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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lebanon’s retail sector has finally shaken off the effects of the war as it moves towards a modern shopping culture. The good news is that a new generation of shopping malls is getting it right, offering a modern retail experience in an equally modern retail environment, catering to both local shoppers and tourists.

This modern culture has not had an easy birth, having emerged from the retail chaos of the immediate post war years. Then, the downtown, historically the capital’s retail core was still rubble and the ad hoc shopping districts that emerged during the conflict – Verdun, Zalka and Kaslik – still thrived in the absence of a genuine retail hub and modern malls. There were shopping centers of a sort, built with the money of returning exiles. This haphazard approach to retail was doomed to fail. The developments were badly run, ill-designed with small shops, fitted with low quality specifications and with little or no thought given to tenant mix. This and a once-thriving market of pirated goods (now happily on the wane) was not an auspicious start to a sector that has the potential to contribute to $3.6 billion or 20% of GDP.

However since 2000, the renaissance of the BCD, new malls –such as the ABC in Ashrafieh and Dunes – and the emergence of supermarket chains have all transformed the sector and the way we shop. This mini revolution has been helped by the fact that many Lebanese have lived and traveled abroad almost guaranteeing a target rich environment for the international brands. Today, as Lebanon continues to fall in line with international retailing trends it is witnessing larger developments, more car-borne shopping and longer opening hours. This is creating increased competition as retailers place greater emphasis on location, access, customer flow, tenant mix, climate control, service accessibility and parking. “The new malls will see a repositioning of the retail landscape, which is currently defined as the high-street,” explained Mark Morris-Jones of Cushman and Wakefield Healey and Baker’s associate office in Beirut. “Those malls that are properly conceived, managed and well-let will succeed.”

Beirut and its suburbs are dotted with promise. Six major retail developments in Dora, Dbayeh, Sin el Fil, the BCD and Verdun will add nearly 200,000m2 of net retail space. The five do not include the 100,000m2 Souks in the BCD, which has been delayed for four years and does not look like it will be built any time soon. However, local retailers believe that this increased supply will meet the demands of Lebanon’s retailers who insist on modern retail space. “The trouble is that today we just can’t find the right location for our premises,” said Admic chairman Michel Abchee. “The new projects are responding to this demand. If anyone is going to suffer it is the previous generation of retail developments.” It was a painful lesson to learn for those who poured their money into badly conceived projects. “We must remember that much of the retail space in the first phase was sold and, therefore, lack the management and direction of a modern mall where space is rented,” said Morris-Jones, who added that developers with the long-term view will be the eventual winner as they should see growth in sales, which will lead to rental growth and then capital growth.

One of the most adventurous new projects is the Metropolitan mall in Sin el Fil. While many analysts believe that the Habtoor Group is throwing good money after bad, but Morris-Jones believes its might just work. “It is a lot smaller than the other malls coming on stream. It has less than 14,000m2 with a lot of restaurants and coffee shops,” he said. Analysts believe that the new ADMIC mall at Dora will help Sin El Fil’s customer draw, as it will be the first genuine hypermarket in Lebanon and will change shopping patterns in Beirut’s northern suburbs.

Area’s that are expected to make a significant comeback include Hamra, a traditional retail area with a proper commercial street and a residential base woven into its fabric. Verdun should also survive as long as it responds to the new challenges presented by the malls. “We need to see retailers’ associations providing street furniture, parking and safety features that will enhance streets and allow them to compete,” said Morris-Jones.

