Times of change and upgrades of operating systems are confusing events, or, in today’s economic lingo, disruptive. Few things can be more disruptive than the abrupt upgrade of a whole industry to a higher level, forcing it into new ways of doing business and, inevitably, altering its whole identity in the process. That’s what’s currently happening to insurance.

The upgrade of this industry encompasses on one hand the transition into the digital age, with a host of new challenges in distribution, security, consumer behavior, and, perhaps most importantly, new risks, accumulations and synergies of risks. On the other hand, insurance has been deeply affected by the global transformation of the financial economy and the rise of uncertainty and change triggered a decade ago in the Great Recession, which remains far from over.

Since Lebanon’s economic rebirth after the internal warfare of the 1970s and 80s, the insurance industry has made some remarkable strides. Premiums grew almost exponentially and rates of insurance penetration, or percentage of GDP spent on protection, remained at the top among Arab countries.

But one cannot overlook the fact that the Middle East is a global laggard when it comes to insurance penetration, something that is not expected to change radically in the next 10 years. Global insurance group Allianz predicts that the average per capita contribution in the Middle East and Africa will only grow from $139 to $180 from 2016 to 2026, and that the MENA region will account for just 1.8 percent of global premium income in 2026.

Current insurance penetration in Lebanon – estimated by Swiss Re Sigma at 3.42 percent for 2015 – shows the country to be at the forefront of Arab markets, and respectable in comparison with middle income countries from Argentina and Russia to Bulgaria and Iran. But this is not much to write home about when compared to the average global insurance penetration rate of 6.23 percent. In purely domestic terms, the Lebanese insurance sector’s assets, premiums and profits in 2016 (while not yet officially announced) are dwarfed by the assets, deposits and profits in our banking industry.

With change, opportunity

Within the financial landscape, Lebanese insurance stands timidly in a swamp of undeveloped capital markets and foggy legislation. Moreover, when compared with the friendly but boisterous banking ogre and its substantial marketing power, the sector is practically invisible. In Executive’s view, this situation warrants remedy.   

By conventional wisdom, great change is a time of great opportunity. Agility and openness to new ways are a requirement for benefiting from these opportunities. But effective exploitation of change requires legal empowerment. Executive believes that it is not enough to pursue piecemeal improvements in the legal framework for insurance and calls for the adoption of a new insurance law in Parliament. 

With a view to insurance, we reiterate our demand for a supportive framework for growth in the financial markets, and our call for the Capital Markets Authority of Lebanon to focus equally on the regulation and development of our capital markets. The CMA has to step up its efforts and effectiveness to invigorate the markets under its supervision, and the Beirut Stock Exchange has yet to deliver vibrancy to the bourse. We would like to see all local insurance companies listed, and adhere to the corporate governance structures and systems that befit a modern corporation. 

One often encounters the perception that insurance is boring. In truth, it is a complex cog in the financial industry and one with much hidden – or difficult to understand – potential and attraction.

Reporting on these issues in our current issue, Executive endorses the view, expressed by the chairman of the country’s largest insurance provider, Allianz SNA, that an indispensable precondition for successful adoption of corporate governance and transparency in our private industries is public sector leadership by example. We need full and speedy implementation of the new law on access to information, and transparency and accountability in our government institutions before we can realistically hope to see tax compliance, proper reporting, and real transparency in our private sector.

As for insurance stakeholders, we affirm our view that it is time to free industry minds from the last remaining burdens of egoism that symptomized the industry in the past; they must cast off the cloak of invisibility and put on the armor of transparency and good corporate governance. 

Executive didn’t get past security at the Grand Serail. It was March 3. The access to information law was just over a month old, and we were barking excitedly, unsure if whether we were even in front of the right tree. In hand were requests for minutes of cabinet meetings. We were hoping to reach the Office of the Presidency of the Council of Ministers. Our parting advice from the security official acting as gatekeeper was to call back and follow up. Call back we did. Repeatedly. Since then, however, our requests have been ignored.

An attempt to access information from the Ministry of Finance was swifter and more definitive. “No,”  Executive was told by phone (read: no paper trail) within one week of making a request for the Value Added Tax (VAT) and customs revenues from mobile phone imports over the past five years. So far, not so good.

Flood the gates

After it had been sitting in a drawer in Parliament for nearly 10 years, the legislature finally passed the access to information law in January. As Executive noted in a special feature last month, the law mandates the creation of an anti-corruption commission (ACC) that would, among other things, adjudicate appeals when requests for information are denied or ignored. It’s a hopeful sign that Speaker Nabih Berri reiterated the need for the ACC in late March. We stand with the speaker in calling for immediate legislation to create the ACC – not least because we’re unsure of how to proceed with the Ministry of Finance stonewalling access to information that can help highlight just how costly the country’s rampant mobile phone smuggling is for the treasury.

The last week of March brought some more good news. The Council for Development and Reconstruction (which signs large-scale public works contracts on the government’s behalf) has dedicated a staffer to handle information requests, as the law requires. This staffer was welcoming and helpful, even assisting Executive in submitting a request after the president’s office technically closed (full disclosure: it was around 2:30 in the afternoon on a Tuesday). That very same day, Executive received a late email reply from the Ministry of Telecommunications. A faxed request sent March 10 had been received, and the ministry’s lawyer was busy retrieving the requested documents. While we were warned the process “might take some time,” updates, the email promised, would be forthcoming.

We’re cautiously optimistic at this point. While there are indications that recent talk of a “new era” and promises of long-stalled reform will prove hollow, we have witnessed that the access to information law is at least being partially implemented. Law 28 of 2017 is an important tool, and we encourage more individuals and institutions to make use of it, and go public with their experiences. Decision-making in Lebanon far too often happens in a black box. This law is our chance to pry that box open. The more requests pile up – and the more institutions are bombarded with pleas for information – the harder this law will be to ignore. This magazine will keep pressing, but we need all the help we can get both from fellow transparency advocates, and from a properly constituted, functioning, and empowered anti-corruption commission.

For 12 years running, Lebanon has been without a budget. This does not mean the state hasn’t been collecting revenue and spending it. Rather, it means there have been no clear-cut priorities, nor a strategic vision guiding how the government manages taxing and spending. During the past five years, the problem of finding revenue to finance raising public sector wages has been the only issue discussed in the budget “debate.” While it’s fiscally prudent to consider how to offset increased spending with increased revenue, a laser-focus on this one issue is myopic, and gets us no closer to a sound fiscal policy that would benefit the wider economy.

The fact that three separate governments have spent five years mulling how to raise taxes suggests our lawmakers’ fiscal policy is limited to ensuring minimal government spending needs are met. The state’s continued failure to provide basic, uninterrupted services proves we do not have a fiscal policy focused on meeting the people’s needs. First and foremost, this must change. It won’t be an easy change, but there are a few clear actions that can be taken immediately.

In parallel with imposing new taxes, the state must begin the full collection of taxes already on the books. The International Monetary Fund estimates Lebanon only receives around 50 percent of the revenue from existing taxes. This won’t change overnight, but addressing the shortfall should be an immediate priority. Because talk of state finances is conducted behind closed doors, it is difficult to offer precise recommendations on how to improve tax collection, but global best practice can certainly guide us. Studies of the US economy suggest every $1 invested into the country’s tax authority brings in $4 (possibly more) in tax revenue. A strategic lift on the civil servant hiring freeze would be a good first step toward better collection.

Along with improving collection comes the need to reduce waste. The Ministry of Finance is nearly finished closing state accounts from the past 20 years (i.e., tallying Lira by Lira where state money went, to the extent possible from available documentation). In a 2015 interview, the ministry’s director general told Executive that “anomalies” were found. What this means is that money went missing, and is presumed to have been stolen. Everyone in this country knows corruption is a serious problem. Provided Parliament makes the details of the finalized accounts public, we’re close to a roadmap detailing how much revenue has been lost in the past two decades and from where it disappeared. It is perhaps too much to expect the state to be paid back, but the exercise surely must have provided clear indications of how future theft can be prevented. If the government’s objective in drafting a budget is simply to meet its spending needs, than those of us paying for it must be confident we’re not being swindled.

Building that confidence requires more detailed and public budget discussions. We demand a budget that prioritizes stimulation of the economy and improves the internal distribution of wealth. Options for how to achieve these goals are myriad and should be chosen based on robust national discussion, not dictated by the Minister of Finance, Parliament or cabinet after closed-door meetings. Passing a budget that actually benefits the country and its people, instead of imposing new taxes to meet an immediate need and preserve the status quo, demands careful calibration and communication. Our budget debates must be public, detailed and forward-looking. Civil servants certainly deserve a raise, but the nation also deserves a fair and strategic fiscal policy.

Lebanon is closer to ratifying a national budget than it has been in recent memory. For the past 12 years, the country has not passed a budget into law. In recent years the roadblock has been, at least publicly, a salary increase for certain public sector workers.

The debate is taking place in a fiscal environment where the money to raise public spending is non-existent, so the revenue needs to be created – through new taxes. To fund the salary increase, some economists and some politicians are arguing for reforming public spending rather than setting new taxes.

Announcing the budget figures at a press conference on the last Thursday of March, Minister of Finance Ali Hassan Khalil provided little by way of details. He laid out spending cuts, and stated that the budget is primarily based on improving tax collection and administration – collecting taxes already on the books, rather than subjecting citizens to new taxes – with the government aiming to address poor collection of revenue from public agencies, including customs. But he did not say what impact these measures would have on public finance.

While there are new taxes in the budget, the minister did not make clear what these were. The government will send an approved budget to Parliament which, it seems, will be tasked with figuring out which taxes to levy – there will almost certainly be new taxes if Parliament ratifies the budget.

Given this debate has been going on since at least 2013, when Najib Mikati was prime minister, there are a few likely candidates for new taxes, including an increase to VAT by a percentage point to 11 percent, a 15 percent tax on capital gains from real estate transactions, an increase of tax on financial institutions’ profits to 17 percent and on interest of deposits to 7 percent.

On taxation, it is difficult to pinpoint with any certainty who has to pay, how much they have to pay, what the expected revenues are, and whether or not there will be an impact on economic growth and gross domestic product (GDP). On the sidelines of the press conference Alain Bifani, the finance ministry’s director general, said the ministry had assessed the budget’s tax measures, but these studies have not been made public. Earlier in March, Executive requested interviews with both Khalil, and Bifani, but did not receive a response. To gain the best available expert assessments of the impacts of proposed taxation under these circumstances, Executive approached economists and stakeholders knowledgeable about various sides of the issue.

Impact of tax measures

For real estate, burdening a stagnating sector with new taxes could risk its collapse, argues Raja Makarem, managing director of Ramco, a consultancy catering to the industry, in a contribution to Executive.

For the banking sector, the surveyed economists agreed that there is room for a tax increase on the institutions. “The banks are making profits and could be taxed and incentives for banking in this country is still a lucrative business”, says an economist at the central bank, who did not want to be named, before adding that “You have to estimate [bank profits] in percentages of the return on assets or, better yet, on equity. Is it good or too high? Return on equity in Lebanon for banks is high but not tremendously high when compared to the rest of the world.”

The banks’ position from several years back is that they are penalized because they are the only transparent sector in terms of taxation. The banks are holders of government paper and pay taxes on them, but deduct those taxes from the corporate income tax they pay. What the government is trying to do is prevent the tax deductibility, and the banks are refusing. ((See our 2014 Banking Special Report story: Should our banks pay more?)

While the economists agreed there was room to tax the banks they also expressed reservation. Banks which hold nearly $49 billion (around a third) of the state’s debt, and are known to be the top buyer of government debt in Lebanon, hold more and more paper and experts worried that if tax is increased then their appetite for holding more paper might decrease. But returns on debt holdings compared to the increase in taxation banks would have to pay makes a very big difference because their stock is huge. And, several economists pointed out, the additional tax they would pay is only on new paper they are going to hold. Georges Corm, a former minister of finance, disagreed that a tax hike on the banks would reduce appetite to buy public debt. Instead, he argues for a different approach, “I would advise the central bank, the ministry of finance and the banking sector to agree to decrease the average interest rate paid by the state on its public debt by around 1 percent on any new issues. Such a decline in the cost of servicing public debt to the state would save the treasury a yearly amount of $700 million in a few years’ time”.

The economists cautioned against raising the tax on the interest of deposits. Talk of a tax increase, says the central bank economist, “is very important when it comes to depositors, non-resident depositors, who have a choice [in where they park their money] and who continuously weigh risks.” Corm said he was not in favor of the tax, but downplayed a negative effective if it were a one-time measure. “Raising this tax from 5 to 7 percent will probably not produce a decline in the amount of deposits in the banking system.”

When it comes to an increase of the Value Added Tax (VAT), the International Monetary Fund (IMF), in its January Article IV consultation report, does not spell out how the tax measure would impact growth, but its analysis shows that imposing taxes initially does negatively impact GDP. Through disposable income (income minus the taxes) an individual will spend, consume, and invest. This will lead to GDP growth through a multiplier effect. With an increase of taxes, what is left to be spent and consumed into the economy is going to decrease. On that point the economists Executive spoke to generally agree with the IMF. “Increasing VAT can penalize consumption and demand. We don’t have a detailed idea of the structure of consumption and what can be affected or penalized by the increase to VAT, but at first inflation could spike and then level out. In the medium and long run it can reduce economic growth, but it is a random hypothesis. I’m not sure because we don’t have data to run a simulation,” says Joseph Gemayel, chair of the economics department at Beirut’s Universite Saint Joseph (USJ).

“Nobody in government or any think tank has recently, at least in the past three to four years, done any tax incidence analysis on any fiscal reform, or at least it’s not public,” Jad Chaaban, a professor of economics at the American University of Beirut, told Executive. When posing the question of what might happen to Lebanon’s economy as a result of the new taxes, a lack of information forces the economists to revert back to basic economic theory. Lebanon’s slow economic growth since 2011 suggests that, “In a typical textbook situation you have to decrease taxes. Unless those taxations and a better fiscal consolidation gives confidence to investors then yes, you might increase taxation and at the same time see confidence increasing that the country is better managed and then see investment increasing. But, this is a big if. If you want to increase taxation and other things remain as they are, business as usual, then definitely it would have a negative effect on economic growth,” says the central bank economist.

Lebanon’s productive sectors are suffering from a slowdown of the nation’s economic activity, argues economist Sami Nader, and the effect of taxes could push companies to the brink of closure. Instead he says, Lebanon should grow its way out of the problem. “At this time, you are expected to do the exact opposite, lower some taxes, make some improvements to the private sector, increase the economic activity in order to increase the revenue,” Nader says. Byblos Bank economist, Nassib Ghobril, cautions that taxes will “definitely affect economic activity on the economy overall. When politicians say these taxes will not affect the poor or the middle class, that’s very misleading. [The tax increases will affect the poor] because inflation will increase.”

The International Institute of Finance as late as February forecasted Lebanon’s economic growth at 3 percent for the year, but the economists say this projection is unlikely. “I don’t see 3 percent growth, even if they do not pass the taxes. The debate alone has poisoned the atmosphere. Now we are three months into the year and you do not feel [that] anything tangible on the ground has changed economically. In my opinion, in addition to addressing the business climate and the competitiveness on the economy, the debate should have been which taxes we should decrease,” says Ghobril. Including the tax measures in the budget, the finance minister is projecting a 2 percent growth of GDP for 2017.

No fiscal policy

If the budget’s tax measures are ratified into law by Parliament, how much revenue will be collected and what will be the effect on the economy? The question has no easy answer.  The entire budget approval process has not been transparent, the figures have not been made available for public scrutiny, the government did not make public the assessments on who would be impacted by the tax measures or what would happen to the economy, and officials would not discuss the matter with Executive.

