CEDRELeadersOpinion

This won’t be easy

by Executive Editors
written by Executive Editors

This month, Lebanon will send a delegation of state officials to Paris to pitch an infrastructure development program dubbed the Capital Investment Plan (CIP) to the international community and private investors. Alongside the CIP officials will also unveil an economic vision, fiscal discipline measures, and structural and sectoral reforms.

Of the four, Executive has only seen the CIP, which it obtained through an informal channel despite the plan’s endorsement by cabinet on March 21. The others are not accessible. On paper, the CIP calls for some $20 billion in funding for 250 projects scheduled over the next decade, until 2030, though at this stage the plan is not set in stone.

What effect the CIP will have on the economy is unknown, and we do not know when further information will be unveiled, but the picture will be clearer after Paris. For now, we know that the development plan calls for raising debt to pay for the projects. Obviously, this will increase Lebanon’s public debt, but we do not know by how much because at this stage it does not appear to have been modeled.

One component of the plan that would have a large impact to the economy, but remains ambiguous, is expropriation. The expropriation program, some $2.6 billion as written in the CIP, will basically transfer funds from the public sector to a specific group of landowners. The state will borrow the money it needs to compensate the owners for their land. This implies a subsidy to consumption, but the owners are undisclosed. Therefore, it is impossible to gauge whether the transfer of wealth will be socially just, and we do not know how these people will spend the money they receive for land. The  plan’s infrastructure projects, which are required to support the economy, will have to be built somewhere, so expropriation spending will be necessary.  Whether the projects or the subsidy to consumption process will bear the fruits of enhanced economic productivity and competitiveness over the long term is unforeseeable.

The needs of communities and stakeholder groups will have to be balanced, and Lebanon’s high level of communal fragmentation will be  an especially challenging obstacle. Our leaders must find a way to create a compromise culture that finds a mutually beneficial approach, but our past experience with this is not so encouraging.

Lebanon saw volatile periods first during the years of the late Rafic Hariri, where compromises were insincere, and people vied to get the biggest slice of pie for their own interest. In the post-Rafic Hariri years, after 2006, the compromises were reached on a horizontal level but at the expense of greater disruption at the vertical level: elites were happy, but the people neglected.

The challenge from that perspective is to reach a compromise that is better for the country. All the projects in the CIP are geared toward boosting employment for refugees as part of a formula that rests on international support—which Lebanon deserves. Our country made efforts to take care of refugees when no one else would. But is this support for refugees genuine or is it of a political nature? Political statements and market observations provide no indication that this support is yet coherent, internalized, or even forward-thinking, and the support might come from all stakeholders, but they need to make much more effort to think of the needs of people. Promises are abundant but whether they are empty remains to be seen.

Payback

If the CIP, in its current incarnation, tells us one thing, it is that we are not banking on the future—we are banking on hope. Lebanon is attempting to raise some $20 billion in new money, whether in the form of public-private partnerships (PPP), grants, or concessional lending, all of which will have to be reimbursed in one way or another; no one invests without the expectation of returns.

Repayment arrangements will likely vary by stakeholder. The World Bank, for example, would want to be reimbursed in monetary returns and is interested in avoiding the headache of Lebanese instability. The hope of institutions like the European Bank for Reconstruction and Development (EBRD) and others is to maintain stability and keep Syrian refugees from leaving Lebanon and flooding into the EU. For this, they are ready to provide concessional loans, essentially at subsidized rates of interest. But loans remain loans and, of course, EBRD would like to get their money back, with a little bit of compensation for their time and effort. PPP partners will hold similar expectations in the sense that they may want to help Lebanon, but with clear expectation of investment security and profits. Some Lebanese, be they locals or diaspora, may be interested in doing something for their country, but even they will expect to see real returns on their investments. Taking on $20 billion in debt to pay for these projects means Lebanon would have an obligation of $20 billion, meaning each and every Lebanese national acquires a future obligation, piling on burden to our collective responsibility. So we as a society have to be aware of that.

Painful reforms

Lawmakers are considering a 5 or 6 percent budget position cut to state spending that the cabinet endorsed in mid-March. What we spent in 2017, almost $16 billion, is lower than the new obligations that the CIP could represent, $20 billion. If we borrow this money, it is just reshaping and increasing our obligation. Our public debt is now over $80 billion, and new debt from implementing the CIP means we are burdening new generations long into the future. These obligations will only be met if there is an increase in economic productivity, and economists Executive spoke with predict that Lebanon needs to achieve, over many years, at least an 8 percent annual growth rate to claw its way out from under the public debt.

With Lebanon’s current demographics, conventional wisdom might suggest this to be almost impossible to achieve. Reforms are necessary, and we have been saying this for a very long time. But let us not forget the alternatives. We can decide to effectively bankrupt the state, go into default and ask for the world community to bail us out with an externally imposed rescue plan managed by the World Bank Group and International Monetary Fund. But ask around in countries that went through such processes. It is a recipe for uncertainty and great suffering. Also, Lebanon just does not have it in itself to break down in state default. So we have to succeed to win investors, mobilize our many real friends, and show that we can do as we promise: that we can reform. Reforms are never without pain and people do not like pain. Lebanon will need to embrace this pain if we want capital investment with a lot of external help. To make it work this time it must come with the understanding that it will be painful. All of Lebanon must accept that.

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EditorialOpinion

L’espoir fait vivre

by Yasser Akkaoui
written by Yasser Akkaoui

On March 27, before addressing an auditorium filled with our best scholars, academics, researchers, journalists, intellectuals, and experts who have dedicated their lives for this nation, I asked if any of them was granted access to or had seen or even touched one page of the Capital Investment Plan (CIP) CEDRE project—the answer was a unanimous “NO.” The rest of the conference, which was titled “Enhancing Domestic Accountability in Lebanon in Light of CEDRE Conference,” organized by Issam Fares Institute and the Lebanese Center for Policy Studies, was a succession of inspirational but frustrated presentations on what should be done to save Lebanon.

The CIP was eight months in the making and was endorsed by the cabinet on March 21. The CIP and a vision document for stabilization, growth, and employment that included ideas for reform were posted online seven days before CEDRE as Executive went to print, which did not allow time for a full evaluation. The McKinsey report on Lebanon’s productive sectors did not make it online. The rushed and opaque manner in which these pillars have been prepared is alarming.

