Samar Ibrahim doesn’t like her current office. Since February, necessity has forced her into a small space in the bowels of ABC Mall, Ashrafieh. She suggests meeting for an interview instead at Urbanista on the top floor. It’s fitting that she’s chosen a coffee shop as a setting – she sounds like her own ideal client. Ibrahim manages the temporarily closed Coworking +961, a shared workspace. An 11-year-old concept with activism in its genesis mythology, co-working is gaining popularity from Los Angeles to Singapore and even boasts its own unicorn in WeWork (valuation as of writing: $16 billion).

Disrupting work

In 1989, Mark Dixon observed demand. The official Regus story has it that Dixon saw so many people in Brussels working from coffee shops and hotels, he opened a serviced office business. The idea was simple: the professionally homeless (be they travellers in town for a few days, the self-employed or a small business who cannot afford a long-term lease) need a professional place to work. A private desk (or desks, depending on the size of the venture), shared office equipment, meeting rooms for rent, flexibility and reduced overhead costs were the main value propositions. And it worked. Regus went public in 2000 and reported 1.9 billion GBP ($2.77 billion) in group revenues for 2015. In 2005, Brad Neuberg was working for a startup company out of a Regus location and thought of a way to change the model: socializing. He called it “community” in a 2012 interview with Deskmag, a publication that dedicates most of its coverage to Neuberg’s increasingly successful concept. He was pitching work meets activism in a casual setting with a startup mentality, not a business center with beanbags and an open bar. When a reporter with the left-leaning US magazine The American Prospect covered co-working in 2007, there were but 12 or so co-working spaces globally (all in the US, compared to the estimated thousands around the world today). The author described a social movement, not a business model. Taking a dig at ‘fly-by-night commercial coworking spaces,’ the author questioned how long the “communities” being created would remain authentic, warning that “relentless commerce is the solvent that loosens the ties that bind us.”

The “community” aspect of co-working is still an integral part of the concept. A “Coworking Manifesto” – which explains that the people who use these spaces “envision a new economic engine composed of collaboration and community, in contrast to the silos and secrecy of the 19th/20th century economy” – continues to garner signatures, but disdain for the co-working space as a profit center seems to be on the wane. There’s no shortage of advice online about how to make a co-working space commercially viable. Karly Nimmo, founder of a failed space in Australia, offers concise guidance on the importance of marketing: “Build it and they will come is bullshit,” she writes on Deskmag.com. Lying just below the surface of Nimmo’s advice is again the notion of creating the right sort of “community” for the space one is operating.

As for interior design, co-working spaces tend to be open plan. The “community” is all about mingling, sharing ideas, networking and, for some, generating new business. Many spaces bill themselves as ideal launching pads for startups and a market study on nurturing the “knowledge economy” in a region of the US state of Wisconsin argues that co-working spaces are integral to building an entrepreneurship ecosystem. Co-working is part of the “new economy.” The “sharing economy.” Think Uber and Airbnb.

The business side

As a business model, both co-working spaces and business centers are at least partially a real estate proposition. The owner of an office can potentially earn more from the property by renting small portions of it – say 5 square meters per desk – to a large number of separate clients on a short-term basis than renting the whole space to one client on a long-term basis. Consider a simplified, hypothetical example: Executive found a 200 sqm office for rent in Verdun on ultimatebrokerage.com. It’s listed at $45,000 per year. If the owner rents the office to one client for five years, the property will generate $225,000 in steady, fixed payments over the course of the lease. If our property owner divides the space into 25 co-working spots available for $350 per month (ignoring for the moment alternate revenue streams), in five years it could generate $525,000 if operating at full capacity. The cashflow is not as stable, and that last “if” concerning operating at full capacity is a big one at the very heart of a co-working space’s commercial viability. Flexibility is a big co-working selling point. One can rent space by the day, month or year, particularly helpful for startups that may have fluctuating space requirements in their first few years or for those new companies that are not even sure they will exist next month or next year. Clients can pay for “undedicated space” – meaning there might not be an open desk to use – or spend a bit more on dedicated space. Many co-working spaces offer private offices as well, and are accessible 24/7. This flexibility is a draw for clients, but a risk for space operators.

Fuzzy numbers

Popularity of the co-working concept is undoubtedly growing. Deskmag produces a yearly “Global Coworking Survey” launched in 2011. The 2016 edition forecasts the number of co-working spaces worldwide to surpass 10,000 by the end of this year. Considering there was exactly one back in 2005, that’s arguably impressive growth. We must add, however, that Deskmag does not regularly publish a methodology for its survey, so Executive is not certain just how “global” the survey really is. It also doesn’t include a margin of error, nor are the exact same questions repeated year-on-year. For example, one of the most interesting questions (Is your co-working space profitable?) seems to have been asked only once in 2012 for the survey’s second edition. The one-time result, however, is promising. Slightly over 70 percent of surveyed co-working spaces self-reported reaching profitability after “more than two years in operation.” Respondents also noted that around 40 percent of their revenues came from services other than a desk with an internet connection (events, tickets to events, rentable meeting rooms and food and beverages, for example). In reporting the results of this one-time line of survey questioning, Deskmag notes it only offers data from privately held companies – meaning that even if the respondents were known, their answers could not be verified. Anyone trying to argue for the profitability of the model, however,  would no-doubt skip the survey results and point to the outlier: WeWork. Founded in the US in 2010, the company closed a $430 million investment round in March, according to the Wall Street Journal, that will help it push into Asia.

Co-working in the local context

To date, co-working spaces have not been widely profitable in Lebanon, but part of that is by design. Ibrahim, manager of Coworking +961, explains that the company is a partnership between the Bader Young Entrepreneurs Program and the MIT Enterprise Forum for the Pan Arab Region. She says Coworking +961 is more about serving the country’s entrepreneurship ecosystem than being a successful business in its own right. At the end of January, the venture left the building near the Sursock Museum it had been renting since July 2013 in search of more stable lease conditions, she tells Executive. They found a new, 250 sqm spot in Saifi Village (on the edge of the Beirut Central District) with a five year lease and expect to open after around $50,000 in renovations are finished, Ibrahim adds.

AltCity – which used to operate a co-working space in Hamra – also recently closed its doors. While founder David Munir Nabti was not available for a full  interview, in a brief exchange he offers: “[Co-working spaces are] great for the community and the [entrepreneurship] ecosystem, but it’s hard to make them profitable.”

Richard Azoury, head of Solidere’s business development unit, tells Executive that the real estate company’s co-working space – Cloud 9 – is typically not even self-sufficient. It covers its own cost at 100 percent occupancy, he says, noting that is “very rare,” with occupancy typically around 70 percent. The space holds around 50 people, he says. Profitability of Cloud 9 is not exactly the goal, he explains. The space is limited to small companies or individual workers in the information and communication technologies (ICT) field and aims to be a home to startup companies that grow into businesses that require more traditional office space (ideally in a Solidere property). Walking through the all-but-deserted Maarad district of Downtown (surrounding the parliament and, since the middle of 2015, accessable only via military checkpoint), Azoury argues that the empty street-level storefronts that used to house restaurants and shops could be a techy business hub. While the prospects of that happening any time soon look remote, it’s the argument you might expect from a real estate company. Mouhamad Rabah, general manager of ZRE, makes the same argument. ZRE manages the Beirut Digital District (BDD), and Rabah sees the same kind of pipeline potential in a co-working space. That said, the district currently does not offer any co-working space. He explains that ZRE left the management of co-working in BDD to Berytech, ZRE’s partner, along with the Ministry of Telecommunications, in the development. Instead of opening a co-working space in BDD, Bertytech used the space to open Speed@BDD, a startup accelerator, Rabah says. Berytech operates its own co-working space outside of Beirut – the Digihive – but the person responsible was not available for an interview. That said, in an email exchange to try arranging a meeting, Executive did learn that “Digihive as a concept is being relaunched by Berytech.”

New entrants

Up in Byblos, Tarek Matar is soon to launch a new co-working venture called “Neopreneur.” And he speaks the social movement language as well. Referring to friends with entrepreneurial enterprises, he says the co-working space idea was born in part because, “they want an open space to share ideas and discuss.” He’s renting space in a hotel with the aim of hosting a co-working space alongside a hybrid incubator/accelerator for startups. Three new companies are already onboard to join, but he insists the space is “a social initiative. The model of co-working isn’t profitable. You can’t make a high return on investment. You barely break even. But the programs are profitable.”

Some beg to disagree. While recognizing the need to create a vibrant community, profit and scalability are key deliverables for Zina Dajani, co-founder of Antwork – a new co-working space set to open this summer on Spears Street, near the Hamra district. Antwork is a member of the DNY Group, of which her husband Tarek is chairman. The new co-working space has a long-term lease (10 years, renewable for another five) and anchor clients from DNY Group that will take up “30 to 40 percent” of the 5,200 sqm. These anchor clients will help limit the volatility risk inherent in such a venture, let Antwork start with “a healthy cash flow,” and provide “traction” for the space, she explains. Investment into the space (which includes renovation and some new construction) should be recouped in the middle of year two, Dajani estimates, citing WeWork in describing Antwork’s growth plans (being present in 20 countries in 10 years). And unlike many of the local co-working spaces that came before it, Antwork will understand the opportunity to make a little more.

“All our services are revenue streams,” Dajani says.

The more the merrier?

Reliable statistics, as always, remain a problem in Lebanon. Dajani sounds a bit like Regus’ Mark Dixon when talking about the growing number of Lebanese working from coffee shops and new startups being created with support from central bank circular 331. She admits she has no hard numbers on Antworks’ potential client pool, but it doesn’t phase her. Middle East Venture Partners – which is managing a $70 million fund of 331-compliant bank money – invested in DNY Group, so she believes this relationship may help feed clients into Antwork and the anchor clients – themselves all startups – she thinks will help kickstart the community Antwork wants to create. Dajani comes from a real estate background, and offers market insight she says also plays in the space’s favor. “As more new startups were coming up, the real estate [market] was not responding to the needs they had. One of which is the agility, the quick access to more or less space when you need it,” she says. This agility is exactly what co-working spaces offer and why they are arguably ideal workspace models for young companies.

Solidere’s Azoury and ZRE’s Rabah are less convinced. Azoury says he simply hasn’t seen a big enough boom in new startups to justify the creation of significantly more co-working space in Lebanon. Rabah declares, “Do we need 10 co-working spaces? No.”

Facts on the ground, of course, will prove who’s right on the demand side, but there appears to be no disagreement on the overall purpose of these spaces. While Executive did not ask if they read it, everyone interviewed for this article seems to agree with the first two sentences of the “Coworking Manifesto”: “We believe that society is facing unprecedented economic, environmental, social and cultural challenges. We also believe that new innovations are the key to turning these challenges into opportunities to improve our communities and our planet.”

The post Going it alone, together appeared first on Executive Magazine.

Drug use in Lebanon is said to be prevalent but remains difficult to define. An estimate from a 2012 report by the Institute of Health Management and Social Protection at Saint Joseph University in Beirut suggested that the “number of drug users in Lebanon ranges from 10000 to 15000 and that this figure is continuously increasing.” The leading drugs of choice are heroin, cannabis and cocaine, the report concluded, and statistics corroborate a high incidence of those drugs among arrested users. Looking at the statistics on user-related arrests gives a tip-of-the-iceberg snapshot of the problem but gaps in the data obscure its real size and challenges efforts to push progressive alternatives, like rehabilitating drug users instead of jailing them, forward.

When arrested, anecdotes by drug users describe maltreatment during detainment at the hands of the Lebanese police. One such story was recounted by Sadecc Choucair who admits, in his self-published book, he was under the influence of alcohol at the time of his detainment – a fact that may have altered his recollection of the incident. In telling his story Choucair alleges entrapment and wrongful detention by the Internal Security Forces, Lebanon’s national police, although Executive could not corroborate this.

On Christmas Eve 2013 Choucair was having drinks at his neighborhood watering hole when he received a telephone call from a close friend in search of a quick fix. In ten minutes I’ll be there, the friend said, though Choucair had told him he wasn’t carrying any weed. Not a dealer, Choucair was a university student that smoked recreationally with no prior run ins with the law. What transpired next, according to his recount, was less a friendly catch up and more an ambush planned by the authorities. The police arrested Choucair and hauled him down the street to the drug unit’s holding cells at Makhfar Hobeish (Ras Beirut police station). There, detectives questioned Choucair, coercing an admission of drug use and forcing him to spill the names of his dealer and others he knew who smoked. 

Local advocates say Lebanon’s drug control regime is repressive, the judicial process opaque, with little emphasis on harm reduction and quality of life for drug addicts. There are significant gaps in the data for several important indicators: the number of drug use-related prosecutions, the number of individuals incarcerated for drug offenses, the number of rehabilitated users, and the efficacy of treatment programs in terms of cost and success rates, and the effect of rehabilitation, instead of incarceration, on crime rates. While data for Lebanon is limited, studies from other countries show strong correlation that rehabilitating users is cheaper than incarcerating them, that crime rates drop when drug offenders are treated for addiction instead of sent to jail and that personal lives improve significantly when the government focuses on harm reduction over criminal punishment. Advocates in Lebanon point to small victories that have advanced the issue but say significant obstacles remain.

Entrapment

Choucair’s account falls in line with the findings of torture and abuse in Lebanon’s police stations and detention centers by the Human Rights Watch (HRW), a global watchdog. In a 2013 report HRW interviewed 52 individuals arrested for drug offenses, prostitution or homosexuality. The report highlighted personal accounts of aggressive interrogation tactics and mistreatment in the prisons – 19 of the interviewees, detained for drug use or prostitution, gave testimony to HRW while in pretrial detention. “Seventeen former detainees reported being denied food, water or medication when they needed it, or of having their medication confiscated. Nine individuals reported being handcuffed in bathrooms or in extremely uncomfortable positions for hours at a time. Eleven said ISF personnel forced them to listen to the screams of other detainees in an effort to scare them into cooperating or confessing. Twenty-one women we spoke with reported that police had subjected them to some form of sexual violence or coercion,” HRW found.

In response to allegations of abuse, the ISF in 2014 launched a pilot project to boost public trust in the police, revamping the image of the Ras Beirut police station, where the drug enforcement unit is headquartered, and introducing new training methods to the police force. The ISF also launched a complaint system for citizens to record ill treatment by the police.

But Karim Nammour, a lawyer and member of the Legal Agenda, a judiciary watchdog advocating for reform of Lebanon’s drug control regime, say the police’s reforms have not eased the heavy-handed tactics that drug users face. Users, Nammour says, are the weakest link because they often do not have the financial resources or political clout that others in the drug trade might leverage to avoid trouble.

To the police they are the low hanging fruit in a drug version of the Garden of Eden, a quick score to pad the numbers for results. Nammour’s criticism lies in what he says is an imbalance in who is targeted and arrested  and statistics from the drug enforcement unit of the ISF back up the notion that the police aggressively pursue drug users. In the last four years, 2012 through February 2016, the police arrested 11,038 drug users – 6,057 of those were for hashish use – compared to 2,169 street level dealers and 992 individuals closer to the source (growers, manufacturers and distributors).

Then again the arrest numbers also suggest, as Nammour points out, a pervasive culture within law enforcement and the court system viewing drug use as a criminal offense instead of an issue of public health, in contrast to a global outlook that favors harm reduction and civil infractions over incarceration.

Counting its victories where it can, the ISF and judiciary hit hardest at those who are weakest, throwing users down a deep hole they must climb out of. From arrest through protracted legal battles in the courts the deck is stacked against users, particularly the more vulnerable of those who have crossed the invisible line into the dark world of addiction. They say they want to go to rehab but the system says no, no, no.

Think of the money

“In Lebanon it is not allowed to use or buy drugs,” says Colonel Ghassan Chamseddine, chief of the drug enforcement arm of the ISF. True, the use and possession of all narcotics is against the law, not to mention the sale, distribution and production. But for users the law offers a path to avoid a criminal record and get the help they need to break addiction: rehab.

According to Nammour’s calculations less than 3 percent of the some 8,700 arrested drug users since 2013 were actually sent to rehab. The math is not exactly accurate, he acknowledges, because it is based on arrests rather than cases that are prosecuted. It is incredibly difficult to obtain statistics from the judiciary because access is limited (Executive’s multiple requests to judiciary officials and to the Ministry of Justice were declined or remain unanswered). Most cases are sealed because they are ongoing investigations, are classified secret because of the nature of the investigation, or involve a minor. The judiciary also has no centralized information system so lawyers, like Nammour, must go to each court and build connections with clerks to obtain case information – it will never be accurate, he says.

There are findings of financial and societal benefits of rehabilitating drug users instead of sending them to jail. In Western countries studies have found the cost of incarcerating drug users greatly outweighs the cost of rehabilitating them. Data also show a correlation in a fall of crime rates when drug offenders are rehabilitated rather than imprisoned. But there are no figures available on the cost of incarceration in Lebanon’s prisons and there is also a dearth of data on the cost of drug rehabilitation provision to the country’s users and addicts.

