space can seize the cards, and deny violators further entry. He believes that this will be a good way to control those who might intentionally want to destroy the park.

Dima Boulad of Beirut Green Project, a local NGO also working on public green spaces,  says that while rules are certainly needed to protect the park, “We don’t need the rules to be so uptight that people aren’t able to enjoy the park experience anymore.” Boulad gives the example of the newly-opened Zaitunay Bay, which does not allow pets or eating in non-designated areas.

Nahnoo and other civil society organizations remain unsatisfied with the municipality’s evasive techniques and last month organized guerilla picnic protests at major intersections around Beirut, along with 12 other local NGOs also campaigning to the open the park.

Nahnoo’s Ayoub said that he fears the municipality is “coming up with excuses to delay the opening,” and is working with the other NGOs to pressure Hamad to set a clear target date for the opening. Hamad says he believes in the importance of public green spaces and has even launched a campaign, “Beirut is Amazing”  to renovate several public parks, such as Sanayeh Park and the Sioufi Gardens, starting this summer.

According to Hamad, a landscape artist has donated plans for the rehabilitation of Sanayeh, and the retail company Azadea has agreed to donate the needed funds for the project. The municipality is currently asking private donors, companies and NGOs to donate money or resources for the rehabilitation of the Beirut’s main parks and to add greenery to the  streets of Beirut, mainly on road islands and strips dividing the roads.

Notably absent from this campaign is Horsh Beirut. When asked about this, Hamad said that, Horsh Beirut, being the biggest park, requires a separate campaign. He concluded by saying of the Horsh “it is a jewel for the people of Beirut and we want to make sure it stays that way once we open it.”

Yet one wonders how valuable a jewel is when no one can see and appreciate its beauty. Until the park is opened, the children of Beirut will continue to grow up with memories of playing on hard concrete in narrow alleys, while the wide open greens of the Horsh lay in lonely silence.

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Business

The oil importers’ albatross

by Sami Halabi
written by Sami Halabi

The perception of Lebanon’s oil importing companies as a cartel of money-making executives feeding off the backs of the people is an easy one to buy into, especially in an import-driven economy such as ours. But as any journalist knows, there are at least two sides to every story, if not many more.

“We are always accused of being people that are making fortunes, which is not true,” pleads Dania Nakad, general manager of Wardieh Holdings (Wardieh) — the self-proclaimed largest Lebanese-owned private sector oil company — and the recently appointed vice president of the Association of Petroleum Importing Companies (APIC), the industry’s lobbying body.

“During the war when the country was just a bunch of mafias and there was chaos everywhere you could say that the oil industry was a cartel, because there were two or three importers with control over the few ports,” she says, adding that such is not the case anymore.

Wardieh is probably best known in Lebanon for its gas stations, and the fact that it used to be owned by Exxon-Mobil before the later decided to exit the country. Yet the company does not own most of the stations that brandish their name.

Instead, Wardieh’s main revenues come from the import of petroleum and other oil derivatives ranging from diesel to petrochemicals. It signs supply contracts with gas station owners and finances the underground tankers and station equipment. While this has proved profitable for Wardieh, there have been a few hiccups.

Last year, a Wardieh gas station exploded near Beirut’s Adlieh district killing three and wounding 14 others. Nakad explains that the incident was a result of a panic-stricken owner, looking for his employee, turning on an electricity switch that had been shut off after fumes were detected in a storage area “that should not have been there."

The leaking underground tanker had been identified and subsequently filled with water for safety, but apparently this was not sufficient to prevent the incident. Nakad says that no charges were pressed because it was obvious where the fault was and “a few months later the station was up and running; we are still with them, them with us, but we lost Joseph,” says Nakad, referring to the station’s former owner.

Explosions aside, oil importers also have to take on significant credit with gas stations that pay post-factum while they pay their suppliers and the government in advance. “I have no protection. So what if I have a contract with a station? If he doesn't pay me I can sue him, go to court, spend a million years there and meanwhile he’ll have zeroed in his account and when the court tells him to pay, he’ll say he’s bankrupt, so what have you gained,” says Nakad. “If you want to be really smart you can steal a million dollars tomorrow and just sit in jail for three months! Honestly, this is the case today.”

