EntrepreneurshipEntrepreneurship in LebanonSpecial Report

Innovation economy needs investment

by Matt Nash
written by Matt Nash

Lebanon being Lebanon, there are no statistics. But by the accounts of stakeholders throughout the country’s entrepreneurship ecosystem, one big gap is not being filled: strong financial support from the state for research and development (R&D).

Many governments make R&D investments, and the Lebanese government does fund the National Center for Scientific Research—which has four centers for study around the country and gives out research grants on a bi-annual basis. Additionally, a small amount ($3.2 million) of the $650-or-so million in funds aimed at growing the entrepreneurial ecosystem and guaranteed at 75 percent by Banque du Liban (BDL), Lebanon’s central bank, is now being directed toward R&D investments. Word of slightly more of this money possibly being diverted toward R&D in the future is currently echoing in the jungle.

Calculating the return

In technical terms, the branch of scientific inquiry most likely to breed commercial success is called applied research (as opposed to basic research, which seeks merely to gain knowledge for the sake of doing so). Applied research is about solutions, and even if companies do not approach it with scientific rigor, they regularly invest in it. An online survey seeking to make a website more user friendly is R&D—but so is the possibly years-long process of a diaper manufacturer running lab tests and experimenting with various materials to create a new product that can pack in just a little more poop. The latter is obviously more capital- and labor intensive.

Innovation is impossible without R&D, but cost is often a barrier.

[pullquote]Applied research is about solutions, and even if companies do not approach it with scientific rigor, they regularly invest in it[/pullquote]

In many countries, governments make strategic R&D investment decisions to help push innovation forward. Additionally, available evidence suggests that state R&D spending in a given area spurs more private R&D in the same area.

The exact return on state R&D spending, however, is difficult to quantify. A 2015 paper written for the European Commission sought to calculate a state’s return on R&D investment, based on a review of previous studies on the topic. The caveat in the paper’s findings is that because investigations into R&D investment returns have largely only been conducted in advanced economies (meaning the US and a few European countries), the results are by no means true globally nor easy to quantify (there is a lot of messy spillover involved—knowledge included).  That said, the paper found that available evidence suggests governments make a 20 percent return on R&D spending, and boosts private R&D investments by 7 percent.

In fact, state funding for R&D has probably changed the world as we know it. A component of the Silicon Valley story that often gets neglected is the role the US Department of Defense (DoD) played in ushering in the digital age. DoD was an early funder and adopter of microelectronic technology, nurturing it toward mass commercialization, which lead to the development of everything from desktop computers to smartphones and wearables.

Not a priority

While both the World Bank and the United Nations Educational, Scientific and Cultural Organization (UNESCO) collect statistics on state R&D spending as a percentage of GDP, neither has any data for Lebanon. Elise Noujeim, director of the grant research program with Lebanon’s National Council for Scientific Research (known by its French acronym, CNRS), says that state spending via CNRS is minimal, but that it increased slightly in 2017-18. CNRS gives out two-year research grants ranging in value from $20,000 to $40,000, up from approximately $13,333 to $26,666 in previous years.

She says that research money can be hard to find for local academics, but opines that “if a researcher has a good proposal, they will find the money.” She notes that CNRS helps link local researchers to international universities and research institutions, and can often fund travel and living expenses for local academics who can find research budgets abroad.

CNRS, Noujeim says, is also making headway in partnering with more of the country’s universities. In 2017, CNRS signed memorandums of understanding with eight of the 19 universities and hopes these agreements will lead to more coordination and cooperation in research activities in the country.

Working together

On the level of existing cooperation and coordination among universities, Dany Obeid, an assistant professor in the Faculty of Agriculture at the Lebanese University, and Sophia Ghanimeh, an assistant professor in the faculty of engineering at Notre Dame University, tell Executive that Lebanon has a “do-it-yourself” kind of research environment. Funding is scarce, and inter-university coordination is personal rather than institutional,  meaning academics have to leverage a network of personal contacts to make things happen as opposed to relying on formal cooperation mechanisms among different institutions of higher learning. Zaher Dawy, an assistant provost at the American University of Beirut, agrees that coordination could be better and admits that research spending in Lebanon is relatively low (although he says one gets more from each dollar invested, as salaries and tuitions are lower in Lebanon than elsewhere, so more of the investment goes to the actual research).

[pullquote] In 2017, CNRS signed memorandums of understanding with eight of the 19 universities and hopes these agreements will lead to more coordination and cooperation in research activities in the country[/pullquote]

Ghanimeh singled out research that requires expensive equipment as particularly difficult to conduct in Lebanon, as research funding is often only in the tens of thousands of dollars. “Grant money can’t buy equipment,” she laments. Dawy agrees that state-of-the-art research needs state-of-the-art equipment and laboratories. And while he praised—but did not quantify—AUB’s investments into medical equipment that researchers and practitioners can use, he noted that few of the university labs around the country are state-of-the-art. Dawy also says the university is in talks with BDL to steer money the bank is guaranteeing to 75 percent for investment into the “knowledge economy” via 2013’s Circular 331 toward R&D at AUB. He refuses to go into details as discussions are underway, but says this is part of the university’s plan to better incorporate entrepreneurship in a multi-disciplinary way.

Wouldn’t be the first time

Elie Akhrass, director of the UK-Lebanon Tech Hub’s International Research Center (IRC), tells Executive that 331 money is being used to match $3.2 million in funding from the UK government for the initiative, launched in late 2016. Akhrass says the IRC is funding applied research into, for example, a wearable, non-invasive glucose monitoring device. The for-profit initiative is not time-bound beyond the ability to raise and deploy capital.

The Tech Hub itself was initially launched as an accelerator financed by an investment backed 100 percent by BDL, without the UK’s participation. Launching the IRC has been part of the Tech Hub’s monetization strategy for at least the past 18 months. Akhrass says IRC will monetize by sharing royalties with intellectual property right-holders as a start, but address the question on a deal-by-deal basis.

Stakeholders Executive queried over four months for this piece agreed that more R&D spending in Lebanon—whether by the state or others—would benefit the ecosystem, as the link between R&D and innovation is so clear. Calculating exact economic returns are difficult, but as Akhrass puts it, “If you want a knowledge economy and an innovation economy, you need R&D.”

0 comments
1 FacebookTwitterPinterestEmail
Last wordOpinion

Lebanon needs to clean up its act

by Bassam Khawaja
written by Bassam Khawaja

Lebanon is once again staring down a waste management crisis, with news that the Costa Brava and Bourj Hammoud landfills will reach capacity in 2018—two years before the government’s initial estimate of 2020. In response, the cabinet is reportedly considering a proposal to reopen the infamous Naameh landfill, whose closure in 2015 sparked a crisis that left garbage piling up in the streets of Beirut.

The government adopted a temporary fix to the crisis in March 2016, when it began dumping waste from Beirut and Mount Lebanon into the two new coastal landfills. Now that these landfills are filling up faster than expected, the government is discussing yet another emergency solution.

The waste management problem was never actually solved—the government just pushed the garbage out of sight. The 2016 “fix” was just another short-term emergency measure, the latest in a string of emergency plans adopted after the end of the civil war in 1990.

The new landfills have been plagued by controversy and lawsuits since their inception. The Ministry of Environment says that neither landfill had an environmental impact assessment, so it remains unclear what effect they will have on people living nearby. Garbage at the Costa Brava site, which is located near the airport, attracts birds that have become a threat to planes, and therefore, public safety. At the Bourj Hammoud landfill, videos show trucks dumping garbage into the sea, and local fishermen have protested the amount of garbage they are now catching in their nets.

