Executive Magazine

Lebanese banking in times of scarcity and reforms

by Thomas Schellen June 4, 2019

written by Thomas Schellen

They have never seen the likes of it. Elias Alouf experienced a Lebanese childhood and adolescence. He is today general manager of one of Lebanon’s most history-rich banks, BSL, which has 155 years of existence under its belt, but in his living memory Alouf never witnessed such an intense cabinet debate as he did in May 2019. “For the first time in my life, I see in the 2019 budget discussion that the Council of Ministers is meeting regularly to discuss a single issue. What struck me most in this regard was that on one day they worked from 9 p.m. to 3 a.m. This has never happened before, and this means that they are serious in tackling the issues of the budget,” Alouf tells Executive.

Like any banker, Alouf is fully cognizant that the proposed budget’s revenue measures, of which the raised tax on interest income is the most significant one, will hit the banks as well as their depositors. “We as [the] banking sector will obviously have to contribute our part under the new budget, and we will be impacted by the planned measures. When the state increases the taxation of interest from 7 to 10 percent, this burden does not only fall on depositors who will have their revenues taxed [more than before]. This measure will also impact the revenues of banks, because the money that I am taking in from depositors is placed with the central bank and other banks and financial institutions by way of different interest-bearing instruments/deposits.” I will face a higher withholding tax on these interest earnings. Nevertheless, as banks we will have to adapt. Overall, I am very positive. What I would like to see in the budget, however, is a view for the future, a view toward profound economic reform,” he explains.

A qualified positive view on the state’s budget needs, and eventual future reforms and their economic impacts, is also the perspective of Shirine Beyrouti, the head of project finance and syndications unit at Byblos Bank. “Everybody will have to contribute their fair share, it has to be the public and private together in an equitable way, with reforms that make sense. And the banks are strong enough [for this],” she says.

Nonetheless, the upside of the cabinet’s seriousness in drafting this budget is accompanied for many by a downside in the proposed budget’s lack of convincing reforms, as economists pointed out repeatedly during the weeks when the budget law was readied for submission to Parliament. And from the banking perspective, despite the sector’s awareness of its many strengths, the debates over the budget with all their collateral protests and knee jerk actions have witnessed another, perhaps most serious downside in the fact that these debates saw fearful rumors and deliberately damaging propaganda about economic meltdowns in Lebanon run—over months—from peak to peak.

Business unusual?

“The current economic situation is not difficult. It is artificial. We are living in an artificial financial and economic environment right now, but I think this will be short-lived” answers Salim Sfeir, the chairman of Bank of Beirut when asked by Executive about his view on the prevailing economic situation in mid-2019. For Freddie Baz, chief strategist and vice-chairman of Bank Audi Group, the problem of the fake debate over the state of the Lebanese economy is as blatant as the debate is defying of logic and proportion. “If we compare the risk profile of Lebanon three years ago with the risk profile of today, how would it be rational for people to have been comfortable enough with the risk profile back then so that they had no ground for panic? We have a problem in this regard. Yes, there is a deterioration in the risk profile [if one compares 2019 to 2015], but this deterioration is not to the extent that it should translate into a justification of panic,” Baz tells Executive.

He emphasizes that his message is not intended to signal that banks are happy with the current status of the economy, with the delays in reforms, or with the overall efficiency of the government and administration, “There are so many things in the public governance of Lebanon that need to be addressed and adjusted. Many reforms need to be implemented, and real improvement in the political governance is required. This is also necessary for the sake of the private sector so that it can recapture its competitive edge,” Baz says, continuing: “But I want to tell you that this risk profile of Lebanon and all the debate about 1 percentage point more in [the ratios of] budget deficit to GDP and debt to GDP is teeming with pseudo-experts and politicians who have their own agendas. They are making people go mad by telling them that the risk profile is an indication of definite collapse—[something] leading to a collapse, to hyper-inflation, a drift in the exchange rate, insolvency, and so forth.”

Seen from this perspective, the last 18 months in Lebanon were marked by two narratives that propagated themes of “business unusual” and had their problematic impacts on banking. One narrative was the search of the country for a sane government. It had more cliffhangers than any Netflix series and bubbled over with irrational plot twists. The other narrative relates to the spread of negative propaganda about the economy by interested or ignorant parties.

It would be extraordinarily naïve to remain unconcerned under those double barrages of unwelcome surprises and fake news, and banking sector numbers, albeit much better than some might have expected them to be, contain enough ambiguity to fuel the minds of the eternal worriers among local and international economists. One sign that could, for example, worry some observers is the evolution of the Beirut Reference Rate (BRR), a monthly interest indicator calculated by the Association of Banks in Lebanon. Issued first in 2009, annual snapshots of the rate in May of each year show the BRR on US dollars jumping from 4.79 percent in May 2011 to 5.77 in May 2012, then advancing incrementally on an ascending slope to 5.87 in May 2013; 5.94 in 2014; 6.14 in 2015; 6.24 in 2016; 6.72 in May 2017, and 7.30 in May 2018. But from this elevated value, the BRR then jumped by more than two full percentage points in only one year, to 9.58 percent in May 2019. As the BRR is connected to lending interest calculations of Lebanese banks, the leap in the rate is not good news for Lebanese companies seeking to borrow from their banks.

However, there are doors of good promise to the future. For Audi’s Baz, one light at the end of the tunnel of fake and frivolous debates that have sought to down-talk the Lebanese economy is the fact that the propaganda assault against Lebanon’s economy has been going for 18 months without producing extreme results. “The outflows of deposits in the last 18 months was $4 billion or $4.5 billion out of approximately $115 billion of domestic deposits in foreign currencies, although the outflows were concentrated in two periods in the last two months of 2018 and in early 2019. This means that dollarization increased by 1 or 2 percent [-age points] and outflows represent 2.5 percent of domestic deposits. [By now], panic signals should have been translated into either more panic of people still holding local currency savings or more panic of those people who are keeping their savings in Lebanon. This is not the case. More importantly, if we consider Lebanon as a single bank for the argument, this bank, despite all panic signaling that has been going on, is still proving its capacity to maintain $115 billion of deposits with a rate of 5.5 percent [interest on deposits], which is 2.7 percent more than what most global banks are paying on three-month deposits,” Baz points out.

When seen in context with the positive developments that have emerged in 2019, Baz, in an interview with Executive, states repeatedly that the deterioration in the risk profile of Lebanon is indeed real, but insists that this reality is more than compensated by various improvements, such as concerning political awareness of the need to implement reforms. “In my opinion, the percentage-wise worsening in the risk profile by several points is more than compensated by the improvement in the political governance and awareness,” he says.

Strength in ethics

A further hard to assess but not to be underestimated factor contributing to the strength of Lebanese banks seems to be the sector’s diversity. This diversity and wide range of banking positions and strategies is something like a collateral benefit of the banking sector’s unusually large size in comparison with the size of the Lebanese economy. For example, while one might assume that the tighter lending approach of Lebanese banks that had to be observed in 2018 and 2019 would be engulfing all banks in the sector equally, the truth is that some banks have strategies that tend in entirely different directions. This is noteworthy, because the different banks may pursue their credit tightening and consolidations without Lebanon experiencing an aggregation of identical banking decisions that come all at the same time, and then might be counterproductive for economic development.