What’s more, this government and previous ones have not clearly articulated an economic vision or fiscal policy, the  economists surveyed point out. The budget should be the document laying out the objectives of the government for public spending and how it will raise revenue to finance that spending. “Lebanon is entering the 12th year without a budget. It is mind blowing, a country without a budget. Is the objective to boost productivity, contain public debt, boost job creation – what is the objective of the government when it comes to public spending?” asks Jean Tawile, an advisor to political party Kataeb.

USJ’s Gemayel says that the lack of transparency diminishes the government’s ability to articulate such a fiscal policy, and points out that flexibility in public spending is nevertheless restricted. “There is no clear vision, whether toward expansive or restrictive fiscal policy. We know that monetary policy is restricted because of the pegging to the USD, and fiscal policy is constrained by public debt and the deficit. There is a need for structural reform, but Lebanon is not able to articulate that reform. The financial needs of the public sector are growing, but the function of the public sector in the economy is too little, in terms of GDP. So it is a paradox.”

Other economists agreed with the notion that the government has not publicly articulated its fiscal priorities, and said that a lack of transparency over the draft budget has confused the process. “Nobody knew what the exact taxes included in the budget were, and that’s because the ministry of finance did not release a draft of the budget, which is not a good sign. The draft budget should be moderately accessible; I don’t understand why they did not make it available to the public. That’s a lack of transparency in my opinion,” Ghobril told Executive.

A better way

The IMF, drawing on consultations with the government plus government data to reach its conclusions, says in its latest Article IV paper that Lebanon should increase some taxes irrespective of the salary scale because of the weight of the country’s public debt, nearly $80 billion at the end of 2016 or 144 percent of gross domestic product (GDP). The IMF’s Article IV paper argues that the public debt is unsustainable so fiscal measures must be adjusted in order to put the debt on a sustainable path regardless of new spending, like the proposed salary scale. The report also “urged passage of a budget” because it is a critical priority, and “stressed the immediate need for reform in the electricity sector, which remains a large drain on the budget and a key bottleneck to improved competitiveness and equity.”

Projections of the increase in salary spending has ranged from $2.1 billion down to $1.1 billion, according to a 2014 report by Al Akhbar English that did not note if those were annual figures or projections for the first year of implementation alone. By removing retroactive pay this government cut $400 million from its salary scale estimate. The government has framed the tax measures this way: It said it would need $800 million in spending on the salary scale, so it would collect $800 million in revenue.

The government does not acknowledge, economists pointed out, that moving forward the salary mass would increase exponentially even without new hiring, and that revenue mass would increase very gradually or even remain unchanged when measured as a percentage of GDP. The “public sector salary increase is not $800 million, nobody knows how much the exact cost of it will be,” says Ghobril.

Assessments by the ministry of finance were not made public, and government officials with knowledge of the matter did not respond to questions seeking clarification. It seems the government believes the salary scale and taxes would be budget neutral. The economists say in general that imposing taxes would negatively impact GDP, at least in the near term, and thereby any generated revenue from a tax increase could decline in the medium to long term.

Economists interviewed agree there are other ways to pay for the salary increase. “The tax approach of the government for the budget is to finance the public sector salary increase. The argument is that there are sources of financing other than taxes,” says Ghobril. The Kataeb party opposed the new taxation to finance a public sector wage increase, according to Tawile. Instead Kataeb has argued that a reduction of government inefficiencies, as Tawile politely put it, must be the source of financing for the wage increase.

To Nader, the government, “officially recognized that there is corruption to the point that they nominated a minister and called it the state ministry for combatting corruption. They recognize they are corrupt, and now want the citizens to finance the corruption?” Saad Hariri, Lebanon’s prime minister, in addressing the March 19 protest against a tax hike, made a big promise to the crowd as they pelted him with water bottles: he and president Michel Aoun would stamp out corruption, inshallah. Hariri, in forming his cabinet in late December, created a ministerial portfolio that would target corruption – but it is unclear what its objectives are or what, if anything, has been accomplished so far (Executive had asked for an interview with the Minister of State for Combating Corruption in January but the request went unanswered).

The government has announced a plan to reform spending in the electricity sector. The ministry of energy was set to lay out the details after Executive went to print, so it is not exactly clear how much money might be saved, but Finance Minister Khalil, in announcing the budget figures, said allocations to cover Electricite du Liban (EDL) deficits would be capped at nearly $1.4 billion. In general, the plan calls for a reduction of the subsidy to EDL and an increase of rates. For EDL the price per barrel at which it will pay for oil – with help from the treasury – to generate electricity will rise from $25 to $60. For customers the plan calls for a tariff increase on electricity bills that is said to be around 40 percent but the details are not yet clear.

At a minimum, the economists say, emphasis on capturing revenue instead of more taxes and reforming electricity spending is probably a reaction to the street protests, political pressure, and acknowledgment of the fiscal advice that the IMF and World Bank, among others, have long advocated. All of it is an embarrassingly loud testimony to Lebanon’s lack of fiscal policy, with neither clear-cut priorities nor a strategic vision guiding how the government manages taxing and spending.

With little official communication about the government’s proposed tax reforms and no public discussions with civil society or concerned professionals, confusion and misinformation about the proposed tax law have run rampant. In an attempt to clarify the debate, we have examined the six proposed tax reforms pertinent to the real estate sector and their possible implications for the industry.

There are two findings: The majority of the proposed taxes are fair and are commonly applied in most developed countries. However, in Lebanon, burdening a stagnating sector with new taxes could risk its collapse.

Taxing sales contracts

The new law proposes a 2 percent tax on the value of any sales contract, whether it is signed privately between the seller and the buyer, or in front of a public notary. Payment is due within five days of the signature of the contract.

The proposed law allows for this tax to be deducted from registration fees, provided the sale is registered within one year of the date of the contract. This new tax will force buyers to register new purchases within a year of acquisition – existing law gives them the right to register the sale up to 10 years from this date.

If the sale is not registered within a year, in effect the buyer pays a penalty of 2 percent, on top of the 5.6 percent in registration fees imposed under current law.

Forcing buyers to register a property within 12 months of its acquisition will have a corrective impact on data available to the government, as transactions and the tax revenue they generate will be reflected in the fiscal year in which deals are concluded.

But the net impact of the tax would be much more damaging, as it forces investors to register the purchases of property they acquire and intend to place on the sales market. Under current law, investors have 10 years to dispose of a property without incurring registration costs, but with the new law, they will have only one. The tax will deter real estate investments, which to date have benefited from the effective exemption of registration fees for intermediaries, as only the end-user registers the property.

Taxing vacant residential apartments

Under current law, apartments that have been officially declared vacant are not counted for the purposes of real estate fiscal tax paid to the Ministry of Finance. The new tax law proposes to tax all residential properties, whether or not they are occupied. Individual owners are exempt for six months from the date of acquisition, after which they must start paying real estate tax. Developers have an exemption period of 18 months from the date apartments are completed and property deeds are issued.

The proposed measure would further deter potential investors looking to place their money in Lebanese real estate, driving capital to international markets, other forms of investment, or cash deposits.

It would be particularly disastrous for developers left with unsold apartments in completed developments. The market has been at a virtual standstill for five consecutive years, and the new tax could potentially bankrupt an incalculable number of professional developers, large and small.

Developers have traditionally been cash-rich, self-financed individuals or companies, with very little leverage. This has so far allowed them to withstand the pressures of the market and avoid a total crash of the real estate sector by absorbing drastic drops in sales ratios.

According to market data collected by the RAMCO Research Department, residential projects post an average sales ratio of 65 percent upon completion across Municipal Beirut, down from near 80 percent during the boom years between 2005 and 2011. This means that of roughly 10,340 residential units under construction at the end of 2016, around 3,620 will still be on the market when the projects are completed.

It is this huge stock of vacant apartments that the new law proposes to tax. The bill would be significant. Real estate fiscal taxes are roughly between $7-15 per square meter, calculated incrementally at between 7-10 percent of the estimated rental value of the property. The above vacant stock would correspond to roughly 780,500 square meter of unsold residential space, resulting in a tax bill of somewhere between $5.4 million and $11.7 million.

Supposing a development company ends up with 4,000 square meter of unsold residential space on its hands after the completion of the building, it has 18 months before it starts paying a tax of around $40,000 per year for the vacant, unsold residential units.

Taxing construction permits

The proposed law would increase the cost of construction permits by around 50 percent. Today, construction permits cost about 1 percent of the estimated fair market value of the land on which the project is developed; the new law proposes to tax it at 1.5 percent.

Construction permits currently account for about 10 percent of the total cost of construction. If this new law is applied, they will account for 15 percent. The additional cost will be reflected in an increase in the asking prices or by shrinking of the developer’s profit margin. Either option is disastrous – a hike in prices would stall an already stagnating market, and developers are already working with very narrow margins and cannot absorb more losses.

Many developers have already begun taking measures to help defuse some of the pressure off the market, cutting a sizeable chunk from their profit margins. Over the past several years, profit margins have dropped significantly, from around 30 percent per year to less than 12 percent in some instances. They have also begun offering larger and larger discounts, as high as 30 percent on certain properties.

Requests for construction permits are already dropping year on year, as per official data published by the Order of Engineers and Architects in Beirut. Imposing higher taxation and driving up construction costs will further shrink the number of new permit applications.

Taxing capital gains

An income tax has also been proposed on the capital gains realized upon the sale of a property. Capital gains are calculated as the difference (increment) between the purchasing price of a property and its selling price. All sellers will be taxed at 15 percent, even individuals who are not registered with the local authorities and those who are normally exempt. Companies will be taxed at 17 percent instead of the current 15 percent income tax rate. Additionally, companies will still be taxed 10 percent upon the distribution of profits to shareholders.  The proposed capital gains tax would be applied across the board, to individuals and companies, on the sale of any property – residential apartments, plots of land, shops, offices, warehouses, buildings, etc. It is payable within two months from the date of sale and would further deter real estate investment.

Additionally, the proposed increase to the value-added tax (VAT) from 10 percent to 11 percent will mean less disposable income for potential real estate buyers, but even higher property costs. Indirect taxes on the sector (such as increased tax on the services of notary publics and a hike in the stamp duty on contracts) will further burden contractors, developers, investors and individual buyers.

Taxing perception

Taxing income and profits is natural and fair. However, introducing new taxes to the real estate sector could threaten one of the last working sectors of the local economy. The market is already burdened by more than 17 different taxes and fees, and corruption traps everyone – from developers to investors to individual buyers – under a very heavy yoke. Real estate investments have traditionally been seen as a safe haven in an otherwise highly volatile, insecure economy. Taxing developers, investors, and buyers – at a time when the entire Lebanese real estate industry is hanging on by the sheer will of these players  – could mean its demise.

The biggest question is how the government will employ the additional tax revenue. Will increased taxation translate into better infrastructure, better quality services, the eradication of corruption, or reduced bureaucracy? Or will it come as yet another burden to be borne by an overwhelmed population?

When will real estate developers, who generate 18 percent of the gross domestic product, according to 2015 figures published by the Central Administration of Statistics, and who employ hundreds of thousands of people, stop being labeled by officials as financial pariahs, amassing fortunes on the backs of unsuspecting customers?

The reality is very different. Developers made good money and sizeable profits when the market was booming – as did everyone else. However, since the economy has stagnated, so have their businesses, their incomes, their profit margins, and their liquidity. If they do not drop their prices further, it is largely because the price of land has remained stable. Many cannot afford to sell at depressed prices because they simply will not be able to afford to buy the next plot of land they need to build a new project.

Developers are part of this economy, and main players behind its growth. Taxing them into bankruptcy can only be detrimental to the economy as a whole. Real estate investments have been a major driver of the local economy, and lenient taxation has attracted investors across property types, from residing locals, the large Lebanese expatriate community, to regional investors, mainly from Saudi Arabia and the Gulf countries. Today, foreign investors are divesting from the market, leaving only local buyers. Further taxation will drain even that last remaining market driver.

Now that the government has approved the 2017 budget, the question remains as to what new taxes or tax increases might be imposed. As Executive goes to print, the indication is that there will be some introduced, but it is not clear which, and Parliament will have to debate the budget before it is ratified into law. There appears to be zero studies by the government (or, at least, none that are public, and officials decline to provide details) of expected revenues, their social impacts or the effects to the economy that new taxes might imply (see cover story). Georges Corm, Lebanon’s minister of finance at the turn of last century, describes to Executive the government and Parliament’s approach to financing public spending as convoluted and misleading. “[It’s] like somebody stumbling through a room without lights,” he says.

E   How do you view the government’s proposal of new taxes or tax increases as a new source of revenue to the state?

The tax system is unfortunately not based on any strategic view of what the needs of the Lebanese economy are. What I’ve said repeatedly is that our tax system is putting a burden on people that are in the productive sector. As soon as you are productive and receive an income from your productive activity you are liable for the income tax. But if you live from your rent revenues, except for the 5 percent tax on interest income from banking deposits, you have no income tax to pay. So this is an unfair system and a system that punishes the productive sectors (industry, trade and services) and encourages Lebanese to go more into rent-type activities that are untapped by the government. When I was minister of finance, I wanted to introduce a general income tax, as our income tax system is fragmented with different tax rates according to different categories of revenues. In addition, taxpayers have to file separate income tax returns for each kind of taxable income so that income from various sources are not accumulated and assessed to be subject to a general income tax according to the same progressive rate of taxation of the overall income. This not only causes the treasury to lose a substantial amount of income tax, but it is also a headache for the taxpayers, as they must presently file many different income tax returns it have revenues from different sources. Therefore, a unified income tax system would make life easier for all taxpayers as many Lebanese have several sources of income that are not taxed together. So having several sources of income that are assessed separately by the tax department is a big headache both for the taxpayers and the tax authority.

E   One local bank said in early March that tax evasion amounted to $4.2 billion. Is this figure anywhere near accurate?

These are guesses, we [don’t have reliable] statistics in Lebanon. What is extremely important is to close the many loopholes in tax legislation that allow revenues to legally escape income tax. Looking at petty trade activities, it is a loss of time for an income tax department to try to tax them, while what is important is to check that tax collection is properly followed by tax authorities as compared to tax assessments. In addition, there are a lot of tax breaks, especially for new investments, but it is not transparent and you do not really know who is getting the tax exemption.

E   In late March the government issued $3 billion in treasury bills which were snapped up by local banks.

The government has no problem in raising the amounts needed to refinance its maturing debt obligations, as a large part of the quite substantial yearly banking profits is due to subscribing and trading T-bills (treasury bills) and Eurobonds issued by the state. This is why I would advise the central bank, the Ministry of Finance and the private banking sector to agree to decrease the average interest rate paid by the state on its public debt by around 1 percent on any new issues. Such a decline in the cost of servicing public debt to the state would save the treasury a yearly amount of $700 million in a few years time.

E   Some of the newly issued debt does replace old debt that was at a higher interest rate. But for Lebanon to get to a more attractive interest rate would that not require a higher sovereign credit rating?

Not necessarily because Lebanon’s public debt is mostly owed domestically, even in respect to dollar denominated debt. This would affect the profit of the banks only a little bit. They have had such huge and continuously increasing annual profits since the nineties, whatever the economic situation of Lebanon, that a reduction in interest rates paid by the state can be bearable without endangering their profitability. Whether there is a 1 percent or an 8 percent growth of the economy, bank profits are unaffected by the variation in economic activity because they have this huge portfolio of treasury bills that secure a steady and increasing flow of banking revenues.

E   The banks always argue that because they are the most transparent sector, they are penalized and targeted to pay more taxes.

I don’t see how they’re penalized, and I don’t think the banking sector drives the economy. Yes, Lebanese banks are very good at serving their affluent clientele both inside or outside Lebanon. This is why this contributes partially to attract the big flow of remittances that are sent from our emigrants, remittances being the biggest source of financing of our huge trade deficit. But, one should also mention that Lebanese banks are giving higher interest rates on deposits than anywhere else in the world, which might be the most important drive for the flow of remittances. This is why I believe that they can decrease them a little bit, instead of these endless discussions on how to tax more the banking system.

