Real estateReal estateSpecial ReportSubsidies

BDL decision upends plans of prospective first-time homeowners

by Jeremy Arbid
written by Jeremy Arbid

Just when you thought you could not disappoint teta any further, news that your home loan has been put on ice will surely do the trick. For the first time in nearly two decades, Lebanese citizens can no longer rely on the public sector for support in buying a starter home.

For older generations especially, Lebanese society is still a patriarchal one: The man must provide, and if he cannot, then he is not an eligible groom. For many young men, life leads inevitably toward that conversation with an elder on the general route of life: finish your education and then find a job so that a home can be purchased to house a wife and children. Those looking for more, asking the question ‘then what?’ are simply told that once these markers have been reached and children are in the picture the only thing left is to ‘live life.’

Following such profound wisdom in 2018 is neither as certain nor easy as these elders make it seem. For many single as well as dual-income households, the path to homeownership, marriage, and family planning is on hold—not because young Lebanese do not wish to marry or raise children, but because purchasing a home in Lebanon has become increasingly expensive, and many have been priced out of the homebuyers market. This is especially true in the capital, Beirut, where the minimum price for a first floor apartment can start at $2,000 per square meter, pushing people to search for properties in the suburbs and in the mountains overlooking the city. Now, with a public sector scheme designed to help low income, first-time homebuyers currently in limbo, even apartments away from Beirut may be out of reach. Parliament did legislate a one-year $66 million fix to subsidize housing loans as Executive went to print, but how much this temporary solution will help depends on future decisions, including on a more permanent solution by Parliament and a housing policy from the next government.

A subsidy is born

Public sector support for homeownership loans in Lebanon is currently on hold. At the end of 2017, Banque du Liban (BDL), the country’s central bank, decided it wanted to change course and would no longer offer the financing mechanism that had been key to facilitating low-interest home loans for nearly 20 years.

Since 2000, BDL has been helping subsidize home loans in two ways. First, the central bank allowed commercial banks to borrow against deposits held at BDL for liquidity purposes. Later, when Lebanon’s economy began to slow down, BDL offered stimulus packages geared toward Lebanon’s housing-related economic activity. Through both initiatives, commercial banks gained access to cheap credit with the understanding that savings would be passed on to the consumer in the form of lower borrowing rates.

Several organizations have made use of the financing through multiple schemes: BDL itself offered subsidized loans to developers to finance their projects, and home loans to employees in the public sector and the security forces. Lebanon’s housing bank, Banque de L’Habitat, offered loans with ceilings ranging from $553,000-$800,000 to qualifying Lebanese nationals and expats, respectively. The Public Corporation for Housing (PCH) channeled loans through  commercial banks to low-income Lebanese households buying their first home. (See explainer on financing and subsidy mechanism below.)

The discontinuation of the financing mechanism is cause for concern, especially due to its impact on the PCH. The PCH offers a housing loan, known locally as the “Iskan loan,” to borrower households earning less than $4,500 a month. PCH pays the difference between the interest rate offered by the commercial banks and a rate set by the central bank, covering this cost on behalf of the buyer. The loan amount needed is disbursed by the chosen commercial bank, following BDL’s financing rules.

This year, BDL was still willing to help homebuyers as part of its latest stimulus package, with a set budget of $500 million. This was exhausted during the first quarter of 2018, leaving applications in the pipeline in limbo. To satisfy the applications that had already been approved but were stuck for lack of funding, BDL promised additional money from the 2019 allocation. It is unclear how much money will be needed to make good on the approved loans, nor how much will be left to subsidize loans next year. The shelving of the financing mechanism and the early exhaustion of stimulus money means no more subsidized home loans for the foreseeable future.

The end of BDL’s financing mechanism means less cheap credit is available for banks to deploy for housing loans. Commercial banks could still finance loans from their own capital at the market interest rate, but with the exhaustion of the $500 million during Q1 2018, plus the amount BDL made available from 2019’s allocation, home loans will become more expensive in the long run and less attractive to the borrower.

What happened?

“The mission of the PCH is to facilitate Lebanese citizens’ access to housing through the provision of loans at low interest and competitive advantage,” explains Rony Lahoud, director of the housing authority.

Lahoud says that at the end of 2017, the central bank decided to no longer allow commercial banks access to their capital reserves—that money, held under a BDL rule for liquidity purposes, would again be blocked as it was before 2000. Concerning the PCH, BDL’s decision to allocate $500 million in lieu of the financing mechanism as a sort of interim solution translated as follows: The interest was set at 3.75 percent, commercial banks would lend from their capital via the PCH, and the central bank would pay the difference between the set rate and the commercial rate.

As is now known, the $500 million was not enough to satisfy demand for loans across the subsidization schemes of the different organizations. Lahoud tells Executive that every year PCH was averaging 5000 loans with the borrowing ceiling at $180,000 and the average loan disbursed at $133,000. This amounts to 50 percent of all subsidized loans but around 33 percent of their value. Lahoud says $2 billion in subsidized loans are disbursed annually, with the PCH facilitating roughly $700 million each year. (The central bank did not respond to Executive’s request for clarity on the breakdown of the subsidization schemes of the different organizations).

If the PCH only accounts for just one quarter of annual demand for subsidized loans, how was BDL’s allocation of $500 million for 2018 exhausted before the end of the first quarter?

There is no available data on who borrows what and how much, though presumably all organizations offering home loans—commercial banks, the housing bank, the PCH, and, ultimately, BDL—do collect such information. Although the reasons behind the rapid depletion of the housing fund cannot be determined, there are several possible contributing factors.

Increased demand for housing loans may have been brought on by public sector workers thanks to salary increases enacted last year, says Massaad Fares, director of Prime Consult, a real estate asset management firm. Fares says the salary increase may have boosted the number of households that could now afford a housing loan through the different subsidization programs, primarily the PCH. He speculated to Executive: “All of a sudden, [newly eligible workers] ran to the PCH to apply for a subsidized loan, and the banks began approving without looking at what funds were available. The allocation was finished but the approved loans were still there, and we still hadn’t finished the year. So the central bank made an exception, putting [forward] $500 million to give loans to those who were approved. This money was exhausted in two months.”

The absorption of available funds by big-ticket borrowers may be another factor. Lebanese expats and qualifiers residing in country could access subsidized financing to purchase homes at values up to $800,000 and $533,000 respectively, via BDL and the housing bank. Big-ticket borrowers, allegedly including the Mikati Group, a holding company founded by MP Najib Mikati—a billionaire and two-time former prime minister—may have eaten up a large chunk of the available funds. For its part, the Mikati Group said earlier this summer that it had accessed nearly $14 million in housing loans in 2011 and 2013, not from the PCH or the housing bank, but through another scheme offered by BDL that began in 2001, and denied any wrongdoing.

But we do know that since 2011, lenders have made fraudulent use of BDL money meant to subsidize home buying.

In early September, the central bank issued a statement announcing that it had counted 437 violations by undisclosed banks and their unnamed clients, and that it had consequently handed out fines to the tune of over $5 million, according to a statement quoted in The Daily Star.

Alain Aoun, a member of Parliament, told Executive in a mid-September interview that market conditions after then-Prime Minister Saad Hariri’s resignation under unusual circumstances in November 2017 were too juicy for unscrupulous lenders and borrowers to pass up. “So some people took the housing loan at 5 percent and parked it in a bank account earning 10 percent interest. This was done through complicity with some bankers and this is where anomalies were detected.” Aoun says that this is part of the reason why the available funds allocated for housing loans were quickly exhausted this year.

The central bank did not respond to Executive’s request to discuss this or any other matter relating to subsidized home loans.

What next?

Speaking with Executive before the temporary solution was legislated, Lahoud, the director of the PCH, said no more housing loans could be accepted until a solution is found to finance loans and to pay for the interest rate subsidy. He said that in 2018 PCH was able to service 1,800 loans before the BDL funds were exhausted, and that there are currently 500 loans in limbo—applications that were approved but cannot be financed.

Lahoud wants a solution to the issue of financing and if it were up to him, all subsidized loans would follow the criteria of the PCH, which stipulates that: household income should be less than 10 times the minimum wage ($4,500 per month); the household should not have taken any previous home loan from the public sector; the borrower should be a first time homebuyer; the borrower must have held Lebanese citizenship for more than 10 years; the borrower must be older than 21; and the borrower must not own an apartment within 25 kilometers of their place of work.

In June, Executive asked the governor of the central bank, Riad Salameh, whether the state could offer a solution to finance housing loans and pay for the rate difference. Salameh responded: “This will depend on the budget that [the government and Parliament] will adopt. Of course, all these initiatives need to be funded and need to be subsidized. Thus, if the policy of the government is to take over these activities, this will be shown in the next bud-get, because in the present budget there is no allocation for such subsidies.”

Lahoud said there were multiple legislative proposals that differ slightly but have the same objective:  that the state treasury should pay for the difference between the set interest rate and the market rate. “This will need a law and hopefully [one will be legislated] as soon as possible,” Lahoud says.

Aoun, a co-sponsor of one of the proposed laws, said that any legislative fix from Parliament to subsidize mortgages could come as a standalone law. But he says that since there are only three months remaining in 2018, any subsidies legislated immediately under this year’s budget framework should be followed up with similar measures for 2019 and beyond.

