Economics & Policy

The state of industry, 2011

by Zak Brophy
written by Zak Brophy

The industrial sector in Lebanon is often regarded as the runt of the economic litter. Real estate, tourism and banking receive the lion’s share of attention and praise, not to mention political support. Perusing the figures over the past five years showing the manufacturing sector’s inexorable decline in share of value added to gross domestic product(GDP) — in comparison to other sectors of the economy — it is easy to see why attention is focused elsewhere.

Nassib Ghobril, head of economic research and analysis at Byblos Bank, holds firm that Lebanon’s industrialists are actually faring rather well, however. “The sector is doing well, and we shouldn’t always be putting it down saying it is on its way to disappearing and that industry is not in good health,” he said.             

Indeed, when judged on its own merits, and not in comparison to other sectors of the economy, industry has proven resilient in recent years. Imports of industrial equipment — a good indicator of industrial activity —have increased by a compound annual growth rate of 9.2 percent over the past decade. What is more, the value the sector has added to the economy has increased at an accelerating rate, from 1.5 percent in 2001 to 11.3 percent in2009. 

A rocky road

But this growth has not been without its blips. If anything, the vicissitudes of the local and regional political arena over the past decade have highlighted industry’s acute responsiveness to security concerns. The long-term nature of investment in the industrial sector means it is one of the first areas where investors get cold feet when the all-too-common specters of discord rear their ugly heads.

“They [industrialists] don’t want to borrow in a market where there is a lot of uncertainty and where cash flow is a major concern, especially when you have political concerns,” explained Jad Chaaban, acting president of the Lebanese Economics Association.

At the close of 2010, industrialists had good reason to hold their heads high after a strong performance throughout the year. Industrial exports were up 27 percent on 2009 and imports of industrial machinery and electrical equipment hit a record high of $227 million, up 14 percent from2009. In fact, industrial exports have been increasing consistently and strongly for most of the past decade — excluding 2008-2009 during the international financial crisis and a slow down following the 2006 war — with the prepared foodstuffs, machinery and mechanical appliances, pearls, precious and semi-precious stones (excluding gold ingots) and base metal sub-sectors performing consistently well.

But 2011 has ushered in upheavals in Lebanon and across the wider region, with events in Syria remaining the most pressing concern for Lebanon, and how the chips will fall is still far from certain. 

Head of the Council for Industrial Exports’ Development Khaled Farshoukh fears the consequences for Lebanese industry. “There has been growth of around 20 percent to 25 percent every year [in industrial exports in the last three years],” he said. “When we compare that to the first quarter of2011 we can see there is no growth… When we look to the figures, if we don’t move up we will lose.”

His concerns are warranted — especially as imports of industrial machinery and electrical equipment also stagnated in the first quarter — but it is still too early to assess the impact of the recent regional turmoil on Lebanese industry. Heading into the second quarter, industrial exports were up 16.76 percent in April 2011 on the same month in 2010.

The new Minister of Industry Vrej Sabounjian told Executive, “I encourage Lebanese businesses to see this as an opportunity to search for new markets if theirs in the Middle East have been affected. It presents new challenges and new opportunities.” Beyond the creation of a stable and secure environment for investment, few Lebanese industrialists have high expectations of support from the government. General Manager of Dalal Steel Industries Toufic Dalal said, “people nag about the government. I don’t nag because if you compare between Lebanon and other countries — in Europe, for example, — you would pay 40 percent to 50 percent tax, but here I only pay 15 percent [corporation] tax. It offsets the costs we have to endure.”

Basic requests

But low expectation for services does not mean no expectations.

Ghobril from Byblos Bank reasoned that a “15 percent corporation tax is low, as is the capital gains tax, but that doesn’t excuse the government from providing basic services like electricity, roads and water. The very basics at least. Not to mention security. If the government can’t deliver these basic services it should not exist.” 

Addressing the perennial saga of Lebanon’s debilitated energy system is one of the ‘basics’ where industrialists concede they need government support. “This is a very big problem… There is no clear government policy for the energy sector,” Farshoukh said. “Until now everyone is still working on diesel and there are no alternatives. So if there isn’t a push from the government to have a special price for diesel for industry we will continue to have the same problems.”

A 2010 report by the Ministry of Industry states that in 2007 industrial spend on energy from Electricité du Liban amounted to 1.3 percent of intermediate consumption — the cost of the inputs of production — which is proportionally not particularly high. However, because electricity supply is not constant, industrial establishments spent $192.3 million on fuel products for their own energy production, which constituted 4.1 percent of intermediate consumption. Additional costs to industrialists stem from disturbed production and increased depreciation of equipment, according to Chaaban. “The major cost for industrialists is the interruptions. The indirect cost is the replacement of the machines that are hit by these interruptions,” he said. A 2008 World Bank report states that the average industrial firm loses7 percent of its sales value due to interruptions in electricity supply.

The government could also foster a more propitious environment for industrial development with the creation of a well-designed and managed network of industrial zones. These would be designated areas of cheap land for industrial firms with the suitable infrastructure on site to provide a microcosm with lower operational costs [see Q&A with Neemat Frem on page94].

Industrial zones do already exist but they have failed to provide industrialists with the infrastructure or land price incentives to relocate.

In the late 1990s, the Investment Development Authority of Lebanon  composed a strategy to encourage the migration of industrial firms into the zones but it was beset with difficulties. According to the Ministry of Environment’s “State of the Environment Report 2000”, almost 88 per cent of all industrial establishments in Lebanon in January 1999 were located outside  of the 72 industrial zones in the country.

The issue is a sticking point for the new minister, however, as indicated by its inclusion in the new cabinet’s ministerial statement. The government “will also create a committee to administer industrial centers and look for industrial zones”, it says, and Minister Sabounjian confirmed to Executive that the issue of industrial zones was a top priority for the new cabinet. However, details on when the committee would be established, and its makeup, were not forthcoming.

Chaaban expressed trepidation at the expressed interest. “Every government program says, ‘We want to have industrial zones throughout he country’, but nothing happens. The problem is that those in charge are still driven by financial interests linked to the real estate and banking sectors.” Minister Sabounjian countered, saying “There is a great environment here [in the cabinet] and an atmosphere to do together what needs to be done for this country, especially in the Ministry of Industry. I feel the ministers are pro-industry; for the first time in a long time this government is pro-industry.”

But the jurisdiction and budget of the Ministry of Industry remains relatively limited; in 2010 its budget allocation was approximately$5.8 million, just 1 percent of the total for the general works and transport ministry and less than 10 percent of the agriculture ministry.

If Minister Sabounjian is going to execute his policies to stimulate the industrial sector he will need to enlist the support of several of his sister ministries. This should be easier with a somewhat unified cabinet, which needs to show it can deliver on its policy promises. However, first some concrete policies and plans need to be developed, which are at present woefully lacking in substance.

United we stand

There are clearly several infrastructural hurdles that need to be surmounted to improve the competitiveness and profitability of Lebanese industry. However, when firms do decide to invest, access to finance and capital is, generally speaking, readily available. According to Neemat Frem, president of the Association of Lebanese Industrialists (ALI), “this is not a problem at all”. 

In 2007, $165 million in interest-subsidized loans were provided to the industrial sector, which constituted 67.2 percent of all such subsidized loans given that year. In fact, every year from 2004 to 2007 the industrial sector received more than 50 percent of offered interest-subsidized loans, which come through a number of channels, including the Banque du Liban, Kafalat, the European Investment Bank and leasing companies.

But while access to loans, often at discounted rates, is nota problem for Lebanese industrialists, Chaaban argues the reluctance of Lebanese family-run businesses to consolidate and open up their capital is a hindrance to growth in the sector. “There has to be some kind of consolidation. Until now it’s very family-oriented small units and it’s inefficient,” he said. “If you go to Dora and Bourj Hammoud everybody is producing the same products.” His assessment is supported by a 2007 Ministry of Industry study, which reported 78.2 percent of industrial establishments employed between five and 19workers.  

