SLOW MOVERS? Some shop owners say the project has taken far too long

Despite experiencing a drop in sales revenues of up to 40%, Hamra retailers are confident that the on-going construction work and facelift will eventually help Hamra become a thriving retail area, serving Ras Beirut’s middle-market catchment.

After nearly one year of road works, the rehabilitation of Hamra Street is nearly complete. Roads have been asphalted and paved, pavements widened, trees planted and the colorful overhead jungle of electricity wires has been buried underground. The renovation effort is part of a $12 million project to rehabilitate five major streets in Beirut (including Corniche al Nahr, Monot Street and Barbour) and paid for by the Arab Fund for Economic and Social Rehabilitation. The Council for Development and Reconstruction (CDR) had earlier appointed Dar al Handasah Nazih Taleb & Partners to design a new Street.

However, while most shopkeepers praise efforts to upgrade what was once Lebanon’s main shopping boulevard, a few claim that the project has taken too long to complete, resulting in a loss of revenues of between 15% and 40%.

“Of course we have had less customers,” said Hala Shaftary, store manager of Librarie Antoine. “For months Hamra was hardly accessible. On days when they were working in front of the shop, we hardly saw any customers. But I think we suffered less than others, as we have a lot of regular clients.” According to Librarie Antoine’s general sales manager, Emile Tyan, the 40-year-old Hamra store is the best performing of the chain’s ten outlets. He estimated a loss in sales of 15%. Elsewhere, Mohamed Bushnak, manager of Starbucks Hamra, the American coffee chain’s first branch to open in Lebanon, estimated a loss of up to 20%, blaming the lack of parking.

Ghassan Mahfouz, managing owner of Marilou Women’s Wear, estimated his losses to be some 35%. However, he did not to place all the blame for bad sales figures at the government’s doorstep. “Business has been going down since 1997, ” he shrugged. “Business was good until then,” he said, “then it went down by some 20% a year. We are in a recession and the middle class is suffering.” Some retailers are less forgiving. Most volatile among Hamra’s retailers is Georges Moujaess, who founded Roi Des Frites in 1967. The snack bar is one of the most famous fast food outlets on Hamra and is normally open till the early hours of the morning. The construction work forced Moujaess to a hang a banner reading “The King is off due to works,” in front of his closed facade for the two months he was forced to close. The closure cost him $60,000, while overall business has been hit by the lack of pedestrian traffic.

Moujaess blamed the contractors for the delay, claiming they worked slowly to earn more money and that the whole project had been flawed from the start. “They dug up the road twice. First they did the sewage and water and then they closed it. The next month they opened it again to fix the electricity.”

Aynan Bassam, secretary of the Hamra Traders Association (HTA) sympathizes but does not agree with all the complaints. He estimated the average losses of Hamra’s shopkeepers not to exceed 15%, while according to him the project has been largely executed according to plan. Currently, most of Hamra Street is open again to traffic and heavy works are only taking place in front of Hamra Cinema. The project will be completed when the Fransabank building is reached.

“The project started on May 12 and is due to be finished on June 31, which it will be,” said Bassam, who owns Al Bassam, a 650m2 ladies fashion and lingerie store in the heart of Hamra. “The contractor gave us a choice,” Bassam said. “Either to execute the works fast, which would mean the area would remain closed for several months or to do it in stages. We chose the latter.”

The main work was carried out to replace 2,000m of Hamra’s 50-year-old drainage and sewage system, which was dealing with waste and rainwater with one 6-inch pipe, which, in heavy winter rain, would flood, creating a terrible stench. Now, two wider and separate pipes take care of the effluents. The project is in anticipation of the completion of the wastewater treatment plants being built in Ouzai and Dora. The South for Construction’s project manager, Rabiah Dejhaim, said traffic would return to normal by the end of June and admitted that work may have seemed to drag on, but said this was due to special seasonal requests. “It was the HTA and others who asked us not to work during Christmas and the February shopping festival,” he said. “That’s why we closed and opened the street again, and had to ask for an extra $2 million for the total of five streets.”

Still the reality is that business suffered and it wasn’t just the shops. Crowne Plaza’s Sales Manager Ziad Bassila estimated a 30% lower occupancy rate, which increased when the heavy machines reached the hotel entrance. Najib Nasser, manager of the Plaza Hotel, said: “we suffered like anyone else, as for three months we hardly had any customers.” He was nonetheless realistic about the situation. “I don’t like to point fingers,” he said. “Hamra Street is much better now. Let’s hope it will only get better in the future.”

It should. Before the war, Hamra was everything Beirut stood for. It was not just the city’s high-end shopping street, but also a place to go out and have fun. Hamra boasted no less than ten cinemas, and a string of cafes and clubs. Those who have cited the demise of the Modca Café (rented to the Vero Moda chain for $20,000 a month) as the final nail in Hamra’s cultural coffin have missed the point. The street is prime retail with rents that have still to reflect its potential. Bassam, who can remember the so-called good old days, is convinced Hamra will get back on its feet. To him, the rehabilitation of Hamra Street is but a first step. His dream is to see it turned into a pedestrian zone.

The retail experts point to the thorny issue of old rents as a factor that held up Hamra’s post-war development. “The biggest problem facing Hamra after the war was the large number of displaced people who lived in the many empty buildings,” said Raja Makarem, managing partner of Ramco Real Estate Advisers. “This gave the area a shabby, insecure feel.”

Today, the squatters have mostly left and Makarem believes that Hamra has all it takes to become a genuine highstreet and the retail backbone of the area. Crucially, he does not see either Verdun, downtown or the rise of shopping mall culture as a major threat.

According to Makarem, Hamra is affordable. Today, the average rent for new retail space is between $500-$600 per m2 a year. At Hamra’s more affordable poles, rent is even cheaper, with shops at the Sadat Street junction offered for a mere $300 per m2 a year. And it has a social fabric. “Someone coming from the mountains to Beirut will not feel comfortable in downtown, where he can’t even pay for a coffee,” said Makarem, who lives in Hamra. “Hamra is the only place that still has the fabric of old Beirut, a place where rich and poor, Christians and Muslims can meet. What used to be downtown before the war will become Hamra: the melting pot of Lebanon.”

Cliché or not, he has a point. It is a target rich environment, serving the area’s relatively affluent community, a significant percentage of whom work in or attend the Lebanese American University, the American University of Beirut and the Law Faculty of the Lebanese University. It is also close to the beach and the Downtown.

Hamra measures some 2 km2, hosting 1,000 retail outlets, 500 companies, two main hospitals, several smaller ones, 450 private clinics, 65 banks and 24 hotels, among which are the Commodore Le Meridiene, Crown Plaza and the nearby Gefinor Rotana. It has a population of 20,000 and this does not include the 13,000 students and 22,000 employees. The area has an estimated 100,000 visitors a day.

“I’ve got high hopes for Hamra,” said Makarem. “With the new city center and Verdun both targeting the upper segments of the market, Hamra is giving a chance to reposition in the middle market segment. This would entail a gradual upgrade of the street’s merchandising, and this is exactly what seems to be happening after an initial shift to the lower end of the market with the likes of Eldorado, Akil and Big Bros.”

Innovation has helped. Hamra’s cinemas although beautiful, remain unrestored since the 1970s and are not in touch with modern cinema-going trends, which dictate a ‘more screens for less seats’ policy. Today, following a $2 million renovation, the old Eldorado cinema earns its owners an annual rent of $250,000, as a 4-storey budget “department store” and one of the street’s best performers. However, the trend is mainly heading up-market and in 2003, many new outlets such as Vero Moda, Jack & Jones, Dunkin Donuts, La Senza and Librarie Orientale have opened in Hamra Street. However, apart from the Crowne Plaza much of the Taj Tower’s 5,000 m2 retail remains unoccupied.

“Of course, we have been affected by the works,” said Taj Tower owner Omar Ramadan, who is asking for an average of $625 per m2 a year for his new shops. “But we’re also in the process of refurbishing the building, as we separate the entrances of hotel and mall. Now that the street is finished we hope things will get better.”

In the first six months of last year, Adidas Lebanon’s general manager, Zeina Hallak, noticed that sales of the famous sports clothing had dropped by 20%. What she discovered was disturbing. Not only were illicit dealers selling faked Adidas products, but also official Adidas outlets had replaced authentic goods with fake ones. Their excuse? “They said they had to protect their revenues as customers were buying fakes elsewhere. Adidas was potentially losing millions of dollars,” Hallak said. Fearful that the local company would be downsized or restructured by Adidas worldwide, Hallak began implementing a tough anti-counterfeiting plan that cost hundreds of thousands of dollars. Lawyers were hired, dozens of raids carried out, and over 50 law suits filed. Although 10,000 items have so far been confiscated, Hallak said there are tens of thousands more hidden away. Adidas has also launched a PR campaign warning retailers that it would be fighting counterfeiters tooth and nail and that they had two months to clear their shelves of fake merchandise or lose their contract with Adidas. And they had to commit, on paper, to steering clear of fakes. Only those who signed appeared on a list of authentic Adidas dealers printed in a newspaper ad taken out by the company.

