Economics & Policy

Crying over spilt milk

by Eleanor Blanch
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.”

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Business

Q&A: Gebran Tueni

by Executive Contributor
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.

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Economics & Policy

Is it worth the risk?

by Tony Hchaime
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.

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Business

Overvalued aid deals

by Michael Young
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.

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Society

Vital cover

by Executive Staff
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.

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Economics & Policy

Road ahead

by Eleanor Blanch
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.

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Economics & Policy

Industry woes

by Executive Staff
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

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Society

Battling the ad wars

by Anthony Mills
written by Anthony Mills

An uphill battle awaits the advertising sector in 2004 as it struggles to reverse a plunge in revenues – which have dropped roughly 30% since January 2003 – played out against a backdrop of allegations of unfair competition and mafia-like cartels. As another desperate year draws to a close, many in the sector predict financial disaster in 2004.

“I hope that 2004 will not be worse than 2003 because if the annual drop in advertising revenues continues at this rate for another three years, there will be no advertising industry anymore,” warned Dani Richa, managing director of Impact/BBDO Lebanon.

“Next year will be no different from 2003,” predicted Wassim Rizk, regional director of media group CSS & Grey. “There will be a continuing decline in revenues because of the downturn in the economy – which we in advertising are a reflection of.”

However, Talal El Makdessi, chairman and CEO of the THG/Group media conglomerate believes that the economic travails should not be used to shroud the real problems plaguing the sector, “There is a lot of money in Lebanon in the advertising industry,” he said. Expenditures, by rate card, are increasing by 15% to 20% every year.”

Red Cell media group CEO Joe Ayoub concurred: “We’re suffering from marketing myopia now, where we think, ‘Ah, this is due to the economic crisis. This is wrong. Something is fundamentally sick in our industry.” In a sector dogged by domestic political instability and post-Iraq war fallout, local, independent Lebanese agencies are continuously falling victim to unfair competition and losing out to multinational affiliates that are causing many to pack up and leave the country. The situation is not helped, argued Richa, by regional and international advertisers’ misapprehension that they can reach Lebanese consumers through satellite television. “As a consequence, they are not investing in local media,” he complained. This misconception runs counter to efforts by terrestrial channels LBC and Future Television to increase viewer numbers with programs like STAR ACADEMY and SUPERSTAR.

In addition, belt-tightening across the board has led to a shift from above-the-line to below-the-line investment. The focus now is on the point of sale, rather than on brand building. As a result, the ‘special offer’ strategy has proliferated – with unwelcome effects. “There are so many ‘special offers’ now,” observed Richa, “that they, in general, are not attractive anymore. It’s a very short-term policy.” In the long term, profit margins and consumer loyalty wane.

Agencies, for their part, must discard a preference for discount strategies. “They might work for the day, but down the line profit margins shrink and your ability to attract talent is affected,” cautioned Rizk.

Industry experts are in agreement that if the sector is to recover, advertising agencies and media buying firms will have to work on regaining the trust of their clients. Something that is easier said than done considering that in Lebanon today, it is impossible to determine the correct price of services bought from media or advertising agencies – figures that are easily available in any healthy media sector. Agencies are continuously accused of over billing.

“The client doesn’t trust his agency. The agency doesn’t believe the media is giving it the right price. The media doesn’t believe that the agency is giving the client the right thing, and the agency doesn’t trust the client because he says: ‘I will spend $1 million’ but ends up spending $50,000,” Ayoub said. The lack of objective, professional consultancy on the part of media buyers is another serious issue facing the sector. Clients complain that agencies only recommend certain newspapers and TV stations because they are the most financially beneficial to the agencies, not because they represent the best strategic choice for the client. Although many problems exist within the industry itself, the government, say experts, also bears responsibility and confidence in the government must be restored. “We have no leadership, no responsibility. The only thing that our government cares about is how to collect tax. It’s about time that new talent, new politicians, who are ‘clean,’ educated, unaffected by the Lebanese civil war and are not remotely related to any war leader, take over the government. We have enough corrupt politicians who have drained the country and amassed billions of dollars,” declared Makdessi. A reversal of the decline is only possible if players combat their woes in unison, possibly through mergers and acquisitions, Ayoub said. This is likely, though, to prove difficult since many of Lebanon’s small advertising agencies are family, one-man-shows. “They have to let go of their patriarchal mentality. To survive, they will have to open up, share decisions and not only give but also receive orders.” But the senior industry executives, who hold the strings of power, will be loath to change. The industry’s powerful egos are indeed a formidable hurdle, acknowledged Makdessi. “Everyone wants to be first,” he said. “If the industry’s four or five major players were to sit around a table, leave their egos aside, and talk logic and sense, the solution would be there immediately.”

