Executive Magazine

Waiting to offload

by Thomas Schellen February 1, 2004

written by Thomas Schellen

The matter of greatest obvious concern for stakeholders in sea and overland transportation is the new container terminal at Beirut Port. Idle since its completion some three years ago, the $200 million project’s commencement of operations depends on two factors: contracting an operator and installation of essential equipment, like the so-called gantry cranes.

Three of these giant cranes, capable of lifting containers between cargo vessels and shore-side facilities, have been manufactured in China at a cost of $27 million. The contract also includes six smaller, mobile gantry cranes and other equipment. Representatives of Lebanon’s shipping industry are eagerly awaiting the arrival of the cranes. “They were scheduled to arrive here in February or March but an agreement between the Port of Beirut and the supplier has been made to postpone delivery until May,” said Elie Zakhour, president of the International Chamber of Navigation in Lebanon.

Sector companies are nervous about any sign of delays in delivery of the cranes, as it highlights the fact that the tender for an operator contract is overdue and is reminiscent of the derailment of the container terminal’s start in 2001. At that time, the Dubai Port Authority (DPA) bowed out of a contract to operate the terminal, and shipping insiders believe that a key factor in the cancellation was problems between the port and a group of contractors who hitherto have been entrusted with handling cargo movements.

These operators are independent firms, which the Lebanese government invited at the end of the war to provide stevedore services when the authorities needed to bring the port back to life in the fastest and least costly manner available. The contractors were rewarded for their commitment by receiving a 30% share of the cargo fees collected by the port. This, said Zakhour, “provided the equipment owners with a total revenue of $15 million over the past 13 years” – but port and operators never signed a formal contract that would regulate their status and cover questions of canceling their services. Almost unavoidably, the current matter of contention is compensations. It was over this issue that stevedore companies last month staged a one-day walkout that paralyzed cargo movements at Beirut Port. Observers contend that similar disputes between the port and the same operators – whom some industry insiders call “the Mafia” – played heavily into the fact that DPA stepped out of its contract. And they are asking whether the interests of this smaller group again could, by using their alleged ‘pipelines of influence,’ prevail over the common good. Following the DPA withdrawal, cargo handling at Beirut Port continued in a fashion that made visiting specialists gasp at how well the operation was working – but only given that the work is done by using the methods of a bygone shipping era. The problem is, the system is simply unsuited for large ships. “No shipping line is interested to come to Beirut as long as there is no container terminal,” said Zakhour. “When we have the terminal, Beirut will have a chance to become a transshipment hub.” Completion of the container terminal will boost capacity of Beirut Port to be able to handle 500,000 twenty-foot-equivalent units (TEU), a theoretical increase of about 70% over its 2003 cargo volume that was in the magnitude of 300,000 TEU. But more important than this increase in capacity would be improvements in service quality and reduction in turnaround times for big vessels. Undoubtedly, even the best imaginable boom of Lebanese domestic consumption and exports could not provide Beirut port with the volumes and turnover of a major hub. To some operators, the facts that the port generates income and operates with some degree of efficiency thus serve as arguments to justify the current situation as acceptable. In the eyes of others, repeated postponements spell another lost chance for each day that the terminal remains idle. There is but one way to test whether Beirut would be able to succeed in competing for sea-to-sea transshipment business, and that is offering the services of a functional terminal.

What adds further spice to the situation is the recent upturn in cargo movements to Iraq. “Sea to land transshipment has much improved,” Zakhour said. “When the US/UK-led coalition made war on Iraq, we were afraid that impact on shipping would be disastrous, but it is now better than before the war. Under Saddam, everything in Iraq was state controlled whereas today, private importers rule the scene.”

Although much of the increase in deliveries to Iraq last year was in shipping cars, members of the industry view growth of container forwarding in 2004 as a sure thing. The main reason for the optimism is based on the situation in other ports, mainly the Jordanian Aqaba. It is the primary gateway for shipments into Iraq and favored as an ally by the Americans, but traffic at the port has become so intense that carriers have been leveling high congestion charges for sailing to Aqaba.

From the Syrian ports, Latakia and Tartous, shipments to Iraq have similar overland transit times as from Lebanon. But in these ports congestion reportedly is also becoming an issue, thus opening new prospects for Beirut and Lebanon’s second port of call, Tripoli, which also saw cargo business pick up in the second half of 2003. (Like Tartous, Tripoli Port is undergoing extension and modernization, financed by a development loan from the European Investment Bank.)

Trucking a container from Beirut to Baghdad currently costs between $1,200 and $1,800, depending on the circumstances, said Nabil Sakr, managing director of DAS Express, a firm with experience in overland forwarding to Iraq. He estimated shipping costs via Tartous to be about 25% lower, but claimed greater speed and expertise in Beirut could make up the difference for shippers. DAS management expects an increase of Iraq-bound container shipments via Beirut by 500% to 600% for this year alone. But even after such an increase, other ports would still be far ahead in their throughput of Iraq cargo. “What we are getting is almost peanuts,” Sakr said. Based on the reasoning that Beirut can equalize its higher port fees by already offering a faster turnaround time to ships and better service than the bureaucracy-heavy Syrian ports, Lebanon’s premier port could push its advantages further by offering lower rates and achieving additional improvements on service quality and speed – tasks for which a well-run, spanking new container terminal would come in more than handy.

A third industry concern and opportunity for developing the Lebanese shipping location is as a logistics hub. The crux of such an operation lies in the ability to provide large international manufacturing companies with a regional distribution base, from where adjacent markets are supplied and serviced.

International express shipping and logistics company DHL has already taken steps that could assist Beirut in assuming a stronger role in its regional network: it has set up new overland routes and their Lebanon operation has just received approval for expanding its facilities at Beirut International Airport by 3,000 square meters. The expansion involves a capital expenditure of $2 million and the hiring of some 40 new staff over the next three years, country manager John Chedid told EXECUTIVE.

He attributed much of Lebanon’s growth potential in providing logistics to improvements in the regulatory and customs environment. “When you have facilities and good customs practices, you start attracting transit material,” he said. “New procedures in customs have made everything clearer and much more transparent. If I dare make a prediction, 2004 will see further progress towards a much better regulatory environment.” One crucial improvement in operating conditions for international and domestic logistics firms is definitely in the making. Exploiting the geographical and skilled labor advantages of Beirut for providing logistics services to any of the big names in manufacturing requires a free zone environment that permits repackaging and distribution of shipments – which previously had not been possible under Lebanese regulations. However, EXECUTIVE learned the rulebooks for Lebanon’s free zones have just been rewritten. The revised rules, allowing freight forwarders to establish facilities in the free zones and implement regional distribution activities, are in the final approval phase at time of writing this article.

Joseph Harb, president of Beirut Cargo Center, told EXECUTIVE the new regulations will open tremendous opportunities for logistics providers not only for his company, but also for the economy at large. “If you want a big manufacturer like Addidas or Siemens to open an office in Lebanon, allow freight forwarders into the free zones,” he said. Additionally, the move would serve to promote Beirut Port internationally, Harb enthused. “Ports and customs authorities do not promote the free zones,” he said, “the freight forwarders are the ones to promote them.”

February 1, 2004 0 comments

Business

Young blood: Al Balad’s big debut

by Anthony Mills February 1, 2004

written by Anthony Mills

There’s a new newspaper in town and it’s in your face – television, billboards, vans, in other newspapers, sales people in the street, your doorstep, even the office. Al Balad’s marketing is aggressive; with start up costs of $6 million, its investors are not taking any chances, especially with a daily print run of 65,000 copies.

