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EditorialOpinion

Le monde du plus fort ou du plus fou

by Yasser Akkaoui October 21, 2019
written by Yasser Akkaoui

French anthropologist Marc Augé coined the phrase “non-lieu” (non-place) in the mid-1990s to describe places where considerations of history and identity were erased—think shopping malls or airports. Listening to him speak in Lebanon earlier in September got me thinking, Lebanon is the antithesis of a non-lieu. Every space in Lebanon is linked to our history and our identity—even the naming of our highways and airports evoke politics of our past.

In some ways that means we can never escape the economic and political realities of this country. Never free ourselves of our past to allow independent and forward thinking. Yet, many Lebanese—at least when times are good—seem content to stay in their heads, behind their screens, immersed in social media and technology. Those who stay in the lieu of it all are those with a bigger stake in protecting their share, but also those who have in the past been easily manipulated.

If we want to see change, real change, in Lebanon, then all of us have to get back into the lieu. We need the middle classes to be more aware of the realities around them in both good times and bad. Our political class has been taking advantage of the absence of oversight in this country, indulging in what is not theirs to take. But change is coming. It is no longer possible to detach ourselves from reality. The one space where we could express ourselves freely, the non-lieu of social media, is becoming a place of oppression. Our online thoughts and tweets subject to state scrutiny. But this overreach has a side benefit: More are beginning to take notice and understand the diversionary tactics employed by our politicians. And they will hold this political class accountable for every violation they have perpetrated against the people.

The end of September brought with it a whirlwind of rumors and fears over dollar liquidity in Lebanon. People rushed to withdraw their money from the banks. Panic ensued, while our delusional and dishonest politicians continued to squabble over the little that was left for them to steal. We have been here before. Many middle class Lebanese in the mid-80s, my family included, found themselves impoverished when the lira devalued. But chaos always has its victors; the few profited, while ordinary families struggled to get by. We were kept in the dark then, as we are now. But the cracks are beginning to show.

It has been 18 months since the international community pledged $11 billion on the condition of serious fiscal reform. In the time since, there has been a lot of talk, but little action. Duquesne and others no longer hide their impatience with the unruly rabble that we have in place of statesmen. Our politicians behave like kindergarteners, bickering among themselves, while the international community looks on with disdain. Warning after warning goes unheeded, and Lebanon teeters on the brink of crisis.

To our politicians, I say this: It is your choice. Be strong or be fools.

October 21, 2019 0 comments
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Economics & Policy

Change is coming

by Executive Contributor October 21, 2019
written by Executive Contributor

This is the beginning of the end of Lebanon’s current financial model; the problem is that we refuse to accept it. There are clear signs that painful change is coming, made all the more painful by attempts to ignore the inevitable.
Chronic corruption has paralyzed the country. The absence of growth the past eight years has caused thousands of businesses to shutdown (3,000 in the last 18 months) and seen unemployment hit record high numbers in times of peace—unofficial estimates put unemployment at 35 percent in 2018, up from 16 percent in 2010. The Lebanese lira is under a pressure not seen in 27 years; an indicator that the post-war economic and financial system is coming to an end.
Banque du Liban (BDL), Lebanon’s central bank, has been forced to prioritize crucial imports, such as wheat, medicine, and fuel.

Long unsustainable

The choice to peg the lira to the US dollar is a monetary policy that works best for small open economies like Lebanon, where investors feel safe to transfer wealth because they know that they can take it back at the same exchanged value—along with their profits—whenever they please. And so, with the help of the peg, Lebanon was blessed with GCC investment and tourism dollars, and, more importantly, expats’ dollars— leading to one of the largest deposits to GDP ratios in the world. The latter seems like good news, but it came coupled with GDP growth rates that consistently lagged behind potential.
What does that tell us? With one of the largest debt stocks to GDP in the world, mainly borrowed from local banks, it means that every resident and non-resident depositor—who are currently fleeing—has funded 27 years of corruption, instead of financing an economy that had great potential 20 years ago.
It is not true that local debt is better for the stability of the financial system, because when the game ends, it is the locals that pay the highest price—not foreign banks. It is also not true that Lebanon is dollarized; it has a pegged system, but all government income and expenditures are in lira. Its debt service is in US dollars, which it is unable to generate. This all might be common knowledge, but a crucial point has been missed over the years when describing the rentier economy of Lebanon. The system of feeding corruption through the dollar deposits of Lebanese locals, expatriates, and GCC tourism could not continue forever because the rate at which the inflows needed to increase would never match the rate at which the problem was growing. The GCC tourists are long gone, and the Lebanese no longer trust their own financial system and currency.
We now live in a country that cannot afford to pay back what it owes and cannot finance its expenditures.
Instead, it is feeding its citizens cancer through the corruption and lack of basic infrastructure that permeates through every bite of local produce we eat and every breath we take.
We are one of the worst credit-rated countries in the world; our debt ratios are much worse than other countries that have faced government debt crises in the past few years. Interest to revenues per year in Lebanon is now at 50 percent; when the Greece economy tanked their interest to revenues was at 17 percent. Our pain will be several times their pain.

Time to choose

Our politicians are starting to throw around the hot potato; the head of state bluntly tells reporters to go ask the governor of BDL and the finance minister about the situation because he was busy traveling.
We have lost all credibility with the international community; foreign diplomats do not hesitate expressing their disgust with us. It has been 18 months since our leaders agreed to implement reforms in exchange for loans pledged by the international community, yet in that time we have failed to even start building one power plant. The electricity sector is in dire need of reform, but our latest electricity plan includes more barges under the excuse of a “temporary so lution” before new plants are built. The same excuse we heard in 2012. What a bad dream.

The first choice is to keep watching ourselves drown, allowing politicians to reinforce the denial they promote by promising us that offshore gas will solve everything. As a result, Lebanon will soon be force-fed the usual poison, which could have been avoided had change occurred earlier.
This will include a combination of devaluation, a haircut on debt and depositors, and selling government assets cheap—all of which will lead to extreme poverty and from which it will require decades to recover. The other choice is to say stop.

October 21, 2019 0 comments
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Last wordOil and gasOpinion

Oil and gas will not save Lebanon

by Diana Kaissy & Sibylle Rizk October 11, 2019
written by Diana Kaissy & Sibylle Rizk

As Lebanon races to enter the new oil producers club, decision-makers display a dangerous tendency to put all hopes on this uncertain sector and label it as the economic savior. This goes against the advice of Lebanese experts who have been warning against a “presource” curse  (the underperformance of economic growth after a commercial discovery, but long before production—a result of skyrocketing expectations and a correlated increase in public spending and/or borrowing) and calling for structural remedies to the economic crisis. Early last month, Pierre Duquesne, the French envoy in charge of the CEDRE dossier, warned against the “false hope” that oil and gas extraction was a “magic remedy.”

The Lebanese economy is facing great challenges. Indicators show signs of a prolonged contraction. The financial model long used to maintain the Lebanese standards of living—despite unsustainable levels of public debt, budget deficit, and current account deficit—is now on the verge of breaking. The deficit in the balance of payments accelerated from $0.76 billion in the first seven months of 2018, to $5.32 billion over the same period in 2019. In an attempt to lure back depositors, Banque du Liban (BDL), Lebanon’s central bank, has raised rates on its deposit facility to unprecedented levels.  

Pierre Duquesne warned against the “false hope” that oil and gas extraction was a “magic remedy.”

Despite—or because of—this bleak economic picture, decision-makers (government, heads of political parties, members of Parliament) are putting all bets on the oil and gas sector. 

The 2019 budget openly cites Lebanon’s potential oil and gas wealth as one of the reasons to not worry about the risk of default. The government is thereby implicitly dismissing the costly efforts needed to tackle the crisis, and using anticipated proceeds from oil and gas resources that are yet to be discovered in order to boost confidence.

Last April, the government launched the second licensing round for five new offshore blocks. This came prior to any commercial discovery in wells that will be drilled in the coming three to five years by the Total-Eni-Novatek consortium. Under more relaxed economic circumstances, in order to improve awarding conditions, the government should have waited for the results of the first round of drilling, scheduled for the end of 2019, before launching the second licensing round.

Total is also being pushed by Lebanese authorities to start drilling as soon as possible; a pressure the company says it has accepted. Instead of the usual one to two years to determine the exact location for drilling, Total did so in less than one.

All these signs are a clear indication that while authorities are buying time through unconventional monetary policies to compensate for increasing imbalances (growing debt, fiscal and current deficit), their only hope is to bet on an exogenous “miracle” such as petroleum wealth to save the day. Tapping into uncertain non-renewable assets that belong to future generations to cover for debt accumulation and mismanagement of current resources is not an option. All efforts should instead concentrate on developing a strategy to get back on a sustainable debt and fiscal path.

Tapping into uncertain non-renewable assets that belong to future generations to cover for debt accumulation and mismanagement of current resources is not an option.

Countries, such as Ghana and Sierra Leone that have pinned excessive hopes on uncertain future revenues have paid the price in the form of declining economic growth. The government is falling into this presource trap, notably by seeking at a very early stage to establish a Sovereign Wealth Fund outside the framework of a broader macroeconomic vision. We believe that prior to creating an oil fund, the government ought to reduce public debt to sustainable levels, and enact and enforce fiscal rules to credibly commit to fiscal sustainability in the future. 

