BankingCover storyNumbers & Figures

The breakdown

by Dany Baz
written by Dany Baz

It has been one of the most reassuring factors in the Lebanese economy—some might be inclined to say nearly the only one—that local banks maintained their strong financial standings during the past years and have been perfectly assuming their role in financing the economy. Beyond their financial performance, which is highlighted in the analysis below, banks have also been implementing adequate corporate governance standards and nurturing good transparency and disclosure practices. The Lebanese have every reason to conclude that the robust financial fundamentals, rigorous adherence to standards under supervision by the central bank, and solid risk profiles put Lebanese banks in a good position to reap the benefits of an economic upturn locally and regionally.

The analysis below is based on the consolidated performance of 26 banks that account for 97 percent of banking activities. Fifteen of these 26 banks are defined as comprising the Alpha banking group with deposits above $2 billion (per bank) and the other 11 banks are classified as the Beta banking group with deposits between $500 million and $2 billion. The number of Alpha banks increased from 14 to 15 as of December 31, 2017.

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Banking activity

Total assets stood at $241 billion at year-end 2016. Customer deposits, which represent more than 80 percent of consolidated assets and have increased by 15 billion over the past two years, totaled $193 billion, while consolidated loans represented $74 billion in 2016. A second look shows that domestic deposits have increased by $18 billion while foreign deposits decreased by $3 billion. In parallel, domestic loans to customers have increased by $5 billion over the period while foreign loans have remained at the same levels since December 2014. Based on the figures of Alpha and Beta banks, assets could reach around $260 billion at year-end 2017, deposits could surpass the $200 billion mark, and loans could reach $75 billion for the sector at year-end 2017.

The breakdown by currency reveals that the dollarization of domestic deposits remains steady at 64 percent while dollarization of domestic loans decreased substantially from 74 percent to 71 percent during the period under study, further reasserting the Lebanese Lira (LL) as a lending currency. Much has been said and written on the impact of the central bank’s stimulus packages and the fact is that banks have injected more than $3 billion worth of loans denominated in LL in the past two years with a growth of 13 percent compared to a 4 percent growth in total domestic loans.   

In the light of growing regional and local tensions, 2014 was the last year where activity growth registered double-digit figures. Since 2015, overall activity dropped to an average growth of around 5 percent and the domestic/foreign breakdown reveals that the slowdown is due to foreign aggregates that were hit by the devaluation of currencies in major markets of presence, namely Egypt and Turkey. In addition, some banks have deconsolidated their foreign entities in Armenia, Russia, Cyprus, Syria, Iraq, and Sudan, further translating into a decrease in balance sheet aggregates.

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Foreign activity represents around 16 percent of deposits and 27 percent of loans. It is interesting to compare the ratio of deposits and loans per branch locally and abroad. In fact, Lebanese banks are able to replicate their local pace of circa $50 million per year per branch in terms of loans, but foreign branches are collecting only half the deposits of domestic branches, respectively circa $75 million and $150 million per branch per year. Lebanese banks operated a network of 1,427 branches at year-end 2016. Of these, 359 branches were located abroad after the closure of 52 branches in foreign markets in a development linked to the deconsolidation of foreign entities mentioned previously. The domestic network of 1,068 branches grew by 29 new branches in the past two years.

Liquidity and asset quality

Liquidity is on the rise at 35.15 percent, well above regional averages, with liquidity in LL rising to 37.55 percent and liquidity in foreign currency (FC) registering 34.08 percent. In parallel, the loans to deposits (LDR) ratios remained stable throughout the period under study and well below regional and international benchmarks. At end of 2016, the latest observation currently available for this analysis, LDR stood at 38.36 percent overall, broken down into 27.11 percent in LL and 43.32 percent in FC.

The persisting regional and local challenges have slightly impacted asset quality with an increase in the ratio of doubtful loans to gross loans that rose to 6.55 percent at end 2016, similar to its 2014 level but slightly higher than the 6.37 percent registered in 2015. In parallel, the coverage of doubtful loans stood at 75.52 percent, up from 75.44 percent in 2015 and well above the world average of 68.70 percent in 2016. In addition, Lebanese banks increased their collective provisions to a new high of 1.55 percent at year-end 2016.

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Profitability

Net profit increased by around 13 percent to $2.5 billion at end 2016 with domestic profit dropping from the mid-80s to low-70s as a percent of total net profit. Return ratios followed suit with return on average assets (ROAA) and return on average equity (ROAE) nudging up to 1.06 and 11.23 percent respectively. In comparison, the MENA average ratios stood at 1.50 and 11.40 percent respectively in 2016. It is worth noting that Lebanese banks have increased their equity by around $3.5 billion over the last two years under study.

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The analysis of components of return ratios show that margins and spreads remained stable throughout the period under study at around 2 percent and 1.90 percent respectively. In parallel, the net operating margin was equally steady at around 34 percent while cost to income improved, dropping from around 50 percent to 44 percent over the period compared to a world average of 55 percent at end 2016.

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BankingCIPCover story

Strongest linkage or missing links?

by Thomas Schellen
written by Thomas Schellen

The list of infrastructure needs is long, yet the wish list of these projects for Lebanon is still very rough, and as Executive noted last month, looks methodologically as messy as a disorganized teenager’s room waiting for an encounter with neatness. As the projects in the vast national infrastructure file may contain some old and technologically obsolete plans or plans of dubious national economic value, any realistic outlook for upgrading Lebanese infrastructure to the levels required for economic sustainability, plus social and environmental compatibility, is clearly more in the mid and long term than in the immediate or short term.

This is without even starting to talk about the systemic challenges of managing projects in public-private-partnerships (PPPs) wisely and with great efficiency, nor about the prioritization, selection, and determination of time frames for specific projects. But within this general perspective, what is the outlook for Lebanese banks’ participation in the finance of the great effort?     

From the perspective of invigorating the Lebanese economy and finance on the macro level through the CEDRE process, the question to the role of local contributions gets a clear answer from Banque du Liban Governor Riad Salameh. “The idea about CEDRE is to fund the projects with international funds, not local funds,” he tells Executive. In his view, the sourcing of funds through local capital market platforms should thus be an exception.

The international angle in the CEDRE context is of primary importance for the economic equation in the country, emphasizes Alain Wanna, deputy general manager and head of group financial markets and institutions at Byblos Bank. “[Lebanese] banks will play a role, but the funding for the infrastructure projects will come from outside of Lebanon, and it is very important that Lebanon receives new funding from outside. For the balance of payments, for currency reserves, [and] for stimulation of growth, it is very important that the money comes from outside the country, and comes at subsidized interest rates,” Wanna says.

financing ppp

He clarifies the expected division of labor between the external funders and the local commercial banks, saying, “International donors and funders will follow the projects [organized under CEDRE] very closely, and they have a key role in this. They will observe the bidding process, study the costing, and monitor the development of the projects. This is important to avoid any notion of corruption. Lebanese banks, within their available liquidity, will be involved with activities such as extending credit lines and providing financing deals to contractors and companies involved in the [infrastructure] projects.”

For Saad Azhari, chairman and general manager of BLOM Bank, Lebanese banks will have a definite role to play in PPP infrastructure projects but he says this must be put into perspective. “In Paris [at CEDRE] they were able to secure long-term financing for those projects. Long-term financing is coming from those specialized international institutions that can give those loans for 20, 25, and 30 years. This is provided.

“When those projects come to be executed, however, private sector involvement will be large. The role of the banks is in this area. The private sector will need [Letters of Credit and] open overdraft facilities, or they might need to get loans, for example for buying a piece of equipment or construction machinery with a three to four-year loan. Thus our role [as commercial lenders] will effectively be in supporting those who are going to execute the projects,” Azhari says, adding that local banks on one hand will benefit in this way from the CEDRE process and on the other hand will be able to ensure that local companies will have the ability to execute infrastructure projects under the plan.

