Digital transactions ­— via websites or mobile applications — have become commonplace in everyday life. From shopping to booking a vacation, most tasks can be accomplished with just a few steps through an app — at least in more developed countries.

In Lebanon, those wishing to outsource such interactions to apps have fewer options, though this is beginning to change. With more apps and (functioning) websites on the market, consumers are now able to settle their phone bills or manage their bank accounts on their smart phones.

More recently, apps have begun to appear in the Lebanese food and beverage (F&B) industry. From booking a favorite restaurant online, to home delivery, to simply choosing which restaurant to dine out at, one can now easily satisfy a food craving with minimal human interaction.

From the world to Lebanon

As with many trends, online delivery and booking apps were common globally and regionally before penetrating the Lebanese market. For example, the online reservation platform Open Table was launched in the late 1990s in San Francisco. Talabat, an online delivery website and app, launched in Kuwait in 2005.

Despite Lebanon’s well-developed F&B industry, it took a little longer for these types of apps to make a mark here. Onlivery — an online delivery app — was one of the first F&B apps to be launched in the country in 2013, with others soon following suit.

By 2014, the market was more open to convenience apps, encouraging entrepreneurs to take the leap. “The first time I came back [to Lebanon] in 2011, I wanted to do it, but it was too early because no one had apps then. But now everyone has gone digital, even the banks have apps and everything, so I felt the appetite was there and it was the right time to launch,” says Aoni Ahdab, who launched Wizmates, another online delivery app, in 2017.   

Zomato, a restaurant search and discovery startup founded in India with a global reach of 23 countries, also saw potential for their app in Lebanon’s F&B industry. “It’s a small market compared to India and other markets, but it is [also] a very food-centric country, and eating is one of the main activities in Lebanon,” says Bechara Haddad, country manager of Zomato Lebanon, explaining that, for example, all of Portugal has around 12,000 F&B outlets while much smaller Lebanon has around 10,000. 

Homegrown versus international

Some of these apps, like Zomato, or Reserve Out, an online reservation platform launched in Amman by a Jordanian American, were active outside of Lebanon before entering the local market. Others, such as Wizmates or Onlivery, were developed in Lebanon, but inspired by successful international models.

In that sense, these app founders have not reinvented the wheel, they have simply tailored a global product to a Lebanese clientele. “We’re not innovative, but we proved the concept in a place where no one had before. We have a solid business model and growth plan because we know where we are going, and we know this is going to work because it’s been proven outside,” says Daniel Kofdrali, founder of Onlivery.

What’s in a buck?

Finding funding is challenging for tech entrepreneurs in Lebanon, so getting off the ground was not easy for these homegrown apps. “Funding in Lebanon is very hard [to get] and takes time, and this is why we are getting funded from Europe. In Lebanon, it can take six to nine months after your funding is approved [to get the money], and some startups can’t last that long,” says Kofdrali. He wishes that investors in Lebanon would be a bit more aggressive and a bit less traditional, and asks them to believe in the region, rather than wait for an international acquisition before they take interest.

Being part of a company with international reach has its perks. “Being part of a global startup is an advantage for us because we have faster access to funds. I know a lot of local startups who spent  their own money while waiting for the papers to be completed or for compliance issues in the banks to be sorted out and this affected their business and continuity. When we needed funds, we asked our HQ for them and it got done in a few days; our investor is basically Zomato HQ India,” says Haddad, explaining that Zomato Global was funded by Info Edge Limited, Sequoia Capital, VY Capital, and Temasek.

Starting at the very beginning

Even as banking and mobile top-up apps are being used more and more frequently by Lebanese consumers, there is still some reluctance to trust technology over good old-fashioned human contact.

In fact, most of the developers and founders Executive talked to mentioned changing consumer habits as a challenge they faced when they first entered the market. “In Lebanon, one of the issues we tackled is that some people don’t really trust technology and prefer to talk to a human. We tackled this issue through the push notifications that provide reassurance to customers that their order has been received and is being executed,” explains Wizmate’s Ahdab.

At first, Reserve Out also faced some difficulty in encouraging users to book tables online, but having a presence in the region helped. “In Lebanon, we have all kinds of customers. There are those that still prefer to call and reserve and those who prefer to book online. In Dubai, everybody is open to online booking and many prefer booking online, which is great because when they travel in the region, including Lebanon, they can use the app as well,” says Moussa Rida, country manager of Reserve Out Lebanon.

Kofdrali recalls struggling with restaurant operators when entering the Lebanese market. “It was very hard to convince the big players of its worth when we first started. They weren’t convinced that we were going to get them a large volume of orders, and they weren’t convinced that we would give them the kind of customer service that wouldn’t jeopardize their brand name, but we proved ourselves and paved the way for newcomers,” says Kofdrali proudly.

Warming up

Despite hesitance from older consumers, F&B apps in Lebanon found an almost immediate audience in the younger crowd. The app founders Executive spoke with say those between 18 and 35 years old readily welcomed their products.