Meanwhile, outside of Beirut and Mount Lebanon, the situation is even worse, but gets far less attention. Lebanon’s garbage crisis didn’t really start in 2015—that’s just the year it reached Beirut and Mount Lebanon; the wealthier parts of the country.

Lebanon has never had a comprehensive waste management system that covers the entire country. The central government contracted two companies, Sukleen and Sukomi, to manage solid waste for most of Beirut and Mount Lebanon under a 1997 emergency plan, but municipalities in the rest of the country have been left largely to their own devices, without the resources or expertise to adequately manage their waste.

A burning problem

A forthcoming report from Human Rights Watch outlines the health implications of openly burning waste. Over the course of my research for the report, I’ve spoken with families who live close to open dumps that have burned continuously for years. Many have told me they have respiratory illnesses, that the smoke has at times driven them from their homes, and that they live in constant fear of a long-term health impact on them and their children. Doctors treating these residents say they believe burning trash was the cause of their respiratory illnesses, and that it could take years for its long-term effects to become clear—including, for example, on the incidence of cancer. And researchers at the American University of Beirut found that burning waste during the 2015 crisis released dangerous particles in Beirut and Mount Lebanon, with potentially severe health effects.

Waste-burning and the garbage crisis are symptoms of a larger problem in Lebanon: a decades-old failure to develop and carry out a long-term national waste management plan that is based on public-health principles and is environmentally sound.

Fortunately, unlike some of the other challenges facing Lebanon, there are clear solutions to waste management: About 90 percent of Lebanon’s solid waste is made up of materials that could be composted or recycled. However, at the moment only 8 percent is being recycled and 15 percent composted. The rest is being landfilled, dumped, or burned; the government has not even taken the basic step of providing a convenient recycling option in Beirut.

Researchers have already put together proposals for a sustainable solid-waste management plan, informed by public-health principles. And environmental organizations such as Cedar Environmental and Terre Liban have already shown that it is possible to apply sustainable waste management practices in Lebanon.

With yet another crisis looming, the government urgently needs to end its reliance on short-term emergency plans. It should finally adopt a sustainable solution that respects the health and environmental rights of its citizens.

0 comments
0 FacebookTwitterPinterestEmail
Art & Culture

A time for love

by Zeina el-Khalil
written by Zeina el-Khalil

“I was born in 1976, that means I died in 1976. In Beirut, red shoes, white blouse, blue skirt fell to the street.”

This is the first memory I have of my very last memory. How is it that I know this? It is not something I remember. Of course not. How does one really remember their own death? But it is something I know deep in my gut. This present, physical body of mine was never shot, but could I perhaps have inherited this memory from somewhere? More and more research today, by way of epigenetics, shows that trauma can be passed down genetically. Could this memory have come through by way of the collective memory?

Over 20 years ago, ceasefire was called and general amnesty declared. We picked up the ragged pieces of what was left of our lives and moved on after our civil war ended. A collective amnesia, supported by both the government and the people took ahold, and we all agreed to forget … as quickly as possible.

The city I have inherited is one that lacks a coherent history. The bullet riddled walls tell a story, while the skyscrapers tell another. Porsches and Range Rovers parked side-by-side in front of champagne nightclubs give a hint of celebration and success, while behind the tinted windows, we see wounds that have never healed, trauma that has been disguised, and pain manifesting itself through physical and mental diseases. How is it that we never ask why there is so much cancer in our community? How is it that our children so young have been attacked by the most unfair and vicious of diseases.

I believe that the lack of reconciliation after our civil war created the distinction of dysfunction in the city we live in today. Our lack of apology to one another, apologies for what we did to each other, contributed to the lack of respect we have toward one another, a lack of unity, and even, a lack of love. Lack of love toward community and often also toward oneself.

“Love that is the essence of what we are, the subatomic texture of the universe, the dark matter that connects everything.”

In 1994 Beirut summoned me, and I decided to move here. I was 18 years old and the war had just ended. I remember walking through the old airport, my eyes picking up the details of peeling paint and mold bursting through the cracks. Today, I miss that fabulous zodiac mural that greeted us upon arrival, or was it departure … During the rebirth of our city, we traded in our luminous dreams and Milky Way skies for greige, glass, and dust.

Enter the clubbing scene. Dancing may have been the closest thing we had to release and reconciliation, as we swayed and swooned side-by-side in nightclubs like the former Monkey Rose, Crazy, and original BO18, we wondered why we had thought each other to be so different before. In these dark spaces, as our bodies collided and caressed, we unconsciously became one. But this oneness was temporary; the duration it took to down a bottle of whisky and dance until the sun came up.

Perhaps at the time, this was the only way to move forward. The only way to numb the pain of the loss of family, friends, and country. To become so emotionally and physically numb that even lying to someone’s face has become a norm.

Twenty years later, we have yet to apologize to each other for the atrocities committed. We have yet to have a real reconciliation process. We have yet to talk about our pain that was shoved down so deep that it has turned us hard and brittle. Because we did not apologize, we failed to come together as a community, we failed to develop respect toward one another. And this lack of respect, coupled with decades of suppressed pain, is very much present in our society today. It is even passed down to our children, either through genetic inheritance, or through our parenting.

“Cosmic memory. Transference across generations,and in my heart, cosmic collisions. One after the other until I collapse into a single point of you and me.”

Maybe it was always like this. Maybe since time began. We are all born with a tendency toward violence. We were biologically created this way, which sealed the deal on our dominance as a species. But today, we are no longer in need of this tendency, nor are we ignorant. Perhaps, it is time for a collective evolution in which we can all agree to move forward by way of compassion and love, rather than oblivion. It is time to heal. To heal this small beauty in a most violent part of the world. Pain is the greatest teacher for compassion. It is time to apologize. It is time to acknowledge our pain in public. It is time to share and connect. It is time for love. Here, there is only love. Time to consciously step into the future that is ours to create. Time to come together, as we no longer wish to carry the burden of humiliation.

“Transmuting pain to love, the evolution of consciousness, gathering momentum. The continual state of love, present.”

Where to start? Often it is much easier than we think. There is a prayer from the island of Hawaii. It is called the Ho’oponopono, and it goes like this:

“I’m sorry.  Please forgive me. Thank you. I love you.” – Poem excerpts taken from Zeina’s poem titled:
96% Love 4% Beirut: Zero: Śunya

0 comments
0 FacebookTwitterPinterestEmail
Industry & AgricultureWine Industry

Raise a glass to something new

by Nabila Rahhal
written by Nabila Rahhal

Lebanon’s wine landscape has evolved continuously since the end of the civil war in 1990. There were only about five operational wineries at the time; today, Lebanon has 45 wineries, according to the latest count by the Union Vinicole du Liban, Lebanon’s official association of wineries—and some in the field place the figure as high as 50.

This increase has opened investors’ and wine enthusiasts’ eyes to the potential that lies within a glass of Lebanese vino, and as a result, even more wineries are set to enter the market.

Executive took a look at three wineries that launched their first vintage within the past few years to find out what motivated their owners to enter this business, and what they bring to this dynamic industry.

Latourba

Nestled deep in Saghbine, west Bekaa, with a view of Lake Qaraoun, lies Latourba winery. Latourba is the brainchild of Elie Chehwan, an engineer and former head of municipality of Saghbine, who envisioned a social-development angle for the winery. It also includes an animal farm and an ecotourism project.

Chehwan wanted a sustainable project that would support Saghbine and allow locals to work within the area rather than have to travel into cities for work. He already owned some land in the village, and rented additional land from a nearby monastery on a long-term contract.

