Business

The determination of a man of steel

by Nada Bakri
written by Nada Bakri

Toufic Dalal, owner of Dalal Steel Industries, is at his desk at 06:00 everyday. Today, his desk is a four-room office in a building he owns on Makhoul Street off Hamra, but he will eventually relocate to a multi-level, modern facility outside of Beirut he has just finished building. A sign of moving forward, one might think, especially as Dalal Steel was a multi-million, family business, exporting prefabricated homes and other steel structures.

That was on July 22. The next day, three Israeli missiles levelled his 25,000m2 factory, destroying $20 million worth of industrial machinery and products and incurring losses of $4 million to $7 million in anticipated revenues. Four hundred of Dalal Steel’s 600 employees found themselves out of work. He recalls the day he heard of the strike, some 65 km east of Beirut. “I drove there immediately and I saw the 25,000m2 factory on the ground, but I did not panic.”

The next day, he flew to the US and then to Italy where he bought new machinery, arranging for it to be shipped to Lebanon once the blockade was lifted. “We have to restart production as soon as possible, because we have contracts to deliver orders,” he says.

Two weeks later, Dalal joined the long queue of industrialists who met with Prime Minister Fuad Seniora to seek compensation. The Premiere was blunt. He told the 56-year-old civil engineer that unless there were goodwill donations allocated to the industrial sector, the government could not compensate his or the other factories that were completely or partially destroyed in the war. In fact the only government reaction was to send representatives from the Ministry of Industry – “wearing nice suits,” Dalal, wryly observed – to the site of his wrecked factory to mumble words of regret.

Dalal recalls that prior to the war, Bekaa ministers and MPs would constantly pester him to hire this or that person. “And I did, not because they asked me, but because we like to hire people. But when we were hit, no one picked up the phone – not even to say they were sorry.”

Looking to the US

Dalal has since dropped the expansion plans for his Beirut office. He is currently making contingency arrangements to move his business to the US. “In four or five months, if the government does not pay us compensation, we will move to the United States and Lebanon will be nothing more than a small operation. My son is over there now making preparations,” he confirmed.

Dalal feels it is important to have the backing of the state, any state. “We planned to expand; we planned to add new products lines such as steel tanks and fibreglass products. These plans are cancelled.” He pauses. “The government is my insurance company. If they fail to pay us compensation so that we can stay, I will have to look for another insurance company. Why should I put another $25 million in a country that does not insure and protect its people? Why should we have to pay the price for the fact that they can’t work out [political] issues?”

It was not always thus. In 1986, Dalal, then a young ambitious civil engineer, returned to Lebanon from the United States, and established a 10,000m2 factory in Shoueifat to manufacture steel structures. Business grew, thanks to what Dalal claims was prompt delivery of a high-quality product.

“We concentrated on steel structures first, and later I introduced a new line of prefabricated houses. When that took off, I decided to expand the line and I went to Italy and bought some of the most sophisticated machinery,” he says.

Dalal explains that Lebanon was a good country from which to do business, not least because its favourable geographical location meant he could ship to almost anywhere in the world. “It is a very good country for the industrial sector in general, because production costs and taxes here are cheaper than anywhere else,” he says.

Working for Uncle Sam

In just few years, Dalal became the country’s biggest steel factory, shipping products to customers in Afghanistan, Austria, Nigeria, Slovakia, Kuwait and Iraq, while local clients included Coca-Cola, Pepsi Cola and Beirut International Exhibition and Leisure Center (BIEL).

But probably the biggest client was the US military, with its bases in Iraq, Kuwait and Afghanistan, for which Dalal built camps and provided pre-fabricated housing. “We were lucky to win those contracts. Their first orders were for a few thousand houses. We were automated and ready to produce and deliver on time. And we did,” Dalal says.

The company increased production and, according to Dalal, “made a fortune” during the first two years of working for the US army immediately after the 2003 American-led invasion of Iraq. “Money is not an issue for the US army,” he explains “They are more concerned about quality and prompt delivery and there was no one as automated as we were to deliver on time.”

So why was Dalal hit, if it was a supplier to Israel’s closest ally and Israel claimed to only be attacking Hizbullah’s infrastructure, bases and members? After the strike, the word on the street was that Dalal had been in direct competition with an Israeli manufacturer to win the contract with Uncle Sam. The factory was in the Bekaa, the Bekaa was perceived as a Hizbullah stronghold …you do the math.

Dalal disagrees. “Our main competitors are in Saudi Arabia. I never felt there was any competition from Israel. I don’t think that was the case. I think it was just a rumor to make people feel better. I am not an expert in politics but I think that my factory was hit because we are paying the heavy price of problems our politicians cannot solve with Israel. Imagine if we had a strong Lebanese army and I had a strong company and a strong competitor in Israel, could I really go to my government ask to bomb the Israeli factory? No. They were hitting our economy. They wanted revenge.”

Although there is now demand for Dalal’s prefabricated homes to shelter Lebanon’s nearly one million displaced people, he will only provide 1,000 units to the Lebanese army, recently deployed to the South. “I agreed to take this one contract because it is paid for by the United Arab Emirates. I don’t trust the government.”

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Business

The cruel face of economic warfare

by Nada Bakri
written by Nada Bakri

In early July 2006, Liban Lait, Lebanon’s largest dairy farm, was witnessing an unprecedented growth spurt.

“At the beginning of July, the market was booming; we had a peak in sales that wasn’t normal. There was a 40% increase – we were expecting it to be stable at that level,” says the factory’s Sales and Marketing Manager Marc Waked.

“We were the only producers of long-life milk, fruit-flavored yogurt, desserts in cups. We had a wide range of full-fat, semi-skimmed and skimmed milk. We basically controlled the market,” recalls Waked, 39.

At that time, the factory was producing more than 80 products, ranging from fresh milk to cheeses, yogurts and desserts, and had plans for expansion and new product lines. It supplied the domestic Lebanese market and the South Lebanon-based United Interim Forces in Lebanon (UNIFIL), and exported throughout the region.

“It was a continuous expansion for us, we wanted to inject new products in the market periodically,” Waked says.

A strike at dawn

But on July 19, six pre-dawn precision-guided Israeli bombs destroyed the Bekaa-based dairy’s processing plant, causing damages upwards of $20 million and putting 300 employees out of work.

“The only reason I can think of [for the strikes] is that the Israelis knew the eventual outcome of the war; I am sure they knew. I mean, they planned it, and they knew that they would be asking for 15,000 troops to be stationed in the South,” Waked says.

Liban Lait had been the supplier of the UNIFIL troops since 2001, when they outbid a northern Israeli firm for the contract.

“Before the war, the contract was nothing, it was almost $300,000 a year, a small business. But now, with 15,000 troops stationed in the South, the contracts will be different and will amount around $2 to $3 million. The only reason I can think why the Israelis hit our plant is because they knew we were the only plant [in Lebanon] that could supply 15,000 UNIFIL troops with enough products on a daily basis,” Waked says.

“Now, if the UNIFIL wants to get fresh milk and fresh yogurt, they will have to get it from north Israel,” he observes.

Liban Lait has dropped all plans for expansion, and will transform the firm into a small unit for the time being, producing just yogurt, labneh, cheese and milk, and importing some other products— like long-life milk— from France.

“We are going to do a small production unit, basically to do labneh, laban, milk and cheese. At the first step, we are not going to rebuild the main plant. We are just doing a small unit to return to the market again,” explains Waked.

“We are going to try to be present in the market as much as we can, but it will not be like before, because we are not producing in full range. Everything will be downsized, from production to distribution to staff – the whole lot.”

Waked says the firm has no plans to return to full-capacity production unless the government pays them compensation; if it ultimately fails to do so, the decision has been taken to shut down Liban Lait altogether.

Compensation concerns

“We are hoping to get compensation and we sense that there is the will, but we are not going to rebuild if we don’t get compensations for the damage. We will close the plant, we will shut down the business and go home. It is $20 million, for a war that was started and ended with no purpose whatsoever; we were hit for no reason,” he says.

He says the firm is lobbying on different levels.

“We sent files to everyone, all ministries— agricultural, industry, finance, economy and the Central Bank, too,” he explains.

“We don’t have another choice. We will try as hard as we can to get compensations, otherwise we are not willing to inject a $20 million in capital again into a company that is only five years old and was hardly breaking even,” he says.

“We feed 2,000 cows every day, and we have nothing to sell now. If you have a downsized plant with 2,000 cows it will be operating at losses—we’re working to feed the cows, and you can’t tell the cow, “don’t eat today” or “go on a diet.” They haven’t heard of diets,” he jokes grimly.