Greg Demarque

A 2013 tally by the Central Administration of Statistics found Lebanon’s incarcerated population totaled nearly 73,000, up only slightly following the parliament’s ratification of law 216 in 2012, shortening the annual prison calendar to 9 months to ease overcrowding in the country’s 21 prisons, suggesting incarceration bills may be high [ed. note: the 2012 budget ceiling – Lebanon has not passed a national budget since 2005 – for the Ministry of Interior and Municipalities did not separate the expenses of the police force and prison system, it totaled almost $535 million].

A 2008 Ministry of Public Health case study of drug rehabilitation treatment estimated some 1000 drug users were incarcerated (though not necessarily for drug offenses) at Roumieh prison, Lebanon’s largest jail. But the study only noted the high financial costs of offering such treatment within the prison; it did not break down what those cost amounts were nor did it give a figure of the total amount needed. Executive could not find the number of prisoners in jail for drug offenses, and the outdated studies do not allow a comparison of the cost of incarceration to that of drug rehabilitation.

In Western countries the financial cost of imprisonment is high. A 2012 study by the Vera Institute of Justice in the United States found, in a survey of prisons in 40 US states, the annual average cost to taxpayers was $31,286 per inmate. A European Council survey of 47 of the union’s prison administrations found that the average per day cost for each inmate in 2011 was 103 euros ($116).

The National Institute on Drug Abuse (NIDA) in the United States estimated the average cost to rehabilitate heroin addicts with methadone treatment for a full year was nearly $4,700 per patient. NIDA also found that in several estimates “every dollar invested in addiction treatment programs yields a return of between $4 and $7 in reduced drug-related crime, criminal justice costs and theft. When savings related to healthcare are included, total savings can exceed costs by a ratio of 12 to 1.” Deloitte, a for-profit consulting firm, found a dramatic reduction in Australia of AUD 111,458 ($84,604) in total financial savings when diverting drug offenders from prison to inpatient rehabilitation.

Correlations between rehabilitation and a fall in crime rates are also positive. For example, The Economist reported that Texas spent $241 million in 2007 on alternatives to prison for nonviolent drug offenders, including rehabilitation treatment, and that in the period between 2003 and 2011 violent crimes dropped by 14.2 percent.

Theoretical alternatives

Despite the found benefits, little has been accomplished to help users receive the treatment they need to break addictions and avoid prison time. Some users (there are few indicators other than anecdotal) who do go to rehab in Lebanon do so voluntarily, before the police pick them up, at non-profit treatment centers like Skoun or Oum el Nour or with specialized practitioners in hospitals. Joseph Khoury, an addiction psychiatrist at the American University of Beirut Medical Center (AUBMC), says most of the users he treats come to him on a voluntary basis, instead of for court ordered rehab.

The alternative of rehabilitation instead of jail time is but a theory. Since its ratification in 1998 this aspect of the law remains largely ink on paper. Nammour argues that prosecutors wrongly interpret the law when going after drug users. “The law states that a person using drugs, an addict – that’s the term used – is to be penalized unless this person states that he or she wants to undergo treatment. So you have two components of the crime – being an addict or refusing to undergo treatment. If one of these components doesn’t exist you don’t have a crime,” Nammour tells Executive. He says their justification for arresting users is to generate leads gleaned from interrogating them, that prosecutors pit users and street dealers against each other to widen the cast of their net. Lumping users into investigations pervades the notion amongst law enforcement and prosecuting officials that users are also criminals, Nammour argues.

Judges point out that users can receive rehabilitation treatment once their case reaches the court but Nammour says no, this is a wrong reading of the law that disincentives users from seeking treatment because it punishes them upfront. Rehabilitation is meant to be an alternative for drug users to avoid jail time, but because they are used as bait they are not afforded this option until it is too late. “This person will feel that [they’ve already been penalized] and at the end of the case – this is a pattern I’ve seen in almost every case – they don’t want to go to rehab anymore. What’s the point? When we tell them the point is so that you keep a clean criminal record (because if you finish treatment the judge should close the case with no marks on their record), they’ll tell me that ‘I don’t care about my criminal record, I just want this over with. I don’t want to go through anymore’,” Nammour says. Faisal Abdullah, a defense lawyer, says he’s had clients that have been incarcerated multiple times only to later die of an overdose because they did not receive the treatment they needed to break addiction.

But referrals for rehabilitation are also hindered because the government lacks the ability to treat the large number of arrested users. Lebanon’s 1998 drug law established a Counter Addiction Committee (CAC) meant to identify user cases that qualify for rehab. Though the CAC is up and running it does not have the necessary means to be effective in providing the alternative to incarceration. “There are very real obstacles prohibiting the CAC from referring [users for rehabilitation] – to refer 3000 users per year, it’s a huge number,” Nammour says. For one the sheer number of drug users arrested per year overwhelms the committee. Centralized in Beirut, Nammour argues the caseload should be diffused across several committees spread throughout the country. But an appointment to the CAC is an unpaid commitment that piles an additional full time caseload on already overworked judges (the same is true for others appointed to the committee, government officials plus doctors and civil society representatives). That the committee hardly functions is “a major gap” in the provision of rehabilitation, says Khoury, the addictions psychiatrist at AUBMC, a gap that “actually undermines its purpose because the government, the police or the legal profession don’t take this committee seriously enough.”

Then there’s the issue of too few treatment centers in the country. “Because the government did not accredit rehab centers – you have a committee created by the law that is completely disabled because it doesn’t have accredited rehab centers to send users to,” Nammour says.

Long road to recovery

Advocacy by civil society, led by the Legal Agenda and Skoun, has produced small but tangible victories. Last year the Ministry of Public Health published a five year plan to improve mental health care in the country, including substance abuse. The Ministry of Justice, the responsible authority, has accredited three rehabilitation centers to treat drug addiction but the spaces available are yet inadequate given the numbers arrested.

More recently, the Ministry of Public health issued a memo (the ministry provided the memo but declined to comment) directing the medical community to not call the police when overdosing users show up at hospitals. Allegedly, hospital administrators or their staff acted as a network of informants for the police, but Nammour could not provide evidence supporting this allegation citing fear of defamation lawsuits and Executive was not able to independently corroborate the claim. On whether the ISF has informants in hospitals Chamseddine tells Executive that, “No police [officers] from the drug enforcement agency are working in hospitals. I don’t care about arresting people overdosing, I care about their safety and their rights – we prefer they are treated to become well to avoid loss of life.” When the police are called about overdoses, he says, they are contacting nearby police stations and not his unit. Chamseddine also adds that hospitals are obligated, as per a 2006 memo by the general prosecutor, to call the police when a patient is a victim of crime, such as a gunshot wound. Nadya Mikdashi, Skoun’s executive director, points to the misinterpretation of this 2006 memo as enabling the reporting of overdosing patients. For whatever reason, calling the cops on patients, Nammour says, at least compromised doctor-patient confidentiality, a violation of Article 7 of their medical code of conduct (Lebanon’s Hippocratic Oath). In any case, the new memo from the Ministry of Public health is a welcome step forward but one that Skoun says it will closely follow to observe its application.

Nammour says the way ahead is straightforward yet challenging – apply the law, focus on enabling the CAC and accrediting treatment centers so that users who need rehabilitation have a place to go. But the key area that would resolve a number of issues is the period when a drug user is arrested and investigated, where users become disillusioned with the system and first encounter the obstacles they must hurdle to avoid prosecution and receive rehabilitation treatment. “There is a lot of work to be done because we’re speaking about the most rigid part of the judiciary looking at drug users [as criminals],” he says. Short of decriminalization or full on legalization of narcotics, Nammour says Lebanon can best serve its drug using population by rehabilitating them and expanding harm reduction programs, an outcome that Executive has previously advocated.

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Insurance is good for an economy. It is as simple as that. By being insured, that is by dedicating between 3 and 10 percent of their gross domestic product to financial care and protection of life, economic stakeholders in developed countries globally manage risk and prepare for problems arising in any situation – from earthquakes, floods and other natural catastrophes to manmade perils and plain old needs for health care or the accumulation of capitals for times of needs.

In the estimate of Swiss Re Sigma, a research institution affiliated with large global reinsurer Swiss Re, global real premium income is forecast to rise by 4 percent in 2016 and 4.2 percent in 2017, with emerging markets as the main driver. According to Sigma, insurance in the Middle East and North Africa region (MENA) is expected to witness a strong improvement to 8–9 percent premium growth in real terms. The outlook for life insurance in MENA is for insurance to benefit from the region’s “robust economic development and favorable demographics” but the reinsurer also noted that life insurance on a regional level – including Pakistan for the purpose – is low in the region comprising the Middle East, Turkey and Pakistan (METP) at 16 percent of total premiums in the METP region. To realize the potential for growth, stringent and comprehensive regulations as well as utilization of technical tools and Takaful – insurance systems in compliance with Islamic law – are needed.

Since the middle of the last century, the insurance industry in the Middle East has been a part of the equation, taking the much older concept of mutual protection to new heights. Risks change, however, and insurance needs to adapt to new practices – such as digital distribution and cyber insurance – and to new challenges related to issues as diverse as the human impact on climate and the aging of our societies. To address changes and challenges, bright minds in regional insurance have over many years teamed up with international experts in events such as the biennial large conferences of the General Arab Insurance Federation (GAIF).

Lebanon has been a pioneer in the development of insurance services and skills – from actuarial knowledge to underwriting and marketing – in the Middle East. It is the host of GAIF this month. As such, the country plays an integral role in the rollout of services for insurance and in discussions of the challenges that regional insurers should tackle over the coming years. However, GAIF is often also a political event and is exposed to the internal politics of the sector and to the politics of Arab governments. This is reflected in the program and composition of GAIF.

In 2016, for example, Executive has found only a handful of GAIF registered delegates from the largest economy in the MENA region, Saudi Arabia. Out of nearly 1,300 participants who registered one month before the event, only 5 percent were shown as originating in their work identities from the three Gulf countries of Kuwait, Qatar and Saudi Arabia.

Saudi Arabia has just published its vision (2030) to turn the kingdom into, among other things, an economic hub and global investment powerhouse. This vision promises a “tolerant country with Islam as its constitution and moderation as its method” with “healthier employment opportunities for citizens and long-term prosperity for all.”

The future envisioned by Saudi planners – and that is importantly not some foreign product of hapless civil-society people but is based on holy writ and identity and introduced by the royal chairman of the Council for Economic and Development Affairs, Muhammad Bin Salman Bin Abdulaziz Al-Saud – will include increased room for economic development of SMEs and commitment to education, health, housing resources, such as mortgages, and becoming “a leader in competitively managing assets, funding and investment.”

That is good news for insurance, which has an integral role not only in investment, financial markets and risk anticipation but also in all areas where governance and transparency are prioritized. One can take events and conferences such as GAIF as rituals or as possibilities to innovate in an area that is of vital importance for this region, all the more as improvements in insurance profitability in developed markets will remain subdued by pretty much every expectation. Executive stands with the call for improved collaboration in the insurance sector of the Arab world, whether in the area of regulatory stringency or in the development of our products, services and financial markets. All should work together.

The post Insuring a healthy economy appeared first on Executive Magazine.

The Lebanese insurance industry is enigmatic in the sense that numerous companies – 50 – share $1.5 billion in gross premiums but that not one of the companies is listed. For a considerable time – at least in the era of the current insurance law which was updated almost 20 years ago – the country’s insurance sector has also been characterized by a dichotomy between on the one hand being among the largest insurance industries in the Arab world in terms of insurance penetration, meaning the role of insurance in percentage of gross domestic product, and on the other hand being overshadowed by commercial banks in their contribution to jobs and to the economy in general.

Insurance providers count among the pillars of developed economies because of their stewardship of the people’s pension money and thereof resultant long-term investments. This role of institutional investors is largely absent from the Lebanese market as the Insurance Control Commission (ICC) noted in its recently published annual report for the sector.

Additionally, the Lebanese insurance market has seen numerous opportunities for development that have not been utilized. As insurance executives confirm, passing interests in the newer lines of business – whether insurances in case of riots and civil commotion or unrest (which are types of property covers), kidnap and ransom policies, or liability insurance for directors and officers of companies – are specialties that do not gain more than fleeting demand in Lebanese and regional markets.

Some insurance innovations will make their way into the Lebanese market – whether because of the internet of things, the shift of economies (and of economic confrontations) in the digital and cyber security world or because of the issues related to our climate and need of insuring alternative energy generation and preservation.

Life, motor, medical dominate

According to the records published by the ICC, the number of insurance providers which underwrite risks in the six different categories that require licensing under the existing law ranges from 45 in general accident insurance (which includes motor and medical) to 10 in credit and zero in agricultural underwriting. For life insurance, 36 companies are licensed of which all but a handful of firms can act as composite companies that offer non-life coverage alongside their life insurance licenses.

However, for the time being the Lebanese market is still best described in terms of the market shares for the different insurance volume specialties, namely motor and health insurance in the non-life or general sector and life insurance with the varieties of protection only, protection with savings, and unit-linked (with risk participation) lines. Life, motor and medical insurance account for around four in every five dollars in coverage sold by insurance providers in the local market.

It is instructive to see that in the life insurance sector the split between the three sub-specialties is tending toward growth of protection-only policies which, according to the ICC, rose from 9.4 percent to 11.3 percent of total premiums written in the years 2010-2014. Protection-only covers played main roles in bank-induced insurances of loan takers in the retail segment. Over the same time period, the issues of wealth-building insurance through protection-cum-savings contracts stayed comparatively stable, whereas unit-linked products saw both fluctuation and degradation as uptake of such contracts fell to 8.1 percent in 2014, compared with 9.9 percent of the market in 2010.

Demand still limited

From an operational perspective, the demand for life insurance is therefore a reflection of investment needs in the rather limited segment of society where such needs are present and on the other hand the needs and realities of people in the wider Lebanese economy, which in recent years suffered a downturn from the growth of incomes that was seen in the period prior to the outbreak of the Syrian crisis and other crises affecting Lebanon.

This also correlates with the growth concentration in general, or non-life, insurance lines where the five years from 2010 to 2014 saw a shift to medical insurance as the number one category in written premiums, moving ahead of motor insurance where demand for vehicles stayed buoyant but customers often opted for new cars that were less costly in acquisition, upkeep and maintenance, including insurance. Fire insurance saw increases amidst new ministerial scrutiny over policy requirements for enterprises but other branches of general insurance, including professional liability and similar covers, did not witness expansions that would have been intuitive in markets with more developed frameworks and stronger economies.

According to the annual report on the sector, it is now possible to see which companies exactly are leaders in underwriting of the various business lines.

The market is served largely by three types of companies: local firms that associate with international companies, local firms that are owned by local banks and firms that are local and independent. The local firms serve the long tail of the market while firms with regional or international ties often have stronger opportunities for product diversification and size-wise development. The question is what insurance companies are financially secure (see story page 64) and how to encourage greater financial and operational transparency of insurance companies in Lebanon.

The post Anatomy of an insurance sector appeared first on Executive Magazine.

E   Can you confirm data suggesting that AROPE Insurance maintains a leading role in underwriting comprehensive motor insurance, meaning insurance that covers the risks of owning and operating a car?

Yes, and we are the most profitable company among composite insurers which provide both life and non-life insurance, as per the 2014 Annual Report published by the Insurance Control Commission (ICC) on the Lebanese insurance sector.

E   Would you update us on the company’s results for 2015?

If we talk about consolidated figures, we had $109 million in gross premiums with $19 million in profits. Our shareholders’ equity stood at $126 million. The group is healthy.

E   Did you see any particular changes in your market share?

We can’t tell yet, but I think that we are still leaders in motor insurance and one of the major players in life insurance. Our business is growing across the board, despite what is going on around us. There were some impacts that we had to adjust to in 2015, such as the central bank circulars that mandated borrowers to put down 25 percent of any loan as well as the premium [of insurance related to the loan]. This led to a small regression in our life insurance portfolio but this will be better over the years to come, because the business is now more sustainable.

E   Banks also now have to offer loan customers a choice of five providers for the insurance that secures their loans. How did this innovation impact you?

This is a good thing. Banks have to offer more choices to their clients and for us at AROPE it was a win-win situation, because while other insurance companies are on the list [at our parent bank, BLOM] we are on the lists of other banks.

E   In its recent annual report for 2014, the ICC showed separate but very similar underwriting results for compulsory motor insurance in the two coverage areas of bodily injury, which has been imposed since the early 2000s, and material damages, which is quite new as a requirement under the 2013 traffic law. Are the growth rates aligning?

As you know, the only cover that was compulsory was for bodily injury. One of the articles in the new traffic law mentioned two years ago that insurance against material damages was required and we started to finalize this but there was no decision to go ahead with implementation.

E   So it is still not enforced?

No; all relevant decrees have not yet been issued.

E   You are bank-owned. Is the expansion into other countries driven by BLOM Bank?

As you know, we are in Egypt with life and non-life insurance. We usually follow in BLOM’s footsteps.

E   Apart from risks such as the currency risk, the Egyptian market has a large share of local insurers. How does this work for you?

