Executive Magazine

Washing water

by Hugh Jeffrey February 25, 2000

written by Hugh Jeffrey

The office of Fadi Cumair, the director general of equipment at the Ministry of Water and Electricity, is a plush affair. While his secretaries were busy serving liqueur and chocolates, Cumair was explaining that if any person other than himself was to be quoted in this article, he would not provide any information. Cumair’s attitude, which is ironic considering he is a public servant, seems to typify the less than assiduous approach of local authorities towards the issue of proper water resource management in Lebanon.

In the Middle East, countries go to war over water, it is such an important issue. But, as far as government spending in this area in Lebanon is concerned, well, it isn’t. If the government’s allocation of financial resources in its annual budgets is any indication, attention to its water resources has increasingly taken up less of the government’s attention in the past decade.

Philippe Zgheib, an economist and professional hydrologist, made some calculations based on budget figures published in Lebanon’s monthly Official Gazette between 1984, 1994 and 1997 to prove the point. In constant dollars, annual budget expenditure for ministries such as defense, interior and labor has increased significantly. But budget expenditure for the Ministry of Water and Electricity has decreased from more than 7% in 1984 to just 0.2% of the total expenditure in 1997. Moreover, while aid from multilateral lending institutions such as the World Bank has been used to fund the rehabilitation of the electricity system, there has been no major funding for, or investment in, dams or other forms of water infrastructure. Similarly, the Ministry of Public Works, which is responsible for infrastructure projects required for water resources such as dams, saw its budget collapse from 22% of total expenditure in 1984 to 0.7% in 1997. And considering that wages and salaries absorb almost 40% of the state’s total budgeted expenditure, the money that has been provided has most likely been spent on just keeping the ministry’s employees paid.

Why has the government been so stingy in allocating resources to water? Governments are notoriously shortsighted and in Lebanon, the reality is that water has not been an issue weighing heavily on the government. Lebanon, at least for the time being, is not in dire need of water, unlike most other countries in the region. And considering the obvious repair needs after 15 years of civil war, perhaps it is understandable that water received less attention than urban reconstruction and telecommunications.

But scientists reckon spending policies have been shortsighted. Although Lebanon may have enough water for its domestic and commercial needs in a year of average rainfall, that will not always be so.

Population in the Middle East is growing at 2% to 2.5% annually, which means that water for domestic use will be in increasing demand while the productive sectors of the economy that rely on water, such as agriculture and industry, will come under pressure.

The equation is fairly simple. Lebanon is dependent entirely on precipitation, be that rain or snow, for its water supply. According to Musa Nimah, a professor of irrigation and soil physics at the American University of Beirut, Lebanon on average receives 860 to 900 mm of rain in a good year. If this figure is multiplied by the area of Lebanon, 10,452 km², Lebanon has a water supply of 9,200 million m³ per year. When rainfall drops below average, as in a time of drought, that figure drops to around 6,000 million m³ a year.

But there are problems with this figure. Lebanon lacks dams, reservoirs or other water-holding facilities to maximize the country’s use of its annual rainfall. Through evaporation loss, runoff loss, it runs into the sea, and other inefficiencies, approximately 50% of total annual rainfall is lost. That leaves Lebanon with around 4,600 million m³ per year. Out of that, 650 million m³ goes to Syria through the Orontes, Assi, River and the Northern Al-Kabir, 165 million m³ goes to Israel via the Hasbani and Wazzani tributaries of the Litani River, and 700 million m³ goes underground.

So in a year of average rainfall, Lebanon is left with approximately 3,200 million m³; in a year of drought, that falls to 800 million m³ to 700 million m³. And that, says Nimah, does not put Lebanon in a good position vis-a-vis its water needs.

Nimah calculates that domestic water consumption this year will be approximately 200 liters per day per person, about 20% of the average daily consumption in the United States. Total annual consumption, therefore, will work out to be around 400 million m³. Add that to the industrial and agricultural consumption, and Lebanon’s annual water needs come out at 2,445 million m³. So, if Lebanon’s rainfall falls below average, it will suffer a water shortage. And since domestic use always receives priority, the shortage will hit agriculture the most. Out of the 250,000 hectares of arable land in Lebanon, only 90,000 are irrigated, which is ruinous to agricultural productivity. “Irrigated land is two to three times more productive agriculturally than rain-fed land,” says Nimah.

By 2020, Nimah calculates Lebanon’s total annual water consumption will be 3,555 million m³. Without any attempt to increase water supply, Lebanon will face water deficits each year.

So what is the solution? Lebanon needs to dramatically increase its ability to store water if it hopes to maintain a water surplus in 2020. Obviously, this will require large-scale investment in dams and water reservoirs. Less apparent is Lebanon’s decrepit and leaking underground piping network, which needs to be replaced. Chafic Abisaid, the director of the Barouk water authority from 1980 to 1990, says that the system loses up to 40% or 50% of its water load.

With new piping, the way water is distributed and charged for should also be changed. In developed countries, businesses and households pay for the amount of water they consume. But in Lebanon this is not the case. Instead of a meter, pipes connecting consumers to water are fixed with an orifice that adjusts the pipe’s water capacity, but does not record the actual amount used. The result is that your neighbor might consume twice as much as you, but still pay the same price. In addition to making people pay for what they use, the installation of meters would allow the water authority to apply different tariff rates for certain sectors of the economy.

Besides the lack of funds, one of the major impediments to such obvious reforms has been the absence of any effective administration. In what must rate as one of the more ridiculous administrative follies the country has ever seen, Lebanon has 21 financially independent water authorities, a concept that goes against any idea of effective water management, especially in a country this small. For example, if there is a deficit in one authority and a surplus in another, there is currently no possibility of a transfer.

There was a decree in 1972 to reduce the authorities to five, but it was never implemented for political reasons, says Abisaid. “There have been too many beneficiaries,” he says ironically. “Every small water authority has its own board, its own director and staff. If you merge, a lot of people will suffer.”

In a January interview with EXECUTIVE, the minister of water and electricity, Suleiman Traboulsi, said the government is preparing for the looming water deficit. He is reviving the push for administrative changes, submitting a project to the council of ministers to eliminate the 21 different water authorities and reduce them to five, Beirut and Mount Lebanon, North Bekaa, South Bekaa, North Lebanon and South Lebanon. “These five authorities,” says Traboulsi, “will operate on commercial principles and will involve the private sector in administering their facilities.”

Reform of the administration is part of the larger project submitted to the council of ministers. Although short on details, the minister says the project, worth LL1.3 trillion ($867 million), will build dams and mountain reservoirs to ensure more than 2.2 million m³ after 2015 over a nine-year period. “This project,” says Traboulsi, “will be financed from the government treasury and not from foreign loans.” And he says this is not because of the difficulty of attracting funding. “It is our belief that within nine years we can secure the funds every year from the budget through a government decree called the ‘program law.'”

Governments are fond of large-scale development plans; they make good press. Completion and success of the plan is a different prospect, however. Besides the political difficulties of condensing 21 water authorities to five, Lebanon’s porous soil and mountainous terrain make large-scale dams and water reservoirs no easy task. It will take a committed ministry to secure the necessary funds and see it through.

The best-case scenario

Philippe Zgheib, an economist and professional hydrologist, is keen on water. With two doctorates in the field and a range of international experience, the Lebanese university professor has made water development issues the “passion” of his life. That’s beside, we assume, his expecting wife.

Given Zgheib’s approach to his work, he has chosen a suitably grandiose goal to pursue: nothing less than a multibillion-dollar integrated development of the region’s water resources. What is so exceptional about this? The area that we are talking about is the four points between Lebanon, Israel, Syria and Jordan.

Jordan, Israel and Syria all face severe water shortages, and in theory, an integrated development of the region’s water resources is the optimum solution to water shortages. The theory states that water, being a natural resource, does not adhere to national boundaries and therefore efficient management of the resource cannot be maximized at the country level. Instead, Zgheib says that to effectively develop the waters of one river, all the rivers in the region must be taken into consideration at the same time. Similarly, any water infrastructure, such as canals, dams, ducts, and pipe systems, has to accommodate all the water sources, not just one spring or river.

But pessimists, who always seem to outnumber optimists in the Middle East, believe the plan is wishful thinking. Even though most agree that an integrated development approach is best, they argue that the intractable grievances between the countries in question would make it impossible to join hands. Water resources, a lot of commentators say, have traditionally been a major source of conflict in the area, with no mechanism short of war being used to allocate the resource between countries.

But this year Israel and Syria are back at the negotiating table, with both sides interested in coming to a final settlement at last, a settlement in which questions over water resources will figure heavily. So perhaps it is time to give Zgheib’s plan more attention.

Although Zgheib can produce a lot of complicated figures to demonstrate the exact efficiency gains that would stem from an integrated development of the region’s water resources, understanding it is beyond this poor writer. But the basic plan makes sense. “My proposal,” says Zgheib, “goes beyond the country and looks at the resource regionally. Which means that I calculate all the water available in the region and compare that with all the demand, not by country, but by user sector: domestic, agricultural and industrial use.”

Second, instructs Zgheib, these needs would have to be factored in to population growth, which would change the level of demand for culinary and drinking water, agricultural and industrial water. Third, the development plan would need to prioritize these needs according to sequential use. This is water development speak for consumptive or non-consumptive use of water, the latter meaning using water in such a way that it does not change its chemical constitution. Industry, for example, uses water in cooling towers; the water used will rise in temperature, but its chemical makeup remains the same. Consumptive use, on the other hand, means that water undergoes a major chemical change, such as drinking water that comes out as sewage. By prioritizing non-consumptive use first, water supply can be magnified without tapping new sources since certain volumes can be used two or three times.

By looking at all the water demand and supply in this way, an integrated development plan could determine how to manage the water resources effectively. For example, it could determine what transfers would be necessary between countries and sectors to minimize shortages, calculate the infrastructure necessary to accommodate such transfers, the costs that would arise and hence what could be charged for the water in each sector.

