During five days in April, Lebanese internet users were given proof that their notoriously terrible connections have been kept that way on purpose. Lebanon had become a laughing stock. Back when Ookla – the US-based operator of the ubiquitous speedtest.net – offered public rankings of average internet download speeds by country, Lebanon was always near the very bottom of the list. With the rankings no longer public, it is hard to reliably say where we stand today, but we do not really need an official ranking to know typical Lebanese download speeds of 1 to 2 megabits per second (mbps) are pathetic.

Last month, the publicly owned gatekeeper of Lebanon’s internet – Ogero – conducted five days of speed tests in different parts of the country. The results were jaw-dropping. The company’s new director general (appointed by the cabinet in January) claimed on Twitter that some users reached download speeds of 27 mbps, a 1,250 percent increase from the 2 mbps standard of the past few years. The majority of speedtest.net results tweeted at Ogero showed speeds around 16 mbps. And this without any intensive infrastructure projects. It was programmable.

“We’ve been saying for years that a simple administrative decision would improve the internet by at least 30 percent in terms of bandwidth, in terms of speed,” explains Maroun Chammas, CEO of IDM, a local internet service provider (ISP).

The bad old days

The Ministry of Telecommunications (MoT) is the sector’s steward. In addition to devising and implementing policy, it owns nearly all the infrastructure (fiber, copper and mobile-phone base stations). On the MoT’s recommendation, the government decrees the price of every phone call (mobile and landline), and the ministry’s hand is heavy on the internet. Competition in this segment is permitted, though in recent years it arguably has not been encouraged. In 2007, the steward oversaw a transformation in the market. At long last, the dial-up connection (complete with screeching modem) was replaced with a digital subscriber line (DSL) service. The future. Lebanon was a last adopter of this technology. Local rollout was slow, and download speeds are, a decade later, still abysmal.

To make a long and technical story short, the MoT and Ogero, a state-owned enterprise working as a ministry contractor, have considerable power over the internet market. With control of most of the infrastructure that allows someone in Lebanon to check their email, competition in the market can be easily hobbled. Private companies are allowed to use some of their own equipment to serve customers, but Ogero is in charge of the links that move customer traffic from one piece of equipment to another, before actually moving that traffic on to the information superhighway (via cables Ogero manages all access to). In other words, Ogero is the one closing lanes on access roads and opening only two tollbooths onto the highway during rush hour. Except it is at all hours. Every day. Whenever an unhappy customer – or a curious reporter – would ask a private provider why the internet was so bad, there was always one answer, however diplomatically delivered: Ogero, specifically in the person of its former director general. This has been true for 10 full years. It almost seemed like a convenient excuse (“Abdel Moneim Youssef ate my homework”) until the internet magically got better. Much better. Just like that.

The grey market

There used to be informal advertisements all around Beirut (which, when Executive decided to photograph one in April, were surprisingly very hard to find). An A4 piece of paper adorned with a few words in black ink, slapped up on a wall: “Wireless Internet Free for one month [local mobile number].” Some included monthly prices, some did not. This is the grey market. You pay a guy. He brings a wire to your house, sells you a router, and you have internet as fast as the two lowest-priced DSL packages, which an estimated 90 percent of legal users opt for, according to interviews with private players and an Ogero official that Executive conducted in 2014. Until recently, these illegal providers would get international bandwidth (actual internet access) in one of two ways: 1) by redistributing several legal connections to multiple users (small fry, and as best Executive can ascertain, the smaller part of the grey market segment) or 2) by bringing it in from abroad. As noted, Ogero controls the cables connecting Lebanon to the actual internet, but international capacity (as that on-ramp to the highway is called) can be secured via satellite or microwave. Many grey market providers were avoiding Ogero (and associated costs) all together.

Anywhere in the world, an ISP is that link to the highway. They buy access to the internet (bandwidth) and sell it to users at a higher price. The price at which Ogero buys bandwidth and from which provider has not been made public, but market estimates of around $4 per E1 line (2 mbps of bandwidth) seem reasonable based on internet research into the topic. ISPs in Lebanon currently pay Ogero $250 per E1 line (reduced from over $1,000 in 2014). Grey market providers buying bandwidth abroad no doubt pay more than Ogero (having at least a satellite link provider between themselves and an actual internet seller), but almost certainly less than local ISPs pay Ogero. And the advantage is not only on international bandwidth. ISPs must deposit  a $1,000 letter of guarantee on every E1 line they get from Ogero, according to both IDM’s Chammas and an ISP owner who spoke on condition of anonymity. Also, ISPs can only offer DSL on an Ogero cable. The grey market providers just add another wire to the tapestry slowly being weaved from building to building across Lebanon and hook users up the next day.

Between 2014 and 2015, the grey market got a bit whiter. Chammas as well as one private-sector and one publice-sector source told Executive that around 120 grey market ISPs were semi-legalized during that time period. Details are unclear, but what Executive can confirm is that companies formerly buying international bandwidth from abroad were sold bandwidth by Ogero – at a time when previously licensed ISPs were asking for bandwidth and not receiving it – but continued to be exempt from providing letters of guarantee and respecting distribution rules. Shortly after this apparent attempt at better regulating the market – which disrupted a supply chain at least 10 years old – corruption charges against then-Ogero Director General Abdel Moneim Youssef began to fly.

A new era?

Ogero’s director general is one of three directors general at the MoT. As such, the company’s head is an integral part of devising the ministry’s strategy for developing the country’s telecom sector. Ogero implements whatever strategy it helps write. The three-seat power structure gives the MoT’s Director General of Maintenance and Operation power to oversee Ogero’s work, and act as a check and balance, as Imad Kreidieh, the new head of Ogero, explains it. Until January, Abdel Moneim Youssef was both Ogero’s DG and the DG of maintenance and operation, “judge and jury,” Kriedieh says. That situation has now been resolved. Youssef is currently being scrutinized by the judiciary and is out of, well, two jobs. Kreidieh replaced him at Ogero, and Bassil Ayoubi is now in Youssef’s other former leadership spot at the MoT.

Market reaction to the change – only around 12 weeks old when Executive made the rounds – was cautiously optimistic. Communication between the private sector and both Ogero and the MoT is significantly improved, and Kreidieh speaks to Executive like a penitent. He admits that, prior to assuming his post in January, for Ogero, “the private sector used to be seen as the enemy.” He insists, however, “my role is not to consolidate a monopolistic position, but to offer the infrastructure for anyone who has a license, the technology, and the content to deliver it.”

Offering the infrastructure he reportedly is. On April 11, 13, 15, 27 and 29, Ogero quite simply unleashed the speed, to borrow the company’s hashtag. The tests lasted only a few hours, and were conducted in a handful of areas on each day. However, according to Habib Torbey and Patrick Farajian, heads of the data service providers Globalcom Data Service and Sodetel, respectively, the private sector has been able to keep the speed unleashed in the spots Ogero tested, as the lines between privately owned equipment are no longer congested.

Kriedieh has repeatedly said in public (both in March at ArabNet and during April on Twitter) that a new internet pricing decree will be presented by the MoT to the cabinet sometime soon, never committing to a precise deadline. While in the mobile phone segment, such a decree sets the price of all phone calls in the country (and out of it, which is why voice over IP services, like Skype, are still technically banned). In the internet segment, such a decree only sets internet package prices for Ogero. Private sector ISPs can charge customers whatever they choose (although most stick close to the decree to remain competitive), but the price of internet access (an E1 line) they pay Ogero is set by the decree. In the past, the price of internet packages for end users has been based on two factors: the speed of the connection and the monthly cap on download capacity. The decree will remove speed as a factor, Kriedieh explained, meaning users will be given the fastest speed their connections can deliver. Word on the street is that Ogero’s speed test days will become market realities after the decree. Executive interviewed Kreidieh before the tests, and he was unavailable for comment after.

Remaining constraints and the road ahead

This is not to say it is internet Christmas eve for every last one of us. Congestion is only one part of a series of problems. Individual internet users in Lebanon connect to central offices (COs), which then connect them to the internet, with copper cables. This is an old technology, with speed transfer limits and a serious problem transferring data quickly over a distance more than one kilometer. Fiber optic cables are now industry standard, and Lebanon has fiber in many places where it is needed (the country has 6,000 kilometers deployed, Kriedieh says). With a new government taking office in January came a new policy for the sector, Kreidieh explains. He describes the new strategy as “not politicized, user-centric and time-bound,” adding that “by the end of 2018, things will be much, much better.” Four projects are currently in motion, he says, the centerpiece of which is a long-discussed fiber-to-the-cabinet project (a cabinet being a piece of telecom equipment placed between users and a central office, not to be confused with the Council of Ministers). The project involves connecting individual users via copper wires to nearby cabinets –  which would themselves be connected by fiber to COs, meaning only a few cabinets and fiber cables would need to be installed to provide a multitude of users fast connections instead of fiber from the CO to each individual home. The project should begin in September and take 18 months to complete, Kriedieh says. He promises download speeds of “over 100 mbps without fiber” to the home (a technological breakthrough circa 2010).  [Editor’s note: Fiber to the cabinet was phase two of the now-fully-abandoned MoT national strategy launched in 2015. It was supposed to be nearly completed by now.]

The elephants in the room

Kreidieh claims not to see himself at the helm of a purely profit-driven commercial enterprise. At one point during the interview, he describes Ogero as a regulator. What he promises to deliver is a nationwide telecom network capable of providing all users with voice, data and streaming video services on the same cable. Triple-play, as it is called in the industry. Yes, a better network will benefit Ogero and help expand its market share (which he pegs at 290,000 of 700,000 legal subscribers, or 41 percent, admitting, however, that there are “leakages” that make the true number of subscribers unknown). Kreidieh, however, insists strengthening Ogero’s market position is not his goal. With a network capable of modern offerings, he says that he wants the private sector to flourish. The private sector, meanwhile, seems to want the access it has long been denied and a level playing field (meaning either fully licensing the 120 or so providers semi-legalized two years ago or forcing them out of business). Many estimate these semi-licensed providers have a significant customer base, although the numbers are very fuzzy.

Lebanon’s reported total number of fixed-line broadband (DSL) connections stands at slightly over 1.2 million, according to MoT data supplied to the International Telecommunications Union. If both that number and Ogero’s figure of 700,000 fully legal connections are correct, the formerly grey market would service over 500,000 customers. Ignoring the fact that 1.2 million fixed connections would mean Lebanon’s estimated 900,000 households are all wired, with some households actually having two or more DSL lines, it is safe to assume that there are at least some potential market share gains for fully-licensed ISPs if some providers leave the market when the rules apply equally to everyone.

Kreidieh offers no detail on how to deal with the 120 or so semi-legalized ISPs aside from suggesting that when the service offered by Ogero and fully licensed private ISPs is significantly improved the market will correct itself. If these providers are allowed to continue buying bandwidth from Ogero while being allowed to ignore the rest of the rules, however, it is hard to see how they will be pushed out of the market completely. Fully licensed ISPs may have more services to offer in the not-too-distant future (i.e., streaming, high-definition video and TV over the internet), but the market overwhelmingly demands a cheap connection, and is conditioned to accept vastly inferior services.

Lebanon will finally be rescued from the electricity cuts it has long suffered from, or so says the government as it trumpets its latest plan for the sector. Eight years ago, Electricité du Liban (EDL) supplied, on average, only 18 hours of electricity per day, and an ambitious plan from 2010 did not accomplish much in terms of reducing the country’s shortfall in generated electricity. It did employ short-term measures, like leasing electricity barges, refurbishing existing power plants, and constructing small-scale renewables, all of which slightly boosted the electricity supply. The latest proposal looks like it will, again, emphasize short-term measures, but the government has so far avoided detailing the plan to the public.

At the end of March, Cabinet heard the electricity plan. According to minutes from a meeting that took place, Lebanon’s Minister of Energy and Water Cesar Abi Khalil presented the plan to the cabinet, which agreed to it in principle, permitting him to publicly announce the plan the following week in early April.

But Melhem Riachy, the Minister of Information, told reporters after the March cabinet meeting that ministers had made many comments on the plan, which would  be kept secret, and that the plan would be implemented in a completely transparent way after it was ratified.

Executive requested an interview with the Ministry of Energy and Water (MoEW)  but did not receive a response. A source at the ministry, who did not want to be named, wrote to Executive in an email at the beginning of April that details of the plan could not be discussed because there were several issues yet to be resolved. The source would not explain what those issues were and  could not give a timeframe for the finalizing of the plan’s details.

The plan, in general, calls for measures to bridge the gap between the supply of electricity and consumption, according to a draft that a separate ministry source, who also did not want to be named, confirmed to Executive as authentic but outdated (it was dated March 24, 2017). In the short-term, the plan will call for new generation capacity by leasing new barges. Over the long-term, the focus will shift toward constructing new power plants, and a switch from fuel oil to natural gas for power generation.

Electricity generation capacity VS demand, 2016

Short-term measures

Lebanon, by the end of 2016, had a total generating capacity of 1,873 megawatts (MW). The figure includes megawatts from two Turkish barges that connected to Lebanon’s electricity grid in 2013, and from new reciprocating generators installed at the Jiyeh and Zouk power plants in 2016.

Last summer, peak demand reached 3,100 MW. The government wants to increase the supply of electricity by leasing new barges, according to the draft plan, as a short-term measure to meet this summer’s electricity needs.

In early April, the ministry did publish a tender for two new electricity barges that would generate between 800 to 1000 MW, but bidding was postponed, according to a report in Al Akhbar.

Long-term measures

The new electricity barges that the government might rent are meant as short-term measures that could turn into long-term. The government wants to lease those barges to meet Lebanon’s electricity demands, while it builds new power plants that it hopes to power with natural gas or renewables. 

According to the draft plan, the government wants to partner with the private sector to build new power plants through a modality known as Independent Power Producers (IPP), where companies would own the power plant and sell the generated electricity to the public or Lebanon’s utility, Electricité du Liban.

Worst ranking countries for power cuts and reliance on electricity generators

The government wants to set up solar power infrastructure that would generate 1,000 MW and is now readying to tender 120 MW of solar generated electricity after receiving 265 expressions of interest at the end of March, according to a list of applicants published on the website of the Lebanese Center for Energy Conservation (a government agency tied to the MoEW). The plan also calls on the private sector to build a 1000 MW plant at Solata to be powered by natural gas. Electricity Law 462, ratified in 2002, stipulated that a regulator would be the authority to license new power plants, but the government never got around to appointing that body. Parliament, instead, passed legislation in 2014 and 2015 to get around that roadblock by allowing cabinet, on the recommendations of the MoEW and the Ministry of Finance, to decide when the private sector can build power plants.

The government is again looking to shift from burning fuel oil to generate electricity at most of Lebanon’s power plants to using natural gas. The country’s newest power plants at Deir Ammar and Zahrani, built in the 1990s, were meant to use gas but were never supplied. Gas burns cleaner and would help Lebanon reach its climate change commitments, and gas imports would be cheaper and more predictable than fuel oil. It is also possible that Lebanon might find offshore gas fields as companies are now preparing to bid for exploration, with licensing expected in November this year. However, finding gas and extracting it is a possibility that is several years down the road at the earliest.