We live for the day when the role of civil society organizations is reinforced and their rights respected. We have a seat at the table because we, the citizens—the owners—need to monitor the practices of our self-entitled politicians who have manipulated our trust and mismanaged our resources for decades. It is not a privilege to have that seat; it is a right. When it is treated as a privilege, and accepted as such, we shall be as corrupt as the establishment itself.

For 20 years, no one has called for the realization of each one of the projects that are now included in the CIP as much as this magazine. No one called for the adoption and implementation of reforms as much as we did, and no one has been a witness of our government’s disregard to these appeals as much as we have. So forgive us for our frustration, but we are not seeing, or getting assurances, that this call for reforms is authentic. And as long as it does not fall within the framework of inclusiveness and participation, citizens will find it difficult to swallow the legitimacy of our government.

It’s unfortunate, but we are only left with the hope that the World Bank, the IMF, the UN and its agencies, will help donor countries learn from the past and go beyond their political motivations to help institutionalize our government’s commitment to best practices.

We remain ambitious, positive, and naive. Let’s hope for the best.

Inshallah.

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CommentEconomics & Policy

VAT rises from 10 to 11 percent

by Manal Abdel Samad Najd
written by Manal Abdel Samad Najd

Since at least 2011, the IMF has urged the Lebanese government to increase its VAT rate and to broaden the tax’s base by lowering exemptions. After this year’s increase of the VAT standard rate by 1 percent, from 10 to 11 percent, Lebanon’s VAT rate is still the second-lowest in the region after Djibouti, and there remains room for increasing it without hindering its efficiency, according to the IMF’s 2017 report on Lebanon. Lebanon’s VAT standard rate is even less than the average rate of 15.7 percent for its peers in upper-middle income developing countries, according to a 2011 IMF report.

Lebanon’s VAT increased by 1 percent on January 1; however, it is expected to contribute no more than an additional 0.7 percent to tax revenues (assuming all other factors remain constant). The impact of this raise is alleviated by the wide range of exempt goods and services, such as basic needs (meat, dairy products, medicines) and the supply of some activities of public interest (medical services and education). It is also possible to deduct the tax paid on purchases (input VAT) from that collected from customers (output VAT) on taxable activity; only the net balance is filed and paid to the treasury, which eliminates what is known as the cascading effect of the tax. In addition to preserving these exemptions, the 2017 law taxed no new items, goods, or services.

It is well known that taxes, while not popular, are needed. The introduction of VAT in 2002, the tax on bank interest in 2003, and then increasing  both in 2017, were not undertaken by choice, but were instead a bitter treatment for the increasing public debt and its service. A flashback in fiscal history shows that Lebanon’s economic situation has deteriorated since 2010, placing public finance in a worrying situation and requiring the government to optimize its tax revenues. This critical public finance situation now requires the Lebanese state to significantly increase tax revenues. Therefore, the government has not only focused on raising taxes, but also implemented comprehensive reforms of the tax administration. Focusing mainly on the modernization of the latter, these developments aim at keeping pace with global changes, such as setting up an organizational structure based on the function type (e.g. audit, data processing, taxpayers’ services, objection, and appeal) instead of the tax type income tax, inheritance tax, VAT, etc. This will result in strengthening the transparency and accountability of agents, as well as improving the relationship between the tax authority and taxpayers.

Raising taxes does not only aim at generating revenues; it also has a significant role in ensuring social justice. Lebanese taxation is based on the coexistence of two regimes—proportional and progressive—allowing both the tax administration and the taxpayer to cumulate their advantages. Since a VAT was first introduced in February 2002, this tax has become the most important source of tax revenue for the treasury due to its sheer tax base (see chart). With a single standard rate, VAT contributes some LL3 trillion (or $2 billion) per year, more than one-third of Lebanon’s annual tax revenues, or about 0.52 percent of GDP per one percent of VAT, according to the IMF. It is an indirect tax collected on behalf of the treasury by registered companies. This destination-based tax does not differentiate between imported and locally produced goods; it is levied on all taxable products and services delivered on Lebanese territory.

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After more than a decade of VAT in Lebanon, indicators show that it is an effective form of taxation. The question remains: To what extent does this tax help mobilize the revenues of the state and rebuild the tax system? It would be desirable to have a tax that is evolving, profitable, difficult to defraud, and well recovered, with low exemptions and derogations. The increasing implementation of VAT in the world—more than 160 countries out of 190 have some form of VAT—indicates that this tax has proved to be a robust source of revenue, representing more than one-third of state tax revenues. Due to its sheer base, VAT is responsible for collecting a significant amount of tax revenues that ensure the sustainability of public finance.

In addition, the implementation of a single VAT rate, with a system of reverse charge of the tax by companies and a declarative system that relies increasingly on e-filing and e-payment, helps limit the cost of administering this tax and cuts the tax compliance cost. A multitude of tax rates makes the management and control of VAT more complex, which encourages tax evasion and fuels litigation. A single rate ensures the simplicity of the system, with less limitation to meet tax obligations.

Citizens notice any increase in tax rates, but overlook tax exemptions. Substantial VAT exemptions have been established in the Lebanese tax law since March 2012, such as the exemption applied to red and green diesel.

If we want a civilized society, we should start by ensuring a modern tax system based on effective and efficient taxes. We citizens are all responsible for paying our taxes. This is a cornerstone for a better quality of life and a prosperous Lebanon. Meeting spending needs and the sustainability of the public finance cannot be ensured by continuous government borrowing, but by mobilizing tax revenues based on a fair and modern tax system. The misery of every society is when the government stops adjusting its regulations and taxation system and refrains from raising taxes, the main source of the country’s revenues. This, however,  will not be the case in Lebanon.

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Lifestyle

Taking the plunge

by Lamia Charlebois
written by Lamia Charlebois

Fourteen years ago, a well-intentioned financial advisor asked me if I liked to take risks. I put on a wicked smile and replied, “My slippers have non-skid soles.” Before I was an entrepreneur, I led a safe corporate life as an employee. I enjoyed a regular paycheck and benefits, went to the same office every day, and worked with a team of professionals who were always on hand to help resolve different issues—or, sadly, to stab each other in the back.

I could have never imagined becoming an entrepreneur, let alone a solo business owner. I never saw myself as a risk-taker. Even though I had left Lebanon when very few young women were leaving without their parents, pursued university degrees and jobs in Canada without any real guidance, moved from city to city, changed lives many times over, married, divorced, and raised a child by myself, it wasn’t until the day I decided to launch my business that fear nearly paralyzed me. Maybe my youth under the bombs of Lebanon’s civil war had used up my courage. Is there a bravery quota?