The real challenge that lies ahead for Lebanon is to agree on a new economic and social contract that promotes a competitive and fair economy, instead of capturing state resources to fuel a corrupt political system. The only way forward today is to tackle head-on the task of sharing the burden of losses accumulated by this failed economic model. Hoping that oil and gas proceeds will cover up for these losses is at best an illusion, and at worst a crime. Lebanon needs to make sure that future proceeds are not allocated through the same economic model and find channels that can transform them into investment capital within a new economic and social strategy. The only guarantee that this sector will not be used to fuel further corruption is sound governance practices that ensure an inclusive, transparent, accountable, and participatory management of this potentially lucrative sector. As a start, transparency measures, such as beneficial ownership disclosure as mandated in article 10.7 of Law 84 (2018) on enhancing transparency in the petroleum sector, need to be applied to all contracted and subcontracted companies working in the oil and gas sector in Lebanon.

October 11, 2019 1 comment
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CommentSpecial ReportWine

Challenging misconceptions about Lebanese wine

by Farrah Berrou, Selim YasmineMakram RabbathJean Kissonergis & Nabila Rahhal October 10, 2019
written by Farrah Berrou, Selim YasmineMakram RabbathJean Kissonergis & Nabila Rahhal

There is a negative perception of Lebanese wine that views it as overpriced and headache-inducing. This perception may even be shared by some readers of this piece. Luckily, those in the retail and hospitality industries who sell local wine say that this misconception is changing over time. There is a vast range of Lebanese wines out there for consumers to try, and more and more, it seems, are doing just that. 

Executive opened the floor to four players in the industry to weigh in on their experience with local consumers’ perceptions of Lebanese wines. 

Farrah Berrou

At Wesley’s, because we specialize in imported products that aren’t found anywhere else, customers are already in this “discovery mindset” when they walk through the door. They want to find things they’ve never seen or tried before. When it came to our wine section, we wanted to leverage that by giving customers a chance to discover Lebanese wines they don’t usually see on supermarket shelves or in shop cellars. We have one of the most diverse ranges of local wines, and it’s still growing month by month as we procure new additions gradually. 

There’s no need to fear what’s in your own backyard.

However, even with that extensive selection there is resistance when it comes to going for something new. There is fear of what they don’t know, especially when it may be more than what they wanted to spend on a bottle that’s just for Tuesday’s mac n’ cheese dinner. Sometimes, because it’s cheaper, customers tend to go for a foreign bottle. But it’s also because of this assumption that Lebanese isn’t “good enough.” It’s an unfair blanket statement to make about an industry that’s come a long way and is currently booming. 

Through the Lebanese wine classes we host, it’s been much more effective to not only prove that our local wine scene is worth exploring, but also to tackle the common misconceptions when it comes to our wines—like pricing and the production process. Attendees have been pleasantly surprised by the variety and experimentation that’s happening across Lebanese regions. The experiential approach of our classes shows them that we’ve got something magical happening right here, and that there’s no need to fear what’s in your own backyard. We’re proud of everything else we produce, from olive oil, to cheese, to honey—why not wine?

Selim Yasmine

As a rather small country, Lebanon can only produce a small amount of wine, and therefore cannot compete in volume or quantity. The only edge for Lebanese wine is quality, and we are very confident that the quality of Lebanese wine is high. Moreover, if one were to compare the price of Lebanese wine, they must benchmark it to similar quality bottles. We need to compare apples to apples, and this is where we can see that the price of Lebanese wine is competitive when compared to bottles of a similar high quality.

Having said that, I believe it is impossible to put all Lebanese wines in the same basket. The wide diversity of Lebanese wineries—especially with the notable increase of winemakers of late—makes it very difficult to give a quality statement that applies across the board to the 60+ Lebanese wineries across the country. I am certain that we could find both Lebanese wines that are overpriced and bottles that are high-quality for their price. Ultimately, it is all about perception, taste, and education.

The only edge for Lebanese wine is quality, and we are very confident that the quality of Lebanese wine is high.

When it comes to that rather shallow yet popular belief that Lebanese wine causes headaches, this perception is inaccurate. We must bear in mind the sheer variety and diversity of wine that exists in Lebanon and not stereotype it by labelling it all as the same. Until now, there is no definitive evidence as to what causes some people to have headaches from drinking wine while others do not. A common misconception is to blame the sulphur dioxide (sulphites) within the wine, but the reason this is listed on the bottle is that for a small percentage of people sulphites are an allergen. There are more sulphites in dried fruit than there are in wine. Other reasons being explored as possible headache-inducers include the tannins in red wine, an antioxidant that comes mainly from the skin of the grape when it ferments, which is also found in black tea and dark chocolate. For those without an allergy, headaches will more likely be down to an overindulgence. 

In the almost three years that I have been exclusively selling and promoting Lebanese wines, I personally have never faced any complaints about price or quality, mostly because consumers are becoming more educated and are being exposed to more accurate information. We are proud that our wine is being appreciated both locally and globally.

Makram Rabbath

Over the last two decades, local wine consumers’ habits have totally evolved and matured. The number of winemakers in the past decade has more than doubled. Traditionally, the perception of local wine had always been negative, with consumers tending to say they got headaches when drinking Lebanese wines, or that they were overpriced, or even that the wine is not up to international standards.

Over the years, three major parameters have radically changed, and in turn have led to a change in this perception. Technique has evolved, and today winemakers have a totally different approach to the wine making process. Some of the wineries have access to the latest equipment and technology, and make good use of it. 

The number of winemakers in the past decade has more than doubled.

The second thing that changed is that local consumers are more and more attracted by wine. They often visit wineries, attend wine courses and seminars, and even travel to discover and taste new wines. Lebanese people in general, and Lebanese winemakers specifically, have today become the best ambassadors for our local wines. They are now proud to share and taste Lebanese wines with their friends from all over the world, and in some of the most renowned restaurants in the biggest cities across the globe.

Finally, the development of specialized wine shops selling a wide collection of local wines have helped people discover the richness of our terroir. Many activities and festivals themed around wine are also supporting this.

At Le Petit Gris, we have seen this big change with an increase of more than 50 percent in the sales of our local wines over these past two years.

Jean Kissonergis

In Lebanon, we are blessed with great landscape and weather—ideal conditions for wine production. Therefore winemaking is becoming an even bigger trend nowadays, and we find new emerging labels every few years.

I perceive Lebanese wines as being artisanal products and not mass produced items.

We offer a big selection of Lebanese wines at PepperTree and always encourage our customers to opt for local when pairing their wine or having a drink. However, our clients tend to request foreign wines more often, especially European bottles. This isn’t representative of the quality local wines have, but instead it is a product of minimal taxation over European wines—they end up having very similar price tags on our menu. I also believe that another reason customers order foreign wines is because they can try something new at the restaurant, a bottle they aren’t familiar with, and experience new tastes. Whereas most of our foreign customers go for the local selection for the same reason.

Personally, I perceive Lebanese wines as being artisanal products and not mass produced items. This explains the high production costs and thus, the somewhat high price tag. But in any case, we are proud of our Lebanese wines as they are getting more and more noticed abroad for their great quality and the care that goes into their production.

October 10, 2019 0 comments
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CommentSpecial ReportWine

Lebanon must learn from New World wines’ successes

by Hady Kahale October 10, 2019
written by Hady Kahale

Lebanon has one of the oldest wine heritages in the world. It has been producing and trading wine for the past 6,000 years; is home to the world’s largest Bacchus temple, dedicated to the god of wine; and one of its cities, Botrys (Batroun), was named after the ancient Greek for grape bunch. Under Ottoman rule, wine production declined in favor of the production of arak, but the Lebanese never truly stopped making wine. In fact, the resurgence in wine production began before the end of the Ottoman period in 1857—some 162 years ago—when Jesuits planted vineyards in Ksara. And it was in the early 1990s that Lebanese wine exports started picking up.

Lebanese wine shares a similar story with the likes of American, Chilean, Argentinian, Australian, New Zealand, and South African wine. Some of these New World countries—a wine term identifying wine producing countries outside of Europe—started making wines in the 16th century, others later. They all went through tough times—e.g. economic downturns, adverse regulations on alcohol, international boycott, and grapevine pests—and all reemerged on the international export scene between the 1960s and 1980s.

But this is where the similarities stop. Without having thousands of years of wine heritage, these countries somehow managed in the span of a few decades to revolutionize, reinvent, and reshape the global wine industry and—in an equally unimaginable feat—tossed European wine makers out of their comfort zones. In the space of a few vintages, they built a strong identity for their wines.

Lebanon, however, despite its wine heritage, has yet to make an impact on the world stage. A Master of Wine—a title bestowed upon 390 people worldwide by the Institute of Masters of Wine, considered the highest accolade or title achievable in the wine world—was asked back in a closed session with Union Vinicole du Liban (UVL) in May what the perception was of Lebanese wine abroad. She paused, reflected, and her painful—but honest—answer was: “What perception?” 

