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Q&A with economist Freddie Baz on Lebanon’s economic survival

by Thomas Schellen
written by Thomas Schellen

In discussing Lebanon’s economic survival, some local opinion makers and economists have been making nothing but dire predictions since the fourth quarter of 2019. Executive wanted to take the perspective of Freddie Baz, a Lebanese economist, banker, and citizen who has for over two decades been a regular interlocutor of this magazine on banking and economics. The interview has been substantially edited for brevity.  

Although you are not thrown around by the Lebanese storm as some of the people, one could regard you as an observer in the eye of this storm. Knowing that you are someone who has been an economist and strategist in banking for more than half of your life, and knowing that you are a direct witness to the destitution of the people living around you, how does it feel for this economist to sit in the eye of the story and see all this happening? 

It is obviously very, very sad. It is very sad when you look at the lost opportunities in this country. When I was looking at figures and numbers in preparation of our meeting today I found out that since the late Prime Minister [Rafik] Hariri assumed office for the first time in 1992 until the end of December 2019, Lebanon has got $280 billion of cumulative inflows. We could have built a second Singapore, and probably would have needed less [than that amount] to build a second Singapore. We have spent all of this on consumption and imports. 

But does this mean all of us collectively, or is there truth to allegations that there was this or that political figure who imported luxury cars or some economic decision-makers who were solely responsible for all what the country spent on consumption and imports?

If we go into breaking down responsibilities, there are obviously different levels of responsibilities. Being a banker, you are much more responsible than if you are an entrepreneur. Being an entrepreneur, you are much more responsible than a freelancer for the business that you are running. But being a central banker, you are also much more responsible than a banker. Being a minister of finance, you assume different types of responsibilities than a central bank governor. Being prime minister, being speaker, being president… 

One can go into details and examine how the responsibilities should be broken down but if you look in parallel at how much [money] all those successive governments in Lebanon have had since 1992, how much they have spent, we are talking about $250 billion. For what? When I say I am a top-down analyst for Lebanon, it is because for me the main problem of Lebanon is to have never succeeded in building a nation-state. Unless we succeed in building a nation-state, whatever we do, and even if we were to get again $400 or 500 billion [in inflows], and even if the government spends hundreds of billions, we will not reach anywhere.  

What has the role of the monetary authorities been in the context of this absent nation-state?

The monetary authorities by law have a lot of independence and they were supposed to define independent monetary policies. What I mean by independent monetary policies are policies that serve the economic targets of the government. But none of the previous governments have ever had any economic policy or set any economic targets. Have you ever heard about a GDP growth target? Have you ever heard about a headline inflation rate target? Nothing. But instead of volunteering to highlight this to the government, instead of building independent monetary authorities that are serving the purposes of currency stability and [preserving] the purchasing power of people, monetary policies have been accommodating to serve completely distorted financial policies. 

You referred to the financial engineering of 2016 as a turning point of the Lebanese narrative. Have there been one or many turning points that one can point to, for example such difficult and controversial decision points as the initiation and continuation of central bank stimulus packages in much of the past decade?

Every single year, the IMF used to tell [the governor of the central bank, Riad Salameh], “You have to stop this and get rid of it.” But it was serving the purposes of failing politicians. There are definitely many question marks, Thomas, but in my opinion, the biggest error of the monetary authorities—talking about them as an institutional body, not as one person—is that they are responsible, as per the Code of Money and Credit, for two main targets: the currency stability and the financial standing of the banking industry. The focus has almost exclusively been on the first target, and it happened that overdoing it [on the first] was at the detriment of the second target. 

And in terms of talking about governance—because what we are now talking about is the lack of good governance—the issue is that by law, the Banking Control Commission (BCC) is independent from the central bank. They are only administratively linked, so they are on the payroll of the central bank and are occupying offices within the building of the central bank. They have, however, a great if not total independence in executing their job. And at this level too, many things have been accommodated. If one wants to expand on where the responsibilities of bankers start and end—this is linked to the responsibility of the watchdogs supervising them and setting rules and regulations. 

When I say watchdog, you have the central bank and the BCC, but you have also the auditors. To be fair, in every single year in the audit reports, which are public, there was mention that banks are in breach of, I believe, article 156 of the Code of Money and Credit, which imposes a good match of assets and liabilities in terms of duration. Those reports go to the BCC—which never did get back with imposing sanctions or penalties or short delays. Why? Because the reason for this mismatch was to accommodate financial policy by the state, to acquire [treasury bills] and eurobonds, which have much longer maturities than the average life of deposits. 

Over the past few years, we witnessed a stream of fake news and economic conspiracy tales but there was very poor interest in really understanding the Lebanese economy and the banking situation. As of today, there is much academic interest and media interest. At the same time it seems that one cannot be entirely sure about the quality of simplistic and repetitive but uncorroborated media reporting or even the quality of some populist academic analyses. Is it not also adding to the problem and perception of the crisis as it presents itself today that there is a large number of pseudo-economists in the country and that one cannot feel assured on the quality of populist analyses and even some long-distance academic opinions on the very complicated Lebanese situation with its many financial and economic intricacies? 

There are some people who appear nearly every day on television, sit on panels and challenge people who are much more knowledgeable. Also on social media you have a lot of people who have become very popular, people who have no track records. They have excellent writing skills and excellent talking skills. They write funny articles that one enjoys to read and they know how to present themselves on TV as super knowledgeable financial analysts and economists but when you look at their track record, you see that they have been asked to resign from previous jobs because they were totally inefficient. They were responsible for small jobs in small institutions—and today they are icons. 

When I asked you if there was overvaluation of the lira in 2018, based on some assessments by currency strategists at some international banks, you said it is not much overvalued. This was something where I thought that we were differing in opinions.  

You know, at that time the IMF was saying that there could be overvaluation of 13 to 14 percent but the IMF did not say at that time that the lira could reach [a rate of] 10,000 or 15,000 to the dollar. A real effective exchange rate is very difficult to estimate. The IMF are the only technical experts who do this but every year they put it with a lot of reservations—and they don’t give you a figure, they give you a range. This is just to tell you how much of a critical exercise this is. I did my thesis at the Sorbonne with Raymond Barre. He used to tell us money is about perception, it is not fundamentals. Currency is perception, not fundamentals. 

To answer the question about what I told you two years ago, if you came to see me at a point in time when Lebanon was getting $16 billion of yearly inflows, I definitely would say this is a major support to the real exchange rate. This would have determined my opinion regarding overvaluation. But then you will tell me: “You are not assessing the value based on the fundamentals, you are assessing it on the basis of inflows.” Things are different when you have a real economy or when you depend on the diaspora. [However], we would have agreed that [the lira] is not overvalued by a large amount. It all depends on the question: Are the grounds [that we were standing on with the lira peg] solid? No. But still those inflows were supporting the real value of the currency. 

The assessment of the overvaluation in 2019 and 2020 was indeed a totally different ballgame. But what created the conditions that led to the total meltdown of confidence? With my humble capacities I got stuck looking at it under the framework of Hyman Minsky’s Financial Instability Hypothesis.

Let me say something to make things more precise. Banks have placed a lot of money with the central bank but without being overly curious to see how this money was being spent. But knowing that the part of this money [which was committed to] financing the state is limited, there is a confusion. It is not that banks were placing customer deposits in hard currency at the central bank knowing that of every dollar we were placing at the central bank, 60 or 70 cents would go to financing the government. What was the amount of eurobonds held at the central bank? $7 billion. The central bank was buying TBs in local currency while the issue today is about a financing hole in hard currency, a hole that was not necessarily used to finance the state.

What created the hole then? 

In my opinion, under the Minsky definition, the central bank was paying 6 to 7 percent on average on USD deposits, so if you have $80 or 70 billion, or two years ago, $60 billion, that makes $5 billion of yearly interest [payments]. There also was other spending. I have done some calculations on the turnover of financial engineerings. If you look at four items from end-December 2015 until end-December 2019, [namely] increase in bank deposits in USD, the reduction in bank loans in USD, because this is a new liquidity that has been generated, the reduction in banks’ liquidity with their correspondents abroad—the real BIS [Bank for International Settlements] liquidity as they call it—and at the reduction of banks’ eurobonds portfolio, it gives you an idea about the real liquidity generated by banks that has been used in the financial engineerings. You have four assets that have decreased and been replaced with one asset, which is deposits at the central bank—we are talking about $36 billion cumulative in the period from Dec 2015 to Dec 2019. When you look at the [net foreign assets], NFA at the central bank in Dec 2019 grew by $300 million with respect to Dec 2015—I am talking about the period of financial engineering. There was a turnover of $36 [billion], which should have propped up the NFA. But obviously everything that the public and private sectors have received and paid as dollars is embedded in the [BOP, balance of payments]. We have an adjusted BOP deficit that has conceptually consumed $14 billion dollars of the NFAs of the central bank. There have been $4 or 5 billion in cash withdrawals, people hoarding at home. Banks took this money from the central bank, so deposits have decreased.  [Adding] 14 and 4 is 18, [accounting for] $18 [billion] out of $36 billion. Where are those [$18 billion]? The answer for me is that most probably a big part of the financial engineering did not translate into new cash generated as much as it was rolling over [and paying out interest on] existing deposits that were maturing. But unfortunately at a high cost. 

Are we then in an episode of hyperinflation? 

Yes, of course. We are in hyperinflation because the price structure is today benchmarked on the parallel market rate—which is, in my opinion, wrong. The minister of economy should have taken steps [to regulate] how people are billing today, invoicing today. In our case, hyperinflation is imported, it is not locally induced.

What is the definition of hyperinflation? I was under the impression that it is 50 percent inflation per month. 

The 50 percent per month, which leads obviously to high three-digit increases on yearly basis. This is the definition. 

So where do you see inflation go by the end of 2020 or in 2021? Can one have a rational expectation? 

For me, that is as if you are asking to give my views on the exchange rate. When you convert your new prices denominated in local currency at the parallel market exchange rate, then they are almost the same, or some prices in USD have decreased. 

But there is a very important point [about dollars created in Lebanon], which very few people understand. In 1992, at the start of reconstruction when Hariri came and brought new prospects, we had $4,370 million dollars of resident deposits—$4.4 billion. By April 2020, we have $88.9 billion. People believe that the process has been auto-nourished by interest—but this is wrong. If you take the average yearly interest rate on USD, the $4.4 billion of 1992 deposits would have become $10.3 billion today, at the real average weighted rate of 4.5 percent over the period.

What contributed to the increase in resident USD deposits—if a country allows this, and Lebanon allows—are the cumulative surpluses of the BOP. Over this period, we have $20.5 billion of contributions from BOP [money brought into Lebanon and deposited into local bank accounts]. When I calculate 88.9 minus 10.3, which is the accrued interest, minus 20.5 which is the real contribution of the foreign sector, what remains is $53.6 billion. Those have always been Lebanese dollars since inception. It is not that these used to be real dollars and are lollars today. The people talking about lollars do not understand the principle of credit multiplier in USD. Loans create deposits. Not deposits make loans. 

It was one of the errors of the governor that he promoted dollarization and always tried to consolidate it and push it even farther. When you tolerate lending in USD, then you provide banks with the power to create Libano dollars, as we labeled it in the early ‘90s. When you tolerate the credit multiplier of lending in USD you create deposits in USD that are produced in Lebanon. Those $54 billion have from their inception been produced here in Lebanon. Let’s say you come to me, the banker, and ask for a million dollars to build a factory. This million is broken down in three parts—$300,000 to buy the land, $300,000 for constructing the plant, and [$400,000 as] money to obtain raw materials etc. When you buy the land, the owner gets a check and deposits it. This loan that I have created has generated a lot of waves of Libano dollars. When you see loans in USD, they used to be $2.1 billion [in the early ‘90s] but reached $24.9 billion  of domestic loans in foreign currency in April 2020 , out of $39 billion total loans, resident and non-resident in all currencies. So [advancing] from $2 [billion] to $25 [billion], the [loans] increased by $23 [billion], times the credit multiplier, which is 2.4, this is what has generated those $54 billion Libano dollars. So you are not 100 percent eligible to transform this into real dollars either by transferring it abroad or transferring it locally into cash. 

The system works as long as you have enough of a monetary base in USD. This monetary base is the liquidity that central banks maintain abroad, meaning real liquidity that some call BIS liquidity [in reference to the Bank for International Settlements, the Basel-based organization of the world’s central banks]. What happened in Lebanon was that hoarders of Libano dollars were allowed to transform them into real dollars. As long as you have 20 or 25 percent of your resident US dollar deposits [in form of] real BIS liquidity, you can manage. But when the ratio goes to 12 or 10 then you have an issue. It is true that you still have 8 or 10 percent, but what if there is a lack of confidence and all the owners of Libano dollars want to convert to real dollars? That is why in an interview in October 2019 I urged the central bank to immediately stop domestic clearing [meaning to withdraw from facilitation of dollar-denominated transactions among Lebanese financial institutions] in USD. It was still a good time before the total fall of confidence, and it would have provided much more flexibility. 

What is your view on capital controls? Are they coming in at any moment and how can they help us?