Rise in electricity generation capacity and demand

For now, if the government’s plan is to use gas to generate electricity, then Lebanon will have to import that gas. In 2009, the Lebanese government inked a deal to import gas from Egypt via Syria using the Arab Gas Pipeline (AGP). Media reports point to dozens of attacks damaging sections of the pipeline in the Sinai Peninsula since 2011, hampering gas supplies to Jordan and Israel, and it is not clear whether the sections of the pipe snaking through war-torn Syria are functional. Even if the AGP was fully operational, the problem has been that there was never enough gas to supply Lebanon. Egypt is currently a net importer of gas to meet its own consumption needs. Its 2015 discovery of the Zohr gas field offshore might change that, but the first gas is expected from Zohr in 2018, and it is not clear where that gas will be allocated, domestically in Egypt or for export.

In any case, the AGP only connects Lebanon in the north, at Tripoli. Lebanon would have to import Liquified Natural Gas (LNG) from a supplier abroad to feed the country’s other power plants, and it would need to build a pipeline to connect them. The plan calls for a pipeline that would extend from Solata, the proposed 1000 MW power plant in the north, to Tyre in south Lebanon. The plan forecasts the construction of the pipeline at just under $200 million, but does not acknowledge that much of its proposed pathway cuts through urban areas. The government would have to clear land, including part of the Palestinian refugee camp Ain al-Hilweh, to construct the proposed pipeline, and its proposal does not mention the costs of doing so.

The plan suggests the alternative of contracting three floating storage regasification units (FSRUs) to import the needed gas. A FSRU takes LNG and converts the liquid gas back into its gaseous form for power plants to burn and generate electricity. FSRUs come in different capacities, but three FSRUs would be unnecessary if Lebanon’s power plants were connected by pipeline. If the government does end up with plans to tender three FSRUs, then it is tacitly acknowledging that a coastal pipeline connecting Lebanon’s power plants is not possible.

The MoEW did not want to discuss the proposed electricity plan with Executive and has kept its public comments on the plan to a minimum. One of the ministry officials that Executive spoke with on condition of anonymity described many of the items in the plan as too far-fetched and politically motivated. In the end, the government is proposing a plan in the same way it has operated the electricity sector, and we are all still living in the dark.

Potential is the most important word to keep in mind when thinking about a future Lebanese oil and gas industry. In November (provided there’s a functioning government at the time), the country is scheduled to begin offshore exploration, which could provide a revenue stream flowing decades into the future and kickstart a local industry services sector. Fifty-one mostly foreign companies have pre-qualified to get in on the action (see list below), and despite  weaker prices per barrel than Big Oil would like, there is clearly appetite for investment in east Mediterranean acreage – industry slang meaning, in this case, drilling and production rights in blocks of a country’s Exclusive Economic Zone (EEZ). Evidence, from both drilling in the neighborhood and abundant subsea survey data covering nearly all of offshore Lebanon, suggests there could be good news in the country’s near future. That said, detailed predictions about what to expect (which companies will bid to win a contract, how much gas or oil will be found, how much it will be worth) remain as useless today as they have been previously. What is undeniable, however, is that Lebanon’s slice of the gas-rich East Med is on radars near and far.

Terms and conditions

Some four years behind schedule, in September Lebanon will accept bids from oil and gas companies keen to explore its offshore. The rules say each bid must come from a consortium of prequalified companies (one operator, the company actually overseeing the complicated work of drilling hundreds of meters into the seabed, and at least two non-operators). Bids will be based on a model exploration and production sharing contract with a potential lifespan stretching more than 30 years. Certain technical and financial provisions in these contracts have been left undefined, and filling in these blanks is the heart of the bidding process.

The financial offer is the more important of the two in terms of bid evaluation (i.e., on a 100-point scale, it is worth 70 points). Lebanon’s plan for an oil and gas fiscal system (i.e., how the state captures rent from potential resources) has been loudly maligned, but not very well understood. There are certain fixed revenue mechanisms in the contracts, the most talked-about being a 4 percent royalty on natural gas, and a sliding royalty on oil ranging from 5 to 12 percent, based on volumes. Were these royalties Lebanon’s only straw for syphoning revenues from the sector, they would be laughably low, and the critics of this one component of the overall fiscal system would be correct to complain. However, royalties are only part of the story. In addition to paying Lebanon’s corporate income tax (currently set at 15 percent but expected to rise to 20 should Parliament approve a long-promised new oil and gas tax law), companies will bid on the parameters of further revenue sharing with the state based on the volumes of resources (if any) found. The details are complicated (and covered by Executive in the past), but in essence, no matter what exact numbers companies put in their bids, if enough oil and/or gas is found to justify extracting it, the state will begin sharing profits from resource sales immediately, with the state’s share growing over time. Not every country uses the same model, but it is common and – as a system – perfectly capable of maximizing the state’s take from the sector. This is all to say that there’s no way to predict what revenues Lebanon can expect at this point, but the system in place has been proven in other markets and attacks against it are likely to be driven by alterior motives.

The technical bids are arguably more exciting. Evidence from both drilling in the neighborhood and abundant subsea survey data, which today covers nearly all of offshore Lebanon, suggests there could be good news in the country’s near future – and that is not hyperbole. The aforementioned delay, abundant data and regional evidence have pushed Lebanon to be more ambitious than one would expect of a country that has never drilled an offshore well (a frontier area, in industry parlance). If contracts are signed in November, winners will be committed to drilling at least one well (if not more) in the first three years (as opposed to after 7-10 years, which can be the case in other frontier areas). What many people fail to realize is the value drilling offers in terms of useful information that itself can be of greater value in the future. For all the large natural gas discoveries nearby and talk about Lebanon’s potential, we actually know nothing about Lebanon’s offshore. Absolutely nothing. Drilling will change that, even if no discoveries are made. One arguably learns as much from “failure” (a dry well) as from success. The truth is out there, and the first real answers on Lebanon’s potential will come relatively quickly after contracts are signed.

Slow and steady wins the race

Oil and gas is a long game. The contracts Lebanon hopes to sign soon will last more than 30 years, provided a discovery is made (if companies do not find anything in Lebanon’s offshore, the sector could well be very short-lived, although all available indications suggest this will not be the case). A big discovery will no doubt intensify interest in Lebanon’s offshore in the same way large gas fields in Israeli, Egyptian and (to a lesser extent) Cypriot waters make the whole East Med an exciting exploration area. With this in mind, the Lebanese Petroleum Administration (LPA), the sector’s not fully independent regulator, pushed long and hard for gradual licensing (i.e., offering chunks of offshore acreage over time instead of signing contracts covering the entire offshore all at once). From a strategic point of view, gradual licensing allows Lebanon to leverage knowledge gained from drilling to get better terms in the future and also potentially expand the timeframe over which revenues from the sector pour into state coffers. At one point in the past four years, some politicians were against gradual licensing. Ultimately, however, the LPA won. Of the 10 blocks into which Lebanon’s offshore is divided, five are on offer in the first round, with no obligation for how many contracts the government must sign.

Managing expectations

If the deadline is respected, Lebanon will be doing more than signing contracts in November; it will be establishing a potentially valuable new sector. However, even if all goes as well as possible, oil and gas will not transform Lebanon’s economy. In the first few years, most Lebanese likely will not notice a difference. Even 30 years from now, if Lebanon is a regional gas powerhouse, the oil and gas sector will not be an economic pillar the way banking and tourism are. While there will be direct job creation, exact numbers are hard to predict, but thousands and thousands of jobs is an unrealistic expectation. The industry will need services (from housing and transportation to catering and local legal advice), and many local companies may find new opportunities, but again, not in a volume to actually re-configure the economy. In fact, one risk the LPA is actively trying to avoid is known as Dutch Disease, or the rapid refocus of an economy on one sector to the detriment of all others.

The $1,000,000 Question

As noted, it is far too early to guess what revenues Lebanon can expect from potential oil and/or gas finds. It is also a bit too early to say for certain how those potential revenues will be managed. A 2010 law governing offshore exploration and production calls for all state earnings to be deposited in a sovereign wealth fund. The law gives the fund a dual, and potentially contradictory, mandate: save some, spend some. Writing a separate law fleshing out the sovereign wealth fund will function as the sector’s next political priority after contracts are signed. The success of drilling will determine just how quickly the sovereign wealth law needs to be written.

From a technical standpoint, the East Mediterranean is a challenge because the seabed is generally more than one thousand meters below the surface. Ultra-deep water, in industry parlance. From a geopolitical standpoint, the complexity is arguably even greater.

Many problems among a variety of neighbors

Production of East Med gas began in Egypt in the late 1960s. Activity remained localized for over thirty years until discoveries were made off Israel and the Gaza Strip in 1999 and 2000. For political reasons, the relatively small Gaza find remains undeveloped, while exploration continued apace offshore Israel, resulting in discoveries – namely Tamar in 2009 and Leviathan in 2010 (see map below) – that have helped spark intense interest in the so-called Levantine Basin, a subsea structure shared by Lebanon, Israel, the Palestinian Authority, Syria, Cyprus, and Turkey, at least from Turkey’s perspective. In 2012, Cyprus was elated by news of the Aphrodite discovery, but for all the gas Israel and Cyprus have found, not a molecule has yet been exported. In fact, most of the gas (including everything in Tamar, Leviathan and Aphrodite) remains buried for lack of a clear means to move it out of the region, among other reasons.

In essence, there are two ways to move gas: via pipeline or in liquid form. Shipping gas as a liquid requires liquefying it, which itself requires very costly infrastructure (think hundreds of millions of dollars) regardless of whether the facility is built onshore or offshore. Back in 2013, Cyprus was touting plans to build an onshore liquefaction plant, although the country’s lone discovery did not – and still does not – justify the cost, meaning without more gas (from Israel, for example), there would not be sufficient reason to build an onshore plant, and this plan is currently on hold apparently in favor of a pipeline to Greece. Egypt was also an export route option for East Med gas. As noted, Egypt has been in the natural gas business for decades. However, it has not been the best manager of its resources. Egypt has two onshore liquefaction plants, evidence of past export hopes. Domestic demand far exceeded expectations, however, and for years now the liquefaction plants have either not been used or were used far below capacity, opening an export opportunity for Israeli and/or Cypriot gas. The late 2015 discovery of the “supergiant” Zohr gas field in Egypt’s offshore near the maritime border with Cyprus may change just how much spare liquefaction capacity Egypt can actually offer. In that context, politics have re-entered the equation. The latest Israeli-Cypriot export plan involves a very long subsea pipeline to Greece, and then on to the rest of Europe. Pipeline plans come and go, but a Europe desperate to diversify its gas supplies (over 30 percent of European gas imports come from Russia), an Israel desperate for a political line to Europe, and currently stranded gas earning nothing for anyone could give life to a project that might have been dismissed in a different geopolitical context.

What this means for Lebanon

Even before the Zohr discovery, available evidence suggested Lebanon’s coastal waters were well worth exploring. Zohr changed the game and in the past year, companies prequalified to bid on Lebanon’s offshore blocks have successfully won acreage offshore both Cyprus and Egypt (see company table). While this is no guarantee companies prequalified in Lebanon and working in the neighborhood will bid here, it is a positive sign. In contrast, Israel is also holding a bidding round, but extended its closure from April until July, reportedly due to lack of interest from the major oil and gas companies currently working in Egypt and Cyprus. Receiving bids, of course, is only the first step on a long journey.

It is arguably too early to delve deep into potential export routes for Lebanese gas (remember, we have not found anything yet and have not even really begun searching), but it is worth noting that Lebanon is arguably in a better position than Cyprus or Israel, namely because of existing onshore infrastructure. The Arab Gas Pipeline (AGP) already connects Lebanon to potential buyers in Syria, Jordan and possibly even Egypt, depending how much domestic demand gas from Zohr will meet. How much damage the AGP has sustained during six years of conflict in Syria is unclear, but fixing stretches of a pipeline is clearly cheaper than building an entirely new one. On top of that, building a relatively short additional leg out of Syria can connect the AGP to Turkey, and Lebanese gas to Europe (although the hypothetical leg connecting Homs in Syria to Turkey is currently a war zone, meaning this is not a short-term option).It’s also important to remember the commercial aspects of the oil and gas business. Lebanon is not drilling for resources, profit-driven companies are. Barring a serious disruption in the energy industry, natural gas is expected to be an important part of the global energy mix even if the world keeps its climate change commitment to reducing the use of fossil fuels and stemming the global rise in temperatures. Floating gas liquefaction technology was born to bring stranded gas to market. If companies find quantities worth selling in Lebanon, history suggests they will manage to find a way to bring it to market.

Recent offshore gas activity in the East Mediterranean (Click to view full image)

There’s no shortage of headlines about Russia’s grand design for the East Mediterranean gas resources. An unrealistic understanding of the strategic significance of these resources and the role they could play in weaning Europe away from Russian gas fuels these claims. In reality, we have yet to see a Russian breakthrough in the upstream oil sector of the countries surrounding the Levant Basin.

Cyprus has recently concluded a successful licensing round, awarding exploration licenses to Italy’s Eni, France’s Total and US-based ExxonMobil, alongside the latter’s partner Qatar Petroleum. No Russian company participated in this round. In the previous round, Russia’s Novatek and GPB Global Resources (part of state-owned Gasprombank Group) presented an offer together with Total but ultimately failed to win a license. In 2012-2013, at the height of Cyprus’ financial woes, it was reported that Cypriot officials were tempting the Russians with rights to gas exploration in the country’s Exclusive Economic Zone in return for a second loan from Moscow. It was even rumored Gazprom would offer Cyprus a private bailout plan, as reported in The New York Times, but the Russians were not tempted.

Russia’s interest in Israel’s gas sector has been more palpable. It has made several attempts to enter the Israeli gas market, with no success so far. In 2012, Gazprom bid for a 30 percent stake in the Leviathan gas field. The Russian company reportedly submitted the highest bid but lost to Australia’s Woodside Petroleum (whose bid was ultimately aborted). In 2013, Gazprom signed a letter of intent with the Tamar gas field partners to buy and export liquefied natural gas (LNG) through a floating facility. It never materialized. More recently, Russian President Vladimir Putin and Israeli Prime Minister Benjamin Netanyahu addressed the issue of Leviathan’s development in their latest meetings, with the rationale being that Russian involvement in the Israeli market would contribute to securing Israeli offshore drilling platforms and installations from cross-border threats, particularly those that of Hezbollah. But, here too, we have yet to see concrete results. It will be interesting to follow the results of the first Israeli offshore licensing round and see whether Russian companies place bids, and more importantly, if they will be awarded contracts.

In December 2013, the Russian state-controlled Soyuzneftegaz was awarded an exploration and production license in Block 2, off the Syrian coast. In September 2015, its chairman decided not to proceed with the project because of the risks involved, and announced that the project would go to another Russian company. On April 21 this year, Syrian President Bashar Assad was quoted as saying that his government has started signing deals with Russian oil and gas companies. No details have yet been disclosed.

In Lebanon, three Russian companies prequalified in 2013 for the first licensing round in offshore oil and gas. All of them sought a non-operator role (and some of them partnered with western operators at the time), which came as a surprise for those expecting a more visible presence by Russian companies, and behind them, the Russian state. In the latest prequalification round, one of these companies, Lukoil, sought to modify its status and qualify as  an operator for the tender, but the attempt was unsuccessful. 

The picture is different in Egypt, where Russian companies are more active and are looking to expand their presence. Lukoil is involved in three upstream projects in Egypt, while Rosneft is negotiating a 30 percent stake in Zohr, Eni’s massive 2015 gas discovery.

Generally speaking, Russian energy companies have yet to match Russia’s growing political influence in the region.