For those who were still unsure, incentives have been used to pique their interest and convince them to at least try the app once. “Those who lived abroad, or who are tech savvy and familiar with this type of app, will use it without any prompting, and then you have those that are reluctant to use it. But what attracts those customers is the exclusive deals and offers that are only available through our app and the ability to order from restaurants that do not have delivery services,” explains Ahdab.

Other apps also use rewards to encourage engagement. Rida explains that users get a certain number of points once they download the app and gain points with each reservation. Once they reach a specific number of points, they can redeem them as money to pay for their meals.

Kofdrali says they invest heavily in marketing Onlivery, through campaigns and competitions to raise the app’s visibility among consumers. “It is a challenge to market this in Lebanon, and this is why we are happy there are other apps. Competition is good from a perspective of helping create awareness. Today we are reinvesting every dollar into marketing; if they [the other delivery apps] help me in marketing, this shortens the distance for [all of us],” he explains.

According to Kofdrali, once a user orders through Onlivery two or three times, they are hooked and become repeat users, Ahdab also says that 90 percent of Wizmates’ customers are repeat users. It seems that these little incentives have been key to creating new habits.

Making money

A few years into their operations, the F&B apps active in Lebanon all say they have profitable business models.

Reserve Out makes its money through a fixed fee it takes from participating restaurants on bookings, and from a table management software which it sells to restaurants. “Restaurants pay a monthly fee to utilize the Reserve Out reservations and table management system, which also includes all support, training and future software updates. We also charge a fee per reservation (depending on the number of people who reserved) if the reservation materializes: when the restaurant makes money, we make money,” says Rida explaining that both aspects of the business are profitable.

Zomato spent the first four months of operation in Lebanon getting restaurant menus, GPS coordinates, pictures, and phone numbers before going live, then the focus turned to increasing consumer engagement with reviews and photo uploads. Once they had enough users and traffic, they started to generate money. “We started as a restaurant directory, and once we gathered enough users and enough traffic, we were able to sell advertisement spots (on the platform) to restaurants to promote themselves. But the prices were proportional to the number of users we had back then. We review our prices and zones constantly, to adapt to market demand and zones’ web and app traffic,” explains Haddad.

Both Onlivery and Wizmates take a commission or percentage from each delivery made through their apps. Onlivery, which has started its own delivery fleet, takes an additional commission from restaurants that have subscribed to their service.

What the future holds

The size of the market in Lebanon could be limiting to app founders with big ambitions. “The market is small, so you can never make it big if you stay in Lebanon. But for us, we wanted to start from Lebanon because it is our home, and we believe in it and want this to be a Lebanese app. We have a plan to expand [outside of Lebanon] and are working on it very seriously,” says Wizmate’s Ahdab.

Regional player Reserve Out, which has reach across seven cities in the Middle East, also has further expansion in mind. Rida says that they have already signed an agreement with a big restaurant chain in Tokyo; Turkey and Egypt are also on their radar.

None of the F&B apps operating in Lebanon have completed their domestic expansion yet — all say they want to cover more areas across the country. “We want to expand in the Lebanese market as well, to areas which are beautiful but not as exposed online, such as in Sour or the north, where there are very good restaurants with little publicity. I would like to collect all these restaurants so they have coverage abroad and in Lebanon as well,” concludes Rida.

Besides having to dispatch their staff to rigorous regular training programs required under central bank stipulations, banks provide employees with a variety of opportunities to participate in continuous education. Training extends from honing soft skills to mandated skill checks, acquisition of professional certifications and pursuit of academic degrees. Executive spoke to five banks about how they approach the issue.     

Each of these banks provided Executive with similar figures, stating that their training budgets represent 1 or 2 percent of their payroll and reporting between 20 and 30 average annual training hours per employee. But the breadth of approaches, offerings, and perspectives on the benefits of training show that both job seekers and banks would do well to give training and educational support as much attention as their remuneration packages. 

Bank AUDI

Bank Audi’s training portfolio represents one of the most advanced and diverse educational support programs in the country. The long-standing employee qualification policy with regard to MBA degrees gives employees a chance to pursue a master’s degree in Lebanon or even at a university abroad. It is part of the policy to sponsor attainment of a master’s degree without regardless of the need for such a degree in the employee’s current position at the bank.

“Everybody has [an] equal opportunity to apply for a masters. The bank fully covers [the tuition cost] of any employee who would like to do a masters. Whereas other institutions might look [to see] if the [employee’s] position needs a masters, we don’t. We say that the person needs the masters and will give more [to the bank] afterwards,” says Nayiri Manoukian, head of human resources at Bank Audi.

Manoukian says that training and continuous education involve all of the bank’s departments, even under a tightened budget. She claims that an employee request to pursue further education might be deferred for one year if the budget does not allow for it immediately, but the bank’s HR department never says no to an educational pursuit, while possessing a clear preference for quality universities.