Unfair competition, if left to flourish, will continue to compound the industry’s woes, say many. They contend that a handful of powerful players have the market in a chokehold and smaller players are being squeezed out. “In the absence of regulation, everything is possible,” noted Ayoub. “It becomes jungle law.” Rizk conceded that agencies are guilty of favoritism with respect to certain media outlets because of juicy incentives – which he said should be revisited and toned down. Makdessi, though, vigorously denied the existence of any form of advertising mafia. “The claims are not true. There is no monopoly of the industry. Those who claim there is a mafia are those who do not know what advertising is. They don’t know how advertising functions.” He said that only small advertising agencies might opt for a particular media outlet to serve private interests. “International agencies go by figures, statistics and research and are accountable for whatever they do.” His denials were echoed by Richa: “This mafia story has been circulated by weak media outlets, which, naturally, do not get a high share of advertising. The only excuse they can offer, to shroud their shortcomings, is: ‘so-and-so is in bed with so-and-so.’ But clients are not stupid, and advertisers can‎’t just do whatever they want.”

More regulation of the industry would help, say some insiders. Most regulation proponents, however, favor auto-regulation and there is widespread aversion to government interference. “They don’t really understand the ins and outs of this business,” said Ayoub. “They could impose really damaging decisions.” But unless the industry gets its act together, government intervention may be just around the corner, Ayoub warned, complete with unfair regulation and harsh decisions that would batter business even more and further damage investor confidence. “We don’t want this to be a government-led industry,” he said.

The term ‘regulation’ is, in any case, meaningless, Makdessi argued. “Why are we afraid of regulations if ministers do not respect them, politicians do not respect them, the government does not respect them. No one respects them,” he said, adding that the best form of regulation would be amending VAT charges so that they are exacted according to rate card, not invoice, value. A number of industry insiders have suggested that the source of the sector’s ills be pinpointed in a process overseen by global advertising bodies, such as the International Advertisers’ Association. An essential first step would be the mutual concession by principal actors that they all bear a portion of the blame. Makdessi, for his part, argued that a crucial ingredient of any remedy must be clean research that subsequently forms the basis for a new rate card sporting fair rates. The media must then respect those rates. “The day the media respects the rates, you will see an increase in the advertising spend in Lebanon by 15% to 20% gradually every year for the next five to six years,” said Makdessi, adding that a recent press conference, he offered to contribute $100,000 dollars as a first payment towards research. His gesture did not prompt others to open their checkbooks. Pessimism fuelled by the ongoing exodus of industry flair from Lebanon currently clouds the sector. The Gulf is packed with Lebanese talent and now, of the seven leading ad agencies in North Africa, five, Makdessi said, are owned and run by Lebanese who have fled the dearth of career opportunities in their own country. For those left behind it will take a long time to rebuild the trust necessary for smooth sailing. “I don’t see any light at the end of the tunnel 2004,” concluded Makdessi.

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Society

No season

by Anthony Mills
written by Anthony Mills

Ever-optimistic tourist industry insiders contend that 2003 has been a satisfactory year overall and that Lebanon will continue to replace Europe and America as the destination of choice for high-end Gulf Arab tourists in 2004. In reality, however, some major prodding is necessary in the coming year for an underdeveloped sector that needs to overcome serious obstacles imposed by the government, extend a paltry two-month summer peak season and bolster the number of arrivals to the country by attracting a fresh brood of tourists from non-Arab countries.

Working with a government that critics say is doing little, if anything, to help buttress the sector will continue to be a main hurdle for the tourism industry throughout 2004. The ministry currently operates with a hopelessly low budget, an aversion to new blood, no marketing plan to counter media that portray Lebanon as a violence-prone country, fractious domestic politics that unnerve prospective visitors – even in the Gulf – and simmering regional instability.