Another energy with strong potential to work to the advantage of banks in the to-be-expected austere times resides in their ethical orientation. The conscious tiers of the Lebanese banking sector have, in recent years, invested great efforts in the improvement of their ESG policies. Observers of Lebanese banks thus are increasingly treated to perspectives such as this one by Nada Rizkallah, deputy general manager and board member at Credit Libanais Group. “Credit Libanais continuously strives to maintain best ethical practices, which was evident in the bank becoming a signatory to the Investors for Governance and Integrity declaration. Moreover, the bank has developed an Environmental and Social Management System,” Rizkallah tells Executive. (Editorial disclosure note: Executive editor-in-chief Yasser Akkaoui is founder of the IGI initiative.) According to her, the ESM system is now applied at Credit Libanais in all of the bank’s credit decisions, meaning that, for example, borrowing enterprises have to meet well-defined environmental and social standards.

As Bank of Beirut’s Sfeir confirms about the role of banking in periods of scarcity, “In this time, the role of the banking system is to fuel the economy of the country and give enough strength to the country to not face a long period of austerity.”

For BSL’s Alouf, the primacy of ethics permeates all of his bank’s practices. “As I have been saying since joining this bank, banks have a mission in any country, and this mission of helping the economy grow is in their DNA,” he tells Executive. For him, this means, for example, to prioritize lending that helps people fulfill legitimate needs for education, homes, and sane vehicles, but not lend money for luxury acquisitions or trips just for the sake of having the bank do more business.

There appear to be as many perspectives on ethics and moral orientation of banking in Lebanon as there are sincere banks with good governance, and a sense of their business mission that is in agreement with their shareholding structure and stakeholder interests. As the banking numbers on the whole do not appear threatening for Lebanon and have not appeared so for years, and as profit margins and profits are expected to reflect any real direction toward spending control and revenue improvement that the Lebanese state has written this year on its banner—or is assumed to commit to with notable substance this month through adoption of the 2019 budget law—banks have much to do and innovate to help Lebanon find its new direction.

Today more than ever, no one can deny that banking in Lebanon is inseparable from the fortune and economic course of the country and its government. For Byblos Bank’s Beyrouti, the issue is clear. “Until the outcomes of all discussions are visible, the only thing that banks can do is be conservative, maintain their liquidity in order to be ready to support the economy at [the right moment]. At this point, I think, everybody will have to put their skin in the game,” she says. And similar awareness is what, despite all their competition with each other, unites plenty of her banking peers (ones that Executive interviewed this summer and those that were not available for different reasons).

June 4, 2019 0 comments

Banks have done a lot for Lebanon, they deserve our trust

by Executive Editors June 4, 2019

written by Executive Editors

Banks have offered much to Lebanon. They have financed the country’s public and private sector needs for the entirety of the post-conflict years. They stood throughout the 1990s with a people scarred by violence and economic trauma. Through the 2000s, they stayed at the side of a state that was under constant financial pressures. In the 2010s, banks never ceased to respond positively and with vigor to the latest unconventional ideas that were sent their way by the central bank. As if this was not enough pressure, local banks all the while were subjected to the need to comply with ever-tougher international regulations on things like money laundering.

While this happened in this small country of ours, the world stumbled through overheating financial markets and over-risky banking behaviors in almost all economies into the Great Recession and its aftermath of imperfect recovery. Thus, it is well justified to regard it as miraculous that Lebanon, albeit always balancing on the financial edge, never went over this edge into the kind of receivership that exposed some other countries and bigger economies in the past three decades to the dictates of foreign rescues by the likes of the European Union and World Bank.

This does not mean that Lebanese banks are perfect, either as economic agents or as corporate citizens. They are profit-driven, just as banks have been at all times since the first money lenders set up their booths outside religious districts and centers of worship. And if the founders and revered parental figures of historic religions were cast into the roles of banking CEOs today, their first experiences would probably consist of being confronted with litigation by shareholders who challenge their lending policies for not generating enough returns.

So when asking what banks can do for Lebanon in the context of the reformist—but still fundamentally fuzzy and vulnerable-looking—budget of 2019 and, hopefully more robust, budgets of coming fiscal years, the first order of import is to understand that banks will remain profit-relying financial institutions. Lest they die, they will have to chase profits.

They also are mirrors of this society. In a country where six degrees of separation is about three degrees too many for any person, and where anyone with any decision-making influence is some sort of cousin of all other people in similar positions, it is not productive to decry the intermingling of those in political and banking power. Banks are furthermore tied to often divergent communal interests in fragmented Lebanon, whether they admit to it or pretend otherwise. How else could they exist in a country that in every practical regard is defined by sub-national and self-interested communities?

This essential business nature and Lebanese-ness of local banks are crucial factors to recognize and be aware of, so as to avoid plastering banks with unachievable expectations that no Lebanese citizen or community would accept to place on themselves. Operationally, Lebanese banks are furthermore imperfect human institutions, not superior entities. In this sense, the first thing that the Lebanese society might want to do, is humanize its banks, in a manner of speaking, and see them for the reality of their good and bad, strong and weak.

Making the behaviors in banking more holistically human and nudging lenders away from extreme homo economicus-type self-interest, will in many ways be coherent with trends in global thinking that, in one example, recently drove leading ESG (Environmental, Social, and Governance) experts at Paris-based consultancy Vigeo-Eiris to observe the essentiality of diversified banks’ strong ethical cultures in making them less vulnerable to misconduct. As impregnation with best ESG genes, resilient values and future-proof conduct is a long-term process that has to go viral in a bank’s entire organization, it is highly advisable that more banks in Lebanon embark on this path—and it is encouraging to see that several have taken the first or second step on this demanding journey.

As this route is time-consuming, arduous, and historically under-traveled, Lebanese banks in the medium or medium-long term should not be bombarded with demands and expectations for turning themselves into pure benefactors to society—as if bank A, B, or B+ were competing for the title “savior of the month.” They will continue to be banks with behaviors that are productive and profitable for their own interests but are not going to save Lebanon’s economy. Banks will also continue to operate, as they must, under restraints of financial interest logics and international regulatory dictates.

However, there is also no reason to expect that banks will do any less for this country and its people than they did in the decades that are behind us. In these past years, even as they made important profits via the easiest routes open to them, banks paid their taxes and expanded their social actions, arguably more so than any other Lebanese economic sector or societal grouping. Let the banks be taxed, certainly, but let them be taxed fairly and in ways that will not drive them into ruin or exodus. Executive also calls for banks to improve their ESG and avoid the herd behaviors that can aggregate pressure on the people that depend on their good will, whether as household and retail borrowers or as debtors to the commercial and SME units of Lebanese banks.

Times of scarcity and intense economic obligations are not times to disrupt all that can be disrupted. They are times to trust and earn trust. Executive is calling on our banks to make every effort they can to be absolutely trustworthy. At the same time, we call on all our readers and all the people of this country to use the greatest possible care when examining the conduct of their bankers, and empower them with the trust they deserve, and that is consistent with their record of the post-conflict decades.

June 4, 2019 0 comments

Editorial Opinion

Best case scenario?

by Yasser Akkaoui June 4, 2019

written by Yasser Akkaoui

After missing self-imposed deadline after deadline, our cabinet has finally agreed on the terms of the reformist budget, passed to Parliament on May 30 for more bickering. Never mind that it is now June, and we still have no budget set for 2019. Nor that projected rate of reduction of the budget deficit seems more like a slight of hand, at best.

Our political class were careful in who they targeted to pay the price for these new austerity measures. Not their followers, whose support is maintained by way of unwarranted transactions and the granting of jobs without legal definitions. No, those bearing the brunt are those without a vote—such as our proud military pensioners. This reformist budget will also require more from us, the citizens, via direct and indirect taxation.

If Lebanon was a corporation, its management would need to be fired and fired fast. A company’s budget ought to be accurate and be pegged to the strategic objectives of the firm. As we see it now, Lebanon has no vision, no common mission, no productive and strategic objectives that will allow the country to compete in the region and an increasingly globalized world.