“We have a very serious marketing plan and a very serious business plan, and it shows,” said Marwan Dimas, the newspaper’s general manager. “We think there is room in Lebanon for a new newspaper that has a different approach to news and it is clear that this is a serious newspaper, not just a bunch of people publishing anything.”

One has to be a serious player – at least financially – in Lebanon, to set up a paper because it involves buying an existing state-set number of licenses, which cost several hundred thousand dollars. Insiders say that it cost Dimas and his fellow shareholders $300,000 to buy the defunct title Al Balad from ex-parliamentary speaker Hussein Husseini.

Dimas acknowledged the price was wholly unreasonable for a license. “Although journalism in Lebanon is supposedly free, you cannot obtain your own license. You have to buy an existing one for several hundred thousand dollars. This restricts people’s ability to open a newspaper. The existing licenses are rare and those who have them hold onto them,” said Dimas. “In a free country, everyone should be able to open a newspaper.”

Despite these obstacles, the Al Balad team is out to smash circulation records and shatter the hidebound assumption that Lebanon’s total daily print circulation figure will never surpass 60,000. To achieve that goal, Al Balad aims to overcome religious and political barriers that it believes has created this apparent readership ceiling.

“The newspaper industry has a complex political and religious scene. All the newspapers have their political identities and this automatically reduces the target audience, or target group of readers. Nobody in Al Balad has any local political agenda,” said Dimas, admitting that newspaper’s editorial line is pro-Gulf countries as a number of the shareholders in Integra, the marketing and advertising arm of Al Balad, are Kuwaiti.

The emphasis is on marketing, Dimas reiterated, a domain hitherto neglected by Al Balad’s Lebanese competitors. “Can you name the marketing manager of any of the daily newspapers in Lebanon?” he asked. “They don’t have a marketing manager. They have commercial managers to sell advertising but they don’t have anyone to market their newspapers. They don’t sell subscriptions. They don’t have street vendors. There is a lot missing in their marketing activity and tools. There is no tactical marketing.”

Al Balad, on the other hand, has adopted a marketing strategy that they are confident ultimately allow it to reap “huge” advertising revenues, declared Dimas. The paper’s aggressive home subscription campaign constitutes a starting block of 50,000 subscribers within a year – a tally that Dimas is sure will be attractive to advertisers. Dimas maintained that this was a realistic goal, but conceded that it would be no easy task to get more people in Lebanon to read.

“Lebanese people don’t have the habit of reading a newspaper every day,” he lamented. In an effort to spur such a habit, Al Balad has given away 50,000 free three-month subscriptions. Overall, the paper has embarked on a major advertising campaign involving television, billboards, radio, and direct marketing activities – Al Balad salespeople have distributed free copies and promotional items across Beirut using funds set aside under a $500,000 advertising and marketing launch budget. Dimas said a little less than that amount would be spent on marketing and advertising every year until expenditure stabilized at around 2% of total revenues. He preferred not to give a figure for projected revenues, saying that people would regard it as totally unrealistic and think he was crazy. He said he expected 20% of revenues to come from subscription fees and the remainder from sales and advertising. In general, he said, a newspaper in Lebanon needs to make about $500,000 a month to break even.

Finding an unexploited niche market in the lighter side of the news, Al Balad is not bound by the confines of a serious image, unlike Lebanon’s other major newspapers. “They cannot accept the light-hearted stories, the light-hearted layout. It’s against their fundamental principles of credibility, seriousness, and traditionalism. This has constituted an opportunity for us,” said Dimas.

With its modern, self-effacing image, Al Balad is unpretentious, meaty and speaks to the whole family, claims Dimas. Its dozens of pages comprise a lifestyle, sports, economy, business, and politics – both regional and international – section, and its layout is novel and refreshing. True to its innovative image, the paper places special emphasis on the Lifestyle section, the eight pages of which cover entertainment, nutrition, beauty, health and fitness, fashion, food, music, and art. Less attention is paid to politics.

“You don’t usually find our kind of content in the local newspapers,” said Dimas. “Al Balad is like a daily magazine. We aim to have less politics. It is part of our strategy to have a maximum of 30% to 40% of our content related to politics.”

Pressed to elaborate, Dimas said: “In politics, I believe we cannot compete with the opinion-leading newspapers of Lebanon, such as An Nahar and As Safir. Our strategy is to compete elsewhere.” He acknowledged that Al Balad’s conscious accentuation of the light-hearted could initially lead some people to dismiss the paper as trivial. “Just because we place greater emphasis on the light-hearted does not mean we are not a serious newspaper. We tackle all issues very seriously. You can tackle the marriage of Britney Spears as seriously as you tackle any other issue.”

Overall, Al Balad employs 200 staff, from printing press technicians and delivery boys to salespeople. The peper’s owners claim to employ 55 journalists, most of whom are hungry, fresh, young graduates, attuned to the youthful, energetic pulse the paper is attempting to generate. Editors enjoy an established pay scale scheme, which starts at $500 for the least experienced, and reaches $1,200 for the most experienced.

As an entity, Al Balad encompasses two companies: the newspaper – which is run by Dimas (general manager), a chairman, Ahmad Badrani, and an editor-in-chief, Charles Charbel, formerly of Al Hayat – and Integra, a company contracted by Al Balad to take care of the marketing, advertising, sales, distribution, and printing.

The stakes for Al Balad are definitely high: running a daily newspaper costs about $5 to $6 million a year. Although the paper’s shareholders don’t expect a profit after the first year and have embraced a five-year business plan, they will be looking for early reassurances that their hefty financial investments will pay off in this most difficult of markets.

February 1, 2004 0 comments

Business

Q&A: Hassan Kraytem

by Executive Contributor February 1, 2004

written by Executive Contributor

Is it fair to say that the port has been performing reasonably well in 2003?

Yes. Beirut Port has been performing well with regards to imports and total revenues, which increased from $71 million in 2002 to $75 million last year.

A much talked-about issue is the project of putting the port’s container terminal into business. Is the tender for finding an operator progressing?

It is ready. We have completed the tender documents, and they are now with the minister for final approval.

How long until an operator would be able to come in?

In the tender documents, we specified one-and-a-half months to receive responses from interested operators, but we think that we should extend that to perhaps two months. For the phase from awarding the contract, we have scheduled three to four months for the operator to mobilize and start operations. In total, we are talking about half a year.

For what duration will the contract be awarded?

It would be for 10 years, with a possible five-year extension.

A second big issue regarding the container terminal is necessary equipment, which you ordered from China. Are these gantry cranes ready for delivery?

Delivery of all the equipment we bought has already begun. I think the gantry cranes are on a boat and just left China. They require two-and-a-half months at sea because they have to go all the way around Africa. Then they require another two-and-a-half to three months of erection and testing, which, like the operator tender, brings us to the middle of the year.

Did you request a delay of delivery?

There was a delay by two months. Delivery was originally scheduled for end of March. However, we did not actually delay delivery. We pinpointed some issues in a punch list for modifications and we requested the manufacturer to change most of them in China.

Does this delivery provide all the equipment needed for the terminal?

Ideally, we should have four gantry cranes and not three, which means that ideally we should have eight Rubber-Tyred Gantry cranes [RTG] and not six. We opted to buy the strict minimum as an initial step and allow ourselves to buy more when need arises. In our contract, we have an option to buy one more fixed gantry crane and two more RTGs.

Steel prices have gone up. Could that alter prices under the contract option?

The option does not allow for a price hike due to steel price fluctuation. The only price hike is on the euro side. When we signed the option, 25% are to be rescheduled taking into regard euro appreciation.

Considering the total cost of $27 million for the equipment under delivery, you got a good deal?

We got an excellent deal.