I used to criticize the government for handling the situation as if the remaining stock of real reserves, the strategic reserves for fuel, medicines, wheat is [all there is]. [This means] acting as if we need to optimize the use [of these reserves] and have no prospects for any replenishments. This is the worst situation, because if you start thinking like this, you forget about any means or way to replenish and adjust. I hate this. But today, with respect to the reality of them doing nothing and, as matter of fact, having seen that the recent visits of presidential envoys to the Gulf did not bear any fruit … [this door for seeking replenishment appears to be shut].

I was trying to analyze monetary flows over the last five months because the central bank has just published the May figures. Just to give one meaningful example, total deposits decreased by $12.7 billion in five months [Jan to May 2020]. This is slightly higher than the full year 2019, which saw [decrease of] $11.3 billion. But when you look at the breakdown [of the 2020 decrease], $9.4 billion is coming from resident and $3.4 [billion] from non-resident deposits. In parallel, total loans decreased by $6.8 billion. Loans [generate] deposits but redemption of loans decreases deposits. Obviously, when you pay back the loan and it is not renewed, this is destruction of currency. Looking further at resident and non-resident figures, $3.4 billion of the deposit decrease [occurred] in the non-resident part, in a context of only $300 million of loan decrease. This money most probably left the country. You obviously have to put up a barrier. As long as you are not considering your available resources, you have to put an end to any leakage with capital controls today. We are talking in terms of months of survival. 

It is critical [to have capital controls] but in my opinion it is not enough because what I said also last year in November, was that Lebanon needs to put quotas on imports. You do not only place capital controls on money outflows. You have also to put quotas on imports. In the first five months of this year, imports decreased by 46 percent when compared to the similar period of last year. But we still had $4.3 billion of imports. It seems that fuel, medicine, and wheat represent 50 percent of this amount. This means there are many things that are still being imported but that are not essentials. I got some mails yesterday from wine shops that told me that they got new arrivals of French wine. Or let me take the example of the blue cheese that you like. It is a luxury. When you put a quota on imports, those imports will not be allowed at this time. In my opinion, we need to manage our external financing needs wisely by limiting them to the minimum, [which] also means quotas on imports, especially [luxuries].

So you say we need capital controls and import controls?

Of course. During the transitory period. 

For how long in your opinion?

In my opinion, you have to implement capital controls for five years minimum. If you want my deep belief, no prospects before ten years. There are 115 billion of Libano dollars today in the banking sector. If you take the central bank net reserves and add the liquidity of banks with their correspondents abroad which is still available, and deduct all correspondent banks’ deposits still existing in Lebanon, you get $14.4 billion at end of May versus $115 billion of total liabilities in USD in total banks. If you remove the capital control after one year, what would happen? 

What is your view on the divergent financial assessments between the government’s plan and the plan of the parliamentary committee?

The issue for me is not the loss assessment controversy of LL240 trillion versus LL120 trillion, as long as whatever assessment you take represents a multiple of financial system equities. We are technically bankrupt. But to be fair, the assessment of the government and their advisors is much closer to reality. But the major discrepancy and issue for me comes from the spirit of both plans. The government drafted its plan with a resolution spirit. The commission answered with a plan that has a recovery spirit. These are legal terms, and there is a major difference between resolution and recovery. Every bank by law needs to provide the Banking Control Commission every year with a recovery and resolution plan. Recovery plan is when you are facing a major challenge but still have the means, although costly, to adjust. Resolution is when there is no recovery possible and you have to sell a subsidiary, add immediate capital, or are forced to merge. The government drafted a plan with a resolution strategy whereby the other [plan] says that with time, things can be managed. As an external observer who is also an insider, because I know not only the banks but also the economy very well, nobody of both parties has convinced me about their idea. Because nobody in his plan—when saying these are the losses and this we should move to clean up the financials and restructure—addressed what will happen one day after [this process has been done]. If we do the write-off of shares and the bail-in through depositors, we will get debt to GDP to a sustainable level and the central bank balance sheet will become clean, and the Lebanese banks will become a good bank. I reduced my assets and my liabilities, and all my liabilities have been converted and frozen into assets, meaning higher quality but frozen. So I don’t have liquidity. 

To use the banking system again, in order to make the economy take off, for me there is something material which is missing: We need to get new liquidity in order to pay back depositors and launch new waves of productive loans in order to have this economy lift off. Nothing of this has been mentioned. 

What do you think of other plans, such as the plan of the Association of Banks in Lebanon, that seem to be competing with the government plan and the plan by parliamentary commission?

I believe that the parliament and the government have discussed closely with the central bank and the ABL. The spirit of the document of the parliamentary commission reflects the ABL and the BDL [perspectives]. I position myself toward something different. 

The bottom line [of two earlier reports by IMF and World Bank is that] in order to create 60 or 70,000 jobs a year, and catch up with the upper range of middle-income countries, Lebanon needs between $15 and 20 billion of yearly investments over ten years. [We need the] nation state, and we need as soon as possible to agree on two very strategic MoUs—one I will call defense strategy between the state and Hezbollah, because this reality cannot help Lebanon attract any foreign investment, which today is at the heart of the problem. We have to solve this duality and I am talking political economics, not politics. We need to favor an environment capable of helping Lebanon attract investments.

The second MoU I will call a new social contract, but between real output partners. Not a social contract from a political standpoint. We need to assemble together economic associations [and] labor unions, under the sponsorship of the state, and as the observer civil society, which can help adjust policies because of their power in order to define a new social contract whereby each party has to agree upon the level of sacrifice that they need to make—I won’t recommend reducing real salaries but people will need to work more for the same salary. Likewise, entrepreneurs need to accommodate much lower [internal rates of return] on their investments in order to help the machine to take off. 

This sounds like things that are doable if you have the right spirit.

You need good people, you need a good government, you need a nation state with [all its functioning institutions]—you need citizenship and governance. We also need to have very strong planning and thoroughly assess our competitive and comparative advantages. God provided us with many advantages in terms of geography, geology, and human resources. We need to build on those comparative advantages. There is a lot of talk now that we need to promote export industries, yes, definitely, but in my opinion the priority is much more on the level of import substitution—we need to promote import substitutes.

What do you think on the subject of bank restructuring? Will it happen, can it happen? Is there a formula? 

With respect to the materiality of the problem, there is going to be a huge restructuring which would require fresh money. [Restructurings] require fresh money and under the current conditions I don’t see any possible appetite or interest from whatever investors to come and inject money. First of all, I believe that everyone who is responsible, should pay. It is very difficult for me to say this because I have been a member of management and it is a responsibility from anything I did. But I have been consequent with myself [and my principles] when I resigned because I had divergent views with my colleagues on how to go forward. 

When I decided myself to quit at the bank, there were no prospects of the additional problems [that happened later in 2019]. When I made my decision, it was only based on what I have seen as normal development with respect to all those accumulations requiring adjustments in strategy and asset utilization, without the sufficient leverage to make things happen. So I have decided to withdraw although at the time when I decided [this meant] big sacrifices of position, authority, and also money. 

But we are talking about governance and now are focusing on banks, we need to restore, as quickly as possible, very strict governance of banks. This is a necessity.

This includes the central bank, its governor, and all the boards of banks and the managements? 

I don’t personalize and I believe in the sacrosanct principle of innocence until proven guilty but in my opinion it is clear that there are super-negative vibes toward the governor [coming] from politicians. This has expanded to civil society. The governor has become a target. The governor’s main added-value in the collective sub-conscience was that he was guaranteeing the stability of the currency. As long as the currency is collapsing today and there are those negative vibes, why we are still [not acting for change]? Probably a change to a new style, new approach, new name, this is part of the countenance to restore. 

How about the protection and preservation of jobs in the banking industry? Are we looking at a significant contraction? 

There is progress toward negotiated layoffs, which is the opposite of what is happening elsewhere, and [happening] so far to acceptable levels. There are plans for 200 or 300 employee [layoffs] at big banks. We are talking about a banking sector with 26,000 employees. I won’t be surprised to see a 10 to 15 percent reduction. 

Do you see a rebuilding of the banking industry with regional offices and subsidiaries abroad, or perhaps by bringing in foreign banks? Why would foreign banks be interested in coming into Lebanon?

Which foreign banks? They all left Lebanon. In my opinion we need to consolidate but under today’s Lebanon political conditions and embargo at all levels, consolidation will add losses without necessarily generating savings. We need to have fresh capital in order for consolidation to make sense. What is needed is to generate real savings. As long as staff represents 60 percent of expenses, real savings come from staff, as there are overlaps of highly paid c-levels, of branches, and duplications of subsidiaries. But there also are large impairments and I am not sure that financial synergies coming from mergers would by themselves be enough to offset the impairments. What is needed is to restore the ability to get new, fresh money in order to be able to launch new waves of good loans. 

What do you think of the project of a banking restructuring commission at the central bank? 

I don’t know about the people [that have been appointed]. I don’t know how much experience they have in this field. I have worked on a lot of [acquisitions and consolidations] and know that this requires a lot of skills and knowledge.

Will the forensic audit of the central bank provide a turning point? 

The connotation is not good. They are focusing on the central bank as if this is where the problem is and where you smell ‘onion and garlic.’ The successive governments as I told you, from 1992 until last year, spent $250 billion in aggregate. Two different knowledgeable ministers [in the previous government], representing two different political parties, Ghassan Hasbani and Ali Haj Hassan, said several times that the magnitude of waste and corruption in Lebanon represents 11 percent of GDP (Hasbani) and represent $6 billion (Hassan)—which corresponds to 11 percent of GDP (at the time). If we take the cumulative formal GDP of Lebanon from 1992 until today, this is $820 billion, 11 percent [of that] is [over] $80 billion, $84, 85 billion. 

We [furthermore] did a lot of analyses on the revenue gap in the budget, the main component of which is tax evasion. A lot of Lebanese are good tax payers but there are many inefficiencies that relate to the fiscal administration. This is another 9 percent of GDP. So what is the aggregate foregone income, which relates to corruption, waste, and uncollected taxes and revenues? $160 billion. 

Now I will start with my forensic audit at the level of the public administration of Lebanon, because the $250 billion that have been spent over 28 years, to see how much each ministry has spent and how it was spent in order to see how we can recuperate part of this. We also have to do the forensic audit of the Ministry of Finance: Why there are $80 billion of uncollected revenues over 28 years? Include the central bank, because nobody can argue against the growing opacity in central bank accounts over at least the last ten years. I can understand that the government is asking a new company to do a new audit of the central bank but it would have been much more eloquent and rational for the government to ask for a comprehensive audit of all public administrations, ministries, and funds that report to the prime minister. To start with just a forensic audit just of the central bank is pretty bad.

Every proposal for the rescue of the economy included some form of public asset management fund or defeasance fund. How can one in the current period of economic crisis and global recession reliably evaluate assets for such a fund, especially assets of supposedly revenue generating state-owned enterprises? 

Numbers need to be adjusted with respect to recent developments but it is not a very difficult exercise. Normally valuation for a company like Middle East [Airlines] is based on EBITDA [Earnings before Interest, Taxes, Depreciation, and Amortization] and reconfirmed by net asset value. But the issue for me is the principle itself. I don’t understand populists who are saying that the assets are the people’s assets. You cannot say that the public assets belong to the Lebanese population and cannot be touched, [but argue] as if the national public debt of Lebanon is not a burden of all people and impose on others, which are the big depositors, to pay our debt—this is ridiculous. 

What is the quality of our assets?

I personally believe that the net equity position is negative, even if I include the net present value of oil and gas at the initial level of reserves that has been [announced]. As per my calculation, at £93 billion of debt today and minimum $5 billion of arrears, which are not included in the debt, the net position is negative. Assets do not allow to cover [this debt] but if allocating a part of assets can help safeguard depositors’ interest in banks, I will do it. The central bank is holding public debt that it is not supposed to and the [discussion is] to write off the government debt and for the government instead to give assets to the central bank. Those assets will allow covering the gap between bank deposits and remaining resources and we can start talking about how we can pay over time, in order not to affect depositors. Banks can then negotiate with depositors. You need to be innovative. But whatever else we are talking about, Lebanon needs immediately about $20 billion to $25 billion of fresh liquidity. If we don’t get this, nothing works. No consolidation of banks, no debt restructuring, no central bank balance sheet cleaning.

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Beach clubsBeach resortsHospitality & Tourism

Lebanon’s beach club operators discuss summer 2020

by Nabila Rahhal
written by Nabila Rahhal

On May 31, when beach clubs and resorts were given the green light to open for the season, following the government mandated COVID-19 lockdown measures, operators of such properties were faced with a dreary grey seascape.

Not only did they need to learn and invest in new sanitization protocols in an attempt to severely reduce the risk of exposure of their staff and clients to the pandemic, they also had to deal with the implications of the ongoing economic and COVID-19 related crises in Lebanon. 

On the demand side, these implications included less people willing to spend on leisure, because of their collapsing purchasing power, and some avoiding crowded places, even if outdoors, for fear of being exposed to the coronavirus.   

On the operational side, the increase in the foreign exchange rate has meant an increase in almost all the costs beach clubs and resorts incur, including diesel for generators and chemicals for pool hygiene.

With this in mind, Executive met with some of Lebanon’s beach club and resort operators to understand how the current situation is impacting them and the ways in which they are adapting.  