This budget, which fails to strategize the country’s resources, is not sufficient to appraise the performance of our government. How do we tell if a government is doing its job well? We judge this by checking if it has managed to lower unemployment, if its policies have resulted in a vibrant and purposeful private sector, if it has managed to improve the balance of payments and trade—all this while minimizing any damage to the environment and society. Management cannot call in the CFO and just order him to cook the books with a sole aim of getting additional debt. The CEO has to create the conditions upon which the CFO can balance the books. In an economy, this means it is the government’s responsibility to present to its citizens a strategy that aims to increase productivity, boost agriculture and industry, and improve services and trade in a cost-efficient way.

When success is measured by counting numbers, you only end up with a self-devouring behavior. That is what explains the attack on our banking industry. Whether you like it or not, the banking sector is the only industry in Lebanon that is fully compliant with international standards—it has to be or it risks being shut off from the world. It contributes the most in taxes, and is the most transparent about its economic activity. And what do we do? Shove the banks and citizen’s deposits into the middle of the conflict and inflame anxiety, rather than shielding them from the immature manipulation of politicians.

There is a vindictive propaganda targeting banks in Lebanon. One that claims that banks feed off the government—the opposite is true. In the last 20 years the banks have massively reduced their exposure to the government; they have sought to pull away from the state’s mess yet get sucked back in time and time again. What lies ahead is, in the best case scenario, reforms and temporary scarcity. Such will be the circumstances under which blaming the banks will not achieve anything bar allowing some people to vent their frustrations and others to sow discontent and spread dangerous lies. Whom will this serve? No one but those who benefit from a weaker Lebanon.

June 4, 2019 0 comments

Freshwater tourism Special Report

Despite new efforts to tackle pollution in the Litani River, challenges remain

by Lauren Holtmeier May 21, 2019

written by Lauren Holtmeier

The Litani River and its health—or lack thereof—directly impacts those Lebanese residents living near the river or buying produce irrigated by the river. The largest river in Lebanon, the Litani River Basin (LRB) is equivalent to 20 percent of Lebanon’s land area and winds through the Bekaa Valley and south Lebanon. In April 2018, the Lebanese Agricultural Research Institute (LARI) officially asked all farmers—particularly those in central Bekaa from Riyaq down to Qaraoun—to not use the water for irrigation because pollution levels were so high. Michel Afrem, head of LARI, told Executive it will be years until water from the Litani is safe for irrigation again. Since August 2018, there has been an uptick in citations against alleged polluters, says Nassim Abou Hamad, head of the Litani River Authority (LRA)’s water governance department, but a clean river is still almost a decade away when considering the current cleanup roadmap and the amount of time after implementation that is needed for the river to rid itself of pollutants.

A tale with many actors

Ending pollution in the Litani is not a simple task. Legislation to tackle the governance and protection of the river does exist, including Law 63 (2016) that: established the governance structure for the Litani River Basin, giving the LRA authority; set out a roadmap for improving the wastewater network and building treatment plants, due to be completed by 2023; and earmarked $730 million to clean up the river, though so far only $55 million has been spent, primarily on rehabilitation of wastewater networks. Roland Riachi, visiting assistant professor in political studies and public administration at the American University of Beirut (AUB) said Law 63 gave the LRA more capacity to act than the previous Law 221 (2000) or the more recent Law 77 (2018), which is the water code for the whole sector. According to Law 63’s text, which defines 17 government entities’ roles regarding the river, the LRA’s mandate includes the ability to “prosecute all offenders with regards to the LRB through unlicensed construction, uncontrolled waste dumping, dumping soil, or unlicensed well excavation” regarding industrial pollution, which the law defines as waste coming from industrial enterprises, including farms, gas stations, health sector institutions, and tourist institutions, as well as sand drills, quarries, and crushers. Law 77, on the other hand, was passed hastily the week before CEDRE in April 2018, says Riachi; it does not have implementation decrees attached to it yet, and is currently under review at Parliament. In an attempt to satisfy international donors, the law was pushed through to demonstrate progress being made in the sector. Neither Abou Hamad nor Riachi knew the specifics of the potential revisions of the law.

Coupled with these legislative powers, Sami Alawieh’s appointment as head of the Litani River Authority (LRA) in March 2018, has furthered progress on the river, as under his tenure there has been an increase in the number of citations issued and in subsequent legal action surrounding accused polluters. “Since Sami Alawieh has come into power, he’s really taken action,” says Yasmina el-Amine, the author of an AUB policy brief on pollution in the Litani published in March. According to the brief, the LRA has issued over 200 citations to factories and municipalities in the basin with the help of the ministries of environment, energy and water, and industry, as well as the Internal Security Forces. Explaining the process to determine if a company is dumping waste in the river, Abou Hamad says that there is a team of six or seven technicians working on the ground who first try to visually determine if there is pollution. If it cannot be confirmed by sight, the water is collected and sent for testing; if it tests come back positive for pollution levels higher than those allowed under Ministry of Environment (MoE)’s guidelines, a citation is issued and a lawsuit filed. The case then goes to a judge at a civil court; to date no judge has ruled against the LRA in a case, Abou Hamad says. The presiding judge may also request a third party take another sample before the final verdict is issued. Both Abou Hamad and Afrem told Executive of an upcoming memorandum of understanding between the LRA and LARI that will increase cooperation between the two entities, with LARI lending its ability to test water for pollutants.

Facing the consequences

Factories found guilty of polluting are given a grace period of three to four months to build the necessary treatment facility before being shut down, says Abou Hamad. In some extreme cases they will be shut down immediately, like one slaughterhouse that was found to be dumping between half a tonne to 1 tonne a day into the river. Shutting down factories is the mandate of the Ministry of Industry according to Abou Hamad. “The attorney general took the decision to shut down the slaughterhouse until a solution was implemented because of the massive amount of waste,” he says.

The ultimate authority regarding the river is the Ministry of Energy and Water (MoEW), but the MoE also has some authority, setting the environmental standard that the LRA use, Abou Hamad adds. According to Amine, Law 221 (2000) gave the four regional water establishments responsibility for wastewater management, but they lack administrative or financial capacity to play this role, leaving the responsibility to other actors. “For wastewater they either contract a third-party, or [in] some cases the municipalities take on the work, or (in most cases) the job is not done,” Amine wrote in a follow-up email to Executive.

Muddying the waters

There is no single source of pollution flowing into the Litani, but factories, municipalities, and agriculture have all contributed to the problem. Recently, refugees have received blame for dumping their waste directly into the river, and the LRA has sent letters to the UNHCR asking that the settlements be moved from the banks of the Litani, citing the LRA’s authority on the matter granted by Law 63. “Syrian refugees located on the river are dumping their sewage directly into the river and in many cases solid waste as well,” says Abou Hamad. However, while the refugees’ presence does contribute to the overall problem, they are not responsible for the largest amount of—nor the most dangerous—waste, both Afrem and Abou Hamad told Executive separately. Those titles go to municipal and industrial waste, respectively.

LARI’s Afrem explains that while municipal waste contains largely bacterial pollution, industrial waste contains heavy metals that have more long-term health risks. Whereas bacterial infection can be treated with antibiotics relatively easily, heavy metals may accumulate in the body over years, increasing the risk of cancer. Municipal sewage is the biggest polluter, Abou Hamad says. “At least 35-40 million cubic meters (MCM) a year enter from household and municipal waste. The other amount comes from industries, 4 to 5 MCM, but it’s concentrated with heavy metals and it’s very dangerous effluent.”

