Part 5 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with enhancing core strengths and specializations in the digitized knowledge economy landscape Date: March 31, 2021 – 6:00 PM – 8:00 PM
Part 4 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with aiming to export successful F&B concepts and develop job-creating quality hospitality ventures Date: March 31, 2021 – 3:00 PM – 5:00 PM
Part 3 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with taking media creativity ,integrity and professionalism to new heights of regional prominence Date: March 31, 2021 – 11:00 AM – 1:00 PM
Part 2 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with helping the agro-food sector contribute to building a productive economic system Date: March 30, 2021 – 6:00 pm – 8:00 pm
Part 1 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with overcoming rising financial barriers by leveraging competitive skills and new labor cost advantages. Date: March 30, 2021 – 3:00pm – 5:00 pm
Elephants are the epitome of power. These times of mystifying power tugs-of-war remind us that Lebanon’s economy has a fundamental right to security and stability. If you personally like the company of an elephant is thus secondary, as long as their power is wielded democratically.
The scary downside of this equation is that when out of control, an elephant in any room will be ruinously destructive. Without a harness, ours has been running loose for much too long. What is tricky is that we cannot mislabel, ostracize or kick it out, since years of indoctrination have engrained it in the identity of Lebanese individuals, families, and communities.
We understand that this elephant is part of our national mix of communities, we know its roots and doctrine, and we are well aware of the bloody path it has taken for forty years, rampaging both for and despite of Lebanon’s interests. But in all our awareness of this destructiveness and despite the track record that includes years of undermining the rule of law, flaunting the national sovereignty, amassing weapons and, lately, mastering cyber weapons and wielding them in cyberwars in support of Syrian and Iranian interests, we also recognize that harnessing the elephant will require a whisperer.
At this moment where we face a very real collapse of a nation, however, we cannot stand idly by the hijacking of Lebanese social causes or the continued destruction of our politics and future. Yes, the elephant is today more dangerously out of control than ever and has failed, along with the whole Lebanese establishment, to deliver on any promise to the people while doggedly warding off alternatives.
This ugly truth is unbearable, but it is time to face it. Look at our barren land, standstill mills, wasted youth and frightened eyes.
Elephants may arrogantly look down on roommates. But any would-be or real elephant in our room has to understand that Lebanon can no longer afford and will no more accept stampeding over its affairs and interests for the benefit of power-mad and bloodthirsty patrons.
Established in early 2020 as a private initiative to address the pressing social and economic difficulties of the Lebanese industrial sector, Cedar Oxygen was later approached by the Lebanese central bank (BDL) which invested $175 million of financing in order to address the need of local industries. In light of the financial crisis in Lebanon and the depreciation of the Lira, which is making it more difficult for the Lebanese to import foreign goods, including raw materials, Executive sat down with Alexandre Harkous, Chairman and Managing Partner of Cedar Oxygen.
Could you please start by introducing yourself and telling us about your background?
I left Lebanon in 1985 and moved to France. I am an engineer, technology oriented, specialized in Finance. All my background is with banks, asset management and capital markets. Then I ventured into startups. I founded my first one, SIP, in 1996, and sold it in 1998 to a very big company in the UK, Mysis UK. For the following three years I was head of wealth and asset management at Deloitte, then my second startup was established in 2000, BI-SAM Technologies, which became a worldwide leader in wealth and asset management systems. Today, more than USD 15 trillion of assets under management use this system. This company was then sold in 2017 to FactSet [and relocated from the UK to Lebanon]. Why Lebanon? I am Lebanese […] I wanted to give back to Lebanon, and even wanted to come back and live in Lebanon. I had prepared everything in Beirut, then we started facing the problems we know. My objective was to help Lebanon and help the Lebanese youth in creating startups.
Could you expand on the genesis of Cedar Oxygen? How was it created? Were institutions such as the Lebanese central bank or expat organizations involved in the design?
[BDL] was talking to different fund managers and counterparties, including the Association of Lebanese Industrialists. The Governor [Riad Salameh] called me in January 2020 and we met. We discussed in length the problems that the industrialists were facing, their increasing need for liquidity as well as the foreign reserves situation and the subsidies issue. He asked me for my opinion. We import between 11 and 14 percent of GDP per year for the industrial sector. We import raw materials for USD 3 billion. We should have a way for industrialists to finance themselves which should be a closed circle.
The other idea was related to the FX, because industrialists selling to the domestic market will collect their money in LBP, and therefore we should have a solution to inject money in the fund in USD. He mentioned that he was talking to different parties. So we started the process in the end of January and early February. After a long procurement process and 11 different meetings, due diligence and compliance processes, our proposed solution (Fund and Digital Fintech Platform) was approved by the Governor and voted by the Central Council members
I had called different partners, from Moscow, Paris, and Beirut, and we worked hard during six weeks and presented this program in March. It has two legs: a fund (a pool of money), and a platform for peer-to-peer FX.
