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.

Abi Habib: `Our loans are convenient, because they are cheap… and long term`

In making agriculture more sustainable in recent years, the availability of financing options has seen some important improvements. The number of loans to the agro sector has mushroomed in the last two years, especially through loans granted under the Kafalat loan guarantee program.

Lebanese farmers and small agricultural enterprises commonly encountered problems in accessing loans at commercial banks, whose focus of business would rarely include agriculture and whose branch networks were concentrated away from rural areas. Agriculturalists on their part were often reluctant to seek bank loans, which carried high interest charges and requirements to post land as collateral, a stipulation which the small land owners and family farmers viewed as running contrary to their traditions.

This placed agriculturalists in a situation where sponsored programs were most appropriate to their needs. One type of such finance vehicle is micro finance, which fundamentally aims at enabling poor people to realize their potential for economic productivity. The tool to achieve this is provision of micro credits with strict repayment discipline, modeled after a development concept popularized over the last two decades through the collateral-free lending activities of the Grameen Bank in Bangladesh. Over 20 foreign and domestic NGOs have involved themselves since the mid 1990s in managing the provision of such loans to Lebanese individuals and small enterprises, in many instances with an emphasis on serving specific communities or geographic regions.

An UNDP country survey from 1997 found that the concept encountered a notable amount of skepticism at that time, but a 2002 paper for a World Bank development debate drew a more promising picture on the potential of micro finance for Lebanon. Presently, accumulated NGO-driven micro lending activities with a ceiling of $5,000 per loan are estimated to stand at a level of around $30 million. As charities, micro finance NGOs are dependent on donor contributions. Except for micro lending initiatives within general lending by commercial banks, the activity is yet to be regulated, making it difficult to analyze the overall scope, distribution and performance. “Some of the NGOs have become more productive, others less,” said economist Joey Ghaleb, who co-authored the 2002 paper.

Experts said that new dynamics would enter this realm and boost the micro finance volume when the central bank implements a planned framework, under which banks will be allowed to utilize a portion of their statutory reserves for advancing funds to micro lending. For the time being, the Kafalat program remains the best non-commercial loan. Kafalat is the loan guarantee corporation whose shareholders are the National Institute for the Guarantee of Deposits and 50 commercial banks. The company was established in 1999 and its portfolio of loan guarantees has seen a tremendous increase from mid 2002, to reach a total amount of $199.2 million at the end of February 2004. With 1,355 loans, agriculture accounted for almost half of all guarantees awarded.

“Our loans are convenient, because they are cheap and more importantly, they are long-term,” said Kafalat chairman, Khater Abi Habib. Loans benefiting from the scheme, under which Kafalat guarantees 75% of principal and interest up to a ceiling of $200,000, can go a long way to help farmers restructure their activities, or enter new activities on land that had been under-exploited.

As it does not stipulate a minimum loan amount, the scheme could also be accessible to clients whose needs are in the range of micro finance. Kafalat as a rule processes loan guarantee requests within three weeks. A characteristic of the program suited to the needs of small businesses, and farmers in particular, is the low reliance on real estate collateral. “With the presence of our guarantees,” Abi Habib said, “it has not become totally easy but much easier.”

While not designed to finance major agro-industrial projects, the scheme allows the infusion of larger amounts into agro-industry through the nation’s industrial lending program. “I saw a number of agro-industrial concerns financed by central bank-subsidized loans creating sure markets for agriculturalists as suppliers of raw materials,” said Abi Habib, “and those agriculturalists are in turn being financed by banks on basis of the strength of the purchase contracts given to them by agro-industrialists, plus the strength of market developments and guarantees given by Kafalat.”

As medium-term facilities, the low-interest seven-year loans with a one-year grace period are suited to the needs of most agriculturalists. One sub sector of agriculture to which the parameters of Kafalat loan guarantees are less well suited, however, is tree farming. To start operation of an orchard, a farmer needs finance facilities that are repayable over 12 to 15 years, with a three-year grace period. For this, Kafalat guarantees are inadequate and a source of long-term funding would be needed, with possible sponsors including Lebanon’s usual partners in lending and aid programs, such as the World Bank, EU and their affiliated finance institutions.

The loan guarantee company is engaged in continuous efforts to inform its client base of existing or potential small and medium entrepreneurs. “The best marketing is for us to be in the midst of our potential users,” said Abi Habib, “the north is our weakest market, and that’s why the largest portion of our visits and activities is now to the north.”