Another pollutant is agricultural waste, generally caused by an overuse of pesticides and lack of proper runoff and treatment networks. From sources Executive talked to, the problem is four-fold: household waste, waste from industry and agriculture, and, on a much smaller scale, waste from refugees camped alongside the river bank. Making matters more complex is that each type of waste requires its own treatment processes.

While the LRA and other actors, like the Council for Development and Reconstruction (CDR) work to implement solutions, the level of pollution in the Litani is intensifying. A new report by LARI due to be sent to all ministries in May found that pollution levels were worse in 2018 than in 2017. “We are now reaching 50 million bacteria per millimeter in some places,” Afrem says. The permitted level as established by the Food and Agricultural Organization and the Lebanese Standards Institution is 200 bacteria per millimeter— 250,000 times lower.

Efforts to rehabilitate wastewater networks and build treatment plants have seen some progress made with $55 million (7.5 percent of the allocated funds) dispersed after Law 63 was passed. When Executive queried why such a small amount of funding had been secured so far, Abou Hamad said that talks were held last month with the CDR, LRA, MoEW, and World Bank in which releasing another $300 million in funding was discussed, but he did not know if or when those funds may be received. These funds would go toward rehabilitating and building wastewater networks and establishing treatment facilities. Thirty years ago, wastewater networks were built in the Bekaa, but no treatment plants were built, effectively expediting the pollution flow to the river, says Abou Hamad. “It would’ve been better to leave every house with its own septic pit instead of connecting everyone to one line,” he says. In other places, he says the wastewater network itself is deficient and leaks are prevalent.

Those Executive spoke with say that treatment plants, new and rehabilitated wastewater networks, and stronger governance are all needed to effectively clean up the Litani. So how long will this take? According to Abou Hamad, 2023 is the goal, but the question remains if this is achievable. “As the LRA, we issued a letter to CDR in November or December saying you are not upholding Law 63,” says Abou Hamad, referring to the roadmap set out by Law 63 that stipulates all projects related to networks and treatment stations must be finished within seven years of the law’s issuance. CDR, he says, is not on schedule. “They said everything was on track and everything will be finished by 2023.” Executive reached out to CDR for comment, but did not hear back before publication.

However, assuming every plant, municipality, farmer, and refugee along the river stops dumping waste and proper wastewater networks and treatment plants are installed, a pollution-free river is still four to five years beyond this, Afrem says. This would mean if everything is finished by 2023, Lebanese can expect to see a clean river by 2028, but in a country where little runs on schedule, a country-wide river clean up seems unlikely to arrive on time.

May 21, 2019 1 comment

Last word Opinion

‘Normalization’ with Israel is a flawed policy

by Riad Al-Khouri May 10, 2019

written by Riad Al-Khouri

Realities are becoming increasingly unreal in an ever more volatile region. Expectation of the Netanyahu government formally annexing Palestinian land—with the excuse that they are only confirming the reality of Israeli rule—means 2019 is going to be a dangerous one in the Middle East. At the heart of the current mess is a “normalization” policy with Israel that will not work, if only because any Arab leader who tries to push this through knows the backlash will be swift. Yet normalization is nevertheless at the core of the so-called “deal of the century” yet to be revealed publicly by the US, but already declared dead by Palestinian Authority President Mahmoud Abbas.

Lately, US policy on Israel has been shaped without Palestinian input. A book coming out this summer by Khaled Elgindy, an ex-adviser to the Palestinian leadership now at the Brookings Institute, refers to American policy-makers as blindly ignoring Palestinian politics. Entitled “The Blind Spot,” the book explains why the US has failed to broker peace, the role Trump has played in this, and how the issue of Israel and the Palestinians will continue to reverberate in the runup to the November 2020 election—suggesting that these interesting times will be with us for at least another year and a half.

The problem is that normalization has become appealing to some Israeli and Arab leaders as the way to resolve the Israel-Palestine conflict without formal diplomatic relations. In this new normal, Israelis will sell their products in Riyadh while Saudis make pilgrimages to Jerusalem—without Israel’s dismantling West Bank settlements as part of a durable peace. Netanyahu has seized on the principle of normalizing relations with Gulf states without Israeli withdrawal. Yet this policy, which also appears to be backed by some in the Gulf region, will ultimately backfire and rekindle tension. Regardless of the realpolitik of their leaders, the populace of the Arab world is overwhelmingly anti-Israeli, and post-2011 no regime should feel secure in imposing their will on their citizens.

America has been touting their deal as a commonsense policy acknowledging facts on the ground. In an April 9 appearance before a US Senate committee, Secretary of State Mike Pompeo laid bare the administration’s thoughts: “We can’t make sound policy based on wishful thinking … Basing policy on reality, we recognized Jerusalem as Israel’s capital. We recognized Israel’s sovereignty over the Golan Heights.”

Behind all this lurks a new US military policy in the Middle East, which Pompeo outlined at the hearing. Referencing February’s Warsaw conference, he stated that it brought over 60 countries together “to discuss common threats and shared opportunities in the Middle East—and that included both Arab and Israeli leaders talking to each other”—i.e. normalizing. Underlining this is the US desire to get its “Middle East Strategic Alliance” off the ground, even as it builds “an Indo-Pacific strategy to do a true pivot to Asia.”

The US has legitimate interests in the Pacific—or the “Indo-Pacific,” a US term that is annoying the Chinese, who in turn speak of an “Asian NATO.” To focus there, America sensibly wants to exit the Middle East and—less sensibly—turn over its policing to Saudi Arabia and Israel.

Yet, American imperialism’s regional departure does not look like it will happen without a lot of noise involving Syria and potentially Lebanon, which receives training and support from the US for the Lebanese army. As for Syria, in December 2015, President Obama admitted the existence of a “specialized expeditionary targeting force” there to train, advise, and supply partner troops. Two years later, Turkish media revealed there were nine US military outposts in northern Syria alone. There and elsewhere on Syrian territory, the presence of American ground troops is combined with an extensive US-led air campaign. Though US ground forces are in the process of being greatly reduced—following the Putin-Trump meeting in Helsinki last summer—this might be interrupted or even temporarily reversed in the present state of international tension.

How will the next 18 months play out in the Lebanon-Syria theater, including US attempts to push Lebanon into segregation of Shiite groups and their leaders? The US, at the end of April, offered a $10 million reward for information that will disrupt Hezbollah’s finances; more such inducements will likely follow.

When ex-US Senator George Mitchell, the last serious American Middle East Peace envoy, resigned in late 2010, I half-jokingly suggested Spielberg as a replacement. I was not wrong: The coming excitement will out-Hollywood Hollywood. This could include high-profile temporary US naval deployments, sabre-rattling by the American air force in Syria, and further Pompeo pomposity regarding the status of the West Bank. Let us hope this will all be special effects “diplomacy” and not involve real destruction.

May 10, 2019 0 comments

Economics & Policy Electricity

Lebanon’s new electricity plan adopted in the dark

by Hala Bejjani May 10, 2019

written by Hala Bejjani

The Council of Ministers approved a new electricity policy paper on April 8. Although this was a long-awaited reform, the Lebanese were expecting better governance and more transparency, especially in view of the commitments made at CEDRE. However, the government already seems to be falling short on its promises of reform, with no development of regulatory or procurement frameworks for the electricity sector and contracts being granted without guarantees of transparency or due process.

Efficient regulatory and procurement frameworks are essential for ensuring competitive offers—they incentivise the private sector, increase competition, and de-risk the electricity sector. Yet, to date Lebanon lacks a procurement framework that guarantees transparency and good governance in this sector, and the existing regulatory framework has been consistently breached. Parliament not only extended the mandate of Law 288 (2014) enabling the cabinet to issue licenses for power purchase agreements (PPAs), but also enabled the bypassing of any legal or regulatory framework on tendering procedures. Regulations in Lebanon have become subject to perception and choice, with each entity cherry-picking which laws and provisions to implement, and which to dismiss.