Since the land he owned was known for its rich layers of soil—hence the brand name Latourba, which translates to “the soil” in Arabic—Chehwan considered crops that would benefit from this richness. “We thought of wine because, since the time of the Romans, the land here used to be planted with grapes known for their superior quality,” says Chehwan, explaining that he did not want to stop at planting table grapes since he believes agro-foods—processed foods from the land—have a larger and more stable market, both locally and abroad, compared to fresh produce. 

Starting in 2006, Chehwan began working with Sofoklis Petropoulos, a Greek winemaker who has a PhD in winemaking from Australia and five years of experience making wine there, to plant his 65 hectares with a variety of grapes.   

[pullquote]Latourba released its first vintage in 2014. Today, the winery produces 12 vintages, making 4,000 to 5,000 bottles of each. Latourba also wants to be the first winery in Lebanon to produce a sparkling wine[/pullquote]

Chehwan only uses his grapes for wine and sells the surplus to other wineries. Latourba produces only monovarietal wine and does not have blended vintages. “Every parcel has a different grape variety, and the same parcel makes the same vintage every year, so it’s interesting to compare year after year,” says Chehwan, explaining that as a new winery, producing monovarietal for a couple of years helps him understand how each grape variety is maturing and responding to the soil, in case he wants to produce blended wine in the future.

Latourba released its first vintage in 2014. Today, the winery produces 12 vintages, making 4,000 to 5,000 bottles of each. Latourba also wants to be the first winery in Lebanon to produce a sparkling wine. Chehwan says he has been working with an expert consultant from Champagne, France, on this pet project for five years now: “It takes time, because you can experiment only once each season, so you have to wait until the next year to modify the recipe and test it,” he explains.

Latourba wine is currently available for purchase online on the 209 Lebanese Wine website, in high-end restaurants, and in boutique wine sellers. Chehwan says he is planning on opening a boutique store in Beirut where Latourba wines will be sold among international wines, and where charcuterie, cheese, and wine nights will be held with visiting sommeliers.

The Latourba winery itself was only the beginning of the vision Chehwan had in mind for his property. In 2015, he built an animal farm with cows, goats, sheep, and chickens adjacent to the vineyards. He uses these animals to produce eggs, labneh, and a variety of cheeses, including goat cheese.

While these products do not have a brand name yet and are not available in the retail market, customers can buy them from Latourba. Visitors will also be able enjoy them in the restaurant Chehwan is developing on the property, which will be open by summer 2018.

The restaurant will be a part of a 15 kilometer space for a tennis court and children’s activities, a small guesthouse, the winery and cellar, and the animal farm. The project will also include a shop that will sell Latourba wine, the food products produced on the property, and traditional mooneh—food such as pickled vegetables or mollasses made by villagers to be stored in the pantry—prepared by local villagers. Chehwan hopes to employ more than 10 families through this project, in addition to the families making part of their livelihood through selling their items in the shop.

Chehwan thought of this project as way to profit from the serene and beautiful setting of his property in a way that city-dwellers would appreciate. “I felt that luxury tourism is no longer in demand, and people are looking for authentic ecotourism. They want to be in nature [at least] once a year. It’s also good for children to experience farm life and nature,” he says, recalling how one of his children’s friends was surprised to see that chickens have feathers, having only seen them on supermarket shelves.

Chehwan will not disclose how much he invested in the project, claiming he was focusing on the social impact of his venture and did not have a feasibility study in mind. Today, however, Chehwan sees promise in his project beyond the social value. “I felt that this project has a lot of potential, whether it’s the wine or the food products—it has the potential to [meet] some of the local demand for quality food items and decrease the rate of importing,” he says. He also took a subsidized loan from Banque du Liban, Lebanon’s central bank, when he set up the farm, and another one for constructing the winery. He says he will take a third when he wants to expand his wine production.

Sept

Maher Harb was satisfied with his life in Paris—he had a promising career in business-intelligence consulting and had lived there since 2001 when he left Lebanon for his university education—but he always felt there was something missing.

The only place he would feel truly at peace, he decided, was in the home his father built in their village of Nahla, Batroun, a year before he passed away.

In 2009, when the economic crisis was just starting in Europe, Harb was denied a project he had really wanted within his company, and began to question his life choices. “I realized that I feel at peace in nature, and when I would go visit the villages around France, I would feel almost the same kind of peace I would feel on my visits to Nahla. I realized that maybe the life I was living is not the one for me,” explains Harb.

After months of introspection, Harb decided to become a winemaker and plant the small plot next to his family’s home with winemaking grapes. Thus began a year of research during which Harb read as many books as he could about winemaking, visited many wineries across France, and even made wine in his apartment.

Harb returned to Lebanon in 2010 and, using the $35,000 he had saved in Paris, he transformed the woodland in Nahla into a plot of land ready for planting. But this depleted his funds, and he was left with no resources with which to move forward.

For the next two years, Harb worked within his original field in Lebanon to make the needed amount to plant the land with grapes—which he did in February 2012. But he was once again at a financial roadblock, so he returned to work in business-data analysis, this time in Riyadh. “I stayed there for two years and a half, struggling with wanting to come back to the vineyard and staying in Riyadh to make a living in a domain which was helping me make a life,” recalls Harb.

In the end, the vineyard won out, and Harb submitted his resignation in Riyadh. In mid 2014, he applied for a Master of Science in Wine Management at the International Organization of Vine and Wine. Using $50,000 from the money he had earned in Riyadh, he spent the next year and a half immersed in learning about wine, touring 25 wine-producing countries, and meeting influential figures in winemaking. “This was the most beautiful experience of my life. I came back to Lebanon [at the] end of 2015 physically exhausted and broke, but full of energy and determination to start my own winery,” says Harb.

For the next two year, he made money by working at wine retail shops and wineries, and by giving wine appreciation lessons. At the same time, he was working on launching his own winery and promoting it on social media.

He registered the company in 2016 and chose the brand name Sept (“seven” in French), as that is his and his father’s life number in numerology. “This project is really an homage to my father, so our common life number was the perfect name,” explains Harb.

He took his first personal loan the same year to buy winemaking equipment in order to produce the 2016 vintages. He also applied for an $80,000 Kafalat-sponsored loan, which was approved two months ago, and which will allow him to work toward the 2017 vintages.

Harb follows the natural method of winemaking, meaning he works with natural yeast and uses no additives in his wine except sulfur, of which he uses less than the minimum recommended amount. Since he produces vin du lieu (wine that represents the soil and area it is produced in), he uses each grape variety separately and clearly states the region of origin on every bottle. In addition to the grapes from his vineyard in Nahla, Harb buys grapes from Zahle, Deir El Ahmar, and Riyaq from farmers whom he works with to establish quality control.

Harb launched his first vintages in October 2017 during Vinifest, the annual Lebanese wine festival, and says the positive response he received from fellow winemakers felt like validation for his difficult journey. He has produced 6,000 bottles of the 2016 vintage, and will produce 7,000 for the 2017 vintage. He expects to produce up to 12,000 bottles annually for the three years after that.

[pullquote]I know that the concept, and the way I do my wine, will appeal to the international niche markets that I know of[/pullquote]

Sept wine can currently be brought from 209 Lebanese Wine’s online platform and enjoyed in several niche restaurants, such as Bar Du Port in Saifi. Harb is working with Tire Bouchon, an importer, on a distribution strategy that includes training hospitality staff in wine appreciation so that they may in turn knowledgeably help customers make wine choices. 

Harb is keen to distribute internationally, taking advantage of the strong network he developed from his master’s program days. “I know that the concept, and the way I do my wine, will appeal to the international niche markets that I know of. This will give great credibility for my project,” he says.

Vertical 33

The name Vertical 33 stands for a latitude with rich soil ideal for red wine production. Eid Azar, one of the winery’s founding partners, chose the name to highlight the importance of terroir, which is the type of soil used for his wines. “It’s the geographic location that makes all the difference in wine; everything else is details,” he says.