The downtown’s retail dynamic, once so full of promise, has stuttered due to the delay of the Souks project. In 2001, the development was touted as the single most important development in the BCD and a catalyst for foreign direct investment. With roughly 52,000m2 of retail space – including a 15,000m2 dept store and a 7,000m2 supermarket – it was estimated at the time that the Souks could achieve revenues of $270 million in its first year. International retailers – including Les Galleries Lafayette, Harvey Nichols and Printemps – showed genuine interest in leasing the department store while Spinneys also showed an interest in the supermarket plot. Today, political squabbling has thrown Solidere’s original retail blueprint out the window. Allenby and Foch were designed for upmarket brands but have had to absorb those “high-street” labels originally earmarked for the Souks. When the Souks open for business, retail analysts believe that the high-end shops will head to the BCD. “The expectation is that the price point of products offered in the Souks will be some way above those elsewhere and will serve the higher end market segment,” said Morris-Jones. “This will be an extension of the current trend where we have already seen some of those high end retailers drifting in from a number of outside destinations. There will however be an impact on those retailers operating outside the BCD in that they will take with them a chunk of total sales and this will see a reduction in rental levels elsewhere.” But what is selling? Currently women’s wear and restaurants are the most popular retail outlets with home accessories, footwear, jewelry and men’s wear in close pursuit. “There are some outstanding homegrown retailers in Lebanon, such as GS, Patchi, Kababji, Crepaway, Red Shoe, Pointure, Aziz, Ghia Holdings, Maison du Café and any number of the jewelry retailers and some of the boutiques,” said Morris-Jones. “This includes branded franchises from overseas, as well as some home grown operators. Quality will always show through and as long as a full range of stock is carried, which the good retailers do.”

Of the branded concepts – most under franchises – there are the big regional operators such as Retail Group and Al Shaya. Virgin is also a good example of an operator going into and dominating a sector in a professional manner. Special mention must be made of the MaxiMa Group as they have taken brands to the region as a Lebanese company based in Lebanon.

The future is bright. Rental levels should come down and tighter contracts between tenants and mall owners should lead to a more professional performance by malls – including uniform opening hours etc. The Souks will eventually be the jewel in Lebanon’s retail crown and the final jigsaw in the BCD retail evolution, attracting tourists who will add shopping to their Lebanon agenda. Prices will drop, standards will rise and services will improve. Demand for leisure goods and fashion items will mean more international brands and bigger stores. Increased car borne shopping should lead to better facilities in malls in order to make the shopping experience more of a family day out and daycare and crèche facilities will become a must. There should be more specialist shops forcing out those who are unable to respond to the changes in the market and there will be a gradual move away from developing residential buildings with shops on the ground floor as retail hubs come into sharper focus. Finally, customer care service and better stock control will come about as a part of the sector’s natural evolutionary process. No longer will the Lebanese shopper be grateful for what is on offer. The shopper will have more of a choice and better redress.

Why did the original LibanPost fold at the end of 2001?

The investors were upset at the slowness with which the agreement signed with the ministry of telecommunications was being implemented.

What was the state of the company when you took over?

There wasn’t a clear sense of direction. There wasn’t a clear vision.

What have you done since then?

We have improved quality, separated customer service and sales from distribution, renovated post offices and introduced a wide array of retail products – prepaid phone and internet cards, fuel coupons, newspapers magazines and maps, screensavers, stamps. We have also introduced a number of services, to make people’s lives easier. These include fax and photocopy facilities, as well as passport and residency renewal, military service postponement, and university degree certification services. We are trying to make LibanPost a serious intermediary between citizens and the various government departments, while making money along the way – because we are not a charity. We are a ‘front office’ for the government. Finally, we have invested in our 600 employees and in technology. We have invested about $1 million in computerizing the post offices. And recently, I received a telephone call from Fadi Abboud, head of the Lebanese Industrialists’ Association, asking me what we can do for Lebanon’s industrialists.

How serious are you about quality?

We are very serious about it. We have quality controllers who do nothing else all day long but ensure that the mail is delivered on time and that we don’t have issues with customers. We have a 24-hour National Control Center and a daily 9:30am meeting, during which we deal with any ‘incidents’ over the previous 24 hours. Any necessary amendments are made. We don’t hesitate to take drastic measures against our employees, if necessary.

What are your future plans?