There are two ongoing licensing rounds in the region: the Israeli bidding round will close on July 10, the Lebanese on September 15. By the end of the year, we will see if Russian corporations express interest, and – more importantly – if one or more is awarded a license. Where Russia will choose to set its foot, and who will award it a license, are both equally important questions.

Walid Nasr’s eyes rolled so far back his head, Executive worried he was having an episode. The Lebanese Petroleum Administration (LPA)’s head of strategic planning was clearly disappointed. Only a few moments into an event organized by the Lebanese Forces, the emcee had wasted no time in estimating the value of Lebanon’s undiscovered offshore oil and gas. Whether she said it was hundreds of millions or billions USD, Executive forgets, as any such forecast is not worth remembering. As promising as Lebanon’s offshore may be, (with each new discovery in the east Mediterranean only adding to the hype), only actual drilling brings any certainty.

That said, revenues are no doubt the first thing to come to mind when one thinks about the oil and gas industry, followed closely by images of a country and economy transformed (think back to the billboards promising bullet trains built with resource money peppering Beirut in 2013). In an interview with Executive, however, Nasr explains, “To get an answer on all the [economic] impacts [the industry could have], you need four important factors: the volumes (discoveries and how large they are), the cost of production, the market price and your actual market. Those four variables are totally unknown.” The LPA, he says, has done scenario planning based on a variety of estimates, but “those series of results are not actual numbers that will be published because they are based on a lot of estimates and assumed values.” And this is only measuring the direct economic impact from the sector (i.e., revenues and employment). The LPA is also embarking on an exercise to estimate the multiplier effect the sector would have throughout the economy. “To have an actual number in ripple effect, you have to know all the variables I talked about [on] one side, plus you need data from the country itself, like the national accounts, economic indicators, facts and figures about other relevant sectors. This is what we are trying to collect, and you know the challenges regarding accurate data and the availability of data,” Nasr says. A sober and pragmatic economic approach to building an oil and gas industry is key, he argues, pointing to a problem already manifesting itself in the education sector.

Lebanon’s first offshore licensing round opened in 2013, with an expectation for exploration and production sharing agreements to be signed in the first quarter of 2014. Many of the country’s universities took this deadline seriously – even if if its politicians did not – rolling out courses and majors in fields like petroleum engineering and the like. “This is a major problem,” Nasr says, “because the students that have already graduated can’t even find [local] training opportunities, since the industry doesn’t exist. We need to go step-by-step and be really gradual in thinking and moving forward.”

A slow start

Oil and gas is a long game. Contracts tend to last 30 years or more. For offshore acreage like Lebanon’s – which has never been drilled – this means that if contracts are actually signed as planned in November 2017, the country’s economy is still many years away from an oil and gas boost. An October 2014 guide from the United Kingdom’s Department for International Development estimates that – at the long end – a country can wait more than a decade between signing an oil and gas contract and the first revenue flows, as companies decide where to drill (exploration phase) and evaluate any discoveries made (appraisal phase). The guide states, “It is important to note that in the majority of instances, [oil and gas] activity is unsuccessful at the explore and appraisal phase – no potentially viable oil/gas sources are found, or when exploration wells are drilled no oil/gas is discovered or the reserves are not sufficient to justify the size of investment required to extract them. The majority of projects will therefore not reach stages three [development], four [production] or five [decommissioning] of [a typical project] life cycle.”

In Lebanon’s case, keeping its first offshore licensing round open for more than three years has given it a data advantage. It is not uncommon for a country to open a licensing round on acreage that has never been surveyed. Nearly all of Lebanon’s offshore, however, has been covered by 2D and 3D seismic surveys, with the data being interpreted and reinterpreted over the years. This means that the companies that win contracts will start with a pretty good idea of where they might want to drill. Some additional surveying may still be needed, but the bulk of the work that can make the exploration phase take up to five years has already been completed.

Lebanon’s exploration phase, by law, can last up to 10 years. However, the model contracts the state hopes to sign soon narrow that timeframe to five years, divided into two periods (the first a three-year period, and the second a two-year period extendable for another year with sufficient justification, according to the model contract). Companies are obliged to drill at least one well in each of the periods, though they can opt for more. An exact work program (drilling plans and other components) during the full exploration phase is one of the items (with multiple sub-components) companies bid on when submitting an offer. While this seems a strategy in part based on the aforementioned wealth of data and designed to get the sector moving relatively quickly, the actual impact on the economy in the first years after the contracts are signed is likely to be minimal.

Day 1

Zooming in a bit, as soon as contracts are signed, the winning companies will have to open branch offices in Lebanon. With a theoretical maximum of five contracts being signed, this translates into some very minor FDI flows into real estate (it applies to each company in a consortium, so if two contracts are signed – each with a three-company consortium – that is six branch offices). On employment, it’s impossible to guess at this point, but it seems clear that a few branch offices will only require limited staff. And while the model exploration and production sharing agreement includes a much-talked-about requirement for contractor staff to be comprised of 80 percent local citizens, Nasr stresses this a target and “a gradual thing.” “Knowing the situation and to be very pragmatic, we know that we cannot supply 80 percent of professional Lebanese experts from day one, it’s not something doable. However, we kept this target so that companies make every effort to recruit as many Lebanese as possible,” he explains. “Every year the companies will have to submit a recruitment plan – what they need in terms of human resources – and they also do public recruitment, so they would announce the professions needed and Lebanese can apply. If they have the qualifications and skills needed they receive preferential treatment, if they don’t, companies are not obliged to recruit any Lebanese who doesn’t fit the criteria.”

Additional surveys that companies may want to conduct will only have a limited economic impact. An offshore geological survey can cost millions of dollars, but most of that would not actually enter the local economy. However, Nasr notes that for past offshore surveys, “when those [survey] companies were working here, they used some Lebanese services like legal firms, logistics, whatever they needed to actually implement the survey, but of course this is a small percentage of the total investment.”

Feeding the beast

In an effort to pull maximum investment into Lebanon, the rules call not only for hiring locally when possible, but for sourcing goods and services locally as well. In fact, the model contracts give local companies an advantage, requiring oil and gas corporations to use a public procurement procedure when contracting and subcontracting for every good and service,  and demanding locals be given preference even if their prices are slightly higher (10 percent for services, 5 percent for goods) than an equivalent foreign supplier. In the earliest days this might not amount to much in terms of opportunity for the private sector, but if commercially viable discoveries are made, the opportunities (and revenues) will begin flowing. Again, Nasr will not put any numbers on what the future might hold, but notes, “I think with a few efforts from the Lebanese private sector, they can start getting involved.”

Illustration by Ivan Debs

EDITORIAL

Recourse to reform

After a four-year Parliament extension, we demand elections in 2017

LEADERS

Dashing our hopes for reform

It’s time to break the silence on the CMA

Protect us from the modern plague

Lebanon remains overwhelmingly vulnerable to cyberwarfare

Rare opportunity

People now have the right to request information from government entities

COVER STORY

The battle between good and evil goes virtual

Online threats continue to proliferate 

Cyber(in)securities 

Fresh thinking needed to secure the banking system

Securing the entrepreneurship system 

Protecting the startups from the get-go 

The Lebanese cybersecurity landscape

Providers and markets

Propaganda goes viral

Communication continues to morph in the digital age

The public sector’s vulnerability to a cyberattack

A Q&A with OMSAR’s IT security expert, Ihab Chaaban

Cyberthreats in the GCC and the Middle East

Building legislative defense shields

How to protect your email from cyberattacks

A step by step guide

BANKING & FINANCE

Roundup of numbers and sentiments

Rise of financial optimists

HOSPITALITY AND TOURISM

A grand hotel plots a new course

Phonicia Beirut’s GM talks upcoming plan and her vision for 2017

LAST WORD

Lebanon’s national budget

A strategic instrument for adequate policymaking

EDITORIAL

The devils must go

Illustration by: Ivan Debs

LEADERS

Stonewalled

A mixed response: making use of the new law

An industry-wide upgrade

Overhaul in governance and legislation is required

Taxation without representation

Budgetary process must be transparent 

COVER STORY

Tax squeeze

Online threats continue to proliferate 

Taxing tax reforms

Fresh thinking needed to secure the banking system

Interview with Georges Corm

Protecting the startups from the get-go 

SPECIAL REPORT
INSURANCE

Vital and seeking vibrancy

Lebanese insurers’ march into a mysterious future

A desperate chase for consolidation

Accurate roadmap needed for mergers

More acquisition than merger

Al Ittihad al-Watani takeover by NASCO Insurance Group

Lapping up management of health and diseases

Changing TPA business models in medical insurance

Taking the long view

A Q&A with acting ICC commissioner Nadine Habbal

Going further

A Q&A with Lebanon’s leading insurer

ECONOMICS AND POLICY

The long goodbye

Government & waste management scheme not fully implemented

De-risking green power

Financially sustaining sustainable energy

Far off the target

Mismanaging Lebanon’s water

ENTREPRENEURSHIP

Bolstering Lebanon’s game development

Translating passion into a career

HOSPITALITY AND TOURISM

When snacking becomes healthy

Local producers bite into growing market

Of burgers and pizzas

Classic Burger Joint and Tomatomatic franchising

LAST WORD

Investing in women

Worldwide commitment needed

In an effort to maximize the benefits for the local economy from the oil and gas industry, the Lebanese Petroleum Administration (LPA) has included provisions in the model exploration and production sharing agreements to help domestic companies. The contracts state that when oil and gas companies need to procure goods, they must give preference to qualified local suppliers, even if the suppliers’ price is up to 5 percent more than a foreign providers’. For services, local contractors will get preferential treatment, even if their prices are up to 10 percent more than a foreign supplier. Executive sat down with Walid Nasr, the LPA’s head of strategic planning, to take a closer look at how a Lebanese oil and gas sector might impact the private sector.

E   Take us to Day 1, the contracts have been signed, what happens next?

In the contract, the companies are required to operate from Lebanon, and are required to open a branch locally. This is where the first activity starts; they have a branch, they recruit [a] few people to work at the branch, and then what we mean by operating from Lebanon is that they need actually to do the services and logistics from Lebanon – unless there’s big justification not to do so. But, in principle, this is what the contract says. And then, they need to use as many goods and services from Lebanon as are available, and this will grow gradually, of course because we don’t have an existing oil and gas industry in the country. But, we have the potential to have one, and it depends on which services we are talking about. For example, for legal and financial services, shipping, transportation, communication, I think with some effort from the Lebanese private sector, they can start getting involved. In the contract, we have a provision to give incentives for local goods and services, so if the Lebanese companies offer the quality and the services required by the operator, they’ll get preferential treatment. It’s also in the regulation that all contracting and subcontracting has to be done by public procurement. This is extremely important because the operators will have to procure every single thing they need [publicly], whether it’s goods or services, and Lebanese will have the opportunity to apply, compete, and get those contracts.

E   And will that be done via the LPA’s website?

No, this will be done by the companies directly. We’re working on [the details of what this will look like], but definitely [all procurement notices] will be public. The tools and the [exact mechanism are] being designed now and will be agreed upon with the operators. But, the important fact is that it [will be done publicly]. Everyone will have the opportunity to see what’s required, and apply if they have the services and can compete.

E   Aside from contracting and subcontracting incentives for local businesses, is the LPA working with the private sector to prepare for the birth of this industry?

It’s not our job to do it, and the operator will have to [contract out various goods and services]. I think the Lebanese private sector is good enough to grasp opportunities, establish itself, and provide these services. Of course, we would encourage that, but it’s not the LPA’s job to [get the private sector ready]. So, the operator will have to say, ‘We need such and such services,’ and any company that can provide [them], Lebanese or non-Lebanese, they can compete and get it.

E    When it comes to project finance, are there are big opportunities for local banks or will most of the operations be financed from abroad?

Typically the operator [will finance the project] because we require a consortium with a minimum of three companies [one operator and at least two non-operators] for prequalification, and the financial requirements are high. The operator needs to have, at minimum, total assets of $1 billion, and non-operators [must have] $500 million, so already the consortium will have a lot of capital available. And, those three companies – they may be more, but at least three – usually have their own funding sources. But, of course, as with all the services these companies will need, if Lebanese banks wish to, they can provide certain financing for these companies and agree on some things. But, by law nothing is mentioned, the operator is free to get its funding from anywhere.

E   Oil and gas projects, especially in the exploration phase, tend to be valued in the hundreds of millions of dollars. In other emerging markets, do local banks play a big role or does the finance come from abroad?

I’m not aware of the specific cases of local banks. But, what I know is that which is usually industry practice for any business – the operator will search for the least expensive source of funding. So, I presume they are open to getting funding at the cheapest rate. If Lebanese banks are willing to get into this venture and provide cheap financing, or at least competitive financing, I think they have an opportunity. But, we need to always emphasize that exploration is risky. If the bank or the operator wants to get into an agreement on funding this risky operation at a competitive rate and they both agree, they can do that.

E   What about local insurance companies, I know they were asking for regulations allowing local insurers to pool capital and requiring contract winners to insure projects locally. Did that ever get written into the rules?

No, they have to compete. If they can provide the operator with the coverage that operators need at a competitive price, why not? But, that’s their job.

E   One could argue a Lebanese oil and gas industry could boost the country’s dormant capital markets. The model contracts require each company that is part of a winning consortium to open a local branch office. Did you consider requiring companies to turn the consortium into a locally registered company, some or all of which must be floated on the Beirut Stock Exchange?

I think it can be done in the future. But, we need to start somewhere. It’s a frontier area, it’s our first licensing round, first well to be drilled, so let’s take it step-by-step.

E   Finally, should natural gas be found offshore, as many expect, what are the plans for using it domestically?

We’re planning, with the ministry of energy, to start increasing the demand for natural gas in Lebanon. First, it’s environmentally better, not as much as renewables, but it’s much cleaner than using fuel oil or diesel oil, and it’s relatively cheaper. If we manage to extract our own gas, we’ll be using indigenous gas and ensuring energy security. We did studies on this. The first client [for local gas] will be the power generation sector. Of the [country’s] current [electricity] generation capacity, around 60 or 65 percent could be generated using natural gas, and [any] new plants will all be operating using natural gas.

The next client after power is the industrial sector. Today the industrial sector is facing difficulties, especially as they can’t compete with industries in other countries, and the main factor [behind this] is [the high] energy bill [they pay because of generation shortages from the public utility, Electricité du Liban]. If we can provide the industrial sector with a cleaner, cheaper, more sustainable source of energy, they may be better able to compete. [Down the road, we may have] an opportunity for new industries to be established that depend more on energy [like petrochemicals].

So, the short-term is power, the medium-term is industry, and the longer-term is [getting] the commercial residential sector to be able to use natural gas. Here, you have two options, either you gasify the commercial residential sector [which requires building a residential pipe network to deliver the gas] or you [encourage more residential electricity use] and the electricity will be [generated from] natural gas, which is more reasonable and cheaper to do.

The tools to monitor Lebanon’s hoped for oil and gas sector are nearly on the workbench. In January, the government committed itself to joining a global transparency initiative, and in March, a draft law promoting the future sector’s transparency was finally shown to the public. Taken together, they could help Lebanon build a clean oil and gas industry.

But, the draft law is no longer being billed as an anti-corruption bill. Instead, the law, under preparation for at least the past two years, is now being touted as legislation to support transparency in the petroleum sector. The name change can be likened to a marketing tool – the word corruption was in the law’s title, it would suggest that there is a battle to wage, and that the sector is already dirty. Pitched differently, as promoting transparency, represents a glass-half full approach – it both sounds prettier and presents a better image.