He says that during the 34-day-long war, milk production went down from 25 liters a day on average per cow to 15-18 liters, because the cows were “sensitive to the bombardments and because they were not fed properly.”

If the plant closes, Waked says the cows will be sold, which would severely affect the agricultural sector providing cow feed. But most importantly, closure threatens to keep 300 employees out of work ahead of a cold Bekaa winter season.

“Our employees complained to the labor ministry, but what can the ministry do? It was force majeur. They did not have a case,” he says.

For this reason, Waked says the shareholders – who include his father Michel Waked, major investors like De Freij family, Mohamad Zeidan and Audi Investment, among others – are also lobbying with the private sector to get donations or subsidized loans.

Pressure on all levels

“I don’t want to say the government is not doing anything yet, because that would not be fair. I don’t know much about politics, I don’t know if [Prime Minister Fuad] Seniora or [Industry Minister Pierre] Gemayel will decide on the compensations, but we are trying on all levels,” he says.

Waked says he is optimistic.

“We know the people and we are exerting pressure; we have 300 employees on the street, a sector is waiting for us to restart. This is a factory that has a future in Lebanon. Just to say, “we are not going to compensate – manage yourselves”… does not seem possible and besides, I am sure they have money to compensate,” he says.

He explains that a possible solution might be reached through Central Bank, which could subsidize the firm’s old loan, “or wipe it out” and replace it with a new loan, instead of paying compensation.

“They may tell us, “let’s forget about the old loan,” and give us a new loan with a long-term plan until we can stand on our feet again and start making money,” Waked speculates.

Although Liban Lait will, for the time being, be reduced to a “mini-plant” slated for completion by November, Waked says he is still busy these days because “it is like somebody wiped out the whole place and we are rebuilding it.”

The business was established in 1994, but did not start production till June 2000.

“We had no experience, so it took us some time to do the feasibility study and build the plant,” explains Waked. “Now we are doing the same thing all over again, but on a smaller scale. We have the right experience, the infrastructure—but we still need the factory.”

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State department

Middle East Unrealities

by Executive Contributor
written by Executive Contributor

American President George W. Bush envisaged a new Middle East, and by all appearances he may be getting his wish. The political landscape of the Middle East is changing, but not in the manner the president anticipated. Instead of American democracy leading the way, the Bush administration is struggling to prevent the region from falling into the grips of an Iranian-led Islamist theocracy.
Thanks largely to Washington’s lack of coherent policy, such as its shortsightedness in Iraq and in allowing Israel to pursue its war on Lebanon as it tried to decapitate Hizbullah, Bush may have contributed to the problem rather than the solution. It was only when Israel contemplated a full-scale ground invasion of Lebanon – yet again – that the American president reached for the panic button, and asked the United Nations to seriously sue for a ceasefire.


The president, much like his secretary of state, Condoleezza Rice, had resisted earlier appeals from Arab and European leaders to pressure Israel to stop hostilities. Bush hoped Israel would be able to destroy Hizbullah before a ceasefire was voted and approved by the UN Security Council. But as one Israeli general confided, not all wars are won in six days. This one took 34 days, and at the end, Israel still could not claim victory. But Hizbullah, Syria and Iran had no such qualms. They went out declaring victory to whoever would lend a sympathetic ear.
Hizbullah proved to be a far tougher foe than Israel initially imagined. War, by its very nature, is an uncertainty. This is heightened in an asymmetrical conflict, as was the case in this war.
Israel was forced to re-evaluate tactics along the way, going from fighting a war it initially believed could be won exclusively from the air, to committing boots on the ground, something it was reluctant to do with memories of 1982 still fresh.

Major changes for Israel
The war was so askew for the Israeli military that just four weeks into the offensive, its High Command felt the need to change a top military commander, a rare move in the middle of a war. Military affairs specialists saw the move as a blow to the Israeli army’s morale – and pride.
The other major change for Israel is that for the first time since its war of independence, war came to Israel proper. Since the start of the conflict July 12, more than 4,000 rockets fired by Hizbullah militants crashed into Israeli cities, towns and settlements, killing more than 150 people.
But as numbers go, the war took its biggest toll on Lebanon’s civilian population and its economic infrastructure: 1,020 killed, 3,568 injured and 915,762 displaced at the height of the conflict, according to official Lebanese sources. One hundred and forty one bridges destroyed, hundreds of kilometers of roads damaged, billions in potential revenue lost, including the promising tourist season, along with tens of thousands of foreigner visitors.
But was this conflict really between Israel and Hizbullah, or was there more to it? Israeli Prime Minister Ehud Olmert told senior officers during a visit to the Northern Command that Israel was not just fighting Hizbullah. Israel was fighting Iran and Syria.
Iran and its newfound ally, Syria, now play vital roles in Lebanon in the aftermath of the war. Many analysts saw in the conflict a precursor to what could be a far wider conflict – a major political tug-o-war between Syria/Iran and the West. Whether Washington likes it or not, Syria, feeling somewhat vindicated by Hizbullah’s “victory,” continues to hold one of the keys to ensuring peace – or lack of it – in the region.
As for Iran, it supplies Hizbullah with arms, training and money. As soon as the ceasefire went into effect, representatives from Hizbullah were out assessing the damage and offering financial compensation. In Beirut’s southern suburbs, Hizbullah quickly began to distribute cash. Residents whose homes were damaged or destroyed received $12,000.
Where did all this money come from? Iran. As a major oil producer Iran is not cash-strapped, especially given the current price of oil.

The French want to know the rules of engagement before they commit troops


Hizbullah’s rapid reaction in providing emergency assistance to tens of thousands of Lebanese villagers and residents of the southern suburbs has embarrassed the Lebanese government, which was unable to match Hizbullah’s speedy generosity.

Double standards
Needless to say, this was quite predictable. In its war against terror and its efforts to win the hearts and minds of the people of the Middle East, this is one more area where Washington showed shortcomings in political preemption. If Washington could deliver high explosive artillery and mortar shells to the Israeli army, it should have been able to airlift food, medicine and other emergency supplies to Lebanon.
Hizbullah’s munificence – compliments of the Iranians – will score major points with the Shia community. For decades, the Beirut government has ignored much of the South, one of the poorest regions in Lebanon – and one of the most beautiful, except that it has the misfortune to border Israel.


As the fighting stopped and the haggling began to intensify over which countries were going to send troops to South Lebanon to beef-up UNIFIL, the ghosts of 58 French paratroopers and over 250 American servicemen, killed in a double terrorist bombing in 1983, lingered in the minds of European politicians. An early incarnation of Hizbullah was widely believed to have been responsible for that attack. No country wants to see a repeat performance, but by the end of the month, the French and Italians, veterans of the 1980s peacekeeping operation, were leading the way and landing at Tyre and Beirut. Qatar has pledged troops and the French are sure to follow in greater numbers. Lebanon is historically its darling and it has to be seen to do right by her.
Still, fears remain: “Above all, we need to avoid repeating what happened in 1983,” a French official, who spoke on condition of anonymity, told this correspondent. “Until the rules of engagement are defined, we don’t want to place our troops in a situation where they can become targets. We need guarantees,” said the official.
The guarantees need to come from Syria and Iran at a time when relations between France and both countries are at their lowest ever.
The trouble is that everyone in this crisis wants to have the last word. Syria would probably like to see the investigation into the Hariri assassination dropped before it gives its last word on a multinational deployment. Iran wants the West to lay off its nuclear program. And Lebanon is once again caught in the middle.

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For your information

Ramzi Ghosn

by Executive Editors
written by Executive Editors

Ramzi Ghosn, co-owner of Massaya, the boutique Franco-Lebanese wine producer, was holed up in his Tanail winery for the entire conflict. Now he, his brother Sami and their French partners have decided, for security reasons, to have a limited harvest. Massaya plans to make just one wine, a red, from the 2006 harvest, producing a mere 25,000 bottles. It is a symbolic gesture of defiance more than anything. Ramzi Ghosn speaks to Executive about the past two months and the immediate future.

E You remained at your winery during
the entire war. What was the motivating
factor that led to this decision?
The 1975 syndrome. In 1975, my family and I left Tanail, supposedly for one week and it took us 17 years to come back.

E You have decided not to have a full
harvest this year due to security concerns. What was the biggest fear that led you to make this decision? How will it affect the price of your other wines and will you change your distribution strategy in terms of imports and exports?
It will force us to reduce our aged wine stock. This is unfortunate. It is similar to selling family assets but what can we do? We have to use our resources to overcome the crisis.