Aoun tells Executive that the treasury could pay the subsidy, but that it is unclear where exactly new revenue would come from. Salameh reportedly had suggested the reapplication of LL5,000 tax per 20 liters of gasoline, plus an increase to the value-added tax (which was already hiked last year, to 11 percent) to finance a fix for the housing loan crisis. In response, Lebanon’s current caretaker Minister of Finance Ali Hassan Khalil downplayed the possibility of new taxes in the 2019 budget. A second idea suggested by Aoun was to subtract the amount required to subsidize the interest rate from the tax bills of commercial banks. “We can encourage private banks to offer these mortgages by deducting the [amount needed to subsidize the loans].”

On September 25, Parliament passed a $66 million law to subsidize PCH loans for the coming year. It was not clear how this law woud work or how many loans the money would service, or what will happen past 2019. Where the money will come from to pay for this law is also not clear. If it is to be part of the 2019 budget, this would require government formation, because cabinet must approve and forward the budget to Parliament for it to be ratified into law. Ratifying the budget must be done at the start of the parliamentary session beginning in October and before any other laws can be considered.

Authorities scrambled to reach this temporary solution, but when the state will come up with a permanent one and how it will work is not known. Demand across the upper segments of Lebanon’s real estate market has already been slow for several years, and the discontinuation of the financing mechanism by BDL and the halting of the PCH subsidy this year meant the lower segments of the market came to a standstill—a dynamic threatening a knockout punch to the entire sector, developers tell Executive (see overview).

For individuals, purchasing a home is a major step in the building of wealth, and those without access to competitive financing are now unable to take this step. The route to homeownership for low-income households looking to purchase their first apartment was effectively blocked. This means teta will not be trying to marry you off anytime soon—such a disappointment.

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LeadersOpinion

Lebanon in need of a housing policy

by Executive Editors
written by Executive Editors

There is a perception among Lebanese that the state is unresponsive to the needs of the public—it’s easy to understand why people might think that. For much of their thrice-extended mandate, from 2009 until May’s parliamentary elections, lawmakers neglected to legislate, the presidency was vacant for two and a half years, and laws that were passed were often not immediately or fully implemented due to long stretches of time under caretaker governments.

Through most of 2018, the country has experienced a real estate crisis affecting low-income households looking to buy starter homes (see overview). Until the end of 2017, Lebanon was offering subsidized home loans through a central bank financing mechanism that made cheap credit available to the country’s commercial banks, on the understanding that savings would be passed on to home loan borrowers. This was the general nature of a multi-sided subsidy program that made up around $2 billion of housing loans per year. When this financing mechanism was discontinued, it effectively ended subsidized loans.

Just as Executive went to print, Parliament—in a rare instance of rapid responsiveness to a public need—offered a solution: Legislators passed a law establishing a one-year $66 million fund that would allow qualified borrowers to again access subsidized loans through the Public Corporation for Housing (PCH), a state agency. But this solution is a temporary one; the mechanics of the new law are not yet known, nor is the date on which the disbursement period is scheduled to begin. We also do not know when the law will take effect because there is no government to implement it. In addition, there is no clarity on how the state will finance this law.

What Lebanon really needs is a permanent solution to finance the subsidy for PCH qualifiers, and this should come as part of a multi-year comprehensive housing policy.

To develop and implement a comprehensive housing policy requires a government. Executive does not call for the state provision of housing, because such a policy is oblivious to market mechanisms, limits the freedom of choice of where people can live, and would rely on the government to monitor and regulate these properties to ensure they were maintained and remained safe to live in—not a proposition that many would favor given Lebanon’s rampant corruption and frequent gaps in governance.

Financing the subsidies

For a housing policy to work best, it needs to allow people to live where they want to and to support them in doing so. A policy for Lebanon needs to support urban productivity, because everything in this country depends on its improvement. This would include infrastructure that helps people commute from home to work, or that enables them to work from home in a way that meets the needs of 21st century business operations. Such infrastructure would include fast internet, 24-hour electricity, and decent quality public transportation. Such a housing policy needs to be integrated with urban planning, infrastructure, and the development of industrial zones. A market-based housing policy is needed, because the market is a better conduit for housing than the government, which would likely build public housing whose quality it couldn’t maintain.

Financing home loan subsidies should be a part of the housing policy. The state should avoid using indirect taxation or taxes targeting consumers, such as the value-added tax (VAT), to pay for the subsidy. An indirect tax or a consumption tax is not redistributive because it disadvantages lower-income taxpayers, who would then spend more money on consumption.

Giving the banks a tax break, one idea floated to Executive by lawmakers and industry stakeholders as a means to pay for the PCH subsidy, is also not a redistributive mechanism. An example of a financing method that would be redistributive is a tax on real estate above a certain value—wealthy landowners should have to pay more in taxes to purchase land and luxury-grade property.

That the subsidy would pay for itself from the collection of taxes and fees by the state up and down the real estate and construction value chain is a notion referred to as deferred financing: the subsidy will be recouped, but must be paid out first. This is a lovely concept—if you already have the money—but Lebanon has been running primary deficits, and to date, the state has piled up $83 billion in public debt, so deferred financing is not a realistic option.

For a long time Executive has been calling for a change in Lebanon’s tax system—from indirect to direct taxation—and this year’s housing loan crisis is another reminder of the need for direct taxation in order to finance housing subsidies for the benefit of poorer households. Last fall, Alain Bifani, the director general of the finance ministry, told Executive that new taxes legislated at the end of 2017 were a first step toward more equitable taxation and the redistribution of wealth: It is now up to Parliament to come up with the second step.

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OverviewReal estateReal estateSpecial Report

Survival of the fittest for Lebanese real estate developers

by Jeremy Arbid
written by Jeremy Arbid

Coming into 2018, Lebanon’s real estate market was already sputtering. For several years, real estate developers have complained of worrying market conditions—always hoping that the next year will be better, that the political situation in Lebanon will change, and that buyers will come clamoring back.

The first wave of concerns was voiced by developers of luxury units. Property sales in this uppermost segment began slowing down around 2011, creating a glut of luxury-grade apartments that industry insiders estimated at a value of no less than $3 billion. The mid-segment of the market came next, with a drop in the sale of $300,000 to $500,000 apartments, which mostly cater to Lebanese expats. Sales performance of that portion of the market began dipping in 2015, when the pocketbooks of those working in oil-producing states took a hit with the fall of oil prices. What still remained vibrant was demand for entry-level units that were affordable for young families, thanks in no small part to the subsidy schemes promoted under the annual economic incentive packages of Banque du Liban, Lebanon’s central bank.

The cancellation of a central bank-administered financing mechanism at the end of 2017, however, has changed the outlook. While developers are not quite saying the apocalypse is nigh, they are increasingly concerned. The central bank’s decision to close the spigot financing home loan subsidies—a near $2 billion market segment—has brought the market to a standstill. The loss of this financing mechanism creates a further impediment to any remaining demand for Lebanese property. As Executive went to print, Parliament did legislate a one-year $66 million budget to subsidize housing loans. But how much this temporary solution will help is dependent on future decisions—including efforts by Parliament to establish a more permanent solution, and by the next government to implement a comprehensive housing policy.

The subsidy disruption has called into question the health of the entire real estate sector value chain—including a number of construction businesses, material suppliers, and home furnishing outlets—which industry insiders estimate constitutes up to 25 percent of the economy.

Zero demand

Executive spoke with six developers and real estate asset management firms in September for this report. They described a troubled market and a sector in crisis. Some see a prolonged downturn of the market, while others suggest that real estate will bounce back with local and regional economic revivals. All of them, however, agreed that today’s demand for housing is practically zero.

From 2008 to 2011, Lebanese real estate was the business to be in. The market was on full blast: money poured into Lebanon in the form of investments in new development projects and property sales peaked. Property prices multiplied during this period, says Walid Moussa, president of Lebanon’s real estate brokers syndicate (REAL) and CEO of Property Brokerage & Management. He tells Executive that there were several reasons behind these price hikes. “There was the election of the new president of Lebanon at that time [and] there was the Doha Accords, giving political stability.” Moussa says. “Plus we had the international financial crisis and people wanted to get their money out and put it in Lebanon, so a lot of money came from outside into the market. All that resulted in development in the market.”

Abdullah Hayek, CEO of construction and real estate services firm Hayek Group, says that the period saw a high in building permits and sales transactions. In his view, however, this high growth was marred by excesses and developments that later would prove to be detrimental to the sector. According to him, the downside of the boom was an invasion of unprofessional developers. “They started building the way they wanted to but not the way they should have,” he says. “Most of them, since they are not professional, bought the wrong land, used inadequate designs and specifications, and incurred higher costs, and therefore wanted to sell at higher rates. That’s why we have a lot of vacant apartments these days. Those apartments were built in that interval.”

Today, the market’s boom times are firmly in the rearview mirror. The downturn began in 2011 as unrest swept across the region, disrupting economies. Gulf citizens—including nationals from Saudi Arabia, the Emirates, and Qatar—no longer traveled to Lebanon and stopped eyeing property in the country for political and security reasons. Lebanese expats stopped buying because of job insecurity, particularly those working in oil-producing countries who preferred to hold onto their cash. From 2011 to the fall of 2017, the real estate market continued to slow down, before a shock accelerated this decline. In November 2017, when then-Prime Minister Saad Hariri announced his resignation, the market started to cool even more rapidly, and this freeze—which remained in force even after Hariri rescinded his resignation—was further exacerbated by the closure of the subsidy well in spring 2018. These two incidents marked the turning point from market downturn to market crisis, developers tell Executive.