Byblos Bank’s Ghobril pointed to the failure of private equity schemes to take root in Lebanon as an example of the reticence among Lebanese industrialists to open up stakes in their companies to outside investors. “The capital is there and the expertise to manage private equity funds exists in Lebanon, but family businesses are reluctant to open up their capital to institutional investors,” he said. “They prefer to go with their own internally generated funds or with loans, even though it is more expensive to borrow.”

Director General of the Beirut Chamber of Commerce Rabih Sabra argued that the predominance of small firms was due to the entrepreneurial spirit of the Lebanese, which in itself is a strength and a driver of growth. However, in a changing climate of increased competition, he added that consolidation in some sectors may be inevitable. “It will come when they feel there is competition, and companies from abroad are getting parts of the market. It’s a slow process but I hope that Lebanese companies realize that they can’t compete if they don’t merge and create partnerships,” he said.

While most people acknowledge certain sectors of industry would certainly benefit from more consolidation, opinions diverge on whether this needs to come from market incentives alone or if the government has an encouraging hand to play. 

ALI’s Neemet Frem argued that while large is not always preferable to small, some sectors, such as agro-industry, would benefit from more consolidation. What is more, he will be campaigning for new laws and policies to incentivize mergers, including assistance with relocation costs, tax holidays and social security benefits.

Minister Sabounjian conversely reasoned that market forces alone should provide the incentives for firms to merge while the government keeps its nose out. It is a safe bet to say that devising policies to encourage greater consolidation will not be on the minister’s to-do list any time soon.

Keeping the edge

So, while Lebanese industrialists may be trundling along in the shadows of the economy’s power-house sectors, they should still be given credit for their tenacious toil. But fresh challenges and opportunities lie ahead for them. In recent years Lebanon has entered into a number of bi- and multi-lateral trade agreements, and trade liberalization is likely to continue in the coming period; Lebanon is still intent on joining the World Trade Organization. 

As barriers to trade come down and protectionist measures are removed, Lebanese industry will clearly have to overcome a number of internal and external obstacles to remain competitive and thrive on the international stage.

The government is going to have to get its act together and provide industry with the stability and infrastructure that will encourage investment and lower operating costs. And, for their part, industrialists are going to have to show flexibility to adapt to the changing climate in which they will be operating, and when necessary abandon the ‘I’m the keeper of my castle’ mentality.

 

0 comments
0 FacebookTwitterPinterestEmail
Economics & Policy

Q&A – Neemat Frem

by James Reddick
written by James Reddick

Neemat Frem is the president of the Association of Lebanese Industrialists, chief executive officer at INDEVCO Group and founder of technology service provider Phoenix Machinery. He recently sat down with Executive to look back at Lebanese industry since the 2006 war and to discuss the sector’s future needs.

E: It has been five years since the 2006 war. How has the sector fared since suffering so much damage?

If you look at the numbers over the last five years, the industrial sector was able to grow at a rate of 20 percent per year despite the2006 war. This is something exceptional. This growth was due mainly to the entrepreneurial craft of the Lebanese and relative stability since 2006, and probably a sense of optimism.

The number one exporters have traditionally been the printing sector and then it moved towards food products, and then lately, in the last two years, we have been witnessing a pick up in the electro-mechanical sector, with steady growth in what has always been number two, the jewelry sector. So the number one today is the electro-mechanical sector, in terms of exports.

E: Has the government assisted in reconstruction efforts?

No, actually this is the problem. We have more than 50 cases of plants completely bombed out and up to now we still don’t have the right support. On the contrary, we are having a lot of problems. Even tax holidays we don’t have. Really we have not seen any support for industrialists.

E: And was there support promised?

Yes, it has been promised. We have had special laws being worked on in this direction but nothing has materialized. At this minute, we have not yet had any support.

E: With the new minister, do you think this might change?

We hope so. I am demanding this with a louder voice more and more. But still, maybe it is dependent on the environment we were living in the last few years where we had a freeze basically of any decision because of this paralysis in government.

E: On that note, what should be the priorities of the new minister?

I have been working very closely with this minister because he is an industrialist and a close friend. The priorities for us will always be creating the proper industrial cities in Lebanon where we will have enough land and enough infrastructure in areas where we can develop and grow — where we will have cheap lands, availability of water, of roads and of labor. So we have been demanding these zones this last year and now will be even more. And today there is enough awareness of this issue. In the ministerial statement, it has been noted about the importance of making industrial cities.

E: What does that entail?

Industrial cities are locations in the five muhafazas (regions); these lands will be first of all cheap and will have proper development. As you make housing developments or tourist developments, we would like industrial developments for those lands where you would have local power generation, where you can create a microcosm for industrialists in Lebanon instead of waiting for the development of the rest of the country, because you know that we are suffering mainly from the fact that the industrial sector has been growing but infrastructure is not following. The whole country did not follow; the administration did not follow; even our laws did not follow. They need to be rejuvenated.

E: And how far along are these efforts?

There are two tracks on this. Track one: public administration. There is a law for forming the body to administer the industrial areas. This is what is meant in the ministerial statement. I hope this will be formed very quickly and headed by an industrial or an experienced engineer. When established, this body will have the duty to come up with geographical zones where you need to have the right infrastructure. So it’ll be a development exercise. Lebanon is known to have a slow pace for public administration so we need to also create another track that has a private initiative with the right investment to create these zones, and possibly have a private-public initiative where maybe you would have freehold lands to be developed by the private sector. But again, all of this is tied somehow to stability and the degree of optimism in Lebanon.

E: Lebanon’s industry is very concentrated in Mount Lebanon. Have the outside areas been neglected?

No, I would say that instability has been traditional in the south and other parts of Lebanon and is one of the biggest reasons for this. Also, the infrastructure availability has been ahead in Mount Lebanon compared with other areas. Now, what you are seeing in the last 15 years is that Mount Lebanon is having infrastructure problems whereas you have power plants in the south and the north, along with land availability in the south, north and Bekaa. So I foresee that if we are able to have enough stability in these areas they will be very promising for the industrial renaissance of Lebanon. At the same time, we should not forget about Mount Lebanon.

E: Growth in exports has stagnated so far this year. Are you concerned about the decline?

I am concerned, for sure. The whole economy in Lebanon is a reason for concern. I’m very much worried that we won’t achieve the growth that we want to achieve.  Lebanon needs to grow at a rate of 6 or 7 percent a year; it’s not a luxury. We’re not a country that can grow at 1 or 2 percent and consider that acceptable. The focus of the whole cabinet should be on re-stimulating growth, especially that the area had all these problems. This could have been an opportunity for us. We should have been able to provide the needed stability.

E: Related to that, how has the regional upheaval affected Lebanese industry?

To tell you the truth, it has affected it as shown in the exports but not to a high extent. I consider the problems coming from a major consumer confidence issue in Lebanon. Today there is a slow-down in consumption. The countries that are still being effected — Libya and Yemen — we don’t sell much to. The Syrian market is affecting us, as we sell 5 percent to Syria.

E: The industrial sector doesn’t benefit from tax incentives as do others in Lebanon. Is this a problem?

Our tax laws need to be revised to incentivize the industrial sector. We need to have special tax holidays. This is how you attract foreign direct investment. Now we have a decree issued by [former Finance] Minister Rayya Hassan when she was a caretaker where we would have a 30 percent tax exemption for five years, which is quite an interesting initiative. We would like to see it implemented. All profits generated from exports should be tax exempt. If we do this, we will stimulate exports and hence increase the goods leaving the country. Right now we have a flat rate of 15 percent on profit. And another 10 percent as a distribution tax. I would think that is high compared to what we are receiving as services. The value proposition is wrong. I tend to agree with those schools that say that we should increase consumption taxes and decrease profit taxes. I think it’s easier to control and better for creating growth.

