Executive Magazine

Offshore petroleum investments made riskier

by Hassan Khalife April 16, 2018

written by Hassan Khalife

In light of the recent Lebanon Investment in Infrastructure Conference as well as the highly anticipated CEDRE conference (also known as Paris IV), it is undeniable that attracting private investment is Lebanon’s top priority. This comes shortly after the country signed petroleum contracts with international oil companies (IOCs) for the exploration and production of offshore petroleum resources in Block 4 and Block 9. This major step for the Lebanese petroleum sector is anticipated to bring investments not only for the offshore upstream petroleum sector (exploration and production), but eventually to other sectors contributing to the overall petroleum value chain.

To draw in private investment, Lebanon faces the challenge of providing an attractive investment environment. The BMI Report (compiled by BMI Research, a research firm that provides macroeconomic, industry, and financial market analysis) for the first quarter of 2018 stated Lebanon was a relatively high-risk location for foreign direct investment. According to the report, Lebanon scores 54.1 out of 100 in the overall BMI Trade and Investment Risk Index, with 100 being the lowest risk country. Lebanon ranked in eighth place out of 18 MENA countries (between Morocco and Tunisia). A “relatively high-risk” environment for investment could deter petroleum investors.

These investors, especially in the upstream petroleum sector, generally engage in investments that are described as long-term, capital-intensive, and risky. Although they may take on risky investments, investors are cautious when venturing into such projects. They require that the risks associated with their venture are manageable. Managing such risks is a key determinant to invest or not. In upstream petroleum investments, these risks can be categorized into (i) risks inherent to the petroleum sector, and (ii) risks related to the country hosting the petroleum investment.

Managing risk

The petroleum industry bears substantial risks that stem from the uncertainty surrounding the sector. In the upstream sector, for example, this uncertainty derives mainly from the presence or absence of petroleum resources in a defined well, and the amount of such resources once a discovery is made. Further, there is uncertainty resulting from unexpected or unknown technical problems, as well as potential accidents affecting the environment, which could be detrimental to the investment.

The country hosting the investment may subject the investor to an array of risks that can reduce the investment return rate. These risks include, inter alia, macroeconomic instability, exchange rate risk, capital transfer risk, legal and regulatory risk, and political risk. Among the cited, political risk represents one of the highest-ranked factors constituting a main constraint on investment. In the World Bank Group’s 2014 MIGA-EIU political risk survey, approximately 20 percent of executives considered political risk as one of the greatest disincentives to investing in emerging markets.

The Lebanese context

Political risk generally can be defined as the potential damage to a business operation arising from political behavior. Robert McKellar, in his book entitled “A Short Guide to Political Risk,” broadly enumerates the sources of political risk as being: political instability, feeble governance, and conflict.

Political instability is the persistent serious challenge to the longevity and legitimacy of a government. Feeble governance often materializes as inefficient leadership and management throughout a wide range of governing institutions. Conflict generally refers to friction between different interests and is often preceded by a build up in tension over time. At an international level, risk of conflict is represented by political sensitivity or hostility between rival countries.

A simple extrapolation of the above sources of political risk to the Lebanese context leads to the conclusion that Lebanon has a relatively high political risk. This is due mainly to the political uncertainty heightened by the relatively short life of governments, the prolonged time to form a government, delayed parliamentary elections, regional tensions, the ongoing war in Syria, endemic corruption, and the long history of hostility with neighboring Israel.

Heightened political risk in Lebanon decreases its ability to attract investment in general, and foreign direct investment in particular. This negative relationship between political risk and investment could explain why only three IOCs (Eni, Total, and Novatek), forming a single consortium, participated in Lebanon’s first offshore licensing round.

Maritime boundaries

An additional contributor to Lebanon’s political risk is the maritime boundaries dispute with Israel over an area of approximately 873,722 square kilometers (see Executive’s timeline online for details). The recent award of exclusive rights to petroleum exploration and production in Block 9, falling partially within the disputed maritime area, reignited tension in political public statements.

The non-recognition of Israel by Lebanon and the longstanding state of war between them defeat any prospects for cooperation to resolve the dispute. Dispute resolution mechanisms available under international law, namely the UN Convention on the Law of the Sea (UNCLOS), are also undermined as Israel is not a signatory of UNCLOS. Ongoing indirect negotiation lead by a third-party, which seems the only current avenue to resolve the dispute, has also failed to reach any solution thus far.

It could be argued that the disputed maritime area is too small to have a substantial effect on the petroleum industry. However, this increasing hostility caused by the ongoing dispute and the near start of petroleum activities in offshore Block 9 may escalate into violent actions. Any violent action in response to the build up of tension would be detrimental to the overall Lebanese investment climate. Also, the dispute may undermine the attractiveness of future offshore licensing rounds in Lebanon. Therefore, addressing political risk, including the risk generated by the maritime boundaries dispute, is an imperative for fostering an investment-friendly climate.

Mitigate the risks

The ideal scenario for reducing political risk arising from the maritime boundaries dispute would be to resolve it. However, private investors can still play an integral role in mitigating its risks.

Generally, there are available strategies, organizations, and legal instruments for private investors to mitigate political risk in the petroleum industry including the risk of boundary disputes. The strategies include project financing, joint ventures, corporate financing, energy diplomacy, and alliances. Organizations include private and public insurance providers for financial capital and political risk insurance, governmental and non-governmental regulatory agencies, and international energy forums. Legal instruments that can manage political risk include bilateral and multilateral investment treaties, as well as petroleum contracts such as exploration and production agreements (EPAs).

Standard petroleum contracts do not usually deal with the disputed maritime boundaries’ effect on the parties’ rights and obligations. However, the mitigation of risks arising from disputed maritime boundaries can be achieved through well-negotiated contractual clauses inserted in an EPA such as force majeure and indemnification clauses. Such clauses address the rights and obligations of the parties in case of any incident that arises from non-delimited or disputed boundaries.

The Lebanese model EPA, issued by Decree No. 43 (2017), does not address the risk of maritime boundaries disputes per se. Force majeure provisions under the EPA could be interpreted to include adverse events caused by the existing dispute and affecting the performance of the investors’ obligations. The EPA deems transboundary hostilities as an event of force majeure, among others. Despite their relatively broad terms, however, the EPA force majeure provisions may not cover all the scenarios that may arise from the ongoing maritime boundaries dispute. Should the dispute continue to future licensing rounds, a comprehensive and well negotiated contractual clause would largely contribute to mitigating its risks.

Finally, it is crucial that public and private stakeholders jointly undertake a comprehensive effort to mitigate political risk and its sources by taking a holistic view of the potential levers, to attract more investments and to ultimately improve the wellbeing of the Lebanese citizens.

April 16, 2018 0 comments

Say (goat) cheese

by Nabila Rahhal April 16, 2018

written by Nabila Rahhal

Goat dairy production has a long history in our part of the world. Archaeological evidence suggests that goats were the first dairy animals to be domesticated, sometime between 9,000 and 8,000 BC in what is today Iraq and Iran. Goat milk was also mentioned in the Bible, with the prophet Abraham owning herds of goats, and the Book of Proverbs speaking of the animal’s ability to produce milk.

The dairy market later shifted to cows, and is today globally and locally dominated by the larger mammal. The relatively recent trend toward healthy, clean foods and the rise of food allergies, however, has brought goat milk back under the spotlight. The global market for goat cheese products is growing slowly but steadily, and Lebanon’s dairy producers have been quick to take part.

A brief history

Nomadic goats are traditionally bred in Lebanon’s mountainous areas. Villagers use their milk to produce cheese and kishek (a dry cheese) for the national market and occasionally, international distribution.

Mazen Khoury, the production manager at Dairy Khoury, one of the leading dairy producers in Lebanon, says his family business has been producing goat yogurt, labneh (strained yogurt), and baladi (local) cheese (a type of white, round cheese also referred to as green cheese) since the 1970s. However, according to Khoury, nomadic goats—the only goat variety found in Lebanon at the time—produce milk only seasonally, so Dairy Khoury’s production was limited to the period starting in February and ending in August at the latest.

As such, a steady and consistent business revolving around goat dairy products was not feasible in Lebanon until 2005, when Jihad Daher, the technical manager of and partner in Goût Blanc, used personal funds and a loan from Kafalat to import 60 dairy goats from France with the purpose of providing a consistent supply of high-quality goat milk to the country’s dairy producers.

A goat by any other name

The goats imported by Daher were Saanen, a Swiss breed, and Alpine, a breed that originated in the French Alps. Saanen goats are stronger and less vulnerable to disease than Alpine goats, according to Walid Bou Habib, a partner at Goût Blanc, but both breeds have a significantly higher yield than the local goat variety. “The local breed is strong and can resist diseases, but their yield is low, at 0.5 kiloliters per day per goat, whereas with the Saanen you get an average of 3 kiloliters per day. This is related to the goats’ inherent genetic potential, and there is nothing you can do to increase a goat’s maximum yield. Because of this small yield, no Lebanese dairy [farm] would invest in a local breed to get goat milk,” explains Bou Habib.

Khoury speaks of the advantages of Saanen goats over the local variety, saying that their yield is more consistent, therefore allowing for a year-round production of dairy products. Khoury also explains that Saanen goats are bred to be farm goats and can milked using automated milking systems, whereas local goats are typically milked by hand in the fields. He says automated milking is more hygienic, and it produces milk that can be immediately processed and refrigerated.

Following the trend

Bou Habib says goat cheese is fast becoming a global trend: “Internationally, people are shifting from cow dairy products to goat dairy because of the idea that goat milk is healthier and does not contain lactose, which makes it easier to digest.”

Khoury explains that because the food industry in Lebanon has evolved a lot over the past decade and a half in terms of food safety, quality of products, and consumers’ taste and awareness of global food trends, Dairy Khoury has had to keep up with these developments to grow further.

As such, Dairy Khoury introduced a dedicated line of goat cheese products, Chevrette De Khoury, in 2016. “We chose to start this dedicated line because goat dairy is now the global trend, since it is perceived as healthier than cow milk, as it has fewer allergens and is lower in cholesterol,” says Khoury, explaining that their line includes goat yogurt, soft labneh, hard labneh, as well as baladi, halloumi, and double cream cheeses.

Dairy Khoury set up their 75,000 square meter goat farm in Meshmesh, in the mountains north of Jbeil, which is an hour and a half’s drive away from their production center in Ain el-Sendyene, Metn. Khoury explains that the company chose this location because of its extreme remoteness (thereby ensuring a pollutant free and cleaner environment) and abundance of agricultural land, as goats are extremely sensitive to their surroundings.