What happened to Adidas is the tip of a very costly iceberg. From car parts, CDs and handbags to painkillers and sports clothing, the trade in counterfeit goods is costing the Lebanese government and private sector roughly $500 million each year (a spokesperson for high-end clothing retailers Aïshti estimated the cost of counterfeiting to the fashion retail sector alone – including watches and jewelry – at over $100 million a year). When the bill gets that high, it’s time to fight back. In recent months, brand distributors have launched their counter attack: they have hired lawyers, adopted controversial marketing tactics, clamped down on rogue retail outlets, and are hiring informants to lead them to warehouses, dodgy dealers, and containers full of fakes hidden among toys from East Asia. The government says that, with meager resources, it is trying to help and although some industry executives laud what they call a positive official attitude, others say the fight against counterfeiting is in fact being hindered by powerful politicians whose private interests are too close to their public ones.

The counterfeiting scourge is also frightening off foreign investors and seriously damaging the country’s international image as it strives for World Trade Organization (WTO) membership. In fact, the quest for WTO accession may explain the government’s recent efforts to at least appear involved in the anti-counterfeiting fight. Lebanon is already bound under an agreement it has signed with the European Union to combat counterfeiting after the EU expressed concern that Lebanon could become a regional counterfeit hub. Most of the imitation merchandise on sale in Lebanon comes from East Asia, Turkey and Syria. Observers agree that the process is facilitated by corruption – which the ministry of economy and trade insists is being tackled. The permeability of Lebanon’s borders is taken full advantage of by smugglers, bringing in easy-to-smuggle watches and jewelry. Once the fake goods arrive in Lebanon, they find their way to stores across Beirut, from Bourj Hammoud, Hamra and Dahia to the downtown district. A number of shops in the downtown area offer fake luxury handbags. Other districts, throughout Beirut, are full of imitation Nike, Adidas and Puma sportswear, as well as fake designer clothes, shawls, watches, bags, perfumes and footwear. Retail outlets only hold a fraction of the imported imitation merchandise, though. The bulk is stashed in warehouses that, despite the financial incentives for informants, are notoriously difficult to locate. Thus, when those inspectors motivated enough to raid an outlet do spring into action, they confiscate only a handful of items.

Counterfeiters pay minimal import duties. Although fake brands are often sold for significantly less than genuine ones, a bogus pair of Nike sneakers sold for $12 by someone who paid only a dollar in import duties and has almost no overhead costs, represents, across tens of thousands of pairs, a significant profit – which infuriates authentic brand agents, who pay around $13, or 1,300%, more in duties to import a pair of sneakers.

“We have a lot of employees. We pay at least 10 times more duty than they do. They bribe to get their merchandise into Lebanon. They don’t pay VAT. We are fighting a big mafia,” stormed Robert Elias, manager of Puma Lebanon. He said he had invested around $3 million in the company. “This is very dangerous. What will happen to all our investments if this is not fought in the proper way?” he asked. He said that between 10,000 and 50,000 fake shoes or garments are confiscated at Beirut Port alone every month. If that wasn’t enough, Elias is currently suing the former Puma agent after it was discovered that he had been selling certificates of authenticity to counterfeiters. Abdo Kassir, general manager for Nike Lebanon, said the counterfeit trade eats away an annual 30% to 35% chunk – nearly $1 million – of his revenues. According to his estimates, clothing and footwear counterfeiting is costing the private sector “tenfold that amount.” And, he complained, it takes a year to a year-and-a-half to plow through a court case against a counterfeiter, who is then ultimately slapped with a token fine. Nike, alone, does not have the funds to take on counterfeiting. That is why it has banded together with other brands to stem the flow of imitation goods at the primary source, East Asia. Fighting the fakers at home however is equally serious business. Brand agents employ undercover spies, paid informants, hush-hush telephone calls, and cash rewards in secret locations. “We have five or six people doing nothing but going around giving us information, giving us the names and addresses of shops. We have people down at the port, at the airport, at the border,” acknowledged Elias. “All information is paid for.” For his part, Kassir said that Nike has “dedicated persons within the company” who follow the counterfeit mafia on a daily basis. “Normally, we shouldn’t have to have these kinds of persons,” he sighed. Other companies operate a “reward scheme” under which informants who lead them to warehouses or containers are given $2 for each item (mainly shoes) confiscated. Some warehouses and containers hold tens of thousands of items. The scheme has led to four raids at the Port of Beirut and four on warehouses, the manager added. Asked if they were concerned that they might be putting informants’ lives at risk, especially since they lack police training on how to handle informants, one manager admitted that he was worried. “One informant has been promising us information since last August. So far he has given us nothing, even though he knows everything and could make a fortune. He says he is afraid of the counterfeit dealers. They can hurt him.” “All the big brands have this system,” said GS Chairman Samir Rayess, one of Lebanon’s most respected clothing retailers and whose brands include Timberland, Springfield, Bossini, and Polo jeans among others. Rayess had another concern: the possible abolition of exclusive dealerships, without concomitant progress on the anti-counterfeiting front. “If something is not done to fight the counterfeiting trade, we will be very negatively affected,” he warned. “It would be very bad if exclusive dealerships are abolished while at the same time the brands are not protected against counterfeiting.” Rayess, and other agents, fear that a multitude of dealers would be less likely to present a united front against brand imitators. And in a retail sector with multiple agents, the opportunity for retail fraud would probably multiply, because it would become more difficult to keep track of legitimate importers and to identify the fraudsters. The incidence of corrupt practices would, in all likelihood, also rise. Overall, it would become much more difficult for already overburdened governmental anti-corruption staff to respond to complaints and to enforce the law. In another effort to combat the counterfeiters, some brand distributors are adopting controversial marketing tactics. Nike has discount stores selling previous years’ lines of clothing and footwear at prices comparable to those of the fake Nike products, while Adidas has told its retailers who were peddling fake products to replace them with authentic reductions. “We dumped the prices of certain products,” conceded Hallak, “to ‘kill’ the counterfeiters.” Although such outlets and sales strategies are part of everyday retail life in the West, not all brand agents applaud the tactic. Detractors say its proponents are giving in to counterfeiters and doing immeasurable damage to their brand image and to the country. “This is very, very wrong,” warned Elias. “They should fight counterfeiting in the way we are.” But so far, he noted, very few brands have committed to the effort. Kassir defended his strategy as a justifiable way of countering counterfeiters by offering authentic goods at realistic prices to people who cannot afford the higher ones. Nike has three or four discount stores selling past years’ goods at up to 50% less, he said. “If I try to sell something at $80 and the counterfeiters are selling it at $20, then I end up with a huge stock that cannot be sold. We propose the product at much lower prices, to give a message to the counterfeiters. It’s fighting them on their own ground, not giving in to them. Resorting to bribery would be giving in.”

Although a decades-old Lebanese law clearly prohibits the trade in counterfeit goods, almost no perpetrators are sent to jail and only pay puny fines. However, the sad reality, according to observers and industry insiders, is that the counterfeiting business is propped up by corruption, operating at the highest political level.

Francisco Acosta, first secretary for political and economic affairs at the European Commission’s Beirut office, who recognized the steps taken by the ministry of economy and the customs department to combat counterfeiting, said: “The problem with Lebanon is the economy is so interlinked you don’t know who is managing what. Some of the people importing counterfeit products are linked to the government. Others have links to Syria. You cannot have a policy on counterfeiting as long as private and public policy are so close.” He added that there was a, “reluctance in some parts of the government” to commit to anti-counterfeiting moves. Hallak of Adidas said: “Even when sports goods shipments were all passing through the Red (Customs) Zone, other containers were still coming in unchecked. We knew that this was because a senior politician had given instructions. A lot of people have an interest in maintaining the status quo. As long as this remains the case it will be very difficult to control counterfeiting.” Asked if Syrian interests were involved, she answered: “I am sure.”

An official at the ministry of economy and trade, who spoke on condition of anonymity, acknowledged that some members of parliament with “narrow interests” protected counterfeiters from their constituencies, while Kamal Abi Merched, of the ministry’s Intellectual Property Department, identified what he called “the great negative impact of political parties that benefit from this corruption.”

But the ministry itself has not been without blemish. According to ministry of economy and trade director-general, Fadi Makki. Up until the end of 2003, seized imitation brands were routinely allowed into the country if importers removed the labels and pledged to desist from ever importing fake goods again. One brand executive, who said that the law was clear in its prohibition of the practice, described the policy as “absurd.” Makki conceded that counterfeiters were not abiding by the gentlemen’s agreement and in theory made the ministry an accomplice to the crime. “Somebody is trying to be lenient with the smugglers,” Elias said. “Everybody has his own way of making his earnings.”