Bank Audi’s broader training for staff includes a laboratory where new hires can go through a sandbox-style simulation of branch environments; an in-house academy for employees, with required courses for aspirants to specific career positions; a corporate academy; two-day manager training on an annual basis; and its latest addition, a year-long advanced management program carried out in collaboration with the American University of Beirut.    

According to Manoukian, the depth of Bank Audi’s commitment is captured by the following numbers: The yearly training budget represents 2 percent of total HR expenses and 1 percent of total operating expenses, with employees logging between 110,000 and 115,000 training hours per year.

BLOM

“We encourage our employees to pursue higher education, mainly in Lebanon,” says Pierre Abou Ezze, head of human resources at BLOM Bank. He tells Executive that some 125 staff members of the bank’s 2,500 workforce are currently pursuing master’s degrees, and explains that BLOM finances these studies to 50 percent, 75 percent, or even 100 percent, with the extent of the sponsorship determined by the university’s international academic ranking.

Sponsorship is tied to a commitment to stay with the bank for five years after graduation, otherwise, all or part of the tuition has to be paid back to the bank. Tuition investment is amortized to 20 percent each year, meaning an employee who leaves after one year would be obliged to pay back 80 percent of the tuition, and after five years, would be free of degree-related obligations. On a broader level, Abou Ezze says that the average number of training hours per employee in 2016 was 23. He says that BLOM staff are a frequent target of headhunting by other banks, due to the bank’s provision of strong continued education. On the other hand, training also serves as a tool for winning employees’ loyalty. “The way we are trying to retain our employees is that we train them well and offer them competitive packages,” Abou Ezze says.   

BYBLOS Bank

At Byblos Bank Group, the practice of MBA sponsorship also exists, but on slightly different terms. According to head of human resources Fadi Hayek, the bank selects high achievers to participate in an MBA program at several well-reputed universities in Lebanon, such as AUB, Lebanese American University (LAU), Université Saint-Joseph (USJ) and Ecole Supérieure des Affaires (ESA). Between five and eight employees every year can pursue an MBA, and the bank covers their tuition up to 80 percent, with funding tied to work retention commitments and an amortization period of five years after completion of the MBA.

According to Hayek, Byblos Bank also selectively sponsors employees for qualifications such as Certified Public Accountant (CPA) or Chartered Financial Analyst (CFA) if these skills contribute to their fulfilling a job requirement. For example, someone working in the finance department might be approved for a sponsored CPA qualification program, while someone working at a branch might not. However, the bank does allow time for branch employees to pursue additional qualifications. Hayek says that the average annual training time per employee is 2.8 to three days (equivalent to 22-25 training hours per year).

Credit Libanais

Credit Libanais Training and Development Manager Bassam Nammour explains that the bank operates with a regimented [training] budget. The budget is set at the beginning of every year and divided into sections, including external, in-house and overseas training. It also entails provisions for career management training, a resource library and extras related to training. “We have an e-learning system that we developed [further] this year to also facilitate mobile learning and introduce the gamification concept to the learning atmosphere in general,” Nammour says.

Training hours at Credit Libanais are subdivided into several categories, such as classroom, e-learning, overseas and executive training. According to Nammour, the average number of training hours per employee is 40 to 50 per year, when including e-learning. Without e-learning, he says that the average training commitment stands between 20 and 30 hours. “We try to focus courses as much as we can — having 30 hours of focused training is much better than having 100 hours without focusing,” he adds.

He explains that Credit Libanais’ approach to financing master’s programs is different from that of other banks, driven by the observation that elsewhere around 40 percent of the sponsorship recipients move on from their bank within two years of graduation. “The point at Credit Libanais is that we don’t sponsor the education of employees, but we encourage it with an emphasis on certifications. Upon success, we pay employees the fees for the certifications. Concerning MBAs, we provide employees with loans at zero interest so that they can further their education,” Nammour says.

Banque Misr Liban

Banque Misr Liban is engaged in an expansion strategy. According to human resources head Rabih Joumaa, the bank’s growth is reflected in the increase in the number of employees, from 248 in 2011, to 359 as of the end of April 2017. In this context, the bank has sought to lower HR turnover and, as part of its strategy to retain employees, has massively expanded its training budget, which has more than tripled in each of the last few years. The number of training hours per employee grew 50 percent between 2015 and 2016. Employee feedback is incorporated into the design of training   in each department. The range of offerings includes team building activities and courses on leadership, communication skills, and business etiquette.

“Any employee can, at any time, contact HR and register to attend a training [course] under an automated process,” Joumaa explains, adding that the benefits of the bank’s availability of training enhances cultural buy-in, so that all employees share the same vision and speak the same language. “It made our task easier to enhance the culture and communication among the employees, and although we are an institution — not a family owned bank — the culture in the bank is like that of a family, with an open-door policy implemented by the executive general manager so that employees can discuss any concerns they have.”