Private sector participation has also been touted as a key component of CEDRE reforms. Lebanon adopted a public-private partnership (PPP) law in 2017, article two of which states that the law applies to public sector projects, including the power sector. However, this law will also be disregarded due to the extension of Law 288 (2014), on the claim that its application, which includes the involvement of the Higher Council for Privatisation and PPP (HCP), would take too long.

The absence of a clear regulatory framework with procurement procedures for private sector participation, forms a barrier to effective competition, especially in the tendering of PPA licenses. These contracts will lock the government into purchasing electricity at an agreed rate for a period of 20-25 years—a deal worth hundreds of millions of dollars. It is therefore vital that the government ensures a highly competitive basis, not only for now, but also for the years to come.

The case of Deir Ammar 2

The evidence so far suggests a lack of transparency and good practice on behalf of the government. Instead of seeking to set a better record in procurement practices, the electricity plan sets out a timetable that includes starting work on the Deir Ammar 2 power plant in the second half of 2020. Behind this proposal are two unpublished agreements: a PPA and an arbitration process, the details of which have not been disclosed.

A quick refresher on the facts: In May 2018, the then-resigned cabinet approved transferring the engineering, procurement and construction (EPC) contract for Deir Ammar 2 into a PPA contract with a build-operate-transfer (BOT) model. The initial EPC contract was awarded to a consortium of Greece’s JP Avax and Sweden’s AF Consult, but was then halted after the government refused to issue the contract’s second payment due to an issue regarding the applicability of VAT. The consortium thus resorted to an arbitration process, the details of which have still not been publicly revealed, despite the cabinet statement last year that announced the intention to transfer the contract to a new company under the BOT model.

The cost of the PPA was not announced at the same time as the cabinet’s decision, but was revealed later that month by former energy minister Cesar Abi Khalil to be 2.95 US cents per kWh. Abi Khalil was tasked with carrying out negotiations and signing the new contract with the new company. However, the name and ownership of the newly awarded company have not been disclosed, let alone the qualification and contract award criteria that the government adopted to select the company.

Moreover, the cabinet chose not to disclose any details regarding the arbitration process or the negotiations that took place. The identity of the newly awarded company and the contract terms, including the rights and duties of each party, also remained undisclosed.

Basic procurement practices entail launching an expression of interest open to local and international firms assessing their technical capacity, experience, and resources, and shortlisting those qualified based on clear criteria. The tender documents are then sent to the qualifying firms, and include the evaluation criteria and the template PPA contract. None of this was done when the cabinet awarded a PPA to an undisclosed entity without any public procurement process; it is therefore unclear how the government ensured that the new contract and the new company were the best choice for the Deir Ammar plant, nor how the project will be financed.

Improving regulations and ensuring transparency and good governance in procurement are not only basic requirements the government should abide by—especially after pledging to implement reforms—but they also serve to increase competition and improve the sector overall. The government has pledged to do things differently, yet based on its actions in the energy sector initial signs are not promising.

May 10, 2019 0 comments

Economics & Policy Healthcare

Lebanon’s Ministry of Public Health issues decree on reimbursement for palliative care

by Hibah Osman May 10, 2019

written by Hibah Osman

When H.S. was diagnosed with pancreatic cancer she made it clear to everyone around her that she was going to put up a fight. She had surgeries, took chemotherapy, and continued to manage her home and business as if nothing had changed.

I met her two years into her illness during her last hospitalization. She had been admitted with severe pain and intractable vomiting. She was unable to eat and had lost half her body weight. Her oncologist performed the necessary tests, then informed her family that she had exhausted her treatment options. She had intestinal obstruction, but her body could not tolerate the surgery required to fix it. The pain and vomiting could not be controlled, and she would most likely have to spend her final days in the hospital.

Her family was advised to reach out to me by a physician friend. I visited H.S. in her hospital room on several occasions. I advised her medical team on how to manage her pain and vomiting. I also had long discussions with her about her worries and hopes and what was most important to her at this stage of her illness. H.S. wanted to spend her final days at home, remain as independent as possible, and be comfortable enough to enjoy her remaining time with her family and friends.

The medical team at Balsam, a nongovernmental organization that aims to improve the quality of life of people facing life-threatening illness, set to work on making this happen. Our physicians, nurses, social worker, psychologist, and pharmacist worked together to ensure her pain was controlled, her vomiting stopped, and she could enjoy small amounts of food again. We were able to make her comfortable enough to leave the hospital and continued to provide the medical and social support she needed to allow her to feel safe and supported at home.

The care that H.S. received is referred to as “palliative care.” The World Health Organization (WHO) defines palliative care as a medical approach that aims to improve the quality of life of patients and their families by managing physical symptoms, such as pain, as well as the psychological, social, and spiritual sources of suffering. While most medical specialties focus on curing disease, palliative care specialists focus on the person living with the disease—making their choices and the quality of their lives the center of medical decision-making.

The benefits of palliative care have been well documented. Patients who receive it have better quality of life despite their illness. They are less likely to experience pain, less likely to suffer from depression, and more likely to report satisfaction with their care. Studies have also shown that providing palliative care early in the course of an illness can also prolong survival. The benefits also extend beyond the patient to the healthcare system. Research has shown that palliative care significantly reduces the cost of medical care. When their symptoms are managed and patients are given choices regarding their care, they tend to have fewer hospital admissions and avoid unnecessary invasive medical procedures.

In a report published in the medical journal Lancet in 2017 it was estimated that every year 25.5 million people die worldwide with serious health-related suffering. Of those, 2.5 million are children under 15 years of age, and most live in lower and middle income countries. It is estimated that an additional 35.5 million people suffer unnecessarily from pain unrelated to the end of life. Most of this pain and suffering could be avoided with basic palliative care.

Palliative care has been increasingly viewed as a basic human right. In 2014, a resolution was passed at the WHO’s World Health Assembly calling for all governments to integrate it into their health systems. More recently, the WHO included palliative care as part of a comprehensive primary healthcare package in their declaration calling for universal access to primary health care in Astana, Kazakhstan in October 2018.

Palliative care was not available in Lebanon until 2009. Services initially began with the establishment of small donor funded organizations providing care to patients at home. Recognizing the importance and value of this specialty, the Ministry of Public Health established a National Committee for Pain Control and Palliative Care in 2011 with the aim of setting a strategy for the development of palliative care in Lebanon. Since the establishment of the committee, there has been a slow but steady increase in palliative care services. Today, although the number of healthcare workers trained in this specialty remains limited, palliative care is being provided in some form at a small number of hospitals in Beirut, as well as by a few home-based palliative care organizations. These are able to meet the needs of only a small fraction of the estimated 15,000 patients who could benefit from palliative care in Lebanon annually.

Until recently, palliative care was not covered by insurance. This naturally restricted it to donor-funded organizations or larger institutions that chose to allocate internal resources to sustain their programs. On March 18, the Ministry of Public Health took a major step toward integrating palliative care into the Lebanese health system by issuing Decree 1/447 that defines criteria for the reimbursement of palliative care services. The decree defines coverage for both home and hospital-based programs and provides a blueprint for a reimbursement structure that can be applied by the National Social Security Fund (NSSF) and private insurers.