E How do you think the war has affected the Lebanese wine industry, locally
and internationally? In 2005, Lebanon managed to turn crisis into opportunity.
Is there any way that Lebanese wine
producers can capitalize upon the
international sympathy generated
for Lebanon during the conflict?
Sure, if Lebanon carries on sending signs of western values such as tolerance and sophistication and people don’t get bored with our stories.

E Will the fact that you are making a very limited vintage in 2006 affect your brand locally and internationally?
No. Our concern is quality, otherwise we would have taken advantage of the drop in grape prices to increase production. Frankly speaking, if we want to maintain the quality, we have to cut our production. We have to admit honestly that we are not as well prepared as usual for a full-scale harvest and therefore we are downsizing the production but the objective is to maintain the quality, hopefully.

E Massaya has chosen not to be a
member of the Union Vinicole du LIban (UVL) but how do you think Lebanese wine producers should respond en masse to the effects of the conflict?
Unfortunately, the strength of Lebanon is in its individuals and not in its synergy. All efforts will remain privately-funded with private initiatives. I cannot foresee a move from wine producers and I expect individual opportunists dealing with the matter. In Arabic there is a popular saying: laoula badda tchati kanat ghaiamet. To start rain you have to see the clouds.

E There is a shortage of Syrian labor
in the country. How have you been able
to hire pickers for the harvest?
I prefer to call them nomads or Kurds and not Syrians because that is what they are. We hope that students and supportive Lebanese will help in the harvest this year. I believe that people are positively motivated to heal the scars of the war and they might be looking for a challenging experience that would allow them to contribute to Lebanon’s prosperity and sophistication.

E You have a trio of high-profile French partners. How did they respond to your decision to a) stay at your winery during the conflict and b) have a limited harvest?
In this company we rely on good judgment and experienced people to take decisions. The French partners relied on our best judgment for the company. I repeatedly told them that I was staying as long as I felt the threat bearable but ultimately I was prepared to evacuate. We kept a 4×4, the company car that we use for the vineyards, packed with valuables at the ready. I did not want to stay at any cost. I wanted to stay as long as I could take the pressure.
Honestly, MBA programs don’t have enough courses about “threat management.” Threat management is an extreme “crisis management.” I am confident that the most experienced and reliable people in this field are the Lebanese, not because we are more clever but unfortunately we are more experienced. Our French partners are willing to profit from our experience in this field.
The harvest was not an individual decision. It was reached after lengthy discussions. We are very concerned about quality and to preserve it we have to bring the challenge to acceptable limits

E Have you received any messages of government support or any indication
that there will be any kind of government compensation for losses?
Yes. We are preparing the file. It seems that compensation is for direct damages only, which were less than 20% of the incurred losses. There were $19,030 in direct fixed and current assets, $79, 200 in operational costs (the fixed costs that you have to disburse to carry on even if you are off, bearing in mind that during that period revenues were at zero) and opportunity costs, such as loss of sales, breach of sales and supply contracts, fairs and promotions cancellations.

E Three other factories next to you were destroyed: what was the extent of the damage you sustained? At any point did you feel that Massaya would be bombed?
In fact, it was four factories and the road in front of the winery. I was ravaged by this thought. I was imagining the military analyst somewhere in his office in Tel Aviv rushing to set the target coordinates because he wanted to join his girlfriend at a café. I thought, what if by mistake he picks us?

E Many wine producers are complaining that they found it difficult to import the raw materials they need to produce their wines. How much of a problem has this been for Massaya?
To start with, Massaya doesn’t use any enzymes and since 2003 we have not used imported yeasts. We generate indigenous yeast and we sustain it during the harvest. I believe that most wineries are worried about the yeast and we don’t have this concern. Our wines rely more on our terroir than on imported science.
Traditionally, we import French barrels but fortunately the barrels arrived ahead of the war along with a new harvest pump, our new acquisition of 2006.

E Conversely, how will the ongoing blockade affect exports? Will international agents lose patience?
Not yet, but we might have this concern in couple of weeks.

E Before the war you signed a distribution agreement with drinks distributor, Diageo, the first local producer to sign with the international company. Is this deal still in place?
Yes.

Those who want to take part to the harvest can contact Massaya between 8:00am and 4:00pm on 08-510135. They pay $15, including accommodation and full board for a hard day’s work on Sept 20th.

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For your information

Jeffrey Feltman

by Executive Editors
written by Executive Editors

Jeffrey Feltman was sworn in as US Ambassador to Lebanon on July 22, 2004 and took up his duties on August 20, 2004. Before that, he served in Iraq, Jerusalem, Tel Aviv and Tunisia. Mr. Feltman, who is from Ohio, speaks French, Arabic, and Hungarian. He spoke to Executive about the current crisis and US’s economic and political ambitions for Lebanon and the region.

E What signal do you think was sent by the extent of international community’s generosity in Stockholm yesterday?
My view is the fact that it doubled the amount pledged for Lebanon shows that the international community’s support for Lebanon remains strong. It is not often that you have a donor conference where the pledges were double what the goals were. It shows confidence in the Seniora government, but it goes beyond that; it shows the concerns that the international community has for Lebanon and its commitment to Lebanon. It shows the links between Lebanon and all the countries that participated. Look at the US for example: we have Lebanese- Americans everywhere and those Lebanese-Americans want to make sure that we do our part in reconstructing Lebanon after this awful conflict. We are proud that, of those commitments, about 25% was an American commitment to Lebanon.

E Representative Tom Lantos has vowed to block aid to Lebanon until Beirut agrees to the deployment of UNIFIL 2 troops along the Syrian border. Can one man make this kind of unilateral decision for the entire United States? How seriously should we take his initiative?
Tom Lantos is an important voice in Congress. I think you know our system. We have checks and balances between branches of government. The president has the lead on foreign policy making but Congress has the lead on appropriating funds and Tom Lantos is the leading democrat for the House of International Relations Committee, which means that he has a very important voice. All congressional representatives have voices but his is a particular voice because of his position and his long study of this part of the world, so we do have to consider Congressman Lantos’s concerns. But Lebanon should want to take them into account as well. His concerns, the specifics of his request, are less important than the issue he is talking about. Lebanon needs to secure its borders. This is not an infringement of Lebanon’s sovereignty; this should be an assertion of Lebanon’s sovereignty. Countries need to control their borders. Lebanon has an obligation under UN Resolution 1701 to stop arms smuggling. The world has an obligation under resolution 1701 to prevent arms smuggling into Lebanon. But this isn’t a gift from Lebanon to the international community. This is something Lebanon needs to do for Lebanon. It is something businesses need to be looking into as well. Businesses want to operate in countries where there is transparency, rule of law; and smuggling, be it arms or commercial smuggling, will not help Lebanon attract investors.

E The success of Stockholm could not have come a day too soon for Lebanon. Michel Aoun has again put pressure on the Seniora government. In whose interests would it be if the government collapsed?
In our view the prime minister and the cabinet did a very good job in managing Lebanon during the crisis. If you look at the development of 1701 and how it evolved … it is not a secret … look at the text and the various drafts that were floating around Lebanon and New York, and it is clear that the prime minister, the cabinet, the speaker of the parliament all worked to see that 1701 evolved in a form that the cabinet believed worked better for Lebanon. This shows the respect the international community has for the governing institutions of Lebanon, for the prime minister, the speaker and the cabinet that they were able to get a Security Council resolution to evolve in Lebanon’s favor. Now, who ultimately is the prime minister of Lebanon is a question for the Lebanese to answer and not the United States or the international community. But we do know that you have democratic institutions, you have a parliament, and while we all have recognized that the electoral law was not the best law you have, you do have a parliament and a cabinet and you have constitutional institutions. We hope that those constitutional institutions would be relied upon if you’re looking at a change in government.

E From what we understand the American government has specifically committed itself to backing the Seniora government.
We have confidence in the prime minister’s leadership of the country during the crisis. We have confidence in the goals that he has set out. Some of the goals are stated in the seven-point plan, some of the goals are the reform ideas he discussed before the crisis that broke out on July 12. He has won the confidence of the international community, whether we’re talking IMF, the World Bank, the [international Friends of Lebanon] Core Group, the United States, and the UN. This is an asset in Lebanon’s favor, but again, who is the prime minister of Lebanon is not a question for us. Yes, we have confidence in Prime Minister Seniora’s leadership. We have confidence in the cabinet. We have confidence in the way the speaker has played his role during the crisis, but who is the leader of Lebanon is not for us to decide.
E But would the American government be prepared to accept an alternative now?
It’s a hypothetical question. The Lebanese need to calculate what’s best for Lebanon. Is it best for Lebanon right now to try to change the government? Is it best for Lebanon right now to be calling for a collapse or resignation of the prime minister? That’s not a question that I can answer. I can certainly give you our views but our views are less important than what the Lebanese think. I would hope the Lebanese would consider this question very, very carefully.