Who would manage all this? Depending on a comprehensive peace settlement, Zgheib is envisaging some kind of supranational agency. Funded by member countries and international aid, the agency would have powers to attract financing, construct water infrastructure, impose operating and engineering rules, settle any disputes and establish and regulate a water market where users buy and sell water according to need. But given that water is a necessity for life, such a water market would have to operate under certain constraints. For example, Zgheib argues that this supranational agency would have to impose an “equity constraint,” meaning if there was a 10% water deficit in Syria’s agricultural sector, the same deficit should exist in the agricultural sectors of the other member countries.

And, says Zgheib, since Lebanon is the only country in the group with a current surplus in water supply, such a market could represent a business opportunity. One example that Zgheib uses is the Israeli predicament. The United Nations standard for the minimum amount of water each person must be secured for culinary and municipal needs is 90 liters a day; Palestinians currently have around 15 liters per person. “This is a time bomb for the Israelis,” says Zgheib. “They know that it will cost them less to buy water and give it to the Palestinians than to raise a policing army to deal with the potential instability, so they are ready to talk.”

Right now Israel could import water in floating medusa bags via ship or desalinate or build a sea pipeline from Turkey. The cheapest of these would cost at least $1 per m³. If Lebanon could supply water at a cheaper rate, Zgheib estimates that it could generate up to $2 billion in annual sales to the region, including Israel, a significant boon to the country’s huge budget deficit. But at its current level of development, Lebanon faces a water deficit by 2020. Perhaps Zgheib’s plan can be an added incentive to local authorities to get serious with improving water resource management in Lebanon.

February 25, 2000 0 comments

Feature

Beast burden

by Natacha Tohme February 25, 2000

written by Natacha Tohme

Who would want to have a company that relies on fuel oil for its energy? In less than a year the price of fuel oil has almost doubled, from $90 to $140 per ton. Worse, what if that company sells energy at a flat rate and absorbs the price increase?

This situation, which no private company would tolerate, is the situation for Lebanon’s electricity provider, Électricité du Liban. The autonomous public authority, which the government hopes to one day put up for sale, is bankrupt. Shouldering huge losses due to electricity theft, uncollected bills, poor management and adverse operating conditions, such as Israeli air raids, EDL regularly reports an annual operating deficit of about $150 million, which is subsidized by the government. Its accumulated debt now stands at a staggering $1.6 billion, 11.4% of the total public debt. And according to Suleiman Traboulsi, the minister of water and electricity, EDL’s almost total reliance on fuel oil generated additional expenses of $80 to $90 million last year.

In the face of this financial disaster, EDL’s ability to supply the country with constant electricity, although improved enormously since the war, is far from reliable. Lebanon has spent around $1.3 billion on the rehabilitation of EDL, including interest on loans, which is responsible for the generation, transmission, and distribution of electric power throughout the country. According to a 1998 report, the restoration of existing facilities and the construction of new power stations has meant that Lebanon’s electricity capacity exceeds total demand. But the lack of transmission capacity and high losses of electricity through its network, reportedly more than 50%, means that Lebanon still suffers shortages and blackouts, even in Beirut.

So what is the government to do now? EDL is financially bankrupt at a time when it also faces a host of technical and administrative problems.

What has received a lot of media attention recently is the effort to reduce the burden EDL is placing on the budget by switching from fuel oil to natural gas. According to Pierre Chammas, a petroleum economist and president of APS Energy Group, natural gas is less prone to price fluctuations and “in terms of per barrel of oil equivalents, is half the cost.” Estimates vary, but converting all EDL’s power plants to natural gas could save the treasury more than $150 million a year. “This is very conservative, according to my estimates it’s over $250 million,” says Chammas.

Additionally, gas turbine equipment for electricity generation is two-thirds cheaper than that of a fuel oil plant and is much more efficient. EDL’s current method of producing energy, generating steam with fuel oil to run the turbines, involves huge losses. “Out of every 1,000 tons of fuel, only 30-35% generates power,” says Ronald Diab of National Energy Consultants. “With gas it’s between 40-60% efficiency, depending on the technology used.” Two technologies are available: one-cycle and combined-cycle gas turbines, with the latter the most efficient at up to 60% energy output.

Combined-cycle gas turbines produce electricity, and the gas exhaust then goes into a steam turbine which also produces energy. “One-third of the energy that you put into the gas turbine comes out free of charge, from the heat of the exhaust,” explains a private consultant.

There are other benefits. Operating and maintenance costs are less, because natural gas does not wear out equipment as quickly, giving it a longer life. It is estimated that these benefits alone could save EDL a further $100 million every year for 25 years.

Natural gas is also more environmentally friendly than fuel oil, which is sulfur-polluting and causes acid rain. There is a cost element here, because when oil is burned it must be desulfurized. The desulfurization process, says Chammas, is very costly. Natural gas also produces 60% less CO₂ than fuel oil, which has implications for the future. At the Kyoto convention, a commitment was made to reduce carbon dioxide emissions by major industrial polluters, namely the US, Japan, and Europe. The WTO will punish countries not complying, with a CO₂, or “green tax,” on emissions. In time, with the growth of energy systems in developing countries, they too will be required to reduce emissions. And Lebanon’s demand for electricity is growing at 4-5% every year.

So why doesn’t the government begin switching to gas immediately? Currently nine of the country’s 11 power plants run exclusively on fuel oil, building these plants was more convenient because fuel oil is more readily available. Only two new power plants, in Zahrani and Badawi, are ready to receive natural gas, built with the more efficient combined-cycle gas turbines at a cost of $600 million. But because natural gas is not yet available in Lebanon, these plants were built with dual systems, and can run on gas oil, which is even more expensive than fuel oil.

All depends on getting gas to Lebanon. Unlike fuel oil, natural gas cannot be bought off a ship. One way is to have it transported in its natural gas condition via pipeline, a heavy investment and often a politically difficult prospect. Israel, for example, is in negotiations with Qatar, owner of the world’s second largest natural gas reserves, to supply natural gas via a pipeline. But this cannot be realized until a peace settlement is reached.

Another alternative is to use special tankers to import the gas as liquefied natural gas, LNG. The compressed gas has to be received in special terminals then reconverted to gas, the facilities for which will need to be constructed. With these kinds of investments involved, importing LNG is more expensive than natural gas via a pipeline.

Syria, another producer of natural gas, has agreed to provide one billion cubic meters of natural gas every year for 25 years, three million cubic meters daily, with the quantity to be increased if more reserves are found in the future. The project involves building a 230-km pipeline from Homs to Badawi, then extending it to Zahrani. If work on the pipeline begins this year, gas could start running to these two plants by 2002. Suleiman Traboulsi, the minister of petroleum, told EXECUTIVE: “For this project to happen, we have to look for a source to finance it, or to find a way not to burden the treasury.”

Last year Elf Aquitaine Gaz International and its foreign partners presented a proposal to provide Lebanon with its natural gas needs under two different 25-year build-operate-own-transfer (BOOT) contracts. In the first, Elf is proposing to build the pipeline from Syria to the plants in Badawi and Zahrani. But if EDL converts all its power plants to natural gas turbines, by 2005 between nine to 11 cubic meters will be required daily. Its second contract proposes the rest be imported from Qatar, which has offered to supply 7-8 million cubic meters of LNG per day. Elf is offering to build two LNG tankers, a receiving and re-gassing terminal, outlined for Batroun, and additional pipelines to the other power stations. The tankers are each valued at $200 million, and the import area is estimated to cost $500 million to $600 million. The entire project is valued at almost $1 billion, which Elf will pay. If approved now, by 2004 the other power stations will be supplied with natural gas.

However, the government would have to cough up the money to refurbish the power plants running on fuel oil, estimated at $40 million to $50 million each. “This project will make Elf Aquitaine by far the biggest foreign investor in Lebanon,” says Chammas.

Considering EDL’s financial woes amidst the rising price of fuel oil, some experts are aghast, although not enough to go on record, at the government’s delay in giving the go-ahead on the project. But the current administration has gained a reputation for delay. Its 1999 budget was four months late, so too its five-year plan. Its tax collection program has yet to be implemented, and so far no concrete steps have been taken to restructure Tele-Liban and MEA.

Realistically, however, to convert the power plants to natural gas means scrapping or selling expensive equipment recently purchased, before recouping any return from it. And it requires large investments, which the government cannot afford.

The government’s oft-expressed goal of privatizing the utility could provide the funds, but that hardly seems realistic given EDL’s current financial and administrative status. To make it attractive to private investors, the government would have to invest heavily in restructuring or face selling it at fire-sale rates.

Instead, the government should focus just on improving billing and collection. Last year, 40% of the delivered electricity remained unpaid and Traboulsi has said that $466 million is owed to EDL by its customers. If EDL could demonstrate the ability to be profitable, private investors would be more willing to get involved.

Alternatively, the government could spin off some of EDL’s operations. One example might be to keep the generation and transmission public, but sell the distribution arm, which includes billing and collection, to the private sector under a profit-sharing agreement similar to the one which the government has with the cellular providers.

There is one other alternative, deregulation. Removing the monopoly and inviting the private sector to compete would result in less efficient power producers, in this case EDL, having to upgrade or fold. Minister Traboulsi has already indicated this is a possibility.

Whatever the government chooses, privatization and/or deregulation will have to figure. The UN’s ESCWA recently presented case studies of the Jordanian, Egyptian and Yemeni electric utilities, which have all been privatized. Egypt is presently the fastest growing country in terms of power generation in the Arab world. “They now have in excess of their needs,” says Diab.

As George Corm, the finance minister, likes to say, if other countries in the region can do it, then why not Lebanon?

The ‘other’ factor

The natural gas market for electric power generation is skyrocketing worldwide; it is predicted to rise by 2.5% every year for the next 20 years. In 1998 the value of gas turbine production worldwide was about $25 billion, 71% of it associated with aviation gas turbines. However, in the near future its application to electrical power generation is expected to exceed that of aviation gas turbines.

Besides being cheaper and environmentally friendlier, natural gas is readily available. The world’s gas reserves are estimated at 54 trillion cubic meters, over one-third being in the Middle East. With existing reserves estimated to last 60 years, utilizing it will help preserve oil resources, with current reserves estimated to last 40 years.