Is the world even aware that Lebanon is producing wine? And if it is, can it pinpoint what Lebanese wine identity is? To be clear, this does not mean that Lebanon is not producing beautifully crafted wines. It does not mean Lebanese wines do not have aficionados and cult followers. It simply means that very few people have ever heard about it, and if they have, they cannot define it. Only one winery has managed to shatter the hazy glass ceiling. In my experience of asking wine professionals all over the world about Lebanese wines, their answer will, almost invariably, point to Château Musar. This achievement makes us all proud. However, to market Lebanon efficiently, one winery is simply not enough. 

What we need is a group of young Lebanese winemakers teaming up to experiment and transparently share knowledge.

Lebanese wineries produce close to 9 million bottles a year, according to estimates by UVL. Of that, approximately 3 million bottles are exported. It is a success story. Winemaking is one of just three industries in Lebanon that use local raw materials and have a positive trade balance; based on 2018 customs statistics, only wine, jam, and vinegar production meet these criteria. Winemaking is a craft that, by my own estimate—as official data is lacking—provides the livelihood of thousands of workers and their families in Lebanon. And, while it was historically the case that Lebanese winemaking was the purview of Christians, nowadays the industry is diversified by region, religion, and social environment. The government should take note of this and support winemaking as an industry that benefits all Lebanese. 

Yet, the room for improvement is vast. Lebanon should be exporting far in excess of 3 million bottles, in line with the exports of its neighbors. In 2017, on the Eastern Mediterranean shoreline, Greece exported 34 million bottles of wine, while Israel exported 23 million (a ten-fold increase over a 15-year period), according to statistics from the International Organisation of Vine and Wine (OIV). And if we delve into New World countries, numbers become mind-numbing. According to the OIV, in 2017, Chile exported 1.3 billion bottles; Australia, 1 billion; South Africa, 597 million; the US, 437 million; Argentina, 297 million; and New Zealand, 377 million. How did they do it? By uniting, by experimenting with, and then promoting their own specific variety, and by expanding beyond speciality cuisine restaurants abroad. All are examples that Lebanese winemakers can learn from.  

Strength in unity 

In the mid 20th century, no one in the New World had dreamed of challenging France on the wine front—except, that is, for Californians, who decided to defy Europe by creating a Cabernet Sauvignon and a Chardonnay that could rival the best French wines. The sun-drenched vineyards of Napa Valley, following the wisdom of great winemakers like Andre Techilstcheff, and the impulse of visionaries like Robert Mondavi, were ready to take the wine world by storm. These great men realized that to take on the world, they would be more successful working together than on their own. It meant setting aside petty competitor behavior and embracing transparency and full cooperation. In 1944, seven wine merchants signed an association agreement that formed the Napa Valley Vintners trade association—now 550 wineries strong. For the last 75 years, the collective spirit and camaraderie of the association members ensured the success and quality of Californian wines. Technical, commercial, environmental, and marketing challenges were—and still are—tackled together, in unison and transparency unheard of in any other wine regions.

Photo by Greg Demarque | Executive

Unity, information sharing, and common experimentation are key if we want Lebanese wine to have the kind of international success that American wine has found. UVL does what it can to coordinate efforts. Likewise, the agriculture ministry, and its energetic director general, Louis Lahoud, try to help the industry, but are financially limited. The National Wine Institute, which should be the technical governing body of wine in Lebanon, is adrift amid Lebanese bureaucracy. What we need is a group of young Lebanese winemakers teaming up to experiment and transparently share knowledge. The wine world is unique in the fact that any experimentation in new grape varieties and winemaking techniques can take 10 to 15 years before seeing results. A group, working together, learning from each other’s mistakes, and sharing successes, will exponentially increase the learning curve’s speed and efficiency. 

In search of Lebanon’s Malbec

Beyond working together, Lebanon needs to find and promote its own specific grape variety. Take the example of Nicolás Catena Zapata, who propelled Argentinian Malbec onto the world stage. In the 1980s, Argentina was perceived as a bulk wine producer. Going against the trend, Zapata sold his table-wine-producing company, keeping only the fine-wine branch of the family’s winery, and started playing around with a grape variety called Malbec. Many of his colleagues told Zapata he was completamente loco. Malbec has its origin in France, but was far from being a coveted grape variety by wine amateurs who were falling in love with wines made of grapes like Cabernet Sauvignon. Zapata wondered if Malbec would ever be able to reach such heights; it took five years of experiments before he was satisfied enough to make a Catena Malbec in 1994.

It was an absolute success. “Kudos to Nicolás Catena,” wrote American wine critic Robert Parker Jr; The Wall Street Journal ran its first ever feature on Malbec in 1999. A decade later, Malbec became a superstar, and Argentina became the Malbec capital of the world.

So, what is Lebanon’s Malbec? Cinsault, planted by the Jesuits in the mid-19th century? Maybe. Musar opened the way decades ago, followed more recently by the bold Vertical 33 and the colorful Domaine des Tourelles. Is it Syrah, which performs beautifully in the Mediterranean climate of Lebanon?

We need to gratefully, but painfully, outgrow the commercial bridge that led us to the international scene.

Or is it Obeidi, one of the very few indigenous local grape varieties to perform well in winemaking. Naysayers say it is not good enough. I say we have not tried enough. We have not yet explored in-depth what this fickle late ripening grape has to offer.

Is it the Mekssasi, championed by Karam Wines in Jezzine? Or the Merwah, a variety used with promising results, by the likes of Ksara, Sanctus, and Phoenix in Batroun? Or is it the same old Malbec, exclusively planted in Lebanon by Atibaia, a boutique winery—which as of October 15 I will head—established in Batroun in 2008?

We need to experiment, as Joe Assad Touma from St Thomas and Fabrice Guiberteau from Kefraya are doing. We need to embrace a local variety and use it to make some of the best wines ever made with it, and we need to make sure the world knows what we are doing. The wine world will soon start listening.

The Lebanese gastronomy trap

Lastly, Lebanese winemakers must expand their horizons beyond Lebanese restaurants abroad. Have you ever heard of Chilean gastronomy? New Zealand haute cuisine? Very few people ever have. And yet, somehow, Chilean and New Zealand wines can be found in every corner of the world. Not having an established Chilean and New Zealand gastronomy on which to base their wines’ expansion was an obstacle to overcome, but it was also a blessing that pushed those wine producers to find creative and bold ways to market their produce. Aided, albeit, by the heavy promotional budgets allocated by their governments—something we cannot even dream about in Lebanon.

Lebanese gastronomy is the pride of Lebanon as well as being the main client of Lebanese wine producers. Through my own research, I have estimated that Lebanese restaurants abroad buy 70 percent of Lebanese wine exports every year. But Lebanese gastronomy is a golden, honey-coated, trap. 

It is a trap because, with the majority of wineries wanting to sell to the same restaurants, everyone has to discount prices. It is a trap because marketing efforts are widely channeled to Lebanese restaurants, without looking at the bigger picture. Growing Lebanese wine exports means growing beyond Lebanese outlets. How many people make truly informed decisions while choosing their wine at small-sized, family-run Lebanese restaurants abroad, when wine is usually included in set menus, or proposed as a house wine? How many will remember the wine after their meal? Lebanese wineries need to reach for wine critics and wine amateurs, create a unique image, and be present in wine shops, wine bars, and international wine restaurants all over the world. Mediterranean cuisine restaurants would be a good start. We need to gratefully, but painfully, outgrow the commercial bridge that led us to the international scene, if we want to achieve international recognition.

If the most dynamic Lebanese winemakers join efforts, if they agree on which grape variety, or grape varieties to push forward, and if they make concerted, intelligent, and creative efforts to grow beyond the home country gastronomy scene, then most probably, in a few years, when a wine critic is asked about the Lebanese wine international perception, the answer will be clear, obvious, and agreeable to hear. And when this starts happening, Lebanese wine exports will soar. 

October 10, 2019 0 comments
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Special ReportWine

In search of Lebanese wine’s identity

by Nabila Rahhal October 9, 2019
written by Nabila Rahhal

Although Lebanon has a rich history of wine production, dating back to the Phoenicians who used to trade it, it has only recently reached a high level of maturity that often leads to introspection and a questioning of identity. The last decade saw the number of wineries in Lebanon go up from about 20 to 54 registered wineries at the Ministry of Agriculture in early 2019, according to Zafer Chaoui, current head of the Union Vinicole du Liban (UVL) and chairman and chief executive officer of Château Ksara. The more than two-fold growth in the number of wine producers vying for local and international markets has led to self-reflection regarding the competitive value of Lebanese wine when compared to international wines.  

What has also led to this self-examination is an increase, albeit slight, in Lebanese winemakers as opposed to foreign winemakers, which remain the norm for the majority of wineries in the country. “While 20 years ago it was very normal [to have a foreign winemaker], today there are more Lebanese winemakers educated abroad and working in Lebanon,” says Hady Kahale, a wine consultant who will be heading Atibaia winery as of October 15. “Although the majority of those work in wineries they or their parents own, or are somehow related to winemaking, it’s still exciting times.” Kahale explains that because of this ownership, Lebanese winemakers can take risks, experimenting with winemaking techniques, or exploring alternative grape varieties. A foreign winemaker with a contract is more restricted.  

