Economics & PolicypolicySpecial Report

Prevention of corruption in autonomous public institutions

by Jessica Obeid
written by Jessica Obeid
 

“You can’t build a great building on a weak foundation.” The same applies to institutions. Strong institutions are critical for crisis recovery and economic development. In Lebanon there are several autonomous institutions that, theoretically, were supposed to be shielded from political interference and improve sectorial performance. Yet, in practice, these institutions suffer from structural problems that have rendered them a vehicle for vested interests, leading to a reduction of the country’s competitiveness and a deterrence to investments.

 Autonomous public institutions, by design, should benefit from an independent decision-making process, autonomous employment and access to resources. These institutions’ characteristics have been largely defined by their post-civil war restructure. The then-governments attempted to expand the role of the public sector while developing the private sector. The linkages between business people and politicians increased as more financing was available within the private sector compared to the public sector. This has led to the emergence of ministers and public officials with private sector’s interests of profit-making while operating within public institutions – even autonomous ones.

This phenomenon is witnessed clearly in the health and power sectors. The focus of private profit on the provision of health services has exacerbated inequality and weakened public hospitals. In electricity, reforms have largely remained on paper and citizens perceive the national electricity utility, Electricité du Liban (EDL), as a symbol of corruption.

Structural defects

There are obvious trends in the Lebanese autonomous public institutions: weak governance, illusion of autonomy portrayed in the political involvement in these institutions, and lack of accountability.

Corruption arises when there is a level of autonomy and availability of resources, but there is also political meddling in decision-making and recruitment, compounded by an absence of mechanisms to promote responsibility and accountability for specific actions. The involvement of certain ministers in the institutions’ decisions results in further blurring of the autonomy and boundaries between the institutions and ministers. Autonomous employment also took a hit when it was modified by the Council of Ministers to require its approval for public employment and appointments. The absence of accountability is rooted in the structural gaps within the parent institution. These shortcomings span from the design to the implementation stage of these autonomous institutions and can be summarized by: 1) the opacity of mandates and functions of the institution; 2) the absence of or weakened regulatory oversight; and 3) flawed coordination in assessment and organization. As a rule of thumb, the ownership, board of directors, and management of the institution should be separated. When the lines become blurred between the owner or parent institution and the management entity of the autonomous institution, responsibility becomes scattered and answering to actions becomes impossible. This is further aggravated when there is the lack of an oversight entity that controls and monitors the performance of the relevant sector’s institutions. The parent entity then deviates from its mandates and designated role, leading the way to ministerial exertion of power over decision-making in the autonomous institutions, thus exposing the latter to vested interests and corruption. The end result is therefore institutional corruption and the eroding of citizens’ trust as these institutions increasingly appear to serve the private interests of government officials.

Botched reforms

As economic crises mount, the need for reforms multiplies as states can no longer afford the cost of the status quo, and as citizens turn more towards the public sector for service provision. However, reforms do not happen in a vacuum, and solid institutions are a prerequisite to enable the adoption and implementation of reforms. Following Lebanon’s protests in October 2019, and later the county’s first Eurobonds default in March 2020, calls for enhanced governance across all sectors have increased but were met with complete absence of political will for effective reforms. Instead, the country has witnessed the emergence of the “décor-reforms” that give the illusion that something is being changed without actual implications on the end result, which continues to be institutional corruption.

Nowhere is this more evident than in the electricity sector. In July 2020, the cabinet appointed an Electricité du Liban (EDL) board of directors, allegedly as one of the reform measures, following a 2-decade board vacuum. Yet, instead of hiring for expertise, credibility and independent thinking, the cabinet appointed the board based on sectarian and political affiliations. The first test of the board happened a few weeks later when the Beirut blast severely damaged the utility’s headquarters, leading to deaths, injuries, and the loss of the national control center and data, in the absence of digital records and archives. Instead of stepping up, the board remained in idle mode.

The chronic dominance of private interests in the healthcare sector and public hospitals also emphasizes the need for institutional reforms and digitization. Minor attempts to develop and invest in governmental hospitals resulted in shy improvements in the public access to healthcare. The investments were impaired by major institutional shortcomings including lack of monitoring and supervision and overall transparency, and weak recruitment criteria and administration. The absence of digital medical records for each patient further reduced the sector’s efficiency.

Moving Forward

Corruption has cost the country tremendous debt, in addition to the deterioration of the quality of life and overall competitiveness. Economic recovery and attraction of future capital will hinge on reducing corruption and improving institutional performance. Thus, commitment to a long-term robust transformation plan is urgent. These transformations are embedded in institutional reforms that start with the creation of independent oversight and regulatory bodies in order to define functions through multi-stakeholder representation. Oversight and regulatory bodies should integrate into a broader framework of reforms and therefore require political commitment. They should have financial autonomy as well as the authority and capacity to assess the quality of regulation, coordinate with stakeholders, and make independent decisions. Another major requirement for their successful performance is hiring independent professionals on the basis of competence and relevant qualifications. The institutional mandates should be clearly defined to mitigate the risks of bending stakeholders’ authorities and responsibilities. Many layers of functionality, expertise, regulatory, and human resources are required to design the detailed structures. The political appointee or relevant minister should have a definite role that limits political influence on a sector. The latter’s performance should be dictated by experts and should derive from solid policies, regulatory frameworks, and institutional structures, which would curb and control vested interests.

In order not to fall in the trap of previous shortcomings, putting in place adequate monitoring and accountability mechanisms is a critical factor for institutional reforms. Promoting these accountability mechanisms and transparency also entails citizens’ engagement. Not only is this necessary for improved sectoral performance and services, but also for ensuring a people-centered recovery. This is addressed in Lebanon’s Reform, Recovery and Reconstruction Framework of December 2020 which recommends implementing oversight mechanisms for assistance funds in order to promote transparency and accountability, and ensuring an effective enabling environment inclusive of non-governmental organizations at all the stages from consultation to monitoring[2].

The National Anti-Corruption strategy supports the sectoral reforms efforts through the provision of a practical roadmap and measurable indicators in its 7th outcome (preventive measures against corruption integrated at the sectoral level) in order to achieve a gradual integration of the institutionalized corruption prevention platform across sectors. The prevention plan can therefore be optimized and segregated into both the electricity and health sectors. This would allow the concentration of resources into focused areas, building capacities and developing mitigation plans relevant to the specific type of corruption and threat per sector[3].

There are no reforms without solid institutions and one cannot improve what is ignored. The starting point is to tackle the institutional structural woes and adopt a methodology for managing corruption risks. An assessment of these risks should be undertaken across the different processes of the autonomous institutions in order to determine and estimate the level of risks and analyze the enablers. The result would be an identification of the high-risks decision-points, thus enabling an optimal mitigation.

Jessica Obeid is an independent energy policy consultant

Disclaimer: The analysis, views and policy recommendations of this article do not necessarily reflect the views of the United Nations, including UNDP, or its Member States. The article is an independent piece commissioned by UNDP as a build up to the “Prevention of Corruption in Autonomous Public Institutions” webinar organized in partnership with Executive Magazine.

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Economics & PolicyQ&A

Keeping tabs on gender equality

by Thomas Schellen
written by Thomas Schellen

Towards better inclusion of women across economic sectors

The quest for women’s inclusion in the Arab workplace has taken another step on the long journey to improving the role of women in the formal economy. The Center for Inclusive Business and Leadership (CIBL) at the end of March 2021 launched the first iteration of findings from its KIP Index (KIP originally was an abbreviation for Knowledge is Power, a two-year project on gender and sexuality that was launched in the 2010s at the American University of Beirut). The KIP Index website describes the new gauge as a “sector-based measure of women-inclusive policies and practices in local organizations” in countries of the Middle East and North Africa region. Executive had a virtual sit-down with Charlotte Karam, PhD, the founding director of CIBL.

What are the milestones and target dates that you want to achieve with the index?

Moving forward, our intention is to collect data every two years and expand the sample. We are hoping to track how things progress or digress. There is no point in collecting data except to do it over time so that you can be a companion with employers {encouraging them] to do better and hold themselves accountable. Given the changes in funding priorities, we are also trying to seek an endowment to support this work. So far, we have funding for the next iteration, which will start in 2022.

I think you obtained a fair amount of funding in 2019? This funding is committed and secure, right?

Yes. The first funding for the first iteration was a grant from the [United States’] Middle East Partnership Initiative for $1.5 million. For the second iteration it was a little bit less, but now we worked out the kinks and so it will be much easier to run.

Almost every newly launched index these days gives one the sense that there is an ideological framework behind it. Assuming that this is no different for the KIP Index, what is it that you intend to prove and what are your fail-safes so that you do not get false positive or false negative outcomes in line with whatever ideological expectation you might have?