And then one day, I jumped! You might remember the icy cold swimming pool at Coral Beach. Many swimmers tried the gradual-entry strategy, but the most successful were those who dove straight in. So what does it take to dive into your own business? What kinds of qualities—or chromosomes—does one need to take that plunge? It really depends. For some, it’s instinct, flair, a great idea, or an opportunity. For others, it’s a crisis. The latter was the case for me. In the midst of my marital Titanic, I realized I was going to become a single mom overnight. Knowing full well that an upper-management position would mean never leaving the office before 8 p.m., and with no one to pick up my four-year-old from school, I had to find a solution.

I had worked in communications, public relations, and journalism for years, so offering those services would be easy. But how was I to start? Write a business plan? Consult a professional? Where was I supposed to invest first, and how was I to spend wisely in order to make money? Rent an office? Design a logo? I built a name for myself in four cities in Canada with the hard work and perseverance that immigrants deploy in their adoptive land, so I decided to stay away from a company name and logo, and rely solely on my name. As a PR consultant I’d offer services and counsel. I started by designing and printing my first business cards myself. The design wasn’t the prettiest, but it became my weapon everywhere I went. Just like prehistoric man, I went out hunting with it, killing prey to feed my business and my kid.

Motherhood and entrepreneurship feel like a circus performance where acrobats keep adding difficulties, dangers, and risks in a horrendous crescendo of suspense. I found myself combining four separate departments—service, marketing, operations and accounting, and human resources—into one person. As a solo parent, I had to put on a juggling act every day to handle my business and family life. But unlike a circus, where the crowd cheers on, this was a solitary fight on a tough battlefield with very little help or encouragement. My tools are mental determination, psychological strength, tricks, hacks, shortcuts, a fine sense of humour, and loving friends and family to motivate me even when I was an ocean apart.

Today, 14 years later, I can look back and say: What a ride! Clients come to me and stay with me, interesting assignments land on my desk, I go from crisis management to strategic counseling to public speaking coaching to media relations to social media advice to content writing­—all in one day. I juggle with different clients: pharmaceutical companies, a preschool, a candy maker, a meat wholesaler, and an apparel company. The pace is crazy, but it goes well with my temperament.

Success is not born out of luck. I believe in hard work, combined with creativity, flexibility, stamina, passion, positivity, integrity, humility, and even fear. Why would you jump in the first place if it wasn’t to conquer your fear? Conquering the rest is a breeze.

Lamia Charlebois is a public relations consultant, speaker, author, and reporter based in Montréal. She works with clients in Canada, the USA, Europe, and the Middle East.

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EntrepreneurshipQ&A

Creating synergies

by Thomas Schellen
written by Thomas Schellen

MIC Ventures is a new fund in the Lebanese entrepreneurship ecosystem. Seeking to boost the value of startups and young companies that specialize in areas of interest from a mobile telecommunications perspective as well as establishing partnerships between sector companies and the two Lebanese mobile networks, MIC Ventures is itself a startup backed by governmental vision. Executive set down with the fund’s manager, Khaled Zeidan.

E   When did MIC Ventures start to operate?

We had an introductory investment committee about two weeks ago [in the first half of February] and we expect to have a second one at the end of March [or] beginning of April. For investment opportunities, we are looking at four verticals and we also want to say that we are activists, we are not passive investors.

E   So you are looking to create synergies and coherent portfolios of invested companies in each vertical rather than betting on the search for singular “unicorns” and super performers?

Yes. One and one in our thinking does not need to add to two but can be made into three or more, meaning synergies can be combined into tremendous value, but we need to put some acumen and effort into it to align interests and objectives. This is exactly what we are trying to achieve with this fund, by introducing young entrepreneurs to the two large Telecom operators in Lebanon as partners. We are seeking to identify opportunities and build a storyline that makes sense to the owners of the fund—which are MIC 1 and MIC 2 and ultimately the MOT [Ministry of Telecommunications]—and the entrepreneurs, while creating skilled job opportunities which is in line with the MOT, the PM, and the government’s vision.

E   What do you want to achieve with regard to relations with local and foreign corporations, ICT companies that you want to invest in, and with other innovative companies?

We want to build partnerships with as many players as possible, and we want to be as agile and proactive as possible in creating opportunities. We are looking to invest in companies that are able to become cash flow positive with our help and the support of our sponsors.

E   What is the size of your team?

For the moment we are a team of four. In the end, we aim to be a team of six.

E   Can something be done on the level of MICV to assure that the consumers get the best deals from the companies in which the fund has invested?

The consumers will get new products and services. These new products and services are for the general public. In some instances, they would be free products and services paid for by the operators. In other instances, the products and services will be paid for by the consumers. The companies [that MICV will invest in] already exist and have proof of concept or are operating as businesses with revenues. All that we are doing is creating a partnership between the portfolio companies and the two operators.

E   Will MICV have a policy of taking an equity stake in every portfolio company and a seat on the company’s board?

Absolutely. MIC Ventures will aim to take equity or quasi equity stakes, depending on the structure of the transaction. We will in many ways have approaches in terms of investment criteria and investment policies that meet basic global standards and are similar to the criteria used by funds established under BDL Circular 331. The only thing that will differ is that our target market will be slightly different from others. Having said that, we see MIC Ventures as being complementary to Circular 331 funds, not as a competitor.

E   Will it be a strategy or policy of MIC Ventures to be a majority shareholder when investing in a company?

Our standard policy is not to have majority but to have reserved matters that protect MIC Ventures.

E   Will you seek international VCs to co-invest with you in Lebanon?

Yes, we will.

E   You also mentioned financial institutions. Do you see banks as your potential co-investors?

We see banks as potential co-investors on investments that are relevant to their businesses. For instance, if we have a specific investment in the Fintech space, it might be interesting for banks to come in as co-investors when MIC Ventures have a certain capacity and where they can fill the rest [of the investment need].

E   As for the size of investments that you are interested in doing, what are the parameters? Would you go as small as investing in a fresh startup or look at entrepreneurs that have just completed an acceleration round?

We are willing to go as low as $100,000 and we have a cap of $2 million unless the board decides otherwise.

E   But might there be limits from the perspective of the amount of work that is required for assessing a small opportunity, the due diligence and all?

