Society

Treading water

by Thomas Schellen
written by Thomas Schellen

By all signs and measures, insurance in Lebanon remains on the slow burner. Business developments and preliminary expected results for 2003 – even a somewhat conclusive performance evaluation based on unaudited results is not possible before next April because far too few members of this sector provide half-year or third-quarter reports – indicate no significant changes or additional sector growth in comparison to 2002, when the volume of insurance premiums increased by about 6%.

Aside from stronger hopes and aspirations harbored by individual companies and for specific products, insurance managers widely expect that also in 2004, their industry will see more of the same – treading water. This is not to say that the sector doesn’t breathe easier today than it did two years ago, when operators were looking at a mountain of bad news based fundamentally on increasing reinsurance costs and faltering investment portfolios. And the industry certainly appears far healthier and more promising than in the late 90s, when it was battling to emerge from a long credibility crisis and struggling to gain firm financial and operational grounds on the platform of the gradual implementation of a revised national insurance law. This period lies now behind Lebanon’s insurers, even though some of the goals for downsizing of operator numbers and consolidation have yet to be achieved. What that leaves the sector, at this point, is a mixed lot. Firms on their protracted way out and those that in best-case scenarios are broker-sized candidates for acquisition by a viable insurer, stand vis-à-vis operators investing into their growth and increasing professionalism. The latter group comprises first of all the companies with international corporate affiliation, bank-owned firms, including life and bancassurance specialists, and Beirut-based companies with regional scope, but it also includes a share of independent local companies eager for growth. Most of the straits that plagued insurers in 2003 stemmed clearly from the prevailing of adverse economic conditions; others were related to matters of public policy and the state of government affairs. The economic environment made for few interesting projects that firms could go after. “The financial and economic crisis is continuing to take its toll by keeping the number of projects for general insurance low,” said Lucien Letayf, general manager of Libano-Suisse Insurance. The company, which has growing regional activities, could secure contracts to provide coverage for three major construction projects in 2003, he added, “but there are not many of them.” On the health insurance front, persistent problems in the public sector coverage, created through non-payment of government dues to the National Social Security Fund, derailed expectations that pressures on the sector would be relieved by stronger NSSF involvement and new public health care provisions. The much-touted introduction of mandatory third-party liability (TPL) insurance for motorists turned out to be less than companies anticipated, with a plethora of organizational and regulatory difficulties slowing the implementation process. But on the bright side, as far as the government’s work is concerned, insurers widely credited the ministry of economy and trade and its insurance control commission for doing a good job in implementing the first-ever series of complete field audits of sector companies, a task that had been outsourced to two professional auditing firms. Companies across the board furthermore confirmed that essentially, the government took an excellent step in beginning to enforce that motorists obtain compulsory TPL insurance against bodily injury.

With the prospect of increasingly thorough enforcement of vehicle inspections and insurance requirements and ongoing deliberations over the expansion of the compulsory insurance to property damage liability, the motor segment stands to be the main event in occupying the sector’s attention also in 2004. However, some insurers would rather the government not rush into making motor TPL coverage for property damage mandatory. Companies have yet to review the claims ratios and evaluations of the sector’s first experiences with the new motor liability cover. “We should initiate a dialogue with the ministry of economy and trade in order to amend the law on personal injury TPL in motor before moving to implementation of property damage TPL,” said Elie Nasnas, general manager of insurer Axa Middle East.

While the motor cover is a welcome development, “it could also be very risky,” warned Letayf, who also considered the end of 2003 too early for introduction of a compulsory TPL property damage cover. “Companies are not sufficiently capitalized to pay a multitude of claims,” he said, “especially since reinsurers mandate them to retain a large share of risk.”

Numerous managers offered anecdotal evidence for massive increases in claims amounts, in cases where the courts had issued judgments reaching multiples of what plaintiffs had been customarily awarded. One judgment this year reportedly ordered payment of $100,000 to the family of the victim in a deadly car accident, significantly exceeding a long-established practice of awards in the range of $10,000 to $17,000.

With an explosion of bodily injury claim judgments, even the most conservative insurance providers would face challenges to maintain a sustainable level of profits from mandatory motor insurance, given the low minimum premiums set by the regulators. And indeed, the reputable insurers have either discouraged clients from obtaining only the TPL cover or priced their packages considerably above the minimum. As a consequence, these companies did not see their motor portfolios grow by major percentages in 2003.