A crisis for whom?

Is Lebanon’s real estate sector actually in crisis? The answer depends on whom you ask.

Landowners aren’t experiencing a crisis, says Mireille Korab, head of business development at FFA Real Estate and vice president of Lebanon’s developers syndicate, REDAL. Korab tells Executive the number one issue concerning the market is a lack of demand. “This is where the crisis comes from: People are scared and don’t know what to do. [Should they] keep cash or put it in real estate?” She says that, for now, landowners are content to sit on their properties and wait for better times to sell. “If it is a big [piece of] land and the owner is in debt [then you may find a willing seller], but these are peculiar cases,” Korab explains to Executive in a mid-September interview. “All in all, land did not lose value in Lebanon because of its scarcity. Definitely there are discounts, but there is no crisis for land [prices].”

Wealthy developers are also far from crisis, says Massaad Fares, CEO of Prime Consult, a real estate asset management firm. Fares says well-to-do developers will be able to hunker down and carry on once market conditions improve. He also says that the banks, in general, are still in a comfortable position and not overleveraged. “Lebanese developers are rich, they have the money in general,” Fares says. “We hear that some are not doing so well, but, [for] banks, even if [a developer] is not paying down the principal, they are paying the interest. This is why we don’t have foreclosures, and the banks are not afraid of real estate, because it is valuable. They are not so worried about it—even if they end up foreclosing [on properties], they are not afraid because it is a good asset for them, a good security.”

Wealthy players in the real estate market—landowners, rich developers, banks—are going to be fine, industry stakeholders agree. But those who are not so well off might have to pay a steep price.

Smaller developers may be the first to go under, says Carlos Chad, general manager of Demco Properties, the sales arm of the Lebanese steel conglomerate Demerjian Group. “It’s like the ice age, when there were so many species of animals it was survival of the fittest. This is what is going on in the property market today. When you have a wounded animal in the herd, he won’t make it.”

All of those interviewed by Executive agree that it is a buyer’s market and some developers are still selling—to those who can pay cash. But buyers who were on a payment plan and expecting delivery of their apartment may be in trouble if the developer they bought from goes belly up.

For some projects under construction, prepayers will be losers, says Fadi Jreissati, general manager of Sakr Real Estate. Jreissati explains that some projects still being built are at risk of not being delivered because of poor sales disrupting cash flow to the builder. Lack of liquidity by the builder coupled with an inability to pay back loans borrowed from a bank may push the bank to foreclose on the project, effectively punishing the presale apartment buyers. “I think so far it is under control, but you’ve heard what’s happened with Sayfco and Badawi—probably many [builders] have not declared yet but are in bad shape and are running out of ideas,” Jreissati says. “Banks are pressuring them. Is there a risk on the market? Yes, I would say there is a very high risk now.  [Project foreclosure would create] an even bigger crisis because so many clients would have [prepaid] by then up to 50 percent [of the value to purchase an apartment]. So if the bank takes over [an unfinished project], they are inheriting hundreds of problems and creating a social problem—a huge one.”

Weak economy, weak real estate

The market situation the sector faces is just a normal reflection of the deterioration of the overall economy, Hayek tells Executive. He also says that the discontinuation of the financing mechanism means Lebanon is now subject to a housing loan crisis. The central bank’s decision means no more cheap credit is available for banks to lend out for mortgages, cutting off borrowers’ access to subsidized loans in the process (see subsidy story).

The central bank’s decision terminated the financing mechanism it had used to intervene in the housing market for the better part of two decades. According to Moussa, this was done for two reasons: to maintain the currency and to contain inflation. Hayek speculates to Executive that the diminished economy since 2011 has reduced consumer buying power, meaning that the banking sector would rather park money in government debt then risk mortgage defaults. “[This is] what worries the banks. They prefer guaranteed low-risk treasury bills, rather than going into housing loans, because they want to avoid any default from now on, if the central bank does not subsidize loans.”

Banks are still offering home loans, but with cheap credit from the central bank no longer available and subsidized mortgages on hold, borrowers must pay more for their loans over the long run. “Banks have plenty of money, but, if they offer mortgages, the interest rate is around 9 to 10 percent, and this is not attractive for consumers,” Hayek explains.

Who are the losers?

The central bank’s decision puts a $2 billion segment of the market in jeopardy. That was the knockout blow for market demand, FFA’s Korab says. The Lebanese state was expected to fill the void and a recently passed law allocating $66 million to subsidize home loans may manage to do that for the coming year—though, as Executive went to print, it was unclear exactly how the legislation would work, how many loans could be serviced, and where this money would come from.

Any prolonged delay implementing the state’s solution for this part of the market could spell trouble for developers. Many builders are not able to sell their current stock, meaning they may not be in a position to build what the market wants—smaller and cheaper apartments—when demand recovers. The lack of accessible financing for homebuyers could put the developers in a cash bind, themselves unable to pay back loans to banks, settle bills with suppliers, or pay employees’ salaries. Plummeting sales could bring problems up and down the real estate value chain. A project under construction means employment for many specialized workers and requires raw materials. After an apartment is sold, it must then be furnished. This cycle, from construction to delivery to occupancy, creates value up and down the chain and drives revenue to government coffers in the form of taxes and fees. If the whole cycle stops, companies can go out of business, people stop working, and the government loses revenue.

The sector may now be approaching the end of a boom-bust cycle that was in a boom phase from the mid-2000s until 2011 or 2012. If there is to be a bust, it will be—for developers engulfed by the real estate ice age—the final calamity after a long decline.

All we can do right now is identify clear losers: low-income households looking to buy starter homes. Because first home buyers can no longer access cheap credit to finance the mortgage on their property, for many young people, life—marriage, children, building wealth—is on hold.

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Book review

A short conversation about how to prepare for the unknown

by Thomas Schellen
written by Thomas Schellen

Farid Chehab is known for his innovative mind, having developed fresh advertising concepts throughout his career as a director of international ad agency Leo Burnett. Today, as honorary chairman and advisor to the board of Leo Burnett Beirut, Chehab appears to be more curious than ever about new concepts. Executive sat down with him to discuss his third book, which is forthcoming.

E   Bridge to the 21st Century is your third book in six or seven years. Your first book entailed very specific national proposals on how to better manage Lebanon’s water wealth for the people and the economy; the second contained more personal reflections on happiness and creativity. Where does the upcoming third book take your oeuvre and what is the story behind the writing of it?

This book is very dear to my heart because I spent a lot of time on it. It all began with the Harvard Arab Weekend in 2015. I was invited to Harvard to give a speech on how to prepare our region for [greater connectivity with] the world. I had some ideas in this regard. I shared them in this presentation, which was very well received, but in doing my presentation I realized that when I was talking about [taking] the Arab world to the West, the wider issue is that our world is facing a new world, which is the digital world. So I used the four pillars from my presentation that I think are essential [when being confronted with a very powerful new reality], and wrote about these four essential pillars.

E   In the note that you sent me about Bridge to the 21st Century, the four pillars were listed as resilience, ideas, values, and tolerance. All these are concepts that we associate with important human mental achievements, but what makes them special in the context of preparing ourselves, our kids, and our grandkids for the digital age?

The digital age is an age of mental effort. It is totally new. However, we have been living in an age of consumerism, which means that people are not ready. They are no longer used to making a mental effort because things come easily to them. But because the premier métier, or first task, in preparing for the digital age is [related to the mind], the first pillar [in becoming ready for the digital age] should be resilience. Because if you don’t build resilience, you don’t develop your mental agility and mental power.   

E   Can you describe what you mean by resilience? The term has been used in many different ways, from describing someone’s ability to bend but not break under existential crises to characterizing the state of the Lebanese banking system over the past 10 years.

Resilience means a lot of things, and it starts with education. If you tell parents today, “Your children will not be equipped for the 21st century,” they will often respond that children will get used to [the digital age] and point out, “My kid is playing very well on their smartphone.” This is silly, because the more the child plays, the less they will develop mental energy. Playing is not the same as developing mental energy. For this, you have to develop the screen that you can play on, not play on a screen. In this, there is a paradigm shift in education and we have to move away from the misunderstanding of education.

E   Why are your other pillars important? What does creativity have in common with values, and what connects values and tolerance?

I compare the new age, the digital age, to an unexplored jungle, because everything is unknown. Besides being resilient, what do you do to survive in an unknown jungle that is full of dangers? You need to come up with ideas, be inventive. You will die if you are not inventive, because someone else who is more inventive will [make you] fade away. If you want to survive economically, you need to be inventive—look at all the successful digital gurus and geek entrepreneurs: they invent all the time; ideas drive them. This is also coming back to education. If you want the kids to be inventive, you need to prepare them to be inventive. Under the old education models, you have [repetitive cycles of] teach and absorb. But the brain [does not work best] in absorption mode; it should be in the mode of invention.