The pioneer of a branded and dedicated goat dairy production in Lebanon was Goût Blanc, who began its venture in 2013. While previously Daher had sold his imported goats’ milk to local dairies, he had not considered starting his own dairy production company until he met Bou Habib through Alfa Laval—a Swedish company that markets itself as the global leader in heat transfer, separation, and fluid handling—where Bou Habib used to work and from whom Daher had bought his automatic milking line.

The duo introduced new partners to the company—Camille Atallah, a lawyer, and holding company Sarkis Group—and imported more goats from France, bringing the total of imported goats to 300, which then went on to breed others. To house them, they built a second farm adjacent to the first one Daher had already built in Anaya, north of Jbeil, an area Daher also chose because of its remoteness and pristine environment. They built the production facility and the nursery for newborn goats in the same area as well. All this investment was aimed at having a large-scale goat production business, and Bou Habib says that a total of $1 million has been invested in Goût Blanc to date. A further $1.5 million will be invested to expand the farm, as well as for distribution and transportation—Bou Habib says this amount will come from personal funds and a subsidized loan from the central bank. Until now, Goût Blanc is only breaking even with its goat dairy products.

Supply and demand

Lebanese have indeed warmed up to goat dairy products, as even a casual observer cannot help but notice the abundance of restaurant menu items listing goat cheese as an ingredient or the supermarket shelves that are increasingly stacked with goat dairy products.

In fact, demand for locally produced goat cheeses and yogurts has generally been increasing faster than the available supply. Goût Blanc has a total of 1,400 goats and is in the process of constructing a third farm with a capacity of 1,800 goats which will be ready in mid-2018 and will bring their total number of goats to 3,200). Currently, the company processes a maximum of two tons of milk per day, but Bou Habib says this is not enough to meet demand. “The market demand is ahead of us—we should have started construction of the third farm two years ago to meet the growing demand that we are facing now. People think our distribution is bad because they don’t find us consistently in our points of sale. But what is happening is that our products disappear fast from the shelf because we have a limited supply,” he explains, adding that by early 2019 they expect to have enough supply to meet local demand.

Khoury also believes that the market demand for goat dairy is higher than the supply, and that there is therefore room for more players to enter the market without leading to saturation. Dairy Khoury has more than 3,500 goats that produce 3 tons of milk per day and has created a division in its factory solely for processing its milk—as such, Khoury says the company is able to keep up with the demand for its goat dairy products.

Old dog, new tricks

Although goat dairy products are hot items in Lebanon, not all of them are created equal, and it seems traditional tastes are hard to change.

Goût Blanc’s original idea, says Bou Habib, was to produce only French goat cheese. However, he and Daher quickly realized that the Lebanese market for that type of cheese alone was too small and would not justify the big investment they had in mind for their project. “A small segment of the market in Lebanon consumes French goat cheese, and they do so mainly in winter time around holiday gatherings, while they eat halloumi, labneh, and laban on a daily basis. So we decided to introduce these products as well to sustain and grow our business,” explains Bou Habib.

Goût Blanc has 10 products which include soft and hard labneh, labneh with oil, yogurt, two types of French goat cheese, halloumi, and double cream cheese. Of these products, labneh alone constitutes 46 percent of the company’s turnover, while 15 percent is from yogurt, and only 10 percent is from the French goat cheese. “As a general taste in Lebanon, we prefer the sourness of the labneh and laban to the creaminess of French cheeses,” muses Bou Habib. Similarly, Khoury says Dairy Khoury’s most sold goat dairy products are labneh and yogurt “which are part of our traditional cuisine.”

Greener pastures

Given the global goat cheese trend, both Goût Blanc and Dairy Khoury see a rosy future for their dairy products. Although Dairy Khoury says cow milk products will always be their best sellers—it currently constitutes 90 percent of their business—they plan to expand their goat line further by introducing French goat cheese in 2018, along with other goat milk products, to satisfy both local and export demand. (Its goat cheese products are currently exported to Qatar, Dubai, and Kuwait.)

Bou Habib says Goût Blanc also has expansion in mind, although its aim is to first meet local demand before it considers exporting. “Our goal is to have a total herd of 5,000 goats and use that to build a very strong brand in Lebanon before [exporting]. Once we feel the market in Lebanon is saturated, we would consider investing abroad, or increasing our production to export it. But there is a lot of potential in Lebanon itself. Hopefully, if we follow the global trend, the goat milk market should be around 10 to 15 percent of the total dairy market in Lebanon—to get to that figure, we would have to have 10,000 goats, not just 5,000,” he explains.

The main limit to the growth of the goat dairy products in Lebanon is that the feed is imported, which drives up production costs, and therefore price. Khoury says that the feed produced locally—mainly corn yeast and straw—can only satisfy 30 percent of a goat’s nutritional needs. And even then, it is cheaper to import all their feed.

Because of this, Lebanon cannot hope to be competitive with global leaders in goat cheese production unless the country specializes in niche products, explains Bou Habib. “The big problem in Lebanon is that we don’t have enough fields or agricultural spaces. It’s not normal to import feed and essentially transform it into milk, in Europe for example you have the milk where you have the feed. We therefore cannot be competitive in the international market unless we are competitive in special products where we can give added value,” he says, citing goat labneh as one of these products.

Even so, dairy producers say that certain governmental actions, such as protection of local dairy products from foreign competition and supporting dairy producer’s energy and export costs, would go a long way in strengthening their businesses both locally and abroad. If goat dairy products do someday constitute even 15 percent of the total dairy market in Lebanon, it would open up fresh opportunities for those looking into investing in Lebanon’s dairy market and for existing producers to diversify their pastures.

April 16, 2018 0 comments

Eden Bay Real estate

The untouchable hotel

by Scott Preston April 16, 2018

written by Scott Preston

While it is widely assumed that Lebanon’s real estate business is rife with unethical dealings, only a few detailed examples of wrongdoing actually come to light. In the case of Eden Bay, a resort situated along Ramlet al-Baida—Beirut’s last public beach—evidence of violations and fraud piled up throughout 2017.

The disclosures culminated in the form of a report compiled mid-2017 by the president of the Beirut Order of Engineers and Architects (OEA), Jad Tabet. The report alleges eight violations related to Eden Bay and is informed by building documents released by the Municipality of Beirut. The report’s allegations range from the infringement of public property to the forgery of permit application material. As a whole, Tabet’s report portrays a development project for which legal obstacles were fudged or ignored entirely to deliver the lucrative seafront hotel. Public pressure from media coverage, a unified civil society movement, and even lawsuits initiated by NGOs and the environment ministry have not prevented the completion of the hotel.

With the façade completed in recent months and the resort aiming to open this April, Eden Bay’s opponents now view the ineffectiveness of these efforts as proof of the public sector’s failure to adequately govern the real estate market.

Crazy eights

According to Tabet’s report, violations related to the hotel date back to before it was actually conceived.

Initially, the real estate giant that owns Eden Bay, Achour Development, had planned to establish a larger resort in the same location. To manage the project, Achour created a company named Beirut Marina Gate, which set about purchasing two plots of land in the area. In 2011, Beirut Marina Gate signed a contract to buy two parcels—numbered 3689 and 3687 by the Directorate of Land Registration and Cadastre (LRC)—from a company called Eden Rock Real Estate and Tourism.

But, according to the report, Parcel 3689 was the product of an illegal merger that combined four smaller plots earlier the same year. Two of these component plots were categorized as non-buildable and therefore could not be merged with the others that were eligible for development.

However, in a letter dated June 6, 2012 and seen by Executive, Beirut Governor Chebib requested that the LRC remove the non-buildable status classifications from the properties. The LRC complied, merging the plots into Parcel 3689 without the required approval from the judiciary.

Lama Karame, a lawyer with the non-profit Legal Agenda that monitors public policy, says that the unification of the parcels is one of several violations that should have prevented the construction of Eden Bay from moving forward.

Creating space

Despite the apparent illegal origins of Parcel 3689, it was sold in 2011 along with Parcel 3687 to be used for Achour’s resort, which was also named Eden Rock. Cynthia BouAoun, an architect that has contributed to the coastal protection campaigns of the heritage advocacy NGO Nahnoo, says that Achour then pooled Parcels 3687 and 3689 in a move that grouped them but did not formally merge them in the records of the LRC. This, she says, was done in order to meet the 20,000 square meter minimum developable threshold that was required to build the Eden Rock resort in the zone.

For reasons that have not been publicly disclosed, Achour later dropped its plans for Eden Rock, having only completed the necessary Environmental Impact Assessment (EIA) for the project, according to the report. The developer incorporated a new company, Eden Bay sal, to oversee the establishment of a smaller resort. Karame says that Parcels 3689 and 3687 were ungrouped by the LRC and the former was transferred to the new Eden Bay project; however, she explains that the Municipality of Beirut was not informed of this change, so when Parcel 3689 was transferred to Eden Bay, the project was entitled to a larger building than what would have been allowed if the decision had been based on the size of Parcel 3689 alone.

An unusual decision by the Directorate General of Urban Planning (DGUP) also facilitated the creation of a resort that would have been too large by normal standards. Mona Fawaz, a professor of urban planning at the American University of Beirut who helped research Tabet’s report, explains that development projects close to the shoreline are by convention set back from the sea by at least 20 meters in most places along the Lebanese coast. But in 1964, Fawaz says Beirut’s zoning regulations were changed, and the setback from the public maritime domain was no longer specified. Since the change, however, the DGUP has generally applied the old 20-meter standard.

Fawaz says that in the case of Eden Bay, the DGUP in 2015 suddenly dropped this standard and instead deferred to the building law, which states that the setback for most public property is only two meters.

Even with the diminished setback, Tabet’s report alleges that Achour went on to increase its building size beyond what is allowed by local zoning regulations. The report highlights a substantial discrepancy between the ground elevation claimed by Eden Bay and the elevation from state sources. Mona el-Hallak, an architect and activist, believes that the company tried to pass off levels now marketed as luxury beachfront chalets as underground parking space, which would legally be omitted from the project’s tally of buildable area.

Tabet writes that the topographic map that was submitted for the resort’s construction permit defines the ground height at 7.7 meters above sea level. However, geographical images from the Directorate of Geographic Affairs of the Lebanese Armed Forces mark an elevation of 1.4 meters.

The report acknowledges that the Eden Bay development was originally meant to be built into a hill, which means one side of these floors would have been partially below ground. However, Hallak says the earth has since been cleared away, exposing the two lower stories meant for parking, leading Tabet to conclude in his report that Eden Bay had planned the alterations from the start.

Tabet calculates that the addition of these two levels and the apparent illegal unifying of properties in Ramlet al-Baida doubled the project’s built area from 5,251 to 10,439 square meters. That would mean that Eden Bay exceeded the maximum building size by about twice what was allowed for Parcel 3698.