Paying the price of a swim

While there are several public free beaches along the Lebanese coast, such as the ones in Sour in the south or Anfeh in the north (see Executive’s 2018 coverage on public beaches), the majority of the shoreline is taken up by private beach clubs (private properties where customers have to pay a fee to access the pool area and services) or resorts (a similar concept to a beach club but with a hotel on the premises), both of which charge entrance fees.  

Those fees have been gradually increasing over the years. Back in 2015, Executive reported that the average entry fee for a beach club in Lebanon was LL40,000 on a weekend day. In summer 2019, according to the beach club operators Executive spoke to this year, average weekend day rates were LL45,000.

Damour Beach Club / Photo by Greg Demarque

This summer, three of the six beach club and resort operators Executive spoke to, Sporting Beach Club in Beirut, and Lazy B and Pangea Beach Resort in Jiyeh, say they have increased their entry fees by LL5,000 (meaning LL50,000 during weekend days), an 11 percent increase from 2019 and a 25 percent increase when compared with 2015. Comparing these price increases to the Central Administration of Statistics’ Consumer Price Index (CPI) in the same period underlines the difficulty businesses have in matching admissions to rising costs without becoming unaffordable for potential clientele. Between 2015 and 2019 the CPI had only increased by 14 percent (from 97.22 at the start of the summer season in June 2015 to 110.69 in June 2019) in line with the price increases at beach clubs and resorts, but between June 2019 and June of this year, the CPI has jumped up by 87 percent (up to 206.83)—had admission fees followed suit they would have been as high as LL84,000.   

Operators Executive spoke with say they will not be increasing their entry fees any further this summer, for fear of discouraging customers from visiting. “We are not going to play around with these prices at all this season,” says Waleed Abu Nassar, partner at Sporting Beach Club. “Because at the end of the day, the client that is coming to the beach can only afford to allocate this much money for a beach outing and he or she needs to allocate the rest of their money for their other expenses, especially if they have kids or families.” Following the same line of reasoning as Abu Nassar, some resort managers opted to not increase their entrance fees at all this season. “We did not increase our entrance fees because we know that the demand this season will not be as high as previous years and we wanted to encourage customers to keep on coming,” says Slavy Ghazal, director of sales and marketing at Coral Beach Hotel and Resort in Beirut. “Let others increase their prices if they want to and we will attract more business that way (laughs).” 

Sweetening the deal

Considering the current dismal economic situation and the competition among beach clubs and resorts, operators have implemented different strategies to attract clients to their waters.

Eddésands Hotel and Wellness Resort / Photo by Greg Demarque

Resorts Executive spoke with that had existing membership plans that allowed customers to buy entry passes valid for the season and save some money, either did not increase the package price this season or lowered it in hopes of developing loyalty among their clients. “Our four-month seasonal membership was for $500 [last year] but we made it for LL500,000 this season,” says Lazy B’s owner George Boustany. “We did this to encourage people to keep visiting the beach and to create some sort of loyalty scheme. With this kind of offer, we should have had hundreds knocking at our doors but the reality is not the case. It’s a very tough year.” 

Hussein Charafeddine, owner and operator of Pangea Beach Resort in Jiyeh, says he offers 50 percent discounts on entrance fees to the resort through GoSawa, a platform that features discounts on various local experiences. He says 2,500 people have purchased the GoSawa deal so far in the season (mid-July) noting that they have until the end of September to redeem it. Charafeddine says this is so far “much less” than the number of people who bought the same deal last season, although no exact figures can be shared until the season ends. 

Some resorts followed the strategy of keeping their entrance rates the same as the previous season but increasing the price of services within the property, such as the price of massages or access to VIP areas. “We went into market survey to compare places that are a bit similar to us in terms of service and we saw that they did some changes in the price of the menus but kept the entrance fee as is,” says Walid Yammine, general manager of Eddésands Hotel and Wellness Resort in Byblos. “Keeping it as it is means they want people to enter the place and then, whatever they spend in there will be good. You would have attracted them to your place with the price.” Eddésands has kept its weekend entrance fee at LL50,000 but is promoting its VIP area, at an additional LL100,000 per person, and its cabanas (cabins with private hot tubs that customers can rent for the day), which run for LL850,000 on a weekend for ten people—eight of whom can access the resort without paying an entry fee. 

A lonely shore

Despite all these efforts, the number of guests frequenting beach clubs and resorts is roughly half of what it was last year, according to all the beach club and resort operators interviewed for this article. “This year, on a busy weekend day, we get 300 to 350 people at most. Whereas last season we had up to almost 800 customers at times with an average of 700 on a weekend day,” says Pangea’s Charafeddine. 

Pangea Beach Resort / Photo by Greg Demarque

Last summer the airport was operating normally, this has not been the case this summer season due to COVID-19 restrictions and was bound to affect visitor numbers to beach clubs and resorts. At the time of most of these interviews, the airp on a busy weekend day, we get 300 to 350 people at most. weekend day, we get 300 to 350 people at most.  Whereas last season we had up to almost 800 customers at times with an average of 700 on a weekend day,” says Pangea’s Charafeddine. 

In June, the airport was still closed—its reopening on July 1, according to Boustany, led to an increase in the number of visitors to beach clubs and resorts but still not comparable to summer 2019. 

This drop can be primarily explained by the economic situation. “The economic situation played a big role in the dwindling numbers,” says Sporting’s Abu Nassar. “Those who are coming to the beach club, and who do not have businesses outside of Lebanon are, in my opinion, living in denial.”

There are also other reasons for the decrease in the number of beach clubs’ customers. To begin with, road closures and protests on weekends—both in the north and south of Beirut—made a comeback once lockdown measures were eased, starting early June and were still frequent at the time of interviews in early July.

Such occurrences make people think twice before venturing on the road to beach clubs relatively far from their homes. “We remain heavily affected by road closures since our opening on the first of June,” says Michel Abchee, CEO of Damour Beach Resort sal, which owns and operates Lost at Sea and Damour Beach Club, in an interview early July. “You cannot build tourism while you are closing the roads almost every day, but you cannot but close the roads if people are hungry and are not getting their salaries.”  

Lost at Sea / Photo by Greg Demarque

Road closures aside, traffic congestion on the highway connecting Beirut to the north—especially in the Nahr el-Kalb to Adma stretch—is a long-standing complaint made by beach club and resort operators in the area and one that has shown no signs of abating. “Another [challenging] factor is the traffic back and forth to Beirut: On Saturdays, because people are not worried about traffic going back to Beirut, they stay until 8 p.m. and have dinner at our restaurant. But on Sunday, you will notice that people start leaving the place at 5:30 p.m. or before to avoid traffic,” says Yammine, who explains that Eddésands’ clientele are mainly from Beirut.  

The value of a hotel

Although customer numbers were low overall, resorts fared slightly better than beach clubs because of the presence of a hotel on the premises.

Since most Lebanese are unable to travel this year (because of COVID-19 related travel restrictions and limits on their local credit cards), those who can afford it are opting for staycations instead. “When you are Lebanese and are in Beirut—and can afford it—and you are starting to really psychologically collapse because of the lockdown and you used to be in the south of France or Italy or elsewhere every year around this time, for you to have Eddésands, it is paradise. We have guests who are staying weeks and months and we are fully booked at full price,” says Roger Eddé, owner of Eddésands, which has 20 rooms in total, between the boutique hotel adjacent to the beach club and the three suites on the beach club itself. 

In line with Eddé, Ghazal says 60 percent of the guests in the 98 rooms of Coral Beach are long stayers—mainly Lebanese expats who came home for the summer and benefit from the strength of their dollars. He says that the reopening of the airport has increased occupancy of the hotel by 15 percent. “We have expats coming in and booking for one month, instead of opening up their homes or renting an apartment in the mountains they take advantage of the exchange rate to book rooms here,” Ghazal says, explaining that at LL220,000 per night and with the current exchange rate, room prices have become significantly less than last year. (At Lebanon’s official exchange rate, the room would be $147/night, at the current bank rate it is more than halved to $57/night—at the time of writing, if exchanging dollars on the black market, the room could go for roughly $28).

Corona and the beach

COVID-19 related restrictions and measures have also played a role in decreasing footfall to beach clubs this season. One measure that would have had a negative impact on business had things been operating normally this year is the 50 percent capacity restriction on beach clubs. However, the way things are going this season, operators tell Executive they are not reaching that figure anyway. “Once the corona-scare hit Lebanon, most of our clients moved out of Beirut,” Abu Nassar says. “Now they are either in the mountains, Batroun, the south, their hometowns … They simply got away from the city to avoid being in clusters where they could get infected. So the 50 percent came naturally and we were not affected in that sense.”

Yammine says that there has not been a major pickup in the beach club-side of their business (as opposed to the hotel and villas), despite the reopening of the airport (speaking a week after the reopening in a follow-up interview with Executive), blaming the rise in numbers of those infected with coronavirus for that. “We thought at first that business would pick up one distance learning and exams ended for the academic year and once the airport reopened,” he says. “But we later realized that, although they know we are following all safety precautions to the dot, people simply prefer not to be too close to others these days.” 

Paying the bills

Whatever the reasons behind this overall drop in customer numbers, it translates into a decrease in revenues at the worst possible time for beach club and resort operators, when the lira’s unofficial depreciation has increased their operational costs substantially.

Several operators mentioned maintenance as their biggest cost, explaining that it is fast becoming unaffordable especially as spare parts are calculated in cash dollars. “We have eight large generators, 300 rooms, 1000 cabanas, a marina, and so on,” says Chadi Gedeon, general manager of Mövenpick Hotel Beirut. “So a lot of maintenance is needed and all suppliers are asking for cash dollars. The more the lira devalues, the more of a challenge this is becoming.” 

Mövenpick / Photo by Greg Demarque

Abu Nassar says the cost of pre-season maintenance and upkeep for Sporting ranges from between $150,000 to $400,000, depending on the severity of damages incurred in the winter (repairs after storm Yuhan in 2015 cost $400,000). “This year the damages were not that major so we were able to sustain them out of pocket, hoping that this upcoming winter will not cost us tremendous damages,” he says, adding that their strategy nowadays is to put aside some money for repairs for the upcoming season in spring 2021. “The reasoning is the following: Banks may or may not be around next year,” he says. “And if they are around, they probably will not be available to loan us the money to do repairs and then pay them back like we did every year (before this year).”

Another major cost for beach clubs and resorts is chlorine and other chemicals needed for pool maintenance. “The cost of chlorine and other chemicals needed for a clean pool is $900 per month this year, whereas it was $200 per month last season. But the cost of everything has increased this year,” says Eddésands’ Yammine.

Lazy B’s Boustany considers himself lucky that he bought his chlorine supply for the season at the LL1,500 exchange rate back in October when he says he felt that the lira was becoming unstable. “Recently, we bought everything we need for the generators in terms of filters and parts at the rate of LL4,000, whereas today you have to buy them at the rate of LL9,000,” he says. “These will finish though and then what do we do? If the situation continues like this next year, I am telling you the entrance fee will be a minimum of a LL100,000.”

While on-site restaurants are usually magnets for hungry swimmers, and therefore are cash cows for operators, this season is different, again because of the exchange rate. “We increased the price of food by about 10 to 20 percent [to date, meaning early July] on some items and reduced the number of items on the menu to 30 percent of what it used to be last year,” says Pangea’s Charafiddine. “I stopped serving steak, frozen shrimps … everything imported. I wanted to work with local products only so that we don’t have to increase our prices by much but even the price of such items has increased.”

Finally, COVID-19 related safety measures, which all beach clubs and resorts had to comply with, were an additional cost this season. “Added cost this year is that of corona safety measures, which includes lots of disinfecting material, you have to fumigate seating areas daily, provide gels, pools need to be monitored every two hours,” Abu Nassar says. “The ministry of health put up regulations and we felt that it is in our interest to abide by them because at the end of the day, if you have one client that comes out with corona, I will have to shut down the institution so it is in my interest to do it.”

Keeping afloat

Faced with all this pressure, beach club and resort operators say they are just trying to make it through the season. “The situation now is no longer about sustaining a business, it is survival mode,” Damour Beach Club’s Abchee says. “Today to stay afloat we have to manage with the minimum resources possible and try to do the best you can.” 

To limit expenditure, all operators Executive spoke with say they have reduced their number of employees to the bare minimum when compared to previous seasons. “Last year a hundred families were directly living out of Lazy B and now we have 50 employees or families,” Boustany says. “And these are being paid at the exchange rate of 1,500. Imagine how hard it is.” 

Lazy B / Photo by Greg Demarque

Another way some beach club operators are reducing cost is by keeping one of their restaurants closed for the season. “We closed the pool side restaurant and started the season with self-service kiosks,” Charafeddine says. “When we saw that that was negatively impacting the business, we started having customers order food at the huts and have waiters deliver it to them at the pool and that helped matters more.”

Sporting Beach Club, which usually operates both the beach club and restaurant year-round, is considering shutting down in the winter for the first time since it opened its doors in 1953. “When we get to the fall, we will have to take the hard decision of either closing down for the winter so that we have enough money to launch next season or we play ostrich and expect that next year everything will be fine and rosy,” Abu Nassar says. “It is very risky.” 

With all these costs and challenges and with the still comparatively low number of customers this season, it seems the tide is pulling Lebanon’s operators toward murky waters. Whether the tide will turn with the Adha holidays and the relative stability Lebanon is currently passing through (with no major protests the past few weeks and decreased exchange rate volatility), will need to be reassessed at the end of the season. The hope is that even if this season cannot be salvaged anymore, resort and beach club operators can survive to see another, brighter season in 2021. 