The next pillar, values, is all about  capitalism, the flow of the economy, and the environment. We are now in the Anthropocene and have started changing our world, but not with an attitude that would be compatible with nature. We need to start taking care of this, which means solar versus fossil [fuels] and the fusion of hydrogen. Entire industries have to change to new values. Today’s values have to be “to do good” and use less energy.

Also, there will be the problem of job destruction. How do you solve the problem that by 2030, 800 million jobs will have vanished, as [businessman and investor] Jack Ma predicts? All of that means that you need to listen, understand, and connect—so you need to have tolerance. Intolerance is the end of the world.

E   As you are talking about such problems now, do you see us as moving toward the end of the world, a day of doom?

No, I am very optimistic. I believe that the human political problem will have to be solved because of the existing pressure to solve the problems related to Mother Earth. Necessity will oblige us to solve these problems. But the biggest problem and test of tolerance is [not the environment and] not human rivalry. It is the coming new tyrant, which is the digital age. It is artificial intelligence. How will you, Mr. Human, you organic being, cope with artificial intelligence? How tolerant are you going to be toward it?

E   How would it be from your perspective if your artificial intelligence unit started worshipping you as its creator? How would you deal with that challenge?

This is beautiful. Such questions are what the last chapters of my book are all about. I say that at the end of the day we are the story of intelligence. What are you? What are we? It is the story of growing intelligence. We were not very intelligent when we were lizards, we became more intelligent when we were monkeys, and again more intelligent when we became Cro-Magnon and today Homo sapiens. What I say is that intelligence made us Homo sapiens and I say that intelligence discovered that as Homo sapiens, we will need backup and we invented artificial intelligence. So [AI] is not our enemy, it is a continuation of [our existence], and I say it very bluntly: We need to get used to it. We need to absorb [the new reality] and accept the fact that we, human beings, are not going to keep on existing as flesh and blood. We will be a mixture of organic and numeric, and I believe—this is at the end of the book—that the new man is not going to be the same as you and me. Humankind will become different, perhaps as different [from Homo sapiens] as we are from monkeys. The new man after the 21st century will be totally different.

E   Historian Yuval Harari talks at the end of his book Homo Deus about such questions, such as dataism and trans-humanism—new religions that he expects to arise from Silicon Valley and from entities that have artificial intelligence but no conscience. He speaks of a dichotomy between machine intelligence without conscience, and humans who have a conscience and are defined by it. What is your position?

I swallowed Harari’s book as well as 30 other books. I have a chapter called “Intelligence versus conscience.” I believe that the [term to use] is not artificial intelligence. It is intelligence that drives us, not artificial intelligence. I believe that conscience is a byproduct of intelligence. We are not born conscious, we are evolving toward intelligence. Conscience, being a byproduct, is definitely going to change. Conscience of our organic state, this is going to change. What intelligence will drive us to do is keep on developing. And it will be ruthless in selecting the new species.

E   But is not the propensity to make decisions based on emotions, rather than on rational decision making, the most serious drawback of humankind?

I am not sure, because what drives your intelligence is not only being rational. What drives you is dreaming, is creativity. It is art. Art is the beginning of the game. What humans started doing was creating art in everything, because it was driving them. I believe that in the mix of two intelligences, organic and artificial intelligence, and the artistic value of what we are in our complex brain will continue to drive us in pursuing our purpose. It will be our purpose to become a happy intelligence. This, becoming an intelligence with a purpose, is the [next step] of humanity and the [step after that] is going to be outer space. A large part of humanity will be exploring [in space], and that is [a project] for the end of our century. Mars will be explored and inhabited. We will also become the new discoverers.

E   So you’re saying that mankind might one day upload human minds into a sustainable and resilient spaceship and travel beyond the solar system to explore stars and systems that are light-years away from earth?

You are [anticipating] the book. Yes, that is what I say. And I say that if we are not part of the development of mankind as in [steps] two or three, we will be collateral damage and fade away, like Cro-Magnon, a species that disappeared. Homo sapiens, as is, will disappear. If you want to pinpoint one part of what is in this book, it is that it is very optimistic in the sense that intelligence, out of the hand of today’s humanity, has a big future.

E   Would you then describe Bridge to the 21st Century as a book about digital technology, about innovation, about education, about attitude, or a metaphysical speculation from the perspective of today’s Homo sapiens?

Definitively attitude. It is a book about attitude. Harari and all of them talk about all the innovation, and I don’t want to copy what they say. I say, read them. My ounce of wisdom in this regard is that nobody talks about the attitude [required] for the digital age yet. What is going to be our attitude? We will be responsible.

E   Another question regarding attitude in the 21st century: What do you regard as the starting point of the 21st century, not in relation to some date in a calendar, but in the sense of the shifts and innovations that define it?

I would say I associate the 21st century practically with the smartphone. Computers started in the 20th century for all of us, but the smartphone placed the computer at the tip of your finger, and nothing connects you with the world today as much as the smartphone.

E   So, this means the 21st century has been emerging over the last 15 years?

Yes, absolutely. The smartphone is opening a vast field, in which the iPhone is an example. With the computer you still went and sat at the screen. With the smartphone it is different. The digital age sucks you into it through the smartphone.

E   But you already said in this conversation that it is not enough for kids to be playing on the smartphone in the same way that kids from the 1950s until the 1990s were sitting exclusively in front of TV screens? How do we advance from having consumer minds to having at least prosumer minds, and ideally to be creators and innovators?

That is your golden question. That is what I said in the beginning about resilience. You first need to have a protocol where all screens, from the very beginning, must educate kids not to go into absorption mode, but into creation mode. Secondly, you need to develop with kids their sense of curiosity. I believe that if you do not have curiosity, you go nowhere. Thirdly, I say that we need to change the pattern of education from alphabets to numbers. Absorbing an alphabet is easy [by imitation of sounds], while numbers immediately are a concept. If you start to educate your kid through concepts you might start developing the child’s brain in a much stronger way, which will make the brain more resilient. A new pattern of education should emphasize a mixture of alphabets and numbers. People think mathematics and knowledge of numbers comes after [teaching a child words]. I say, no, it should come even before.

E   So will people with a strong predilection for numbers and mathematics have a special advantage in society under your concept?

No. Numbers are a prerequisite, but you can still be a great artist if you have an understanding of numbers. I say in one chapter of the book that there is a new renaissance of art in the digital age where we can create art that we never thought we could create. We say that numbers are [the realm of] computers and digital, [whereas] our brains are just organic, but this is not true. Our organic material is based on numbers. When you go inside the brain and its cells and the miasma, there is an electronic system at work.

E   Some think that evolution is not fully describing the process of human development. In the sense of attributing a leading role to human intelligence in the progress of mankind, might you be debunking the myth that all mutation occurs at the DNA level and consequently takes a lot of time? Is there mental evolution—are there changes in behavior and thinking that might lead people to consider that in order to be human, I need to be able to “create” god, and by being able to create god, become like a god?

Allow me to read for you what is written in my book. These are the last lines of Bridge to the 21st Century: “We will have opened the way for a new humanity, one that will escape its self-destruction because it understands that its human envelope is not immutable, but should blend with what intelligence prepares for it. Mankind can now start to mutate imperceptibly across the next century and understand even better the nature and destiny of limitless intelligence. He is probably also discovering more mysteries of the cosmos with an equity so developed that before long, human beings of energy and light will think themselves divine. Born from light, intelligence will have become the god of life.”

E   So we are heading toward the Omega god as opposed to the indescribable Alpha god, in the sense of the creator about whom we do not have enough data points. But when we go into literary traditions on the creation myth, don’t we need to ask if intelligence could have come about without poetry and the literary component?

What you are demonstrating here is curiosity. Let me say that the new age is a step in our evolution. Our organic human envelope is bound to shift and change. People will have a lot of resistance to this. This is one of the basic problems of the 21st century, but we are [facing] a major change in our evolution. Whenever we get used to it, we will start becoming superman. If we do not accept it, we will vanish.

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CommentEconomics & PolicyOil and gas

How far can Lebanon go with transparency measures in its oil and gas sector?

by Laury Haytayan
written by Laury Haytayan

Last year, Lebanon signed two contracts to explore potential oil and gas resources in its offshore waters. It took the authorities nearly four years to close the country’s first offshore licensing round, with the two contracts awarded to a consortium of companies—France’s Total, Italy’s ENI, and Russia’s Novatek—for two blocks, one in Lebanon’s northern waters and the other in the south. Drilling is expected to begin late next year, and the government has already announced its intentions to launch a second offshore licensing round this December. It is encouraging that Lebanon is moving forward toward drilling, but the country needs legislation and regulation to ensure strong transparency and accountability in this sector.

A step toward transparency

The near four-year delay in the first licensing round was caused by political deadlock that led to total paralysis in institutions. The government was unable to take decisions, Parliament twice extended its own mandate and was unable to elect a president for two and a half years. Lebanon does not fair well in international rankings, with a high score for perceived corruption from Transparency International, and ranks low for ease of doing business and trust in politicians according to the World Bank and the World Economic Forum respectively. With these indicators, it would be easy to assume that the oil and gas sector in the country would get caught in the same cycle of corruption, yet there have been positive steps.