Closing the pump

At present there are just 12 companies licensed to import oil into Lebanon. More players are not involved due to the large investment needed for storage, transport and infrastructure, coupled with the need for access to land on the seashore suitable for such an operation. 

Wardieh’s total assets, for example, are valued at $100 million, according to Nakad. She describes last year’s turnover as “excellent” and revealed to Executive that the company raked in revenues of “something like $340 million.” That is because oil prices stayed relatively stable throughout 2011. But now that oil prices are dropping again “since April we are witnessing another crash,” similar to that of 2008 when prices plunged from around $147 per barrel to below $50.

But with such revenue-to-asset ratios it’s little wonder that many say oil importers are running a racket. Oil importers have been accused of acting like an oligopoly and fixing prices. These companies bid for petroleum on the international market in groups in order to be able to buy up whole tankers, as opposed to half-tankers or less, thus allowing for better prices. Wardieh currently groups up with Total and IPT to bid for ships in the Lebanese market. Nakad denies that there is price fixing between the three large groups who usually engage in the bidding, but concedes, “In the absence of a government, the absence of a ministry and the absence of a strategy and policy, we do what we can to safeguard our basics.”

“At some stage ministers like to flex their muscles, and that applies to the current and previous ones who say ‘we want to import [gasoline]’. We tell them, ‘please do, we beg you to do it’,” says Nakad. “It would be better for us because then we wouldn't have to have all this expensive equipment, open up letters of credit for millions of dollars, and take the risk in a country where Israel can come tomorrow and bomb our facilities whenever they feel like it. Instead I would just simply go to the [government] refinery every day, as I do today with the gas oil [red diesel], and take my stock and sell it to market.” 

Caught red handed

At present the government only imports ‘red’ diesel — diesel with high parts per million (ppm) of sulfur, at around 500ppm — while the private sector imports ‘green’ diesel, at around 350ppm. Lebanon’s government-owned petroleum refineries have been out of commission since the Civil War, and perhaps that is a boon given the amount of corruption recently uncovered at their existing facilities.

At the beginning of the year, the government offered a one-month subsidy on red diesel, which removed the value added tax for distributors, the savings of which were passed on to end consumer. A report issued earlier this year by the Audit Court, Lebanon’s government spending oversight body, said that during the last days of the subsidy period government-run facilities in Tripoli and Zahrani continued to sell at the subsidized prize, with 101 of 215 licensed distributers of oil products suppling the red diesel on the last day of the subsidy. The distributors then sold the product at non-subsidized prices.

“I told one of the people who bought, ‘tomorrow morning if you are smart you go and take a credit note from all the people you sold to with the higher price because this will not pass and the files will be opened and heads will roll,” says Nakad. “Another calls me and says he made $50,000 [in profits off the deal], I told him go and sell at the lower price because I was sure that their will be a scandal. He thanked me a month later.”

The Audit Court eventually blamed the government, the consumer protection authority and the companies that made millions of dollars of profits but no one has yet been held accountable. “You think the guy at the door or the accountant makes the decision to extend working hours until after midnight,” she asked rhetorically. “When the big ones fall, it's the little ones that take the blame. The issue was cooled off and tucked away, not because there was a guy at the door who made a decision, there were big people behind it and if it gets to the courts they’ll find a scapegoat.” 

No margin for error

Even if things look good for oil companies, margins may not be as lucrative as one is inclined to believe. In 2002, the Lebanese government commissioned the international accounting firm PriceWaterhouseCoopers (PWC) to carry out an assessment of the pricing structure of petroleum in the country. The study suggested a structure whereby the oil importers would make a 5 percent profit margin on the cost of their product. Other elements included in the pricing structure were the government’s excise tax, currently at $2.67 per jerry can (20 liters) of 95-octane gasoline, value added tax (10 percent), insurance, additives and other costs to the consumer.

Since then, however, Nakad says they have had to incur further costs associated with increases in additives, operational expenditure, invested capital and others, such as a war risk premium that was imposed after the 2006 war with Israel, effectively bringing the margin to 3 percent of the cost of product. The three percent figure was also confirmed by another general manager of an oil importing company that spoke on condition of anonymity. “I dare anyone to identify one commercial sector that can do with 3 percent profits. The dikeneh [shopkeeper] next to your house won’t accept a margin of 3 percent,” says Nakad.