To preserve its oil reserves, Saudi Arabia has invested $25 billion to encourage its industries to run on gas. Presently a quarter of the country’s industries have shifted to natural gas.

In a related issue, an Israeli report commissioned by Jerusalem’s Hebrew University claimed that Syria’s petroleum reserves will run out in 10 years. Being Syria’s main export commodity, this typically led to rumors that Syria was pressuring Lebanon to convert to natural gas to preserve its oil reserves. Pierre Chammas, a petroleum economist, thinks that is beside the point. “Anybody who knows this business knows that the switch to natural gas is the option to do.”

Syria produces about 12.5 million cubic meters of natural gas daily, but the figure is expected to rise to over 18 million by next year. Chammas says that Syria is doing Lebanon “a favor” by promising to supply natural gas, as it presently cannot supply enough natural gas for its own needs. Between Syria’s proximity and the fact that gas is cheaper in its natural state via pipelines, the supply from Syria alone is expected to reduce costs by 30%. “It will be a good push for the Lebanese economy,” says Chammas.

February 25, 2000 0 comments

Cover story

Chilin’ with the big boys

by Hadi khatib, Peter willems & Hugh Jeffrey February 25, 2000

written by Hadi khatib, Peter willems & Hugh Jeffrey

When visiting Concord last month, EXECUTIVE got that “it could only happen in Lebanon” feeling. Representing this $50 million-a-year conglomerate is not some hard-headed CEO with years of experience, but two relative youths, Ihsan Hafez, 32, and his cousin Khaled Hafez, 25, both sons of the company owners. A typical family business.

But you can’t argue with results. The combined revenues of the family’s business, which comprises a variety of companies in the region focusing on refrigeration, have exploded in the last five years, from $25 million in 1995 to $50 million in 1999. One example of this growth is in Lebanon, where production jumped from 2,500 refrigerators in 1992 to 30,000 in 1999. And these figures took place in the face of heavy competition from imports and a shrinking local economy. So what gives?

The first answer is that the Hafez family runs a diversified operation that is not tied to the sick Lebanese economy. The family group manufactures household appliances in Lebanon, Syria and Saudi Arabia. Unusually, the company sells its products under different brand names: Concord in Lebanon, Al Hafez in Syria and Lematic in Saudi Arabia.

Furthermore, unlike many Lebanese companies that believe that the rich will always be around in large enough numbers to support them, they’re not, the family has no delusions of grandeur; its products are downright inexpensive.

Lebanon is a good test case. In a market where established brand names like General Electric, Maytag, Samsung, LG, Hotpoint and others all have local distributors competing for market share, Concord has around a quarter of the refrigerator market. This adds up to $10 million in sales, the single largest chunk for any company.

The simple reason for this is that Concord refrigerators are the lowest priced coolers on the market. According to Raji El Mayla, the regional manager for Maytag, a US manufacturer of household appliances, Concord is on average 35% less expensive than Korean-made refrigerators and 45-50% less than the American competition.

For example, a 27-ft³ Concord fridge/freezer retails at anywhere from $750 to $840, while its Korean and US counterparts sell at slightly more than $2,000 and $2,500 to $2,700 respectively. In an economic recession, with people seeing their purchasing power decline, this pricing strategy is working like a charm.

“It’s a good time to sell low-end,” says Antoine Cherfane, president of AC Holdings, importers of the Korean Samsung brand. Historically, US brands have dominated the Lebanese market, one that once had an insatiable appetite for good quality and large-sized refrigerators. However, the recession has been particularly hard on US imports. “US imports overall have dropped 30% in the last three years,” says Majed Al Zein, deputy general manager at Abdulrahim Diab, a pioneer wholesaler of home appliances and sanitary ware in Lebanon and a supplier of Maytag refrigerators. US imports went down from 36,000 units three years ago to some 23,000 units in 1998 and “won’t exceed 15,000 units in 1999,” predicts Mayla.

Statistics from the Ministry of Economy and Trade show that imports of complete refrigerator units went from $21 million in 1998 down to $15.7 million in 1999. The beneficiaries of these conditions were the lower-priced Korean companies, which managed to increase their imports from $3.23 million in 1997 to $6.41 million in 1999, and Concord, which has boosted its production by 10,000 units since 1997.

But the key for the group in Lebanon is that no one can match or undercut its prices. Although there are some 500 suppliers of commercial refrigerators for mini-markets and supermarkets, such as Adam and Takal refrigerators, Concord is the only manufacturer of domestic refrigerators. It doesn’t have to fight any price battles with local competitors, something very few Lebanese businesses enjoy. Similarly, with shipping, customs and clearance adding 35-50% to the cost of US and Korean imports, Concord does not have to fear price competition from imports.

Concord backs up its low pricing with a strategy of taking good care of customers. Although it sells directly to retailers and distributors, its strategy is to provide service directly from the producer to the end-user, thereby relieving their buyers of the responsibility and gaining the trust of the consumers. The company has 10 roving trucks that go daily to all corners of Lebanon, carrying out maintenance and replacing parts.

But Concord does something unparalleled by any of the importers. It goes beyond its three-year warranty and replaces any damaged refrigerator parts for free. “Concord is very generous with their spare parts,” says Walid Tahan, sales manager at Abed Tahan and Sons, arguably the top retailer of household appliances. Tahan sells some 6,000 refrigerators a year, including some $400,000 worth of Concord refrigerators. “Our large volume of sales in refrigerator units allows us to replace a $10 plastic tray for free because it only costs us 10 cents to assemble it,” says Khaled Hafez, who handles factory operations. “So instead of burdening our distributors with that cost, the company prefers to absorb that cost to offer a better service.”

Since 1994, Concord has also maintained advertising of $600,000 a year, 80% of which is spent on ever-powerful TV commercials with the rest distributed among other media outlets. That budget exceeds the $470,000 budget put in by the Maytag Group for its number one brand Maytag, the group’s total budget averages $600,000 for its collective brands, namely Maytag, Hoover, Admiral, Magic Chef and Norge, and the budget for Samsung is just over $500,000. Thanks to this branding strategy, Concord has made itself a household name with many consumers.

Still, Concord is far behind the quality of its foreign counterparts, some point out. “Concord has more problems than US or Korean imports with leaks, noise and doors that don’t open or close well,” says Tahan.

But comparing the capital available to importers and their volume of sales to that of local manufacturing, it is easy to see why imports are better quality. Samsung has the newest factory in the world, costing hundreds of millions of dollars to build and which produces more than two million units a year but employs fewer than 30 workers. On one production line, robots assemble five different models and five different colors, achieving a ‘zero’ stock level, i.e. orders are manufactured simultaneously with other orders to remove the need for storage.

Samsung has used this efficiency and consistency in manufacturing to boost its sales volume by 25% a year in Lebanon. On the other hand, Maytag has invested some $220 million in a new technology called Advanced Product Design. Maytag has been the number one brand in the US for three years in a row, according to the US-published Consumer magazine. This new technology essentially eliminates noise, leaks and makes refrigerators totally rust-proof; Maytag has used this new technology to increase its local market share against other US importers from 32% in 1997, to 41% in 1998 and 61% in 1999.

Nonetheless, Concord is trying to improve quality within the means it has available. As production increases, quality will also improve as more money is invested into offering a better quality product. Concord invests about $1.5 million a year on upgrading machinery to improve the finish and on computerized equipment that performs internal temperature monitoring on the production line. “The manual test used to take us eight hours to perform, now the computer does it in two and a half,” says Ihsan Hafez, who handles the sales, exports and finance. Last year, the company increased its production by 5,000 units, but has maintained the same number of service calls, an indication that maintenance efficiency has improved.

The biggest chunk of the family’s business is generated in Syria. According to Ihsan, half of all revenues, some $20 million, originate from Syria, twice as much business as in Lebanon. The original company founders were Syrian, beginning with a small factory in 1952 which was later nationalized in the days of pan-Arab nationalism. Another larger factory was built in the early 1970s by the government, which ironically is now the factory that Al Hafez uses today. So now the company competes against a government-run factory it used to own and one other local manufacturer, a partnership between Joud and Syrian Batric Company, two large local manufacturers of a range of home-appliance brands such as Hi Life, Penguin, Zerowatt and Riviera. The family reckons Al Hafez has half of the market share in Syria, which consumes 120,000 refrigerators a year. That leaves 30% for the government, 15% for the Joud/Batric outfit and 5% for a slew of small workshops spread throughout the country.

But regardless of which company has what share, Al Hafez enjoys some marked advantages while operating in Syria. The company has seen sales increase by 20% a year. It produces about 30 refrigerator models at any one time; the competition, Khaled claims, manages to produce only three or four models.

Having a factory in Syria guarantees another advantage. For one, the country is a closed market to all but a few imports and thus competition is limited to local manufacturers. “In Syria you can import according to a quota, in a very limited fashion,” says Raymond Daou, sales manager at Samsung’s main showroom. Al Hafez is already an established brand name with more than 50 years in the market, and newcomers will have a very hard time taking away market share from it. “Al Hafez has their tradition and history in the market,” says a Joud representative in Syria. And, even though a free-trade deal exists with Syria, don’t look to Lebanon for increased competition.

Despite a 25% cut in import tariffs between the two countries since January 1999, Lebanese exports have declined from $47 million in 1998 down to $27 million in 1999. The deal has run into serious snags, mainly generated by the complex bureaucratic procedures that are still in place in Syria, leaving many Lebanese exporters wondering about the usefulness of the agreement. Although the accord stipulates the immediate removal of all paper formalities for the exchange of goods, customs officials on both sides of the border have ended up as the real enforcers of the agreement. Traders cite red tape and corruption as the major obstacles to trade. A further 25% cut in tariffs, bringing it to a 50% total cut, took effect last month, but it is too early to predict the effect.

Another advantage to having a factory in Syria, says Khaled, is that the current market will not provide sufficient returns on the investment necessary to break in. “If you’re already in Syria, you can invest little by little and grow gradually. But if you have to put in $30 million to start a new factory, it’s nearly impossible to make it.”