E   What effect might the proposed 2 percent tax increase on the interest of deposits (a capital gains tax) mean for the banking sector and for the economy?

I am personally not enthusiastic about raising the tax on the interest of banking deposits. But raising this tax from 5 to 7 percent will probably not produce a decline in the amount of deposits in the banking system. If adopted, this measure should not be repeated. In fact, I believe that a reduction in the average rate of interest paid on public debt would save more money for the treasury than what the increase in the tax would yield as an additional revenue. All these kinds of measures should be studied carefully.

E   Would an increase on the corporate tax from 15 to 17 percent discourage Lebanese banks’ appetite to buy locally issued debt?

Certainly not. But again, I prefer the decline in the average interest rate on the public debt. We have almost 4 or 5 or 6 percent differences according to the maturity of the bonds and treasury bills that the state is issuing. If Lebanese today, because they are the subscribers directly or indirectly want to go to foreign banks abroad to place deposits, they will get what? One percent, maybe 1.5? So you still have quite a margin to have a reasonable decrease. Let’s bring the premium paid on large deposits in Lebanon to 3 or 3.5 percent above average interest rates paid outside Lebanon by international banks on their deposits. Currently, on average, we’re around 6 to 6.5 percent paid on Lebanese pound deposits and 4 to 4.5 percent (or sometimes more) on dollar deposits. For what the state is paying on its debt, if you take out 0.5 or 1 percent it will not be a catastrophe for the banking sector nor for attracting capital from abroad. A decline in interest rates in Lebanon will also be positive for productive activities and new investments as it will also reduce the cost of financing in the economy for the private sector.

E  What might be the effect when taxing consumer behavior by raising the Value Added Tax (VAT)?

Nothing has been studied carefully. For VAT you can have two rates, although I do not like that. You can have a 15 percent tax rate on luxury goods for instance, and keep other goods at 10 percent. There should be a study of the different alternatives to see what  the yield will be to the treasury, but you have a government which did not detail how the proposed 22 new taxes or increases in existing taxes are going to be implemented. Such a proposal in one shot is unreasonable, especially since most of the proposed taxes are fees and excises. For instance, when the government says it is going to double the fees for public notaries, this will affect all the Lebanese population and will constitute quite a burden on the large poor segment of the Lebanese population. The government says they’re going to, and this is a very old issue, tax the resorts along the coast that are not legal, estimating that it will yield 400 billion Lebanese Lira, but how did they arrive at this figure? And what about raising the very low basis for calculating the rent paid to the state on using legally public domain along the sea or the river coasts? Why did the basis of assessment of this tax not change since the early 1990s?

E   Are these figures pulled from thin air, or how has the government arrived at its estimates of revenues for these proposed taxes?

You can do it but you need the statistics, but if you don’t have data how can you have an opinion? The minister of finance says this will bring us a certain number of billions of LBP, but I don’t see how the ministry determined its estimate of the additional income that would accrue to the treasury.

E   What effect do you think new or increased taxes might have on consumer behavior?

You have to distinguish between Lebanon’s two separate economies. The economy that is very prosperous – the nice areas of Beirut with the restaurants and hotels and some summer resorts in Mount Lebanon, and where you see luxurious cars and the very affluent part of the population. I don’t know what percent of Lebanese families are affluent, but my guess is that it can’t be more than 6 or 7 percent. Then you have the other economy that is a deprived one, where people are on the level of poverty, sometimes extreme poverty, and these are not the people that should support additional taxes on consumption or on legal documents they need in their daily life. This is why we have to stop going to indirect taxes, and to simplify the tax code through a unified income tax, canceling old dated excise taxes or fees (like the stamp duties). In addition, the government can take some additional income tax measures, so that ultra-luxurious villas or apartments are taxed in accordance with the luxury and quality of the residence. In addition, real estate companies can buy and sell real estate assets just through buying or selling shares, thus escaping the 6.5 percent registration fee. I tried to introduce a 6 percent tax on the selling or buying of shares of real estate companies so that it is the same as the tax burden that is paid by individuals buying a property. This is a legal loophole.

E   So you are in support of some new taxes?

I am not in favor of imposing 22 new tax measures in a haphazard way just to increase treasury revenues. There should be an intelligent and adapted tax policy that will rebalance the sources of tax revenues between productive and non-productive activities on one hand, and between income tax revenues and consumption taxes or excises and fees on the other hand.

E   If the government imposes any of the proposed taxes should projections for economic growth downgrade?

No, because I go back to what I said earlier: we have two economies. A very affluent economy that could support a reasonable increase in the tax burden on income or on luxurious consumption without any problem; and the other which is stagnant where the level of poverty is continuously and dangerously increasing. Of course, a 1 percent increase in VAT for this category of people might affect them. In any case, it is urgent that we have enough studies and statistics to study the impact of additional taxation measures. Today, the staff at the Ministry of Finance is in a black room, pitch black – they act like anybody would in such a case, i.e. behave erratically.

There is no shortage of challenges present or overdue reforms absent in the insurance sector in Lebanon. The backlog of unsolved issues begins with the need to renew the insurance law that was adopted about the time the Chevrolet Camaro was a new automotive design. It has – albeit once facelifted in the 1990s – stayed in power since. Problems do not end there, of course, stretching to absent corporate governance and transparency in sector companies, to underperformance of insurers as institutional investors in the context of Lebanon’s largely dysfunctional capital markets. The legal framework lacks provisions for the proper supervision of mutual societies, for support of life insurance as savings instrument for the masses, and for regulation of distribution channels (such as bancassurance) that were innovative some 30 years ago. The industry faces a future that will be bubbling with new realities, new risks and new distribution channels, but it is still stuck in the past in terms of capital structures and requirements and corporate cultures in many organizations, and  is crowded with inefficient actors.

The insufficiencies of the Lebanese insurance industry cannot be blamed on anyone in particular. As with so many other things in this country, they have resulted from conflicting historic trajectories where the ingenuity of local minds clashed with encrusted structures in politics and society. Even if it were possible to point an accusatory finger at one group of persons or institutions, it would do nothing to solve any problems. The question again coming to the fore is: can consolidation transform the insurance industry?

Observers and insiders of Lebanese insurance have, during the past 20 years, said time and again that the market has too many insurance companies and would benefit from cutting that number down by about half: from 50 to 60 existing insurers to 20 or 30 players. The latest idea, which has been discussed in insurance industry circles and by the regulator, the Insurance Control Commission, is to convince the central bank of Lebanon to provide soft loans as incentives for mergers and acquisitions.

Posing the question about the value of financial merger incentives to a number of industry members put the issue into perspective. No insurance manager told Executive that a push for mergers would be detrimental or that provision of soft loans would be anything but good. However, sector members pointed out a wide range of priorities and factors that would feature more prominently than financial incentives in any M&A. And while the recently finalized acquisition of Lebanese insurance company Al Ittihad al-Watani might stoke new interest in the consolidation topic, it hardly seems able to serve as a model for successful consolidation among local insurers.

Acquirer NASCO Holding initiated the negotiations for the takeover of Al Ittihad, but not under a rationale of promoting synergies between its Bankers Insurance and Al Ittihad in the Lebanese market. Instead, the move was driven by the potential that NASCO saw for boosting business in the United Arab Emirates, confirms Marc Abi Aad, manager for group corporate development at NASCO. “The acquisition of Al Ittihad al-Watani in Lebanon, which has a branch in the UAE, will enable us to consolidate NASCO’s existing book of business in the UAE at the level of this new vehicle. Instead of fronting it with two third parties, [we can] now capture the whole profitability of the portfolio by underwriting profits in the UAE instead of earning commissions on these premiums. That is one of the main motivations and [an important] driver behind the acquisition,” he tells Executive (see story).

Acquisition rationales

The case of a Lebanese insurer that is attractive for a takeover in the context of an international player’s regional strategy because of its operations outside of Lebanon has been something of a standard scenario in recent years. The existence of licensed branches in GCC countries is presumed to have been the main driver behind the less-than-perfect acquisition of Compagnie Libanaise D’Assurances (CLA) by Zurich Insurance in 2010, which spawned a court confrontation between acquirer and acquiree. Zurich Middle East, according to the annual report of Lebanon’s ICC for 2015, had only a minuscule share of premiums in the local market and did not seem to have an active presence in Beirut. Regional strategy and the aim to leverage a Lebanese insurer human capital for expansion in the Gulf region was also an element in the acquisition of 81 percent of Bank Audi’s LIA Insurance by Casablanca-based Saham Finances in 2012, as the Moroccan company’s CEO told Executive at the time.

Even if crowned with success, opportunities to push regional expansion by way of aquiring a Lebanese insurer’s acquisition are rare, and cannot define a pattern for consolidation among local companies in Lebanon’s insurance sector. It may thus be more fruitful to gauge acquisition opportunities on the basis of best practices in corporate behavior as experienced by decision makers who have undergone the exercise in the financial industries of emerging markets. For example, in the experience of regional insurance holding Chedid Capital, which in only the past three years has facilitated the creation of an African insurance joint venture and the acquisition of two broking units (one in Mauritius and one in the UAE), money and financial incentivization is not the top consideration when thinking about M&A possibilities and looking at an acquisition candidate.

Money does not come first

“First and foremost, as rule one, we look at ethics and integrity of owners and managers in the company. Rule number two is that we look at the potential to grow not only its business but also to enhance its systems, processes and corporate governance. We want to make sure that the company will adhere to our level of corporate governance and risk management, and to our standard of internal controls and ethics,” says Farid Chedid, the chairman of Chedid Capital and general manager of multi-country reinsurance brokerage Chedid Re.

When it comes to the acquisition process, money is not Chedid’s first concern. His priority is to have a well-structured framework of detailed merger rules. These should then be accompanied by incentives, he adds, saying, “Soft loans are one aspect. What is required is a clear set of rules to protect both the buyer and the seller during an M&A. Once they are protected by rules, you also need to give incentives. Any M&A has constraints, one of these could be financial. There needs to be a set of rules with duties and obligations for each party [to a merger] and incentives that will push investors to buy or existing shareholders to sell.”

For Chedid, the specificities of the insurance industry in terms of reserves, provisions and regulatory capital requirements warrant special care when it comes to a merger or acquisition. Buying an insurance firm is not like buying any other company, where gaining an understanding of its assets would be the main task. “Assets are easy to figure out in an insurer but reserves are difficult. The difficulty is to assess the reserves and their quality, to see if all data is in the system or if some has been withheld from a potential buyer. One of the worst situations would be that a buyer comes in and finds out later that they were misled or that information was withheld,” he explains.

Therefore, a new insurance law in Lebanon, if it gets adopted, needs to include rules on corporate governance and internal controls, he emphasizes. “Within the law’s rule on corporate governance there needs to be a section on change of control, how it has to be managed, e.g. can sellers sell and be free of [any further] obligation even if they have misled [the buyer in the transaction]? Can buyers withdraw even if they did not perform proper due diligence? Lacking clarity in such rules and subsequent court battles affect the reputation of the Lebanese insurance industry,” he warns, with an unspoken nod to the problems and court arguments which have followed opaque mergers in the recent past.

The problem with the Lebanese governance culture

Indeed, the trajectory of developments in the Lebanese insurance industry in recent years does not bode well for mergers and acquisitions, says Antoine Issa, the MENA CEO and chairman of Allianz SNA (the Lebanese unit of the German insurance multinational and leader by overall written gross premiums in the Lebanese insurance sector). In his view, the infrastructure for successful M&As in Lebanon, in terms of regulation and governance, is “probably the lowest in the Middle East today,” because many other countries in the region have developed stronger frameworks for governance in the past decade, with Saudi Arabia having led the advance. “So far we have not seen real mergers and acquisitions, but [only] changes of shareholding because small companies are reluctant to open their capital. This is a little strange. We [Lebanese] participated in the development of all these markets in the Middle East but today we are lagging behind in terms of governance, risk management and regulation, capital and solvency, etc.,” he tells Executive in an interview to be published online at a later date. To the question of how mergers and acquisitions in Lebanon could be encouraged most effectively, he responds that, in his view, this is very difficult because best governance structures result from the listing of companies, but the appetite for listing companies is lacking in Lebanon, even in the banking sector. “In a listed company, governance is creating transparency for the public and shareholders,” he explains. He advocates that all banks and all insurance companies in Lebanon should be listed and traded on the stock market, but that this cannot be achieved without first instituting a culture of capital markets and transparency in the public sector.

“Capital markets in Lebanon are very weak; we don’t have real capital markets and I think this is bad. We definitely need strong capital markets if we want to develop the economy. To grow a successful family business into an institution, you need capital markets that give access to funding other than having a loan. Unfortunately, we don’t have this culture in Lebanon and this cultural lack begins with  the public sector. If the government does not have governance in its institutions and if we don’t promote governance in public institutions and then in private institutions, nothing will happen,” reasons Issa.

Need for risk-based capital requirements

It seems that the more one asks about M&A prospects in the Lebanese insurance industry, the more alerts to missing requirements one gets. Bernard Sfeir and Charbel Chaanine, heads of the finance and marketing departments at bank-affiliated Lebanese insurance company ADIR, chuckle mysteriously when telling Executive, “We know which insurance companies might be potential acquisitions for us in future.” The two managers confirm that ADIR – thought to be among the top10 in terms of consolidated premiums position in life and non-life in 2016 and the fifth most profitable insurer in Lebanon in 2015 by the bottom-line figures shown in the ICC’s annual report – would by its financial strength be able take its pick among any of 40 smaller insurers for an acquisition, but concede that the number of healthy and realistic takeover candidates would be much smaller.

In the perspective of ADIR’s head of finance Sfeir, an acquisition of a small insurer’s portfolio could be more interesting than an outright corporate takeover. “Why [would you agree to] have the headache of acquiring a whole company and go through the due diligence process and seek if there are any synergies between your company as a well-built organization and another organization that may be smaller or weaker?” he asks rhetorically. In his view, any of the top insurance companies in the Lebanese market would probably benefit more from acquiring a portfolio and could on its own solicit agents or brokers associated with the portfolio, without going through the trouble of assimilating another company with all its possibly hidden skeletons.

Acquisition of a portfolio would be contingent on its quality, its synergies with ADIR’s portfolio and on its acceptance by ADIR’s primary reinsurers, and also necessitate a due diligence process on the technical side as well as an assessment of human resources that might be taken over together with the portfolio, Sfeir adds. The central element in his list of merger incentives would, however, be an increase in minimum capital requirements for insurance companies, preferably in combination with a risk-based capital approach. He thinks Lebanon in this regard should learn from European experiences, for example, the long process of drafting and implementing the Solvency II regulation.

As he sees it, any generic, large hike of minimum capital requirements would promote consolidation but might disproportionately benefit large insurers and hurt small ones. It also would not be as fair and as effective as the implementation of a package emulating the Solvency II evaluation approach, entailing risk-based capital, market conduct, corporate governance and a host of detailed parameters. “A whole concept should be applied to encourage mergers and acquisitions, not only subsidized loans. [Offering] subsidized loans is a good step but only one step. Other steps would be to impose the law, update it when there is a possibility, and most importantly, adopt a risk-based capital approach,” Sfeir explains, elaborating further, “Basically, if [Lebanese regulators] want consolidation through M&A in insurance, they should start by imposing minimum capital requirements that are based on a minimum solvency capital requirement. If there is no risk-based approach, we will not get anywhere with just subsidized loans.”    

Under the ideologies of shareholder value and financial market efficiency, modern concepts of mergers and acquisitions – up to mega-mergers, hostile takeovers or leveraged buyouts – are about as far from the anti-trust and anti-merger concepts of the early 20th century’s as a Tesla Model S or Google’s autonomous Waymo car is from the American muscle cars of old. M&As nonetheless require great care to be able to restructure and redeploy assets and deliver competitive efficiency in an industry that is rife with contenders of varying quality while simultaneously preserving consumer choice in the face of the markets’ perennial gravitation toward economic concentration.