What you are saying is 100 percent right but to look at it from the other side, before we arrived, there were companies in the market [which invested in Egypt]. Our penetration is good, there is a problem with monopolistic and big properties, which is not our cup of tea. Our strategy is to go toward personal lines – such as life insurance, medical, personal accident, all these policies which we love to sell. And we follow BLOM’s footsteps and we go after their customers.

E   Would AROPE aim to become more of a regional company in its profile? Do you have a strategic aim on how much of your business should be generated outside of Lebanon?

We were aiming to have a company that is bigger than the one we have in Lebanon when we entered Egypt. Our business plan was based on personal lines and bancassurance and when the government changed, the central bank stopped bancassurance agreements and it wasn’t until 2014, a year and half ago, that they issued a decree on how to do bancassurance. We applied and waited for the approvals and if I’m not wrong, we started selling the bancassurance [in Egypt] by the end of 2014.

E   Do you have a current target on how much of your revenue you want to generate outside by 2020?

If you asked me this question in 2010, it would have been much easier to answer. It is no secret that we had a lot of ambitions. Now, with everything that is happening around us, you have to be very careful. Play it by ear.

E   We talked some years ago about the role of insurance regulators and the need for a unified MENA market to make it easier to do intra-regional activities. Is this happening?

I can tell you that things are much better now in Lebanon [as far as dealing with regulators], because things are run very smoothly and we have new instructions every few days, which is good as long as they are good instructions.

The post Insuring growth appeared first on Executive Magazine.

The insurance penetration rate in Lebanon for 2014 was $557 premium per capita or 3.3 percent of GDP and very low for personal lines. Hence, there is much room for growth. However, if the insurance sector continues to grow without enforcing the appropriate solvency adequacy and corporate governance reform, the possibilities of default would certainly increase.

Vulnerabilities of insurers to default are not automatically tied to the size of the company but such risks do increase when insurers lack transparency in their financial disclosures and operate below the size thresholds that commonly define viable providers. The World Bank pointed this out in December 2013 in a technical note on the Lebanese insurance sector. “Small insurers, family owned and operated, might well be more like family brokerage firms in other jurisdictions, with limited risk retention and a focus on simplest low risk products,” said the World Bank’s market and risk-based review, which overall highlighted potentials in the sector and noted the good quality of supervision.

Since the publication of the above mentioned World Bank’s technical note, the Lebanese insurance sector has not seen major changes to its structure – with 50 active companies, there are still more providers than the underlying economy appears to justify, especially when noting that economic growth in the past few years was impeded by external and internal factors. However, the Insurance Control Commission (ICC) as supervisory authority has since that time enabled analysts and market participants to gain a much improved view of sector companies by releasing the revenue accounts in addition to the balance sheet information on a company level in the Annual Sector Reports for 2012, 2013 and 2014.

Finding transparency

On the basis of its own methodology and analysis of Arab insurance companies in the annual Digest Arab Insurance Rating (DAIR) and in the ICC annual reports, the company i.e. Muhanna rating services is now able to shed light on the Lebanese Insurance market in comparison to the insurance sector in the Arab World that is covered in DAIR. We present these findings that are based on the companies’ 2014 audited annual accounts, noting that DAIR has obtained most of the 2015 figures but we have limited the period of comparison to the years 2012-2014 in order to coincide with ICC’s most recent annual report.

This brief, which was prepared for Executive as an exclusive contribution, covers the 50 Lebanese insurance companies. It is important to note that 11 companies out of the 50 are referred to as “transparent companies” for the purpose of this article (see figure 1), since they voluntarily made their annual audited accounts public well before the ICC started fully disclosing company results with the publication of its annual report in 2013.

In analyzing all the companies in the Lebanese insurance sector, we defined three categories in which companies are clustered for the purpose of this article: transparent, unrated but secure, and unrated and uncertain (see figure 2 for the number of companies in each category).

Although 60 percent of the insurance companies in Lebanon fall within the uncertain range, 80 percent of the insurance coverage in 2014 originated from secured insurance companies as far as their financial strength are concerned. This should give some comfort among the insured. It is worth noting that the largest 10 Lebanese companies dominate the market with a 64 percent market share.

The satisfactory proportion of insurance business by secured companies notwithstanding, the large number of unsecured companies, 31, (see figure 3) – meaning providers which a full rating would place below investment range – brings attention to the importance of introducing transparency among the Lebanese insurance companies. Based on the ICC reports, the i.e. Muhanna rating services has rated the 39 companies which do not voluntarily publish their accounts. However, in the absence of full disclosure of the audited accounts, we have refrained from publishing the results in DAIR. We urge the insurance companies to respond to this concern for transparency and make their complete audited financial statements public, including their income statements, revenue accounts and notes.

Financial Highlights on the insurance companies in Lebanon:

Total shareholders’ equity of the 50 Lebanese companies amounted to $1.053 billion in 2014 against $981 million in 2013, an increase of 7.4 percent. Total Net Premium Written amounted to $1.15 billion in 2014 against $1.1 billion in 2013, an increase of 4.2 percent. As a result, the risk of underwriting exposure measured by net premium written over shareholders’ equity for the Lebanese companies reached 109 percent in 2014, similar to the 110 percent figure in 2012. The rate in Lebanon compares positively with the Arab World average of 176 percent (see figure 4). However, the Arab World average is distorted by the underwriting exposure of four companies with extremely high rates of this risk. If we exclude the four outliers, the Arab World average would stand at 117 percent.

The insurance business is unlike any other business: as the risk expires, the collection of premiums becomes harder. Hence, bad debt or inadmissible assets are common among companies with Premiums Receivable in excess of 30 percent. In this context, it needs to be pointed out that Premiums Receivable for the cluster of companies labeled “Rest – Uncertain” represent 44 percent of Gross Direct Premiums, which is well above the average ratio for the two other company clusters and the sector overall (see figure 5).

While the Management Expense Ratio is reasonably stable over the 3 years, it was noticed that the cluster of companies labeled “Rest – Uncertain” are spending more than double on their Management Expenses when compared with the secure and transparent companies (see figure 6). This could be for two reasons; the first is due to the economy of scale since most of those companies have very small portfolios. The second, since all the companies are family-run insurance companies, the structure of expenses is set by the owner/management.

Although it is imperative to separate the cost of doing life insurance business from the non-life business, the data provided proved difficult to analyze bearing in mind the existence of composite companies. In spite of that, it is clear that the acquisition cost among the non-life companies in the “Rest-Uncertain” cluster is well above the others in Lebanon (figure 7).

Capital vs. equity

The following table sheds some light on why very small insurance companies still exist in the current business environment (figure 8).

The World Bank’s comment on the current insurance solvency position in the insurance sector in Lebanon is to the point: “Solvency margin requirements are out of date and low by international standards. Local and foreign insurers and reinsurers (if any) are subject to the same minimum capital requirements. At 2.25 billion Lebanese Lira ($1.5 million), the absolute minimum is not out of line with international norms or a barrier to entry. An out of date solvency margin requirement at 10 percent of premium is required. As part of the future development of the sector, a more risk based regime should be explored. Initially, this could be developed as a risk assessment tool for the sector and the ICC before it is implemented as a solvency regime under a revised insurance law with appropriate transitional arrangements.”

So, it is not the capital requirements which count but rather the shareholders’ equity. The difference between the policyholders fund and the shareholders fund should be in access of the solvency requirements in order to allow for all the risks associated in calculating the provisions, as well as to allow for the company to grow or to close down. In short, the shareholders of the insurance companies have co-owners i.e. the policyholders.

Thirty-five Lebanese companies, which constitute 70 percent of the Lebanese insurance market, and 55 Arab companies, which represent 36 percent of DAIR, have shareholders’ equity that amounts to less than $25 million. It is unfortunate to note that three Lebanese companies have a negative shareholders’ equity. In addition, 15 Lebanese companies, which represent 30 percent of the Lebanese market, have shareholders’ equity between $25 million and $300 million.

As the World Bank commented, “it is not necessary to reduce the number of insurers to unleash further development,” we were reminded of sector development in one European country, Denmark. Denmark, with a similar population to Lebanon, is home to over double the number of insurance companies, yet it is a solid, well developed and properly managed insurance market. At the same time, consolidation has streamlined the Danish insurance market since the country felt the impacts of the global financial crisis in 2008/2009. Due to the crisis and as a result of the low interest rate environment, the number of insurance companies operating in Denmark declined from 174 at the end of 2008 to 115 in 2013. Compared with best practices and country examples such as Denmark, the Lebanese insurance sector can still cover much ground.

The post How secured is the Lebanese insurance sector? appeared first on Executive Magazine.

It means one thing and one thing only when flags of many colors are hoisted on Lebanese balconies: football is imminent. Famed for one of the most consistent and largest shows of fandom for big football nations, the first diehard Lebanese fans of the Nationalmannschaft – a word which the most-watched Arab sport reporters here bark out with three exclamation marks as a mixture of a battle cry and endearment – have already put up German flags on their buildings in April, more than six weeks before the team managed by Joachim Löw will run onto the pitch in Lille for their opening game in Euro 2016.

These expressions of affinity recur with every World and UEFA Cup tournament and are as handy as they are rewarding when one seeks to illustrate the passion for the foreign in everyday Lebanese culture. One of the most attractive foreign identities during tournament seasons is the German one, even more so in tournaments where Brazil is not a contender. And it’s not just the football in its proverbial roundness which evokes such fascinations. More specifically, the affinity hangs together with the admiration for German cars and for living or wanting to live in Germany. When one discloses German nationality in a casual conversation with a Beiruti it is the exception that the Lebanese partner would not refer positively to any one or all three of these purported denominators of shared interest.

As a rule in such conversations, there will be praise of a German-engineered product, of a presumed German quality or virtue, and/or of Germany as destination or model of statehood and societal organization. Talk of the “ugly German” just doesn’t happen and any criticism of country, politics or people is almost frighteningly rare in Lebanese society – and what makes the approval even more poignant is the sharp contrast to the eagerness with which the Lebanese criticize their own state and the vigor with which people from all strata readily and openly agree that the one human being not to trust, ever, is the average Lebanese politician.

Shared concerns

But while it is easy to speculate that romanticized Lebanese views of Germany may include a considerable dose of wishful thinking to compensate for perceptions of defectiveness in their own socioeconomic structures and hopes that are juxtaposed with systemic deficiencies in the organization of the state, getting hung up on the infatuations with German cars and football and the craving for Germanness may also distract from some areas of mutual interest that deserve greater attention.

The secular take on the ‘destiny’ topic is of course the Syrian crisis with its far-reaching implications for European Union member states and for the EU’s entire Eastern Mediterranean neighborhood. As Germany’s ambassador to Lebanon, Martin Huth, emphasizes in an interview with Executive, the arrival of the Syrian refugee crisis in Germany in September 2015 came as a surprise and demonstrated how “in today’s interconnected world a crisis can happen in one part of the world and it almost immediately affects us in other parts of the world” [see Q&A here].

According to Huth, the current relationship between Germany and migrants and refugees has the three aspects of humanitarian aid, integration and control of people flows. The former two are a case study for how one should deal with migrants and refugees and the latter is a case study in the volatility of trying solutions to what many perceive as an impossible – or unsolvable – quagmire.   

If not by design or understanding but certainly by default, the crisis has put the German and Lebanese state actors into a joint venture situation of shared concerns. The same truth applies grosso modo to the entire community of European and Mediterranean states but the partnership of necessity between Berlin and Beirut reveals some very interesting behavioral learning potentials. That is to say, opposite characters in a team have to learn to work together.

And what partners dealing with high, albeit different, impacts from the Syrian crisis could be more opposite to one another than Germany, Europe’s economic power player and a key policy influencer, and Lebanon, which combines small size with a minimal role not only in regional policy making but even in governing its own affairs to the point of living in a sorry state of political self-impairment? Immanuel Kant, the German philosopher who defined enlightenment as man’s emergence from self-induced tutelage (selbstverschuldeter Unmündigkeit), would not have approved.

The most oriental of all questions

The European identity has been entwined since antiquity with the cultural DNA that was found in the eastern Mediterranean and the Fertile Crescent. Science, religion and culture of the two regions were linked inextricably and often it was European thinking and behavior that was fertilized from the Orient. Even after the power center of human development shifted to Europe, and during centuries when Eurocentric worldviews dominated historiography, the Orient was a canvas of dreams and a source of ideas. In the slightly more modern parts of history, for about the past 150 years, the Orient – understood from the European vista as the region beginning in the Balkans and stretching clockwise around the Mediterranean and into Asia Minor – became an area of increasing economic and political interests. The issue was known as the oriental question in the Prussian-denominated Deutsche Reich of the later parts of the 19th century, which German-Israeli historian Dan Diner described as the historical episode of the Ottoman Empire’s decay and the impact thereof on European power constellations.

Up to the 1890s, it was a paradigm of German exterior policy to have no stake in the ‘oriental question’, according to a speech by Otto von Bismarck that the entire Orient was ‘not worth the healthy bones of one single Pomeranian grenadier’. However, interests in commercial development, including armament deliveries and banking expansion, were growing and reflected in the establishment of German financial institutions in Palestine and trade depots in, among other places, Beirut. These interests were also evident through the humongous infrastructure project of a railroad between Konya and Basra in the Ottoman Empire (the Baghdad Railway) that traversed Syria and Iraq, with a link to Damascus, and which was implemented on the basis of the German-engineered and funded 1890s Anatolia Railway project between Istanbul and Ankara and on to Konya. As German historian Gregor Schöllgen pointed out, the dream of the development of German interaction with the waning Ottoman Empire in the late 19th century even included ideas of settling German surplus population in Anatolia and Mesopotamia along the transportation artery.

Of course best-laid schemes have a tendency of going awry and the great railroad from Berlin or London to Basra by way of Mesopotamia was not a way to peace but an added trigger to the conflict that became known as World War I. This is of some relevance if one agrees with Diner’s essay from 1995 that the oriental question was playing out in the same spaces as the late-20th century question about the definition of Europe – and, one wants to add, it seems that this definition of two separate spaces and competing identities is still in existence in the 21st century but is neither a religious (Islam vs. Christianity) nor a political or social question but a question about two identities, each of which is multi-tiered.

To quote yet another truism, opposites attract, all the more if there are hidden underlying similarities and affinities. In this context, what German journalist Manfred Lüders wrote in an essay for weekly Die Zeit in 2012 about orient and occident may very well apply to the relationship of Germany and Lebanon. Despite their shared cultural roots in Abrahamic origins, historic exchanges and joint Mediterranean lifestyles, the interaction of occident and orient has become one of “twins who live in enmity”. Lüders also argued, “In the images that both have of the other, each of them discovers the oppressed subconscious portion of the own ego and reacts in fear, through cultural stereotyping.”

This is not to say that common economic ties are of no value. Executive did, in fact, discuss resurging economic activities with Ambassador Huth, and is happy to note that not only will the embassy finally move closer to central Beirut – after a hillside hiatus of several decades – but it is also planning to enhance the interaction of Lebanese and German business, as well as the activities of the German-Lebanese Business Council.

It is, to use the example of German cars, true that vehicles branded in Stuttgart, Ingolstadt or Munich today are not the most sold makes in Lebanon, at a total share of newly licensed passenger cars at about 10 percent for example in the first quarter of 2016. But it is equally true that these makes dominate in the segment of premium cars to the point that more than eight out of ten vehicles sold by importers of premium marques were German. And there is so much more: from Germany to Lebanon there is beer and socks made in North Rhine Westphalia, trees and sweets (for Christmas) from Rhineland Palatine and Bavaria, trucks, reciprocating engines and so on. In Lebanon, you find also the German teachings, technologies and even theology. The open question is if the future will see more of a mutual traffic of goods, services and ideas. But for the moment, while this leaves plenty of room to bring greater rule orientation to traffic in the Lebanese capital and to engineer a boom in adaptiveness of behaviors in Berlin, it gives hope that the wait for the first kickoff at the Euro 2016 tournament next month will be filled with (moments of) Lebanese-German Gemütlichkeit.

The post Way beyond cars and football appeared first on Executive Magazine.

E  In 2015, Germany experienced a sudden unexpected influx of migrants and refugees in large part due to the Syrian crisis and its effect on host countries, including Lebanon. As Germany has been trying to deal with the large number of people coming in, what will the political impact be and what are the current prospects for Syrians seeking shelter in Germany and elsewhere in Europe?   

Allow me first to express my appreciation for Executive Magazine. It was more or less by coincidence that I came across a copy of the magazine one or two months after I arrived in Lebanon [to take charge of the German embassy in September 2015]. I found a lot of interesting articles and in-depth information, especially [concerning] the oil and gas sector. I was greatly intrigued by this.

When we talk about Germany and the refugee crisis, it is of course an ongoing process and an ongoing story. In the Syrian crisis we were dealing with what you may call a surprise factor. Refugees arrived most notably over the course of the past year when in September 2015 thousands of people were stranded on the German borders and, as our government was faced with these challenges, our chancellor, as you know, decided to open up the borders. It shows us that in today’s interconnected world a crisis can happen in one part of the world and it almost immediately affects us in other parts of the world. One of the lessons to be learned for future crises is that you have to be able to anticipate them and be prepared for what might come toward you by building on previous best practices.