Hallak was more straightforward: “We identified a container with 3,400 pairs of fake Adidas shoes. Because the importer had an inside connection, he asked to be allowed to import the shoes if he removes the logos. I think we will lose the case. Imagine that. The law is clear. We paid thousands of dollars for the information. Yet a law will be invented to allow them to import the shoes. We were told it was a decision taken by the ministry of economy. They told us it was customs and customs told us it was nothing to do with them. And there is no paper with this decision on it.” Hallak also pointed to the revocation, in January, of a recent agreement with customs, under which all sports goods entering Lebanon had to go through the Red Zone, where there was greater scrutiny, as further evidence of double standards. The ministry, which said it could not give a figure for the revenue it has lost because of counterfeiting, says it does not have the manpower to launch a comprehensive crackdown. Anything short of all-encompassing raids would create political problems: “If we crack down in one area, I will be asked, ‘why didn’t you start with another region?’” said Makki. “It would be politically unsustainable. Therefore, I am not going to go out of my way to combat counterfeiting in the market. I’ll try to handle it at the source and wait for complaints.” Perhaps this might explain why Beirut is still awash with counterfeit products, many on open display, even in the downtown district. Makki also stressed that brand distributors have an obligation to share the burden of the anti-counterfeiting battle, in conjunction with NGOs, by raising awareness among consumers. This obligation is enshrined in a new consumer law that has to be ratified by Parliament and which should be in force by the end of the year. Makki said that the partial delegation of responsibility to the private sector was a reflection of the ministry’s dire financial condition. “We’re not allowed to recruit. I know that next year I am losing about 10 or 12 inspectors. Every year I lose three or four,” he lamented. The problem of understaffing at the ministry is so acute that 10 already-overburdened anti-counterfeit inspectors from the Consumer Complaints Department are also working for the Intellectual Property Department. Some observers have suggested that Makki’s emphasis on the ministry’s lack of resources and the shifting of the anti-counterfeiting burden to the shoulders of the private sector reflects, in an indirect manner, an unwillingness to take on the powerful political interests embedded in the counterfeit trade.

If passed, the new law should provide for stiffer penalties for counterfeiters. They can theoretically expect fines of up to LL150 million ($100,000). But without enforcement it will be toothless. “We lack effective enforcement by the judiciary,” said Ghaleb Mahmassani, of Lebanon’s Intellectual Property Commission. “A law by itself does not take you far.” According to Francisco Acosta, “Lebanon has to make an effort to properly apply and enforce the law. The laws are being modernized but the application is still lacking. You have to have political willingness to apply the law.” Judges lacking in counterfeiting expertise merely aggravate the issue. Adidas manager Hallak said the company has to send lawyers along on police raids to make sure the officers do their job. “This doesn’t happen in Europe. Here, the government announces one thing but what happens on the ground is completely different,” she said. Managers like Elias want laws that are effective. “The government is not helping us,” he said. “It is impossible to hurt the counterfeiters.” And the counterfeiters do not appear particularly concerned. They seem confident that their business will continue to thrive – fueled by image-conscious Lebanese with limited buying power and coddled by a judiciary unwilling or unable to implement the law. “Yes, the inspectors came to my shop,” said one counterfeit retailer. “They were responding to a complaint but didn’t take away all my fake stuff.” Would the inspectors win at the end of the day? He shrugged. “There are thousands of shops like mine. They can’t close them all so why should they pick on me and not the rest?” Despite the words of defiance, Samir Rayess chairman of GS expressed a cautious optimism. “Yes there are major problems that need to be addressed, but positive aspects of our growing retail sector must not be overlooked. However, if we are to capitalize on our reputation as a retail hub and encourage regional shoppers to visit Lebanon, then our reputation must be whiter than white and that means stamping out those that sell fake goods.

On Monday morning, April 19, hundreds of Lebanese educators, academics and policy makers took their seats in the UNESCO Palace auditorium to listen to a series of presentations on what the ministry of education and higher education (MEHE) billed as a preliminary framework for a national education strategy, the final version of which will be released in October.

Unfortunately, for many in the room, the topic, as well as the specifics of what was discussed seemed all too familiar. Indeed, some skeptics of the ministry’s latest efforts say that the real test will be whether the relatively new administration of Samir Jisr will go beyond the work of his various predecessors to actually implement some badly needed reforms – many of which have been on the table since the mid 1990s.

Moreover, several experts, including members of the government itself, wonder whether all the new efforts are being adequately coordinated with various other stakeholders, like the ministry of labor and private sector concerns, in what they say must be a serious effort to finally develop a comprehensive, multi-sector human development strategy for the Lebanese workforce.

With youth unemployment estimated at a whopping 40%, the continued emigration of skilled university graduates (for whom unemployment is almost as much a fact of life as it is for lesser skilled workers), and a bruising public debt, time may be running out for reform.

“People are tired of this,” said American University of Beirut (AUB) education professor Munir Bashshur. “Everybody knows that the question is not really a lack of a strategy. You can have all the strategies and plans you want. But if you don’t really have the political will to move forward, it is not going to happen.”

Indeed, since the mid 1990s, the Lebanese government has produced a series of earnest policy statements aimed at improving Lebanon’s education system – a system that includes almost one million school-age students spread across more than 2,800 public and private schools, 84,000 teachers and a budget that is more than LL812 billion annually.

While there are many reasons why education reform has stalled in Lebanon, the notion that the country must address its economic problems first before human development reforms could even hope to work, has created a particularly unproductive obstacle – even if, at first glance, it appears valid.

If students are more skilled, the argument goes, they will simply leave the country – if they are able to – because the absorptive capacity of the job market is severely limited. So why focus scarce resources on improving education?

This argument has been conveniently buttressed by the inwardly complacent conviction, expressed at many different levels, that Lebanon is itself an “island of educational excellence” – that instead of some schools, mainly private ones, being individual “islands of excellence,” as the UNDP has put it, the entire education system is a sort of jewel in the Middle East. This is where the argument moves from being merely unproductive to downright destructive.

“You find the worst kind of schools in Lebanon and the best kind of schools in Lebanon. The mixture is amazing,” said Bashshur, dismissing any illusions to the contrary. “What is good in Lebanon, however, is because of the private system. What is bad in Lebanon is because of a lack of coordination between the private and public [systems],” he added.

And indeed, if one looks at the available statistics (of course, the poverty of statistics is certainly a huge part of the problem), there is a welter of evidence to support his claims. 35% of all youth between the ages of 14 and 19 are, in effect, school dropouts. The average age of teachers is approximately 50, with only 38% of primary education teachers holding a license (among the lowest percentages in the Arab region).

What’s more, few teachers have undergone regular professional development, much less the kind of Information and Communications Technology (ICT) training that is increasingly so vital for the new economy. Not surprisingly then, as the last UNICEF State of the Children in Lebanon report put it, “the education level of our population is poor. 45.22% [of the population] have not completed the basic schooling necessary for social integration at all levels.”

Lebanon is also burdened by the fact that it spends vastly more per pupil than neighboring countries ($1,122 per student in primary education and $938 per student in secondary education; see chart for comparison). While this normally would be a cause for celebration, it is unfortunately more an indication of inefficient resource allocation, a deep level of corruption rooted in confessional politics and the degree to which the entire system is geared more to the employment needs of teachers, rather than the educational needs of children. Indeed, the Lebanese Transparency Association has reported that some schools, particularly in the South, even have more teachers than students – a costly proposition to say the least.

With an overall pupil to teacher ratio of 9:1 in Lebanon’s public schools – a figure that should be the envy of the entire world – and with a costly system of educational subsidies for the children of government employees – who often move their children into the private system at taxpayer’s expense – the idea that Lebanon’s school system costs so much generally provokes only shrugs from experts and government officials alike who are all too familiar with the profligacy and gross inadequacies of the current arrangements.

Another discouraging aspect of its high per pupil cost is the fact that according to UNDP’s 2003 Human Development Report, Lebanon’s spending on education as a percent of its GDP (3%) is less than that of other countries in the region like Saudi Arabia (9.5%), Israel (7.8%) and even Syria (4.1%). Although Lebanon’s system is expensive, it is, paradoxically, not funded like the national priority that many say it should be.

Perhaps more problematic than the corruption and inefficiencies though, is Lebanon’s approach to education – an approach that many experts agree is simply not getting the job done at either the purely pedagogical level or at the level of responding to the actual demands of the labor market.

As a March 2004 ESCWA report noted, “secondary education in Lebanon is based on a one-track system [where] it is difficult to transfer from one field of specialization to another. Furthermore, higher education is still based on an old-fashioned structure of specialization that is incompatible with the requirements of employment in the 21st Century.”

“In many cases,” said the same ESCWA report, “the education system produces a highly skilled and well-educated workforce that lacks the skills needed in the new economy.”

And the problem is not just confined to the general or advanced education levels; it extends to vocational and technical education as well.

After merging with the MEHE two years ago, the Directorate General of Vocational and Technical Education (VTE), an office charged with transferring skills at a relatively advanced level, is now also facing the hard reality that its programs are not meeting the demands of the labor market.

In order to address this situation, as well as to finally gauge the actual shortcomings of its system, the VTE has been included in the MEHE’s latest education strategy effort – although Ghassan Kabbara, who is coordinating the project for the Ministry’s Educational Center for Research and Development, could not say when the VTE component of the overall project would be finalized. According to the director general of VTE, Youssef Dia, the hope is that once the agency gets a handle on its programmatic weaknesses and gathers precise information about the needs of the market, its bureaucracy can then move from a supply driven training model to a demand driven one that is accountable and, most of all, flexible.