H.S. was able to spend the last month of her life in the comfort of her own home with the support of Balsam. She celebrated her 60th birthday with friends and family, and was able to have many good days after her discharge from hospital. The alternative would have been to spend her last days suffering in the hospital and leave her family with memories of uncontrolled pain and the trauma of helplessly watching her suffer at the end of her life. Unfortunately, at this point in time, too many people in Lebanon experience serious illness that way. This milestone decision by our Ministry of Public Health is a step toward changing that by making it possible to scale up this essential service. Hopefully, within a few years everyone in Lebanon who can benefit from palliative care can receive it.

May 10, 2019 0 comments

Comment Economics & Policy

Internet copyright laws

by Nicole Purin May 9, 2019

written by Nicole Purin

As the growth of a few digital giants with base in the United States and state intrusion into the online world have reached dimensions that were unimaginable just a decade ago, some critics speak of ‘surveillance capitalism’ as the new form of dictatorship. In the middle of the uncertainty about our digital future, lawmakers are seeking to determine what is the right level of regulatory interference in the context of this sector. The issues they are encountering is how to balance creative freedom, economic opportunity, and an individual’s right to privacy. It is a very complex legal category, yet the harmonization of internet law is key in a globalised world. The EU Copyright Directive—passed on April 15 by the EU Council—has been fiercely debated. Proponents see it as a step toward greater accountability on the internet, its opponents fear it stifles creativity and free speech. How then does this legislation propose to reshape the internet, and what impact, if any, will it have on the Middle East?

The complexity of internet regulation

In Europe, there have been multiple endeavors to harmonize copyright laws through the Berne Convention (1886), the Council Directive 91/250/EEC (Computer Programs Directive), and the Copyright Duration Directive in 1993. European states in the last 20 years have maintained a high level of autonomy with respect to copyright laws. Changes to these laws, which started during the 1990s through EU directives, have often attracted controversy and disagreement—specifically in the context of globalization and the penetration of giant conglomerates into diverse markets.

The internet has created a further layer of complexity when it comes to regulating copyright legislation, as illustrated by the heated debates over the EU Copyright Directive. The directive has been in the making for the past two years and was designed to modernize and update copyright legislation for the digital era. The European Parliament passed the directive in March, with its regulations passed by the European Council in April. The next stage is a two-year grace period in which member states will need to adopt these new regulations into national laws. The extraterritoriality of the law, however, means that it will be impactful across jurisdictions—similar to the EU data protection legislation.

Big players like YouTube, Twitter, Facebook, and Google will be heavily impacted by the directive as it imposes direct responsibility on these tech companies to monitor and prevent unlicensed copyrighted materials from being uploaded by users. The debates centered on the legislation are emphasizing the opposing views of EU legislators and the top tech players on how to find a balance between internet competition, users’ freedom of speech, and regulatory intervention.

Champions of the EU Copyright Directive argue that the internet has been unregulated for too long and that the likes of Google and Facebook have benefitted excessively from this lack of regulation in financial terms—Google’s online ad sales for 2019 is forecast at $102.4 billion, while Facebook’s is forecast at $67.2 billion according to eMarketer—at the expense of newspapers, writers, publishers, and record labels. The directive’s advocates are of the view that it protects artists, content creators, and writers—as opposed to tech giants.

Opponents of the law have argued that its implementation would have the effect of suppressing innovation and freedom of speech on the internet, and ultimately would damage newspapers by limiting their main source of revenue—advertising. They claim that the legislators have no knowledge on how the internet works and its technicalities—specifically “upload filters and artificial intelligence.” The result is that instead of protecting the “smaller guy,” the directive is imposing cumbersome responsibilities on tech companies that might have the effect of curbing news contributors. Many campaigners argue that the legislation is impractical and that artists do not need additional compensation in addition to the royalties they are already receiving. Opponents also argue that users globally will be penalized as their access to content will be limited. Hence, the costs and requirements of the law appear excessive and, ultimately, only the big players have the resources to navigate and comply with these laws, reasserting their supremacy.

For the directive’s advocates, however, there is a general belief that the big internet corporations have financial responsibilities toward copyright owners and content creators. They claim that the directive is designed to promote fairness and eradicate the corporate greed of tech players that caused the collapse of many traditional newspaper publishers and distributors.

The directive is trying to achieve its balancing act through a number of measures, mainly in the form of articles 11, 13, and 17. Article 11 relates to the sharing of news articles and lets publishers charge companies like Google when they share extracts of news stories, while articles 13 and 17 made it more difficult for tech giants to release user generated content. The directive has implemented a new requirement on “news service providers” to recognise the quality and contributions of writers. For example, the law requires that uploaded copyrighted materials—in the form of videos and music—be removed by the likes of Google, YouTube, and Facebook, and if they fail to do so via an automated system, they will be liable to the copyright owners. This means that any content linking to other copyrighted materials in different forms must be blocked.

At the heart of the debate has been the “parody ban.” What this means in practice is that while the directive is introducing a lot of restrictions against the uploading of copyrighted materials without permission, automatic filters are not yet able to distinguish between infringements and parodies. This could mean the blocking of memes in spite of the adjustments made to the directive designed to protect the use of such content “for purposes of critique, review, caricature, parody and pastiche.”

How will regulation affect the GCC?

The monitoring and protection of intellectual property and copyrights in the Gulf Cooperation Council (GCC) has been particularly demanding due to the fragmented legal frameworks, as well as the non-alignment between tech advances and the laws in the individual countries. Copyrighted materials and trademark laws in the Middle East require unification, and this is a recurrent global problem. Registration of copyrights in the GCC is not that frequent and litigation does not occur often. With respect to legislating copyright laws vis-à-vis the internet, the EU appears to have taken the lead, but this will have a global effect for sure, although its impact in the GCC is still unclear. The uploading of memes, videos, and photographs by GCC users could amount to plagiarism under the directive because of its extraterritoriality. There are many companies in GCC operating in Europe or advertising online, and compliance will be a requirement as sanctions could be imposed on businesses or individuals with European presence. The big tech giants have offices in the GCC, and they will clearly be affected by the directive.

It is possible to draw an analogy between Europe’s General Data Protection Regulation (GDPR), the new law on data privacy that came into effect on May 25, 2018, and the EU Copyright Directive. The GDPR allows individuals to demand that a company deletes or shares available personal data, and the EU is imposing significant penalties with a maximum of 4 percent of a company’s global turnover. The law extends to EU companies and individuals offering services to persons in the EU, hence it has a very extensive reach. It also protects non-European nationals that have a connection with Europe through EU companies. Similarly, the EU Copyright directive is likely to protect copyright owners, artists, and writers based in the GCC who are engaged in European businesses or have offices or travel to Europe. The internet is like a giant highway, and whoever starts driving on it will be subjected to its rules.

We have seldom seen such fiercely fought battles as we have seen recently with respect to the implementation of the directive—the hashtag #SaveYourInternet illustrates the vocality of it, and the global panic that resulted. However, at this stage it is very difficult to predict the practical implications of the laws and whether they will affect freedom of speech by limiting the volume of content uploaded and censoring the works of content creators as some of its critics assert. Such limitations could affect many jurisdictions, including the GCC. It appears that the intention of the regulators is to inject some level of discipline to rein in some of the potential imbalances between the creative industries and the technological giants that have characterized the internet in the last few years. No laws are set in stone, and there is always flexibility to reconsider and improve certain provisions, but some level of regulatory intervention is certainly needed to ensure that the internet does not become a new wild west.