Obeidi Château St Thomas
Photo by Greg Demarque | Executive

French winemaker and technical director at Château Kefraya, Fabrice Guiberteau, says that this relatively new generation of Lebanese winemakers want to do wine differently, and so have introduced international grape varieties that were previously uncommon to Lebanon, such as Merlot or Pinot Noir. “This is pushing the industry forward, and this is why we have such a huge diversity of grape varieties in Lebanon,” Guiberteau says.

Meeting market demands

The identity of Lebanese wine has also been shaped by a consumer trend to embrace a country’s heritage and originality. “Our identity would have developed anyway with time, but what is accelerating this is the market,” Kahale says. “It is the international market that wants a clear identity for Lebanese wine.”

Several winemakers interviewed for this article—speaking from their own experience—confirm that the international press and critics’ appetite for Lebanese wine has certainly been whet. Guiberteau explains that it is ultimately those players who dictate what is defined as a good wine, and so offering them a competitive and unique product becomes even more significant.

“Today there are more Lebanese winemakers educated abroad and working in Lebanon.”

Maher Harb, winemaker and owner of Sept Winery in Batroun, echoes Kahale, explaining that both local and international consumer habits have moved toward demanding unique products that tell a story, and Lebanese wineries should capitalize on that. “If I open a bottle of Lebanese wine in Paris, and it tastes like Bordeaux or Burgundy or Australian wine, what is Lebanese about it?” Harb asks. “If Lebanese wine starts being called Lebanese Bordeaux, what have we done other than copied Bordeaux?” 

Old and proud

For some, the identity of Lebanese wine is entrenched in its history. As Guiberteau explains, there is a common misconception that Lebanese wine is new to wine production, while in fact it is an ancient wine producing country. This misconception is brought on by the fact, Guiberteau continues, that wine production was severely restricted during the long Ottoman rule over the region, only to be revived again with the Jesuits coming from north Africa and bringing with them the grape varieties common to the hot Mediterranean climate such as the Cinsaut.

UVL’s Chaoui says they are working on, and have come very close to, proving that Lebanon is the first country from where wine was traded outside of the country of its production with the Phoenicians. They are also trying to determine whether it is the oldest country to produce wine, but here there is uncertainty as Georgia, Armenia, and Iran are also possible contenders to that claim. Currently, Georgia says it is the oldest wine producing country, and refuting this would prove difficult. The hope is that by forging this narrative, Lebanese wine production and sales will benefit. In Lebanon, the total production of wine, according to UVL figures, is only 9 million bottles and total turnover of the wineries of Lebanon is $55.3 million to $66.3 million.

To Guiberteau, celebrating Lebanon’s viniculture also means reviving ancient methods of wine production, such as aging wine in clay amphoras (a tall ancient Greek or Roman jar with two handles and a narrow neck) à la Phoenicians—Château Kefraya experimented with this technique and released its first vintage of Amphora 2017 Special Cuvee early in 2019. “The identity of Lebanese wine needs to be marketed under the story of their viniculture, and the fact that they are the oldest country to trade wine,” Guiberteau says. “This is followed by the diversity of our wines borne out of the diversity of the country’s soil, micro-climates, and grape varieties.” 

Sept
Photo by Greg Demarque | Executive

A beautiful land

Indeed, highlighting and bringing out a winemaking region’s terroir—defined by Wine Folly, an online platform for wine knowledge and appreciation, as “how a particular region’s climate, soils, and aspect (terrain) affect the taste of wine”—is seen by some interviewed for this article as a crucial element of a country’s wine identity. “We need to celebrate our terroir,” says Sept Winery’s Harb. “Wine is an expression of the land, and the country is land so, for me, this is the only way to put an identity for your wine.” 

Harb believes Lebanon is blessed with highly diversified micro-climates and terroirs. To illustrate this diversity, he gives the example of the same grape variety he plants in his vineyards, which are spread across Lebanon, having completely different tastes depending on the micro-climate and terroir in which they are grown.

A grape like no other

For consumers, perhaps the most easily recognizable aspect of a country’s wine character is the grape variety used in a mono-varietal wine. Joe Assad Touma, winemaker and co-owner of Château St Thomas in West Bekaa, gives the example of how Greek wine is synonymous with the Assyrtiko, and Argentinian wine is known for the Malbec, saying that this model of identity creation should be recreated in Lebanon.

Often times, such popular grape varieties are native to the country and are called indigenious grapes. “Indigenous grapes are today very much in fashion, and some countries are trying to emphasize on their native grapes,” Chaoui says. “In Lebanon, we have two indigenous grape varieties, the Obeidy and Merwah which, following a global trend, have been well developed by some producers who sell 100 percent Merwah, or 100 percent Obeidy wines.” 

Initially, Obeidy and Merwah were thought to not stand well on their own, and as such were used in wine blends or to make arak. Château St Thomas was the first winery to produce a 100 percent Obeidy wine in 2015, as part of a collaboration with the Wine Mosaic project, a nonprofit organization championing vinodiversity by promoting and protecting original grape varieties of the Mediterranean. In explaining what led him to experiment with native grape varieties, Touma says: “What gave me the idea was that we were always asked why we use international grapes for our wines when we are an ancient wine-producing country.” He says both local and international response to Château St Thomas’s Obeidy have been extremely positive, as is evident by the increase of production from 3,000 when it was first launched to 20,000 bottles in 2018, all of which are sold out halfway through the season.

Following St Thomas’s success, several wineries began producing mono-varietal wines with native grapes, and Harb believes even more wineries will do so with time. “I think it is coming,” he says. “The Obeidy grape was the first native grape to be used in mono-varietal wines around five years ago, and I remember we faced doubt and resistance back then, but now there are more than 20 wineries experimenting with Obeidy in winemaking.” Harb has recently released a mono-varietal Merwah (see overview).

“We are always asked why we use international grapes for our wines when we are an ancient wine-producing country.”

Château Ksara has also released a mono-varietal Merwah, the 2017 vintage, to great success in 2018 (the second vintage, 2018’s, has recently been released in the market). “Merwah gave the world the opportunity to taste a rare and ancient grape,” says George Sara, Château Ksara’s Chief Commercial Officer. “Most of it was sold abroad as there is greater awareness of, and demand for, such esoteric wines. It has helped push the Lebanese wine narrative in the UK, and hopefully will do the same in other markets in the coming year.”

In search of the native

While the Obeidy and Merwah seem set as the indigenous darlings of white grapes, a native red grape variety is yet to be found, and the search is on, according to winemakers interviewed for this article. “The Wine Mosaic has around 40 varieties of grapes registered as native Lebanese, but many of those are table grapes,” Touma says. “Of these 40, if only five work for wine, it would be great. We need to have some native red winemaking grape varieties.” He explains that there is more room for experimentation when working with red wine as opposed to white wine, since it has to be aged, and hence a variety of techniques can be used (aging in oak or stainless steel, deciding how long to age it, etc).

Just as our own

Some wine producing grapes have been used in Lebanon for so long, they are considered heritage or adopted grapes and can be used to identify wine as Lebanese. “We can adopt Cinsaut because it has great potential and has been planted in Lebanon for more than 100 years with the Jesuits. So we can say that it is an adopted grape and can be used in Lebanese blends,” Touma says.

Sept
Photo by Greg Demarque | Executive

While Cinsaut is typically used in light wine blends such as rosé, Domaine Des Tourelles’ winemaker and co-owner Faouzi Issa challenged this notion and produced a mono-varietal red wine Cinsaut in 2014 that was well-received internationally and is the winery’s top performing wine in New York, London, and Budapest. In recounting what made him think of using Cinsaut in a mono-varietal wine, Issa says: “Being an old winery, Domaine Des Tourelles had 70-year-old Cinsaut vineyards which I used in my blends, but every time I would taste the Cinsaut tank during harvest, I would be impressed by its taste. So I thought it would be a good idea to give it a try as a mono-varietal wine and bring Lebanese wine back to its roots,  since the Cinsaut was the king of red wines before the introduction of noble grapes (Pinot Noir and Cabernet Sauvignon) by French winemakers in the 1960s and 1970s.” Domaine Des Tourelles started out by producing 6,000 bottles of Cinsaut in 2014, and today has reached maximum production of 25,000 bottles and has prompted Issa to call his Cinsaut “the passport” of his wines “as it offers international distributors a unique and special product.”

Together we grow

There is a lot of energy and enthusiasm around indigenous or adopted grapes in Lebanon, and around finding an identity for the country’s wines, but both Guiberteau and Kahale say this will take time and requires patience—as Guiberteau points out, it took Burgundy three centuries to develop its reputation for wine.

Government support through the Ministry of Agriculture would serve to push this quest for an indigenous Lebanese grape forward, as it has done in other wine producing countries. “In France and other countries, there are privately funded institutions, or government-funded ones, that have all the tools to test and experiment indigenous grapes, and then help winemakers grow their grapes,” Harb says. “What we lack in Lebanon is this. There is no support, and it is based on individual initiatives, which is very hard.” 

It took Burgundy three centuries to develop its reputation for wine.

Kahale believes this search for local grape varieties and an identity for Lebanese wines could be sped up if winemakers work together. “Making a new wine variety is at least 15 years experiment because you only get one yield per year, so you need Lebanese winemakers with experience ready to share the results of their experimentations with their peers in order to cut this time down; we have to cultivate this spirit. This will make the giant leap, otherwise it will take time, but the identity will develop,” he says.

