Executive Magazine

Keeping lebanese wealth alive

by Executive Staff September 12, 2018

written by Executive Staff

The quest of trying to depict the 2018 outlook on investment opportunities from the Lebanese corner reminds in some respects of the almost 20-year old hit comedy on the American mob, Analyze This. As with the Robert de Niro and Billy Crystal pic, any move of international financial markets and any development on the political front might lead to a panic attack. There are double-crossing mobsters hiding in every cabinet and behind every curtain. Plus, everything is complicated.

What makes things especially complicated for local investors is that they are threatened on two sides. To revert from Hollywood movie imagery to the rich lore of seafaring Mediterranean peoples, the Lebanese investors’ perennial odyssey on financial markets in 2018 is passing through the narrows between the mythical monsters, Scylla and Charybdis. To one side towers the global markets scenario of volatility and uncertainty like the six-headed monster, Scylla. On the Charybdis side looms the whirlpool of the local political economy where the forces of economic disintegration are rotating with increasing speed and emanate lightning flashes of gloom and doom.

At the beginning of last month, to mention just one example, the daily fuss of Lebanon’s political un-movers in their exasperating 2018 theater season of third-rate gobbledygook was briefly interrupted by news that the Purchase Managers’ Index (BLOM Lebanon PMI) in July showed its lowest reading since October 2016. Comprised of five components, the PMI’s downtrend according to BLOM signaled that business conditions in Lebanon’s private sector economy deteriorated to a sharper extent at the start of the third quarter in 2018. The bank’s chief economist, Ali Bolbol, commented that the index made for “depressive reading” and called in a published comment for the “urgent formation of a new government and the serious tackling of the dire economic conditions.”

Similarly, Bank Audi observed an accumulation of worrisome symptoms. Officials at the bank confirmed to Executive that the Lebanese economy has been burdened by elevated levels of public debt and a growing current account deficit, while major sectors (real estate, tourism, and construction) were growing at a very slow pace. The rising interest rate environment acted as an additional headwind to economic growth while higher inflation has to some extent eroded the purchasing power of the Lebanese population, they noted. Although the country has been able to weather economic shocks in the past, this particularly lackluster outlook has been well acknowledged by the Lebanese political class, they added.

Global volatility

Addressing how global clouds are gathering in the vision line of high-net-worth investors, Toufic Awad, general manager at Audi Private Bank, tells Executive that “2018 and 19 are looking to be more heterogeneous” when compared with 2017, in which, according to him, most asset classes showed a “stellar performance.” (Editorial note: due to the seasonal combination of holidays and vacation season, Executive conducted several of the interviews in this article via email).

“Stock markets have moved to a higher volatility regime, while bonds have suffered from rising US yields and exacerbated political risks in Europe. Valuations have improved as stock performance has been slower than earnings growth. If indexes have done their job as market performance ‘averages’, they have, however, been masking rising performance dispersion,” he explains. In this economic climate the primary objective of Audi Private Bank for a risk averse client, according to Awad, is to preserve wealth by shielding the client’s purchasing power from inflationary pressures.

“For such risk profiles, we usually recommend short maturity high quality bonds that would not carry duration risk in a rising-rate environment. We also follow a bond ladder portfolio construction to reduce reinvestment risk. As for other clients that are not typical Private Banking clients, we continue to prone diversification even if it has shown its limits in 2018. An equity growth portion is core in every portfolio; its size would depend on the investor risk profile,” he says, citing gold and/or the Japanese yen as risk management options as they are this summer priced near or below their fair value. According to Awad these are good hedging alternatives when the sizes of a client’s equity position do not permit hedging via options.

“A portion of cash is also strategic in such a market setup, as it now provides some interest yield due to rising rates, and it acts as both portfolio stabilizer and dry powder for arising opportunities,” he adds. In his perspective, a comparison of returns from listed assets to those on deposits in Lebanese lira (LL) would amount to comparing apples and pears. With a view to the increased deposit interest rates that moved up alongside yields in the United States and equivalent yields in emerging markets, Awad says, “We believe a deposit in LL is perfectly compatible with other investments in a global, diversified, liquid portfolio.”

The issue of steering Lebanese wealth and asset management customers through the recent lures of high interest rates for deposits was also perceived as noteworthy by Charles Salem, assistant general manager at Banque Libano-Française (BLF). “Lately, we had to face another problem which is the gradual increase of the interest rate on deposits in both USD and LL, which channeled more money toward deposits and drove clients away from asset and wealth management,” he says.

According to Salem, who heads the Private Banking and Wealth Management Unit at BLF, his team operates under a customer-centric strategy with the top priority of building long-term relationships with BLF’s private banking clientele of high-net-worth and ultra-high-net-worth individuals (HNWIs and UHNWIs), entrepreneurs, and families. “We seek to understand their needs through innovative solutions and expertise, in order to protect and grow their money. In fact, we position ourselves as a trusted and reliable partner who understands the needs of clients from different generations,” he says.

Although the distribution of household savings in Lebanon between the vast majority of households and the top wealth groups is unknown, the clienteles that are likely to be customers of providers such as Audi Private Bank and BLF’s Private Banking and Wealth Management Unit or other institutions in the wealth management space—such as BlomInvest, Bank Saradar, and FFA Private Bank—appear to be exceedingly limited in numbers.

As Audi Private Bank’s Awad reveals, the threshold in disposable wealth that clients should meet in order to benefit from the expert asset management advice and services of private banking is in the solid six figures. “At Audi Private Bank, we usually start at $500,000. Indeed, size matters when we look to achieve diversification across asset classes as the minimum required to invest in some investment vehicles (direct line bonds, active funds, option contract sizes, etc.) is a constraint we need to work around. On another note, our fund-based discretionary mandates can be implemented starting at $250,000,” he explains.

At the top end of the market, banks operating in the lofty sphere populated by HNWIs and UHNWIs are eager to provide asset and wealth management services because they presumably appeal to their profit orientation as much as to their conservatism and desire to be appreciated for their exclusivity. But even banks that relatively a few years ago appeared to prefer catering to large corporate clients and dealing with big-ticket financing needs are of course cognizant of the entire pyramid of incomes and wealth and have improved the targeting of their offerings to specific customer segments.

One small example of this diversification of bank offerings at the largest Lebanese bank is the creation of a dedicated department for small and medium enterprises (SME), which was introduced publicly in August 2016 and presented to customers with an extensive marketing campaign. According to Hassan Sabbah, the head of SME banking at Bank Audi, the business line has seen demand on lending and non-lending services from the unit’s launch onward.

While not disclosing growth rates of either activity over the course of the past two years, he notes in response to Executive that there was eagerness by SME clients to utilize free value-added services along with other non-lending services. “Lending products which witnessed the highest demand since the launch of the business line are short-term facilities for working capital needs. This type of loan is usually required to sustain the business and cover running business expenses such as purchasing goods and raw materials, and in some cases to settle premises’ rent or pay staff salaries,” Sabbah tells Executive.

Lebanese microfinance

Even as the SME market has great importance for stabilization and sustainability of the Lebanese middle class, what appears more interesting from the perspective of vertical expansion of banking services in Lebanon to all population and income strata is progress toward the professionalization of the financial services in the portion of the market that has been internationally pioneered over 40 years and was until the 2000s strongly affiliated with non-governmental organizations: microfinance.

Mayada Baydas is executive general manager of Emkan Finance, an institution that is fully owned by the BankMed Group and focused on micro and small enterprises and provision of microcredits to employees. According to Baydas, Emkan and other microfinance organizations in Lebanon today reach a low-income population group that is positioned above extreme poverty. People in this group would not access traditional commercial banks because of their income situations but also cultural barriers that exist in this population group as well as the Lebanese banks. “The [microfinance] industry established a platform and an outlet that reaches this group of the population. I think we have reached a good percentage [of the Lebanese] but there is definitely still more room. But I can also say that many households would have been in a worse situation if not for the presence of services by the microfinance industry,” Baydas tells Executive.

She explains that the microfinance landscape in Lebanon today comprises three institutions which operate under license and supervision by Banque du Liban, Lebanon’s central bank, and that the industry has in the past ten years made significant progress toward achieving the dual objectives of providing access to microcredit and furthering financial inclusion. In her estimate, the addressable market for microfinance in Lebanon is difficult to quantify but is no less than 500,000 persons of which the microfinance industry caters to more than 200,000.