Despite the poor transparency indicators, Lebanon did manage to attract three international oil and gas companies. The government, in a show of good faith, published the two signed exploration contracts, for Block 4 and Block 9, despite being under no obligation to do so. Legislation organizing offshore oil and gas exploration, the Offshore Petroleum Resources Law (OPRL), does not include provisions requiring publication of the contracts, and the law does not mandate disclosure of information to the public. The disclosure was therefore a voluntary act by the Ministry of Energy and Water (MoEW), allowing the public to monitor the implementation of the commitments of the companies and of the government—and to hold them to account if contractual obligations are not met.

A lack of trust

The publication of the contracts was a very encouraging measure, but contract disclosures and the public dissemination of information should be norm and mandated by law. And, sooner than expected, at the end of September,  Parliament did ratify an oil and gas transparency law that ensure disclosure and prevent conflicts of interest. Despite this, people are still worried; many have lost faith in the leadership of the country, believing that the oil and gas sector will be another means by which the political class will siphon Lebanon’s wealth. We need to safeguard the transparency gains in the oil and gas sector and ensure that these gains will have a positive spillover effect on other sectors in the country.

How can we do this? The leaders of the country need to work hard to gain the trust of their citizens, so that citizens can believe that when Parliament ratifies a law, the government will then enact the needed regulation to ensure the law is followed. In addition to the transparency law, there are two crucial regulations that must be approved by the next cabinet: a decree concerning beneficial ownership and another on subcontracting. The subcontracting decree seeks to ensure fair and competitive bids for services and goods that will be needed throughout the exploration phase and, hopefully, for the production and sale of oil and gas. The beneficial ownership decree is designed to help prevent politicians and state officials—or their relatives or close associates, acting on behalf of these officials—from dominating the sector and controlling the allocation of work contracts. Control by politicians or officials over subcontracts in the services and goods sector would be catastrophic for the country, as dangerous as the mismanagement of the revenues. One of the main problems Lebanon has is that politicians and their friends typically control the economy and secure the biggest deals for themselves. If they do the same in this sector, it will deprive businesses that are not close to the political elite of the right to fair competition, and keep the country’s wealth concentrated in the same hands.

We need to make sure that the companies are publishing data on their progress. They should be transparent and disclose information on their exploration plan milestones and timelines to the public, so that there is clear understanding of what the companies will do and when.

Access to information

In addition, we need to make sure that the Lebanese Petroleum Administration (LPA), Lebanon’s oil and gas regulator,  continues setting in place transparent systems and mechanisms. Recently, the LPA sent a delegation to Ghana to share their experiences in open and competitive licensing with their Ghanaian counterparts. Sharing best practices with counterparts is a positive indicator of the LPA’s management of the sector thus far. Information sharing is a strong suit of the LPA via its web presence, especially when compared with other ministry of energy and water “sister” sites such as the Lebanon oil installations website. The LPA’s website is the place to go to gather information about the sector, but there is room for improvement—for instance, by increasing the accessibility of disclosed information through different formats; producing easily searchable and user-friendly documents, or formatting information in visual forms so that the general public can understand the complexities inherent to oil and gas issues.

Recently, the Natural Resource Governance Institute (NRGI) released a new study on the best practices in licensing, titled “Open Contracting for Oil, Gas and Mineral Rights: Shining a Light on Good Practice.” This report is based on research identifying 16 global good practices that governments have used to improve transparency across the processes by which they award and manage oil, gas, and mining rights. Lebanon was mentioned in this report as a country with some best practices in licensing, but there is more that can be done. The recommendations put forward in the report can help the Lebanese authorities to improve transparency, and we encourage authorities to adopt them.

The oil and gas sector, if managed effectively, could go some way toward restoring the reputation of Lebanon’s political elites.

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CEDRECommentEconomics & Policy

Is CEDRE a last chance or a mirage?

by Khalil Toubia
written by Khalil Toubia

Half a year has passed since CEDRE, the economic conference for development through reforms with the private sector, the latest in a long line of international conferences aimed at propping up an unstable Lebanon. It seems like a good moment to ask what past initiatives and recent developments can tell us about CEDRE’s political context and chances of success.

The outcome of CEDRE that received the most attention in Lebanon was the financial promise of support and development funding to the tune of $11 billion. The funds allocated at CEDRE are of two types: soft loans that provide around $10.2 billion and grants amounting to around $800 million. The World Bank is the main contributor, committing to provide a package of soft and concessionary loans for a total of $4 billion.

As CEDRE was timed to be held just one month before Lebanon’s parliamentary elections, government formation and fiscal reforms were outlined as prerequisites for the implementation of the agreements reached at the conference. Not only has the government formation process been dragging out, but it also appears that any expectation of an imminent regional and international solution settling Lebanese domestic challenges would be misplaced. Under such domestic circumstances, do the CEDRE proposals have any chance to succeed, given the regional dynamics and the conflicting interests of the different stakeholders? Can Lebanon’s economy go on despite the worrying economic indicators? Is there a potential causal relationship between the possible collapse of the Lebanese economy and a renewed refugee influx to Europe? These are questions that international and local observers cannot afford to ignore.

Between internal reforms and geopolitics

Then-Prime Minister Saad Hariri presented CEDRE as a serious engagement by the international community that would prompt Lebanon to start implementing reforms and building a modern state, as a step toward increased stability, growth, and employment. Hariri’s vision was based on four pillars: increasing the level of public and private investment; ensuring economic and financial stability through fiscal adjustment; undertaking essential sectoral and cross-sectoral reforms, including fighting corruption and the modernization of the public sector and public finance management; and developing a strategy for the reinforcement and diversification of Lebanon’s productive sectors and the realization of its export potential.

However, events since CEDRE make it advisable to not only re-examine the determinations and resolutions reached at the conference, but also to take a careful look at some of the realities that are present in Lebanon today—beginning with previous attempts to alleviate problems and achieve reforms in the county.

Since its independence, Lebanon has witnessed several crises that either resulted in a domestic conflict or were resolved by the negotiation of a new political settlement. In both cases, the solutions were inspired and administered by regional and international actors.

Recent Lebanese history teaches us that Lebanon has long been a seedbed for problems hatched elsewhere; it is a country where regional crises have directly impacted its economy and security. The reconstruction period following the adoption of the new constitution in 1990 was the result of the 1989 Taif Agreement. Several international conferences soon emerged to foster the Arab-Israeli peace process, which was a central factor in regional tensions. After the Madrid treaty in 1991, the Oslo treaty in 1993, and the Arabah treaty between Jordan and Israel in 1994, it was time for the peace process to reach Lebanon and Syria. However, in the maze of the Middle East’s search for stability, Syria’s strong man and the main powerbroker in Lebanon, Hafez al-Assad, had a different agenda.

Between 1990 and 1992, Lebanon’s economic situation worsened fast. The LL/USD exchange ratio reached 2,800:1 during the summer of 1992, and inflation rose beyond 100 percent, creating social protests that threatened to result in a new round of internal conflicts. Most of the big players in the LL depreciation process of that period belonged to what many call a “Lebanese Club” of politicians, communitarian leaders and top bankers, in addition to some key Syrian political and security actors.

Post-Taif, a Syrian-Saudi agreement was forged on “constructed stability” for Lebanon. The deal granted Saudi Arabia control over economic progress while Syria presided over the political agenda, effectively sidestepping Lebanese sovereignty. It was in this geopolitical and economic environment that Rafic Hariri, close friend of Saudi Arabia, was appointed as Lebanese prime minister, on October 31, 1992.

Hariri was a dynamic businessman. His plan for the Lebanese economy was to attract investments and inflows of fresh capital from abroad. This made currency stability and the Lebanese lira’s parity to the dollar a necessity, in order to ensure investors secured high yields. Moreover, Hariri’s plan for stability envisaged achieving social peace in volatile times by increasing public spending to create job opportunities, in addition to generating capital investments for the purpose of reconstruction. His main focuses rested economically on increased public expenditures, and politically on the integration of confessional militias, as well as warlords, into the system.

political setbacks

However, the Israeli occupation of southern Lebanon, which drove more locals into the Syria- and Iran-backed “Resistance,” meant that a potential peace process between Israel, on the one hand, and Syria and Lebanon, on the other, was a distant prospect. The eventual disruption and dissolution of the Oslo process and renewed violence in south Lebanon thwarted Hariri’s initial vision for Lebanon’s political stability and economic progress.

Despite notable successes in the reconstruction of Beirut and the rebuilding of the Lebanese economy as a consequence of the lira’s progressive alignment with the dollar immediately after the Hariri era had begun in 1993—and the eventual full peg of approximately LL1,500 to $1—economic problems prevailed and reached new heights in 2000.

In a once again difficult economic situation, Hariri achieved electoral success in 2000 and returned as prime minister. This time, he found a new approach for imposing his economic and political agenda through the promotion of international conferences for Lebanon. At Paris I, in 2001, and Paris II, in 2003, Hariri pushed for reforms of the Lebanese administration and economy. However, due to Syrian refusal, with the collaboration of some major Lebanese political and economic players, the impact of the international conferences fell short of expectations. In order to support Hariri’s plan, and their wider geopolitical aims on the other, the international community demanded Syrian withdrawal from Lebanon in UN Resolution 1559 in 2004. Shortly after, however, the elder Hariri was assassinated.