E   What has this surprise migration created in German society?

I think it has brought out the best and the worst in some respects, and that is easy to see and understand. There was an enormous wave and readiness to assist in all quarters of society and there were outpourings of help and sympathy for the refugees. On the other hand, as the situation progressed and the influx increased, there were also concerns over whether Germany would be able to accommodate and integrate such large numbers that are arriving on short notice and all at the same time.

We now have about one million people who have entered Germany and of course not all will be able to stay. We still expect 500,000 to 600,000 people to gain access to Germany over this year. This of course poses a significant challenge but I see some hope on the horizon that eventually the conflict in Syria will come to an end and lead to a situation that will enable Syrian refugees and migrants to return to their country. We believe that a large majority will want to return.

E   How about those refugees who will want to remain in Germany?

The second area we are working on in Germany is the integration of refugees. Integration is a challenge that will not be achieved in a short time, and let us not forget that not everybody who is coming to Germany is from Syria – that is a misperception. But when it comes to Syrians there are a lot of people among them who are qualified and eager to work and who are willing to integrate.

One final point and one that you see here at the embassy is that every morning there are a large number of people who are waiting to have their cases processed; these are mainly people who apply for Familienzusammenführung, or family reunion. We have so far accepted 476,000 persons in Germany who are either refugees under the Geneva Convention or are registered as asylum seekers. People who have gained this status have a legal right for their children and their spouses to come to Germany [and, in hardship cases, their parents]. These people are now applying here for admission to Germany and we expect this to continue for some time because the registrations in Germany are ongoing and because of the decision taken in September of last year. I understand that this embassy will still be very busy until the end of next year processing those cases.

E   But is it correct that this embassy is not an open window for any person arriving from Syria and saying, ‘I am a refugee and want to apply to go to Germany’? People have to have a relation who is already in Germany in order to approach the embassy?    

That is absolutely correct. People have to have this and specifically there is no way of applying for asylum through a German embassy abroad.

E   What about managing expectations in Lebanon that Syrians should go home and dealing with local perceptions that the United Nations and the European Union might want to resettle Syrian refugees in Lebanon?

As I have illustrated to you, Germany is doing a lot to receive refugees and migrants from Syria in the present context. As you raised the issue of Syrians being implanted into Lebanon, which is a topic that is raised very often during political discussions here, let me make it very clear: neither the UN nor Germany nor any other Western donor country that is involved in helping Lebanon does so with the objective of implanting Syrians in Lebanon. And we believe that Syrians themselves don’t want to stay there longer than necessary.

E   Turning to the topic of assistance, it seems clear that the financial commitments made during the Supporting Syria & the Region London conference in February of this year cannot be expected to be disbursed all at once or even as quickly as one might hope for from the perspective of humanitarian assistance and relief. Can you update us on the main points regarding German assistance to Lebanon under the London commitments?

Germany was co-host of the London conference and pledged 2.3 billion euros to improving the living conditions of refugees in the region. That relates to Lebanon, Jordan, Turkey and Iraq. Out of this amount, 330 to 350 million euros will go towards Lebanon in 2016 alone. We have an ongoing discussion with other donors about how best to go about using this money and an implementation mechanism that will allow us to oversee and control this whole process. This involves the UN, donors and the Lebanese side.

On the other hand, we are putting some focus on certain deliverables that we would like to see from the Lebanese side; one of them relates to waiving or significantly reducing the registration fee for refugees and another relates to possibilities for opening the job market for Syrians in Lebanon, because as part of this money we have a special initiative for creating job opportunities for Syrians. For that to be successful you need some openings, notably in the work intensive sectors like agriculture and construction, where there are some difficulties here in Lebanon. These things have to happen in parallel so that the funds can be put to best use and that is what our country and the Lebanese are focusing on.

E   The disbursement period for these funds will be from when to when?

I cannot answer fully when the flows will commence and how they will be implemented. I think $20 million has been made available already with the [International Labour Organization] and other first amounts may have been authorized in other areas, but things will certainly get moving over the next weeks and months. We have to do our part and act as quickly as possible.

E   Lebanon as a country of course has not just entered German awareness since the refugee crisis, even without reminiscing as far back as when Kaiser Wilhelm visited Baalbeck in 1898 and made a statement about those magnificent ruins. When it comes to the development of economic and social relations between the two countries, what are your priorities?

In fact, [when talking about touch points in history] we can even go back to the 12th century when the body of Frederick Barbarossa was buried in various places and his heart was to be taken to Jerusalem, though according to lore it made it only to the town of Tyre and is actually buried in the cathedral, which I visited [in mid-April].

In terms of current economic relations, I think we benefit from the good reputation of our products. A special example is a type of Mercedes car from the 1970s, known as the Strich Acht Mercedes (W 114/115 model series). They feature in every Lebanese film and documentary about the civil war, probably because the trunk was so large that you could transport all kinds of things across the Green Line. These cars are in service until today and have become somewhat synonymous with Lebanon. I actually own a very nice one myself but didn’t bring it to Lebanon.

The love of German products is very much alive in Lebanon and there is a huge network of German company representation here. Lebanon also, until very recently, used to be a springboard for exporting these goods into other countries of the region, to Syria but also to Iraq and the Gulf countries. All of this is in the hands of very competent and clever Lebanese businessmen who again prove that in a situation where the state is notably absent, they can still make their living and the economy flourishes more or less rather independently from the political quagmires.

E   How does this economic relationship look in terms of numbers and potentials?

We have an exchange of about 700 to 800 million euros in trade from Germany to Lebanon. From the German perspective this is not a huge figure but given the size and population of Lebanon, I think it is quite noteworthy and we are number four in the Lebanese import statistics.

Exports from Lebanon to Germany are only about 40 to 45 million euros per year and mostly agricultural products and there is probably room for improvement. I think we should be more interconnected not just for the exchange of goods but also for services, knowledge about technology, et cetera. An important link in this regard is trade fairs. We have a very unsatisfying level of attendance at the German trade fairs, even the very big ones. Take for example the (biennial) IFAT trade fair for waste management and sewage technology, which is coming up at the end of May. The topic is very important for Lebanon but our visa records showed only two registered visitors from Lebanon [in 2014]. According to our records, we had about 6,500 visitors to German trade fairs from Lebanon [in 2014] and about 90 who attended trade fairs [as exhibitors] with a stand. This can be greatly improved and extended. We will take a hopeful step in this direction now by boosting the capacities of the Lebanese German Business Council (LGBC) to provide information and assistance on business with and in Germany and on trade fairs. This service was offered previously by the embassy when I first worked here about ten years ago [but] was removed due to budget reductions, and inserting such capacities through the LGBC will move us forward.

An important area to mention in current economic activity is the revamping of electricity generation capacity. [One part of this is] through the refurbishing of power stations in Jiyeh and Zouk Mosbeh by a Danish-German consortium in which the German company MAN is providing turbines and I just saw these huge diesel generators, each with 18 cylinders, powering away at full speed in Jiyeh.

E   Have you seen these generators running?

Yes. These [power generation] capacities should go online very soon.

E   Is the embassy able to help specifically with the reputation development of German products in Lebanon when there is increasing global competition for German brands from Korean or Chinese makers?

We offer possibilities to promote our goods and we do that at our annual exhibition on the Day of German Unity [October 3] but I want to add that German cars, for example, don’t compete in the same market segment as Kia. We have Audi, Porsche, Volkswagen, Mercedes-Benz and BMW present here and they are very, very successful. Whether German washing machines face serious competition in Lebanon from other brands, I guess that is the case, but that is a market issue. Coming to our reputation: it builds on the solidity and the value-for-money reputation of our products and on other factors too, such as that we were not a colonial power in this region and that we have a strong cultural presence. Sometimes we don’t advertise ourselves sufficiently so people say what Germany is doing in Lebanon is one of the best kept secrets in Lebanon.

E   Marketing is not always seen as the German forte.

Marketing is important, especially in our day, and we should apply the saying that we have in Germany, which is, ‘Tue Gutes und rede darüber’ [do something good and talk about it].

E   Are you hoping for more marketing of Germany in Lebanon then?

We are taking a first step with the LGBC and I am ready to listen to any proposal from within or outside of the LGBC that takes us further. Another thing that is important is to move the embassy. We are rather removed from central Beirut. Fortunately now, after more than 25 years of relative isolation at what was supposed to be a provisional solution in Rabieh since 1988, I am happy to say that probably by the end of this year we will move into our new premises much closer to downtown Beirut and this should also give more prominence to our presence in the country.

E   There have been aspects of cost-cutting on the German side that impacted the presence, whether it was the Goethe Institute in Tripoli or the LGBC, but there were continual elements such as technical assistance and vocational training programs. Is the greater attention awarded to Lebanon under the current crisis providing some benefits in terms of funding for German presences?

As one of the things you mentioned, we should certainly try to reach out to other regions of the country. Lebanon is a small country and it is therefore not that difficult to look at centers outside of Beirut, notably Tripoli and perhaps Sidon and Tyre.

E   And you have already visited those regions.

The recent visit to the south underscored the importance of developing that region. We should be reaching out there as well. In Tripoli there is now a focal point of the Goethe Institute with the Safadi Foundation but there is room for more. But when it comes to directly assisting Lebanon, let us not forget that Lebanon is not a low income country. The average income is quite high when compared with less or least developed nations. When we talk of helping Lebanon what really needs to be done is to overcome the current political crisis and that is what should put Lebanon again on a good footing. What we have been witnessing is unfortunately a prolongation of the vacuum and the paralysis and a general unwillingness to overcome this. There is no abyss, but the absence of the state and its institutions that are really working in the service of the Lebanese citizen is a great deficit of this country, and I can only repeat what I said on other occasions: you can only help a country to the extent that it is willing and able to help itself.

E   You used the word unwillingness. Do you think the Lebanese political class have an attitude of unwillingness or are they not even aware of the importance of properly functioning institutions in order to be engaged in international discourse and exchange?

It depends on who you speak with. I think that the primary function of a state to look after the welfare of its citizens is a notion that is not necessarily shared by every Lebanese politician. A very concrete example is the presidential vacuum when, every so often, you hear people tell you that the president of Lebanon traditionally was not chosen by Lebanese but was preordained and chosen by outside countries beforehand – and that right now the situation is so difficult that we need a green light for a solution from Riyadh, from Washington, from Tehran, from who knows who, to agree on a new president and we can’t do anything. At that point I always inject into the discussion that the Lebanese should turn this around and agree on a president first and then the green light will come as well.

E   It seems to me that Germany, back when I was growing up, was mired in geopolitical dependencies larger than those of Lebanon but the issue of sovereignty or the will to elect the people’s representatives in national parliament was not diminished by our geopolitical dependency.

That gives me the opportunity for a closing remark that is very important to me. All of us know that if we look back at our childhood and try to imagine the Germany that we grew up in and compare it to our country today, we must say that our country has undergone an enormous transformation. In this region, we always talk about stability, but the understanding of stability is very often limited to preserving the status quo in the sense of saying al-amn wal istikrar, security and stability, in the sense of having state security and no criminality. However, this is the twenty-first century and we live in an interconnected world. What does stability mean in this context? I think real stability, no longer means this kind of static stability, but rather it has to be some kind of dynamic stability – a stability that allows for the ever-happening transformation and change that takes place in every society. What is key to achieving this notion of dynamic stability is in my view one simple thing: participation in constant discourse in a society. We need a political class that is ready to tackle the challenges of society but is doing this on basis of a participatory dialogue with the population. That is why invigorating the Lebanese Parliament is so important. How can a country function if there is no parliament and no discussions? As societies have to renew themselves all the time, populations have the responsibility to actively participate in challenges that have to be mastered. In Germany there have been so many challenges; we can talk about the refugee crisis, about reunification, about the euro and the European process – all these have been accompanied by heated debates and elections and this for me is the core element for ensuring a degree of stability – and I think the same applies to Lebanon as well. This society is ready and willing to participate in dialogue and discussion of all issues.

The post Diplomatically speaking appeared first on Executive Magazine.

The disruption was illuminating.

When the knock first came, Georges Chehwane tried not to interrupt his interview with Executive. The matter, however, demanded the chairman of Plus Holding’s attention. A client wanted to buy an apartment in a building Plus Properties is promoting, but needed flexibility in payment scheduling. It wasn’t long before Chehwane was standing, shaking the client’s hand. “Mabrouk,” he said.

“So that’s how it’s done?” Executive asks the man who only moments before was lamenting the slow pace of sales on the local real estate market. “You have to,” he says. Plus Properties is promoting four developments at the moment, in addition to constructing the company’s own projects. Why do developers come to him to market their apartments? Chehwane cites his company’s old-school marketing machine. He doesn’t do digital because he doesn’t see the value in it at the moment. “There’s a lot of competition. Everyone’s going digital.”

For Chahe Yerevanian, chairman of Sayfco Holding, Facebook is a money-maker par excellence. The pride in his voice is clear when he mentions the one-page case study Facebook wrote in 2012 about the $25 million in sales Sayfco generated exclusively from the social networking site for its Crystal Towers project, one of the few developments the company built itself. Yerevanian explains that of the 30 or so projects Sayfco has been involved with since 2004, it directly owned and developed land for only five (and was a partner in the land ownership on an additional two). Yerevanian’s model focuses on being a service provider. For 8 to 10 percent of sales revenue (plus a 30 percent bonus for sales above the pre-arranged target), Sayfco provides landowners with a development concept and markets the project. He claims the model is almost zero risk, but admits only 99 percent of the projects that he took on under that model will be completed. There’s reputational risk, and he says it has made him much more diligent when taking on new clients. He laughs when Executive asks about rumors the company is in financial trouble.

“I’ve heard I’m bankrupt,” he says, jokingly. “Or hiding in Brazil.” The slowdown has hurt, he admits, but insists the company is strong. Like Chehwane, Yerevanian says Sayfco benefited from a Banque du Liban circular from late October 2015 allowing for companies with cashflow problems to restructure their debts. Unlike Chehwane, Yerevanian says the process was painless. (The Plus Holding head contends that the banks are “not being very flexible” and says a union is needed to strengthen the developers’ hand). Aside from the debt restructuring, Yerevanian says he’s currently raising capital to help Sayfco expand into Saudi Arabia and the United Arab Emirates. Yerevanian says that in late 2015, he became Sayfco’s only shareholder after buying out his brothers, amicably. He plans to sell 50 percent of the company to unnamed silent partners for an undisclosed amount. Yerevanian wants Sayfco to be a global name in real estate development. He plans to grow the brand over the next five years and will only then begin thinking of floating a percentage of Sayfco.

Chehwane is similarly focusing on expansion at the moment by building in Cyprus, where he says margins are similar to Lebanon. But he also stresses the importance of diversification. A new member of the Plus Holding family should be coming soon, he says. Time does not allow an in-depth discussion but the project, Green Plus, will be well outside the real estate domain. It’s a hydroponics venture in the United Arab Emirates.

To survive as developers in Lebanon, Chehwane and Yerevanian agree it’s all about delivery these days. Chehwane admits it’s increasingly tough, however, and says he uses barters over cash whenever he can. While the number of real estate transactions is up 25.6 percent in the first two months of 2016 compared to the same period in 2015, a return to the boom days seems a distant possibility.

“Right now, we just need to get the buildings up,” Chehwane says. “It’s in everybody’s interest for projects to be completed.”

The post Strategies to survive the real estate sales slump appeared first on Executive Magazine.

It’s been three years since the nascent oil and gas sector in Lebanon was brought to a complete halt. The relative success of the pre-qualification round in 2013 brought the sector to center stage and contributed to the hype surrounding it. But the pre-qualification round was not followed by a tendering process. Instead, this was put on hold for a variety of both rational and irrational reasons. No licenses were awarded. No exploration was conducted. Not a single discovery was made.

Yet, the oil and gas debate in the country appears to be oblivious to these realities.

Conferences abound, though on a much smaller scale than a couple of years ago, and instead of investments and grandiose ambitions, we are left with capacity building and activism. Nearly every university in the country has launched new majors to prepare the Lebanese youth for work in the country’s petroleum industry. The first batch of graduates will soon enter a market which is completely void of a petroleum industry. But, perhaps the strangest debate in town, the one attracting all the attention in the past weeks and months, is the question of whether or not Lebanon should establish a national oil company (NOC) and when, for the sooner the better.

Taking a step back

Article 6 of the 2010 Offshore Petroleum Resources Law provides for the establishment of an NOC “when necessary and after promising commercial opportunities have been verified.” The law includes a degree of prudence that is welcome, though the article is now being associated with conspiracies alleging that it intends for petroleum activities to favor the private sector at the expense of the nation’s wealth. Calls for establishing an NOC years before any verification is possible is at best questionable and raises fears that the company would face the same crippling challenges most other public institutions in Lebanon have long suffered from: patronage and mass-staffing, at the expense of productivity.