We do not want to discard smaller investments if we see merit in them.

E   Can you elaborate more on the structure of the board and the venture and process under which MIC Ventures will proceed?

First, there is the management team which will source opportunities [and] present them to the investment committee—which we expect will convene every two to three months—and the final approval will be done by the board.

E   What is the structure of the board and investment committee?

With regards to the board, there is one independent member and the other members are equally split between the MICs. As for the investment committee, they are individuals who have a deep understanding in the ecosystem.

E   Is there already a strategy for exits from portfolio companies?         

The current ecosystem is not conducive to exits through public offering. We think that a trade sale or even an acquisition by MIC 1 or MIC 2 are more realistic exit strategies. We are realistic and that is why we are looking for companies that will survive and thrive without our continuous injection of capital.

E   How many board members and how many investment committee members do you have?

The board right now is composed of five individuals but will be expanded to seven. In terms of the investment committee, right now we have seven individuals.

E   What will be the frequency of the investment committee meetings?

In the beginning we will have them every two months and then probably every three to four months later on.

E   As to governance on the board level, do you adhere to standards for private enterprise?

It is a private entity and transparency standards will be applied on all transactions. We will have a website listing our portfolio companies.

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EntrepreneurshipQ&A

A fund manager’s dream

by Thomas Schellen
written by Thomas Schellen

The MIC in MIC Ventures is not short for Mission Impossible, Cruise. But it could be. Khaled Zeidan, the managing director of MIC Ventures, could easily have a second career modeling cool shades, and the chosen mission of MIC Ventures, should it succeed, will bring life to a sector whose true potential in Lebanon has lain dormant for the past 15 years or more.

This sector is information and communications technology (ICT). MIC Ventures approaches mainly local ICT investment opportunities with a $48 million war chest. Over the next four years, it aims to deploy this money through investments into Lebanese companies with value-add potential, mainly in four verticals: fintech in all its varieties, gaming (including anything virtual reality), content, and logistics and delivery. Beyond ICT companies and value-creation opportunities related to these verticals, MIC Ventures (MICV) also looks at opportunities that have an internet of things angle—for example, in agriculture, Zeidan explains.   

According to him, MICV, as a venture capital fund company, has a projected lifecycle of seven years, during which it wants to add value to companies in the tech entrepreneurship sector, to the Lebanese economy, and to the two equal owners after which it is named: MIC 1 and MIC 2, better known in the market under their associated mobile communications brands, Alfa and touch.

These fine bureaucratic twins called MIC have carried superbly ironic—but not by design—names of Mobile Interim Company 1 and Mobile Interim Company 2 since they were reborn in the early 2000s to succeed the former Build-Operate-Transfer (BOT) companies FTML (operating under brand name Cellis) and Libancell. BOT, the period’s fashionable version of a public-private partnership, was the model the Lebanese state under the late Rafik Hariri had embarked on from 1993 to 1994, through a highly successful rollout of second-generation GSM cellular services.

A tangled past

With FTML and Libancell, the Lebanese telecommunications sector had been blooming and innovating at levels head and shoulders above all other Arab countries between 1994 and about 2002. But on this path of strong growth, the mobile communications duo—and de-facto duopoly—were also accused of being corrupt and characterized as illegitimate profit-reaping corporate monsters. The Lebanese Republic first unilaterally changed and then terminated their BOT agreements in mid-2001 and took ownership of the networks as state-owned enterprises (SOEs).

Costly rebranding and years of languishment and backsliding in mobile communications rankings were to follow. Soon, the only narratives of note to surround the political-economy animals MIC 1 and 2 and the entire Lebanese telecoms sector were, from about 2002 to 2016, anti-strategic stories of arbitration, temporary management contracts, failed privatization attempts or aborted auctions to sell off telecoms licences, general lack of innovation, and allegations of corruption, criminal activity, and shady deals by even shadier figures hiding behind certain desks at the Ministry of Telecommunications (MOT).

The new chapter in the narrative of Lebanese ICT—one that MICV is a key part of—began with a round-table meeting organized by Prime Minister Saad Hariri’s economic team about a year ago. A number of ideas and proposals for invigorating sectors in the Lebanese economy were discussed, and among the ones contributed by Zeidan was the idea of a fund under the ownership of the two mobile SOEs, MIC 1 and MIC 2.

Zeidan’s proposal was founded on the reasoning that telecom operators had missed many value-generation opportunities as they generally had “stopped innovating” in the rapidly changing ICT environment about a decade after mobile communication’s hyperactive growth years in the 90s and early 2000s, when cellular license auctions made top news and mobile companies were as hyped as today’s behemoths, Google, Apple, Facebook, and Amazon (GAFA).

Besides the rise of these online giants, a lot has changed in mobile communications in terms of technology, user experience, and user behavior—and mobile providers had to transform accordingly. Voice traffic is the opposite of a growth engine; data accounts for most activities in mobile communications. Regional operators such as Zain Group (formerly MTC) of Kuwait and Riyadh-based STC set up their own venture capital funds or comparable initiatives earlier this decade, seeking to compete with mobile-tech investments by other players such as large funds by conventional VCs or GAFA.

The bold idea

By Zeidan’s reasoning, the general logic of mobile operators’ need to invest in innovative companies applies to the Lebanese market, but with the twist that Lebanon is late to this particular game and that the ICT niche has not been covered in the rising entrepreneurship ecosystem. He explains that many companies in this specialty space already exist, have operational revenues, and could rise on steady growth trajectories over time with the help of capital injections. They face barriers on this path, however, because their service orientation or projected growth profiles do not make them top targets for funds organized under the central bank’s Circular 331, he claims.

“I made a recommendation to set up a fund that invests in those companies and builds a partnership between them and the two MICs,” Zeidan says, based on the notion that the two MIC entities could benefit substantially from having access to product and service offerings produced by companies funded with their investments.

The plan for this fund was discussed by stakeholders and simmered for several months while its progenitors, including Zeidan, went looking for a person to assume full mental ownership as fund manager. “I was not supposed to manage this fund. I worked on this fund with the intention of having somebody else manage it,” he says.

After leaving his job as head of BankMed Group’s investment banking firm Medsecurities in the middle of 2017, Zeidan shelved plans for a personal sabbatical and instead engaged more deeply with the fund project plan starting in around September. In the following months, he gained stakeholders’ trust, he says, including people at the two mobile networks’ operators, Alpha and touch, but still could not find a person willing to run the fund. “I pitched a lot of managers to take on this fund, but nobody accepted the job because they thought it was a pipedream,” he tells Executive.