Opposition to the Syrian presence in Lebanon climbed to new heights after the Hariri assassination. Following Syrian withdrawal in compliance with UN Resolution 1559, the international community voiced its support for Lebanon at the Paris III Conference in 2007, but stabilization efforts failed due to political deadlock between the March 8 and 14 camps, and also due to the socio-economic system whereby household consumption and public budgets were continually allowed to exist on what can essentially be seen as a basis of revolving borrowing or even a snowball finance scheme.

The international and regional political entanglement that hampered previous attempts to implement reforms and capitalize on foreign economic support to counter domestic problems must be kept in mind when considering CEDRE’s chance of success. Fast forward to the present time, where Lebanese and international economists are increasingly warning that the country is experiencing a financial crisis that, despite reassurances by politicians and central bankers, could threaten the national exchange rate and the banking sector if appropriate and specific actions are not implemented. The growing need of Banque du Liban (BDL), Lebanon’s central bank, for fresh US dollars, and the growing fiscal deficit and government debt, is heavily pressuring the Lebanese economy.

The lebanese business and political model

Since October 1992, the Lebanese business model can be summarized as follows: Depositors place their money in the bank, which deposits most of those funds at BDL, receiving high returns. Banks also acquire treasury bills from the government, which, in turn, spends money on wages, salaries, and debt servicing to those very same banks. Due to BDL’s and the government’s need for a constant influx of money, the central bank raises interest rates to attract fresh US dollars. Consequently, banks ensure financial and social stability by covering public-sector salaries and by providing high returns on investment to its shareholders. In sum, this creates a system of dependency between the central bank, commercial banks, and the Lebanese government, in which the commercial banks and public servants benefit at the expense of the wider public. In this case, both the central bank and the government are in deficit. More than 90 percent of Lebanon’s debt is held by domestic banks. This model helps Lebanon maintain the USD/LL parity but leads to an economy of clientelism under a “rentier model,” where the central bank gets fresh capital from the commercial banks in return for high interest rates. The Lebanese business model is reflected in cumulative government expenditures. From 1993-2016, the interest paid on debt amounted to $70 billion, a full 33 percent total government spending, at the expense of other vital spending priorities such as infrastructure development. Meanwhile, domestic banks hold over 90 percent of Lebanese debt, with this debt representing about 60 percent of banks total assets.

The economic equation is tied in with the political one. In 2017, Michel Aoun, an ally of Syria and Hezbollah, was elected president after a two-year vacancy in the position. His mandate has thus far resulted in two major domestic decisions. First, a new electoral law, which secured for the March 8 camp a clear majority in Parliament. Second, increased public spending through raised salaries for public servants, which applied more pressure to the country’s economy and sharply increased the state budget deficit.

Hariri’s resignation from the premiership, announced last November from Saudi Arabia and since rescinded, was considered by many to be an action taken by the Saudis against the Lebanese economy. The Lebanese public understood this “resignation” as a Saudi withdrawal from the Lebanese market. This action led to a lack of confidence and trust between local actors. The inter-bank interest rate reached unprecedentedly high levels and treasury bills with 10-year maturity dropped to record lows, resulting in a sharp decrease of confidence in the Lebanese market, with capital inflow failing to increase.

Europe and fears of a

second refugee wave

The willingness of the international community to assist Lebanon rests on many political and strategic considerations. Internationally, and during a politically volatile time for Europe, partly due to the refugee influx, Lebanon’s strategic location in the Eastern Mediterranean positions it as a last bastion before mainland Europe. Europe is witnessing the rise of right-wing parties, largely triggered by the large-scale arrival of refugees in recent years. Lebanon is currently hosting more than 1 million Syrians and anywhere between 175,000 to 450,000 Palestinian refugees. In this sense, CEDRE can be seen as an attempt by European countries to contain the ongoing refugee crisis by bringing some stability to Lebanon.

After delving into historic international efforts to revive Lebanon, and taking a closer look at CEDRE, it remains to be seen whether the most recent international donors’ conference will prove successful. Previous international conferences failed due to outside stakeholders’ interventions, mainly from the Syrian regime, and intransigence by major players in Lebanon. In this regard, it is also necessary to take account of Europe’s anti-migration stance as well as Iran’s increased stake in Lebanese politics. In the end, reforms needed to unlock CEDRE financing and put Lebanon back on the path toward renewed economic growth and monetary stability will require compromises from political and economic Lebanese stakeholders, and a willingness to break from past behavior. This will be the biggest factor in determining whether CEDRE will eventually be viewed as the catalyst for a more dynamic Lebanese economic model, or as another missed opportunity to bring economic progress and desperately needed stability to the country.

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EditorialOpinion

Going it alone

by Yasser Akkaoui
written by Yasser Akkaoui

The conventional wisdom of the Lebanese real estate market, and I’m sure the readers of this magazine have heard it a million times, is: “The value of real estate never goes down.” Making it the undisputed bulletproof investment or saving tool that we have adopted through generations.

Our real estate industry is accustomed to riding out political and socio-economic crisis, tends to plateau during difficult times before picking up again once geopolitical forces give Lebanon a new role to play. Real estate developers have the habit of licking their wounds and tightening their belts during these plateau periods to weather the storms.

However, the current crisis in real estate that started in spring 2010 has been persistent much longer than any real estate developer can endure. Amplified with their indebtedness and coupled with our government’s disrespect to our sovereignty—which continues to fail in minimizing the external, or their internal selfish bickering effect—have pushed real estate developers to take measures and enact manners that have never been witnessed before.

Prices are being slashed and corporates are imploding from within, vaporizing the value of our assets and estates along. In the absence of a progressive fiscal policy, the central bank was left alone to devise ingenious incentives to sustain the demand for real estate and keep the industry afloat.

However, the central bank today, in the midst of yet another political deadlock, is unable to continue supporting the Lebanese economy beyond reasonable expectations. The real estate industry is left to figure out a way to survive on their own. We believe in the entrepreneurs and business acumen of the Lebanese private sector. Patience may spread thin, but we remain confident in their ability to overcome current setbacks.

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Hospitality & TourismQ&A

ABC talks coping mechanisms in a difficult retail environment

by Nabila Rahhal
written by Nabila Rahhal

ABC Verdun has been in operation for a year now. Although it was a year marked by the continually challenging economic situation in Lebanon, Frank Kuntermann, chief executive officer of ABC Group, feels there are several milestones to celebrate, all things considered. In this interview, Kuntermann discusses ABC Verdun’s performance since its opening in late July last year, and how the group is managing growth despite trying economic circumstances.

E   Were the projections or expectations you had for your first year of operation in ABC Verdun met?

First of all, we started in the middle of the year, and usually, you don’t do a forecast for the first few months—you do an expectation over a year and a half. So it is toward the end of this year [2018] where we will touch base with our projection. But in general, there are several interesting points to look at.

For us, the first steps in Verdun are definitely encouraging: We opened earlier than planned and below the planned budget. The department store is leased out at 100 percent, and the mall is leased out at 84 percent. In another 10 months, we will be slightly above 90 percent [of mall leasing capacity], so this, from an industry standard, is good, because a mall always aims to be between 90 to 95 percent leased.

For the projections regarding the sales of our tenants and our sales, we did them roughly two and a half years ago, while today the retail [industry in Lebanon] is suffering, so we are below those projections.

But honestly, we are not really concerned—we are very cautious, we look at the expenses, watch out, etc.  We watch out a lot for our partners because, you know, they invested and opened stores. People ask us if we revised the rent [agreements], but you don’t do that after only a few months—we have very long-term relationships with our tenants and like to work with people we know and trust, so we are very flexible with them and we support them.

E   How do you support your tenants?

There are many ways in which you can support them. You can support them with marketing, you can support them with events that we organize with them or for them, and you can give them incentives, such as one month rent-free. We try to be flexible in supporting them because after just one year it doesn’t make sense to re-discuss rent [prices] that were so recently agreed to.

We are below projections, but we are much above the [average] situation of the market. There is a saying in German which translates to: “There is one eye laughing and the other crying.” We’re not happy about the situation of the market. We’re not happy because our partners are suffering, especially the ones who are outside of ABC—today, retail on the street is very, very challenging. The very good thing is that we are building up traffic every month and the number of visitors is going up.

E   Did you notice an increase in footfall from the start?

What is very interesting—and this is not specifically Lebanese—is that people have a very hard time changing habits. I was talking to a lady who lives 500 meters away from Verdun, but still went to ABC Achrafieh. She told me she only recently went to ABC Verdun. And there was another lady from Ashrafieh sitting next to her who said it took her two years to stop going to Dbayeh and [instead] go to Ashrafieh. So we are really getting into the lives of people in Verdun, and what is very interesting is that through our CRM (customer relationship management) we can observe that once they start [coming], the frequency of their visits increases month after month. So it really builds up.

There was a peak in footfall in July because of all the tourists, and we broke the record for car entrances in July, when we had more than 100,000 cars that entered. It’s very interesting to see how it builds up, and July was by far the busiest month since we opened. Every month we are signing up new loyalty cards, which is surprising, since we [already] have the biggest loyalty system in the country.We welcome 12 million people [annually], and at the end of 2018, with Verdun, [this will rise to] 17 million people, more or less. So you can assume that people already know the mall, but no, we were discovering people that we didn’t know about, from Verdun, Jnah—people that are totally new customers, which is good.