The Al Hafez factory only supplies the Syrian market and spends around $700,000 in yearly advertising to market its products. But what if peace with Israel takes effect and borders open up, will the company be affected? “It’s better for us,” says Ihsan. “Labor cost will still be down, the cost of parts will be reduced and since we’re the only ones selling in large volumes in Syria, we will have the best chance of surviving in the market.”

The final manufacturing operation of the family business is the 10,000 m² factory in Saudi Arabia, which produces 50 commercial freezers per day used for ice cream displays; Lematic complements the local market with imports of refrigerators from the Lebanon factory. The company does not manufacture refrigerator units in Saudi Arabia since local competitors produce 50,000 units a year, not to mention around 30,000 US imports. Saudi operations represent 20% of the group’s total annual turnover, $8 million, and spend $500,000 in advertising.

But since profit margins on refrigerator sales do not exceed 3% to 5%, the company has looked to diversify its operations. To that end, the family has started an industrial engineering company to take on turnkey projects in the region. This involves building home-appliance factories from scratch, starting with the design, moving into the manufacturing line, supplying the machines, operating them and transferring the entire operation to its clients. In almost all cases, these are government-run factories or government-funded projects, designed as an incentive to produce locally.

The family has built half of all the refrigerator factories in the Gulf. In order to support these activities during the civil war, the Lematic group built factories in Turkey and Italy and design offices in Germany, Britain and Canada.

An average project starts at $5 million and can go as high as $20 million. Now that these projects have been reduced to one or two a year at most, these factories have been reduced to representative offices. However, although factory building is slow-going due to the saturation of factories, agreements with the factories they built stipulate that the family supplies them components, and this currently represents a nice and steady income stream, 20% of sales in 1998 and 1999, for the company. In the early 1990s, when building projects were peaking, the company was supplying components that used to represent 55% of its turnover.

The company also branched into the commercial end of the market, supplying freezers and drink cooler cabinets for such clients as Pepsi, Cortina, Iceberg, Dolsi, and Maccaw. These companies use the refrigerators to push sales of their products and distribute these machines free of charge to supermarkets and grocers. Having the capability of high-volume manufacturing, the company has essentially pushed all competition out in Lebanon.

Hryar Atamian, the general manager of Adam Industries, was one of those supplying the market with soft drink coolers. “This market became dead for us because we couldn’t compete with Concord’s lower prices and volume of production,” he says. “Concord has almost a 100% market share supplying freezers, soft drink coolers, but we do have 15% of the supply of juice coolers for companies like X-tra, Libby’s, Snapple and Gatorade,” says Houssam Moghraby, sales and marketing manager at Joud Lebanon. Joud took that share by applying some special marketing techniques that included allowing clients to lease instead of buy, offering free parts and service, even if the user broke it, and free delivery. Joud Lebanon is also trying to get in on the cooler refrigerators and water cooler market under its brand Riviera.

Diversifying even more, the family also manufactures twin-tub semi-automatic washers and supplies the Gulf, Algeria and Libya, where most of its sales occur due to water and electricity shortages. They are competing against Chinese manufacturers, which got involved in the business about 10 years ago and have flooded the market due to overproduction. Lematic produces about 10,000 units annually, supplying anything from 2,000 to 20,000 components depending on the year, but its local sales are declining because as electricity is restored, people are shifting to fully automatic units.

Besides that, the family decided it wanted to tackle global competition. In 1998, the group embarked on an expansion program trying to export more finished products than components. It has entered North and West Africa, the Gulf and parts of Europe. As soon as customs barriers between Egypt and Lebanon were lifted, the company jumped into that market, where there are close to 60 million consumers.

The family is leaving it up to the wholesalers in these markets to advertise and market the products and also to provide service and maintenance. It will use these cost savings to introduce very inexpensive products and will not make any profits on them. The main goal of the company at the beginning will be to increase market share and establish a foothold in these markets. The exports will originate from Lebanon; the family won’t open a factory there, even though it would mean significant savings on shipping and customs. “I cannot enter the market with a factory and supply only a limited amount, it’s too risky,” says Hafez. Instead, the company will concentrate on increasing its sales until it reaches a respectable amount of units sold, around 20,000, that warrants investing in a $20-30 million factory.

And the group has made progress in the new markets, selling a total of 1,000 units in 1998, and 4,000 units in 1999. Although making no profits on those sales, economies of scale indicate that selling more volume reduces the cost per unit of manufacturing, thus generating indirect profits not coming from the sale of individual units.

However, this expansion program faces some obstacles. For one, Lebanon is the most expensive country to export from. To get a container from the factory to the ship will cost $400 per container, so the prices have to be discounted even further. Secondly, even if the company decided to open a factory overseas, it doesn’t have the resources. “Our weakness is that we are not a shareholding company and we are not listed, so we don’t have easy access to capital,” says Khaled.

Like the family outfit that it is, the company is reluctant to open itself up to outside influence. And this could be a deciding factor in its continued sales success. Lebanon’s economic future, and that of the region, lies with the global market; the family will need significant resources to keep going forward or it will face rivals jumping ahead, not just in these new markets, but on home turf.

Even though they are facing obstacles, the bottom line is that the family wants these new markets to be the driving force of the group. They’re hot now; we’ll have to wait and see if they will cool off.

February 25, 2000 0 comments

Best Sellers

Stuck in the mud

by Avo Tavoukdjian February 22, 2000

written by Avo Tavoukdjian

What’s big and yellow, rips up the ground, flattens the earth and breathes fire? Caterpillar, the world’s leading brand in construction equipment. Okay, it might not breathe fire, but it is one tough piece of machinery. The quality and endurance of the Caterpillar product line, which includes everything from excavators and loaders to trucks, tractors, forklifts and a diverse range of engines, are the reasons behind the success of the company and the record sales it has had for six consecutive years. Sales and revenues for 1998 totaled almost $21 billion worldwide, a record for the company, although the first nine months of 1999 showed a drop of almost 5.6% over the same period of 1998.

Business for M. Ezzat Jallad & Fils, the agents for Caterpillar in Lebanon, Syria and Jordan, has taken a much sharper turn for the worse. The company’s revenues from the Lebanese market had been rising steadily from $10.9 million in 1994 to $18 million in 1998, but 1999 was a disappointment. Business dropped 43% from the previous year, plummeting to $10.2 million. Even business in Syria and Jordan, both potentially far larger markets than Lebanon, has seen better days. So what has so dramatically affected Jallad’s sales?

In Lebanon, the weak economy and government deficit are the main factors that have hurt the company’s construction equipment side of business. While gross domestic product shrunk by 1% in 1999, according to the Economist Intelligence Unit, the government’s efforts to reduce the deficit included putting a freeze on most public construction projects. This forced contractors to focus more on private projects, such as building and renovation works, where heavy construction equipment is used less.

“The drop in demand is tremendous,” says Walid Tamari, general manager of Michel Sehnaoui and Sons Plant Division, which also deals in construction equipment. “As long as the government has funding problems, the slowdown will continue.”

Jallad’s revenues from sales of construction equipment, about $7 million and 39% of total revenues in 1998, nosedived by more than 90% to some $600,000, a mere 6% of 1999 revenues. And despite taking up a greater proportion of total revenues, from 28% in 1998 to 42% in 1999, total sales of generator sets dropped by almost 10%, down from $4.68 million in 1998 to $4.28 million in 1999.

Sales of generators have been adversely affected by the same factor that has hit the construction equipment side of business: projects in Lebanon are dead. On top of the smaller demand for generators, especially since the days of erratic supply of electricity seem to be behind us, there are more players taking a chunk of the $35 million-a-year business. One such firm is Saccal Power Engineering, a local assembler of generator sets that launched in 1987. By 1998 it had grabbed around 10% of the market with a turnover of $3.7 million. Jallad claims to have a 22% to 25% share of the market for generator sets.

The only side of Jallad’s business that is doing better is its product support. Here revenues climbed nearly 50% from $6.3 million in 1998 to $9.36 million in 1999. But this doesn’t come as a surprise. If contractors aren’t purchasing new equipment, they’re maintaining the ones they already have, and since maintenance requires the replacement or repair of parts, this boosts Jallad’s revenues from its product support department. “Without sales of new equipment,” says Omar Jallad, the company’s chairman and part owner, “even this will decrease eventually.”

In 1997, revenues from Jallad’s business in Jordan surpassed revenues from the local market, but 1999 was disappointing even abroad. The combined revenues from both Jordan and Syria barely equaled that of Lebanon, and an upturn isn’t expected soon. “As long as the Syrian government doesn’t receive funding for public construction projects,” says Jallad’s chairman, “we can’t expect business to pick up.” It’s a shame. The volume of business that Syria is capable of putting Jallad’s way could make that from the Lebanese market seem trivial.

The same goes for Jordan. Phosphate mining has not only become a major contributor to Jordan’s economy, but that same mining created the demand for Jallad’s products. Now, with Jordan’s economic slowdown, Jallad’s business there has also dropped significantly, especially after 1997.

But what can Jallad do to face this slowdown? It can’t really diversify. The most it can do in this regard is to push sales of related products such as forklifts, a strategy Sehnaoui is trying in order to offset the drop in demand for construction equipment. “We are turning our attention to warehouses that use products related to our existing line,” says Tamari. Although that might generate some income, it can hardly compensate for the lack of sales of heavier equipment.

Furthermore, competitors in generator sets such as Saccal, Jubaili, and Ghaddar have an option not open to Jallad. They can export. In fact, these companies have been able to increase their business dramatically through exports. Since April 1999, Saccal landed two contracts with the Iraqi government totaling $8.75 million, or about 240% of 1998’s turnover. Ahmad Rajah Jubaili, a local assembler for FG Wilson generators, has exported to Nigeria since 1997 and to Iraq since 1998.

Ghaddar, assembler of Perkins and Leroy Somer generators, has been present in the international market for ten years and has an annual turnover of over $5 million with contracts in Africa, Dubai, Iraq and Kuwait. But with around 200 agents worldwide with the exclusive representation for Caterpillar products, Jallad can’t market its goods anywhere besides Lebanon, Syria, and Jordan.