The law has passed through several drafts in the last couple of years, which Executive covered in its 2015 and 2016 special reports on oil and gas. In late March, it was  released to the public and is now ready for Parliament to debate and vote on.

Earlier this year, Lebanon committed to joining the Extractive Industries Transparency Initiative (EITI). The EITI is a voluntary global transparency initiative led by governments, companies and civil society, and is a tool to facilitate the disclosure of information. Its standards include releasing such information as: the allocation of rights, production data, revenue transfers to local jurisdictions, the industry’s social impact, and revenue management. It promotes transparency by encouraging the government, the companies awarded exploration licenses, and civil society to share information and decide what additional data should be published.

The draft law goes hand-in-hand with EITI by codifying its current standards. The law would mandate that signed contracts, the terms of the licenses, beneficial ownership, as well as payments from companies to the government should all be published.

“Every single item found in the EITI is there; it is a very good reflection,” says Diana Kaissy of the Publish What You Pay NGO on the merits of the draft law. The main distinction between the proposed legislation and the EITI is that the latter involves for civil society. “That’s the big advantage of the EITI. But the EITI is tied to political will, so even if that disappears we could fall back on the law,” Kaissy tells Executive.

If the release of so much data were mandated by the draft law, the EITI could then be used to collect other information, such as data on environmental prudence and protection, social impact and corporate social responsibility. Were the law ratified, Kaissy says, “We can really go wild and be very creative in the EITI report.”

It is not clear whether Parliament will vote on the law before the government signs its first exploration contracts in November. And, to be truly effective the law would require auxiliary legislation. The bill points to a yet unlegislated anti-corruption commission as the arbitrator when compliance comes into question or infractions occur. Walid Nasr, the Lebanese Petroleum Administration’s point man for strategic planning, downplayed the lack of that body in the near-term. “Many of the provisions of the [draft] law are related to publishing information and don’t require any other party,” Nasr tells Executive, adding that much of what is written in the draft law is already integrated in oil and gas regulations. But, if there were infractions, like bribes, or non-compliance by the government or companies in providing or publishing data, then the anti-corruption commission would definitely matter.

As for the EITI, Nasr says the government has already committed to joining and is waiting to sign contracts later this year to learn which companies will be participating in the transparency initiative. Civil society will join the government and companies, but faces a long road of preparation to choose its representatives and demonstrate their capacity and credibility for enforcing oil and gas transparency. “This is something civil society needs to work on to have really strong representation and an active role,” Nasr says.

The EITI is coming, but it will be up to civil society to force the government to stick to its promises of transparency.  The onus is on civil society to figure out how it will bring together non-profits that have competing interests. The government will move forward regardless, with or without the EITI and the draft law. Civil society must be an active partner in the former and must lobby Parliament to ratify the latter.

Lebanon is historically notorious for its lack of metals and similar natural resources. This makes it even more astonishing that almost one quarter of Lebanese exports are constituted by a precious metal: gold. In 2016, non-monetary gold accounted for 23 percent of total exports, which were worth a little over $700 million according to customs data. Most of this gold was exported to South Africa.

Since mining of gold is non-existent in Lebanon, a second look at trade figures confirms that Beirut mostly acts as a transit point in the gold trade. It imports gold from Egypt, which is a smaller producer, from Switzerland, which is not on the list of the top 100 producing countries, and from several West African nations. Imports of non-monetary gold in 2016 reached nearly $1 billion, or about 5 percent of total imports.

According to the United Nations trade classifications, gold is considered monetary only when it is held in reserve assets by monetary authorities and related institutions. Non-monetary gold includes bullion, including coins, bars or ingots, and gold in powdered or other unwrought or semi-manufactured forms.

Although imports and exports of gold have a ballooning effect on  Lebanese trade statistics, there is very little value-added or actual contribution of the gold trade to the economy. “Numbers are not important enough for gold to really contribute to the Lebanese economy. Even though jobs are created in the jewelry sector, margins are small,” explains Chris Boghos, who, along with his father, manages  the family business Société Boghos that trades in gold both regionally and internationally.

Investigating gold as an important element of the Lebanese economy may thus be a fool’s errand, and any assumption that the high value of our gold exports translates into substantial contributions to our GDP would be misguided. The lure of gold nonetheless is not to be underestimated in the context of our economy. There are many questions about possible links between the gold trade – here as in many other countries – and concerns over organized crime. On the brighter side of this precious metal, local consumption of gold has productive contributions from jewelry production to investments.

A small node by global standards

Lebanon is the 27th largest buyer of gold in the world, behind regional hubs such as the UAE, Turkey, Jordan, Kuwait and Iran, while the biggest importers are Switzerland, China and India, according to the United Nations Conference on Trade and Development (UNCTAD). In terms of exports, Lebanon ranks 61st, far behind global producers such as South Africa, Russia, and Burkina Faso.

There are only a handful of refiners in Lebanon. According to one trader, these are not registered with the London Bullion Metal Association (LBMA), which lists bars and refineries that are acceptable in London and in other markets. For reasons that are unclear; gold from West Africa transits through Lebanon before being exported to be refined. Part of it is then re-imported and stamped with the name of LBMA-recognized refiners such as Valcambi, Metalor or Rand, confirming its value. Lebanese customs figures show that a little under $300 million of gold remains in the country. Some is bought by jewelers, some by investors.

As a prominent Lebanese trader puts it, gold has always been a safe haven in uncertain political times and has an added lure to local investors. “Do not forget we are in the Middle East. Especially in Lebanon, people have lost their money and savings many times. The political risks in the area make people purchase more gold. Even though Lebanon has a strong banking system, there is always more comfort in knowing your money has been invested in gold. It is a measure against inflation and is the real essence of having safe wealth,” says Boghos.

In 2016, 41 percent of gold imports came from the West African countries of Togo, Ghana, Benin, Guinea, Mali and Burkina Faso. When asked why gold transits through Lebanon rather than being exported directly to refineries in countries like Switzerland or South Africa, professionals are vague in their answers. “Historically, Lebanon has always played the role of a commercial intermediary between Europe and Arab countries, East and West,” says  economist Elie Yachoui.

“We have kept a little of this role. Of course, it helps that we work with Lebanese gold exporters based in West Africa,” confirms a trader speaking on condition of anonymity. He adds, “The same trader usually has offices in different countries and can easily transfer the gold from country to country to centralize his exports from one place. This strategy is adopted because his gains are small, around 0.25 percent; he would make maybe $100 per bar that is worth $40,000.”

Whenever terms like gold mining and impoverished African nations appear next to each other, questions over illegal practices and money laundering tend to come up in the media and international civil society. Thus, it cannot be a surprise that gold trade from West African countries is a focus of investigations by a four-year-old network called The Global Initiative against Transnational Organized Crime, which works on human rights and development issues where organized crime is considered to be increasingly pertinent.   

Marcena Hunter, a senior research analyst with The Global Initiative and one of the authors of a recent report on the financial flows linked to gold mining in Sierra Leone, confirms that practices are engineered to obfuscate where gold originates and could have some Lebanese involvement. For example, Lebanon imports from Togo and Benin, which are not significant gold producers, she says. “It is likely [that] a lot of the gold being exported out of Togo has been smuggled into the country. Togo itself produces very little gold. Previously, a lot [of] gold exported from Togo was thought to come from Ghana; currently a lot is thought to be smuggled from Burkina Faso,” she wrote in an email to Executive.

Another reason why West African gold transits first through Lebanon before being re-exported is that it becomes harder to trace, explains a second Lebanese trader, who also spoke with Executive on condition of anonymity. According to him, a lot of small refineries in Switzerland cannot work directly with many West African mines. “If an NGO has reported that a mine employs children, for example, Switzerland won’t trade with it. So maybe professionals are avoiding these regulations by using Lebanon as a transit point,” he says.

One of the examples of an effective naming and shaming is the report published in September 2015 by the Swiss NGO Public Eye, which accused a major Swiss refiner, Valcambi, of importing gold from a non-producing country, Togo. The gold was allegedly smuggled from Burkina Faso, where it is extracted by children and adults “under abysmal conditions.” In the same report, Public Eye mentions that Wafex, a trading company owned by the Lebanese Ammar family and based in Lomé, the Togolese capital, played a role in exporting this gold. Executive was unable to get in touch with Wafex on the phone or through social media to obtain their comment on this report.

After the report’s publication, Valcambi promptly issued a press release in which it said that all “refining activities regarding imports from Togo” were suspended pending an internal investigation. Last February, Valcambi announced that the investigation revealed no abnormalities. In an email to Executive, Valcambi referred to “stringent” Swiss laws against money laundering and the financing of terrorism and emphasized that monitoring of compliance with the law is done by the Organization for Economic Co-operation and Development (OECD). Valcambi claimed that large Swiss gold refiners have adopted OECD and LBMA due diligence recommendations to avoid getting entangled in child labor or human rights violations.

A variety of explanations

According to Lebanese customs, Switzerland is one of only two export destinations for non-monetary gold that transits through Lebanon. However, it is the smaller destination and seems to be becoming less important in this regard when compared with gold exports to South Africa. In relation to Lebanon, the role of this country grew from 71 percent of Lebanese gold exports in 2013 to 89 percent in 2016.

One explanation why South Africa’s share has been increasing, put forward by one of the anonymous trader mentioned above, is that South Africa’s anti-money laundering and anti-child labor measures are less strictly observed than in Switzerland. None of the South African refineries, such as Rand and Gauteng, nor the South African diamond and precious metals regulator responded to Executive’s questions on this matter by the time this article went to print. The Ministry of Finance in Lebanon, which supervises local customs authorities, also declined an interview. 

However, this does not automatically imply that anything sinister is going on. One of the traders who spoke to Executive anonymously stressed that Lebanon implements strict due diligence rules, and that South Africa has similar regulations to Switzerland. He instead pointed to a commercial explanation. “The reason Lebanon exports more to South Africa is that it’s cheaper. The price difference for refining gold is approximately 5 to 10 cents on the ounce, which is important to us,” says the trader, whose company is a major player in the Lebanese gold market.

Lebanese customs figures show that in 2016, gold exports to South Africa tripled (up 226 percent) in terms of value in comparison to 2015. “We decreased our commissions, so we are able to increase our market share. People who were selling through Dubai realized we had better rates,” disclosed the trader, without giving further details on prices. He maintained that his Lebanese company offers other advantages to sellers. “We pay the gold trader on the spot, as we trust our clients. However, most buyers wait until the gold is refined to know how much it is worth, which can take a few days.”

Another shift in trade could be related to taxes. As Boghos points out, Dubai imposed a 5 percent tax on imported gold jewelry in early 2017, and this could have played a role in a recent increase in the amount of gold transiting through Beirut.

Jewelry has its own demand

What complicates the picture further is that Lebanon doesn’t only import gold from West Africa or newly refined gold from other countries; one important component of imports is scrap gold. Jewelers acquire scrap gold from old jewelry and other golden items for reuse in new pieces. Jewelry is Lebanon’s number one manufactured export, with over 1,000 gold workshops and small factories that for the most part export to the Gulf, Boghos says.

Trade sources for scrap gold can vary according to geopolitical circumstances, as was the case for Egypt last year. In 2016, Lebanon imported 30 percent of its gold from Egypt, a relatively new trend. In 2013, only 9 percent of gold came from there. “Following the recent political and financial instability that Egypt has witnessed, people started selling their jewelry, which is then melted, for extra cash,” explains one trader.

According to the same trader, unregistered scrap gold is also smuggled into Lebanon from Syria, presumably for tax avoidance or even attempts to circumvent sanctions against the regime in Damascus. “According to Lebanese law, you are supposed to declare any gold that you import or export, but no one will notice 5 or 6 kilos of gold bars in a passenger’s pocket. There is no tax on raw gold, however, which means that big quantities are rarely undeclared. Jewelry has a higher chance of being smuggled, as it is taxed between 5 and 10 percent,” the trader explains.

As indicated by the import and export data, gold consumption in Lebanon can be estimated at a little under $300 million for 2016. In constant price, taking December 2015 prices as base, local consumption went up 10 percent between 2015 and 2016. According to a source, this increase in consumption is linked to the fact that Lebanon slowly started moving toward more transparent banking when it promised, back in May 2016, to adopt the OECD’s Common Reporting Standard (CRS) starting in 2018.

The CRS facilitates – supposedly automated – financial information exchange between countries that is relevant for taxation in a similar way to the United States’ Foreign Account Tax Compliance Act (FATCA). “People who do not want their banking information revealed started buying gold instead,” the source adds.

Even without the added potential usage as means to avoid taxes, it is no simple task to assess reasons for gold demand and movements in the trade of gold. In the turbulent recent years of the global economy, this precious metal has seen prices fluctuate greatly – on a five-year trajectory from April 2013 to April 2017 one can find a high of almost $1,800 per ounce and a low of little more than $1,050, as well as a price near $1,300 in April 2017.  Demand also reflects what investment recommendations are in vogue at any given time and how asset allocations are distributed between gold and other securities.

According to Boghos, another factor driving up local gold demand was a drop in prices late last year. “In November and December 2016, we saw prices go from $1.3 the ounce to $1.128 per ounce. As prices were cheap, demand quadrupled. Lots of this gold will be saved, and lots will be sold again to make a margin. It will then be recast and transformed into a new bullion or jewelry,” he says.

This gold might find its way into many different hands. “Gold is bought by households as gifts for newborns, baptisms, communions, weddings and divorce, engagements or savings. Companies also buy gold as bonuses for their employees. Like banks, they also diversify their investments by buying gold,” Boghos adds.

However, buying gold as an asset only represents about a quarter of local consumption, reckons one of the two traders questioned by Executive. “Out of the $300 million that is bought in Lebanon, we cannot know what amount stays here. A lot of expatriates that come to Lebanon for the summer buy gold jewelry which then exits the country unregistered,” he explains. As for now, he expects prices of gold to go up because of rising geopolitical instability; an opinion which Boghos shares, “In this case, there will be even more demand and consumption,” concludes Boghos.

E   Where do you think the next economic bubble is?

It’s the broadly defined technology sector, in which you need to differentiate how you approach and analyze each one of these ventures because some of them will be very successful – as the 90s showed us with Amazon, Google, Apple, etc. – yet, many of them will not be successful. So with experience you learn how to do due diligence on companies, but I think there are certain aspects or segments of the technology and media sector that people are excited about today that you have to analyze very carefully.

E   What are the big changes you have noticed since the crisis in the banking industry?

There have been many changes in the banking industry … [it] is in a much better place now, from a regulatory and compliance standpoint. I think, from a deal-making standpoint, there was obviously more excitement for leverage before the crisis that has come down a little bit, though we are seeing some improvements in these levels over the last couple of years. However, in terms of mergers and acquisitions (M&A), the activity and deal-making is back to the levels we had reached before the 2008 crisis, and one can observe many large transactions that have been announced over the last few months on both sides of the Atlantic. Therefore, I think M&A is back, and the backdrop is relatively healthy at the moment, but with the uncertainty recently created in elections around the world, there has been a bit of caution, so we will see what happens next.

E   If we turn to the United States, President Trump’s economic agenda now seems a little bit uncertain given what happened with the healthcare bill. Do you think there will be a major, or even a small setback with the tax reform, given the divisions that exist in the Republican Party?