As Lebanon has no real track record of successful M&As in the insurance industry, it seems a valid point raised by some insurance managers such as Allianz SNA’s Issa that the soft infrastructure for such transactions, not only in terms of adequate legislation, but also in term of expert lawyers and investment banks with skill in insurance mergers, has yet to be massively improved. Then there is the need for functioning capital markets, corporate governance structures, and transparency of insurance company balance sheets as the foundation for building a consolidated industry that consists of healthy companies.

On top of all that, the sector’s consolidation may require egos to become more deeply grounded in reality and readiness to realize the benefits of being immersed in a crowd of capable minds. Insurance in Lebanon today does not appear to sport Napoleon or  any other great leader – but that is all the better if one assumes that the task of taking the industry into growth and consolidation needs not bosses but serious group efforts and teamwork. Still, one should not hold their breath waiting to see a wave of successful consolidation moves in Lebanese insurance.

As the tide of transformation in the insurance industry makes its way across geographies and business lines, it not only floods the field’s core players with uncertainty, but it also affects business models in auxiliary ventures affiliated with insurance. One important auxiliary area consists of enterprises that engage in the management of medical insurance claims. Called third-party administrators or TPAs, enterprises in this specialty services industry bundle the handling of medical claims for a variety of payers – insurers, mutual healthcare mutual schemes and self-insured organizations or corporations.

The TPA business model historically has added value to insurance by providing a layer of efficiency through managerial skills and bargaining power vis-à-vis healthcare providers due to the economies of scale involved. While many insurers locally and regionally might run their medical claims department under the title of TPA, the role of genuine “third-party” organization that is independently serving numerous payers has for more than two decades most strongly associated in Lebanon with the TPA GlobeMed (formerly MedNet).

However, what was a strident growth business in the 1990s and early 2000s (GlobeMed celebrated its 25th anniversary in Beirut in May 2016) currently faces pressures that require serious innovation, concedes Walid Hallassou, the general manager of GlobeMed Lebanon. “The medical insurance business is becoming less of an insurance story and more of a management one. We realized that opportunities in terms of healthy growth in the portfolio through new insurance companies or self-funded schemes were not very visible,” he tells Executive.

As he describes the situation, tidal pressures and crosswinds buffer the TPA business model from different directions. One factor is medical inflation through new medicines and improved treatment methods. Like inflation, which has become understood as a good thing for the economy when it occurs in moderation, the rate of innovation in medical treatments is on the whole regarded as beneficial to the patient. However, it is also associated with increases in costs for patients and their coverage providers. In any case, this rise in costs cannot be stopped and a TPA’s capability to mitigate impacts of medical innovation through control of treatments and hospital admission procedures is limited.

Also completely outside of the control of a TPA is the boost factor in medical treatment costs that is related to changing demographics. Populations in the Middle East are ageing, and the shift of countries characterized by high populations under 30 to societies with growing populations over 60 is, well, only a matter of time. Whether their needs are for treatments or long-term caregiving, older populations have higher medical requirements that are also associated with higher costs. With these two driving elements, medical inflation has become a fact of life for TPAs.   

On the other side of this equation, however, stand restraints on their ability to pass on higher costs to the insured population through increased premiums. As TPA clients, commercial insurers face a trade-off where higher medical insurance premiums translate into lower numbers of an insured clientele. Under either scenario of stable premiums and contracting margins, or of higher premiums and shrinking client numbers, the potential for organic business growth from managing medical claims appears to be much lower than in the past.

Talking and walking wellness

In response to these realities, GlobeMed has developed a strategy of encouraging and assisting people to stay healthy, Hallassou tells Executive. He explains that the TPA can only avert having to pay hospital bills for its insurance clients by promoting health and wellness among its healthy clients and by providing disease management to clients with known ailments or vulnerabilities tokeep them out of hospital as much as possible.

“We told ourselves that it is better if we can stop people from being admitted to hospital. [The idea is] to tell them them, ‘stay healthy, go see your doctor and do the tests, [and] prevent your diseases. Let us manage you outside the hospital.’ There are so many ways for health to be managed. This is where we try to push, and we have developed wellness programs, prevention programs and disease management programs,” Hallassou says.

A first practice under the new strategy was initiated in 2016 with a disease management program for diabetes sufferers. The program includes encouraging patients to take tests such as HbA1c, which shows long-term average blood sugar levels – and making insurance providers accept to pay for these tests. The economic rationale for offering the test to the insured is based on global evidence, which indicates that lowering HbA1c average blood sugar levels by one percentage point can exponentially lower the number of complications that require hospitalizations, or emergency room admissions.

According to Hallassou, patients in the pilot program for managing diabetes with assistance from GlobeMed have now received alerts for their health exams for almost a year. “We call them and send them an SMS that it is time for their test, we help them get the results, and we recommend action. All of this is going in the direction of improving the health of the population,” Hallassou says.

While it is still too early to assess the financial benefits of reducing treatment needs under the campaign, there has been a reduction of 10 and 12 percent in in-patient admissions and emergency room visits in a test population during 2016 under the GlobeMed diabetes disease management program, according to affiliated wellness partner GoodCare Clinics.

In further development of disease management programs, the TPA plans to roll out to assist in disease management of cardiovascular and pulmonary sufferers. Other measures under the health-focused strategy are to promote wellness and preventive activities to insured populations. As a digital tool for these measures, GlobeMed intends to release a mobile application in the near future, which Hallassou describes as “a wellness app” and “not an insurance app.”

Functionalities will include established ones like counting steps and calories burnt by walking, but the app will also contain country-specific databases of available foods, allowing users in Lebanon, Saudi Arabia or Egypt to enter information about the food they are about to consume and receive information on what eating this food means in terms of intake of calories, sugar, fat or the health-boosting mineral potassium. Hallassou says that the app will enable GlobeMed to alert people if they eat something they shouldn’t indulge in for the sake of their health. It can also give reminders on when to take medications, alerts of interactions between medicines, store medical records and test results and – having an insurance related function after all – support and track insurance applications and reimbursements.   

The new app also fits into an industry scenario, whereby digital technology and consolidation in insurance represent further crosswinds in the path of GlobeMed and the TPA model. On the digital front, the environment in which TPAs operate is changing because newfangled apps and digital gadgets lead to customer behavior modifications and changed expectations in the companies that take care of insured populations, with an overall increase in the importance of digital tools and country-specific systems that an insurer can operate online.

Consolidation challenges

As to the other crosswind, consolidation in the regional insurance industry is a necessity but also mixed blessing for the TPA business. Today, the Middle East houses a large number of insurance providers, over 100 of which have contracts with GlobeMed to use the TPA. These are all small companies by international comparison, and they are not capable of managing their claims in-house, hiring an actuary or having a digital transformation, explains Ziad Kharma, GlobeMed group’s vice-president for business development, actuarial and international health services.

Consolidation with a field of so many players is necessary and desirable, he tells Executive, but it also means that the needs of health insurance providers will change. “We recognize that these companies are going to get bigger, and a lot of them are already getting larger, to the point where they won’t need a TPA anymore. This is why our strategy is not just to have a TPA franchise, as we do, but to add a vendor line where we sell our system so that insurance companies, for example, can manage their own,” Kharma says.

While he acknowledges that software systems designed for the administration of health management processes and medical insurance claims handling are available from many large international software firms, he emphasizes that GlobeMed has developed its own systems over the past 25 years and that these systems are customized and localized for their markets. “We have developed our system from our experience as a TPA, and this is something that we are packaging and selling now as a solution on its own,” he says.

The logic behind this pivot from being a TPA into offering systems is to capture the potential for doing business with insurance companies, which grow to a scale where they have enough clout in price negotiations with health providers and can reap the profits of effective medical claims management through their own claims department. “When insurers are getting bigger, they are not in need of a TPA, they need a system, and this system will include digital platforms to manage healthcare,” Kharma explains. According to him, GlobeMed is venturing into the provision of systems with a multipronged approach. We have the option of on-premises setup and offer business process outsourcing; we are very flexible,” he says. 

Noteworthy in regards to the group’s corporate structure is that the GlobeMed brand is not operated by a monolithic company, but by a twin set or corporations consisting of GlobeMed Limited – a company registered in the British Virgin Islands – and of local entities in different countries. “GlobeMed Limited is the holding and the owner of the IT and the know-how and brand,” explains Hallassou. “Our model is a franchise model, so each of our operations is a franchise, and we transfer to them our know-how – how to manage a claim, how to do underwriting, how to set up a network,” adds Kharma, who notes that GlobeMed Ltd could engage in a country franchise without holding any equity.

In most countries, the two entities are akin to fraternal corporate twins that share a brand identity but have genetic (ownership) differences from each other. In some jurisdictions, GlobeMed Limited participates with as little as 5 percent in the equity in the local franchisee that operates the TPA, and in some, such as Syria, GlobeMed Ltd. holds all the equity. In Lebanon, the two companies are more like identical corporate twins under shareholding structures, where the same basic investors own GlobeMed Lebanon through a company called Murex Holding and the BVI company, GlobeMed Ltd.    

Rising competition

An adverse force in the company’s path, for GlobeMed unavoidable – and in business terms not unusual but rather expected – is rising competition. Whereas the Lebanese company once could claim undisputedly to be the largest TPA in the Middle East, it has in recent years been challenged in regional market leadership by Dubai-based NEXtCare. This TPA, whose corporate parent is the multinational insurance carrier Allianz of Germany, claimed last month on its website to have 3 million “managed lives,” meaning individuals with medical covers provided by commercial insurers, corporates, and public sector entities that are handled through the company. NEXtCare, moreover, said on its website that it had a provider network in 14 countries with a total of 11,000 practitioners, clinics and hospitals around the region.

Kharma claims that the regional presence of NEXtCare is not as wide as GlobeMed’s but admits that “NEXtCare is the primary competitor for us, and I think we both drive each other to stay ahead of the other.” Judging from other information available from the corporate website and sources in insurance companies, NEXtCare is strongest in Dubai. It is pursuing growth in regional expansion, which took it to establish offices in other GCC countries, the Levant, and recently Egypt. According to sources, the company will be a sponsor of an insurance conference in Lebanon next month, and it is reputed to employ competition on price in its growth strategy.

Unfortunately, however, NEXtCare declined to be interviewed on journalistic terms by Executive last month or respond to a list of questions after having requested this list from the magazine through its public relations company. After being contacted by Executive, the “key numbers” information on the NEXtCare corporate website was revised to say the company has over 4 million managed lives and a partner network of over 13,000 providers in 12 countries. Not having been able to interview a decision-maker in the company, Executive cannot confirm if these were 2016 NEXtCare numbers, report on the company’s current strategies or compare its corporate structure and position in GCC or Levant markets with that of GlobeMed.

According to Kharma, GlobeMed has more than 1,200 employees regionally, works with over 100 payers, has over 17,000 health providers under contract, and serves between 4 and 5 million people – when one includes those who obtain services through the Ministry of Public Health in Lebanon. In conclusion, it may be a moot question which TPA is currently the size leader in the Middle East in terms of managed lives and network. As only a small portion of the regional population is covered by any managed healthcare scheme, it seems clear that the need for evolving the administration of health and medical services to more inclusivity is greater than the potential for commercial providers to do so profitably.

The sale of Al Ittihad al-Watani Insurance evolved over several years and was rumored in the Lebanese market to involve a number of valuation issues before culminating in an acquisition by NASCO Insurance Group. NASCO, whose founding purpose was brokerage activity and whose main focus is insurance broking, pursued the deal on the grounds that underwriting is becoming more and more heavily regulated and capital intensive.

Not all that much was publicly known about the negotiations for the sale of Al Ittihad before NASCO came to the table. According to a document issued in August 2015, Colina Holding, a Mauritius-based subsidiary of Morocco’s Saham Holding – which controlled 81 percent of Lebanon-based LIA Insurance in 2012 – was seeking a $30 million loan from Saham under the rules of the Mauritian stock exchange. The loan’s intended use was for the purchase of the 94 percent stake in Al Ittihad recently taken over by NASCO.

This fits with the fact that talk about the negotiations between NASCO and Al Ittihad was present in the Lebanese market for several years. According to Marc Abi Aad, the Beirut-based manager of group corporate development at NASCO Insurance Group, the process of due diligence was lengthy, but this was because of the complexity of the transaction rather than other factors. He said the duration of negotiations was not caused by diverging views on the purchase price, which he declared to have been fair to all parties, but the amount of which he was not authorized to disclose to Executive. “The due diligence was a complex process of analyzing the company; it was purely a technical challenge. The amount of data that we needed to process and the amount of preparatory work that needed to take place took a long time,” Abi Aad said.

The reason why the group stayed with the process is clear from the numbers related to Al Ittihad’s operations in Dubai and the United Arab Emirates. NASCO’s insurance broking operation made close to $500 million in transactions globally in 2016. In the UAE it acted as an agent for two local insurance companies, Abu Dhabi-based Al Wathba National Insurance Company (AWNIC) and Emirates Insurance Company (EIC). NASCO wrote about $45 million last year in business as agents of the two insurers.

Eyeing the Emirati market

In the UAE, NASCO has achieved good annual rates of growth over the past few years – as have NASCO units in most GCC countries and certain other markets – but it could not address the local market directly or obtain a new license due to restrictive licensing practices in the Emirates. Al Ittihad’s UAE operation showed impressive annual growth in its underwriting and, according to Abi Aad, grew from $33.7 million in premiums to $43.8 million in five years.

This has very positive implications for the group’s market position after the acquisition. “The immediate potential we have for Al Ittihad by injecting the NASCO portfolio would propel the insurer to rank between 15th and 16th position in the UAE market, by doubling its premium volume to $88 million. This process will start in 2017, and it will be expected to reach full integration in 2018,” said Abi Aad.

He further explained that besides a boost of about 10 places in its market position compared with listed UAE insurers, the acquisition will open the door to synergies, because NASCO has a regional platform as a broker and underwriter through Beirut-based Bankers Insurance. He confirmed that “having Al Ittihad on board will definitely open new opportunities for NASCO,” adding that the portfolio of Al Ittihad will benefit from access to NASCO’s regional platform for inter-company business referrals. “The volume of referrals within the group is high and picking up [further],” he noted.

In all this, NASCO does not harbor an expectation to lasso the moon above Dubai or Abu Dhabi. “We know our place as underwriters and will not compete even for a position in the top-ten insurance companies in the UAE market, but we want to exploit the consolidation potential between our portfolio and the Al Ittihad portfolio to the maximum,” he said, adding that the acquisition would probably translate into a sustained or accelerated growth rate for the resulting entity. “At this stage, it is hard to quantify [the growth going forward], but it is going to accelerate. Double-digit growth is achievable, and I would say more than 10 percent [growth per annum] is plausible,” he opined.

No favorites

However, the contrast between the upbeat expectations for NASCO’s newly consolidated UAE operation and the outlook for Al Ittihad in the Lebanese market could hardly be more pronounced. “For us, it does not make sense to have two insurance companies that are competing in the same market with redundant costs in both companies. We have already stopped production at Al Ittihad Lebanon and unfortunately we have had to dismiss most of the workforce,” Abi Aad admitted.

In recent years, the portfolio of Al Ittihad in Lebanon has weakened considerably – also because of inquietude in the market over the potential sale of the company – shrinking  to less than $6 million; a level, which Abi Aad said, did not justify keeping the operation running. However, he noted that of the remaining workforce of Al Ittihad – the company had already gone through two rounds of severances from employees he said – “some employees will be invited to fill positions within NASCO.”

As to the fate of the portfolio, he did not see it being automatically merged into the portfolio of Bankers Insurance. “It would be unfair and unjustified to give producers of Al Ittihad portfolios preferential treatment, and [take them] directly into Bankers. Of course, we are open to negotiations if any producer of Al Ittihad wants to roll over their portfolio to Bankers, but [this producer or broker] will have to abide by standards that Bankers has in place.”