A decision to set up the fund was taken with the support of political stakeholders around last October. In November, the fund project presumably passed through a patch of deepest political darkness along with the whole of Lebanon. Then came the miraculous resuscitation of the Hariri government, and toward the end of last year, the dawn of MIC Ventures’ creation was realized through the establishment of a holding company.

As Zeidan describes it, the minister of telecommunications and the two MICs asked him, as the idea’s parent, if he could take on the management responsibility for getting the fund off the ground. He accepted the mantle of steering this new financial vehicle toward the goals of creating new jobs and initiating a conversation between the private and public sectors.

According to him, MICV has a three-tiered process of operations. The management team sources prospective deals that are assessed at periodic meetings by an investment team comprised of seasoned experts from the relevant fields. “I wanted to make sure that there is somebody who is an expert in every concerned vertical, so that, if a proposed deal is on the table, I have someone who understands the related sector from the inside out—for example, cloud technology, or payments and transfers,” Zeidan says. He adds that the investment committee’s size could be expanded from the current five to six members to assure that a sufficient number of experts are available to attend the meetings, which are intended to be held every other month in the initial phase of operations and less frequently later on.

Investments that are endorsed by this committee are then presented to the board of MICV for a final decision. The board, which represents MIC 1 and MIC 2 as the equal owners of the fund company, presently has five members, one of whom is independent, Zeidan says. He concedes that MIC owner MOT—and thus the current holder of the ministerial post—by default plays a decisive role in the equation. He claims that the ministry has recently become conversant in financial and entrepreneurship language that was never heard in MOT offices just a year or six months ago, and confirms that the current Minister of Telecommunications Jamal Jarrah has given full support to the fund project.

Total buy-in

The minister, his main advisors, and the top management of the two MICs have fully bought into the MICV project, claims Zeidan. “They and I see the fund as a very good thing for the MOT, for the two MICs, the Lebanese entrepreneurship sector, and hopefully for the country as a whole,” he enthuses. He acknowledges the possibility of political change affecting the ministry and notes that he often heard such concerns in discussions with people in Lebanon, however, he argues in response that the decision to set up MICV was carried by the full range of stakeholders and would not have happened otherwise. Moreover, the possibility of shifts in the political landscape, as far as it might affect his role, does not deter him. “In the event that there is any [political] change and if this change results in a change in the manager, so be it. I will have no grievances whatsoever in this respect,” he declares.

Sitting in his corporate office in a Beirut downtown quarter that has found favor as the base of operations for local financial players and law firms as well as international actors up to the World Bank Group, Zeidan makes a strong personal impression of being situated in a very safe distance from any economic precariat status or existential dependency on a government-related job. Concerns over partisan communal interests and individual corruptibility are not screaming from the walls of this office. 

However, in the wider context of national economic development prospects, the ghouls of Lebanese politics have darkened the pages of the country’s ICT narrative for so many years that many questions beg to be answered in any scenario that includes the terms MOT and ICT. How to defuse worries about monopolistic structures, and dependencies on political deciders and oft-changed ministers in charge of the telecommunications portfolio? How to restore confidence among local ICT firms and international partners whose memories of Lebanese mobile telephony have been tainted by experiences of a sovereign who chose to abandon contracts and break promises? How to assure a sector that it would not again be treated as welcome cash cow and milked to excess, just because it succeeded at a time when the state faced cash flow problems and other political economy issues? Such questions, or issues such as the proper accountability and reporting of monies that might flow from successful investments back into public channels, are not among Zeidan’s declared priorities. 

He explains that what happens between the MIC shareholders in MICV—up the line to the MOT and beyond in terms of reporting—is not under his purview, and prefers to emphasize the potential he sees on the level of the new fund and further opportunities for improving public sector partnerships with private sector actors. He says, “The reason why I am managing this particular venture is because I was the person that initiated the process to establish it. My intention is to make this fund happen and getting it to work, and I feel that we can make this work. Transfer of private sector culture and language has happened now at the MOT and I see the potential for the same to happen at other ministries, such as the Ministry of Economy. My belief is that you will see other, similar initiatives from other ministries. I think this will be fantastic.”

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Economics & PolicyOil and gas

The petroleum legislative framework for Lebanon

by Talal F. Salman
written by Talal F. Salman

Now that Lebanon has signed the first two exploration and production agreements (EPAs) for offshore oil and gas, companies will prepare the groundwork to start drilling at the beginning of 2019. This achievement is a long time coming. The first oil-related legislation, the Offshore Petroleum Resources Law, was enacted in 2010; the sector’s regulator, the Lebanese Petroleum Administration, started operating back in 2012; the block delineation and the model EPA were enacted as decrees in January 2017, almost four years after they were first drafted; and the petroleum-income tax law—a necessity to complete the Lebanese petroleum fiscal regime—was enacted in October 2017, two years after it was first drafted.

This process has taken far too long. Egypt started production of the giant Zohr gas field within three years of finding it. But the constant delays that Lebanon’s oil and gas sector witnessed over the past years—very much interconnected to major regional crises—should not be the reason for interest groups such as Lebanese Oil and Gas Initiative (LOGI) to be blasé when evaluating the current efforts to complete the legal foundations of the sector, which are a prerequisite for a successful, well governed, well invested, and regulated sector. The late arrival of LOGI to the game does not mean the work that has been done over several years needs to be halted because LOGI thinks so.

There are still very important laws that need to be enacted to promote confidence in the Lebanese petroleum investment climate, ensure transparency toward the public—the ultimate owner of any resources found—and lay down solid legal and governance foundations for operating the sector. Four important laws are currently at the initial stages of the parliamentary process: They cover the establishment of a petroleum asset-management department, a sovereign wealth fund (which this author helped draft), and a national oil company, as well as prospects for onshore exploration. The proposed legislation is not being hurried through Parliament, but rather is being discussed at length in subcommittees. The fact that Lebanon currently has the right set of circumstances to make up for the years that we missed should not be mistaken for the conspiracy theory that the laws are being rushed.