I don’t have a crystal ball, but I don’t think the same would apply to taxes [as] usually the Republican side is in favor of reducing taxes. They will therefore probably be less resistant than on the healthcare reform. On the tax side and deregulation, I expect those to go through. We are, however, still in the early days of the new administration.

E   With regard to the UK, now that Article 50 has been triggered, what do you think will be the downside for the country?

The British Pound has already taken a hit following the referendum, so I don’t expect much more pressure there – it even reached levels under 1.20 against the [US] dollar on the cable – and now we are back to a better level. But, I believe it is a double-edged sword, as the low currency makes investments in the UK, as well as exports, more attractive – it works both ways. Moreover, following the referendum, the expectations were for a much more negative economic performance, but the reality surprised everyone. In fact, there has been a lot of resilience in the UK economy following the Brexit referendum and the decline in the pound. The next couple of years will probably provide some uncertainty now that Article 50 has been triggered, and uncertainty is never really good for investments or for people with a long-term view, given that they need to have visibility. It is, however, in the benefit of both the UK and the rest of the European Union to agree to a good deal, because the EU also benefits from the UK. If you look around this neighborhood, whether Belgravia, South Kensington or London more broadly, there are many Europeans that live here and work in the City, so the UK should be able to negotiate a reasonable deal that is beneficial to both parties – as Prime Minister [Theresa] May has mentioned several times. I, however, believe that it will take time to have that visibility, and it will also depend on the elections in France, Germany and other countries that are important for the European Union, and on the [upcoming] negotiations. So, it’s [too] early to say. However, we have seen, through the recent announcements from the Qatari delegation, billions of pounds [worth] of investment in the UK, irrespective of Brexit, and the same was announced by other countries from the Gulf over the last months. The UK has a long history of being a good trading partner for many regions around the world, not only for Europe. I strongly believe that given the importance of the City of London – not only as a financial center for the rest of Europe, but also as the deepest pool of capital in Europe – it’s in the benefit of both [the EU and the UK] to reach a good deal, and I think the worst case scenario, as Prime Minister May has mentioned, is no deal, instead of a bad deal.

E   You just mentioned that politics will continue to be at the fore in Europe, so what do you think is the next shock in Europe? A Frexit, with France leaving the EU?

Well, that would be a big one, but nothing is surprising anymore. I think the fact that there are two rounds in French elections, unlike the referendum in the UK, or the elections in the US, make it harder for Mme [Marine] Le Pen to be elected in the second round on May 7. But, we’ve been surprised before, both by Brexit and the US elections. It’s hard to predict, but Germany and France are at the core of Europe, so obviously if one of the two goes, it would be a big blow to the concept of Europe.

E   So, where do you think we will be in December 2017?

Ha! I learned a long time ago not to make such predictions because I was actually in Davos – where I go every year – in January 2008 with all the big CEOs of the Wall Street banks, alongside the private equity firms, and we all saw what happened less than a year after that. When I went back in January 2009, many of those CEOs had lost their jobs. So, it is hard to predict what could happen in less than a year from now. All the more so, 2016 was another lesson; it was very hard to predict the black swans that were Brexit and Donald Trump in the White House. Nevertheless, I’m cautiously optimistic. The Dutch elections showed a new turn in the populist movement in Europe, and the next big test will be in France. If the French elections go as planned, there will be less to worry about. Moreover, on the US side, at least from an economic standpoint, [things] are going well, so on that basis I am cautiously optimistic for the rest of the year.

E   Based on that, do you still think the euro will still be around in 10 years?

Well, if I cannot predict one year, it’s hard for me to predict 10! But it really depends on the French elections, so we will find out soon.

E   You are originally from Lebanon, if you were the Lebanese president what would be the first thing you would do?

I left Lebanon a long time ago, but I still take a vested interest in its politics and future direction. It’s obviously a tough question, and I think it would take a lot of political headache to achieve, but I strongly believe that if we can overcome the religious fragmentation in Lebanon, it would be a great achievement – so, any move in that direction would benefit the country and would benefit the region because more religious tension can only lead to conflicts, pressures and obstacles.

E   How attractive do you think it currently is to have deposits in Lebanon?

For a Lebanese person it is very attractive because they get a very attractive return on their deposits, even in dollar terms, much more so than what they can get outside the country. It is a timely thing that you mention, but in the context of Barclays [and Eurobonds], we raised $3 billion in the last [few] weeks for the Republic of Lebanon, which is a record amount of capital raised for the country in a series of transactions, as there were three tranches. We saw demand of over $17.5 billion for the $3 billion that we closed on, so it was almost six times oversubscribed. Interestingly, a lot of the demand came from Lebanon, obviously, but a record level of demand came from international investors, much more so than at any point in the past. This also highlights that Lebanon has become increasingly attractive as a destination for foreign investors, which is a good thing to see in the context of Lebanon, given what is going on in the Levant.  It’s a positive indication of the direction of travel that Lebanon is taking, particularly after the recent election of the president and the more peaceful arrangement that the parties have reached – all the more since the economy is on a better track now as well. So, to answer your question, deposits are attractive for both Lebanese investors and foreign investors.

E   Are deposits/Eurobonds the least risky investments in Lebanon, appreciating the level of political risk in the country?

I believe the components are very linked, in Lebanon in particular. Given the interconnection between the central bank and the Lebanese banks themselves being the main buyer of sovereign paper and the bonds, I think the three components are very well linked to each other.  So, I don’t think it is very risky to invest in deposits in banks because those are very well regulated by the central bank, and have been for a very long time, and in turn, I think the Lebanese banks support the government in their bond issuance, so the three components are there to safeguard the security of the investments of investors and depositors.

It’s hurray time for Lebanon’s consumer society. Shopaholics, retail marketers, mall strategists and their assorted public relations minions are gearing up for the launch of the third ABC Mall in Lebanon. The new retail temple is slated to open its doors this summer in Beirut’s Verdun quarter. It will accommodate over 200 stores, including its signature 10,000 square meter (sqm) department store. With a total gross leasable area (GLA) of 50,000 sqm, the mall promises to provide plenty of leisure opportunities, from a multiplex cinema, to a roof garden and restaurants. The mall was designed by US-based architects Callison (today CallisonRTKL), a Seattle firm specialized in mall architecture, and a leader in the design of retail environments. With its design, commercial and leisure offerings, and a built-up-area (BUA) of 120,000 sqm, the opening of ABC Mall in Verdun is going to change the urban fabric of the Lebanese capital, both in terms of shopping and in terms of communal living – or so hopes Frank Kuntermann, deputy CEO of the mall’s operating group, ABC.

The Verdun project, in Kuntermann’s view, is the next stage in development after the success of the group’s mall near Sassine Square in Ashrafieh, which dazzled competitors with its design and architecture when it opened almost 14 years ago. “It is the 2.0 of [ABC] Achrafieh, integrating all the needs of the community. What are the aspirations of the population living in the surrounding area, and how can we answer those aspirations? That is the real question,” he says. (see interview)

Describing the Verdun project as a “community mall,” he explains that the concept behind both the new department store and the entire mall is “by the community and for the community.” According to Kuntermann, this approach led ABC to take new measures in considering its design, such as responding to the area’s lack of green spaces by allocating more room for a roof garden than was initially planned. They also sought to address Verdun’s propensity for traffic by focusing on pedestrian access and increasing the parking capacity to 1,700 spaces.

“The model of the community mall, as ABC conceives it, is extremely interesting, and the approach is [apparent] in how it is constructed and even in the priorities of recruitment,” Kuntermann says, explaining that the first round of hiring focused on candidates from the area around Verdun.

ABC also sought to extend the mall’s offerings to a very wide bracket of consumers, from those with student budgets to upper-middle income earners. This is reflective of the wide range of income strata in the potential catchment area, which according to Kuntermann is not conclusively defined at this time, but presumably stretches from West Beirut to southern parts of Lebanon.

In investment terms, the mall is a $300 million project, excluding the land value, Kuntermann says. He confirms that a joint venture for the development was formed between Verdun 1544 Holding, a company under the portfolio of the Bahaa Rafic Hariri Group (BHG), and ABC group. ABC brought its knowhow and concepts, whereas BHG brought the land and Verdun 1544 Holding invested in the project. Kuntermann denies knowing the land value of the joint venture, saying the assessment was done several years ago, before he joined the ABC Group. Kuntermann began working at ABC in 2013; his previous position was Middle East general manager at a regional company representing French luxury group Hermès.

Shopping malls have encroached on Lebanese consumer habits since the beginning of Beirut’s gradual recovery from internal violence in the 1990s. In the early days of this development, malls were created in existing commercial buildings or as small-scale affairs. Walking through Verdun quarter in the late 90s, one could stumble up a narrow escalator in the Concorde Center and venture between the racks of a hastily put-together fashion sales zone to buy a suit from German brand Boss, or browse through a crowded (with paper, not people) bookstore in a dark first-floor corner of Verdun 730, where three floors of retail space made an attempt to emulate a mall.

Given that consumption and imports have been prime drivers of the Lebanese economy over the last 25 years, it did not take very long for larger purpose-built malls to debut in the Beirut market. ABC Achrafieh and CityMall in Nahr El Mott provided enough size to draw crowds and serve as regional centers, to go by the definition of the International Council of Shopping Centers. A third project, the Souks in the Beirut Central District, had plans dating back to the 1990s, but was held up by non-commercial delays.

With the opening of these ‘real’ malls between 2003 and 2009, the story of Lebanese retail centers entered a new phase, but not one that was void of difficulties. Some 1990s shopping centers attracted significant footfall for a while, but had to settle back into more modest C-Class or neighborhood malls, as their attractiveness was eclipsed by larger and newer malls. Others launched with fanfare only to flounder within a few years, such as a project on the Mkalles Hill, or languished during the various difficult economic periods of the 2000s and 2010s. Further malls opened in and after 2009 in various parts of the Beirut conurbation, only to be quickly affected by an apparent dichotomy of increasing purchasing power and the rollouts of new grade-A retail GLA.      

Even more convincing malls like Beirut Souks, ABC Achrafieh and CityMall, underwent serious remodeling and numerous changes in terms of retail concepts, anchor tenants, and leisure offerings to arrive at their current incarnations. Some sins bred into their designs by obliviousness to optimal circulation (whether of exterior car traffic, interior pedestrian traffic or just air flow) proved impossible to breed out.

Given Lebanon’s economic vagaries over the last 20 years, ABC Group has developed its skills for operating retail environments in a school of hard knocks. Today the company aspires to transform itself from a family business to a veritable corporate player on the regional retail scene.

ABC has retained and expanded its brand equity to a level where the group can boast of very strong brand awareness in Lebanon. Kuntermann cites brand awareness and assisted brand awareness to be at 95 percent, and says, “BHG decided to go into this project with ABC because they knew that we were the ones that could not only implement a project that was in line with the aspirations of this community, but also, would be able to attract the brands, who would be confident enough that this mall would be run in a way to make it a success. I think the brand value of ABC is what allowed this chemistry to happen.”     

E   You say that the ABC Mall in Verdun is seeking to be a community mall, starting with the priority hiring of local staff who can walk to work. You are well aware of the challenges that exist in the neighborhood relating to traffic congestion and parking. What is your recipe for organizing parking and charging parking fees in the community mall?

The problem is that you see a lot of abuse when [parking is offered] free of charge. The question is: how much [in terms of an hourly or daily fee] is enough to discourage abuse, and how much is low enough [for people to not be discouraged from using the facility]. This is a huge discussion, almost [like] a Byzantine discussion on the gender of angels. The legend says that while the Ottomans were besieging [Constantinople] the people there were talking about the gender of the angels. I think what was found as a solution [for parking] is acceptable, but we need to take into consideration that being a community mall means serving the community, and we need to listen and see if we will [need to] adapt.

E   What else are you adapting?

We are adapting our offer to bring more medium brands with a lower price level. We are likely to review [the brand mix] later on, if we believe it becomes a problem. We need to listen to [the people].

E   No supermarket as an anchor?

No, the strategy of [having] no supermarket is still the same [as with the other two ABC Malls]. It was also a long discussion. We believe it is a different motivation to shop, and that people who want to have a quiet time to go for a coffee or do some shopping should not bump into people with [supermarket trolleys].

E   Anything else about the mix of products and brands?

The brands are very similar [as in the two other ABC Malls]. Within the department store, we will still have the same positioning. [The orientation] will be what we call medium-premium, not premium, and fashion-forward with a strong component of French brands. Historically, when the first ABC department store opened in Bab Idriss (near the center of Beirut), it was the first department store in the Middle East, and they brought in exclusively French brands, lingerie, perfumes, toiletries, etc.

E   Any new brands or consumer electronic stores?

Electronic no. There are ongoing discussions, but nothing is confirmed. In terms of new brands, we have a few new brands arriving because we wanted to have a new component in our offer compared to the other ABC [Malls]. We have, for instance, a Calvin Klein as a standalone store. It will be the first Calvin Klein standalone store in the Middle East. Dubai will be after. There will be [other] new concepts in restaurants and perfumery, which will make it a bit different, but overall the positioning will be sophisticated but reasonable [in price].

E   Do you have community participation in the form of a community board or through regular meetings to address community concerns?

We had very intense [community consultations] during the preparations, and I have raised the question of whether we should give [these consultations] a regular rhythm. The question is in which form and how people would be part of it.

E   How large is your catchment area?

This is [also a] Byzantine discussion. We had very contradictory studies on this. It all depends first on how you include the southern part [of Lebanon]. Do you consider the mall to be half-way between western Beirut and Tyre? Some people consider the time of transportation, others take the kilometers for saying that the catchment area can go up to there or there. We had very contradictory figures, which at the end of the day, we didn’t use because they were not coherent. The catchment area is western Beirut and part of the southern part of the country, halfway up to Tyre, where it makes sense for people to [comfortably drive to Beirut].

E   What can you tell our readers about your approach to the concept of an Arab mall and Arab department store?

The first thing is that from a design point of view, it’s extremely Lebanese, in its visual fluidity. Fluid, simple, architectural and transparent – this is for me the Lebanese identity. We integrate – and we should do it more intensely – by giving more space to Lebanese designers. There’s talent everywhere; fashion and jewelry is what everyone talks about, but [there are examples of other crafts] that you would not find anywhere else.

E   How can you promote this?

In jewelry, it is pretty easy; [we have both established jewelers and new, young ones]. In fashion, I would be very favorable to have some kind of Lebanese designers’ corner. [We have a small one], and I think we could intensify it. There is an amazing substance of creativity, and we should be even more Arab and Lebanese in this sense. We want to be modern, creative, and we have to “Lebanize” our offerings more strongly. At the same time, we don’t want to be luxury.

E   You’re placing great emphasis on culture and integration with the community. On the other hand, aren’t you engaged in an activity – retail – where there is intense competition in Verdun, given that it is a district where a business structure is already established?

Your question is about the impact on business in the neighborhood. The first thing is that some retailers decided to [pull over and work with us]. [One local store], with whom we have been working in the Ashrafieh mall, decided to leave [a nearby mall] and come with us. He said, ‘I want a modern retail environment, service and parking for my customers, so I [will] move over [to ABC].’ It is true that existing mall operators in Verdun are being challenged by the arrival of ABC. But challenges are a part of life and part of business. People are going to move, and thus, operators [of retail spaces] will have to reinvent themselves. They will have to find and take advantage of their location. 

E   What about small stores in the area?