In the near future we will be offering over-the-counter insurance products at our post offices – for cars, personal accident, things that are not complicated to sell and do not require medical exams. We just signed an agreement with the ministry of interior relating to the annual roadworthiness check, the renewal of drivers’ licenses, car registration etc. In addition, we plan to introduce two or three other services which should be announced soon. A few days ago, we established a new department within the company. It is responsible for printing, folding, and inserting into envelopes any publications. These are then immediately distributed. It is part of our plan to offer ‘complete solutions.’ We have reached an agreement with the ministry of telecommunications and the telephone company Ogero, under which we will print and distribute telephone bills. We hope this will prompt other utility companies and financial institutions, including insurance companies, to follow suit.

How much has LibanPost invested in these initiatives?

The printing and distribution initiative alone is worth $1 million. Along with the $1 million for the computerization initiative, that already makes $2 million in a year. That is significant. And it doesn’t include other things like digital map systems, which we are going to invest in. That is another couple of hundred thousand dollars.

What problems do you face?

Firstly, is very difficult to operate in a country that doesn’t have a proper addressing system. Secondly, many buildings do not have separate mailboxes for separate tenants. For LibanPost, this is catastrophic. The time wasted because of this is phenomenal. Mailmen have to knock on doors to deliver letters. Sometimes, it takes them 45 minutes to complete delivery to one building alone. Thirdly, not everyone knows of our services, and even if they do, they have to be induced to try them. We have an issue with the way we are communicating with the public and are in the process of addressing it.We can do better. We are finalizing a marketing and media program worth 2.5% of our projected turnover this year. I would like our media costs to one day reach 3%.

What is your projected turnover?

That’s not public information – several million dollars.

What were revenues for 2003?

They were 15% higher than for 2002, and revenues for 2002 were 12% higher than for 2001. And 2004 is planned to be 16% higher than 2003.

How about profits?

Our plan was to break even in 2004. We almost did that in 2003, so we’re slightly ahead of schedule. We now envisage a profit for 2004 – about 2.5% of revenues.

What influence does the government have?

All pricing is controlled by the government. We have some concerns about this. I understand that given the current economic environment the government wants to keep mail prices as low as possible. But from a private business perspective we don’t share those concerns. Also, LibanPost was supposed to be working in a monopolistic environment. Unfortunately, there are local Lebanese courier companies operating without licenses. They are competing with LibanPost in the profitable areas. It’s unfair.

Is there any theft of the contents of parcels opened by the authorities?

None at all.

Chateau Ksara

Chateau Ksara, Lebanon’s biggest and oldest winery (it has been making wine in the Bekaa since 1857) boasts a 35% market share, producing nearly two million bottles each year with revenues of around $6.5 million.

Managing director, Charles Ghostine has just returned from Pro Wein, the premiere German wine fair held every year in Düsseldorf. Ksara is an energetic exhibitor on the international stage, regularly attending the major wine fairs in London, Bordeaux, and Verona as well as Düsseldorf. “We need to be there. If we don’t show up it might send the wrong message to the market,” said Ghostine. “We don’t go expecting to take big orders. We go show our face,” he explained.

Much has been said lately about the potential of Lebanese wine: that it can compete with the very best of the New World producers and that it should position itself as a boutique product. While other producers may be tempted to hit the volume market, Ksara will not skimp on the final product. The winery harvests nearly 2000 tons of grapes from its 300 hectares, an average of nearly seven tons of grapes per hectare (Chateau Ksara, the winery’s flagship wine, is made from the oldest vines, which yield just five tons per hectare). “Some wine regions will obtain yields of as much as 14 tons per hectare,” said Ghostine. “We will not do this.” Although Lebanon’s wine sector has enjoyed significant growth in recent years, until the mid-90s it was a market dominated by a triumvirate of Chateaux Musar, Ksara and Kefraya. Since then, old names – Nakad and Tourelles – are mounting a comeback, while a handful of newcomers, notably Massaya, Wardy, and Clos St Thomas, have made their presence felt with exciting and affordable new wines in eye catching bottles. This increased supply and variety coincided nicely with a change in tastes. The Lebanese have been drinking more wine and local consumption is increasing by around 10% each year. For the record, the Lebanese consumed three million bottles in 2003. Of that number, roughly 1.2 million were imported – 89% from France. This mini-revolution forced Ksara to defend its position in the local market. “The challenge for us was to maintain our market share,” said Ghostine. “In the early 90s, we were producing 1.2 million bottles now we are hitting 1.8 million.”