E: How do you feel about efforts to join the World Trade Organization (WTO)?

I think we’ve done much more than we should have done. I think we implemented it in the wrong way and it affected our productive sector. I don’t see any advantage in joining the WTO. We need to make sure that our productive sector isn’t hurt. In 2001, we did destroy our productive sector in the name of reducing all kinds of customs duties and opening at large our markets without providing the right manufacturing costs and providing the right environments to be productive.

E:  So you don’t see liberalization as such a bad thing as long as the infrastructure is there?

This is the issue. Lebanon is so liberalized, more than any country I know of in the world, including the United States. This is not acceptable when you have such high manufacturing costs. We need to improve our manufacturing competitiveness in line with improving our manufacturing costs.

E: Small industries dominate the market. Do you see a decline in economies of scale as a problem in Lebanon?

What we see in Lebanon is a shifting from heavy to lighter industries. But this does not mean we should only have small industries. I believe large industries have a role to play. I think there are sectors that need to have more large industries. This is why we as an association have been working on making special laws to incentivize mergers of small companies. I believe personally that in the food sector it warrants to have one or two big entities which would allow the opening of new markets in the world, developing new products, strong marketing, to claim back the hummus, the falafel, you see? I would like to see the Nestle of Lebanon. Imagine Switzerland without Nestlé —without their food industry. We need this in Lebanon and we can have it and it is imminent. I tell you, this is a sector that needs to be developed.

 

0 comments
0 FacebookTwitterPinterestEmail
Comment

When every day is Friday in Syria

by Nicholas Blanford
written by Nicholas Blanford

After four months of a steadily intensifying popular uprising, the regime of Bashar al-Assad, the Syrian president, is bracing for what may prove to be a climactic few weeks ahead.

August 1 marks the beginning of the holy month of Ramadan when pious Muslims fast during the daylight hours and — crucially in the Syrian context — visit mosques on a daily basis for prayer.

Since the uprising began in mid-March, demonstrations have focused on Fridays, Islam’s holy day of the week, when young men can freely gather in large numbers for prayers without hindrance from the security forces. Once prayers are over, the protestors are well placed to leave the mosques andlaunch straight into street demonstrations. In August, every day could be a Friday, turning this year’s Ramadan into a grinding and bloody test of stamina and determination on the part of both the protestors and the Syrian security forces. It is open to question how the already over-stretched security forces will be able to confront daily protests from opposition activists, many of whom will have the additional inspiration of the holy month to sustain them. On the other hand, if the security forces escalate their ruthless repression of the protest movement, with a corresponding escalation in casualties, the opposition activists will need all the resolve and nerve they can muster to keep returning to the streets day after day. Indeed, regardless of what one thinks of the Assad regime, the tenacity and courage of the protestors over the past four months has been extraordinary.

The Syrian security forces — using a blend of the elite Fourth Division headed by Maher al-Assad, Bashar’s younger brother, intelligence agents and shabiha militiamen drawn from the Alawite sect — have rushed from one flashpoint to another, using brute force in a bid to stifle the rebellion. But the protest movement has refused to yield and is slowly gaining traction with demonstrations growing ever larger and more widespread.

The army numbers some 220,000 regular troops, but the vast majority of them are ill-trained Sunni conscripts, most of whom presumably have little intrinsic loyalty to the regime. Indeed it is the Alawite-heavy Fourth Division, which numbers some 20,000 troops, that has spearheaded the crackdown. Minor fissures have appeared in the army, mainly due to individual soldiers refusing to open fire on protestors, and allegedly some have been shot for disobeying orders, have escaped into Turkey or Lebanon or have joined the ranks of the protestors. The number of defectors appears minimal at this stage and does not as yet presage a major split within the army. But the collapse of the army remains a possibility in the longer term, particularly if the protest movement continues to gather momentum and the security forces are seen as incapable of suppressing the dissent.

An indicator to look for is defections or signs of dissent among Alawite army officers in the weeks and months ahead. Rami Makhlouf, Syria’s uber-oligarch and cousin of the president, told The New York Times in May that the regime would “fight to the end”. Such stark comments raise the specter of a sectarian conflict between the majority Sunnis, sensing that their time for ruling the country is at hand, and the Alawites, who fear the backlash should they lose power. The Assad regime has played upon those fears of sectarian conflict. Certainly, the smaller communities in Syria — including the Christians and Druze — generally have dithered between throwing their weight behind the opposition in the hope of a peaceful transition to democracy, or standing with the regime and its protection of Syria’s diverse minorities.

Worryingly, there have been isolated incidents of sectarian violence, mainly in mixed Alawite and Sunni neighborhoods, although it is too soon to say whether this is a harbinger of a broader communal struggle to come.

Still, it is doubtful that the Alawites really would stick together for a “Masada-style” finale in their lofty redoubts in the coastal mountains. Indeed, many analysts conclude that it is a mistake to lump all Alawites together as a single pro-Assad block (similarly Syria’s Sunnis are not a homogenous group). Alawite unity has frayed in the 11 years that Bashar al-Assad has ruled Syria, with power becoming more centralized within the extended Assad clan. Hafez al-Assad, the former president, was careful to disseminate the privileges of power, not only among fellow Alawites but among the Sunnis too, thus blurring Alawite control of the levers of power and honoring in perception if not in deed the secular ideology of the ruling Baath Party.

Other than a split within the army, the other key dynamic under watch is the fate of the Syrian economy and how it could shape the out comeof the confrontation between the regime and the opposition. The economy has been badly hit by four months of unrest. Syria achieved growth of about 3.5 percent in fiscal year 2010, but the economy is contracting by about 3 percent this year. Tourism, a key sector that accounts for about 18 percent of the economy, has been heavily hit, with visitors staying away this summer and hotels reporting record vacancies.

Even before the uprising took hold, the Syrian economy was facing several long-term threats. They include declining oil production, high unemployment and a devastating five-year drought that has decimated arable production and driven many country dwellers into the cities. Increasing public debt has forced the state to curb its long-standing policy of subsidizing everyday goods, from electricity to bread and cooking gas — a legacy of the Baath Party’s original socialist principles. The removal of subsidies has led to increased inflation (15 percent in 2008) and price rises, aggravating the economic plight of many ordinary citizens and serving as a motive for the protests. Cheap clothes imports from China and Asia have also put many Syrian textile factories out of business.

At the beginning of the year, the Syrian government announced a five-year plan to attract $11 billion in foreign investment. But foreign investment has slowed. Qatar Electricity and Water has cancelled a $900 million project to build power plants, and other foreign companies are also considering canceling projects.

Syria’s business community so far has watched the unrest from the sidelines, unwilling to make any commitments that could backfire against profit margins. But the longer the uprising continues, the more the economy will stagnate, which could force the hand of the merchant class. But for now the heterogeneous and divided opposition has offered little in the way of reassurance to the merchant community about how it intends to usher in a stable, free market democracy.

How this ends is anyone’s guess. But it is evident that the Syria over which Assad presided at the beginning of the year has gone. There can be no return to the status quo that existed before March. Some analysts maintain that the Assad regime cannot prevail in this struggle because it faces a no-win situation. If Assad ushers in a meaningful program of reforms, it will undermine the regime’s grip on power, thus leading to its eventual demise. If it does nothing and continues to rely on force it is similarly doomed.