First, we don’t go into the utility store business, so we are no competition to the [dekaneh] or mom-and-pop store. Second, we open doors to local retailers on conditions that are not the same as for the big groups.

E   Did you entice some of the more desirable large stores away from nearby locations by giving them special deals?

We contacted all of them. Putting the project through was a tough challenge because people today are thinking twice about putting capex (capital expenditures) on the table. Some brands, including major brands, have said, ‘We are not coming in now, we will come in in one year because this year, we have no capex.’ You can feel that the [economic] environment is difficult, and yes, there have been very tough negotiations.

E   So, you’re saying that you are flexible when it comes to negotiating with a potential lessee?

Yes, these days you have to [be].

E   Are you satisfied with the outcomes of all these negotiations?

We are satisfied in that we have leased 85 percent [of the mall’s GLA space], and that the department store is leased nearly 100 percent.

E   Mall operations in the Middle East have seen many developments with varying architectural accomplishments, but also  malls which have been fairly dysfunctional in terms of noise reduction, access options, air flows and overall design and efficiency. Does ABC have aspirations on regional terms, and did you ever consider doing an IPO and getting listed somewhere?

We thought about it and have been contacted by people who said they love the way in which we run malls and asked if we would run their mall. Inquiries came even from some exotic countries. We are not ready for that, but [we are approaching this possibility] in several steps. The first step is that we would transform a family company into a corporation. This involves processes with long-term outlooks and structure. We are a developing people. I’m just about to create an internal think tank.

It would definitely make sense for the only Arab department store concept to go elsewhere, into another country. If we did something like that, it would have to be really Lebanese. Running malls for other people is an option, but it would have to be in the Arab world as you have Lebanese talent were speaking Arabic is an asset. The thing is that running a mall that is not your own is not easy when you have a very special concept on how a mall should be designed and operated.

E   So you would favor a sort of joint venture where you are part owners of a mall?

And also, owners of the concept. When you have a community concept and see how such a concept [needs to be implemented gradually], you cannot just take on running a ‘box’ in the middle of nowhere. The conditions would have to line up, but I think ABC is slowly growing into the position of a company that is ready to move outside [of Lebanon].

E   What do these aspirations mean in terms of board structure and corporate governance?

First of all, the board has been renewed quite heavily and we have people with international exposure within the board. One comes from Geneva, the other from Dubai and from America. We also have local personalities who bring a lot of added value.

E   Do you have non-executive directors on the board?

It is a bit more complicated. We have the chairman of the board, which is [former Tripoli MP] Robert [Fadel]. He is still executive [director]. The plan is for [him at] some point in the future to become non-executive. [In terms of] organization of the board, we work through committees and follow the [standard] recommendations of the International Finance Corporation.

E   So what you are saying is that you’re in the process of creating a capacious board and upgrading its structure, in addition to which you are creating an internal think tank. What can you tell us about this project and what it is going to be its budget?

We are planning to launch the think tank in the second quarter. It is a very exciting project. First of all we will use it in our talent development program [by including some of our young talents in this think tank]. We have [involved] an academic who has a PhD in innovation and gives us an outside view. We are thinking about how we can completely rethink the future of the company and what the department store of tomorrow is going to be like. We could go in many directions, from buying studies, to getting in professors from around the world on special topics, or sending the young talent on fact finding trips abroad. All of this has to be put into a budget. We are working now on our ideal [scenario]. Then we will see what the gap between the ideal world and our reality is and will try to bridge it, as always in life. No company has done this kind of thing in Lebanon, but the board was very open to undertaking such an exercise.

E   Any numbers on ABC turnover that you can give me?

We don’t publish them. It is a policy which I asked about. One day [transparency] will be the direction, and people will have to change their habits. The whole company is progressing very rapidly and the subject of publishing the numbers will one day come back onto the table. Also, in regard to your question of an initial public offering there is no project for an IPO. The company [has been] changing completely in the past three years already. We are here (points to the new head office villa where the interview is being conducted) in a totally new environment, and in six weeks we will open a new logistics organization with top notch structure.

E   Can you dare a guess at the valuation for the company?

We’ve done this exercise recently. I can’t give you a value because we’re challenging this figure.

E   But when you live in Beirut today it’s almost synonymous to say “go to the mall” and “go to ABC.” Shouldn’t ABC be able to assess the value of its brand equity, after having invested so much into it over the past 15 years?

There is the technical value and the brand equity. If the brand would one day be for sale, I think someone with the means [to buy] would put a lot of money on the table only for the brand. But, I have no clue about how much.

E   Surely you must have an idea how much the enterprise is worth between hard assets, soft assets and equity?

As I told you, we have done the exercise recently but are challenging the logic of this exercise. The question is not that easy to answer. The question of  good will is really the central question. As the brand is nearly 100 years old, some Lebanese might put a [very high] figure on top of what is the value of the company, but I don’t know. If we have a more established valuation, we will talk about it on the day that we have a valuation that makes sense to us.

E  It just gives one the feeling that as a company in the 21st century global economy, you still have a 19th century corporate habit as far as valuation.

That’s quite true, and it’s the same when it comes down to publishing figures etcetera. But, as the saying goes, Rome wasn’t built in a day. We’ll get there.

As the weather heats up, the Lebanese people have turned their eyes to the upcoming summer season, earnestly planning their next grand escape.

Whether potential travelers take matters in their own hands and book through an international or local online travel agency, or whether they consult with one of the many travel businesses in Lebanon, one thing is for sure: the busiest period for many of the country’s travel agents is upon us.

Summer Fun

With school children off for the summer, and employees’ productivity challenged by the long warm days, it is no wonder that around 60 percent of outbound tourism trips are scheduled between mid-June and mid-September, according to travel agencies interviewed for this article. “We cater to the holiday travelers, and the bulk of our work is in the summer – we don’t cater a lot to business travelers,” says Elie Nakhal, general manager of the travel agency Nakhal.

For many Lebanese, the summer getaway is the only vacation they take all year and is, therefore, perceived as a reward for their hard work, according to Charbel Kahaleh, head of marketing and communications at Kurban Travel.

Travelers take many factors into careful consideration when planning for that all-important holiday, the most important being proximity, ease of access, price and activities at the destination, according to those interviewed by Executive.

Bringing the world closer

When traveling for a short getaway (the average summer trip is for up to seven days according to those interviewed for the article) it is very important not to squander precious time in airports waiting for connecting flights.

Indeed, ease of access to a destination through a direct flight is a strong indicator of the location’s popularity among summer leisure travelers. While certain locales may be attractive in their own right, a lack of direct flights can affect their success. “Past experience has shown us that good flight connectivity and easy access can significantly increase the destination awareness to the leisure travelers. The uncomfortable flight connection from Beirut to Thessaloniki is not an ally in our effort to showcase our luxury resort group, and the unique destination of northern Greece and Halkidiki to the Lebanese travelers,” explains Periklis Gompakis, senior market development manager at Sani Resort, adding that they counteract that issue by putting in extra effort into marketing Halkidiki to the Middle Eastern market through industry fairs, press trips and joint activities with their travel partners in the region.

The charter plane

Many full service and some budget carriers fly out from Beirut Rafic Hariri International Airport to key business cities – mainly in Europe and the Gulf countries – on a regular or daily basis.

However, there are no such flights to destinations which are more popular in the summer, such as the Greek islands or the south of France. And since ease of access is of such importance to the leisure travel market, Lebanese travel operators have stepped in with charter planes.

Charter planes are planes typically used for full service travel, but are leased to tour operators who pay in advance for the whole plane. They then resell the seats to their clients or to subagents.

Leased success    

During the summer, operating charter planes constitutes the bulk of business for the bigger travel agents in Lebanon. Nakhal, for example, has charter flights to 30 destinations known for their summer appeal. “We fly to destinations which are summer destinations and which other airlines don’t travel to. Our strength is that we allow travelers to reach their holiday destinations through direct flights,” says Nakhal, giving the example of how they fly to Venice and Naples during the summer while MEA or Alitalia only have flights to Rome and Milan.

These travel agencies use their chartered planes primarily for their clients, but they also open them up to subagents or smaller travel agencies in Lebanon. “We fill a lot of it and small travel agents, which are many in Lebanon, who don’t have the capabilities to charter planes benefit from this and go through us,” says Kahaleh. Kahaleh explains that there is no need for daily charter flights to these summer destinations. “There is not enough demand or volume to have daily charter flights in Lebanon. Two to three times a week is more than enough,” he says, explaining that flights are scheduled based on their experience with the Lebanese market, with most travelers wanting to travel on a Thursday and get back on a Sunday.

While customers can book just the charter flight ticket through the agencies, they are also encouraged to book accommodation. “The client does not have to reserve his entire trip through us, but once we have him looking into our flight information, we offer him the option to book the hotel and guides through us. Why not? They are booking the ticket through us and can get the whole package from one place.” says Nakhal. In this manner, the charter flight becomes a tool to rake in profit from accommodation as well.

The classics

It is when winter creeps in and dreams of seasons in the sun are put aside for the year that travel agencies begin planning for the upcoming summer.

Agents consider several points when deciding on which destinations to work on for the summer.  “We try to combine curiosity for new destinations with convenience. We think of whether the destination is worth it, if it would be interesting for the client. The city has to have many aspects they can take advantage of, such as visiting a new destination and spending time on the beach,” explains Kahaleh.

Some destinations, such as Greece or Turkey have become classics. While security concerns in 2016 affected the flow of Lebanese tourists to Turkey, it seems the appeal of affordable prices and proximity was too much to resist. “People are still going to Turkey, especially the islands. For example, twice as many people went to Bodrum this year, compared to the same period last year. The demand is still there because we changed the system of pricing and had heavy negotiations in the area to reduce costs,” says Nakhal.

Kahaleh also speaks of Turkey’s popularity pointing out the lack of visa requirements as one of the major allures. In fact, Nakhal says he was encouraged to charter direct flights to Georgia this summer because he knew from experience with Turkey that the lack of visa requirements would appeal to his customers.

A whole new world

For the seasoned leisure traveler, going to the same destinations, however popular, can be redundant. Travel agents are aware of that and add new destinations to their portfolio on an annual basis. “Lebanese like to discover new places and not stick to classical destinations. Therefore, I keep the same destinations, but also add to them, offering the opportunity for the Lebanese to discover new destinations in a convenient way. This allowed the market to grow,” explains Nakhal.

The relatively new summer destination on the block for the past five years has been Dubrovnik, Croatia, with both Nakhal and Kurban offering direct flights there. “Dubrovnik is a requested destination, and it combines a winning mix: beach destination, amazing scenery, site seeing, landscape and nature. [It has] affordability and proximity, with a Beirut/Dubrovnick flight duration of around two hours and 30 minutes,” says Kahaleh.

Beyond the quick getaway

While many opt for a close beach getaway for their summer break, there are still others who prefer to do something different with their vacation.

Wild Discovery specializes in tailor made packages that cater to those individuals. “Wild Discovery is the specialist for customized packages and personalized travel experiences. Our selection ranges from simple stays in vibrant cities to honeymoons in exotic islands to unconventional stays, which include, for example, a 13 day tour of Argentina, Peru, or Japan,” says Johnny Medawar, marketing director at Wild Discovery.

For those who want to combine many cities into one trip, Kurban Travel offers guided tour packages to a collection of adjacent destinations typically over a period of seven to eight days. These packages are often in Europe, with the most recent addition being a trip to the Baltic countries. Kahaleh says that these tours appeal to a variety of travelers explaining, “It is always a good idea to discover several cities when you don’t get the chance to travel more than once a year.”

Another way to see a lot in one trip is to take a cruise. All the travel agencies Executive interviewed spoke of their affiliation with international cruise liners, which provide trips as near as the Greek islands and as far off as South America.

If you can’t beat them

This April, Nakhal launched an aggressive marketing campaign across all media forms with one specific goal: to market Nakhal online for flight booking. In 2015, Kurban Travel had a similar campaign for GoKurban.com, their online travel agency site.

The market share of online booking has become too big to ignore, even in Lebanon. “A growing number of people in Lebanon these days prefer to book their trips online, whereas this was not the case in our early years. We’ve had the online flight booking system for a decade now, but previously, we only gave access to our employees and to other travel agents. This year, we decided to open it to the public,” says Nakhal.

Lebanese travel agents see their online presence as a means of gaining back the customers they lost to online booking sites by offering the service themselves – with a little edge over the international booking sites.

According to both Nakhal and Kurban Travel, Lebanese customers have two main concerns when booking a vacation online. The first is the insecurity that Lebanese feel when using their credit cards online. Nakhal believes their secure payment system with Bank Audi should reassure their customers that their financial information is safe.

Meanwhile, Kurban Travel allows their customers to complete and pay for the booking online or opt for a pay in cash option through money transfer or a personal visit to the agency’s representative offices.    

The other drawback is the anonymity of the big international online booking sites, as opposed to the familiarity of names like Nakhal or Kurban to Lebanese travelers – a fact which both agencies promote fully. “We have the local edge in that we have a cultural proximity with our clients. Besides, they can get instant assistance from our travel consultants via the ‘live chat’ feature on the website or talk on the phone on a dedicated line, for example – they feel there is a human element behind the technology,” explains Kahaleh.

Another advantage that both Kurban and Nakhal have over international booking sites is the availability of flights on the charter planes they themselves operate from Beirut. “Although [flights] can be found on international booking sites, they don’t provide the direct charter planes and packages that we provide from Beirut to other destinations,” says Nakhal.

Year-on-year comparisons from travel agencies indicate that more Lebanese have traveled so far in 2017, compared to 2016, with 10,000 Lebanese going to Sharm el-Sheikh over the Easter break, according to Nakhal. If this is any indication of what’s to come, then summer 2017 is going to sizzle.

Knowledge Production in the Arab World assesses regional research, posing questions crucial to understand the relevance of this research and its beneficiaries. The book studies the Arab drive to join the increasingly globalized world of research, and in doing so promote “knowledge” economies. Yet – as the provocative subtitle The Impossible Promise suggests – authors Sari Hanafi and Rigas Arvanitis find that this ambition has not, or not yet, been realized. Hanafi and Arvanitis (respectively based at the American University of Beirut and at the French Institut de Recherche pour le Développement) argue that research from Arab countries is still struggling to reach its potential.

Using case studies from the region, the book depicts Arab research as involving two potentially opposing strands: local relevance and internationalization. Underlying this dichotomy is one of the more obvious problems in regional research dynamics – underfunding; the financial investment in scientific research in the Arab world being scant compared to other regions. In fact there seems to be little connection between the financial resources of a given Arab country and the amount it invests in knowledge production. Given such underfunding, many researchers turn instead to foreign financing, but this can often be problematic, leading to output potentially unrelated to local issues that has minimal societal impact. A major dilemma in the Arabic academic community then becomes choosing between local and international relevancy.

The book notes that, in general, the number of scientific publications in the Arab world is low, though some recent growth was observed. Furthermore, Arab researchers are underrepresented in terms of citations. Alongside underfunding, the authors give several other reasons for the relatively low production of knowledge and research in the Arab world. One problem is that most universities prioritize teaching and show little interest in research.

Another issue is language and the push by universities and institutions to publish in English in international journals, as opposed to in Arabic for local outlets. This general drive to publish in English in internationally recognized journals means that the wide range of knowledge that is produced in the Arab world, and especially in Arabic, is doomed to become “invisible” –  difficult to find, and thus, rarely referenced or used by other researchers. This is partly because international databases and ranking systems are biased toward publications produced in English, but is also due to the Arab region itself lacking a good functioning scientific database that can connect different areas of knowledge production. For these reasons and others, the number of local Arab scientific journals in international databases is low.