Azar is a medical doctor at Saint George Hospital. He did his medical training in New York, where he learned to enjoy drinking and began collecting fine wines.

In 2011, during a hike in Bouarij—a village on the outskirts of the Bekaa, which lies between the eastern slope of Mount Kneisseh and Kefraya village—he came upon an old village called Remtanieh, which had been abandoned for nearly 50 years.

It was clear from the ruins, which included broken-down farmhouses and farming terraces, that the area had been agriculturally rich. “During the 1930s and 1940s, before the state of Lebanon came to be, this area was all planted,” explains Azar. “The village was left to decay because it didn’t make sense to have a cultivated area here when the Bekaa valley had opened up as a plantation; it was very difficult to compete with that economically in terms of scale. It’s also difficult to plant here because no big tractors can come in due to the narrowness of the roads. The area’s gradual revival began in 2005,” Azar said, when a few farmers started apple plantations.

While taking in the beauty of the land, Azar saw some live vines, which dated back to the pre-independence era. It was then that he thought of reviving the location as a vineyard. So he and two of his friends pooled their personal funds and brought nine hectares of land to set up a vineyard and winery.

In 2012, Azar and his partners met Yves Confuron, a well-known winemaker from Burgundy. They invited him to their property to study its potential, and he joined the project as their partner. After rebuilding the terraces and preparing the land, they began planting in 2014.

Azar says the idea behind the winery is to make the most of the area’s microclimates. “Our approach to winemaking is terroir-based, which means that you don’t drink grapes, you drink where the grapes are coming from. If you put the exact same grape in a different soil, it’s going to behave differently,” explains Azar.

As such, he planted each variety of grape in the climate where he thought it will grow best. For example, Azar planted the Pinot Noir in the land adjacent to the winery because of its high altitude (1,600 to 1,400 meters), which the Pinot needs, while they planted the Cinsault in Kefraya, since it is hotter in the valley, and that grape responds well to heat.

In addition to the vineyard around the winery, Azar and his partners bought additional land in Zahle (planted with Cabernet Sauvignon), Umol (planted with Obeidy), and Kefraya (two separate plots—one in the valley, and one on the slopes above it).

Vertical 33 released its first labels in 2017. Azar says he plans to have nine labels and will produce between 2,000 to 4,000 bottles of each depending on the yield. All the company’s wines are monovarietal, and the grape variety along with its area of origin is clearly labeled on the bottle.

Azar plans to distribute Vertical 33 in niche markets. Confuron, a distributor that is already present in 80 markets worldwide, will be facilitating the international distribution of Vertical 33.

Azar says they are planning to open their own wine shop and bar in Gemmayze before the end of 2017. The purpose of this venture, according to Azar, is to market Vertical 33 “one-on-one,” since, as a small winery is it easier for him and his partners to do their own marketing.

Vertical 33’s local distribution will be through two friends, one of whom works with Found’d Group, a holding company of several restaurants in Lebanon. Vertical 33 will be present in The Gathering and Kaléo, two restaurants managed by Found’d, as well as in high-end restaurants such as Liza, where customers appreciate good wine, Azar said. “My wine is $35 per bottle, so I’m not interesting for most restaurants because other wineries offer them a bottle for free for every two bottles they sell,” he says.

The wine will not be available in supermarkets, as Azar explains there is too much competition. “I’ll be smashed among titans, and I’ll have to compromise on quality, which I don’t want,” explains Azar.

Those interested in buying Vertical 33 can do so in the upcoming Gemmayze outlet, and at the winery itself. Azar and his partners are working on a restaurant and guesthouse project on the property, the construction of which is almost done. Azar says they are respecting the nature of the property and only using the stones and materials which are already on the land itself.

0 comments
0 FacebookTwitterPinterestEmail
BusinessHome Loans

A good time to borrow

by Hani Bathish
written by Hani Bathish

Home loans account for more than a quarter of local banks’ private sector lending. This is in large part thanks to subsidized loans from Banque du Liban (BDL), Lebanon’s central bank,  and loans from the Public Corporation for Housing (PCH), which are offered through local banks to lower-middle and low-income home buyers.

A surge in home loans in recent years has prompted banks to explore untapped areas in the home buyers’ market, offering loans in US dollars with attractive terms to those buying second or third homes, luxurious and expensive units, seaside or mountain chalets, and even land to build on or property abroad—none of which are covered by BDL subsidized loans or PCH loans.

Through billboard, radio, and TV ads, banks try to make a case for their home loan products, touting better terms than their competitors, including longer repayment periods, a longer grace period, more competitive interest rates, and even 0 percent interest. All banks offer nearly identical products when it comes to BDL subsidized loans or PCH loans, and their proprietary home loans are crafted within very strict guidelines from the central bank that leave them with little wiggle room to differentiate their product from their competitors. Nonetheless, banks have cleverly used that wiggle room to grow their portfolios of home loans. Home buyers would do well to educate themselves about banks’ bag of tricks and shop around for the product that best fits their needs.

A surge in home loans and incentives

In today’s property market, developers are increasingly eager to make sales, offering sizable discounts on units that dip to 20 or even 30 percent below asking price. “The volume of home loans in the market has gone up by 20 percent per annum over the past 10 years,” says Marwan S. Barakat, head of research at Bank Audi. “Today, there are $12.2 billion in housing loans in Lebanon, compared to just $4.5 billion in 2010.”

By comparison, total private-sector loans in the market today stand at $53 billion. According to 2016 figures from Bankdata, the three Lebanese banks with the largest home-loans portfolios were BLOM Bank at $1.84 billion, accounting for 16 percent of the market, Bank of Beirut at $1.52 billion, accounting for 13 percent of the market, and Bank Audi at $1.45 billion, accounting for 12 percent of the market. And it is not only Alpha banks that are looking to capture a sizable share of this lucrative market: BSL Bank, a midsize Beta bank, launched its Home Initiative Loan in February with the tagline, “Repay what you borrow and not a penny more.” The loan has an annual percentage rate (APR) of 0.65 percent—nearly zero.

“We got a call from consumer protection at BDL,” said Charbel Watfa, CFO of BSL Bank.  “We were happy we got that call—it meant they were doing their job. They were curious to know how we could offer such an attractive rate. I sent them my calculations, and they were satisfied and wished us luck.” At the end of 2016, BSL’s total home loans stood at $41 million; in the seven months since the bank’s initiative was launched, their home loans portfolio has increased by $21 million.

“The home loans sector benefited a lot from the stimulus packages of the central bank, although over the last two years there has been a slight slowdown in growth in the housing loans sector,” Barakat says. To counter this dip, the central bank has raised the ceiling on the amount home buyers can borrow to purchase a property under its subsidized loans program, from LL800 million ($533,333) to LL1.2 million ($800,000), a significant hike. Nassib Ghobril, head of economic research and analysis at Byblos Bank, says that BDL is set to announce new incentives to help increase demand for home loans from expatriate Lebanese, which he notes have dropped significantly. “The incentive is said to include a 30-year mortgage at 2 percent interest and a four-year grace period,” Ghobril says. “The intention to buy property may have increased, but that has not yet translated into actual transactions—for that, you need incentives.”

The 0 percent myth 

BSL Bank is technically correct when it says its loan is offered at 0 percent interest, not including fees—however, this is not to say that the bank doesn’t profit from the deal. The bank requires customers who qualify for the home loan to give it 20 percent of the value of the property being purchased, on top of the 25 percent down payment the customer already paid the seller, totalling 45 percent cash upfront. The 20 percent is returned to the customer in monthly payments over the duration of the 30-year loan period, minus the interest that the bank earns on the money from investing it. The bank could potentially lend the money out several times over that 30-year period at a much higher interest rate to recoup its costs and net a handsome profit.