The debate lacks a strategic vision. And, as is the case with public institutions in Lebanon, particularly those operating in a lucrative sector, these are regarded more as tools of political influence rather than  instruments intended to effectively implement a particular policy.

It is not enough to call for the establishment of an NOC at this stage, though it is not a complete anomaly to establish an NOC prior to any oil or gas discovery. But there is a series of questions that must be carefully considered, particularly at the pre-discovery phase.

Crucial questions

What will the NOC’s mandate and objectives be? This could range from the relatively reasonable to the very ambitious, and may require revising the legislative framework, with inevitable interferences and stalling whenever deemed necessary by one or more political sides. Is there a risk of institutional proliferation? The multiplication of institutions all addressing the same issues without a clear division of roles and responsibilities cannot guarantee a sound management and presents the risk of duplication of work. It is also important that ambitions are realistic and match the resources available, so as not to disappoint.

Does it have the capacity to carry out its mandate? It is critical to understand the time and resources needed to develop the required capabilities, and factor in possible hurdles. It is also important to be fully aware of the weaknesses, and resist the urge to brush them off, by, for example, claiming that we can seek the services of the talented Lebanese diaspora. Experience shows that the “Lebanese diaspora” argument is used more frequently than are the actual services of said diaspora.

How large will its workforce be and what will the hiring process look like? In Lebanon, it is very hard to resist clientelistic tendencies and the urge of mass-staffing public institutions. Some of those calling for establishing an NOC at this stage have a poor record in this regard.

What are the resources needed to carry out its role, knowing that it will have limited revenues in the pre-discovery stage? It is critical to understand the financial requirements and have the means to meet them. At the pre-discovery stage, and with little (onshore) to no (offshore) exploration activity, expenses must be kept under control.

What guarantees are the proponents proposing to alleviate fears that this company would not be mismanaged or would not dry up public funds? Following the experience of Electricité du Liban, the Lebanese are traumatized and their fears need to be addressed. If recent experience with Lebanese public companies is an indication, there is a real threat that an NOC would suffer from the same problems plaguing other already established companies. These include mass staffing, at the expense of quality (rendering the overall work less efficient), and possible corrupt practices. Are there any valid reasons to believe the management of this company will be an exception?

A generational conflict?

Finally, it’s worth noting that those that are most active in calling for establishing an NOC all belong to a certain generation that has experienced the past ‘glories’ of nationalization in resource-rich countries. However, today’s context is fundamentally different than that of the 1960s and 1970s. Maybe what is needed more than an NOC at this stage is for professionals and specialists that have a relevant experience in today’s oil and gas industry to set the framework for a national debate.

Establishing a national oil company is not intrinsically a bad idea. But for it to work, the subject deserves to be addressed from all angles and for all the aforementioned questions to be much more carefully considered.

The post A national oil company for Lebanon? appeared first on Executive Magazine.

There is an old Lebanese saying for reassurance in troubled times. For years, comparatively well-off people have told others, especially children, that ‘ma fi hadan bimout min el jou’’ (no one dies of hunger) when they complain excessively. While that may be true for some, five years of a refugee crisis coupled with long-standing structural issues are threatening that age-old adage and the confidence that buoys it.

Unsettling statistics

Food security exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life. People may not know it, but Lebanon has entered a new phase of food insecurity and, while malnutrition is not yet a problem, food security has been falling across the country. According to the latest figures from the United Nations, the proportion of Syrian refugees who are food secure has fallen from 32 percent in 2013 to 11 percent in 2015. Out of an estimated 1.5 million Syrian refugees in the country, only 165,000 have stable access to nutritious food.

With poverty rates increasing from around 28 percent in 2004-2005 to around 32 percent by 2013, according to several estimates cited last month by the World Bank Group, there are indications that the Lebanese are also becoming more food insecure. The latest figures from the UN Food and Agriculture Organization show that around 11 percent now cannot access their basic food consumption needs, 31 percent do not have access to healthy food and 49 percent are worried they will not have enough food to feed themselves over the course of the year.

Of course, one only needs to walk into the supermarket to understand why this is happening. In 2008, food inflation rose 18.1 percent. From 2008 to 2013 food prices rose some 45 percent. Obviously this looks bad for a government who is supposed to protect the food security of the country. But instead of using their authority to regulate food prices or creating more job opportunities, the government re-indexed inflation in December 2013 and voila, they now claim that inflation (and food inflation) is in negative territory and prices are falling.

Government inaction

To be fair, global food prices fell by 0.95 percent in 2014 and 0.64 percent in 2015, but that is also related to today’s low oil prices, the relatively strong dollar and stunted economic growth, all of which bode well for inflation. Prices are sticky for the same reason they have always been; we live in a country where price fixing and oligopolies are rife and there is no national economic vision.

Government subsidies on bread production have already proven ineffective and disproportionately beneficial to those with more income, not the poor who need the most support. Lebanon also never really benefited from the fruits of free trade because the World Trade Organization accession was halted once oligopolists realized obligatory competition regulation would run contrary to the moneyed interests that keep prices up and wages stagnant. At the same time, Lebanon threw open its doors to foreign food imports through both bilateral and multilateral trade agreements. Now we are up to 80 percent import dependent for our food, while our agricultural sector is in retreat.

Being physically able to bring in more food over the past years allowed our country to adapt to more than 1.5 million new mouths to feed. Yet, as those mouths become more food insecure and food aid dependent, the government also restricts them from working or possessing assets that can help them feed themselves. Restricting refugee labor is considered a sound policy to the extent that it can protect employment opportunities for unemployed Lebanese citizens. However, requiring refugees to abandon their refugee status and become sponsored migrant workers to perform menial jobs is a narrow-minded and zero-sum proposition when those restrictions increase food insecurity.

Instead of forcing Syrian refugees into informal labor and exposing them to abuse, a more intelligent and humane policy would be to allow them to work alongside Lebanese in agriculture. Permitting refugees to own assets that are used in agricultural production would strengthen food security in the country and produce more jobs for everyone. At the same time, Lebanon needs to stop being complacent about food security. The government must devise an integrated Food and Nutrition Security Strategy which rationalizes trade, market and production against resources and actually implement it.

Lebanon cannot wait for another food price shock to compel the government to act. People have already started to go hungry, and soon they may turn angry.

The post The fear of an empty plate appeared first on Executive Magazine.

Our economy is seriously underperforming. While this isn’t a surprise, it still bothers me every single day. I love our banks, but they are only part of the equation for real economic success. We need functioning capital markets, and we needed them yesterday. I love our central bank, but it simply cannot continue being the country’s only economic agent. We need a robust and well-planned fiscal policy, and we needed it last year.

The Beirut Stock Exchange is a joke. Companies with growth ambitions in Lebanon have debt as a local financing option. That’s basically it. This is absurd. We Lebanese have trading in our blood. Our financial markets – indeed, our entire economy, including capital markets – should be at the service of traders pushing our economy forward. Instead, we don’t even have laws that allow private equity and venture capital funds to be properly structured. While private sector initiative led to a draft PE/VC law, there’s a very real fear our politicians will ignore it, not understand it or both. Our national economic strategy was written for an era that ended 100 years ago. It’s pathetic.

While you might expect parliament or cabinet to develop and implement fiscal policies that can help the economy grow, ours are silent on that front. Our central bank is doing all of the heavy lifting, even as its actions are increasingly far from its mandate. Central banks do monetary policy. It’s a medium- to long-term game. Fiscal policy – which can have immediate effect – is meant to be hammered out by politicians (ideally with some input from the people they were elected to represent). Today, through stimulus packages, long-term loans, investment subsidies and debt restructuring guidance, our central bank is supporting the real estate, film and ICT entrepreneurship industries, to name but three. This is not only wildly abnormal, but also arguably unsustainable. We can only ask and expect so much from the central bank.

Last month’s municipal elections proved two things: elections can be held without the country imploding and people are ready for change. With parliamentary elections scheduled for next year, the opportunity to move this country in the right direction is more real than it has been in over 25 years. This is an opportunity that the unqualified will no doubt try to exploit. Our chance to influence the outcome begins now. If we begin demanding candidates who have real economic vision, we just might get them.

The post In need of a new national economic strategy appeared first on Executive Magazine.

Last month Lebanon celebrated, on May 25, our liberation and resistance national holiday for the 16th time. The region also marks 100 years of the Sykes-Picot Agreement’s adoption on May 16, which was signed in secret by colonial powers to delineate areas of power in the Near East. We commemorate too that 10 years ago this summer, some Israeli hardheads said they would bomb Lebanon “back into the stone age”. And last but surely not least to note is that May 25 is the day on which the country suffered the completion of two years without a president.

It goes without saying that the country needs a president and that history, however loaded with mistakes, is a river whose tide we cannot turn back. But in noting the painful past and its many sins of omission, something also deserves to be said about the current time, namely that Lebanon now, more than ever, is advised to think with full appreciation of its banks and its central bank.

Even if the banks’ results in 2015 and the first quarter of 2016 demonstrate lower or absent growth except for profits (see analysis) and even if the central bank governor is so pressed for time that his statements sound like similar to previous ones (see Q&A), the story is simple: we need both factors of confidence, the banks’ prowess and the central bank’s integrity, more than ever.   

This is not because the central bank has a monopoly on printing and controlling our money and because the commercial banks are financing both our private and public deficits. They have been doing both for ages.

There are at least three reasons why we should think about banks and the financial economy at this point. One is external. The global economy is calm now – but the question begs if this is the proverbial calm before the next storm. Experts warn that the developed and large emerging markets are passing through perilous moments of uncertainty and risk (see overview), and we will be under their influence.

Growth in the wrong places

The second reason is that the Lebanese economy is faced with low growth in 2016, for yet another year. As conventional wisdom goes, there is not much – not any – progress in the development of the oil & gas sector; not much growth in our traditional power house sectors like hospitality and real estate; not much transparency in most sectors of our economy; and a depressed mood to the point that the only things perceived as rising are corruption and inequality.

All this is reflected or even demonstrated in the data – as weak as some of the data are – such as the relentless increase in the gross public debt to over $71 billion in March 2016 according to numbers cited by the Association of Banks in Lebanon; the increasing share in recent years of gross public debt as percentage of gross domestic product (GDP); the weak consumer confidence index levels that are in a trough for multiple quarters and 66 percent below peak levels that were reached in the fourth quarter of 2008; and the declining perception of Lebanese competitiveness, as shown in the World Economic Forum’s Global Competitiveness Index where Lebanon slid down from 89th place in 2011 to 101st place in 2015, including the world’s second lowest (139) ranking in the “macroeconomic environment” pillar.

Inversely, it feels as if – whether based on facts or not – banks and the central bank are ever more important. The stimulus packages that keep our housing market afloat (as illiquid as real estate is in itself) come from the central bank. The investments that drive our slow migration into the entrepreneurial knowledge economy come from the central bank (see update on the latest funds). When people organize large social events, such as the Beirut Marathon, a cultural festival, a design week or a startup competition, they go to banks, and the banks, as Byblos Bank’s chief economist Nassib Ghobril put it, “respond”. That is why we sought out examples of how important a role banks play in our society, not only in their core business activity but also in areas like sponsorship of movies (see story) and cultural events (see Executive Life).

What is not a reason for any worry about the banking sector’s viability, by the way, is compliance. Lebanon’s commercial banks are prepared for whatever compliance mandates are thrown at them and the latest updates on the compliance front only confirm this (see story and Q&A).

The third reason why there is still room for serious, fundamental concerns is related to the difference between sustainable staying power and exhaustion by being in power too long and too lonely. The inherent instability of capitalism – which is not to be confused with the discredited idea of capitalism as being doomed – is captured in well-known concepts like Austrian economist Joseph Schumpeter’s ‘creative destruction’ and American economist Hyman Minsky’s financial instability hypothesis according to which “the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system”, or in short ‘stability leads to instability’. The history of finance does not support the argument that something will work in future just because evidence shows that it has worked in the past.

Within the reality of us not ever being able to predict the future with certainty (but enjoying the illusion that we can), trust in our banking system is key for having confidence in our own future. That is perhaps the reason why banks are vulnerable to sudden changes in the narrative that determines investor behavior, as seen in the financial crisis. It is when the narrative and behavior of our economic actors change that the future is in jeopardy.

What lies beneath

But also, we dare surmise, because even the strong get vulnerable when they are on their own in stemming the tide. The home-made problem is the weakness of our implementation of democracy. This problem means that in our experience of the past two years in absence of the Baabda manor’s mistress or master, inefficiency, inequality, irresponsibility and corruption cannot be curbed.

These monsters are building their strength for the third year now – and all the while too many banks seem overly and increasingly concerned with controlling their messages than with open and honest debates that come, for example, from answering the questions of journalists (and not from trying to turn all that is asked into controlled PR). If the banks are the last line of defense against economic decay and if the central bank is the last force standing against the invading monsters of inequality and greed, even the most ethical bankers or central bankers need support. They are tasking themselves with doing what they are not trained for – things like issuing fiscal incentives on top of guarding monetary stability.

Although writing about a different set of circumstances from the Lebanese scenario, American finance guru Mohamed el-Erian lately sounded like he was talking about Lebanon’s central bank, when he said “We all owe a big debt of gratitude to central banks. Acting boldly and innovatively in the midst of a massive financial crisis, they helped the world avert a multi-year depression that would have wreaked havoc on our generation and that of our children.” But he also observed the danger of them being so central to the whole economy, saying “the longer central banks remain ‘the only game in town’, dedicated to repressing market volatility and artificially boosting asset prices, the greater the subsequent risk to their effectiveness and operational autonomy.”

The problem is that the monster, of whatever nature, is growing and gnawing beneath the ground that our economy is based on: it is gnawing at our roots of trust because we give it too many opportunities to do so by not empowering a groundskeeper. It may be speaking to the wind, but Executive calls one more time for the election of a president, and for more standing together: that means standing shoulder to shoulder in openness to an unconventional and inclusive search for solutions to coming challenges, in our banking sector and the entire economy.

The post An ode to strength appeared first on Executive Magazine.

Lebanon without banks. That is far more difficult to envision than Mount Sannine without snow or the coast line without illegal buildings and the hills without litter. Asking some Lebanese economists if they can imagine the country without banks is like asking a king salmon if it can live without water. “It is true that there is an over-dependence on banks for financing but I would shift the question to ask, ‘what if there were more developed capital markets? What if you had a developed stock market that would enable companies to raise equity? What if you had a developed private equity sector and a venture capital sector?’” retorts Nassib Ghobril, chief economist and head of research at Byblos Bank.

“You cannot answer this question that way. In any country, banks are building the currency. You should ask this question differently: Can you imagine any society where there is no currency?” comments Freddie Baz, chief strategist and vice-chairman of the board at Bank Audi.

With currency he describes not only narrow money but also broad money, which is created at banks through deposits. “Currency is not cash, it is scriptural currency, deposits. The central bank is responsible for issuing banknotes. We create the other currency through our loans. We are financing the Lebanese economy exclusively; there are no capital markets. You cannot imagine any country without a banking system, unless you want to go back to barter economies,” Baz explains further.

Both economists are unequivocal in their appreciation of banking as elementary constituent of an economy and Ghobril emphasizes that banking would flourish even more successfully if it were supported by another systemic element. “Capital markets would complement commercial banks rather than compete with them and that would definitely reduce the burden on the banking sector of financing the entire economy and the government on its own. That would reduce the pressure to attract deposits,” he says.

While their concepts of money cannot be expected to reach the complexity of economists’ understandings, it is a safe bet to assume that the thousands of invitees at a cocktail reception with dignitaries from Lebanon’s top bank were in agreement on the importance of banking in Lebanon. As they were lining up to shake the hands of Samir Hanna, Mark Audi et al (after already having queued in their vehicles around the Centre Sofil block and into the nearby through streets), their voices were summed up in the words of a well-known business man and consultant. “Lebanon could not exist without its banks,” he commented when asked by Executive how important banks are for the country.

The same view exists from abroad. When asked why UK-based events company Euromoney Conferences was coming to the small Lebanese market to stage a financial conference for the second year in succession, director for the Middle East and Africa, Victoria Behn, commented that they are “convening in Beirut to provide a platform for discussions on the future of finance and technology in Lebanon.” Lebanon’s “financial and business success stories should be told to the international markets and to our core audience of financiers and investors,” she adds and enthuses, in response to a why-here question, “Lebanon has an incredibly strong banking sector with globally recognized banks.”

Points acknowledged. Lebanon stands out in banking and it is unthinkable to contemplate a modern – i.e. short of returning to Paleolithic barter – global economy without it. Still, there are reasons today, and increasing numbers of such evidentiary factors, to send the conventional economic thought box to the shredder. Perhaps not so much Lebanese reasons, but all the more valid macroeconomic and geo-economic ones.

Consider this: Productivity growth in all member countries of the Organization for Economic Co-operation and Development (OECD) has been declining in the pre and post crisis years, the OECD at the end of May said in a press statement with new data in preparation of its June 1 & 2 Paris Summit on the theme of “enhancing productivity for inclusive growth”.