E Given then the implicit support America has for the current government, do you think the Americans are doing enough to encourage Israel to ease the economic blockade, which is one of the key pressures on the Seniora administration?
I assure you that whoever I meet with in Lebanon today – across the political spectrum, in the economic and commercial field – the air and sea blockade is the first topic that is raised. I assure you that this embassy has been playing its part to make sure that our government understands the cost, whether we’re talking economical, political or even psychological cost, so we are actively conveying Lebanon’s deep concern about this to Washington. Washington has an understanding of this. Washington is in a dialogue with Israel on this and I have to say it is linked to issues of securing borders and arms smuggling. The international community wants to see Lebanon prevent arm smuggling and, in terms of the air and sea embargo, Israel has linked that into the question.

E But it is not very helpful is it?
As I said, I understand the economical, political and psychological costs of this embargo and I would love to see it lifted as quickly as possible. I would like to have a better understanding as well of how Lebanon is dealing with the need to prevent the airports the sea ports and the land crossings from being used for smuggling.
E You served in Israel in 2001. Considering the strong US ties with Israel, how difficult is for America to play the genuine honest broker in this part of the world? I think the embargo highlights the difficulties involved.
Yes, the United States has strong friendship with Israel. No one can dispute that. By the way, in 2001 I was posted to our consulate in Jerusalem, which is our diplomatic mission to the Palestinians. It is different to our embassy in Tel Aviv, which is our diplomatic mission to Israel. In any case, we do have a strong friendship with Israel but that doesn’t mean we can’t have as strong friendships with others. I would argue that our friendship with Israel can be an asset for countries like Lebanon, who have a different relationship with Israel and also have friendship with us. The relationship is different. You do not have any relationship with Israel. In fact, you technically are still at war with Israel and it is criminal to have any contact with Israelis. We don’t think that it is a useful policy right now, but it is your policy. That means that you need people who do have channels to the Israelis. You need people who can talk to the Israelis, who the Israelis have confidence in. This is an asset to you. It should not be looked at with suspicion or negativity.

E Given the events of last month, there is a desperate need for confidence to return. There is a large Lebanese community in the United States and there are also emerging markets funds in the US. What do you think can be done to encourage foreign direct investment from America?
I think you will see, in the coming weeks, several groups from the private sector coming to Lebanon. For example, I know that the Arab American Chamber of Commerce is bringing a group of Lebanese-American executives to Lebanon sometime in the second half of September. It’s a private sector group so we’re not directly involved, but we certainly expect to meet and brief them and grant assistance. You’re going to see people come, either who have Lebanese-American ties or who want to be part of the reconstruction effort. When you’re talking about $3.6 billion or more of damages, there are people who want to come and see if they can help try and get business, and they will go back and talk to their colleagues. I see the reconstruction phase as actually providing a marketing tool for Lebanon as a destination. But when you start the reconstruction, will there be transparency? Will there be border controls? Will there be an easing of bureaucracy in order to assist in job creation? Those are questions we need to ask the government and parliament and others. We are going to have a lot of attention on Lebanon for the next few months. Are the people who are watching Lebanon over the next few months going to be impressed by what they see and going to continue to get involved in Lebanon and going to want to set up offices in Lebanon? It’s going to depend on how the next couple of months go. If you have things like big demonstrations calling for the downfall of the government or rhetoric about arms not coming under the control of the state, I would say that that is not going to encourage people to make long-term commitments to Lebanon. So I think that the atmosphere here in the coming few months, when so many people in the world are watching Lebanon, will determine the sort of long-term commitment you get in terms of investment and trade.

E Given the funds pledged in Stockholm, what are the Americans doing to help ensure a degree of transparency in the allocation of funds and to ensure that the reconstruction effort is being seen to be carried out by the official authority?
We hope to be able to take our cue from the government. The government has identified several projects and we picked up on one ourselves, the rebuilding of the bridge between Jbeil and Byblos. But in terms of how the government is going to manage the funds that are coming in, we’re waiting for details. I agree with the implicit philosophy of your question, which is they do need to be transparent. They do need to be accountable. There need to be assurances to donors and to the Lebanese people that this money is being used with the intention stated.

E And what about ensuring that it is seen to be channeled through the official authority?
The Prime Minster has taken an interesting approach on this. He has talked about several approaches: one is to put the monies into what would be set up as a fund by the government to manage in cooperation with other entities. He’s also talked about adopting, allowing people to adopt villages. Countries have adopted Khiam and Bint Jbeil to rebuild them. In essence, we’ve ‘adopted’ a bridge between Jbeil and Byblos, so the prime minister himself has set priorities but given different mechanisms by which Lebanon can meet those priorities. So I hesitate to say that everything must go through the government of Lebanon, when in fact you have private sector interests and the prime minister himself suggesting other options.

E Last year, after the assassination of Prime Minister Rafik Hariri, Mr. Bush held Lebanon as a beacon of change. Does Lebanon still have that status as far as US Middle East policy is concerned, and is it still being used by the American administration as an example of a country that can embrace democratic values and move forward?
Lebanon has a long history of democracy. It’s not like democracy came to Lebanon 18 months ago. We are all very aware of Lebanon’s democratic traditions, like civil rights, freedom of speech freedom of the press, freedom of assembly. We see these as similar to our own values, similar to a European and American model of how civil society works. You have lots of checks and balances built into your system to prevent any one institution or one person from emerging as a dictator. Our commitment to Lebanon, I would say, is stronger now than it was a year ago. We see the fragility of the situation. We understand how regional concerns have played themselves out to a certain extent within Lebanon to the detriment of Lebanon. Our normal assistance budget to Lebanon is about $40-50 million a year when you put everything together. Even after last year’s March 14 demonstration, although we increased various activities, we are still talking about $40-50 million program. In Stockholm, people were talking about $230 million program. That’s a change and it shows how the tangible commitment we are making to Lebanon is greater than what it was a year ago. There is also a great understanding of what Lebanon needs. A year ago, we were talking about $2 million of assistance to Lebanon’s armed forces. Now we’re talking about over $40 million of assistance to the armed forces, just from the United States alone, because we recognized that you need a strong army that has the training and the equipment to serve Lebanon’s needs.

E But surely, Mr. Ambassador, these needs were apparent before July.
They were indeed apparent. There was an international effort to try to support Lebanon in its political reform program and re-equipping the army and the internal security forces through what we call the Core Group, the International Friends of Lebanon [United States, France, United Kingdom, Lebanon, European Union/European Commission, Russia, Egypt, Saudi Arabia, Italy, United Nations and World Bank] but the urgency became ever clearer because of what happened on July 12.

E Given that America could use a success story in the region, is Lebanon still being touted for this role?
Yes. Look at the increased of financial commitment and the number of delegations we’ve seen. Look at the congressional delegations alone. So far we’ve had four or five congressional delegations in the past month and this indicates that the United States is optimistic about Lebanon’s future. That’s why you have so many people coming – because we believe that with people as talented as the Lebanese, Lebanon has a bright future.

E In 2000, when Israel withdrew from its so-called security zone, there was talk about going into the South and throwing aid at the South and rebuilding its social infrastructure. Six years on, no one has touched the South and we saw how Hizbullah filled in the vacuum. Now that the dynamic of the South has again changed, what is the American government doing to help ensure that social welfare and education in the South becomes the responsibility of the government?
I dispute the underlying philosophy of the question. Over the past six years, 40% approximately of all the US spending in Lebanon has been in the South. We’re talking about the Litani and the far south. People in Akkar have not been happy with the US focus on the South because one could argue that the needs in the far north of Lebanon are also great, but because of the concerns you raised, we put around 40% of our funding in aid in the South since 2000. We work in a variety of areas, but we don’t wave the flag all the time. We’ve done a lot in bringing clean water to villages and in solid waste management. We’ve done a lot with income generation, setting up farmers’ co-ops, helping on high-value labor-intensive agriculture markets with organic products, such as rose petals and the production of rosewater. There are a lot of US-funded projects in the South based on economic development, job creation, and stuff like that. You are wrong in stating that there has been nothing done in the South. Hizbullah’s has also spent a lot of money in the South, and we recognize that, but the international community has not left a vacuum in the South and we will not leave a vacuum in the South now.