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Hospitality & TourismRetail Overview

Impact of COVID-19 and economic crises on Lebanon’s retailers

by Nabila Rahhal
written by Nabila Rahhal

Storefront banners and text messages announcing extended clearance sales or “70 percent off” all merchandise have been part of Lebanon’s retail landscape since 2012. Executive has been reporting on the dwindling purchasing power among Lebanese and the overall decrease in tourists from wealthy GCC countries as the reasons behind the gradual decline of the retail sector rather consistently for almost eight years now (see articles from 2012, 2014, 2017 and 2019).

While this state of slow decline might have dragged on for a while longer, the intensification of Lebanon’s ongoing economic crisis—in addition to the COVID-19 crisis that has negatively impacted fashion retail worldwide—has exacerbated an already tough situation and has pushed the retail sector to the edge of a cliff.

Retailers Executive spoke to in early July described an almost impossible situation. The increase in the foreign exchange rate has significantly driven up the cost, and hence the price, of their imported merchandise at a time when consumers’ purchasing power and desire to spend on anything beyond necessities is at what they described as an all-time low.

The corona connection

The global retail industry was one of several that has been negatively affected by the coronavirus pandemic. In its late March coronavirus update to its State of Fashion 2020 report, US-based consultancy McKinsey & Company estimated that a two to three month lockdown (which has been the case for many countries) would cause “financial distress for 80 percent of European and North American fashion businesses, as volatility reduces investor confidence in a stock market facing its hardest hit since the global financial crisis of 2008.” The report further estimates that revenues for the global fashion industry will contract by 27 to 30 percent in 2020 when compared to 2019, although it predicts that the industry could regain positive growth of 2 to 4 percent in 2021.

In Lebanon, a nation-wide lockdown commenced on March 15 and imposed the closure of all non-essential services, one of which was fashion retail businesses. Stores located outside of malls were allowed to reopen a little over a month later on April 27, during phase one of the easing down of the lockdown measures, while malls were closed until the final phase of the country’s gradual reopening, which began on May 25. 

During the lockdown period, non-essential businesses such as restaurants, hotels, and retail companies did not get any support from the government to sustain their livelihoods and be able to pay their employees, who were essentially left jobless as a result.

For small fashion retail enterprises (the ones with few or no branches that are typically found in Hamra, Bourj Hammoud, or Kaslik) a month-long closure with no revenues was the straw that broke the backs of their already struggling business. While there are no exact figures to examine, a simple drive along these streets reveals an significant increase in vacant stores with “For Sale” or “For Rent” signs displayed on them when compared to earlier in 2020.

Even some more established fashion retailers, those that could afford mall branches, did not reopen following the easing down of lockdown measures. Michel Abchee, CEO of Admic sal, which holds the franchise of department store BHV and which owns and operates City Mall in Dora, says four fashion retail brands and one restaurant out of City Mall’s 140 units remained closed following the re-opening of the mall. This was despite the payment facilities Admic extended to all businesses in the mall during the lockdown and for almost three months after it (paying on a percentage of their sales basis until the end of August). 

No money, no confidence

The COVID-19 crisis has aggravated the suffering Lebanese were going through due to the country’s own economic crisis.

Consumers in Lebanon already did not have easy access to their money due to erratic banking restrictions that have been in place since the forth quarter of last year, which at first meant shifting ceilings on dollar withdrawals before preventing those with dollar accounts from withdrawing the currency altogether, and instead imposing a third exchange rate in the country (not the official rate nor the black market rate), at which these dollars are converted into lira. Lebanese whose income is in lira have seen its value against the dollar depreciate by over 80 percent from October last year, and all are faced with the day-to-day realities of a shifting black market exchange rate and hyperinflation on lira prices of goods as the increase in FX rates wreaks havoc on imports and businesses bottom lines. 

This dismal situation had an understandably negative impact on consumer confidence, as is measured by the Byblos Bank/AUB Consumer Confidence Index. A May press release by Byblos Bank Group stated that the index, which averaged at 38.7 points in the first quarter 2020, had decreased by 19.1 percent from the fourth quarter in 2019 and by 49 percent when compared to the first quarter in 2019. This decrease in the first quarter of the year was the lowest level the index had reached since the fourth quarter of 2016, with the March result the lowest level since December 2013. 

With no easy access to their money and with confidence so low, consumers across the board, albeit with a few exceptions (see below), are in no mood to shop for non-necessities. 

Deceptive appearances

In an apparent contradiction to this bleak description of consumers’ purchasing power, pictures circulating on social media depicted customers queuing in front of fast fashion brands such as H&M and Zara (in the first few days post-easing down of lockdown measures) and more recently, in early to mid-July, in front of sports brand Adidas and luxury retailer Louis Vuitton (LV), both of whom did not respond to Executive’s emailed request for an interview.  

According to a salesperson in a well-known fast fashion brand catering to mid-income customers on Hamra street, the increase in footfall in the first few days after shops reopened was short-lived and did not translate into a major increase in sales. The same salesperson felt that if people bought anything, it was mainly children’s clothes and shoes (likely because children grew in size during the lockdown) or necessities such as underwear and socks.

On the other hand, those who could afford to do so lined up in front of Adidas and LV to take advantage of the difference between the black market exchange rate (averaging LL8,000 at the time) and the exchange rate used by these retailers. One of the women who waited in line to purchase a $3,500 LV handbag (and who works at an international NGO that pays her salary in fresh dollars) later told Executive she considered this purchase “a smart investment.” Since LV was calculating the exchange rate at LL3,000 to the dollar, and she had exchanged her dollars on the black market for LL8,400, she was paying less than half of the sale price of the purse.

Sami Saliba, owner and managing director of sports goods retailer Mike Sports, believes only retailers who plan to exit the Lebanese market can afford to price their merchandise at such a low exchange rate, giving the example of Adidas who he says is calculating the exchange rate an average of LL2,000. Adidas  has released a statement saying  its own stores will exit the Lebanese market by the end of 2020 “due to the ongoing economic challenges in the country” (the brand will still be available at resellers). 

Stuck in an exchange rut

From the fashion retailers’ side, and since their merchandise is imported in cash dollars, the current economic situation has made operating their businesses a steep uphill struggle.

Banking restrictions on local dollar accounts are preventing retailers from transferring dollars to their suppliers abroad to buy new merchandise, which means they have to exchange whatever they are making in Lebanese lira at the black market exchange rate. This can drive cost, and hence pricing, up to the point where it makes more sense for some retailers to simply shut down. “We closed because in one week the exchange rate increased from LL5,000 to LL9,700 at the black market exchange rate,” Saliba says, speaking of the period when Mike Sports announced it would be closing all its stores. “No one wins that way.” Mike Sports reopened almost two weeks later because they were able to secure merchandise “at reasonable exchange rates,” he says, pointing out that the exchange rate had dropped by almost LL2,000 at the time of their decision to reopen. 

Because retailers are selling in lira, even with price increases, they will struggle to cover the cost of new merchandise come next season since since they have to import these using fresh dollars. Abchee says the same amount of money in Lebanese lira, which last year would have allowed him to purchase enough merchandise for a whole section of BHV, can barely fill up a shelf or two at today’s rate (speaking at the time when the exchange rate had hit LL9,700 to the dollar).

Given this situation, both Abchee and Saliba believe the real problem will be three months from now when it is time to buy merchandise for the new collection. “You will see branches shut down,” Saliba says. “Instead of having 10 branches of a chain, you will have only one selling at very high prices because nobody will be selling at the old exchange rate anymore since they need to buy a new collection.” He adds that imports in the retail industry have, by his estimate, already dropped by 90 percent.

Both Abchee and Saliba say the retail sector should be given support by the government to weather this period. This support could be either through tax reductions or cancellations, according to Abchee, or by allowing traders to buy a percentage of the dollars they need at the exchange rate of LL3,850 through their banks, according to Saliba.  

At the time of writing, Lebanon is in the middle of another partial lockdown (from July 30 to August 3) to combat the recent surge in the number of COVID-19 cases with another one on the way from August 6 until August 10.

Whether the already fragile retail industry will survive another round of lockdowns, which some medical experts call for, is uncertain in the best of circumstances. But when an economic crisis, complete with an increased foreign exchange rate and bank restrictions, is thrown in the mix, the industry’s future appears dreary.  

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EntrepreneurshipOverview

Signs of positive disruptions in the Lebanese tech ecosytem

by Thomas Schellen
written by Thomas Schellen

Moving counter-cyclically to conventional business wisdom and exhibiting disregard for old boundaries are attributes of enterprising minds, of those daring people who start pursuing an economic opportunity without regard for the current resources at their disposal. In the case of Lebanon in 2020, one could add that these have to be enterprising minds without regard for an absence of resources taken for granted in most countries and without fear of total financial uncertainty.

The Lebanese tech entrepreneurship ecosystem, first built in the 2010s around the mental assets of the country’s entrepreneurs but this year in need of being rebuilt for the 2020s and beyond, appears to be emerging from several months of functional paralysis. Encouraging signals of the system’s positive disruption are converging this summer from the avenues of technology, finance, orientation, new projects, and ecosystem self-organization.

   These five confluents are, one by one: On the tech side the rise of the virtual as exemplified by virtual hackathons; on the financial side, the shift to new fundraising structures and sources of finance; in terms of startup orientation, a strengthening of social entrepreneurship with focus on economic sustainability; in terms of meaningful projects, several startups in the ideation and prototyping phases; and, in terms of the overall ecosystem, an impulse of new general vitality and expansion.

Arrival of virtual hackathon culture

Stopping in Lebanon somewhat belatedly when compared with the rapid rise of virtual hackathons in startup ecosystems in Europe, Asia, and the Americas (where virtual hackathons became the rage as soon as the severity of the coronavirus challenge and lockdowns made migration into online worlds the most logical environments for ideation and project-based competitions), the virtual hackathon train first arrived in the local ecosystem at the end of June 2020, in form of the MIT Lebanon Challenge.

Conceived and organized within the space of less than two months and aimed, in the lingo of a post-event press release, at “connecting Lebanese at home and in the diaspora to build creative, responsible bridges toward a more stable Lebanon,” the three-day event was a, by local standards, massive hackathon that according to its organizers digitally brought together 600 participants, 120 mentors, 24 judges, and 51 volunteer organizers.

Followed immediately by an acceleration program, the MIT Lebanon Challenge stood alongside two smaller virtual hackathons that were convened in early July, one seeking to fight disinformation under the title “Hack the fake” that was organized by the American University of Beirut (AUB), Saint Joseph University (USJ), and German foundation Friedrich Naumann Stiftung (FNF), and one seeking to address “Life after corona, a Lebanese take,” which was organized by the ESA Business School and Smart ESA accelerator.

Stakeholders in the tech ecosystem, some of whom represent organizations listed by the MIT Lebanon Challenge as sponsoring organizations and some who were interested observers of the event universally told Executive that they had had received excellent reports about the event from their teams as far as they were involved or had generally heard nothing but good things about it.  

The hackathon opened new participation strata for the majority of participants (organizers spoke of 75 percent); even for many participants with previous tech entrepreneurial achievements, it was their first-ever hackathon.

Examples for this novel experience value, as noted by Executive, were tech entrepreneurs Roy Baladi (San Francisco) and Nour Fakhoury (Beirut), who enlisted in the event with their concept of developing a digital platform to help local graduates and career changers to upskill themselves with a view toward improved employability. Called Campus For Lebanon through a brainstorm by the team that was formed during the hackathon, the concept participated in the knowledge economy track of the MIT Lebanon Challenge.

Explaining that it was the first-ever hackathon of any kind for her, Fakhoury emphasizes how the virtual format meant participants were able to work with people across the globe, including Lebanese diaspora from all around the world. “My expectation going into the hackathon was to have no expectation—we expected to build something new from scratch and we had a frame of what we hoped to accomplish,” she says, adding that the collaboration she experienced in an ad-hoc team was productive, enriching, and overall “very inclusive.”  

When asked why virtual hackathons in their opinions made late arrivals on the local scene, ecosystem stakeholders Fawzi Rahhal of accelerator Flat 6 Labs and Jihad Bitar of Smart ESA mentioned respectively that a recent exploration of a virtual coronavirus hackathon on regional scale had been discouraging in terms of quantity and quality and that the delay was rooted in the stickiness of regional online cultures that did not facilitate a quick pickup of the new virtual meeting pattern.

Irrespective of what had held virtual hackathons back from being convened in the first six months of 2020 in the thoroughly shaken Lebanese environment, MIT Lebanon Challenge initiator Jad Ojjeh tells Executive after the event that neither wanting internet connectivity nor absent electricity could depress the minds of the participants.

Describing the three-day experience of the event as a demonstration of participants’ global geographic diversity, joint enthusiasm for Lebanon, their calm and understanding patience at occasional hiccups, and the best personal experience of his still young life, Ojjeh confesses, “In terms of the hackathon, it went smoother than I expected it to go. That would be the biggest surprise if you ask what surprised me the most in the experience.”