But even without the aforementioned violations, Tabet argues that the location should never have been cleared for development in the first place, as the country’s national urban master plan, decreed in 2009, specifically declares that Ramlet al-Baida should be protected from real estate construction works.

To the courts

In spite of these issues, a construction permit was issued by the Beirut Municipality for the Eden Bay resort in September 2016. Yet, Tabet’s report states that Eden Bay failed to commission a new EIA to accompany the permit.

In a 2015 interview with Executive, Achour’s lawyer, Bahij Mjahed, claimed that the EIA from Eden Rock would cover the construction of the Eden Bay project. However, Ralph Haddad, an attorney at Bou Chaaya Law Firm who specializes in real estate litigation, and is unconnected to the project or related lawsuits, contradicts this view. Looking over Tabet’s report, he says that a new EIA would have been required, and that regardless the old EIA had expired before construction began. For this reason, the environment ministry filed a lawsuit against Eden Bay on May 5, based in part on information provided by Nahnoo.

On November 28, 2016, the Green Line Association, an environmental-advocacy organization, initiated another lawsuit that contested the building permit held by Eden Bay sal, which the group suspected was intruding on public property. Green Line Association, represented by Legal Agenda, is also challenging the Municipality of Beirut and the Lebanese Government over the project.

On February 8, 2017, the State Council ordered a construction freeze on the resort in response to the Green Line Association’s lawsuit, until the legality of the development could be determined. According to Karame, Eden Bay continued building nonetheless, even when a second stop order was issued by the council on March 6, 2017.

She says that Eden Bay cited multiple technicalities to avoid complying with the council’s decision. For example, Karame says that Achour argued the building permit that Green Line Association was contesting no longer affected it as the company had filed for a modification permit that amended their original. Although modifications are not technically considered separate construction permits, the Council issued another order to halt the building on March 6, 2017. This too had little effect, says Karame.

Legal Agenda then asked Jad Maalouf, a judge of urgent matters, to oblige the construction company to halt its activities under threat of a $100,000 fine for each day that work continued. By March 18, the order was in place, and Karame says Achour stopped contruction soon afer.

Meanwhile, the council required the Municipality of Beirut to hand over Eden Bay’s building permit and related application material. The information garnered from this disclosure largely contributed to exposing the violations alleged in Tabet’s report, which he compiled at the request of President Michel Aoun and Minister of State for Combating Corruption Nicolas Tueni.

Against the current

But less than a month later, on April 11, the State Council reversed its earlier decision and allowed construction to go forward. Karame says the State Council did not explain the decision.

The Green Line Association’s lawsuit is still awaiting a final ruling from the State Council. Karame explains that Legal Agenda submitted Tabet’s report to the court, but one of the council members decided to appoint their own experts to investigate the hotel. She says that so far, the appointees have been unable to conduct site visits because Achour’s attorney claims that the company was not notified and the state maintains that it has not yet selected a lawyer to attend these visits.

Media reports on Eden Bay have also been restricted based on orders from a judge of urgent matters who barred two TV stations from disparaging the company.

All sides of the Eden Bay controversy have been reluctant to provide interviews for this article. Only the lawyer from Achour agreed to speak, on the condition he was not recorded. The municipality was unresponsive and an official at the DGUP was unavailable. For his part, Tabet told Executive he had no further comment at this time.

Who holds the reins?

Executive asked Mjahed to respond to the charges presented in the report. He stated that the only authorities that can evaluate whether the company’s actions were legitimate are the Beirut municipality—which approved the necessary permits—and the judiciary, which ultimately allowed construction to proceed. Mjahed dismissed the accusations of violations as a “fantasy,” saying that it is impossible that all the relevant Lebanese agencies are allied in a “conspiracy” with Eden Bay.

Meanwhile, Eden Bay draws closer to opening. One Achour employee, during a request to be interviewed, put the opening as soon as early April. At the time of this writing, Achour had not announced whether an inhabitance permit, which certifies a building’s completion and enables its occupation, had been issued. The delivery of the permit, if granted, may represent both the finalization of the hotel and yet another regulatory violation, says BouAoun. “When you [apply for] the inhabitance permit, [the municipality has] to verify that what you realized conforms to what you got a permit for. [Eden Bay] didn’t abide by its permit, so of course, the inhabitance permit is not legal,” she says.

Haddad, the unaffiliated attorney, says the violations outlined in Tabet’s report are clear, and that they are common throughout the market. With construction of the first major real estate project on Beirut’s last public beach nearly complete, the question is not only how many Eden Bays are out there, but how many more there will be.

April 16, 2018 1 comment

Book Review Economics & Policy

Troubled and troublesome

by Thomas Schellen & Riad Al-Khouri April 16, 2018

written by Thomas Schellen & Riad Al-Khouri

Every stroll in the Eastern Mediterranean lands means walking in the presence of some historic reference. Transformed into politics and national ideologies, history has long been a tool of identity building. When looking at identity politics, these days may we squirm over the rise of new, presumably white identity politics in the United States or how questions of national identity have in recent years been shaping politics in the European sphere, as epitomized in the Brexit vote. In discourses of academic belief systems around the developed world in the 21st century, one might moreover deride identities as constructs of colonial-nationalistic Europe in the 19th century, or oppose identity concepts on contemporary intellectual grounds. But to escape from identity-driven views will likely be harder in Middle Eastern societies than in any European or American ivory tower. With that in mind, Executive looks at two books with implications for national identities in the Levant.

In Search of the Phoenicians by Josephine Quinn Princeton University Press, Princeton and Oxford, 2018 Hardcover, 360 pages

The book “In Search of the Phoenicians” by Josephine Quinn opens—not counting her introduction—with a 1946 quote by then freshly minted Member of the Lebanese Parliament, Kamal Jumblatt. The quote bubbles with fervor for the Lebanese “ancient young country” and, as Quinn points out, not only connects the nation of Lebanon with the Phoenicians through history and geography but passionately portrays the Phoenicians as being responsible for the idea of the nation itself. In Jumblatt’s phrasing, optimism for Lebanon is rooted via backward projection in the ancient history of the Phoenician coast which saw “the emergence of the first civic state.”

The idea of how a democratic Lebanon in the 21st century might or might not be validated by Phoenician roots—however timely such a discussion might appear in the context of the country’s current quest for a sustainable future and its “economic identity”—is not what drives Quinn, who teaches ancient history at Oxford University in the United Kingdom. Nor is the book really about a search for anything but evidence that the Phoenicians might have been people whose collective identities never rose above the level of their own towns or even families. “The Phoenicians, I will suggest in this book, constitute just such a case,” Quinn writes in her introduction.

The specifics of Quinn’s book thus is a tale of anti-Phoenicianism, as she dedicates her investigation to the deconstruction of any notion, if anyone harbors such, that the Phoenicians were actually a coherent people or nation in their golden era during the first millennium BC. This academic quest and anti-Phoenician stance is directed not against the Phoenician people per se or against the construction of national identities but mainly against the use of the Phoenicians as a paradigm in nation-building myths and nationalist ideologies in later antiquity and in modern ages in Europe and the Middle East. Quinn clarifies in a promotional interview for her book on the Princeton Press website that she does not at all deny the existence of the Phoenicians. She says, “The people we call Phoenician certainly existed as individuals, and they often have fascinating stories,” before reiterating the notion, also expressed in the book’s introduction of how the question of whether these Phoenicians saw themselves as “distinct people” and thus were “a self-conscious collective” intrigued her.

Ethnic ideologies

In this, Quinn draws on the modern academic concept that sees ethnicity “not as timeless fact about a region or group, but as an ideology that emerges at certain times.” In the book’s subsequent body text she explains, through about 100 pages of scholarly writing, that that there is no evidence for this self-conscious collective in the form of either artifacts, including coins, architecture, and various monuments, or written sources through known inscriptions on funerary steles or stone markers, or in early literary sources.

The learned explanations in these chapters of Quinn’s book are adorned with chapter or section titles—from Phantom Phoenicians to Melqart’s Mediterranean—that testify to the author’s craving for attractive story telling. At the same time, the book’s array of antique evidences for Quinn’s thesis of a non-self-conscious Phoenician ethnic group makes for a curiously anemic read, which is somewhat reinforced by a text-heavy layout. Chapter titles come with little graphic flourishes that constitute the book’s core design together with page layouts using a font, Libertine 0, which, albeit attractive for all-purpose use, might strain some eyes due to its very small size.

Modern afterlives

The book’s narration comes full cycle not between the notions of its first chapter and its concluding pages, not from and to Lebanon, nor from the Phoenician settlements in the Eastern Mediterranean to present-day stories of identity in this troubled region. It instead circles, from a reference to Irish plays in its introduction, to citing in its final pages poetry and plays written by authors whose names, being Seamus Heaney and Frank McGuiness, do not exactly signal self-identifications of th§e Phoenician kind.

However, it is this third part of Quinn’s book that the discourse in In Search of the Phoenicians is emotionally most engaging. This part is dedicated to what Quinn calls the “modern afterlives of ancient Phoenicia,” which means anything more recent than the fourth century BC, and specifically the deployment of Phoenicianism in Europe—mainly in England and Ireland, but with diametrically opposed ideological orientations—in post-Enlightenment times “in the service of autonomy, power, and honor.”

For an author whose cradle rocked to Irish or British tunes, it must indeed be captivating to chase the role of Phoenicianism in such contexts of nation-building in Europe. It is the real story in this book. If on the other hand anyone, enticed by the book’s initial quoting of Jumblatt, Charles Corm, and Michel Chiha, ventures to search its pages for Phoenician references that can be utilized in relation to Lebanese quests for political identity in our time, she or he will only be reminded of the, very useful, general insight that the Phoenician past cannot be an ideological panacea in any modern nation-building attempt.

People who seek mental support indicators in developing a forward-oriented Lebanese identity, however, may benefit from the insight that the scarce evidence preserved in artifacts and sources from Mediterranean antiquity testifies to then living people’s open-mindedness in dealing with foreigners, to cultural communication and economic appreciation of foreign cultural goods, and to an ability for building durable networks of trade and relations. People living in the Eastern Mediterranean thousands of years ago also displayed familial and communal qualities.

Viewing this from a local vantage point in Lebanon, no reason appears conceivable why the same cultural and social feats should not be achieved by people living today on the shores that were called Phoenician in various observations throughout history. Moreover, from this same vantage point of experiencing Lebanon at the threshold of a major historic junction in its economy, politics, and identity, it is impossible to deny that, with a quote by American thinker George Santayana, “the picture we frame of the past changes continually and grows every day less similar to the original experience which it purports to describe.” In this sense, Quinn’s In Search of the Phoenicians can serve as useful reminder that turning to the lure of a mythical past for finding a path to the future can be fraught with risk.