E After Hassan Nasrallah’s admission that July 12 was a miscalculation, his apology if you will, what message do you have for Hizbullah as it seeks to rebuild its sectarian infrastructure and its position within its community? What incentives are there for Hizbullah to join the political process and eventually disarm?
Hizbullah is part of the government; Hizbullah is part of the parliament and has a history of effective, targeted and efficient social programs. The question we have is why Hizbullah insists on the need for arms when all the parties in Lebanon are competing democratically for office, for power. Why is Hizbullah not willing to play on equal playing field in Lebanon with the others? It seems that Hizbullah has enough to offer its population without having arms that violate the very nature of democracy. I found Hassan Nasrallah’s comments, what you call his apology, quite strange because many of us when we watched the kidnapping of an Israeli soldier in Gaza and saw the Israeli reaction in Gaza, many Lebanese, referring to an incident in November, said, “can you imagine what would have happened if Hizbullah succeeded back in November when they tried to kidnap Israeli soldiers in the Ghajar area?” Surely Hassan Nasrallah, watching what happened in Gaza, knowing what his own plans were, had thought of this too. It can’t be that all the rest of us were watching the June 25 kidnapping and wondering what would have happened to Lebanon. He must have thought of this too. I don’t find it credible that he did not calculate a very tough Israeli response. But what is a democracy? Do you have publicly accountable institutions? Do you rely on your constitutional institutions? Hizbullah has arms that are not subject to any publicly accountable institution in this country. The decision of July 12 to kidnap Israeli soldiers was taken without any reference to Lebanese governing institutions and the cost of doing that was almost unbearably high for Lebanon.

E While the people in Lebanon may be divided on the issue of Hizbullah’s arms, Mr. Bush has tagged the party as part of his so-called Axis of Evil. This is not good for confidence in Lebanon. If Hizbullah were to disarm and throw themselves into the activities you just spoke so highly of, would they be detagged?
Our problem with Hizbullah is the arms. That’s our primary problem with Hizbullah. We’re talking about arms that were used, not only to kidnap Lebanon and drag it into war on July 12, but arms that were used against us. I would encourage you to walk by our memorial to the nearly 400 people who were killed in the service of the US government, including many Lebanese, by Hizbullah in its earlier incarnation. So we do have a real problem with Hizbullah in terms of the arms. However, we also recognize that the Shia of Lebanon need to feel that they are properly represented inside Lebanon. The requirement on Hizbullah from the international community in terms of the Security Council resolution is to disarm. In terms of our own bilateral relation with Hizbullah, we certainly will reevaluate them in line with Hizbullah’s compliance with international obligations, but I won’t speculate what they might be today.

E Can we have a workable peace with Israel?
I don’t think either country should have to go through what you went through over the last month. The pain to Lebanon and the physical damage on Lebanon was greater [than that in Israel] but there was pain on both sides, and for what? What did either side achieve? So I would hope that you would be able to find a way and maybe it’s too early to talk about this now, but the prime minister has talked about the need to define a destination where the two countries can move towards an armistice. If an armistice is credible and allows the Lebanese to live without fear, I think that’s a worthwhile destination. But it requires obligations on Lebanon’s part as well.

E Such as?
Not having armed groups that fall outside publicly accountable institutions and that can drag Lebanon into another conflict.

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Economics & Policy

Stockholm on our minds

by Faerlie Wilson
written by Faerlie Wilson

The most surprising development in this conflict may actually be the most positive – the unprecedented support of the international community for Lebanon, its government, and its people. As economist Marwan Iskandar notes, “This is the first time in the history of Lebanon that the country had received this kind of money.”

Although aid began to flow from the early days of the war, support was demonstrated most strikingly at a Conference for Lebanon’s Early Recovery held in Stockholm, Sweden, on August 31, where participants pledged $940 million dollars to Lebanon’s first stage of recovery, vastly exceeding all expectations.

Early recovery, the focus of the conference, is the initial step in Lebanon’s post-war strategy. It involves ongoing humanitarian assistance, particularly towards displaced and marginalized communities, and interim solutions for high-priority infrastructural damage, including pre-fabricated houses and schools, temporary bridges and bypasses for damaged roads. Emergency measures to minimize environmental damage and public health issues are also addressed.

Thus far, the government has been unable to fully assess the costs of this phase. However, in preparation for Stockholm, it drafted an appeal document highlighting a number of high-priority initiatives.

Speaking to Executive in late August, Mazen Hanna, a member of the Lebanese delegation to the Stockholm conference and economic adviser to Prime Minister Seniora, cautioned against high expectations. Although publicly, the government declared a $500 million target, Hanna doubted contributions would exceed $200-300 million. “Our expectation is not to raise a lot of money,” Hanna explained, several days before heading to Sweden. “This conference is a chance to flag out our needs; it’s a dialoging exercise—the first in a series of meetings to be held on Lebanon’s recovery. We expect only a modest amount of donations.” The true measure of success, he stated, would be a show of support from the international community for Lebanon, and commitments to participate in a broader conference in Beirut, tentatively slated for late 2006.

Exceeded expectations

Another delegation member, Secretary-General of the Higher Council for Privatization Ziad Hayek, also played down the issue of funding in the run-up to the conference: “We don’t expect to receive anywhere near the amount we need for early recovery, but of course, we’ll try to raise as much as we can. This conference is really an opportunity for the international community to come together to support Lebanon and the government, and an opportunity for us to tell the donor world that we’re going to have serious needs.”

So how did the delegation end up coming home with pledges for an amount over three times larger than Hanna’s most generous estimate?

“There is a lot of support for Lebanon and the Prime Minister,” explained Hayek, after the conference, noting that the delegation was far better-prepared than donors may have expected two weeks out of the war.

At present, only some of the aid generated in Stockholm has been specifically allocated. Donors were able to tag their money for individual projects: for example, Qatar’s contribution of $300 million will go towards the reconstruction of Bint Jbeil and Khiam, with any leftover funds to be distributed at the government’s discretion. However, most donors elected to leave the question of distribution to the Lebanese government.

According to Hayek, no conditions were attached to any donations: the government would not have accepted conditional offers. However, that does not mean that donor countries will not impose informal conditions, witholding the delivery of their pledges.

“We hope the funds will be available soon,” says Hayek. “But we’re not going to let people go without shelter because someone hasn’t gone through with their donation.” Regardless of whether pledged aid is forthcoming, the government will proceed with its early recovery plan: if donors drag their feet, Lebanon will simply incur greater debt, but it will not wait. In fact, the government has already started work on several urgent projects, most notably the clearing of rubble in badly-hit areas (including the southern suburbs) and building temporary bridges.

“This process could take longer than people think,” cautions Hanna. However, he notes that the time frame is not dependent on money – as Hayek suggests, the recovery phase will carry on at the same pace regardless of aid availability. Iskandar, on the other hand, sees the question as somewhat moot: he expects $600 million to arrive in Lebanon within the month.

Donors may also have been reassured by the independence and transparency of the two channels in place for their contributions: donations can be deposited in an independently-monitored fund (to be governed by a donor-elected board of directors), or channeled directly to aid agencies; no money will flow directly to the Lebanese government, minimizing the risk of its misuse and giving donors a maximum level of control on how their funds are spent.

Transparency needed

“The government is trying to give donors assurance, so they can verify how their money is being spent in a very transparent, above-board way,” explains Hanna.

Iskandar, however, plays down the concern: “With the Lebanese, people always rush to assume that there will be corruption. Is it the case that this is only an issue in Lebanon? Of course not. You can’t spend that kind of money and not have some wasted in one way or another – not necessarily corruption, but some kind of waste. The government is doing the best job it can, and it has earned a good reputation.”

According to Iskandar, the conference “was a success because other countries helped the Lebanese government to compete with Hizbullah.” The idea of competition between the government and political parties – in particular, Hizbullah – in providing relief and reconstruction is widespread both domestically and internationally. However, some feel the situation is being exaggerated.

“Obviously, everybody would like the government to be the leader in these areas,” states Hanna. “On another level, Hizbullah’s support isn’t really different from that of the over fifty donors at Stockholm. Hizbullah is one of many players in Lebanese recovery; any help is welcome.” Before the conference, he expressed similar sentiments, insisting that Hizbullah and the government had an open dialogue and were cooperating smoothly thus far. Hizbullah’s efforts, he explained, weren’t anything new – they’d always helped. Hanna was confident, moreover, that the government would lead reconstruction even within areas with strong Hizbullah support, like Dahieh.