Most of Syria’s Arab neighbors have watched Assad’s tribulations with unease mixed with quiet schadenfreude, with the latter growing stronger the further the country lies from Syria’s borders (and reach). The West has generally limited its stance to the unrest in Syria with repeated calls for Assad to reform or face losing his legitimacy, a response that most Syrian opposition activists consider tepid and redundant given the nearly 1,500 people killed so far.

Ultimately, the fate of Syria may be decided in the coming weeks as the protestors and security forces gird themselves for the Ramadan protests and a contest to see which has the stronger staying power.

Nicholas Blanford is the Beirut-based correspondent for The Christian Science
Monitor and The Times of London

0 comments
0 FacebookTwitterPinterestEmail
Society

Q&A – Nassib Boueri

by Emma Cosgrove
written by Emma Cosgrove

As Chief Executive Officer of Y&R/Wunderman for the Middle East and North Africa, Nassib Boueri has had a lot to deal with in the first half of 2011. Shrinking budgets, unstable conditions and constant evolution have left some of the advertising industry’s cash cows dry. Executive caught up with him to talk about lessons learned and challenges faced during and after the ‘Arab Spring’.

What have you learned about the advertising industry since January?

The whole region has changed a lot since then. But I am a very strong believer that life goes on. Yes, there is a huge impact on business in these countries. There is a huge impact on consumers as well in terms of spend. But then again, we have learned from lessons in the past that people move past a certain moment and they move on. Yes, it has had a great affect on the economies and the spend in the advertising business. But if I look at places like Dubai or Abu Dhabi today, our industry is slightly picking up.

Saudi has always been and will always remain one of the most sustainable economies in the region. So as much as there is a downturn, or fear, there is always also an upturn somewhere else. [Qatar hosting the World Cup in 2022] is also a sign of things to come. Maybe it will not affect our industry today, but it certainly will in the next five or six years.

The economy is still bad in certain countries and it hasn’t picked up, but then again I haven’t seen anybody, neither our competitors, nor ourselves, close down in these countries that are in turmoil. You cannot pack up and leave the next day.

Regimes will change, be it Syria, be it Egypt, but the country is still there. The economy is still there. Economies do not disappear. They go through difficulties, but they don’t disappear. Countries don’t disappear – leaders do – but countries don’t. And our industry will get affected here or there but it will not get wiped out. So as a group we have not gone backward in terms of revenues or billing. And we are witnessing growth in certain markets and we are holding on in other countries. We have not closed our office in Egypt. We have not let anyone go in Egypt. Our global clients are spending; the budget cuts are minimal. The local client base has been affected that’s for sure. But nevertheless, business goes on.

What kind of questions has your board in New York asked you and what have you told them?

There has been a lot of change at the global level for Y&R. There has been a new CEO and he has formed a global executive committee, which I am on. The challenges have two axes. One is the economic crisis, which is affecting the whole world. And then there is ours, which is the political unrest in the region. But we all still believe that this region is a region of opportunities and a region of growth and they see that as well. Companies don’t look at things short-term.

Today, if we have to be very simplistic about things, Iran has untapped potential for business. Because of the embargo, nobody can go there yet. Iraq has untapped potential. We are there but remotely and we are increasing our presence there as we speak.

Egypt has huge potential regardless of how you break it down between the rich, the poor, you still have 80 million people. If you move from there you have Algeria. Algeria has surpluses of billions of dollars in the banks and this is one of the key issues in Algeria because the government is holding onto the money. And the people are in need of a structure — education, healthcare, services. I have been to Algeria twice this year and the potential there is huge.

When you look at our region, there is potential for the years to come. And like anywhere else in the world you go through difficulties, but I don’t fear for the region and I don’t fear for the future of our industry.

Our issues going forward are not mainly the economies of the region. Our major problems are how to develop our business; how to get the clients to understand that they need to spend. How do we tell them that what they are spending today is way less than the global average? How do we help them to build their brands? How can we keep the young generation interested and excited about our business, which is becoming less and less attractive and exciting?

Why do you feel that young people are less and less interested in working in the advertising industry?

Today it is difficult to keep people interested in this business the way they were 20 years ago. This was a very flashy industry 20years ago. Today it is banking and finance. When somebody graduates today, they are looking for opportunities, for money, for salaries, so they look where the trend is going. In the last five years, all those who were in brokerage and investments made tons of revenues and returns. Today we are still a sexy industry. Then again, it is not easy getting people into Saudi. It is not easy getting people into the Gulf anymore because it is becoming even more expensive.

Today retention of talent and getting new talent is a challenge. Growing the brands and ensuring that the clients understand that the investment they put behind the brand is not an expenditure, it is an investment. When done properly, it is an investment.

What is your opinion of using images from events such as the Egyptian revolution in advertising campaigns?

To me, anything that is taken from its own context, to be used in another context, is unethical. So if I am going to use a picture of a revolution anywhere in the world for a cause that is different than the revolution, then I don’t believe in that on a personal level.

What about recreating images or scenes similar to these events?

I believe in recognizing causes and efforts. Recreating will always depend on what is the usage of this material. If the usage is to diminish from the cause itself then I am against it. If it builds on the cause then I am totally for it.

Let’s assume I take what happened in north Lebanon in 2007or the demonstrations that happened in March 2008 and there were some plastic chairs and you promote ‘I am selling the plastic chairs [from the demonstrations] so my plastic chairs are stronger. Look! I’ve sat 100 million people on them.’ This takes away from the cause. If it is something that builds on the cause then it is fine to be nationalistic; I am more than happy. I am for creating these campaigns. I am for national pride. I am for patriotism. I am for using the local insight to build that, but not to abuse it by diminishing it into something else.

 

0 comments
0 FacebookTwitterPinterestEmail
Special Report

The coveted steps to perfection

by Executive Editors
written by Executive Editors

Underground, down a dark driveway and below a nondescript building in the back streets of the Beirut neighborhood, Tabaris, is a small, unmarked door. Behind this secret portal a bounty of diamonds, sapphires, rubies, gold, platinum, pearls and other precious gems lies in wait. Here, a treasure trove of wishes is carefully and painstakingly molded, filed and polished by the finest expert craftsmen into symbols of luxury and cherished personal items that will eventually adorn fingers, ears, necklines and wrists.

Before it ends up on the velvet pillows of the Mouzannar showroom to be gawked at and drooled over, the giant aquamarine and diamond-encrusted platinum ring passes through many hands. Under the watchful eyes of more than 20 security cameras [1], the jewellers use age-old techniques, with the help of some modern technology, to perform their transformation of raw materials into glorious ostentation.

When the order for the ring comes in to the jeweller, the first step is selecting the stone. Then, using architectural software [2], the cast setting is digitally drawn in three dimensions. At this stage, the ring is moulded in wax [3], before the pure platinum is melted and poured into the setting. Emerging rough and unfinished [4,5], the ring is cleaned and weighed for value before being polished and filed; each tiny precious filing is collected on stainless steel trays for a later date. The giant piece of aquamarine, meanwhile, is weighed and examined in detail for quality, clarity and shape. The same treatment is given to the diamonds that will form the stone’s bed. Dozens of white diamonds pour from plastic zip-lock freezer bags [6] stored in rows in filing cabinets according to size and gem.

[2]
[3]
[4]
[5]
[6]

Once the gems are selected and prepared, they are ready to be set in the cast. The diamonds are laid out in tiny magnificent rows along the diameter, the aquamarine carefully fitted in its platinum jaw. Now, close to ready, the polishing [7,8] begins again — a process the jeweller explains will file away at least 10 percent of the original weight of the metal. At cleaning stage, the ring is plunged into a bucket of warm soapy water [9] using ordinary dishwashing liquid, then blasted with steam to remove any invisible scratches.