Whether through local and adopted grapes or international ones, and whether through ancient winemaking techniques or more modern ones, the Lebanese wine industry has reached a level of maturity where debates about its identity and competitive edge are more common. As such, we raise a glass of local variety white wine—and soon hopefully red—to a rosy future for the wine industry in Lebanon.

October 9, 2019 0 comments
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Special ReportWine

Developments in Lebanon’s wine sector

by Nabila Rahhal October 9, 2019
written by Nabila Rahhal

Late August and September were harvest months for Lebanon’s wineries, and the energy across vineyards, whether in Batroun or the Bekaa valley, was palatable. From grape picking at dawn to Fête des Vendanges brunches (post-harvest celebrations) that stretched until sunset; from gathering around a table de tri (sorting table) for destemming to tasting that first sip of young wine, the country’s wine regions were alive with the sounds of production. 

And the energy does not cease with the end of harvest season. So far in 2019, the wine sector has already seen developments for existing wineries, such as the release of a new wine variety, or plans to open a winery-side restaurant. There is also a new winery that has entered the market (see box below).

These are dynamic times for Lebanon’s wine industry. The significant increase in the number of wineries in the past decade—there are 54 wineries currently registered at the Ministry of Agriculture, up from around 20 in 2009—has brought with it young, mainly Lebanese, winemakers eager to experiment with different techniques or grape varieties in wine making. This has led to more debates as to what makes Lebanese wine unique and what differentiates it from the competition.

Dare to create

Indeed, 2019 has seen the release of several new wine varieties. B-Qa de Marsyas by Château Marsyas has marked its first venture into the rosé world on June 19, releasing a limited quantity of Rosé B-Qa de Marsyas. According to Karim Saade, co-owner of Château Marsyas, the winery had hesitated at first to produce a rosé, discouraged by the perception among some wine professionals that rosé wine lacks depth and complexity. However, they decided to go ahead and produce one that would stand out for its high quality.

The terrace in Château Baal where the new restaurant is planned to open. Photo by Greg Demarque | Executive

Because of the limited production this year, the Rosé B-Qa was largely pre-sold to Château Marsyas’s hospitality industry clients who had heard about the release. It is available in some restaurants, wine shops, and supermarkets’ wine sections, and retails at $14.

Inspired by the demand for indigenous grapes, in 2016 winemaker and owner of Sept Winery, Maher Harb, decided to produce a mono-varietal Merwah, a local variety grape that was mainly used for arak and in blends. Knowing that Merwah tends to grow in the Lebanese mountains, Harb searched for Merwah vineyards in the areas surrounding his winery in Nehla, Batroun.

What he found he calls his “secret vineyard,” as he refuses to disclose its location and has even used the wider kaza Zgharta on the bottle’s label instead of giving away the name of the specific village. Harb says he felt a connection with the 99-year-old man who owns the vineyard and tends to it with his son. Each of the seven vineyards Harb works with were chosen not only for the grapes, but also the story behind the vineyard, he says. The Merwah vineyard produces 4 tons of grapes, and while he produced 600 bottles of 2016’s vintage, this year Harb is producing 4,000 bottles of the Merwah. This is the first year Sept Winery’s Merwah is being sold directly to the public. Costing $30, it is available at the Sept Winery and two other locations (Ashrafieh-based wine bar Vinothèque, Tawlet on Commodore street, and 209 Lebanese wine). Harb plans to export it to the United States, Canada, and London.  

Photo by Greg Demarque | Executive

Meanwhile Château Qanafar has experimented with a German grape variety, Riesling, which originated in the Rhine region. Riesling is thought to need a cold climate to thrive, and so it is uncommon for this region. Aside from Château Qanafar, only Château Khoury and Batroun Mountains have Riesling vineyards, with the latter producing a mono-varietal wine from it. But Eva Naim, marketing director and co-owner of Château Qanafar, says that the limestone soil, the difference in daytime and nighttime temperature in Qanafar, and the position of their vineyard—the sun only directly shines on the grapes for a few hours in the morning—are all ideal conditions for Riesling growth. She says her brother, Eddy Naim, the winemaker at Château Qanafar, chose to work with Riesling as “it is a winemaker’s dream because of its complexity and depth.”  

Eleven years ago, Château Qanafar planted half of a hectare of their vineyards with Riesling, and, in 2017, produced 1,000 bottles of mono-varietal Riesling. Regarding the limited number of bottles, he explains that Riesling vines have a low yield. The wine was aged in stainless steel tanks for two years—Naim explains that although white wines are normally not aged, Riesling’s high acidity allows it to age well—and was released into the market earlier in 2019. It sells for $18 in their boutique in Sioufi and in a few select restaurants and wine shops. “I am not in a hurry to sell it because it can age very well, and so it is a pity to drink it now,” Naim says.

Food for thought

There is a perception among some Lebanese, usually older generations, that Lebanese wines are of lower quality when compared to foreign wines. However, according to those interviewed in the article, the increase in the number of wineries, and the parallel increase in enotourism, is slowly changing this perception. “I decided to have a restaurant [in my winery] because of the increase in demand for such projects,” says Sebastian Khoury, winemaker and owner of Château Baal. “When visitors call to book winery visits, they always ask me if there is a place they can eat in afterwards.” Along with a silent partner, Khoury will be investing $70,000 to turn the terrace next to his fermentation area into a 40-seat steakhouse and tapas restaurant.

Khoury says he was planning to have the restaurant year round, but because of the dismal economic situation the country is in, it will be a seasonal venue that operates from April/May to October. Down the line, especially if the economic situation improves, he is planning to have a few bungalows for overnight guests and to venture further into enotourism.

Khoury believes that having a restaurant on site has several advantages to the winery. “We will benefit from an increase in sales because of the wine we will be selling in the restaurant, and because people are more likely to buy wine from our winery store,” he says. “I can also make a small profit from the restaurant which is, at the end, a small business.” Château Baal’s restaurant will be operational by summer 2020.

Atibaia is another winery planning to have a restaurant by summer 2020. Its owner, Jean Massoud, explains that he wants more people to visit the winery in Batroun and thought of having a cozy restaurant overlooking the vineyards. The restaurant will be operational year long, albeit only on weekends in the winter.

Despite this dynamism and activity, there is still room to grow Lebanon’s wine industry, especially if there is more collaboration among winemakers, and if this spirit of experimentation continues to be fostered. The energy felt during harvest can carry the industry through to bigger successes.

October 9, 2019 0 comments
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E-groceriesEntrepreneurship

Lebanese delivery apps eye growth in grocery e-commerce

by Lauren Holtmeier October 8, 2019
written by Lauren Holtmeier

In 2019, it seems almost any consumer good can be delivered to your door in Lebanon through a quick phone call, WhatsApp, or click online. E-commerce has been available in Lebanon since at least 2000, when the Buy Lebanese website went live in November that year. In the MENA region, the e-commerce market reached $8.3 billion in 2017, with an average annual growth rate of 25 percent over the preceding three years. Yet, the vast majority—over 87 percent—of that market is accounted for by the GCC (the UAE and Saudi Arabia in particular) and Egypt, with the Lebanese market seemingly resistant to the move online. 

Quantifying the size of the e-commerce market in Lebanon is difficult. To Executive’s knowledge there have been no Lebanon-specific studies on the sector, and little done by way of research of e-commerce in the MENA region as a whole. One study “E-commerce in MENA: Opportunity Beyond the Hype,” a joint effort from Google and global management consultancy Bain and Company sought to address this gap in February this year; with a 2019 Wamda report “Online grocery retail in MENA,” following in March and relying heavily on the formers research (cited earlier). The takeaway from both reports is that e-commerce in MENA has a high growth potential—Bains and Company estimates a potential growth of 3.5 times by 2022, to reach a total market size of $28.5 billion—yet is still stymied by regional specifics. 

Most challenging for delivery app operators and the business of B2C e-commerce in the region has been the persistent desire of MENA consumers to pay with cash on delivery (COD) versus the use of cashless payment modes that are nowadays the standard in economies from China to the United States and many countries in between, thanks to providers from from Alipay to Amazon. Around 62 percent of MENA online shoppers favor COD compared to less than 5 percent in the UK and France. COD “leads to higher return rates and failed deliveries, and it adds pressure to working capital requirements while limiting delivery options to logistics companies that accept this form of payment,” according to the Bain and Company report. A second challenge is the slow move online of small- and medium-sized enterprises (SMEs), which account for 95 percent of companies in Lebanon, above the regional average of 90 percent—think the local dekeneh, whose delivery is reliant on explaining directions via phone or sharing a pin on WhatsApp. 

The shop at the corner

Of all the e-commerce segments, the e-groceries market is the most underpenetrated—accounting for less than 1 percent of the e-commerce space in the GCC and Egypt according to the Bain and Company report—and as such, the room for growth is significant. The Wamda report estimates that this segment could see growth rates above 100 percent year-on-year for at least the next couple of years, while Bain and Company is slightly more conservative at almost 90 percent. 