Noting the increasing professionalization of financial services to low-income people, Baydas refers to two BDL circulars that were published in August 2018 that she expects will advance the microfinance frameworks and provide new support to the sector. In her view, the Lebanese microfinance industry is today on the doorstep of a next level of development. “I think we are starting another decade during which we need to see how much Lebanon can keep up with the Fintech that is taking over the microfinance market globally. We introduced microfinance to Lebanon 20 years ago and ten years ago it really started growing. Now digital financial services are growing in microfinance and local Fintech startups could take off with the right conducive framework [by the regulator]. People, in my view, have the adaptability to use those services if they are rolled out in the coming years,” Baydas says.

Many signs point to both yet-unmet and latent demand for a wider variety of financial services and wealth generation options in Lebanon. Some of this market potential seems to be crowded out by the market dominance of banking and the interest rates they offer on deposits. Proponents of insurance argue that the middle class can derive greater benefits from wealth creation models offered as life insurance with a variety of savings and advocates of entrepreneurship propose a—very different—niche activity in form of angel investing (see box above).

At the same time, there is still much room to cover in the provision of finance to different strata of Lebanese society. Chairman and general manager of FFA Private Bank, Jean Riachi, notes that investment options that are geared toward HNWIs do not make equal sense for other wealth groups and in the current interest rate environment, owners of average wealth would not necessarily derive huge advantages from investing in local funds that have been designed by some banks for retail customers. “The interest rates are so high on savings accounts that you won’t go very far in improving your returns. It [doesn’t] make a lot of sense in Lebanon,” he says.

Investing in infrastructure

What could be more promising in the current scenario would be to open previously untrodden ways of activating and increasing the wealth of many Lebanese while also contributing to the creation of better infrastructures in the country. Riachi and teams at FFA Private Bank thus are working on a plan for infrastructure investments while also bearing in mind the comatose state of the Beirut Stock Exchange and the absence of a capacious pension system, not to mention pension funds.

Being furthermore mindful that Lebanon has no charted course for the implementation of infrastructure investments envisioned under the frameworks sketched out this spring, such as the Capital Investment Plan (CIP) and the commitments that the government received and made at the CEDRE conference in April, FFA Private Bank is setting its sights on spreading infrastructure investment opportunities through dedicated financing vehicles. “We need to have something in our system that allows—that forces, if we can—projects that are offered for the private sector and include the participation of the public,” Riachi tells Executive.

For now, Riachi says FFA’s plan is focused entirely on qualified investors. “We are preparing a private equity infrastructure fund which is not designed for the public, but we could find a way to have the public co-invest,” he says, while declining to divulge all the details of the concept. What he does disclose is that investment could be in the form of funds or bonds, with a threshold for participation by the public depending on the distribution channel that is chosen. If retail banks participate in the offerings, he says the threshold could be as low as $5,000 or $10,000. “If investors and businessmen are ready to invest, it means that they expect to make a lot of money out of this [financing of infrastructure]. So why should the general public not be able to do so?” Riachi asks rhetorically.

Given the disequilibria that are proven or suspected to exist in the composition of the Lebanese financial markets and also within the national savings landscape, there have long been arguments to make the Lebanese financial market environment more sustainable by introducing greater diversity.

Technology can be counted on to contribute to this diversity, from digitized savings plans offered by insurers to robo-advisors, which have emerged in the asset management industry over the decade, making their way down the wealth pyramid. (And trust the Lebanese to be in on this. Dubai-based Fintech startup Sarwa, cofounded by two Lebanese, just announced the successful raising of $1.3 million in a funding round that nota bene included funding provided by Middle East Venture Partners).

Thus, under a concept that conjoins mass customization of finance and communal interests, the not-distant future might see Lebanese people—known as equally tech-eager and financially alert— enjoy wealth advisory services in a parallel way as it is the latest digital frenzy in tailoring fashion products. We might just slip into a stretchy wealth services equivalent of a Zozosuit, take a few pictures, state a few preferences on a questionnaire, and get delivery of a vertically integrated wealth advisory package that serves our needs and the needs of our country. However, there is much work still to be done in the changing of cultures to advance from the fractionalized self-perception of Lebanese communities to the self-image of a group of communities that are all dedicated to optimizing national wealth in tandem with accruing individual wealth.

September 12, 2018 0 comments

Agriculture Industry

Holy guacamole

by Nabila Rahhal September 10, 2018

written by Nabila Rahhal

In summer 2018, McKinsey & Company, a United States-based management consulting firm hired by the Lebanese government to design an economic plan for the country, presented their report to government officials. Though the final report has yet to be made public, some details have made their way from government officials into the public sphere. From what was disclosed, the report sounds like a hipster’s dream: boosting the economy through the legalization of marijuana—albeit for medicinal export (for more on this, see Executive’s August 2018 issue)—and through the increased production of avocados, the diet staple of millennials.

While it was the legalization of marijuana in particular that grabbed international and local headlines, the inclusion of avocado cultivation in the plan triggered our curiosity at Executive, prompting us to research the potential for growing this lush green fruit on Lebanese soil. Lebanon, as it turns out, has an expanding avocado farming sector, supported by international organizations and local agricultural experts.

Seeds of change

Avocado is a subtropical fruit, and so needs a mild climate to thrive, explains Kanj Hamade, an assistant professor of agricultural economics at the Lebanese University. This is exactly the climate characteristic of Lebanon’s coastal areas, which were first dedicated almost entirely to citrus fruits before bananas crops began to be planted.

Lebanese citrus, however, is facing challenges. Hamade explains that Lebanon’s subtropical crops used to primarily consist of citrus fruits, which were—and to some extent still are—exported to the Gulf. However, Lebanese citrus fruits are losing market share in the region due to competition and ageing trees. The cultivation of bananas, another subtropical crop, for a while matched or overtook citrus fruits and production was thriving, he says. This new crop briefly made this sector more profitable, with bananas primarily exported to Jordan and Syria. The boom-time for fruit farmers came to an end in 2012, however, as the Syrian war halted agricultural land exports, creating a saturated local subtropical fruits market, with an oversupply of both bananas and citrus fruits.

Why avocados?

It was this oversaturation that led the Lebanon Industry Value Chain Development (LIVCD)—a USAID-funded project that has among its aims the goal to improve the competitiveness and value of Lebanese products and services in both local and export markets—to begin researching the possibility of avocado production, back in 2012.

Sandra Fahd, senior consultant for LIVCD and assistant professor of agriculture at the Lebanese University, says the project initially thought of utilizing Lebanon’s mild climate for avocado cultivation due to the high global demand for avocados, ensuring that it would prove a consistent and varied market. “Avocado is a crop that is highly demanded in a stable market. We do not need to rely on the Gulf for exports only—it can go to the Gulf, but it can also go to Europe, and Europe has a high demand for avocados. So it solves our dependency on the Gulf as a main market,” says Hamade.

Avocado also has a growing local fan base, ensuring a steady market at home as well. Fahd explains that while avocados in Lebanon have been traditionally used as a base for fruit cocktails, the past couple of years have seen the creamy fruit pop up as an ingredient on many restaurant menus, including the new avocado bar, L’Avo. She adds that over the past five years, the number of sushi restaurants in Lebanon has increased, which resulted in a higher demand for avocado, as it is used as a main ingredient for many rolls.

Fahd says that to ensure an even wider reach and market, LIVCD also worked on promotional activities, such as a promotional day, or participation in the cooking festival in 2014 and Horeca in 2015 to increase awareness about avocados among women from rural areas, extolling the health benefits of the crop and working with them to develop variations on well-known recipes, such as hummus or tiramisu, using avocado.

A chaotic market

Fahd says that when LIVCD first began its assessment of the avocado sector in Lebanon, they found it largely disorganized and small-scale. “At that time—according to FAO [the United Nations’ Food and Agricultural Organization] and the Ministry of Agriculture—there were 3,700 growers, but we discovered that close to 50 percent of those were hobbyists or had very few trees. Also, when we started working on the ground in 2015, we found that there were very few lands dedicated to avocados alone, as they were mainly planted alongside citrus trees,” she notes, adding that in 2012, the FAO reported the number of hectares dedicated solely to avocados as just 660.

LIVCD also quickly discovered that there were no experts or academic references when it came to avocado cultivation in Lebanon. This was because the fruit was relatively new to the country, Fahd explains. “Farmers did not know the technical details and were growing them in a traditional way or through trial and error, so a lot of money and produce was going to waste because what they grew was wild, the market value of such fruits is little, and some are not edible,” Fahd says.

Avocado farmers

Compared to the costs of citrus fruits and apples—produce traditionally grown in Lebanon—the costs of avocado production are high, Fahd says. One avocado tree costs $16, compared to just $2 for an apple tree, making it a hefty initial investment for a large area of land. Return on investment, however, is considerable, with avocados generating an average of $8,000 per hectare, compared to $2,000 for citrus fruits.