Bank Audi also leaves no doubt that it is ready to be involved in the finance of PPP infrastructure projects in Lebanon, and that participation in the scheme is a no brainer for a large local bank. “Let me start by saying that we have participated in similar deals in other countries in the region. Why would we not be doing this in Lebanon?” Group Chief Strategy Officer Freddy Baz asks rhetorically. As he tells Executive, Bank Audi has already participated in infrastructure projects elsewhere in the Middle East, for “important projects involving electrical central plans, port facilities, etc.” While he refrains from going into greater details regarding these projects “for reasons of confidentiality,” he makes it clear that the bank would look at projects in Lebanon with both great interest and with the eye of a financier. “We will only be driven by financial considerations. We will be looking at the file [of infrastructure projects] as we do for any other corporate file and any other project financing file,” Baz explains.

“What we look at and stress-test and where we challenge our counterparties is the feasibility of the project, and the capacity of the project to generate the cash required for the project to reimburse itself [from operations and operating revenues],” he elaborates, emphasizing that this is not on the basis of any financial guarantees, as requisite as such are for completion of a financing arrangement. “We are never driven by guarantees on our loans even though these guarantees are essential and we never give final approval for a financing arrangement if the guarantees are not adequate. But this is the last part that we look at [in discussing the project],” says Baz.

He explains further that Bank Audi could either get involved directly in projects, by taking an equity stake, or less directly, through financing the contractor or the investor. This does not involve looking through the project list for something that might be to the bank’s taste, however. “We wait until the investor or the contractor comes [to us]. What is requested is for banks to be available and open,” Baz clarifies. He notes that today much confusion remains regarding the Capital Investment Plan espoused at CEDRE, and PPP projects and the PPP law, given that what was presented was a list of projects which the Lebanese government considered to be priorities and are assumed to be capable of generating profitability for the private sector.

The reckoning

From the perspective of FFA Private Bank, the issue of investments under the proposition set forth in the CEDRE conference involves a macro-economic risk for a GDP contraction in the coming few years, given that the Lebanese government’s promises of reform and deficit reduction require a totally new exertion of fiscal discipline. “Should we decide to abide by that discipline, it is likely to push 20 to 30 percent in the weakest segment of the population into deep poverty. This might be a cost that we would be socially unable to bear and that would come with its own social unrest,” warns Iyad Boustany, managing director and head of investment banking at FFA.

This could translate into one of three rather unsavory options, the first being eruption of heated social debates and top-down attempts to have the burden of the economic and administrative restructuring process be borne collectively—which probably would mean an unequal distribution of burdens from rich to poor. Another option—unwise from a banking perspective—would be if attempts were made to use banks as the donkeys for carrying the cost burden related to reforms. This, says Boustany, could happen under a mistaken presumption that banks were the main financial beneficiaries of the past period when fiscal discipline was lacking, with the consequence of society saying that banks should write-off 20 or 30 percent of the Lebanese government’s debt. The third alternative, of not initiating reforms and trying to continue with the unsustainable pre-CEDRE status quo, would be no solution at all. Thus, a period of reckoning, in Boustany’s view, is very likely as result of the fact that Lebanon has been living above its means for a very long time.

To tap into the economic saving potential of infrastructure investment flows and PPP projects, it would, according to FFA Private Bank, be prudent to broaden and deepen the direct flow of investments of all sizes from the Lebanese population and the diaspora. Banks, which have barriers against participation in PPP finance because of the long tenors—infrastructure projects typically require financing for durations upward of seven, 10, or more years—should be disintermediated from the process of direct infrastructure finance, i.e., the middle man should be removed when it comes to financing these projects.

“We are very strongly advocating something that the government should be advocating, [namely] a totally disintermediated, capital market driven infrastructure financing. [This route] could achieve several benefits in one strike, one of them being that it would give small investors equal investment opportunity, something that the World Bank is very vocal about,” Boustany proposes.

Transparency and ppp

He acknowledges that moving to such a model would imply a total shift in the prevailing economic model of Lebanon, away from issuances of debt instruments that channel income to banks and a minimal privileged strata of society. Boustany argues that the present time would be the right moment to change the business model that the Lebanese economy has been operating for three decades and switch to a model where that the vast majority of the people—who have been paying for the party that others were having for the past 20 years—will be enabled to participate and profit directly from buying infrastructure finance instruments with diversified risk profiles and yields.

This, by his reasoning, would also act as support factor in the fight against corruption as people with stakes in project bonds etc. will have incentives to demand greater transparency and improved governance from infrastructure project managers. Despite imperfections, the new PPP law, according to Boustany, supports the development of transparency and governance. 

According to him FFA Private Bank would seek to play a role in promoting investments in infrastructure PPP projects that are carried out through capital markets instruments with ticket sizes that are as small as possible. He says: “We are positioning ourselves toward very strongly advocating the disintermediated model of public finance and PPP financing, creating all the elements and using all the existing tools in order to give life to this model, which we believe for the time being to be the only one viable for channeling vast needed funds into infrastructure projects.”

Open and equal investment

“Money is available in Lebanon. All that is needed is to agree on an arrangement that isn’t one where the [elites] take most of profit and throw a few morsels to the people. [This means that] we have to ensure that all projects will be open to wide and equal investment to the general public, not just the more questionable ones while the political establishment picks and chooses [profitable projects] for themselves. Everybody needs to be provided the legal ability to access and finance projects, whether they look difficult or promising,” Boustany asserts.

Whereas the disintermediated capital markets strategy advocated by FFA would with high probability run against the current interests of many financial players in Lebanon, the viewpoints of other bankers focus on highlighting areas where disruptive market impulses and established models can mesh. Bank Saradar’s Head of Strategy Sami Abou Jouma seeks to balance the reward expectations and risk potentials that relate to the CEDRE scheme. “Implementation of the agreements in the CEDRE initiative will change the equation in the Lebanese market in a positive way, whether in terms of liquidity, corporate lending, or project finance. PPP projects with support from multilateral institutions and international donors will have a spillover effect on the Lebanese economy, and local banks, especially the big banks, will have a role to play in the financing of the wider ecosystem created by PPP [projects], but it is difficult to say today at which level and in which form and amounts,” he explains.

“The three elements needed for the success of the CEDRE concept and PPP are fulfillment of the right reforms, the right governance framework, and the putting in place of checks and balances. If these three things happen, then I think, yes, PPP will be very positive news for the Lebanese economy,” he concludes.

BLOM’s Azhari, who by his own characterization is a perennial optimist, believes that the impact of CEDRE will be reflected in the national GDP and that the country could see a return to growth rates from the strongest upward periods of post-war Lebanon. He concedes that it is currently difficult to anticipate the GDP impacts of different PPP infrastructure projects or the multiplier effect of inflows expected under CEDRE. He would not join speculations, put forward by some in the financial industry, about rates of increase in the lending activity of banks, though he asserted the view that “overall, the impact is definitely going to be positive and the GDP growth is going to be larger than the amounts that are being received.”

Coming to the provisional bottom line on the views and approaches of top bankers in Lebanon (as far as those responsive to Executive) vis-à-vis the value proposition of infrastructure PPP financing, it emerges that a plurality and a possible majority are leaning to the optimistic point of view on CEDRE and the financing of PPP with participation by local banks. This is notwithstanding their awareness that the prospects of the whole endeavor are yet only visible as if through a murky glass. 

As Audi’s Baz views the many vagaries of prospects for anything from deficit reduction to reforms and finance for investments and PPP, he notes, “Markets are tolerant. They do not need ultimate solutions; they need signals that you are again on the right track.” He summarizes his personal outlook from a banker’s perspective by saying: “Our expectations [related to the new Parliament] are not very high but if all of what has been talked about at CEDRE and in the last Councils of Ministers [meetings of the previous government], 50 percent is achieved, it will in my opinion be more than enough to provide sustainability and stability again in the country.”