Entrepreneurs in this space are banking on that rapid growth. In Lebanon, new marketplace grocery and fast-moving consumer goods
(FMCGs) delivery apps have appeared in the past couple of years: Toters in 2017, MrGrocer in February 2018, Markit in April 2018, and InstaShop later that year (a regional expansion, it was launched in the UAE in 2015). Executive spoke with representatives of the latter three—Toters did not respond to requests for an interview—to gauge how successful these apps have been in convincing store owners and customers alike to embrace e-groceries via apps. 

Markit, InstaShop, and MrGrocer operate with similar business models. As their primary revenue stream all take a small percentage of the invoice from in-app purchases; this cost is on the owners or operators of the store, not the customer, who will pay the same price on the app as they would have dealing with the store directly. As a secondary revenue stream, some sell or are experimenting with selling space to FMCG brands to advertise on the app. None operate their own delivery fleets; they rely on those employed by the stores available on their apps and leave all logistical matters to them. MrGrocer and InstaShop also charge a delivery or service fee of around $1, while Omar Osman, co-founder of MrGrocer, tells Executive that they began to look into how to market customer data to supermarkets to create an additional revenue stream, but this idea is still in the pipeline. 

All three partner with chain supermarkets as well as the smaller local stores within their area of coverage. Apps’ pitch to stores centers on potential for increased traffic via the digital realm and an additional selling channel. Abi Nader says the difference between the informal system is that Markit allows a store to track things more easily, such as delivery times, monitoring, and geographical spread. Once partnered with a store, its products are scanned into a system by an employee of the app, which allows customers to add them into a digital basket. Markit currently partners with eight stores and is finalizing contracts with others. MrGrocer has around 20 stores on its app and is expanding to areas outside Beirut with an additional 20 to 30 contracts soon, and the more-established InstaShop has 60 to 70 partner stores in Lebanon. 

Those behind these apps that Executive spoke with have no illusions about replacing in-store shopping, dealing directly with local shops, or using bigger chains’ online portals for delivery any time soon. Their growth strategy is two-pronged: on the customer side it is to attract those who usually shop in-store, while on the business side it is to convince smaller local shops to digitize their inventory, opening up their access to more customers. “We’re not competing with them, we’re making use of them,” Osman says. “There’s a new channel of business.”

On competing with informal markets—like Mahfouz, a shop in Geitawi that can have wine and vegetables on the doorstep in 15 minutes and charges no delivery fee—and formalized systems—such as Spinneys and Carrefour’s online delivery services—those Executive spoke with cited several factors they believe give them the competitive edge. Having a digitized basket eliminates the back and forth between the customer and their local stores to determine what items are available, something which costs both time and—in Lebanon especially—valuable phone credit. 

For competition with larger supermarkets, these nascent companies all seem to agree that the variety of options on their apps; the lower minimum basket size—sometimes as low as LL5,000 ($3.33) compared to the LL100,000 ($66.66) required of Spinneys; and the 30-45 minute delivery period compared with longer wait times—Spinneys’ customers can only schedule deliveries within three hour increments, and Carrefour’s website shows a LL5,000 delivery charge and a two to five business day wait for non-perishable groceries—make their apps an attractive option for those looking to have a few items or a week’s worth of groceries delivered. 

Growing pains

Though refusing to share figures, those Executive spoke with all reported growth in the first year or two of operations. In its four years of operation, InstaShop has expanded to five other markets, including Lebanon. Instashop’s CEO John Tsioris says that home delivery culture, a similar language and product assortment, and a mature and diverse supermarket industry made Lebanon attractive to expand into. By his estimate, Lebanon is “on a strong growth trajectory that will allow it to achieve growth of three times, year on year.” Markit’s day-to-day orders expanded so rapidly that since operations began their orders have increased by 5,600 percent, bearing in mind the small market size. 

The entrepreneurs behind these apps are confident that they will see more growth in the future. Their average purchasers’ demographics are millennials between 25 to 40. Both Tsioris and Osman tell Executive that they believe use of grocery-delivery apps will increase in line with the collective purchasing power of this demographic. Osman adds that while millennials may be the early adopters, it is not impossible that other demographics will take to the idea in the future. “Look at Facebook,” he says. “No one would’ve guessed five years ago that our parents would be on it.” 

But this sought for growth is not without challenges. Grocery delivery entrepreneurs need to tackle customer awareness, technology adoption, logistics, and competition from other market segments. Markit’s Sara Abi Nader tells Executive that one of the issues they have faced is that when they introduced a tablet and online interface to some stores, the employees were reluctant to use them, preferring to take orders via pen and paper as usual. Malek Fatte, country director of InstaShop, noted logistical challenges in Lebanon compared to Dubai. Where in Dubai, roads are well-built and flat, the mountainous terrain and old roads in Lebanon make it difficult for delivery drivers on motorcycles to reach the customer. In mountainous areas, shops rely more heavily on vans for delivery that are more expensive because of the added fuel costs, especially when transporting products that must be kept cold. 

Competition from within

Given the small market size and the few players within it, those Executive spoke with do not see much scope for competing amongst themselves as of yet. Osman says he believes it is too early to consider the others as competition. He tells Executive that now is the time to raise awareness and having multiple apps in the market will help that goal. 

As demand increases, so will competition between these apps and any newcomers on the scene. Already, all three have identified ways that set them apart from their potential competitors. For example, Markit is looking to operate in underserved geographical areas and tries to offer a variety of products through their partners, rather than signing multiple stores that provide largely overlapping services, says Abi Nader. 

Given their recent entry to the market, it is too early to analyze these companies’ performance so far, though all reported continuously increasing daily sales since launch and high retention rates ranging from Markit’s 32 to InstaShop’s 80 percent; perhaps a reflection on the latter’s experience in the field. Increased awareness, followed by demand, seems to be what all of them need for their young businesses to survive—at least in a healthy business environment. Recent worries over a potential shortage of dollars in the country needed for physical payments may make these types of services less appealing in the short term to potential customers preoccupied with hoarding dollars. Despite these threatening factors, e-grocery has high potential for growth, and entrepreneurs are optimistic that it will carve its place within the growing e-commerce market.

October 8, 2019 0 comments
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ElectricitySpecial Feature

Reforms to the Lebanese electricity sector beset by delays

by Lauren Holtmeier October 8, 2019
written by Lauren Holtmeier

The September 15 attack on Saudi oil facilities that temporarily wiped out 5 percent of global supply did more than trigger a short-term oil trading frenzy with wild price jumps on international markets. It put into sharp relief the issue of Lebanon’s dependency on fossil fuel and—most important in the context of dismal fiscal health—its vulnerability to price increases in the market for refined oil. To question what effect a potential rise in oil prices would have on Lebanese access to energy is not just a potential problem of a 10 or 20 percent hike of gasoline prices for motorists (although such would be painful enough for many households in this car-infatuated country). The attack on the Aramco facilities in Saudi Arabia is a hint at how utterly urgent it is that Lebanon solves the problem of producing insufficient amounts of electricity at aging power plants in a fiscally costly, environmentally unsound, technically inefficient, and economically wasteful manner. 

It was simply of utmost expediency that the Lebanese government has committed itself to revamping the electricity sector, as documented in frequent announcements on the primacy of electricity production and distribution solutions in conjunction with the plans linked to CEDRE, the investment conference 18 months ago. These plans have since been developed in both discussions with private sector partners and public sector stakeholders. In her opening remarks at the Beirut Energy Forum (BEF) on  September 25, energy minister Nada Boustani said that she wanted to highlight the partnership with Banque du Liban (BDL), Lebanon’s central bank, that helps finance renewable energy projects, and added that this partnership along with those of donors such as the European Investment Bank and the European Bank for Redevelopment and Construction were an important cornerstone of these projects. According to the 2018 Capital Investment Plan (CIP), renewable energy projects are expected to total $1.3 to $1.4 billion of the total $3.5 billion planned for the sector.

Since the end of the civil war, the electricity sector has been plagued by mismanagement, non-technical and technical losses—the latter of which in some part stem from old infrastructure built in the late 1990s and early 2000s—theft, a fixed tariff set below the cost of generation, and a reliance on fuel and gas oil rather than making the switch to the cheaper, cleaner natural gas. 

Photo by Greg Demarque | Executive

These deficiencies have left the state-run utility company Electricité du Liban’s (EDL) financial situation in a dire state with the EDL deficit last year totaling $1.8 billion. Transfers from the treasury to EDL equaled LL1.35 trillion ($889.62 million) in January to September 2017, and LL1.86 trillion ($1.22 billion) in the same time period in 2018. EDL contributed just 0.3 percent to the total oil bill of LL1.84 trillion ($1.21 billion) of gas oil and fuel oil in the first nine months of 2018, with the central government footing the bill for the rest. 