Our intention in creating this index is very much ideologically based. I don’t want to sound too academic but I will say that our intention was [departing] from a post-colonial space. What I mean by that is that we want to gain control of our narrative from within the region so that we are able to compare and contrast between local realities […] without being forced to compare ourselves only to standards that are outside the region. Ideologically it really is about creating an indigenous Arab conversation that will move forward together in bringing ourselves to each other.

To the question about false positives, we had no expectation. We did not come in here with a hypothesis. When we developed the index we brought together people that worked in the area of economic empowerment in 11 countries. They are people working on the ground, they are largely [civil society organizations] or academic institutions that have been studying this area and [participating in] trainings. We brought them together and what is fundamental to our method and ideology is the idea of participation. One of the questions that we wanted to ask was who is [the index] benefiting, how does it benefit the local conversation, as opposed to a transnational conversation looking at us from afar. It is academically post-colonial and what we call feminist participatory action research. What guided us in terms of value was how to improve the lives of women who are working in today’s organizations and how to translate that into more inclusive and dignified HR systems.

What timeline or vision do you have about modifying deeply rooted behaviors of superiority in economic organizations that are usually associated with male attitudes?

For us it is not a question of male versus female. It is more about oppressive structures and about vulnerability. In our case, what we are trying to address with CIBL are the neoliberal structures of economics. Our CIBL story and journey started a long time ago but began officially a few years ago. It is a conversation with structure, a conversation with decision makers. We have hit something that is resonating with decision makers in Libya, in Lebanon, in Iraq – in these conflict areas, which is to say that we have to have a conversation about these oppressive structures and how to build more inclusive systems. This is going to help the community and there is also a business case. It will enable them to do business better. Thus when we were creating our training modules, we embedded the fundamental notions of social justice, although we are speaking to business audiences that do not often place social justice as their motivating or animating factor.

It is shocking to us how much this is resonating with [business leaders today], much better than it used to. This may be because, take Lebanese employers for example, they now, more than ever, realize [the problem of oppressive structures] and are fearing to be stuck in a system that is taking away their money. The banking system is collapsing, the State is collapsing, right? So it can now resonate when you start talking about vulnerability and oppressive structures.

To give one example [for the increased receptiveness of business leaders to our programs], based on the results of the KIP index, we, in partnership with Executive Education at OSB, have designed a mini-certification for executives in business across the eight countries [covered in the index] and put out a call [inviting them] to attend free four [training] modules in March of 2021 free of charge to receive this certification. In response to our call, we got 1,700 applicants of whom we chose 482. And these are c-suite or upper level managers, decision makers. They attended all of the program with this curriculum of seeing it from the other side and then going further [to discussing] what strategies you can actually implement in your workplace. It was very successful.

 During what time did you receive the 1,700 applications that you mentioned, and can this number be compared to a previous period when people applied for a similar program?

It was the first time that we did [this program] and designed something at CIBL that would be provided for free. We launched the advertising at the end of January; we filtered through them and did our selection in February and then the classes started. I have been doing executive education for 12 years and when we offer something for free, people will come. But [this was a program] that specifically focused on inclusive systems and [human resources], and on MENA. We do not talk about how you [address HR structures] in the United States and at multinationals. We talk about how you do it when you have no electricity and when there are protests outside [in your street].

As far as interest in this topic of HR structures and talking to decision makers, did you make particular observations as to breakdown per country?

We built the index [as] sector based, not country based. In terms of country groupings we use the World Bank classifications, thus we looked at resource rich and labor importing [countries as one group] and secondly at small and medium enterprises. We created two indices, so that we can capture women’s voices that are often ignored, and [this sub-index] speaks to, or mirrors the structural index that speaks to decision makers.

Changes in political empowerment sometimes seem to be very quick, being as they are based on the number of women elected to Parliaments and political office. Relative to that, the rate of change in economic positions and CEO level or senior professional empowerment seems to be much slower. Is the rate of change on the political level more of a quick burn and how deep and sustainable is the rate of change on the corporate level?

I feel that at least in the Arab region the rate of change in political representation of women comes with so many feudal and tribal ties so that a woman may be empowered one minute and the next will be gone. In the business sector, it is more sustainable, because once she is promoted up, she is there. The way of getting into those positions is very different and much less political or tribal. So I think they can’t really be compared in terms of the dynamics.

Another thing that I want to say is that in a lot of the [region’s] rich countries, there is state feminism, so [you see] these increases in international indices which are measuring who is working for internal security forces or who is working in the airport, or a public university administration. What we are measuring is the private sector, what businesses are doing, not what the government is doing. And this is a lot less regulated and not talked about.

Might there even be a question if state-owned or state-influenced enterprises differ from or influence genuine private sector employment behavior and how much hidden state feminism might be involved in the behavior of private employers? Might there be a blindspot on how much  private sector appreciation of women in their workforce is induced by state influence and how much it is appreciation in its own right?

This is an excellent point. You just gave me a topic for a new paper. This is a new angle that we should be asking about right now, about state intervention or state influence being infused into the private sector. Love it.

On the same day when you launched the KIP index on March 31, the World Economic Forum released their 2021 Global Gender Gap (GGG) Index. What do you think of the numbers that were presented there from the background of your expertise?

We did a comparative review of all the indicators that come out, actually there are 12 other transnational indices that are similar to the GGG Index. We see this as a nice backdrop to the work that we are trying to do but our whole motivation for doing this is in speaking back to these indices. How so? First of all, statistically speaking the weighting and the aggregating and the questions being asked – we are weighting them within the region and not weighting them based on an assumption that the global north is the benchmark. All the weighting statistically happens within the region. This is very important.

The second thing is that the vast majority of these indices collect and use the same data. They use national level data that is often collected by the government or in national level surveys. We are not doing this. We are asking HR managers within the organizations to report what [their organizations are] doing. This is a completely different data set. Our intention is to equip businesses to do differently within the business.

While there is no way in which one could disagree that gender advancement in the Middle East and North Africa is not top of the world, how relevant is it to compare an achievement within the Middle East to an achievement in the global north when even the achievements in those countries appear very fragile, as shown by this year’s GGG results suggesting that within just one year the distance to reaching parity jumped from about 100 years to over 136 years? Doesn’t one have to wonder about the resilience of the methodology used by an index such as GGG and the indicative value of numbers if considering how much they have changed in a single year?

I agree and often question the robustness and how it can switch from [ a gap of] 100 years to 137 years and so on. But my question is different. For me [the question comes from the fact] that on the past ten iterations of GGG or all the other [indices on gender issues], the Middle East has been ranked the lowest region in the world. We know that. Even if [a Middle Eastern country is shown in place] 130, or 140 or 170, wherever it is in the rankings, it has been that way for the past ten years. So what has the index done for us other than tell us that we are doing a shitty job?

What we need now is to measure something that is going to allow us to change things in a practical way, on the ground. This is the point of the [KIP] index. It measures specific practices to be able to change those practices, track them and learn from different practices that are happening at organizations. We know we are doing bad, but now what? These national-level indicators are not telling us [about the] now what. It is extremely important to [capture the voices of the people in an organization] and take that forward and create Hr and employer solutions for inclusion. The voices of women [in the organizations] matter in terms of HR structures and that is what we are trying to do.

But what if the senior decision maker in a company has no idea what the women in the company contribute to the overall performance and results?

Hence the need to track HR systems and what women are doing, how they achieve, what is happening within organizations in terms of recruitment, retention and promotion? This is the point of gender dis-aggregated data both in qualitative through their story telling narrative as well as structural through HR reporting on policies and processes

Can we expect a series of publications and papers out of CIBL that tell us about KIP Index findings over the coming five years or will you communicate this only in the form of twitter blurbs or slogans that circulate on social media?

Because we are academics, we are already in the process of writing academic pieces and we have a moral obligation and social justice obligation to turn into [action]. So we start with white papers that are already on our website and these have specific recommendations and then we are turning them into curricula and executive trainings which have already started. We are now working on academic publications and then intend to do video training, like animated videos. These are kind of key results, all targeted at decision makers.

The KIP index results and the methodology that we use in the KIP Index then is applied for funding of the SAWI project to Support and Accelerate Women’s Inclusion. [SAWI] is a five-year project, $6 million, to work with 80 employers in eight countries and partner with them on implementing some of the changes that were suggested through the KIP index. We are in the process of that and are just completing year one of this five year project.

Is Lebanon among the eight countries, and how many Lebanese employers are with you?

We have 10 Lebanese employers, 10 from each country, so 80 in total.

Did you have a lot of demand and interest from Lebanese employers to participate in the SAWI project?

Surprisingly, we did. We were not expecting it. For the Executive Education Training, we had a list of I think 300+ who wanted to attend the SAWI mini-certification program.

How many enterprise candidates did you have that you could select your 10 partner companies from?