As far as construction of the container terminal, is it correct that the total capital investment amounted to $200 million?

It was less than that and it was more than just the container terminal. The investment was closer to $180 million and it included rehabilitation of some of the old parts of the port.

Are the $27 million for the new cranes included in the $180 million or on top of that?

I believe, on top.

Did it incur specific costs for the terminal not to be operational for a period of several years?

Major cost would have been interest expenses, but the port self-financed this project and basically there were no interest-bearing loans involved. We have some maintenance costs, but those are peanuts.

But how would you assess the cost of lost opportunity from the delay?

I believe the cost of opportunity loss is in the extra services that we could have offered, mostly in transshipment, and in the quality of the service that we could have achieved. What the dollar figure for that is, who knows?

Do you consider attracting large carriers for transshipment to Beirut as a realistic vision?

I have been talking a lot with carriers, and the vision varies. There are those who think that it is absolutely impossible to have transshipment here, and then it ranges all the way to those who think that carriers will be lining up to transship out of Beirut. I think if we can sell that product at a good price we will have some transshipment but I don’t believe that we should aim at becoming a transshipment hub the way Dubai or some other ports are. Further expansion of Beirut Port would be very expensive and I do not believe that transshipment revenue would be able to cover such expenses.

Did the delay harm the concept of becoming a transshipment hub?

Today, we have very little, not to say no, transshipment cargo. The studies we have undertaken show that transshipment starts very slowly and tends to increase with time. So, a three year delay is costing some money, but not a lot.

Can you confirm that freight forwarders will be able to establish operations in the Port’s free zone?

Yes, we have been working very closely with customs on that issue and we just modified the rules for the free zone in order to allow logistics companies to operate inside the free zone. This is especially for re-packing, handling cargo for third parties, and to undertake stock control for major companies, in order to make Beirut a center of distribution for the entire Middle East area. This is much more interesting than transshipment alone.

Last month, the port saw disputes and compensation demands over termination of stevedore contracts with the equipment contractors that have been handling cargo at the port. Would you be able to comment on the validity of their demands?

While I understand their demands and might be sympathetic to some of them, legally speaking, I cannot resolve them from where I stand.

Could you give an estimate on the value of their equipment and what amounts these companies might have invested in the past five years?

Since we are not legally bound or allowed to provide any compensation, we didn’t look into this matter. Just as everyone, I have heard of astronomical amounts of money that are supposedly being demanded. I can only say that I think the numbers I heard are far exaggerated.

February 1, 2004 0 comments

Economics & Policy

Crying over spilt milk

by Eleanor Blanch February 1, 2004

written by Eleanor Blanch

The government and the private sector must do more than squabble over the standards in the dairy product sector if proper regulation is to be achieved. Cutthroat competition between small and big producers, chaotic ministerial control and sluggish exports of a mere $3 million all have to be addressed.

The health standards of dairy products, which became a subject of tit-for-tat accusations late last year, are not as dire as they seem, but their problems have been writ large due the chaos gripping a private sector trying to maximize profits and a government trying to deflect attention away from its failure to boost the troubled sector.

Prior to Agriculture Minister Ali Hassan Khalil’s statements last year about the poor standards of dairy producers, state prosecutors were investigating embezzlement charges by his predecessor, Ali Abdullah, who has been accused of using a $15 million loan for a dairy projects for his personal use.

Abdullah faces 15 years in jail for dipping his hand into credit extended by the United States Agency for International Development (USAID) to finance the import of some 5,000 cows and the creation of milk collection centers in rural areas.

The US-Lebanese cow project and numerous other internationally funded programs aimed at revitalizing the dairy sector have failed over the years due to political intervention, dairy producers say.

“The International Fund for Agricultural Development was working on a project to set up some milk collection centers in the Bekaa but it was only able to create one because politicians wanted a piece of the pie in other centers,” said Iskandar Chedid, head of the dairy producers committee at the Syndicate of Lebanese Food Industries.

And any funding that is made is not focused. “Over the past four to five years, the government has spent at least $100 million of donor loans on dairy projects and yet we still have a load of problems linked to the chaos within the government,” said Atef Idriss, President of the Lebanese Food Industries. “Some of these projects did not involve the private sector and in fact competed with it.”

Elsewhere, many dairy producers say their sector has numerous problems with government licensing, rivalry among small and big producers and the implementation of standards.

Minister Ali Hassan Khalil said last year there were up to 400 dairy units in Lebanon, out of which only 25% were licensed. The rest may be selling contaminated milk and other dairy products. There are no accurate figures for the true number of the dairy units that fluctuates with the seasons and can reach up to 600 units.

While most producers welcome regulation, they say the minister’s public accusations have not lead to a genuine clampdown on unlicensed dairies and instead dried up demand for locally-made products; sales plunged in the weeks that followed.

“Our sales dropped by 60% in the first few days after the minister made his statements, then it went down to 40%,” said Chedid. “We are still smarting from the scandal, but our problems are not over yet.”

The ones that the ministry shuts down, mushroom in other places and in the basement of shops where they go undetected. “For a long time we have been calling on the ministry to control unlicensed ‘under the stairs’ producers, but it is unable to control the whole sector, particularly producers of unpackaged dairy products,” said Chedid. Unpackaged dairy products are banned under a four-year old law, which is not implemented forcefully by the agriculture ministry, he added.

Difficulty of controlling the dairy sector lies in the intertwining of authorities between the agriculture, health, industrial and economy and trade ministries. The agriculture ministry is responsible for supervising dairy farmers, the health ministry is tasked with controlling health standards, the industry ministry is responsible for granting licenses to big and medium sized dairy producers and the economy and trade ministry is supposed to catch any violators through its consumer protection department.

“The are some 12 main legal dairy producers – four of them have their own laboratories -which are licensed by the ministry of industry and 30 factories that produce raw materials or milk and are licensed by the agriculture ministry,” said Zuheir Berro, head of the non-governmental protection agency, Consumer Lebanon. “The 200 other unlicensed dairy units work on a temporary basis and are responsible for the sector’s problems, because their health standards are not controlled.”

Small producers accuse big ones of mass producing dairy goods in modern factories without adhering to standards while big producers accuse small producers of churning out contaminated dairy products. Little wonder there is no esprit de corps within the sector.

“There are small dairy units that are unlicensed and there is also unfair competition from big producers,” said Idriss. “Retail chains also are not paying dairy producers on time and they sometimes have to wait five to six months to receive payments for their perishable goods.”

Some dairy producers accuse big dairy companies of deliberately selling at low prices and forcing smaller ones to neglect health standards to sell cheap products. “It is an abnormal situation,” said Ara Baghdassarian, head of Karoun dairies, Lebanon’s oldest dairy producer, which has stopped producing dairy goods until the market is settled. “Some of the big producers are selling their products without adhering to quality control, falsifying the nutritional contents and tampering with the production dates.”

Not true say big producers, who argue they are complying more than any other party with the standards. “We support the minister’s statements because the industry has to be controlled and unlicensed small producers have to be stopped,” said Marc Waked, marketing and sales manager at Liban Lait, one of Lebanon’s largest dairy producers, which has franchises to produce Yoplait and Candia products in Lebanon. Liban Lait was establish in 2000 at a cost of $30 million – it has yet to make money.

“We have our own farms and we control the production of our milk. We are also exporting some products to Syria, where the issue of price is a problem and recently to Iraq.”

Liban Lait is relatively a new establishment that was set up in 2000 with a $30 million investment and has yet to get a return on it. Meanwhile, both big and small producers face competition from cheap goods coming from Syria and Cyprus and some depend on small milk producers to process their cheese and other dairy products.