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BankingCover story

News on the house of Saradar

by Thomas Schellen
written by Thomas Schellen

Over the past three to four years, Saradar Bank was being developed as a universal bank with a full range of services in corporate, private, and retail banking. The process was aimed at engineering one differentiated banking entity out of two smaller banks, Near East Commercial Bank and Banque de l’Industrie et du Travail. Although, or perhaps because the procedure entails the creation of a new three-to-five year vision and strategy (implementation of which is currently ongoing) on top of the refurbishment of the bank’s brand and network, since 2016 Saradar Bank had been anything but forthcoming with information about its state of affairs and plans for further development. Until now.

“By end of 2017, we grew our assets by 26 percent versus a market [growth] of 6 percent and our deposits grew by 26 percent versus a market [growth] of 3.5 percent. Also, at the end of 2017 we became an Alpha bank [with deposits above $2 billion]. The growth in deposits was an ambition and objective because we wanted to reach Alpha bank [status],” says Sami Abou Jamous, Saradar Bank’s chief strategy and planning officer.

“In 2017 our focus was to implement a new strategy, improve efficiencies, optimize cost structures, [and] invest in technology and people. Moving forward, our focus is on profitable growth. Our ambition is to continue growing fast but claiming that there will be the same high-paced growth [as in 2016 and 2017] would be an ill assumption,” he tells Executive in an interview on the eighth floor of the bank’s head office building.

On the corporate side, the positioning of Saradar Bank is targeted toward a segment that Abou Jamous calls “mid-corporate.” The competitive edges of the bank in this business line include its factoring service, as well as project finance and corporate lending approaches with a strong emphasis on long-term and personal relationships with their client base that extends beyond mid-sized corporates to small and medium enterprises (SMEs).

In private banking, which is the bread-and-butter business of Saradar Bank as it had been the primary strength of the previous Bank Saradar (before a merger into a joint group with Bank Audi in 2004), the bank pampers its clientele with investment advisory, wealth management, and “premium services” that appear to be a banking equivalent of ‘I want to read every wish from your eyes.’   

Most innovative, however, might be the lender’s new approach to retail. The bank is surprisingly more than content with the size of its physical network in Lebanon, which currently entails 17 branches. This number is puny when measured against the what Bankdata states is a total of 1,037 domestic branches operated by Alpha and Beta banks at end of 2017, and is negligible when compared with other contenders in the Alpha group of banks (ranked 14th by deposits, its peer Creditbank, for example, has 25 branches while branch networks at the ten largest banks easily run into counts above 50). However, the small geographic footprint of Saradar Bank is the foundation for shaping the retail line of business into a digital bank that is close to being as “digital native” as possible (see overview piece for more).

In the structural organization context of the family-owned Group Saradar, the bank is not a top-level corporate entity, but rather a unit of Saradar Finance House (SFH), which in turn is one of three units that comprise the group. SFH, according to Abou Jamous, bundles partial or full ownership interests in several financial enterprises, such as micro-lending provider Vitas, money transfer operator CashUnited, and asset management arm Saradar Family Office (SFO). Of the two other units in Group Saradar, the first organizes all property investments and real estate development activities in Lebanon and abroad; the second unites under its umbrella what internally is called other investments, which include postal services provider LibanPost as well as ventures that, according to Abou Jamous, range from artistic enterprises to some that are not-for-profit.

Abou Jamous, who besides his position in Saradar Bank is also is chief operating officer of Group Saradar, reveals that strategic plans on group and bank level include investments into at least one Fintech-oriented startup fund, acquisition of an insurance company, the possible creation of sister banks to Saradar Bank abroad (most likely in Europe and Africa), and expansion of real estate investments in Europe and the United States.

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BankingCover storyOverview

Buoyed by banks

by Thomas Schellen
written by Thomas Schellen

The relationship between the Lebanese economy and its banks is not quite as simple as the numbers suggest. Banking aggregates are improving every year. But the economy in Lebanon cannot be assumed to be sturdy just because the banking sector is jogging on and on. There are far too many risks and alarm signals on the macro level. To name a few beyond the often-cited debt to GDP ratio (now somewhere above 150 percent), seemingly perennial current account deficits (nearly 20 percent in 2016 according to World Bank Group data), and the deficit to GDP (last above 8 percent), the burdens of inequality to society keep increasing—there are weaknesses in factor productivity, poor capital stock formation, lack of competitiveness of manufacturers, an anemic middle class, and arguably not enough energy in the entrepreneurship ecosystem and knowledge economy.

This only can serve to emphasize that banking can supply financial nourishment that a society needs to solve its economic problems—but cannot on its own cure an economy. A society’s economic health is unachievable without banking sector health. When viewed from this perspective, it is more than a simple comfort that banking in Lebanon is still doing astoundingly well. But can one assume that the sector is of overall convincing health, especially when considering the degradation of the regional environment?

Freddy Baz, vice-chairman and group strategy director of Bank Audi, the largest bank in Lebanon by assets, views the health of local banking in context of an economic environment that is marked by tightening conditions, both nationally and regionally. He tells Executive, “As to the health of the banking sector, the quantity effect and the price effect have obviously impacted the bottom lines and internal capital generation of banks because of these deteriorating macro conditions. This is the case in the region as a whole, where one could see decelerating inflows affecting the foreign positions of countries and domestic liquidity. It is true that banks in Lebanon are today facing more challenging macro conditions, but not to the detriment of their asset quality and liquidity, which are still among the best in the region.”

Baz acknowledges that the inflows to Lebanon are down in absolute terms, but “not dramatically so.” According to him, when seen in relative terms, that is when comparing the share of inflows that are attracted to Lebanon with the rest of the Middle East and North Africa (MENA), Lebanon’s slice of the inflow pie was about 15 percent in the past two years. This was down from a previous peak share of 18-19 percent but still a sign that the country in terms of inflows is boxing far above its weight in GDP where the national contribution to consolidated regional GDP is 1.5 percent.

Saad Azhari, chairman and general manager of BLOM Bank, points to the existence of growth and positive profit performance reported by top banks for the first quarter of 2018 despite having borne the impact of increased tax burdens. “I think that the health of the banking sector, even with the difficult environment, is still good. We are witnessing reasonable growth of deposits. The situation in Lebanon is one of challenges, but the banking sector is still in a good shape,” Azhari tells Executive.

According to Alain Wanna, deputy general manager and head of group financial markets and financial institutions at Byblos Bank, the first quarter in 2018 was satisfactory for the sector. “The top four banks, by their published figures, were able to achieve stable profits or small increases, which is very acceptable if we consider that it was after the introduction of new taxes with the involvement of double taxation. Parliamentary elections are behind us, and they were conducted smoothly, CEDRE finished and results were very good, so if the new government is formed quickly, and we have the implementation of reforms that the [previous] government promised, we can expect that acceptable deposit growth will be maintained in 2018,” he says.

Also for Sami Abou Jamous, chief strategy and planning officer of Saradar Bank—the latest entity to ascend to the Alpha group of banks in Lebanon—the good run of Lebanese banking will continue despite turning more uphill. “The banking sector in Lebanon has been resilient and will hopefully continue to be resilient since banks are strongly capitalized. As we at Bank Saradar see it, the pace of this growth will be slower, competition will intensify, and costs driven by mounting regulatory requirements will increase—hence squeezing margins for banks in the years ahead. However, there will continue to be growth. All this means that we [as banks] have to start operating differently, hence our differentiation and our using of digital means to optimize cost,” Abou Jamous says.

Bankable health and harmony

When it comes to preservation and improvement of individual health, the importance of lifestyle choices and influences from the living environment cannot be overestimated. With smoking, drinking, poor diets, and weak control of stress factors, health professionals see the presence of four factors responsible for the development of health problems.

There are some, who in this figurative sense, would regard Lebanese banks as having long been addicted to junk food diets, due to banks’ over-reliance on a single “nutrient group” for fueling their activities—namely the financial food group of treasury bills and sovereign Eurobonds. At present, however, there are added possible detriments to the Lebanese banking sector that must be considered, from taxation pressures to stress-inducing uncertainties over the national outlook. Practically all of these possible impediments to the health of the banking sector are related to political developments, if not in Lebanon, then in the region and world. 