Here the story appears to return to the UAE. “Bankers is the leading underwriter for NASCO Insurance Group and has developed a set of best practices over the years since 1972, which translated into Bankers being consistently ranked among the top three companies of [non-life insurance] in the Lebanese market. All these best practices are going to benefit Al Ittihad UAE, such as enterprise management and enterprise risk management frameworks, internal audit [skills] etc.,” Abi Aad said.

Despite the consolidation, a wholesale merger is not imminent. “For the coming two years, NASCO is planning to keep Bankers and Al Ittihad separate. During these two years, there is a long checklist that needs to be executed before the group can take any decision on how to eventually merge the two entities. Right now, a merger is not on the table, but in the future, anything can happen.”

The task of improving the Lebanese insurance sector through regulatory instruments, financial supervision and increasing governance has been pursued by the Insurance Control Commission (ICC) at the Ministry of Economy and Trade (MoET) for the past 15 years, with growing vigor and ever-increasing activity. To obtain an update on the ICC’s views and projects, Executive conferred with Nadine Habbal, the acting ICC commissioner. (Due to special circumstances, this interview was conducted via email).

E   Can you update our readers on the rolling out of third-party liability coverage against material damages in motor insurance? Has a standard contract template for coverage of material damages and bodily injury under one policy been approved?

The ICC is launching a project [this month] to organize a framework for [Motor Third-Party Liability Insurance], including bodily injury and material damage coverage. The project will be conducted with the support of a team of experts from the World Bank who will commence their endeavours by meeting a number of key stakeholders in the market. Over the course of this project, the ICC will consider a number of options related to the possible organization of this [insurance]. Major considerations will be the analysis of definitions and limitations of various coverage, the exclusions, claims management and recovery processes, and the implementation of a centralized risk database to enhance the underwriting capabilities of insurance companies. In this initiative, the ICC will build on the experience it gained regarding market practices from its recent on-site visits with insurance companies and brokers.

E   How about the design of a standard policy for medical insurance, with mandated minimum prices and minimum benefits?

The ICC is continuing its investigation into market and international practices with regards to medical insurance, and will consider action in due course. In this respect, the ICC has dual objectives in mind; while it intends to shield policyholders from potentially harmful practices, it is also seriously considering ways to help insurance companies combat the unfair and illegal competition coming from cooperative funds who are not allowed to market medical insurance products to the public. A recent warning was sent to these funds, the impact of which is expected to unfold in the coming period.

E   Are there new developments from a regulatory perspective in relation to insurance pools for earthquake risk, oil and gas risks, or any other pools?

The ICC is in the process of updating its analysis on the risk of earthquakes in Lebanon. The analysis focuses primarily on how a major earthquake could impact the financial condition of insurance companies operating in the sector. Along the same lines, the risk management practices implemented to mitigate this risk are [being] scrutinized. The analysis has another tier covering uninsured households; this is an area where major losses can be incurred without any existing hedge.

E   In their latest Financial Sector Assessment Program (FSAP, released this January), the World Bank and International Monetary Fund mentioned consolidation as a measure that could help create larger pools of resources in the Lebanese insurance sector and attract international groups. What is the ICC’s response to this assessment and to industry requests for central bank support for insurance M&As through soft loans and other incentives? Do you regard the recently approved acquisition of Lebanese insurer Al Ittihad al Watani by NASCO as a positive sign for the industry’s desire to consolidate?

In order to enhance the utilization of capital and the quality of the services rendered to policyholders, and to reduce the destructive competition on prices, the ICC is working on incentives to encourage companies to merge in a healthy context. Soft loans sponsored by the central bank would be an ideal scenario, provided the money is invested to build capacity in needed areas such as risk management, pricing, and governance. The acquisition of Al-Ittihad-Al-Watani by NASCO Holding is certainly a step in the right direction. A number of companies in the market may not be sustainable in the long run with the present setup; they must realize it, and seek alternatives to ensure they will remain in business in the coming years.

E   The FSAP opined that the insurance sector faces “structural challenges” to its development and voiced several recommendations. The assessment called modernization of the insurance law a “precondition for strengthening the ICC’s effectiveness.” The FSAP also proposed replacement of the National Insurance Board with a consultative process and effectively suggested legal changes to secure operational independence for the ICC and update the scope of its activities. Do you agree with these perspectives and proposals?

The facts speak for themselves. In the last 18 months, the ICC introduced the first controls and financial returns on brokers, conducted on-site inspections at car registration sites and financial services institutions across Lebanon, took action against unlicensed entities selling insurance products, started a process to review insurance products in the market, opened communication channels with the Association of Insurance Companies of Lebanon (ACAL) and Lebanese Insurance Brokers Syndicate (LIBS) and actively involved them in its process to design regulatory reforms, and much more.

Notwithstanding legal modernization, the regulator needs to assert its role with tangible and useful action; the fact is that the strongest legislation would remain useless if it were not translated into action that left a positive impact on the sector. On the other hand, no one would oppose a regulator determined to fulfill its mission and serve the best interests of policyholders and shareholders, even if its actions were not explicitly stipulated in the law. Replacing the National Insurance Board with a consultative process is a possible solution that mitigates the risk of political deadlock, but it is not the only one.

E   What are the ICC’s plans in relation to imposing corporate governance regulations on insurance providers, and what legal methodology do you envision for the implementation or enforcement of governance mandates on Lebanese insurance providers?

Corporate governance remains a major concern for the ICC, and a challenging area to address given the historical context, as a large number of companies are family-owned. The ICC is addressing this issue using a risk-based approach on a case-by-case basis,  and the sector is cooperating.

It should be stated that companies should not sit back and wait for the regulator to give them instructions on how they should best conduct their business. Corporate governance is not a matter of supervision but a fundamental requirement for the long-term sustainability of any business, let alone insurance. It should be stated that a number of players in the market have implemented advanced governance and extracted significant advantages from it in terms of performance and general business conduct.

E   You have revised the ICC’s logo and identity in 2016. What is your message with the new logo?

This is a step toward an ICC that will become an independent supervisory body with its own internal governance, in line with the international trend for insurance regulatory bodies. Lebanon has a long insurance history, and the potential to reach a stage where the sector plays a major role in the nation’s economy is large. The ICC’s aim is to be a primary actor in this transformation.

Allianz SNA is one of the most active insurance companies in Lebanon and the Middle East. Executive sat down with its Chairman and Regional Chief Executive Officer, Antoine Issa, to talk about the state of the insurance industry and the interconnections between consolidation, governance and institutional investments.

E   How do you view Lebanon from the perspective of a regionally active multinational insurance company?

I have worked in most of the countries in the ME region, in some directly and also as a board member of insurers working in these markets, so I have lot of experience in the [region’s] insurance sector. I can tell you that, despite everything, the level of technical know-how and the level of quality,  and pricing of the insurance market in Lebanon is probably the highest [in the region] still today.

E   Is that surprising, given that other, larger markets in the region have seen a great deal of insurance development?

I was asking myself: how can that be when you have 60 companies in a small country like [Lebanon] and very little regulation over the insurance sector as well as all other sectors in economy? [This is a country where] you don’t have good governance, and sometimes, you don’t have governance at all. So how can it be that you have a very good level of technical know-how, of pricing, of profitability, of innovation and so on? I think this is not contradictory because when you have 60 companies, you have 60 chief financial officers, 60 chief risk officers, insurance technicians, etc. I think [this situation] is promoting competition, innovation and self-discipline, and thus is making Lebanon what it is today.

E   But the insurance industry in Lebanon has seen relatively little growth or innovation as of late. So what is the problem?

The market is becoming too fragmented with too many small companies. The lack of strong regulation, strong capital and strong companies is not encouraging and is sometimes not allowing small well-managed companies to grow. But when you want to grow and institutionalize, you need good governance. Otherwise, it is impossible. So we now have some kind of bottleneck. We have some very good small companies that are very well managed, but they are not able to grow, merge or open their capital.

E   Currently, investment opportunities for Lebanese insurers appear restricted due to outdated regulation and other factors. Do you have proposals regarding how insurers can work as institutional investors in Lebanon?

It begins with the new law and new regulation, plus incentives for companies to move gradually into new environments. The regulation is not very restrictive. You have the possibility today, in this country, to invest 50 percent of your money abroad. When you allow companies to invest abroad, there is a larger horizon when compared with other jurisdictions, like KSA or Egypt, where you can only invest locally. However, we would welcome more local investment opportunities, such as funds that are tailored for the needs of insurers. But, it cannot be some small closed-ended fund; that doesn’t give me enough comfort. I need funds that are listed in a strong capital market. We need to have a change of mindset and need to start agreeing that we need a minimum [level] of infrastructure.

E   What would be the mentality shift to facilitate insurers to act as institutional investors?

To have listing, you need trust in the capital markets and the Capital Markets Authority. Today, people don’t [have that] trust. Why are people not buying? Because they have not seen transparency. We have good names [of listed banks on the stock market], but we don’t see the transparency that one would expect from listed companies. We need more companies to list, and we need to have strong governance, to show us that when we list a company, or tomorrow list a utility, Electricité du Liban or Eau du Liban or whatever, we can as consumers and as institutions start buying the stock because we have good control and good governance. To do this [for the private sector], however, you first need the public sector to accept [a high] level of governance and transparency.

E   How would you describe the relationship between Allianz Société Nationale d’Assurance (SNA) and the Middle East and the relationship between Allianz and SNA? Is what you are going through in the regional and Lebanese insurance markets comprehensible from the perspective of the corporate head office?

Allianz SNA is a company that is now 100 percent owned by Allianz Group. This was a gradual move by the founding shareholders. The name of the company – Société Nationale d’Assurance – was chosen to signify from day one of our history that this was a company with Lebanese management. The Lebanese shareholders always believed that we needed to have a strong foreign partner, not only to develop the insurance market in Lebanon, but also to develop [it in] the Middle East. [The acquisition of 100 percent of SNA] came at the end of a very long and successful gradual journey to team up with a top-notch foreign partner.

E   What is the role of the Lebanese operation for Allianz?

Allianz is using Lebanon as a platform to develop the rest of the Middle East. Out of Lebanon, we developed Allianz Egypt, and also started our journey into Saudi Arabia. Today Allianz is again using Lebanese talent to further develop these two markets, but also other [new] markets in the Middle East. We are using Lebanon as a hub with a talent pool and expertise in insurance. I think that with time, if we see better governance, regulation, more transparency in the law, in fiscal transparency and in the way we operate here, many multinationals will use Lebanon as a talent pool for the rest of the Middle East, as they did in the past. They went out [in part] due to the war but mainly due to lack of regulation and transparency. 

E   How many countries are under your leadership in the Middle East?

I have the whole Middle East, but the core markets that we are working in are Saudi Arabia, Egypt and Lebanon. We have joint ventures in Jordan and in Bahrain, but these two markets are not priorities for us because of their size. We have an operation in the United Arab Emirates, but it is in the DIFC [Dubai International Financial Centre], and thus we are not operating in the local market directly. We are operating in the local market by fronting with local companies. We are looking, as one of our next developments, to enter the UAE market.

E   Do you have a consolidated view on your market position in the Middle East region?

I think we are one of the larger multinational insurers in the Middle East region. We don’t have many multinationals in this region and this is perhaps because we don’t have many [multinational] competitors but also because we are in the largest markets. In the UAE, which is the largest market for insurance in the region, we are fronting locally and have a presence; the KSA is the second largest market and we have a strong presence there. The fourth largest [insurance market] is Egypt and we are there and the fifth is Lebanon and we have a presence [here too]. Out of the top five [markets in the Middle East] we are missing Qatar, but Qatar is closed to foreign players.

E   How is the split between life and non-life insurance in your portfolio?

In Lebanon we are split 50:50 between life and non-life; in Saudi Arabia we are 75 [percent] non-life and 25 life, because the market is very much into non-life and the size of business in non-life is very big. However, we are a dominant player in life with our small share. In Egypt, it is the reverse: 20 percent property and casualty and 80 percent life. The reason is that we identified opportunities in life when we entered the Egyptian market, which at that time was a virgin market for life insurance and also untapped by bancassurance, which we introduced to this market. We are scaling up this position now and we will continue development in life insurance.

E   What is your target in terms of the relationship between life and non-life in Egypt?

Our ideal is to have a good balance between life and non-life like we have in Lebanon. Jordan is also an example of this balance as we have 50 percent life and 50 percent non-life. Allianz is a non-specialized company that is targeting all segments of corporate and retail insurance and all lines of business between life and non-life. Allianz is also known as a multi-access, multi-distribution company with our own sales force, with bancassurance, with brokers and with direct sales. That is why we will participate in the upcoming digitalization conference [of GAIF and ACAL in Beirut next month].

E   One of your high-end experts participated in the GAIF general conference last year as speaker.

That was Solmaz [Altin], our chief digital officer. This time, I’m bringing our head of market management and distribution officer [Jean-Marc Pailhol] because we want to talk about digitalization from the distribution perspective. Digital for Allianz is a priority and part of our strategy.

E   How many banks are you working with in product partnership in Lebanon?

We have [partnerships with] 11 banks.

E   What is the rationale behind working with so many banks in Lebanon?

The strategy of Allianz is [to offer] multi-access. We need to look at the customer. If he wants to deal with us, we should accept to deal with him [through whatever channel]. We are an insurance risk carrier, not a distributor, and we don’t have any conflict of interest in this. In our opinion, it is the customer who should decide which distribution channel he or she uses and all of the distribution channels have a role and an added value.

E   Is it correct that the market position of Allianz SNA in Lebanon has improved in recent years?

Yes, on a composite level we are number one for life and non-life. We aren’t number one in life nor are we number one in non-life, but when you take both combined, we are number one. I think what is making us number one is having this multi-access and multi-segment strategy. Because we want to be multi-segment and offer a comprehensive range of solutions for institutions and for retail, we have been able to become number one on a consolidated base. The challenge for us now is to become number one in each line of business and in each distribution channel.

E   Are you looking to roll out services in new markets, like Iraq?

As I said, our priority, if the law and regulations allow us to do so, is [to establish a stronger local presence] in the UAE where we already have a local fronter. Another market that we are looking at is Iran. I visited Iran in 2015 and it is one of the largest markets in the Middle East. However, before having a local presence in Iran, we are still waiting until all sanctions are lifted. It is a process.

E   But presence in Iran would be through Allianz SNA, not from Germany, Turkey or France?

Yes. We are working on it out of Lebanon, but we won’t see a local presence before all the sanctions are lifted.

E What is your perspective on the Lebanese market in 2017/18, in terms of growth potential and intensity of competition?

Growth [of the Lebanese insurance market in recent years] has been limited to 3 to 4 percent [per year], and we became number one because we were growing faster than the market. In 2016, we had growth of 6 percent, which was above market. I can tell you that 2017 has started quite well. The market here is a retail market, and retail is very emotional. [To date the positive development in 2017] is linked to the new government, the reconciliation between the parties and the movement toward rebuilding the country. This was extremely well received; January was a great month for us and February also was a good month, particularly if we compare them to [the same months in] 2016. As far as we are concerned, we have confidence that we will have similar growth as in 2016, if not more. We also believe that the market will witness larger growth than in the past two years.

E   Some insurance CEOs have the perception that there are too many companies and too much competition on price in the Lebanese market and that this extreme competition is damaging the market.

I don’t have this perception. I think that the number of companies and the number of distributors in the country is creating more innovation, allowing the sector as a whole to increase the penetration rate. Although [insurance penetration] here is the largest in the region together with Morocco with 3 percent, we are still a virgin market in terms of percent [of GDP spent on insurance], and we still have a lot of people who are not insured. The number of insurance companies is definitely creating competition, but not to the extent of reducing the premium. The quality of the management of these companies, even the small ones, is [such that they are] competitive, but not crazy. We still maintain a sound level of technicity in Lebanon. 