These laws have been prepared by very capable Lebanese policymakers and legislators for more than two years. It is vital in any policymaking process to involve interest groups, the media, civil society, and independent experts. It is also essential that Lebanon not fall into the trap of the resource curse, a situation where countries rich in resources tend to have poorer economic growth, flawed democracies, and less development than those without. Interest groups and experts are rightfully highlighting the risks—however, they should know that these laws have been proposed to protect us from the resource curse, and so should be careful about what kind of messages they are trying to send to the public. Halting the laws is not the solution, reaching out to the legislators behind them and providing constructive comments is far more useful. Joining in the efforts to achieve the ideal legislative framework is more productive than campaigning against the need for new laws.

Additionally, last year’s Right of Access to Information law, the Petroleum Transparency Law—which is reaching the final stages in parliament committees—and the plan to join the Extractive Industries Transparency Initiative will all contribute to the transparency of the sector.

The Lebanese economy has struggled for many decades to overcome various internal and external hurdles on the path to proper growth, and is currently at a quarter of its true potential. The proposed petroleum-related laws are important building blocks toward this holistic approach, and there is no shortage of talent in Lebanon to achieve the vision we all share.

 

Here is a summary of the four laws that have recently been referred to parliamentary committees with a brief explanation of why they are essential:

 

1. Petroleum Asset Management Department (PAD) Law: This law would establish a new department under the Ministry of Finance with two major duties. The first is to assist the Minister of Finance in drawing up an investment mandate for the sovereign wealth fund (SWF), which would then need to be approved by both the Council of Ministers and Parliament. Following best practice worldwide, the investment mandate would be a technical document prepared by experts at the Ministry of Finance and approved by the government, setting out general guidelines for the SWF in the context of Lebanon’s macroeconomic policy, including risk tolerance of the investment choices. The role of the SWF is to manage the funds and not to design fiscal or investment policies; the investment mandate, prepared worldwide by policymakers at the Ministry of Finance, presented by the minister, and approved by government, is designed to ensure the SWF is in line with the central government’s vision for the economy. The second role of the PAD is to audit the companies operating in the petroleum industry to ensure the proper collection of the 20 percent income tax. Auditing petroleum activities is a new responsibility for Lebanon, and the proper experts should be hired to support the MoF in its revenue collection role.

2. Sovereign Wealth Fund Law: The cost of debt in Lebanon has become very high, and economic fundamentals would suggest that debt should be paid down with any influx of extra government funds before attempting to generate higher returns in financial markets. But this logic is flawed and dangerous in the context of Lebanon. The problems of chronic debt, lack of investment in infrastructure, failing public services, and high yearly deficit are not caused by a lack of funds, so using income from petroleum activities to pay down the debt is not the solution.

Public-private partnerships can resolve the infrastructure and public-services problem, while cutting non-productive subsidies and improving the tax-collection system can solve the chronic deficit and debt problem. Income from non-renewable resources should be turned into off-balance-sheet renewable financial resources for future generations, to be used only under strict terms and in the right sectors of the economy.

The current draft of the SWF law has very strict fiscal rules for spending, and only allows minor alleviation of the debt burden in the specific case where the government has turned its chronic deficit problem into a debt-sustainable primary surplus—a major achievement, if it were to take place. More importantly, the law ensures checks and balances based on the best corporate governance practices, helping the board of the fund, the finance minister, the cabinet, Parliament, internal auditors, two external auditors, the PAD, and the SWF management interact without overstepping their responsibilities. Moreover, it ensures full transparency of operations by publishing all reports online.

It will take several years to have an able home-grown team in place to manage such a fund, so any delay now will be magnified down the road. The tens of millions of dollars already generated by selling geophysical data to companies could be the seed money for the fund. Lebanon has always been a borrowing country, so launching a culture of savings is important. The fear of building new institutions, overstaffing them, and causing wasteful spending is justified, given the weak corporate governance practices in Lebanon, but should not be a reason to choose the do-nothing approach. Rather, it should encourage a do-it-right approach.

3. National Oil Company (NOC) Law: This law does not establish the NOC, but rather organizes its corporate governance, defines the participation methodology of the government, and starts consolidating government oil and gas assets under one legal entity. The law clearly states that the NOC will be established in accordance with the 2010 Offshore Petroleum Resources Law (OPRL), which states it must be established by a cabinet decree—and after the proof of commerciality, not right away, as some misinformed experts suggested. Hence, this law would send the proper signal to international oil companies about the methodology of government participation. The objective is to be transparent about the incentives of the government in future licensing rounds since the participation method of the state will impact the economics of future exploration and production agreements.

4. Onshore Exploration Law: As the OPRL covers only offshore exploration, production, and decommissioning activities, a legislative framework is clearly missing for any onshore activities, which are usually very different in nature, but equally important to organize the activities of the sector as a whole. This law would set the scope of onshore activities including development, production and decommissioning, the ownership of resources, the methodology for land expropriation, the participation of the state, the role of different government entities, and the preservation of any cultural or historic heritage, among other important components that the OPRL similarly covers.

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CommentEconomics & Policy

A nudge in the right direction

by Fadi Makki
written by Fadi Makki

From preventing simple traffic violations to curbing rampant corruption, ensuring compliance with the rule of law in Lebanon is a serious challenge for policymakers. Heavy-handed controls often do not work, as they rely on individuals making rational decisions, and financial incentives are not sustainable in the long-run. What else can the government do to improve compliance and promote a rule-of-law culture?

Part of the answer lies in a concept known as nudging: using cost-effective policy tools to steer people in the right direction by making small changes in the environment, without restricting their freedom of choice. Effective nudges include placing healthy food items at eye level in cafeterias to increase healthy eating habits, telling households about their neighbor’s energy-consumption levels to encourage them to reduce their own consumption, or texting parents about their children’s progress in school to engage them in their kids’ academic performance. The trick to getting people to change their behavior is, as the 2017 economics Nobel laureate Richard Thaler put it, to “make it easy.”

Irrational beings

The theory behind nudging integrates psychology and other insights from behavioral sciences into policymaking, designing policies with realistic assumptions about how people behave.

Classical economic theory is premised on the core belief that humans are rational and base their choices on unbiased beliefs. But books such as “Nudge” by Richard Thaler and Cass Sunstein and “Thinking Fast and Slow” by Daniel Kahneman question that rationality, and provide much of the intellectual backbone for nudging in the past decade.