The money involved in avocados means that avocado growers are not your average farmers. “The profile of avocado farmers is so different from all the other agricultural farmers in Lebanon because there is more money in it, and so people see it as an investment,” Fahd explains. “This is a worldwide occurrence, it is the same even in Florida and Mexico. It’s also unlike other sectors in that farmers are educated.” She mentions that those involved in avocado plantations are wealthy coastal land owners.

Hamade also believes that avocados are not a feasible investment for small-time farmers and sees in the crop an opportunity to encourage young entrepreneurs to get involved in agriculture. “It’s relatively knowledge intensive, so it could support investments from young people who typically don’t perceive agriculture as an option for them, as its high returns [could] encourage them,” he says.

Growing avocados

With the assessment of the sector completed in 2015, the groundwork was set for LIVCD to organize the sector and help it grow. Fahd explains that LIVCD usually initiates a value chain project by increasing the market demand, but with avocado they chose to start by increasing productivity, as they realized there was already a high demand and an insufficient supply.

As such, the project began by training existing farmers and teaching them techniques to improve their growing skills and help make the most of their land. LIVCD taught them how to intensify planting so that the same piece of land could fit more trees and also introduced the drip irrigation system.

LIVCD, together with the farmers—and with the goal of increasing production—developed a calendar that would allow nine to 10 months of production per year by diversifying the varieties of avocados grown at different times.

Fahd says they also went into rural coastal areas where avocados were not grown and encouraged new growers to enter the sector by providing them with an irrigation system, while the growers provided the land and crops. To further motivate these new growers, the project worked with local nurseries to establish a unified and fair price for avocado trees, regardless of the quantity bought.

Fruits of success

In total, LIVCD has trained 964 avocado growers. The number of hectares dedicated to avocados has also increased from 660 in 2012 to 720 at last count, at the end of 2016. Fahd says the project worked more on improving the yield per hectare of existing farmers than on introducing new farmers to the market. “Our goal was to improve the productivity per dunam of land (1,000 square meters), because according to our calculations, one dunam was used to produce less than 500 kilograms while now the same area is producing double [that], or 1 ton.” She explains that while the initiative has indeed increased production, avocado prices have not gone down because they simultaneously worked on opening new channels for distribution.

Through LIVCD, Lebanon began exporting containers of avocado to Europe in 2017. Fahd explains that European countries chose to import avocados from Lebanon because the Mediterranean avocado production calendar is the opposite of Latin America’s—when Mexico or Peru are short on avocados, Lebanon is in high production, making it a viable alternative for avocado-starved countries. Lebanon has also been exporting containers of avocados to the Gulf since 2016 and has opened new export channels to Jordan.

Although the demand for the avocado fruit itself is high at the moment, Fahd hopes to ensure a market-sustainable crop and says LIVCD is also supporting local avocado growers in experimenting with avocado oil production, for use in beauty products and in some natural remedies.

Land of plenty

The challenge for the continuity of Lebanese avocado cultivation lies in the land it is grown on. Coastal land is highly desirable from a real estate perspective, which in turn threatens the future of local avocados. “The government should designate certain lands on the coast for avocado, since agriculture serves and employs more people than real estate,” Fahd says, adding that LIVCD cannot influence the government and must instead work with the reality on the ground.

Hamade believes that in order to truly benefit from avocado cultivation at a national level—and for this crop to not only be a means for the rich to get richer—the agricultural sector needs to be restructured in a way that would see small- and medium-scale farmers integrated into avocado planting. For the time being, local consumers, and those in the countries we export to, can continue to enjoy Lebanese avocados, regardless of who planted them.

September 10, 2018 1 comment

Economics & Policy Oil and gas

Lebanon’s second licensing round

by Mona Sukkarieh September 10, 2018

written by Mona Sukkarieh

Preparations for the launching of Lebanon’s second offshore oil and gas licensing round have begun. The regulator, the Lebanese Petroleum Administration (LPA), has published a tentative timeline for the tender, which will be officially launched at the end of 2018. The process, including the pre-qualification phase, will extend over a period of one year.

The second licensing round is scheduled to start in January 2019 with the opening of the pre-qualification round. The legal, technical, commercial, and QHSE (Quality, Health, Safety & Environment) criteria might differ from those imposed during the country’s first offshore licensing round in 2013. Given that the initial criteria were deemed too strict at the end of the first bid round, we might see some loosening of regulations. According to the 2010 Offshore Petroleum Resources Law, interested companies need to pre-qualify, either as operators or non-operators, to be eligible to place bids when the tender opens. Changing this prerequisite would require amending the 2010 law. Although the 2013 criteria were strict, a loophole was voluntarily inserted to allow companies that did not meet the criteria to qualify, if they partnered with a company that did. This is how a number of recently-established and “well-connected” Lebanese companies, with no prior petroleum activity, managed to qualify for the tender in 2013. (None of them were able to place bids when the tender resumed in 2017, for various reasons). With a more robust civil society landscape in 2018—including NGOs, media, and opposition parties—compared to 2013, all eyes will be on that pre-qualification decree. It should be relatively easy for authorities to implement and earn credit for this reform. Some of these companies, though, are one step ahead of the authorities and civil society and have started consolidating their petroleum activity by acquiring stakes in promising assets abroad.

Learning from mistakes

The results of the pre-qualification round will be announced in May 2019. Pre-qualified companies will have six months, between May and October 2019, to prepare and submit their bids, and exploration and production agreements are expected to be signed by the end of 2019.

The entire process is designed in a similar way to the first offshore licensing round, which did not go as originally planned. It is important to recognize the main obstacles at the organizational level that hindered the first bid round in order to avoid repeating the same mistakes. The government, mainly the Ministry of Energy and Water and the LPA, this time around has a precious advantage over its mirror self in 2013: six years of first-hand experience filled with successes, drama, and disappointments, and a better understanding of the dynamics that could obstruct their endeavors.

The most obvious obstacle when the first bid round was announced in 2013 was the incomplete legal framework governing its process. There are many political reasons that explain why it took over four years to close the tender, but the straightforward answer is missing regulations and legislation. The absence of three basic documents—a decree defining offshore blocks, a decree specifying the tender protocol and model EPA, and the petroleum tax law—made it impossible to pursue the tender, which had to be repeatedly delayed. Obviously, this lesson had not been learned by 2017, when the first licensing round was finally implemented after a four-year hiatus. At the beginning of 2017, the government approved the first two of these basic documents, allowing the tender to be resumed. The absence of the third document, the petroleum tax law, meant that the closing of the tender had to be postponed once more, until Parliament had approved the law. Fast forward to 2018, since there is an intention to amend some of the documents governing the second licensing round, ideally it would be good to have a stable framework—if not on time for the pre-qualification round (logical and preferable), at least by the time companies are invited to submit their bids.

In fact, stability across the board is preferable. This includes the choice of which maritime blocks to put up for bidding. When the first bid round was launched in 2013, Block 1, 4, 5, 6, and 9 were open for bidding. However, when the tender was resumed in 2017, Block 1, 4, 8, 9, and 10 were put on offer. This confused and discouraged some of the companies that had initially been genuinely interested in the tender. In addition, four out of the five blocks on offer included disputed areas. Awarding Block 9 to a Total-led consortium was indeed a feat that few people expected, given that international oil companies typically are extremely wary of shaky legality. But such a success should not be taken as the norm. This does not mean that blocks along disputed borders should not be open for the tender, rather, it means that more hassle-free options should be on offer alongside them.

[/media-credit] Click on image to enlarge

Who will regulate?

Institutional stability (or continuity) is also essential. The LPA’s mandate expires in December 2018, the month that will supposedly see the official launching of the second licensing round. Will the regulator’s mandate be renewed? No one yet knows and the lack of transparency and communication over the issue is disconcerting. The appointment of a new board looks unlikely, considering that the selection process could extend over many months. The law allows for the one-time renewal of the mandate of the current board, and, given time constraints, this option appears to be the most likely. But new appointments or mandate renewal require a political decision. Will this decision come on time to allow operations to proceed smoothly, or will there be a period of uncertainty?

On the marketing front, the first licensing round between 2013 and 2017 left much to be desired. At the time, some of the events and venues chosen to promote the tender were in fact modest platforms with limited outreach or visibility.

Lebanon opted to hold the second licensing round before the release of the results of initial exploratory activity—which will be conducted by the Total-led consortium toward the end of 2019—despite initially announcing that the second round would be held once these results were available. This is neither good nor bad in itself, as it is impossible to know beforehand what the result of next year’s drilling will be and so it is impossible to know if they will have a positive or negative impact on the tender. But it shows the uncertainties that sometimes characterize the decision-making process, announcing one thing and then doing another. It appears that one of the reasons for launching the second bid round earlier than expected was the intention expressed by other countries in the region to hold licensing rounds toward the end of 2018 and the beginning of 2019. Stability is also preferred at the rhetorical level. Sometimes, when there is no clear-cut decision, saying less is more.