“There is no real control of food safety in Lebanon and that’s why it is important to push through the food safety bill and create a regulatory authority along the lines of the Food and Drug Administration in the United States in cooperation with the private sector,” said Berro.

Dairy producers are pushing for the creation of a milk board made up of government and private sector officials as a first step toward regulating the industry. But they are not the only party supporting this idea. A study conducted last year by a French dairy expert on behalf of the syndicate said the creation of the milk board could help win back consumer confidence and improve the quality of goods.

“The creation of a dairy board could therefore be a fair track to concentrate donor money and skills in the same direction,” said Francois-Xavier Pinard’s in the study. His analysis of the dairy industry was not all doom and gloom. “Has Lebanon achieved a fair basis for further investments in the milk and dairy sector?” Pinard asked in his study. “The answer is ‘Yes.’ All development programs and private investments in farms, dairies and in structured retail chains show a potential competitive 20,000 hectares/25,000 cows/140,000 tons of milk produced by specialized farms.”

The expert estimated the value of the dairy market at retail value to be around $200 million and the present value of small and medium-sized enterprises producing dairy to be up to $47 million. He recommended that dairy producers try to wean off consumers from using imported powdered milk, promote dairy products through a dairy board and sustain intensive dairy farming for 25,000 specialized cows. Convincing consumers to abandon powdered milk is one common interest shared by small and big dairy producers. “Why should Lebanon spend each year $50 million on imported powdered milk?” asked Waked. “Only five percent of Lebanon’s milk market of 80 million liters is fresh liquid milk.”

Each year, Lebanon imports around $150 million worth of dairy products and exports only $3 million, based on customs figures. Nonetheless, Pinard portrayed in his study a bright view of the dairy sector’s capabilities, a view shared by Berro.

“In general, the health standards of Lebanon’s dairy sector are much better than other products where the use of pesticide is quite prevalent,” said Berro. “Even cases of food poisoning from dairy products in Lebanon are much fewer than in some other Western countries, where there are rampant food poisoning cases despite the existence of regulatory authorities.”

But Berro said dairy producers have to strive to improve their standards if they want to export goods to international markets to counter lower domestic purchasing power and compete with the flood of cheap imports once tariff barriers are removed in the near future.

“In a few years time, tariffs on European dairy imports will be removed under Lebanon’s Association Agreement with the European Union and the Lebanese market could become flooded with European dairy goods,” said Berro. “Consumers will not hesitate to buy European goods instead of locally-made ones and the local dairy producers will suffer even more.”

February 1, 2004 0 comments

Business

Q&A: Gebran Tueni

by Executive Contributor February 1, 2004

written by Executive Contributor

How do the Lebanese print media survive?

The word survive is very accurate. Before the war, the Lebanese media was flourished in terms of sales and advertising revenues. Unfortunately, during the war we had to spend all our reserves and now we are surviving. The print media market is depressed not just in Lebanon but worldwide has fallen by something like 25% to 30%, the broadsheet media and the dailies, that is. But because of the political and economic situation in Lebanon and the region, the advertising market has dropped – by something like 35% to 40% for television and 25% for the print media. We face a major problem with all our budgets, short-term, mid-term, and long-term. At the end of 2003, we had lost something like $1.5 million in advertising revenues. That’s a big amount in the print media.

How do you cover your losses?

Our first step, years ago, was to increase the price of the newspaper, from LL1,000 to LL2,000. Then, we increased the capital of the company that publishes An Nahar. We knocked on the door of people who were interested. We integrated them into our family. And of course, in buying the shares, they paid a different price than the normal price. We’ve been able to bring in something like $10 million, just to cover all the losses of the war, to ‘clean’ everything, and to prepare the budget for the next six years.

Has your dependence on investors interfered with the paper’s independence?

In our case, no, because in the charter of the company it is written very clearly that the policy of the paper is decided by the journalists and the Tueni family – because it’s a family business – based on the mission set out in 1948 by my grandfather, Gebran Tueni, concerning the role of An Nahar, the defense of press freedom, and the defense of the integrity of Lebanon. Anyone who buys shares in An Nahar must agree to this.

Is there an advertising monopoly?

I don’t oblige advertisers to advertise in An Nahar. And our prices are high. There is no monopoly of advertising. People can compare and choose.

Why has Prime Minister Rafik Hariri relinquished his 34.5% stake in An Nahar?

I don’t know but I’m happy. He has his own reasons. I had mine for buying back the shares. A lot of people told me I was stupid, but I said: No, no, no, when you want to pay for your freedom, it costs you a lot. I don’t think he was very happy to give them up. I was very happy, but you should know that the price was very high. I can’t tell you how high. But it was a very high price, a really high price. He did good business. But I think politically it was good for An Nahar. A long time ago, I asked him to sell me back the shares, but he didn’t want to at the time. Now I think he feels that the policy of An Nahar for the time being is very independent and maybe he thought that he cannot exert pressure to change that policy. Maybe he thought that it was too much for him to support.

Is there any truth to the suggestion that he relinquished the shares under pressure, indirect or otherwise, from Syria because An Nahar espouses an anti-Syria editorial line?

That is pure fantasy. That would mean that today, I can thank the people I attack in my newspaper for exerting pressure on someone to sell me shares, so that am now more independent. It was a very positive point for the readers also who wrote to congratulate me. Now I’m going to sell shares with the new philosophy that no one person can own more than 30% of An Nahar.

Why was it so important to you to get Hariri’s shares back?

It is very important for a journalist to feel that they are completely independent, that they are not dependent on the money of someone, that no one can say to them: I am a partner, especially when your partner is not always on the same political line.

Did Hariri ever try to exert pressure?

Frankly, yes and no. The relationship was comfortable, though. He endured much more from me than I endured from him, because he knew that he couldn’t exert pressure.

Does Antoine Choueiri have an unfair grip on media advertising?

How? Ok, he represents An Nahar, L’Orient Le Jour, As Safir, but I chose him, he didn’t choose me. Nobody obliged me to go to Choeuiri. I went to Choueiri because I think he is doing very good business. It’s a business contract between him and me. I chose him to manage my ads because I don’t want to create an advertising department in my newspaper. If someone has a newspaper or television station and cannot attract advertising, that’s not my fault. Let him improve his product, convince people that he is number one. Either we are in a free economic system, a free market, or not. This is not dumping. Before [we dealt with] Choueiri, we used to have our own in-house ad department, and it didn’t work. We had the problem then of going out into the market to collect payment. We need a cash flow.

Are the orders of the press and of journalists doing their job as they should?

They are doing the minimum and the minimum is never enough. In this business it’s never enough. With respect to major problems regarding press freedom, they are doing their job. We were able, through the Orders, to get the press law amended. Now, Lebanon’s press law – and I am against any press law – is a good press law. The government can no longer send someone to prison as they do with the audiovisual law, which is a very bad law. But none of the TV owners has presented an amendment of this stupid law, which allows the government to close down TV stations.

How did you feel about the arrest of New TV owner Tahseen Khayyat?

I’m against the arrest of any journalist, of any owner of a TV station or newspaper. I think the TV law in Lebanon is a very bad law. I can tomorrow morning say you are an Israeli agent and put you in jail for 24 hours.

So Tahseen Khayyat’s arrest constituted harassment?

I think it was a form of harassment.

Is this good for Lebanon’s image?

It is very bad for Lebanon’s image, for people to see, as well, that MTV is still closed because our government, our president, was upset with MTV’s policy. The government is trying to bring us back to the Middle Ages. It affects the credibility of the government, of the president, of the prime minister, of the general assembly.

Why is this happening?