This exposure to political influences on various levels increases the value of having a reliable political outlook in Lebanon. The experience of having had successful elections is a good base, Baz notes. The important issue in his view was not the voting outcome of the elections but the process itself. “Going back to the democratic process is something that is positive. The conclusion of the electoral process was needed by itself and is a reflection of an improvement in the political governance process in the country,” he says.

For Azhari, (who spoke to Executive on the eve of the parliamentary elections), a fast formation of a new government would send a very positive signal to the economy and the banking sector. “The sooner a new government will be formed and the sooner that the government will be able to benefit from the CEDRE package, the better for the overall economy. I was positively surprised by the success of CEDRE as I wasn’t expecting that they would be able to reach what is effectively $11 billion of subsidized loans. [This amount] was beyond my expectations and when disbursed over the next five years is really a big number. I think the government’s priority should be to [do everything to] benefit from those loans,” he advises.

While all bankers asked by Executive about the issue of the government formation said that speedy progress to a new Council of Ministers would be highly welcome and provide encouragement to the banking sector, Baz emphasizes that it should not be interpreted as a detriment to the next government’s effectiveness if negotiations over it were to be marred by laborious and time-consuming elements of the type that often characterize processes in Lebanese politics, adding that he was hedging for this risk.

Equally, he says, it will be more important for the government to demonstrate its collective awareness of the nation’s existential needs for structural reforms—reform of the tax system, reduction of waste in the public sector, combating corruption, expanding provision of efficient public utilities, and the creation of better social buffers in areas such as education and health. Agreements among the government’s constituents would count for much more than the government achieving contentious numerical targets such as the exact implementation of an annual deficit reduction by precisely one point. “In top-down analysis we are not driven by figures and numbers—we are bankers and we are managing very large institutions with risk cultures that go beyond what exist in other business. One can question the 1 percent annual reduction in deficit that has been proclaimed but in my opinion this is a false debate. The right debate is to be conscious as Parliament and cabinet about the urgency of reducing the deficit,” Baz says.

For Wanna, an accurate understanding of the banking sector’s health prospects has to include a perception of risks and outlooks for banks. “If you want to look at the main risks, I can summarize these as the mismatching in the balance sheets of the Lebanese banking sector, the level of liquidity in the sector, sovereign exposure, and the quality of the loan portfolio,” he explains. “Going forward, I think that consolidation in the banking sector will, in the short to medium term, be one of the major drivers of growth in the sector. To merge with larger banks will be the only way out of their situation for smaller banks with limited capital and limited ability to introduce new technology or [those] who face problems to even finding a correspondent bank for their dealings with international markets and who also have to invest in compliance and other key areas. It is my view that it is better for smaller banks, and for the country, if they merge with larger banks,” he says.

Digital body builders

The latest movement in the international industry is the rise of digital. There is some chance that banks of the next generation might be unrecognizable to banking customers of today. But while it is actually quite likely this does not negate the possibility that it will be an autobahn to perdition if banks ignore or underestimate the digital future.

Awareness of the importance of digital offerings for banks is arguable near universal, if one goes by their rhetoric and marketing efforts in pushing digital services. Digital native banks cannot at present be established in Lebanon and it is likely that consumers will still be able to recognize a bank when they see one in 10 or 20 years. Still, it is of interest to see that a bank now talks about the digital over the physical as Saradar Bank’s Chief Strategy Officer Sami Abou Jamous tells Executive when explaining why the bank is more likely to keep its network small and is working to create a “tailor-made hybrid digital bank.”

Beyond the political risks to banking sector health and risks related to the Lebanese market regardless of any political factors, keeping the sector healthy will require countless other considerations that would go beyond what can be addressed in this story.

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LeadersOpinion

Beware the bully

by Executive Editors
written by Executive Editors

It is a wild and wondrous time. Almost a Big Bang moment. If all goes perfectly, Lebanon in April and May 2018 laid crucial seeds for a dual process of political maturation and economic resurrection. The two-month long excitement began with better than anticipated commitments from the CEDRE conference, an immense hope for billions of dollars in international economic investment inflows that was not dented even as the results of the Brussels II conference on Syria and refugees left much to be desired in every regard.

The period peaked on May 6 with a development that less than a year ago many verbose and not so outspoken naysayers had doubted would ever happen: smooth elections. In short, government formation is progressing, all the while in between these epochal moments of the past two months, Lebanon saw almost an overburden of investment conferences, international statements of encouragement, and local ones of promise tinted in every conceivable political color. Rationally disinclined minds might even add that the weather in May stood out as very unusual.

Thus, the picture as it presents itself at this felt halfway point between international support events, elections, the appointment of the next government leaders, and the actual formation of a government, is a positive and hopeful one.

a moment to savor

Yet, of course, this picture is not perfect. There are promises of rapid action in government formation and calls for swift agreements that have come from every powermonger in the political arena. But, as the experiences have taught us in similar situations in recent history, inflated promises mean nothing in Lebanon. As of today, the country has no proof yet that its competing tribal chiefs are coming to agreements among themselves, or much more importantly, that they are serious about sacrificing part of their power and initiating needed reforms. Also, shouldn’t one ask, as a responsible business publication, when was the last time that everything went according to plan in Lebanon, irrespective of any consideration as to whether the plan was perfect or flawed?

Perhaps, for now, this moment on the domestic stage is one to savor, and to remember that it could not have happened without the example and success of Lebanese banking. It stands to reason, from the messages and comments that Executive has gathered over these last two months, that this country’s international credibility as an investment destination and partner of international donors would have been far lower if our banking story in recent tough times was not one of resilience and prudent regulations.

It also stands to reason that the ability to conduct elections in this country, and do so reasonably well, rested upon the two pillars of internal military security—kudos to them—and national economic security, which has been channeled for the past 25 years through Lebanese commercial banks and the financial system supervised by the central bank. But another impression that also asserts itself strongly at this particular point in time is that Lebanese banking is profoundly and inextricably entwined with global developments, including developments that range far outside of the spheres of economics and reason.

If there are grounds for concern in this region, and there are, then the biggest tumbleweeds of worry were blown in from the international fields last month, witnessed in the abomination of reckless disregard for international law and the rights of Arab people through the relocation of the US embassy to Jerusalem, and in the stoking of the risk of war following the US decision to renege on the Iran nuclear agreement.    

This side of spring 2018 reminds us that Lebanon may be able to stand on her head and wiggle flowers between her toes, but she can’t dream of deciding things of geopolitical consequence in the Middle East, and thus can’t determine her own fate. The ultimate big picture, seen from Beirut, is one of hope but also of high opacity and more risk—geopolitical, geo-economic, and multi-societal risks—than anyone can welcome.

What to call for in these times? Sanity? But calls for sanity always appear to be either futile or counterproductive. Attempt a reverse psychology gambit and call for insanity, conflict, and geopolitical games of playing chicken? The risk that these would spin out of control stands against such a toying with incendiary tools; this call also doesn’t feel right morally. We want to remain human.

no room for complacency

Calls for better banking practices are always in order, as banking is integral to the never-ending quest for human economic development. However, calls for banking improvements cannot address the need for wider political and social sanity. Let’s make this a general call then, for being aware of human fundamentals, such as the reality that bullies are the losers of history. We have seen the chief bully in Washington and the tier-two bully of Tel Aviv. We are also seeing, but are less directly affected by, bullies in Europe and Asia. But the rise of the global bullies means one thing for all of us: Beware of the bully within.

We are all potential bullies because we have aggressive animal spirits in our blueprint of culture and biological heritage. And the dangerous thing is that bullies can score wins. But what is true for fooling people is also true for bullying: You can bully most of the people some of the time and some people all of the time, but you cannot bully all of the people all of the time. That’s why bullies are losers in the long run.