Affirming that growth of productivity constitutes the central driver of “rising economic output and material living standards”, the OECD said it found that the rate of decline was much sharper in recent years than in the period between 1996 and 2004. Plus, the slow growth is worrisome because it has the potential to exacerbate income and wealth inequalities as it can trap people in low-productivity activities with high job insecurity, as the organization admitted.

It said, with an undertone of puzzlement, “In most OECD countries the slowdown has cut across nearly all sectors, affecting both large and small firms, but has been particularly marked in those industries where digital and technological innovations were expected to generate productivity dividends such as in the information, communication, finance and insurance sectors.”

In sum, the fabled knowledge economy sectors in developed economies did not deliver what they were expected to do. And the pictures do not get better if one looks up and down the road, left and right.

Dark clouds but nothing severe

In the local direction, banking is as vital as ever, and that means the economy is both sensitive and exposed to this segment. As the emerging markets-focused ratings agency Capital Intelligence observed in a note published in April, the state of the Lebanese economy’s vulnerability was on a trajectory of only getting worse in 2015 and beyond. “Refinancing risk remains high, with the government’s gross financing requirement at about 29 percent of gross domestic product (GDP) in 2015 and likely to top 33 percent in 2017,” it said, and continued, “The government is reliant on the domestic banking system for the bulk of its financing in both local and foreign currency. The economy would therefore be vulnerable to a shock that adversely affects the risk appetite of local banks or the confidence of depositors.”

Ratings agency Fitch was more supportive but hardly voicing good prospects for the future when it said in May that on the one hand Lebanon is in the group of banking systems with low outlook when it comes to vulnerability to shocks but on the flipside Fitch gives the banking system a B, a non-investment grade; Standard & Poor’s likewise upheld a non-investment grade ranking with negative outlook in March and the World Bank Group’s view on the role of the banking system and its interplay with fiscal realities in the recently published “Systematic Country Diagnostic” (SCD) on Lebanon is also, well, not flattering. “Fiscal policy is not transparent, lacks basic accountability, is prone to being captured by vested interests, and therefore is inefficient and unproductive,” it says (page 60). The banking sector “has reached a size seen only in a few countries in the world” but to improve financial inclusion “returns from lending to the private sector have to be better than the low risk, low cost, and high margins that banks are realizing by lending to the sovereign”.

This is hardly a new story and on top of this description, the SCD characterizes the central bank as “trapped in a Stackelberg follower role vis-à-vis the fiscal authority”. This term from game theory is not elaborated on in detail or explained to us in its theoretical depths. In a Federal Reserve paper written in the early 80s by US economist Alan Blinder, a central bank in Stackelberg follower role is actually prone to have the hand at the wheel; “Under a leader – follower arrangement, the follower runs the show, albeit subject to some constraints placed on him by the leader’s prior decision” he explained, and the follower’s room to maneuver can allow him to obtain the optimum if the follower only has enough instruments at his disposal so that he can effectively function as “single stabilization authority”. But given the view on the quality of fiscal policy voiced before, the limitation to central bank independence that is implied in the SCD observation is certainly not encouraging.

Still, Lebanon is not anywhere near the epicentres of the new money problems, which are based on the propensity to generate a financial sector that is exceeding the real economy by multiples. Lebanon’s banking sector appears to preoccupy itself with considerations of growth and competition that are very conventional, not to say tedious. Structurally, nothing major is visible at the surface of banking in 2016.

The alpha banks – the financial animals with bellies stuffed with over $2 billion in deposits for each of the 14 institutions in this group – can be seen as a class with approximately four peer groups. At the top are the two super-alpha banks, over-achievers Audi and Blom, whose diversification and size is advanced enough that they in foreseeable years will not be challenged competitively by any other Lebanon-based banking group. Then there are banks vying for the third spot and competing in the first follower segment. They make nice when the teacher is looking but are kicking each other under the table. A bit further down in the pecking order are banks that chase the top performance and size spots in the lower half of the top ten banks, and further down the five or six contenders that haggle with their peers in this size group for leadership laurels in niches or market segments.

Other than making marketing noises and reaching modest positioning gains – SGBL was the sole bank with improvements in every major category – these banks did not roll out models of revolution or new ideas. Even the largest ownership transaction in the sector – the sale of 9.5 million shares, or 40 percent, in Credit Libanais Bank by Egypt-based investment bank EFG Hermes is shrouded in secrecy.

When contacted by Executive, EFG Hermes said it would not comment because the bank has a habit of only issuing statements after the completion of a deal, but by all appearances the transaction, worth over $310 million plus fees and with potential to reach $480 million if all 66 percent of its Credit Libanais shares were sold by EFG Hermes, was more connected to the investment bank’s situation in Egypt than to any local issues in the Lebanese economy. In a local deal, Byblos Bank completed the transaction to acquire Bank Pharaon & Chiha, paying according to its statement $91 million for a bank with five branches, 30,000 accounts, 100 employees and $242 million in assets. It was the ninth acquisition move by Byblos in about 20 years but the first such event since 2010. In a smaller divestment HSBC’s local ops is for sale but bankers say nothing is known to have been decided.

The transformation of Near East Commercial Bank, Banque de Industrie et du Travail, and various entities in the Saradar Group into a new powerful contender is perhaps progressing with less-than-promised speed – also, nothing unusual in Lebanon. As far as operating environments and profits go, nothing new needs to be said beyond the habitual check of the numbers (see analysis page 28). In short, there is still excitement to be waited for, but nothing urgent on the table now. For those cherishing urbanization, building activity will be watchable in the new head office construction projects by Bank of Beirut and Banque Libano-Fran çaise.

The global economic quagmire   

Looking down the global economic road, traffic is even more confused than in Lebanon; dangerous driving abounds. The top economists in positions of influence, such as then-Fed chairman Ben Bernanke, could not foresee the Great Recession because they were thinking within in the boxes of backward induction, said James K. Galbraith, American economist and son of another famed economist, John K. Galbraith, in his book, The End of Normal. In this thought box, Galbraith wrote, the “preferred conclusion is inferred from the improved outcomes. Alternatives are ignored.”

Under the prevailing basic growth theory, central banks could only make two errors – of too loose or too tight monetary policy – and face in consequence only the dangers of inflation or deflation. Near-stable prices meant that it was assumed that central banks did their job. “Far be it from a central banker to master the larger world of industrial profitability, job gains and losses, the build-up of private debts, or the balance of supply and demand in the commodity market. Let alone the malfeasance of private bankers,” Galbraith wrote, arguing that this was why this breed of economists was unable to conceive of the Great Recession in advance of its outbreak.

Galbraith’s was a book in a recent range of clarion calls with fin-de titles given to them by, one suspects, marketing executives who were gauging the international mood as moving into depression or acceptance of downward prospects.

In 2013, Venezuelan author and one-time World Bank executive director Moises Naim published The End of Power, describing how ever-greater power accumulations in a wide range of areas, including corporate and finance behemoths, make the possession of power positions ever more short-term and perilous. In 2014 Galbraith published The End of Normal. And in 2016 two current works are reinforcing the impression that some leading economic minds are now voicing worries and considerations as if they were moving, in the Kuebler-Ross model of grieving, into an acceptance phase.     

One of these new noteworthy books is sold by marketing agents under the fin-de outlook: The End of Alchemy by former Bank of England Governor Mervyn King. The other’s title is – on its sound value – more reassuring. It is The Only Game in Town, by Mohamed A. el-Erian. But the works have more in common than marketing accolades of the kind: “this is the only book that you ever need to read”. Both authors are addressing the aftermath of the Great Recession, the roles of central banks and commercial banks, along with key questions on the future of the global economy, and they can both, as can Galbraith’s, be characterized as works for which gloomy is too weak a term.

Even darker clouds

King opens by saying that the financial crisis triggered “a worldwide collapse of confidence”. El-Erian, the finance man with many hats and even more publications under his belt, opens by saying that the post-crisis era’s “frustrating ‘new normal’ of low growth, rising inequality, [and] political dysfunction” is coming to a sort of maturation point – even this “new normal” (a term which he popularized himself in 2009) is getting exhausted, he says.

Naim cites expert findings that diagnose dissatisfaction with political systems and economic core institutions “is a growing and global phenomenon”. He notes, “The economic crisis that erupted in 2008 in the United States and then ravaged Europe has also fueled powerful sentiments against powerful actors that the public blames for the crisis: the government, politicians, banks, and so on.” He also draws attention to the shrinking power franchises of some top banks in the era after the crisis, and the diminished “freedom of action” of bankers.

Galbraith is more direct. He opines for a slow growth system as a “qualitative different form of capitalism”. In his perception, which seems more in line with traditions associated with the Left but not socialist enough to find the Left’s approval, banks are nothing more than intermediaries. Their usefulness is given only when they support “either household consumption or business investment – and then only as long as they do so in an effective, responsible, low-cost way.”

“Perhaps the country would be better off without its big banks,” he speculates in typically America-centric ways. He believes the financial institutions, along with other big entities, should be scaled back and advocates that the economy should migrate toward a “decentralized system with smaller top-level units, less powerful bankers, and stronger controls”.

The newer recipes and concerns are taking things a step farther. At the end of The End of Alchemy, King’s prescription is as limited as any acknowledgement of – inevitable – human information deficiency has to be. “A long-term program for the reform of money and banking and the institutions of the global economy will be driven only by an intellectual revolution,” he says, and argues that “without reform the economic and human costs of [the next] crisis will be bigger than the last one”.

Only a proper diagnosis, namely a recognition of the severe disequilibrium into which leading economies have fallen, will give us the courage – “the audacity of pessimism” when one has nothing to lose – to undertake bold reforms, he thinks.

El-Erian for his part thinks that “seldom has the global economy been engaged on such a path to a T-junction”, meaning a fork in the road from where one of two possible roads is leading the global economy into even lower growth, higher unemployment and greater inequality than was seen in the recent past.    

The other road, which can herald more inclusive growth, in his opinion, will require something utopian. “High inclusive growth and lasting financial stability requires a more comprehensive policy response that sees other government entities joining central banks in steadfast and serious effort,” he writes at the end of his too short book, and while he says that there is nothing preordained about our future, taking the better road will require our governments to get their act together.

In his words “a more comprehensive policy approach is urgently needed and is available” by governments and central banks and he postulates that they, and companies and households, will have to come to terms with their blind spots and do more to gain greater control of their destiny under either road out of the T-junction. Everybody working together? El-Erian might as well be asking for a lunar colony to deliver answers to the world’s economic problems. In the case of Lebanon, the request would be for a colony to function on the backside of our orbiter.

The silver lining

Compared to the troubles of the global banking scene, the Lebanese banks are reassuringly boring. Baz points out that this is continuing to be the case. “Look at our balance sheet as an industry. It is very simple; 90 percent of our funding is customer deposits. If you look at the assets side, there is no borrowing from the markets, it is customer deposits and equity. Loans represent 50 percent of our assets. We have some portfolio investments, but in Lebanese and some regional securities that we understand. The remaining is primary liquidity which is placed either with the central bank here or with our main correspondents abroad. Lebanese banks are boring banks,” he emphasizes. 

The banking troubles of today are actually economic problems that are rooted in a past of fragility and conflict, not of crises of the financial system. According to Baz, the steady-state size of an undisrupted Lebanese GDP – i.e. growth continuing at the average rate achieved in the two decades prior to the outbreak of the Civil War in 1975 – would make the country reach $120 billion in today’s economy. Even if one takes into account that this figure is hypothetical and that history cannot be reversed and restarted toward a more favourable outcome, the discrepancy between what could be and what is, is in the billions. Baz assumes that the economic utilization rate is 75 percent, and the economy, which he estimates at $55 billion at present, could therefore stand at $73 billion.

In Ghobril’s assessment, the gap is similar. “The point is the decline in consumer confidence correlates with the decline in GDP growth, which averaged about 1.4 percent between 2011 and 2015. Compare this with the average growth rate over the period between 2001 and 2010, which was about 4.6 or 4.7 percent. The output losses from declining growth in the past five years [sum up] to about $24 billion,” he tells Executive. 

This means that Lebanon, due to regional strife, political inaction, and similar issues, is suffering an “opportunity cost for the overall economy”, and this translates into less lending opportunities to the private sector for banks. “We extended $2.9 billion to the private sector last year, compared to $3.9 billion in 2014. The banking sector would definitely like to see the economy grow and expand, so that it can find more lending opportunities. Banks cannot be successful if there are no successful sectors to lend to,” he says.

Another entrenched problem is the opacity of the economy and the lack of information on most sectors which makes it impossible to say how large a share of corporate profits go to the banks. “As your question is, how much the $1.9 billion dollars of banks’ corporate profits represented in 2015 in percentage of corporate profits in Lebanon, and the answer is we don’t know. We don’t have figures,” Ghobril affirms. This means that everyone looks to banks as the institutions for all seasons and purposes.

“Is there an over-dependence on banks? Yes, there is over-dependence on banks in the sense that they are the only source of financing for the private sector and almost the only source of financing for the government. Between commercial banks and the central bank, and in absence of political will to reduce the fiscal deficit, which is the weak link in the economy, the banks will have to continue to attract deposits so the government can continue to meet its maturities and dates of payment,” he confirms.

In Lebanon, banks feel that their problem is that “we are impacted by the underperformance of our economy,” as Baz puts it. Where ignorance of sustainable economic mandates is endemic, central bankers and forward-looking commercial bankers would be waiting till the end of times if they wanted, in the sense of el-Erian’s recipe, real support from their political counterparts who are not trained in relevant skills. Lebanese politicians – if they get their heads out of demagogistan or wastastan and away from populist and simplistic decision attempts on promising sectors – will be hard pressed to find solutions to even exit their own communal backyards and gain regional perspectives on issues like developing oil & gas or employment.

At their best, the observations and recipes of global thought leaders like King and el-Erian perhaps qualify as belonging to the phase of grief over the loss of the small business world, a phase where we come to acceptance of information that the future will be different from what we expected before the Great Recession. That means also – positively – accepting limited but existing options that will be at our disposal to influence the future. After all, as King says, in a capitalist economy money and banks play such a critical role because they constitute “the link between the present and the future.”

The post Back to banking for the future appeared first on Executive Magazine.

Alain Saadeh, the lead actor in Film Kteer Kbeer (Very Big Shot), shocked audiences at a domestic awards show on May 28 when he refused the Murex d’Or award. Speaking on behalf of the director and production crew of his film, Saadeh pronounced the Lebanese award show, which recognizes regional players in a variety of entertainment categories, corrupt and did not want any part of it.

Executive cannot ascertain whether Saadeh and his crew were right in their accusation or not, but the refusal shows two things. One, the Lebanese movie industry is on a path of expressing greater self-confidence and sensitivity to the quality of the recognition that is offered to them. Two, the growth of this industry is accompanied by growing pains.

As Executive did its inaugural investigation of the cinema industry in Lebanon, we found an industry at a crossroads. Things are starting to look up in terms of volume and financing possibilities, though the future would be much brighter if more regional grants and government funding were available (see finance story). 

The industry, however, must get its house in order at the levels of labor and distribution and in boosting the quality of production. Film crews often work for little or almost no remuneration and the vast majority of Lebanese productions struggle to be seen; often the best chance for visibility comes if they are selected to be screened at an international film festival (see Cannes story). On the other end of the spectrum are the hypersexualized, cheap comedies that are snubbed by other filmmakers and yet manage to attract a considerable local audience, partly due to their extended theater runs.

In order to bridge this gap, the industry needs to feed itself: a percentage of profits earned at the box office should be reinvested back into the sector to develop talent and fund more projects. Investment into the production value chain such as scriptwriting would lead to higher quality Lebanese stories that would be made into movies with both commercial and artistic sides in mind. In turn, distributors would invest in the marketing of these films which would lead to greater box office results. The end result is that exhibitors would keep the films on their screens a couple of weeks longer.

In a nutshell, what is needed to push the whole industry forward is a collective film fund, something that has worked remarkably well in France. The country has a tax of 10.72 percent on theater admissions that goes directly to a common pot managed by the Centre national du cinéma et de l’image animée (CNC), a financially independent entity under the culture ministry.

Further down the road, once a certain volume of quality feature films has been reached, setting a quota in theaters for domestic films is another way to build up the industry. The Arab Media Outlook 2011-2015 reported that a reduction of the domestic quota in South Korea led to a 9 percent decrease in feature films in the same year.

When it comes to distribution, Lebanese films also need to capitalize on the rising trend of digital viewing in the region (see VOD story) and thus expand beyond its small local market. Cinema is a nation’s history, culture and a part of its identity, and therefore it is worth fighting for.

The post Get your house in order appeared first on Executive Magazine.

When the 12th edition of the Lebanese Film Festival opened to movie enthusiasts at the Beirut Souks on May 30, it reflected the potential of the nation’s film industry but was also a testament to the need for funding – the festival was only made possible this year with the help of crowdfunding.