E   In last year’s interview with Executive, you mentioned your intentions of having ABC Verdun be a community mall …

This is the case. When we look at the profile of our customers, it is exactly the people from the community. Same for the profiles of the employees: We indirectly created about 2000 jobs—more than 400 directly ourselves—and 85 percent of them are from this immediate region, which is logical. One characteristic that is very interesting is the percentage of youngsters going there, which is very important.

E    More frequently than ABC Achrafieh?

Much more. Almost double.

E    Why is that, in your opinion?

We’re working on this. We don’t know if it’s a question of population structure or the fact that it is “the” place to hang out for youngsters. This makes us think a lot about services and concepts for the youngsters. For instance, we are working now on a concept for a space dedicated to teenagers, so they can do more than sit and hang around. We’re learning with every month, and we have done some very interesting customer roundtables. We always do [roundtables] after six months to really get feedback from our customers. We discovered a lot of corrections to be made and came up with a list of 85 projects that were extracted from these discussions.

E    Can you give us an example of a project?

In the front entrance, for instance, we created a drop-off zone, or island. This was a result of customer feedback, when they said they don’t know where to stop when being dropped off. The percentage of female customers with drivers is much higher than in Ashrafieh.

So it’s very practical stuff, and I have to say, it’s quite different [from the other two locations], so every month we are learning what works and doesn’t in Verdun. Same for the tenants, where some are surprised at how well they are doing, while others are struggling and don’t know why, because elsewhere [similar strategies] work very well for them.

We are working on an I-Play [the ABC children’s play section], since three quarters of women in our customer roundtable sessions asked about it. We were surprised because we had planned it a bit further down the line, because we are watching out for expenses and investments—our group had heavy investments in 2016-2017 in terms of new offices, new logistics, the renovation of ABC Achrafieh, and now Verdun, all within a year and a half. But [if] the customers are saying they want it now, it should be now. So we are already working on it much earlier than planned.

E   Did cannibalization happen between ABC Achrafieh and Verdun, with both of them being in Beirut?

At the beginning, cannibalization was very little because people kept their habits. Today, it’s—depending on the type of product—between 6 and 9 percent. We had planned in our budget for a bit more, so it’s rather a good surprise.

It’s true that when you have cannibalization and a bad market, the mixture of both is challenging. When you are in a difficult environment, and you say, ‘Guys, this is tough, but on top of it I am going to remove 6-9 percent of everything because we opened in Verdun,’ it’s a challenge for people. But look, on a consolidated basis, we are experiencing double-digit growth because of all the investments we have done. On a like-for-like basis, it’s challenging. We need to be prudent in an environment like this, which is logical. We are not in a bubble.

E   How are you and your tenants incentivizing customers to keep spending in a difficult economic environment?

There’s three things: What our tenants do, what we support them to do, and what we do ourselves directly. For instance, we have been stronger this year on [promoting] sales. We started earlier and have slightly higher discounts because we noticed that people have a bit of cold feet when it comes to spending.

There is an evident problem of trust in this country. The government is still not formed, and the environment is tense. People are scared, so it’s true that in such an environment people try to make themselves feel at ease. What we observed is that the traffic is still there because people want to move—they want to see their friends, have coffee, or go to the cinema—but they watch their spending. They still move, but they spend less. This corresponds very well to the Lebanese mentality: People continue, they want to have fun and they want to be entertained, but they are smart people. They watch what they spend. I think it’s a very healthy reaction in the face of such uncertainty.

Summer 2017 to summer 2018 was really tough for the country, and it was the exact period in which we opened in Verdun. But in Lebanon, you need to be consistent and keep on with what you are doing and not pay attention to what is happening left and right. So it’s a challenging environment, but we are happy with these first steps and believe that 2019 is going to be better.

E   Out of all the mall elements in ABC Verdun, which are the ones that are attracting the most footfall?

F&B works extremely well in ABC Verdun. People were literally waiting for that and were very keen to have a nice pleasant environment where their kids can play while they enjoy a cup of coffee. It’s very interesting that they always mention their kids; it’s a very family-oriented area.

The big brands are doing well, but what is interesting for us is that the introduction of new concepts received very strong echoes. The first COS shop got a lot of response, and so did the makeup brand Kiko—[given that] they sell units at 70 cents and such, to do the turnover they did is quite impressive. People were waiting for that, but they want a smart price [to] quality relation[ship]. They want new stuff, known stuff, and smart stuff from a price point of view.

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Economics & PolicyFundraising

Lebanon’s squeezed nonprofits’ hunt for funding

by Natascha Schellen
written by Natascha Schellen

The ability to attract donations and sponsors is a vital factor in an organization’s survival and is generally regarded as a full-time commitment in the nonprofit sector. Lebanese nonprofit organizations (NPOs) succeed in this endeavor only when they understand their audience and can engage them creatively—despite the many challenges.

The NPO management that Executive spoke with in August all agreed that the present economic downturn has made it increasingly challenging to raise funds, as charity spending is often the first thing to go when belts are tightened and budgets cut. Fady Gebrane, president of road safety awareness nonprofit Kunhadi, says that his latest bi-annual Taxi Night—a major fundraising and awareness event for the organization, held most recently on August 6—was only able to acquire two sponsors willing to fork over the full amount of $10,000 each, whereas previously the organization averaged five sponsors per Taxi Night.

To maintain their fundraising targets, NPOs are being forced to put in much more effort than was necessary a few years ago. “If we have a specific campaign that requires getting sponsors, instead of targeting, for example, 10 [potential sponsors] to get two, we’re targeting 50 or 60 to get two,” says Nisrine Tannous, the fundraising manager of the Children’s Cancer Center of Lebanon (CCCL).

Another challenge is the increasing number of NPOs vying for funding from the same limited number of corporate sponsors, making it harder to secure the necessary funds for projects and operational expenses. Marie Muracciole, director of the nonprofit Beirut Art Center (BAC), argues that the situation has changed since the center first opened its doors in 2009: “[Sponsors] don’t give only to the arts, and also there are many [more] places now.”

There was a belief among some of those interviewed by Executive that the market for donations and NPO sponsorships was tight due to the economic situation, and getting even tighter due to new NPOs entering the fundraising fray. This, however, was not a uniform belief. As an early player in the sector,  CCCL has 16 years of fundraising experience and, according to Tannous, confidently see itself as a pioneer and a model for other NPOs. Moreover, more NPOs does not automatically translate into greater competition for the same donors. Board member and treasurer of mental health NPO Embrace, Omar Ghosn, argues that, thanks to the broad diversity of needs that are not met by the state, there is room to launch a variety of fundraising initiatives. Instead of having to face direct competition from larger, more established NPOs, Embrace, which was launched in 2017, is able to attract sponsors interested in its niche area of work—there are only two or three other NGOs in Lebanon focused on mental health, he says.

Several of those working in the nonprofit sector allocate some blame to the government, either for the lack of support for the sector from the Ministry of Social Affairs, or for the general mismanagement of funds due to corruption. For those without connections or wasta, any registrations or requests are processed at a frustratingly slow pace. Relating the experience of the suicide prevention helpline that Embrace established in September 2017, Ghosn says that everything takes so much time, and that the launch was delayed by as much as nine months “because of paperwork that doesn’t really make sense.”

Know your market

As Lebanon is a small market, there are not many large local corporations that offer sponsorships, which is an additional challenge for those on the hunt for financial assistance. Moreover, several of those Executive spoke with were skeptical of the philanthropic nature of such sponsorships, as they believed that Corporate Social Responsibility (CSR) was often used as a marketing ploy. Gebrane offers one example of this, in which Kunhadi approached a potato chip manufacturer to sponsor educational conferences in schools. The manufacturer agreed, on the condition that his products be taken into the schools. He ended up funding the conferences once Gebrane was able to promise his products would be taken to 80 percent of the schools.

One obvious target for any NPO is to obtain sponsorship from a well-reputed financial institution, which in Lebanon primarily means a bank. The banks typically appear to value the visibility they can obtain and the good they can do with CSR, but nevertheless have limited budgets for their CSR initiatives. This means that NPOs need to apply early in order to get a slice of the pie. “[Banks] have a budget that starts at the beginning of the month, or [for a] certain time limit, and the budget for social responsibility [runs out] very quickly. So when you apply they are like, ‘We are out of funds, we’re sorry,’” explains Ghosn.

Knowing your audience is key, and Lebanese NPOs that fundraise locally realize this. Social events such as gala dinners and night gatherings tend to bring in the most funds for these organizations—such as Kunhadi’s Taxi Nights or the gala dinners of CCCL. Tannous notes that, on the whole, the Lebanese are more responsive to restaurants and campaigns involving eating out than to sports events, which are a much harder sell.

Art is another field that often finds it difficult to attract a large Lebanese audience. Muracciole explains that, when it comes to acquiring funding, the BAC is not the most obvious thing that comes to mind—so the center must put in extra effort to attract sponsors.  One way to do so, she says, is through family connections, as people in Lebanon gravitate more toward family and social gatherings and may take an interest in art if relatives or friends are involved.