But Watfa insists that what BSL Bank earns on its home loan product is barely enough to cover its costs. “In our situation, we needed to grow our market share, so we offered this loan. To be eligible for the loan, you have to put money in the bank, have an account, credit cards—in short, be a loyal BSL customer, and not just passing through,” says Watfa. He adds that BSL benefits from this home loan by building their customer base and cross-selling various other bank products.

[pullquote]Property prices went up so high that monthly payments couldn’t increase in the same way and still be affordable to salaried employees of limited financial means[/pullquote]

Banque Misr Liban (BML) offers a similar facility to buyers through its Prepaid Interest Housing Loan, which requires clients to pay the interest on their loan up front in cash, instead of over the 25-year loan period as part of the client’s monthly payments. Roger Zovighian, assistant general manager and head of branches and retail at BML, says this is advantageous for the client. “The amount paid in interest is less if paid up front than if you pay it in installments over the whole period of the loan,” he says. For example, the interest paid up front on an apartment worth LL300 million would come to around 20 percent of the apartment’s value, whereas if the interest were paid over the whole period of the loan, it would come out to around 40 percent of the apartment’s value. “We also invest the prepaid amount to earn interest and pay part of that interest back to the client,” Zovighian says.

Since introducing its prepaid interest loan a year ago, BML’s total portfolio of home loans has grown to $87 million, up from $74 million last year. Both BML and BSL home loans appeal to wealthier homebuyers who are able to pay 45 percent of the total value of a property in cash; it is an opportunity for them to leverage the purchase of a larger property and save on interest.

Buyers’ market intensifies competition 

Developers have had to adjust their expectations and offerings over the past few years. Since Gulf Arabs pulled out from the market, the luxury segment of the property market has seen almost no activity. “Competition is high between developers on quality of finishing, number of parking spaces assigned per unit, size and location of storage room for each unit, the quality of the material used. Developers are also providing financing facilities through tie-ins with banks and trying to make it easier for buyers to bear the costs of buying a home,” says Marwan Mikhael, head of research at BLOMINVEST Bank. “Before 2007, we didn’t have 30-year home loans; today you can get up to a 40-year loan. Property prices went up so high that monthly payments couldn’t increase in the same way and still be affordable to salaried employees of limited financial means, so we followed the US and Western countries in giving long-term loans.”

Demand today is for small units, according to Mikhael: Units measuring 70 square meters to 130 square meters sell best. The shift from luxury to utilitarian, from a supply-oriented market to a demand-driven one, began in 2011 with the start of unrest in Syria and its impact on Lebanon. Prices had been rising steadily from 2006 until 2010 by about 35 percent annually. “Real estate in 2006 was undervalued when compared to the region and other emerging markets at the time,” said Mikhael. “This was a boom time—9 percent [GDP] growth per annum—[and] the housing sector benefited because it was undervalued.”

The boom years are over now, but prices remain relatively high. “The cumulative decrease in real estate prices over five years, since 2011, has been just 20 percent,” says Bank Audi’s Barakat, adding that list or asking prices rarely go down in Lebanon. “Low leverage in the market means developers don’t rely on debt to finance their projects, but instead,count on their own financial means and are not under pressure to sell at any price. In addition, the type of demand in Lebanon is end-user demand; speculation only accounts for 20 percent of the market,” he adds. With Gulf investors out of the market, and Lebanese abroad investing less, Barakat says resident Lebanese demand is keeping the market together.

[pullquote]With Gulf investors out of the market, and Lebanese abroad investing less, Barakat says resident Lebanese demand is keeping the market together [/pullquote]

Bankers’ bag of tricks

BDL protects consumers’ rights by requiring banks to disclose their APR, including all fees and insurance costs, to any potential home loan customer. But sometimes, highly suggestive and emotive language used to promote a loan in advertising campaigns can mislead. Grace periods, in particular, are a misnomer. “A grace period as advertised by banks is not really a grace period,” says Mikhael. “While you only start to pay the principal amount after the end of the grace period, you actually do make monthly payments during the grace period, but only interest payments on the principal.”

In fact, the much-touted grace period, be it for one, two, three, or four years, is a little more than a poison chalice. “People are happy when a bank gives them a grace period, but in fact, this is to the bank’s advantage, not the customer’s, since it’s a period of time during which your principal has not decreased at all, but [instead] accumulated interest that you eventually will have to pay,” says BSL’s Watfa.

The way the monthly payments are structured also has an impact on how much a customer pays each month. BDL rules require that monthly loan repayments not exceed one third of a borrower’s total income. Some banks allow customers to make a one-time balloon payment at the end of the year to lower the outstanding loan amount and further reduce the interest. “Customers should ask about the monthly payments more than the interest. The monthly payment is divided between interest payment and principal payment. If a bank overloads the monthly payments with interest, the principal remains high, and a customer ends up paying more in interest over the whole repayment period,” says Mikhael.

Two different banks could have the same interest rate for the same loan amount, and the same repayment period, but their monthly payments would still differ markedly. “If a customer asks how the monthly payment is structured, a bank is obliged to tell them,” says Byblos Bank’s Ghobril. Mikhael says that banks generally do not tell customers how their monthly payment is structured, how much of it is interest, and how much is principal, if they do not ask. “It’s up to individual banks to decide how they structure their loans—BDL doesn’t insist banks tell customers how much of their monthly payment comprises interest and how much is principal,” Mikhael says.

Selling the loan

A loan is still a product that comes with a price tag and the unassailable consumer right to ask questions. Advertising is designed to make any product attractive and compelling, and home loans are no exception. “While advertising may get customers through the door, once they’re in, BDL imposes strict guidelines on banks that require them to disclose how interest rates are calculated to their clients. Banks have to be very transparent,” says Ghobril.

Local banks are intensively marketing their products to both resident and expatriate Lebanese, especially banks that are looking to expand their market share. “We do a lot of marketing for our products. We had a huge campaign for expatriate housing loans, and it has been a great success,” says Georgina Dinar, head of group consumer loans at Byblos Bank. “The idea is to assure the Lebanese living abroad [so that they] come home and invest in their country. Our team in Abu Dhabi and Dubai held a seminar for expatriates to promote our loan products.” The bank also adds a few sweeteners to reel in potential customers, including a special account for expatriates, cash transfers at low rates, and a pre-approved credit card with a $5,000 limit and no basic annual fee for the first year.

[pullquote]Interest in the land loan has been very good. It’s very important for the Lebanese abroad to buy a home or buy land on which to build a home in their native villages[/pullquote]

Three years ago, Byblos Bank also introduced the Expatriate Land Loan as part of its expatriate package. “Interest in the land loan has been very good. It’s very important for the Lebanese abroad to buy a home or buy land on which to build a home in their native villages,” Dinar says. To sweeten the deal further, for the first two years of the loan period, Byblos’ rate is cost of funds plus 2.8 percent instead of the standard 3 percent.

Bank Audi runs two or three promotional campaigns for their home loan products each year, according to Grace Eid, head of retail banking Lebanon at Bank Audi. “Over seven years, we have had road shows aimed at expatriate Lebanese. We have gone to Latin America and sent people to the Gulf. Most Lebanese in the Gulf would love to own a home in Lebanon. We see less interest from the US, but we do see interest from Latin America and from Africa—the Lebanese there have a nostalgic longing for owning a home in Lebanon,” Eid says.