We had a list of I think 300. [We] did not allow for applications. We had a list of people that were engaged with CIBL through our trainings and our webinars and from that community of CIBL. We tried very hard to have cross-sectional representation [in terms of company locations and sizes] so we selected the 10 together with our country partner, which is the Lebanese League for Women in Business [LLWB].

Did you do anything together with LLWB angel investor fund?

No. Up to this point we have shied away from working in the field of women-led entrepreneurship because we do not believe that it inherently means that you are doing inclusive systems just because you are a woman-led business. You could be the most oppressive and patriarchal [person]. But we are starting to look into investment, with a gender-lens investing project. That is part of the SAWI project.

Would you agree that a person having more or less of a social conscience is not determined by their sex but by whatever other factors?

Exactly. It is discriminating [to think that social conscience has something to do with gender]. It is not true. From our research, this is not the case. Because you are born a woman does not mean that you are more against oppression, or more inclusive.

One thing that we have seen from the pandemic experience, to quote once more the GGG, “the hardest hit sectors by lockdowns and rapid digitization are those where women are employed”. Would you say that this general finding applies also to the Middle East region, that the highest hit sectors by the corona recession were those with high female employment?

We didn’t collect data on that. But just in terms of my understanding of the region, one of the hardest hit sectors has been healthcare where women are frontliners. I would agree there. Also on banking, which is a feminized industry across the region at least at the lower levels, I would agree that it was hit hard because of the economic collapse in Iraq, Libya, and Yemen. The sanctions. But generally speaking, women have been hit the hardest across the board. One thing that people are not talking about but should be talking about is the increased burden of care work because children are at home […]. But [what creates new questions] is the whole idea of the dissolution of the work-life balance, the division between work and life which is now gone, and the idea that your office is now your home: what does that mean for new contracts from the employer perspective? What does it mean for employer responsibilities toward their employees who are now working from home, in terms of gender based violence and domestic abuse? How do we re-define this new era of engagement and paid labor?

The short-term repercussions of the pandemic shock on women have been noted and are very bad. This is of course highly speculative, but could the long-term outlook for women in the Arab world,, given their resilience and the ability of women in the MENA region to digest shocks perhaps better than their male counterparts, improve due to the pandemic shock? Would that be a remote possibility?

The way I would say it is that the history of survival under oppression, or the history of resilience and the skills of navigating that oppression, is equipping certain demographics, like women, to do better in this new era. It is an excellent question. Time will tell.

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Brand VoiceBusiness

Introducing the next-level virtual credit cards from Monty Mobile

by Monty Mobile
written by Monty Mobile

In a global climate of patterns’ shifts towards digitization, Mountasser Hachem, chief executive officer and founder of Monty Mobile, entered the world of FinTech on solid grounds through innovative products revolutionizing financial concepts to introduce them into the Telecom industry and accompany modern high-tech trends.

Hassan Mansour, general manager at Monty Mobile gives the rundown on the company’s latest portfolio.

How is Monty Mobile revolutionizing mobile payments in the telecom industry?

Following Monty Mobile’s active role and commitment to integrate a wide community into the financial world through various aspects, we launched Monty Virtual Credit Card (MVCC). We are moving forward to implement virtual credit cards’ perception to the Telecom industry. Virtual cards are witnessing growing demands worldwide and are broadly recognized by numerous suppliers that accept any form of physical cards. With our MVCC, mobile operators can now provide their subscriber base with a virtual and digital service to make instantaneous online and electronic payments.

The economic environment today requires businesses and individuals to evolve and adopt technologies that contribute to increased efficiency and a better management of their daily lives, save time and streamline procedures. From now on, visiting traditional banks’ sites will not be a prerequisite anymore to access the MVCC.

What are the fundamental trends characterizing Monty Virtual Credit Card (MVCC) issuance compared to traditional virtual cards?

Virtual credit cards are not a new concept. However, the modernization stands at shifting and implementing this technology to Mobile Operators who will be managing and offering their subscribers this new line of product, thus conveying an original experience at their users’ hands. It is a new opportunity for the telecom industry to expand and strengthen its activity in FinTech services.

The MVCC   follows very simple issuance procedures easing the long norms and requirements imposed by any traditional bank. The process is transformed to a fully digitized chain. Based on a progressive subscribers’ statistics and behaviors analysis, MVCC is offered to eligible users based on an advanced credit scoring. Qualified clients are then embarked through a mobile application to fill a quick KYC form which is automatically redirected to a local bank for a full background scan and profile verification approval before access to our virtual card. This simplifies an entire old-fashioned course of visiting banks, opening numerous accounts, filling tons of forms and many endless procedures before receiving any credit facility.

What are the key features offered by Monty Virtual

Credit Card (MVCC)?

As a modern payment alternative, MVCC has many innovative features creating a secure, simple and straightforward experience. It allows users to complete their purchases from their smartphones instead of using physical cards. It can save the stress of carrying a wallet around. Fully digitized and stored in users’ devices, MVCC reduces risks of fraudulent crimes and thefts. It could even be locked from users’ devices in case they are concerned that their accounts have been compromised.

In addition, it could be complemented to any existing and new financial services or loyalty programs that operators intend to offer, thus aiming at creating improved incentive and better experience for their subscribers.

Why did Monty Mobile choose to enter the FinTech industry?

Today, FinTech is a sector experiencing exponential growth and witnessing exceptional flow of interests influencing many businesses from diverse industries and backgrounds. The future lies in this sector which complements many industries in their day-to-day operations. Fintech solutions are generating increased awareness by end-users and are becoming an inseparable part of their daily routines.

It is a challenge for us to seize this trend and create a bridge that links our industry as well as mobile operators’ needs to customize consumer needs. Thus, paving the way for development of new pioneering products and new market reach.  Even though mobile operators and FintTech originate from different environments, they complete each other to deliver new facilities for their clients and to expand the industry towards better prospects.

The banking sector is taking a new path worldwide. Given the population’s structural behavior change, a younger population is driving the demand for new approaches to tackle financial needs that go beyond traditional banking concepts. And this will not stop at this point. Rising initiatives for digital transformation of financial needs and the extensive use of smartphones are key factors to accelerate use of FinTech products.

Endless evolution and the desire to exceed our clients’ expectations shaped our foundation of sustained growth. With a resilient talented team, we cannot but expect outstanding outcomes.

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Economics & PolicyHealthcare

Novel Science Addresses Novel Virus

by Fadi Makki
written by Fadi Makki

Applying behavioral strategies that utilize insights from psychology and behavioral economics while maintaining freedom of choice -otherwise known as ‘nudges’- have the potential to gently steer people towards greater adherence with COVID-19 lockdown measures. The overreliance on classical policy levers such as rewards and penalties has yielded suboptimal compliance rates because it assumes that people are rational. However, with limited success in enforcing lockdown measures, the pandemic has revealed deep behavioral roots underlying the lack of compliance which requires alternative policy tools.

A regional study that looked at the policy responses of 13 Middle Eastern countries in order to assess the effectiveness of stringency measures in managing the spread of the virus found risk perceptions to play a central role in compliance. The study used the stringency index from the Oxford COVID-19 Government Response Tracker, which is an aggregate of eight indicators on specific government responses, and the number of cases per day, which was used to measure each country’s enforcement capacity and the compliance of the public.  

It was recorded that in Lebanon there were significantly more violations by the end of May 2020, despite a lower stringency index, than in the beginning of May. The increase in violations began just as the government announced a reimposition of preventative measures following a resurgence of cases. However, the number of daily cases went up even more drastically after the period of renewed stringency which highlights the behavioral challenges to lockdown measures.

Behavioral economics challenges human “rationality” to help design interventions based on realistic understandings of human behavior and the behavioral barriers they face during COVID-19 lockdown measures. Several cognitive biases – systematic errors in judgements – prevent people from complying with rules mandating people not to leave their homes.

In the presence of such biases, risk perceptions can falter and change over time, which diminishes compliance with lockdown measures. Travel restrictions and enforced penalties do not address these cognitive shortcomings nor do they address inter-temporal risk perceptions which can influence adherence to stay-at-home orders. In addition, while conventional communication campaigns may be informative, they only add to the noise and do little to change behaviors.

These biases include “present bias”, whereby individuals place greater value on the “today,” but less so on the distant future.  This leads people to miss out on lucrative long-term benefits as they focus on myopic short-term ones which put them at risk. Individuals who do not adhere to strict lockdown measures focus on the immediate benefits of visiting families and friends while not appreciating the long-term health benefits of staying at home.

Another bias is “optimism bias” where individuals underestimate the probability of a negative event happening to them in the future. For example, people not adhering to lockdown measures may be aware of the risks of contracting COVID-19 but will underestimate the probability of being exposed to it.