Anti-semitism: The Generic Hatred (Mo’adaat as samiyya: Jawhar al-karahiyya) By Shimon Samuels and Esther Webman (eds) translated into Arabic by Hani Abu Laila, translation review by Amro al-Barjisi Editions Le Manusrcit, Paris, 2017 / Paperback, 421 pages

Mo’adaat as samiyya: Jawhar al-karahiyya is the recent, Arabic translation of “Anti-Semitism: The Generic Hatred,” a collection of essays that was initially published in memory of Jewish-Austrian activist Simon Wiesenthal and translated into French, Spanish, and Russian over the past decade. Supported by UNESCO, the book clearly involved a lot of efforts, although from the perspective of this reviewer, some of it may have been misplaced.

By way of background, let me explain that as an Arab Christian who grew up in America, Europe, and the Middle East, I know what it means to be part of a minority. Yet, in those times, being part of the Christian minority in a Middle Eastern country was less dramatic than one might think. Except for episodes of the Lebanese Civil War in the late-20th century that I witnessed, my feelings of persecution, as well as those of many co-religionists around me, were mostly part of the recreational paranoia practiced by some Christians in the Arab World. In that context, musing on “Why they hate us” was not entirely serious.

That was before the ISIS mayhem, which exploded in 2014 and changed the atmosphere for many Christians in the region. Previously mildly anxious, some of them are now deeply afraid, and taking practical steps to emigrate—just as many European and other Jews had done in the 20th century, including to Israel.

In such an atmosphere, one of the good points of the book is to serve as a reminder that anti-Semitism continues to blight regions around the world, impacting new generations of Jews and others. Indeed, this is more relevant than ever: Over 10 years after the book was first published, anti-Semitism in Europe is on the rise. Reported physical assaults against Jews there include beatings, stabbings, and other violence, which have increased over the past few years. Such attacks are associated with rising far-right political parties following the economic crisis of 2008. Parts of Europe have seen nationalist movements accusing Jews of causing economic crises, taking over local economies, and bribing government officials.

As for recent anti-Semitism in the Arab world, a 2011 survey by the Pew Research Center concluded that, in all Muslim-majority Middle Eastern countries polled, few participants had positive opinions of Jews. The survey found that only 2 percent of Egyptians, 3 percent of Lebanese Muslims, and 2 percent of Jordanians reported having a positive view of Jews. Yet, this may be due to general negative feelings in surveyed countries toward the state of Israel and its actions, and the misconflation of Israel with Jews worldwide. The American writer Thomas Pynchon in his great novel “Gravity’s Rainbow” described the mechanism for such processes under the heading “Proverbs for Paranoids,” one of which explains that “paranoids are not paranoids because they’re paranoid,” but because they keep putting themselves “deliberately into paranoid situations.” Bands of Jewish settlers putting themselves in just such situations surrounded by indigenous Palestinian Arabs, or Israeli military forces threatening refugees in Gaza, therefore, really have no right to ask, “Why do they hate us?” By way of response, another proverb for paranoids by Pynchon states: “If they can get you asking the wrong questions, they don’t have to worry about answers.”

Away from Pynchon’s literary flights, the causes of Arab reactions to Israel were elucidated in a 2015 talk on the Israeli-Palestinian conflict by Tony Klug, special advisor on the Middle East to the Oxford Research Group and an international board member of the Palestine-Israel Journal, who himself is a British Jew. Klug describes conflict over Palestine from various perspectives including that of the Palestinian Arabs who feel that the violence is “the product of centuries of virulent European anti-Semitism at home and rampant imperialism abroad, crowned by double or, in this case, treble British-French dealings,” to which I would add current American quadruple-dealing. The Arab reaction to Israel extending to Jews cannot be dismissed as anti-Semitism if Israel—paranoid-style, allied to a menopausal American Empire—loudly and incorrectly touts itself and the US as defenders of the Jewish people.

The book rightly asks us to consider the lessons it holds for non-Jews struggling against hatred and oppression. Fine, but a better point would be to have future generations of Jews and others relearn the importance of confronting virulence like settler Zionism and Israeli militarism—laughably seen as “defenders” of the Jewish people. The only sustainable defense of Israel will be for it to make a just peace with all her neighbors, especially Palestinians. When that happens, anti-Semitism in the region will likely witness a drastic decline.

April 16, 2018 0 comments

Comment Economics & Policy

Lebanese in Brazil will not vote come May

by Peter Speetjens April 16, 2018

written by Peter Speetjens

The Lebanese parliamentary elections on May 6 are bound to make history, as, for the first time ever, Lebanese residing abroad have been granted the right to vote. Their appetite to do so, however, has so far appeared to be rather humble.

In total, 82,900 Lebanese abroad have registered to vote, according to the official Lebanese government website. Numbers quoted in The Monthly, a publication by Information International, a Beirut-based research and consultancy firm, cite 45,827 Christians and 38,329 Muslims registered (the discrepancy in the overall total is likely caused by the difference in those who registered versus those registrations that were accepted).

Some 60 percent of registered Lebanese voters abroad live in Australia, Canada, the US, France, and Germany—in that order. Only 2,106 Lebanese, or 2.5 percent, registered in Brazil, which may come as a surprise, given the country’s status as the world’s “second Lebanon.”

“Estimates vary slightly, but we reckon there are some 8 million Brazilians of Lebanese descent, about half of whom live in and around São Paulo,” says Sabah Khoury, Lebanon’s consul in São Paulo. “They live in every corner of the country. [Other] major concentrations are in Rio de Janeiro and Foz de Iguaçu in the south, where we plan to open another consulate.”

One need not travel far to spot Lebanese and Arab traces in São Paulo. Situated on Paulista Avenue, the city’s most prestigious thoroughfare, the Lebanese consulate sits right across from “Club Homs,” a restaurant and event venue established by Syrian immigrants in 1920.

Several skyscrapers along the avenue boast Arabic family names, while eateries on every corner sell kibbeh and sfiha, which have become staple foods in Brazil. Two of the city’s mayors since 1990 were of Lebanese descent, while a third was Syrian, and Hospital Sírio-Libanês is widely regarded as the city’s, if not the nation’s, best.

Historic ties

According to Khoury, the low number of registered voters in Brazil is arguably due to the complex registration procedure. “People could register online or at the consulate,” she says. “However, the Ministry of Interior in Beirut had to approve the application, which could take a month or more, while the registration period closed in November. I think people may have underestimated that.

“On the other hand, although 8 million is a fair estimate, we should put the figure in perspective,” she added. “The first Lebanese immigrants arrived in Brazil in the late 19th century following the visit of Brazilian Emperor Pedro II to Lebanon. Their descendants often are only partly Lebanese.”

Pedro II had a keen interest in the Orient and visited the region twice in the 1870s. Legend has it that in 1871 he halted his convoy on the way to Baalbek to talk to a group of peasants and encourage them to emigrate to Brazil, where plenty of fertile land and opportunities would await them.

True or not, the first Lebanese immigrants arrived in South America’s promised land in 1871. Driven by economic malaise, hunger, or conflict, many more would follow in this first wave of emigration from Lebanon that roughly lasted till the end of the Second World War.

Naturally, many of the early pioneers married other immigrants. As a result, there are numerous Brazilians who have a claim to Lebanese roots, but their link to the country of their great-grandmother or great-grandfather is cultural or nostalgic at best. To count potential voters among Brazil’s considerable Lebanese contingent, the focus should be on more recent arrivals.

Distant politics

“I didn’t know you could vote through the internet,” says 75-year-old Georges Habib. “I assumed I had to go to the consulate and needed all kinds of documents, so I didn’t bother.”

Habib arrived in Brazil in the mid-1960s. He had done his military service, but did not wish to make a career in the army, which would have been the path ahead had he stayed in Akkar. In Brazil, he worked in textile and electronics, which allowed him to provide his three children with a good education, and today, enjoy his retirement in one of the better parts of São Paulo.

“But, even if I had registered, who was I going to vote for?” he asks. “I don’t follow politics in Lebanon. I don’t know who is good and who is bad.”

And that is coming from a Lebanese emigrant who still maintains strong links with his home country. He and his wife, also Lebanese, regularly visit Lebanon. At home, they speak Arabic, and mainly eat Lebanese food. It is a very different story for their children who occasionally visit Lebanon and only speak broken Arabic. None of Habib’s children registered to vote.

“I have no clue who to vote for,” says Habib’s daughter Tanya. “But also, I don’t have a Lebanese passport. I do feel Lebanese, and I love Lebanon, but why would I get a passport? It’s expensive. It’s easier to travel with my Brazilian one, and whenever I visit Lebanon, I get a visa upon arrival.”

Becoming Brazilian

As in São Paulo, there are plenty of signs of a Lebanese presence in Foz de Iguaçu, a touristic city on the border with Paraguay famous for its massive waterfalls. While the first Lebanese immigrants arrived here over 100 years ago, many thousands arrived in the last three decades. Most are Shiite and left the country due to the civil war and the Israeli occupation of south Lebanon.

Yet, even here, the appetite to register and vote has been virtually non-existent. Nearly all of the 2,106 Lebanese who registered to vote did so in São Paulo.

“Why vote?” says Ali Farhat, a journalist who has lived in Foz for 18 years. “I have to vote in south Lebanon, even though I grew up in Beirut. Now, I thank Hezbollah for the liberation of my village, but I’m not happy with their role in government. They should fight corruption. As politics in the south is dominated by Hezbollah and Amal, my vote would be a lost one.”

Yahya Awali did not register either. “I don’t like any of the parties, so why vote?” he says, “Maybe in the future that new party, Sabaa, can make a difference.” The 42-year-old arrived in Foz in the late 1990s and is the living proof that the Brazilian dream is still alive some 140 years after the first Lebanese immigrants arrived. Awali left Lebanon because he could not find a job, “not even at Sukleen.” Today, he has a thriving business in mobile phone repairing equipment situated across the border in Paraguay, which allows him to financially support his family back in Lebanon. The low voter registration turnout does not surprise him.

“Brazil is a country built on immigration,” he says. “Everyone is welcome here, but everyone must become Brazilian. For example, we have a Lebanese school here in Foz, fully recognized by the Brazilian educational board, where we teach the children some Arabic and the Quran. However, we can only do that a few hours a week as extracurricular subjects. That is the reason why the second generation Lebanese generally only speak broken Arabic, and the third generation not at all.”

The gradual weakening of the connection to their ancestral land casts doubts on the viability of attempts to draw the Lebanese diaspora into voting, this year or in future Lebanese elections. On the other hand, placing members of the diaspora in better empowered positions for determining the course of politics in their homeland could work in the diaspora’s long-term benefit and be in their own political interest. As Awali notes, he remains strongly connected to Lebanon. He visits regularly, and even dreams of returning for good one day. “I’m building a house near Marjayoun,” he says. “And I would like to live there. The problem is I don’t want my children to have the same childhood I had. I want them to live a life in peace.”