Former UK Prime Minister David Cameron’s Behavioral Insights Team was the first government agency focussed on nudging, or nudge unit, in the world, and was soon followed by other governments, including former US President Barack Obama’s Social and Behavioral Science Team. In the region, Qatar’s Behavioral Insights Unit led the way in 2016 and was soon followed by Lebanon and Kuwait; Saudi Arabia, among others, is looking to create its own unit in the future. This global explosion of nudge units is driven by the desire to experiment with what works—data-backed interventions—in policy areas such as health, education, inclusion, and finance, rather than rely on intuition.

The impact of such interventions is tested through randomized controlled trials, a common experimentation method traditionally used in clinical trials. Lebanon’s first nudge unit, Nudge Lebanon, has tested numerous small behavioral interventions and demonstrated the profound impact it has on increasing citizen compliance with the law.

In one experiment, Nudge Lebanon partnered with Electricité du Liban to improve timely payment of electricity bills in Saida by sending customers letters informed by behavioral psychology. Among the intervention letters was one that read, “Your country needs you. Be a good citizen and pay your due electricity bill on time,” priming people’s sense of patriotism. Another informed people when 90 percent of their neighbors had already paid, asking if they wanted to join them. These nudges increased timely payment by 15 percent and 13 percent respectively, compared to the control group.

Nudge experiments

In an experiment aimed to encourage drivers and passengers to fasten their seatbelts, hotel valet parking attendants delivered a verbal prompt, “Be safe; please don’t forget to put on your seatbelt.” This increased  the number of those who wore their seatbelt by 82.8 percent compared to the control group. Another experiment reduced the amount of plastic cutlery that restaurants gave out with delivery orders by 79 percent simply by asking people if they actually wanted them.

Other nudge experiments currently underway include efforts to increase payments in Lebanese lira (in line with the central bank’s strategy to reduce dollarization in Lebanon), promote voluntary compliance with the smoking ban in restaurants, reduce illegal u-turns, and encourage victims and witnesses of government corruption to report these incidents and seek legal advice.

Many of Lebanon’s policy challenges have underlying behavioral roots that cannot be addressed with traditional tools: for example, people might have limited willpower to act on their intentions. Policy levers like command and control—threatening punishment to secure compliance—or financial incentives and subsidies fall short in addressing these behavioral pitfalls. Nudging people in the right direction using simple changes in context can help close the gap between people’s intentions and actions.

These evidence-based methods have their efficiency gains for government as well: They could nudge citizens into complying with traffic rules and regulations, bring in much-needed cash flow by increasing on-time payments of taxes and utility bills, get people to save more for their pensions using default rules (rather than relying on people to opt-in to pension schemes), and encourage regular health checks with timely reminders via SMS. While these interventions might not solve all the problems plaguing Lebanon, they can provide inexpensive, measurable improvements that can be built on in the future.

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Economics & PolicyPPP Law

The new PPP law

by Malek Takieddine & Maryline Kalaydjian
written by Malek Takieddine & Maryline Kalaydjian

Previous experience in a number of countries has proven that public-private partnerships (PPP) are an efficient method for developing long-term infrastructure projects. Under a PPP model, the government remains focused on its primary regulatory role, while the private sector injects funds and expertise into developing projects for the benefit of the government and, ultimately, the public. One of the main factors of a successful PPP is the existence of a legal regime based on the principles of transparency, competitiveness, and accountability.

After a decade of delays, the enactment of Law No. 48 on  September 7, 2017 will undoubtedly create new prospects for the implementation of PPPs in Lebanon for both existing and future projects. The enactment of the law cannot be dissociated from the upcoming international donors conference, Cédre, which is scheduled for April 6 in Paris for the purpose of supporting the Lebanese economy, and in particular for the financing of infrastructure projects in Lebanon—expected at around $16 billion over a period of 10 years.

The law introduced a new legal regime for PPP projects in Lebanon, replacing the traditional procurement processes, which suffered from weak transparency, competitiveness, and accountability standards. The PPP law renames the “High Council for Privatization,” a ministerial committee, to the “High Council for Privatization and PPP,” and grants the council the power to assess and evaluate potential PPP projects. Once a PPP project is identified by the council, a PPP project committee will be established to study the technical, economic, legal, and financial aspects of the project, and to determine the criteria for qualifying the private partner. The PPP law stipulates the main mandatory provisions that must be included in the PPP agreement governing the contractual relationship between the public and private parties, and defines the procedures that should be applied by each party and their obligations. Therefore, the private partner is provided with sufficient clarity and visibility on the implementation of the project.

In addition, the PPP law provides that the private partners must submit both a technical and financial proposal, and that at least three offers will have to qualify, or the project will be reopened for another round of bidding, ensuring equality among the bidders and creating fair competition. Moreover, it is worth nothing that the appointment of experts and consultants to support a PPP tender may be based either on the provisions of the Lebanese Public Accounting Law or, if available, the relevant internal regulations of the High Council for Privatization and PPP, or the relevant state authority that is involved in the tender. This possibility provides for additional flexibility in terms of developing the necessary tender resources.

Private sector knowhow

The PPP law is expected to create a favorable environment for the private sector to invest in infrastructure projects in Lebanon. The private sector will be keener to enter into partnerships with the Lebanese government and to provide much-needed funding when the partnership is governed by a strong legal framework that protects their interests. In this respect, the country will benefit from the private sector’s knowhow and managerial skills, contributing to the efficient development of infrastructure projects in Lebanon. In addition, the adoption of the PPP law will play an important role in attracting foreign investments and international funding opportunities. And most importantly, PPP projects are expected to create job opportunities in various sectors in Lebanon, and hence ultimately increase revenues and stimulate economic growth.

Nevertheless, the PPP law includes certain gaps that must be bridged. For example, the law does not provide for a specific time frame between a PPP project proposal and the signature of a PPP agreement between the parties, which may discourage the private sector if the process is unreasonably lengthy. In addition, the law does not deal with PPP financing, although this is a crucial element in large-scale and long-term projects. Moreover, there is no local content requirement, like a provision requiring PPP projects to employ a minimum percentage of Lebanese nationals. In addition, the law does not stipulate that the PPP agreement should include stabilization clauses that consist of contractual clauses to protect the private party from any future changes in legislation after the execution of the contract with the public party, which are considered an important protection mechanism for the private partner against the discriminatory power of the government. Foreign investors will certainly request the insertion of such clauses to protect their investments from unexpected changes in applicable laws after they inject large capital and invest skills and intellectual property in the development of a PPP project. 