As it currently stands though, VTE, like the general education system, is doing a poor job at what it is specifically responsible for: providing high-quality skills that are in demand. And it is private sector employers that are complaining. According to one World Bank report on the system: “In Lebanon, syndicates representative of different economic sectors have expressed frustration that the training institutions are not producing graduates with the required level of employable skills.”

Also problematic is the fact that VTE’s responsibilities – and thus its ability to both gauge effectiveness and provide ongoing support services – wholly end after a student receives his or her diploma. “Our last contact with them is when we deliver their certificate,” said Dia. The newly skilled student is thus left on their own to compete in a domestic labor market that has not been well understood by the agency that provided the training in the first place.

Of course, it is difficult to imagine that the VTE could even afford such follow up services, much less undertake expensive data collection or market analyses on an ongoing basis, since its own budget is perpetually in deficit. In fact, VTE recently scaled up the number of students it serves from 23,000 students to an astounding 36,000 students – a 57% increase in program enrollment over just one year.

“It is a political decision,” said Dia’s assistant Maurice Rizk. “You cannot say, ‘no,’ we can only take 30,000 or we can only take 20,000 and all the others, we have to throw them out. Our government will not be satisfied.”

Even more incredibly, the increase in the number of students – which was mirrored by an increase in VTE schools from 42 to 66 last year – comes while teachers at 14 vocational schools have not been paid yet. Although VTE asked for LL42 billion this year, it will only get LL25 billion, far short of what it needs to operate at current levels, much less meet the needs of the population.

Given these common themes across the different components of the education system, it is encouraging, say some experts, that the emerging national education strategy is focused on implementing reforms across the board.

“This is a major change in policy,” said education consultant Marquis Bureau, who is a part of the World Bank funded team developing the strategy. “We are at a point now where we have collected regional data, we have a national summary and the next step is to bring the expert content together with the content that we have collected from each region [and] provide the base for which we will address strategic objectives.”

Among its components, the strategy will develop an integrated policy framework for general and vocational education, undertake a labor market needs analysis for both, build a unified Education Management Information System, complete an up-to-date study on education financing, design a professional development program and create a framework for active participation by the private sector.

It is an exhaustive, and not surprisingly, expensive to-do list, to say the least – which is perhaps why decision-makers won’t even speculate on the problematic issue of cost.

Another potential weak spot is the fact that, despite sincere efforts at coordination across bureaucratic boundaries, the Ministry of Labor (MOL) has mostly been left out of the MEHE strategizing process.

According to a spokesperson for the International Labor Organization: “There is some coordination between [MOL and] the Ministry of Education … unfortunately not enough is being done in this regard, particularly with the increasing number of youth leaving the country.”

Significantly, the Ministry of Labor runs its own VTE program, mainly for lower skilled workers, coordinates labor policy and, through the National Employment Office (NOE) and its board, is supposed to collect labor market data, coordinate policymaking with other ministries, and involve the private sector.

But, as Jamal Fakhoury, legal advisor to the minister of labor, explained: “It is not organized between all of these parties involved in the employment affair that is related to the education affair.”

When asked if MOL had been consulted about the emerging national education strategy, Fakhoury said flatly: “we have not been consulted about it. But it does not mean we do not approve … although we could give them so many ideas about it.”

And indeed they could. The MEHE and VTE are aimed at gaining precisely the kind of data and coordination that Fakhoury knows is also vital for the MOL, if it is to reform its own practices. But avoiding duplication and realizing system-wide economies of scale are apparently not high on the agenda of either ministry.

The result, as Fakhoury pointed out, is that the demands of the labor market are not being met by the education system or the MOL, despite its own ongoing reform efforts. As evidence, he cites two sectors that are actually growing in Lebanon – tourism and health care. “The actual graduated or prepared people for the needs of the [tourism] sector are very far below the numbers needed. [Moreover], we have about 200 hospitals in Lebanon, but we have 10% of [the workforce] that is needed. The education system is not producing enough for this sector,” he said.

Fakhoury, like others, hope that the new education strategy and promised reorganization within his own NEO, especially in the realm of statistics, will bring real improvements to Lebanon’s human development capacity – something that will ultimately be reflected in the country’s economic performance. “We are aware,” said Fakhoury at a recent conference on human resource management, “that out human potential is our only real capital.”

For those Lebanese who are either forced to stay in the country because of socioeconomic reasons or who want to stay and contribute to their native land, they can only hope that this time, the government, at its various levels, will finally make good on its promises.

Municipal finance is a cornerstone of successful decentralization in government. In light of ongoing discussions over proposed new legislation and the municipal elections this month, EXECUTIVE talked to attorney Ziyad Baroud about the state of municipal finance and municipal reform proposals. Baroud, who teaches municipal law at St. Joseph University and is a consultant with the UNDP, is also an activist for municipal reform and development.

How important is the finance issue to Lebanon’s municipalities?

The law of 1977 gave the municipalities wide jurisdiction in governing their local affairs. If the municipalities do not have the money needed to implement projects, which are their prerogatives under the law, they cannot fulfill their mandates.

What difficulties hamper the financial aspect of municipal governance?

The problems begin with size. Small municipalities do not have enough resources. Another problem is that some of the funding that is in principle due the municipalities via the central government has not been distributed equally and regularly. Going into details, municipalities have two sources of income. First, taxes from residents on properties, shops etc, are payable to the municipalities. The other source is a share of phone and electricity bills and certain customs duties. This money goes into the Independent Municipal Fund (IMF), which was created in 1977. This fund is supposed to serve all municipalities but mainly to finance small municipalities, which do not have enough income from direct taxes.

How much money are we talking about here?

The total amount collected in this fund between 1997 and 2001 was LL890 billion, or almost $600 million. This is a rather large amount. There are criteria for distributing moneys in the fund. But money was not paid out regularly, and distribution was based on political considerations. Take for instance one QADA where you have 40 municipalities and another where you have 26. In the first one, LL4.7 billion were paid in 2001; in the latter, LL19.6 billion were paid. Revenues in the IMF need to be distributed equally and regularly.

If properly distributed, would the funds make municipalities more effective?

They would be sufficient only for large municipalities. Before the 1998 elections, we had around 750 municipalities. Today, we have around 900, in a country of 10,000km2; so an average of one municipality per 11km2, which is very small. So you see a need for a redrawing of the municipal map?

Yes. We need to resize municipalities. Jordan restructured its municipalities two years ago. They have around 240 municipalities today, and Jordan is larger than Lebanon.

What activities fall under the financial authority of the municipalities?

86% of municipal expenditures go to services. Some municipalities undertake infrastructure projects because they have the financial support to do so, often from international donors. Others do not implement infrastructure projects, because they don’t have the means. It is not the nature of the project that influences decisions, but the availability of funds

Do municipalities have the resources to hire employees?

Unfortunately, municipalities have been forbidden from hiring anybody since the Council of Ministers decided in the early 1990s to impose a hiring freeze in the public administration. We have municipalities that are without civil servants and qualified employees. Instead, elected council members and municipality presidents do the jobs if they are qualified. Plus, employees are underpaid. Wages in the municipalities are worse than elsewhere in the public sector.

What is the total employee count on the municipal level?

We do not have these figures because there are no centralized data. Employee numbers vary from 2,500 in Beirut to zero in some municipalities. All municipalities need more employees.

Are municipal budgets published?

Not by virtue of the law. Some municipalities publish their figures, but as far as I know, not more than five are doing so. A new draft law should oblige municipalities to publish their budgets so that citizens can be aware of how funds are being used. Municipal funds are public funds.

Are there audit procedures for municipal budgets?

Yes, municipalities are not free to do whatever they please. We have financial controls, judicial controls, and controls by citizens. One of the positive points in the new draft law involves auditing. However, we need to rethink how the auditing of municipalities can be conducted without having the central government directly involved.

Is implementation of financial autonomy more important than elections for building good municipalities?

No. It is very important to address both political and financial issues. Municipalities are a good exercise in democracy, transparency and accountability. What makes the financial issue so important is that you cannot give municipalities a range of prerogatives but deny them the means to accomplish them.

Arab Re

Sourcing of regional reinsurance is an issue of growing importance to primary insurance providers across the region, be they established companies or newcomers. For reinsurance company Arab Re, this translates directly into a substantial increase in perceived business opportunities. “I can confirm that our board has taken the decision to double our capital. This issue is now on the front burner,” deputy general manager of Arab Re and current ranking executive, Tayseer Treky, tells EXECUTIVE. He expects the capital increase to be completed before the end of the year.

Established in 1972 upon direct recommendation by the General Arab Insurance Federation, Arab Re’s capital had last been increased in 1998, from $12.3 million to the current $25 million. From its inception, the firm’s mission was directed specifically at assisting insurers in markets across the region and run Arab reinsurance pools. With greater integration of Arab markets on the horizon, the firm feels that it is time to assume a bigger role. “We are the Pan-Arab reinsurance company par excellence,” Treky claims. “We are an ambitious company but we are also aware of the limitations of our size and from market conditions. Our policy has always been gradualist.”