The Lord of the Rings trilogy captured a generation of fantasy fans in the early 2000s and succeeded in drawing an enduring worldwide love for the natural beauty of New Zealand, where the films were shot. Local businesses have capitalized on the popularity of these films, which have been credited with directly bringing tourists to the country, by setting up tours of various filming locations. More recently, the hit HBO television series Game of Thrones resulted in a similar benefit to the Northern Ireland economy – the show brought in an estimated 110 million pounds ($161 million) in the first five seasons, according to national agency Northern Ireland Screen. “Cinema has a huge impact on a country. It’s the best ambassador we can have,” says Gabriel Chamoun, chief executive officer of Lebanese production house The Talkies.

Film production in Lebanon is a nascent industry, if it can be called that at all, when compared with developed industries such as the United States, India and France. “Lebanese cinema [is so small] and also the history of Lebanese cinema was interrupted at many stages because of the Civil War and all the turning points within the Civil War itself… There were always interruptions and the film industry would start all over again, depending on the situation. We’ve had some sort of stability since maybe 1994 and you can see that films of all sorts are being made,” explains Rima Mismar, deputy director at the Arab Fund for Arts and Culture.

A 2015 film industry report published by the Investment Development Authority in Lebanon (IDAL) reveals that the sector employs around 1,000 people directly, not including the hairdressers, makeup artists, costume designers and so forth. The total number of companies involved in production and postproduction is 97 (this includes production of television shows, commercials, music videos and others), 27 of which are exclusively film, in addition to 18 distribution companies.

It is hard to pin down in percentage terms precisely how much film and production as a whole contribute to the Lebanese economy, but it is in the low single digits. The economic potential in terms of indirect jobs created, however – particularly in the tourism sector – is substantial.

The Ministry of Tourism has been making efforts to put Lebanon in the spotlight as a filming location for foreign producers through its office in Paris, in collaboration with the Fondation Liban Cinema (FLC), a nonprofit organization dedicated to supporting the film industry. Serge Akl, the director of the Lebanese Tourism Office in Paris, informs Executive about his role in spreading the word to foreign filmmakers on Lebanon as a filming destination. The office has so far sponsored at least 10 “fact-finding trips” for foreign producers and directors to explore Lebanon as a potential shooting site and meet with local technical teams. While the IDAL report outlines Lebanon’s competitive prices relative to the region, as well as its multilingual and highly skilled technical staff – six universities graduate some 220 students in the audiovisual field in roles such as cinematographer each year – and its favorable weather and diverse scenery, it fails to mention the security concerns.

In the words of The Talkies’ Chamoun, “The major problem of Lebanon is the perception of insecurity, the proximity of the war zone in Syria [and] the fact that many insurance companies will not insure stars coming to Lebanon.” He also points out that the Saudi and other Gulf states’ ban on travel to Lebanon has affected the usual pre-Ramadan business boom in TV commercial productions. There will have to be a substantial period of stability and security before the next Game of Thrones or Lord of the Rings can be shot here in Lebanon.

Turning to another area of potential, the digital age has led to new heights in entertainment distribution. According to media reports, recent South Korean hit TV series Descendants of the Sun was streamed more than 2.3 billion times in China this April. Estimates vary, but the show is expected to add several hundred million dollars to the Korean economy through product placement-driven exports to China as well as increased tourism to the country. When it comes to Lebanon, regional success in the silver screen has limited potential due to the underdeveloped theatrical infrastructure in many Arab countries – in Saudi Arabia, cinemas are officially banned. And while the Middle East is not on the same scale as China, an opportunity nevertheless presents itself in the form of online, which is a growing segment in the region. Lebanon has already achieved an audience base to a certain extent. “There are a lot of documentaries, short films [and] experimental films when it comes to Lebanese cinema, and that has been exporting extremely well. In North Africa – Tunisia, Algeria, Morocco – these viewers are avidly consuming Lebanese independent cinema,” reports Karim Safieddine, whose streaming site Cinemoz also analyzes data on viewer habits.

Digital companies in the film business such as Cinemoz have also been able to make use of Circular 331 funding, unlike traditional production houses – but new avenues for financing have recently opened up.

Although the industry has been taking baby steps, there is a sense of optimism in the air. “What I feel is happening right now between all the different institutions, like the Ministry of Tourism, the Ministry of Culture, IDAL and FLC, is that things are getting together and I think we’re at the beginning of the organization of a true industry in Lebanon called cinema,” says Akl.

The post Lebanon’s cinema: the best ambassador appeared first on Executive Magazine.

In mid-May there was a temporary mass migration to the south of France as film professionals around the globe rushed to attend one of the year’s most prestigious international film festivals. When Executive spoke with a number of Lebanese film industry stakeholders last month, the excitement in the air was palpable. But it wasn’t the overly talked-about celebrities on the red carpet that shone in the eyes of these individuals. The real stars here were the three Lebanese films in the official selection at the 69th Cannes Film Festival.

For most Lebanese productions, being seen on an international stage at a festival like Cannes is their best bet of getting picked up by foreign distributors or sales agents. And with such a small domestic market that even the most successful theatrical releases have difficulty breaking even (see finance story), securing distribution in France, for instance – a country with a long history of co-producing with Lebanese cinema – is on the minds of local independent production houses such as Abbout Productions, which was one of the producers of Tramontane, the feature film that competed in Cannes as part of the International Critics’ Week, more commonly known as La Semaine de la Critique.

“Cannes is like the holy grail of [independent] films. Once you are selected, it’s like you are part of these films that will be seen more than others, go around a lot of festivals [and] have more chances of finding distribution, so it’s kind of very exciting for us and for the film to have it at Cannes,” says Myriam Sassine, producer at Abbout Productions.

Festival visibility helps on other counts as well. According to Sassine, gathering the estimated “$600,000 to $700,000” for the production of the film from various sources in multiple countries  was not the Herculean task that it usually is, partly thanks to director Vatche Boulghourjian’s previous success. “[Boulghourjian] did a short film that was in Cannes in 2010 called The Fifth Column, and he won third prize, so he was already kind of visible as an emerging talent [and] there was curiosity about what he would make,” explains Sassine.

Taking it one step further, it is in fact common practice nowadays for unfinished projects to look for funding through the Marché du Film (Film Market) that runs in parallel to the Cannes Film Festival and is the center of all commercial activity in the film industry. The Fondation Liban Cinema (FLC), a nongovernmental organization that has been supporting the film industry since 2003, organized the screening of five films that are works in progress in the event ‘Lebanon Goes to Cannes’, inviting investors and distributors to preview 20 minutes of each in the hope of securing financing for postproduction from interested buyers. At time of writing, there have been no announcements of inked deals, but a source at the FLC stated that the reception had been generally encouraging.

To the thousands of film distributors and sales agents that attend, the Cannes Film Market means serious business. This is where distributors compete for the biggest projects, as they skim through film screenings, talk with producers and sign their deals for the year.

The importance of Cannes to the industry thus lies in the exposure given to selected films, which increases the likelihood of getting financed, and because it is the movie marketplace where distribution contracts are signed. It is also a great opportunity for a nation to promote its cinema, and realizing that, the FLC worked in collaboration with the Lebanese Tourism Office in Paris – the Lebanese tourism ministry has just one other overseas branch in Cairo – to establish an official presence at Cannes with the Lebanese Pavilion starting in 2005.

“As the ministry of tourism, we are fulfilling our mission: communicating on something interesting in Lebanon – in this case cinema – and promoting our territories for filmmaking,” says Serge Akl, director of the Lebanese Tourism Office in Paris. With this goal in mind, an initiative called 35mm from Beirut was launched by Akl in 2009, the year that it provided the “first ever location guide” for Lebanon to facilitate networking between foreign and local film professionals.

Participation in the festival is a costly venture, with 60,000 to 80,000 euros ($67,103 – $89,471) invested by the Ministry of Tourism through their Paris office on a yearly basis, not to mention the corporate sponsorship by Bankmed that supports FLC going to Cannes. The Lebanese Pavilion itself, now in its 12th year, does not come cheap. According to the Film Market website, the starting fee for a standard pavilion is 16,800 euros ($18,789), which gives you 25 square meters of tent space and 25 square meters of terrace. The cost then goes up with each additional square meter. Add to that promotional and media spend, as well as travel expenses – Akl revealed that the ministry sometimes assists Lebanese filmmakers going to Cannes with airfares, hotels and other costs. This year in particular required a sizeable investment, with the addition of a Lebanese cinema party organized for industry professionals – a similar event was held once before in 2007 – and the production of a promotional video to advertise Lebanon as a film-shooting destination, commissioned by the ministry and directed by renowned filmmaker Philippe Aractingi.

The general consensus is that the investment has been worth it, with each year improving on the last. In 2015, Lebanese Ely Dagher picked up the Short Film Palme d’Or, the highest award in his category at Cannes, for his animation Waves ‘98, allowing Lebanese student filmmakers to dream that they too can succeed. FLC representatives returned from Cannes last month, bubbling with enthusiasm over the positive response to the films – Tramontane received a standing ovation – and the fact that Lebanon had its largest Cannes presence to date. With the rising momentum and the high number of films being produced this year, “2016 is the year of the cinema for Lebanon,” says FLC President Maya de Freige.

The post Yes we Cannes appeared first on Executive Magazine.

When M Media’s Chairman Eli Khoury described the recent success of Bil Nesbeh La Bokra Chou? (What About Tomorrow?) as “phenomenal”, he was right, from the perspective of the Lebanese market. With gross ticket sales of more than $1.3 million in local theaters, according to online reporting service Box Office Mojo, it is the highest grossing film of the year as of April 2016 (the latest available data). Based on the same website, in the past decade, there have been 10 movies (five of which are Lebanese) to break the $1 million mark. One filmmaker that has stood out with her international triumphs is Nadine Labaki, whose film Caramel, on a budget of $1.6 million, achieved an international gross box office result of $13 million. Her next film, Where do we go from here?, had a much larger budget of $6.7 million and earned more than $2 million in Lebanon alone. But Labaki’s films are the exception, not the rule. The reality is that most filmmakers leave no stone unturned as they search for the necessary funds to see a project through development, from production to distribution.

Myriam Sassine, Abbout Productions

And yet movie production is on the rise. “I don’t know if it’s a wave, but there is something happening. There’s popular films, there’s documentaries, arthouse films, radical films, films in between, and we keep receiving projects. This is amazing. That wasn’t the case when I started working [in 2010],” says Myriam Sassine, a producer at Abbout Productions.

Although there are conflicting sources of information and gathering data on the sector poses quite a challenge, according to the non-profit entity Fondation Liban Cinema (FLC), the number of feature films, including any documentaries or works of fiction running longer than 40 minutes, being produced in Lebanon jumped from four in 2004 to 31 in 2014, with the most significant growth after 2010. The investment value in these 31 films in dollar amount is anyone’s guess, as the figures presented by the two most ‘reliable’ sources available are 150 percent apart ($13 million and $32 million).

Recent developments

One encouraging sign was the memorandum of understanding (MOU) signed by the FLC and the Investment Development Authority of Lebanon (IDAL) in March 2015, which has added the media sector as a whole and film in particular to IDAL’s mandate of bringing investment to the country. “IDAL was not aware of this mission that [it] could fulfill and now [it] realized that the media sector is a good field to support… That’s why now with IDAL we are trying to finance more promotion and presence of Lebanese cinema abroad,” says FLC President Maya de Freige, adding that another MOU signed this year with Minister of Culture Raymond Araiji will also benefit the cinema industry. The significance of IDAL’s support is the 100 percent tax exemption on corporate profits for up to 10 years, provided certain requirements are met. Tax exemption was something the FLC and others had been trying to achieve through a draft law submitted to Parliament in 2014.

The second positive indication is that Banque du Liban (BDL), Lebanon’s central bank, has started to move. As the banking sector has been driving the Lebanese economy in various industries (see banking overview page 20), BDL has been increasingly concerned with bolstering the knowledge economy, notably through Circular 331, which includes digital media – online video platforms such as Cinemoz and M Media have already made use of it. And on April 6, 2016, the central bank took an important step in supporting the arts with the release of Intermediate Circular 416, which subsidizes loans of up to $3 million by banks and financial institutions for the production of movies, television series and documentaries, as well as theater plays. The loan is set for a maximum of 16 years and is based on the condition that at least 90 percent of the work is carried out in Lebanon. The central bank Governor Riad Salameh announced in a statement on May 12 at the Arab Economic Forum that he is committed to supporting film and the arts, which can contribute to job growth in the creative economy. He further stated that a total of $100 million in loan guarantees had been made available at the low interest rate of 1 percent.

Circular 416 has opened banks’ doors to producers in need of liquidity. “For example, [a fund granted by] the Centre national du cinéma et de l’image animée (CNC) would give you 100,000 euros but would pay you in installments, and sometimes you need the money right now to do the film. You know you will get it, so you can get it right now [with the bank loan]. With such a circular we can now access the money and just pay 1 percent interest, which is not big,” says Abbout Productions’ Sassine.

Weighing the options

The idea of a bank loan isn’t always attractive to film producers, however. Some industry players argue that in the current market, their prospects on return aren’t that good, even if they have 16 years, which means they would much rather receive “soft money” or grants instead of taking on a debt.

The other side of the coin here is the equity financing, which seems to be a model that could suit film, according to Blominvest General Manager Fadi Osseiran: “For me, the movie industry should rely mostly on the equity because it’s risky, and it fits very well with the private equity concept because private equity is a risky business.” He then continues with the analogy, saying, “If you put money into one idea, that might be a flop, or you might put in money and it turns out to be the Facebook of this world. The amount of ideas like Facebook has been tremendous; few of them survived and most of them did not. But if you have put money in all of them, you make it. This is because one will cover all the other failures.”

What he is referring to is the need to invest in a portfolio of films in order to distribute the risk. This means investing in one prolific production house or studio that has a number of projects lined up and the phenomenal success of one would, hopefully, make up for all the underperformers. Gabriel Chamoun, chief executive officer of The Talkies, the production company behind the feature film Ghadi, is working on setting up such a studio: “The idea is to create a studio and the studio will be producing many different forms of content: some feature films, some TV series [and] some digital series. So the investment risk will be spread over many projects and we will have the size and leverage which will allow us to negotiate better terms with the various partners involved in the distribution chain. We will even have leverage to reduce production cost and to improve our revenue flow.”

Nadine Labaki in ‘Where do we go from here?’

For the moment, no such studios exist in Lebanon, and according to what investment managers are saying, it seems unlikely that private equity funds would consider the financing of movies, based on the risks and costs considered. The concept of investing in films as a business is also relatively unfamiliar territory here. “Most of the demand is not from investors. Mostly producers go to investors and they have to pitch for that,” explains Osseiran.

The question remains, if not from banks or venture capitalists, where do producers in Lebanon go in order to get financing? When it comes to independent films, one road oft taken is applying for grants from funds in Lebanon and the region (or even beyond), such as the Arab Fund for Arts and Culture (AFAC). Since it started in 2007, AFAC has promoted various artistic fields in the Arab region, including cinema, through short- and long-term programs. The documentary program, for instance, is in its fourth year with a yearly budget of $300,000 and has supported around 35 projects that address “political and social realities in the Arab region,” says Rima Mismar, deputy director and film programs manager at AFAC. Then there is the general cinema grant, which includes all kinds of films – documentary, fiction, shorts, animation and experimental – that is given to “between 15 and 18 projects per year” with a total budget of $400,000. According to Mismar, individual grants range between $5,000 and $50,000, but the average grant is $30,000 per project. This amount will get a producer started, but certainly not cover a major feature film production, so why stop there? Often you will find a single movie being supported by multiple funds and institutions.

There are just a handful of funds in the Arab region, a couple of notable ones being the Doha Film Institute and Enjaaz, the funding arm of the Dubai International Film Festival. But these funds generally don’t receive a financial return on their investment. “We don’t hold any rights to any of the films that we support. We only ask for a sentence [of acknowledgement] to be placed at the beginning and end of their film,” says Mismar. Funds are thus dependent on fundraising and donations from a variety of institutions and philanthropic individuals to stay afloat, which is why unfortunately they don’t always last. On April 19, Screen Institute Beirut, a local fund, announced that it would temporarily not be able to allocate any more funds due to a lack of resources.

Another way of securing funds from abroad is through co-production. Lebanon and France signed an agreement in March 2000 that encourages exchanges and co-productions between the two nations in the cinema industry. According to the Euromed Audiovisual III report on Lebanon published in 2013, 37 percent of all Lebanese co-productions in the period between 2006 and 2011 were with France. The United Arab Emirates came in second, with 20 percent, and all other countries were in single digits.

These co-productions do, however, come with strings attached. Among other things, the French-Lebanese co-production agreement states that “the minority co-producer’s contribution shall involve an effective technical and/or artistic participation that is equal to no less than 20 percent of the total budget.” Even when it is possible to meet all the conditions, the competition is fierce. “The actual situation is that when you go [for co-production], everyone knocks on the same door. We just all knock on European doors,” says film producer Diane Aractingi, adding that the amount of money you bring to the table has sway over the final decision.