[7]
[8]
[9]

Finally the ring is submerged in salted water and exposed to an electric current to remove any lasting grease before getting a last bath and puff of steam. Still exhibiting golden tones, the ring is lastly dipped in rhodium [10], from which the metal emerges gleaming white. Dried with a hairdryer [11], the ring is ready to leave its humble home [12]. After a process that has taken three days, the ring is taken to the showroom for pricing and exhibition [13].

[10]
[11]
[12]
[13]
0 comments
0 FacebookTwitterPinterestEmail
Real estate

For your information

by Executive Editors
written by Executive Editors

Dubai’s cedar shoreline

By the fourth quarter of this year, the island of “Lebanon” will be home to the first commercially operating project within The World, the 300-island man-made archipelago off the coast of Dubai developed by Nakheel. The island is fully owned by Indian entrepreneur Wakil Admed Azmi, who has spent approximately $16.3 million [AED 60 million] on the construction of a beach club and facilities, in addition to the initial cost of the island. Reza Sinnen, operations manager at the World Island Beach Club (which is being developed on the island), told the United Arab Emirates (UAE) daily Arabian Business in a June 15 article that another $2.17 million [AED 8 million] would have to be invested to complete the commercial resort, which includes a restaurant, lounge, entertainment venue and cabanas, with facilities that allow yachts of up to 80 feet to be docked. The resort aims to sell club memberships that cost up to AED 40,000 [$10,889] per year. Sinnen said problems with the delivery of water, electricity and on-island services mounted as Nakheel’s credit burdens grew, but that the owner cut construction costs by nearly 70 percent and managed the project himself in order to complete it on time. “We are about four months away. We are tying up with partners, yacht operators, travel agents, the Road and Transport Authority, Sealink…there is a lot to do,” Sinnen said. While 70 percent of the 300 islands are sold, according to Nakheel, none of the other owners have begun construction, except Kleindienst Group, which is developing resorts on the six islands it owns, which together are known as the Heart of Europe Project.

A greener prospect

A new environmental initiative that rates the green credentials of buildings in Lebanon was launched in June. The scheme was announced on the closing day of the 16th Project Lebanon, the international trade exhibition for construction and environmental technology that saw around 500 contractors and construction companies from 26 countries set up shop at Beirut International Exhibition and Leisure Center (BIEL) for the week. The ARZ Building Rating System is the first of its kind in the Middle East to classify the environmental performance of existing commercial buildings. The system takes into account Lebanon’s water and electricity shortages, and includes renovation conditions to reduce greenhouse gases. Building owners can invest between $100,000 and $4.9 million, based on building size and condition, to save between $35,000 and $890,000 in costs per year, according to Lebanese Council for Green Buildings President Samir Traboulsi.

From Damascus to Mayfair

A June 20 article in British daily The Telegraph reported that former Syrian Vice President Rifaat al-Assad bought a 10.3 million pound [$16 million] Mayfair townhouse in 2007 by signing a 110-year lease from the Grosvenor Estate, with funds paid by an offshore company based in the British Virgin Islands. Given the current unrest in Syria and the possibility of several Syrian officials facing international investigation, the properties could be confiscated in the event of a criminal investigation against Rifaat al-Assad for “crimes against humanity,” as he is blamed for ordering the massacre in the Syrian town of Hama in 1982 that killed tens of thousands. The article added that the 73-year-old uncle of current Syrian President Bashar al-Assad did not live in the residence until more than a year ago, but has been residing mostly in France and Spain. In 2008, Hafez al-Assad also bought a lease on the adjacent property, but Land Registry documents did not reveal the amount of the contract. In related news, Rami Makhlouf, the maternal cousin of the president, appeared in a rare televised appearance on state television on June 17 and pledged to relinquish all his real estate in Syria to the state and give up any business ventures that bring him personal gain, such as his stake in Syria’s monopolistic telecommunications company Syriatel.

Tourism takes the cake

Of the 35 business developments launched with the help of the Investment Development Authority of Lebanon (IDAL) between 2003 and 2010, tourism projects accounted for 79 percent ($860 million) of the $1.1 billion total mobilized investment. IDAL indicated that the bulk of tourism projects were the construction of luxury hotels and resorts, generating nearly 3,300 jobs over the same time period. The industrial sector was the second largest recipient of IDAL-supported investment between 2003 and 2010, receiving $131 million. IDAL mobilized investments accounted for some 4,760 new jobs over the seven-year period.

Solidere trumps 2010

Due to a surge in operating profits, Lebanese real estate firm Solidere was able to increase net profits by 7.8 percent in 2010 to reach $196.5 million, according to a June 15 statement by the firm. Sales of land plots and increasing revenues from rental units expanded Solidere’s operating profits to $272.2 million last year, a yearly increase of 16.5 percent. Based on its market capitalization of $3.1 billion at the end of 2010, the company was ranked 61st in Al Iktissad Wal Aamal magazine’s annual survey of the Top 100 publicly-traded Arab firms in the region, down from 45th place in the previous survey. As the largest property developer in Lebanon, its total assets are estimated to be worth around $10 billion today, while unsold property is valued at $7.5 billion.

Noor International’s dodgy dealings exposed

Beirut-based developer Noor International, founded by Mohammed Saleh, has not completed more than 5 percent of its residential projects sold off-plan, according to a June 1 article in Lebanese daily Al Akhbar.  It further claims that Saleh fled to Saudi Arabia in May after scamming investors of around $10 million. Noor International first gained notoriety (or infamy, depending on one’s perspective) in 2006 when Saleh sought to raise $1 billion from investors to build “Cedar Island”, a dredging and construction development that would have seen the creation of a 3.3-square-kilometer island off the Lebanese coast in the shape of a cedar tree. To the relief of many, this project was among the 95 percent of Noor’s development ideas never to see the light of day.

Gloom and dividends

Property transactions contracted 21.3 percent year-on-year by the end of April, while the value of the sales dipped 16 percent over the year, according to BLOM Bank. Further indicating a slow-down in construction activity this year, the major supply indicator, cement deliveries, fell 3.5 percent as of the end of April in comparison to the same time last year, according to the Order of Engineers of Beirut and Tripoli, and Byblos Bank. Holcim Liban, one of the major cement producers in Lebanon, will pay $30.25 million in dividends to shareholders starting June 27, at a dividend ratio (dividend payout as a ratio of 2010 net income) of 80.8 percent. Société Libanaise des Ciments Blancs, another major local producer, will also distribute dividends based on last year’s profits on the same day.

0 comments
0 FacebookTwitterPinterestEmail
Banking & Finance

Regional equity markets

by Executive Editors
written by Executive Editors

Beirut SE  

Current year high: 1,073.93    Current year low: 890.83

>  Review period:  Closed June 23 at 892.64 points       Period Change: -0.25%

Slumping Beirut stocks were not buoyed by the long-awaited emergence of a new, Mikati-led government. Instead, the market seesawed ahead of an anticipated political showdown during the upcoming parliamentary session and on uncertainty about unrest in Syria, leaving stocks down 8.2% in 2011 through June 23. Shares of Solidere hardly budged despite positive news of an 8% increase in 2010 net profits. Political bickering has driven the stock down 4.5% so far in 2011, though it is outperforming Bank Audi and BLOM Bank, which shed 15.6% and 10% respectively.

Amman SE  

Current year high: 2,477.99                Current year low: 2,113.46

> Review period: Closed June 23 at 2,122.97 points     Period Change: -1.7%

For Amman stock prices in June there seemed no end in sight for the slide that started at the onset of 2011. The market index has already given away 10.6% in 2011 through June 23 and stocks are yet to recover from the ‘Arab Spring’- driven declines earlier in the year. Continued political uncertainty, as well as unrest in neighboring Syria pose additional risks for all stocks.  However, the banking sector has generally shown considerable resilience with only a 4.7% decline year-to-date, including 1.4% in June.