The near future can be expected to provide further indications if and how far the hackathon’s winning ideas—six winners were named with flat-sharing, agricultural filtration, agricultural financing, employment energizing, co-manufacturing, and rural tourism proposals, and virtual demo days scheduled for early August—will be able to add viable and specific solutions in Lebanon’s distressed economic environs.

There is no reason to doubt that virtual hackathons will be durable additions to the Lebanese tech entrepreneurship environment, given these virtual events’ broader geographic reach, by comparison to conventional hackathons advantageous cost structure, and adaptive quality for functioning under the expected prolonged coronavirus culture. Supporting this expectation are plans, in various stages of development by local ecosystem players, to align their future hackathons and general operations with the new mandates of entrepreneurship life with the coronavirus.

In one notable such example, the brand new Nucleus Ventures organization, the successor organization and heir to the work of the UK Lebanon Tech Hub (UKLTH) initiative, tells Executive that it will organize virtual hackathons and virtual startup days in the next few months as it is preparing to offer such options in balancing of having to possibly restrict physical access to its new entrepreneurship space in Sin el-Fil. “We are making up for the limited physical facilities by offering full virtual support services as well as virtual events such as startup days and hackathons and the clinics that we run with our experts and mentors,” says Nadim Zaazaa, managing partner in Nucleus Ventures.

New duality in funding patterns

Up until 2019, the financial design of the Lebanese ecosystem incorporated access-to-finance paths that led startups into dual strategies and a sometimes inflationary automatism in looking for funds. The idea for igniting an entrepreneurship ecosystem was that startup financings were provided by venture capital funds in compliance with the stipulations of the Lebanese central bank’s famous Banque du Liban (BDL) Circular 331, authorizing and partly guaranteeing capitals that commercial banks dedicated to knowledge economy investments through a batch of venture capital (VC) organizations.

Given domestically centered usage stipulations attached to these 331 funds, many startups—all those with the natural and logical ambition to establish some overseas operations for better access to target markets outside of the small Lebanese pen—additionally sought funding that was not restricted to local usage or required overly detailed reporting to and permission taking from BDL.

That the ecosystem’s 331-based financing paradigms would need fundamental adjustment was already on the horizon before the general evaporation of confidence had affected the entrepreneurship scene and was fully thrown into jeopardy by the last quarter of 2019. What was not initially clear was what this would mean for existing startups.

By mid-2020, however, a new funding pattern seems to be emerging by the descriptions of several ecosystem stakeholders as both a consequence and partial remedy of the old closed system’s inbuilt tendency to create valuation distortions, competition for viable startups, and conflict of interest potentials among VCs. For Jihad Bitar, chief executive officer of accelerator Smart ESA, the current banking and finance scenarios for entrepreneurship appear not to be burdened with some of the disincentives that held investments back under the previous settings.  

“Saying it in a cynical way, investing in a startup in Lebanon today is less risky than keeping your money in a bank,” Bitar puts it. He tells Executive that he had argued already for many months prior to the 2019 liquidity crisis against the banking sector’s high deposit interests on grounds that no one would want to risk their money by giving it to a startup if they could easily obtain north of 10 percent in deposit interest (which was then regarded as very low risk). His expectation that a drop in deposit interest rates would translate into an increase in investments in entrepreneurship has been fulfilled, he adds. “So what we are seeing today is a micro-boom of investment in startups. I am talking about early-stage investments in startups, coming from some angel investors. Yes, the funding from 331-funded VCs has stopped or slowed down a lot. But on the other hand, we are seeing a boom in angel investments.”

Also for Fawzi Rahhal, the managing director of fund-cum-accelerator Flat 6 Labs Lebanon, the new trend for private investments is tangible. According to him, several funds-seeking companies in the past two months have either received verbal commitments or actually raised money. “Investments came from Lebanese angels that have lollars [dollar-denominated deposits in Lebanese banks that cannot be withdrawn as dollars in cash] and virtual coins in the bank that they want to turn into equity so it does not disappear the next day,” he says. “Or they came from interesting initiatives—[Abu Dhabi-based entrepreneurship] hub71 recently awarded [funding to Lebanese startup Mint Basil Market] under an equity and grant mixture. So there is movement on the fundraising level, [but] some of these things should have happened six or seven months ago.”  

Speaking of signs of hope, Rahhal concedes that these are still feeble signs that come after many months of financial paralysis. “It was frustrating, a period of every man on his own,” he says, pointing to his and other VC funds that were waiting for previously agreed capital calls, ineffectiveness of steps by the Lebanese Private Equity Association, and restraints on the ability of accelerators to provide support to startups in their portfolio.

This notwithstanding, he confirms that he and his peers in the ecosystem have been initiating talks with some late-stage funding organizations and that daily talks with angel investors have been ongoing. “On an ad-hoc level and a personal level, we have been doing as much as we can and the quote-unquote network has been doing as much as they can,” he says. 

 A positive spin on the narrative of ecosystem 2020 also comes from Sami Bou Saab, the chief executive of accelerator Speed@BDD. “This is actually a great time for those [startups who are] fundraising, because local investors are looking to get their money out of the banks and now, the risk of investing in a startup may be comparable or less if it is a good startup—angel investors are excited and saying that it is better to put their money in startups than keeping it at the bank,” he enthuses to Executive about the developments in the local financing scene.

Moreover, there is also increased interest in startup investing internationally, due to reasons that include the impact of the coronavirus crisis, he adds. “On the international scene, investors as well are seeing this as a great time,” he says. “They can invest in startups at discounted value, they think, and get more equity and ownership with less amount invested. In both cases, it is a good time for startups to go fundraising.”

More and clearer purpose

However imperative the need for money might feel in a moment of desperation to a cash-strapped startup, it is a mantra of entrepreneurship thinking that finance is never the biggest hurdle for a worthy venture. The value question in this sense is usually a function of the motivation that drives and the purpose that guides a startup.

What had been in this sense a third and hitherto ephemeral ingredient in the Lebanese entrepreneurship ecosystem’s mixology, figuratively speaking the ginger and lime juice as the healthiest parts in the local startup cocktails, was social entrepreneurship. Albeit proclaimed and promoted at quite a few events (often by stakeholders with an excellent nose for attractive buzzwords), social entrepreneurship was not well understood, has not been supported by clear legal definitions and dedicated incorporation templates, and tended to either transmute into a startup’s conventional commercialism or descend toward becoming the anti-business models of unsustainable and opportunistic non-profit ventures that speculated on exploiting the money spouts of international public sector donors and foreign non-governmental organizations.     

Mona Itani, entrepreneurship program coordinator at the American University of Beirut (AUB) and member of the engineering faculty there, has a story to tell about the importance of entrepreneurship for Lebanon and its academic institutions as well as the adoption of social entrepreneurship thinking in the Lebanese ecosystem. “At AUB we have a mandate to keep working and promote entrepreneurial culture among our students, whether they are at the engineering faculty or any faculty across AUB, whether they are undergraduates or graduates,” she says. “We also sometimes open programs for staff and faculty members. This means for us that building this entrepreneurial culture is very important, regardless of what is happening in the country or in the world. Personally speaking, as someone who is fond of social entrepreneurship, I believe that Lebanon, with all its troubles and challenges, is a very good soil for such projects because we need [entrepreneurship] the most.”

As Itani narrates it, she was motivated to become a social entrepreneur herself and establish Riyada for Social Innovation, a consulting startup that offers project-based training in social entrepreneurship, by seeing how poorly her Lebanese engineering students rated in terms of connecting to the social issues and real life problems of underprivileged communities and refugee populations.

“Engineers are problem solvers, so what [could positively be done] if they exercise their talents in creating new solutions that solve social problems that exist in our community?” she asks, explaining her approach and emphasizing that the emerging global coronavirus crisis and the current Lebanese crisis, although extremely difficult as environments for starting a socially conscious enterprise, open new windows for entrepreneurial minds. “There is a huge opportunity in this to pitch in, take leadership and initiative in solving a lot of the problems that we are facing right now, for individuals, for startups and for companies and the private sector more generally,” she says.

While Itani concedes that she does not have sufficient visibility yet on the development of social entrepreneurship in Lebanon since the onset of the coronavirus crisis, she emphasizes that in the period before the crisis, awareness of social entrepreneurship “has been increasing dramatically in the ecosystem.”

According to her, awareness was getting better in quality and understanding of social enterprise paradigms. In this regard, she is adamant that a social enterprise should be a sustainable enterprise, ergo be profitable, and be conscientiously passionate about social causes—meaning neither move from one temporarily popular cause to the next nor keep depending on external funding.

Useful concepts

This perspective on the role and method of social enterprises as economically sustainable ventures is echoed by several stakeholders in the Lebanese ecosystem who this summer talked with Executive. It is more importantly also mirrored in a cohort of post-coronavirus startup concepts.

Notably, the emphasis on social entrepreneurship virtues as important for Lebanon in the crisis was mentioned by representatives of the accelerators such as Smart ESA’s Bitar. But even more interestingly, whereas it was mainly startups conceived in the period before the 2019 crisis that were mentioned as promising by the accelerators and had adapted their business models to needs for social distancing, the stories of appealing new concepts and startups originated with individual entrepreneurs. These could be participants in the MIT Lebanon Challenges and the recent virtual hackathons and other startup competitions organized with students of universities such as AUB, ESA, and USJ, as well as entrepreneurs who have chosen to pursue ventures independently from the old system.

While it is still very early to discuss the prospects of very recent concepts, interesting ideas by Executive’s impression were quite numerous and indeed seeking to address real micro-problems that exist in Lebanon. To name two anecdotal examples among this larger crop of projects that will be worth watching out for, Executive encountered people who are aspiring to widen the effective scope of entrepreneurship in Lebanon with new projects such as “From the Villages,” a nascent e-commerce venture that is still on the drawing board (see interview) and the “Campus For Lebanon” project that debuted as idea at the MIT Lebanon Challenge.

As co-founder of the latter project, Nour Fakhoury has a positive opinion of the Lebanese ecosystem. In her perception it is capacious despite the country’s extremely difficult situation because it is formed by solid components such as accelerators, incubators, VCs, startups, and so on. This over years established foundation notwithstanding, she agrees that the system has its greatest growth potential in social entrepreneurship. “[This] is one of the most needed fields for adding value to the ecosystem, given the current circumstances, and so I would say that we with the Campus For Lebanon are [working on] an essential addition to the ecosystem for it to still be sustainable,” she says.   

The rural-to-urban ecommerce venture “From The Villages,” which is a serendipitous result of the country’s coronavirus lockdown, is an example for a startup initiative that is pursued independently from the existing Lebanese ecosystem. As initiator Ziad Hourani tells Executive, he is pursuing its development with the approach of making it financially sustainable without enrolling in the BDD ecosystem. “It is an e-commerce platform with a social mission but we are fully for-profit,” he explains, adding that seeking profitability from the beginning of operations will enable the venture to secure jobs and pay its stakeholders, which include farmers that he sources products from.

While conveying views that are very similar to Itani’s statements on the unproductive leanings of NGO-centric social enterprise projects, Hourani says he is generally critical of the Lebanese ecosystem, including investors, as he has encountered them when immersing himself in the system at several occasions in the past few years. He is thus preparing to incorporate “From The Villages” as an sal and fundraise, later this year, by seeking value-added strategic investors who understand the story that the project is trying to establish.

Comparing his local exposure with his experience in the US and UK tech ecosystems, he elaborates: “My opinion about the ecosystem [here is that] the ecosystem is against the entrepreneurs. If you are an entrepreneur today and want to start some business in Lebanon, I don’t see anything supporting the entrepreneur other than Circular 331, which is the money. But at the end of the day, in these kinds of ecosystems, the money is usually not the issue.”

He includes in this criticism the state of the infrastructure that is a hurdle to the growth of startups, mentors that are seeking mainly their own glory instead of being passionate for the sake of startups, and investors, including angel and early-stage investors, who behave abusively to entrepreneurs by evidence of, for startups, unfavorable term sheets and equity deals. “For the early stage startups, you need a pro-entrepreneur ecosystem, and we actually don’t have this in Lebanon,” he says.    

Keeping the eyes on the pre- and post-corona context

In considering the role that the Lebanese tech entrepreneurship ecosystem might need to play in coming years, it serves to remember that this system is not old. Even by the standards of the digital entrepreneurship world, where you mature and advance through the enterprise-related lifecycle in months and years, not the industrial and pre-industrial ages’ decades and centuries.

The local system’s first building blocks—in forms of private visions and rudimentary semi-private initiatives with minor-league support from local banks—had been tossed around in the 1990s when every tech corridor and their hillside cousins wanted to become the next Silicon Valley. Things got a bit more concrete in the 2000s, with notable trial-and-error attempts of tech enterprise funds at importing investment and financial disciplines and combining such funding structures with the less-formally-inclined local business culture.

The small funding bang that appeared big for Lebanon came with the launch of Circular 331 and the following—relative to Lebanon’s size remarkable—proliferation of venture capital firms, funds inflows, real estate designations (the Beirut Digital District), hyped-up international events (BDL Accelerate), etcetera.

This ecosystem development cycle, vacillating its way through several stages and producing a visible if not at all perfect ecosystem, was fundamentally and in the first instance negatively disrupted toward the end of 2019 and subsequently was exposed with the entire economy to the over-reported and more-than-sufficiently described following spiral of triple doom of finance, economy, and society.