Nakad says that APIC commissioned PWC to do another study in 2010 to update the price structure, and the brief was presented to the previous and current Ministers of Energy and Water, who have not responded. That is why gas stations have gone on strike several times since, says Nakad, closing down gasoline supply in the country.

“You think the international names got out of Lebanon because they don't like the country or because of the weather?” she asks. “It’s not rewarding. Put the money in the bank. You get more and it’s secure!” 

A plausible solution for the industry, she says, would be for the government to crack down on the estimated 2,000 unlicensed stations in Lebanon and stop giving out new licenses to stations, which have reached some 5,000 across the nation. “We are not asking for the government to take [the PWC study] and just implement it, but do something in between, make a compromise.”

Nakad admits that if the companies got their way then consumers would bear the brunt of higher prices. “The awkward situation that we are in is that, whatever demand we have, it is going to be reflected on the end users because the government wants to maintain their income from the jerry can,” she says.  “But we are not supposed to be the financier of the cabinet. The government should not rely on gasoline, which is a consumer good, as a source of income because it is places the burden on the backs of the people.”

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Economics & Policy

How prices have hit the moon

by Zak Brophy
written by Zak Brophy

Fuel is expensive. Food is expensive. Rent is expensive. Everything, it would seem, has become expensive. Over recent years trips to the gas station, the supermarket and the landlord have morphed into a recurring nightmare of increasing prices, draining the pockets of the Lebanese. Add to this the sluggish growth in the economy and people are feeling the squeeze.

“Everything has become so expensive recently it is completely crazy,” says Nayla Otrakji. Although she lives in a comfortable middle-class neighborhood in the Beirut district of Ashrafieh and her husband runs a successful engineering company, the rising cost of living is still felt in the home. “The amount we spend on food has increased so much. I have noticed the highest increase in the prices of dairy products,” she says before adding, “Now I make my own labneh and laban.”

Priced from abroad

While dairy products are largely produced locally, many of the inputs needed to stack a bottle of milk on a supermarket shelf (feed for cows, fuel for transport, and even the cows themselves) come from abroad. Lebanon to a large extent is vulnerable to the vagaries of international markets as it imports over half of what it consumes in any given year, and that is not set to change any time soon. As of February this year the balance of trade — the difference between how much Lebanon buys from and sells to the rest of the world — has reached its highest level in recent memory at a $15.9 billion deficit. That means the country’s reliance on international imports is increasing, making Lebanon more susceptible to rising international prices.

In this context, much of the increases in food and drink prices can be understood. The cost of food commodities on the world markets declined substantially from the 1960s till the early 2000s, but then the tide turned and prices surged from 2006 to mid-2008, turning sharply north once again in 2010. Prices have since held relatively steady, according to the United Nations Food and Agriculture Organization. The receipt received at the end of the weekly shopping in Lebanon reflected these rising trends.

There are two main indices measuring inflation in Lebanon, one from the offi- cial Central Administration of Statistics (CAS) and one from the private Consultation and Research Institute (CRI). Yet while they provide good insight into the trends there are discrepancies between the two and many believe they both understate the rates of change. According to CAS, since its base year of December 2007 until April 2012, prices have risen by just 20 percent. The CRI’s base year is 2004 and its accumulative year-on-year inflation rates suggest prices have risen by 28.1 percent from January 2008 to March 2012.

Rima Turk Ariss, Associate Professor of Finance at the Lebanese American University, has led a two-year-long study into inflation measurement in Lebanon and she says that, “people feel there is a gap between the inflation measurements and the reality of the increase in prices. There is cleavage between the two.”

However, in the case of food, Ariss and her colleagues found that the calculations for food and drinks were pretty close to the mark. So the 132 percent increase in sugar and confectionaries between 2004 and 2011 recorded by the CRI may well explain Mrs Otrakji’s complaints that, “My husband and I, we like dark chocolate. It was LL4,500 [$3] and suddenly it has become around LL6,000 [$4] in less than two years.”

 

Impact on businesses

Rising prices strike not just the consumers but also the nation’s businesses and enterprises.