In June 2017, there will be unprecedented room for emotion in banking. Lebanese financial markets could express a wide array of feelings — a mix of relief (at the stability of personnel), exasperation (at the inertia of political processes), doubt (in the ability of the body politic to ever deliver needed laws) and fear (over the impact of American hatred and global economic developments).

Reassurance comes from the numbers. According to a Bankdata review of top-tier bank performance issued at the end of May, banks with deposits of over $2 billion (Alpha group banks) saw “moderate activity growth” in the first quarter of 2017. Their consolidated assets increased 0.9 percent on the quarter and 7.5 percent on the year to $218.8 billion, with larger domestic than foreign activity growth.

Growth of consolidated deposits in Alpha banks likewise increased in quarterly and annual terms, at respective rates of 0.8 percent and 5.4 percent. Growth trajectories of domestic and foreign deposits diverged more than in the category of assets, Bankdata says, at a contraction of 1.3 percent in entities abroad versus a 1.2 percent expansion of domestic deposits (ironically attributed mainly to deposits in foreign currencies, which increased four times faster than deposits denominated in Lebanese Lira), resulting in increased dollarization. “Domestic FX deposit growth should be read in conjunction with double-digit growth in financial inflows, turning the deficit in the balance of payments to a net surplus,” Bankdata says.

With the arrival of the IFRS 9 rules still over six months away, both this new internationally-rated accounting methodology and the Basel III standards have already been internalized and mentally incorporated by Lebanese banks, some bankers opined in conversations with Executive. This leaves time for Alpha banks to proceed with business as usual, nurturing high liquidity (the ratio of primary liquid assets to deposits was at 37.1 percent at end-March), albeit juxtaposed with less-than stellar developments in loan portfolios. According to Bankdata, loans to the private sector retreated by 0.7 percent in the first quarter, but doubtful loan ratios stayed cool. Collective provisions rose to a record 1.6 percent of the Alpha banks’ net loan portfolio, which the consultancy attributes to banks’ compliance with the central bank’s Intermediary Circular No 446.      

Profit announcements came from BLOM Bank, whose general manager claimed top of the class with first-quarter profits of $112 million, edging perennial rival Bank Audi’s reported $110 million. On the whole, the year-on-year net profit growth of Alpha banks in the first quarter was reported as a “modest 1.7 percent.” Return on average assets dropped to 0.95 percent at end-March 2017, from 1 percent a year earlier, and the return on average equity declined from 11.07 percent to 10.14 percent, according to Bankdata, which interpreted the return ratio developments as indications of “the persistently tough operating conditions of Lebanese banks in Lebanon and in various foreign markets of presence, pressurizing both their yields and their efficiency metrics within the context of persistently low spreads and interest margins at large.

(Click on image to view full table)

“Part II of this legislation is coming”, US House of Representatives Foreign Affairs Committee Chairman Ed Royce said in his opening statement at a committee hearing entitled “Attacking Hezbollah’s Financial Network: Policy Options.” The United States alleges the Party of God is a global crime syndicate and has designated Hezbollah as a terrorist organization. The hearing, held June 8, comes on the heels of Lebanese media speculation that the United States was already drafting new legislation intended to strangle Hezbollah’s finances, rumors local government and banking officials downplayed Executive reported in the June print issue.

After weeks of media speculation, in May Lebanese officials moved to downplay the possibility that new American legislation would expand the scope of sanctions targeting Hezbollah’s finances. Rumors circulating in the Lebanese press since mid-April alleged that the US Congress was quickly drafting a new law that would tighten the noose on Hezbollah and its affiliates’ ability to use banks.

According to multiple sources from the Lebanese banking community, and from statements and media reports following trips to Washington by MPs and the Association of Banks in Lebanon (ABL), at the moment any talk of legislation is just that — talk. American officials, however, remain mum.

True or not?

While media reports may have jumped the gun on the prospect of imminent new legislation, there is no denying that there is a draft bill circling through the corridors of Washington D.C.

A senior official at Lebanon’s central bank told Executive that there “is a draft bill, and we all have copies of this draft. That is serious. What is not true is names. There are parties: Hezbollah, Amal and associates yes, but no names. There is no bill yet, but there is a draft of the bill.”

Returning from their trip to the United States, the ABL confirmed the existence of a draft bill and their opposition to it. In meetings with US officials from Congress, the State Department, the Treasury and the National Security Council, the ABL “made observations on the text of the proposed law and on the negative effects that may ensue and join Lebanon and banking activities in it. The delegation insisted that the current legislation in force is sufficient, thus eliminating the need for any new provisions that may leave inappropriate interpretations,” according to a May 22  press release.