Because we don’t have politicians in Lebanon. This is not an independent state. These people have been designated to do a certain job, by the Syrians.

What is your reaction to Walid bin Talal’s purchase of a 49% stake in LBC International?

It’s good. It’s good to see that Lebanese television can attract the interest of foreign investors. If it was a bad TV station, bin Talal would not have invested in it. It’s good for the sector, of course, good for the brand name of Lebanon, good for the whole industry.

What is your evaluation of Walid bin Talal’s newly-formed 24-hour Rotana music channel?

It’s good because I think that Walid bin Talal will be able to help a lot of Arab artists, who do not have the money to produce clips. I hope that we will have real artists and not popcorn artists and video-clip artists.

February 1, 2004 0 comments

Economics & Policy

Is it worth the risk?

by Tony Hchaime February 1, 2004

written by Tony Hchaime

Fluctuating performances, a harsh competitive environment, a limited market, and high threats of terrorism and war are just a few of the critical factors affecting both the current operations of foreign banks in Lebanon, and their future strategies with that regard.

Major shock waves have hit foreign banks in Lebanon over the past few years, ranging from the economic recession plaguing the country since 2000, to the threat of terrorism and heightened war activity in the region. Foreign banks in Lebanon, as in other countries in the Middle East and the Mediterranean, suffered a number of terrorist attacks or attempted attacks. A major explosion at HSBC headquarters in Turkey late in 2003 sent all European and American banks in the Middle East scrambling for additional security measures, to the extent of almost paralyzing daily operations. In the case of Lebanon, this has translated into armed guards protecting the entrances of European and American banks, in addition to those of Arab countries considered at risk of terrorism. It remains to be seen, however, how such banks have coped with years of struggle and hurdles, how they have performed, and what are their strategies for the near future.

Numerous banking professionals have addressed the presence of foreign banks, often criticizing their inability to compete with the major local institutions, and their overall risk aversion towards lending and retail banking.

While the end of the war in Lebanon saw the return of a number of foreign banks to the “lucrative” financial sector in Lebanon, the trend has been reversing over the past four years, with a number of banks abandoning their attempt to establish a significant presence in the country. At present, there are 12 foreign banks operating in the country – of which seven are Arab or Iranian – compared to 17 in 1999. The latest foreign bank to shut its operations in Lebanon was Dutch banking giant ABN Amro NV, which sold off its assets to Byblos Bank SAL and halted operations at the end of 2001.

Total assets of foreign banks in Lebanon have shrunk by more than 24% between 2000 and 2002, reaching $3.9 billion, compared to a growth of 15% for the Lebanese banking sector, and 20% for Alpha Group banks. Accordingly, total deposits at foreign banks in Lebanon have also fallen by more than 24% between 2000 and 2002, to $3.3 billion, compared to a growth of 15% for the Lebanese banking sector and 18% for Alpha Group banks. Loans and discounts have also dropped in tandem with the shrinkage in customer deposits and total assets.

Of the existing foreign banks in Lebanon, the three largest (Arab Bank, BNPI, HSBC) account for close to 80% of both total assets and total customer deposits of foreign banks in Lebanon. Arab Bank is the largest, with total assets of $1.5 billion, and customer deposits of $1.3 billion – thus making it party to the elite Alpha Group of banks. Furthermore, Arab Bank enjoys a market share of 2.9% of customer deposits domestically, compared to 1.8% for BNPI and 1.2% for HSBC. Other foreign banks in Lebanon, such as Citibank, Saudi National Commercial Bank, and National Bank of Kuwait, play a much more limited role in Lebanon, with respective market shares not exceeding 1%.

The overall performance of foreign banks in Lebanon is mostly geared towards that of Arab Bank, HSBC, and BNPI. Significant improvements in profitability, resulting mainly from better lending strategies and lower cost of funds, have contributed substantially to the bottom line of Arab Bank and HSBC, especially between the years 2001 and 2002. On an overall note, growth in the net earnings of foreign banks in Lebanon has fluctuated widely over the past few years. The year 2000 saw a 10% drop in net earnings, which was followed by a significant 51% gain in 2001, led by HSBC’s ability to turn an $11 million loss in 2000 into a $2.5 million net gain for 2001. Things improved in the year 2002, with net income for foreign banks in Lebanon jumped by a staggering 68% to reach $35.6 million. This growth was heavily influenced by the performance of Arab Bank and HSBC, which saw their bottom line increase by 206% and 167%, respectively, to $10.9 million and $6.7 million. Bearing such fluctuations in mind, the compounded average growth in net income for foreign banks in Lebanon between 1999 and 2002, remains in excess of 25% annually. This compared to a shrinkage in net income of 9% for the whole banking sector in Lebanon over the same period.

Excluding such outliers as Arab Bank and HSBC, however, the sector’s net earnings have grown by a more modest compounded average of 3% per year over the same period. While basically contributing the majority of revenues to foreign and local banks alike, interest income has played a minimal role in the increased profitability of foreign banks in Lebanon over the past few years. In fact, interest income for the sector as a whole grew by merely 6% annually on average between 1999 and 2002, compared to the 25% growth in net income. With the high number of banks operating in Lebanon creating strong competition, and foreign banks’ common policy of avoiding interest war with local banks, most opted to offer value added private banking and other specialized banking services. Backed by their international networks, foreign banks have been able to tap into a niche of banking services yet not fully supported by local banks. The foreign banking sector’s net financial income grew by an average of 10% between 1999 and 2002, while net commission income grew by an average of 8% over the same period.

As previously stated, foreign banks in Lebanon have attempted to tap into a niche market of private banking and other specialized services in which the Lebanese market is not yet saturated. In such a sense, foreign banks are dwarfed by local entities in terms of deposits and loans, while they remain highly competitive in other banking services. Such a strategy has, to a certain extent, limited their direct exposure to political and economic risks in the country, while, on the other hand, limited their ability to achieve sizeable income. While this approach may have a certain risk-control aspect to it, its restrictions on growth and gain in market share has severely misrepresented the attractiveness of Lebanon to foreign banks with, as of yet, no presence in the country. In such a sense, the highly competitive environment and the resulting slim margins put Lebanon at a competitive disadvantage to other emerging markets such as Africa, Qatar, Russia, and Eastern Europe.

These developments have been accelerated by the threat of terrorism against western interests globally, which have partially led many international banking institutions to scale down on their operations in emerging markets. As such, Europe’s leading banking institution, ABN Amro, has opted to shut down its operations in a number of countries in the region, including Lebanon. In addition, it has been recently rumored that a number of international banks are seeking to sell their equity stakes in major Lebanese banks. Although such developments may be misinterpreted initially as originating from domestic or regional factors of various natures, it is rather, a result of revisions to strategies regarding emerging markets.

Nevertheless, the activities of foreign banks in Lebanon are certainly not on a definite shrinkage route. In fact, a number of foreign banks, namely HSBC and Standard Chartered, have successfully clawed their way into a decent market share. Their strategy was aggressive and focused on services – including, credit cards, internet banking, investment products, and other special banking packages. Needless to say, the growth of foreign banks in Lebanon, or lack thereof, does have a direct impact on the Lebanese banking sector as a whole. In essence, large Arab banks or sizeable international banks grabbing a foothold in Lebanon would put pressure on the smaller Lebanese banks, thus enticing consolidation in the banking sector – a development long sought after by Riad Salemeh and the central bank.