In addition, human beings have “limited cognitive bandwidth” which affects their ability to objectively assess risks, particularly in high stress environments. Individuals who are experiencing financial hardships for example will be prioritizing food security and employment, leaving little mental bandwidth to assess the risks of not complying. In addition, the information overload people are bombarded with daily via social media and news outlets can have an additional strain on risk perceptions and decision making.

Integrating behavioral tools to counter the systematic errors in judgment is a viable alternative to the standard command and control regulations, which fail to address many of the cognitive barriers. Over the past few years, an increasing number of behavioral insights initiatives, also known as “Nudge Units”, were launched around the Middle East and have been employing behavioral techniques or “nudges” with astounding success.

Results from the stringency study indicate that people with higher risk perceptions tend to have a higher likelihood to comply with preventive behaviors, which suggests the importance of having individuals properly assess the risks of contracting COVID-19. This highlights the need to address the limited cognitive bandwidth people experience by finding ways to properly communicate these risks through behaviorally informed messages.

The study also found that people become less compliant the longer they spend undertaking compliance behaviors, which demonstrates the role of present bias and optimism bias as compliance measures drag on, and as behavioral fatigue sets in. 

In addition, a pilot survey that measured respondents’ rate of compliance over time and relative to their risk perceptions on COVID-19 found that participants were more compliant when their risk perceptions were higher. However, participants were less compliant the longer they spent undertaking these behaviors. These results suggest that people are less likely to comply to restrictions such as leaving their house and having access to public spaces. Data from Lebanon shows that cases can rise, even during lockdowns, the longer people are required to comply and get habituated to the disease which may also diminish risk perceptions.(Makki et al., 2020)

Thus stringency measures are more effective in lowering the number of daily infections if imposed for shorter periods. This is especially problematic overtime as people are less likely to comply the longer lockdown measures are enforced. Thus, quick and hard-line government lockdown measures are more effective in lowering the number of daily recorded cases, compared to more delayed, gradual responses.

So what are nudges that can work to overcome the cognitive biases inherent in people and improve risk perceptions in order to increase compliance?

A pilot study in Lebanon designed to increase self-reported compliance measures randomized participants into a control group, which received a generic survey, and a treatment group which included additional behaviorally informed survey messages. Participants in the treatment group received a nudge text in the survey describing how adhering to strict social distancing would help save the economy, which decreased the amount of times they left their homes by 41 percent compared to the control group. There are several reasons why this intervention had an impact on compliance rates which include the appeal of economic benefits for those who report higher self-interest and because it encourages feelings of collaboration, which can equally prompt individuals to adhere to lockdown restrictions.

Other nudges have also been employed during a large study which sampled UK and US participants to measure their impact on compliance and preventive behaviors in order to reduce the spread of COVID-19. Since these nudges worked for a specific demographic, they would have to be adapted and tested to see if they work in the Lebanese context. A letter condition was delivered to participants asking them to think about a person vulnerable to COVID-19 they know and who means a lot to them, and to write a letter to that person explaining that they will do everything that is necessary to stop the spread of the virus and to ensure this person survives the crisis. This nudge decreased the number of hours participants spent outside by 12.6 percent compared to the control condition. This nudge demonstrates that having individuals engage in an immersive exercise to think about a loved one, and inducing greater empathy and concern for others can change behavior.

An additional informational nudge presented hypothetical scenarios on violations with behavioral recommendations to prevent the spread of COVID-19, after which participants had to assess the appropriateness of the hypothetical violations and were then immediately provided with feedback on the accuracy of their answers to debunk some of the misconceptions they had regarding COVID-19. This informational nudge made participants less likely to allow their family members, friends or other people to visit them, which was statistically significant. Underlying the success of this nudge is inoculation theory that postulates an individual’s beliefs can be ‘psychologically vaccinated’ against persuasion or influence by exposing them to misinformation that is subsequently refuted. Thus the feedback participants received regarding the accuracy of their answers helped them develop the ability to debunk some of the misconceptions regarding the virus. An additional reason why this intervention may have been effective was because it helped mitigate optimism bias which reduces risk perceptions. 

Consistent with previous findings, these nudges are effective for people who start practicing social distancing recently and make them go outside less, however, they can have undesirable effects for those that have been complying for longer periods. This underscores the fact that a blanket approach to implementing behavioral interventions in a situation where many people already comply may not be meaningful and that delivering targeted nudges to subgroups of individuals, particularly to those that have only recently started to comply may have the greatest impact.

With many behavioral challenges underlying this pandemic, behavioral insights can bring small but measurable improvements to lockdown measures. This is particularly important given the diminishing authority of the state and their incapacity to enforce rules and regulations. With limited institutional capacity, additional nudges and behavioral policy levers will be required to address the cognitive biases affecting citizens to nudge them towards greater adherence. As the political crisis drags on and the country struggles to encourage citizens to get vaccinated, nudging can be particularly useful in addressing some of the cognitive biases and their overall hesitancy to get inoculated.

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Economics & PolicyReal estate

A house “divided” can bring profits

by Habib Chammas
written by Habib Chammas

The current Lebanese financial and currency crises could be an opportunity for everyone to pool their fresh dollar funds and access real estate through crowdfunding. Not only will investors benefit from the drop of property prices in fresh dollars, but they will also put their money to work for them and earn both short term income and medium term capital gains.

The odd marriage of crowdfunding technology and the oldest form of investing appears to be getting along quite nicely and allowing investors to leverage investments in the global real estate market, diversify their portfolios to mitigate risk, and earn much better returns than stashing their money in saving accounts. The idea of making real estate transactions online had its doubts, but as more investors have been embracing the business model the real estate crowdfunding market value reached $8.3 billion in 2020, with the United States and Canada serving as the leading players (CrowdCrux).

In the current economic situation, real estate acquisition could attract more players from the Lebanese diaspora and those with access to fresh USD who are now able to buy goods, services, and assets (specifically real estate) at low price tags with their fresh dollars. With the threat of losing their savings in the banks, many Lebanese rallied towards the purchase of property using their lollars, which were accepted by those developers owing loans to the banks. This has pushed the property prices in lollars (USD bankers checks) irrationally high, while on the other hand, due to the devaluation of the value of the lollar as compared to the dollar, property prices dropped by 50 – 65 percent in fresh USD term, depending on the location and the property type. This represented a buying opportunity for vulture funds and anyone who has enough fresh dollars to afford to buy a property on their own.

Built-in protection for all parties

The global real estate crowdfunding market is on the rise. According to a publication by Facts & Factors (Dec 2020), the global market size will exceed $869 billion by 2027. That’s more than 100 times the size of the global market size of 2020, which translates to a compound annual growth rate (CAGR) of 18.96 percent. Using crowdfunding as a vehicle to invest in real estate, many of the platforms allow investors to start with as little as $500 without the need for a down payment of at least 20 percent of the property price, which is the practice with conventional real estate investing. This provides an opportunity for investors to diversify their investments and reduce their risk while earning good returns on their investments. It allows investors to be a part of deals that were previously unattainable to them. Residential properties are the primary source of real estate crowdfunding investments. These properties currently account for more than 50 percent of all crowdfunded real estate investments. Experts predict, however, that the growing commercial sector is likely to play a larger role in years to come. This could mean lucrative future gains for investors ready to support this particular high-risk, high reward play.

Real estate crowdfunding has come a long way since Fundrise launched its first project in 2012 in America and raised $350,000 from 175 people. With investors earning their dividend checks, more confidence was gained in the business model and the platform grew exponentially four years later with closing one project a week and raising more than half a million dollars a day, according to co-founder Ben Miller (CNBC). Eight years later in 2020, Fundrise has more than 150K active investors and has crowdfunded over $5.1 billion in real estate projects with more than $100 million net dividends earned by its investors. The industry is now full of success stories like these, with many platforms experiencing rapid growth. From their launch in March 2013 to October 2013, Realty Mogul’s cumulative investments rose from under $2 million to $8.07 million, with 23 properties under their belt. Two years later, they have now financed over 265 properties valued at over $600 million. Other platforms like Ground Breaker, Patch of Land, and Crowd Street among many others have their share of similar success stories.

The legal side of real estate crowdfunding is simple to set up and comes with built-in protection for all parties. Investors can invest small amounts of money in either the equity or debt of a real estate project to realize income. This can happen through a combination of rent, lease, or debt repayment, as well as from capital gains when the property is sold when its price appreciates over time.  The sponsor will propose an exit strategy at which the property will be sold at a profit and, which is usually within an estimated period of time, referred to as a term. But, if the target exit date so happens to be in the middle of a bear market, it may be prudent to keep holding and collecting rent until the cycle turns. Investors effectively become limited partners in the investment. Acquired properties are usually owned by a Limited Liability Company or a Limited Partnership with the sponsor participating as the General Partner or Manager and the investors participating as limited partners or passive members.