The ABL has lobbied US officials and its American banking counterparts for years. According to disclosure documents compiled by opensecrets.org, a research group tracking money in US politics, from 2013 through April 2017 the ABL spent just over $3 million lobbying US officials on Lebanese banking concerns, including $1.8 million attempting to water down last year’s Hezbollah International Financing Prevention Act (HIFPA).

Lebanon’s Parliament dispatched its own delegation to Washington in mid-May. “Everyone is speaking in Lebanon as if there is a new US sanctions law targeting Lebanon that has been issued, and this is a big fallacy because it has not happened yet,” MP Yassin Jaber told al Joumhouria on May 23. According to Jaber, there was a committee in Congress drafting a bill, the draft was leaked, and the result was an explosion of rumors that reverberated through the Lebanese press. (Jaber did not respond to multiple requests for comment).

Abdul Hafiz Mansour, secretary general of the Special Investigation Commission (SIC) at the central bank, downplayed the possibility that the Americans will introduce new legislation targeting Hezbollah’s finances. He says local media “was [reporting] the news as if it were a fact that the United States was expanding the radius of its sanctions, or targeting individuals or parties.” Mansour dispelled these reports as unsubstantiated, though he did acknowledge that US authorities were discussing new legislation (or amending HIFPA), with the addendum that these talks had not yet reached serious levels.

Confidence in the toilet

The attempt by Lebanese officials to downplay the threat of new legislation is understandable. The mere talk of further sanctions has shaken faith in Lebanese banks, and local officials say any new legislation would crush confidence in the banking system, disrupting the country’s economy in the process.

Around 100 individuals and entities were sanctioned by the United States following the April 2016 implementation of HIFPA. The SIC, which acts as Lebanon’s financial intelligence unit (FIU), would not disclose the aggregate number of accounts that were closed, citing banking secrecy. But a senior international monetary official told Executive in December that the legislation probably had little effect on Hezbollah’s finances but had a large impact on confidence in the banking sector.

Regarding media reports about new American legislation, the head of compliance at one of Lebanon’s Alpha banks said that if the rumors of new sanctions  were true, the “impact would not be good, because we are talking about psychological effects.”

And the senior official at Lebanon’s central bank told Executive that a consequence of a new law could be de-risking, a unilateral severing of banking relations. “That’s the worst, the de-risking potential. And what really scares me is banks and central banks chickening out. When you’re hit with sanction after sanction they begin to ask, ‘Why should we do business with Lebanese banks?’”

Mansour told Executive a similar story, that following last year’s local implementation of HIFPA the number of accounts that local banks closed was not significant, but confidence was affected, adding that rumors of fresh legislation have reminded the banking community of this uncertainty. “There is conscientiousness from everybody because of the rumors, but it has not culminated into something like de-risking actions.”

AML framework fine, but…

Confidence in Lebanon’s banking system is a delicate thing. Mansour describes Lebanon’s anti-money laundering (AML) and counter-terrorism financing (CTF) framework as robust, and says that local banks are in full compliance with international standards, foreign legislation and national regulations.

However, to outside observers, it might be hard to recognize the integrity of Lebanon’s financial system and the rules that govern it. To them the core may be intact, but the rest of the apple looks rotten.

According to the 2016 Basel AML Index, compiled by the Basel Institute of Governance at the University of Basel, Lebanon is not doing so well when considering its AML/CTF rules in concert with its perceived corruption rating and the weakness of its judiciary. The Basel Index ranks Lebanon as second worst in the Middle East, behind only Iran, and 28th worst out of all 149 countries. The index measures “AML/CFT systems combined with structural and functional vulnerabilities, such as high rates of perceived corruption, weak judicial systems and inadequate financial sector standards.” Though it also states that, “it is important however to note that the fact that these countries are placed higher in the risk-rating category does not necessarily mean that they can automatically be considered as attractive destinations for money launderers. It only means that the country has a heightened vulnerability to money laundering due to shortcomings in their AML systems as assessed by international standards.”

To tackle these gaps, Lebanon created a ministerial portfolio to target corruption ­— but it is unclear what its objectives are or what, if anything, has been accomplished so far. The country is consistently perceived as corrupt, according to global watchdog Transparency International, and in early 2017 the International Commission of Jurists called on Lebanon to extensively reform its judiciary to ensure its full independence, concluding, “Measures must be taken to ensure that the judiciary is not subject to any form of undue influence by political actors and confessional communities, and that it is able to fulfill its responsibility to uphold the rule of law.”

What is US policy?

Stateside, talk of new legislation is seemingly less about money laundering concerns and more about politics. HIFPA is a continuation of the United States’ war on terrorism, an American policy that dates back to the Bush administration. Its passage was a consequence of the P5+1 nuclear agreement with Iran and the lifting of sanctions on the Islamic Republic. Those opposing the Iran deal feared the removal of sanctions would allow Iran to float more money and aid to Hezbollah and other proxies in the region.