But Jallad does have some advantages going for it. Brand power has been instrumental, especially since Jallad is no longer the only supplier of heavy construction machinery. “What makes Jallad number one in generator project sales is branding,” says Maher Saccal, CEO of Saccal Power Engineering. “This makes a difference with clients.” Hasan Ghaddar, owner and CEO of Ghaddar, agrees. “We cannot compete against Jallad who has had the Caterpillar name for over 70 years.”

Some projects executed by Jallad include supplying the American University of Beirut, the Indevco power station, the Beirut International Airport, Ghandour Mills, Liban Cables, Pepsi Cola, Coca Cola, and Casino du Liban, with $11 million worth of business just from the first three.

Brand power helps give Caterpillar products an edge despite higher prices than competitors. “Caterpillar products are 20% to 100% more expensive than others in the market,” admits Emile Copty, Jallad’s general manager. Due to low operating and maintenance costs of the machines as well as a relatively high resale value, Caterpillar products are a good investment in spite of the hefty premiums. One example was a 25-year-old machine that was recently resold for $30,000; its original price tag was $50,000. A new one now costs about $250,000, so considering the machine’s age and the need for repairs, the resale value is good.

Nonetheless, Jallad has already taken steps to become more competitive on pricing for generators. For example, a 1,000 kVA generator, previously priced at $150,000, can now be purchased for $120,000, not much more than $110,000 for the same output product offered by Ghaddar. “Selling at the same price, and backed by discounts from the supplier, he will get the deal because he is Caterpillar,” says Ghaddar.

Today’s market requires different marketing tools. “Before we used to just negotiate the price with the client,” says Copty, “but the consumer is no longer satisfied with a standard product that he can just walk in and buy.” Jallad increasingly uses tools such as operating cost per hour, life cycle costing, and productivity to persuade a client to buy. Since many clients don’t know how to assess the requirements involved in obtaining the right tool for a project, they solicit the dealer’s recommendations.

And Jallad has been quick to integrate that service into its operations. “We now perform five studies for every ten projects as compared to before, when it was one for every ten,” continues Copty. The Indevco plant in Halat, which Jallad supplied with two Cat 3616 generators, each rated 4,200 kW at 1,000 rpm, required six months for study and installation. Caterpillar engines were chosen after studies by 18 different suppliers were considered.

Jallad ensures that stock of the most popular goods never falls below a minimum, 97% of most spare parts are now on hand. Even the stock of heavy construction equipment, though now reduced substantially, still includes the most popular machines ready for delivery. While Jallad also manufactures soundproof chambers and control boards for the power generators, not to mention all supporting equipment and installation, it’s not alone. Local manufacturers like Saccal do the same.

Basically Jallad is in still waters without a paddle. “We will have to suffer,” says Copty, “for the next few years.” All they can do is maintain a solid reputation, whilst taking as big a chunk of the generator market as possible. Having survived as Caterpillar’s Levant dealer for more than 70 years, Jallad should be able to hang on until things get better.

Global operations

Caterpillar Inc., the world’s largest manufacturer of construction and mining equipment, as well as diesel and gas engines, is a Fortune 500 company with $26.5 billion in assets at the end of the third quarter of 1999. Following record revenues of $20.98 billion in 1998 and profits of $1.51 billion, last year brought some slippage. At the end of the third quarter, revenues totaled $14.68 billion versus $15.57 billion for the same period of 1998, while profits were just $707 million, down from $1.2 billion. With a reputation for manufacturing rugged machines that set industry standards for performance, durability, quality and value, the Illinois-based firm, one of a handful of US companies that leads the industry, had clocked in record highs for six consecutive years.

In the past five years, Caterpillar added 88 facilities to its assets, such as warehouses and manufacturing plants, acquired 20 companies, and entered 17 joint ventures. In addition, it introduced 244 new or improved products, with 44 of them introduced in 1998, when revenues climbed by 46% and profits by 58%. Engine sales increased by 37%, a result of recent acquisitions, while the ensuing $6.5 billion in engine business accounted for a third of total sales.

Caterpillar records more than half its sales to overseas customers, with export sales of $6 billion in 1998. Its products are sold in nearly 200 countries through a network of 195 dealers, 131 of which are located outside the United States. Much of its success and reputation has resulted in customers that have remained loyal throughout the years, with 80% of the company’s sales coming from repeat customers.

February 22, 2000 0 comments

Best Sellers

Dealing with adversity

by Hadi khatib February 22, 2000

written by Hadi khatib

So Lebanese industry has a checkered past; that doesn’t mean there are not some truly decent operations out there. Bassile Freres is one of them. From a tiny outlet in Hazmieh half a century ago, this modest binding company has become one of the major players in the local stationery manufacturing industry.

Bassile’s market is school and office supplies. It is so dominant in the latter that competitors such as Stationers, a school supplies importer, and Oriental Paper Products, a local school stationery manufacturer, call it a “monopoly.”

Milad Bassil, the company’s financial manager and one of the eight current owners, is more modest. “Though statistical data is lacking in our line of business, I can safely say that we have a fair market share in office supplies and we are a leader in some 50 to 60 items. But I wouldn’t call that a monopoly.”

Picture perfect? Unfortunately not. Since the early 1990s, Bassile’s local sales have been growing at around 15% annually, from about $2 million in 1993 to $4.4 million in 1998, with exports adding a respectable $3 million. That, however, is the catch. The export market used to represent 75% of Bassile’s sales during the war years, but has been in a steady annual decline of 5-8% for the last five years.

Cheap stationery imports from Indonesia and increasing industrialization in the region have exposed the uncompetitive operating conditions for Lebanese industry. Fadi Bekdash, for example, was once a part-owner of stationery manufacturer OPP but left five years ago to concentrate on importing from Indonesia. Now the general manager and part-owner of Stationers, Bekdash doesn’t miss the manufacturing side of the business. “The local manufacturing industry is not much appreciated by the government or the consumer,” he says. “Although equal in quality, people would rather buy imports.”

And now with the recession biting, Bassile’s total sales have dropped by 5% last year, $4 million, with a corresponding 3% drop in its net profits.

The timing wasn’t good. In 1997 it embarked on a $6.5 million investment strategy to solidify its position locally and compete regionally by adding 3,500 m² of warehousing space, renovating and increasing manufacturing capacity and expanding printing operations.

So while GDP growth slipped from around 4% in 1996 to an estimated -1% in 1999, Bassile’s new machinery came online in the first six months of last year. The result was stacks of inventory it could not sell. In 1998, Bassile’s stocks increased by a typical $400,000 between January and the end of September. But during the same period last year, inventory jumped $1 million in preparation for the school term and business.

To make matters worse, in the second half of the year last-minute buyers, who represent 10-20% of Bassile’s business, did not come through. That brought the company’s extra inventory to $400,000 near the end of 1999. Bassile froze its investment program with only two-thirds complete and cleared $130,000 worth of products at 20% of their market value, around $22,000.

Adapting to these conditions has meant big changes. Most importantly, Bassile introduced a whole new brand last year called Quest. “The best way to compete in these conditions,” says Bassil, “is to compete against yourself.” Although the new brand covers the company’s traditional product range such as files, indexes, account and office books, school notebooks and diaries, its target is different.

Instead of focusing on good quality items with standard specifications and constant prices for all his clients, Bassile will target the low-end buyer. Quest uses 60-gram paper instead of a good quality 80-gram paper, uses smaller-sized paper instead of A4 and lower quality binding and covers. “If people today cannot afford good quality stationery, I’m giving them a choice. We cut corners here and there and offer cheaper prices, even giving discounts for large orders,” says Bassil. “And since the product doesn’t carry our name we protect our image.” The brand now represents 8% of Bassile’s total sales.

And although Bassile’s investments did not come at the best time, they have helped it cut costs by improving on efficiency. In order to satisfy its yearly production of some 2,674 metric tons of products, an employee earning $300 and producing 4,000 items daily can now earn $500 and produce 10,000 items using the new machinery. Speed of production also goes towards better servicing of clients. For example, it used to take the company one month to produce 10,000 notebooks, but now an order of 10,000 privately labeled notebooks can be delivered within one week. Bassile’s competitors have not had that luxury for lack of serious investments in that type of machinery.

Bassile could go a step further by dropping unnecessary employees to compensate for overproduction or to cut costs even further, but it won’t. “We don’t have the heart to do what it takes, which is send a few employees home and stuff like that,” says Bassil.

Additionally, the company needs to compensate for the high hidden costs of storing raw materials and finished products, which run at 25-30% of the total cost. Bassile uses around 800 different types of raw materials, such as paper, plastics, glue, steel plates, just to name a few. Company suppliers have not been able to commit to just-in-time delivery, where the material gets used at the same time it is needed. So when looking at the aggregate between raw materials, storage and finished product stock, they end up with a 1.1 turnover ratio, ratio of goods sold over raw materials and finished goods in dollar value. “For us that ratio is too low, because the quality of some paper adhesive deteriorates, and paper products get damaged from moving equipment for lack of maneuvering space,” says Bassil.

OPP, on the other hand, is fully aware of cost cutting and has set out a plan to streamline operations and management to cut costs by 5% a year, even if it means reducing the labor force while trying to maintain the same efficiency.

OPP approached the economic slowdown differently. Instead of investing heavily in its core stationery manufacturing business, it put money into diversifying. It decided not to build more on producing seasonal goods that create a lag time, but rather move into year-round products. OPP invested $500,000 in 1997-98 to produce computer paper, using available space within its factory. It quickly grabbed about a 20% share of the market, competing with four other producers. It also invested in a sheeting and cutting business, which cuts reels of paper into standard-sized paper used, for example, for photocopying.

Bassile is still standing strong with a wide customer base of about 450 clients, mostly bookstore owners, but also small businesses, banks, insurance companies and other stationery wholesalers, both locally and abroad. It now distributes directly to its customers, doing away with the distributors it used to rely on. This came about partly because it could not reach some areas during the war. In order to maintain a constant price, the company used to take 2% out of its profits to compensate for the distribution costs, but not anymore.