Were there any Lebanese expatriates involved in the process?
All the founding team members are expatriates. We hired a team of seven in Lebanon after we created the company. Today we have two structures, the back office in Paris and a front office team in Beirut.
Did any organization such as Lebanese International Financial Executives (LIFE) take part in this process?
The founding team seeded the initiative, then the BDL was the first anchor investor in the fund. Cedar Oxygen is a private initiative, founded by expatriates. I am a member of Life, and chairman of the technology pillar of LIFE today. Two other members of Cedar Oxygen are members of LIFE. This is how I contacted my partners. It is not a LIFE initiative but an initiative by LIFE members.
In the current situation, Lebanese enterprises are finding difficulties in accessing capital, in paying for imported materials (raw materials and machinery), and the need to activate exports. How will the Cedar Oxygen fund address these issues?
The journey ahead of us is long. We have a pool of capital and a FX platform. Now if you are an industrialist, you need to buy your raw materials let’s say from France or any other country, you can ask for a facility from Cedar Oxygen, you can import through the platform, which is digitalized, with a new way to treat the files. Given that we are in France, we will be talking to Coface and Euler Hermes to help structuring credit insurance for exports.
The process starts by collecting the data from applicants, studying the files, financial statements, and their financial situation. We have a credit team in the Beirut front office that collects and analyses the data, and creates a credit memo for an Investment Committee (IC). The IC is composed of five members; three of them are independent and two are not Lebanese. The idea was to avoid a conflict of interest. There is no decision made in Beirut with regard to how we allocate the funds. Any file we receive is treated in Beirut, a detailed memo is sent to the IC. Every week we have an IC, the vote has to be unanimous for the file to be approved. Then we deploy the money and pay directly to the sellers of raw materials. The materials are then sent to Beirut.
How would you describe Cedar Oxygen’s business model? Would you qualify it as a private debt fund?
Yes, but for the moment it is not debt for capital expenditures or working capital. It is for buying raw materials. However we are talking to different development finance institutions (DFIs), and we hope to help more by deploying money for capital expenditures and working capital, this will help the industrialists augment their production, especially the exporters. Our target is to improve the balance of payments.
Will this include export support or export activation programs? (For example, participation in trade fairs among others)
You are aware that we have signed a memorandum of understanding with the Association of Lebanese Industrialists (ALI). We are working now with different economic attaches, either Lebanese or non-Lebanese, in different Lebanese embassies, but also the French Chamber of Commerce and the ALI. We are preparing a virtual trade fair for Lebanon that will be held in Paris on April 29 to promote the Made in Lebanon label. It will be the first virtual trade fair where we will expose real Made in Lebanon brands in Europe, and it will be our first occasion to show that.
Is Cedar Oxygen banking on specific key sectors for exports (for example agribusiness and key industries with competitive edges)?
We are excluding jewelry, due to Know Your Customer (KYC) and Anti-Money Laundering (AML) problems. We were excluding oil because it is not raw materials. But we received a file today, a request for a company that is importing oil for industrial purposes and we will consider it. Other industries, agribusiness, of course, textiles, machinery, and other industries are all eligible.
You mentioned hoping to reach $400 million per fund. How are you segregating the funds?
When I met Fady Gemayel, the president of the ALI, we were looking at the needs of the Lebanese Industries, and we came to the conclusion that if we reached this number, and we could roll it out once or twice a year, this would be enough to cover the initial demand. This was in February 2020. Afterwards, the government announced their default on Eurobonds, then resigned, then unfortunately the explosion at the port and the COVID-19 lockdown occurred, so we are trying to readapt our strategy to be pragmatic, especially as our stakeholders, the DFIs have two problems today: they have concerns about the political issues, and the country risk. We are trying to reach this amount as a target.
You mentioned before that you were hoping to reach a $2 billion a year financing. How are you segregating the funds?
We are allocating by sector. Our business strategy is to manage risks. We have to manage risks by sector, we will not concentrate our investment on a few sectors. We reallocate things differently, but we are still deploying. We cannot have more than 5 percent concentrated to a single borrower and no more than 30 percent concentration to a sector.
Industrialists have expressed interest. Are they mainly interested in the fund as potential borrowers or recipients? Or are there desires to be part of the financing?
There is interest in borrowing from the fund, but we have received interest by some of them to invest in the fund. You can use money in the fund, but you cannot obtain any priority to borrow from the fund in that case, or receive any information on your competitors. It’s a candid answer we need to give to those industrialists; it’s part of the communication.
When we created the IC, we were concerned to receive these calls from Beirut. I have one vote, even if I want to transfer money from the account I cannot sign alone. The signature is done not just by the chairman but also by two external managers that are partners in the corporate service agent that we work with who operate under Luxembourg jurisdiction. We are always under control by the IC for any money in and out.
Has potential funding interest been expressed by other sources?