The United States might be honing its pursuit of Hezbollah’s finances, after last year’s HIFPA law seemingly had little practical effect. According to SIC’s 2016 annual report, Lebanon’s FIU received 470 cases related to money laundering or terrorism financing, 107 of which were referred by foreign sources. This was only a small uptick in referred cases from 2015, despite Lebanese banks’ compliance last year with HIFPA and additional local regulations.

But Ibrahim Warde, an expert on terrorism financing at Tufts University, points out that there is not yet a clear strategy from the White House with regards to Middle East policy. “There’s a great deal of confusion within the administration, but one must also contend with Trump’s impulsive instincts,” Warde wrote to Executive in an email. The future of American policy may have been partially revealed during Trump’s visit to the region in mid-May. In a speech in Riyadh, the US president praised Gulf countries for “blocking funders from using their countries as a financial base for terror and for designating Hezbollah as a terrorist organization.”

In justifying the HIFPA legislation, the Americans alleged that Hezbollah is a key player in global narcotics trafficking and money laundering networks, charges that Hezbollah vehemently denied. According to the US State Department’s 2016 International Narcotics Control Strategy Report, Lebanon is among 65 nations considered a “jurisdiction of primary concern” for money laundering and financial crimes. In explaining this designation, the department noted, “Lebanon faces money laundering and terrorism financing challenges. Domestically, there is a black market for cigarettes, cars, counterfeit consumer goods, pirated software, CDs and DVDs.” However, the report notes that “the sale of these goods does not generate significant proceeds that are laundered through the formal banking system,” adding, “the domestic illicit narcotics trade is not a principal source of laundered proceeds.”

What the Americans might be attempting to do is influence Hezbollah by leveraging the banking sector. “This is the spirit of HIFPA and this is what [the Americans] want, but the outcome of this is very debatable. Regarding the effects of the sanctions imposed by the US on Hezbollah, some say they haven’t been affected, but that it’s affecting poor people of the [Shia] community. It may be putting pressure on some in the party to change their behavior,” says the commercial bank compliance chief.

Out on a wire

The recent reappointment of Riad Salameh as governor of the central bank might boost Lebanon’s ability to negotiate or head off proposed American legislation. But as the Trump administration’s Middle East policy evolves, particularly its effort to isolate Iran, Salameh alone cannot save Lebanon. Hezbollah has acted unilaterally in Syria’s civil war while the official stance of the Lebanese government continues to be one of disassociation. And along Lebanon’s southern border, Hezbollah continues to possess the means to threaten Israel.

There does seem to have been an acceptance on the Americans’ part that they should not disrupt the Lebanese economy by cutting off local banks from the global financial system. And the banking community’s message to US lawmakers, when related to Hezbollah, seems to be that if you cut off Lebanese banks, you give the country to Hezbollah and Iran. But there are different tactics at play. The United States is applying the bullying strategy: Do as we say, or else. Lebanon’s part is to roll over like a good little doggy: We know you don’t mean what you say, you’re nice and we’re nice so don’t confront us. But the notion that the Americans are not contemplating something serious is hard to buy, and the worry with Trump is that he seems willing to push the envelope further than previous administrations, and in unpredictable ways.

Where does that leave Lebanon? The banking system is the pillar of the economy, and so it begs the question of Lebanon’s political class: Is blowing up the country’s banking sector worth the price of resistance?

“Part II of this legislation is coming”, US House of Representatives Foreign Affairs Committee Chairman Ed Royce said in his opening statement at a committee hearing entitled “Attacking Hezbollah’s Financial Network: Policy Options.” The United States alleges the Party of God is a global crime syndicate and has designated Hezbollah as a terrorist organization. The hearing, held June 8, comes on the heels of Lebanese media speculation that the United States was already drafting new legislation intended to strangle Hezbollah’s finances, rumors local government and banking officials downplayed Executive reported in the June print issue.

According to its annual report, Lebanon’s financial intelligence unit, the Special Investigation Commission (SIC) at the central bank, received 470 cases related to money laundering or terrorism financing in 2016. This was only a small uptick in referred cases from 2015, despite Lebanese banks’ compliance last year with the United States’ Hezbollah International Financing Prevention Act (HIFPA) and new local regulations.

Local media outlets have been reporting since mid-April that the United States was close to expanding its legislative efforts to target Hezbollah’s finances, a rumor that the Secretary General of the SIC, Abdul Hafiz Mansour, says has been blown out of proportion. But while new legislation or amendments to HIFPA remain at the draft stage, media speculation alone has caused a spike of uncertainty and forced a rush to Washington by Lebanese officials in an effort to water down any expansion of regulations.

In an interview with Executive, Mansour dispelled rumors of new legislation and discussed compliance with international anti-money laundering standards, correspondent relations between local banks and their American partners, and the possibility for consolidation in the Lebanese banking sector due to the ever-rising costs of compliance.