In terms of immediate expectations, the firm’s outlook actually projects rather steep growth. After gross premium income rose from $17.9 million in 2002 to $20.7 million in 2003, Arab Re’s anticipation for 2004 is a near 50% increase in premiums, to $30 million. For 2005, the company expects a further increase to $35 million.

Arab Re’s premium income originates to 92% from the region, with the remainder generated in Asia and Africa. Lebanon is the number one market for the Beirut-based firm, accounting for 16% of premium income, followed by Egypt (13%), Libya (12%) and the United Arab Emirates (10.5%). “The degree of our presence in different Arab insurance markets is determined by our marketing orientation and also by the existence of our shareholders in different markets,” says Treky, “We tend to be stronger where we have shareholders.” The company’s shareholder base includes 55 entities from 16 countries, mainly insurance and reinsurance companies but also some public and private sector banks. The largest equity stake by a single shareholder does not exceed 12%. Following a three-year period where the company saw its premium income drop annually between 1997 and 2000, Arab Re benefited from the changed reinsurance world, post the September 11 terror attacks. Some European and international reinsurers lost parts or all of their enthusiasm for doing business in Arab countries. And like many in the hardening global market, insurers from across the region encountered harsher conditions and stricter limits from their international reinsurance partners. While acknowledging that September 11 triggered a wave of changes in the relations between regional insurers and international reinsurance firms, Treky sees the changes as rooted in factors that came into play considerably before the fateful day. “Arab Re anticipated well ahead of 9/11 that smaller Arab companies would one day face difficulties with their reinsurers, due to economies of scale. The concentration and mergers in the global insurance industry in the 1990s made the average sized Arab company probably less attractive,” he says. “We have long been telling our clients not to put all their eggs into the basket of international reinsurers, because a day would come when the need for regional reinsurance would be greater.”

With WTO membership impending for an increasing number of Arab countries and liberalization of – thus far – closed insurance markets looming, the managers in Arab Re’s executive offices in downtown Beirut see not challenges but substantial new opportunities in the opening of more Arab markets to more players. In Libya, for example, where two new insurance companies are under formation, the persons driving the process of establishing these firms are, in Treky’s words, “old good friends of Arab Re.” Because of its low insurance density and penetration, Syria would be a promising market even if the insurance regime were to prevail as it is, Treky says. “If, however, the Syrian insurance market opens up and more opportunities come into the picture, the pace will be much faster and growth will be greater.” Also in Iraq, once the country returns to normalcy and security, the insurance market is, in his opinion, bound to grow very quickly and perhaps recover its grandeur as the Arab world’s biggest and best developed one. Arab Re has major shareholders in these two countries, which leads the manager to expect that in the hoped for business growth there, the company “will enjoy the support of many friends we have.” As good connections, vital as the are, cannot substitute crucial skills, Arab Re is focusing in practical preparations for its future on developing their human resources in a two-pronged approach of training their existing employees and seeking to hire new additional staff with significant experience in reinsurance from within the region.

The future of Arab insurance markets may at last favor the fulfilling of the vision that guided the creation of Arab Re over three decades back but that was blocked for the longest time by regional strife. Today, Arab Re believes that after the hard school of corporate survival under the worst circumstances imaginable, future business obstacles could not cause more than a light hiccup for this reinsurance company.

Medgulf

He who wants to play in the big leagues has to live by big-league rules and must be willing to compete on every ground. The Mediterranean & Gulf Insurance and Reinsurance Company – known in the market as Medgulf – abides by these terms. It employs the business logic that permanent growth is an absolute obligation for a company that aspires to reach market leadership and stay in that coveted position.

“In life and business, you never want to stop, because if you do, you don’t expand anymore,” says Michel Abou Jamra, Medgulf’s executive vice president. “And if you don’t expand, somebody else will.” The company’s ascendance over the past decade and their long-term plans match this disposition. Although displaying a single corporate identity, Medgulf actually is a group comprising two separate companies, an anonymous shareholding company (sal) in Lebanon and an offshore exempt company (ec) in Bahrain, which was established in 1995 for conducting business in Saudi Arabia. Both companies achieved rapid growth and are today holding claims to being the largest private sector insurance operator working in Saudi Arabia and the leading non-life insurer in Lebanon. After receiving license approval by the Bahraini central bank, Medgulf earlier this year entered Bahrain directly as their third market. And having every intent to acquire the stature of true regional insurer, Medgulf executive management confesses as their strategic aim to establish a presence in the majority of Arab countries.

However, the company does not rush in implementation of the far-reaching ambitions by seeking a fast geographical rollout. “It is not important to pretend being a regional player but it is important to do things needed to become effective as regional player,” Abou Jamra says.

“We are looking to expand quite soon into the UAE and have further expansion projects. But we do it in phases, digesting every move before making the next one,” elaborates Faysal Malak, the company’s executive in charge of bancassurance and communications. According to the company’s annual report, Kuwait and Oman are further targets for expansion in the near to mid term. Medgulf can certainly be expected to have the staying power for regional deployment, thanks to being backed by two of the strongest financial private sector groups in the region, Prince Walid Bin Talal’s Kingdom Holding and the Saudi Oger/Groupe Méditerranée of Lebanese tycoon Rafik Hariri. Medgulf chairman Lutfi Zein is the third main shareholder. The group’s financial acumen is reflected in multiple capital increases that the shareholders injected into the two companies over the past three years, bringing capital in Lebanon from $8.5 million in 2000 to over $13 million in 2002, and raising it from $15 million in 2001 to $ 33.3 million in 2003 for the Saudi arm.

Results for 2003 were good in both markets, Abou Jamra tells EXECUTIVE. Premium income for the group reached around $135 million, up from $120 million in the previous year. Shareholder equity climbed to $57 million. Through subsidiary company Addison-Bradley, Medgulf is also active in Jordan, the UAE and UK.

Although the operation in Saudi Arabia achieved the higher premium income between the two group companies, the number of individual policies written in Lebanon was six to seven times larger, according to Abou Jamra. “The market structures are not the same. In Saudi Arabia, we have much more corporate business and fewer private clients. Driving license insurance is the single main retail product with premium turnover there,” says Malak. “However, after new regulations come into force in Saudi Arabia and the GCC [Gulf Cooperation Council] countries, the situation might change and offer better prospects for individual sales.” Economic conditions in the Gulf countries are definitely influencing residents and nationals to view insurance with greater interest, agrees Abou Jamra. “In earlier years, employers in GCC countries provided ample packages to their expatriate workforce but under a more competitive labor market today, nationals and foreign employees alike seek out insurance companies for the benefits they offer,” he says.

The increasing adaptation of Gulf economies to international business and banking practices – such as requiring insurance as precondition for issuing a letter of credit – also help in widening the reach of insurance in the region, and the emergence of regional enterprises with employees in numerous Arab countries is creating new demand for services of insurers that are present across markets, say the two executives. Seeing this new Arab insurance environment taking shape, the Medgulf Insurance Group is enforced in their perspective that continued growth into a major international player is the way to secure their ambitions for Arab market leadership. The firm’s management culture is geared toward accommodating this. “We are working in a team with a diversified cultural background of people living in different Arab countries. All our management and middle management are ready to move to any market, and task forces can be formed wherever needed,” says Abou Jamra, adding that in the creation of this unified culture, the Medgulf main base in Lebanon plays a crucial role.

Arabia

Their name is tradition in the Middle Eastern insurance business. Commemorating their 60th anniversary this year, Arabia Insurance has sold policies in Arab countries already before some of them had gained their independence. The firm’s fortunes since its establishment in mandate-era Jerusalem in 1944 read as a corporate diary of exposure to changing political conditions and ideological risks, and of sustaining business throughout. With operations in seven markets – Kuwait, Bahrain, Qatar, Oman, the UAE, Saudi Arabia, and home base Lebanon – Arabia Insurance remains active in a larger number of Arab countries than most competitors. The company’s strategic growth focus for the foreseeable future, however, is on two markets where Arabia is active today and two others to which the firm wants to return after a long enforced absence. “We are shooting for market share in Saudi Arabia and Lebanon, and ultimately in Syria and Iraq,” the general manager of Arabia Insurance, Fady Shammas, tells EXECUTIVE. With the news of the release of Saudi Arabia’s insurance law just out, Shammas leaves no doubt that the kingdom is the most titillating market for the company at this point. “It tops the list in terms of our involvement in the region. We will consolidate and create a joint company in Saudi Arabia,” he says. “If medical and some other insurance covers are made compulsory, market potential could go from $1 billion in annual premiums to $5 billion within the next few years.” Arabia’s plan is to form a company involving several partners, probably including other insurance operators and a major bank. If negotiations among the prospective partners work out, the firm would enter the Saudi market as an insurance and reinsurance firm, with a mandatory minimum capital of $53.33 million. The business vision would entail competing for all public tenders – especially the energy and airline ones – and, for acceleration of retail business, engage in bancassurance as a distribution channel from day one of operations. Arabia’s confidence of being able to rise high in the kingdom’s insurance market is based, in good part, on the company’s knowledge of the Saudi market. By 2003, it had generated 19% of their business in the kingdom, although it had to operate their seven branches under the same hand knit setup as other private sector insurers, necessitated by the impossibility to register and run a regular insurance company in Saudi Arabia until the passing of the country’s new insurance law.