February 1, 2004 0 comments

Business

Overvalued aid deals

by Michael Young February 1, 2004

written by Michael Young

In early December 2003, a Pentagon decision outraged a number of American allies. US Deputy Defense Secretary Paul Wolfowitz issued a memo stating that several countries that had opposed America’s war in Iraq, including France, Germany, Canada, Russia and Mexico, would be barred from bidding for $18.6 billion in US-financed Iraqi reconstruction contracts. By January, the Bush administration’s mood had changed. It became clear that the stated rationale for the decision, namely that it would protect “the essential security interests of the United States”, somehow implied that countries historically close to the US, somehow threatened its national security. This was a bit too much even for noteworthy Bush administration unilateralists. At the Summit of the America’s in January, President George W. Bush rescinded the ban on Canadian companies, amid signs from the Defense Department that three or four states in all might be removed from the list of proscribed nations. If that’s the case, then it’s good news, because aside from the fact that the move was no more than petty payback, it undermined one of the key things that Bush and his acolytes claim to be trying to spread in Iraq: the benefits of the free market.

Writing in the New York Times, Nancy Birdsall and Todd Moss of the Center for Global Development in Washington noted: “All the fuss must seem rather strange to the more than four billion people in the developing world. After all, restricting overseas development contracts to domestic bidders – so called ‘tied aid’ – has been standard practice in the aid world for the past 40 years.” However, the authors didn’t defend the habit; they argued it led to one of the main problems in current aid spending practice -and in the Bush administration’s decision to bar non-American competitors: restricting bidders increases costs by limiting competition.

As Birdsall and Moss observed: “Advocates of improving aid effectiveness have long argued to eliminate the practice of tied aid – which, according to one economic study, reduces its value by 15% to 30%. Untying aid would allow poor countries to purchase the most efficient and cost-effective goods and services necessary for their development projects. That makes sense because the real point of aid is to help people escape from poverty. But old habits die hard.”

That may not matter much if American companies, particularly ones financing presidential election campaigns, benefit. However, as the post-war situation in Iraq has dragged on, and as American taxpayers have been compelled to pay tens of billions of dollars for Iraqi reconstruction, the matter of financial transparency has become highly sensitive politically. Very simply, voters are not keen to fatten the accounts of American multinationals like Halliburton, which recently overcharged the Pentagon by $61 million through a competition-free contract, even if the prevailing, and fallacious, wisdom in the administration is that what is good for American companies is good for America.

As writer Matt Welch observed in Beirut’s Daily Star, conflating companies with countries is “a marriage which the trade liberalization project has long been trying to de-couple.” The problem is that “where large companies are so intertwined with the identity of their countries […] their governments won’t allow them to fail.” This means that the pathologies of private firms instead of being filtered out by market forces are enhanced by them, so that mismanaged or corrupt companies survive.

A second problem is that it makes no sense to peddle the advantages of free minds and free markets to the Iraqis, if half of that equation (or indeed all of it) is ignored. From the outset, the American-led reconstruction process in Iraq has been dipped in controversy, some of it unjustified. And in a country like Iraq, where animosity to the U.S. presence is rising and where unemployment may be as high as 50 percent, according to a UN-World Bank report (including an estimated 400,000 soldiers), even the semblance of financial impropriety can be politically disastrous.

It is to avoid this that, for example, George Soros’ Open Society Institute instituted the Iraq Revenue Watch (IRW) project, to “monitor Iraq’s oil industry to ensure that it is managed with the highest standards of transparency and that the benefits of national oil wealth flow to the people of Iraq.” As IRW remarked on its website, implicitly linking transparency and political stability: “In many parts of the world, the lack of proper stewardship over oil resources has resulted in corruption, the continued impoverishment of populations, and abuses of political power… If Iraq is to become an open, democratic society it will need to develop transparent accountable institutions for ensuring honest management of oil revenues.”

Economic policies born of pique are rarely profitable, and the Pentagon’s intervention in limiting participants in Iraqi reconstruction was surely an example. The Bush administration has backtracked, and might console itself by recognizing that there are two beneficiaries: American taxpayers, who will get more aid for their money; and Iraqi citizens, who will get more money for their aid.

Michael Young is a contributing editor at Reason magazine in the US.

February 1, 2004 0 comments

Society

Vital cover

by Executive Staff January 1, 2004

written by Executive Staff

April 2003 saw ACAL succeed in reaching a viable framework for the implementation of the 1972 law governing compulsory third party car insurance covering bodily damage. Although some may argue that the early period of implementation may not have been as smooth as one may have hoped for, it did not take long to appreciate that the scenario whereby uninsured bodily injuries and/or deaths arising out of motor accidents have been eliminated. Most importantly, the “hit-and-run” culture has also been significantly reduced as those involved in accidents are less likely to flee the scene of an accident and more likely to help those injured.

The subject of extending this policy to include third party material damage is under review and may be implemented in the near future. No more will we hear stories from friends and acquaintances about how they have had accidents with cars that could not afford to offer indemnification. Statistics have proven that many accidents happen in the work place, especially construction sites. Another observation was that the low-income labor bracket has the highest exposure not only to minor injuries, but also to disabilities that can jeopardize their and their dependents welfare. Following fruitful discussions with the relevant authorities, providing proper insurance for workers has now become a prerequisite to obtaining a construction permit. Such insurance provides compensation for medical treatment (including hospitalization) and compensation following work related disabilities or deaths.

We all remember the tragic scenes of collapsed buildings and the consequences to the tenants. The government has now felt the need to promote safety standards for new buildings starting with early in the design phase. ACAL was actively involved in working with the official committee that took charge of studying this issue and the result included a recommendation to have various insurance policies for the different stages, including a 10 year insurance plan following the completion of the construction to compensate for inherent structural defects. A parliamentary committee is now reviewing these recommendations and we feel that it will not be long before building safety standards are significantly improved.

From our perspective, our work is not only contributing to the improvement of the quality of life in our society but also gradually creating new opportunities for our sector and increasing the size of the Lebanese workforce. ACAL has also been working to improve the difficult working conditions of insurance companies, including the slow recovery and development of the Lebanese economy following the years of war and the high increase in the cost of reinsurance following 9/11 with no possibility of increasing the price of insurance in our market. The latter has led to a drop in profit margins, the relatively small size of the Lebanese market and structural features not facilitating the expansion of Lebanese insurance operations in other countries Faced with these challenges, the insurance sector has worked individually and collectively through ACAL towards maximizing the potential of their development. We have seen remarkable progress in the quality of insurance contracts made available to the customers and I believe that this has been the natural result of our free market economy. In this sense, traditional single cover policies are being replaced by a variety of covers with competitive premiums.

Although debatable, there was surely extensive innovation in the distribution channels of insurance policies and here we have to acknowledge the introduction of Bancassurance and e-business. These reduce administrative costs of insurance sales transactions and the cost of premium collection, as well as the time dedicated to complete the sales operation

In conjunction with the above, the challenge will always be to provide the client with professional consultancy on his risk transfer requirements and the adequacy of the insurance contracts that he is buying, aspects that still seem to be better served through the traditional insurance intermediaries.

Regionally, Lebanese insurance companies have a proud tradition of regional expansion, especially in the Gulf. However, their role may be gradually diminishing due to the development of Arab insurance sectors with large financial capitalization and national interests. At present, there seem to be good prospects in Syria. There are high expectations that Damascus may be granting licenses to Lebanese insurance companies. ACAL is working closely with the Syrian insurance representatives and we have already established an excellent level of cross border co-operation.

Elsewhere, we have been witnessing serious efforts to optimize the potential of the Lebanese insurance companies to grow and compete. These efforts are the result of the joint commitments of the legislators, regulators and ACAL. Capital adequacy and regulatory control have formed the essential elements of our efforts. From the legal side, the law governing the insurance operations in Lebanon was subject to serious review, resulting in the promulgation of the amended 1999 law. The outcome was surely a step in the right direction but ACAL is aiming at further improvements and is currently working on further law amendments, which we shall reveal in due time.