More importantly, bullies lack the ability to aim for win-win or win-win-win outcomes. They are experts in “I win, you lose.” Yet in a world where peace and sustainability have to be engineered with resilient and durable institutional foundations, where contracts and greater public goods have to be matched into winning combinations, bullies are incapable of performing according to desired and needed outcomes. They are incapable of helping the world move forward into a more sustainable future. This is necessary to keep in mind in a time when global bullies sail with strong tailwinds.

The next thing to call for at this time is relentless alertness. Abandon complacency. Complacency is not exactly a prime risk in Lebanon, except perhaps for the few and very powerful who had been the beneficiaries of the economic balance-on-the-brink-of-an-abyss for the last 20 or 30 years. It will remain to be seen if these elites have still enough vigor to break out of the narcissism, smugness, and vainglory of the role that they did nothing to deserve. But while we are waiting for the ‘elites’ to reform (or else), we can ill afford to wait for our banks. It is reassuring that the sector appears to be in good health, but Lebanon needs more of them by helping toward improving the socio-economic equilibrium. For this, Executive looks at links between banking and infrastructure investment potential under the scenarios from CEDRE to PPP.

A final thing to call for is to take ownership of our attention. We often do not pay enough attention to who grabs our attention, with what means, and for what purpose. One assumption with high favor in 20th century economics construed human rational behavior as basis for the core premise of economic theory that people choose by “optimizing.” In truth, and very different to the assumption of man as rational economic agent, we are driven by a plethora of motivations, desires, and influences. This bears well to remember also in banking where the drift of our society to consumerism is leading to increasingly un-economic behaviors. In this context, we nudge you to think about your banking choices in the age of consumerism, continually expand and improve your own financial literacy, and pay attention to your personal data privacy in this era of growing digital exposure.

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EditorialOpinion

Pursuit of excellence

by Yasser Akkaoui
written by Yasser Akkaoui

The vicious survival cycle that Lebanese corporates are stuck in comes at a price. To sustain their existence, they have to constantly bend the rules and outsmart the system, while suffering the inefficiencies and lack of vision that come from the absence of the state.

In short, corporates adhere to a short-term management style, winging most decisions in order to provide for the next day. This behavior is destructive to say the least, and its repetition develops bad habits and builds bad practices. It is only when you have a vision for your greater purpose that you begin to commit to long-term objectives. Corporates should be reminded of their purpose and develop their participative strategies in a wider national context accordingly—a challenging proposition in the absence of national policy.

The one industry that demonstrates how commitment to purpose pays on the micro and macro level is our banking industry. After the chaos of the 1980s, which left vulnerable citizens manipulated and impoverished, came the 1990s, and the renewed commitment and role of the banking industry was re-established and reinforced, putting at the disposal of the citizens reliable, trustworthy services that protected their assets with fairness, commitment to best practices, rigorous controls, and astute oversight. Adherence to such standards paid off, and the contrast that exists today between the financial industry’s space and the rest of corporate Lebanon is so clear in terms of both corporate performance and human resources welfare. Not only did the banking industry survive every crisis since 1992, but none of the serious participants stopped growing, while one bank which ventured into unethical behavior was quickly flagged and liquidated.

The integrity of our financial system’s health rests in the vision and character of Riad Salameh, the governor of the central bank. His ability to commit to the good that this industry brings to Lebanon alongside his mastery in identifying unnecessary risk without neglecting the development and growth of the industry, his consistency, his passion, and his hard work have allowed the banking industry to flourish and gain respect. All this was achieved by nurturing relationships, both nationally and internationally, and keeping things in balance for the national well-being.

Other industries that operate in less regulated environments can watch, learn, and mimic the success of our banking industry, and hopefully deliver to and protect all their stakeholders and participants in a manner we have come to expect from Lebanon’s banks.

Elevating our commitment to excellence pays, regardless of the uncertainties that plague our nation.

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CommentEconomics & Policy

Closing the infrastructure gap in Lebanon

by Talal F. Salman
written by Talal F. Salman

With the world’s population expected to grow by 2 billion—reaching almost 9.5 billion by 2040—one of the major structural changes that would need to keep pace is the development of infrastructure. The world is expected to need close to 100 trillion dollars worth of infrastructure investment by 2040, mainly in developing countries, according to estimates by the UN and the World Bank. This sum is required to meet the demands of clean water, sanitation, electricity, transport, and telecommunications, in addition to schools and hospitals. The sum is also likely to increase, given the escalating impact of climate change. Around 20 percent of the required funds will not be available if national economies, which are financially interconnected now more than ever, do not plan accordingly. The availability of funds is a blessing that a country such as Lebanon might not realize. While other developing countries might struggle to generate savings or attract investment in their local economies, the Lebanese financial system is sitting on 320 percent of GDP in deposits—one of the highest in the world. There is no doubt that the infrastructure in Lebanon has been severely neglected since the end of the civil war. The lack of proper investment in electricity, telecoms, sanitation, transport, and water is causing major costs to the economy, to the productive capacity of all sectors, to household income, and to the health of every individual.
The deposits in the Lebanese financial systems, with the proper use of available cheap international loans and guarantees, can help Lebanon close its infrastructure gap while minimizing borrowing.

Economic Stimulus
The CEDRE investment conference on April 6 was testament to the commitment of the international community in helping Lebanon to achieve the economic security it needs and to compensate for the seven years of near zero growth, due to the impact of the Syrian war. The repercussions for the Lebanese economy—which stands at $53 billion in size currently—is around $30 billion so far, a massive challenge for any country. The support that Lebanon received at CEDRE provides much-needed confidence, and can have great results if properly executed. The right investment in infrastructure is known to boost growth—in the case of Lebanon it could lead to a 3 percent increase in GDP in the current environment. However, the Lebanese economy has the potential to grow at 6 percent a year in the absence of external factors impacting our ability to grow, and within a proper policy-making framework.
The involvement of the private sector through public-private partnerships (PPP) is important to attract capital. However, the cost of infrastructure projects that are not commercially viable and thus not eligible for PPP—$11 billion out of the $17 billion worth of projects proposed—are intended to be financed through concessional loans. This means that even if the cost of debt is low, it is still debt being added to the third most indebted country in the world (Lebanon has a public debt equivalent to 151 percent of GDP). Debt service cost is around 10 percent of GDP, 50 percent of government revenues, and 36 percent of total government expenditures, all among the highest in the world. Therefore, adding debt to the government’s balance sheet does not seem to be the best approach. Let’s take a look at PPP and what is the best model for Lebanon to use the pledged investments from the CEDRE conference to its advantage:
Firstly, PPP is not privatization, which is the complete divestiture of a public asset to the private sector, and it is not a procurement contract where the government hires a private company to construct a road or a power plant for example, or to provide a service. Even though the term is globally used to encompass a wide range of relationships between the public and private sector, a proper partnership is one that defines two major factors needed for the success of infrastructure projects—especially greenfield ones, which are new projects as opposed to upgrades to existing infrastructure. Those two factors are financing and risk. The allocation of financing refers to what portion is to be invested by the private sector and what portion is to be invested by the government. The allocation of risk determines who is responsible for the design, implementation, operation, and maintenance of the project.
The usual steps in a PPP project are first to define and design the project, second to structure the financing for the cost of implementing the project, third to build the physical resources, and forth to operate and maintain these assets.
Governments tend to benefit from PPP structures by attracting capital they do not possess, by implementing a project at a lower cost, and by delegating operations and maintenance to the private sector, which generally, albeit not always, does a better job.
From the point of view of the private sector, PPP infrastructure projects are attractive because they provide a steady and strong cash yield with low volatility, are a natural hedge against inflation, and have low correlation with other financial assets.
A third important factor when it comes to PPP—in addition to financing and risk for developing countries’ projects—are guarantees provided by multilateral organizations, such as the World Bank. Guarantees to the private partner in case the government does not meet its cash payment obligations reduces the risk of investment, and hence reduces the required rate of return.
The PPP law that Lebanon enacted last year organizes this process clearly and monitors it, and the intention was to have projects financed 100 percent through private partners who would be responsible for financing, construction, operation, and maintenance of a project. The government would be responsible for collecting the fees for the services provided and transferring the agreed upon cash flows to the private partner in return for their investment and operations.