Over the past few years, there has been a tendency toward big announcements over adopting a more pragmatic and prudent approach. This included premature announcements of the launch of the first licensing round—despite an incomplete framework—and of key milestones afterwards. The key takeaway from the first licensing round—from the local perspective and the handling of the tender—is that there is an order for things. Hopefully, both the legal and institutional framework will be complete and fully functional by the time Lebanon officially launches its second offshore licensing round. Stability and the ability to anticipate the regulatory framework are vital for investors in the sector, and are the first key to the success of a licensing round.

September 10, 2018 0 comments

Comment Economics & Policy Refugees

The perils of sending refugees back to Syria

by Sara Kayyali September 10, 2018

written by Sara Kayyali

As the Syrian government retakes territories across the country and active conflict narrows to smaller areas, questions about how and when refugees will return to Syria are on many people’s minds. The questions are spurred in no small part by the eagerness of Syria’s neighbors, including Lebanon, to see these refugees leave.

On July 26, Saad Hariri, Lebanon’s prime minister, met with a Russian diplomatic and military delegation to discuss a Russian refugee return initiative. This was one of many meetings Russian officials were holding regionally, and with EU countries, to urge countries to provide support to the Syrian government to facilitate the return of refugees. The meeting between Lebanese and Russian officials came just over two weeks after Hezbollah, another Syrian government ally, opened reception centers in Lebanon to promote and help facilitate refugee returns.

In Lebanon—which hosts an estimated 1.5 million Syrians, by far the highest number of refugees per capita in the world—we at Human Rights Watch have documented government policies that appear designed to push refugees toward returning to Syria. The June decision by caretaker Minister for Foreign Affairs Gebran Bassil to freeze staff residency permits for UNHCR officials on the false grounds that they were discouraging refugees from returning by “spreading fear” came as part of a long line of decisions seemingly designed to deter refugees from staying. These policies have made refugees’ lives in Lebanon increasingly difficult.

But in their eagerness to see refugees go home, Lebanese politicians and the public have paid far too little attention not just to logistical obstacles, but also to the barriers preventing some refugees from returning to Syria—such as an inability to pay legal residency fees and a lack of proper documentation—and the difficult situation that awaits those who are able to return.

An impossible choice

Ironically, many of the policies that the Lebanese government put in place to discourage refugees from staying are now obstacles to their return. In 2015, Lebanon introduced regulations that made it both harder and prohibitively expensive for Syrians to renew mandatory residency permits. As a result, 74 percent of refugees now lack legal residency. They live at constant risk of detention and face barriers to enrolling their children in school, getting health care, and working to support their families. Until the requirement to have legal residency was removed this year, Syrians could not register their marriages or the births of their children. Lack of legal residency has also made Syrians more vulnerable to sexual and labor exploitation by employers.

The issue of residency also impacts returns. According to an August 1 General Security directive, to leave the country Syrians must either pay fees based on how long they have defaulted on those residency permits, or risk a one year or permanent ban from Lebanon. While some refugees have agreed to the entry bans, many have expressed hesitation about foreclosing a future escape route, since the situation in Syria is so volatile and humanitarian conditions and respect for human rights are poor. Given the lack of transparency regarding what awaits these refugees on the other side, it is not a risk they are willing to take.

For many, the prospect of returning to live under the rule of an authoritarian government, whose abuses of civilians have been very well documented, without any changes to the status quo is untenable. The Syrian government continues to forcibly conscript young men. Even those who have already served are at significant risk of being called up again and sent to the front lines. To refuse is to go to jail, and detention in Syria, particularly for those perceived to be anti-government, will most likely mean mistreatment and torture. The Syrian government has not stopped arbitrarily detaining people.

In fact, the Syrian government has created obstacles to returning that match Lebanon’s obstacles to leaving, such as Law No. 10 (2018), which was passed in April and allows the government to confiscate private property without due process or adequate compensation. The Syrian government restricts access for independent humanitarian and international organizations in areas under its control. This not only means that people who return may not be able to get the aid they need, but that these organizations are not able to monitor vulnerable people in these areas, as they have elsewhere. The Syrian government has also restricted access to entire communities, for instance, in parts of Daraya, in the Damascus countryside, whose residents could not go home even if they wanted to. It has also denied some Syrians the right to return through locally coordinated deals requiring security clearance.

The way forward

Beyond a few—often contradictory—statements, the Syrian government has not provided protection guarantees for those returning, or put in place any concrete plan to resolve other deeply entrenched obstacles, including the government’s practices of arbitrary arrests, mistreatment, and confiscation of property without due process. For most refugees, prior experience with the Syrian government makes it difficult to believe its rhetoric without clear commitments and a means of enforcing government promises.

The question of when and how Syrian refugees will return to Syria, and under what conditions, is complex. Syrians themselves need to make the choice, voluntarily and with a clear understanding of the conditions to which they are returning. Host governments, including the Lebanese government, cannot—by law—force refugees back to a country where they face persecution or death.

In the meantime, there are clear ways forward for the next Lebanese government that do not require Russia’s helping hand. For starters, Lebanon’s General Security and Ministry of Interior should ease restrictions on Syrians that make both staying and returning to Syria difficult. The Lebanese Ministry of Foreign Affairs should also communicate constructively with the Syrian government to address the real obstacles to return—such as arbitrary detention and torture—and ensure that there are viable commitments to protect returning refugees, backed by transparency and access.

September 10, 2018 0 comments

Special Report Wealth management

Curses of poverty and affluence and the search for financial cures

by Thomas Schellen September 6, 2018

written by Thomas Schellen

Many believe that there is no such thing as too much money. At a closer look, however, the extreme abundance or absence of wealth both appear to be prime causes of anguish, albeit in incomparable proportions. Even moderate and temporary cases of poverty lead to all manner of problems, from stress and sleeplessness to ulcers and constant headaches; the poor are often denied their rights to dignity, housing, a clean environment, safe water and food, education, healthcare, labor, and freedom of movement.

It is also true that more people stress over the absence of wealth than those who suffer due to extreme riches. However, this is only the case since the precariat, and the extreme poor outnumber the wealthy by such huge margins.

Adjusting of premises: Poverty is no self-inflicted epidemic and wealth no sign of geniuses

For each billionaire there are millions who languish in extreme poverty. Yet there are many reasons why wealth is not headache-free. One is that wealth is not an existential and intrinsic quality, but a secondary or external property that, as such, is of limited existential value. The third millennium’s dominant cultural norm on wealth and the afterlife is that “you can’t take it with you.” The historic belief systems whereby people adorned corpses with food supplies and possessions for the hereafter are, by and large, as dead as the Pharaohs.

Moreover, in social terms, wealth restricts your networks, which, since the emergence of the post-industrial era, increasingly constitute your social capital. As a high-net-worth-individual (HNWI) with a streak of exhibitionism, you might have millions of insincere “followers” and “friends” on social media, but loneliness appears to be one of the first trade-offs that comes with wealth.

Next, in our money-obsessed global capitalist culture, wealth tends to lead its possessor to form a dependency on what Nassim Taleb described as “constructed preferences” in his 2017 musings “Skin in the Game.”

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“When people get rich, they shed their skin-in-the-game experiential mechanism,” wrote Taleb, by which he meant that the newly rich lose their own preferences and substitute them with preferences constructed and pushed upon them by people who want to sell them something. In so doing, he says, the rich complicate their lives unnecessarily and trigger their own misery, but—because they are rich—without even having the benefit of being acknowledged as victims of their exploiters.

These pressures of constructed preferences appear to get exacerbated with possibly increasing frequency in resonance with external impacts of economic cycles that for the past ten years have appeared to be less and less predictable. In 2018, volatility and uncertainty cloud markets and shape the language of wealth managers and investment advisors—which tends to result in mixed signals and confusion.

Mid-2018 observation checkpoint: Examples of constructed preferences and their signaling

Just this summer, in July and August, some top names in international wealth advisory appear to have cranked up their bullshit generators even while admitting to heightened levels of uncertainty in the economy and financial markets. That there is confusion over the investment outlook for this year can be surmised by reading statements from institutions such as Goldman Sachs. The investment bank in July issued an—as the bank admitted, unusual—mid-year update to its 2018 investment outlook with this header: “Ebb and flow between steady and unsteady factors continues unabated.”