“The government must understand that tourism is not only selling hotel rooms and restaurant meals,” said Paul Ariss, president of the union of restaurant, café, nightclub and pastry shop owners.

Also hindering the development of the tourism sector is a flawed infrastructure, which the government has yet to seriously tackle. Not only do the poor roads restrict tourists from visiting major tourist destinations in various regions of the country, water and electricity shortages occur at the height of the summer season. Power cuts in Bhamdoun and Aley in August 2003 prompted 20% to 30% of the Arab tourists staying in the region’s mountain resorts to pack up and head for Syria, or home.

Government policies adopted in 2003 will also harm tourism in the coming year. The recent decision to stop granting British citizens visas upon their arrival at Beirut airport, for example, will undoubtedly cause a decrease in British visitor numbers and reflect negatively on Lebanon as a tourist destination. Although understandable as a diplomatic tit-for-tat measure – Britain now requires transit visas for Lebanese with layovers in the UK – the move, critics say, is a case of cutting off your nose to spite your face.

“Unfortunately, politics in Lebanon very rarely takes into consideration the benefits of tourism,” declared Ariss.

Another threat to the tourism sector is the levy of burdensome government imposed taxes that is driving 50% to 60% of the some 3,000 or so restaurants to consider shutting down and moving to Dubai, Abu Dhabi and other Gulf cities, despite the fact that each have already spent an average of $500,000 in start up costs to open in Lebanon. “There is no logic to the way the authorities deal with the general economy, and with tourism. The tourism sector should not be overburdened with taxes and charges,” Ariss complained. A realistic view of Lebanon’s tourist sector shows that the country no longer enjoys the unassailable position it held before the civil war. It must now work to compete with rival destinations, such as Egypt, Jordan, Syria and Dubai. According to Pierre Achkar, president of the Lebanese Hotels Association, Lebanon will have to fight to compete with the tourism industries of these countries. “We are not competitive because our prices are high, due mostly to the taxes and charges,” he said. For the moment, however, critics say the government is seemingly under the mistaken assumption that because Lebanon is blessed with natural tourist assets, it will somehow blossom unaided as a tourism destination. “We need a real political decision at a high level to make this country a real tourist destination,” said Achkar. “The government has to understand that you have to do a lot of things – even if you have a nice country, nice people, a nice nightlife – to be on the international map of tourism.” But detractors allege the ministry of tourism is either unwilling or unable to do its job. “We really have a problem in the ministry. They need human resources and they need a budget,” stated Ariss. “The current budget is at a minimum and it’s forbidden to have new employees in the ministry, even though they don’t have professional people.”

Criticism has also been leveled at the ministry over its handling of this year’s Arab World Trade and Tourism Exchange (AWTTE), held in September 2003 at BIEL. The ministry awarded the management contract for the fair to a certain Lebanese travel agency, invoking the anger of its competitors, which then boycotted the gathering. This contributed strongly to weak participation at the event and its failure to impress.

“The tourism ministry sometimes helps very big industry investors and ignoring the small investors,” protested Achkar. He added that the hundreds of smaller players, who actually put Lebanon on the international tourism map and constitute a social fabric upon which countless families depend for a living, are being swept aside to make way for powerful companies. According to Achkar, one reason why no tourism-bolstering governmental decisions have been taken is because the government has been resting on its laurels since the 9/11 attacks and the impression that Gulf Arabs wary of travel to the US and Europe will continue to turn to Lebanon. But accurate tourism-related data would help smash the false sense of security. Information is needed on where visitors are staying. For example, when Lebanon registers a million tourists, the implication is they all stay in hotels. But in fact, observers estimate that as many as 50% of Gulf Arabs own property and houses and do not pay for hotels, and spend much less on restaurants and other outings. To ensure a successful 2004 season, industry experts agree that Lebanon’s constricted two-month summer tourism season should be extended. In other countries, Achkar noted, the summer season runs from the beginning of May until the end of October. “Turkey, Cyprus, Egypt, are all fully booked from the first of May until the end of October. For us, the summer season is July and August and we are losing a lot of money [as a result].”