Electricity First
Naturally, some projects, such as wastewater and the construction and maintenance of roads, are not profitable for the government. Therefore, in the absence of a budget surplus and in the presence of high borrowing costs, concessional financing might seem like a good idea. It is not, however, because it means more debt for the government when there is an alternative method of financing those projects without the need for the government borrowing.
The solution is to start with PPP projects that can have a direct impact on the fiscal deficit. By that, we obviously mean electricity. The electricity deficit is responsible for 40 percent of our national debt and 3 percent of GDP in yearly deficit (around $1.5 billion, depending on fuel prices), not to mention the major costs to the economy, businesses, and households. The annual household spending on private generators is around $2.5 billion in the informal substitute market for electricity. A simple calculation shows that if the government provides electricity efficiently, a major reform by itself, it can not only eliminate the deficit caused by fuel subsidies to Electricité du Liban but also become profitable to the tune of around $1 billion, without any added cost to households. Other promising projects would be those that can increase the governmant revenues, such as expanding the airport, building a second one, and improving the capacity of ports, moves which would all be profitable for both the public and private sector.
Reversing a deficit into a significant surplus would offer room in the budget that could be spent on projects that are not profitable for the government but crucial for society and the economy, such as wastewater and roads. The maximum absorptive capacity of an economy like Lebanon with regard to infrastructure is 2 percent of GDP yearly, or in Lebanon’s case $1 billion. The absorptive capacity refers to the ability of government institutions and the size of the economy to translate infrastructure investment into sustainable growth in output. Therefore, since the investments proposed will be implemented gradually, starting with the right ones will make others possible without the need to add to the government’s debt burden.
We can use the international support received at the CEDRE conference in two ways. First, to direct the concessional financing provided toward PPP projects and not toward the balance sheet of the government. Any private partner in a PPP project will be looking to finance the project through a combination of equity and debt to maximize his returns; the debt portion will be borrowed from a commercial bank and the interest rate level will be based on the risk profile of the private partner. If the private partner is given access to concessional financing, his returns would be improved, which means the government can indirectly benefit from better terms in the PPP structure by channeling its access to concessional financing toward PPP projects. Secondly, the availability of guarantees that donors and multilateral organizations could provide to investors would reduce the risk premium investors request when they invest in developing countries with low credit ratings such as Lebanon. Additionally, the availability of funds in the Lebanese financial system means that the financing structure of PPP projects can include investment contributions from small Lebanese depositors. This means the Lebanese population can reap a portion of the future cash flows generated by the projects, which will offer a higher return than the deposit rate from their point of view, and will give an opportunity for the Lebanese financial system to diversify its use of funds. The latter would create an improved economic cycle as a portion of the profits would remain in the Lebanese economy rather than being repatriated as profits by foreign entities.
The CEDRE conference was a step in the right direction, but the real success would be to achieve the needed projects with no additional debt on the government through an innovative financial structure, proper use of funds, and proper implementation. This would result in increased return for investors, the government, the economy, and society. The only way to achieve that is to start building electrical power plants (instead of renting expensive barges) using concessional financing provided to the private sector, coupled with a portion from local deposits, and turn the budget deficit into surplus to be used for other crucial projects in a gradual manner that ensures economic, financial, and operational efficiency.

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Last wordOpinion

The patriarchy problem

by Carmen Geha
written by Carmen Geha

Lebanese voters will head to the ballot boxes in just a few days. One of the major changes to the electoral scene after thrice-delayed parliamentary elections has been the increase in the number of female candidates, up from 3 percent of overall candidates in 2009 to 14 percent this election. This time around 111 women initially registered to run, and 85 made it onto lists.

Lebanon’s numbers show progress in the bid to increase the number of female members of Parliament, but not nearly enough. We need to have a national discussion about why we are so far behind other countries in the region, and what obstacles Lebanese women must overcome to obtain their basic right of representation in Parliament. The overarching theme of these challenges is the pervasive ideation and institutional influences of sectarianism and patriarchy. These trickle down into electoral battles favoring strong men, father figures, and former heads of militias. The patriarchy is further entrenched when a man is chosen to head a ministry solely responsible for executing policies and programs to advance the rights of women. But more worryingly, women now have to appeal to this minister, and other men, to step aside or to grant them the equal opportunity to be ministers, parliamentarians, and mayors.

Because of sectarianism and patriarchal influences, the electoral system favors men time and time again. One exception is the all-female list running in Akkar, but even independent lists emanating from civil society could barely secure a 30 percent representation of women. Men make the deals, negotiate the alliances, and head the lists as spokespersons and representatives. Men already embedded in the political system who are more likely to retain their seats. This is what sectarianism and patriarchy reproduces, a system with the man as the savior and the facilitator of a woman’s access to votes and visibility.

The second part of this problem is the argument that there are no competent women willing to enter politics. Out of a total of 75 electoral lists, just 48 include women. This leaves 36 percent of lists all-male. The official line is shared across most parties: Not enough women could be convinced to run. Other parties placed emphasis on the traditional role of women in the home as a barrier to their involvement in Parliament. Women, it seems, are required to pass a test of competence and availability not placed on their male counterparts. 

The third problem is that political parties and civil society have got it all wrong. Women do not need to be put in rooms and trained to be good candidates. They do not need female branches within political parties to identify female candidates and groom them into becoming mouthpieces of their leaders. For women to be better heard and represented we need to move away from the political discourse of sectarianism and patriarchy. Recent literature shows that fighting patriarchy would go against the customs rather than codified rules of Lebanon’s political power-sharing system. It would require the end of secretive deals between men that craft legislation and regulations, form governments, make political appointments and employment decisions across state institutions, and ultimately divide the spoils amongst themselves.

Lebanon is failing to do justice for its women and needs to create bonds of political solidarity on structural inequalities that require different solutions. Lebanese women do not have the same rights as Lebanese men: they cannot pass their nationality to their children, they suffer discrimination in divorce and custody battles because of the absence of a civil status law, they earn less than men, and women remain bound electorally and administratively to the ancestral district of her father or husband. To improve the representation of women is to make the system less patriarchal and less sectarian. But that would require focused structural political reform. Until then, we shall enjoy a male minister hailed for supporting the candidacies of women and male heads of lists bragging about including one or two token women within their ranks.

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Hospitality & TourismInterview

A dynamic heart

by Nabila Rahhal
written by Nabila Rahhal

Executive sat down with Mounir Douaidy, board member and general manager of Solidere, to discuss progress in the company’s master plan for Beirut Central District (BCD), and how the planned developments could contribute to the revitalization of BCD as a tourist destination that encompasses the essential pillars of hospitality, retail, and cultural activities.

E   Today, Solidere is in Phase 2 of its master plan described as the development of the Waterfront area and the eastern marina.  When can we expect this to be completed?

The area is currently closed off for works, and excavations are underway to create the marina, which will be completed within the next two years.

Once this is done, it will be the second marina, the first marina being the western marina where Zaitunay Bay is, and there will be a marina on each side of the reclamation area [between Zaitunay Bay and Waterfront]. This is going to be another prime tourist component of the BCD, which will probably also have what the western marina has around it today in terms of restaurants, activities, maybe even hotels eventually.

E    Why did Solidere decide that a second marina was needed in BCD?

There is an under supply of mooring space. The current marina is overloaded, and we have many people who want spots, but can’t find any. The eastern marina will take relatively smaller boats and yachts (between 16 and 30 meters), while the western marina can also take larger boats and yachts.

Also, regardless of the demand, [we are committed to doing it] because it is in the master plan and part of Solidere’s obligations to execute all these main infrastructure components. We already completed the infrastructure of the whole [Waterfront] area, we did the western marina, and now there is the eastern marina.