Governments leveraging real estate crowdfunding

Because of the integral role that real estate plays in the economy, major economies across the world have started looking for solutions to facilitate investing in real estate. As an investment model, real estate crowdfunding started in the US in 2012, and the Securities and Exchange Commission passed several regulations under the Jumpstart Our Business Startups (JOBS) Act that now allow both accredited and unaccredited investors an unprecedented opportunity to take part in online equity and debt investments, including investing in real estate in their own neighborhood and beyond. The European countries and Latin America followed suit and made real estate investment-based crowdfunding increasingly accessible to investors and project developers to boost this major pillar of their economies. From the investor’s point of view, it is not necessary to spend a large amount of money, thus assuming a little risk and allowing the investment to be diversified.

When it comes to the MENA region, this business model is rarely heard of, except in Dubai. While its legal system was not ready for real estate crowdfunding in 2016, Dubai’s real estate authority started working on a system that allows the issuance of “partial title deeds” that will give assurance to investors to engage in such schemes. The government has facilitated the registration of the acquired properties in the names of Special Purpose Vehicles (SPVs), which are legal entities that list the investors who crowdfunded the relevant projects as shareholders in the fund. SPVs benefit from a less complex application process, reduced registration and licensing fees, and are allowed to use their existing companies as the registered office of the SPV. An SPV also offers a range of advantages, including tax neutrality, no restrictions to foreign ownership, limited liability to the amount of the shareholders’ commitment to the company’s share capital, and a robust regulatory and legal system.

Founded in 2017, SmartCrowd became the UAE’s first real estate crowdfunding platform with an entry ticket of $1,400 per investor, thereby reducing barriers to an investable asset class that is out of reach for many. One year later, the company has completed approximately $1.5 million in transactions with individual investments ranging from $1,400 to $34,000). With the company outperforming the UAE’s real estate market returns by paying out multiple dividends with annual net returns ranging from 6.5% to 8%, it kept attracting more investors and it has completed more than $6 million in transactions in 2020, at a time when the real estate market dropped in the UAE as the pandemic was impacting the whole economy. The successful market entry of SmartCrowd opened the doors to other platforms, such as Ellington Properties and Stake, which launched in 2020 and started offering opportunities to invest in the UAE’s real estate market and take advantage of the attractive lower prices (35% lower than their 2014 peak values).

Fresh USD into the Lebanese economy?

If the purchase of real estate is made accessible to the Lebanese diaspora (specifically those who cannot afford to purchase property with their own funds) with crowdfunding, it will help the remittance of fresh dollars to the economy, which can help in mitigating the short supply of fresh dollars and the further devaluation of the Lebanese pound. Real estate crowdfunding allows all those transactions to take place online and through bank transfers, which provides transparency to the amount of fresh dollars being exchanged for the purchase of the real estate. As a side note, it would not make too much sense for lollar holders to convert them into fresh dollars and lose more than two-thirds of their lollars to purchase property in dollars. The recommended practice for lollar holders and who wish to purchase property is to look for rare buying opportunities (distressed deals) where the asking price in lollar is not inflated compared to 2019 prices.

The current Lebanese legal framework is a hurdle for real estate crowdfunding platforms to make property investing accessible to almost anyone. This limitation makes investing in real estate reserved to those who have the capital to scoop properties and benefit from opportunities.

Without a doubt, Lebanon’s real estate laws are outdated, as they were promulgated 90 years ago with no real updates or modifications that make the property registration process seamless, transparent and proof from being manipulated by corrupt front-end clerks. With great proven models from the west and the UAE, such reforms could (and should) be rolled out quickly by just “borrowing with pride.” At the same time, the outdated rental laws froze down thousands of properties since their promulgations and caused many buildings to deteriorate with time with no maintenance whatsoever since the landlords of such non-performing assets do not have any incentive to do that.

The business legal framework is also outdated and is not welcoming enough to entrepreneurs, both nationals or foreigners, to conduct business with minimum cost and setup hassle. Recent modifications were drafted, but the hurdles and obstacles for crowdfunding startups were not eliminated, but on the contrary, exacerbated, thus making it only accessible to large capitalists and financial institutions that can afford a capital of more than 1 billion Lebanese pounds. This drafted crowdfunding law applies to small and medium enterprises (SME) or startup companies aiming to get funded for their operations and traction by the general public with investments ranging from $500 to $10,000 in return for ownership of equities or shares in these companies.

In the absence of a law specifically drafted for real estate crowdfunding, the Capital Markets Authority (CMA) is treating Real Estate Crowdfunding (REC) startups as if they wish to get funded as a company by the general public, whereas the REC business model is about crowdfunding a portfolio of properties. This process is never-ending, when listed properties get funded, new ones will get listed on the crowdfunding platform to be made available for investors to pitch in. This gets more complicated the legal entities that will own a handful of properties to protect the investors’ ownerships are factored in. This will entail a capital of 1 billion Lebanese pounds for each legal entity that owns a small portfolio of properties. This is a hurdle for the REC business model. The fact the property will be owned by a legal entity, in which the investors own their respective shares, is a solid enough protection for investors.

There is a large potential for an influx of fresh dollars through fractional real estate ownership through crowdfunding. Although the capital flow will go through the banking system but it will eventually get parked in tangible real estate assets.

Habib Chammas

Founder of CasaBayt

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Brand VoiceBusiness

Is the future of tobacco smoke-free?

by Philip Morris Lebanon
written by Philip Morris Lebanon

The strategy adopted by Philip Morris International (PMI) over the past decade certainly bears closer scrutiny, not least as a case study in how vision and perseverance sometimes pays off in the face of what seemed, at a shallow reading, overwhelming odds. While the company’s line of heated tobacco products, including the IQOS, hasn’t yet replaced conventional tobacco products, the new leadership, helmed by Jacek Olczak who was appointed chief executive officer on May 5, 2021, is determined to maintain its leading position and accelerate the company’s transformation to what it considers to be a less harmful risk-reduced – but not risk-free, it is worth underlining – alternative to traditional tobacco products, and, in his own words, to a “smoke-free future.”

PMI demonstrated how a company can manage through a combination of innovation and responsible commercialization to not only stay in business but also thrive in a highly competitive global market, and a challenging one to boot, where consumption of tobacco products is widely banned in indoor public spaces – as well as in an increasing number of outdoor venues – and access to advertising and sponsorship opportunities is virtually completely sealed off. Over the past decade, PMI has recognized the growing trend of vaping and other alternative smoking products, and has invested heavily in research and development in order to develop a portfolio of reduced-risk products for adult smokers. In an open letter on the occasion of his appointment, Olczak writes, “When I consider how PMI can contribute to this better future, one action stands above all others: Replace cigarettes as soon as possible with better alternatives for women and men who would otherwise continue to smoke.” The company’s ambitions encompass a future where smoke-free products would ultimately replace cigarettes products, improving the health quality of life for adults who would otherwise continue to smoke, society, the company and its shareholders.

Looking at figures, it seems that PMI’s decision to place its bets on smoke-free products, with the introduction of the IQOS in Nagoya, Japan, in 2014, was a judicious one after all. The IQOS has been approved for marketing in the US by the Food and Drug Administration (FDA) as a Modified Risk Tobacco Product (MRTP), finding that an exposure modification order for these products is appropriate to promote the public health. As at March 31, 2021, the geographical coverage of PMI’s smoke-free products, has extended to 66 markets worldwide, accounting for 28 percent of the company’s net revenues. Olczak played a significant role in this short span, leading PMI’s transformation from a primarily business-to-business company to an increasingly business-to-consumer company.

In February 2020, Beirut joined the string of cities in PMI’s expanding markets for smoke-free products when the IQOS was introduced in the country just prior to the COVID-19 pandemic. In a recent press release, Taylan Suer, PMI country manager for Lebanon, said: “Jacek has been driving PMI’s smoke-free transformation internationally, and his skills and expertise portend an exciting new chapter for PMI. In line with this vision, we introduced IQOS in Lebanon in February 2020. After 1 year of the launch, it is encouraging to see adult Lebanese smokers making the step towards leaving smoke behind and embracing a scientifically substantiated better alternative than continued smoking.” Lebanon has arguably long constituted an attractive market, albeit small in size, for various tobacco products in general, a legacy that endures despite rampant hyperinflation and a ban on smoking in indoor public spaces that came into effect in September 2011 – only a short six years after ratifying the Framework Convention on Tobacco Control (FCTC) that came into effect in 2005 – followed a year later by a national ban on all forms of advertising and sponsorship of tobacco products.