Structures for new infrastructure

New structural mechanisms are needed after years of the electricity sector’s inability to right its own wrongs. Emphasis appears to be on awarding large-scale infrastructure projects on various contracts combining public and local or international private initiatives whether as build-operate-transfer (BOT) or independent power producer (IPP) contracts in an effort to shift some responsibility and assumption of risk to the private sector. In a BOT, a supplier provides and installs the infrastructure and is responsible for operations for a certain number of years before the facility and operations are transferred to the state. IPPs are private entities that own and operate a facility, but sell electricity to a utility or central government. Under BOTs and IPPs, a power purchase agreement (PPA) is required that sets terms for how much the offtaker will pay for electricity generated and under what conditions those prices may change. Unfortunately, such contracts and processes have become the source of seemingly endless delays, such as the PPA for the Akkar wind farms and other infrastructure projects. Permits were issued to three companies in July 2017 for wind farms, with PPAs supposed to be signed within the following three months. However, the PPAs were only signed in February 2018, and works on the ground are yet to begin—instilling little confidence in potential investors. 

New structural mechanisms are needed after years of the electricity sector’s inability to right its own wrongs.

Electricity infrastructure projects, such as the Deir Ammar II plant, two new power plants, and floating storage and regasification units (FSRUs) to be built or imported on these types of contracts have all faced delays. The Deir Ammar II project, granted in 2013 to Greek-Cyrpiot firm JP Avax under an engineering, procurement, and construction (EPC) contract, was controversially transferred to a BOT in 2018. Prior to this revised agreement, construction had been held up for years, with JP Avax filing an international arbitration suit—since dropped, following the revised agreement—against the Lebanese government due to a dispute between the Ministry of Energy and Water and the Ministry of Finance over whether VAT would be part of the contract. On the short term, the plant is supposed to provide 450 megawatts (MW), on the long term 550 MW. It was announced on September 9 by Martin Parker, a member of the project’s management team that engineering works would begin that week. However, in a late September interview (see box below), Boustani told Executive that construction would begin in December. 

Photo by Greg Demarque | Executive

Tender documents for two new 550 MW thermal power plants— which run on diesel oil, fuel oil, or natural gas—at Zahrani and Selaata, to be contracted through an IPP with a PPA, were completed on September 11 by engineering consultancy Fichtner. The tenders were supposed to be announced in September, but as of writing they had not been issued. Boustani told Executive that she was waiting on a final answer from the ministerial committee before these tenders could be moved on to the next stage. 

Both plants will be capable of operating on natural gas, which is cleaner and cheaper than fuel oil or gas oil, but currently the country lacks FSRUs—which take gas and turn it into liquefied natural gas (LNG) and back into gas again—that are needed to supply power plants with said natural gas. According to one 2018 Business News report that cites adviser to the MoEW Zaher Sleiman, an FSRU could cost up to $400 million. A May 20 deadline for selecting companies to import such infrastructure was extended 90 days. One hundred and twenty days later, no announcement has been made. Boustani says discussions on the results of the FSRU bids were currently happening. A statement released on September 27 by the Council of Ministers confirmed the ministerial committee in charge of studying the terms of the electricity tender met, saying a technical team will study the options, and a decision will be made as early as the first week of October.

Delays, delays, delays

Reforms in the sector seem to be plagued by delays. Currently behind schedule are the power plant projects and FSRUs, as well as the construction of three wind farms in Akkar, originally tendered in 2013 to generate 180 MW and vital to reaching the goal of 12 percent renewable energy by 2020. Ministerial Decision No. 43 (2017) said selected companies would be given 18 months to complete necessary preparations to begin Akkar project implementation. And in February 2018, contracts were awarded on what would be the country’s first issued PPA agreements. A June 21 news report in The Daily Star said work would begin in July or August, and the farms would be fully operational by summer 2020. Speaking at the Beirut Energy Forum September 25, Boustani said that construction on the wind farms would begin in 2020, but she did not say when they were to be completed. The terms for a further set of wind farms to generate 500 MW were also announced at the forum on September 27.

Boustani tells Executive that while her ministry was on schedule, decisions not under her control had delayed progress.

These delays, specifically those on generation projects, such as Zahrani and Deir Ammar II, which were supposed to boost short-term generation to 1150 MW, threaten to leave Lebanon with no increased generation capacity heading into 2020, the date for which the April 2019 updated policy paper, a follow-up to the one adopted in 2010, ambitiously predicted 24-hour power. When asked about the timetable set out in policy paper, Boustani tells Executive that while her ministry was on schedule, decisions not under her control had delayed progress, knocking them off the timetable. 

Increasing generation capacity, decreasing technical and non-technical losses, beginning the switch to natural gas, and reducing the sector’s deficit were of the main goals set forward in the updated policy plan. Reforms in the updated policy paper are designed to appeal to CEDRE donors, who pledged more than $11 billion in soft loans at the April 2018 conference. 

When Prime Minister Saad Hariri met French President Emmanuel Macron September 20, Hariri said he would speed up structural, economic, and fiscal reforms to meet international donors’ demands. The following day, Hariri and Saudi Finance Minister Mohammed al-Jadaan discussed Saudi private sector engagement in CEDRE projects, but funds are contingent on the international community seeing fiscal reform from the government. Without any tangible progress to reform made, money pledged to the electricity sector at the conference remains locked.  

While estimations on actual capacity and demand vary depending on report, the April policy paper puts EDL’s current installed generation capacity at 2,449 MW, peak demand at 3,669 MW, and actual capacity at 1,823 MW. This excludes two temporary power barges with a combined installed capacity of 374 MW, according to the CIP. By 2020, the updated policy paper predicts actual capacity will be 3,990 MW and peak demand will decrease to 3,476 MW. According to World Bank estimates, 24-hour supply and an increased tariff will lead to a decrease in demand by 8 percent. As Lebanese are already accustomed to paying two electricity bills, this rationale is questionable, says energy consultant Jessica Obeid. With three months left in 2020, and no work on the ground yet seen, achieving the 2020 generation capacity goal seems unlikely.

These delayed projects have implications on generation capacity, which is needed before the tariff can be raised, and on the confidence of the private sector looking to invest in infrastructure projects. 

A need for confidence

In her opening remarks at the BEF, Boustani addressed the need for creating an attractive environment for investors. Improving the current environment would require the government to keep projects running on schedule and avoid years-long contract negotiations delayed by the inefficient bureaucracy or internal politicking that keeps tenders and contracts from being awarded on time. Continual delays are a bad signal to other companies contemplating bidding for similar projects, especially foreign investors looking to make a bid for the new Zahrani and Selaata projects. 

Further, in an IPP contract with a PPA, risk is assumed by both the private and public entities. Private entities will want some guarantee from the state that power will be purchased at a certain price for the duration of the contract period, usually 20 to 25 years. Ramy Torbey, managing partner at Aziz Torbey law firm, which co-founded the Lebanese Association of Public Private Partnership, says that typically in such a contract, a price is agreed upon per kilowatt hour (kWh) between the public and private entity and includes an agreed upon adjustment system to take into consideration market fluctuations, operation and maintenance charges, inflation, etc. The recent attacks in Saudi saw oil prices fluctuate, and regional tensions are still high. Another attack would likely send prices up again, which under a PPA would constitute a higher risk for the private partner. How risk for price increase is distributed in these scenarios will be a determining factor in how attractive an IPP is to a bidder. For PPAs on solar and wind renewable energy, such as those on the Akkar wind farms, additional risks include the variability and the uncertainty of generation, given the sometimes fickle nature of, well, nature, according to a 2018 International Renewable Energy Agency publication.

With three months left in 2020, and no work on the ground yet seen, achieving the 2020 generation capacity goal seems unlikely.

While renewable energy sources have the ability to help reform the sector in the medium to long term, measures, such as increasing the tariff, need to happen in the short term to help alleviate EDL’s debt burden. Increasing the tariff from the current 9.5 US cents per kilowatt hour (USc/kWh) to 14.38 USc/kWh in 2020, was another important part of the updated policy plan, according to Obeid. “The tariff restructure is really important and should account for the socio-political context, but we don’t have information about it yet,” she tells Executive mid-September. On the sidelines of the BEF later that month, Boustani said talks were in progress with the World Bank (see box below). Obeid argues that tariffs cannot be increased unless EDL can provide at least 21 hours electricity all over Lebanon, given that currently citizens already pay a dual electricity bill—one to EDL and a diesel generator bill because of power cuts ranging from three hours in the capital to 18 hours in other areas. In 2008, the average household consolidated energy bill was approximately 180 percent higher than the average EDL bill at the time. In late 2018, the government mandated that generator operators install meters by October 1 to regulate the informal industry. This decree was met with protests from generator operators, with some demanding the government subsidize diesel as a result of lower set prices for hourly generator use. As of September, the Ministry of Economy and Trade said that almost 80 percent of generator owners had complied with the new regulation, which should lower household generator bills across the country helping alleviate additional expenditure.

Modest progress

Some visible progress has been made especially on the transmission networks since the transmission master plan was implemented in 2017, even though little has been done to address specific CEDRE donor-demanded reforms. In June, the final link located in Mansourieh of the 220 kilovolt (kv) loop went live after a 17-year delay, which alone reduced technical losses on the network by 1 percent, says Ramzi Dobeissy, the head of the high-voltage transmission lines department at EDL. The 66 kv Bikfaya-Faytroun-Halata line also went live July 30, reducing losses by less than a percent. The 66kv Hermel-Qobayat line, after facing some opposition from local residents, is expected to go live by the end of September or early October. Dobeissy says this line is on track, but could be delayed a week.

Whether the government will meet its stated target of reducing losses from 34 percent to 25 percent by the end of 2019 remains to be seen.