Modifying structures

As a new phase of the ecosystem is thus emerging by necessity, the final element of note in this apparent early process of adaptation to the needs of the next digital knowledge scenario in Lebanon are adjustments and expansions of structural components in the entrepreneurship ecosystem. Perhaps the most noteworthy of these changes is the adaptation of the UK Lebanon Tech Hub.  

“We are launching as of [July 23] a new seed program that is called The Nucleus and was actually run by UK Lebanon Tech Hub since 2015. We ran four versions and are now running version five. What has changed is that we are now backed by private investors and our team is now running under a company called Nucleus Ventures,” says Nadim Zaazaa, previously the CEO of UKLTH and now managing partner of Nucleus Ventures.

Woven into the BDD ecosystem since the UK’s then-ambassador Tom Fletcher invested his charisma into knitting UKLTH (an initiative of the UK government, acting through its Beirut embassy, and BDL) as the base fabric for further tech entrepreneurship ties between the two countries, the role and structure of the eponymous entity has now been transformed, Zaazaa explains. Instead of providing a series of acceleration programs organized under a scheme that was situated at the core of the BDD (with a significant workspace in the Berytech Digital Park, one of the first buildings integrated into the BDD cluster) and that took winners of each year’s cohort for training in the UK, the team of UKLTH has become the team of Nucleus Ventures, a Lebanese seed program and seed fund.

According to Zaazaa, Nucleus Ventures is locally backed by private investors and also backed by the Lebanon Enterprise and Employment Program (LEEP), which is funded by the UK government’s department for international development and which fortifies small and medium enterprises in Lebanon with funding and development services. Sporting the equivalent of an enticing PR jingle—“We offer our startups cash, customers, and community,” Zaazaa repeats a couple of times—Nucleus Ventures aims at building a portfolio of startups and SMEs that are either part of the knowledge economy or seeking to leverage knowledge technology to scale up traditional business activities and develop their exports.    

The seed program and fund will be providing support that is customized to recipients’ needs and they will be “evergreen,” meaning accessible year-round. The funding formula is described as flexible and extending from ticket sizes of $5,000 for ventures that can be still in their ideation phase all the way up to $100,000 or $120,000 for those that are on stages of validation and execution, up to an annual revenue of $2 million. Notably, prospective fundings are likely to include investments in lollars but have two additional sweeteners—which, according to Zaazaa, are potentials for being matched by the likes of Kafalat’s ISME, IM Capital, or other funds in the Lebanese ecosystem and for being matched with up to $35,000 in hard currency grants by LEEP.    

Moreover, Nucleus Ventures will leverage its experience as operator of programs and expert on emerging market startup ecosystems regionally, where it already has entered agreements to run the Fouad Makhzoumi Innovation Center at the Lebanese American University and a scale-up program for the World Bank in Jordan, Zaazaa says. Nucleus Ventures’ Lebanon activity hub—likely to be part physical and part digital—is being phased in in August and September of 2020.

Completing the bouquet of activities from later this year, will be regional, meaning Mashreq and Gulf countries, operations of a program called Go Global, a UK-sponsored enterprise development program that includes focal components such as “tech for social good.” UKLTH at time of this report was not part of a public list of similar hubs on the website of the UK government’s department for digital culture, media and sports (DCMS) but Go Global Middle East is going to be operated by the Nucleus Ventures-run UKLTH, which in turn supposedly is part of this international tech hubs network under the DCMS umbrella.

Synergizing  the disruptions

Looking at the five components of the Lebanese tech entrepreneurship ecosystem then creates by comparison with the past eight years a more comprehensive picture, whereby the overall system’s enterprise and product focuses could well range from the expected post-coronavirus winners healthtech and edutech or digital media to newly tech-enabled productive SMEs and even include a revived fintech concentration (Smart ESA and others are harboring plans for fintech hackathons, and researchers at the IMF recently confirmed that, “During the COVID-19 pandemic, technology has created new opportunities for digital financial services to accelerate and enhance financial inclusion”).   

Corporate and academic stakeholders with entrepreneurship expertise could sustain themselves by spearheading and spreading entrepreneurship cultures in the Arab region (as shown by the case of Nucleus Ventures but also emphasized by AUB’s Itani as engine for sustainable revenues under the university’s entrepreneurship expertise).

The small entrepreneurship system in Beirut could in coming years benefit from further expanding its network and aggregate social capital through intensification of bonds with European partner countries such as the UK and France as well as new virtual employment-generating interactions with Lebanese expatriate communities and collaborations with fresh Lebanese graduates of top international business schools, as demonstrated by the MIT Lebanon Challenge.

The system’s purpose and scope of entrepreneurship could henceforth be better tuned to the needs of Lebanese society through genuine and profitable social enterprise developments and its access to finance could be improved and expanded through interactions with new private investment sources on local and institutional sources on international level.

But what makes all of these—individually speculative—components meaningful and endows the observer with an ignited fuse of hope for resurgence of the Lebanese knowledge entrepreneurship ecosystem is that the synergies of all these development streams could create a more productive and more natural tech entrepreneurship ecosystem that can prove itself as the profound building block of a productive knowledge economy that it has hitherto not functioned as.

The common thread in the entrepreneurial minds that Executive interacted with in this summer of 2020 was the thread of “doing something that is beneficial for Lebanon” (The MIT Challenge’s Ojjeh), of realizing that “we need social entrepreneurship more than ever” (AUB’s Itani) and that “Lebanon has hit rock bottom and we really need to reinvent the economy” (Nucleus Ventures’ Zaazaa). Or, to say it with hopeful Campus For Lebanon entrepreneur Fakhoury, “The minds and hearts of the Lebanese people are in the right place, and I cannot stress on this enough. People are eager to learn. They just need the proper guidance.”

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Last WordMediaOpinion

Coalition formed to defend free speech in Lebanon

by Alia Ibrahim
written by Alia Ibrahim

Fourteen local and international organizations announced a coalition to defend freedom of speech in Lebanon on July 13. Along with most signatories, I share doubts about the viability of this collective action, but also a certitude about its necessity. In the 20 years I have been a journalist, rarely have I been more scared about Lebanon’s insidious descent into a police state. 

Things were never perfect, but in a region where authoritarian regimes impose draconian laws against free speech, Lebanon remained a relatively safe haven. This began to change for the worse in 2015, when, triggered by a trash crisis, protestors took to the streets, for the first time raising the kellon yani kellon (all of them means all of them) slogan. The movement ultimately failed to produce change, but the prospect of Lebanese uniting against their political elite was not lost on the ruling class. The freedom to criticize, already limited by law, came under increasing attack.  

This perception is borne by data. One of the signatories to the new coalition, Human Rights Watch (HRW), released a report last year detailing the increase in defamation cases from January 2015 to May 2019. Using numbers from the Cyber Crimes Bureau (CCB), HRW found that the CCB had investigated 3,559 defamation cases in that time—a 325 percent increase when comparing 2018 to 2015. 

During this period oppressive measures were not exclusive to the state and suppression was not limited to political opinions. As just two examples of many, widespread xenophobia saw Syrian refugees blamed for all manners of socio-economic problems, and homophobia and threats of violence were used to justify the cancelation of a 2019 Masrhou Leila concert. 

Worse to come

Since the October uprisings, attacks on freedom of expression have continued; more than 60 people have been arrested or summoned for interrogation. Amid a national economic crisis, Lebanese have been criminalized for critiquing their government and media has come under pressure for reporting economic realities. In October, the president’s office released a statement reminding that the criminal code allows for prosecution of those publishing material that threatens the stability of the economy, a day later, four Lebanese lawyers announced their intention to sue The Economist for its reporting of the unfolding currency crisis. 

As bad as things are, they can get worse. Media monitors among the coalition members were able to obtain a leaked draft of the new media law being reviewed at Parliament, which, while prohibiting pre-trial detention for all publishing crimes, still allows for imprisonment due to defamation and even increases prison penalties and fines in some instances. 

The work of these media monitors brings needed accountability to Lebanon’s media landscape. Contrast this to the main media channels that have been rightly criticized for the ways in which they kowtow to their political and economic sponsors. At the launch event for the coalition, a live TV transmission was cut within minutes, with the anchorwoman commenting on air that what was being said was “exaggeration.” These organizations are part of the problem. 

The coalition is seeking solutions. As such, it is calling for public prosecutors and security agencies to refrain from summoning people for investigation for exercising their right to free speech, for legislative discussions in parliamentary committees to be made public, and for the new media law to be amended to bring Lebanon in line with international standards on free speech. This would mean decriminalizing defamation, removing special protections for public figures, preventing government and security agencies from bringing defamation suits, allowing truth as a defense, decriminalizing blasphemy and insults to religion, criminalizing only statements that amount to advocacy of national, racial, or religious hatred, removing all requirements for licensing of journalists and advance authorization of publications, and removing civilians and all children from the jurisdiction of the military courts.

Much still needs to be accomplished in the long battle to protect and foster freedom of expression in Lebanon, but looking at the crowd around me on that Monday morning I was comforted by familiar faces I trust. We may not have seen the worst yet. The elements that allowed for co-existence between the establishment and those who opposed it are no longer available and the system is running out of resources—real reform will mean its end and the only available tool it possesses is oppression. But while the image is bleak, it is not without hope. The battle for freedom of expression is a battle for a new future for Lebanon, and this coalition stands ready to fight.

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CorruptionEconomics & PolicyEntrepreneurshipHospitality & TourismSpecial Report

Executive Magazine’s July/August issue

by Executive Editors
written by Executive Editors

It has been just over two weeks since the deadly Beirut Port explosion that killed at least 180, injured over 6,000, and left over a hundred thousand without homes. The impacts of this horrific event are still unfolding.

The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) Lebanon’s most recent sit rep on the port explosion, covering the period from August 14 – 17, says that an estimated 70,000 workers have lost their jobs as a result of the blast, this coming amid an economic crisis that has improvished so much of the country—compounded by a coronavirus crisis that has, post blast, reasserted its threat through record increases in cases and a new lockdown scheduled for August 21 to September 6.

Our July/August issue comes, not as intended in the first week of August, but instead in its third, a direct consequence of the blast. None of our team suffered any serious injury in the explosion, for which we are incredibly grateful. But we could not but be impacted by what happened, our city, through sheer incompetence and negligence, was destroyed around us. The mental stresses and trauma of August 4 has had an impact on us all.

The original focus of this issue was our special report on anti-corruption, undertaken in partnership with the United Nations Development Programme. After the blast, we took time to rethink our cover for this issue, as well writing our own reflections on the explosion and its aftermath, which can be found in the beginning pages of this PDF.

The rest of the magazine we bring to you as intended, prior to the events of August 4. Our special report on anti-corruption has lost none of its relevency in the wake this tragedy, rather the raw necessity of combatting corruption in this country has sharply increased in focus.

We hope that the articles within this PDF issue, available to read online, or to download, will help our readers amid the necessary conversations to come as we all do our part to rebuild.

As always, our articles will also be uploaded individually online, and will be shared on our Facebook, Twitter, LinkedIn, and Instagram pages. 

To our readers, we are simply grateful you are still with us and share our aspirations for a just future.

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Coronavirus AnalysisEconomics & PolicyHealthcare

The surge of COVID-19 cases in Lebanon

by Lilian Ghandour
written by Lilian Ghandour

The article below was written two days before the massive explosion that occured at the Beirut Port on Tuesday, August 4, just after 6 p.m, killing at least 154 people and injuring over 5,000.

Its author, Dr. Lilian Ghandour, is thankfully safe, as is all the Executive team. The damage to some of our homes is extensive but pales in comparison to the devastation that has flattened so much of the city.

We are in shock, we have not yet had the time to mourn.

What Dr. Ghandour writes of below is a healthcare system on the brink of being overrun due to the coronavirus pandemic and the recent surge in cases in Lebanon. It is hard to convey how much worse the situation is now. Hosptials were heavily damaged in the blast. Some had to treat people in parking lots, others were forced to turn away the injured and move their own patients for safety.

Field testing for COVID-19 has been suspended in wake of the deadly explosion. On Thursday, August 6, 255 new COVID-19 cases and two new deaths were confirmed, bringing the total to 4,604 cases and 70 deaths.

Given the search and rescue efforts, the sheer amount of injured, and the necessity of cleaning up and helping those most affected to rebuild, there is little doubt the rise in infections will be significant. That the Lebanese have taken to the streets to help one another is so important, so necessary, and so admirable, but we cannot forget that the country is still battling this pandemic. The virus has no sympathy for what we have endured.

Lebanon needs help. If you can afford to, please give what you can to local organizations working on the ground.

A list of organizations you can donate to can be found here.

Dr. Ghandour’s article begins below.

As of August 2, Lebanon has registered 4,885 cases (almost 80 percent of which are local) since the first case of COVID-19 was identified in Lebanon on February 21. At the time of writing, 3028 cases are considered “active”—of whom 110 are hospitalized, and while the majority (70 percent) are mild cases, still one in three hospitalized persons currently require intensive care treatment. The predominant majority of the active cases (96 percent) are in home isolation—not requiring hospital care. While that is unequivocally positive news, it is not entirely risk-free as the proportion committed to home isolation is far from 100 percent in some areas of Lebanon. According to the daily report published by the Disaster Risk Management (DRM) unit, self-reported compliance has been at 50 percent or less in areas such as the Bekaa, Akkar, and Baalbek, and suboptimal in Beirut (80 percent), the North (70 percent) and Mount Lebanon (60 percent). While reasons for non-compliance may vary and have not been investigated, repercussions of non-compliance are quite clear: the risk of transmission from an infected case to several healthy and possibly immunocompromised individuals.  