The updated outlook informed readers that Goldman Sachs sees a close to zero likelihood for a recession in the US in 2018, while projecting a 10 percent probability of a recession by mid-2019. Beyond that, it constructs a balance of steady factors—such as economic growth and a low probability of recession—with some unsteady potential influences—from terrorism, populism, cyber attacks, global political tensions, a cyber-currency craze, and domestic politics in the United States—and concludes that the tug of war between steady and unsteady factors has intensified since early 2018 and will continue unabated.

Another US-based financial services group, BBVA Compass, noted “concerns surrounding the financial health of the business sector,” which it described as justified to some extent. The firm shared its view that “market participants are worried that higher price pressures, faster monetary policy normalization, and a trade war, amid stretched valuations, could trigger a significant decline in risk appetite,” and warned that the convergence of several problem factors could, at non-specified times, cause “a major asset price correction” and “bring about an economic recession.”

Meanwhile, the mid-year investment outlook by investment management company Blackrock, also published last month, noted that greater uncertainty along with rising interest rates “has contributed to tightening financial conditions and argues for building greater resilience into portfolios,” even as it opened its outlook with reference to its base case scenario of “strong U.S. growth extending positive spillover effects to the rest of the world, sustaining the global economic expansion.”

American financial weekly Barron’s reported in late August that wealth advisors are counselling clients to stick to their “core values,” naturally without attempting to offer any suggestion of what that could mean. “It’s not that wealthy families shouldn’t buy a Ferrari. It’s that purchases of any size should be made in the context of core values and principles as well as what individuals see as the ‘desired outcome’ of their wealth: to preserve it, grow it, or spend it down (which could include giving it away to charity),” the weekly said, as it presented activities by a team affiliated with Bank of America Merrill Lynch’s Private Banking and Investment Group, which chases ultra-HNWIs.

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Wanted: New definitions and better answers

With this deluge of messages aiming to sell the rich products that would profit the salesmen, it’s no wonder that the wealthy are doing what they can to mask the existential unimportance of their manifold assets. This makes it ever more imperative for society and the wealthy to look for any potential means of stimulating a paradigm shift on global wealth.

Global wealth is increasing despite all of the Minsky moments and episodes of creative destruction this century. According to the most recent Global Wealth Report by the Credit Suisse Research Institute (CSRI), the growth rates of global wealth have slowed from 2007 onward, but wealth has overall continued to rise. Not only did it reach in excess of $280.3 trillion by mid-2017, and was up 27 percent from $220.9 trillion at the onset of the Great Recession in 2007, but CSRI estimated global wealth to reach $341 trillion by 2022, or $60 trillion more than its estimate for 2017.

This relentless accumulation of wealth makes new methodologies for wealth measurement all the more interesting. The World Bank has used such a methodology in its publication “Changing Wealth of Nations 2018,” in which it calculated total wealth per nation per capita in a bottom-up approach that considered four wealth components: natural capital, produced capital, human capital, and net foreign assets.

Elaborating further, the report notes: “A nation’s wealth consists of a diverse portfolio of assets, which together form the productive base of the national economy. These assets include:

Natural capital—including energy (oil, natural gas, and coal), minerals, agricultural land (cropland and pastureland), protected areas, and forests (timber and some non-timber forest products);

Produced capital—including machinery, structures, equipment, and urban land;

Human capital—including the knowledge, skills, and experience embodied in the workforce; and Net foreign assets (NFAs)—including portfolio equity, debt securities, foreign direct investment, and other financial capital held in other countries.”

According to the World Bank, the approach used in Changing Wealth of Nations 2018 marked “a significant departure from past estimates, in which total wealth was estimated by assuming that consumption is the return on total wealth, and then calculating back to total wealth from current sustainable consumption.” Under the previous top-down approach, calculation of produced and natural capital and NFAs and their subtraction from total wealth led to a residual of “intangible capital” attributed mainly to human capital. “Now with a direct measurement of human capital, total wealth can be estimated as the sum of all categories of assets,” the explanation of methodology concluded.

As Kristalina Georgieva, chief executive officer of the World Bank, explained in the report’s foreword, the World Bank used the new approach in seeking to measure “comprehensive wealth.” For this, the bank could for the first time ever attempt an estimate of human capital in each of the 141 countries covered in the report by drawing on a database of more than 1,500 household surveys maintained by the World Bank. According to Georgieva, the new approach is hoped to set the stage “for addressing development through a comprehensive measure of wealth, which underpins income and well-being,” and to contribute to better policy making for economic progress on national and international levels.

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Another interesting new development in international wealth and growth debates is a tendency to move beyond the century-old fixation on gross domestic product (GDP) as a central measure for a country’s economic health. Even the CSRI has recently focused more on taking a new direction on GDP, publishing a report in May that questioned the assumption that GDP adequately reflects the state of the respective society. The report—called “The Future of GDP”—argues that that weaknesses of GDP metrics need to be discussed further and responded to by policy makers and economic stakeholders. Further, it calls for public and private decision makers to deploy the many instruments they have at their disposal for complementing GDP measurements with better assessment of impacts on societies and the environment.

Asked by Executive about his views on GDP for measuring economic health and performance in Lebanon and in general, Marwan Barakat, chief economist of Bank Audi, concurred that there is new ground to be broken. “While GDP remains a main and widely acknowledged measure, it should by no means be the only one used to measure economic performance and progress,” he says. “It should rather be complemented by wealth and equality measures taking into account social, technological development and perhaps environmental factors so as to gauge economic expansion and growth dynamics in a more comprehensive manner.”

Add in: The inequality equation

That inequality is not something that can be made extinct does not mean that certain levels of inequality are unproblematic. If inequality is left to fester, it can balloon into a massive social problem. This seems to be on the table for Lebanon. In an Executive contribution in 2014, the chair of the Economics Department at the Lebanese American University, Ghassan Dibeh, noted that Lebanon is one of the world’s most unequal countries in terms of wealth distribution, “with around 66 percent of the adult population owning less than $10,000.” He warned “the economy will continue to wobble” under continued low tax rates on capital and profits in combination with a high public debt burden and increasing “power of the rentier class in the economy.”

Lebanese economist Roy Badaro separately agrees that the problem of economic inequality was not taken seriously by political decision makers in the past, but says he sees more and more people in political parties waking up to the repercussions of inequality—which Badaro views among Lebanon’s most serious economic problems. He describes the current state of inequality in the economy as having reached the end of the road.

“As an economist, I am very sensitive to inequalities in Lebanon,” he tells Executive, adding that the national savings issue, which is intertwined with the country’s inequality problem, is in urgent need of being addressed. “There is no economic prosperity if the private savings rate does not get much higher and if there is no negative savings rate in the government,” Badaro says. “Having a negative savings rate for large parts of the population [as is strongly suspected to be the current situation] is very detrimental because it is not sustainable in the long term, so we have to find a solution for these people and the best solution is to decrease the cost of living, not to increase salaries.”

With the infographic charts in this overview, Executive can give our readers some impression of the contributions of human capital and other significant intangible assets that are made more accessible for the calculation of Lebanese per capita wealth under the multi-factor bottom-up methodology deployed by the World Bank in Changing Wealth of Nations. The report’s authors describe human capital as the largest component in global wealth; this approach is reflected in the numbers given, as the value for total global wealth is $1,143 trillion in 2014—much higher than estimates given by reports using other methodologies.

According to the World Bank, wealth increased by 66 percent from 1994 to 2014. The much higher estimate of global wealth under the World Bank’s approach might be considered an indication that wider consideration of wealth components—eventually even including attempts to somehow quantify social capital so that it can be better recognized and developed in national economic contexts—is an attractive avenue to explore.

In looking at wealth and inequality, one must acknowledge that labor compensation systems and many other ways in which societies today assess wealth require much fundamental work.

Add: Computable data and inclusion

One issue in this regard is understanding the size and concentration of national and household savings in Lebanon. Nassib Ghobril, the chief economist of Bank Byblos, points to the high deposits in the banking system. He says these are clear indicators for significant savings in Lebanon, but concedes that there is no official information on the savings rate and no information regarding its distribution by income group. No analyst or financial industry stakeholder could tell Executive to what degree savings are concentrated with the top wealth group.

All who confess adherence to the concept of existential human equality are best advised to cherish wealth and work for increasing the wealth of the nation writ large. To this end, the financial system can play a significant role on the microeconomic and technical level, if it is capable of getting more vertically aligned with the interests of client groups across the social spectrum.

Society needs the rich and the poor. Inclusion by banks cannot be limited to financial inclusion, and banks should focus on allowing access to services that most adequately reflect each client’s needs, rather than focusing only on private banking. Small steps in the right direction can be seen in financial industries, such as life insurance , and microfinance.