Brand loyalty among local drinkers has Ksara in good stead and, despite increased competition, it has been able to meet the increased demand and can claim a 35% market share. With Kefraya not far behind in second place, many new labels have been forced to penetrate overseas markets. Much of this success lies in the performance of one wine: the Reserve de Couvent, Ksara’s mid-priced red, which is still a massive performer among local drinkers. “In the restaurants, the Reserve is king,” said Ghostine. “It offers the best quality to price ratio. It is the backbone of the company and we are pushing it very hard both here and abroad, where we send 60% of the 530,000 bottles of Reserve we make each year.”

Ksara exports 49% of its wine, mainly to France, which takes around 250,000 bottles. (Lebanon exported 1.8 million bottles in 2003, roughly 30% of total production). In 2003, Ksara appointed Hallgarten, the specialist fine wine company, to be its UK agent and Verbruggen to distribute in Belgium.

Finally, the company has invested $200,000 to enhance its hospitality profile at its Bekaa winery. Ghostine explained that, despite being one of the early advocates of a structured wine tourism program, the Ksara board made a decision not to go for a full-out F&B operation like those at Massaya and Kefraya. “We receive around 40,000 guests a year, who visit our famous caves and tour the winery,” he explained. “Now we will be offering cheeses and other snacks with our wines, but we are first and foremost wine makers.”
 

K-Sun

Fruit juice and fresh-cut produce manufacturer K-Sun is an example of a firm that has restructured production and creation of new market segments. But even with adherence to innovative practices in agro-industry, the company is expecting real profitability out of its $2 million factory only from exports. “The Lebanese market is not big enough for such investments,” said general manager Mazen Kassem. “We couldn’t recoup our investments from the Lebanese market, and never thought we would.” The export revenue should begin to flow this year, as K-Sun recently reached an agreement to deliver packaged fruit juice to France beginning this month. K-Sun first brought their fresh juice to market in late 1996, seeking to dominate the domestic market’s premium segment with 65 juices and a mix of varieties. Turnover of the product line in its first month was precisely $83. A first challenge was changing consumer habits, as people in Lebanon thought fresh juice was something they squeezed at home. “It took time to educate consumers,” said Kassem. The project took off as a sideline of a larger business growing fruits and vegetables, which the Kassem family had been running for some 50 years. When they decided to launch K-Sun, the initial business plan entailed a nationwide retail network of 18 shops in a vertically integrated operation from grower to home consumer. A central aim was to eliminate middlemen from their trade in fruits and vegetables. The value-added products, juice and fresh-cuts, emerged as an afterthought. In terms of product lines, market realities led K-Sun onto a different path of making most their revenue from juices –mostly orange juice and lemonade – and supplying first and foremost hospitality enterprises. At more than $1 million annually, fresh juice accounts for 50% to 55% of K-Sun turnover, according to Kassem, and the firm is the leading supplier to restaurants, hotels and delivery food specialists. A company-owned store in Hamra is the base for K-Sun’s distribution network, which relies on a modest fleet of one truck and several delivery vehicles.

The evolution of K-Sun was not simple, mostly because of shrinking purchase power and growing competition. Some competitors introduced pasteurized juices roughly at the same time as K-Sun, which also had to contend with the increasing domestic manufacture of reconstituted juices as well as juice drinks and watery nectars. One (now defunct) competing product used K-Sun look-alike bottles and although they were trademark protected, seeking legal recourse would have been lengthy and costly. Additional hurdles included inflexible customs practices and nitpicking officials, not to mention the absence of government support. Despite the obstacles, K-Sun in 2001 obtained a new factory and a high-tech machine that allows non-thermal processing of fruit juices at a capacity of 15,000 liters per day. This equipment treats foodstuffs with ultra-high pressure, which is proven to eliminate pathogens and foliage organisms without the side effects of pasteurization. As a result, K-Sun juices increased their guaranteed shelf life from five to 21 days. The company also expanded into the manufacture of fresh-cut foods, marketing popular salads and vegetables in ready-to-eat portions.