April 16, 2018 0 comments

Economics & Policy Energy

Energy and climate change

by Vahakn Kabakian, Jil Amine & Hassan Harajli April 16, 2018

written by Vahakn Kabakian, Jil Amine & Hassan Harajli

Lebanon’s commitment to combating or mitigating climate change culminated in December 2015 when Lebanon became a signatory to the Paris Agreement at the United Nations Climate Change Conference (COP21). Lebanon committed to reducing its greenhouse gas emissions by at least 15 percent by 2030 and up to 30 percent conditional upon the provision of international support. This high-level commitment toward a better climate is being converted into action through strategic governmental projects.

Before discussing these initiatives, it is vital to visit the UN’s 17 Sustainable Development Goals (SDGs), which were adopted by world leaders in September 2015, pledging worldwide action amongst governments, businesses, and civil society to end poverty and to create a life of dignity and opportunity for all by the year 2030. Goal 7 of the SDGs, Affordable and Clean Energy, ensures reliable, sustainable, and modern energy for all, while Goal 13, Climate Action, presents solutions to climate change.

How has Lebanon positively contributed to COP21 while remaining consistent with SDGs 7 and 13?

To ensure access to affordable, reliable, sustainable, and modern energy, the Lebanese Ministry of Energy and Water (MoEW) published an energy policy paper in 2010 laying out solutions for electricity in Lebanon; a sector facing up to a 40 percent gap between supply and demand. The policy paper considered a 12 percent commitment for renewable energy by the year 2020. This commitment was put forward at the Copenhagen Summit (COP15), and is projected to reach 15-20 percent by the year 2030.

The National Renewable Energy Action Plans for the Republic of Lebanon (NREAP) 2016-2020 offers a detailed description of the different renewable energy technologies to be developed in Lebanon to meet the 2020 and 2030 commitments of 12 percent and 15 percent respectively, while emphasizing the target of each technology, the financial assessment, and the required budget to keep the plan going. The NREAP’s agenda for 2020 includes: 200 megawatts (MW) of wind energy, 150 MW of solar photovoltaic farms, 100 MW of decentralized solar photovoltaic generation, 50 MW of concentrated solar power, 686 gigawatt-hours (GWh) from solar water heaters, 332 MW of hydroelectricity, 1.3 MW of geothermal energy, and 772 GWh from bioenergy. Lebanon’s demand for electricity reached a peak of 3,460 MW during the summer of 2017, while the power plants’ supply peaked at 2,160 MW.

Strategies in place

With these targets set, Lebanon’s progress toward its climate pledge has been solid. It is anticipated that the cabinet and Électricité du Liban (EDL), in partnership with the private sector, will soon build and operate 200 MW worth of wind energy in the Akkar governorate. In addition, the MoEW launched a Call for Expression of Interest in January 2017 aiming to build up to 180 MW of solar photovoltaic farms in Lebanon. These two initiatives would constitute major milestones in meeting the 2020 targets. This was followed by a massive Call for Expression of Interest (estimated $1.5 billion) in March 2018 for 1. Wind energy (200-400 MW capacity), 2. Solar PV farms (24 farms, 10-15 MW each), 3. PV farms with storage (3 farms, 70-100 MW each, with 70MW/70MWh storage), and 4. Hydropower (300 MW).

In terms of decentralized solar photovoltaic electricity generation, Lebanon has been witnessing triple-digit growth rates for four consecutive years with an installed capacity of 23 MW at the end of 2016.

With the government’s plans for the renewable energy sector along with the private sector’s initiatives, Lebanon stands in agreement with Goal 7 of the SDGs.

While Goal 7 helps reduce Lebanon’s contribution to climate change by introducing renewable energy sources, Goal 13 of the SDGs aims at taking urgent action to tackle climate change and its impacts.

With support from the UNDP, the MoEW has completed several assessments that look at climate change impacts. Historical records of the early 20th century indicate unprecedented high temperatures with an expected warming of 1.7 degrees Celcius by mid-century and of 3.2 ºC by 2100. Also, a decrease in precipitation ranging between 4 and 11 percent with drier conditions is projected by the end of the 21st century (up to 5.8 mm decrease in average monthly precipitation).

Projections for the end of the 21st century confirm a rise in the number of days with temperatures higher than 35 ºC, and an increase in the number of consecutive dry days whenever precipitation reaches below 1 mm. These alterations will produce seasonal prolongation and geographical expansion of drought periods.

This combination of significantly less wet and substantially warmer conditions will result in hotter and drier climate. This switch will bring a reduction in the snow cover by an estimated 40-70 percent (an essential source of water and an important tourism sector) with an expected 2-4 ºC rise in temperature. Less precipitation will fall as snow, with snow that currently falls at 1,500 meters shifting to 1,700 by 2050, and to 1,900 by 2090. This will also be coupled with reduced snow residence time from 110 days to 45 days. Snow will melt earlier in the spring. These changes will affect the recharge of most springs, reduce the supply of water available for irrigation during the summer, and increase winter floods by up to 30 percent. This will have adverse impacts on rivers and groundwater recharge and will affect water availability during the summer season and in drought periods.

The decline in precipitation levels will also exacerbate existing challenges to water availability for agricultural (reduced productivity), commercial, and residential uses. Forest fires will be more common and extreme weather events will be more severe, causing damage to infrastructure.

Cost of climate change

The above-listed impacts are expected to cost the government $610 million in 2020 and $44.3 billion in 2080 from direct damage (storms, floods, drought) and forgone GDP (expected reduction of 3 percent GDP in 2020 rising to 32 percent of GDP in 2080). What is even more alarming is the fact that households will also incur costs which are projected to reach $1,500 in 2020 and increase to $107,200 in 2080, with a higher burden on rural households. A greater risk is that of the damage inflicted on individuals’ health. Costs associated with potential increases in the risk of death as a result of heat stress, malnutrition, diarrhea, malaria, floods, and cardiovascular disease are estimated to total $47.2 billion by 2020. In tandem, costs associated with potential increases in illness and disabilities—from the same climate-related factors are projected to amount to $177.9 billion by the same year.

The decrease in agricultural production will knock around $300 million off Lebanon’s GDP by the year 2020. In addition, the expected climate change impacts on global food prices will burden Lebanese consumers with an additional $470 million of costs. Considering the above, Lebanon has produced various strategies and plans, some of which are sector-specific actions that aid in strengthening the adaptive capacity of the country and decrease its vulnerability to climate change. The plans in action include the national biodiversity strategy, the national water sector strategy, the national forest program, the Ministry of Agriculture strategy, the land degradation and desertification action plan, the strategy on health and the environment, and the Paris Pact on water and adaptation. In addition, two water harvesting guidelines have been laid out for the country: one from agriculture greenhouse rooftops and the second from built structures.

In its Intended Nationally Determined Contributions (INDCs), Lebanon has set ambitious mitigation goals with clear sector specific objectives, along with clear indicative adaptation goals. As a matter of fact, strategies and policies subject to modifications will have to meet the national plan; the UNDP will continue to assist the Lebanese government in securing clear directions on the various approaches to be implemented to reduce impacts of climate change and to increase resilience of its most vulnerable sectors.

To facilitate cost-effective deployment of renewable energy technologies in Lebanon, and thus assist the government in meeting its international pledges, the UNDP has commissioned a study on how to reduce the “risks” perceived by the investors. This in turn is an action plan for the government in moving renewable energy forward. These could include instruments, such as well-designed power market regulations, which reduce risk by removing the underlying barriers that create it; financial derisking instruments, such as loan guarantees offered by development or central banks, which transfer risk from the private to the public sector; and financial incentives, such as direct subsidies for sustainable energy, which compensate investors for risk. The outlined action plan was endorsed by the MoEW. Meanwhile, the UNDP along with the MoEW and EDL, prepared the Solar PV and Wind Grid Code of Lebanon—which serves as one of the derisking measures, and when implemented by EDL will allow a larger update of renewable energy sources onto the electricity grid. The ball is in the court of the government, which, armed with the above tools, should follow their implementation to reach its national and international obligations.

April 16, 2018 0 comments

Economics & Policy Energy

Wind farms in Lebanon

by Jil Amine April 16, 2018

written by Jil Amine

Earlier this spring, Lebanon signed its first-ever power purchase agreement (PPA) for wind energy with three separate consortiums that will build and operate wind farms in Akkar, in the north of the country. The energy ministry’s signing of the agreements represents Lebanon’s first PPA with the private sector in electricity generation as part of efforts to close an estimated 1 gigawatt gap between current electrical supply and demand in the country. Combined the wind farms will have a total generation capacity of 180 megawatts. Global wind-energy generation capacity reached 487 gigawatts by the end of 2016, according to the renewable energy policy network REN21, up 12 percent since 2015—but for Lebanon’s first venture into wind energy at this scale, many challenges and opportunities await.

One of the main challenges facing the wind energy industry around the world stems from the sheer size and dimensions of wind turbine components. As wind turbine components continue to grow in size and weight, transportation and logistical challenges complicate the components’ delivery to project sites. In Lebanon’s case, most of the components will be imported from Europe, arriving via sea to the Port of Tripoli. The challenge of transporting the long, wide blades—three are required for every wind turbine—is caused by the difficulty of maneuvering the massive trailer trucks carrying them around tight turns, along narrow roads, and beneath bridges and overpasses. The same applies to the large-diameter tower sections, of which three or four are required for every wind turbine, depending on the tower’s height and design. In addition to these geometrical burdens, road-weight limits also complicate the transportation process, due to the heavy weight of the nacelle, a unit that sits on top of the tower and contains the generator and gearbox, which can reach around 80 metric tons for turbines that generate between two to four megawatts.

For Lebanon’s first wind farms, the route between the Port of Tripoli and the project sites in Akkar represents a major challenge. Since the highway connecting the port to Akkar’s main coastal road is not fully built, trucks carrying turbine parts will have to use the narrower Beddawi road, which runs inside an industrial zone and includes tight turns and roadside obstructions. The same issues will reappear when the trucks leave the coastal road and start heading up mountain roads to the project sites in Akrum. To mitigate these transportation problems, the turbine components’ dimensions and weights need to be studied early in the project planning phase so that the roads can be surveyed ahead of time. This will provide advance notice for any necessary road widenings or modifications. The construction of the wind farms is scheduled to begin in April 2019, with the sites planning to begin operations by the end of 2020; if these roads are not upgraded in time, the deliveries risk grinding to a halt. Equally importantly, these upgrades represent much-needed infrastructure investments that will translate into increased local employment and reduced journey times. The cost of road congestion in Lebanon is estimated at $2 billion per year, or nearly 4 percent of GDP, according to BLOM Bank.