If economic mobility is taken at the level of the individual, a lifetime can see one move across the spectrum of poverty to wealth, with added complexity due to individual perceptions of each extreme. One can take lessons in this regard from Seneca, the stoic Roman billionaire who once influenced the young Emperor Nero before being forced into suicide by his one-time charge. A member of the one percent, he wrote of poverty: “Non qui parum habet, sed qui plus cupit, pauper est.” (Not he who has too little but he who craves more, is poor).

Note: Countries represented in the infographics in this overview have been selected for illustrative purposes. The countries show the breadth of the wealth spread and their selection does not imply any shared category or grouping.

September 6, 2018 0 comments

Editorial Opinion

On your own

by Yasser Akkaoui September 6, 2018

written by Yasser Akkaoui

If you moved back to Lebanon after the civil war during your late 20s with the dream of rebuilding the nation—and of course, haven’t held any public office—we predict you’re going to be working until you drop dead. Yes, Lebanese are known to be successful entrepreneurs—it’s a reputation that a few outliers have given us—but the majority of Lebanese are ordinary people with no safety net nor a propensity toward saving.

Whoever worked hard during the heydays of the 1990s until 2005 were, most likely, able to buy a roof over their heads and maybe put some money aside to enjoy over champagne, or exhaust during wars and crises. If you graduated after 2010, however, you entered the workforce at a time of decreasing prosperity. That is, if you were able to find a job rather than migrating to brighter pastures.

Our wealth management patterns follow the same rules that apply worldwide. Real estate, like in any other country, remains the first saving instrument we use. Everything else is subject to the cyclical global economic situation and amplified by the specifics of Lebanon’s geopolitical position, and of course, the lack of intelligence of our politicians.

While our politicians remain oblivious to the World Bank’s recommendations on poverty alleviation, inclusiveness, and market dynamics, Lebanese are left to devise their own retirement plan, quite the challenge with an annual GDP growth of less than 2 percent.

You are on your own.

Disclaimer: The above does not apply to state officials. They belong in a different economic model where you do not exist.

September 6, 2018 0 comments

Design Entrepreneurship

The journey of Lebanese makers

by Sara Assi August 25, 2018

written by Sara Assi

With daily electricity cuts and the lingering garbage crisis overwhelming us, it may be hard to keep our attention on the positive: There is a growing “maker movement” in Lebanon—also known as “Industry 4.0” (part of the fourth industrial revolution). This maker movement is made up of individuals who design, tinker, and create tech-based hardware products. The movement has been gathering traction—and definitions—worldwide, arriving in Lebanon as early as 2008. In Lebanon, however, these makers face a raft of challenges not seen by their global counterparts.

The maker movement has the potential to boost Lebanon’s economy in myriad ways: by increasing Lebanese productivity through the creation of hardware locally, providing job opportunities for engineers, business developers, marketers, and craftsmen, and producing locally-made products for export. Raed Khoury, caretaker minister of economy and trade, says that the maker movement is “a promising sector,” and that “investing in this sector could lead to several success stories” and contribute to economic growth. But before raising up the maker movement as a potent pillar of the Lebanese economy, there are several obstacles that must be addressed. In addition to the struggles that all startups must endure, makers witness additional burdens because hardware is expensive and difficult to make, and considered a risky investment.

Funding, bankruptcy and tax

One of the main obstacles to hardware startups is funding. In 2014, the money injected by Banque du Liban, Lebanon’s central bank, into the ecosystem through Circular 331 aimed to de-risk funding Lebanese startups, but while this has proven successful for software companies, many hardware companies still struggle to find investment.

Fares Samara, chief technical officer and program manager at Speed, a Lebanese accelerator, says that hardware startups are not appealing to local venture capital (VC) funds, and founders are often encouraged to shift to software: “there are limitations in the Lebanese market. Hardware is not [Lebanon’s] strength and it’s very hard for us to compete on a global level in terms of equipment, expertise, and funding. In software we have the capacity to be competitive on a global level as it only requires brainpower and a laptop, which is accessible to everyone and even a slow internet connection cannot obstruct your work.”

This view was echoed by Riyad Abou Jaoudeh, managing director at regional VC Middle East Venture Partners, who cited barriers such as imports, customs clearance, and lack of expertise when it came to hardware. Even those funds willing to invest in hardware, such as Berytech Fund II, look for ideas that find “solutions to big problems,” according to managing director Paul Chukrallah.

Hardware is usually expensive to develop and produce. Jad Berro, co-founder and CEO of the startup Innovo, a hardware prototyping service provider in Lebanon, says, “Many young entrepreneurs have interesting ideas, however, most of the time they cannot afford the cost to build a minimum viable product or a prototype, which could be the main killer of a project that could have become a success story.”

Fouad Fattal, co-founder and CEO of Krimston II, a dual SIM iPhone charging cover, explained that investor mentalities need to change as iteration is tough, long, and costly. He added that VC funds don’t invest in hardware startups because they believe that hardware is difficult, without having an understanding of the product development process: “To assess hardware startups, you need people with product development experience on the committee and that’s what’s missing.”

Investment gaps in Lebanon mean many ideas may not get off the ground at all. This scarcity discourages entrepreneurs, and even worse, makes them more vulnerable to so-called “shark angels” who take advantage and acquire large stakes in startups.

Fouad Fattal and his partner Nabil Nasr

Funding aside, startups are prone to failure—a commonly quoted but rarely sourced statistic is that nine out of 10 startups will fail—and with Lebanese bankruptcy laws as they are currently, this failure can cripple an entrepreneur. It takes two years on average for every bankruptcy case to be finalized and in that period entrepreneurs cannot register a new company. The potential for bankruptcy also deters investors who worry about safeguarding their money through the lengthy procedures, as well as attorney costs, and the reputational hit.

Governments are expected to supply the basic needs for startups—such as continuous electricity supply and fast internet—according to the International Monetary Fund. In Lebanon, however, it is not just these structural needs that are lacking; makers are treated by the government as though they are large enterprises rather than individuals, and suffer from the extra burden of income taxes, Value Added Tax, social security, and custom clearance tariffs. Expecting startups, especially makers, to pay the same taxes and custom tariffs as larger businesses is short-term thinking that could slow down the economic cycle by blocking access for emerging SMEs.

Customs clearance

Another major challenge Lebanon-based makers have to deal with is customs clearance. These businesses must import parts and electronic components from abroad, as they are not readily available in Lebanon. Once packages arrive they are often delayed and have high clearance costs, to the point that some makers find it faster and cheaper to travel and get the packages themselves.

A senior customs official, who spoke on the condition of anonymity, laid the blame for delays at customs on other institutions. He says that packages delayed at the airport are either held by shipping agencies or are being examined by the designated authorities while they are listed online as being held by customs. Customs also has no control over other institutions examining importing goods, such as the Industrial Research Institute or Lebanese Armed Forces, he adds. The customs tariffs for electronics is between 0-5 percent, so the high clearing costs that might exceed the shipments’ cost are defined by the clearing agents, who work independently from the customs institution and set their rates depending on their own expenses.

In the current customs system, the margin of mistakes, bribery, and delays is large. Major reform could spare makers from delays and financial loss. It is up to the Investment Development Authority of Lebanon (IDAL) to lead such reforms, as it is their duty to promote investment in Lebanon and decrease obstacles for entrepreneurs. On his end, Khoury says that the attempts by his ministry to reform customs policies were not successful.

Education: mentality and access

Those interviewed agreed that Lebanese students do not lack talent but are constrained by the lack of practical experience offered by educational institutions in the country. Guillaume Crédoz, a French architect and a maker who runs the “Bits to Atoms” fabrication laboratory (Fab Lab) in Lebanon, says, “Japanese schools send their students to visit pottery makers, for example, as they consider them life treasures, while in Lebanon, parents want their children to become doctors, lawyers, and engineers without getting their hands dirty, because manual work in not well regarded.”

Bassam Jalgha

Wael Khalil, the Berytech Fab Lab manager, points out that not many are taking advantage of the Fab Lab and those who do are either architects eager to learn, or engineers who don’t want to operate the machines themselves. This draws attention to the fact that Lebanese engineers do not lack the means to make, but the skills. How can we expect to have a strong industry sector and educated craftsmen if vocational and technical schools use old curricula, have weak practical training due to a lack of equipment, and no accreditation standards? There are no educational institutions providing technical studies on machinery and equipment manufacturing in Lebanon. This, in addition to the stigma of working with one’s hands, has limited innovation in this sector.

Berro, who started Innovo while still at university and subsequently dropped out in his third year, says “After my second year at university, I could not stand our education system anymore. It was too theoretical for me. Our instructors had never built anything before. I knew what I wanted and how to get there on my own.” Meanwhile, Bassam Jalgha started Roadie Automatic Guitar Tuner as a university project, but said that despite taking courses in entrepreneurship at university, he realized he lacked the know-how to go about building his project after he had secured funding.