Industrialists are interested. DFIs were all interested, but with all that happened last year we have had ups and downs. Since the US elections we are seeing more interest from the American side. In Europe it’s more wait and see, as they wanted us to form our government. Now they are accelerating, since it’s a private initiative and for the private sector. I cannot tell you which country, but I had a meeting with the ambassador from a European country, and he mentioned the need to accelerate. We are accelerating with these DFIs without waiting for the government and waiting time.
In light of the political instability in Lebanon, do you believe Lebanese industries can thrive even if economic instability seems to have become the norm?
We are looking into the private sector, and our contracts are under Luxembourg and UK laws, if they are under Lebanese law it’s for rare cases like mortgages and guarantees. All the investments are under the UK and Luxembourg laws.
Lebanon is unstable and has always been unstable. Unfortunately the good days of Lebanon are behind us for now, we should wait to get those good days again, and I am optimistic. But we can work without this, we should continue, otherwise we lose a lot of time.
We made studies about what happened in Italy, Germany, and France with regards to lockdowns for example, and we gave the Government the protocols applied there and told them not to lock down the industry, as it is a productive sector. We are trying to help. I don’t think we should be concerned about the government and the reforms; otherwise we lose a lot of time.
It’s an alternative system and an alternative fund; it’s even an alternative economy. It’s a private initiative. Investors have no leverage on us.
True, but Lebanon’s Ease of Doing Business rating is very low, industries are not hit by a lack of financing only, but also by issues related to infrastructure and regulatory issues (for example electricity outages and slow internet). Wouldn’t this be an impediment to the growth of the industrial sector?
Of course, but look, let’s be pragmatic, and let’s consider a moment that Cedar Oxygen was not established and that we are here to build something and come up with solutions. The banking sector won’t recover in the next 18 months, it will take years, and when we say years we say five years minimum. You don’t have a lot of financial solutions. If you wait for the government, who knows?
In my opinion, if we want to rebuild the country we need private initiative, direct to the consumer, direct to the industrialists, to people, to become productive. Cedar Oxygen is one initiative, but we can duplicate this. Even at Cedar Oxygen, we finance trade, but also what else can we do? We are considering Capital Expenditures. If we make our initiative successful, we can duplicate this to other sectors such as technology or agriculture.
You put a lot of emphasis on governance, principles; you have an investment committee with unanimous voting. Do you think you can help promote better governance standards?
That would be our aim. If you asked me this question two years ago I would have told you it’s difficult, due to the fact that Lebanese companies are family businesses, with strong connections. It’s a difficult mission to be honest. We are trying to talk to our industrialists but the road is long, they have to rebuild a lot of things. There are things we can’t address now like pollution or sanctions.
Today I am seeing people more open to equity investments, because they want to save their companies and jobs. I think that implementing new standards is an opportunity, and not just an economic one. It can promote best practices and gender equality, for example.
On our end, we have best practices implemented and corporate governance, including Environmental, Social and Governance (ESG) principles that we review with different experts and asset managers.
I feel I have to take on this mission, and fortunately I have a great team behind me. It was a learning curve. I was naïve when I came to Beirut, I learned a lot from that one year.
Note: We modified this text on March 26 and 27, 2021, based on clarifications from the interviewee, specifically in terms of Cedar Oxygen’s relationship with the Lebanese central bank, its internal structure, and its allocation of funds.
Eight months after Beirut’s deadly port explosion, the French initiative seems a lost opportunity in need of resurrection. Post-blast, French President Emmanuel Macron was welcomed in the streets of Beirut on August 6, 2020, while overseeing damages, which was followed by a second visit less than a month later, on August 31, 2020. During his visit, he promised to initiate talks with donors and to come back to Lebanon to bring forward an initiative that would help alleviate Lebanon’s woes and unlock the Conference for Economic Development and Reform through Enterprises (CEDRE) money that had been once considered as a main pillar of Lebanon’s future economic revival. The CEDRE conference was held on April 6, 2018, in Paris, and had pledged USD 11 billion of infrastructure projects (The pledges include $10.2 billion in loans and $860 million in grants), on the condition of political and financial fiscal reforms: these never materialized. As of March 15, 2021, Macron has delayed sending an envoy to Lebanon, in a sign of frustration with the current political deadlock in Lebanon.
The draft of the initiative was presented on Macron’s second visit to Lebanon on September 1, 2020 to Lebanese governing parties. In broad strokes, it called for: the need to establish an independent government of technocrats to tackle Lebanon’s economic needs; a forensic audit of the Lebanese Central Bank (BDL); a restructuring of Électricité du Liban (EDL)’s chronic deficits; reform of procurement laws; the need to implement laws guaranteeing an independent judiciary; in addition to a demand for legislative elections to be held within a year. This was followed by the nomination of ambassador Mustafa Adib to form a government on August 31, 2020. On September 26, the Prime Minister-designate resigned in the face of deadlocks in forming the government.