Audi offers 0 percent interest credit cards, special accounts, low cash-transfer rates, and a free robot vacuum cleaner to each home loan customer. In addition, the bank also tries to build a strong bond of trust with consumers through what are framed as public-service TV ads that inform the public of their rights when dealing with banks. “As the consumer is not an expert, three years ago we introduced “Banking Tips,” a video series on TV, which includes advice on real-estate expert fees, home insurance, and bank-file fees,” Eid says. The series was a clever way to promote a feeling of trust between consumers and the bank. It has since been replicated by at least one other local bank.

Not all banks, however, promote their housing loans intensively. BML’s Zovighian says, “We don’t advertise our housing loan products; we only promote it through our brochures that we have at our branches. We haven’t found a way to market it properly to a wider audience yet, but we can’t market the [prepaid interest housing] loan as a ‘0 percent’ interest loan because it is not.”

Types of loans

The market has many options for first time home buyers: For lower-income homebuyers, there are loans from the Public Corporation for Housing (PCH); at the middle to lower-middle end, there is the BDL subsidized loan and Habitat Bank loan; and then there are the banks’ own custom home loans that meet the needs of second home buyers.

The Banque de L’Habitat, or Habitat Bank, offers home loans at attractive rates, and its customers are exempt from stamp duty and mortgage fees, but the loan amount is limited to LL800 million ($533,333). The bank currently has a 6 percent market share in the home loans market, according to Bankdata. “BDL owns 20 percent of the Habitat Bank, while commercial banks own 80 percent. BDL asked the Habitat Bank to lower its rate to 3 percent with the stimulus package, [and] this took clients away from commercial banks,” says Ghobril.

The PCH offers home loans that can finance 100 percent of the value of the purchased home with no down payment required, but the value of the loan is limited to just LL270 million ($180,000). The applicant’s monthly salary also determines the size of apartment one can purchase under this loan. “The PCH is the most advantageous: The loan period can extend for up to 30 years, but in the first 15 years you only pay off the principal, [and] the PCH pays the interest for you. After 15 years, your home is fully paid for. Over the following 15 years, you start paying back the interest the PCH paid on your behalf to the bank,” Mikhael says.

For higher-income people looking to borrow larger amounts to finance a property purchase, banks offer custom loans. Byblos Bank, for example, offers a US dollar loan with no upper limit on the amount borrowed, at rates that top 9.5 percent for a 10-year loan to finance the purchase of a piece of land. “Our product allows us to address the needs of niche customers, those who wish to buy a second home or a chalet—even those who wish to buy a piece of land, we cater to them,” Dinar says. “It’s not a highly profitable loan product, but our aim is to serve our customers and to grow our customer base.” She adds that if a customer wishes to build on the land, the bank can extend a second loan to cover construction costs with the land mortgaged to the bank as collateral.

Structuring the loan and transparency 

Each bank structures monthly loan repayments differently, through its own internal financial engineering. BDL leaves such decisions up to local banks to determine. “The monthly payment is reviewed each year based on the new interest [rate],” says Dinar. “From a transparency perspective, we provide our customers with a key-facts statement from the start that lists all the fees and costs of the loan and interest payments distributed throughout the year. The structure of monthly payments—[the] percentage of the payment that is interest and [the] percentage that is payment of principal—is standard for all banks in Lebanon,” Dinar says.

[pullquote]Two different banks could have the same interest rate for the same loan amount and the same repayment period, but their monthly payments would still differ markedly[/pullquote]

Bank Audi’s Eid says that banks have to tell clients about their APR, as well as life-insurance fees. “Banking services are standard. We differentiate ourselves from other banks by putting the customer at the center of our offering. People have different needs, and we have to provide financial solutions for our customers. We are not driven by volumes alone, but rather offer the right product for the right customer,” Eid says. Personal bankers learn about applicants, so they know to point them to the product that best suits their needs, she says, examining their repayment capacity and total income. Eid adds that the market has become more regulated over the past three years.

While banks continue to promote their home loan products as the best deal for the consumer, they will be held to a high standard of transparency and fair dealing by the central bank. This, however, does not replace the consumer’s responsibility to ask questions and to shop around for the home loan that best fits their needs and their financial means.

0 comments
0 FacebookTwitterPinterestEmail
EditorialOpinion

Enough empty promises

by Yasser Akkaoui
written by Yasser Akkaoui

Their crimes must not be forgiven again. For 11 years, Lebanese politicians spent some $130 billion without an audit. To pass the 2017 budget, our lawmakers defied the constitution by promising the audit will come next year instead of now. I’m not holding my breath.

Let’s not lie to ourselves: Audits can be manipulated. We had a regular budgetary process throughout most of the 1990s, but everyone in this country still believes there was waste and theft during that period. That said, at least there were tangible results from the spending: a new airport, improved roads, telecom networks, etc. Since 2005, however, what has really changed? New traffic lights and parking meters? Where are our reliable supplies of electricity and water?

An annual audit is like our state’s conscience reminding itself of the sins of the past year. By silencing our conscience, we’ve slid deeper into immorality. The likelihood that spending from the last 11 years will be audited is next to zero, as all indications suggest that the theft of public money has only increased during that time—with devastating effect.

Our economy is in tatters. People are struggling to survive, and there’s no light at the end of the tunnel. Our warlords and militiamen pardoned themselves for taking the lives of around 150,000 and the livelihood of a whole nation during their civil war. While recent economic crimes are by no means equal, the level of devastation is undeniable. We must not allow them to do it again.

Our politicians must be held accountable, and we must find a way to break this cycle of crime and pardon. They’re so far removed from their real purpose—to serve the nation—that they justify their every wrongdoing by convincing themselves that their personal gain somehow benefits their tribe. In reality, they’re creating dependencies that a functioning state would render obsolete, believing the lies they tell themselves about their roles as protectors.

We don’t need them, we don’t want them, and yet, praying that they will just disappear is a fool’s dream. Our political class has ruined this country, corrupting the entire system to its core as they cling to undeserved power.

We can no longer turn a blind eye, no longer accept the corruption at the heart of our country. Our politicians must be held to account.

1 comment
0 FacebookTwitterPinterestEmail
EntrepreneurshipEntrepreneurship in LebanonSpecial Report

Still starting up

by Matt Nash
written by Matt Nash

Over the past four or five years, it has been conceived, announced, born, developed, mapped, hyped, challenged, expanded, reassessed, praised, mapped again, hyped to excess, and questioned. But all the talk makes it hard to assess the true state of Lebanon’s tech entrepreneurship ecosystem in 2017.

Finance—in form of the funds mobilized under Circular 331, an initiative by Banque Du Liban (BDL), Lebanon’s central bank, to invest in startups—has been the driving force behind transforming a loose collection of tech entrepreneurs into a budding ecosystem, and fund managers say that ecosystem is quietly thriving. Established funds see their portfolios developing nicely, and do not anticipate the pipeline of interesting startups to run dry any time soon, pointing as an example to recent demo days at Smart ESA, an accelerator that was launched in 2016. Flat6Labs and Azure, two new venture capital funds, have experienced more interest than they had expected. As Flat6Labs’ Fawzi Rahal explains it, “Clearly, it’s a disadvantage in being late to the game [by setting up several years after others], but we’re not sure [the] game was ready if we were earlier. [The] pipeline is better than it was years ago. I’m not sure that will stay true two years from now, but it’s better today than it was. All other accelerators have been increasing the numbers they accept year on year.”

Angel investors are stepping in to plug the funding gap between acceleration and raising the first round of VC funding, known as the valley of death (see story). Foreign interest in the ecosystem’s development has not waned, as demonstrated by the UK’s willingness to support the UK–Lebanon Tech Hub, an international initiative kick-started by a collaboration with BDL and the UK government through the British Embassy in Beirut. But foreign investors are not making unrealistic gambles: Although its original goal was to create 25,000 jobs in the tech sector and entrepreneurship directly, the UK has revised its aim down to 25,000 jobs related to the entrepreneurship sector, of which about 5,000 will be directly in tech, and the other 20,000 induced jobs in more traditional areas, such as food delivery and printing.