Although K-Sun built their factory to European standards and with exports in mind, Kassem said entering Europe “hasn’t been easy.” The firm encountered difficulties ranging from acquiring a distributor to finding transportation. No air carrier offers refrigerated flights from Beirut to Paris, for instance, so K-Sun took to routing their first deliveries to France through Luxembourg. With a foot in the French market, K-Sun hopes for profitable times. At 80,000 liters per month, the target for the first year agreement means a tripling of current production, Kassem said. The company aims to reach further European countries, such as the United Kingdom and Germany. K-Sun is also in the process of implementing distribution of its juices to the Gulf, and the company eyes growth of its fresh-cut lines in the domestic market (including manufacture for private labels) and in exports to regional markets, such as Cyprus and Jordan.

Dairiday

Mohamad Gandour, president of Gandour’s The Dairy, established his company in the mid-nineties when he decided to revive an ancestral farm and make it the cornerstone of a dairy enterprise. He began in 1996 by transforming the farm into a dairy operation and acquiring over 200 high-yield Holstein milk cows. In 1997, Gandour established a modern, two-block long, dairy factory in the industrial area of Kfarchima. Networks for milk collection from the corporate farm and independent subcontractors, and distribution of fresh milk and cheese products were set up. By May 1998, Gandour dairy products – fresh milk, cheeses, and fermented products – poured into the market under the brand name Dairiday.

The company allocated $600,000 over the first two years to develop the Dairiday brand identity. All in all, investments amounted to over $7 million, which the company could finance to less than one third with a government-subsidized loan. The remainder was sourced from private equity and high-interest commercial loans, Gandour told EXECUTIVE.

Since its debut, the Dairiday brand has been fighting battles brought on by recession and insufficient regulations. In the milk market, consumer habits, lack of knowledge and above all, price barriers have kept the share of fresh milk down. “I thought that every family of four would consume at least one liter of milk per day,” Gandour said, “and perhaps they do, but it is powdered milk.” The powdered competition retails at a third to a quarter of the price of fresh milk. With all their production capacities, The Dairy’s fresh milk has thus been forced to compete for a sliver of the market “that is 5% to 8% of total consumption in liquid milk in Lebanon.” In cheeses and fermented products, the company has to hold their ground against unlicensed operators who, said Gandour, have “no overheads, no distribution costs, and no marketing costs.” From 1998, he was involved in persistent appeals to the ministry of economy and trade and its consumer protection unit, to oblige Lebanese producers of LABAN, LABNEH, cheeses and related goods to comply with standards on packaging and food safety. “Nothing has been done,” said the entrepreneur. The problem of unsanitary conditions in predominantly unlicensed bulk production of fermented dairy goods was brought to public attention last year by agricultural minister Ali Hassan Khalil. Instead of helping, the official outrage only pushed Dairiday sales down by 13% to 14% over two months, which forced The Dairy to run TV advertisements, reassuring their customers that their product is trustworthy. In spite of the verbal commotion, the unlicensed operators are populating the market as they did before, maintained Gandour, and enforcement of regulations never happened. The problems, which Gandour shares with his licensed competitors, have one common denominator: consumer education. Campaigns promoting the health benefits of fresh milk and the importance of food quality and food safety are amiss in Lebanon. If licensed milk producers would collaborate in their efforts, they could stage such campaigns to increase awareness. Another option would be public sector participation in such campaigns. However, Gandour is more optimistic about the possibility of achieving the former. Without strong prospects for short-term improvements, The Dairy has turned to a marketing partnership with the region’s largest dairy manufacturer, Saudi-based Almarai. Under their agreement, the Lebanese company has added Almarai UHT milk to its portfolio and will also begin distributing Almarai cheeses. In the longer term, The Dairy aims to also partner in production terms with the Saudi company, for local distribution under their brand.