Furthermore, in a joint campaign with the tourism ministry, the Hotels Association is to start aggressively targeting potential tourists from Eastern Europe, in particular Russia and Ukraine (for Eastern Europeans, the cancellation rates in Egypt during the Iraq war were far lower than for Western Europeans and it appears the are less susceptible to the regionally-generated jitters). However, marketing studies will prove imperative to determine which prospective tourist types and what countries should be targeted, and how they should be lured in. “The figures that are published by the government should be analyzed more accurately in order to decide where to invest and who are the targets,” said Ariss, adding that Lebanon should start to steer away from relying heavily on the Gulf Arabs that constitute the lion’s share of the country’s tourists. “We cannot say that we have tourism in Lebanon just because we have some Arab tourists who come here during very defined periods.”

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Society

Q&A: Ali Abdallah

by Executive Staff
written by Executive Staff

E: What was the ministry’s strategy in 2003?

AA: This year should see a robust and energetic campaign to promote the Lebanese tourist industry, especially in light of the encouraging figures that were recorded in 2003. Not since 1974, 20 years ago, have we seen over one million visitors and the business that was generated was in the region of $1.6 billion or 10% of GDP. This growth, which realistically began in earnest in 2000, should translate into the end of 2003 seeing 1.1 million visitors, mainly from Arab countries, compared to 936,000 for 2002.

E: How do you explain the fact that 2003 was an unstable year for the region, while the local tourism industry saw a considerable improvement?

 

AA: Well, we still have regional instability and some foreign countries still associate us in their media with terrorism, but the reality is that tourists are amazed when they come to Lebanon and see the level of security and quality of services provided.

E: Who is coming?

AA: In 2002, 44% of visitors were Arabs. This August nearly 200,000 Arabs visited Lebanon. Currently, information is being collected at the airport to get a clearer picture of all the different types of tourists coming to Lebanon.

E: Are those that visit Lebanon big spenders?

AA: Although we have a relatively small number of tourists, their daily spend is high. Tunisia needs five million visitors to reach our income. There, the average daily spend is around $60 per day, while in Lebanon the average expenditure per tourist per day is $250. Many Gulf Arabs spend as much as $500 per day. There are untapped countries like Japan and South Korea, whose tourists spend up to $400 per day. Lebanon has no tourism office in Japan. Today, there are talks to take exhibits from the national museum to Japan in an effort to help promote the country there.

E: What type of tourism is the ministry keen to focus on? Religious, shopping, archeological or conference tourism?

AA: We will have a clearer picture once the results of our research are finalized.

E: What about the more niche activities?

AA: We are trying to develop Lebanon as an upmarket destination, stressing on quality and luxury, but we are also promoting Lebanon as a destination for what I am going to call “medical tourism,” where we can offer packages to people looking for medical treatment and the ensuing recuperation period. Hospitals would be classified according to specialization and we would imagine a lot of Arabs would opt for this, as they respect our doctors and facilities. Cultural, eco and archaeological are other sectors we need to develop.

E: What do you anticipate will be the sectoral obstacles for 2004 and how do you intend to overcome them?

AA: Well, we need to improve the state of the roads. This is crucial if we wish to woo western tourists to Lebanon. We need to be seen as a safe country. We also need to work on our service skills, especially how we receive, talk to and help tourists, and this is especially needed in the public sector. We also need to develop modern laws for the sector and this will help hotels and restaurants overcome the problems that are limiting the inflow of foreign investment. The ministry has established a mechanism to reduce red tape. IDAL used to handle this but it was not doing a good job and that is why we decided to bring tourism-related investment development back to the ministry.

E: What is your strategy for 2004, assuming you are still in office?

AA: We are in the process of analyzing the tourism sector in every region in order to know what will be needed in terms of investment and then develop that region’s tourism potential. We will be promoting the country with an international marketing campaign, but domestically we are working on the TELEPHERIQUE project that aims to link all ski resorts. This will benefit a lot of derivative activities and companies such as MEA, car rental firms and tourism fairs. We will increase the number of tourism police; work closely with the private sector and others in the tourism community to improve the environment – an important factor for the modern tourist.
 

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