Bassile has also done well in financing half of its investments. While 50% was self-financed, Bassile utilized the Arab Trade Finance Program (ATFP) to secure investment at an interest rate of Libor + 1.5%, now around 6.5%. By comparison, OPP resorted to local bank financing for its expansion program at rates of 8% or more. And for once, some outside forces were there to help Bassile’s business. After a five-year fight lobbying the government, customs on stationery imports went up by 50% last year.

If the economy improves, Bassile will benefit. The company is highly liquid, having the benefit of using the ATFP fund. This is a revolving credit line that finances the company in an amount equal to 80% of its export invoices any year it wants it. Still, OPP has a solid 40% market share in a business that grew with the generations of students using notebooks, note pads and school copybooks with OPP printed in bold.

It might be a good idea for Bassile to concentrate on its strengths in supplying office stationery. Will its ‘monopoly’ be broken up?

February 22, 2000 0 comments

Best Sellers

The right flush

by Kirsten Vance February 22, 2000

written by Kirsten Vance

The last few years haven’t been easy for local industry. And the Lebanese Ceramic Industries Co., which is owned by the Garghour Group and Finland’s Sanitec, is no exception. A local manufacturer of sanitary ware and tiles, Lecico saw its profits go down the toilet in 1998, when it registered a net loss of $1.4 million, and barely managed to break even last year. Not the direction anyone wants to see their business take after a net profit of $3.5 million in 1995.

Output in tiles has remained steady at 1 million m², but Lecico decreased production in sanitary ware, which includes toilets, sinks and bidets, from 730,000 pieces in 1995 in order to off-load excess stock. Last year it produced 490,000 pieces. At the same time exports dropped from a level of 50% to 55% of production in the 1980s to about 25%.

In Egypt, where Lecico also has manufacturing facilities, it’s a different story. There the company has been dealt a royal flush. Lecico Egypt dwarfs its Lebanese cousin; though the company would not release exact figures for each year, its Egypt operations have generated yearly net profits of between $8 million and $11 million since 1995. Its annual production of sanitary ware increased from about 2.2 million pieces to 3 million last year, with export markets soaking up 800,000 to 1.1 million. About half is destined for England, where the firm claims to have a 7% to 8% market share. Last year the group’s revenues totaled almost $90 million, while Lebanese operations accounted for just $17.8 million.

So why has the company taken a turn for the worse in Lebanon despite having a 58% market share and being the sole local manufacturer of sanitary ware, while its Egyptian operations remain strong? “Lecico has definitely been affected by the freeze in construction activity in Lebanon and the lack of opportunity to develop new export markets in the Middle East,” says Georges Ghorayeb, general manager of Lecico Lebanon and the group’s technical manager. While exports to the region shrank with the economic downturn in the Gulf, Syria and Iraq have remained closed and low-cost manufacturers have wreaked havoc on Lecico’s market share, explains Ghorayeb.

To add insult to injury, industrial costs in Lebanon are high. Ghorayeb should know, being the beneficiary of low-cost production at Lecico Egypt. “There is no comparison at all between the structure of cost in sanitary ware manufacturing in Egypt and Lebanon,” says Ghorayeb. He estimates that direct industrial costs are 60% to 70% higher for energy and labor in Lebanon than Egypt.

Faced with such a drain on profits, Lecico has begun implementing a strategy to boost its local operations and reap greater rewards in Egypt. Staff in Lebanon have been reduced from 670 at the start of 1997 to 500. Further reductions will come through attrition. Last year, Lecico invested close to $900,000 to upgrade the tile-making facilities in Kfarchima. That is expected to reduce costs by 18% to 20% on energy and labor. It also allowed the company to introduce floor tiles to the market this year, having previously been restricted to wall tiles. “That should help diversify our market share, but on the other side it will make a more complementary product,” says Ghorayeb.

That’s an advantage that Uniceramic, the other local manufacturer, doesn’t have. Uniceramic, which is 39% owned by the Ghorra family, produces just floor and wall tiles at its factory in Chtaura. Nonetheless, it has the larger market share in tiles with about 30%, while Lecico claims 15%. Imports account for the rest of the estimated 8 million m² market. More importantly, Uniceramic is in a profitable position, with 1999 showing an increase of 15% over 1998’s net profit of $1.05 million, unless provisions are increased.

“Lecico’s going through restructuring and this is costing them a lot of money today … we had done that in the previous three years so we were a little bit ahead,” says Nabil Ghorra, the assistant general manager, explaining his company’s better fortunes despite the downturn. Joseph Ghorra was among the founders of Lecico, which held a 36% share in Uniceramic until two years ago. The $4 million raised was reinvested into Lecico.

At $7 to $8 per m², Uniceramic’s prices are comparable to Lecico’s $6 to $8.25 per m². But Ghorra insists he’s targeting the import market share. To that end, the company is monitoring trends in colors and designs from Europe and expanding its size variations from 11 to 15 by the end of 2000. Lecico counts three sizes and will increase that to four. Ghorayeb acknowledges that Lecico cannot compete with the sophisticated manufacturers from Italy and Spain. His strategy is to protect the company’s current share of the tile market, and target growth in sanitary ware.

In this connection, Lecico was given a boost by its joint venture with Sanitec, a Finnish manufacturer of sanitary ware, which has operations in Europe, Southeast Asia and the Middle East and recently acquired the Dutch company, Sphinx. Last year’s net sales of Sanitec and Sphinx combined are expected to total about $800 million. Sanitec purchased a 50% share of the controlling stake in Lecico in 1997. Sanitec’s Wolfgang Molitor came on as Lecico Group’s managing director, while Gilbert Garghour retained his position as president. Together they own 96% of the Lebanese operations and 76% of Lecico Egypt.

“Lecico is pushing more on the sanitary side because that is Sanitec policy, they’re not in the tile business at all,” says Ghorayeb. Now comes the move to modernize the local sanitary ware facilities, which will suck up a yearly investment of $600,000 to $700,000 over three years, and gradually return to full capacity.

In Egypt the company is undergoing expansion. With an investment of $21 million, Lecico opened a second plant. Starting with a production level of 1 million pieces a year, the factory’s output will gradually be increased to 4 million. That would bring Lecico group’s total production to 7 million if the Lebanese plant reaches its full capacity of 800,000.

Increasing production is one thing, but what’s the firm’s strategy to sell more? In 1997, Lecico began creating a greater presence by establishing an active marketing division and building showrooms. Currently at three, that number will be increased to five or six in three years. Through its technical agreement with Sanitec, Lecico will begin producing European models here, including brand-name items. Ghorayeb also hopes that the new Lebanese norms for sanitary ware, established in late 1999, will be enforced and keep poor quality products off the market. But for Mansour Ayoub, sanitary division manager of Abdulrahim Diab, agent of American Standard and Ideal Standard, it’s another bureaucratic nightmare, requiring certification with each shipment. He questions the timing and reasons behind Lecico’s push for norms.

Lecico is also pushing for an increase in customs duties, which are about 25%. Unless the government can decrease energy costs and assure fair bilateral agreements, Ghorayeb sees higher tariffs as the only way to save Lebanese industry from a certain death in the face of low-cost imports. Importers disagree, and say it goes against the trend of opening world markets.

“Customs duties have never been effective in protecting industry, because if you can’t compete you shouldn’t be there. It’s artificial competition,” says Mazen Zantout, managing director of Wafco, a local distributor of Spain’s Roca sanitary ware.

Nonetheless, neither Zantout nor Ayoub consider Lecico as direct competition. Targeting largely the medium to high-end market, they believe the local manufacturer could only soak up some of the higher quality portion of the low-end market if prices are bumped up with higher duties. A sanitary set, bath tub not included, from Abdulrahim Diab sells at a low of $400 and an average of $800 to $900, and for Roca the low end is $500 and average $650. Lecico says it can supply the low, medium and high end of the market with prices at $120 to $500, and claims a 58% share of the low-end and 59% of the mid- to high-end market. Importers aren’t having an easy time either. Abdulrahim Diab has seen its sales drop by 16.6% since 1995, though it staved off a worse fate by bringing in more medium to low-end products.

From Egypt, where Lecico has a 40% share in sanitary ware, the firm hopes to expand further into the European market. That will be given a boost through its partnership with Sanitec. Exports will also target the south of the Arabian peninsula. From here, Ghorayeb is eyeing the Syrian market, which he currently gauges at 700,000 to 750,000 pieces a year, and Iraq for 2001. Sanitary ware and tiles were included in the Lebanese-Syrian free trade agreement last fall. Lecico estimates it can supply 150,000-160,000 pieces, having already established a chain of dealers.

With that, Lecico would move back into the black for 2000. Ghorayeb has received confirmation from Lebanese officials that the Syrian market will be open to tiles and sanitary ware starting in February. “We hope it will be a good year,” he says. But trade between the two countries has declined in the past two years, while industrialists complain that red tape has kept the border from opening up. Lecico Lebanon will still have to fight hard not to sink further, while its Egyptian sister looks ready to clean up.

February 22, 2000 0 comments

For your information

Energy Crisis

by Executive Contributor February 22, 2000

written by Executive Contributor

TRABOULSI: Our capacity for producing electricity is around 2,200 megawatts. The Beddawi and Zahrani plants produce 900 megawatts, Zouk 550 megawatts, Jieh 300 megawatts, Litani about 150 megawatts, Baalbak and Tyre together produce about 150 megawatts and Hreishe about 40 megawatts. We currently consume about 1,600 megawatts. In reality, when there is a malfunction with certain facilities, then we have some problems and some areas get temporarily cut off. The reason is that when Zahrani and Baddawi were commissioned, there was no simultaneous installation of a power grid or network. So although they can produce 900 megawatts, we can only benefit by about 300 megawatts. We are currently executing the installation of these power grids in order to be able to fully access the 900 megawatts those facilities can produce. Because we can’t currently make full use of these capacities, we are sometimes forced to buy about 150 megawatts from Syria, 50 from the Bekaa and 100 from the North.

But what about EDL’s finances?