With an upswing in sales, the struggling dairy company could be amortized within two to three years. But for now, Gandour is looking for viable markets outside Lebanon, with Syria being the only lucrative option. “We hope that one day, Syrian consumers will have access to Lebanese milk.”

Shuman

Horrific stories that often come out about Lebanon’s slaughterhouses do not usually give the meat and poultry industry in Lebanon a good name. Producers often have to work doubly hard convincing consumers their animals are fed healthy food and not just dried up carcasses. So far, three poultry companies have managed to carve their brands in the consumer consciousness: Hawa chicken, Tanmia and Shuman. Forty-nine-year-old Shuman chicken is no newcomer to the poultry market, which has flourished the past decade after the government slapped a near-ban on fresh poultry imports in the mid-1990s to protect the industry. “Poultry prices have been dropping ever since the government imposed the ban,” said Nabil Shuman, who has taken over the business of selling chicken from his deceased father. “This is a perfect study of how a government can protect an industry, that later develops, experiences a price decline and attracts investments.”

Today, Lebanon slaughters about 60 million chickens per year, the bulk of these are raised on farms owned by the three biggest chicken companies. “In the 1950’s, we were producing 20 chickens a day, now we are producing 5,000,” said Shuman. “Back then, there was only one supermarket and only one restaurant was buying packaged fresh chicken.”

Shuman also credits his company with pioneering the packaging of chickens. “We were the first company to process ready-to-cook chicken breasts. In 1995, we were the first to manufacture chicken nuggets and breaded products in Lebanon.”

In order to remain an effective player in the market, Shuman explained their use of a vertical integration strategy. “We control everything from A to Z: we own our farms and slaughterhouses, breed our own chickens, have our own distribution networks and own processing plants for chicken nuggets. This allows us to control quality of the end-product.”

For this reason, Shuman chickens are pricier than their rivals and quite less spread. But the company has been able to compete in the market following the entry of other big companies by maintaining its own niche. “We only have 5% of the $130 million poultry market in Lebanon,” said Shuman. “But we have 75% of the branded chicken in self-service sections in supermarkets.”

Unlike Tanmia and Hawa chicken, Shuman’s operations are not widespread. Tanmia’s processed products and Hawa chicken’s outlets dot nearly every main area in Beirut. “We have managed to remain profitable because we chose to take a niche and develop it,” said Shuman. “In normal periods, people may tend to buy any fresh chicken, but when there is a crisis in the poultry industry they head for brands like ours.”

Despite declining chicken prices, Shuman expects his company to sell 1.6 million chickens in 2004, raking in some $5.5 million in revenue, with sales increasing by 20% a year. The company is maintaining a bullish approach to the poultry industry, mostly because of Lebanon’s flourishing supermarket outlets and the sophistication of the Lebanese consumer’s brand consciousness. “The purchasing power is not going to stay like this and it will improve in three to five years. With the development of the supermarkets, consumer habits will change.”

For now, Shuman chicken will try to reach its sales goals by importing technology, which is needed to cut production costs and help raise capacity. “Production costs in Lebanon are high and the only way to cut them down is to continually upgrade our technology,” said Shuman. “The $150 million in investments that were spent over the past decade in this sector have mainly gone into lowering costs.”
 

Lebanon’s agricultural sector has seen better days. Between 1979 and 1981, the labor force of the agricultural sector accounted for 14% of the total labor force, based on the figures of the United Nations’ Food and Agricultural Organization (FAO). This dwindled to 3% by 2001. In 1961, Lebanon’s Gross National Agricultural Production stood at LL300 million ($900 million, $1= three pounds), according to statistics compiled by the Lebanese Center for Agricultural Research and Studies. Four decades later, this figure has hardly budged, settling in 2002 at LL1.5 trillion ($1 billion).

“Up until, 1918, Lebanon used to provide the French city of Lyon, with half of its silk threads,” said Riad Saade, the center’s director. “In 1936, the French region of Roquefort used to import half of the raw cheese processed in the caves (bearing its name) from Lebanon.”