The final 66kv line in southern Wadi Jilo is still facing opposition from one resident, and progress has stalled, but EDL is in talks with the government and the opposed resident to resolve the issue. While transmission projects have been stalled in the past, a series of upgrades on the network this year are a positive sign that at least one aspect of the electricity plan and the transmission master plan launched in 2017 is moving forward mostly on schedule. Whether the government will meet its stated target of reducing losses from 34 percent to 25 percent by the end of 2019, however, remains to be seen.  

Since 2017, $16.5 million has been spent on transmission projects of a budgeted 690 million euros ($757 million, as of writing) to be spent by 2030, including substations, overhead lines, and underground cables, Dobeissy says. The updated policy plan sets aside LL405 billion ($268 million) for transmission projects in 2019. 

Even with progress on transmission networks, the 2019 updated policy plan requires generation projects to move along simultaneously with generation projects. With delays on the latter projects, which are, in part, a result of the inability to resolve contract issues, Lebanon risks being in the dark for days, months, and probably years to come. Furthermore, these delays along with current economic conditions might as well be a neon signal to foreign investors that reads “BEWARE OF HIGH RISK.” It is likely that local investors, such as the three companies awarded licenses for the Akkar wind farm projects (Hawa Akkar, Sustainable Akkar, and Lebanon Wind Power) will continue to bid for these contracts and adjust their reward expectations to include high-risk premiums; if the resulting contracts will be socially feasible for the Lebanese population, and especially the vast group of impoverished no-income, low-income, and lower middle-income earning households, will largely depend on how the numerous risks attached to the electricity plan are mitigated and distributed between local and public entities. With the country’s economy in a bad state and EDL’s financial situation already in ruin, the question beckons as to which players will be able to shoulder such high risk and at what price to the taxpayers, even with the local private entity partnering with various financing partners, such as local and international banks and multilateral development institutions. The other big and daunting unknown variable in this equation of power and risk is that the people will be the ones to be stuck with the bill if the plan does not come to reasonable fruition.

October 8, 2019 0 comments
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CommentEconomics & Policy

UAE emerging as a global innovator in AI

by Nicole Purin October 8, 2019
written by Nicole Purin

The past few decades have seen major advances in the field of artificial intelligence (AI). As a result, AI has become a transformative business force, specifically in the technology sector. Numerous organizations are significantly expanding their use of AI tools and services, with 2018 a landmark year for this trend. Supporting technologies, such as computational powers, digital storage, and adaptive algorithms have sufficiently matured to enable AI to enter into a new period of adoption and integration as part of the digital transformation of businesses. This changing landscape is obliging companies, organizations, and governments to take note—arguably their future success will depend on their ability to embrace AI. 

The future of AI remains a hotly debated topic. At the 2019 World Artificial Intelligence Conference in Shanghai, tech entrepreneur Elon Musk publicly voiced concerns that computers could outsmart their creators and end humanity, yet others hold more optimistic views. Jack Ma, the Chinese business magnate and co-founder of the Alibaba Group suggested at the same conference that AI would “enable humans to understand themselves better.” Irrespective of differing views on what AI signifies for humanity, it is becoming an integral part of daily life, technology, and business, and the United Arab Emirates (UAE) is a rising pioneer of this sector through concrete initiatives that will—very likely make it a beacon of innovation.

AI can be defined at its core as machines performing activities that require human-level intelligence, including the capacity to learn, reason, and self-correct. AI can be used to resolve complex issues, by, for example, making predictions through analyzing large data sets, or through linguistic processing and recognition of shapes, reasoning, and images. There are two classifications of AI: weak AI and strong AI. Weak AI is a machine intelligence that is limited to a particular area or focus; it can simulate human consciousness, but it is not in itself conscious. Strong AI is a form of machine intelligence equal to human intelligence; it is conscious and self-aware. Strong AI does not currently exist, and it is considered highly controversial because of the danger that it could outperform humans.

The weak AI model that is being developed internationally is focused on improving services and creating improved products. This can be seen in practical terms through the likes of Google and its AI tool that is used for searches, translation, and healthcare. Similarly, Amazon bases a lot of its business on machine-learning systems, such as the autonomous Prime Air delivery drones (due to start in selected countries at end 2019), the Amazon Go convenience store, and Alexa AI. At the 2017 Internet Annual Gala, Amazon CEO Jeff Bezos referred to AI as being in a “renaissance and golden age,” and as a “revenue driver.” AI can effectively improve communication, relationships with customers, service turn around, and overall business performance, according to the 2018 State of AI in the Enterprise report by Deloitte. 

UAE perspective 

The UAE has been at the forefront when it comes to AI and the potential it entails. The UAE government counts AI in its strategic vision for the future; in October 2017 they launched the “UAE strategy for Artificial Intelligence” in line with the UAE Centennial 2071 vision. The intention was to make the UAE a champion of AI in the public and private sectors, in turn creating new crucial markets with substantial economic value. The leadership of the UAE are of the view that AI will improve performance in the private and public sectors. Sheikh Mohammed Bin Rashid al-Maktoum, vice-president and prime minister of the UAE, notably stated at the 2017 launch of the UAE Artificial Intelligence Strategy: “The next phase requires Emiratis specialized in AI to serve our supreme national interests as the implementation of AI technologies will help develop new sectors and create various opportunities for our national economy.” The strategy covers the following sectors: transportation, healthcare, space, water, renewable energy, education, and the environment. The focus is reducing costs, increasing productivity, enhancing technology, and simplifying processes across these fields.

Regulating AI

Key initiatives that have been introduced have been a mixture of legislative and practical measures, and the UAE is currently ranked number one in the Arabic world on AI enterprises, according to the Artificial Intelligence Adoption in Enterprise 2018 report by Dubai Technology Entrepreneurship Campus (Dtec), prepared with the collaboration of ArabNet and startAD. One solid legislative initiative has been the creation of the UAE Council for Artificial Intelligence (CAI), chaired by Omar Bin Sultan al-Olama, minister of state for artificial intelligence; its first meeting was held in March 2018. The establishment of the CAI was aimed at developing a broad AI infrastructure, promoting international collaboration within the public and private sectors; liaising with international institutions to effectively integrate AI in key UAE societal sectors (transportation, environment, services, energy, and health); and promoting quality of life for Emiratis. A report by international consultancy firm Accenture estimated that by adopting AI, the UAE could increase economic input by $182 billion by 2035.

The CAI has implemented a dynamic action plan by launching programs and centers designed to enhance innovation and the skills of government officials, in addition to field visits to government bodies, and the organization of workshops. The development of the AI capabilities of future leaders and human capital of the UAE is paramount to the success of its overall AI strategy, according to the UAE government.

“The UAE has been at the forefront when it comes to AI and the potential it entails.”

 The UAE is also striving to implement AI services in the medical and military sectors, and investments are pouring in—a 2019 study by Microsoft and Ernst & Young states that the UAE’s investment in AI has been the second highest in the region over the past decade, reaching a total of $2.15 billion. Developing the UAE artificial intelligence infrastructure requires consideration on how to regulate the sector. Globally, governments have been cautious to regulate AI as it could stifle innovation in this upcoming market. Yet, there have been considerations as to what extent AI can be left unregulated when it comes to specific technologies, such as facial recognition due to potential discrimination and intrusion of privacy. Data protection is critical to AI, given that the value of data collection is immense for service providers who sell it. Accordingly, legislative measures have been passed that give individuals rights over their data and regulate how companies can acquire and sell data, such as the European Union’s Global Data Protection Regulation (GDPR), enacted in 2016 and the California Consumer Privacy Act of 2018 (CCPA). There could also be improper uses of AI in the field of surveillance, policing, and weaponization. As this sector in its current form is still relatively new, it is difficult to predict the long-term outcomes. The UAE needs to be prepared on how to balance AI’s uses and competing interests.

In order to facilitate the AI sector, a UAE federal law was enacted in 2018 by UAE President Sheikh Khalifa bin Zayed al-Nahyan, which granted authorization to the UAE cabinet to grant temporary licenses for testing and vetting innovations that utilize future technologies and their application of AI. This effectively launched the UAE’s governmental Regulations Lab, which aims to work closely with the private and public sectors and, according to a speech by Minister of Cabinet Affairs and the Future, Mohammad al-Gergawi, at the 2018 World Economic Forum’s Global Future Councils meeting in Dubai, aims to further “anticipate and develop future legislation and regulate products of the like of AI, self-driving vehicles in a solid and transparent manner.” This is an important development as it is laying the foundations of the AI infrastructure in support of the Vision 2021 initiative and consolidates the position of the UAE as a global player.

 The AI renaissance has taken the world by storm as businesses and governments become increasingly reliant on AI and launch platforms to integrate and share initiatives internationally. The advantages of AI include a reduction in the costs of services and products, greater quality, efficiency, and, most significantly, less human error. It is nonetheless a sector that requires vetting and regulation to ensure it is not misused due to its potential ramifications. The UAE is becoming a top leader in this field and understands the competitive advantage it will acquire by fostering AI futuristic technologies, but it will need to ensure that it is carefully balanced to maintain innovation not stifled through excessive regulation. 

October 8, 2019 0 comments
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