“In 2010 I was making a plan in my head that if I bring in $30,000 to $37,000 every month to pay all my expenses, salaries, rent, interest, telecoms and fuel, I would be fine. Now if I make $60,000 every month I won’t make anything,” says Barakat Chalhoub, who runs his own customs clearing company, adding that he worries the spiraling cost of running his business is simply unsustainable.

As well as increasing wages in recent years, Chalhoub has taken on some of the increased living expenses for his staff by giving them additional support. “I have three children but now I make plans as if I have 25 children because I am responsible for my staff,” he says. Recently, he has started to pay LL100,000 ($66) to all his staff for their fuel costs and LL150,000 ($100) for their telecoms.

In the CRI statistics transport costs, which consist of the costs of new cars, gasoline prices, tire prices, certain repairs and price of taxis and public transport, have increased 55 percent from 2004 to 2011. The rising cost of transport is intrinsically linked to global fuel prices and therefore, as with food and beverages, the rate of inflation in this sector is predominantly imported. However, Ariss’ study found that Lebanon’s inflation rates within transport costs were less volatile than global trends in fuel prices. The price of a liter of gasoline in Lebanon is now 95 percent of the average daily income of one person within Lebanon, based on the prices of gasoline between April 2 and April 11 2012 according to research by Byblos Bank.

As well as chipping in for their petrol, Chalhoub also supports his staff with the burden of their telephone bills. The Lebanese penchant for a good chinwag, coupled with the unreasonably high cost of telephone credit means that rarely a day passes without hearing someone complain about their phone bill.

However, this sector is perhaps one of the few areas where prices have actually fallen in re- cent years. According to the CRI, tele-coms prices have?fallen by 23 per-cent from 2004 ?to 2011 and Firas Abi?Nassif, advisor to the Minister? of Telecommunications and Post Nicolas Sehnoui, cites a number of achievements during his tenure, such as long-overdue decreases in Internet prices to subscribers by 80 percent and decreased BlackBerry prices by 40 percent.

Yet, despite all of these welcome advance- ments that often go unnoticed, Lebanon still has comparatively high telecoms rates for what are in many cases substandard services. What is more, the room to push prices down is constrained by Lebanon’s huge public debt of some $53 billion dollars, some 140 percent of Gross Domestic Product (GDP) depending on which statistics are used.

The two major telephone providers, mtc and Alfa, are publicly owned and last year raked in some $2 billion for the government’s piggy bank, pretty much covering the servicing of the country’s debt. Further significant drops in telecoms prices would make a serious dent in the country’s coffers if subscriptions do not increase in tandem.

Paying for a pad

One significant cost that is not factored into the nation’s inflation statistics is the cost of property or rent, but this is perhaps where people are feeling the pinch the most. Business owner Chalhoub complains, “For my office’s rent I pay around $15,000 per year, but when I started five years ago it was around $4,000 to $6,000 per year.”

There is no national real estate index in Lebanon so it is unknown exactly to what degree real estate prices have increased in recent years. However, bemoaning the crippling rise in land, property and rent prices, especially in Beirut, has become something of a national pastime. Karim Makarem, director of real estate advisory company Ramco, calculates, “If you bought a flat in 2005 for $300,000 with a yearly average increase of around 25 percent you could be paying at least 3 times that now.” Rents in Lebanon tend to provide a yield of around 3 percent on the property price, so the significant rise in the latter helps explain the predicament Chalhoub now finds himself in.

The balloon in property prices in Leba- non, especially up until 2010, was par- tially fuelled by optimism after the Syrian withdrawal in 2005. Then followed huge inflows of money after the signing of the Doha Agreement to end the civil conflict in May 2008, and investors seeking safe havens in Lebanon’s real estate after the global financial crisis hit, and property prices crashed in the Gulf and later that same year. However, there is also a structural nuance in the Lebanese economy that can go a long way to explaining the inflationary pressures in real estate and all of the non-productive service sectors.

 

Lebanon's economic oddity

Lebanon enjoys huge inflows of capital, such as remittances from expatriate Lebanese and oil money from the Gulf which, along with easy credit from the banks, boost the local money supply. As Lebanon is such a small player on the global stage, both in terms of consumption and production, prices for nearly all things tradable are determined externally, as we saw in the case of food and drinks. However, for any non-tradable goods or services these large inflows of capital drive up prices.