The decline in Lebanon’s agricultural output took place during the civil war, but it has been exacerbated in peacetime. The loss of agricultural land to the haphazard construction boom of the 1990’s, competition in the key export markets in the Arab World and the government’s focus on investments put the agricultural sector on the back burner. There have been half-hearted attempts, by successive governments to rehabilitate the sector but the only visible evidence of government backing are random subsides dished out at various times to farmers.

In 2001, the farmers raised an outcry and some replanted illicit crops to protest government inaction toward their plight, which left them trampling surplus produce on the streets. The government responded by allocating LL50 billion ($33 million) for an export subsidy program dubbed Export Plus, which gave farmers cash for exporting quality goods to markets around the world.

In 2004, the government and parliament is scrambling again to save the agricultural sector by extending new subsidies to apples and partially re-instating subsidies to sugar beet farmers to appease would-be voters in a decisive election year.

“Unfortunately, successive Lebanese governments have looked at the agriculture sector from a social rather than a socio-economic point of view,” said Raphael Debbane, head of the agricultural committee of the Union of Chambers of Commerce and Industry in Lebanon. “Tobacco subsidies are pure social help whereby the government buys the crops and throws it away because it cannot sell them on the world market on account of their poor quality. Now they have renewed sugar subsidies in a non-professional way and the main reason for that is socio-political.”

Against this government backing to the agriculture sector, the private sector is finding it harder to compete in the local and international markets, where subsidies are given to farmers on a different basis. “If the subsidies are stopped in developing countries, farmers will suffer but they will survive,” said Imad Bsat, owner of B-fresh agricultural company. “If Export Plus ends, nobody will enforce standards and the sector will collapse.”

IDAL helps farmers sell their quality goods, but it does not tell them what type of crops to plant or what kind of crops are wanted by consumers in world markets. “Technically, Export Plus is a success but economically it is a big failure,” said Saade. “The problem is not money. Export Plus is only one ring in a chain. Other rings are needed.”

The other rings of the chain start with orienting farmers on what to plant according to market demands and what types of products to export. The next chain consists of extending technology to farmers to improve their crops and introduce new varieties through government backed research and financial credit. The final chain is marketing, which is what IDAL handles now, said Saade.

“Under Export Plus, farmers exported some 350,000 tons in 2003, which is equivalent to the amount of citrus Lebanon used to export in the 1970’s and 1980’s,” said Bsat. His family used to own Safa Citrus, one of the country’s largest fruit exporters that shut down in the 1990’s. “The government is spending millions of dollars on subsidizing crops when it should be using this money to fund research and help farmers develop new varieties,” said Bsat.

Agricultural engineers say Lebanon’s farmers are unable to adapt to the new agricultural modes, which rely extensively on technology and marketing. “It is a vicious cycle,” said Debbane. “Lebanese farmers have to get know-how and expertise from outside, which means importing technology at a cost. But if you don’t have money, consequently you have no money to invest in new varieties.”
 

The odds are stacked against the farmers’ development. Their production costs are significantly higher than their neighboring countries. They once had a monopoly over the Arab markets, but their rising costs and competition from cheaper produce have forced them to lose their edge in their prime markets. Neighboring Arab countries are swamping the Lebanese market with cheap produce while closing their doors to Lebanese produce, which have been hurt by badly negotiated agricultural agreements. Farmers often cite the agreements with Syria, Jordan and Egypt as disastrous and some are even calling for the suspension of Lebanon’s membership to the Greater Arab Free Trade Agreement, which is due to enter into force in 2005.

“All hell is going to break loose once GAFTA is implemented,” said Bsat, who develops his own varieties of fruits and sells them to supermarkets. “We are already facing stiff competition from their produce now and it will only become harder to sell our produce once the markets open further under GAFTA and the World Trade Organization.”

Waddah Fakhri, head of the Southern Farmers’ Association, wants the government to suspend Lebanon’s membership in GAFTA until farmers are ready to compete with goods from the Arab World. “The government has negotiated trade agreements without consulting farmers, who bear higher production costs than neighboring countries and lack the standards needed to export,” said Waddah.