Reforming the education system will be tough, according to Ramy Boujawdeh, deputy general manager at Berytech, who says it is hard to change universities because they are often large and bureaucratic. “It mostly requires a national strategy and a vision,” Boujawdeh says. A 2017 World Bank report also cites the educational barriers to entrepreneurs, finding that local accelerator programs do not provide sufficient quality training, and mentors are scarce.

Further obstacles

Research and development (R&D) plays a critical role in the innovation process, and is an area of high investment in big companies. However, startups cannot afford R&D on the same scale. In Lebanon, R&D is lacking, and, according to Khoury, investing in R&D is the responsibility of the private sector. But spokesperson at the Ministry of Industry (MoI), noted that the ministry is putting more effort into research in response to world trends and the need to develop new industries here. Infrastructure for hardware production is also an obstacle, as the laboratories specialized for certification are lacking and local patenting is not recognized abroad—which pushes makers to turn to the US or Europe and spend a lot on patenting, which they might regret later.

Securing visas for foreign employees is also a barrier in Lebanon, as Fattal notes: “Unfortunately our CTO is working remotely from India as he could not get a working permit unless it’s a domestic worker permit.” If the CTO were able to be based in Lebanon, he could have shared his knowledge with Lebanese engineers, Fattal adds.

Jad Berro

Light at the end of the tunnel

There are some positives, however. In terms of investment, the iSME program by Kafalat has tried to plug the funding gap by giving grants to early stage startups. Another obstacle has been removed with the opening of Fab Labs—The Maker Lab, a collaboration between Innovo and Antwork, The Berytech Fab Lab, and Bits to Atoms—in Lebanon, which gives makers access to machinery so they can produce their own prototypes. Boujawdeh says that the aim behind opening a Fab Lab was to allow more hardware companies into Berytech’s programs by helping to reduce prototyping costs.

The MoI has been aiding makers through building industrial zones that include an incubator for high-tech manufacturers across Lebanon. In 2016, three industrial zones launched, and in 2017 five further locations were announced. An upcoming law is also set to provide Lebanese industrialists that export locally manufactured goods with a 50 percent tax cut on the profits generated from exports.

The MoI is also working to reduce another financial burden on entrepreneurs by amending the Income Tax Law to exempt research and development expenditure, and has prepared draft laws suggesting changes and exemptions in VAT. The ministry has also signed an agreement with the Ministry of Education and Higher Education, and the Association of Lebanese Industrialists to design educational programs addressing industrial needs.

Meanwhile, the Ministry of Economy and Trade is currently working with the World Bank on providing funds for early stage startup, and, according to Khoury, the government is currently working on a draft law that would protect startups, investors, and debtors in the case of bankruptcy.

Moving forward

What if we treat the makers movement as the potential savior of this country, and pour our energy, expertise, and potential into it, instead of planting obstacles? What if the government, ministerial committees, central bank, and other institutions start working together and draw a plan for this movement to succeed? What if more technocrats start occupying public sector positions and start channeling the resources we have, the knowledge economy, in the right direction?

Lebanon should review its business models and consider instigating a free trade regime to become a hub for tech production in the MENA region, galvanized by an industrial free zone, startup visas, and e-services.

Lebanon’s education system, both technical and academic, needs to be geared toward industry, and celebrate makers and making. More funds need to be injected into the local startup ecosystem. The government should support those startups through a “Made in Lebanon” policy, and collaborate closely with them.

It is up to the government to design a vision, and decide whether to let entrepreneurs like Jalgha, Berro, Fattal, and others be pillars of this movement, or just struggling passengers in the making of Lebanon.

August 25, 2018 0 comments

Design

The reality beneath the trend

by Reina Arakji Solh August 25, 2018

written by Reina Arakji Solh

Design thinking, as a strategic design and creative problem solving process, is still quite popular in design and business circles and has gained mainstream status, especially as an enabler of innovation. Yet evidence is emerging regarding the failures of the method, leading design and business professionals to become its harshest critics. Genuine practitioners of design thinking regard it as an exploratory method that is more focused on the process than the end result. They work on enhancing the outcomes of so-called “wicked problems,” the complex situations encountered in modern society. Design thinking practitioners also favor the incorporation of end-user perspectives early on in the design process, as well as working in interdisciplinary teams in order to generate a multitude of ideas for possible innovative solutions.

To that effect, the design thinking methodology, as popularized by design and consulting firm, IDEO, comprises five iterative stages: (1) Empathize, or make the design process human-centered by learning about the end-user circumstances and behaviors, and uncovering their unmet needs; (2) Define, or characterize end-user objectives and the scope of the situation to be addressed; (3) Ideate, or brainstorm to generate different ideas for possible design solutions or interventions; (4) Prototype, or build simple representations of select ideas; and (5) Test, or share the prototypes with end-users as well as business and technical experts for feedback, before moving back to the ideate and prototype stages as necessary. This process supposedly allows for the emergence of products and services that are more likely to be successful when launched, as they would have already been vetted for desirability, technical feasibility, and viability.

In theory, the design thinking process and its core elements are quite valuable as a catalyst for innovative ventures. In practice, however, design thinking suffers from major drawbacks that often render the process ineffectual and affect the quality of its outcomes.

First of all, design thinking creates the illusion that everyone is or can become a designer. This has led to the design thinking fad. Design thinking workshops and executive courses—with a duration that varies from a few days to a few months—are now offered internationally by leading educational institutions. These educational programs do not equip attendees with any tangible design or business capabilities besides familiarity with the process itself. Professional designers, on the other hand, undergo rigorous training in design skills and research.

Furthermore, by democratizing the design process and including end-users and experts from a variety of fields, design thinking effectively replaces the traditional lone genius model of creativity and innovation with a creative problem solving process and interdisciplinary project teams. But does democratizing design create better designs? Not necessarily. Only in very few instances is the crowd actually able to produce a truly brilliant idea, the proverbial needle in a haystack. This is in contrast to the work of genuine and talented designers, who can regularly and intuitively address complex design conditions by using a variety of holistic approaches to devise solutions.

Moreover, making end-user needs the focal point of the design process, and downplaying the role of scientific and technological advances, results in relatively minor solutions and not radical discoveries.

Organizations of various sizes have also been quick to adopt the design thinking trend, even creating chief design officer positions, in their effort to remain effective and relevant in a fast changing marketplace. However, design thinking is often adopted internally by organizations, both for-profit and nonprofit, in a way that ignores their current realities and innate social dynamics. Bureaucracy, departmental silos, fear of failure, and managerial interference often hinder design thinking’s inherently exploratory process. This becomes evident when an organization is more established, i.e. more conservative and inflexible. IDEO is known to have “fired” some of its consulting clients—prominent global conglomerates—claiming that these organizations were too slow in adapting to the design thinking process. Also, in the case of for-profit organizations specifically, design thinking’s essence, the exploratory process that aims to add value to end-users first, often conflicts with corporate profitability and the organizational schedule of deliverables.

International NGOs (such as the nonprofit IDEO.org, and numerous others) have likewise attempted to implement design thinking to tackle global challenges such as poverty, the environment, education, and migration. While design thinking has delivered noteworthy small-scale solutions at the group and community levels, addressing global crises is not as simple. What the design thinking process uncovers in terms of population needs and aspirations does not necessarily correspond with what those in positions of power covet. Large-scale design thinking projects have therefore been mostly failures, due to political interference in the outcomes and red tape in the implementation phases.

The most significant drawback of design thinking is its fan base: the design thinking evangelists who believe it can reliably provide innovative results in any field or setting. They apply it uncritically, without paying attention to contextual nuances disregarding other tools that scientists and designers have at their disposal.

Most design thinking enthusiasts have forgotten its origins in the consulting world and the fact that it is a process that is fundamentally about commercialization of products. Design thinking should be a complement, not a substitute, for other problem solving methodologies and traditional R&D as drivers of innovation. Design thinking, if applied on its own, can collapse under its many shortcomings, but combined with other tools and approaches, could constitute a powerful and holistic creative methodology.

REINA ARAKJI SOLH is a design and innovation strategist leading advisory projects that build innovation opportunities in situations of economic, social, and cultural transformation. She was previously assistant professor and director of the Strategic Design and Management program at Parsons School of Design NYC and assistant professor of Information Systems at the American University of Beirut.

August 25, 2018 0 comments

Design

How it looks vs. how it works

by Joe Ayoub August 21, 2018

written by Joe Ayoub

My first encounter with the term “design thinking” was five years ago, while researching a project for a client. At the time we were facing a “wicked problem,” a problem with multiple and inter-connected sources. The client’s team had tried all the traditional methods and tools and failed, so we were tasked with looking at how we could find unconventional ways of solving the issue.