E   Were there not, for example, large medical group contracts that were hotly contested and moving from one provider to the next due to price wars?

This is true, but the competition is still not crazy. We have much tougher competition in other markets, and sometimes we see crazy competition [there]. Also [in Lebanon], we are selling to people that were not insured in the past, and we are still seeing that the market is virgin. I’m quite optimistic for this [reason]. Having said that, I think we will gain by having better regulation and fewer companies, with a higher level of capital. This will definitely help, but I’m not sure that the problem is in the number of companies. I don’t have the same position as many of my peers who are saying that it’s bad to have a lot of insurance companies. On the contrary, we need to grow and I would be glad to have 60 very strong companies tomorrow. I’m saying they should regulate themselves and their capital should be stronger.

Makram Azar is Chairman of Banking EMEA and Chairman of Barclays Bank PLC, MENA.
Makram also chairs the Senior Client Group globally.
Mr. Azar joined Barclays in September 2010 from Kohlberg Kravis Roberts & Co (KKR) where he was Managing Director and Head of Middle East and North Africa. Prior to joining KKR, Mr. Azar had spent 18 years at Lehman Brothers, latterly as Managing Director, Global Head of Sovereign Wealth Funds and Chairman of Media Investment Banking for Europe, the Middle East and Africa (EMEA).

Lebanon’s energy sector is characterized by a significant supply-demand imbalance, continuing growth in demand (5 percent per year), high generation costs (partly due to aging infrastructure), and a lack of financial sustainability. Electricité du Liban (EDL) cannot recover its operating costs and depends on the Lebanese government to subsidize operations. In 2013, EDL received transfers amounting to around $2 billion, corresponding to 4.5 percent of the GDP – creating a significant strain on the country’s budget and economy.

Lebanon’s baseline energy mix is dominated by oil, accounting for over 95 percent of generation. Renewable energy currently accounts for 4 percent of the electricity produced in Lebanon, predominantly hydropower, with less than 0.2 percent from solar photovoltaic (PV).

Renewable energy resources

The climate change case for investing in renewable energy is well known. A global and local shift to renewable energies, requiring both public and private resources, is essential to achieve the outcomes stipulated in the Paris Agreement.

Lebanon has significant wind and solar energy potential. The Ministry of Energy and Water (MoEW) started a wind energy procurement process in March 2013, requesting that wind farms be built and operated under a power purchase agreement (PPA). Three bids from local developers have been considered, and while the procurement process remains ongoing, there is optimism that agreements could be signed by mid-2017, which would bring with them a total of 180 megawatts (MW) worth of wind energy.

As for PV, most of the capacity installed to date is distributed on a small-scale (10 MW by the end of 2015), with an estimated 30 MW installed capacity by the end of 2016. Lebanon has two large-scale PV projects: the Beirut River Solar Snake (1.1 MW) and a second PV plant located within the Zahrani Oil Refinery Installation (1.1 MW), which are both connected to the EDL grid. The MoEW issued a call in January 2017 for parties interested in building solar PV farms in various regions of Lebanon, with the aim of installing an additional 120-180 MW of solar energy. The ministry received a total of 173 expressions of interest.

A risky matter still

A great deal of the recent advances in renewable energy can be attributed to increased political will and rapidly declining technology costs. However, financing costs for wind energy and solar PV in Lebanon today are estimated at 16 percent for the cost of equity (CoE), and 9 percent for the cost of debt (CoD).  These are substantially higher than in the best-in-class country, Germany, where they are estimated at 7 percent CoE, and 3 percent CoD. Given the longevity of energy assets and the capital intensity of renewable energy investments in particular, the impact of Lebanon’s higher financing costs on the competitiveness of wind energy and solar PV is significant compared to traditional fossil fuel powered technologies.

This means that high financing costs are a key factor hindering investment in renewable energy. Interviews with investors in Lebanon have shown that there is considerable interest today from domestic private sector actors, despite the slow pace of power sector reform and procurement activities to date. The high financing costs reflect a range of technical, regulatory, financial and institutional barriers, and their associated investment risks. The graph below shows how a range of investment risks currently contribute to higher financing costs in Lebanon. The risk categories with the largest impact on elevated financing costs are: 1) power market risk, which relates to accessing power markets and the price paid for renewable energy; 2) grid and transmission risk, which concerns the failure-free feed-in of the electricity produced; 3) counterparty risk, which concerns the credit-worthiness of the electricity off-taker (i.e., EDL); and 4) political risk, which concerns a country’s general intra and international stability.

By addressing these risks, Lebanon can create an environment conducive to investment and effectively address the concerns of private sector investors. This requires a targeted approach, which could include instruments such as: well-designed power market regulations, which reduce risk by removing the underlying barriers that create it; financial de-risking instruments, such as loan guarantees offered by development or central banks, which transfer risk from private to public sector; and financial incentives, such as direct subsidies for sustainable energy, which compensate investors for risk.

While challenging, these barriers are not insurmountable, especially if policymakers seeking to promote renewable energy assemble combinations of public measures to systematically address these underlying risks.

Public instrument selection

In order to specifically address the risk categories identified in the financing costs, a package of public instruments, containing both policy and financial de-risking instruments, needs to be developed and implemented (shown in Table 1). These measures would reduce the cost to the private sector, which in turn would be reflected in lower cost premiums quoted by the private sector when responding to government requests for wind and PV bids.

The ‘take or pay clause in PPA’ and ‘government guarantee for PPA’ are estimated to cost $55.1 million for wind and $25 million for PV. Taking a reserved approach, the ‘public loans’ and ‘political risk insurance’ are estimated to be $36.3 million for wind and $16 million for PV. This means that for financial de-risking of both wind and PV technologies, $91.4 million and $40.9 million are needed respectively. Policy de-risking instruments are estimated to cost $6.7 million for wind and $4.8 million for PV.

These represent costs (or expenditures) that would be incurred by the Lebanese government to de-risk (or uptake the risk) from the investors. This would allow for the further development of the sector and reduce the cost on future PPAs, as the investors would be bidding in a de-risked environment, and therefore, reduce the long-term cost on the government. This is obvious when the business-as-usual case (i.e., with the current risks) is compared to the post-de-risking environment (i.e., after implementing the policy and financial instruments mentioned above), where lower financing costs can be guaranteed.

In the business-as-usual scenario, wind energy and solar PV are more expensive than the baseline. The baseline technology mix consists primarily of combined cycle gas turbine (CCGT) plants, which Lebanon will likely use to increase its electricity generation capacity, and to a smaller extent the existing power generation fleet, which could be partly replaced by wind energy or solar PV. This approach results in baseline generation costs of $0.074 per kWh, assuming unsubsidized fuel cost for the CCGT technology. Therefore, the aim is to bring the cost of the wind and PV technologies closer to the CCGT technology.

To meet the 2030 National Renewable Energy Action Plan targets, the de-risking report estimates that $426 million and $140 million are required (in terms of price premium) for wind and PV technologies respectively.

However, the government could spend a total of $98 million and $46 million respectively to de-risk the wind and PV sectors. The de-risking would bring down the wind energy price premium to $205 million, thereby saving the government $221 million in generation costs over the next 20 years and resulting in a net savings of $123 million. The same holds true for PV energy, where the solar PV price premium is reduced to $43 million, thereby saving $97 million in generation costs over the next 20 years and achieving a net savings of $51 million. As such, following government interventions to de-risk the investment environment, and taking into account the resulting lower financing costs, the price premium for wind energy and solar PV would be reduced by roughly 50 percent and 70 percent respectively.

The above clearly demonstrates that investing in de-risking measures is good value for money when compared to paying a premium price for wind and solar PV energy. However, the majority of these measures could take time to implement. In the meantime, the government can offer subsidies to encourage immediate investments in the renewable energy sector. The ultimate risk, especially when generous subsidies are provided, is that the subsidy scheme itself might be vulnerable to a policy reversal. There are a great deal of complex trade-offs involved, and what seems to be of more importance is having continuous and consistent progress toward expanding the renewable energy portfolio. The thermal and renewable energy portfolios should  proceed in tandem by introducing renewable energy portfolio requirements for any future independent power producer (IPP) schemes in order to pursue the national 15 percent renewable energy target for 2030.

Click on image to view table

In the first of a twelve-month series investigating Lebanon’s capacity to reach the UN’s Sustainable Development Goals (SDGs), Gaelle Kibranian Zavzavadjian, Stephanie Nakhel and Gebran Azar take a look at Goal 6: Clean Water and Sanitation.

The Lebanese are blessed with favorable amounts of precipitation, with the highest average rainfall of any country in the Middle East, according to the UN’s Food and Agriculture Organization (FAO). The government estimates that there is between 2,000-2,700 million cubic meters of total available water per year in Lebanon, exceeding the country’s projected water demand of 1,802 million  cubic meters in 2035. 

However, water supply shortages are still a major problem in the country. Most of the population faces severe water shortages, leading households to rely on unlicensed private wells, overpriced tanker trucks, and purchasing bottled drinking water to meet daily needs. Among an estimated 80,500 private wells in the country, only 20,529 are officially licensed, accordingly to a 2014 study conducted by the United Nations Developement Programme (UNDP) with the Ministry of Energy and Water (MoEW). This is execerbated by widespread pollution and substandard water infrastructure that restricts the government’s ability to meet the demand for water now and in the future. Among the major issues that need to be addressed are poor water storage, deficiency in water quantity, deficiency in the quality of water supply networks, an increase in demand, unsustainable water management practices and an increase in the salinity of groundwater.

To date, Lebanon is capable of storing only 6 percent of its total water resources, making it the country with the least storage capacity in the MENA region. As such, international organizations such as the World Bank expect Lebanon to face chronic water shortages as soon as 2020.

In the wastewater sector Lebanon faces major obstacles, such as insufficient sewerage networks and wastewater treatment plants. Furthermore, constructed plants are still not operational, leading to the unsanitary discharge of wastewater.

The influx of Syrian refugees since 2011 has intensified the problem, leading to additional stress on water resources and wastewater infrastructure. Across the country, particularly in regions playing host to large refugee populations, there has been an increase in demand for water and sanitation provisions.

To better address these challenges, in 2012 the MoEW launched the National Water Sector Strategy (NWSS), a detailed road map for improving water conditions and service delivery in the country. The strategy addressed infrastructural concerns relating to distribution and wastewater treatment, as well as management issues related to institutional, financial, legal and environmental concerns. It also presented a projection of how planned resource augmentation will meet future demand and identified $7.7 billion worth of capital investment opportunities for reshaping the water sector.

The NWSS provides a framework for Lebanon to achieve the sixth UN Sustainable Development Goal of ensuring the availability and sustainable management of water and sanitation for all. The national targets included maximizing the potential and improving the quality of surface water resources, improving the management and protection of groundwater resources, ensuring proper and continuous access to a high quality water supply, and increasing coverage of wastewater collection networks and treatment capacities.

The MoEW, in partnership with UN agencies, international donors and others, is working on several initiatives in line with the NWSS objectives and responding to water issues that were exacerbated by the Syrian crisis. 

However, to fully achieve the goal of providing clean and safe water to all, the Lebanese government needs to reform or repeal legislation that still impedes the full implementation of the water strategy, increase public awareness of the 2030 target for the SDGs, and seek funding from internal and external sources to implement the projects  in the water and wastewater sectors.

With a touch of the screen, fat bunny bounces his way up the vibrantly colored mountain terrain, munching on the occasional carrot. Press too long or too little, however, and splat goes bunny into the mountainside – game over.

Like many mobile games, Fat Bunny’s concept is simple, yet its gameplay addictive. It was launched in its beta version on March 20, the first offering of Lebanese game studio Groovy Antoid, who, along with another Lebanese newcomer, Van Ahmar, were selected as part of a piloted partnership between the startup accelerator Speed@BDD and Arab Arcade, a self-described community initiative.

Game development is not new to Lebanon. Local game studios began appearing 2008-2012, boosted by investment from the likes of Middle East Venture Partners (MEVP), Berytech and Resource Group Holding. But this last year has seen a sudden surge in activity and a more concentrated effort to grow the game development community in Lebanon –  at the heart of which lies Arab Arcade.

Creating a community

The initiative has been operating since January 2016 with a stated mission “to grow and bolster the game development community in Lebanon and connect aspiring game creators across the region.”

The last six months have seen a flurry of activity. Arab Arcade organized the Beirut Games Festival back in January at the Beirut Digital District (BDD), alongside a range of other events such as Games Jams (48-hour-long marathons where teams compete to create a game) and Fuck-Up Nights (where enthusiasts gather to learn from each other’s mistakes) – all seeking to foster ties between those who are passionate about games and those who are experienced in game development.

It also launched an incubation program for game studio startups that provides everything from office space at BDD, to mentorship, help finding investment, and business and PR support. Groovy Antoid was the first team taken under their wing, and slots are open for the next to apply.

It seems as though the Lebanese game development scene has been touched by an angel; indeed the investors behind Arab Arcade have a particular love for the local industry. “Our angel investors see great potential for gaming in the Middle East,” explains Arab Arcade’s CEO and co-founder Raja Riachi, who declined to name the investors or the amounts they’ve invested. “And on a personal level, they are passionate gamers who want to see more and more games coming out of Lebanon.”

Passion aside, there is also money to be made. The game industry brought in close to $100 billion globally in 2016, and Arab Arcade takes either equity or revenue share from teams they incubate – they took equity from both teams in Speed’s accelerator. They also arrived on the scene at a particularly prescient moment, with Speed CEO Sami Abou Saab stating that the generalist accelerator has reached a point of maturity, and they are now keen to move into niche markets.

When Arab Arcade approached him about using Speed’s space at BDD for their events, a deeper partnership evolved. “Gaming is pretty interesting, since the teams draw technical co-founders on board, which is very important for Speed,” he says, explaining what made the case for focusing on gaming startups.

Arab Arcade and Speed officially launched their partnership on March 15, alongside Speed’s Cycle IV acceleration program. The two game studios will receive the usual support from Speed, in addition to in-kind gaming-specific mentoring from Arab Arcade.  If the pilot scheme proves successful, it could lead to an acceleration program aimed specifically at gaming startups, according to Abou Saab. “We are looking to get the feedback of the startups after the acceleration [program] and how this joint effort helped them build their studios. The traction and end-user engagement with their games is one of the criteria for success that we’re looking at,” he says.

Yet, there are still obstacles to be overcome before Lebanon can claim a place as a regional hub for game development, namely the lack of funding, resources, and specific talent.

Investment remains challenging for game developers in Lebanon, where there is no venture capital fund specialized in gaming. According to several game developers Executive spoke with, there is talk of, but no viable university level degree capable of producing graduates with the necessary skills to transition into the field.

Instead, there is passion and talent on the peripheries of game design. “I think we’ve got a huge pool of talent adjacent to what a game designer or developer would need,” explains Riachi.  “Translating that talent shouldn’t take too much; we are trying to set up the infrastructure that would make that transition easier.”

Encouraging investment

The majority of game studios in Lebanon are focused on mobile gaming, seen by some as a high risk/high reward venture. However, Abou Saab explains that investors are only willing to back gaming startups if they have a vision for more than one game. “If they have a plan about how they are going to do it – and also a conception of how they are going to monetize in the future – then the investors are interested.”

The numbers alone show why investment in Lebanese game development, financial and otherwise, could prove a smart move. Globally, the games industry rakes in billions of dollars annually and is on a path to eclipse other entertainment mediums. “In 2020 it’s going to overtake all other entertainment industries; I’m talking movies and music combined,” says co-founder of game developer Wixel Studios, Ziad Feghali. Such claims are not so hyperbolic when you consider that the global movie production and distribution market generated $95 billion last year, according to IBISWorld’s Global Movie Production & Distribution: Market Research Report, compared to the global games industry’s $99.6 billion in revenue – a year-on-year increase of 8.5 percent – according to Newzoo’s 2016 Global Games Market Report.