Macron, in a press conference held on September 27, 2020, lambasted the Lebanese political class and accused them of “collective betrayal.” Adib’s resignation as Prime Minister-designate, was followed by blockages preventing the formation of a new Government led by the new Prime Minister-designate Saad Hariri who was designated to form a government on October 22, 2020, and failed local mediations to resolve the political deadlock. For these reasons, it seems that any hope put in the former mandatory power’s proposal for Lebanon is now long gone. Nevertheless, as the government formation process is still ongoing, and with many hoping that said government of technocrats could still be formed, the question remains: could the French initiative be revived? And if so, would it help alleviate Lebanon’s woes?
An incomplete initiative?
The most important question in regards to the French initiative is whether it addresses Lebanon’s priority needs. Lebanon suffers from a default on its foreign-currency labeled sovereign debt, losses in the banking sector estimated at $44 billion according to a recent report from the World Bank, a depreciation of the Lebanese pound, and with ever rampant corruption. The French initiative, on the surface, does seem to address some of the main issues, such as EDL’s deficit, the losses at the BDL, and corruption, among others. Nevertheless, it is deemed insufficient according to many economic experts. According to Ziad Hayek, former secretary general of Lebanon’s High Council for Privatization and Public-Private Partnerships, the French initiative “touched on some of the most obvious things, some of which are not applicable anymore,” referencing the fact that the proposed reforms are outdated as they rely on assumptions from the CEDRE investment plan. According to him, the French initiative is too general and overlooks two main factors, the first of which is the lack of a coherent governmental economic strategy, and the second is that the plan seems to lack “a proper understanding of the play between economic, monetary and fiscal policies.”
Indeed, overall, the French initiative seems to overlook key aspects regarding the lack of effective governance in Lebanon. Lebanon’s Ease of Doing Business Index rank is no. 143, it’s competitiveness index is 56,29 (ranked 88th worldwide), and it’s Fragile State Index is 84,9/120. This opinion is seconded by that of Mounir Rached, President of the Association of Lebanese Economists. “There is too much focus on general issues, but not enough on what needs to be done,” he says. According to him, Lebanon needs an economic roadmap, and precise measures to reform governance and boost the economy (issues that were addressed by Executive Magazine in its Economic Roadmaps 1.0, 2.0, 3.0 and 4.0).
Indeed, if anything, the French initiative does seem to lack details, as it focuses on some of the “main” issues affecting Lebanon from a deficit standpoint, and the audit of the BDL (to determine the exact losses of the institution), but has little to say about how to promote economic growth or on monetary policy.
The French initiative is also not clear concerning an overall economic strategy to get Lebanon’s economy back on track, instead of relying on the need to obtain funding from the International Monetary Fund (IMF) through negotiations. Though negotiations with the IMF, which are part of the measures mentioned in the French Initiative, have stalled, little has been done to revive such talks on the part of the executive branch in Lebanon.
With regards to EDL reform as proposed by the French Initiative, according to Hayek, the plan relies on many assumptions from the CEDRE investment plan, which needs to be reviewed in light of the current economic situation. He cites for example the need, mentioned in the French initiative, to build new power plants, “Serious thought should be given to distributed generation instead of building large power plants, because it would be difficult to attract proper large investor interest at this stage.” This is because large power plants require large foreign investments, whereas distributed generation is decentralized and adopts more flexible technologies that are located close to the load they serve, with more limited production capacities.
Status quo
French President Macron, having postponed his visit to Lebanon originally planned for December 22, 2020 after contracting COVID-19, meant to send an envoy to Beirut (with no concrete date proposed yet). With new Prime Minister-designate Hariri’s consultations to form a government showing little to no progress since September, little has been done on the Lebanese political side to help advance the initiative. Indeed, bitter disputes regarding the formation of a technocratic government, with political parties arguing over cabinet portfolios, has frozen efforts to form a government, one of the main points of the French initiative to help restart the negotiations with the IMF and engage the necessary reforms. “We need a government,” says Rached, “and for now there is little sign of progress”.
The French initiative without the French?
The reforms proposed in the French initiative, though deemed incomplete, appear nevertheless to be necessary. The question remains then: would it be possible to engage in these reforms without French backing?
Such reforms are mostly local and do not require direct foreign assistance, since they could be the result of local governmental initiatives. Rached and Hayek both believe that the Lebanese are capable of implementing large parts of the French initiative, without the French, and see no reason to delay. Indeed, many of the recommendations mentioned in the initiative, such as ending EDL’s deficits, an audit of the BDL and others require only a political decision.