Improved testing, but also greater cases

In the past few weeks, we have witnessed a surge in the number of positive cases detected on a daily basis. One may be tempted to attribute these higher daily numbers to the parallel significant rise in the number of daily tests conducted (the total PCR tests conducted as of August 2 is 308,735): 6,799 tests in March compared to about 50,000 in May and June each, to a total of 164,775 tests during the month of July alone. Indeed, the increased number of confirmed cases daily is a result of the higher number of daily PCR tests conducted. Nonetheless, the published data also points to a doubling in the positivity rate (number of cases/number of tests x 100), which was hovering around 1 percent in June versus about 2 percent in July (reaching 4.2 percent on July 12). Since July 1 marks the first day of reopening the airport at about 10-15 percent capacity (bearing in mind that four phases of repatriation had already occurred between April 5 and June 11), many may also be tempted to attribute the increased number of tests to incoming expats/tourists. Digging into the published numbers, however, the higher percentage of tests has been conducted among the locals and not at the airport (on August 1 for example, 6,666 PCR tests were conducted for locals in the preceding 24 hours versus 2,072 at the airport). Moreover, during the month of July the average positivity rate was 1.6 percent among locals (compared to 1.13 percent in June), in contrast to 0.86 percent among those tested at the airport.  

While the majority of the hospitalized cases are mild (and 48 percent of all registered cases are asymptomatic), it is important to consider three additional statistics besides the positivity rate (which has doubled from June to July) when evaluating the current local COVID-19 situation. First, the number of cases requiring admission to an intensive care unit (ICU), which has quadrupled in a month from eight on July 1 to 34 on August 2. The second indicator is the number of deaths per month, which increased from seven in June to 25 in July, bringing the total number of coronavirus deaths to 59 at end-July (noting that the case-fatality rate is at 1.3 percent versus 3.8 percent globally). The third indicator is the percentage of cases that remain untraceable (an indicator of community transmission), and currently about 25 percent of registered cases remain “under investigation/of unidentified source.” 

Dangers of lockdown fatigue

It is worth recalling that Lebanon by mid-March was in full lockdown with only about 100 confirmed positive cases. This aggressive containment early on was key to flattening the curve and building healthcare capacity to respond to COVID-19 cases. The high number of COVID-19 cases confirmed on a daily basis these past few weeks threatens to overwhelm Lebanon’s healthcare system. On July 30, after a series of record daily highs, Dr. Firas Abiad, director of the Rafic Hariri University Hospital warned: “Whether it is wearing face masks, social distancing, the financial situation, the blackouts, the drums of war, the sweltering heat, or the wretched lockdown, everyone is extremely drained and wants a break. #Covid19 is not listening.” Both public and private hospitals are threatened despite significant improvements since the start of the epidemic in terms of daily PCR tests, distribution of testing centers, available beds, ICUs, and ventilators. This is mainly because Lebanon is simultaneously battling an economic catastrophe, which is resulting in significant power cuts in hospitals, laying off nurses and other hospital personnel, and translating to critical shortages in personal protective equipment (PPE), medicines, and other essential medical supplies. 

Early in the epidemic, the Lebanese government initiated a “whole government response” and has since implemented several decisions, albeit some controversial such as the most recent partial lockdown that started July 30—which some health officials disagreed with, warning that only an enforced two-week full-lockdown could create any significant progress. The partial lockdown was also questioned by many precaution-taking citizens. Many wondered about the public health value of closing restaurants and holding instead banquets in home gardens, or closing of sports clubs and holding big birthday parties at home, or even necessitating PCR tests from arriving airline passengers if positive cases do not adequately home quarantine. Lockdowns have been perceived by the socially responsible as a punishment for the risky behaviors committed by the social butterflies who continued clubbing, partying, and not taking any precautions. What some local residents and incoming passengers fail to realize is that containing the second wave of COVID-19 in Lebanon requires shared responsibility—and the collective effort of multiple stakeholders—including them. 

Young, but not invincible

At the end of July, the World Health Organization (WHO) warned that young people could be driving the surge in COVID-19 cases in some countries, as illustrated by a higher proportion of new cases among the younger demographic. In Lebanon, there are no clear demographic trends across time but the current demographic distribution of the cases shows that about 25 percent are in the 20-29 age group, and an additional 20 percent of the cases are in the 30-39 age group. This is in contrast to the profile of critical cases and deaths, which are predominantly among the 50+ year olds. Therefore, while young people are likely to experience a mild case of coronavirus and fully recover, they still pose a great risk to others in their community—by transmitting the virus to vulnerable groups including immunocompromised individuals (such as a sibling with asthma) and older adults with risk factors (such as parents who smoke or have a comorbid heart condition or cancer). One should be careful not to blame the younger population—for one cannot determine the directionality of transmission (who infected whom) by looking at the age distribution of cases. Still, global researchers have shown that younger people do tend to react to the end of lockdown by socializing more, perhaps partially attributed to them misinterpreting the repeated messages they have been hearing about young people being less at risk. As such, there has been a recent shift in messaging and we have been hearing more and more that COVID-19 can affect any age group, and that young people are “not invincible.” It has always been the case, but with lesser precaution taking in the young and an increased risk of transmission to others, the thinking and messaging framework has shifted. The young must not only be warned but rather also be engaged in the process of re-flattening the curve as active agents of change. In the words of WHO Director-General Dr. Tedros Adhanom Ghebreyesu: “The pandemic does not mean life has to stop,” it just means we have to find ways to adapt to the “new normal”—including safer ways of socializing.  

While individuals, across all age groups, play a crucial role in lowering the risk of transmission within their communities, they are only one of many stakeholders responsible for the mitigation of a “second wave.” Inter-ministerial coordination is key, and so are collaborations across various entities in Lebanon (community, healthcare facilities, municipalities, and non-governmental organizations [NGOs]) as they all have major responsibilities and must work collaboratively to implement advanced structural measures. The government must balance Lebanon’s economic and public health needs and ensure the implementation of evidence-based measures and strategies as outlined in a newly published policy brief by the Knowledge to Policy (K2P) Center. The report stresses on the need for a comprehensive and cross-sectoral strategy, and outlines evidence-based measures at various levels to support the control of a second wave of COVID-19 in Lebanon. 

Civic action and responsibility is necessary though not sufficient. Today, there is an unprecedented need for residents of Lebanon to join in the efforts aimed at containing COVID-19 locally—and that is by acting with heightened sense and sensibility. This does not preclude one from going to work to make a living in these incredibly stressed financial times, or sustaining small and close family and friends gatherings for mental health wellbeing. It simply necessitates that we all act responsibly and abide by international and national guidelines, otherwise, as Dr. Abaid warns, “if we falter, it will be a very steep fall.” 

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Coronavirus CloseupEconomics & PolicyOpinionQ&ATransport

Q&A with the Bus Map Project’s Chadi Faraj, on the impacts of coronavirus measures on Lebanese public transport

by Nabila Rahhal
written by Nabila Rahhal

Among the many aspects of our daily lives that were perceived in a new light following the four months since Lebanon introduced coronavirus-related safety and lockdown measures was the way we move from one place to another.

Not allowed to use their cars on Sundays and only on alternative weekdays from April 5 to June 15, Lebanese were forced to either walk, ride a bicycle, or take a bus, cab, or service (shared taxi). This was a novel experience for some and the hope for public transport proponents is that the mobility habits picked up in that period would be carried into the future, especially since they may be needed now that the economic crisis has made driving potentially costlier (the price of spare parts has increased and there have been proposals to remove government subsidies for fuel).

The economic crisis has also had an impact on the drivers within the informal public transport system, especially since they were prevented from working during parts of the COVID-19-related lockdown measures. With the rising cost of living, the Ministry of Public Works and Transport officially increased fares from LL2,000 per service to LL3,000 and from LL1,000 to LL 1,500 per van/bus when traveling within Beirut.

In an interview prior to this fare increase, Executive talked to Chadi Faraj, co-founder of the Bus Map Project (which developed a map for the informal bus system in Greater Beirut) and Riders’ Rights (an advocacy initiative that supports public transport in Lebanon), about the effect of COVID-19 and economic crises has on the Lebanese and on the drivers of services, buses, and vans.

How did the coronavirus lockdown measures impact public transport?

When the government announced lockdown on March 15, they took the decision to stop all forms of shared transport from operating during the first phase of the lockdown.

In many countries, such as Canada, China, or the UK, public transport is considered an essential service because a lot of citizens depend on it for their commute to work. Those include people who work in services that were deemed essential and allowed to continue operating, even in Lebanon, such as healthcare, grocery store employees, and delivery people.   

So in these countries they allowed public transport to continue, with reduced operational hours and with restrictions on the number of people allowed on buses or metros.

How do you think the Lebanese government should have dealt with this instead?

It is true that there is a risk of transmission of the coronavirus in public transport, since it is essentially a public space, but this is not the way you deal with that risk.

We could have taken precautions, sanitized the buses frequently, reduced the number of riders per bus, relied on contactless payments instead of exchanging cash by hand …

But we don’t have the option of contactless payment for buses or services in Lebanon…  

There is always a solution.

In some African countries, which also don’t have contactless payments for public transport, they had hand-washing stations at bus stops for riders to wash their hands before taking the bus.

In Lebanon, they did not try to find solutions but took the decision of halting these services temporarily.

How did the total halt on shared transport affect people in Lebanon?

This caused a problem for essential workers who were still allowed to go to their place of business.

A lot of those workers, such as bakers or nurses or darak (police), use shared transport and so had difficulty getting to their work when this service was halted. Even when services were allowed on the roads again (a month after the lockdown, I think), it was not easy to find one.

The government should have considered shared transport employees as essential employees and kept them operating under certain conditions. 

It was a difficult period for shared transport operators and we tried to help as much as possible but, at the end of the day, we are not a charitable organization. We only managed to help five drivers with food supplies during the lockdown period. Once that was lifted, we launched a campaign called Bus Line Heroes through which we were able to support 34 drivers with a [one-off lira] cash amount [of LL221,500].

When the odd-even license plate measure was introduced by the ministry of interior, how did it impact shared transport?

At first, this bothered taxi drivers since they could not drive on certain days at a time when work was already slow. It was slow because people were scared to take shared transport at the beginning.

While keeping the odd-even measures, the ministry gradually allowed first the 14-riders minivans to operate and then the 24-riders buses, both at half the capacity. In my opinion, they should have started with the buses first since it has more space for distancing than a minivan but they considered the number of riders instead—so two in services, seven in vans and 12 in buses—and asked everyone to wear masks.

Some bus drivers appreciated the odd/even circulation because there was less competition in that period so they would have more riders than they would have had in two days.

What was the situation like after it was lifted?

When this measure was lifted, demand slowed down significantly [for buses and minivans] since there were more buses on the road. So this odd/even [restriction] organized shared transport somehow and allowed riders to be distributed more evenly among buses.

Did the lockdown period and then the odd/even license plate period change how people in Lebanon view public transport, from your perspective?

Yes. 

We saw more people walking or riding bicycles so there were positive steps in that direction. 

We would have liked to see more of a push from the government for this mode of transportation, as was done in other countries which reduced the space for cars in favor of bike paths and walking lanes.

How do you think the economic crisis the country is passing through will impact Lebanese’s views on public transport?

At one point, most Lebanese relied on their private cars and did not even think of taking shared transport. This is because it was relatively easy to buy a car since banks offered loans on good terms, cars were advertised everywhere, and there was this whole image of how essentials cars are to our lives.

Public transport was basically ignored, by the government and many Lebanese, and was viewed as mainly being for the poor. But with the economic crisis today, there is potential for more people to view public transport in a more favorable light. Some people may be forced to use the existing shared transport because, at some point, they may not be able to fill their cars with benzene (gas) anymore or they will not be able to afford fixing their cars when they break down. This thing, this crisis, may end up having a positive effect in that it drives people to use shared transport or alternatives modes of transport again.

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Hospitality & Tourism

New Damour beach club, Lost at Sea, opens despite Lebanon’s economic crisis

by Nabila Rahhal
written by Nabila Rahhal

All that can be seen in the drive down the narrow road in Damour, south of the airport, that leads to the country’s newest beach club, Lost at Sea, is the glittering Mediterranean. This serene seaview provides a soothing backdrop to the white sunbeds, the turquoise pool, the natural wood bar, and the restaurant seating area that makes up the 450-person capacity beach club.

Within that environment, it is easy to forget the stresses of daily life in Lebanon nowadays—be it the longer than usual daily power cuts, the non-functioning traffic lights, or the increasing number of businesses that are shutting down—and to make believe, even for an afternoon, that all is well in the country.

Michel Abchee, CEO of Damour Beach Resort sal, which owns and operates Lost at Sea and Damour Beach Club, is quick to bring things back to reality. He points out that all the infrastructure for Lost at Sea, including their 100-meter square pool, was developed last year and that around 40 percent of the $500,000 total investment into the beach club was made at that time—giving the impression that the company had sunk too much by way of investment and physical infrastructure to just walk away.