Lebanon’s Internal Security Forces will also play an important role in the project, escorting the delivery trucks and facilitating their maneuvering by blocking intersections where necessary and removing vehicles parked on the side of the roads.

These logistical constraints need to be identified and resolved early in the process to prevent bottlenecks in the delivery and installation processes. At the same time, these logistical challenges are opportunities for prospective Lebanese logistics companies, who will have a new market to compete over. Investing in trucks, specialized trailers and cranes, and trained personnel will likely pay off as Lebanon continues to develop its wind energy resources in Akkar and other windy regions.

Developing and operating wind farms can also turn low-income rural areas into prosperous ones through job creation and local economic development. This transformation will begin with the construction of the wind farms, which will require the hiring of hundreds of engineers, skilled tradesmen, and workers to take on the many preparations needed before the wind farms are commissioned and operational. The transformation will continue when the wind farms are up and running, as new permanent jobs will be created to support the operation and maintenance of the farms. It is advisable that a significant share of these jobs be filled by local workers, which will lead to increased social acceptance of the project. This is a huge opportunity for young men and women who are looking for jobs in rural Akkar and the surrounding regions.

Personnel working on site could stimulate the local economy with their spending on accommodation, groceries, and transportation. New businesses such as hotels, restaurants, supermarkets, and other retail outlets would be attracted to the area to serve the local workforce, spurring new economic activity. Moreover, wind farms will provide rural landowners and municipalities with a new income stream through land-lease payments for every wind turbine and access road located on public or private land. Overall, Akkar, which is in great need of local economic development, stands to benefit significantly when wind farms and the required workforce move in.

Power purchase agreements are only the beginning of a long process, which will face many challenges, from planning and construction to commissioning and operation. However, these opportunities will likely prove to outweigh the drawbacks, and will translate into much-needed economic activity in an impoverished area.

April 16, 2018 0 comments

Insurance Q&A Special Report

The art of insurance

by Thomas Schellen April 12, 2018

written by Thomas Schellen

Brokers play an important role in highly functional insurance markets, providing clients with advice on risk and policy choices. They often help clients obtain covers, assist them with claims, and act as intermediaries between clients and insurers. But Lebanon’s insurance brokers have faced several difficult years in a row. To gauge the views of licensed Lebanese brokers on the state of the industry, Executive sat down with Elie Hanna, president of the Lebanese Insurance Brokers’ Syndicate (LIBS).

E It appears that the past few years were not extremely profitable for insurance companies. How has development been for brokers and intermediaries?

The fact that many insurance companies have not been making a lot of profit, in my view, is due to the high competition among the many insurers that exist in Lebanon. This is their problem. The insurers have to study the risks and determine their rates in line with the market, whereas we, as brokers, advise our clients and provide consultancy. We sell the most competitive and most suitable policy to the client. As far as the development of our business, brokers have a good share of the market in Lebanon. Things could be better economically, but I am satisfied, except for our need to fight all kinds of illegal brokers and illegal channels for insurance distribution, such as bancassurance [insurance products sold through banks] and mutual insurance cooperatives that work through informal and illegal channels. From our communication with the Insurance Control Commission (ICC) [a regulatory body that operates under the Ministry of Economy and Trade] we know that in 2017 the ICC started banning all illegal brokers, meaning all who are not licensed but sell insurance. We should thank [them] for this and also for working toward a new law that improves the insurance industry in Lebanon.

E How many licensed brokers and LIBS members do we have in Lebanon right now?

There are brokers who are licensed with the ministry; I don’t have the exact number, but it is around 400 to 500 brokers, both individual and companies. Then, there are about 1,600 to 1,700 agents who represent insurance companies. At LIBS, our number is now about 170 members out of the 400 to 500 brokers. Under our bylaws, only individual brokers and brokerage companies can join. Agents [who represent a single insurer] are not eligible to join, but we are working on the bylaws and [will] hopefully amend them this year so that all brokers, agents, and other intermediaries can come under the umbrella of LIBS as the official representative body of brokers in Lebanon.

E What are the main targets that are currently being pursued by LIBS?

Our main target is to modernize and upgrade the law as far as insurance broking is concerned. If we can reach an agreement with ACAL [the Association of Insurance Companies in Lebanon] on this and have a joint position on the insurance law, it will be great, but we aim at least to see the law on brokers. The second objective is about digitization, which is very important. In this regard, we have a concern not to be late and out of the market. Another objective, which also would relate to the law, is how to ban or close down all illegal channels, illegal distributors, or brokers. In December 2017, Banque du Liban [BDL] reminded all banks that it is illegal to market, sell, or advertise insurance in banks.

E Did you see a change of bancassurance-related practices in response to the BDL memo?

It was not 100 percent implemented. We are working very closely with ACAL and the ICC in order to have this BDL instruction applied, especially since it is a reminder from Riad Salameh, the governor of BDL. We discussed this issue with the ICC and informed [them] that we will no longer [allow] the banks to [sell all types of insurances]. We have no problem if the situation is amended under a clear legal provision that defines what policies the banks can sell, such as unit-linked life insurance contracts or policies that are attached to other investment products. But banks must not be allowed to oblige their [loan] clients to buy insurance products through the bank or an insurance or brokerage owned by the bank. As per Article 152 in the law on banking and finance, banks are not allowed to sell any products except for financial products.

E Are any numbers available yet that would allow an assessment of the degree to which the BDL reminder was adhered to?

The reminder was issued in the last week of 2017, and the ICC issued a memo in 2018 about the issue. This memo did not address the issue to its full extent, and we, as LIBS, informed the ICC that we did not accept the roundabout way in which the memo was formulated. The ICC was perhaps trying to help the brokers, but the memo was not clear to us, and we saw it as unacceptable. We want everything to be very clear. We decided to give the ICC time to review our comments, but informed them in an official letter that LIBS will take the issue to court if the memo is not canceled. We are serious because this is our domain, and our future as brokers, our families, and employees.

E There is much talk related to oil and gas projects in Lebanon. Do you also expect this new business to help the brokers?

Of course it will help the brokers. We are working to assure that this sector is activated for the benefit of all Lebanese, not only for one group of people.

E One plan for oil and gas insurance in Lebanon involves a pool of insurance companies and managed by ACAL. What is your position on that idea?

We do not want any pool that will be a monopoly and positions us as brokers outside of the pool. We as brokers should be part of the pool or participate in oil and gas insurance in another way. We are ready to collaborate with the ICC and with ACAL, with the [Lebanese] Petroleum Administration, the Ministry of Energy and Water, everybody. We will fight [to take part in the arranging of oil and gas insurance deals] because this is our future livelihood.

E Oil and gas insurance is not only a matter of having capacity in underwriting, but it also requires a lot of specialized expertise. What about this aspect?

We brokers have more expertise on this than the insurance companies. Some Lebanese brokers have activities and branches in oil-producing countries like Saudi Arabia, neighboring Gulf countries, Egypt, or in Europe where they do oil and gas insurance. They have experience in handling oil and gas risks, which tend to be very large, and also challenging—more so than the Lebanese insurance companies.

E I want to ask you about the about the 250 infrastructure projects sought after in Lebanon’s recent Capital Investment Program. How are brokers prepared to deal with such projects, as far as the related insurance needs on the ground?

When any of these infrastructure projects are implemented, many investments will be made with money from abroad. International investors will require insurance against risks such as expropriation or nationalization. Secondly, as per Lebanese law, all insurance of assets on the ground in Lebanon should be issued through licensed Lebanese insurers. In any case, international investors and companies engaging in infrastructure projects should coordinate with somebody who is present in the market. It is better for international companies to deal with someone who knows everything about the market, and as Lebanese brokers, we have experience with arranging insurance of infrastructure projects. It is the law that policies should be issued with licensed Lebanese insurance companies, and international companies have to work with Lebanese insurers and brokers that are licensed in the market.

April 12, 2018 0 comments

Insurance Oil & gas Special Report

Taking risks

by Thomas Schellen April 12, 2018

written by Thomas Schellen

Adding to the misty picture of insurance industry prospects in Lebanon are uncertainties over the sector’s ability to exploit three major opportunities which are slowly taking shape inside and outside of Lebanon: energy, infrastructure, and reconstruction. The book of doubts on the purported three new miracles includes some question marks if the industry will be able to develop a profitable pool for energy insurance related to the new oil and gas contracts. However, much more precarious are the opportunity prospects themselves as far as cross-border reconstruction projects in Syria and beyond, oil and gas finds offshore on Lebanon, and, the newest, but existentially old, prospect of insuring infrastructure projects laid out in the recently announced Lebanese Capital Investment Plan (CIP).

Max Zaccar, the president of the Association des Compagnies d’Assurances au Liban (ACAL), current president of the General Arab Insurance Federation (GAIF), and chairman and general manager of Lebanon’s Commercial Insurance, is enthusiastic about all three development prospects. He tells Executive, “Regarding the infrastructure program, everything under the Capital Investment Plan will need insurance, and the CIP projects will bring additional work to the insurance companies. But this is just the tip of the iceberg, because we are all waiting for the reconstruction of Syria and Iraq. Africa is also full of insurance needs where Lebanese companies can play a role. We have to get ready for all this.”

However, his greatest enthusiasm is reserved for the project of constructing the ACAL energy pool for insuring the oil and gas industry locally, on the reasoning that the Lebanese insurance law mandates all assets are insured in Lebanon. “The contract for oil and gas exploration was signed between the government and the operators as of February 2018, which means operators will start drilling in 2019 and should prepare themselves by importing their equipment and materials in 2018.

“Under the law, all assets have to be insured in Lebanon, the insurance [for local oil and gas industry assets] has to be made in Lebanon, and we as insurance [providers] have to prepare ourselves to serve this new industry. ACAL wants all interested member companies to participate in this new insurance, and this is why we developed the idea of a pool. The pool should see many companies participate and be managed by ACAL. It will create new job opportunities and expertise for ACAL, and we will export our pool in the future to other Arab countries,” Zaccar says.

Pooling resources

In the overall move to fulfill the national resource dream, an important milestone for implementing the long-awaited exploration and eventual exploitation of Lebanese offshore gas has indeed been reached in the awarding and signing of contracts with the consortium that emerged last year as sole bidder for Block 4 and Block 9 (out of 10 maritime exploration blocks in Lebanon’s Exclusive Economic Zone). Even before these contracts were signed, however, ACAL had been working to ensure the rights of Lebanese insurance companies in the national energy industry.