Lebanon’s Investment Development Authority, IDAL, figures twofold in the task of promoting the national agriculture and agro-industry sectors. Under the 2001 investment law 360, the agency offers incentives to investments into strategic sectors of the economy, including agriculture and agro-industry. For the past three years, the IDAL mandate also extended to supporting agricultural exports through the Export Plus program offering farmers transportation subsidies and quality certification for produce. In February 2004, IDAL and the nation’s agro-industrialists signed a collaboration for an Agro Market Access Program (Agromap). EXECUTIVE talked to IDAL chairman and managing director, Samih Barbir, about the agency’s achievements and plans in relation to the agro sector.

Where does IDAL set its priorities in supporting agriculture and agro-industry?

In Lebanon, we don’t have large volumes in agricultural production. Therefore, our main priority is quality. The successful experience of Export Plus of having two international firms implementing quality control has proven to be a very important factor in marketing Lebanese agricultural products abroad.

When you discuss Export Plus as a success story, where are the highlights, and what are the areas still in need for development?

The level of success is simply the fact that we witnessed an increase in our exports. In the first year, it was a big increase of 15%, in the second year, 5%, and last year, it was stabilizing. But one has to look at it in a different way. Before the launch of Export Plus, we were on a downward slope. Exports were dropping and the whole sector was suffering a lot, due to many problems. Maintaining a stable level of approximately 360,000 tons in exports per year is a success in itself. We experienced some additional difficulties, such as some bad weather hitting Lebanon over the last two years, the devaluation of the currency in Turkey and the war in Iraq, all of which affected our export markets.

In your statistics, 99% of agricultural exports went to GCC countries, plus Syria and Jordan. What can IDAL do to improve agro exports across other markets?

The GCC are the natural market. The Iraqi market is a new one that we are trying to enter right now. But our main objective is to enter European markets. We are doing a lot of contact work with all the embassies here, especially Eastern European ones. As a first target, we are trying to enter those countries that have the least obstacles.

Your 2003 report states that about 5% of agricultural products destined for exports to Arab countries were rejected in quality inspections. Would the same quality requirements apply to produce destined for Europe?

Exports to Europe would have to meet higher and different quality requirements. They have some very strict controls on pesticide residues and other issues that are not required by Arab countries. That is why we have to inform those farmers prior to starting to control their products.

On the other side of the coin, IDAL has the mission to draw in investments. How is this progressing as far as attracting agricultural investors?

We offer the same incentives to projects in all the sectors listed in the [Investment Development] law, as are tourism, ICT, agro-industry, industry in general and agriculture. The only difference is that agricultural projects have the lowest minimum investment requirements to qualify for incentives.

How have agricultural and agro-industry projects fared in terms of attracting investors?

We have two agro-industry projects that are being processed under the one-stop-shop service. The law is still relatively new and the incentives are new. It takes some time to let people know about it. We are planning to do a campaign by the middle of this year, to promote those incentives. But definitely, compared to tourism, it is still very shy.

Can you name an amount for the value of one of those two projects, to give an idea of the magnitude?

The project that has progressed further is for $4.3 million. Don’t expect to get big figures in this industry.

How much funding for agricultural export promotion do you have at your disposal?

The Export Plus program was approved for LL100 billion spread over the four years, 2001 to 2004.

How much have you dispersed to date?

A bit less than LL30 billion each year. We can handle the program until the end of this year. We might need some more [funding] but there is no problem in that. Theoretically, it should be covered.

Under the new Agromap project, you are sponsoring participation of Lebanese exhibitors in trade shows in Beirut, Paris, and New York. How does this interlace with the promotion of agricultural exports under Export Plus, where you described the strongest markets and prospects as being in the Gulf and Eastern Europe?

With Agromap, we are targeting a different sector, agro-industry, and are promoting Lebanese agro-industry products. We are doing this as a pilot project in 2004 and I wanted to reach the Arab, European and North American markets, to see what the impact would be. We will evaluate each event right afterwards and depending on those three events, we could consider going into another round with a bigger budget in 2005.

Did you allocate equally to each fair, Horeca in Beirut, the Fancy Food Show in New York, and Sial in Paris?

Between the US and France, there will be equal space. Lebanon will be bigger. Here, much more people will come because they do not have the transportation issue. Horeca also accounts for biggest amount in the budget.

How was the response from the industry?

The first results are very good. For Horeca, we have about 35 industrialists and for the Fancy Food Show about 15. We are over-subscribed but I wouldn’t call that a problem. We will have the luxury to choose the best products to represent Lebanon abroad.

What will you provide to the companies that qualify for participation?

We will have a Lebanese pavilion, and we will cover 100% of the rent and the stand decorations. Exhibitors will have to cover their transportation and other costs.