TRABOULSI: The financial situation is known. The projects that were undertaken by the government and delivered to the electricity authority have a total value, including interest rates, of about $1.3 billion. It is our responsibility to make the credit and interest payments. In addition to that, the fuel prices went up by $50 per ton and EDL uses about two million tons per year. So there were additional expenses on electricity of about $80 million to $90 million. We also have the burden of paying our employees and other expenses and additional equipment. There’s also about LL700 million worth of uncollected money on the market.

Has collection improved?

TRABOULSI: There is a collection problem, of course, as a result of some residents not cooperating or paying and others illegally using electricity. We expect to accomplish the installation of meters, transformers, low-tension wiring, and accurate billing and collection as an attempt to reduce debt as much as possible, within an acceptable period of time. This is what keeps us awake every night.

Will there be a rate increase to cover the debt?

TRABOULSI: We have noticed that our receivables have increased, but only slightly. Of course, a study made by the electricity authority in France suggests we should increase the fare; the World Bank also recommends that we should increase the fare. But there are also social and economic considerations to consider; we shall see what the appropriate thing to do is.

Will EDL be privatized? Is deregulation an alternative?

TRABOULSI: I am preparing a ‘project law’ for electricity, which I will submit to the council of ministers. But electricity will not be privatized soon. However, its operations will become more flexible, and its primary rules of operations will be set in place as well as the conditions involving the private sector in its operations. There is nothing prohibiting private companies from distributing and competing against EDL in the future, but it all hinges on this ‘project law’ and reorganization of EDL.

What about converting to natural gas instead of oil as the fuel for generating electricity?

TRABOULSI: There is an American company studying the feasibility of converting EDL’s operations into gas: liquid gas would probably originate from Qatar and natural gas from Syria. Our Syrian neighbors have natural gas and so they commissioned EDL to design the plans to lay pipes from Homs to the Beddawi at a cost of about $50 million to $60 million. Then there is the issue of financing the project. The Syrians will probably look to finance their end by selling some gas or oil supplies to the company that will finance construction. As for our part, the electricity authority is still studying how the project will be financed. In Beddawi and Zahrani, our consumption will be 3 million m³ daily. The cost to build the pipeline from the Syrian/Lebanese border to the Zahrani power plant is about $200 million. Using gas is cheaper and the facilities are cheaper to maintain because mazout (diesel) is more difficult to handle than gas. For this project to happen, we have to look for a source to finance it that will not burden the treasury.

What about liquid gas from Qatar, which has been suggested by the French petroleum giant ELF?

TRABOULSI: This is a very recent project. It is big, and costs a lot, around $1 billion. We still have to look at the findings of the study and how much Lebanon will have to bear by way of financing costs. This project not only involves using liquid gas for the facilities producing electricity like Beddawi and Zahrani, but also for Jieh and Zouk, which need to be rehabilitated to allow for such use. The government will not go for such a project unless the feasibility study is favorable. Within two or three years we aim to have private partners help run EDL, but you cannot burden them with unfavorable economic considerations.

Switching to another of your responsibilities, oil. Petroleum companies in Lebanon have been very unhappy with the ministry’s role in regulating the distribution of gasoline. Why not let the market adjust the price of gasoline?

TRABOULSI: In 1977, a law was drafted to restrict the import of gasoline to the ministry of industry and oil, as it was called then, and to organize a system that would take care of its distribution. At the time, the ministry was responsible for all oil imports. In the 1990s, the ministry released control over the import of oil, kerosene, asphalt and gas to the private sector, but retained responsibility for importing mazout and fuel oil to satisfy the needs of the country. However, the ministry of oil is the one that issues the schedule of prices for distribution of private sector imports for a simple reason: You cannot leave it up to the importer to set his own price of gasoline. We have implemented a schedule of prices that is built on adequate numbers that are well studied, where profits are secured, as it is done in all parts of the world. If we let the importer set his own market prices, the price of the 20 liters tomorrow would jump to LL50,000. We guarantee the importer’s profit to cover his expenses and give him a profit margin. It is fair for the consumer and for the importer. Now we are using a variable scale ladder that adjusts the pump price to the increase or decrease in the price of oil imports. Previously, when the fixed scale ladder was used and when the oil price was in decline, we as a government were making more money from increased customs. It might have been the case that importers were making less money but they were still making their set profit margins. The only loser in this equation is the government.

Is there a plan to upgrade the refineries?

TRABOULSI: The cost of rehabilitating the refineries is around $1 billion, for both Zahrani and Tripoli. But as they only refine 34,000 barrels per day, this alternative doesn’t make sense. To justify this cost, they would have to be refining about 100,000 barrels per day. In this case, the government doesn’t have the capability to do this and, furthermore, we live in an area where oil is plentiful. It is not economically feasible to ship oil, refine it and then compete with other oil companies that are already selling oil derivatives to the region

February 22, 2000 0 comments

For your information

Help to the GDP

by Sami Atallah February 22, 2000

written by Sami Atallah

The banking sector in an economy is an important determinant of economic growth. It raises funds from those who have an “excess” of capital and lends them to those with a shortage. In this process of transferring funds, banks collect information, evaluate alternative investment projects, and monitor borrowers to ensure that loaned funds are efficiently utilized. Generally, the more effective the function of screening and monitoring, the more productive the financed investment and the higher the economic growth rate in the economy. It is through this role that economists find a statistically significant link between commercial banks’ allocation of credit to private firms and real per capita GDP growth.

In the post-war period, Lebanese banks have made major improvements. Their ability to mobilize savings went up; that is, the deposit-to-GDP ratio is 170%, exceeding that of developed countries, whose ratio ranges between 70% and 130%. Additionally, the banks’ total assets are around 200% of GDP, while profitability in terms of net return on average equity is 28% in 1997. Nevertheless, the growth rate in the economy has been declining. So the question remains: Why, despite the rosy numbers, has the banking sector failed to reverse the economic decline? There are four reasons.

First, while enjoying high returns and low risk on government treasury bills, the banking sector initially found little incentive to develop its credit assessment technology, which would allow banks to identify, assess, and finance projects. Its lending to the private sector has been confined to areas where credit can be easily assessed and monitored. It should come as no surprise, then, that trade, services, and construction absorb two-thirds of the banking sector’s credit. The majority of the loans are short-term, which allows the banks to closely monitor their performance.

Lending on such a basis can be detrimental to the economy since it may discriminate against sectors that require closer credit assessment and monitoring on one hand and medium- and long-term credit on the other hand. The most obvious victim is the agricultural sector, whose contribution to GDP was 12.4% in 1995 and yet whose share of credit was a dismal 1.6% in 1997.

The second major problem is a lack of reliable information on borrowers. The majority of private sector firms in Lebanon fail to publish accurate balance sheets. To avoid such risks, banks have concentrated lending to known, trustworthy clients, who are generally large borrowers. Credit in Lebanon is concentrated in the hands of very few people: 81% of the total credit goes to 9% of borrowers. In other words, roughly 4,500 people absorb four-fifths of credit. These are the well-known clients of the banks with large assets and/or who have been doing business with banks for many years.

Another consequence of the paucity of information is simply a lack of lending. Although the Central Bank of Lebanon allows banks to lend up to 70% of their foreign currency deposits, many of the large banks have lent much less than that. In fact, the average for the top 17 banks in Lebanon is 52%. A rough calculation shows that in 1997, an additional $3 billion could have been lent to the private sector. Such low lending and high liquidity are damaging to the banks’ profitability. And they deprive unknown and particularly small firms, generally the source of employment opportunities, of access to capital.

A third problem is collateral. A study shows that countries with a legal environment emphasizing creditor rights and enforcing contracts have better-developed banks and higher per capita growth. The absence of these two ingredients may discourage lending by banks in the first place. In Lebanon, although creditor rights are ensured, collection and enforcement are more problematic. Banks consider court procedures too complex, time-consuming, and uncertain.

According to a survey conducted by the Lebanese Center for Policy Studies, over 45% of banks consider the unpredictability of the judicial system a major problem for business. This is in contrast to a lower level of dissatisfaction expressed by other sectors. Banks also seem to want to avoid going to court as much as possible; it was cited as the last option for solving a dispute. They are discouraged from using the formal appeal process since it is considered to be time-consuming by fully 90%. Furthermore, the high formal and informal costs of property and mortgage registration unnecessarily increase the cost of borrowing for entrepreneurs.

The final problem is that despite the fact that banks have mobilized savings, the average maturity of deposits is too short, around 45 days. This has negative repercussions on the banks’ ability to lend to firms on a medium- and long-term basis.

One of the things that could be done to get the economy out of the recession is to work on building a stronger link between the banking sector on one hand and the productive sectors on the other hand. The objective of this is straightforward: get the money stacked in the banks’ coffers into the cash-strapped productive sectors. But for this to happen, the private sector must publish transparent and accurate balance sheets and income statements. The government could streamline bureaucratic procedures to facilitate collateral collection. In addition, it must prepare coherent strategies for the productive sectors to become competitive and hence profitable enough to pay back the loans. And finally, the banks should develop loan technology that can better assess and monitor loans to these sectors. Some have already begun doing this. At least it is a start.

February 22, 2000 0 comments

For your information

The low-end strategy

by Hadi khatib February 22, 2000

written by Hadi khatib

Sell Fast, a company founded by Kheireddine Fakhoury and Kamal Sinno in 1994, is a concept designed for an economically challenged country like Lebanon. The idea was to stock a store full of items where everything goes for a buck. After opening the first $1 store late in 1993, Fakhoury cleared his $30,000 inventory of shampoo, plates, and kitchenware in less than two weeks, selling around 4,000 items per day.

“Business was so good and more people kept coming in asking me to supply them with goods that I invested every penny I had in this business,” says Fakhoury. Six months after sourcing more items from the US, the company went from just retail to wholesale operations with a $300,000 investment. Today, besides its four retail shops, called Shop One, Sell Fast supplies over 600 clients including BHV, Spinneys, Monoprix, Vendome Hotel, and others. The products range in price from $1 shampoos, soaps and cotton buds up to $150 for 123-piece dinner sets. With an average sale of $10 per client, the company turned over $2 million its first year of operation and has been growing at an average of 20% yearly, prompting the owners to reinvest their capital each time to upgrade their operations.