E   There is much speculation in the Lebanese press about new legislation in the United States targeting Hezbollah’s finances. Executive reached out to spokespeople at the Treasury Department, the House Committee on Foreign Affairs, and the US Embassy in Lebanon … silence. This appears to be news that came exclusively from Lebanese sources. What insight can you share — is the United States drafting a new law, or is this an issue that has been blown out of proportion?

There were two teams that went to the United States recently: the Association of Lebanese Banks and the parliamentarians. Both arrived at the same point — there was nothing new. [On May 23] MP Yassin Jaber told al-Joumhouria that there was no new legislation, neither final nor at a serious stage of drafting. Mainly, the media was [reporting] the news as if it were a fact that the United States was expanding the radius of its sanctions, or targeting individuals or parties, while actually there was nothing.

We’re of the opinion that this doesn’t need to be addressed, as there is still nothing concrete, and until there is, I don’t think we should encourage the rumors that are circulating.

E   In an interview last year, you told Executive that Lebanon’s banks met anti-money laundering and counter-terrorism financing requirements. This includes the international standards set by the Financial Action Task Force (FATF) and the United States’ HIFPA. Has anything changed on that legal front?

Nothing has changed. Actually no new regulations, neither nationally nor internationally, have come into the picture this year. We’re continuing with the same regulations in force and doing the normal procedures to make sure all financial institutions are implementing the Lebanese regulations that were issued and complying with international standards to protect the interests of all.

We’re always following up on any new developments and requirements, and we’re passing the necessary regulations and enforcing them as needed. We believe we’re doing all it takes to be in compliance to protect the Lebanese banking sector, Lebanese individuals, and [the] national interest at large. This has been the stated policy all along, and I think that nobody contests that  the country’s interests come first. All our efforts and compliance enforcement fall under this banner.

E   There is a central bank regulation requiring each branch of a commercial bank to have a compliance officer. Are banks fully in compliance by hiring specifically for that role or are they assigning those duties to another employee?

The regulation doesn’t go to that extent. The banks either appoint someone from within the branch to do the job or they assign a new person or staff member to perform the duties. But this is a very advanced kind of arrangement that we have imposed, and it’s a very important step to make sure that with the clients there is always someone watching and making sure the procedures are applied. Of course, there are other layers within the banks, such as the central compliance office and internal audit, as well as external audit and the SIC, that all have different procedures of ensuring compliance. I think our system is quite rigorous in this regard.

E   Last year, when the United States implemented its HIFPA legislation, there was a wave of de-risking, with local banks closing accounts. Is there a concern today, with rumors of new American legislation, that there might be more de-risking?

The central bank has a regulation that requires banks to notify the SIC before closing an account along with the justifying reasons. We want to make sure that an action taken by a bank is proper and ensures the rights of its customers. I’m not worried that this is happening because if so [we would’ve heard about it]. We didn’t receive an exceptionally large number of [notifications of] accounts to be closed for whatever reason. It’s just business as usual. There is conscientiousness from everybody because of the rumors, but it has not culminated in to something like de-risking actions.

E   Last fall, the International Monetary Fund (IMF) published a survey of banks in the region. With regards to the closure of correspondent relations with American or European banks, the primary reason given was that there was a lack of profitability.

Yes, this was the principal cause, not de-risking Lebanon because of HIFPA. But de-risking is taking place in many areas of the world because of low compliance practices, weak regulations [and] weak jurisdictions that don’t have the right rules, regulations, and enforcement in place. Correspondent banks don’t like to expose themselves, so they de-risk countries, clients or classes of clients. This isn’t something limited to Lebanon.

So, when the IMF is referring to this practice, yes it’s an observed practice in many countries, and some of the reasons could be economic. Other reasons could be for compliance purposes, [whereby] the correspondent banks are visiting their corresponding banks in the countries in which they operate, and they are doing their own due diligence, examination and assessment of the compliance with anti-money laundering and counter-terrorism financing regimes in a certain jurisdiction. And, if they are not satisfied, they might consider it as a source of trouble and would start pulling out, or de-risking such businesses from their portfolios.

E   Do you foresee this becoming an issue for the smaller banks in Lebanon?

For economic reasons maybe, but smaller banks that are keen on maintaining a relationship might ask their correspondent banks why they want to stop the relationship. However good the procedures in the country and at the bank, sometimes a relationship cannot be maintained because of low profitability. These smaller banks – -— because they are keen on having direct correspondence banking relationships — are negotiating with [correspondent] banks to determine the minimum fees they need to generate from an account in order to maintain the relationship. Some are negotiating and paying that minimum to maintain the relationship, this happened last year and in the years before. But, for those smaller banks that do not want to do that either, they’ll solve their transactions through the bigger banks.

E   So small local banks can work through larger ones?