And the fourth element that we still have to do—and which also goes under the big heading of tourism—is to landscape this [Waterfront] area. When we do that, this should also attract bigger footfall and stronger tourism.

E   What will the landscaping of the Waterfront area include? And what is the time frame for that?

It is planned, but its execution should come in sequence after we have finished all these big groundworks. Since all the other infrastructure has been completed—meaning everything that is underground [in terms of the network of utilities which includes water, electricity, drainage, and sewage] and the roads and lighting on top—we will finish the eastern marina, and the only thing left to do will be the landscaping.

The landscaping will consist of the 70,000 square meter public park [located between Zaitunay Bay and the Four Seasons Hotel] which will happen in the next three years, and there is also the plan to landscape the whole 1.3 kilometers corniche starting from Zaitunay Bay and running all the way along to the Seaside Arena.

Parts of the walkway are already open for bicycles and pedestrians, but it’s not all open for cars yet. You should imagine Waterfront with all the plots that are destined for development built, and in front of it you have the corniche road, which will also be landscaped. All this landscaping will enhance the environmental and esthetic image and quality of Waterfront and will [also] drive footfall and tourism to the area. 

E   Beyond the Waterfront area, what, from Solidere’s master plan, remains to be done in terms of landscaping in Beirut Central District? Martyrs’ Square area, for example, is currently rather drab.

Fifty percent of Solidere’s surface area is public space, and the remaining plots are all private plots which already have buildings or where new projects may be built. Thirty percent [of the public space] is designated to be all green, including the park, corniche, and all the other open spaces that exist south of the corniche such as Martyrs’ Square.

Under Martyrs’ Square, there is a public parking lot planned. … Since the land belongs to the municipality, it is principal the municipality that is normally entrusted with such projects in the city but it has to be done before  Solidere can landscape the top part.

E   What about plans for the Garden of Forgiveness (a garden representing reconciliation to be situated in the Nejmeh Square-Maarad Street intersection amidst several places of worship)?

The Garden of Forgiveness is a historical location and is a spot that we have obviously planned to do, but that we have not been able to start executing for many reasons,  namely the country’s circumstances including the different events that happened around the area especially after 2005 in terms of sit-ins and road blockages.

Nevertheless, it is something that has to be done, and the idea keeps going from one year to another until the time comes when, hopefully, the circumstances and required funding will allow its execution.

E   Retail is a major driver for tourism. How would you evaluate the performance of the Beirut Souks, and what projects are still being undertaken by Solidere there?

The department store designed by Zaha Hadid is being completed and will take around a couple of years to open and is the last component we have to do there.

The footfall has been fairly good. Obviously there are times when we have a much larger footfall and others, such as during the weekdays, when there is not as much footfall. But it also all depends on the activities within the Souks area. We have been creating activities in addition to all the activities that are proposed to us by third parties such as NGOs and event organizers.

All these activities are looked at from the point of view of how much footfall they bring and how much of a push they give to the tenants of the Souks. Supporting complimentary activities is something Solidere has been very active at, and this has yielded very positive results over the last few years.

The two main areas where events take place are the Souks and Saifi Village, and occasionally Zaitunay Bay, which Solidere does in conjunction with the Bay’s management.

E   Waterfront has also been used as a space for large-scale events such as the historic visit of Pope Benedict XVI in 2012. Do you see an ongoing potential in Waterfront for such events?

When the Pope came, we had not started exploiting the land yet; it was open and flat, and not much was happening there. But now, many projects have been created, namely a number of what we call temporary activities, which operate for around five years.

E   By temporary activities you mean the hospitality venues and similar projects? What is Solidere’s strategy behind these venues?

It all started several years ago when we felt that we had all this land that is up for sale lying idle while the infrastructure works were being completed.  So what we thought was that, while we are waiting to sell all these plots, we can put up some activities of a temporary nature.

There was Biel to start with and then came the One, then Kidzmondo and the Music Hall, and in the last few years, we have agreed with certain operators to bring in other activities such as Kahwet Beirut, 7 Sisters, or Garten, but this is about it now as space has become very limited.

What we have today is good to keep the footfall going, and it was a way to introduce the public to Waterfront. The public knows Waterfront from physical activities, such as jogging or biking, and now there are also these hospitality activities.

E   How long are the contracts on average?

About four to five years, and there is no intention to have them renewed.

E   We noticed that there are already some permanent developments being constructed in Waterfront. Could you tell us more about that?

Two developments have started and will continue, albeit at a slow pace given that the situation in the country is not very encouraging. But I think the starting point is there; we have been advised that BLOM will be starting construction very soon—within a month or two—and the moment that one building comes up, others will follow.

E   Do you think that once developments in the Waterfront area are complete, and the area becomes a mix of commercial and residential use, its contribution to tourism will diminish somehow?

Not necessarily. Look at what happened in the Minet el-Hosn area where all the restaurants are today. You have all these buildings that came up, whether residential or offices, but what do you have on their ground floors?

E   Restaurants.

Ok, so the same thing eventually may and will happen on Waterfront. You will have all this mix of buildings, but on the ground floors it is, of course, allowed by Solidere to have commercial activities including restaurants.

So it is not that if you have residential or office buildings on Waterfront, you will not have any hospitality components. On the contrary, there will be a hospitality component in each building plus the two marinas. Even facing the marina, which is under construction now, there are all these plots that we have not yet put up for sale, and which are envisioned by us as a good location for hotels eventually. We will encourage investors in the coming five to 10 years who want to buy these plots to [build] hotels if the economic situation in the country permits.

E   Are there any cultural developments planned for BCD? For example, at what stage of completion is the History of Beirut Museum, and what can you tell us about it?

It is a collaboration between Solidere, the Municipality of Beirut, the Ministry of Culture, the [Council for Development and Reconstruction] CDR, and the Kuwaiti fund, which contributed $30 million several years ago for the construction of this museum. It will not be enough to finish the museum, and so what is needed beyond that will be contributed by Solidere in conjunction with the rest of the Tell area—an archeological site adjacent to the museum which encompasses four or five different civilizations. All efforts are being made to have it done by 2020.

E   Finally, is the idea of a Beirut Opera House still viable?

The opera house is an idea that has been proposed to us many times either in Waterfront or in different spots in the city. Solidere itself was not going to do an opera house because it is not our business to do that, but we encourage and support people who would bring this idea to execute in Lebanon.

Of course, it requires institutions or individuals who are ready to bring the idea, and they would have to make agreements with an international opera house abroad (probably Paris or London). They would have to find the spot in Lebanon that is suitable, and there has to be funding. Solidere can create the framework for this funding, but it cannot put in all the money for this.

So far, the few investors who came along for this did not find a location that was 100 percent appropriate among the ones we proposed for this project. We hope that one day there will be an opera house or a big congress center in Waterfront, which will incorporate a place where you can organize operas and other types of functions, such as conferences or a big theater—and in fact, I am sure it will happen eventually.

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Hospitality & TourismReviving Downtown

A Beirut spring

by Nabila Rahhal
written by Nabila Rahhal

The telltale signs that herald spring in Lebanon are already in full swing: the longer days, the blossoming streetside flowers and trees, and the mounds of janarek (sour plums), freize (strawberries), and akidinya (loquats) at roadside fruit stalls have all made their early appearance this year. This is in addition to the most indicative—and sad—sign of all, the almost eerie emptiness of Beirut on weekends and holidays. In winter, this void is not as obvious in the city simply because few pedestrians are about anywhere and car traffic is always overbearing. But come spring, people head to their village homes.

It is arguably normal for city dwellers everywhere to decamp to the mountains or seaside for a change from their routine or a breath of fresh air during their time off work, and more so in Lebanon where distances—the dreaded traffic jams aside—are short, and thus encourage weekend escapes. But, in Beirut, the desire to flee this city seems to run so deep that there is a mounting and tangible sense of discontent among its inhabitants that intensifies with every sunny weekend until the last day of summer. Could this be because of the low quality of urban life the capital is providing its residents with? More and more Beirut dwellers are complaining about the endless traffic gridlocks, the increasing levels of pollution, the lack of well-maintained and easily accessible public green spaces, the systematic destruction of Beirut’s urban heritage and cultural fabric, the heightened cost of living, and the list goes on.