What I discovered about design thinking was beyond my expectations, and it was one of those big “aha!” moments. What struck me was the realization that design is actually not how things look—as we have been accustomed to describe the design of, for instance, flower vases—but it is about how things work; in the case of a vase, is it easy to handle, fill with water, put on a shelf? As the late Steve Jobs said, “Most people make the mistake of thinking design is what it looks like. People think it’s this veneer—that the designers are handed this box and told, ‘Make it look good!’ That’s not what we think design is. It’s not just what it looks like and feels like. Design is how it works.”

Since this epiphany, at Brandcell we took a deep dive into this discipline and now use design to solve key business challenges, designing growth strategies for major clients.

So what is design thinking? According to Tim Brown of global design company IDEO, “Design thinking can be described as a discipline that uses the designer’s sensibility and methods to match people’s needs with what is technologically feasible and what a viable business strategy can convert into customer value and market opportunity.”

Basically, design thinking is a methodology that we use to solve complex problems, and it is a way of using analytics with empathy, and using user-research to trigger and envision future innovations that lead to sustainable growth.

The design thinking process, or what is now called human-centered design, starts with understanding user needs and the job to be done. This is achieved by walking in the customer’s shoes with a large dose of empathy to discover the world through the lens of the customer’s declared and undeclared needs and aspirations. This leads to identifying key insights, which are translated into opportunities for innovation and problem solving, or what is called “framing the challenge.” This is followed by an ideation stage to design solutions that are: 1. desirable (for customers), 2. viable (for the company) and 3. technologically feasible (doable and differentiating). The third stage entails zooming in on a key solution and creating rapid prototypes for testing before roll-out. The last stage involves implementing and monitoring results.

It is worth noting that in a lot of situations we are surrounded by bad design. Bad design is easy to achieve as it does not require high skills, and people do it all the time without much effort. It does not need much concentration to think about the best way to integrate the form and function of the object. However, the most worrying and insidious effect of badly-designed products or services is its impact on our well-being. Some examples include: complicated public administration processes that cause people to suffer because of a poorly thought-out service design; a frustrating call-center where no answers are given; bad product displays; difficult to read packaging; a back-breaking chair; a website with 100 steps to process one request; a one hour queue at a hospital. These bad designs make people’s lives more difficult and stressful. Design is therefore about moving things toward more desirable outcomes and more enjoyable experiences.

Design thinking is today a core capability adopted by major companies around the world. Companies have embedded design labs and applied design thinking to solve issues, producing both incremental and radical innovations. Large management consulting firms have embedded or acquired design studios and designers to complement their traditional tools and provide more holistic solutions to problems that cannot be tackled by analytics alone. The fields in which one can apply design thinking are extremely wide, from designing business strategies, to organizational development, customer experience, new product development, social design, and more. One particular field of importance nowadays is “experience design.” As the world economy shifts toward customers spending more on experiences and less on goods, designing a good customer experience is key. If you’re a strategist or CEO, and you are thinking about how to differentiate your company and services without attempting to understand and improve how your customers experience your brand at every touch-point, you are probably missing out on a very, very important lever.

Another application of design is digital transformation. Too often we meet clients who want to integrate digital channels but start at the wrong end, building a lavish website and spending on social media to attract potential customers, with limited success. First you need to understand which part of the journey customers would like to see digitized and in which part they prefer to keep interacting with a human, which is more reassuring (insurance and banking works best with a mix, for example). This is what we call designing an omni-channel strategy. Design then permeates the back-end, to redesign more efficient functions and processes, removing silos to ensure best delivery of a customer experience that will delight and create loyalty. We have been helping local organizations adopt design as a core skill for innovation, rapid prototyping solutions, and new initiatives in situ, before committing heavy resources and spending on expensive launches that might fail in the real world.

While not everyone is a designer, to design is to liberate the creative confidence and advance with an open, curious mind. With this approach, we can achieve better solutions, amazing innovations, and aspire to the best there is, and even to heights that have not yet been scaled. Better designing what we need is also a good discriminator to limit what we produce to what is of real value in improving human lives, and dropping the clutter that pollutes our senses and affects the quality of the environment.

It is important to realize the greater sense of design that lies beyond the shape and look of things, and to understand and practice how human-centered design actually improves life.

Brilliant design is holistic beauty, and as they say, beauty is a promise of happiness—in Lebanon, we all need it badly.

Joe Ayoub is the founder of Brandcell Consulting.

August 21, 2018 0 comments

Design

Mapping the future

by Tania Anaissie August 20, 2018

written by Tania Anaissie

Design thinking” is a powerful agent for social innovation, and since its emergence in 2002, when David Kelley of IDEO coined the term, practitioners have been applying it to drive social innovation. Design thinking is being used to address healthcare, education, and environmental challenges across the world. However, as designers engage in this work, they are finding gaps in the process, and as true designers, they are adapting and iterating the design thinking process itself to meet these new challenges.

As a design practitioner and instructor, I feel there has never been a more exciting moment in the design field than now. It is a time of experimentation and growth. So what are social innovation designers doing to adapt the process? What are we changing and why?

When I left my post at the Hasso Plattner Institute of Design at Stanford (known as Stanford d.school) in 2016 and launched a social impact design studio, I found working on social challenges required adapting the design process. I started to question: Why are we only asking for community members’ input on a challenge at the beginning and end of the cycle? What if they were part of our design team and present for all decision making? Why are community members viewed as unaware of their own needs, when many of these communities are organized and actively asking for what they need? What are the ethics of starting a design project when there is not a clear implementation plan or budget? How am I challenging my own biases around how I view this challenge and how I collaborate? How can I create an intervention with confidence that it will create positive behavior change?

I quickly started building tools to help navigate these queries. I started practicing co-design “with” communities instead of “for” them. I met many designers who were asking the same questions and developing their own tools to address them. We spent a year learning from each other’s work and then founded the Equity Design Collaborative, a group formed to share this work and build a movement in the design sector.

“Equity design” is a design thinking process that acknowledges historical context and power dynamics. For example, when I did work in Cape Town, South Africa while a lecturer at the Stanford d.school, I had to understand how I was perceived as an international lecturer coming from an American university to a country that has a complex relationship with colonialism and a history of abuse from outside researchers. That was an important factor to understand before I did any design work there. Equity design also helps us manage our biases of people, ourselves, the challenge framing, and the outcomes. It involves a practice of building deep self-awareness, which is critical for being able to work effectively with communities on difficult social challenges.

I developed a form of equity design called “liberatory design” with colleagues from the Stanford d.school and the National Equity Project. We pooled our expertise from the design thinking, systems thinking, and equity change fields. Equity change helps us build deep relationships with communities, talk honestly about power dynamics, navigate difficult conversations, and practice co-design in a way that uplifts all. Systems thinking tools help us see the social challenge in a wider context—a context that includes multiple stakeholders who are intricately interconnected. For example, I am working with a government agency to help them reduce the rate of recidivism in their county. They want to help formerly incarcerated residents thrive in their city and stay out of jail. In this project, behavioral health, security, data, medical, and program teams across the county have to collaborate to address this social challenge. To do this work demands systems thinking tools. Systems thinking helps us design an intervention that works across departments and systems. Without systems thinking tools, we risk oversimplifying the challenge and either creating ineffective solutions or even harmful ones with unintended consequences.

Equity design has immense potential to drive impactful social change in Lebanon. Design thinking helps identify meaningful challenges to explore, develops creative solutions, and generates rapid learning through prototyping and testing. In addition, using systems thinking we can unpack the complexity and interrelatedness of these challenges. For example, if we are trying to address the trash crisis in Lebanon, we need to interview community members in different cities to understand how it is impacting them. We also need to use systems tools to map out everyone connected to this issue: manufacturers, trash collectors, restaurants, government officials, recycling plants, and more. We cannot address this challenge by focusing on changing human behavior in one group alone; we need to identify the interconnectedness of the groups and how that affects the outcome. We might decide that the way to address the crisis is to reduce the amount of plastic packaging that people purchase at the grocery store. Or we might find that the most powerful leverage point is to change a national policy. By mapping the complexity of the system and designing a solution with communities, we can identify ways to most powerfully intervene to drive social innovation.

Lebanon is rich in driven, compassion, and intelligent change-makers. By leveraging equity design practices, these actors can add a powerful resource to their toolkit in their mission to drive social innovation. I encourage you to start building your own equity design tools and join our movement. The need for social innovation will continue to adapt, and so must our design practices.

Tania Anaissie is the founder and CEO of Beytna Design Studio, and lecturer at the Hasso Plattner Institute of Design at Stanford University.

August 20, 2018 0 comments