While PMI is confident that it is off to a good start and an equally good succession with its new leadership, it is still early to determine whether its ambition to widely commercialize smoke-free reduced-risk products and establish its domination over alternatives to conventional tobacco products is risk-free or certain. It is important to remember that a number of factors should be considered, not least of which are health concerns relating to the use of tobacco and other nicotine-containing products. Another significant risk, by PMI’s own admission and from its viewpoint, is a potentially diminished ability to convert adult smokers to smoke-free products. Narrowing the focus down to the Lebanese market once more, continued hyperinflation could delay more widespread adoption of PMI’s IQOS and smoke-free products, restricting it to a small number of consumers, although this would apply to other alternatives as well, and even consumers of conventional tobacco products – although attachment and addiction to cigarettes and the quasi-ubiquitous nargileh would contribute to preserving the market.

If the past decade or so of product innovation and disruption has taught the discerning observer anything, it is to reserve passing judgment until more user-generated data becomes available – and, in the case of smoking, until extensive medical studies are conducted – that would allow for product improvement and fine-tuning. With this in mind, Olczak writes: “Our greatest task is to always bring new thinking forward. To demonstrate through action, transparency, and verifiable proof points the integrity of our promises. And to work ceaselessly to forge partnerships with those who can accelerate the change we seek.”

Brand voice is the paid window that Executive provides to our corporate partners and the business community for sharing their views, insights and messages. Brand voice content has to comply with Executive’s content guidelines but is not under the magazine’s editorial responsibility or control.

This article is brought to you by Philip Morris Lebanon.

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EconomyOpinionSpecial Report

Lebanese industry: from productivity to prosperity

by Josiane Fahed-Sreih
written by Josiane Fahed-Sreih

The Industrial sector in Lebanon is a major contributor to the Lebanese economy by employing a large number of workers, and by being the largest source of hard currency to the country especially after the major economic collapse and the scarcity of the dollar that started in 2019. The Industrial sector in Lebanon is becoming more and more innovative and sophisticated just like its counterparts in innovative countries, and will become one of the major sectors that will witness increasing investments. With the development of oil and gas and the reconstruction of Beirut after the August 4, 2020 explosion, the industrial sector is set to become more competitive and serve the needs of the country.


In 2018, the sector accounted for around 8 percent of GDP ($4.2 billion) and employed 20 percent of the local labor force (around 318,000 employees). There are over 4,700 industrial firms in Lebanon the largest
portion of which is in agro-food production (26 percent or 1,245 firms), followed by construction materials (12 percent) and chemical products (8 percent). Industrial exports stood at $3.5 billion in 2019, accounting for 95 percent of total Lebanese exports. The top five Lebanese industrial exports in 2019 were pearls and precious stones (41 percent), mechanical machinery (6 percent), electrical machinery and equipment (5 percent), plastics (4 percent), and essential oils and cosmetics (4 percent). Key export destinations in 2019 included Switzerland (30 percent), the United Arab Emirates (12 percent), Saudi Arabia (6 percent), Syria (5 percent), and Iraq (4 percent). The share of medium and high-tech manufactured exports of total manufactured exports had reached 21 percent in 2017, indicating promising technological capabilities in the sector, knowing that industrial permits increased by 16 percent from 375 in 2011 to 1,086 in 2018.

Knowing that Lebanon is part of several multilateral agreements, most notably the EU-Lebanon Association Agreement, the Taysir agreement, The European Free Trade Association (EFTA), the Greater Arab Free Trade Area (GAFTA), the US-Generalized System of Preferences (GSP) and others, this by itself is a trigger for open market competitiveness and for the sales of the locally produced products. The industrial sector will become more competitive if some of these measures can be taken. Therefore, I recommend the following:
1- Encouraging private-public sectors partnerships.
2- Encouraging cooperation with academia by developing programs that can position Lebanon at the forefront of innovation, such as green industries
3- Encouraging and supporting SME creation that would create jobs and position Lebanon as a pioneer in enterprise creation knowing that Lebanon’s workforce is highly educated and savvy, compared to other Middle Eastern and gulf countries.
4- Offering technical support through the development of programs that encourage manufacturing.
5- Providing tax incentives to encourage people to invest in manufacturing.
6- Lowering the cost of manufacturing on all fronts from energy to land costs.
7- Creating industrial zones where the cost of land and other costs are low.
8- Advancing the transition towards a green economy while reducing the numerous environmental risks lying
ahead and accelerating the shift away from carbon-intensive industrial production to more sustainable models.
9- Offering incentives to move to a green economy as per European circular economy developmental goals.

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CommentEducationLaborSpecial Report

Fates hinging on international funding

by Elie Gholam
written by Elie Gholam

In Lebanon, the non-governmental sector has been booming since 2011 from the year the Syrian refugees influx started. This sector is employing Lebanese staff and paying them in real US dollar currency, enabling them to support their families and benefit the surrounding local economy. However, employees of international non-governmental organizations (INGOs) on fixed-term or consultancy contracts do not enjoy currently enough job security and so the trickle-down effects of their salaries are lost. In 2020 alone, the Lebanese economy lost 220,000 jobs and among those jobs were INGO employees working on fixed-term contracts and consultants. That fact has a high negative impact on the local economy. Helping the INGO employees and consultants retain their jobs enhances the local micro economy, and retains their talents in the country. Hence, the article discusses the potential increase of job security and stability for the INGO employees on fixed-term contracts and consultants. Non-governmental organizations (NGOs) working in Lebanon are classified into local NGOs, United Nations-based NGOs, and international INGOs. The current article discusses only the jobs of INGO employees since most of them pay the salaries of their employees in US dollar banknotes (“fresh” dollars) they can use to purchase goods priced in US dollar currency or exchange at the daily black market rates, which, as at end-August 2021, hovers between 18,000 and 20,000 Lebanese pounds to the dollar, compared to the bank rate of 3,900 Lebanese pounds to the dollar (the “lollar” rate). There are around 60 INGOs in Lebanon who employ people based on three types of contracts: fixed-term contracts, open-ended contracts, and consultancy contracts. Almost 100 percent of these INGO employees start on a fixed-term contract for the first two years, and less than 5 percent of the total number of employees are hired as consultants. INGOs activities in Lebanon started to spread out rapidly with the significant increase in the influx of Syrian refugees as of 2012. The mandate of those INGOs is based on humanitarian objectives where their role is to implement social, nutritional, hygiene, and educational programs targeting mostly Syrian refugees and host communities in underserved areas. In addition, with the emerging economic crisis, their role started to encompass social programs targeting the hosting communities within the Lebanese society in order to help them surpass the crisis. After the August 4, 2020 explosion, the INGOs increased their support to the hosting communities within the Lebanese society through the local NGOs.


ON FUNDING AND JOB INSECURITY


INGOs pay the contractual agreements of their employees and consultants out of funds allocated by donors that include general donors such as the World Bank and European Union, UN-based donors (UNHCR, UNDP, UNICEF, OCHA, etc.), state-let donors such as the USAID, BPRM, LAFD, WPA, BMZ, Australian Aid, NORAID-SIDA (Swedish) and CIDA (Canadian), as well as individuals and corporations. Contractual agreements between the INGOs and their employees and consultants last as long as there are funds. Those funds granted to the INGOs working in Lebanon, were on an increasing slope until 2017. After 2017, the INGO funds started decreasing drastically and got diverted into surrounding countries having also a Syrian refugee influx, mainly Jordan and Turkey. Whenever there is a shortage in funds due to a decrease in donations, consultancy agreements and fixed-term contracts will not be extended after reaching their deadline. In addition, employees on open-ended contracts will be subject to article 50 of the Lebanese Labor Law, which allows for a massive employee downsizing in case of lack of funds. Thus, the INGOs employees who are on open-ended contract are notified at least a month ahead that their contractual agreement is ending. The INGOs operating in Lebanon are compensating their employees and consultants in real US dollars. This compensation enhances the micro Lebanese economy where it has a role in decreasing the inflation through making US dollar banknotes more available. In addition, it increases the purchasing power of the INGOs employees and consultants. Since some of this monetary compensation is spent in the local market, third parties (suppliers, service providers, currency dealers) are also benefiting from this inflow of US dollar banknotes. Compensation costs for INGOs’ employees and consultants represent 20 percent to 25 percent of the total allocated funds, with the remainder going towards program implementation and logistics. The majority of this compensation includes the basic salary, bonuses, NSSF subscriptions, benefits, and cost of transportation. Whenever there is a lack of funds, it drastically affects employees and consultants where their contractual agreement comes to an end. Thus, that fact affects negatively the local micro economy since less US dollar banknotes would be available for the local market. Stopping the contractual agreements of the employees and the consultants impacts also the remaining ones where this increases their level of job insecurity and reduces their motivation.