The trouble is not only with the city’s waning appeal to its natives and residents. Beirut’s touristic appeal has been declining as well, with foreign visitors heading to cleaner sea shores north or south of the capital or to more authentic and culturally interesting experiences in Lebanon’s rural areas. Ezzat Koraytem, managing partner of Its.—a media and events organizing company—and secretary general of the Beirut Cultural Festival (BCF), believes this is especially true with regards to  summer cultural festivals, adding that this was the driver behind the inception of BCF.

“In all other cities across the world, there are activities going on in the summer, but in Lebanon these activities happen in areas outside the capital. Beirut is neglected, with people only landing at the airport, and then spending most of their time out of the city. So we thought that someone should take care of Beirut, and so, we created the Beirut Cultural Festival in 2015. The goal of the organization was to make sure that the heart always beats in all of Beirut,” Koraytem explains. The first edition of BCF, originally planned for 2015, was meant to take place in Nejmeh Square but got canceled because of its closure to the public following protests in the area. Since then two editions of BCF have taken place—in the Waterfront district in 2016 and in the Beirut Hippodrome in 2017—and indeed the now annual event has contributed to placing Beirut on Lebanon’s cultural festivals map. But the BCF, while commendable, is nowhere near enough to reclaim Beirut’s position as a summer cultural destination.

Beirut is in dire need of revitalization. There needs to be a clear and shared vision that guides public and private stakeholders and civil society toward realizing concrete solutions for the main challenges facing urban life in Beirut—complete with a strategy to achieve them and a delegation of responsibility. This will not only make the quality of life of its citizens immeasurably better; it will also draw tourists back to Beirut.

Reimagining Beirut

There is no better time than this second quarter of 2018 to embark on this mission of reimagining Beirut—and not just because it happens to be spring season right at the time when Beirut is in need of its own rebirth. The CEDRE donor conference in April secured pledges for funding needed to implement Lebanon’s Capital Investment Plan (CIP). Many of the projects proposed in the CIP address issues facing Beirutis, including the lack of public transport and proper infrastructure. The CIP also includes projects under the heading of culture, tourism, and industry relating to “the restoration of unspecified archaeological sites and heritage buildings, the support of unspecified museums, and allocations of money to cinema, the arts, public libraries, and educational facilities” (see article in Executive’s April 2018 issue). It is hoped that at least some of these projects will be in Beirut.

Through a series of upcoming articles, Executive will be addressing the many dimensions of reshaping urban life in Beirut. We want to start right where the urban landscape contrasts its greatest tourism and hospitality potentials with the greatest desolation in spring and summer: the city center. Downtown Beirut, rebuilt in stages beginning in the 1990s under the mandate of The Lebanese Company for the Development and Reconstruction of Beirut Central District sal, better known as Solidere, is where the potential to revitalize hospitality and tourism in the capital is logically concentrated. With its wide spacious roads, pretty buildings, numerous glitzy hospitality venues, yacht marina, and largely landscaped roads it is easy to assume that Beirut Central District (BCD) and its historic political core, Nejmeh Square, is already a touristic hub. But, as the saying goes, not all that glitters is gold. There are several elements that need to be addressed in the area, including the lack of public green spaces and venues for cultural activities, before it can meet the needs of the modern day tourist or urban dweller.

As part of its master plan for BCD, Solidere believes that Waterfront—a landfilled district on the north side of Downtown which is still under development—and several other projects that are yet to be completed in BCD will have elements that offer a more complete tourism package to Beirut’s visitors, as well as an improved quality of life for its dwellers.

Waterfront today houses several night clubs that are more than happy with the surrounding emptiness, which allows them to pump up the volume as high as it goes with no complaints from the nonexistent neighbors—the area’s central location does not hurt business either. These concepts are certainly successful contributors to nightlife in Beirut and have proven so for Rabih Fakhreddine, chief executive officer of 7 Management which operates three out of the nine hospitality venues in the district.

He tells Executive that on average over 5,000 people flock to Waterfront venues each weekend night. The downside of the arrangement, however, is that the venues there are all on short-term non-renewable contracts as the area is designated by Solidere to be of mixed use with both commercial and residential buildings as well as second marina in the works. This overall plan means that Waterfront might not be lost to hospitality entrepreneurs, given that both types of development projects would entail opportunities for venue operators to bring new concepts to market. The time when these opportunities would present themselves, however, could be quite a long ways off if the district’s slow track record of attracting upscale developments is any indication. While Solidere banks on the long-term potential of Waterfront, company officials hope in the meanwhile, and for the next few years, that hospitality operators will turn their attention to other opportunities in the heart of Beirut (see interview with Solidere General Manager Mounir Douaidy).

Dare to dream

It is also to be hoped, in the interest of the hospitality entrepreneurs and of Solidere, that the lessons learned from relatively recent experiences in Zaitunay Bay (almost none of the original venues on the bay are still in operation today, and they have been largely replaced with more affordable establishments) and Uruguay Street will not be forgotten. Concepts developed in the area need to cater to both tourists and locals in Lebanon, not all of whom are necessarily wealthy. Also, an overarching management of the Waterfront area would do well to enforce consistent and unified regulations on hospitality operators to avoid unpleasantness such as overcrowdedness and chaotic offerings.

Solidere’s vision for BCD also includes a 70,000 square meter public garden in Downtown and a museum of Beirut’s history that will be adjacent to an archeological site. Once they are completed, both of these developments will go a long way in making BCD an attraction for tourists and locals alike.

Meanwhile, Nejmeh Square, which was reopened to the public on December 31, 2017 with a memorable New Year’s Eve countdown event, presents a potentially exciting opportunity to address what is missing in Beirut with regard to tourism. The square has had its shares of ups and downs and has emerged from its most recent down—its closure to all local visitors following protests in 2015, though it had been largely empty even prior to that due to numerous sit-ins and business closures—as an almost empty canvas ready to be utilized.

Aside from the few restaurants that remained in operation despite all odds, venues in Nejmeh Square have slowly shut down throughout the years when footfall was low or non-existent. The Municipality of Beirut’s plan is to incentivize interested past owners to reopen their shops and attract new investors into the area, but this is difficult. Investors have been hurt by past experiences in Nejmeh Square and are extremely cautious. They are waiting for other operators to take the plunge, in addition to security guarantees ensuring that the area will not be closed again. Given the current dismal economic situation in Lebanon, it may be a while before someone risks their cash on an uncertain investment.

Meanwhile, the square is being utilized as an events venue with several planned festivities taking place in the area, following the success of the New Year bash. Koraytem, who says he is the advisor of Prime Minister Saad Hariri regarding events intended to revive Nejmeh Square, is the first to admit that these events are not a long-term solution to revitalize the area: “Events bring people but then people leave. We have to find a way to convince investors to come back.”

To do so, Koraytem says Its. proposed a three-tier plan to the prime minister. “In addition to the events, you have to have a very strong communications network on social media to show people what is being done so that they become convinced that what is being done is sustainable and meaningful. Once this is done the investors will see that there are good events, things are well communicated, and there is a clear vision so they will at least consider [investing in] the area. But investors also need strong incentives to be convinced, including the sense that what they are investing will be protected,” he says, adding that his plan proposed a unified management structure for future venues in the style of hospitality clusters.

It is, however, not so easy to implement such plans in Nejmeh Square since there are multiple owners and stakeholders—from both the public and private sector—involved. The future of the square beyond the frequent events and festivities, such as the upcoming jazz festival, therefore remains uncertain. But if one were to dream a little dream, and reimagine parts of Beirut, would Nejmeh Square not make a wonderful designers and artisanal craftsmen hub? Or a setting for different cultural spaces, such as a public library and art galleries?

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