Abu Dhabi Exchange  

Current year high: 2,833.09                Current year low: 2,471.70

>  Review period: Closed June 23 at 2,716.72 points     Period Change: +2.94%

Stocks on the ADX roared in June to a new 2011 high of 2,775 points on investors’ high expectations ahead of a decision by global index provider MSCI to advance the UAE from “Frontier Markets” to “Emerging Markets” status. However, stocks weakened at the end of the review period when MSCI postponed the decision for six months. The ADX benchmark retained a flat record for the year through June 23 and posted solid gains for the month, as Etisalat leapt 7.8%. Year-to-date gains of 6.8% for banking stocks have been the market’s saving grace.

Dubai FM  

Current year high: 1,781.92                Current year low: 1,352.24

>  Review period: Closed June 23 at 1537.48 points     Period Change: -1.44%

Although the DFM index stumbled on MSCI’s decision to delay a possible upgrade to UAE’s bourses, stocks had little to lose. By June 23 the market was already down 5.7% in 2011 on expectations of further losses at real estate and construction companies and despite a year-to-date gain of 5.7% in banking stocks, with a nice top up of 2.4% in June. Market cap leader Emirates NBD booked a handsome gain of 48.6% during the first half of the year, while real estate behemoth Emaar Properties was down 13.2%, including 2.2% in June.

Kuwait SE  

Current year high: 7,129.30                Current year low: 6,134.60

>  Review period: Closed June 23 at 6,263.9 points     Period Change: -1.8%

Missing positive cues and dropping to thin volumes, Kuwaiti stocks slid further down the May slope at the onset of the summer low trading season. Kuwaitis go on vacation this year with almost 10% of their equity investments scrapped during the first six months. More ominously, the banking sector continued its steady decline, reinforced by Moody’s downgrade of National Bank of Kuwait’s credit ratings on Egypt exposure and real estate risks; the sector is 8% in the red for the year through June 23.

Saudi Arabia SE  

Current year high: 6,788.42                Current year low: 5,323.27

>  Review period: Closed June 22 at 6,449.49 points     Period Change: -4.26%

Tadawul’s stock activity was vibrant in June, backed by plentiful government loans and corporate Sukuks, including a massive 25-year $13.6 billion soft loan approved by the government for Saudi Electricity Company. However, real estate and banking stocks appeared to be off for an early stint of Red Sea vacationing, diving 8% and 4.9% respectively during our June review period. As a result, Tadawul’s year-to-date performance sank to -2.6% by June, ending Saudi’s earlier MENA exchange leadership.

Muscat SM  

Current year high: 7,027.32                Current year low: 5,952.60

>  Review period: Closed June 23 at 6,003.82 points     Period Change: -0.07%

June’s mood swings are not unusual on the GCC’s smallest exchange. Following an optimistic Bank of America Merrill Lynch report, foreign investors flooded blue chip stocks hit by significant May declines. However, it appeared domestic investors were either not swayed or had defected to summer activities as the market gave back earlier gains and volumes thinned out. Investors may be saving up for the three IPOs scheduled for the fourth quarter, or are not hurrying into a market down 11.1% for the year and with few positive catalysts on the horizon.

Bahrain Bourse  

Current year high: 1,475.10                Current year low: 1,330.03

>  Review period: Closed June 23 at 1,338.61 points     Period Change: -0.6%

As Bahraini courts were inking new life sentences for opposition members in June, the market index was inking a seven-year low, followed by a short-lived uptick. Despite continuing protests and the uncertain outlook for the upcoming national dialogue, the market has held up relatively well given the circumstances, falling 6.5% in 2011 through June 23. The key banking sector only gave up 3.7% during the first six months, with the market’s largest traded stock Ahli United Bank actually adding 1.4% year-to-date, compared to a 12.5% dive at Batelco.

Qatar SE  

Current year high: 9,242.63                Current year low: 6,766.80

>  Review period: Closed June 23 at 8,214.35 points     Period Change: -1.92%

It is telling when Qatar’s central bank’s announcement that real GDP may grow 19% in 2011 does not move markets while MSCI’s decision to delay the decision on Qatar’s upgrade sparks a downturn. But this internationally focused exchange can still cheer foreign activities by Qatari companies, including Diar’s recently-approved multi-billion dollar Chelsea Barracks project in London. The market index on June 23 closed down 5.4% year-to-date, ironically one of the better showings among MENA exchanges.

Tunis SE  

Current year high: 5,681.39                Current year low: 4,058.53

>  Review period: Closed June 23 at 4,254.12 points     Period Change: +3.23%

With Ben Ali sentenced in absentia for 35 years, the pre-crisis appeal of Tunisian stocks has returned. Business delegations from across the globe flocked into the country as political parties agreed to postpone elections until October. The market still has a long way to go before it recovers the 16.7% losses in 2011 through June 23, but the upward trend appears to be accelerating; the Tunindex registered the highest June return in the MENA region reviewed here. Meanwhile, Banque de Tunisie remained anchored, declining a relatively modest 5.3% during the first six months.

Casablanca SE  

Current year high: 13,397.47              Current year low: 11,499.64

Casablanca stocks witnessed a precipitous decline in June after the youth movement called for a boycott of the king’s July 1 reform referendum. The MENA region’s June laggard has compiled an 8% loss in 2011 through June 23, with market-cap billionaire Maroc Télécom hitting a multi-year low during the month. Banking stocks have tracked the market so far in 2011, with an 8.1% decline, while the largest bank by market cap, Attijariwafa Bank, shed 9.7% during the first six months.

Egypt SE  

Current year high: 7,210.00                Current year low: 4,878.00

>  Review period:  Closed June 23 at 5,479.74 points     Period Change: -0.79%

Since touching the year’s low in early May, EGX stocks have gained 12.3% through June 23, reflecting optimism for a recovery in tourism and real estate. Although the market is down 23.3% in 2011 to date, heavyweight Orascom Construction is only 4.5% in the red after post-Mubarak gains of 20%. Commercial International Bank and Telecom Egypt investors have not been as fortunate, with the two stocks losing 17.7% and 5% respectively since trading resumed in March.

0 comments
0 FacebookTwitterPinterestEmail
Special Report

Fady Chams

by Executive Editors
written by Executive Editors

After starting out on the Cannes interior design circuit, Prospect Design International’s Managing Director, Fady Chams set up the second branch of the boutique design firm in Dubai in 2005. The firm’s work has been ogled by the eyes of the jet set, with a portfolio that includes the VIP Room in Saint Tropez, to world-famous Movida and Maddox in London, to the iconic art deco Sass Café in Monaco. Closer to home, Prospect left their mark on Beirut’s La Plage beach and Palais nightclub. Though the firm has worked on high-end projects from Casa Blanca to Kazakhstan, the Middle East’s highly hospitable climate remains the focus for their well-secured niche within the interior furnishings market.

  • How did you become a high-profile interior design company so quickly, designing interiors of exclusive high-end clubs and restaurants in Monaco, London, France, and the like?

My brother Sami, after having worked with Ralph Lauren Interiors and many other brands in the south of France, set up Prospect Design in Cannes in 1996. Several friends asked him to design restaurant interiors, which became very successful, and we became specialists in that domain of hospitality design. We were thinking to open Prospect Design in Beirut but security and investment-related factors didn’t allow us to do that.

  • Do you position yourself as designers in the luxury segment?

Not necessarily. We do high-end and we can provide a mid-end French classical Provence house, which is rich in natural materials, [such as] French antique wood, without having necessarily the highest technology and the expensive marble and so on.

  • Wasn’t Palais the biggest budget project in hospitality at the time?