One reason, according to Hanna, is that Hizbullah may have money, but they do not have the necessary equipment for recovery and reconstruction. The removal of debris in heavily bombed areas, for example, has been overwhelmingly dominated by the state, not Hizbullah.

Hayek does not see the situation as a competitive one, either. He believes that the Lebanese government must take care of its own citizens, regardless of what any other group does. The people who have already received compensation for damages from Hizbullah, Hayek notes, will still compensated by the government as well.

Competition or not, the past few weeks have seen a high level of cooperation between the government and Hizbullah – though it remains to be seen who is ultimately the senior partner. Sources note that Hizbullah is happy to work with the government, but it will not wait for them to take action. And certainly, the Party of God has been far quicker on its feet: thousands of people have already received an average of $11, 000 in compensation; although the government has promised the significantly larger sum of $33,000 per family, the money has not been forthcoming.

Recovery and reconstruction

Over the coming months, as early recovery plans are implemented, the Lebanese government will prepare for the next phase in the postwar efforts: reconstruction. The second conference will be held in the near future, mostly likely in Beirut. This conference will raise funds for long-term reconstruction, but it will also double as a stand-in for the “Beirut I” conference, seeking debt restructuring in return for pledges of economic reform.

Iskandar sees the current situation, ironically, as an opportune moment for such a conference, as the Lebanese government currently enjoys widespread international sympathy, and reforms will be necessary for effective postwar economic recovery. Should tensions between the international community and Syria and Iran continue unabated, support for a strong Lebanese government may further increase, compensating for any lingering hangovers from Paris I and II that might have spurred donor fatigue at Beirut I as originally planned.

Achieving commitments to participate in this second, vital meeting later in the year was a primary goal of the Stockholm conference. In this area as well, the Lebanese delegation was overwhelmed by the response it received from conference participants, says Hayek. Donors present gave their full support to both short- and long-term recovery plans, committing to ongoing partnerships and continuing financial assistance. Moreover, they firmly reiterated their support for Lebanon’s sovereignty, territorial integrity, and independence.

“The expectations were exceeded because there was a feeling this government should be assisted,” explained Iskandar. “There was a feeling that that they deserve a shot.”

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Economics & Policy

Industrial revolution blues

by Faerlie Wilson
written by Faerlie Wilson

Although in many ways, industry was less affected by the month-long conflict with Israel than other sectors, it faces one of the most challenging recovery processes. Speaking with Executive in days leading up to the conference in Sweden, Lebanese industrialists emphasized the need for strong government support in rehabilitating the embattled sector.

Mohammed Zeidan, the Plants Manager at Liban Lait, said that his factory would be unable to raise the $20 million required to rebuild on its own. “Investors already paid once,” he noted. “Why should they pay again?”

As long as the political situation that led to the factory’s destruction remains unstable, few investors are willing to take such major risks. Maliban’s Hassan el Fil echoed Zeidan’s sentiments: the glass factory has “no plans” to rebuild unless it can obtain outside help and assistance.

However, this does not mean industrialists are idly standing by. In cooperation with Association of Lebanese Industrialists (ALI), factory owners are preparing comprehensive damage reports to submit to the Lebanese government. Liban Lait is also formulating its assessment with the possibility of bringing a lawsuit against the Israeli government in mind. Zeidan is quick to emphasize, moreover, that contingency plans are in place to keep his products on the market: Liban Lait is still producing milk every day, and plans to convert the least-damaged sections of the factory within the next three months to increase production.

Strong sector solidarity

ALI has taken a leading role in postwar recovery, serving as a liaison between industry and the government and an advocate to the industrial sector. According to ALI vice president Waji Bisri, ALI’s main project has been making contacts between badly-hit factories and functional ones in the same sector. “The major problem every industrialist faces is that if he loses his factory, he risks losing his market. The best way for us to assist is to find a way for him to produce in another factory under his own label until he can return.” Bisri lauds the strong level of solidarity that emerged within Lebanese industry in the wake of the conflict; through links made by ALI, a number of factories are offering production space to competitors whose facilities were damaged or destroyed. In addition, along with the Ministry of Industry and Trade and the Lebanese Chambers of Commerce, ALI established a center in Beirut to support members of the commercial and industrial sectors through every step of the assessment process, providing forms, personally assessing damages, and assisting in the preparation and delivery of compensation claims.

The reports are expected to figure prominently into ALI’s appeal for aid from the Lebanese and foreign governments. Bisri believes there is a high level of willingness to support industry, but that claims must be presented as transparently, accurately and quickly as possible. Not all of their efforts, however, have been fully successful – despite heavy lobbying to include private sector or ministerial representation of industry at the conference in Sweden, neither was ultimately present in Stockholm on August 31.

Minister of Industry and Trade Pierre Gemayel seemed unfazed by his exclusion from the conference: “It’s not personal – I would have said the same things as the Prime Minister about the industrial sector,” assured Gemayel. “I know the Prime Minister and my colleagues described the problems and difficulties we are facing well.”

Bad representation

ALI President Fadi Abboud, however, was less confident. Although he applauded the conference overall and repeatedly emphasized support and respect for Seniora and his team, Abboud was concerned with how the recovery needs of industry were expressed.

“It’s not really representation that matters,” he notes. “What matters is what was written in the report.” The report on Lebanon’s early recovery presented by the government in Stockholm only addressed agro-industrial needs, and according to Abboud, did a poor job of it. “Whoever wrote that section did not have a clue about industry. It’s very frustrating.” Abboud notes that many of the few industrial sectors specifically highlighted in the report have almost no presence in Lebanon, such as tomato paste manufacturing and meat processing. Furthermore, although the section concerned agro-industry, the action plan was wholly related to the agricultural side of recovery, despite the fact that it sustained less serious damage.

Abboud believes that these were not merely errors, but symptoms of a larger problem within the Lebanese government.

“There are traces of animosity towards industry – some “economic philosophers” still see industry as a burden: they want the Lebanese economy to focus on hotels, bordellos and casinos. These people say that we can buy cheaper tissue from Jordan or Saudi Arabia – so why do we need industry in Lebanon? When you speak of how this leads to unemployment, they say, “Let them emigrate.” But we cannot keep exporting our youth to develop other countries.

“We feel these “philosophers” are the enemies of Lebanon. They don’t know how to produce a strong country or economy.”

Gemayel seemed less concerned by the issue. When asked to comment on claims that some government economists undervalued his sector, the minister replied, “I hope everyone understands the importance of industry. But if they don’t, it’s my job to convince them to the contrary.”

Nonetheless, industry is not backing down. Abboud believes that if the blockade is lifted soon, the industrial sector may still be able to reach the $2 billion export target it set for 2006. Despite heavy losses, the sector was less badly hit than many, and Abboud sees a great willingness – especially in the Arab world – to support Lebanon through buying Lebanese products, even at higher prices.

Two opposing camps

Despite the disappointments of Sweden, Abboud vows to keep fighting to make the voice of industry heard at the long-term recovery conference expected later this year. He hopes that in the future, the government will listen to the opinion of industrialists, rather than relying on “people who don’t value industry.”

“There are two camps right now in the government: the first sees industry as a national treasure; the second – the product of the WTO and company – sees us as a burden. We are working hard to make sure the first camp is listened to. No government can take more unemployment: we are their only hope.”

Gemayel is also counting on the next conference to bring some relief to his embattled sector. He has developed a three-point plan, which he hopes the rest of the government will support. The first step involves assessing direct damages and helping to rebuild; the second relates to various interim solutions – managing production through other factories, and providing tax relief; the third and most crucial phase will propose temporarily changing relevant legislation to give industry more flexibility and freedom during the recovery process. Although the plan is already under way, its full implementation will depend on the cooperation of the government as a whole. Gemayel is hopeful that support will be forthcoming.

For industrialists themselves, however, the political situation alone can ultimately restore confidence. “We hope that this is the last time,” says Bisri. “One question is always facing us from investors: “We’re ready to rebuild… but is it over?””

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Economics & Policy

There are still signs of life

by Peter Speetjens
written by Peter Speetjens

The Economist Intelligence Unit (EIU) warned that, as a consequence of the recent conflict, Lebanon’s 2006 Gross Domestic Product (GDP) could shrink by some 10%, taking the national debt of almost $40 billion to twice the size of the country’s national income. The Lebanese Council for Development and Reconstruction (CDR) has stated that Lebanon sustained some $3.6 billion in material losses, but has failed to estimate the cost to businesses. The United Nations Development Fund (UNDP), which is working in close cooperation with Seniora’s office, announced in August that direct and indirect losses total at least $15 billion. “The damage is such that the last 15 years of work on reconstruction and rehabilitation, following the previous problems that Lebanon experienced, have been now annihilated," said UNDP spokesman Jean Fabre.