In sharp contrast to that are the practices of a handful of insurance operators that have been selling TPL motor policies not only at the $43 minimum annual premium rate but seem to have cut their effective prices even below that threshold. These unsound practices could well escalate to become the Lebanese insurance industry’s main problem in 2004. Akin to several companies that amassed unsound medical insurance portfolios in the nineties and crashed toward the end of the decade, shaky providers that are running up risk from signing cut-rate TPL coverage commitments could rapidly be facing bankruptcy, many insiders fear. “This possibility could be verified sooner than some expect,” said Max Zaccar, chairman of Commercial Insurance. If confronted with these concerns, managers of the companies in question did not respond, said Nasnas. “They don’t care.” Some in the industry observe their lesser colleagues’ game of accident roulette with a touch of social Darwinist attitude, claiming that a few insolvencies would simply purge the ranks from unfit operators. But in the opinions of outspoken insurance managers like Nasnas and Zaccar, such stoicism would be ill placed. A crash of insurance companies with big motor portfolios would lead to a loss in consumer trust, especially among the most-likely first-time clients who went for the offers of these firms, Nasnas advised. “It would shake the market.” Another weighty concern for the industry could arise from fairly widespread disparities between high increases of costs – which local insurers had to carry due to massive hikes in reinsurance rates since 2001 – and much less pronounced premium increases (in some cases, even lowered rates) they charged their clients. This could force some providers to make painful adjustments to their rate structure at moments when such sudden moves would come both late and be hard to explain. The problems that the industry could encounter in 2004 are juxtaposed by a notable share of potential growth and opportunities, some of which is outside of Lebanon. Domestically, life insurance and products optimized for the bancassurance distribution channel are the best growth candidates. “With all we hear about 2004, I don’t foresee any potential growth outside the life market,” Nasnas said. “The life business is getting better, due to bancassurance,” said Letayf.

The trend to buying more life insurance indeed seems to be on the rise in Lebanon. While the absence of tax incentives for life policy owners is still an obstacle, the country’s socioeconomic troubles have alerted larger numbers of people to the increasing unlikelihood that they will be able to rely on their families for a retirement income, thereby tempting many to buy into retirement plans and capital life policies. Companies that in 2003 overhauled their life business and stepped up their marketing, like regional player Arabia Insurance, and firms that devised new life and capitalization plans for distribution in bank branches, such as Adir (a company owned jointly by Bank Byblos and French insurer ADP), have been bullish about their prospects. Also many companies with a license to write life insurance but presently have less than extensive life portfolios, see the need to increase their relevant activities. Axa and Libano-Suisse are both firms that intend to address the market with new life products. For firms with regional ambitions, however, some of the most appealing expansion opportunities are in Arab countries, from Damascus to Doha. The Saudi market for medical insurance alone carries potential for new business worth billions of dollars, Letayf said. The parent company of Libano-Suisse insurance is engaged in a 50/50 joint venture with the El-Seif Group for an insurance company in the kingdom at a total capitalization of $27 million (SR100 million). Other Beirut-based insurance companies have equally staked their claims in the Saudi market, which is in the process of opening to greater international participation. Iraq’s insurance needs are massive and Lebanese firms aspire to play a big role in Baghdad, but most see the evolution of that market as likely to take shape at some later time. The opportunity closest to home and in time is the Syrian market, rife with high potential for insurance partnerships from both sides of the border. “What we hope to see in 2004 is opening of the Syrian market,” Nasnas said. “Lebanese insurers could offer added value here. ” As a member of the European Axa Group, the focus of Axa Middle East covers the Levant and Cyprus. If their aspirations and activities are regional or local, there are few doubts among Lebanese insurers that greater institutionalization of sector companies and consolidation of their numbers are prerequisites for their long-term developments. “We believe that even if we are a profitable and strong regional player,” Letayf said, “a partnership with a strong bank would be good news for Libano-Suisse.”

“Consolidation will happen at all levels; even the largest players in Lebanon write very little in premiums in international comparison.” said Zaccar, and Commercial Insurance, although confident of its capacities and proud of its independence, would be interested to look at merger prospects. “Our partners could be one or more banks, one or more local insurance companies, or one or more international ones,” he continued, emphasizing, “we are open but we are in no rush.” Financial standards and auditing supervision for Lebanese insurance companies will further tighten in 2004, supporting the thrust for consolidation. However, industry managers expect the process to need two to three years to gather speed and reduce provider numbers by a substantial margin from today’s some 60 companies.

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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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Business

Olympian spending

by Anthony Mills
written by Anthony Mills

Three years ago, when it semed the world was his for the taking, businessman tycoon Taha Koleilat bought a second-division Lebanese football team, pumped several million dollars into it, bought top Lebanese players, and set his sights on the number-one berth in the First Division.

Today, even though his business interests are under intense legal scrutiny, he has accomplished that goal with his Olympic Beirut team

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Business

FYI Briefs – October

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Welcome backSince September 1, the Lebanese authorities have again been allowing South Koreans to obtain visas upon arrival in Lebanon. The practice had been discontinued in November 2003, when the Lebanese government imposed visa restrictions on a number of countries. South Korean embassy officials declined to offer an explanation for their country

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