AMENDING THE LABOR LAW


Helping INGO employees and consultants maintain their jobs and income in real US dollars provides a boost to the local micro economy. This help comes in the form of improving the legal framework and legal clauses that ensure enhanced job contractual agreement security. As matter of fact, the Lebanese Labor Law dates back to 1946 and few improvements have been incorporated since then. Moreover, legal clauses within the
Labor Law related to employees and consultants are left to various unclear interpretations. The following are points that can be factored in the current Lebanese Labor Law in order to strengthen the job contractual agreements conditions of the employees and consultants working at the INGOs:

  1. Encouraging INGOs to establish a common union or association, which would represent the interests and welfare of the employees and consultants working with the INGO. Here, each INGO can elect one or several employees on an open-ended contract to represent the welfare of the remaining INGO employees within the union or the association. This election
    of the representatives is considered official. The union board itself is elected by the representatives of the INGOs employees and the decision of the board is binding for the member of this union or association. Actually, there is currently a similar association in Lebanon. It is called the Lebanese Humanitarian INGO Forum (LHIF). LHIF currently counts 60 INGOs member, where they meet regularly in order to share information and knowledge and for each member there is an annual fee. However, the objectives of LHIF are to discuss financial and strategic perspectives. Thus, the objectives of LHIF are not oriented towards the welfare of the employees. Moreover, the decision of LHIF are not binding to its members. 2.
  2. Currently, the compensation and benefits scheme is standardized among the employees working under open-ended contracts and fixed term contracts within the INGOs, however, the former enjoy more job security and longevity than their colleagues on fixed-term contracts. To counterbalance that fact, there is a need to restructure that compensation scheme as per the below points: -Restructuring the fixed-term contract agreements to include more benefits, such as better health insurance schemes and higher transportation refunds. Restructuring the benefits of the staff on fixed-term contracts to turn them into monthly cash benefits such as end-of-service indemnities and yearly bonuses. Restructuring the compensation scheme for fixed term contract employees in order to increase their salary since they are subject to a higher risk of unemployment that employees on open-ended contracts.
  3. Including a clause in the Lebanese Labor Law to standardize fixed-term contracts with a minimal duration of, for example, six months, secures a longer employment period for the INGOs employees. All the employees at the INGOs start with a fixed-term contract before it is turned into an open-ended one after two years of employment with the same INGO. These fixed-term contracts have frequently a duration of less than six months.
  4. In order to provide a higher sense of job security to the INGOs’ national employees, the Lebanese Labor Law could include a binding clause mentioning clearly the percentage of foreigners each private organization and INGO can hire. The current Lebanese Labor Law does not stipulate a certain mandatory percentage of foreign employees working within the private organizations and INGOs. What practically happens, upon hiring a foreigner on a local employment contract, the Ministry of Labor requests a list of the employees’ names and nationalities. This list is requested for issuing work permits. Here, it is left to the discretion of the ministry to assess how high is the percentage of the foreigners working at the organization before issuing the work permit.
  5. As per the International Labor Organization (ILO), in 2017 the foreign workers ratio was 7.6 percent worldwide and 17 percent in the US. Ideally, this percentage in Lebanon should be 10 percent out of the total number of employees. The current Lebanese Labor Law, specifically article 50 stipulating how to rehire employees who were laid off due to downsizing resulting from a lack of funding, needs to be amended. Article 50 mentions that the employer is obliged to grant the priority of rehiring these employees within a year whenever funds are available again. That article mentions also that the employer is obliged to give a one-month notice before the discharge from work.Moreover, article 50 stipulates certain criteria upon which employees are chosen to be downsized.Those criteria are generalized, similar at each situation, and it is unclear how they are chosen. Several steps in article 50 can be incorporated in order to increase the job security and motivation for the employees in general and at the INGOs in particular: Providing the employees to be laid off for lack of funding with a notice period longer than one month. Ensuring the criteria upon which the employees to be laid off are chosen are situational and not standardized. In addition, the employer has to show more transparency and clarity of how those criteria are chosen. Ensuring the rehiring process of downsized employees is clear and transparent. Moreover, giving the priority to rehire the downsized employees has to be based on two conditions: a) employee good performance; and b) acceptance of both parties: the employer and the INGO employee.
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BankingSpecial Report

A tale of two audits

by Nabil Makari
written by Nabil Makari

With the current financial crisis, and foreign currency gap at the central bank of Lebanon Banque du Liban (BDL), the demand for an auditing of the Lebanese State and state-related institutions such as the BDL. ministries, regional funds and others, has been a key demand of many reformist agendas and some political parties, including lately the President of the Lebanese republic, as well as various foreign countries and international institutions.
The Lebanese government, in the past, had requested the assistance of financial services firm Kroll in order to conduct a forensic audit of the BDL, before difficulties resulted in the hiring of Alvarez & Marsal, a New York based restructuring consultancy, to conduct said audit. The BDL, nevertheless, submitted approximately only 43 percent of requested documents to the latter firm, due to the limitations imposed by the Banking Secrecy Law of 1956, which resulted in a public spat with the Ministry of Justice.

FORENSIC VS. FINANCIAL AUDIT


This key demand for an auditing of the BDL requires an understanding as to the differences between a “typical” financial audit and a forensic audit. Financial audit: In general, a typical financial audit is an audit of the financial statements of a firm or institution, conducted by professionals, in order to make sure that the financial records are an accurate reflection of the financial position and situation of the institution. Companies usually submit. a yearly audit of the financial statements: their balance sheet, their income statement and their cash flow statement. Such auditing is conducted either by an external auditing firm, or by internal auditing teams. External audits enable the verification of the soundness of the firm’s financial position, and the identification of any financial misstatements in the financial records. Such external auditors usually issue opinions to provide financial statement users with confidence that the financials are both accurate and complete. Internal auditors, on the other hand, are employed by the company or organization for which they are performing an audit, and the resulting audit report is given directly
to management and the board of directors. Unlike external auditors, they only follow the company’s standards while auditing, whereas external auditors follow more generally applied principles, such as the Generally Accepted Auditing Standards (GAAS).

Forensic auditing: A forensic audit, on the other hand, refers to an investigative audit in which accountants, specialized in both accounting and investigation, seek to uncover frauds, missing money and negligence. In this case, the auditor is not only concerned with assessing the financial situation of a company or institution, but also with uncovering fraud. This audit is usually carried during legal procedures and trials, in order to determine the responsibility of parties, should illegal transactions have taken place. A forensic audit would
then seek to uncover such transactions by checking if compliance standards were applied, and who the beneficiaries of these transactions were. In cases where the BDL had engaged in specific transactions with a counter party, a forensic audit would not only determine the date and amount of the transaction, but also whether it was in conformity with laws, whether due diligence was applied, and whether it was in conformity with the Code of Money and Credit. A forensic audit would also seek to determine the official and “real” beneficiaries of transactions, and whether such transactions violated any laws.


SCHEDULING THE AUDIT


The forensic audit has been a key demand of the International Monetary Fund, the French initiative
and foreign institutions, and also of some Lebanese political parties. Other parties, such as the Future
Movement, have asked that all ministries and public institutions be audited. In addition, the government had previously hired Alvarez & Marsal to conduct a financial audit. The firm pulled out in November 2020, stating that it had not received the information it required. Back in July, the government had hired the financial firm Kroll, though it did not receive the political backing to do so. On April 6, 2021, the BDL issued a statement highlighting it was ready to discuss such forensic audit with Alvarez & Marsal, following Parliament’s decision last December to lift the banking secrecy for one year. By late December, Lebanon decided to
contact Alvarez & Marsal once again to conduct an audit of the BDL.
As of June 2021, there is no clear view yet as to whether this forensic audit, or any audit, will take place. At this stage, a forensic audit is much needed, as it would allow not only to establish a clear and transparent balance sheet of the BDL, to evaluate its assets and liabilities, but also to establish if any corrupt and/or negligent practices have taken place, and who its beneficiaries were, hopefully leading to some accountability. This audit is also considered a prerequisite for any financial aid that would come from international institutions, including the “French Initiative,” noting that such aid is increasingly needed in in light of the acute economic crisis Lebanon is still struggling with.

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BusinessEconomy

The good, the merged, and the bad

by Executive Editors
written by Executive Editors

One year into Lebanon’s economic crisis, country total net losses are estimated at more than 44 billion dollars by the World Bank’s recent report as of early Q2 2020 and as mentioned in the Government reform plan of April 2020 (at a foreign exchange rate estimated at 3,500 Lebanese pounds to the dollar). This results from losses at the Lebanon central bank (BDL), losses in the banking sector, and losses at the government level mainly from the Eurobonds default. In this regard, the banking sector needs a deep restructuring to reorganize its assets and build back the needed trust from its internal and external clients.  

The BDL has started preparing the way to such restructuring, mainly in its Circular 154, where it required banks to achieve a capital increase of 20 percent, as well as securing 3 percent of banks’ deposits in “fresh dollars” by February 28, 2021. Banks have to comply with such requirements as a minimum recapitalization while ensuring liquidity with their correspondent banks. This presupposes that banks who fail to meet those requirements, the BDL will start classifying the banking sector in readiness for its restructuring.