Economist Mazen Soueid, in a commentary for The Daily Star, estimated that loss in exports amounted to some $200 million, loss in tax revenue to some $700 million, while losses in the tourism sector could add up to some $3 billion. He went on to guess that the total cost of the war amounted to some $9.5 billion or 40% of Lebanon’s GDP. Finally, he predicted that the anticipated economic growth of 6% for 2006 would be, at best, zero.

Automotive blues

Take the auto market, where car sales are on their knees. According to Samir Homsi, chairman of the Lebanese Car Importers Association, sales from July 12 till the end of August ground to a halt. “We are probably harder hit than other sectors. A car is a major outlay and therefore first to be deferred,” he said. “What’s more, the situation may not improve as many people’s salaries have been reduced. Already some car owners are no longer able to meet their payment obligations.”

Homsi has been in talks with government officials and banks to find a way to reduce the damage. Many other entrepreneurs and private sector representatives are doing the same, calling for a hold on paying VAT and leniency from banks. However, the most important thing for a rapid recovery, according to Homsi, is to lift the sea and air blockade. “If not, we will become the next Gaza,” he said.

According to port authorities in Latakia, by the end of August some 2,000 containers destined for Beirut had been unloaded at the Syrian port, from where, according to one businessman, transport to Beirut now costs about $2,000. Hundreds of others were unloaded in Egypt and Cyprus.

Advertising counting on a quick recovery

Another sector on its knees is advertising. “July started very well and we thought 2006 might be a year of recovery,” said Dani Richa, president of the International Advertising Association – Beirut Chapter. “But then the sector went back to zero. We had dozens of cancellations.”

In 2005, the sector also took a knock after the Hariri assassination. But even with the the spate of bombs and political killings that rocked Lebanon for the rest of the year, the second half of 2005 saw a recovery as the sector sailed on a wind of confidence after the Syrian withdrawal. According to Richa, it is extremely important that Lebanon experiences a similar wave of post-bellum optimism.

“This summer, we suffered an 80% to 90% loss in business,” he said. “Apart from the banks, simply no one advertised. Look at TV. There was not a single ad on TV during the war. I would like to emphasize by the way, that is not just us who suffer. Through us, it is printers, media, production companies and thousands of families that are also affected.”

Still, Richa is positive about the future. If the ceasefire holds, there are first the summer sales and Back to School campaigns, followed by Ramadan and Christmas. Hence, he expects the sector will be able to reduce losses to some 65% by September and get back to normal by the end of the year.

“What we need now, however, is a lifting of the blockade,” he stresses. “Why should A-brands advertise if they can’t even get the merchandise into the country? The big brands also lost during the war, as a lot of wholesalers and shops were destroyed, and cannot pay their outstanding debts. Some clients are looking at brand building, as they know that people tend to switch brands in times of crisis. Yet, due to the situation, others are looking at cutting costs.”

Lebanon’s tourism sector has been arguably the hardest hit. What was to be Lebanon’s top year in terms of foreign arrivals became instead a bitter disappointment, best illustrated by the sheer emptiness of downtown Beirut and the sales banners trumpeting discounts of up to 80%.

There were few exceptions to the malaise. Some mountain hotels catered to the more affluent refugees from the south. Three hotels in Beirut were largely occupied with foreign news crews and the Rest House hotel in Tyre had a bumper summer. Following the departure of the army of foreign journalists, it has been fully occupied by a legion of foreign aid workers.

Likewise, most of the country’s approximately 6,000 restaurants suffered, especially the ones in tourist hot spots, such as the BCD and all stops from Aley to Broumana. The retail sector, especially in the BCD, is reporting losses of up to 90%, but according to a spokesperson of a well-known Lebanese fashion chain, the current discounts and sales are not just war-related. “Every year we have summer sales,” she said. “But some shops are offering larger discounts over longer periods. The biggest problem facing us is the sea and air blockade. We’re not sure when we will be able to bring in new stock.”

Silver linings

Yet it is not all bad news. Since a healthy economy is all about confidence, it is an all-important sign that the Lebanese pound was able to hold its ground, as did the Beirut Stock Exchange (BSE). According to its chairman, Fadi Khallaf, the BSE stopped trading for two weeks, at first because of the security situation, but mainly to protect smaller investors. Trading was then resumed on August 1, be it under some restrictions regarding threshold effect and transaction size. On August 21, the bourse went back to business as usual.

“In the beginning of the war, we lost some 15% to 20% on market share values,” he said, “But by August 21 that was reduced by 5% to 10%, and today we’re trading only slightly lower than before the war. Take Solidere: the share stood at $21.5 before the war. Today, it stands at $20. Byblos was $2.05, now $2. Cement factories are up from $1.70 to $2.85. I’ve been told that even cement factories in Egypt are trading higher than before with an eye on Lebanon’s reconstruction.”

According to Khallaf, there was demand to open the BSE even during the first weeks of war, as big investors and professional traders saw a chance of buying up bear stock. Another indicator was that, even though every listed company was allowed to suspend trading, none did. “The volume of trading has also returned to the pre-war daily trading levels of $4 million to $6 million a day,” Khallaf said.

The top-end real estate sector also heavily relies on confidence, and seems to have held its nerve. “In my opinion, the market has remained stable,” said Raja Makarem of Ramco Real Estate Advisers. “There is no rush to sell or buy. Everyone seems to be waiting, waiting for the political outcome of the conflict.”

According to Makarem, there were several positive signs that have calmed the nerves of jittery foreign investors. There were no reports of squatters; the areas most coveted by Gulf investors, from Jnah to Broumana, were not been hit and the country’s tourist infrastructure, while dormant or damaged, is still there. “If the airport is fully operational tomorrow, it will be as if nothing happened,” said Makarem.

Property holds its nerve

Makarem also pointed out the absence of “For Sale” signs on the many summers homes owned by Gulf nationals and Lebanese expatriates. “Maybe we need a kick-start, a kind of sweetener, like a dip of 10% to 15% in the market to tempt buyers. Then everything could get back to normal by the end of the year.”

For Lebanon’s winemakers, the ceasefire came just in time for the harvest. They had feared losing the entire harvest, and not only due to the fighting. An absence of pickers and an inability to ship in raw materials for the vinification process also threatened the 2006 vintage. “We can assume a normal harvest,” said Serge Hochar, owner of Chateau Musar and president of the Union de Vinicole de Liban. According to Hochar, in terms of quantity the crop will be the same or a little less than normal, but he expects quality to be better. “It’s not a top year,” he said, “but it is better than last year and definitely above average.”

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Economics & Policy

Buying to the sound of cannons

by Faysal Badran
written by Faysal Badran

Perhaps the most crucial elements of any capital market, especially an emerging market, are confidence and liquidity. During the devastating days of the conflict between Hizbullah and Israel, both took direct hits. Shortly after the start of the conflict, the Beirut Stock Exchange decided to close. This closure, though guided by pure reasoning was a mistake or at least the length of the closure was unwarranted

Despite the gravity of the situation, it ought to have been the BSE’s priority to maintain a semblance of normalcy and, more importantly, allow buyers and sellers to transact. This is especially true given that the largest stocks continued to trade in London as GDRs and sent a dangerous signal about the depth and liquidity of the Beirut market.

Sell to violins, buy to cannons

There is an adage in markets: sell to the sounds of violins, and buy to the sound of cannons. In this case, if the market had reopened, none of the expected panic feared by BSE decision makers would have occurred. Simply, the market would have adjusted and many international investors who had been on the sidelines during the early 2006 euphoria would have stepped in.

When the bourse did reopen, there were several days of virtually no transactions. Bids had accumulated but no sellers were present since the mood swung to optimism after the adoption of UN Security Council Resolution 1701. The openness and liquidity necessary to any bourse in search of investors, was lost.

Some may argue that the need to avoid panic was paramount. Perhaps. After 9/11, the NYSE was closed for only three days, and there was certainly more need to contain panic in a multi-trillion dollar market than in the small but burgeoning Beirut bourse.

But from a mechanical or technical perspective, the bourse was resilient, and though we have our qualms over the decision to close for so long, leading stocks were resilient. This is due to the fact that many view Lebanese stocks as fairly in balance, or near equilibrium. A closer look actually confirms this view. The banks for instance, have seen their shares plunge by 30-40% from peak to trough. Solidere saw a fall of 40% as well. This fall in valuations, to be fair, had started well before the July 12 onslaught.