ACAL has initiated the framework for the continuous evaluations of the sector, and we shall continue to issue the necessary recommendations within a context of active co-operation with all concerned. We do however hope to change our role to become binding with all licensed insurance companies.

To elaborate, we have created what we call CENTRALE DE RISQUES, where we will collect risk related data from all insurance companies to be made available to all member companies with the aim of improving the quality of insurance underwriting and minimizing the risk of fraud. We have also established a joint committee with the regulatory bodies that will be concerned in building up market statistics to promote transparency. Our agenda for the future will be to increase communication with the authorities on the taxation imposed on insurance clients and beneficiaries. The readers may well be aware that clients acquiring all non-life insurance contracts have to bear tax and stamp duties ranging between 9% and 11% of insurance premiums. Also, compensations received from life contracts are also subject to 5% tax deductions. Although these would appear to contribute in the public income, they do not promote growth in the insurance market, a growth that may well compensate for any loss of tax and stamp duty. Other economies have been long promoted the acquisition of insurance by making it tax deductible. Our system has instead contributed to lost local insurance opportunities, mainly in the marine and life sectors, where internationally rates are attractive and easily available and the loss of potential foreign direct investment.

Finally, it is an honor for me to announce that the 25th General Arab Insurance Conference will be held in Lebanon in May 2004 with the participation of a large number of participants from both the Arab and international insurance companies. The event will be presided by ACAL and the theme will be “Arab Insurance: An Outlook to the Future.” In brief, our work will concentrate on setting recommendations of a proactive nature that will allow Arab insurers to meet the challenges of the future with a high level of readiness.

January 1, 2004 0 comments

Economics & Policy

Road ahead

by Eleanor Blanch January 1, 2004

written by Eleanor Blanch

“I’ll be glad if my watch could stop today,” said Jacque Sarraf, chairman of Malia Holding and former head of the Association of Lebanese Industrialists (ALI). “The year 2004 offers a vision of turmoil regionally and locally.”

Lebanon in 2004 will have to elect a new president or renew the mandate of President Emile Lahoud and hold municipal elections, two big political events that could shake the economy, said Sarraf.

“If you look in the region, there is no war but there is also no peace in Iraq. New problems are emerging in Saudi Arabia and the Gulf, with increased threats to Syria and Iran,” he added.

For the record, official government figures show that 418 new industrial units were created up to September 2003, while industrial exports in the first three quarters of the same year increased by 20% from the same period 2002. However, industrialists are not celebrating.

The US-led war on Iraq may have been shorter than previously expected, but it paralyzed a segment of industrialists who relied on an Iraqi market that catered to 24 million people. Many of the Iraqi officials Lebanese industrialists had dealt with were no longer around and some industrialists spent the latter part of the year trying to get money owed to them by the ousted Baathist regime. Major hostilities in Iraq were declared over in May, but oil prices continued to rise and industrialists had to endure higher fuel oil and electricity bills, which were will already steep in the run-up to the war.

The impact of the war on the economy as a whole was cushioned by last year’s Paris II donor conference, which gave Lebanon a breathing space and $4.4 billion in soft loans to reschedule its high public debt over a longer period and at a cheaper cost. The conference banished talks of a financial meltdown that would have hit industries hard. The Paris II loans worked on significantly lowering interest rates on government treasury-bills and deposits at banks, but most industrialists and merchants who were expecting a similar drop on loans were asked to wait.

Industrialists in 2003 also entered into a virtual free trade zone with Syria, which had signed with Lebanon an agreement that phases tariffs on industrial products traded between the two countries by the beginning of this year. The agreement has not rectified the trade imbalance with Syria, which has low labor costs, a vast range of raw materials and large swathes of industrial land.

Lebanese industrialists also entered into a semi free trade zone with the European Union when an interim free trade agreement with Lebanon’s number one import market came into force in March 2003. The interim Association Agreement, signed in the middle of 2002, gave many of Lebanon’s industrial, agro-industrial and agricultural exports nearly tariff-free access to the EU before the actual agreement was ratified. The Arab world remains the number one export market for Lebanese goods, but they are importing less and less products from Lebanon as production costs increase. The agro-industry sector is one victim of such high productions costs. “We were exporting $600 million of agro-industrial goods in 1996,” said Ateff Idriss, head of the Syndicate of Agro-Industries in Lebanon. “We lost in the last ten years more than 50% of agro exports, which stand today at $250 million a year.”

Industrialists are increasing exports because they cannot afford not to. Reducing production costs was top priority for industrialists in 2003 and will be their obsession in 2004. “In Lebanon the cost of land, financing and energy are more expensive than regional countries,” said Fadi Samaha, director general of the industry ministry. “Fuel costs alone represent 20% to 30% of general production costs,” he continued, adding that the ministry is working with the central bank to help cut the cost of financing for industrialists. Currently, the central bank subsidizes interest payments on loans extended to productive sectors.

“The Central bank subsidies are for a short period of seven years, but industrialists need loans for seven to 20 years,” said Samaha. “The loans subsidized by the central bank only cover investing costs, but not operating cost such as the financing of raw materials imported by industrialists.”

The central bank began this year to help the private sector lower the cost of its financing needs by urging banks in Lebanon to lower interest rates on loans, and one bank obliged. It also brokered an agreement between banks and the private sector to reschedule bad loans that banks wanted off their balance sheets and clients, such as industrialists, wanted to reschedule over a longer period of time.

Fadi Abboud, head of the ALI, estimates that 18% to 20% of the $4 billion in bad loans in question belong to the industrial sector. “Yes, the agreement will settle problems, but it does not address how a company is going to refinance itself,” said Abboud.

The industrial sector requires vast investments to help it modernize and compete with a influx of cheap and competitive goods that are finding their way into the Lebanese market. Meanwhile, many industrialists argue they will not be able to export much to European Union under the Association Agreement because they do not have the means to upgrade their industries to meet European standards.

“The EuroMed partnership allows us to have access to markets, but it has its own price because we have to have standards,” said Samaha. “It is not a given for everybody and we have to work on quality to reach European standards.”

Compliance with standards is another issue that is dogging the Lebanese industry, particularly the agro-industrial sector, which got a bad rap this year with rumors of contanimated dairy products finding their way onto the shelves.

“We need a food safety law, a sound legal framework, accreditation and research centers to modernize the agro-industry,” said Idriss. “Research is important for increasing exports because we cannot export unsafe packages to the European Union.”

For the meantime, many Lebanese industrialists are concentrating on a less demanding market, such as Iraq, Lebanon’s former number one export market. But insecurity and US control of government decisions in Iraq is not helping. Nonetheless, Lebanese industrialists returned to Iraq as soon as the war was over, trying to revive contacts and make new ones.

“The war on Iraq paralyzed industries for four to five months and we lost the work of seven years,” said Ahmad Kabbara, head of the export committee at the ALI. “But the Iraqi private sector has started to import from us goods such as cement and electronics.”

There are no accurate figures about the amount of goods Iraqi traders are currently importing from Lebanon, particularly as no proper Iraqi government is yet in charge.

“If the war did not take place, we were expecting to sign contracts worth $1 billion a year,” said Kabbara. “If the Iraqi private sector is revitalized, I think we can export $300 million a year to Iraq.”

Before the war started in March, Lebanese industrialists and businessmen signed over $1.1 billion in contracts with the Iraqi government under the United Nations brokered oil-for-food program. Some $450 million of these contracts were unpaid when the Iraqi government lost power in March. “The United Nations has rescheduled all contracts signed under the oil for food program,” said Kabarra. “We were paid $250 million and some $200 million have yet to be paid.”