The future may well lie outside the big screen, as the smallest screen is the segment showing the greatest increase. Mobile gaming accounted for 27 percent of the global games market last year, generating $36.9 billion, up from $30.4 billion in 2015. This trend is showing no sign of abating, with the mobile games segment set to rise each year to a predicted 34 percent market share and revenues of $52.5 billion by 2019, according to Newzoo.

While MENA is by no means the largest market – Asia-Pacific accounts 47 percent of the global market, compared to MENA and Europe’s combined 24 percent – the potential for investors is still there. “The growth of smartphone adoption in MENA, paired with an increasingly younger population – 50 percent of current MENA population [is] below 24 years of age – support further growth of mobile games in the region,” explained MEVP’s Wajdi Ghoussoub via email. MENA was also the fastest growing gaming region last year, with a year-on-year growth rate of 26.2 percent from 2015 to 2016, and revenues of $3.2 billion.

When asked what criteria MEVP would look for when deciding to invest in a gaming startup, Ghoussoub identified three key areas: a team that is experienced, can execute their company’s strategy and adapt to an ever-changing environment (for example, the growth of mobile games and virtual reality); the business model of the company, whether they are a developer, publisher or both, and how they spend their resources; and return on investment, evaluating user economics and engagement to establish growth trajectory.

In agreement with Abou Saab, Ghoussoub says that while investors would love to come across the next Pokémon Go, sustainable growth is what attracts them. “In theory, we are always looking for a company with the next big game, but that does not mean that anything short of global dominance is a failure. Having a strong portfolio of games and a pipeline for new ones is critical, as it allows the company to diversify its risk and keep on bringing to the market new and engaging games after some might sunset,” he explains.

MEVP brought a gaming studio into its portfolio with an investment into Falafel Games back in 2011. Falafel Games runs on what Ghoussoub says, in MEVP’s experience, is the most common business model; free-to-play with monetization from ads and/or in-app purchases. “An overabundance of mobile gaming options has forced game publishers to resort to this model as consumers have grown accustomed to a vast availability of titles free of charge,” he says.

Games with a smaller reach can still generate significant revenue provided they are able to engage a loyal fanbase, such as Falafel Games’ clientele. CEO Vincent Ghoussoub (a distant relation) says that most of the studio’s games are MMOs (massively multiplayer online games), which make on average around 40-50 cents per day per active user, with active daily users close to 10,000. The company also closed a small –  by industry standards –  but significant round of investment last October that brought in $2.6 million from MEVP and iSME Holdings, among others.

Falafel, which counts localization among their business strategies –  50 percent of their market is Saudi Arabia, where language and cultural concerns are part of doing business –  recently relocated its headquarters to Lebanon and plans to launch projects that are Lebanon specific, though Ghossoub remained coy on details.

Game Cooks is another profitable Lebanese game studio, counting their daily active users at around 30-40,000, though they are focused on the American market. A year ago they also had an in-app purchases business model, but have recently changed their focus from mobile games to virtual reality (VR), a potentially risky move given the projected growth of mobile gaming and industry skepticism about the longevity of VR.

“VR is not a platform you do a lot of in-app purchases in, it’s particularly for premium users,” explains CEO Lebnan Nader. The company’s first VR game was launched on Samsung Gear at $2, and their latest will be at a higher price on the HTC Vive.

Nader acknowledges that there is no way of knowing yet if VR is a fad – the equipment itself is an expensive investment for the user, with good VR kit costing between $500-800 and requiring a top-of-the-line PC. Yet, he was convinced that it was the right direction after seeing both the interest of investors in VR at the Game Developer Conference in San Francisco and experiencing the “unbelievable immersion” of VR games first hand.

Building from the ground up

While established gaming studios have managed to find funding, monetize and expand, there are still barriers to creating a vibrant Lebanese game development community.

“One of the major problems we have is that, although we have a lot of gamers, we don’t have the suitable belief from universities that this can actually be a career,” says Feghali.

Feghali knows this firsthand, as he and Wixel co-founder Reine Abbas teach courses for a Masters degree in Game Design and Development at the Lebanese University, one of the few games-specific courses in the country. They argue that without the foundation of a BA program, this can never be fully fledged. “Developing games is a mindset,” Feghali explains,  a multifaceted discipline that needs a dedicated program.

With Lebanon and the region woefully behind in gaming education, he and his wife Abbas took matters into their own hands in 2014, launching the Spica Tech academy, which teaches children ages five and above about game development.

“We are shifting these kids from dumb digital consumers to smart digital producers,” explains Abbas. The courses, which are always free for girls – part of Abbas’ desire to see more women in gaming – run across Lebanon, with an online platform under construction to launch the academy globally.

Wixel Studios was founded back in 2008 by the couple and Karim Abi Saleh, and has always had a social tint to its games. Their latest, Antura and the Letters –  a partnership between Wixel, Cologne Game Lab and Video Games Without Borders –  was selected in March 2017 as one of the winners of the Education App for Syria competition.

Wixel is further evidence that game development is viable in Lebanon, staying profitable through creating advertisement games for clients and also receiving funding from Berytech back in 2013.

What they and other successful entrepreneurs agree on is the need to redirect talent into game development. “I think, if one or two big universities in Lebanon open up a game development course, that it would be a very good start,” says Nader.  “People can learn how to think about a game, how to take it from idea to development to execution – and obviously how to market it.”

For the Game Cooks CEO, the biggest challenges faced in Lebanon – other than the usual annoyances of infrastructure – are putting a team together, and finding funding in a landscape wary of games.

All also agree that Arab Arcade’s push to create a game development community that is business literate about the is a good first step. “There are finite cases of experienced people who don’t talk to each other. So the Game Festival and Arab Arcade in general foster a liquidity of experience,” says Falafel’s Ghoussoub.

There is still much work to be done if Lebanon is to become a regional hub for game development. It remains to be seen if Speed and Arab Arcade’s partnership will prove successful and, if so,  become the model of how to support a new generation of Lebanese game developers.

It all started in 2010 with a small shop flipping burgers in a mainly residential area of Achrafieh facing Sodeco Square. Seven years later, Ministry of Food – the hospitality management company that owns the restaurant brands Classic Burger Joint (CBJ) and Tomatomatic – boasts a total of 30 CBJs and five Tomatomatics (with a sixth on its way in Hazmieh), and its growth and expansion targets don’t end there.

According to Angela Sawan, franchise manager at Ministry of Food, the company aims to have 100 outlets – including the two brands both locally and regionally – by 2020; an ambitious figure for a company that only began to aggressively franchise in 2016.

A solid foundation

From the start, CBJ resonated positively, particularly with young Lebanese, who were drawn to its trendy branding and modern vibes. Karl Ghorra, the company’s CFO, says that despite local instability, the numbers have been growing since day one, with a steady year-on-year increase. “Last year the increase was perhaps not as strong as before due to the economic situation in Lebanon and the region, but we managed to maintain profitability and even increase it despite a slower increase in sales,” explains Ghorra.

In terms of an increase in sales, store-to-store comparisons both locally and regionally have yielded very good results in the last few years, according to Ghorra. He adds that this is despite the heavy cannibalism in 2016 brought on by many CBJs and Tomatomatics opening in the same year. For full-fledged year round stores in solid locations, Ministry of Food aims to have an annual turnover of close to $1 million per year, per store – another ambitious estimate – with a profit margin of 25 to 30 percent.

The faces of the Ministry

Sawan attributes the success of Ministry of Food to its founders, whom she says are all active partners and come from diverse backgrounds that provide unique strengths to the company. Donald Battal, whom Sawan calls the “guru in F&B,” uses his expertise in the hospitality sector to drive innovation, research and development, and the vital expansion strategy.

Brothers Boudy and Walid Nasrallah are the founders of the design company Wonder Eight and are behind the branding and marketing strategy of both CBJ and Tomatomatic. Sawan says that although Wonder Eight is a separate company, and Ministry of Food has their own internal marketing department, there is a lot of synergy between the two.

Also among the partners is chef Ahmad el-Chami, who developed the menus, and Maroun Chammas, a financial entrepreneur who supported the formation of Berytech and the Beirut Digital District, he brings expertise in economic development and public relations.

Burger beginnings

While plenty of diners have been serving burgers in Lebanon since the 1990s (examples include Roadster Diner and Crepaway), Sawan argues that CBJ was the first to pioneer dedicated burger joints in Lebanon. The “burgers only” concept was already a big trend in the USA and Europe in 2009, when Ministry of Food decided to adapt it to the Lebanese market, attracted by the idea of a single-item operation. “Burgers were a trend outside of Lebanon, and so, we thought of being entrepreneurs, in a sense, and bringing the trend to Lebanon. It was in the vision of the founders of the company to create single-itemed stores where the focus is really on perfecting this item,” says Sawan, explaining that operating such a model is easier because one can control costs better and focus on innovating the main menu item.

CBJ expanded fast, and following their first outlet in Sodeco, they opened a branch in Jal el-Dib that Sawan describes as a strategic location, which allowed them to serve a larger consumer base. The Jal el-Dib store was followed by joints in Uruguay Street, Zaitunay Bay, Hamra, and Le Mall Dbayeh.

Time for pizza

A year after the launch of the first CBJ, and fueled by its success as a single-item F&B concept, Ministry of Food’s partners introduced Tomatomatic, which operates in the same model as CBJ, only here the focus is pizza. The first Tomatomatic was launched in 2011 as a casual dine-in concept located in the same Sodeco building that housed CBJ.

However, the company observed that sales from their pizza delivery far outweighed dine-in sales, and decided to reconceptualize Tomatomatic as quick service and delivery only. Sawan argues that the American-style pizza they bake is inherently better suited for delivery, and illustrates her point by giving the example of Pizza Hut rebranding itself from a dine-in concept to PHD, a delivery only model.

Tomatomatic relocated its operations to Geitawi, where Sawan says they have lower visibility than in Sodeco but are more central, and thus, able to deliver to a wider area. Other benefits from the change to the quick service model include lower rent and lower expenses when compared to a dine-in concept.

CBJ’s franchising presence

Sawan says that Ministry of Food’s main goal from the start was to grow their brands through franchising. “We wanted to expand the footprint of [CBJ], and we wanted to franchise the concept,” says Sawan.

Internationally, CBJ has franchise outlets in the UAE (Dubai), Kuwait and Cyprus, with plans for an expansion to Iraq also in the pipeline.

While at first the company was directly operating its stores in Lebanon, it began franchising domestically in 2016, the “year of the franchise” for CBJ. “The big leap for franchise was in 2016, when we started franchising locally, and therefore doubled our store number. We also had multiple franchisees abroad, and each one worked on a parallel development project. So, in Kuwait we opened four stores, in Dubai two … There was one opening every five weeks in the last 18 months,” says Ghorra.

The first three franchised branches of CBJ in Lebanon are fully operational year-round and are located in Mansourieh, ABC Achrafieh and Jounieh. They now include the franchise in North Lebanon, where the franchisee for the region has opened a shop in a food court in Zgharta, as well as seasonal kiosks in Balamand, Cedars, Ehden and Batroun.

According to Ghorra, each store opening takes between four to six weeks for logistics such as marketing, training and identity development, and utilizes all the company’s operations staff (16 to 20 people in the head office, plus the team of Wonder Eight who have implants in the company to support franchise expansion).

More pizzas in the oven

Growth for Tomatomatic has been slower, and only two franchises were granted in 2016. “For Tomatomatic, we are now focusing on growing the brand locally like we did with CBJ. We tested the franchise model by operating the store ourselves, and then by franchising locally. So, we are ready to go regionally when the time is right,” says Sawan, explaining that they plan to have 10 Tomatomatics in Lebanon and one franchise in Iraq by the end of 2017.

Sawan enthusiastically explains that Ministry of Food’s aim is to grow Tomatomatic into multiple stores that act as a network. “It is a brand that lives and feeds on outdoor marketing campaigns, so what we do is take a chunk of the marketing money we make from each store and invest it into that campaign. The more branches we have for Tomatomatic, the more we can afford to spend on outdoor marketing, and the more clients we get,” she elaborates.

To ensure that oversaturation does not occur, says Sawan, the franchisee territory for Tomatomatic outlets is divided into zones – each of which has between 50,000 to 100,000 potential customers – and is delineated by a 15-minute drive by a motorcycle at a speed of 40 kilometers per hour.

All delivery calls are directed to a unified call center, which dispatches the order to the assigned territory. Sawan says they invested over $50,000 in the modern hardware and software for the call center, which is shared with CBJ. It was established a year and a half ago, and Ministry of Food sell its services to their franchisees. “This allows us to control and streamline the service, and at the same time reduce our overhead cost.”

Franchising the brand

Ministry of Food has a well-defined franchising model in place to ensure that everything runs smoothly. Domestically, Sawan says they mainly sell single-unit franchise licenses, but they have given multi-unit franchises in certain areas such as north Lebanon. “In multi-unit franchises, the franchisee takes over the territory and is in charge of expanding the brand there,” explains Sawan, adding that the opportunity exists in south Lebanon for a similar model.

According to Sawan, the profile of a local CBJ operator is an entrepreneur with a senior or management post in an F&B operation “who shares the same culture and values of the company and appreciates our brand.”

However, the profile differs regionally as franchises are given to very large territories, so seasoned F&B developers or corporations are required, explains Sawan. “To qualify, these operators should have had success in managing brands that are similar to CBJ in that they are casual. For example, our franchisee in Kuwait is the development agent of Subway, and in Dubai he is the franchisee of [Kahwet] Leila,” she says.

Meanwhile, Tomatomatic is described by Ghorra as having a “low barrier to entry” business model. “It is much easier to get a franchise for Tomatomatic, at least financially and training-wise. You can also be a non-F&B person and get it,” he says.

The money trail

As for franchising fees, Sawan explains that there are two main expenses: an area development fee and a unit franchise or license fee, which is related to a single location. Additionally, there are ongoing royalty fees and marketing contributions.

The area development fee differs from one country to another, according to Sawan, while the license fee is based on the number of branches. The more outlets the developer adopts, the cheaper this fee becomes.

Ghorra explains that the initial fee is related to the number of branches a franchisee will take on in a country or area, and the monthly fee is a fixed percentage of turnover. All in all, he estimates that it costs $120,000 to start your own Tomatomatic, while it would cost three times more for a CBJ.

Grilling for growth

As Ministry of Food grew its number of franchisees and developers, it had to become vertically integrated to be efficient and competitive. The company originally had a central kitchen in Lebanon, but when planning for franchising, they decided to close it in favor of having their suppliers produce the company’s proprietary ingredient using its recipes.

Although these suppliers have an exclusive contract with Ministry of Food in Lebanon, this is not the case regionally, as Sawan explains. “Outside of Lebanon we changed this because franchisees were asking for facilities closer to their territories to cut down on shipping expenses. So, we started to approve factories in the GCC region, and we added a factory in KSA to our portfolio. This factory will help our Kuwaiti and Dubai franchisees when they want to import and also help us when we expand to KSA,” explains Sawan.

When it comes to Tomatomatic, Ministry of Food is more lenient on ingredients, and while some items are integrated into the supply chain, the majority can be locally sourced according to certain specifications. “The only two ingredients which must be used like us are the Italian tomato sauce brand that we use and our secret spices recipe,” says Sawan.

A new marketing approach

Marketing and promotion was another area that Ministry of Food had to rethink in order to facilitate their brand expansion. Sawan explains that at the beginning, franchisees would come up with marketing ideas or promotional campaigns based on their outlets’ needs or performance, and Ministry of Food, through Wonder Eight, would do the production and send them the materials to use.

However, with the increasing store count, this strategy was no longer viable. “We decided to elect local marketing agencies wherever franchisees are to drive the brand. So, we asked regional agencies to pitch for the brand, and we selected the best agency to present our brand there,” says Sawan, insisting that they will still feed the agencies a brand level strategy to use, which will be “strictly followed up on and supported by the head office in Beirut.”