For their corporate structure, this meant the firm established an offshore Bahraini company as operator of the Saudi business called, Arabia Insurance International, while Beirut headquartered Arabia Insurance Company coordinated activities in the firm’s five other GCC markets, including Bahrain, and Lebanon. Consolidated unaudited figures for the two entities in the Arabia Insurance group for 2003 showed total assets of 260 billion LL, continuing a steady increase since a new management team took the reigns in 1999. Capital is an unchanged LL51 billion, and total equity without provisions reached $75 million. From non-life business alone, the company expects to realize a net profit of $8 million for 2003, an increase of 40% over 2002. The life division, in which Arabia launched a new concept in 2002 with aggressive ambitions for growth across its geographical markets, also realized good results for 2003 and improved its share in Arabia’s total gross premiums from 6% to 8%. As one of the first companies to participate in interactive ratings with regional ratings agency, i.e. Muhanna, Arabia was rated A for 2001, and the rating was confirmed for 2002. The largest shareholder in Arabia Insurance is leading regional banking group, Arab Bank. In line with a policy to close branches that have not been profitable for seven consecutive years and show no sign of better prospects, Arabia last year shut down one branch in the UAE and one in Saudi Arabia, out of its total network of over 30 branches and agencies. Reconfirming the company’s strategic commitment to Lebanon through opening two new branches, Arabia is raising the count to five active branches nationwide this year, plus five life agencies and one general agency. Syria and Iraq are the markets where Arabia has intense long-term ambitions in a combination of historic affinity, sense of mission, and business expectations. “We are very attached to these countries,” Shammas says, “and it is in our mission statement to export insurance knowledge to these markets.” The proper timing to emerge on the Iraqi market is still difficult to determine for now, but as to Syria, Arabia already conducted a proprietary feasibility study, which the company holds under close wraps. As soon as the legal path is cleared, the insurer intends to move full speed ahead, Shammas confirms. “Hopefully, we will be the first private sector insurance company to newly incorporate in Syria.”

Commercial

There are myths to be dispelled also when it comes to working in several Arab markets, and the most notable of these myths may well be the assumption that cross border activities are only for big companies. For Commercial Insurance, a seasoned Lebanese operator with over four decades of accumulated expertise, the decisive factors for regional activities by an insurer are having the requisite skills and finding the right partners. “There is no minimum size needed for being able to venture into new markets,” says Max Zaccar, the chairman of Commercial. “To be a good insurer, you first need a good team, which we are proven to have and are improving upon. Then you need the professional approach, for which we have been recognized for the last 42 years by our clients, by our market, and by our reinsurers.”

For not counting among the country’s market-dominant top ten insurers, Commercial – which achieved an income of just under $6 million in gross premiums in 2002 – has a track record of versatility and wide competency. Medical and motor covers provided the primary sources of income, but the firm is also regarded as specialist in marine insurance and has a small portfolio in term life policies. Strong client orientation motivated the insurer to be a by local industry standards very early implementer of a round-the-clock customer help line and develop group insurance solutions offering schools easy term life covers that safeguard the education of children in case of parental death. Despite losing a prominent corporate account in 2003, Commercial achieved a 25% increase in profits. “To us, this is confirmation of the way we do our business. It allows us to think that we can invest,” says Zaccar. Market conditions permitting, management harbors strong expectations to realize much growth in Lebanon over the coming years – but the company does not wait for “better days” to arrive before making new moves. Management took on 10 new trainees, equivalent to a quarter of their workforce; it partnered with a university, NDU, in a research and instruction project; and it offered staff members options of continued training at the company’s expense. These measures create a noticeable cost burden, which Zaccar accepts as a price for better productivity. “We are in a period of investing and saying to the market and our people that we are committed to the future,” he says. “Since the end of 2003, the entire company is changing attitudes. We are becoming more aggressive, more aware and more present.” It seems natural that a company engaged in an internal renewal cycle would not treat geographic expansion into new countries as a main concern. But Commercial has indeed made contacts with Iraq, from where it is awaiting feedback, and also explored possibilities in an African country. While Gulf and North African insurance markets are in his view heavily covered, Zaccar would see opportunities in these countries as well as in Libya and Syria. The trigger to make Commercial pursue new opportunities abroad would be interest from potential partners in a target country or from an international insurer seeking after a Lebanese partner for establishing a platform to enter this and regional markets. It would be an attractive proposition to Zaccar. “If partners from an Arab country would seek our professional partnership, we would be most interested, and also if we happen to be approached by an international player” he says and would not be deterred by questions over majority or minority shareholding. “We could be the leaven in any partnership. We are professional insurers. If we are thrown into a market, whatever the shareholding, we can produce results.”

The people of Commercial Insurance appear to believe in themselves, and accept challenges. They’d better. After all, the company just designed a new motto to express their corporate identity: ‘live boldly.’

Centering on Islamic ethics, the concept of takaful insurance reaches out to clients who value transparent policies and financial practices, which steer clear of investments which are morally less-than-pristine. As financial security scheme, the takaful approach by its very name implies mutual protection and solidarity among policyholders. While the term relates to the entire range of Islamic insurance, some operators associate it in particularity with the Islamic alternative to conventional life products. Present for over three decades in some markets, beginning with Sudan, and gaining strength in the Islamic countries in Southeast Asia, Malaysia and Indonesia, TAKAFUL has lately attracted growing attention in European countries with significant Muslim populations, such as the United Kingdom. In Lebanon, insurance firm Al Aman Takaful Insurance (ATI) began operations as the country’s first Islamic insurance operator in 2002 and is expanding. “We are the first takaful insurance provider in the Lebanese market and deal with all classes of insurance, where we aim to reach $4 million in premiums by 2008,” Jihad Faytrouni, ATI’s general manager, told EXECUTIVE. An important factor for computing the new company’s growth prospects is the affiliation with Al Baraka Bank, a 70% shareholder in ATI and linked to the gulf-based, financially capacious Dalla Al Baraka Group. After recently completing a restructuring, Lebanon’s Al Baraka bank has aggressive expansion aims in the domestic market, in which ATI plays an integral role. In its first full year of doing business, ATI wrote 1,040 contracts with new clients in 2003, a large portion of whom were referred by Al Baraka Bank. At a production in the $200,000 range, this result amounts to small fries even by the comparatively minor scale of the Lebanese insurance market. It must be seen in context of ATI’s careful product rollout, which began with general products in October 2002, added life-related takaful in April of last year, and is currently developing a medical line. “It is new but it is growing,” said Safaa Farroukh, underwriter at ATI. “Clients like it that we emphasize transparency. There is no small print in our contracts, no vague statements. Members of our Sharia board supervise all conditions and the wording of contracts.” These experts are versed in both Islam and finance, she explains, and investments of the takaful fund maintain a line of compliance with Islamic standards that prohibit financial participation in certain interest-earning investments or business ventures involved in, among others, arms, alcoholic beverages, and gambling. Another specific of Islamic insurance, which ATI adheres to, is the structural requirement under which the insurance operator is a managing entity for client contributions. “Our job is to manage funds, investing in Islamic investments, and manage insurance for our clients,” said Faytrouni.

The takaful operation is structured into two funds, a shareholder fund which acts as capital and a policyholders’ fund where all payments by participants are managed and from which appropriate disbursements are allocated in claims cases. A portion of the takaful contributions in the policyholders’ fund is allocated to compensating the operator for its expenses. The operator also participates in the gains achieved from managing and investing the money in the policyholders’ fund. At ATI, this share is set at 20%. As a central stipulation under the TAKAFUL principle of mutuality, the insured participate in the fund‘s surplus retained after deduction of technical reserves and provisions. In its SHARIA-driven aspects, the takaful concept is still subject to discussions over fine points of Koranic interpretation, which are best left to Islamic scholars. While these discussions can be expected to lead to further evolutions of specific rulings in areas such as defining the exact nature of financial contributions under a takaful agreement, experts widely contend that on the technical side of actuarial design and compliance with established insurance regulations, takaful is easily reconciled with proven best conventional practices.

For the discussion of evolving insurance paradigms, the growing interest in takaful serves as reminder that the term ‘life insurance’ is a radical misnomer under the perspective of what insurance can achieve. Although the assumption of protecting one’s life against existential vagaries has a proven appeal to large numbers of people, no insurance can accomplish thus.

In the spring weeks leading up to the 2004 GAIF conference, Lebanese insurers engaged in a flurry of new product releases. Each of three fancy launch events presented results of collaboration between local insurers and partner firms, from a leading multinational insurer and an international finance firm, to well-known domestic players in banking and trade. AXA Middle East, the Beirut-based affiliate of insurance multinational AXA and the fifth-largest sector company here, used the opportunity to unveil Viva, a new life insurance plan. Buyers of the plan can benefit from participating in fixed-income and equity-based funds managed by the asset arm of the AXA group. The insurers celebrated by inviting friends over for lunch – over 250 of them.