No, not at all. To tell you, it was approximately half a million dollars, which is acceptable when you consider they already had the services, electrical, mechanical, air conditioning and so on. There is big competition in Beirut, especially for [design in] hospitality. Now, we have a lot of private clients for residences… and hope to design a boutique hotel but that is all related to the political and security situation.

  • When you compare the market for luxury hospitality design in Beirut with the regional market, do you see major differences?

In Beirut there are no limits compared to the rest of the Middle East. You can open a restaurant and club wherever you want and you are allowed to sell alcohol and open from very early until very late. In Dubai, [if you are a restaurant that sells alcohol] you have to be in a hotel, which affects our design.

  • What makes it so demanding to work on a luxury restaurant?

You cannot just design a very nice restaurant [based purely on aesthetics]. When it comes to operations you have a lot of problems with the lighting, the seating or the circulation around the tables. Also, going for a contemporary style or a classical style will definitely last much longer than something futuristic with a lot of LED lighting and changing colors.

  • Did the economic downturn impact your business?

Yes and no. Back in 2008, some clients started to freeze their spending. But we do not have a lot of overhead… Before the crisis in Dubai, we were approached by maybe 20 people a week; 90 percent of them were…wasting our time. Now, if we get approached by four clients, three of them are very serious and have the funds.

  • What was the most expensive project you ever worked on?

There were some private residences… that included an indoor swimming pool, a nightclub, a basement tennis court, you name it. In hospitality, it is a business with projections and a feasibility study and goals to meet. They don’t care if I put a gold-plated part in the ceiling or something that looks like a gold-plated part. But the private client would want gold-plated.

  • How did your strategy develop to combine luxury items with mid-range items in your designs of hospitality spaces?

It comes naturally since in most projects no one has an open budget; we are therefore quite skilled in mixing-and-matching a very expensive sofa with a less expensive table and a chandelier that is not a Swarovski one… to create a unique design. If you want a wall covering, I can find you five similar coverings at very different prices.

0 comments
0 FacebookTwitterPinterestEmail
Special Report

The end of Excuses

by Executive Editors
written by Executive Editors

Exactly five months to the day that Lebanon’s last cabinet fell, a new one was formed last month on June 12. The abrupt formation after months of impasse took many onlookers by surprise and the reasons for the long-awaited but little-expected conclusion will no doubt continue to be debated for some time to come. Was it the insistence of Hezbollah to come to terms on how to split the pie, Prime Minister Mikati’s realization that he could not wait for the outcome of the Syrian uprising to see which side he would take, or merely that the daily loss of credibility that came with being unable to form a cabinet of supposedly ‘one color’ was no longer acceptable?

In any case, the Lebanese will have to play the cards they dealt themselves the last time they went to the ballot boxes. Let us not forget that we choose the MPs who voted in the last cabinet, and who chose Mikati to form this one; talking about coups is little more than crying over spilt and rotten milk. But, to see this government and its organs for what they are, and what they can realistically achieve, some deep reflection need occur.

The first order of business is a revision of our political definitions.

In 2005, between the assassination of former Prime Minister Rafik Hariri and our Syrian neighbors kindly withdrawing their army from our lands, we divided ourselves into two seemingly equal and persistently fractious parts. What may have been an apt way to represent the diverging points of view that March should not continue to be the basis by which we see this new government; to do so is to fall into the same duplicitous trap appealing to one or the other of two opposing monolithic ideological constructions. 

Thanks largely to the ever-capricious Druze leader Walid Joumblatt, political movements March 14 and March 8 are now irrelevant semantic exercises. When you actually study the proposed public policies (where they exist) of the new cabinet’s de facto technical policymaking body, the Free Patriotic Movement, they do not differ greatly from the previous government’s policies.

Both advocate private sector participation in electricity and water; neither have real solutions for, or objections to the cartels they control in almost every sector of the economy — evident in the lack of interest in policies that would encourage entrepreneurship and erode the oligopolistic nepotism that sustains inflated pricing.

We should also be realistic about how much can be achieved when we continue to appoint ministers to our cabinets who have kept our economy at the mercy of cabals, affluent family networks and companies. It is not about how monochromatic your political palate may be, but that the same structure will produce the same results.

However, for the first time in a long time in Lebanon, today we have the semblance of a normal political landscape — a government and an opposition — and that is something we should seek to maintain. What the post-Syrian occupation period has taught us is that national unity governments do not work for two very simple reasons: ties to foreign actors trump nationalism and unity of purpose does not exist.

This time, the cabinet cannot point across the table as easily as it has in the past and say things are not getting done because “they don’t let us.” Even if there is sedition in the ranks — and we should expect some given the amount of bickering we have already seen from those supposedly on the same side — this should not delay the key policy decisions that need to be made from now until the 2013 elections.

The measure of this cabinet will be whether it can make decisions, for good or for ill, rather than crumbling from within. The cabinet’s first achievement — the drafting of a policy statement — should be viewed as little more than a publicity stunt; in practice, policy statements fail to represent anything the population can hold a government accountable for (just look at the last one for a case in point).

The next step will likely be to purge the ministries of opposition supporters in “Grade 1” posts and below. Such action is normal in any democratic society — not a “confrontation” as the opposition paints it — and allows the opposition to criticize and appeal to the population while washing their hands of any blame for stalling the implementation of policies from within. It seems clear at this point that the government will not use the courts to go after members of the opposition, most likely in order to keep their own skeletons safely out of sight. Therefore, the only thing that a true opposition would have to fear is if something were to be accomplished and the government received credit.

This will not be easy to come by. Lebanon’s problems are so deeply engrained in the sectarian and administrative system that resolving them will need to confront the very core of the status quo. We should not kid ourselves into thinking that in the span of roughly two and a half years that will happen. But what we can hope for is that a policy framework is implemented so that reform can begin to take place. Beyond geopolitics and the Special Tribunal for Lebanon, the country’s domestic problems need addressing, regardless of which camp takes them on. The onus is on the new cabinet. In anticipation of the direction this government’s policies may take, Executive lays out the framework for what needs to be done.

Lebanon’s problems are so deeply engrained that resolving them will need to confront the very core of the status quo

The Economy

The first order of business will be to make sure that purchasing power remains intact. The Lebanese lira cannot be allowed to devaluate, and that means confidence must be maintained. Executive does not agree with all the policies of the central bank, nor does it support in principle the idea that government officials should hold their positions for close to two decades. However, Riad Salameh, the current central bank governor, has maintained a stable currency, managed several major crises — including the financial crisis and the Lebanese Canadian Bank debacle — enjoys widespread political support and, whether it is based on reality or perception, symbolizes confidence in the market.

His term needs to be renewed, but it should be done so in accordance with legal norms and not ‘moving decrees’ or other so-called legal instruments that skew the already very blurry lines between the executive and the legislative bodies of government.

If the new government is not sworn in by the time the governor’s term is up, there is a mechanism whereby power can pass to his vice governors until the cabinet gets its act together, drafts its trivial policy statement, receives a vote of confidence and votes him back into office. At that point, and only at that point, should he be reinstated.

Once this occurs, the central bank needs to be clear about its policies and how much of the debt it is holding, and willing to hold. The debt cannot be monetized further, nor can the central bank continue to step in to be a market-maker whenever the commercial banks do not feel like pitching in. The logic of debt markets maintains that there is a price to pay for inefficiency and bad policies. Eventually, the government has to be forced to make tough decisions, like those occurring in Greece. The longer we wait, the worse it will eventually become in the end.

It is time for a New Deal à la Libanaise between the state and the commercial banks. We accept that if not for them we would have no stability in our money markets, and this would have a disastrous effect on our economy. But at this point, the interest the government pays to the banks is just keeping the debt cycle running, making the government even more ineffective, and increasing the risk for everyone further down the line.