Other financing options include going to private investors directly (what Osseiran alluded to earlier), often achieved with the help of personal connections, and seeking sponsorships from corporate institutions. This can manifest itself in the form of product placements in the sponsored film. But according to Abbout Productions’ Sassine, it is mainly the “popular” commercial films that rely on such methods. “[Sponsors] want the films to be seen and sometimes our films struggle to be seen, so they wouldn’t put much money to have their products in them,” elaborates Sassine. She then adds that the independent filmmakers they work with would feel “awkward” about inserting sponsored content.

When all else fails, a work of passion that lacks the funding may be able to reduce its human resource costs. “We work quite regularly with some people, so when they know a film is more fragile than another they are most of the time willing to accommodate us with their salaries, or they give in services and enter as co-producers, so there is a kind of [bargaining]. This works when they like the project,” says Sassine.

A broken chain

One of the most talked-about challenges in the industry is the gap between producers and distributors.  From a story concept to the silver screen, there is a multi-stage process that involves a whole range of individuals, from producer to cast and crew, to distributor and exhibitor (the theater owner). “You have all the [players], but they’re all on their own islands; you need to start building canals between them and those canals are distribution canals – it’s a value chain. So if everyone does their job on the chain, you can have a healthy, flourishing industry,” says Karim Safieddine, founder of online platform Cinemoz and a distributor.

The domestic market is small to begin with, making it hard to return on investment in Lebanese theaters, not to mention the fact that foreign films take the lion’s share of admissions. Based on data that the Euromed Audiovisual III report collected for the year 2010 (prior to the latest production boom), Lebanese films took less than 1 percent of all box office revenues. “We really need to have public support in the fight that is held between producers and distributors because when it comes to the theater, we don’t have the distribution budget. In the US, in the studios [distribution] is 30 percent of your budget, so we can’t afford this at our level. Whatever we put in terms of distribution can never compete with the studios and Hollywood and what’s signed in Cannes,” says producer Aractingi.

Maya de Freige, president of the FLC, and Serge Akl,
director of the Lebanese Tourism Office in Paris, at the Lebanese Pavilion

Distribution costs can run high, between the marketing of the film and the renting of theaters, which sets you back around $500 per screen, according to Mohamed Fathallah, who is both a distributor and producer. Depending on the film, Fathallah will invest anywhere between $10,000 and more than $1 million to acquire the distribution rights for a region-wide release, and the ticket sales are split roughly 50-50 between distributor and exhibitor. In Fathallah’s experience, however, when it comes to Lebanese films, producers tend to bypass the distributor: “Producers in the region like to be in control and for them it’s more a way to maximize on their profits because a sales agent is going to take a certain cut of the revenue.”

Fathallah argues that distributors are more aware of the commercial side of the business – and thus producers would benefit from their input from early on in the production process – and have strategies for when is the best time to release a film. For example, in the Middle East region the month of Ramadan has an interesting role to play. Considered a “dead month” for the cinema sector, particularly in summer, when only the 10pm show is left, theaters release the minor movies during this month. The action-packed blockbusters and long-awaited films, such as the upcoming Finding Dory, are scheduled to be released in time for Eid weekend.

Public funding

The public sector’s contribution to the film industry as a whole has been quite insignificant, in the view of many. The Ministry of Tourism has been taking baby steps through promoting the industry at Cannes (see Cannes story page 74). Culture Minister Araiji told Executive that the yearly budget for the film sector was 256 million Lebanese lira ($170,000) and called it “a shame”. When it comes to giving grants to filmmakers, the National Film Commission of the Ministry of Culture is the entity entrusted with that responsibility, and divides a meagre budget of around $100,000 among 10 to 15 projects each year, according to a 2015 film industry report published by IDAL.  Compare this to what some of the other countries in the region are offering. Aractingi, who researched the topic for a presentation, discovered that “in Tunisia you can get up to $150,000 per film” and that even the Palestinian territories received more funding. There are some who argue that government support is not the make-it-or-break-it factor, or indeed should not be expected to arrive any sooner than Godot, and say it falls rather on the shoulders of corporates to boost the sector, but for the most part producers would welcome the financial assistance.

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The sun is rising over the Anti-Lebanon mountain range that borders Syria. Kowsa Ibrahim, a 12 year old refugee from Aleppo, is already at work pruning grape vines. She will work for the next several hours for 6,000 Lebanese Lira ($4), although she will not get that amount; an overseer, known as a “shawish,” will take 2,000 LL ($1.33) as a form of commission.

Kowsa prefers working the vines to collecting potatoes. “It’s better as there’s more shade. Potato work is out in the open fields under the sun, and it’s hard. I collect the potatoes in 20 kilogram sacks which I have to carry to the collection point,” she says.

Kowsa never had to do such back-breaking work in Aleppo, but for the past three years she has had to help support her family since fleeing Syria to Lebanon’s Bekaa valley. The war in Syria, now in its sixth year, has caused millions of refugees to flee their homes, putting significant strain on already stretched labor markets and services in neighboring countries.

“The number of working children has increased exponentially since the Syrian refugee crisis began. Because the country is struggling economically many families are relying on their children to contribute to their livelihood,” says Hayat Osseiran, a child labor consultant at the International Labor Organization (ILO).

In addition, international aid has been reduced. Last year, the World Food Program (WFP) was forced to cut its food voucher aid from $27 a month per refugee to just $13.50.

“It is a major problem, how can people live on that? But it is not only lowering the monetary amount, the targeted assistance program has been reducing the number of people it aids every year,” says Solange Matta Saade, Assistant Representative at the Food and Agricultural Organization (FAO) of the United Nations.

As a result of such cuts and the economic situation, refugee children are being forced to work as farm hands. But it is not just Syrian children working in the fields.

“We think only Syrians are being affected, but from 2009 to 2016, there has been an increase in the number of Lebanese child laborers,” says Carlos Bohorquez, a child protection specialist at UNICEF, referring to a study the agency carried out on child labor in the country. “There are three times more Lebanese (children) working than before, so the Lebanese are also being affected.”

Out of school, into the fields

There is a dearth of national data on child laborers, but an indication of the rise in their numbers can be gaged through school attendance.

“Last year there were around 10,000 Lebanese students that dropped out,” said Sonia Khoury, Director of the RACE project (Reaching All Children with Education) at the Ministry of Education and Higher Education (MEHE).

Among Syrian refugee children the numbers are even starker. Currently, out of the 482,034 school aged Syrian children, only 33 percent are enrolled in school. To bolster attendance among refugees, the MEHE’s RACE project implemented a second school shift in the afternoons to cater to the surge in students.

“Four months after starting the second shifts we lost 45,000 students,” says Khoury, attributing this to children being forced to work and the lack of affordable school transportation in the more rural areas. There is also a correlation between the picking season and school attendance.

“We are noticing 2,000 to 3,000 are absent during that time,” she adds.

However, the problem has moved beyond seasonal work. “Child labor in agriculture is classified as seasonal labor, but what we’re seeing now is that it is no longer the case as picking seasons vary, from potatoes to year-round greenhouses to picking flowers,” says the ILO’s Osseiran.

12 year old Kowsa Ibrahim hard at work pruning grape vines in Lebanon’s Bekaa Valley (Photo credit: ILO/Tabitha Ross)

Hazardous work

It is not only the workload that Kowsa finds tough. She says she has been frequently exposed to pesticides. “I get a rash from the pesticides. Sometimes I get flu or breathing difficulties too as we get no protection,” she says.

Such exposure can lead to pesticide poisoning and long-term health problems, explains Rana Barazi-Tabbara, a public health lecturer at the American University of Beirut.

“For children it is especially dangerous as there will be immediate health effects from pesticide toxicity, which at the most acute level can cause vomiting and even death. In the long term, pesticides affect nearly all the organs in the body, from the neurological to the reproductive system, and results in cancer,” she says.

Raising awareness

Indeed, the ILO notes that agriculture is one of the three most dangerous sectors in terms of occupational safety and health, irrespective of the age of the worker, because – in addition to occupational diseases – it results in a high rate of work-related fatalities and non-fatal accidents, largely through use of motorized agricultural machinery.

To raise awareness of these dangers, the agency held a children’s funfair in the town of Saadnayel in the Bekaa, one of the areas with a high prevalence of child labor in agriculture.

“The fair was one of our ways to raise awareness, among both locals and refugees, on the very real dangers and risks children face when working in agriculture,” says Osseiran as the fair closes, which was held just ahead of World Day against Child Labor, marked globally on 12 June. “It also included artistic performances by working children and their parents, which provided them with a means to express some of the distress they feel due to their life of toil and hardship.”

Legal loopholes

Children have often been extra hands during harvesting time to pick olives and other cash crops in Lebanon. In fact, children as young as 10 are legally allowed to engage in family farming.

“Not all participation by children in agriculture is defined as child labor. It can be to acquire skills for the future, and is allowed as long as the children are not coming to harm, being abused, or their opportunity to get an education is denied,” says Faten Adada of the FAO’s Social Protection Focal Point.

Lebanon’s Decree No. 8987 of 2012 defines which forms of agricultural labor minors can engage in.

“It specifies which forms of hazardous work and which forms of agricultural work children should not be exposed to, which includes family farming. However, there is a loophole in the law that says that when a child is engaged in family farming they can work from the age of 10 onwards. We are working with General Security on closing this loophole,” says Nazha Shalita, Director of the Child Labor Unit at the Ministry of Labor.

Photo credit: ILO/Tabitha Ross

Minimal enforcement

But with minimal enforcement of the Decree at the national level, children are openly working in the agricultural sector. “As children are working freely, and can be filmed doing so, it shows they are not worried about being caught,” says Adada.

An issue is that the inspection department at the Ministry of Labor has just 90 staff, while there are only around 45 inspectors to monitor labor practices nationwide. To Adada, such inspectors need to be bolstered not only in number but also at the technical training level to properly assess child labor practices, while they should be backed-up during inspections by the General Security. This is considered crucial to take on the shawish.

Forced labor

“We asked General Security to enforce the law, to have a reason to tell the shawish that it is not us (requiring no children to be employed) but the law. We need to show them the law is being enforced, and to get more inspectors for the ministry,” says Elie Massoud, Head of the Agriculture Department at the Chamber of Commerce, Industry and Agriculture in Beirut.

The shawish used to organize Syrian farm hands that came to Lebanon on a seasonal basis before the 2011 uprising. Once the Syrian conflict started, and the number of refugees rose to the government estimated 1.5 million today, the shawish moved into the informal refugee camps to capitalize on an abundance of cheap labor and their agriculture contacts.

“Those living in the agricultural camps pay no rent, and they are obliged to work for the shawish. If they don’t work, they have to leave,” says Riad Jaber, Co-Founder of civic organization Beyond, at the Fayda camps outside of Zahle. “There are 15,000 refugees there – it’s about 10 camps grouped together, and each group has its own shawish. If there are at least 100 women and children going from their camp, the shawish will be making about $200 a day,” he adds.

Unless greater action is taken by the authorities and public awareness around the issue improves, children will continue to be exploited and exposed to hazardous working conditions while missing out on crucial schooling years.

“There should be a concerted effort by the Lebanese government, supported by international donors, to eliminate child labor in agriculture, among refugees as well as Lebanese host communities. Unless it is addressed, it will contribute to a ‘lost generation’ in terms of education and human development,” says Frank Hagemann, Deputy Regional Director of the ILO Regional Office for Arab States.

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“Should I be worried?” wondered one Beirut Souks restaurant owner. During a lunch at the local establishment the restaurateur passed by the table to inquire about the meal and service, casually mentioning concern over an American law – one targeting Hezbollah’s alleged money laundering through financial institutions worldwide.

Local business owners outside the banking industry should hardly be worried. It is the banks that are responsible for complying with the Hezbollah International Financing Prevention Act,  Lebanon’s central bank circular 137 stipulates, and in so doing must carry out client due diligence when opening accounts or facilitating transactions. To the banks this is just another chapter in the book of risk management, where compliance with the laws of foreign jurisdictions in which they do business is not a choice, because the banks must comply and have long invested in the tools to do so.

Compliance costs

This is money well spent, says Chahdan Jebeyli, the chair of the compliance committee at the Association of Lebanese Banks (ABL), who also heads compliance at Bank Audi. Referring to investments in compliance infrastructures to satisfy reporting requirements, he tells Executive that rules first started to surface following the terrorist attacks on the United States on September 11, 2001, with harsher rules introduced in the aftermath of the global financial crisis. In the years since, the costs of compliance have increasingly become a topic of boardroom conversations, not only of local banks but those worldwide as well.

For risk managers the question has never been whether to comply or not, but rather how much investment is necessary to satisfy regulators while not being overly cautious in a way that jeopardizes legitimate opportunities. Compliance costs have certainly increased and are significant, Jebeyli says, noting that its rise has become increasingly more challenging for smaller banks to meet, but one that is still manageable. “You cannot really compromise on [compliance] requirements for the purpose of saving money because you may end up paying a more expensive price. Compliance failure, if it is serious enough, could affect the franchise. That’s why this is essential spending,” he adds. Industry wide figures on investments into compliance structures in Lebanon are not available because they are difficult to determine – they are intermingled with other expenditures such as IT investments or otherwise enmeshed in human capital costs spread across departments. On the other hand, the proprietary nature of those investments, such as for sophisticated software, discourages disclosure of those figures.

The structure of a bank’s compliance department has varied looks, says chief economist at Byblos Bank, Nassib Ghobril. Foremost, it is a mesh of human resources and technology, a combination of interfacing with the client plus sophisticated software tracking transactions and managing clients’ identities.

Compliance is no joke

That the cost of compliance is looked at as an institutional investment is telling: it is an intangible deposit in the bank’s reputation, lending credibility and assurance to correspondent banks – those banks that facilitate a local bank’s transactions in the former’s jurisdiction. Non-compliance with the US law, or Lebanon’s central bank failure to regulate compliance, would jeopardize partnerships, cutting Lebanese banks off from correspondent banks in the United States. That Lebanon is a dollarized economy, and that the bulk of transactions are in US dollars, also fuel the existential necessity of complying.

Of course investing in compliance is no guarantee that a correspondent bank will continue the relationship; the risk of severance is only decreased by proof of compliance. But the cost of a cut off can be far greater than the investment. When a bank is accused of being non-compliant a number of cost factors come into play: the difficult to quantify losses in opportunity resulting from suspended relations with a correspondent bank, and the more easily measurable financial penalties from regulatory action or litigation.

Were a correspondent bank to cut relations with an accused financial institution, the ability to conduct transactions in US dollars would no longer be possible, affecting not only the bank but its clients too – local businesses trading internationally and Lebanese abroad transferring dollar-denominated remittances back home. What’s more, the mere hint of non-compliance may cost the bank – damaging its reputation, an accusation might push clients to migrate to a competitor for any number of reasons.

By size of infractions, Lebanon, in the years since 2002, has not really been on the radar of anti-money laundering concerns. But when terrorism finance is factored, where very small amounts can actually finance a bomb, then Lebanon is on the map. In 2015, the subsidiary of Bank of Beirut in the United Kingdom was fined £2.1 million for intentionally misleading regulators with false information concerning its financial crime systems and controls. Lebanon’s biggest case in money laundering – the forced closure of the Lebanese Canadian Bank (LCB) in 2011, settled for $102 million in 2013 – pales in comparison to bank penalties in Europe or New York. Take, for example, the 2015 case of French bank BNP Paribas (BNPP), at the time the fourth largest in the world by total assets. BNPP was accused of laundering upwards of $100 billion for several sanctioned countries, including Iran and Sudan. The bank was convicted of violating US economic sanctions and forced to pay a total financial penalty of just under $9 billion.

Lessons learned

To say that Lebanese banks are panicked that their compliance investments might not satisfy American standards may be an overstatement, but it certainly is an issue that compliance executives and banks’ management are following closely. “I’m not trying to minimize the [issue] but I’m saying it is important to the US, it’s important to us and it’s important to our clients,” Jebeyli says. Lebanese banking officials and executives are acutely aware of the seriousness of the American legislation, a notion that Jebeyli and others that Executive spoke with pointed out. And the lessons learned from the case of LCB – of alleged management complicity in money laundering and that of insufficient controls – are now core considerations in assessing compliance programs.

But smaller banks, perhaps in acknowledgement of the high investment threshold of compliance, do recognize that client due diligence, coined KYC for “know your client,” is a challenge. “It’s not written on their face and you don’t ask them to fill a document asking ‘Are you Hezbollah? – click yes or no.’ We investigate and do our homework on due diligence but at the end of the day we cannot do anything if someone is Hezbollah and we don’t know that. There is an element of uncertainty that we are worried about, definitely,” says Raed Khoury, chairman and general manager of Cedrus Invest Bank.

As Lebanon’s largest bank, Bank Audi may be less concerned than smaller financial institutions because it can more easily absorb the costs and may be able to incorporate more sophisticated compliance solutions. That continued availability of its banking products or services in parts of the country where clients may come into contact with, may be linked to or directly connected to Hezbollah, is a non-issue for the bank, Jebeyli says. “It is clear which individuals are listed or designated [sanctioned by the Americans], and there are the proper diligence rules that are driven by risk classification,” he says before confidently telling Executive, “We treat our clients fairly and properly. At the same time we’ll apply the law as and when we should and to the extent that we need to.”

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