The decision seems to be, first and foremost, political, and the lack of decision-making in Lebanon is a result of ineffective governance. Since the cabinet of Prime Minister Hassan Diab resigned in the aftermath of the August 4 Beirut explosion, Lebanon has been without an effective government for the past six months, though the Diab cabinet is still acting as caretaker government, and efforts to permit the formation of a Hariri-led government, by time of this writing, did not appear to reach any conclusion. Without decision-making, Lebanon is not able to propose an effective economic roadmap and implement reforms, as takeover governments only tackle everyday business. The formation of a government would allow launching tenders to build power plants, reforming procurement laws and engaging in a BDL audit, all of which are part of the French initiative but also of any reform package that would be approved by the IMF. Another example of immediate measures to be taken is the need to liberalize the rate of the LBP, which has not even been mentioned by the French initiative but is appearing more and more as an economic necessity to avoid a depletion of BDL reserves (due to said reserves being used for subsidies) and to allow Lebanon to minimize its trade balance deficit.
In conclusion, the “French initiative” recommendations could very well be applied by a Lebanese government, but under current political governance, appears increasingly difficult. Meanwhile, with political deadlocks, it seems reforms will have to wait. According to Hayek, the “French” initiative could be pursued without the French, but this could not be done anytime soon due to what he sees as a lack of parliamentary initiative, “If we get 20 new members of parliament from the civil society next elections, maybe we can change the dialogue towards implementing effective reforms.”
Desperately seeking governance
The French initiative seems to have hit a dead end.The main hurdles in implementing needed reforms are primarily political. For example, a full audit of the BDL would require a law to be passed in parliament due to banking secrecy requirements (though it has lately been subject to debate regarding public entities’ accounts according to Caretaker Justice Minister Marie-Claude Najm). In addition, procurement reforms would need a law in parliament, as they do not follow international standards, according to Rached.
Still, the priority issue, according to Hayek, is the banking sector deposits labeled in USD. Whether this money has been spent is still the subject of ongoing debate, though most experts in banking deem it so. For Hayek, the only way to deal with this issue is to stimulate capital markets through the creation of a trust that would hold the assets of the state to eventually privatize those assets and list their shares on the Beirut Stock Exchange when market conditions improve. All of this would require laws to be passed in parliament.
The French initiative calls for elections to be held within one year from the initial proposal in August, which would require that most reforms be quickly implemented by current parties in power.
Macron has delayed sending an envoy to Lebanon as of February 18, 2021. It remains to be seen if the local political deadlocks will be removed to help form a government and initiate reforms, to fully benefit from the hand extended to Lebanon by its old mandatory power.
Overall, the economic solutions to Lebanon’s crisis do not seem to require as much foreign intervention as they do national willingness. The latter, sadly, is still subject to what observers deem to be political bickering, corruption and ineffective governance, which for the moment do not seem close to end.
Along with the reform of capital markets and the strengthening of judicial independence, the modernization of public procurement is on top of Lebanon’s reform agenda and a major condition to unlock international assistance. Public procurement is a fundamental economic activity for public authorities at both the central and the local levels, as it encourages the provision of high quality services in a cost-effective way.
The massive uprisings of October 2019 and the unfolding financial meltdown may signal a wind of change: both the international community and the Lebanese people are demanding strict accountability and integrity requirements, but the challenge is considerable. Despite billions of dollars of aid and soft loans that were granted to Lebanon since the 1990s, the country’s infrastructure and the quality of public services remain among the poorest in the region. To many, the inefficiency of public spending is but one outcome of Lebanon’s institutionalized corruption, elite capture, and pork barrel politics. Moreover, not only have the oversight agencies been systematically weakened over the past years, but the many loopholes in Lebanon’s legal and regulatory framework also offer little prospects for better days without an overhaul of the public procurement system. If properly regulated, public procurement can restore confidence in the Lebanese business environment and attract foreign investors. But there is much more to public procurement than a way towards economic recovery: it is also about restoring trust in public institutions.
Are Lebanon’s laws paired with the mismanagement of public funds?
Lebanon’s current public procurement framework is a fragmented patchwork of various legal instruments consisting of the 1959 Tender Regulation Decree, the 1963 Public Accounting Law (PAL), and a flurry of other texts regulating exceptions and special procedures. Some municipalities follow the Accounting Principles in Municipalities and Unions of Municipalities Decree of 1982 while others are subject to the PAL. To make things even more complicated, some public establishments follow their own procurement system.
Lebanon’s outdated and heterogeneous legal framework, in addition to the multitude of stakeholders, make this activity highly vulnerable to corruption and clientelism. Public authorities have large discretion to resort to unjustified practices such as bid slicing. In other instances, municipal officials resort to vendor bills to reduce the length of bureaucratic procedures and delays for receiving approval from supervision authorities. DRI has assessed these issues at length to support current reform efforts.
According to a December 2020 report, the policy and regulatory functions of Lebanon’s procurement system are “inexistent, and the complaints review mechanism is weak and inefficient.” The quality of the procurement system was rated as “below average (48/100) compared to the rest of the world and to a number of MENA countries.” By all standards, Lebanon does not comply with international guidelines and agreements.
How to move toward a better public procurement system?
There is much hope to pass a public procurement reform bill that was submitted to Parliament in February 2020. The draft legislation lays the groundwork for a comprehensive and modern public procurement system that is aligned with international standards. Since last June, it has been discussed in consultation with key stakeholders.