A real renegotiation, not a ‘Paris IV’, between the banks and their largest obligator is in order now that there is a government in place that should be able to make decisions and follow on through, and there is no better person to negotiate this deal than Salameh himself. As fewer loans go to the government, more should go to the private sector in order to drive the engine that generates fair tax revenues to fund this debt restructuring.

We are not advocating that our industries be privatized, as is being suggested to our Mediterranean cousins by the International Monetary Fund and the European Union. Doing so would require a clear and transparent strategy and a government elected with a mandate — not one that emerged from political collapse. It would require an adequate amount of competition. The scope of service coverage would also need to be ascertained, and that cannot happen when we do not know how many people need to be served, much less what their consumption is. Any privatization would require faith in the institutions that would oversee it, and this is still far off at best.

In the meantime, liberalizing industries such as electricity, water, air transport and telecommunications without selling the state’s assets needs to occur in order to build the platform needed to grow out of the present slump, and to create enough jobs to keep the population from emigrating.

It is unacceptable that we do not have accurate or timely readings of basic economic and social indicators

Concensus on the census

In order to plan for these reforms we will need to know exactly where we stand. It is no longer acceptable that we do not have accurate or timely readings of basic economic and social indicators such as gross domestic product, inflation, poverty, diseases or even the country’s population. The taboo subject of conducting a simple census must be broached and resolved by this government, with questions of sect removed. An accurate reading of residents’ ages, incomes and other essential population statistics are needed before any government can claim it has a public policy. Once this government knows how many people it will need to serve, it can start planning to do so in a realistic and targeted manner. The starting point will be to use what already exists in terms of public policy plans, then improve and implement them.

Public services, taxes and revenue

The electricity plan passed by the last cabinet should be used as the basis for progress in the sector, which must be unbundled into production, transmission and distribution as planned but without its nepotistic elements. Under the current judiciary and regulatory frameworks, private sector participation in the production and distribution of energy will only result in sectarian overlords exercising more control over local populations through distribution contracts and control over production. That is why the electricity law — which establishes an independent regulator —  and others, such as the public private partnership law, need to be enacted and implemented by this government.

The only good thing about the energy shortfall is that there is room to grow in the right direction. Alternative energies such as solar, wind and waste recycling need to be transformed from marketing buzzwords to tangible and transparent industries run by innovators, not sects. If the banks are so keen on ‘going green’, than this is the first energy segment they should fund.

There is no room for waste: all our natural resources must be employed if we are to progress. Our rivers and our seas cannot continue to be dumping grounds for our sewage in a region where water is fast becoming the scarcest resource around. The complications and costs associated with building dams on our perforated geology can only be overcome if we integrate power and water as two industries that are, by force of nature, inextricably linked. Doing so will also allow us to power the plants we need to treat our water so that we do not continue to irrigate our crops with sewage that is creating untold health consequences for the population.

Of course, to build those plants and dams we will need a constant flow of cash and that can only come from one place: the people. Continuing to rely on the debt markets may be an easier and more politically prudent option, but a fair and efficient tax regime is the only way we will ever achieve a just and sustainable solution to our cash flow problem. It is time to wake up to the reality that taxes and fees for public services will need to rise or we will never be able to reform them. This will have to happen gradually for political, technical and social reasons but this government will have to be honest with itself and the people that the days of paying and receiving next to nothing in regards to essential public services are over.

It is simply unfair and unproductive to tax the rich and the poor indirectly through value added tax and excise taxes, while making excuses about a lack of infrastructure to impose or collect progressive and direct income taxes. People need to feel like they are paying for government in order to get angry enough to hold it accountable when it squanders their money. The culture of indirect taxes that has taken hold of this country has separated the people from their government while putting holes in their pockets.

As such, this government cannot continue to view telecommunications as a cash cow for the country. An indirect tax rate of 58 percent on phone bills is not a proper way to fund a government. Instead, the current telecommunications law needs to be applied, in full, and the private sector needs to be allowed to participate on an equal footing with the public sector. If there are parts of the law that need to be amended it can be done through a legal process. The need for such amendments should not be used as an excuse to skirt the obligation of implementing a law that comes from the elected representatives of the people.

With such reform, taxes in the sector could be shifted from being a burden on the consumer to a cost of doing business for private companies that compete against each other, and in so doing lower prices and provide more far-reaching services. The people, not the politicians and their companies, should get something out of privatization if it occurs. There is nothing wrong with a public share of the telecom industry — the same way there is nothing wrong with a private share — so long as the sector works for the people and their businesses and not for the interests of the zaims.

Once these basic elements of a modern economy are in place, the jobs needed to stem the brain drain will appear. But that will not be enough. The most elemental economic responsibility of any government is to create decent work for all citizens. This cannot be done without a national strategy for job creation from school to the workplace. That strategy must be as realistic as our expectations are for this government. Not everyone can be an employee in a high-value knowledge based industry. Some will need to be employed in vocational and industrial jobs, which are no less meaningful or important to the progress of the country.

The first element of that national strategy will need to involve a break with old habits. The government cannot keep funneling the poor into the army and the security services. It must create viable alternatives.

Similarly, qualified people should no longer be discouraged from working in the public sector. Our ministries and administrations are not tools for this government to practice patronage and a sectarian division of favors for votes. This government must formulate a strategy for civil service reform that is fair to those who have dedicated their lives to serve the nation and those who suffer from the lack of services.

The unqualified need to be trained and the incompetent need to go to make room for those who can do the job and deserve their position. Only then may we rightfully be able to expect a decent level of service from our public institutions.

People need to feel like they are paying for government in order to get angry enough to hold it accountable

The courts and corruption

Without question, these national strategies will mean nothing if they are not implemented and if the government is not held accountable. Despite suggestions to the contrary, it is not up to ministers whether or not they apply the laws.

The vote of confidence they receive from the Parliament obliges them to abide by the will of the people. The reason they have not done so, or have done so selectively, is the judiciary is so inefficient and politicized that we must rely on international tribunals to take up Lebanese affairs.

In order to address the problems of a judiciary that is anything but just, combating corruption must be a priority. The basic institutions for combating corruption have consistently been ignored by every post-civil war government to date, barring the implementation of one now-defunct presidential complaints office and a committee no longer in place.

Basic institutions, such as a national anti-corruption body and an ombudsman office, are essential, but so too is the reform of the current oversight bodies such as the Court of Accounts, the Civil Service Board and the Central Inspection Board. As long as these institutions and their budgets are assigned and overseen by the Prime Minister’s office they remain vulnerable to coercion and manipulation.

Learning to stand

It is naïve to think that all these basic elements of responsible government will be established by a cabinet that is manned and controlled by ex-warlords and businessmen with vested interests. But we should at least expect be moving in the right direction.

What many do not realize is that the larger issues — Hezbollah’s weapons, the Special Tribunal for Lebanon and sectarianism as a whole — are linked to a dysfunctional economy and government. A small country constantly subjected to barrages of local and international interests will struggle to protecting its national interests. But some geographically susceptible countries — like Singapore and Switzerland — have protected themselves by creating a strong and sustainable economy, which they use to shield against outside political manipulation.

Whether we can achieve such a reality will depend on how much the Lebanese are willing to accept the excuses that will, in all likelihood, arise when the tough decisions need to be made. As with the last government, it is entirely possible that this new government will attempt to hide behind concocted alibis and scapegoats to justify the continued ineptitude of the Lebanese state.

But before jumping to criticism, the new government is entitled to an opportunity to prove itself — give them a chance to do their job. And if they do not, at least we now know, without doubt, who to hold accountable, because there are no excuses left.

The larger issues – Hezbollah’s weapons, the STL and sectarianism as a whole – are linked to a dysfunctional economy and government

0 comments
0 FacebookTwitterPinterestEmail