Related to the language issue is the dominance of scholars from the west who are working on Arab topics, such as the uprisings that have taken place since late 2010. Some well-known American authors are referred to as “first-level knowledge producers” who, though often lacking local understanding and experience, are considered the main experts on political issues in the Arab world. On the other hand, local scholars, who do have this knowledge, are often merely used as “informants” for the “first-level experts.” This process is worsened by Arab research usually referencing “first-level” US researchers, while ignoring local ones, thus creating a one-way hierarchical structure whereby foreign sources are legitimized and local ones are not.

In the Arab world, there are also disconnects between research and society. This can be seen in the lack of research in the social sciences, and more generally, in weak connections between academic and public debates. For various reasons, there is reluctance by academics to write for local newspapers, thereby missing a chance to engage with the Arab public. The authors of the book urge broadening the audience for scientific research and connecting it to economic and societal issues.

The upshot of the problems detailed above, and many other issues, is to restrict opportunities for Arab players to emerge onto the global stage from a local base. Although published over a year ago, Knowledge Production in the Arab World still has the freshness of a timely work. As a successful example of Arab research, it will be of interest to students, scholars, and policymakers working on the status of science in contemporary developing countries, in our region and otherwise.

The political whisper campaign against Riad Salameh and the gross mishandling of his term renewal by our political class put our monetary and economic stability in jeopardy. Salameh is the last of a post-war cohort that — love them or hate them — were truly faithful to the concept of nation building. Everywhere else, the interest in rebuilding our country seems long dead. In the last 10 years our state institutions have reached an all-time low in managing our future and stability — we are in serious long-term trouble.

Riad Salameh, like all humans, is not perfect. Yet, against all odds, he’s served honorably and has a long list of accomplishments behind him. In an ideal world, there should have been a successor — another respectable and qualified candidate to carry the flame after the end of his term in office.

Whether it’s at the Banque du Liban or anywhere else, there should be proper succession planning. This country will never come close to meeting its full potential without strong institutions and competent, merit-based leadership. As long as top state posts are feudal prizes, any attempt to formalize and institutionalize succession will fail as politicians manipulate key positions for their own personal gain and the gains of their cronies.

As we pivot from the gross mismanagement of state institutions to the tenuous prospect of a long-overdue Parliamentary election, I see a ruined nation. Our people have no shortage of talent and potential. Because of Salameh’s progressive policies, many are succeeding, and even thriving despite a flat-lining economy in which the only viable bet is the reassurance of our monetary stability. But the state, our beloved Republic, is nearly beyond repair.

You do not have to love Riad Salameh, but this magazine will, has and does defend him because he is the last man standing from an era where there was at least a ray of hope.

Executive confesses to nonsense fatigue. Our editors are tired of platitudes about the banking sector. If we hear one more locution implying that the Lebanese economy’s doom is inevitable, or another hackneyed phrase about a banking sector that is trying to resist bad economic tides to the best of its ability while continuing to develop new products and services, we will choke. Especially if such vain observations are tied to attempts to exploit journalists in marketing said products and services aggressively to consumers.

Trying to maintain integrity with respect to editorial independence and the separation of journalism from advertising interests looks more like a quixotic fight against windmills every year — but even if it is not a financially rewarding endeavor, it is a necessary fight if one hopes to be a genuine journalist. Thus, tired as we are of some parts of the Lebanese banking sector’s narrative, Executive is still fascinated by the sector’s unsung assets, and in this issue, attempts to explore how much the human capital in our banks is growing (see story page 14), how much intangible value banks create through employee training and continued education (see story page 30), and how through all this, banking contributes to alleviating the huge problem that fresh university graduates (and all Lebanese) face in finding quality jobs.

Also, we have to admit that our general nonsense fatigue is a mere nuisance when compared with our exasperation over hollow complaints by political types, who do nothing to move the national confidence dial higher but instead vainly berate people, including those very bankers who are trying to make the economy work. Can it be that there is a political class who have it in their hands to bring down corruption by relinquishing their privileges and fiefdoms, but prefer to sit idle?

Playing politics

Most of all, we are disgusted, turned off, and appalled at political tugs of war that are not only unworthy of democratic discourse, but harmful to national economic confidence. Such are the pointless and overlong battles over our electoral law (see leader page 10), the budget, taxes on the ultrarich, and the dishonest attempts to derail the reappointment of central bank Governor Riad Salameh last month.

This reappointment battle is now over, and it is indeed Round Five of Salameh at the helm of Banque du Liban. However, that does not mean that the battles that are sure to come during his fifth term are already won. There are new attacks being formed in the shadows by prejudiced foreign friends, and there is an important area — corporate governance at banks  — where progress is notable but further challenges appear to loom for all stakeholders.

Lastly, whenever a hero is born in the public’s mind, there are concerns that one must not forget. Hero worship is dangerous and being a hero — we guess because we cannot lay claim to any heroic deeds — comes with its own sort of fatigue. And in this regard, Governor Salameh’s most recent appearance before a Lebanese Euromoney conference could be seen as putting the onus on others to call for some fresh ideas at the central bank. Shaped as an on-stage interview, Salameh’s 30-minute appearance did not provide the kind of attention grabbing remarks that the once revered  maestro of the Fed, Alan Greenspan, provided to financial markets with his speech on “irrational exuberance” just over 20 years ago.

Still fragile

One would wish for more than comments on global interest rates. What is needed now is not just the honest remark that the Lebanese central bank relies on the published analyses of international energy augurs for its oil price assessments and anticipations, not the evasive assertion that Lebanon’s central bank favors everything that boosts financial inclusion when the question was about the BDL position on Fintech, and also not the insight that oil and gas, the knowledge economy and the financial sector can be enablers of the Lebanese economy. 

Thus Executive, while very relieved over the commencement of the fifth round of Governor Salameh’s reign at the central bank, calls for succession planning to start as of now. Should we wait until the governor of the central bank has completed his seventh term as an octogenarian and is perhaps ailing before we deign to call a surprise board meeting and advance one of his deputies to the head of the table? Apart from the fact that a sudden board change with internal handover to another office holder is not feasible politically or legally, the idea of running for another 18 years with monetary policy still pegged to the dollar is, today, simply frightening. Lebanon’s political economy is still too fragile to be caught by surprise in any Minsky moment or creative destructiveness that, according to economic learning, the country needs to be prepared to encounter somewhere in the future, whether in the next six years or later.

As if any reminder about the importance of developing a good political economy in Lebanon was needed, the 2017 edition of the World Competitiveness Yearbook (WCY) by Swiss business school IMD made it to our desks just as we were putting the last touches to this issue. The WCY — published on May 31 — showed a number of telling changes in the competitiveness rankings of the 63 countries covered this year. Notably, while the United States lost further ground and now is only the WCY’s fourth most competitive country, the strongest gainers in terms of ranks were Asian countries such as Kazakhstan, which advanced 15 spots to 32nd place, and Mainland China, which improved by seven spots to reach 18th place. Nota bene, the most competitive country in the Middle East was the United Arab Emirates, which improved five positions to 10th place (Cyprus and Saudi Arabia were included for the first time, and could claim respectable positions in the lower middle ranks).

According to IMD World Competitiveness Center head Arturo Bris, upwardly mobile countries maintain business-friendly environments that encourage openness and productivity. He traced China’s improvement to the country’s dedication to international trade. If such examples show that improvements in competitiveness are perfectly achievable, the WCY also reveals what keeps countries stuck in the bottom: The WCY’s lowest ranks are largely occupied by countries experiencing political and economic upheaval. “You would expect to see countries such as Ukraine (60), Brazil (61) and Venezuela (63) here because you read about their political issues in the news. These issues are at the root of poor government efficiency, which diminishes their place in the rankings,” Bris was quoted as saying. Lebanon, sadly, is still not covered by the WCY, but the message fits perfectly.

Banking is such a constant in Lebanese existence that you can pretty much set your watch by its heartbeat. Of course this only looks effortless. In reality, there are a series of arduous and vital balancing acts in progress, primarily at the central bank and then one tier lower at the commercial banks. After all, the sector’s steady performance in the safe annual growth of assets and deposits is entwined with global realities of the most fragile political, monetary and economic sorts. This inconvenient and undeniable reality was underscored by the months-long hullabaloo over Banque du Liban (BDL) Governor Riad Salameh’s term extension, announced at the end of May. 

Another bone of contention is profitability and its implications. In 2015, there were questions over the banks’ taxation, in 2016 a moral legitimacy debate over the benefits that banks gained from the central bank’s financial engineering, and in 2017, again, the dispute over the proper role of banks in the financing of the national budget by way of the taxes they pay. This is not to mention earlier incarnations of the question over the banking sector’s role in the financing or exploitation of what can hardly be described as smart frugality in the Lebanese public administration.

For 25 years banks have fluctuated between rentier-economy style gains in the case of their profits from high-interest paying treasury bills in the 1990s, and their burdens, such as the zero-coupon bonds of 2002/2003 (issued in the wake of the Paris II donor conference), and the more recent debates mentioned above. Without going into any of these issues and regurgitating the many valid questions related to our peculiar financial market, one is inclined to conclude that the concentration of risks — both upside and downside ones — in the banking segment is a perennial feature of post-Taif Lebanon.

The industry’s hidden values

Besides its two main contributions to the national economy — the financing of our public and private sector deficits — there are additional facets to Lebanese banking and its role in society. These facets are varied as banks’ enhancement of consumer lifestyles, sponsorship of events, their charitable contributions, their sponsorship of Lebanese art and their role as job creators and employers. Of these societal functions, banking sector employment is the weightiest one, constituting an important structural pillar of national employee incomes and of the labor market.

The dimensions of the employment pillar are not very obvious, and indeed the labor market in its entirety is shrouded in a fog of data insecurity,  further obscured by partisan international lighthouses. Multilateral agencies and initiatives with their development agendas may illuminate the local labor market’s myriad problems and inefficiencies, but rarely offer any practical way forward. In recent years, internationally driven reports have highlighted high inequality in private sector income distribution, the statistically shrinking productivity of workers, rampant youth unemployment, the absence or inefficiency of social safety nets, and lower female participation in the national workforce.

Realistic hopes are hard to build from these reports, whether for regional job prospects or for Lebanon. For example, a 2015 report produced by the International Labour Organization’s (ILO) local office suggests (based on conclusions from somewhat questionable data on negative growth of productivity since 2000) that “types  of  employment  available  in  Lebanon  over the  past  two  decades  have  been,  on  average, of relatively low productivity, usually indicative of low-quality, low-paying jobs in informal activities.”

Two reports from 2017 are worth noting. First, the United Nations’ World Economic Situation and Prospects 2017 report, published in January and updated last month, stated that the recent weakening of Arab labor markets in the Gulf countries had negative impacts on employment prospects for regional job seekers. The report highlighted that, “armed conflicts have caused large-scale unemployment in Iraq, the Syrian Arab Republic and Yemen, and some negative spillover effects have been observed in the labor markets of Jordan, Lebanon and Turkey.” In conclusion, the UN claimed that “the labor market situation in the region is not expected to improve significantly in the next two years, with structural unemployment remaining high, particularly among youth, and a widespread lack of decent work.”

The second report, issued last month by the World Economic Forum (WEF) in collaboration with the social network LinkedIn, struck the same alarm bell on insufficient job generation, but added a new tone, referring to the “creative disruption triggered by the Fourth Industrial Revolution.” The report — published under the title, The Future of Jobs and Skills in the Middle East and North Africa — raised the notion that the impact of the Fourth Industrial Revolution “will interact with a range of additional socio-economic and demographic factors affecting the region,” creating what was labeled as challenge and opportunity for the MENA region’s workforce.

According to the WEF, data research by LinkedIn from the past five years showed top regional growth in the numbers of entrepreneurs but only single-digit increases in the finance and banking workforces. While the report offers the usual abundance of wise words and recommendations, adorned with statistics from MENA countries, it lacks useful labor statistics on Lebanon.    

Against this weary background, it is quite a different microeconomic picture that emerges when one examines employment data from the Lebanese banking sector. Granted, the banks’ collective productivity is attributable to only about 26,000 banking sector employees. This is only a fraction of the economically active population of circa 2.1 million, as estimated in 2009 by the Central Administration for Statistics, with more than 1.4 million formally employed and another 0.6 million in the informal economy.

If we consider that every high-quality job in Lebanon is an asset to the national fabric, and every newly created job of this sort expands that fabric — then the contribution of banks to the sphere of labor is impressive. The direct and indirect employment bill that comprises the salaries, allowances and social contributions paid by Lebanese banks totals some LL 1.8 trillion ($1.2 billion), equivalent to 2.5 percent of the GDP (2015 figures). According to the Association of Banks in Lebanon (ABL), the salary portion of this total reached 62.5 percent and the total cost paid by banks per average employee is LL 72.87 million (over $48,300) in 2015.   

Similarly, net job creation in the banking sector, which has stood at about 800 new hires per year for the last few years, can rightly be regarded as insufficient when compared with the estimated need for supplying university graduates with quality work — but it can also be taken as a blessing, especially when one considers that the banks’ gross hiring activity of fresh graduates is likely not limited to this net increase, but closer to absorbing 2,000 job seekers with bachelor’s degrees.

Gross hiring figures are not captured in the ABL annual report, but three of the largest banks tell Executive about their gross to net hiring ratios. “As banks we are doing our share of creating [employment] opportunities in the market. If I look at the past three to four years, the gross hiring at Bank Audi is more than 1,150. This is not a small amount,” says Nayiri Manoukian, head of human resources at Bank Audi Group. According to her, the group’s workforce in Lebanon comprises about 3,400 individuals; Manoukian explains that in 2016 alone, new hiring reached around 360, against perhaps 150 out migrations, leaving a net of 210 in added human capital.

At BLOM Bank Group, Head of Human Resources Pierre Abou Ezze says, “In terms of employment we have been growing at about 125 to 150 employees per year for the last five or six years at least, and we are anticipating that this trend will continue.” He adds that the bank hires about 250 new employees per year, in part to balance attrition of the workforce, and in part to satisfy demand for business development. “Our strategy is to aim for stable growth in operations, in terms of opening branches as well as in terms of developing business through existing branches,” he explains.

While the headcount at Byblos Bank was kept relatively constant in the first three years of the decade, new hiring has grown since 2014. “We hired around 100 people in 2014, then 134 persons in 2015, and 189 in 2016. In 2017 to date, we have hired 87, and expect for the full year to reach up to 200 new hires. This is new hires, not net growth of the workforce,” says Fadi Hayek, head of human resources. He puts the bank’s total employee turnover at around 6 percent per year, indicating that about 100-110 of its total national workforce of nearly 2,000 leave the bank per year. This number mainly includes job migrations, people retiring and a very small number of dismissals. “The net effect of hiring in 2015, in terms of human capital, was an increase of 25; in 2016 it was 84; in 2017 [we are] also expecting around 80 to 100,” he states.

Between them, these three large banks have about 7,500 employees in Lebanon, or very close to 30 percent of the total banking sector workforce. Although this number is not large in comparison with the national needs for employment generation, the role of banks in job creation gains even more weight when seen in the dimensions of empowering continued education of employees, developing career and social plans, as well as providing potential model functions to other corporate and institutional stakeholders in the labor market.