For at least the past three years, the association centered its outbound lobbying efforts in a dual track emphasizing the law’s requirement for local insurance on the legal side, and the project of an energy insurance pool on the technical side. Additionally, the association made efforts to internally marshal local insurers toward readiness for participation in such a pool, with the rationale that the project would serve the primary purpose of expanding the skills of the local industry, which has never before been exposed to oil and gas risks. With these core messages, ACAL had been vocal through 2015–2017 by participating in or staging dedicated conferences on energy insurance, and by lobbying public officials and stakeholders with the message that Lebanese insurers are ready, willing, and able to take on the responsibility for oil and gas insurance contracts.

According to Zaccar, ACAL’s effort to rally skeptical member companies behind the idea of a pool has borne fruit as demonstrated by a survey earlier this year, in which a majority of the over 50 insurance companies in Lebanon stated their interest to join. “We did a survey with insurance companies about their interest in the pool two months ago and had the support of 31 insurance companies which expressed their interest in taking a $21 million retention,” he told Executive in an interview last month. Equally, while the external lobbying initially had met with lackluster responses from government officials, comments by officials in the Lebanese Petroleum Authority (LPA) since last year turned more favorable to the involvement of Lebanese insurers.

However, that does not mean that all concerns over the idea of an insurance pool as a risk sharing mechanism for Lebanon’s energy assets have vanished. Elie Hanna, the president of the Lebanese Insurance Brokers’ Syndicate (LIBS), tells Executive that some insurance brokers in Lebanon may even have expertise in coverage of oil and gas risks that is superior to that of local insurance companies, and that LIBS would be opposed to any pool that does not include a role for brokers.

More technically, a vehement questioning of an energy pool’s rationale comes from Lebanon’s prominent Chedid group of companies, which includes insurance and reinsurance broking services, and insurance consulting companies in the Middle East. Farid Chedid, the group’s chairman and general manager, details several concerns over the viability and wisdom of having a Lebanese energy insurance pool when taking into account the number of risks that can be insured, the potential for profit or loss from such a pool for insurers, and the circumstances of oil and gas exploration.

“Oil and gas insurance is a global business because you need a large number of homogeneous risks that are diversified globally. You need to spread your risks on a global basis, or you always lose money. I think there is a misunderstanding [in Lebanon] as to the benefit of the pool. You would organize a pool if you have a large number of homogeneous risks that cannot be insured by one or two companies,” he says and explains that the consortium, which won the bids for oil exploration in the two awarded Lebanese offshore Block 4 and Block 9, cannot be expected to deploy more than four or five drilling rigs at most. “This is not a large number, and for Lebanese insurance companies to come and say, ‘We want to insure three or four rigs and want to do a pool,’ I think is a very wrong decision,” he adds.

According to him, the resulting exposure for the Lebanese insurance industry would be huge in relation to the premium incomes that it could achieve. Moreover, the potential to make profits would, at best, be slim, while a loss would potentially be a financial catastrophe as claims incidents in the oil and gas sector can become huge.

“It is in the interest of the international [energy] companies to lure and attract the Lebanese companies [into having a pool]. But it is not in the interest of the Lebanese to be involved in this, because there is a certainty of a loss. Even if [things initially go without accident and claim for years], in case of a loss [event], you have risk for the Lebanese insurance industry to lose $20 million in one event, with zero possibility of payback,” Chedid explains. He reasons that this risk is juxtaposed with a potential to earn only some $200,000 in premiums income (collectively) over 10 loss-free years when prevailing rates in oil and gas insurance are taken into account.

Regarding the circumstances for operating oil projects offshore Lebanon, he points to the fact that the Arabian Gulf region has shallow waters, and an almost total absence of natural perils, whereas Lebanon has deep waters and has to take the possibility of natural perils, such as an earthquake and related floods, into account. In light of the low profit potential, high risks, and overall circumstances of having a Lebanese energy pool, Chedid is openly dismissive of the idea that Lebanese insurers would acquire greater knowledge about oil and gas insurance by operating a pool at a potential cost of millions. He suggests that a company with a small stake in the pool could earn no more in premiums than it would from insuring a single motor vehicle and calls the plan “an absolute waste of time.”

If and if

It cannot be ruled out at this point that the idea of a Lebanese oil and gas insurance bonanza could, despite all such technical considerations, hold some appeal to local companies in the case that the current scenario of drilling in two blocks by one consortium would result in rich finds, and that subsequent bidding rounds would generate a far-flung industry with a multitude of operators digging and drilling in Lebanese waters. However, this possibility is not one that anyone should be holding their breath for, given that the national reserves are still unclear, and that a large oil industry in Lebanon is, at best, many years away.

Similar to the risk for evanescence of Lebanese energy prospects, recent history can nurture only the most fugacious of hopes for Syria and Iraq to be reconstructed without any delay or backsliding into conflict and violence. As ACAL board member Karim Nasrallah, chairman and general manager of the Lebanese Credit Insurer (LIC), says, “We don’t know when the war next door will end. You don’t want to build your future on the back of the rebuilding of the infrastructure of Syria.”

So what about insuring the CIP and its legion of hot infrastructure projects? Nasrallah and Chedid are both insurance professionals with direct expertise in the issues that relate to coverage of cross-border investments and loans, which is certain to be one of the first issues of concern for international investors who are looking through the proposed Lebanese infrastructure investments. As a matter of fact, insurance needs for CIP projects will entail two dimensions. Chedid confirms that the first dimension is insurance of assets in Lebanon, with coverage needs stretching from construction related policies, such as Contractors’ All Risk (CAR), to covers protecting equipment and materials during transport, etc. Lebanese insurers are well versed in the issuance of the related policies and highly qualified to insure all first-party assets in Lebanon, which moreover is their prerogative under the Lebanese law.

Contrary to this need for local insurance is the scenario when it comes to safeguarding financial commitments that are dedicated by a foreign investor. The topic then, Chedid says, “is a foreign investment in Lebanon, whether through a loan or through equity. As this is foreign money coming into the country, you can insure it against political risk, such as confiscation, expropriation, and nationalization; you can insure it for inconvertibility of currency, [and] for frustration of contract (breach of contract) that is due to political reasons, [meaning] a political decision in the country to stop the contract. From that perspective, foreign lenders or investors expect their insurance [against political risk] to be done from outside [of Lebanon].”

Beware black swans

Nasrallah, whose company LCI operates as a private sector player in the space of insuring trade and investments, confirms that he has seen “definite appetite for Lebanon” coming from actors in the international cross-border insurance of investment risks, and also says that there is some room for insuring projects of the type listed in the Lebanese Capital Investment Plan (which he had not seen, and which seemed to not have been provided to the relevant local insurance stakeholders by the government’s team). However, according to him, capacity for insuring large infrastructure projects is internationally limited. “The capacity from the private market [for insuring such investments] is small, and the tenor of insurance will be very short. [Such] risks are mainly covered by governmental export credit agencies, or ECAs. ECAs can cover long-term projects that have grace periods built into their repayment plans, and they can cover all these ambitious projects,” Nasrallah tells Executive.

As he explains, international rules for export trade credit are defined according to categories set by the Organization for Economic Cooperation and Development (OECD). One has to differentiate between marketable risks (that can be covered essentially by a provider in the private sector) and non-marketable risks that only are assumed by the insurance units of multilateral agencies, such as the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA), and governmental or quasi-governmental ECAs that have governmental mandates to support exports or foreign direct investments.

According to Nasrallah, some small short-term Lebanese projects in infrastructure could be syndicated in the private market for political risk insurance, but, by and large, all political risk insurance for projects related to Lebanon is going to be ECA business as long as a cross-border component is involved. “Anything related to infrastructure, anything that goes over seven to 10 years, which will be the case, will be purely for multilaterals and ECAs to cover. This is not something that any insurer in the local market will be involved in. The local market will not benefit from any of this,” he says.

The prospects of insuring the projects related to CIP and the final implementation of infrastructures in Lebanon thus, while this implementation seems not quite to be just around the corner, look to be the bets that the Lebanese insurance sector cannot afford to miss, even as the political risk side of the coverage looks to bypass many local players. As far as the categories of political risk, Nasrallah says that the main coverage category from a claims point of view for Lebanon would be war and civil unrest, since the track record of Lebanon has been very good in recent years as far as expropriation and breach of contract risks.

Both Chedid and Nasrallah confirm that coverage of political risk in the context of the CIP will be available, and that international trade credit agencies perceive Lebanon as a very insurable market. Chedid additionally emphasizes that, on one hand, investors in Lebanon will expect to be covered against political risk and loss of profits, and that, on the other hand, Lebanon cannot afford going into projects uninsured as they typically represent the risk combination of very low probability coupled with very high severity in case of an event that would qualify as a Black Swan. “On your probability distribution, the Black Swan is the fat tail, something that has a very remote probability of failure, but if you have failure, the consequences are horrendous and catastrophic. For a country like Lebanon, we cannot afford to not insure against fat tails,” he says. Nasrallah, on his part, ends by voicing concerns that more investment and their insurance is needed for the government’s plans to work. “All the CIP projects will be great, but I do not perceive any lender as being comfortable to lend if there are not basic reforms that are done. You cannot pour money into the country as it is today. It needs restructuring.”

April 12, 2018 0 comments

Insurance Overview Special Report

In the fog

by Thomas Schellen April 11, 2018

written by Thomas Schellen

Assessing the insurance industry of Lebanon at the current junction of global insurance challenges, regional vagaries, domestic economic hurdles, and the country’s ongoing political issues is not without difficulty. Just as with the national economy, there are hopes and interesting prospects, but they are mainly just over the horizon—whether in the reconstruction of war-torn Syria and Iraq, in the development of an oil industry, or in the infrastructure and investment programs that are being ambitiously pursued by the Lebanese state.

In the best of all possible worlds, where “tout est pour le mieux,” as Voltaire’s Pangloss never tires of assuring us, Lebanese insurance would of course be developing relentlessly, and managers would not ask for their companies to be mentioned editorially in magazines they advertise in. Alas, the world being as it is, and the Lebanese insurance sector not having released new performance numbers for about six months, it is difficult to perceive insurance as a growth industry in Lebanon for the current period.

Much of the fog that obscures the insurance industry’s state and future prospects is not generated locally. Challenges from abroad are enough to send the whole industry, including its biggest multinationals, into deep soul-searching. “Insurance company leaders have a lot on their plates,” the accounting firm Deloitte mused at the end of last year in its outlook for the global insurance industry in 2018, pointing to intense insurance technology development, political and regulatory upheavals around the world, an “accelerating evolution” driven by innovation and higher customer expectations, and “disruptive newcomers” who are looking to take market share from incumbent insurers.

Changing attitudes

Existential challenges for the global industry are not rooted in the usual vagaries of managing the impacts of natural or man-made catastrophes. According to research estimates by Swiss Re Sigma, 2017 moved, in a 10-year comparison, from having below-average insured losses in the first six months to above-average losses of $136 billion for the whole year (out of $306 billion total financial cost caused by natural catastrophes). Besides being a testimony to the constant basic reality that the world has its annual share of natural perils, with economic costs that are largely unmitigated by insurance, the catastrophe count of 2017 only reinforces the understanding that the global insurance industry is well-prepared and fully capable of managing its insured risks.