Facing the competition

In a landscape covered with international and Lebanese franchises, such as the Gulf, it is hard to stand out from the crowd. Sawan sees several areas where their brands have a competitive edge for their brands over American or European franchises. One of them is market adaptation and cultural literacy, whereby they adapt their marketing strategy based on each country.

Examples include the Kuwaiti burger (a best seller produced only for Kuwait, which includes flavors that nationals appreciate), the soup and dates served during the holy month of Ramadan, and the fish or mozzarella burgers they add to the menu during Lent. “Cultural literacy is high in our brand identity, and this is what the international brands might miss. For us, it’s easy to cater to such requests since we have less bureaucracy, are fast and supportive in that area, and are only a short plane ride away,” Sawan explains.

In countries where there is a large Lebanese presence, Sawan sees brand loyalty playing a role in sales. “Up to 30 percent of our clientele in Dubai are Lebanese, and in a market as competitive as Dubai, loyalty really makes a difference,” says Sawan.

Only time will tell

“Our vision and our aim is franchising,” repeats Sawan emphatically, and indeed, it is clear that all of the company’s energy has been poured into this goal.

Sawan sees the region becoming increasingly competitive, and with the struggling GCC economy, they are now shifting their franchise focus to emerging markets with  high population densities and improving economic situations, such as Egypt or Turkey.

It is still too soon to tell if Ministry of Food will hit the 100 store mark by 2020. Many Lebanese-grown concepts before them have tried to expand this way, only time will tell if Ministry of Food holds the keys to franchising success.

A scantily clad singer belts out another frivolous song, and not only does her video clip get banned, she has her travel privileges revoked. A university blogger dares to criticize the system only to find himself officially ostracized and harassed.

As this is taking place, a former head of Lebanon’s telecommunications company, himself under investigation for corruption, can be found in an expensive downtown restaurant publicly relishing his surroundings without a care in the world. Can this possibly be real? Is it acceptable by any standards?

For years, the Lebanese have been clamoring for faster internet services – their right. Practically immediately after the disgraced telecoms chief was fired, the company he was heading proved that fast download speeds were achievable with the flip of a switch. The word suspicious is too weak here. This could not have been a coincidence. The refusal to deliver optimum internet speed was obviously a deliberate choice by corrupt individuals to sabotage the delivery of fast internet service to the country to suit their twisted personal interests. All this at the expense of millions of resigned Lebanese who are guiltless bystanders.

In a democracy, the government is assumed to work for the people. Its purpose is to serve its citizens and facilitate their transition between stages of their personal and professional lives. This is what a horse does. A horse responds to its rider. A horse meets needs with speed and loyalty.

In our beloved Lebanon, does our system of governance remotely resemble the values embodied in a horse? The answer is a resounding NO! Instead, it is a donkey, moving at its own pace, stopping, drifting aimlessly through life, taking inane steps along the way, with only its own interests in mind, oblivious to the world around him.

Our donkey delayed oil and gas exploration for no justifiable reason – giving our neighbors a head start. Our donkey could neither manage waste management in the country nor pass a much-needed electoral law, even though it had ample time and no shortage of reasonable proposals for both. Our donkey simply waits. And eats. And waits. Our donkey does not care where we need to go. It is completely self-absorbed, self-centered, self-indulgent. Pure and simple.   

Don’t be fooled! Our donkey is not foolish. It knows exactly what it is doing. It is playing the waiting game and it knows that time is on its side. As for us, the riders, we sit defenseless, watching the race pass us by, despite being reconciled not to win. We have been denied participation, let alone victory. Wherever I look, I find that the Lebanese have abandoned their rightful aspirations and no longer attempt to even nudge the donkey. We all know that stubbornness is the donkey’s strength. Once again, the creature has outwitted us.

I, for one, refuse to be cowed. I no longer expect anything of the donkey. It is time to find a horse.

Donkeys deserve more respect than they get. For some 5,000 years, humans have been using them as strong, reliable beasts of burden. We’ve made progress on the backs of these noble creatures, yet denounce them for a strength of will we praise in ourselves. Intransigence is in the eye of the taskmaster, it seems. Donkeys aren’t stubborn because they’re lazy. A donkey’s stubbornness actually belies its intelligence. While humans can poke and prod horses to do nearly anything, if a donkey senses it is being pushed to act against its self-interest, it won’t budge. Hardly ideal for a work animal, but a respectable trait nonetheless. That said, a donkey will never win the Triple Crown. For both strength and speed, the more malleable horse is a far better bet. Lebanon’s economy needs a horse. The donkey we’ve been riding is old, tired and clearly not up to meeting new challenges with anything that resembles swiftness.

Our system is our donkey. Not parliament, cabinet or the presidency as such, but the whole confessional, consensual system. The so-called 1 percent have a disproportionate amount of power the world over, but Lebanon’s elite have their status further protected because each is a guardian of a self-absorbed community worried about its own interests and protection rather than the creation of a strong and functioning state that could benefit all citizens. Our donkey is at once the people in power, but also, the unwritten compromise that keeps them there and paralyzes decision making in this country.

While the donkey has overseen some decent economic times in the past 25 years, recent times have proven just how useless our donkey has become. While the Great Recession did little damage to the Lebanese economy, fallout from the civil war in Syria has been devastating. As growth fell from 8 percent in 2010 to 2 percent in 2011, as per World Bank figures, the donkey didn’t budge. And it has only barely moved since. This stands in stark contrast to Banque du Liban, Lebanon’s central bank, which has proven to be a thoroughbred, albeit one still confined to the paddock. Boosting growth is not BDL’s job, yet the institution has been doing all it can in this regard as the donkey munches grass, neither inspired to follow suit, nor willing to lend a hoof. In the past five years, BDL used subsidies and circulars in an effort to prop up the so-called pillars of Lebanon’s economy, real estate, tourism and banking. The hardest hit – real estate – has received the most help, and BDL still claims responsibility for 50 percent of growth since 2012, which Executive is unable to verify. The donkey makes no such boasts.

This is infuriating. In the pages that follow, the donkey’s dereliction of duty is well documented. Seven years after a plan for fixing the electricity sector won the donkey’s support, nothing has changed. In fact, the donkey is still munching on the same plan it approved but never implemented. Two electricity bills drain households of disposable income and restrict the regional competitiveness of local industry. Twenty-four hours of state-supplied electricity by 2015, as the donkey promised in 2010, would have had a cumulative impact by now.

For its handling of telecommunications – particularly the quality of internet service in the country – the donkey deserves a beating. Download speeds in Lebanon have been kept very slow on purpose in recent years. While blame for this is often laid at the feet of one man, the donkey kept that man in place. A World Bank study from 2009 found that a 10 percent increase in access to fast internet gives GDP growth a recurring 1.3 percent boost in developing countries. Again, widespread, faster internet was possible years ago and our economy would be stronger today had the donkey but moved.

The donkey also delayed the launch of Lebanon’s oil and gas sector, and could yet stand in the way once again. To explore the country’s offshore potential, wells must be drilled. That won’t happen without contracts between the government and companies qualified to do that drilling. Contracts were supposed to be signed back in 2013, but the donkey failed to pass two needed decrees. While the donkey passed the decrees in January, we need a donkey to sign contracts in November, but might not have one, as the donkey’s plans for long-overdue parliamentary elections are anything but clear. The donkey’s refusal to choose an electoral law adds an unnecessary and unwelcome element of uncertainty onto an already disastrous economic situation.

The donkey is a losing bet. We’ve done all we can to push it into action over the years, with little to show for our efforts. It’s time to ditch the donkey and start betting on a horse.

After a rocky start that saw a several-year delay of the sector’s development as a result of political squabbling, in late April the Lebanese Ministry of Energy and Water (MoEW) announced the oil and gas companies that will be eligible to bid for offshore exploration licenses in late. Executive lauds this milestone and hopes the government adheres to the ministry’s step-by-step plan to get contracts signed in November.

Parliament must immediately ratify a newly produced draft transparency law to oversee the country’s hoped-for oil and gas sector. The law codifies the publication of information, like payments from companies to the government, and criminalizes illicit behavior. Its ratification would send a positive signal to the companies and professionals looking to do business in the country on a level playing field. It would also show the public that the government’s management of the sector will be open.

Lebanon needs this law because, as experience shows, we cannot rely on the good faith that the MoEW, and the rest of the government, says it is bringing to the oil and gas sector. We need strong legislation to hold them to account as they manage an industry that is notoriously dirty the world over.

The ministry says it wants to manage oil and gas in an efficient and transparent manner, its track record in other industries, however, sometimes shows it doing the opposite. While it has articulated its near-term plan for oil and gas, and shown its willingness to engage the public, it has not done so for its other major portfolio – electricity. Lebanon was not able to complete the implementation of its 2010 electricity plan; and the ministry has never explained why it failed.

With regards to the the latest plan for electricity, dubbed the “plan to rescue the sector,” the government has given the ministry a carte blanche in filling out the particulars, and the ministry has avoided sharing the details with the public. The last cabinet meeting to discuss the electricity plan took place at the end of March, but what has happened since then, and how will Lebanon secure both its short and long-term electricity needs?

Do not worry about it, the Minister of Energy and Water wrote on Twitter, as Executive went to print. The message was, as long as there is an electricity boost in the summer, do not sweat the details and trust us. Trust a ruling class whose governments have successively failed since the 1990s to provide cheap and reliable electricity? That, in that same time, drained tens of billions of dollars from the public treasury to subsidize Electricité du Liban – a failing public institution that the 2010 electricity plan admits is vastly overstaffed with unqualified political appointees? No, thank you.

The electricity plan needs to be scrutinized, but first, it needs to be detailed. We have no idea, beyond some high level bullet points, of what its measures will cost or how they align with Lebanon’s climate change commitments. We do want 24-hour electricity, but are not willing to write a blank check to get it.

Lebanon’s potential gas resources might be used to generate electricity down the road, linking these two issues, and the ministry is at a crossroads regarding the intersection of these two portfolios. The path taken could lead us miles forward, or in the other direction. Unfortunately, any confidence that could be inspired in the transparent planning of oil and gas is immediately shaken by the opacity with which electricity is handled.

Situated across from Martyr’s Square with a view of the mountains over the Mediterranean, Le Gray hotel has been a prominent structure in downtown Beirut’s landscape since it was founded in October 2009.

Operated by Campbell Gray Hotels and a member of the Leading Hotels of the World, Le Gray Beirut is a luxury five star property with 87 rooms, six F&B outlets and a spa. As such, Le Gray is positioned as a high end boutique hotel with an emphasis on accommodation and food and beverages.

This positioning has served the hotel well in its eight years of operation in Beirut but, since the property didn’t have a banquet hall or large meeting rooms, certain market segments were harder to access- namely the Meetings, Incentives, Conferences and Exhibitions (MICE) and the wedding segments.

While the presidential suites on the hotel’s top floor were often used for small meetings or receptions, this was not enough to usher through the large volume generated by MICE and wedding segments.

The expansion the hotel is undergoing is meant to rectify this and allow the property to tap into these markets.

Executive sat with the hotel’s General Manager George Ojeil to learn of the expansion’s details and its impact on Le Gray.

E What does the expansion entail?

We have finalized three floors in the building. The basement, ground floor and first floor.

The basement includes a ballroom which can accommodate up to 350 people for a seated meal.

E So you’re targeting the weddings market with that ballroom?

Yeah weddings, social events, conferences… It’s a beautiful ballroom with state of the art equipment and decoration.

And then we are going to have a screening room; the only one in Beirut within a hotel. It’s like an amphitheater or small auditorium with the latest technology in audiovisuals, Dolby surround system etc… it can accommodate 53 people.

E What do you see people using the screening room for?

It could be used for product launching such as car launching which needs special effects and advanced audiovisuals; it can be used for a movie presentation or an afternoon kids’ birthday party with animation.

We also added a multipurpose or news room that can be used as a conference room and can accommodate up to 60 people depending on the setup.

Finally we have a board room that can accommodate up to 26 people in a boardroom set up.

This boardroom will have a virtual screen and we will be the first venue in Beirut to have that.

E Are these spaces going to be rented per hour or how does it work?

If any conference is followed by a meal, the conference room will be granted on complimentary basis. However, if there won’t be any meal (and just a coffee break) there will be a rental fee depending on the length of stay per day and on the room. For example, booking the smaller boardroom has a different fee than the conference which is of bigger size and capacity. It also depends on the demand.

E How often do people attending conferences in Lebanon book a hotel room as well?

Demand for residential seminars is on the increase again with the lift of the travel ban and the safety and security we’ve been witnessing at the local level.

Before the lift of the ban, these seminars had been deviated to Jordan and the Gulf (mainly Dubai and Abu Dhabi) so we have been witnessing increasing demand and this should support occupancy in the hotel as well because previously we were perceived as a boutique luxury hotel which offers accommodation simply and I would say luxury or highly developed services in food and beverages. But now I can say that we will be in a position to host residential conferences.

We are also adding more rooms and will have 103 rooms. This usually supports those kinds of seminars because typically when they meet in Beirut they would need up to forty rooms and when we had only 87 rooms, we couldn’t allow ourselves to book half of the hotel for a seminar and anyhow we didn’t have any conference facilities to offer them.

E Is this a rule that you cannot book half the rooms in a hotel for one event?

We prefer to avoid such scenarios especially in boutique hotels. We are a hotel that is known for repeated business and so we cannot book half of the hotel for a single event because it will put us in a situation where we might have to turn down repeaters.

E How does Le Gray still fit into the boutique hotel feel with 103 rooms?

Usually the number of rooms is below 100 and guests are more than just a number.

You have more of anticipating guests’ needs, more of a personalized service, attention to details…

It’s different than a big box and more complicated. We accommodate high end frequent international travelers with sophisticated demands and that’s why they look for such type of hotels. We know their needs from their previous visit and accommodate for them.

E How many new people are you hiring with this expansion?

27 head counts.

We are going to have a new lobby lounge so we will have more wait colleagues for that, banquet sales, banquet operational people, additional colleagues for housekeeping and a few additional colleagues in areas of support (administrative, sales and marketing) and in the kitchen we will have three additional chefs for that.

E With all these new additions, it seems you want to compete in the MICE category knowing that this space is almost saturated with the existing banquet halls and conference rooms?

There will always be other banquet halls or conference rooms and that is why we have a solid differentiation strategy for positioning our product.

Our wish is to position ourselves as the unique destination in downtown Beirut in terms of conferences and events. We have the best location in Beirut -although in politicized area-but when things are calm the location is strategic in being central with easy access.

We are determined on delivering the same quality of service in our banquets that we do in our restaurants and rooms. It’s going to be very personalized: the choice of menu will be meticulously done, the way the food will be set and the displays is going to be different and innovative with elaborated food stations, carvings….

E You are emphasizing your F&B offerings in your reply. Do you consider F&B to be your strength as a hotel ?

We are an F&B hotel.

We have six outlets for F&B and the banqueting in a 103 rooms hotels with each outlet being unique. Our wish now is to take it the higher level and we recruited a new British chef few months ago.

E Why did you choose to undergo the facilities additions when you did considering the situation the country was in then?

I think they took the right decision investing in tough times back in October 2015. Now, we will be inaugurating the project in perfect timing for the summer season.

E How much did you invest into the expansion?

It could reach $13 million. The furniture, choice of fabric, the artwork… we’ve been meticulous about this and it will pay back.

E Who are you targeting with the additional facilities and the expansion?

The conference and events market is flourishing in Beirut regardless of the situation so this will support the hotel during tough times when Beirut is not a destination for international travelers. Lebanese will always spend like crazy on their weddings.

Now we will have an addition which will allow us to penetrate a new market which we did not benefit from at the time and which affected us.

Despite this we have to point out that we were number one in the market in terms of occupancy.