May 9, 2019 0 comments

Industry & Agriculture Upcycling

The upcycling trend begins to take hold in Lebanon

by Lauren Holtmeier May 8, 2019

written by Lauren Holtmeier

“From trash to treasure” is the mantra often cited by upcyclers, or those who use would-be waste to create something new. Upcycling endeavors in Lebanon have multiplied in the last two years with entrepreneurs using materials such as plastic bags, old newspapers and magazines, and cloth to make products such as jewelry, bags, and decorations. While the actual environmental impact of most small-scale initiatives is negligible, where the growing coalition of Lebanese upcyclers say they succeed is in raising awareness of alternative and more environmentally friendly products, promoting waste reduction, and encouraging producers to transition to offering greener products.

Lebanon has an excess of garbage, awareness of which was exacerbated by the 2015 crisis, meaning there is a plethora of materials for existing and potential upcyclers to work with. But this massive excess also makes it harder for an individual to make a substantial impact. World Bank data estimates that average trash production per capita is 1.1 kilogram per day. Taking the World Bank estimate of 6 million people in Lebanon—adding to that an additional 1 million Syrian refugees—that means that there are roughly 7 million people in the country each producing on average 1.1 kilogram of trash per day. This puts the annual garbage production in Lebanon at slightly above 3 million tons per year, of which, approximately 340,785 tons are plastic. A Human Rights Watch report says that only 8 percent of potentially recycled materials in Lebanon are recycled annually; 90 percent of Lebanon’s landfills are stuffed with recyclable materials.

Going green

The new EcoSouk Circular Economy Hub in Hamra, opened in February by Joslin Kehdy—founder of Recycle Lebanon, a non-profit organization focused on making social change and encouraging a circular economy—works with upcyclers by providing them with a place to market their trash-turned-treasure. The organization launched in 2015, and has been marketing recycled and upcycled goods since. The EcoSouk is Recycle Lebanon’s first physical marketplace, the initiative having previously sold products primarily through pop-up markets. With products ranging from upcycled bags, jewelry, decor, and clothes, to organic soaps and refillable laundry detergent and dish-washing liquid, the EcoSouk works with over 60 producers. For Kehdy, this endeavor is about raising awareness and identifying new solutions: “Are we saying that upcycling is the one and only solution? No. Are we saying upcycling is part of a solution, and in doing so it raises awareness, changes mindsets, shows alternatives, and is transitionatory? [Yes]. Well, then it’s worth it.” By transitionatory, Kehdy means that these initiatives are not a be-all-end-all solution, but rather a step taken while the world learns to better reduce waste. She sees herself as a voice that encourages a more rapid shift among businesses, restaurants, and hotels who are trying to appeal to an increasingly environmentally conscious consumer base.

Beyond running the EcoSouk, which she refers to as a “toward zero-waste shop,” Kehdy works with schools, businesses, and municipalities as part of Recycle Lebanon to help them identify more environmentally friendly business solutions and products. She also works with the producers in their store to ensure their eco-friendly businesses are as eco-friendly as they say. Part of this includes reviewing upcyclers’ processes to help them eliminate waste and find green materials to use.

In The Loop, a line of jewelry, coasters, lamps, and keychains made of recycled newspapers and magazines created by Jean-Claude Boulos and Bachir Asmar, is one of the brands sold at the EcoSouk that is trying to maximize the greenness of their production cycle. The duo, who have been in business a little over a year, tell Executive that while almost every aspect of their product is environmentally friendly, they have struggled to find a varnish that meets their standards.

A drop in the trash pile

Being 100 percent eco-friendly is hard, and there is often a trade-off between affordability and organic materials. For Boulos and Asmar, they are interested in keeping their prices affordable for consumers. “We want to find places that we can buy recycled or organic material [from], but usually they’re really expensive, and we want to maintain our price range. Right now [our products] are very affordable,” Boulos says. This has meant experimenting with different patterns to see which products can be produced without a negative return on investment, Asmar explains. Where the necklaces take only five minutes to make and sell for LL10,000, and the earrings may take 30 minutes, the coasters, Asmar says, are fairly labor-intensive and have to be sold at a higher price-point of LL20,000. Even though the bulk of their raw materials are free and brought to them by friends and businesses who would otherwise throw away or recycle their paper, they incur other costs from supplementary materials and labor (Asmar accounts for 100 percent of the labor costs currently, and works around two to three hours a day).

Boulos and Asmar have not weighed how much paper they have recycled or brought in, so measuring their environmental impact is impossible, but taken individually, anyone of these endeavors seems futile. Nour Kays, an upcycler who turns plastic bags into upcycled bags of different styles and functions says she has upcycled 11,000 bags since she began counting in 2014. In a four-year period, Kays averaged 2,740 bags upcycled annually. To give credit where credit is due, for one individual, this is no small feat. But taken as a percent of the total garbage in the country, her efforts account for less than one percent.

She makes the bags by layering old bags and then treating them with heat. A beach bag takes 32 plastic bags, and a 6×8 inch clutch takes 16 bags to make. Her products, which include keychains and credit card holders, sell for between $10 and $120. “It might be a bit pricier than other places, but it’s because it’s artisanal, rather than mass-produced,” Kays says. She works with two locals, one tailor, and a technician who helps with the heat treatment process.

But Kays is not the only plastic bag upcycler in Lebanon. At the EcoSouk alone, there are at least two others with similar products (Jellyfish and Waste Studio), making their collective impact slightly larger. Kehdy says that while she started working on Recycle Lebanon in 2015, the number of upcyclers in the country on her radar has doubled since 2017. Naila Saba, program manager at the Nawaya Network, a non-profit working with disadvantaged youth, says the number of upcyclers they have launched doubled from eight in 2017 to 16 in 2018—in 2016, they launched just two. Saba says she personally has seen a sharp rise in the number of upcycling projects pitched to her.

All these innovators have come up with micro-scale solutions to a large-scale problem, and while the metaphorical mountain is steep, as knowledge spreads and more take up upcycling, the potential to have a larger impact grows. Upcycling is still moving from the innovation to early adopter stage in its lifecycle. It is possible, of course, that trends never move beyond the early adopter stage and fail to find popularity with the majority. The jury is still out on upcycling, but as more companies in Lebanon and globally seek to adopt more environmentally conscious business models, the practice offers a way for companies to make use of products that would typically be discarded and raise awareness of alternatives.

May 8, 2019 0 comments

Industry & Agriculture McKinsey

Can McKinsey’s Lebanon Economic Vision work for agriculture?

by Thomas Schellen May 8, 2019

written by Thomas Schellen

For what it is worth, the current outlook for Lebanon’s crop of traditional cereals, such as wheat, barley and maize, is not plastered with red flags. The Food and Agriculture Organization (FAO) says in its latest country briefing that weather conditions this winter were favorable and that estimates for the 2018 total cereal harvest were at the same level as for 2017, at 164,000 tonnes. The organization noted that in the domestic context, while “limited by landscape, production of fruits and vegetables is important in terms of GDP contribution and employment.” This is of course, without taking into account alleged or potential impacts from a mid-April cold spell on crops at Lebanon’s higher elevations.

The agricultural economy in Lebanon is plagued by the same recent past as every sector: it languished through a quarter century that was lost in communal squabbles and exploited by self-absorbed rentier “elites.” The sector also suffers from the same data drought that impedes all pillars of the national economy. Furthermore, for many years agriculture has been infested—as the 2019 Lebanon Economic Vision (LEV) aka McKinsey report correctly alludes to—by low productivity, structural constraints, competitive insufficiencies, economic challenges, and a government support that is either pitifully weak, “poorly targeted” (LEV wording), or both.