The decision to continue with the project this year, despite the dismal economic situation and dwindling purchasing power, which Abchee is very aware of, was more of an experiment. “This contradiction that you see here is just based on the fact that we started last year and we decided to continue, as [owners], and do a test for the market for this year,” he says. “But it does not mean that it will make money. It just means that we are testing the system and see where the future is heading.”

Lost at Sea / Photo by Greg Demarque

Lost at Sea caters to a niche target market that can still afford small luxuries, Abchee says, which he believes will always exist in Lebanon. “What you see here is more of a luxury resort than a family or casual one,” he says. “We focus on high-quality service and on using natural material and integrating the project with its surroundings.” Accordingly, he set the entrance fee with his wealthy target clientele in mind. The beach club operates Thursdays through Sundays with weekday prices set at LL45,000 and weekend prices at LL60,000, which is 20 percent more than the average entrance fees of beach clubs this season. Abchee says entry fees will remain stable through the summer whereas F&B prices may vary based on the market pricing of ingredients and supplies (for more on beach clubs’ pricing and costs, see upcoming article).

Damour Beach Resort was launched in 2012, and it was Abchee’s experience with that family-oriented project that made Damour Beach Resort sal decide to develop a luxury beach club. “Last year, because we had seen the purchasing power of families decreasing year-on-year since 2015 (at Damour Beach club), we felt that it is necessary somehow to shift a bit to another type of a beach club, while still keeping Damour Beach open, Abchee explains. “We wanted to open a beach club that would cater more to a young [family-free] crowd.” From his travels abroad, Abchee says he realized that Lebanon is lacking beach venues where one can enjoy a high-quality meal or drink with some nice music while spending the day by the pool or beach. This led him to develop Lost at Sea, the concept of which is based on the group’s boutique hotel in Gemmayze, Lost.

Damour Beach Club / Photo by Greg Demarque

The two beach projects, Lost at Sea and Damour Beach Club, were originally meant to be part of a bigger resort that Damour Beach Resort sal envisoned launching in full in 2015. As Abchee recounts, their plan was to develop a beach resort (complete with all the facilities and amenities expected of such a project, e.g. multiple pools, eateries, and entertainment options) that would surpass what exists south of the airport in its scale. “There are a lot of restaurants and cafés [in Lebanon], but we believe there are not too many resorts,” he says. “So there is a lot of potential to build new projects, new destinations … to do it differently than what is being done today. But unfortunately the situation of the country has not been encouraging of such investments.” In lieu of opening such a big project all at once, given the circumstances, Damour Beach Resort sal opted to launch the beach clubs first. “For now, the focus remains on boutique type projects where the needed funding remains accessible to investors,” Abchee says. 

Abchee describes his outlook toward Lebanon at the moment as “very negative” and says most businesses in Lebanon, including beach clubs, are in “survival mode.” (See upcoming article on the challenges of beach clubs in Lebanon this summer). Speaking prior to the airport’s opening, Abchee said he expected it would bring “an injection of oxygen” to the country, but believed it would be a short-term relief at best.

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Coronavirus CloseupEntrepreneurshipQ&A

Q&A with Smart ESA’s Jihad Bitar on upcoming hackathon and future plans for the accelerator

by Thomas Schellen
written by Thomas Schellen

The middle of 2020 is seeing three virtual hackathons—the first that are being staged in Lebanon in the space of just two weeks, from June 27 until July 10. Organized by the MIT Lebanon challenge, the American University of Beirut, and the Smart ESA accelerator at the Ecole Superieure des Affaires, all three separate hackathons are dedicated to solutions for Lebanon. According to the organizers of the third event, the Smart ESA hackathon will be a relatively small event with 10 pre-formed teams and dedicated to ‘a take on Lebanon’ after coronavirus. Executive talked to Jihad Bitar, director of Smart ESA, who shares not only about this event but also about the new batch of startups at the accelerator, plans for fintech and a coding school, and wider plans for an institutional angel fund, ESA Invest.

Will you first confirm for us that a virtual hackathon is coming up at Smart ESA?

Yes, we have a hackathon on solutions for the country. It is mostly going to be a small thing for students, not a core event. But let me say that we are working and never really stopped. We [admitted] a new batch of startups during the corona confinement. We figured that when everybody was stopped it was important to continue and send a signal that things have to go on. So we launched this batch of nine startups.

How strong was demand for the acceleration program in this situation?

In a normal batch, we used to get around 300 applicants when we opened the application process. In this batch, we came to close to 100 applicants.

Compared to the overall circumstance, this sounds quite good.

The good thing and positive side to all this is that the crisis is vetting the ecosystem a bit. I am not saying that all 100 [applicants] were good, probably not—[but I mean that] we have now a smaller number but much more serious commitments and an older average age.

How much older?

In this batch, the average age is above 30, probably 32 or 33. We are getting more experienced applicants.

Is there a specific area of business or tech where you saw a concentration of startup focuses in the current batch?

We, for the first time, did not just take tech startups but also physical brands, brands that can scale and export. So of the nine startups we have two that are pure brands with products. We also have some e-commerce but a lot of the startups are actually projects that ride the wave of the economic crisis in Lebanon. For three or four, the timing in this sense is perfect in that they would actually work very well during a crisis.

Do you see a stronger hunger for social entrepreneurship type of activities when compared to previous years?  

We did not look for social entrepreneurs as part of the [application] criteria but we definitely feel that the entrepreneurs who we got have a better consciousness of their social responsibility.

Entrepreneurship means that startups are fated to chase investment money. How is the funding situation going to be for your new cohort of startups when they have graduated from this program?

I have been saying at several conferences in early 2019 that the high interest rates in banks in Lebanon was the enemy of entrepreneurship. Nobody was going to invest in startups when you could have 12, 13 or 15 percent return from [a deposit in] a bank. What we are seeing today is a micro-boom of investment in startups. I am talking [about] early-stage investments in startups from some angel investors. Saying it in a cynical way, investing in a startup in Lebanon today is less risky than keeping your money in a bank.

Or at least perceived as less risky than leaving your money in the bank, where it seems to be stuck.

If you want to make your money work, you can invest in certain startups in a portfolio mix. We are seeing that a lot of startups are getting funding today. The problem lies in the fact that the local money is not useful for startups that need to grow outside of Lebanon. It is very difficult for them to use that money to grow outside of Lebanon. Thus what we are seeing is more of a double fundraising where [startups] raise local money to pay salaries and try to raise some fresh money to grow outside.

Can you quantify how this micro-boom of angel investing is dimensioned, for example by size of invested amounts in the last three months?

It is very difficult to have numbers and I do not have a statistically relevant number but I can tell you anecdotal numbers. I know startups that have been looking for money for more than a year, which were too small for VCs and which were finding it difficult to find angel investments. Now they are all in very advanced negotiations to raise the money. This is anecdotal because it is a small batch that I saw waiting as they were trying to [raise funds]. Another anecdotal evidence is that today there hardly passes a day without me getting at least one phone call from somebody that asks me if I knew any startup that would be worth investing in.

Can you compare this rate of one call per day to how many such phone inquiries you got a year ago?

From individual investors who were seeking to invest with their own money, we used to get one call per week. Now we have one call per day from such angel investors.

Did you see any flow of Circular 331 money in recent months?

I think there has been a little bit of investment going on. I know that some funds still have a little bit of money. The problem is that the crisis happened at the same time when the funds were supposed to give back the money to their investors and the banks. 331 investments had really slowed down already in 2018; at the end of 2018 and beginning of 2019 there were very few 331 investments. Also, for the last two or three years, 331 investments were not or very rarely going to early-stage startups because [the VCs] were giving the money to later stage, series A [ventures].

So before, there was a lot of money for investment [tickets] above one million dollars but very little for investments below that, and almost no money for investments under $300,000. Today this has inversed. Because angel investors are putting [up] money, you can today find money for tickets of under $500,000 from angel investors but it is difficult to find money for startups that need to grow with $5 or 10 million dollars of investment.

However, I am seeing also another trend. Institutions in other Arab countries that have fully understood what is happening in Lebanon, are contacting certain Lebanese startups directly and tell them to come and set up in Jordan, Abu Dhabi, and other countries. This is important because it is a way out for many startups.

It does not sound like this is a way out for the Lebanese ecosystem, however.

But it is good. As long as these startups keep a back office in Lebanon, and this is what we are asking them all to do and what a lot of them are doing, it is fine.

Keeping a back office in Lebanon as long as you have your funds flowing sounds like a very valuable proposition, because of reduced salary and overhead costs in this country.

Exactly.

How many hackathons do you do each year at Smart ESA?

We do around three.

And this is the first virtual one?

Yes.

Earlier during the corona crisis, there were many virtual hackathons related to the pandemic and solutions for its problems organized in Europe, the United States, and elsewhere in the world but nothing was happening here. Do you have a view why Lebanon was relatively late in terms of bringing on virtual hackathons?

I think honestly that very few people were used to doing things virtually here. It was not in our culture. We are more into direct contact and being physically present. So I think there was a reckoning moment and a cultural change moment where people got used to do zoom meetings and all this … There was a lack of knowledge to be honest.

So one could say that this learning curve was somewhat delayed in Lebanon?

Exactly.

According to the advance information about the upcoming hackathon, ten teams would be in this event and they were all to be pre-formed, not assembled on the spot. Is this correct?

Yes.

Out of how many applications did you select the ten teams?

I am not following this personally and do not have the numbers as this is followed by my team but I can tell you that there were not many applicants.

To confirm the topics of the upcoming hackathon: Is it correct that there are three tracks, one on education and online education, one on the challenge of SMEs that are facing problems due to the coronavirus situation, and one on empowering solutions that involve social distancing?

Yes, it is about how to make businesses thinking of useful solutions to keep social distancing and the best of social distancing. How do you transform a problem like social distancing into a business opportunity?

And it is right that there is no track dedicated to fintech?

No. We will do another hackathon later in the year specifically on fintech.

I saw that ESA started to promote online basic courses on fintech. Do you think that fintech still has a future in Lebanon?

We think that fintech is definitely a solution. The problem with fintech is obviously the regulation. I don’t know if you know this but we were planning on launching a fintech accelerator in June of this year. It was a bit delayed and stopped but we are still working on it—a pure, dedicated fintech accelerator.

We do believe that fintech has a future. It is obviously very difficult, because regulation is extremely complex and Lebanon is very late vis-à-vis our Egyptian and Jordanian competitors that are much more advanced in fintech than we are. But we believe that the economic problems in Lebanon will call for very smart fintech solutions. We truly believe that out of extreme crises like this can come very interesting solutions.

Is the financial future secure, as far as ESA and Smart ESA?

I cannot speak on behalf of the university but I think the university is overall okay, although it is obviously challenging times. ESA until now enables students to pay their tuition at the official LL1,500 [lira to the dollar] rate and certain programs are actually getting many more applicants because ESA has a very good quality education and is still very affordable when compared to some other universities.

Concerning Smart ESA, we have until now been financed entirely by ESA itself, so the university has been covering our costs. We have a few corporate partners but the bulk is still financed by the university. This is obviously a challenge in the long run and we need to find new sources of funding, which we are working on. In parallel, we are also trying to grow and are working on many programs, and this is difficult. We will launch a coding school very soon; we believe one of the major problems in Lebanon is not just money but the lack of technical talents. Hopefully it will be launched by the end of year and will be funded by the French government to create jobs in Lebanon.

What makes the upcoming hackathon most special? Is it that it addresses life after corona from a Lebanese take, as the title says, or is it that it comes at the most desperate moment of existential challenge in Lebanese memory?

No, [the hackathon] is not tackling existential challenges—on this point, I think [our approach is shown in] the fact that we have continued as accelerator and started during confinement to have nine startups, that we are continuing, and that we are even creating something called ESA Invest, which is a small angel fund where we will invest money at ESA directly into certain startups.

As you know our programs are not just for ESA students, anyone can apply. Startups don’t pay for our programs, and our programs are open for everyone, so we do everything for free and in parallel we are creating a fund to invest in selected startups. We are very dynamic, doing all this in the middle of a crisis because we still believe that there are very good opportunities here. This is what we are doing in terms of the existential crisis.

To answer your question in terms of the hackathon, we really want to tap people into thinking: What is the next step after corona? How to use corona as an opportunity and transform this [problem]. Entrepreneurship is always about finding solutions to challenges and what bigger challenge can you have than the corona crisis and economic crisis?

You said the program as Smart ESA is for free, but as you are creating ESA Invest, does this mean that the accelerator will be taking equity?

No, they don’t pay anything and we don’t take equity. Joining the program is independent from the fact that we are creating ESA Invest, with an independent investment committee. It has nothing to do with the actual program.

So the investment committee of ESA Invest will then pursue the usual activities of monitoring the startup, having board presence, and assuming equity?

Exactly. The idea behind ESA Invest is that ESA has a huge network of business people. A lot of [these] people around our university are CEOs and a lot of them want to invest in startups as they want to use their cash in a smart way. But a lot of them are not trained to invest and do this the first time. They have been telling us for a while that they are ready to join in, if ESA invests saying ‘if you as ESA go in, we are ready to follow after you.’ We will put very small tickets [as ESA Invest] but these can open up much bigger tickets from other angel investors.

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