The OECD, the World Bank, and Democracy Reporting International are providing technical advice and guidance to this process. So far, the changes brought in by the draft law have been promising, but the successive lockdowns have considerably delayed progress.
In line with UNCITRAL standards and international good practices, the draft law places a premium on fairness and competition by strengthening competitive tendering and limiting the use of single-source procurement and treating all bidders equally. It also introduces a code of conduct, fosters transparency by leveraging technology to facilitate access to information in compliance with the 2017 Access to Information Law, promotes efficiency and effectiveness by ensuring value for money, and enhances accountability via control mechanisms throughout the procurement process including appropriate complaint and sanctions processes.
For the quantum leap to happen, the law should be consolidated by a package of implementation decrees, Standard Bidding Documents, and a bold program for empowering oversight agencies. Only then can Lebanon correct its course towards public integrity and effective accountability.
Beirut-based financial company OMT is a family-owned and managed enterprise that has morphed from being simply a ubiquitous sight – the yellow and black logos of OMT agencies are scattered around Beirut, urban centers, and Lebanese villages in all of the country’s provinces – in an overbanked country to an existential supply channel of stable currency. An unknown but decidedly growing number of Lebanese families today depend on their relations in the Lebanese diaspora for inflows of handfuls of dollars every month to withstand the country’s insane inflation, capital controls, and the physical impacts of the 2020 Beirut Port explosion. In this regard, OMT, which started in the late 1990s as the agent of international money transfer corporation Western Union and today offers over 100 domestic and cross-border services to Lebanese residents, says it has facilitated about USD 3.5 billion and 10 million transactions (both numbers being in terms of OMT enterprise totals) by volume last year, while providing 150,000 families with cash through inbound money transfers during each of the past seven months.
To find out more about the OMT company’s operation, business model, and plans, Executive sat down with executive board member Naji Abou Zeid.
How did the money transfer volume in 2020 differ from one period to the next, especially when comparing the period before the August 4th Beirut Port explosion with the months following the catastrophe?
Before the blast, the Central Bank of Lebanon [BDL] had issued, in April [of 2020], a circular obliging all money transfer players to pay out transactions in [Lebanese lira] LBP at the rate set by the BDL Exchange Electronic platform At that time, this rate was LBP 3,600 [for USD 1], less than the rate of LBP 3,900 [that was subsequently decided by BDL]. The black market rate at that time was around LBP 4,200, so basically quite close to the payout rate that we would be adopting. We started paying in LBP from April until the blast happened in August. But as you know, the black market rate had reached [close to] LBP 10,000 in July, and the whole market was collapsing. Comparing with the same period in the previous year, we had about an 80 percent drop in our inbound transactions between April and August. It was a disaster.
The blast was a game changer for the entire [money transfer] industry, besides being an unfortunate turning point for the whole country. This is because the BDL issued another circular after the blast, allowing and obliging all players to pay out [inbound transactions] in US dollars. [The first week after the decision] was a hell of a week. We paid during that week what we usually pay in a month. From August until the end of December 2020, we had a 50 percent increase in transactions when compared to the same period last year. On a monthly basis, more than 150,000 families are receiving money through OMT.
In your view, how much of the change in the stream of inbound transfers witnessed by OMT was related to this economic crisis and the problem in banking relations, rather than to the Beirut Blast?
It has been definitely related to the economic changes, because until now we are still witnessing an increase in volume of inbound transactions. The spike was after the blast. But for the following months, we have been back to the numbers seen before the revolution [in the latter part of 2019].
Would inbound transfers today be at the same level or higher than during the economic shock of late 2019?
We don’t know yet. 2021 will be the indicator; 2019 was bad, and more than half of 2020 was very bad; the last four, five months of 2020 were good and we are still in good shape; we now will see how this [year goes].
It is known from studies on financial responses and donations after many types of natural catastrophes that financial support and humanitarian aid transfers usually peak shortly after a catastrophe but that this tends to wane soon after. Are you seeing this kind of pattern in money transfers to Lebanon?
The inbound service that we offer internationally, is mainly person to person. It cannot be used by an international organization to engage directly for sending humanitarian aid to recipients. Most of our transactions are family support, where family members living abroad are sending some dollars to their families to sustain their living. Employing OMT for [institutional] humanitarian aid plays a very big role, but it is not related to Western Union and so we categorize it under “cash out” services. We have applied for eight or nine [requests for proposals] from international donor organizations during the last six months, and OMT was able to win seven of them. Thus we have a cash out service that is totally independent from Western Union [transfer services], whereby the humanitarian donor can transfer to a list of beneficiaries through our locations.
Are you in humanitarian aid partnering with the National Poverty Targeting Program or emergency social safety net (ESSN) program that has recently been winding its way through the administration and Lebanese Parliament?
Currently we are dealing with international donors and UN-based [humanitarian aid]. We applied to all of these organizations such as UNICEF, UNHCR, UNRWA, and so forth.