For Kabarra and many other industrialists, Iraq still remains a market worth venturing in, despite security concerns and current competition from Americans, Europeans and other countries that were shunned by Saddam. “Lebanon, Iraq and Syria is the most important economic triangle that is capable of solving our problems and making us self-sufficient,” said Kabbara. “We will not need to rely on any other country as this triangle has sufficient raw material and human resources.”

Achieving this triangle requires a broader vision from Arab countries, which are usually more adept at erecting trade barriers, as is the case with the much-feared Greater Arab Free Trade Area that will come into force in the beginning of 2005. Most of the signatories to the agreement have not honored their commitments, leaving Lebanon’s open markets prey to their goods without reciprocal treatment.

“We are not prepared for the Arab invasion because Arabs are implementing the agreements in an Arabic way,” said Kabbara. “We face problems in transportation and transit taxes.”

Many industrialists lament the government is quick to sign trade agreements without studying their effects on the Lebanese industry, particularly as the broad cuts in import duties in 2000 reduced tariffs on industrial imports to an average of 5%.

Most industrialists expect exports to increase by 15% to 20% next year, but they do not think much of the increase. Lebanon will be preparing itself in 2004 for GAFTA and entering into serious talks with the World Trade Organization, which will leave Lebanon’s open markets without protection barricades. “We are seriously planning to address the WTO and EU that at this moment we can’t afford to have customs duties abolished due to high production costs,” said Abboud.

January 1, 2004 0 comments

Economics & Policy

Industry woes

by Executive Staff January 1, 2004

written by Executive Staff

In 2003, the manufacturing sector witnessed some improvements, mainly related to healthier exports. By and large, though, 2003 has not been much different from previous years. The fact remains that Lebanese manufacturers are still operating in a moribund economy. Furthermore, mixing politics and economics is adding to our woes. Lebanon doesn’t know in which direction it is heading. The Lebanese Government has run out of ideas on how to promote growth, as was clear most grievously in the tariff-lowering decisions of the year 2000, when the death sentence was passed on the Lebanese manufacturing sector. However, the last wish of the condemned was not even granted, when, upon lowering tariffs, the government reneged on a promise to create a ministerial committee to assess and bring down the costs of production, to offset the damage resulting from lower tariffs. In fact, instead of bringing down costs of production, the government burdened the private sector with additional costs, namely transport and education allowances. Moreover, the government maintains relatively high tariffs on goods that are NOT made in Lebanon, rather than the other way round, such as cars, petrol, alcohol and tobacco, which represent more than 85% of custom duties. Even raw materials, which are not made in Lebanon such as iron roads, and spare parts for generators, still pay high duties. This is an anomaly that is probably unique to our country.

Some of the consequences of the government’s decisions in 2000 have begun to appear in 2003, with the tariffs coming down by 60% from already historic lows in 2003, as a result of the Arab Free Trade Area. The damage will continue in 2004 and 2005, when tariffs come down by 80% and 100%, respectively. This will bring down tariffs to zero among the Arab nations with whom we trade, except that, these Arab countries have a huge advantage over us, as their costs of production are much lower that ours.

The political fabric of Lebanon unfortunately encourages negative behavior (witness the government’s speedy reaction to farmers spilling apples in the streets). Now tariffs (recently imposed to protect local apple growers) are part of the government’s dictionary again. But for three years, the government refused to consider similar tariff increases for the industrial sector, even though such tariffs provide a safety net for manufacturers trying to compete with subsidy-laden Arab and Asian goods.

How can businesses and manufacturers grow in such a fluid environment? Lebanese businesses are required to defy logic by working in a burdensome and costly operating environment. If the government is concerned with, or even a little embarrassed by, closing businesses, emigration and unemployment, among others, it must change its priorities, policies and habits. It must become obsessed by promoting growth and job creation all over Lebanon. If the government cannot bring down production costs, which are the result of inefficient monopolies, then it should seriously consider imposing higher tariffs on imported goods, just as in the case of apple growers.

In addition to Lebanon’s unusually high production costs, including labor, energy and transport, Lebanese manufacturers have to remain nimble and competitive against an onslaught of non-traditional expenses, deriving mainly from bureaucratic red-tape, inefficiency, poor postal services, prohibitive communication costs and restrictive labor markets,

If these practices continue, Lebanese factories will vanish at an accelerated rate. Unfortunately, this would not be the result of “Creative Destruction,” where industries disappear today and new ones are born tomorrow. Far from it – if factories go bust under the prevailing conditions, it is difficult to foresee the birth of new enterprises and the new jobs that go with them.

It is, therefore, imperative today to tackle the causes that keep our factories shackled and unable to compete. Most of the detrimental costs that were mentioned above are relatively easy to deal with since they need no more than a bold government decision. But labor issues need a change of mentality.

So let us concentrate on restrictive labor practices and ask why, for example, Petrol Station owners, according to an informal survey, prefer to hire non-Lebanese workers, even though the wages being paid to those foreign guest workers are $350 per month on average. This is almost double the minimum wage in Lebanon, and therefore a respectable enough salary for Lebanese workers to be seeking. It is no secret that some Lebanese employers shy away from hiring Lebanese workers because they are desperately trying to avoid getting mired in the maze of Lebanon’s restrictive labor laws, including expensive and time-consuming Social Security procedures. The outcome of this state of affairs is almost unique to Lebanon, whereby Labor Laws hinder employment creation, specially for Lebanese citizens. This is the only country in the world which punishes, from a tax point of view, he who employs a Lebanese citizen, and gives tax breaks if you employ foreign workers such as transport and education allowances, while affording the employed worker very few benefits and no safety net in the case of redundancy.

It is a true tragedy that our archaic labor laws have done so much damage to employment levels, not to mention to productivity, as the currently employed have little incentive to work hard while they feel secure in the job that the law protects, not the worker’s performance.

We agree with the government and all concerned parties that our workers are a major resource. Manufacturers should know because they spend years and make large investments in training their workers.

But it is futile to promote growth, employment generation and social development if the restrictive labor practices remain unchanged. We must possess the vision and the courage to change laws, practices and even mentalities. The priority now, as far as we are concerned, is for the country to move forward. Frankly, quibbling is a luxury that the economy cannot afford at this time. But this does not absolve the government of responsibility towards the industrial sector, as many promises have been made and few delivered, particularly concerning promoting exports.

Are manufacturers making unreasonable demands on a government with few resources to spare? Not at all, especially if one considers fast-paced developments in the world. Actually, Lebanon is far behind other countries in recognizing that sustainable industrial development is a prerequisite to fighting marginalization in a global economy. Our government does not even speak the same language as our international partners.

There is a vacuum in strategic thinking on industrial development that needs to be filled. Lebanon must show more commitment to the competitive capabilities of its industrial sector. We are not alone in having identified some of the major hindrances to growth. Independent European consultants have also found that Lebanon’s operating environment suffers from weak interactivity between state and industry, no public or international-standard industrial zones, costly public services and heavy and expensive administrative procedures. If the government does not solve these problems, how then are businesses supposed to survive, grow and thrive? How can we create enough jobs to keep people, especially the young, in Lebanon? Right now, Lebanon produces only one-third of the jobs it needs.

We know for a fact, and we have seen it all over the world, dynamic growth is a product of vision, policy, incentives and support Institutions. In 2004, as in years before and beyond, the manufacturing sector and the economy will continue to trudge along at best, if the Lebanese government does not become obsessed with promoting growth, before it is too late.

Fadi Abboud is the President of the Association of Lebanese Industrialists

January 1, 2004 0 comments