Growing pains

All of this speaks to more stability in the ecosystem. Those working within it say the reduction of the hype of previous years is both understandable and welcome. The ecosystem is becoming “a bit more rational and organized,” according to Jad Salameh of the venture capital fund Phoenician Funds. As Executive was investigating this month’s series of articles about entrepreneurship, the World Bank offered an assessment of Beirut’s technology scene, finding that the “tech start-up ecosystem in Beirut is an early- to middle-stage ecosystem that has passed its nascent growth phase, but is still far from maturity,” an evaluation no one interviewed saw as off the mark.

Stakeholders describe a generally collaborative environment with many funds co-investing on deals, leading to increased transparency, if only for those on the inside. While the funds know what each are doing, many either do not have websites or do not update them with detailed information about their investments, making following the money from the outside difficult. And BDL, the author of Circular 331, has not published any figures or reports detailing how the nearly $650 million in public money the circular made available is being spent.

It is clear, however, that the ecosystem has experienced financial excesses of varying kinds and severities, including overhyped events, inflated funding demands, large honorariums to external consultants, a lack of transparency, audit challenges, governance issues, and even creative accounting or allegedly fraudulent practices. The central bank has made attempts to curb abuses, issuing circulars addressing these alleged problems. One regulation, for example, required funds and players who have been sitting at the table for a few years to intensify their reporting practices. While this is sometimes useful, it can also be over the top, such as the new mandate to report net asset value at the end of each quarter. “We have 20 days max after the end of the quarter to submit a report. If the quarter ended September 30, how do you expect to get a [profit-and-loss] or balance sheet in five days?” asks Zeina Rouphael, a senior analyst with the Azure fund.

At the same time, the ecosystem is impaired by design flaws and the inherent limitations of the Lebanese market and its human-capital pipeline. Companies and their investors feel the need to market their products outside the country, which is difficult because central bank regulations restrict the use of funds to expenditures in Lebanon. It is not easy to market to the EU or the US from Lebanon without at least having an office—and preferably direct human presence—in the target market. And while the human-capital pipeline in Lebanon is remarkably strong, it is strong by the standards of a small country, and when compared to the talent pool in a small place. In order to grow, the human capital available locally may have to be augmented, but it is very difficult to import top talent into a small local company because of various labor market restrictions and bottlenecks.

In the past, questions of strategy were placed at the feet of the industry’s sugar daddy, the central bank, which not only guaranteed 75 percent of funds for approved startups, but also fed some companies with 100 percent guarantees, contributing to the formation of what some people called an “ego-system” within the new ecosystem.

Moreover, BDL put its name in bright lights as organizer of the annual event designed to make the Lebanese tech ecosystem internationally visible. However, the vanishing act which BDL Accelerate pulled off in 2017 begs questions on whether the  event’s postponement or cancellation was done for strategic reasons, and what BDL plans to do next. A press-relations representative for BDL said only, “It’s just a personal reason. Nothing to do with economy or elsewise,” to explain why Accelerate will not transpire in 2017. The jungle is not rumbling because of this year’s cancellation, however, and individual strategies are of the “keep on keepin’ on” variety.

Serious money

Several sources interviewed for this article said the ecosystem needs some big success stories, as well as the follow-on funding to grow startups into such stories in the next few years. A few admitted they do not see any unicorns—startups with a $1 billion valuation—in the Lebanese stable at this point. Walid Hanna, a founder of Middle East Venture Partners, said “the largest company [I expect to see] is $300,000 to $400,000, which is not bad in the three to four years” following the publication of Circular 331. Henri Asseily, a partner with Leap Ventures, however, sees one potential unicorn in Leap’s portfolio: a software logistics company called Keeward, which received an earlier investment from MEVP and is currently subject of a legal dispute between MEVP and Keeward’s founders. Leap invested $10 million in the company and is hoping for a $50 million round to be raised abroad in the coming months.

As the Keeward example illustrates, growing young companies into unicorns will require follow-on funding for those that recently raised or are raising capital. Bassel Aoun, the project manager of the iSME program at the state-backed loan guarantee corporation Kafalat, notes that funding rounds tend to grow by multiples of three to five, meaning serious money will be needed to sustain the ecosystem moving forward. Circular 331 freed up $650 million for investing in tech startups—approximately half of which has been committed but not fully deployed—but that money, while mostly guaranteed, comes from local commercial banks that everyone in the ecosystem suspects are losing their appetite for this asset class. If the banks no longer want to bite, and private money does not fill the gap, desertification overtaking the ecosystem would not be far behind.

0 comments
0 FacebookTwitterPinterestEmail
Cover storyPublic finance

Ball in their court

by Jeremy Arbid
written by Jeremy Arbid

This summer, after years of procrastination, Lebanon passed a law increasing salaries for public sector workers. To help offset the salary increase, Parliament approved new taxes. But, in a surprising move, a group of parliamentarians challenged the constitutionality of the tax law in front of Lebanon’s highest court, the Constitutional Council, which ruled in their favor by annulling the new taxes.

Since then, Parliament has re-legislated the tax law, postponed full implementation of the salary scale, and legislated a budget. But Parliament legislated the budget through measures that may have broken the Public Accounting Law of 1963 and violated Lebanon’s constitution. In the event of a challenge, the high court’s previous ruling on the tax law could set the stage for a showdown between lawmakers and the judiciary over public finances.

Pistols at dawn

For much of 2017, as Executive has reported, Lebanese officials did little to explain to the public what new taxes they wanted to impose or increase, and muddled their function: The taxes were not designed for financing the salary increase, but for covering the deficit that was made bigger by the increase.

In August, both the salary scale and the taxes went into effect, and the latter was challenged via the Constitutional Council by 10 members of Parliament. (Article 19 of the constitution, which established the high court, lays out a very narrow pathway to challenge legislation, allowing only a limited number of officials to appeal a law to the Constitutional Council. These officials are: the Speaker of Parliament, a minimum of 10 MPs from Parliament, the President of the Republic, the Prime Minister, or, for cases related to religious matters, the respective leaders of religious communities. The statute of limitation is short: Laws can only be challenged within 15 days after their publication in the Official Gazette).

The Constitutional Council ruled in favor of the appeal, Executive reported in October, finding that the tax law was unconstitutional.

The high court ruled that Parliament violated its own internal voting rules when ratifying the law, passing it via a show of hands rather than a roll call. “We do not have any idea who voted for or against the law,” says Nizar Saghieh, head of the Legal Agenda, a non-profit organization advocating for the rule of law. The Constitutional Council also ruled that Parliament could not legislate new taxes when it was not giving the government permission to collect the taxes already on the books. Karim Daher, a public-finance lawyer and managing partner at Haddad Baroud Daher-Tria Law Firm, told Executive, “The high court ruled that [Parliament] cannot vote any new tax and [the government] cannot collect any tax without authorization, only provided by virtue of the budget law.” The budget is the document where the government projects expenditures and revenue, and Parliament gives its approval of this plan by voting it into law. Failing to vote on a budget for 12 years meant that Parliament essentially did not authorize the government to collect or spend any money (see overview story on why there has been no budget, and how the government spent money while it was not authorized to do so).