Now Sell Fast imports from China, the Far East, Italy, the US, France, Belgium, Malaysia, Thailand, and Indonesia and sells to $1 stores, supermarkets, wholesale operations, houseware and kitchenware stores, and exports directly to similarly economically challenged countries such as the African states, Bulgaria, Romania and Cyprus. “We will double our turnover in 2000,” says Fakhoury.

Sell Fast is not alone, either. Another successful wholesaler that targets the low end is Bitar Trading Co. For the last ten years, Saad Bitar took his father’s business, set up in 1965, and focused the company’s products mainly on inexpensive glass kitchenware imported from Southeast Asia. And it’s working. Bitar is now a holding company, 15% foreign-owned and comprised of four companies designed to support the glassware business.

With an annual turnover of more than $5 million, Bitar distributes to 120 wholesalers and some 50 retailers of kitchenware, porcelain and enamelware products to clients such as BHV, Fahd Supermarket, Achik and Arout. Bitar’s porcelain items range in price from $1 to $200, but in glassware, most products are in the range of $1 to $10. Bitar reckons that only 15% of his business caters to lower-middle-income earners ($1,000 to $1,500 per month), but the rest is geared to low-income earners.

Reasons for their success are not hard to fathom. “Selling on the low end is more in tune with the current market conditions,” says Marwan Iskandar, an economist with M1 Associates. “People are shifting down their consumption.” Fakhoury agrees: “Consumers are looking for bargains and we have to tempt them heavily to get the money out of their pockets.” Louis Hobeika, an economist at the American University of Beirut, believes that the phenomenon is fundamental: “Selling to the low end is gaining popularity because the recession means that consumers who were once middle class are now moving to the lower class.”

Still, Fakhoury reckons that his business has potential not just in the low-end market. The fact is, he argues, consumers of greater purchasing power will not balk at a bargain opportunity for a good-quality product. But is it good quality? “The Lebanese are shrewd, educated consumers,” says Fakhoury. “They won’t pay for rubbish, even when spending LL 1,000, they want to know it’s worth it.” The fact that big supermarket chains and even five-star hotels are buying those items only proves the point that the products are not cheap, just inexpensive.

That’s the good side, though. Most low-end sales are for non-branded products that carry no warranty. Additionally, branded goods need not be stocked in a wide variety of items to attract customers; the brand sells the product. But when selling low-end coffee cups, photo albums, glassware or porcelain, the trader needs to change with the trends in tastes and fashion. “The pressure is to counteract the lack of brands by supplying a million new things, and for a growing company that’s a headache,” says Fakhoury.

Bitar has the same problem trying to attract women, who are interested in new designs, colors and a variety of sizes. “The market is too small to try to satisfy the changing tastes of my consumers, but we have to do it if we want to stay in business,” says Bitar.

Retailers are not particularly overwhelmed with the benefits of selling low-end. According to a major department store general manager, a drop in purchasing power over the last few years has been noticeable, but the larger sale volumes for cheaper products have not generated significantly higher profits than the slower-selling high-end items. For example, in one month, they could sell five sets of plates valued at LL 5 million and equally sell 100 sets valued at LL 250,000.

Tambourgi is a retail store at ABC, selling high-end glassware, tableware and a variety of household silver items. “I’ve had the same high-end customers for years and they buy with or without a bargain sale,” says owner Edna Tambourgi. Middle-class buyers, however, need to see at least a 30% discount before buying, she says.

The problem, of course, is that getting started on the high end means a larger capital investment and greater risk. So what about developing a low-end one-stop-shop retail concept? For example, Wal-Mart, which operates under a similar concept, is one of the most successful US companies of the past 30 years.

Both Bitar and Fakhoury doubt the likelihood of anyone risking the investment required to see something like this happen in Lebanon anytime soon. “Although the market is waiting for such a place,” says Fakhoury, “I will only open one or two stores just for kitchenware, for example, but not for the entire range of products.”

February 22, 2000 0 comments

For your information

Short-changing town hall

by Samia Jouzi February 22, 2000

written by Samia Jouzi

Beirut’s experience is typical. The city is owed money by just about everybody. “Nobody is paying us on time. The Independent Municipal Fund is way behind and we’re concerned that there should be a final audit of what they owe us. And the three utility authorities, water, electricity and telephone, have not sent us final accounts of their debts to us,” says Abdel Monem Ariss, the mayor of Beirut. Without the final accounts, most municipalities have no way of verifying exactly how much they are owed and how the money from the municipal fund is spent. Faced with high salary costs because of overstaffing and uncertain sources of revenue, municipalities are strained to provide the bare essentials.

Municipal budgets are sourced from 23 different taxes: 16 are local and the rest are central government taxes. The local taxes are the backbone of every municipal budget, because they are usually easier to collect. Beirut collected $33.2 million in 1999, while Ariss estimates that another $13.3 million went uncollected. The collection rate is respectable, he says, because the longstanding employees know who owes what, so the city can eventually collect.

But not all municipalities find it so easy. In Mazboud, a village of 4,200 in Mount Lebanon, the tightly knit nature of the community can make prosecution for tax evasion or raising property rates difficult, says town mayor Muhammad Habanjar. The resort town of Aley has a large number of emigrants and Gulf property owners who are difficult to track down for payments. Down south in Nabatiyeh, the council isn’t strict on collection, says Bassam Fahs, a council member, because of the economic hardship suffered by locals due to the town’s proximity to the Israeli-occupied zone. He does, however, believe that property taxes are ridiculously low and should be reviewed. Charging a homeowner $50 a year on average in return for municipal services is not practical.

The direct taxes are only part of the revenue equation; the other half is the government contributions. These include funds funneled through the municipal fund, which is run by the Ministry of Rural and Municipal Affairs (MRMA), and contributions from the utilities.

Taxes collected by the government on behalf of municipalities include a percentage of customs receipts, a 10% tax on cellular phones, a portion of the built property tax, as well as a surcharge on fuel and tobacco products. Each year, the MRMA should pass a decree to apportion the funds to the different municipal councils, usually by September for the previous year’s revenues. Last year, the Ministry of Finance disbursed about $126 million, but that was only a portion of the dues for 1997. Mazboud is still owed $23,700, and should receive another $67,000 for 1998. Beirut received $6.6 million for 1997, but it is still owed another $18.6 million. A similar decree for 1998 has been included in the proposed 2000 budget.

If getting paid on time is a problem, the portion being allocated to each municipality is another. For starters, divvying up the municipal portion of the property tax can be difficult when owners have real estate in more than one area. And while total allocations are based on the number of registered voters, that may no longer reflect the actual number of residents in the municipalities, argues Kassem Rahal, the interim mayor of Burj el Brajneh in the southern suburbs. His area, which includes Burj, Ramel el Ali, Ouzai and the Palestinian camp, counts some 13,000 voters over the age of 21 on the electoral roll but is congested with new emigrants who may actually vote elsewhere.

This is because in Lebanon, people are registered to vote in their family’s place of origin, which is often different from their place of residence. Re-registering in a different municipality is such a bureaucratic nightmare that most don’t bother. His local data, in the absence of an official census, shows the district is home to some 300,000 to 350,000 people, with 50,000 homes and commercial establishments. Last year, his municipality received only $165,000 from the municipal fund, whereas Rahal believes that figure should be higher based on the number of actual residents in his area.

Another headache comes in trying to collect from the delinquent utilities, even though by law utilities are supposed to pay their dues to municipalities every three months. “We have asked the Ministry of Post and Telecommunications (MPT) to pay us, but we haven’t seen a penny since 1994, although every resident pays a 10% tax on phone bills,” says Sheikh Wajdi Mrad, the mayor of Aley. He does receive payments from the water authority and electricity, however. The electricity facility in Aley is privately owned. Beirut’s municipality is owed $23.7 million by Électricité du Liban, and $20.9 million by the MPT. Those debts date back to 1995.

The Beirut water authority is more up-to-date, having paid the bulk of outstanding debts in 1999, with about $1.6 million remaining, says Ariss. In Nabatiyeh, where residents are exempt from paying water and electricity, the council does not expect much. But the MPT has expanded its service and improved collection, while the council has only received $12,600 for the first quarter of 1999.

On top of the problems with collection and allocations, staff wages eat up a huge chunk of municipal budgets, 60 to 70% for Nabatiyeh and as much as 87% for Beirut. This leaves little money to funnel into services. The responsibilities of municipalities include the supervision of schools and hospitals, zoning, health inspections, traffic police, road signs, street lighting, as well as clearing drains, maintenance and construction of inner roads.

In order to fund new projects, Fahs says the council lobbies members of parliament to volunteer some of their money received from the Ministry of Public Works. Municipalities also stretch out projects over time to help cover costs. When the projected budget of $172,000 did not materialize due to unpaid government disbursements, the municipality of Mazboud cut back and spent $107,000.

Despite Ariss’ concern for funding, Beirut, as the capital, probably has the most options. The city council has been studying schemes to raise money. “The two most rewarding would be municipal bonds and BOT projects,” says Ariss. “The money raised by bonds should mainly be used to improve tax collection and the quality of services.” The city is also looking for individual contributions, such as the fence that was put up for the planned Horsh of Beirut park, on the old road to the airport.

The city hopes to receive foreign funding from either the Arab, Saudi or Kuwaiti development funds, or by signing agreements with overseas municipalities. Île-de-France, for example, has agreed to pay $300,000 annually over a period of five years to rehabilitate the Horsh area. The Beirut municipality is expected to match that amount. The main stumbling block to these projects is the lack of qualified staff. Meanwhile, there is a freeze on hiring and the city has between 1,000 and 1,300 excess unskilled employees.

Fortunately, successive governments have recognized that municipalities lack proper means and have taken over the maintenance of storm drains, highways and main roads, although the money is sourced from the municipal fund. Beirut is the exception, where the administration’s involvement is not restricted to main byways. Maintenance projects have been awarded through the Council for Development and Reconstruction, but those contracts expired at the beginning of 1999 and were not renewed until October. That, unfortunately, was too late to get ready for the deluge of late January and avoid the flood damage.

February 22, 2000 0 comments