Instead, what has the potential to rock the international insurance industry in its boots during the coming decade are not natural catastrophes, but human behaviors and fundamental changes in attitudes and habits when it comes to everyday activities, such as driving to work. Projections from industry giants such as Allianz Group anticipate that the 20th century norm of people owning cars and buying motor insurance will be replaced by models of non-ownership of cars and abstinence from conventional motor insurance coverage, where digital natives increasingly come to constitute the main economically active strata in the United States and elsewhere, from some point in the next decade onward. Thought leaders in the insurance field often discuss how digitization, cyber risk, and all the unknowns of digital capitalism are approaching their industry with the speed and mass of a bullet train.

The local insurance industry has for the past few years been listening to the messages and predictions related to digitization and cyber risks and is aware of the changes that will be imposed on their businesses. As Lucien Letayf Jr., general manager of Lebanon-based independent regional insurer Libano-Suisse notes to Executive, the spread of digitization and new insurance business models are among the main challenges for his company in Lebanon and regionally. That’s in addition to local challenges like the absence of an advanced insurance law in Lebanon, the weak growth of insurance in the county under the prevailing economic conditions, and a lack of social awareness on the importance and value of insurance.

On top of these impending changes under the digital reincarnation of capitalism, international moods in the financial industry—and one must not forget that insurers are essential cogs in the machine of global financial markets—are this year beset by political concerns over trade wars and overdrawn self-interests by important players on nation-state levels. Global trade wars are not here yet, and it is difficult to predict, as with all human follies, what courses they might run. But regionally active insurers have already been impacted by localized disturbances and trade conflicts such as the altercation between Qatar and its Gulf neighbors. One does not need to highlight that economies, and with them insurance markets, in the Mashriq region have been impacted very significantly by the various conflicts that have shaken the region since 2011. If all that were not enough, markets are showing increasing impacts this year from the slowdown in economic growth in the Gulf region that has been caused by weakening global oil prices.

As a new market report on money and banking in the United Arab Emirates by the National Bank of Kuwait notes, the effects of the 2014 plunge in oil prices and the resultant slowing of growth in key sectors to the beginning of 2018 has translated into factors such as “disappointingly weak” credit conditions. “Since peaking at 11 percent year-on-year in mid-2015, credit growth has been in more or less consistent decline, standing close to multi-year lows at just 0.5 percent [year-on-year] in January 2018,” the report reads, illustrating some of the reasons why the Beirut-based regional specialized insurance company the Lebanese Credit Insurer (LCI) says it was compelled to shift focus away from some Gulf markets. “We have scaled down our activities in the Gulf region a bit, mainly in Saudi [Arabia] and UAE, because of the problems related to dropping oil prices that led to the stop of infrastructure projects and to crises of finance and banking in Dubai,” Karim Nasrallah, chairman and general manager of LCI, tells Executive.

Several reputed Lebanese insurance-sector companies with regional business in insurance and brokerage, like LCI, tell Executive that 2017 was a difficult year for them. Lebanese insurance companies often do not report on their performance abroad, however, regional markets are very important for many Lebanon-based insurers. As Libano-Suisse’s Letayf points out, the small, crowded national insurance market in Lebanon confronts providers with high costs and low prices, plus Lebanese insurers have long-standing skills which give them an advantage in regional markets.

When taking the regional and international challenges of insurers into account, the domestic market challenges in Lebanon—which are undeniable—appear very manageable and minor, albeit with one main negative characteristic: They are thoroughly entrenched. One might compare the problems of Lebanon’s insurance industry to an annoying allergy against pollen that resurfaces every spring with violent sneezes, or to some fungus that itches under the soles of your feet and reappears year after year. Worst all, the ailments of the Lebanese insurance industry appear perfectly curable, but nonetheless do not receive proper treatment.

One example is motor compulsory insurance, which has yet to be sorted out fully, even though it was mandated four years ago by the then-new Lebanese traffic law. Specifically, third-party liability (TPL) insurance against material damages was made mandatory for all motorists in this law, which was adopted in the summer of 2014 and purportedly started to see widespread enforcement by traffic authorities three years ago this month, in April 2015.

It was clear to key stakeholders in the Ministry of Economy and Trade, in its affiliated Insurance Control Commission (ICC), and in the insurance industry why the sector was not ready to deliver the full compulsory cover in 2015: Experiences with the compulsory TPL against bodily injury, which had been implemented a decade earlier, showed that it would be necessary to modernize motor insurance processes and improve methodologies to combat insurance fraud before the industry could ramp up to the legal mandate of providing traffic participants with better insurance safety. Implementation of this compulsory TPL against material damages was pushed into the future at the time—justifiably so in the eyes of many observers.

Nadine Habbal, the acting head of Lebanon’s ICC, writes in the recently published 2016 Insurance Sector Annual Report that “work on the motor third-party liability (MTPL) track is nearly accomplished” toward aligning the MTPL with international standards. “The key drivers in this context are the adequacy of the benefits paid to the victims of road accidents, the implementation of a centralized risk database, and a sound governance for the stipulations on minimum tariffs,” she writes, affirming the ICC’s determination to combat practices by some insurance industry players that in the past undermined full implementation of MTPL.

Stalled progress

The impression these comments give is nonetheless that almost four years after the adoption of Lebanon’s traffic law, full implementation of TPL against material damages is still not achieved. This impression is strengthened by comments from Fateh Bekdache, head of the National Bureau of Compulsory Insurance and general manager of Arope, a large motor insurer in Lebanon, who explains to Executive that this document did not obtain all the required signatures from the full Council of Ministers, so the terms and conditions imposed on citizens were voided by the Constitutional Court.

According to Bekdache, there are some positive developments in new initiatives to make sure motor vehicles in Lebanon have verifiable road identities. New license plates with tamper-resistant features were introduced just before the beginning of 2018, and these plates are bound to significantly cut down on illicit practices such as swapping plates from vehicles that are presented to motor insurers to vehicles that have been in a collision in order to commit insurance fraud. “It is definitely a plus. We have been suffering for a long time from having the same plates on two or three cars, as there were cars with fake license plates in circulation. It is a very important move to now have measures to make license plates more secure. New regulations are always helpful, but the more important thing is the implementation of such measures by the security forces,” he tells Executive.

However, Bekdache says, a combined policy for the two branches of compulsory motor TPL, sought by motor insurers, has yet to come into existence and is “in the pipeline” under a project to develop the country’s compulsory motor TPL schemes in collaboration with the World Bank. “Until now, there is nothing that can be called compulsory insurance for material damages,” says Bekdache, adding, “We have been promised that we will very soon have the report from the World Bank in order to implement [compulsory motor TPL against material damages].”

Just as the traffic law and its associated compulsory motor insurance coverage appears to not be fully implemented yet, there are other areas where old grievances seem to linger, and sound insurance development objectives have yet to be implemented. For one, bancassurance—the practice of banks selling insurance—is in need of regulation. A reminder from Banque du Liban to commercial banks at the end of 2017 that bancassurance is not currently legal triggered a curious press release by the ICC highlighting the (uncontested) fact that “insurance companies owned fully or partially by banks form a fundamental pillar of the insurance sector.”

lacking support

Similarly, problems pertaining to insurance sales by mutual insurance societies that operate outside of the overall regulatory framework do not appear to have been resolved, despite many years of efforts from the Association of Insurance Companies in Lebanon, or ACAL. There are numerous further problems about Lebanese insurance practices, the most crucial of which are the failure to adopt a modern and adequate insurance law (a draft law has been in the pipeline of endless delays for almost 15 years), and the need to foster consolidation in the sector through mergers and acquisitions. Wishes voiced by insurance leaders to see the latter, overdue process accelerated with the help of soft loans and incentives from the Lebanese central bank may have been delivered by mistake to the Easter Bunny instead of Santa Claus.

With all that is not advancing, one cannot but note that there is a certain degree of exasperation in circles of insurance advocates who are desperate to see the insurance industry live up to its potential in Lebanon. However, this is not to imply that the insurance industry in this country is in a bad state when compared with the economy, a fact that has been stressed by local and foreign analysts in several reports over the recent past. BLOM Bank titled a brief on the industry last year “Robust Lebanese Insurance Sector Despite Economic and Political Challenges,” and specialized international insurance ratings agency A.M. Best last month tooted the same horn by titling a research note “Lebanese Insurers Continue To Demonstrate Resilience, Despite Challenging Operating Environment.”

The same is true for some (but in all likelihood not all) insurance companies in Lebanon. Outliers among the more than 50 sector companies innovate, perform, and deliver impressive performances, if one makes allowances for the small size of many of these companies. For example, a vocal company in the domestic market is Securité Assurance, which boasted in a recent self-description of its business of its exceptional growth. “During the first quarter of 2017, the company achieved more growth than in all of 2016,” it claimed in a profile document sent to Executive, adding that its growth in 2016 was more than 10 times industry average, at 30 percent. Securité attributed its ascent to the position of fastest growing insurance company in Lebanon to having incentivized and educated its staff, deployed new apps, stepped up its branding and, as assistant general manager Anthony Khawam tells Executive by phone, to “serving our clients in superior ways.”

Farid Chedid, chairman and general manager of the Chedid insurance group, tells Executive that a potent local insurance industry would have been a fantastic partner to the country’s current infrastructure development efforts. “The insurance industry in Lebanon is very resilient, and the problems that exist in sectors like motor and health are manageable problems. It is a very good industry,” he affirms, but then cautions that this industry is in need of “help, assistance, and support from the government.”

He explains that an insurance sector, with its need for assets with long-term duration, makes the perfect investor in infrastructure projects, and that infrastructure projects, in turn, are ideal for insurers to invest in (for more on insurance in relation to the Capital Investment Plan of Lebanon, see page 36). The problem, in his view, is that the development of insurance in Lebanon until now was subject to total neglect from the state. “If the [Lebanese government] assists the insurance companies in growing, the insurance companies will be able to invest long-term and will be able to be a major player in the economy of the country. But they are totally neglected, which is a pity,” he says.

As the Lebanese Minister of Economy and Trade, Raed Khoury, concluded in his introduction to the ICC Annual Insurance Sector report for 2016, “Profitable sustained growth in the insurance sector needs to be achieved with an objective to narrow the gap [with the banking industry] and establish a more balanced structure in the financial services sector.” Given the lack of political support and subdued growth record of the insurance industry, which would need to take 10 steps of growth for every single step of advancement by the banking industry, what remains to be added is only one question: How?

April 11, 2018 0 comments