Lebanon is blessed with talented and creative human capital, and fundraisers are no exception. In keeping with the current trend to use smartphone apps for anything and everything, CCCL partnered with mobile operator touch in 2015 to create the Light a Candle campaign. Users of the touch app are prompted to light a virtual candle and donate to the center; the amount is then added to their phone bill or—if it is a prepaid line—subtracted from their credit. After 30 days, the flame is extinguished and users can relight it and donate again. Tannous heaps praise on this project: “We are continuously working on promoting this, because it’s a pioneering and new idea, globally, even.”

Embrace has been trying out several new fundraising ideas this year, one of which was their first charity runway show, and Ghosn argues that creativity is necessary: “You can’t keep doing [the same] fundraising events, because people get fatigued doing the same thing. That’s why we tried to get creative and did the runway fashion show.” To help them come up with ideas, the organization makes use of their volunteers’ personal interests and hobbies; a hiking event, for instance, is currently in the works.

However, creativity alone will not cut it. The example of CCCL shows how a strategic approach to fundraising—the NPO has a dedicated fundraising manager leading a team of seven full-time fundraisers—can yield impressive results. According to Tannous, CCCL’s cost of operations requires them to raise $15 million annually, of which 75 percent comes from local donors and sponsors. Other organizations are apparently catching on to the fact that successful fundraising means more than just asking the senior members of the NPO if they have good ideas for a fundraising campaign and then playing things by ear. In an effort to expand and professionalize the reach of his NPO, Kunhadi’s Gebrane established a board of trustees for the organization this year, with the purpose of increasing finances. These board members, he says, have proved valuable due to their social networks and wealthy friends.

The animal welfare organization Beirut for the Ethical Treatment of Animals (BETA) constantly struggles to come up with the $45,000 they need monthly in order to continuously feed and treat the hundreds of animals in their care, explains board member Sevine Fakhoury. To improve the fundraising environment in Lebanon, she notes: “I would say that it’s all about education. People need to know about civic engagement. Everywhere in the world, civic engagement is on your CV even; it’s a plus and it’s something that you can help out the whole country with and benefit yourself as well.”

While it is never an easy task for NPOs to acquire funding and still have enough time to focus on achieving their mission, the current economic environment in Lebanon has made it an even greater challenge. As NPOs try out new methods and are stretched to the limits of their creativity, it may be in their best interest to spend some more resources on hiring professional fundraisers in order to become more cost efficient in the long-run

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CommentEconomics & Policy

The fate of Syrian refugees in Lebanon

by Joumana Talhouk
written by Joumana Talhouk

Recent news reports have surfaced on a possible United States-Russia deal to arrange for the return of refugees to Syria—reports that coincided both with the announcement that thousands of Syrians have died in regime prisons, and with one of the worst massacres in the conflict, perpetrated by ISIS in the city of Swaida. The US-Russia deal has been welcomed by Lebanese politicians, particularly those who have been scheming to repatriate Syrians for years now. But, unsurprisingly, the absence of a clear and coherent strategy for repatriation by the Lebanese government puts Syrian refugees at grave risk.

In June, UNHCR interviewed Syrian refugees in Arsal who had expressed their willingness to go back to Syria in order to verify that they had the documentation needed for return and to ensure they were fully aware of the conditions in their home country. In response, caretaker Foreign Minister Gebran Bassil accused the agency of impeding refugees’ free return and ordered a freeze on the renewal of agency staff residency permits.

This tug of war raises two main questions: What are the conditions in Lebanon that are pushing refugees toward returning to Syria while the conflict is ongoing and dangers persist? And what are the obstacles preventing some Syrians from returning freely to their homes?

Conditions for Syrians in Lebanon

Syrians began fleeing to Lebanon as early as 2011, but the Lebanese government failed to produce a single policy response until 2014, leading to ad-hoc practices by donors and host communities.

By the end of 2014, the government began introducing policies to “reduce the number of displaced Syrians,” including closing the borders and requiring Syrians to either register with UNHCR and pledge not to work, or to secure a Lebanese sponsor to remain legally in the country and pay a $200 residency permit fee every six months. In May 2015, the government directed UNHCR to stop registering refugees. These conditions put many Syrians in a precarious position: without documentation, vulnerable to arrest and detention, and with limited mobility. Municipalities have been impeding freedom of movement as well, by imposing curfews on Syrians and even expelling them from their towns.

In addition to the difficulties imposed by the state, Syrians face discrimination and violence on a day-to-day basis. Refugee settlements have been set on fire, Syrians have been beaten in the streets, and camps are regularly raided by the Lebanese army. All the while, Lebanese politicians foster and fuel the hatred of Syrians, blaming them for the country’s miseries and painting them as existential and security threats.

Despite the polarization among Lebanese politicians regarding the situation in Syria, there is a consensus that the Syrian refugees are a burden that Lebanon cannot bear. Politicians across the board have been advocating for the immediate repatriation of refugees, and state officials are beginning to take action. President Michel Aoun made a statement in May declaring that Lebanon would seek a solution regarding the refugee crisis without taking into account the preferences of the UN or the European Union. This was followed by Bassil’s move to freeze the residency permits of UNHCR staff, the leading agency (despite its many shortcomings) providing services for, and protecting the interests of, Syrian refugees. While UNHCR maintains that there are no safe zones in Syria as of yet, Lebanon’s General Security has begun facilitating the return of hundreds of refugees from Arsal and nearby towns. This process has been monitored by UNHCR to ensure that the returns are voluntary. Hezbollah has also established centers to organize the return of Syrians to their homes in collaboration with the Syrian regime.

Syrian regime obstructing refugees’ free return

As the situation for Syrian refugees in Lebanon becomes more and more unbearable, conditions for them back home remain troubling. Since 2012, the Syrian regime has been taking deliberate measures that would effectively make the situation for returning Syrians extremely difficult and dangerous.

Conscription

Syrian males aged 18 to 42 must serve in the Syrian Armed Forces. While exemptions were allowed in the past, a decree issued in 2017 bans exemptions from military service. Refusing to serve in the Syrian army results in imprisonment or an $8,000 fine, which most Syrians are unable to pay, thus risking having their assets seized by the regime.

Property as a weapon of war

Law No. 66 (2012) allowed for the creation of development zones in specified areas across the country. Under the pretense of redeveloping areas currently hosting informal settlements or unauthorized housing, the law is actually being used to expropriate land from residents in areas identified in the decree, which are mostly former opposition strongholds such as Daraya and Ghouta.

Law No. 10 (2018), passed in April, speeds up the above process. This law stipulates the designation of development or reconstruction zones, requiring local authorities to request a list of property owners from public real estate authorities. Those whose have property within these zones but are not registered on the list are notified by local authorities and must present proof of property within 30 days. If they are successful in providing proof, they get shares of the redevelopment project; otherwise, ownership reverts to the local authority in the province, town, or city where the property is located. Human Rights Watch has published a detailed Q&A that explains the law and its implications.

These laws, coupled with systematic destruction of land registries by local authorities, fully equip the regime to dispossess hundreds of thousands of Syrian families. Reports indicate that the regime has already begun reconstruction in areas south of Damascus.

Statements by Syrian officials

Syrian officials have made several public statements that reveal their hostility toward refugees. On August 20, 2017, at the opening ceremony of a conference held by Syria’s foreign ministry, President Bashar al-Assad gave a speech in which he said: “It’s true that we lost the best of our young men as well as our infrastructure, but in return we gained a healthier, more homogeneous society.” On another occasion, Assad stated his belief that some refugees are terrorists.

In September 2017, a video of Issam Zahreddine, a commander in the Syrian Armed Forces, went viral. In the video, Zahreddine threatens refugees against returning, saying: “To everyone who fled Syria to other countries, please do not return. If the government forgives you, we will not. I advise you not to come back.” Zahreddine later clarified that his remarks were meant for rebels and ISIS followers, but that clarification should be taken with a grain of salt given his bloody track record in the war up until his death in October 2017. Along similar lines, leaked information from a meeting of top-ranking army officers just last month reported the following statement by the head of the Syrian Air Force Intelligence administration, General Jamil Al-Hassan: “A Syria with 10 million trustworthy people obedient to the leadership is better than a Syria with 30 million vandals.”

Unknown fate

Considering the unwelcoming policies in Lebanon and the treacherous conditions in Syria, what is the fate of Syrian refugees, specifically those who oppose the Assad regime? Until now, the return championed by Lebanese politicians implies return to a fascist regime that has caused the largest refugee crisis since the Second World War and unapologetically committed countless war crimes. While Lebanese politicians continue to focus on repatriation, they are failing to acknowledge the major barriers preventing Syrians from returning home: the Assad regime and ongoing mass violence.

We cannot speak of safe, dignified, and sustainable returns without demanding justice and accountability. Regime change and trials for those who committed war crimes over the span of the last seven years are a long way off, and all evidence currently points toward the Assad regime retaining power. Any strategy must therefore prioritize the safety of Syrians who are likely to be detained, tortured, and killed for their political views upon return, or simply denied entry to Syria altogether. Lebanese policy makers must take into account that Syrians residing in Lebanon are not a homogenous entity, and some may never be able to return to their homes. Those Syrians should not be forced to choose between a brutal regime that will persecute them and a country that strips away their rights and dignity. It is time for Lebanon to adopt clear policies on asylum, resettlement, and return that ensure the right of all Syrians to lead a safe and dignified life.

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