As Gulf markets corrected and investors retrenched, Beirut lost much of its luster. This regional mood, coupled with the inability of the National Dialogue to produce results, had a lot to do with the falls. Now, after the dust has settled and the guns are silent, it is time to look at value, or at least perceived value.

For Solidere, the math is quite simple. With nearly 2 million m2 of unsold real estate, and even adjusting downward the price benchmarks, the now- resurgent shares are worth, on a valuation basis, close to $40/share. This does not mean you should mortgage the house and buy, it is simply a look at how much of a compression, or discount, this successful company has suffered during the crisis.

In essence, the market is underrating Solidere’s ability to sell and rent space. This may prove to be an anomaly, if the situation clears up. Until then, we have to assume that the market is worried about the future.

Banks recover

Banks have also seen a significant fall in the shares and multiples. This is particularly interesting since many banks are not directly exposed – they lend very little in unsecured funds, and are regionally diversified. The holdings of banks in Lebanese Republic bonds did suffer a sharp blow, but have since recovered. Here, the fall in confidence is also quite sharp and has driven the shares to below 10 times earnings. This contraction in the price-to- earnings ratio belies a major shift in confidence – one of exuberance to near despair – and bank shares will soon represent exceptional value as long as Lebanon does not implode.

The arena that most reflected confidence, as the stock market closed, was bond yields. Taking the January 2016 as a benchmark and using the comparable "risk-free" 10-year US Treasury note yields as another benchmark, one can clearly see the fear reflected in the yield movement. The yield on the Lebanese Republic bond went from 7.75% to near 10% during the peak of the crisis.

Prior to the conflict and despite the political shenanigans, spreads between the Republic of Lebanon and US Treasury Notes had been relatively tight, as Lebanon bonds were trading at a 2.5% spread to US. During the crisis, this figure went to nearly 5% and even now, after UNSCR 1701, remains at 3.8%. So the war has taken its toll on the perception of the quality of Lebanese fixed income paper, and this will not likely redress itself for quite some time. The price of bonds and the yields are reflecting anxiety in the markets; anxiety not only over the aftermath of the war but also the ensuing collapse of most sectors of the economy and thus government receipts.

There had always been a sizable contradiction in the dynamics of the capital markets: On the one hand, there were roadshows by highly profitable entities, such as Solidere and the leading banks, while on the other we had a vulnerable, uneven and unstable political situation. As Lebanon made its entry into the emerging markets club, albeit on a small scale, this dynamic – that of a financial and banking center, a destination for large Gulf real estate cash, and the presence of a non-governmental militia (lets call a spade a spade) – was always going to be too much to bear in terms of risk. We had often reiterated that without a strong government, without a genuine reform of the ugly sectarian and tribal methods, a purge of the public sector and normalized relations with Syria, all this financial house of cards would collapse.

Now is not a time for pessimism, however tough the challenges may be. Lebanon still has the attention of the world, and this represents a clear opportunity. The country was never going to make it through without international intervention. We have previously argued that “the autumn will be a tough one for Lebanon, and the hope is that more international involvement in the economic process, coupled with ongoing great expatriate remittances, will help us, once again, dodge a full blown economic depression.”

Lebanon cannot survive without international involvement, not only to help its central government gain territorial control but to court international confidence.

It must also ensure that the decision to wage war and maintain peace is firmly in the hands of the government. Only then can confidence, a cornerstone of capital markets, be restored.

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Economics & Policy

An uphill struggle at best

by Frank Krumb
written by Frank Krumb

The July war had many similarities to the outbreak of the 1975 hostilities – most notably in how it began, with a political party dragging the nation into conflict – suggesting that 31 years and $45 billion of (unofficial) public debt later, not much has changed. Lebanon and its government were bypassed in the decision to wage war with the fourth-largest army in the world, and both today face serious economic consequences. Early estimates of the economic impact of this short but nasty war show that billions are needed to rebuild the damaged infrastructure; further billions have been lost in the form of income and opportunity costs. Economic growth and investment activity have been reduced to a crawl.

Adding up the bill

According to the Council for Development and Reconstruction (CDR), the largest single infrastructure cost is rebuilding housing units, which until now has been estimated at around $2.2 billion by some of the country’s leading economists. The cost of rebuilding other vital infrastructure – roads, bridges, electric plants, water works, industrial factories, and storage facilities – will probably amount to around $1.4 billion, bringing the total cost of the direct infrastructure repairs to $3.6 billion at the time of the ceasefire announcement. It is also estimated that the job will take around three years, provided funds continue to flow in from friendly nations. So far, Saudi Arabia has deposited $550 million with the Lebanese government towards reconstruction, in addition to in-kind humanitarian aid and a commitment to rebuild 10 southern villages; Kuwait has also given $320 million in aid – and both of these contributions should be disbursed relatively quickly. A further $940 million was raised from participants at the Conference on Lebanon’s Early Recovery held in Stockholm on August 31. A second conference, slated for late 2006, will seek funding for longer-term recovery. In addition, the reconstruction of some of the destroyed infrastructure, such as key bridges, is being financed by the private sector and individuals, including former PM Najib Mikati, the Hariris, and Casino du Liban.

Iranian funding

Despite the generosity of the international community, Lebanon cannot possibly finance the rest of the infrastructure repair on its own. Although it has sufficient foreign currency reserves (around $13 billion), these funds are needed to support the currency and to provide liquidity to the banking system. Hizbullah’s provision of, on average, $11,000 in cash to each family whose home was destroyed, regardless of sect or political affiliation, has helped consolidate its support among many of the war’s victims. Although the government has pledged even larger amounts – at time of printing, the Prime Minister had promised $33,000 per family – the money has yet to be delivered to those in need. The speed and scale with which embattled Hizbullah was able to provide support has led to widespread speculation that the cash being offered has come directly from Iran. The race with Iran’s aid (via Hizbullah) may be even more unequal due to the bureaucracy inherent in state relief efforts, and potentially give Hizbullah more ammunition to criticize the government’s ability and willingness to rebuild a damaged infrastructure.

In addition to the direct cost to the economy in terms of destruction, there is also the loss of income from tourism. The losses in tourism and government revenues, as well as the expected drop of around $1 billion in private consumption should lead to negative growth in this year’s GDP. The latter was estimated to stand at around $22.2 billion in 2005, which in itself was not a great year, and is now estimated to regress by a slight 0.3% to 0.5% by year end 2006. The limited negative growth would be explained partly by a potential increase in public investments or consumption, as the government should step up spending to accelerate the reconstruction effort, while the trade balance is now expected to remain at around the same deficit as previous years. Prior to the crisis, exports were expected to grow by up to 40%, reducing the trade deficit.

Thousands of workers, especially in seasonal and informal sectors, are already unemployed in the wake of the conflict. Fall out from the war could see the loss of as many as 50,000 jobs in the short-run; a massive blow for an economy such as Lebanon’s, undoubtedly leading to a massive drop in private consumption. Other economic sectors, including the public sector, which will not make redundancies, will nonetheless incur substantial costs as salaries are being paid without parallel revenues flow. Indeed, taxes, private bills and revenues were not collected during the 33 days of fighting and it will take time before payments start to be received on schedule. Some companies in the private sector are even considering transferring, at least on a temporary basis, their offices and, in some cases, their production facilities abroad. This is reminiscent of the dark days of 1976, and may lead to a reduction in the size of the economy.

Confidence hit

But most significantly, this latest war was the final straw for many Lebanese and foreign investors. Significant numbers of professionals and young talent have left for greener pastures, while companies, banks and entrepreneurs are left cogitating on whether it is worth going on in a country where the government has no control over its own destiny.

Although wartime deposits of $1.5 billion from Saudi Arabia and Kuwait with the Central Bank are a sign of support to the Lebanese currency and the state’s ability to meet its obligations, the uncertainty of living a“normal” business life, let alone generating profit and prospering, is too big to bode well.

The future of Lebanon now rests on two important factors: Hizbullah’s realization that they have to share a country with a silent and liberal majority and that fighting wars on behalf of regional powers and developing a culture of martyrdom are not the right ingredients for economic prosperity or for challenging controversial US strategy in the Middle East.

While Lebanon cannot control the second factor, starting to sort out the first would definitely constitute a step in the right direction, by bringing the country one step closer to its elusive, long-stated aim of true independence. One cannot hope for more.

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