“I used to park for LL500 10 years ago and now I pay LL10,000,” says Abi Nassif from the telecoms ministry. “The workers who come to do maintenance at your place used to be cheaper than most places in the world, now, many services are more expensive than New York City.”

Restaurants and bars are another area of non-tradable goods and services where inflation has been pronounced. While filling the fridge has become expensive, it is fair to say going out for dinner has become an overpriced novelty. “It is now very seldom that we go out to restaurants,” says Otrakja. “It is so expensive now. There is nothing below $30 per person. Only recently you could easily go out for less than $20. If we want togo for a meal we will now only take the family perhaps once every two months.”

The implications of this nuance in Leba- non’s economy go beyond having to pay through the roof just to have a plumber fix a leaky pipe or to enjoy a romantic dinner with your loved one. The rising prices for real estate and locally sourced services raise the costs of production, eroding the competitiveness of productive sectors such as manufacturing, technology and agriculture. In 2002, agriculture and industry made up around 17 percent of GDP — 5.7 percent and 11.5 percent, respectively. In 2010, the latest figures available, they made up less than 12 percent collectively. Conversely, trade and services made up around 54 percent in 2002 and in 2010 comprised 61 percent of total GDP.

As sure as night follows day, where money goes people follow. With the huge inflows of capital into the non-tradable goods and services sector this is also where Lebanon’s workforce is being directed. However, Abi Nassif, both an engineer and economist by training with extensive experience in finance, warns, “People are flocking into these very low skilled kinds of jobs in which we can be out competed by cheap foreign labor in any case. So this only adds to unemployment.” Alternatively, scores of talented Lebanese youth flee to economies that offer them real potential from where they send back a chunk of their earnings to the homeland. The vicious cycle is completed once again.

Pricey education

With a state education system that many complain is ill equipped to educate, those who can send their children to a private school do. However, the fees for these centers of learning often amount to several thousand dollars a year per student, and they are also on the up.

“My three children go to one of the best schools in Lebanon, Notre Dame de Jamhour. They recently increased the school fees by $1,000 [on average],” says housewife Nayla Otrakgi. “It has become $4,500 [on average]. When we began it was around $2,000, then $3000, then $3,500 and now $1,000 extra in one go.” The school confirmed to Executive that it had indeed raised fees by “eight to 10 percent” on average this academic year. Another leading private school, International College, increased fees by 9 percent from 2008 to 2009, 7 percent from 2009 to 2010, 8 percent from 2010 to 2011 and 8.9 percent from 2011 to 2012. That is an accumulative increase of 37.2 percent over a four-year period.

 

Purchasing power

While the rising cost of living in Lebanon is patently clear to everyone in the country, what is less discernible is how this translates into the individuals’ purchasing power. That is to say how the rising prices relate to levels of income. “As for the change in the purchasing power of the consumer, it is not really captured by the inflation rates as they are currently computed,” says economist Ariss.
However, while certain strata of society may be riding above the tide of surging living costs many Lebanese are struggling to keep afloat. Simon Neaime, professor and chair at the American University of Beirut’s Department of Economics, says “We don’t know by how much exactly but purchasing power is decreasing, and it fair to say the middle class is getting wiped out. The middle classes in the 70s and 80s used to be about 60 percent of the population and now I think it is little more than 20 percent of the population.”

It is also uncertain who bears the majority of the burden from rising prices, the consumer or the producer. There is still no producer price index for Lebanon to measure changes in production costs, although CAS say they have the methodology in place but just need a political commitment to collect the data.

Chalhoub complains that while his costs are rising, business is not following suit. “As costs have risen I am struggling to bring in even the same revenues as before,” he says. With the International Monetary Fund predicting growth this year at a modest 3 to 4 percent—an assumption based on “strong domestic policies and an improved regional environment,” neither of which have been forthcoming this year—his qualms are likely shared by many more of Lebanon’s entrepreneurs.

And while it is not exactly clear on whose shoulders the greatest burden of rising costs falls, it is fair to say that no one escapes unscathed. The seemingly inexorable rise in prices, coupled with a frail economy offers no break anytime soon for homeowner or businessman alike.

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