Nevertheless, to date, the means to ensure such restructuring of the banking sector have rarely, if ever, been publicly addressed. In order to absorb such losses, bank mergers have been contemplated by economists and banking sector experts. Another possible solution would be to restructure the banking sector into “good” and “bad” banks, the latter of which would absorb the losses and take them out of the balance sheets of the banks to recreate a new banking sector, smaller but stronger to drive the Lebanese economy recovery’s in the next few years.

Knowing that the capital of banks pre-crisis was estimated at 20 billion dollars (part of it also being in Lebanese pounds), it seems unlikely, in view of the huge losses in this sector, that banks’ equity will be able to absorb such massive losses, in spite of the requirement to raise their capital by 20 percent.

Losses across the banking sector

Losses across the banking sector can be divided into three different types.

The first is the losses due to Non-Performing Loans (NPLs), which were estimated in April of 2020 at around 18 percent of a portfolio of 40 billion dollars of loans given by Lebanese commercial banks. Today, 18 months later, and according to Nicolas Chikhani, former chief executive officer at Arab Bank Switzerland, this NPL ratio is” higher in view of the increase in the unemployment rate and is estimated at circa 25 percent.” However, it should be noted that the NPL ratio did not grow further because some of the loans are secured (hence collateralized) and others are held by non-residents, which are less impacted by the economic crisis. Knowing that the level of total loans has gone down during the past year from 40 billion dollars to 35.5 billion dollars, due to early settlements, it is estimated that losses in this portfolio could reach 8.9 billion dollars applying Basel III provisions’ requirements.

The second is the losses from the Eurobonds government default on March 9, 2020. Ever since the default on foreign currency denominated debt, of which 9 to 10 billion are held by Lebanese banks as of April 2021, Eurobonds have been trading on average at 15 cents to the dollar, and therefore at an 85 percent trading loss. Overall, at such a discount, such losses can be estimated to be around 8 billion dollars if banks apply international accounting standards.

The third is the underlying loss incurred from the exposure of the banks on the BDL’s balance sheet mainly in the form of certificates of deposits (CDs). In summary, banks have deposited money (in CDs and in term deposits) at the BDL, in amounts estimated at around 60 billion dollars, at a 20 year tenure average, while clients deposits at the banks were at a lower tenure, creating a maturity mismatch risk, which has resulted in a liquidity problem across all the banking sector, as highlighted by Chikhani.

This is also subject to controversy as it resulted in an exposure for local banks of around three times their capital in foreign currency to a single entity, something labeled as an issue called “single borrower exposure breach.” According to International Financial Reporting Standards (IFRS9), such an exposure to BDL should be provisioned to a minimum of 25 percent as per standard practice while BDL required banks to take only 1.89 percent. Hence, in reality, banks should take an estimated additional 14 billion dollars of provisions.

With banks’ equity, being valued today at 24 billion dollars after application of BDL circular 154, banks still need to raise around 31 billion dollars in provisions (while their capital is of 24 billion) to ensure solvency and rebuild the trust with local and international stakeholders.

The road ahead: good and bad banks

The bank restructuring will require a process called “good bank bad bank”, as defended by Chikhani. In summary a “bad bank” is a bank that holds low-quality and high-risk assets, which will be isolated from the initial bank’s balance sheet. A “good bank” would only contain the remaining “good” assets of the initial banks’ balance sheet.

A working paper by international consulting firm McKinsey & Company, published in July 2009, “Bad banks: finding the right exit from the financial crisis,” highlighted the four different scenarios that would allow the segregation of these assets from one another:

The first is an on-balance sheet guarantee, by which the bank protects part of its portfolio against losses, usually with an implicit guarantee from the central government. In this scenario, the “bad” assets remain on the balance sheet of the banks but are guaranteed by the government and therefore no losses are recognized.

The second is through what is called an internal restructuring unit. In this scheme, the bank would centralize the restructuring of the “bad” assets in a separate unit, with its own board of directors and management, which allows for focus and effective management. Though this solution does not transfer risks efficiently, it does increase transparency of the core bank’s performance, according to the McKinsey & Company study.

The third is that of an off-balance sheet Special Purpose Vehicle (SPV). In this solution, part of the bank’s portfolio is offloaded to a separate entity, usually with government sponsorship, with said SPV being removed from the bank’s balance sheet but still related to it.

The fourth, and most effective way, is the “bad bank” spin-off, by which the assets are segregated and disposed into a fully legally separate SPV. Such an external “bad bank,” according to the study, ensures maximum risk transfer and increases the core bank’s strategic flexibility, which allows it to attract foreign investors.

Business Case: Lebanon

In the case of Lebanon, given the sizable losses on banks’ balance sheets, and due to the need to restore confidence both at the international level (with correspondent banks) and also at the local level (with Lebanese depositors), the fourth solution seems to be the most reasonable and effective one. It would allow for maximum transfer of risks off the banks’ balance sheets and therefore for more flexibility afforded to banks.

A Quality Asset Review (QAR) handled through the BDL would first have to be conducted in order to determine the losses incurred by each bank, and in order to assess the strengths and weaknesses of the balance sheets. Once this happens, banks with very high exposure to Eurobonds, NPLs and CDs would probably have those assets transferred to specially created SPVs that will be used for the restructuring of the same assets.

The good banks, which would contain the remaining “good” assets, will have to be bailed in and bailed out to be capitalized and make them solvent and trusted by the international banking system. In a bail-in approach, depositors would be offered the choice to exchange part of their deposits in favor of becoming shareholders of the bank. In a bail-out approach, the rescue of the bank will be operated by increasing its capital through external financial institutions, foreign banks, the capital market, or private equity funds. This will result in injections of fresh money to reconstitute the needed capital of the bank.

In the case of a bail-in, as was the case in Cyprus in 2013, depositors become shareholders in banks to the proportion of the value of their individual deposits to the full amounts of deposits that were deemed high risks. In the Lebanese case, this would make the depositors and creditors, whose deposits were transferred to an SPV, shareholders in the latter, a situation akin to the one of Bank Intra in 1966.

As a result, the surviving banks’ balance sheets will shrink heavily, but will be less exposed to high risks assets and will therefore be able to raise their equity later on without being heavily diluted because they will be financially sound. This is what happened in the early 1990s with the French Credit Lyonnais, where an SPV called Consortium de réalisation “CDR” was created to restructure the bad assets of the bank.

The SPV will have to engage in a restructuring process with the objective to reorganize its “bad” assets with the ultimate aim in Lebanon’s case to reimburse depositors. In this matter, the help of the International Finance Corporation (IFC), a division of the World Bank group, could be requested, as the IFC has a well-known expertise in the restructuring of bad loans.

According to Chikhani, it is estimated that after this process, “some Lebanese banks may cease to exist, others will be merged, and some will survive, and therefore the number of banks post-restructuring may be much lower and their new capital will reflect better the new GDP of the country that has decreased by circa 70% over the last two years.”

Governance reform in the new “good” banking sector

Should these reforms be implemented, and the good bank/bad bank scenario become a reality, “this would not be without serious governance reform in the banking sector and a reshuffling of the current supervision system of the banking and financial sectors in Lebanon,” according to Chikhani.

This scenario requires a full independence of the Banking Control Commission (BCC), as well as of the Special Investigation Commission (SIC) and of the Capital Market Authority (CMA) in Lebanon, as it is common practice in other trusted financial jurisdictions (for example, the Securities and Exchange Commission in the USA, Autorité des marchés financiers in France, Capital Markets Authority in Kuwait).

In addition, commercial banks will have to increase their number of independent board members and ensure that no accumulating of roles between chief executive officers and chairmen of the boards, all to ensure full independence and authority of the board with no conflict of interest ever with the executives.

In addition to that, a stronger internal control unit should be set up across all banks to ensure the application of processes and procedures in line with the “good governance standards.” This would ensure a reduction of potential conflict of interests, a proper monitoring of risks and a better auditing process. Also, Politically Exposed Persons (PEPs) would have their participation in the financial sector capped to avoid systemic and chronic conflicts of interest between the political and financial spheres.

Had these practices been put in place before, it is possible to say that a better monitoring of activities could have yielded more positive results with regards to banks’ single borrower exposure, but also to the maturity mismatch which has resulted in the liquidity crisis in the banking system with regards to assets, as well as a better highlight of risks by external auditors.

Overall, the road ahead is far from easy, and will require a political decision, with a government eager to implement reforms and a parliament ready to legislate on the necessary laws, as well as the BDL agreeing on the needed reforms to ensure independence of monitoring authorities. The solutions are available in order to restore financial soundness and salvage the banking sector, to make it functional again. Lebanon is not the first country to go through a banking crisis, and won’t be the last. But past experience has shown that the same solutions that have been put in place in other countries could be applied to Lebanon to save its economy, should there be a will to do so.

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