That means that people who are receiving support from these organizations, can cash out through OMT?
Exactly.
Civil society activists in Lebanon have voiced concerns that it would not be easy for the poor to use electronic transfer services, because many poor are unbanked and the experience of these families is more based on cash. Do you see this as a problem?
We have two solutions for the cash-out services. In the first, the beneficiary receives an SMS with the payment number and related OTP (OTP= One Time Password), goes to any OMT location and provides this number along with the OTP and legal ID, and takes the support in cash. The other option, and it is basically the donor who selects the option, would be to upload the aid to a payment card. We have the OMT card, which is of course powered by a system and banking system, and the beneficiary can use this card to buy food [or necessities]. Sometimes [donor organizations] may specify specific goods or locations where this card can be used.
How have you adjusted operations to challenging circumstances such as the aftermath of the Beirut Blast?
In the first week we had a shortage of US dollars for about four or five days. Since the crisis, we are shipping our dollars from abroad. As you know, we have an international service with Western Union. There are inbound transactions and outbound transactions. Since the crisis started, the outbound business is down more than 50 percent; the number of foreigners in Lebanon decreased and the dollars available in Lebanon decreased. All people are saving them at home for later. Thus the outbound dropped drastically. The inbound is much higher than the outbound. We pay on behalf of Western Union all transactions and they reimburse us on the second day. Before the crisis, the process was made through banks. Now, we do this manually: we receive the cash in our bank accounts outside of Lebanon, and there is a money shipper who gets the cash. Then we distribute to the network. The whole process takes three to four days.
Is the cost of transporting cash and delivering it to Lebanon on a daily or weekly basis leading you to increase fees? You are charging a two percent cash fee to the customer, right? Is this roughly equal to the added cost of operations under current conditions?
This fee is mainly for the cost of the whole [distribution and money disbursement] operation. It is pretty much equal to the total cost. Sometimes you lose and sometimes you win but these are very small margins. We have a direct cost of minimum 1.85 percent but this can change. Whenever you have a lockdown, the cost of shipping doubles because of airport closures. We had six months of ups and downs.
To give you some numbers about how the situation of inbound transfers looks, before the crisis, 15 to 17 percent of the inbound flow of money was with money transfer companies. Lebanon used to get roughly USD 7 billion per year in remittances and our industry formed 17 percent of that in 2019. Now, in 2021 this is expected to increase. [This could be] because the business is growing; we will see in the coming months, but it is mainly because the banking sector is shrinking. I think we will this year see about 25 percent of total remittances but let’s hope that the numbers will be growing and not stagnating at the current level.
In presenting an introduction to OMT, you said that you have 71 percent of the market. Is that the total market or the inbound market of the industry?
It is for the total market of money transfers, for inbound it is much higher; I guess we are about 80 percent of total inbound in Lebanon.
Viewing this under a scenario of the total Lebanese economy today, the value of inbound transfers as share of overall GDP is today very high.
It used to be around 20 percent a few years ago. We predict that this number is going to grow for the coming three, four, five years. It all depends on what plan we will see implemented. So far, nothing has been done. People will rely on transfers.
How is the situation in terms of your overall profit mix and overall transaction numbers? You mentioned in the presentation that the average transaction since the blast was around USD 600.
Yes, it actually dropped. In previous years, it used to be around USD 650 and this average principal of inbound dropped by 7 percent in 2020 compared to 2019. This shows that the purchasing power of the Lebanese emigrant has also been affected by the pandemic, the global crisis, and everything. Also, they don’t need to send the same amounts anymore. They can exchange more Lebanese pounds for a lower amount of USD. It is also good to mention that over 60 percent of the transfers for the whole year of 2020 are in average for equal or less than USD 300 dollars, although the overall average is USD 600.
Does this mean that in the 40 percent of transfers that exceed USD 300, you have a significant share of amounts that are higher?
Yes, not very high but they dwell perhaps between USD 2000 and USD 5,000. I personally expect this segment of the business to grow in the inbound, because banks are not there. Unfortunately, we cannot handle large amounts. The maximum is USD 7,500 per transaction, and there are compliance rules and regulations.
Could there also be a correlation between the number of inbound transactions and the average value? If a Lebanese living in the US heard that the family back home needs monthly support to survive, but that the transfer of USD 300 might provide the family with 2.8 or 3 million LBP, might he or she remit money more often but in lower amounts per transaction?
It could be. We could do such an analysis in my opinion in June because then we will have almost a full year of knowledge. Right now, the picture is not yet clear, especially since January and February are usually slow months after Christmas and the holidays. The three months from March onward will be significant.
Moving further in thinking about the ease and diminishing cost of transactions, the Fintech disruptions of the past seven years have had vast impacts on the international money transfer industry. How do you at OMT approach this issue?