There is a substantial need for the development of infrastructure projects in Lebanon in various fields: water, electricity, waste management, healthcare, and many others. The new law is largely compliant with international standards and provides the private sector with a basic framework to enter into PPPs, and hence, increase private investments in infrastructure projects. However, the gaps highlighted above should be urgently addressed by the Council of Ministers through regulatory decrees, which will, along with the law, constitute a comprehensive legal framework for PPPs in Lebanon.

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Cover storyWomen's empowerment

Making the most of it

by Bettina Bastian
written by Bettina Bastian

Amartya Sen, the Indian economist and philosopher, wrote in a 2001 essay that in a world afflicted with “the deeply unequal sharing of the burden of adversities between women and men,” gender inequality must be understood as a “collection of disparate and interlinked problems.”

Gender inequality is reflected in laws, regulations, rights, norms, responsibilities, and opportunities. The World Economic Forum (WEF) has issued Global Gender Gap Reports (GGGR) since 2006, aiming to measure gender gaps in four key areas: health, education, economics, and politics. It found in its latest GGGR last year that “gaps between women and men on economic participation and political empowerment remain wide.” According to the WEF, recent years have even seen a partial reverse in what had been a slow but steady trend of closing gender gaps worldwide over the past decade.

In the economic sphere, gender gaps include painful inequalities in labor force participation, with a global average of 54 percent of women actively involved in the workforce, compared to 81 percent of men. Also, women earn on average 50 percent less than their male counterparts, despite the fact that they work longer hours, and do most of the unpaid labor, like household work and child care.

Gender inequality also impacts entrepreneurship. Research has shown that the number of female entrepreneurs is still lagging behind in most countries, but especially so in the Middle East and North Africa (MENA) region. According to the Global Entrepreneurship Monitor 2016 gender report, women in the MENA region run established businesses at one-third of the rate of men. Moreover, women start new businesses at less than 60 percent of the rate of their male counterparts. The report measures these discrepancies based on the so-called total entrepreneurial activities of individuals in the working age population (18–64 years). Moreover, the report finds that women-led businesses are 60 percent more likely to remain a single-person firm, and only one in 10 female entrepreneurs expect their business to grow in the coming years.

Looking only at these stark percentages gives a grim image of the immense detriment that gender inequality poses for women in entrepreneurship, but this is not the whole story. Research on entrepreneurship in the region indicates that the effects of gender inequality are more complex. A look at several important elements for entrepreneurs reveals a picture of women determined to overcome the disadvantages under existing gender gaps by venturing into self-determined entrepreneurial careers, and thus, becoming pioneers and role models for societal change. Limiting our view of female entrepreneurship in the MENA region to just the percentage of the gender gap might distract from very encouraging developments taking place in the region.

Self-confident women

The majority of women-led entrepreneurial projects in the region are opportunity-based innovative ventures with high market and growth potential. The region has a large reservoir of highly educated women: 38 percent of its researchers are female, a significantly higher percentage than the 30 percent ratio found in the rest of the world. Generally, researchers are an important source of innovation. The region also hosts a high number of female internet entrepreneurs: 35 percent, compared to 10 percent worldwide.

Women in this region have been able to derive business opportunities from this challenging environment, and many of the business models they have developed involve empowering others. For example, Ayah Bdeir, who is Lebanese, created  littleBits, easy-to-use, open source, modular electronic building blocks for prototyping and learning that enable users to develop their own innovations. Rana Chmaitelly, the founder of The Little Engineer, was concerned about her own kids’ addiction to smartphone technology, so she created workshops that engage kids with science, engineering, and technology. Many successful female entrepreneurs in the region develop business models that solve social and environmental issues while creating economic opportunities, such as using plastic trash to develop furniture in Hend Riad’s Reform Studio in Cairo.

Moreover, it appears that the unfavorable environment functions as a catalyst for many women as it increases their intention to become entrepreneurs. This is rooted in women’s widespread dissatisfaction with their current situations and the discriminatory working conditions that limit  their career paths in established organizations. Besides the glass ceilings that limit women’s opportunities, gender stereotypes against employed women as well as discriminating labor laws and limited job opportunities motivate some women to start their own business.

The gendered workplace context does not leave too many conventional opportunities for women, so, many create their own opportunities. This might stem from a strong sense of self-confidence among women entrepreneurs in the region. Worldwide, women have been found to have little self confidence in their entrepreneurial abilities and potential—regardless of their educational background—compared to their male counterparts. But while female self-confidence levels differ from country to country, research published in 2012 found that Lebanese women entrepreneurs were among the most self-confident globally, together with women in Saudi Arabia and Iran.

Contrary to women entrepreneurs, who take significant risks to launch themselves into freelance careers, gender inequality was shown to have the opposite effect on many men. In societies where men hold the position of decision-maker and breadwinner in a family, they are less likely to invest in the uncertain future of a new business. This is especially true in Gulf countries, where starting a small business does not afford social status. Instead, the most prized jobs, with higher salaries and benefits, can be found in public administration. Men in the Gulf region tend to start a business only when they are unable to secure a public appointment. In that sense, gender inequality takes its toll on male entrepreneurial potential in the region as well.

International findings have shown that the likelihood to start a venture increases with the presence of entrepreneurial role models and exposure to supportive social networks. However, in highly gendered societies, women entrepreneurs still depend primarily on non-professional networks, notably family and close friends, as research on Tunisia, Lebanon, Jordan, Bahrain, and the UAE shows.

Building networks

The lack of exposure to professional social networks and the reliance on private networks like families, is mostly tied to cultural and social restrictions on women’s mobility and interaction with males outside their families. Thus, there remains a great need for professional support systems that can introduce women to vital connections in the wider social space. Such support systems can open doors for women to meet potential collaborators, customers, and suppliers, in addition to providing mentoring and professional advice.

Therefore, women-centric networking and professional organizations like the Arab Women Organization, the Bahrain Businesswomen’s Society, or the Lebanese League for Women in Business (LLWB), are pivotal in enhancing leadership and entrepreneurial skills. LLWB, for example, offers networking events, mentoring, training, and lobbies the government for women’s rights and development.

In the economies of Middle Eastern countries, where economic progress is a predictor of female empowerment and higher rates of entrepreneurship, gender inequality has not deterred female entrepreneurs. Although gender equality still has a long way to go in the region, evidence suggests that women in the Middle East and North Africa remain determined to carve out a significant space for their inclusion in the economy and polity of their countries through entrepreneurial leadership.

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