UFA Insurance, a provider ranked in the upper third of the market, teamed up with payment card company, Visa International, and Lebanese financial institution Fransabank, in co-branding a credit card that offers buyers of insurance policies extended payment facilities and discounts on policies. The combination of credit card and insurance branding marked the first product of this kind in the Middle East, according to a regional Visa Card executive. After introducing the new card with brief fanfare, the occasion called for obligatory management photos, and a buffet with quality snacks.

Horizon Insurance, a smaller operator and niche specialist in motor insurance, entered a partnership with First National Bank (FNB) and the Lebanese distributor for Hyundai cars. The launch of the company’s latest product, TriPlan, was recently celebrated at the InterContinental Phoenicial hotel. The plan presents as a rather complicated arrangement aimed at wooing customers with steep discounts on the purchase price of a new Hyundai car and a cash bonus in financing it with FNB, after they commit to purchasing a full comprehensive motor insurance with Horizon.

The Lebanese market, long regarded as under-insured, can no doubt do with as many innovative approaches as possible. Life and retirement products are still direly needed in greater variety and more effective distribution. But while assorted product creations and accompanying launches well demonstrate the combination of inventiveness and savoir vivre – the hallmark of Lebanon’s enticing business environment – all marketing strategies are fundamentally aimed at bypassing the prolonged economic stagnation that has consequently infiltrated the insurance market.

In 2003, the country’s only annual survey of insurance industry results – published by a sector magazine on the basis of unchecked company figures – offered a picture of encouraging double-digit sector growth for both general and life insurance for the first time in several years. But industry members questioned strongly whether last year’s sector performance was worth a celebration.

“In 2003, the insurance industry achieved only very slight improvements. As a result of the stagnating economy, plus political disturbances, the situation does not allow for the possibility to improve the premium volume,” said Abraham Matossian, president of Lebanon’s insurance association ACAL. Insurance leaders in the country’s still highly crowded field of providers regarded 2003 improvements in life premiums as continued genuine progress. They were widely concerned, however, over the role of motor insurance in last year’s premium income growth in general insurance. Lebanon began to enforce mandatory third-party liability (TPL) insurance for motor vehicles in 2003 – but the low minimum premiums decreed by the government and substantial upward changes in claims judgments made many experts and insurers fear that the motor business could flood the sector with losses in the near future. These concerns were accentuated even more on account of widely reported undercutting of the already low premiums by a number of unsavory providers, who have generated much negative publicity on the sector. Overall, most industry insiders and analysts consider the sector to suffer from excessive competition and still in great need of consolidation by mergers or company closures. The troubles are not to suggest that Lebanon’s insurance industry was void of progress over the past few years. The sector made impressive steps forward in increasing professional capabilities. The introduction of mandatory motor insurance in itself was highly positive. Bancassurance developed well, opening new paths to spread insurance awareness. Many companies refined their technical skills and streamlined their operations. The organized insurance brokers undertook substantial efforts to shape up the unfavorable image caused by shady practices of unqualified operators in war and immediate post-conflict years. In the matter of regulatory frameworks, the 1999 revision of the country’s old insurance law mandated higher capital requirements and more prudent financial practices. The country’s insurance control commission at the ministry of economy and trade stepped up their role.

This spring, the commission received the results of the first-ever field audits of insurance companies, carried out last year by international auditing firms contracted by the ministry. With these findings, the supervisory authorities expect to gain an unprecedented full and timely assessment of the industry’s state. The regulators at the ministry now hope that a just written entire new proposal for a national insurance law would be adopted and propel the insurance sector to another, much advanced state.

Insurance law upgraded

Canadian experts draft a new insurance law for Lebanon, championed by the World Bank

Lebanon’s insurance regime underwent measurable upgrades in the course of phasing in revisions of the dated insurance law augmented by flanking ministerial decrees between 1999 and 2003. But the revised old law was a makeshift solution that could not address all needs of a 21st century society. The new Lebanese insurance draft law is a piece of work supported by World Bank funding and authored by two Canadian experts intensely familiar with insurance issues in developing countries and with Canada’s insurance law, which is supposed to rate among the world’s best. Drafting of the law was authorized in September 2003 by Lebanon’s minister of economy and trade, Marwan Hamade, who last month hailed completion of the effort as a milestone. “The proposed legal framework draws on cutting-edge concepts from developed countries but does so in a form that recognizes the size of the industry and the nature of the Lebanese insurance environment,” Hamade said during a press conference on April 16. Among other things, the draft newly defines the structure and supervisory competencies of the Insurance Control Commission (ICC), calls for stricter separation of life insurance and general insurance activities as distinct corporate entities, and for increasing minimum capital requirements in several stages. At $3.5 million, the heightened capital requirements would be still far lower than those of comparable countries in the Middle East, said proponents of the new law, who described it as a document capturing the essence of advanced insurance legislation in a condensed and highly practical form on only 70 pages.

In the austere ICC offices at the ministry of economy and trade, the release of the draft created near euphoric vibes. ICC head Walid Genadry had the document and a synthesis distributed to all Lebanese insurance companies before the end of April, in hopes that stakeholders would rapidly register their comments, suggestions and modification requests. First comments from major insurance industry representatives were cautiously positive, but not without undercurrents. “We can only congratulate the head of the Insurance Control Commission on the good job they were performing last year,” said Elie Ziadeh, president of the Lebanese Insurance Brokers’ Syndicate. “However, we fear that at the ICC they do not understand the need to work with the people in the industry. We have the impression that they think they have an important project, work hard, and move forward with it. That is not enough. They should work with us.”

“The draft needs to be studied very carefully. It will be our challenge to look at the new law in a spirit of cooperation, give our recommendations and comments in a scientific approach and seek changes that we believe could improve the law,” said Fady Shammas, general manager of Arabia Insurance and recently elected new member on the board of insurance association ACAL. Other board members of the association voiced similar comments. When agreeing to sponsor the drafting of the law, the World Bank made it a specific aim for the project to create a law that would not only aid Lebanon but serve as a model for a large number of developing countries in all parts of the world. And the World Bank was so convinced of the quality of their final product that their experts already started presenting the document as a model insurance law in other countries. There can be no arguing against the point that being known as a country where a world-class exemplary insurance law was implemented first would serve Lebanon extremely well in heightening its reputation to becoming an international reference. Becoming that reference, however, would need a reasonably fast adaptation of the draft – and fast action on insurance legislation is not a matter of record in a country where implementation of a law on mandatory motor insurance broke all records for procrastination. But it may be that the past does not have to repeat itself. “It is our duty to assist in the progress of the new law. I call upon all colleagues that this law should be entering into effect in 2005,” said Shammas. “There is no reason why it shouldn‘t. Eight months would be enough.”

The General Arab Insurance Federation (GAIF) is the umbrella organization for the insurance industry in Arab countries. Based in Cairo, Egypt, GAIF biannually convenes the regional sector’s landmark conferences. This year, the event is taking place in Beirut from May 10 to 12, and prepared by a committee chaired by Abraham Matossian, president of the Lebanese insurance association, ACAL. The Secretary General of GAIF, Abdul Khaleq Raouf Khalil, gave EXECUTIVE an interview explaining the role and positions of the Federation.

How many companies are members in the GAIF?

A: The Federation is an international Arab body, comprising 237 insurance and reinsurance companies, associations and national insurance unions. GAIF essentially aims to support relations among Arab insurance bodies and markets in order to promote cooperation among them and coordinate their various activities, with the aims of protecting member interests and developing the insurance sector in the Arab region.

By what methods are you pursuing those aims?

A: We concentrate our activities on four areas and main objectives. These areas are a) achieving economic integration among insurance markets in Arab countries; b) developing the insurance sector in the Arab region; c) supporting and developing business opportunities and activities of Federation members; and d) enhancing cooperation between the Federation and other Arab and international organizations and bodies. For each of these areas, we have identified a set of measures that we view as instrumental in furthering our aims.

Could you give us some examples of specific activities?

A: In seeking to achieve economic integration among Arab insurance markets, our activities include examining insurance legislations and systems in Arab countries, cooperation with Federation members in establishment of joint insurance companies, as well as cooperation in matters that could promote investment policies in insurance and reinsurance. We also strive to promote the Arab insurance market as a unified entity on the international scene. For developing our region’s insurance sector and dealing with the issues pertaining to Arab insurance activities, we are, among other things, engaged in forming both permanent and temporary expert technical committees and in establishing service and GAIF-affiliated consultancy centers that offer members technical, legal, and investment consultancy.

You are also committed to the education of Human Resources in the region?

A: Yes. We regard it as important to improve the technical and educational levels of employees in Arab insurance markets by exchanging expertise and information. To this end, we support the establishment of specialized insurance centers and institutes, along with the implementation of training programs and the organization of insurance conferences and seminars.

What role does Arabicizing of insurance language play in your efforts to integrate the sector?

A: Human and general resources available in Arab insurance markets must be employed to the greatest benefit. Arabicizing the insurance language means creating a unified terminology in Arabic and setting unified templates for insurance contracts, reinsurance agreements and other documents. This would help greatly to coordinate work among insurance companies in Arab countries.