One sector that is set to suffer from the government’s negotiating blunders is the flower industry. Under Lebanon’s Association Agreement with the European Union, tariffs on flowers were fixed at 30% and are set to go down further once Lebanon’s five-year grace period for lowering tariffs on European imports is over. The whole problem started when the government in 2000 slashed tariffs on flowers from 105% to 30% while it was negotiating with the EU. Following lobbying by Lebanon’s flower growers, the government agreed to raise it again to 70%, but it was too late; the Europeans had agreed on 30% and were sticking to it.

“Our sector suffers from government apathy and inconsistent policies toward the agriculture sector,” said Rania Younes, the owner of several nurseries in Lebanon. “Lebanon has human resources and the know-how to compete. We do not need mass agricultural areas to export. We can plant specialized products from small pieces of land.”

Besides the European Agreement, Lebanon’s flower sector is already suffering from a special agreement with Saudi Arabia, which is exporting flowers to Lebanon at minimal tariffs, she added. With only a few good trade agreements, Lebanese farmers require marketing cash to venture into new markets. Outside Export Plus, there is hardly any cash for marketing. “With a 0.4% budget out of the total government budget there is not much we can do,” said Louis Lahoud, director general at the agricultural ministry. “But we are working on a development plan for the agricultural sector to which the government has allocated LL5 billion ($3.3 million).”

Agriculturists agree that the government should start to control the sector by regulating standards and resolving the pricing anarchy in the domestic market that drove agriculturalists to seek price stability of supermarkets, despite stiff competition. “If we are able to regulate standards and prices in the domestic market, it would be much easier to do the same for our exports,” said Bsat.

Agriculturalists also want the ministry of agriculture to direct farmers to plant crops that could be used by the industrial sector. “A potentially successful road for developing the Lebanese agriculture sector is agro-industry,” said Debbane. “The government can develop Export Plus into a scheme inclusive of the agro-industry and a scheme for renewing orchards to introduce new varieties.”

According to Debbane, donors, who have pooled millions of dollars into agricultural projects that were doomed for failure due to political intervention or government inaction, need to divert the funds to the private sector. “Donors helping Lebanon develop its agriculture sector should pass this money to the private sector because the institutions of the Lebanese government have proved to be inefficient.”

THE ISRAELI EXAMPLE

Farmers and agricultural engineers point to the example of Israel, a country whose agricultural space and climate is similar but less diverse than Lebanon, but whose export potential has been propelled by staunch government backing. Similar to Lebanon, Israel’s agricultural land was being eaten away by a construction boom, declining number of farmers and a strain on its limited water resources, which had to be used to irrigate extensive desert land that Lebanon does not have. That did not stop the Israeli government from forging ahead in the 1990’s with an aggressive marketing campaign and research.

“When Israeli farmers wanted to introduce a new variety of grapes into England, the government spent $1 to $2 million on the marketing campaign,” said agricultural engineer Imad Bsat. Israel in the 1960’s was primarily known for the famous Jaffa oranges, but in the 1990’s its agricultural landscape changed. Instead of planting just citrus products, the Israeli government heavily invested into research, prodding its traditional farmers in the kibbutzes to adopt new agricultural products.

Currently, Israel’s exports around $200 million a year in flowers – a third of its fresh agricultural exports – an amount equivalent to Lebanon’s annual agro-industrial exports. “Each day an El Al plane leaves Tel Aviv and lands in Holland, the world’s flower market, carrying fresh flowers,” said economist Riad Saade. “Flowers are an example of a high-value added industry that can be easily developed in Lebanon.”

Lebanon’s flower exports in 2003 were around $300,000, based on customs figures. According to the Israeli government, it provides nearly 40% of Europe’s off-season fruit and vegetable market, and ranks second only to Holland in European flower sales. Israel’s fresh and processed agricultural exports stood at $1 billion in 2002. Nearly 60% of its exports were fresh produce, mainly headed to Europe, based on the figures of the Israeli ministry of agriculture. Israel does not only export agricultural produce, its also exports around $1 billion in agricultural technology each year.

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

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

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

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

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

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

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

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

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

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

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