The human dimension

Workforce expansion strategies vary substantially from bank to bank. Hiring is correlated firstly to the addition of new branches, but also linked to adding and strengthening departments with new focuses, such as digitization or growth into SME and retail banking. Departments and specializations that saw disproportionately large additions of human capital, in the years since 2012, are compliance and control.

HR managers at the largest banks, and at some smaller ones, tell Executive of areas under their purview where automation is subduing the need for workforce expansion, such as in back office, archival and basic administrative roles. Overall, however, they confirm that banking jobs are safe, and that the increasing headcounts and creation of new positions has progressed hand-in-hand with the consistent increases in the assets, deposits and loan portfolios of Lebanese banks.

While it is mainly anecdotal information that fresh Lebanese university graduates and job seekers regard banking as a top employment choice — a survey this spring claimed to have found that 36 percent of respondents see banking as the most attractive industry for fresh graduates and that 39 percent see it as having the highest job security, but gave no information on sample size and methodology. Rabih Joumaa, head of the HR division at Banque Misr Liban (BML) says that he  would not be surprised by such findings. This is because in this country, where a great hunger for stability exists, banking is “the only industry that has been stable for many years,” he says.

Job security is indeed closely related to the issue of stability. Although the hospitality industry may have demand for several thousand extra workers at the start of a promising summer season, and the construction industry may hunt after new staff when the economy is on the upswing, these industries are also notorious for seasonality and layoffs during difficult times. By contrast, the statistics at individual banks point to slower hiring during some years but not to the kind of employee volatility found in many sectors that have greater demand for labor.

Historic shifts in the profiles of work at Lebanese banks commenced in the 1990s and were spearheaded by the larger banks. Under the adverse conditions of the Lebanese Civil War, academic qualifications for work in banks became a lesser concern than street smarts in facing daily challenges, such as safely making it home from the office, remembers BLOM’s Abou Ezze. At banks like BLOM and Audi the post-conflict period was the time when senior management embarked on upgrading their staff by looking for skilled knowledgeable workers, with at least a bachelor’s

degree, or even by taking in small cohorts of MBA holders. “When I was hired as a consultant [in 1995], it was the aim to introduce academic elements to training programs at the bank. The nineties saw [the] start of [an] era of human resources in Lebanese banks. That is when banks started to take care of their human capital element,” Abou Ezze explains. Today of course, a bachelor’s degree is the minimum entry requirement that bank recruiters posit.

Merits rule

Meritocracy is not what is usually associated with pathways of social advancement in Lebanon, but the principles of quality hiring and merit-based pay are emphasized by the banks, as opposed to assumptions that only elusive personal connections or specific communal allegiances open doors in bank employment. In the experience of some HR experts, such latter assumptions have, in recent years, gained even more traction among young job seekers. This is a problem, because as self-perpetuating misperceptions they can easily turn into artificial inner barriers that discourage people from applying. “The process of recruitment in the top ten banks is very developed. Banks have specific means that they use to recruit the best in the market through job fairs, internships, etcetra. They are making efforts so that the recruitment process is as accurate and objective as possible,” says Bassam Nammour, training and development manager at Credit Libanais.     

Rather than expecting ulterior motives in how banks recruit and promote their people, career-minded graduates, according to BML’s Joumaa, should be patient. “People should accept the idea [that they must] work hard, prove themselves and make effort in order to grow. It is not enough if fresh graduates would just do the minimum that is required in their job but expect quick promotions to become managers and immediately get what others got after 10 or 15 years of hard work,” he explains. 

Enmeshed with the issue of merit based promotion is the ever-thorny question of gender biases and gender-based pay gaps. Here the tenor of human resource specialists in the banks is uniform — discrimination based purely on gender terms is not an issue.

Women rising

Byblos’ Hayek states it categorically: “You will not find gender-based pay gaps in Lebanon in banks. In comparable positions such as among assistant branch managers or personal bankers, you find women earning more than men and vice-versa. Salaries depend on position and performance.” When doing an analysis of gender splits in different branches of Byblos Bank, such as rural versus urban locations or branches in regions with presumably more traditional views on the role of females, he found the reality ran opposite to common assumptions. According to him, several branch manager positions in places that are religiously conservative were in fact filled by women, and the gender mix in urban and rural branches was the same. 

“We never look whether it is a male or female when we promote anyone,” confirms Audi’s Manoukian. She points out that the rise of female employees is more than a passing phenomenon and today extends, if not yet to the very top of hierarchies, certainly to high echelons in the largest Lebanese bank. “We have a good number of females as middle managers and heads of departments. When it comes to branch managers, we are looking for males, as most [branch managers] are females,” she says. 

BLOM’s Abou Ezze says that the bank has, of late, seen a largely stable ratio of 51 percent female and 49 percent male employees in the strata of professional banking jobs (excluding clerical workers and manual laborers). “The ratio has not changed much in last few years. Twenty years ago the male workforce was dominating, but today female education levels and participation in workforce in Lebanon are higher. Families in Lebanon have need for both parents to work,” he concludes.

“In BML today, you can see that most branch managers are ladies, and if you want to headhunt a qualified one, you have to pay her what she deserves. I don’t see that pay based on gender is the case at all in the Lebanese banking sector today. Pay is based on knowhow, qualification and the market, which in my opinion today does not differentiate between men and women,” chimes in BML’s Joumaa. He adds that the bank also takes a positive view on future moms in the workplace. “We don’t mind at all to hire a pregnant woman. We had three cases in 2016/17 [of hiring pregnant women] where we were convinced that those ladies are very qualified and will provide extreme added value to the bank,” he says.

Staying realistic

It would still be presumptuous to claim that there are no glass ceilings, unjust promotions, communal biases or any sort of wasta or family-driven distortions in the composition of the banking sector’s workforce. This starts at the recruitment phase. HR managers on the one hand describe ideal recruitment practices as regarding applicants as unique individuals, and anonymizing bias-prone information such as the name of the university where an applicant earned his degree, but from the conversations with Executive it appears that it is a dominant practice to discriminate in favor of applicants from “reputed universities,” which in Lebanon firstly includes American University of Beirut (AUB), Lebanese American University (LAU), Ecole Superieure des Affaires (ESA) and Université Saint-Joseph (USJ). Upon further questioning, most HR heads confirm that their preferred lists include a variety of additional universities — especially praising the technical skills of graduates from the Lebanese University — but also caution that the high number of officially licensed tertiary education institutions in Lebanon does entail a portion of universitary entities whose teaching ability and program quality they doubt. 

In terms of career equality and job stresses, equality of opportunity and merit-based pay do not exclude differences in willingness to get ahead, nor do they provide female employees with the means to compensate for periods in which they may

focus on childbirth or child rearing. Simply said, gender pay gaps are a reality in Lebanon and likely will be for the foreseeable future. But as far as banking is concerned they are not based on the undervaluation of women’s contributions in the workplace.

As far as work-life balance is concerned, working in a bank is no easy job, and stresses — such as pressures to meet targets and produce sales results that will boost their bonuses — come to bear on all employees. According to BLOM’s Abou Ezze, work-life balance is a nice concept but he agrees that it is not fully compatible with ambitious career-mindedness. He says average work time per employee is 40 to 42 hours per week and admits that changes in working hours several years ago caused some employees to resign or opt for a transfer to the head office, where time flexibility is greater than in branches.

Average employees will not be pressured to put in extra work, but others have to make choices. “If you want to advance in your career and one day be part of top management, you have to put in more than the rest,” Abou Ezze confirms. This also results in proportionally greater male participation in BLOM’s program for high achievers,  as  younger women might find themselves unable to meet the program’s extensive time requirement if they want to prioritize their family for a period. He says: “People in that program are totally dedicated to their career. To differentiate yourself and justify being in that particular program, you first have to be a cut above [the rest] in your capabilities and second be a cut above in terms of commitment.” 

Also in Credit Libanais training head Nammour’s view, “Work-life balance is not about the bank being flexible, it’s about you as a person and how you can adapt to the bank’s schedule and be flexible within it.” On the other hand, this puts the onus on the bank. Rather than expecting traditional attitudes of employee loyalty, it should focus on proactively engaging employees. “The bank needs to let the employee feel engaged by providing the right environment, economic incentives and rewards, trainings, etc. If an employee is engaged, he will be more productive,” he says.

In the totality of remuneration issues — where still modest entry-level salaries are regulated by a collective agreement that is circulated in three languages by ABL and where pay scales for branch managers potentially reach into six-figure territory — and numerous career-related issues from trainings and continued education options (see story page 30), to the provision of clear career paths and employee evaluation procedures that keep up with international developments, Lebanese banks appear as trailblazers of practices that one might otherwise encounter in teaching manuals at Lebanese universities, but see rarely in such organized and coherent form in the bulk of private-sector enterprises. 

Thinking beyond retirement

Moreover, the banks’ engagement extends into another socially crucial dimension — adequate pension planning. “Bank Audi feels that it is part of its civil duty to help its employees after retirement,” says Manoukian. Although the current number of retiring Audi employees is still very low, planning for retirees is on top of her department’s to-do list. She explains that since the beginning of 2017, the bank has been working on a retirement and pension plan, in a collaboration between the HR department and the bank’s finance and organization divisions, and has also worked with an actuarial company for this project. “We have committed that by the middle of this year we should produce a proper proposal that can be presented to the bank’s executive [board] committee to see if it will be adopted.”

While she concedes that at some point in the future pension provisions might even become a legal obligation, she notes that it doesn’t help an employer to have no proper pension scheme or old-age insurance model enacted by the state. But besides the political aspects, she sees the problem in Lebanon as cultural, citing the fact that very few people ask insurers about pension plans or annuity products. “It is really a culture where people don’t plan for the future, and this is scary,” she says.

In order to avoid pitfalls such as eventual future liabilities, Bank Audi is seeking to develop a plan for its employees which — while preserving the bank’s existing benefits offered at retirement and not affecting end-of-service NSSF indemnities – makes sure that employees will have, at the very least, the comfort of health coverage after their retirement. She acknowledges that this project will demand a strong financial commitment from the bank but refuses to provide any projection on its estimated magnitude.   

“The bank has this culture of taking care of its employees, and it was with management acceptance that we went into the pension plan [project]. Otherwise [we] would not have done it. You cannot have such a big population and productive workforce, and their retirement is not properly secured. We especially want to have the basic need of medical care  covered at age 65 and above, when one needs it,” she assures.

There are provisions in the banking sector’s Collective Labor Agreement for 2016/17 that banks have to ensure for their employees “the right of continuity of hospitalization coverage insurance” after retirement, through a program called in bureaucratese Conversion Privilege Options (CPO). Seen in combination with the other benefits that working at a bank provides in Lebanon’s unstable labor and social security environment, it is noteworthy that such initiatives are actually being implemented (Credit Libanais’ Nammour claimed that the bank recently signed such a CPO agreement for all its 1,600 staff, and was ahead in the industry in this). It should indeed send a signal to other industries that expectations of increasing productivity from employees — vital for economic success — require much more than a CEO pep talk about the “happy work family.”

When venture capitalist Aileen Lee first employed the term “unicorn” to refer to startups valued at or above $1 billion, she intended to stress just how uncommon a creature she was describing. In a November 2013 post that spawned a Forbes list, Lee identified and analyzed 39 “US-based tech companies started since January 2003 and most recently valued at $1 billion by private or public markets.” While her lens was US-focused, that was fewer than four unicorns born per year, on average, during the 10 years under study. Even if she missed some in the wider world, the beasts have undeniably been breeding like rabbits since she named them. The tech and entrepreneurship news website CrunchBase’s unicorn roll included 229 of the horned wonders as of May 23 (more than five times the number Lee found when she went hunting less than four years ago).

At the moment, taxi-hailing app Careem is the only Arab company on the CrunchBase list, having earned the title in December 2016 after a $350 million funding round. At ArabNet in March, Christian Eid, Careem’s head of marketing, joked that the company was a “unicamel,” later explaining to Executive that growth and keeping customers and drivers happy were more important than milestones and mythical monikers.

Gone from the list as of mid-March, however, is the MENA-founded Souq.com. The site began as part of a larger web portal (Maktoob) and followed an e-Bay auction model. In 2009, proof of concept for this type of MENA entrepreneurship came when Yahoo! bought Maktoob (but not its sister sites, including Souq). At the time, the deal had a rumored value near $100 million, although in a disclosure to the US Securities and Exchange Commission (SEC), Yahoo! later revealed that it spent $168 million on Maktoob. The acquisition was a confidence booster for the ecosystems around the region, and after switching to an Amazon-style business model, Souq.com kept growing. In fact, on the heels of a $275 million funding round in February 2016 (eight months before Careem), Souq became the first Arab unicorn, at a time when it was being courted for purchase by Amazon. In March, the global e-commerce platform announced it had acquired Souq, without disclosing a price. Amazon refused to comment on press reports that the deal is far below $1 billion. (The magic number will eventually be revealed, as Amazon cannot decline comment to the SEC.) Like the Maktoob deal, however, a significant added value of this transaction is the confidence boost it brings.

While Arabian Business might have gone too far with the May 26 headline “Gulf e-commerce market seen exploding after Amazon entry” (and inadvertently frightened readers), venture capitalists in Beirut tell Executive that, regardless of size, the psychological impact of the purchase makes it a big deal at a time when ecosystems around the region are teeming with growth.

No shortage of money

Detailed data is hard to come by, but Magnitt, a Dubai-based regional platform for startups and investors, offers something by way of numbers, which are looking better and better in terms of the maturity of ecosystems. Unfortunately, the company follows the modern trend of publishing “reports” as flashy infographics as opposed to text-heavy tomes with annexed raw data. For example, Magnitt’s 2016 State of MENA Funding reports that both the total value of investments and average ticket sizes have shown strong growth between 2014 and 2016, but fails to define clearly in the report (or anywhere Executive could find on their website) what countries are included in MENA. That said, there is plenty more money on the way, although not specifically earmarked for MENA spending.

In October last year, Saudi Arabia announced a partnership with Japan’s SoftBank aimed at creating a $100 billion (yes, that is billion with a b) VC fund, with the Kingdom’s coffers contributing the first $45 billion. On May 21, the SoftBank Vision Fund announced commitments of $93 billion and plans to hit its target within six months. Five days later, Saudi Telecom Company announced it would soon launch a self-funded $500 million VC fund.

Waiting for disruption

One critique still raised about MENA entrepreneurship, at least by those in the Lebanese ecosystem, is the tendency to clone. Yahoo! wanted Maktoob because of its Arabic-language email service (translation is arguably not innovation). Souq.com and Careem are similarly tailoring winning ideas to local markets. This is not to say there is no innovation in MENA, or that ecosystems are not adding value to their home countries even if they are not pumping out unicorns. What is undeniable is the increase in activity, in terms of new startups forming (even if exact numbers are elusive), new VC funds operating, and new support infrastructure (by Magnitt’s count, in the undefined MENA there are today 31 accelerators and 27 incubators).

For Fadi Bizri, an active member of Lebanon’s entrepreneurship ecosystem for nearly a decade and today working with the local VC B&Y Venture Partners, recent good news in the regional startup space — from unicorns to a high-profile acquisition and a Gulf billionaire’s foray into ecommerce (see box above) — is creating a buzz that’s drawing welcome attention, both from international investors and local high-net-worth individuals and governments. If success breeds success, this is arguably an exciting time for MENA entrepreneurs.