Despite this poor state—and the fact that agriculture and agro-industry account for only around 3 percent of Lebanon’s GDP—agriculture is one of the sectors that received considerable attention in the LEV. This is also despite the fact that agriculture achieved annual growth in the impalpable range of 1 percent annually in the two periods from 2005 to 2010 and from 2011 to 2016. In the former period, agricultural growth, according to numbers cited by McKinsey, was just about the lowest of all economic sectors. The only thing that appears to speak in the sector’s favor is that its low growth was stable, whereas some other sectors in recent years had flipped into negative growth.

The attention bestowed on agriculture is explicit especially in the fifth LEV chapter that portends to undertake “deep dives” into the entrails of the McKinsey economic vision and elaborates on its purported “engines of economic growth.” This meaty chapter comprises 25.5 percent of the LEV—325 out of 1274 slides—and is subdivided into focal sections on agriculture, industry, tourism, knowledge economy, financial services, and diaspora.

Agriculture’s impact

This places agriculture and industry, identified earlier in the LEV as productive sectors and thus constituents of the real economy, as part of a discussion alongside sectors that are, by definition, not. Neither the broad but conceptually vaporous knowledge economy, nor financial services, are considered part of the real economy. Meanwhile the diaspora is not only outside of the real economy, but also neither a direct producer of goods or services in the national context.

In addressing this eclectic potpourri of economic force fields, McKinsey dedicates 50 slides of the chapter in total to agriculture. That is a lesser amount of attention when compared with about 100 slides given to the knowledge economy and 60 slides to tourism, but almost the same as for financial services, and more than for industry and diaspora.

Confronted with so much emphasis on agriculture as a pillar of Lebanon’s future, the reader of the LEV might wish for a more concise explanation as to why the sector is important for Lebanon—the one-page FAO country brief actually presents a plausible perspective on this in claiming that the sector, although employing only 8 percent of Lebanon’s total labor force, “is a primary source of income and employment in rural areas where it reaches up to 25 percent of the labor force and 80 percent of the local GDP.” Although the LEV estimate on the importance of the agricultural sector in terms of labor force is, at 11 percent, even considerably higher than the 8 percent estimate cited by the FAO, it lacks a decentralized regional perspective on the varied domestic roles of agricultural production in Lebanon. Critics of this narrow economic angle appear to promote a different, more equitable, and more socially inclusive approach to the sector.

Under the currently sizzling context of transitioning into a more digital economy, it is also curious that the McKinsey team only discusses links between private tech entrepreneurship and internet-of-things initiatives for agriculture in an oddly placed “appendix,” rather than as part of the fifth chapter’s agriculture focus.

But most painful to some observers is the dichotomy between the LEV’s consultancy exercise of drafting an economic vision for agriculture, and the realities of the past 25 years with the hard lessons that these experiences have conveyed about the challenges that need to be mastered for giving the agro sector a fighting chance at implementing economic productivity and export achievements. “We need to look at the Lebanese specificities [as the McKinsey plan attempts to do], but if we are to access European markets, we need to abide by their specifications and requirements,” says Atef Idriss, head of food safety organization Mefosa, which consults on and advocates for food safety in the countries of the Greater Arab Free Trade Agreement (GAFTA) across the Middle East and North Africa. “We have to understand in Lebanon that if we do not go into details of compliance, we will not reach European markets even if we chase the McKinsey vision.”

Different standards

At the end of March 2019, Idriss and food scientist Maged Eid, the consultation manager at Mefosa, attended an international conference in Leiden, The Netherlands. At the event, which was held by non-profit Global Harmonization Initiative and studded with food safety advocates and academics from around the world, Eid and Idriss shared a message about Lebanese agriculture that was based on analysis of every single item in a roster of 30 agro products that had, in the past 10 years, failed to conquer one or other threshold in Europe, and the specific reasons for the items’ rejection. “The biggest problem is that in Lebanon many initiatives [for improvement of agriculture and compliance with import standards in European markets] were not implemented on the ground,” Eid tells Executive. “The important issue is to start reforms from the bottom up, from the farms all the way up to the Ministry [of Agriculture]. The problem in Lebanon is that things are done top-down. Foreign initiatives are driving the action at the ministry, and they don’t know the issues on the ground in Lebanon. They provide interesting ideas that cannot be implemented in the field.”

Idriss has been active in the Lebanese agricultural sector as an agro-industrialist since before 2000. He was the founding president of the Lebanese Syndicate of Food Industries before spinning off a scientific food safety unit established during his leadership of the syndicate into the private Mefosa enterprise, when new officials at the syndicate did not want to continue running it. He describes the past two to three decades as a period marred by disparate European and Lebanese approaches to food testing, mismatched testing practices, narrow and parochial interests of bureaucrats, insufficient communication among public stakeholders, failures to reach primary producers on their farms, misguided funding, and assistance on agricultural development through various three-letter programs that failed to reach their aims.

Export focus

Beginning with a narrative of not being able to fulfill a contract for supplying pitted cherries to a European yoghurt manufacturer due to prohibitive costs and an inability to obtain bank financing for an advanced de-stoning machinery—needed to meet the European partner’s standards for maximum pit fragment counts per kilogram of frozen cherries—Idriss perceives the years since negotiation of the Euro-Med agreements by late Prime Minister Rafik Hariri at the turn of the century as a lost agricultural export opportunity to the cumulative tune of billions of dollars. Just for early potatoes from the Akkar region, where an annual production of 24,000 tons was to be admitted to the EU under the agreement, he says Lebanon missed out on $144 million in export revenue. “If we had exported potatoes from Akkar to Europe over the past 20 years, we could have provided 24,000 tons annually [according to the Euro-Med ceiling]. At an average price per ton of $300, 24,000 tons times 20 [years] times $300—that alone would have given you $144 million,” he says. “That is a lot of money. If you add up all the 30 items that were listed in the trade agreement between Lebanon and the EU, and analyze why we never benefited from these opportunities in the last 20 years, [export revenue] could have reached in a rough estimate about $800 million per year, if every potential was fully used.”

Idriss argues that it is necessary to address and solve very real and specific barriers to Lebanese exports of food before even thinking of embarking on large initiatives, such as investment-intensive and complex efforts toward upgrading the human capital in the sector, or expanding capital expenditure in the agro-industry and agricultural sectors. According to him, the 15 initiatives that the LEV lists as ideas for the improvement of agricultural productivity comprise many steps that will be important for the sector to take, but they do not deal with the core reasons and specific insufficiencies as to why Lebanon saw exports rejected once they arrived in Europe. “We need to address the specifics that are hindering our exports, and that we should work on modernizing our labs, our supply chain, [and] our packaging materials so that we are addressing these issues. Then we stand a chance to export,” he emphasizes.

Without first addressing the need to activate such opportunities in the area of food exports and solve the underlying problems, Idriss frowns at the idea that shifting into crops such as avocados and cannabis would solve the problems of Lebanon’s agriculture. He is also incredulous that, in another strategy proposed by the McKinsey plan, it would make sense to pivot into distant countries as targets for food exports. “The challenge is not about opening new markets in faraway countries [as long as] our products are not complying with consumer needs,” he says. “How can a consumer be satisfied if my own wife is afraid to buy a [local] apple when she finds that it is brown on the inside? … If an apple is refrigerated badly, infested with insects, or contaminated with chemicals, even the Lebanese consumer will not buy it.” According to Idriss, Lebanon cannot currently export apples except to Syria, as even Egyptians and Libyans will not accept Lebanese apples. “We have excellent apples in Lebanon, but if we do not grow them properly, controlling for nitrates and nitrites in them, they will not [be allowed to] enter the markets,” he says. “And if we do not meet requirements for delivering apples, will we be able to deliver cannabis? I don’t think so, and I don’t think that even Kazakhstan will touch our avocados or our [medical] cannabis if it is not up to international standards.”

May 8, 2019 0 comments