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

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.

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.”

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.