I will tell you a few words about our OMT digital platform, which is what we have been [working on] for the last two years and hopefully will launch in phase 1 in April. We have been developing this digital platform and we also had systems that were not compatible with [other] platforms. We had to change many things that were existing before even thinking about starting our mobile presence or digital presence. Now, the whole exercise is almost done and OMT will hopefully launch the first application of this kind in the Middle East.
You have many agents. How is the revenue proposition for an agent, how much money can they make?
Nowadays everything unfortunately has changed. Inbound is the only service that is still flourishing and revenue is generated mainly by inbound transfers from Western Union, because [they are] in fresh dollars. Even the commission that [agents] earn, they earn them in fresh dollars. All other services, from outbound [transfers] to services in Lebanese pound such as paying bills and even transferring money inside of Lebanon, have been losing a lot of revenue in the past two years, because of the devaluation. Our fees [for these services] are in LBP, so we lost about 80 to 85 percent of their revenue for OMT and for our agents. So far we did not change the fees, because putting added pressure on [customers] right now is a sensitive issue.
You have five revenue streams in OMT, inbound international, outbound, intra-Lebanon services, governmental services, and cash-out for donor organizations abroad. What are the shares that each service contributes to your revenue today?
We have four strategic business units: Money Transfer (WU and Intra for local transfers), Governmental Services, Payment Services (Telecom, Payments to Banks and other companies in the private sector), and Cash Out (Cash disbursement to individual beneficiaries). Inbound Western Union is number one, intra, the money transfer inside Lebanon is number two, then payment services for the private sector and then the public sector.
Are you then planning to at some point increase your fees for intra-Lebanon transactions, either to businesses or for governmental services?
We are actually studying this but nothing has been decided yet [Some fees are too low to cover cost] and this has been the situation for one-and-a-half years, but we are still hesitant about adjusting the fees, because [our services affect] all people.
From yet another angle, this brings the question of your social commitment and responsibility to the table. As you say, you deal with everyone. Is it correct that you undertook several steps in this regard after the blast?
We were able to cover 1,000 houses with an instant financial support of one million [liras] per household. We were on the ground with [the NGO] Caritas and got all the data from them, because we don’t have the database.
Wasn’t there also an action with Western Union, of waving the fees for inbound transfers for a whole week? Between direct CSR and aid to the 1,000 families and the waiving of the fees, how much was the total financial support of Western Union and OMT for Lebanon after the blast?
We did a lot for this because with Western Union it was a worldwide thing. It was a joint effort between OMT and Western Union for sending money from everywhere in the world.
What was the total value of the corporate contribution to Lebanon after the port explosion?
We actually have not made this calculation. What I can say is that during that one week, just six or seven days, we paid out around USD 25 million worth of inbound transactions. This was free of fees. Usually we do this in a month.
In going forward, how do you see the role of OMT in terms of responsibility as a financial services provider that many people rely on in a time when banks are not at the forefront of social commitments and corporate citizenship?
It is a tricky role. We have a responsibility to keep things moving and becoming one of the pillars of the daily economy of the Lebanese citizen. This is a big responsibility, because we have to be there and up to the level, provide the right resources.
Talking about compliance, do you have any pressure from the US treasury?
No pressure whatsoever, but I am sure they ask questions to the [BDL]. We deal with the [BDL] because we are regulated by [it]. We receive requests from the Banking Control Commission (BCC) and from the Special Investigation Committee (SIC). We are in very good relations with both of these.
With your ceiling of USD 7,500 per transaction, one might think that you are not high on the anti-money laundering radar.
Actually we are, because some customers tend to split transactions and play some games. But for this we have a special compliance system that screens transactions to spot such suspicious cases.
How many red flags do you have each month?
The [number of] red flags could be very high but the number of referred red flags is much lower. Transactions that we investigate are clean and nothing to worry about 95 percent of the time. Our suspicious transaction reports (STR) have about 100 cases per year.
As far as your company’s future, I assume that you are not intending to list OMT in Lebanon or anywhere else in the foreseeable future. Is that correct?
We are still a family business here. Maybe in the future, who knows?
For governance of OMT, I understand that you have four board members. Do you have major non-family investors?
No. The company is 50 percent owned by my brother and me, representing the Abou Zeid family, and the other 50 percent are owned by my uncle, Toufic Mouawad, and his daughter. The four of us are on the board. My uncle is the chairman of the board.
Combining the families that are relying on OMT as employers and the families that are in the agencies, how many people are depending on the business for their livelihood?
As OMT we create direct and indirect jobs, for about 4,000 families. This is the whole ecosystem, including agents, their employees and their families.
Are you thinking of expansion, in terms of your profile or in terms of geography?
We are so far in Lebanon and it is better to be the master of your market before even thinking about moving to other markets.
Does that mean that you are thinking about it?
For the time being, no, but maybe in the future. Why not? I believe that [once we] have the digital platform, we can reach every Lebanese around the world. Today we serve four or five million Lebanese here. With the digital platform we are perhaps going to serve 10 million outside. It is a big market.