How does GAIF contribute to the creation of new business opportunities for member companies?

A: Possibilities in this area begin with the publication of magazines and books that contribute to spreading awareness and integrated scientific thought in the insurance community and range to provision of arbitration and conflict mediation services for members. Conducting studies on the sector’s problems, collection and dissemination of statistics and information and regular expert meetings also are tools in developing the environment for new business growth for Federation members.

And what do you do to further the cooperation between GAIF and other Arab and international bodies?

A: We participate in international conferences and seminars related to insurance where we also coordinate the presence of Federation members by organizing exhibition involvement and stands. We extend a standing invitation to Arab organizations and bodies that are interested in insurance to attend our Federation’s conferences.

GAIF members will hold their 25th general conference this month in Beirut. Do you expect the event to mark a turning point for Arab insurance companies?

A: Beirut is preparing to host the 25th GAIF conference under the theme of “Arab Insurance: A Future Outlook.” We hope the conference will issue resolutions and recommendations that can be applied and would positively reflect on the Arab insurance sector.

What is the GAIF position on the role of insurance in developing Arab societies?

A: The Arab insurance industry plays an important role in supporting our national economies by providing insurance protection to individuals and institutions. This industry is also a main pillar of society as it gathers capital collected from insurance premiums and invests that capital in various economic areas, which reflects positively on the socio-economic level.

Mr. Khalil graciously granted this interview to EXECUTIVE via electronic transmission in Arabic, from which editorial staff extracted the English translation.
 

Toward the end of last month, insurance managers from the Middle East and North Africa crowded onto the website of Saudi Arabia’s Monetary Agency (SAMA) to download the final version of the kingdom’s new insurance law. Many an executive surrounded himself during the following days with the new Lebanese insurance draft law and the Saudi law.

Years in the making, the Saudi law defines a new insurance regime that provides sector companies with a window to a potential boom in what is currently the region’s most interesting insurance market, with a per capita expenditure of merely $46 in 2002 and an insurance penetration of 0.35%. According to statistics published by Middle Eastern ratings agency i.e., this makes Saudi Arabia the lowest ranking oil economy in terms of insurance penetration.

The law’s announcement also points to an issue at the heart of the Arab world’s insurance industry concerns: the disparate regulatory environment. Observers and industry members widely agree that regulations have been, and still often are, either insufficient or damaging to insurance development – the latter occurring mostly in countries where protectionism eliminated competition on government projects. A paper analyzing strengths, weaknesses, opportunities and threats (SWOT) for the Middle East insurance sector in the year 2000 by then vice-chairman of Arab Reinsurance and Insurance Group (ARIG), Ali Al Bahar, stated “laws governing the insurance industry across the Middle East are not uniform. This hinders cross border activity.” He went on to note that the practice of protected markets “hindered many companies from enhancing their products and services.” Self-defeating underwriting practices in some ruinously over-competitive markets, under capitalization of many insurers, one-sided portfolios and lack of internal transparency were other weaknesses listed in Bahar’s paper, juxtaposed by a smaller number of strengths, including the absence of natural disasters, high returns on shareholder equity, and wide availability of products. Promoting harmonization of regional insurance laws is one of the core aims of the General Arab Insurance Federation (GAIF), said the secretary general, Abdul Khaleq Raouf Khalil, in remarks to EXECUTIVE outlining the Federation’s principles and policies. In Khalil’s views on regional industry concerns, the era of economic globalization created new challenges to Arab insurers by opening these “promising markets to international companies, which made giant companies flock toward them.” As a result, established companies in Arab countries faced the challenge of “confronting weak insurance awareness comprehensively by unifying efforts among institutions.” Khalil named insurance education in schools and insurance promotion through the media as desirable means to increase awareness but specifically called upon governments to aid the sector by reducing taxes on insurance and offer incentives for policy buyers.

In context of larger demographic and cultural changes, societal provisions for retirement plans and pension funds are issues of monumental dimension in the Arab world. According to recently published research by Lebanese financial firm Saradar Investhouse, the share of life insurance premiums out of total premiums is remarkably low in nearly all Arab countries. Ranging from 31% in Egypt down to 4% in Saudi Arabia and 1% in Syria, life insurance ratios are in stark contrast to developed markets, where life insurance and wealth creation through insurance products dominate. Also in global averages for developed and developing countries, life premiums outweigh general insurance, said the report.

Executives from Arab insurance companies point to a number of reasons for the Middle East’s low acceptance rate of life products. Throughout most of the period following the eruption of their national wealth (which in some countries coincided with their independence), oil economies in the Gulf region provided their citizens with extensive free welfare assistance. In a few countries, selling of life policies was simply outlawed. Population growth and experiences of economic and cultural transformation have begun directing these societies towards appreciation of the tools that life insurance offers. However, communal and religious identities in Arab countries run strong, and carry an element of rejection to life insurance on account of dual factors. On the one hand, many Muslims abstain from buying standard life insurance products because risk concepts and investment structures of conventional plans are forbidden under the Islamic legal canon. On the other hand, the notion of ‘life insurance’ also carries emotional messages that can be interpreted as attempts to outwit the creator and deny the sole divine authority over life and death.

Arab advocates of the benefits of life insurance thus have been emphasizing that the real character of a life plan lies in financial safeguarding of people’s loved ones and in preparing for the future. And in course of the overall trend to evolve Islamic finance, insurance companies in Muslim countries are working towards a stronger presence of TAKAFUL insurance, that is insurance where policies and investment methods are in compliance with SHARI’A rules, satisfying both Islamic religious and secular supervisory standards.

Insurers involved in TAKAFUL, including subsidiaries of global financial player HSBC, speak of a great potential. However, provider experiences do not yet suggest that sales growth of either Islamic or conventional life policies would suffice to meet the region’s needs for wide spread wealth creation and building of pensions. “Some insurance and reinsurance companies are building experience with TAKAFUL, but it is yet premature to pass judgment on the feasibility and relevance of these concepts,” opined the deputy general manager of regional reinsurance firm Arab Re, Tayseer Treky. Given the youth-heavy demographic structures of the large and populous Arab countries – from Algeria and Egypt to Iraq, Saudi Arabia and Syria, as well as smaller countries such as Lebanon – in conjunction with severely underpowered public sector social nets, planning for ageing populations appears as a need that will only increase in importance and urgency for decades to come.

In relation to this massive socioeconomic issue, concerns over intra-regional reinsurance capacities may be of lesser long-term consequence, but they have been weighing on the minds of Arab insurers for many years, and attracted a massive increase in attention after global reinsurance markets began to harden four years ago – and more so in the aftermath of September 11. Numerous Arab insurance companies felt hard pressed by the sudden drop in reinsurance availability, and industry members renewed calls for strengthening regional reinsurance pools. For the region’s reinsurance providers, the development offered a welcome opportunity. Nonetheless, managers do not dream of replacing the international firms in the market. “We do not look to international reinsurers as a threat. Reinsurance is international per se,” said Treky.

All deliberations of economics and business concerns in the Arab world are void without paying reference to regional security and political issues. Every Middle Eastern war, from 1948 until the 2003 Iraq invasion, dented the economic stance of the insurance industry to at least some extent. The abrupt decline of the Lebanese standing as the region’s avant-garde location for insurers after 1975 and the downturn of the Iraqi market after 1990 were both directly conflict-caused. And fundamentally, the regional insurance outlook will not be completely positive in the absence of peace.

Future prospects of individual markets with the greatest development potential thus are subject to the two key influences of political stability and improvement and liberalization of regulatory regimes. Iraq shows the strongest current promise of a yet to be realized huge peace dividend for insurance operators. Saudi Arabia is the encouraging example of market opening and regulation for the day, Libya is also en course, Syria another candidate for opening up. Countries that have a history of a strong private sector insurance market and countries that have successfully established and implemented advanced insurance legislation have the best prospects to serve as centers for Arab insurance development. Bahrain, where authorities adopted ambitious aims of establishing a major financial hub, is the noted example for the latter scenario, Lebanon the indisputable representative of the former. Veterans of the Lebanese insurance industry do not tire to declare that the Human Resources, experience and expertise concentrated in this country create a fertile ground suited like no other country in the region for fulfilling the role of insurance center. In view of the benefits of multi-polar structures and respectful competition, the Middle Eastern insurance industry would be extremely well served if these two and eventually additional countries were to evolve into centers of insurance excellence. Sound domestic markets with healthy, well-governed companies and exemplary supervisory regimes are required as ingredients for achieving such functionality for either country. In the opinion of Abraham Matossian, president of Lebanon’s insurance association, ACAL, and head of the event’s preparatory committee, the 25th GAIF conference represents a good omen for developing Lebanon’s role in the Arab insurance world. ”This is not one of many conferences,” he said. “More than 1000 participants have registered, which is an unprecedented number. Our topic is the future of Arab insurance. The fact that the GAIF is convening here this time is unusual because the conference never before assembled twice in the same country within a twelve-year period, and what further adds to its importance is the fact that this is the Federation’s silver jubilee conference.”