It was a landmark decision, says Mireille Najm-Checrallah, a lawyer who specializes in constitutional law at Najm Law Firm, describing the Constitutional Council’s ruling as its most important in its nearly 30-year history. The high court “could have cancelled the law for formal reasons, without going so deep in its interpretation of the violations,” she says. “In this decision, the Constitutional Council condemned the political class for their omissions since 1993. It’s a first, and that’s why its ruling was so disturbing to the political class. If you see the reactions, from [Prime Minister} Hariri to [Minister of Public Works Youssef] Fenianos to [Parliament Speaker Nabih] Berri, stating that the [Constitutional Council] overstepped its mandate,” Najm-Checrallah told Executive. Before the high court was established in the mid-1990s, there was no oversight of Parliament. “Now you have an authority counterbalancing, the so-called checks and balances in a democratic system, and really one of the first times it does so.”

A perfect design for a screw-up

In mid-October, Parliament met for its second legislative session and ratified Lebanon’s first state budget in 12 years. But the budget law passed with a similar pattern of violations as that of the tax law, and barely half of parliamentarians voted on the final bill. To circumvent the constitutionally required closure of accounts, Parliament inserted a clause in the budget law allowing it to delay any audit for 12 months (well after parliamentary elections next spring). That is if the budget law is not challenged at the Constitutional Council.

In speeches during the session before the vote, a small number of MPs opposed adoption of the 2017 budget law for different reasons. Some MPs refused to approve the budget without an audit of spending and revenues for all the years Lebanon was without a budget, saying this would violate article 87 of the constitution. Other MPs rejected a vote on the 2017 budget because the fiscal year has almost passed,  and much of the money has already been spent or collected: They argued that Parliament, if it were to vote on any budget, should have legislated the 2018 budget, and charged that failing to do so would be a violation of article 64 of the constitution. Others protested the order of business that Parliament conducted in the legislative session. On the first day of the session, Parliament elected committee members, which dissenting MPs argued violated article 32 of the constitution, which states that in Parliament’s second legislative session it should first deal with the budget before voting on any other matters. Complicating things further, the re-legislated tax law was published in the Official Gazette on October 26; at the time of this writing, the budget law has not been published. The publication of the tax law, which makes official that the new taxes are now being levied, appears to be a disregard of the high court’s ruling because the taxes went into affect before the budget did. It was not clear as Executive went to print whether or not the budget would be challenged at the high court. Some of the MPs who brought the suit over the tax law were considering challenging the budget law in late October, but as Executive went to print, fewer than 10 were supporting such a move publicly. Should Paliament’s recent fiscal legislation proceed unchallenged, it would represent a triumph of parliamentary dealmaking over the court’s objections.

0 comments
0 FacebookTwitterPinterestEmail
Cover storyExplainerPublic finance

A multilateral tale

by Jeremy Arbid
written by Jeremy Arbid

For 12 years, Lebanon did not ratify a state budget, and politicians have never offered an adequate reason to explain why. To understand what went wrong, we need to understand the process. Who should be doing what, and when should they be doing it? What does it actually take to create and ratify a budget, according to Lebanon’s constitution and the Public Accounting Law?

The budget approval process can generally be broken into three phases, which involve four distinct institutions: the drafting of the budget proposal by the Ministry of Finance, the auditing of public finances by the Court of Accounts, and the endorsement of the audit and the draft budget by the Council of Ministers before ratification of both into law by Parliament.

How the budget train derails

In April of each year, the Ministry of Finance issues a circular asking all other ministries and public institutions—a total of about 120 different directorates across the government—to prepare their spending requests and revenue projections for the coming fiscal year, which begins January 1 and ends December 31, according to article 7 of the Public Accounting Law. Also in April, the Ministry of Finance’s budget team, led by budget director Carole Abi Khalil, meets with the finance minister for direction and instruction on what cabinet wants to focus on, and to draft a budget with a clear vision and targets for the next year.

By the end of May, the ministries and public institutions are supposed to send their budget request back to the Ministry of Finance, which then compiles them into one administration-wide budget proposal. Throughout June and July, the budget team meets one-by-one with the rest of the administration to iron out differences on spending priorities and to reconcile discrepancies between previous spending or revenue and the future projections.

On August 1, after compiling all budget requests into one document, Abi Khalil’s team writes a report to the finance minister summarizing the items requiring the minister’s approval. The report might point out where spending could be cut, for example, or how to resolve unjustified spending. With the minister’s decisions in hand, Abi Khalil’s team begins drafting the budget that is submitted to the cabinet by the end of August.

While the draft budget is being prepared by the Ministry of Finance, the Court of Accounts works on closing accounts from the preceding year. This is where the process becomes confused. To close the accounts—in other words, to audit the preceding year’s budget—the court needs to receive that year’s budget numbers from the accounting directorate of the Ministry of Finance in the middle of August. As an example, in 2017 the state should have audited 2016’s public finances so that it could ratify 2018’s budget. The approval process this year obviously did not play out according to the budgeting and auditing provisions in the constitution and the Public Accounting Law. As for the court to close the accounts, Parliament must first have authorized the government to spend and collect money, in the form of a budget.

That way, the court has a legislated budget to work from when making its comparison with what the government was allowed to spend and collect, and what it actually did. Since 2005, there has been no budget, so the court was not closing accounts each fiscal year. Court of Accounts Judge Bassem Wehbe told Executive that after 12 years without a budget, “There’s no longer a closure of accounts as linked to the permission issued by the Parliament to the government in the form of an approved budget, but rather an account in which there is a period where there was revenue and expenditure, and which should be audited. It’s similar to a closure of accounts, but it’s not [the same].” In other words, without a budget there is no way to perform the closure of accounts as outlined legislatively. However, there are still records of what was spent and what revenue was collected, which can be audited. The closure of accounts—an audit that begins in the middle of August—is the point in the preparatory timeline that the proverbial budget train derails every year, and there are both technical and political reasons for why the court has not been auditing public monies (see overview story on why there has not been a budget, and how the government spent money while it was not authorized to do so).

A road map in theory

Theoretically, the Court of Accounts should, by September 1, finish its audit of the preceding year’s finances. By that date, the court would send a report of its work back to the Ministry of Finance, which would then present the closure of accounts result to the cabinet. According to Article 197 of the Public Accounting Law, the cabinet should endorse the audit report of the Court of Accounts before the first of November and forward it on to the Finance and Budget Committee at Parliament for debate, before submitting to the plenary for a vote approving the audit, a constitutional prerequisite (according to article 87) for ratifying the budget.

By September 1, the Council of Ministers should receive both the closure of accounts report and the draft budget from the Ministry of Finance. The cabinet should debate the merits of the proposed budget, adjusting spending and revenue projections to meet its goals and expectations for fiscal performance in the next year. After the cabinet has agreed on the draft budget, it goes to the finance and budget committee at Parliament before the first Tuesday after October 15 for parliamentarians to begin debate. Once the committee agrees on the draft budget, it submits it to the plenary for a last round of oversight. Parliament has until the end of the year, from receiving the draft budget in October until the last day of December to ratify it—although there is a clause, called “the one-twelfth rule,” allocating spending for one month in case the Parliament debate stretches into the next year. Parliament in 2005 made use of this allocation, voting the 2005 draft budget into law on the last day of January 2006. And though the One-Twelfth rule is legally only good for one month, in the absence of a budget for 12 years it was utilized to allow the government to continue spending at 2005 numbers (see story on how this rule works).

Now that Parliament has ratified the 2017 state budget, the question reverberating across Lebanon is whether this signifies the return of fiscal responsibility. That cannot be answered yet, because there is still a chance the law may be challenged in front of the Constitutional Council, which could strike down the new budget (see story on tax law rebuke). But if the 2017 budget law enters into effect upon publication in the Official Gazette, at least at the procedural level, Lebanon should be able to stick to the process as prescribed by law and the constitution going forward.

0 comments
0 FacebookTwitterPinterestEmail