Yes, they can always do that, but then the large banks will be required to perform the due diligence, otherwise it would amount to nesting of a noncompliant relationship — a small bank would open an account with a larger bank, and the latter would be processing the transaction. The correspondent bank wouldn’t know that the transactions are for a third-party bank. It’s the responsibility of the larger local bank to do the due diligence and make sure the transactions are complying as if they are its own transactions and perform enhanced diligence to make sure everything falls into place.

E   Have the investments in IT solutions and Human Resources that were required in order to satisfy compliance requirements created pressure?

Banks need to have the necessary IT systems and procedures, and they need to have qualified staff to do the job. So yes, this definitely is an added cost that wasn’t part of the formula before.

E   Lower profitability in correspondent relations, combined with higher costs of compliance – do you think that might encourage consolidation?

There are merits to consolidation and that’s an added reason to consolidate. The smaller banks may find it advantageous sometimes to merge with one another, and the compliance requirements are an added reason. Because compliance is not a small cost of operation in any bank. You can see that the compliance function — the compliance staff and officers — at some of the larger banks, four or five years back, numbered less than 10, and now it has multiplied, perhaps many fold; that suggests to you the costs associated with compliance. The smaller banks, because there is a minimum of what needs to be done, may find the cost disadvantageous, but they can’t avoid it. So, that’s another reason that could push them to consolidate.

Finding yourself immersed among a gaggle of high-profile Lebanese bankers at a conference or social get-together can be a mildly frightening experience. When almost everyone in your vision is a banker or economist, what do you say to soften this phalanx of professionals? Which is the best buzzword to break the ice? The answer, personally tested in a meeting last month, is “corporate governance.” 

Dropping the term on the sidelines of a non-governance-related event at the Institute for Finance and Governance at the Ecole Superieure des Affaires (ESA) sparked an immediate conversation with a local banking consultant, who shared his experiences working in the provision of corporate governance (CG).

In the words of the World Bank Group’s International Finance Corporation, CG is “the structures and processes by which companies are directed and controlled.” Good corporate governance is important because it helps companies to operate more efficiently, mitigate risk, improve access to capital, be more accountable, and have the tools to respond to stakeholder concerns.

“Exchanges get involved in good governance work via the listing requirements they specify in order for companies to issue shares on their markets. The general idea is to protect shareholders against the information disadvantage they suffer, to be sure that management is always mindful of their best interests,” said Thomas Krantz, an activist and former chief executive of the World Federation of Exchanges. He offered this perspective on the importance of corporate governance in the context of securities exchange during a speech in late April at the American University of Beirut. The event was sponsored by the Beirut-based specialized consulting firm Capital Concept — a company chaired by Yasser Akkaoui, who is also general manager of Newsmedia, the publisher of Executive.

At the same event, five Lebanese banks signed on to a document called the Investors for Governance and Integrity (IGI) declaration. Per the declaration, they acknowledged their duty to act in the best long-term interest of their beneficiaries, stating, “We believe that corporate governance issues can affect the performance of investment portfolios,” and declaring good CG to be an essential factor “in mitigating financial risks and protecting shareholders’ rights.” With the signatures of the five new banks, the number of IGI signatories has doubled to ten, comprising seven local banks, two investment funds/firms and one regional association that represents 27 private equity firms. 

Rising standards 

Discussion of corporate governance has been on the rise in Lebanon. For several years before the April event, improved CG was trail blazed by some of the few banks listed on the Beirut Stock Exchange, along with eager consultants and the central bank. Adding to the sense that this is a timely and important issue for Lebanese banks was the arrival of corporate governance training for bank board members instigated last year by the central bank and accolades for a Lebanese bank’s CG in a London-based magazine. 

Moreover, recent ratings of Beirut Stock Exchange-listed companies show marked improvement in CG scores. The Governance and Integrity Ratings (GIR), issued by Capital Concept, saw ratings for six of ten listed stocks improve compared with a ratings exercise done two years ago. Except for marginal improvement by cement manufacturer Holcim, all the listed companies with an improved rating were banks. Three advanced by leaps and bounds (though the prior scores of all three were in the insufficient or outright failed range) and two others improved within their grade or by one notch. Of the four listed companies which did not, or barely, improved in the ratings, one is a bank, one a real estate developer ,and two are categorized as manufacturers or traders. 

Banks BLC, BEMO, and Bank of Beirut (BoB) saw the strongest improvement. As the top gainers, BoB and BEMO each jumped 50 points. BoB moved from a grade of F to a B-, and BEMO from a D- to B+ on the grade scale, which entails a total of five grades and 12 sub-grades. The third best improvement belonged to BLC, which added 31 points to its score and moved from an F to a C grade. Small gains from higher bases were achieved by Byblos Bank (three points, unchanged C+ grade) and BLOM Bank, which had an 11 point improvement and rose from a B+ to an A- grade, the highest of all listed companies. Two other listed companies of importance, Solidere and Bank Audi, seem not to have sought any improvement in their GIR scores. Bank Audi, given a B- grade under Capital Concept’s GIR methodology in 2015, received a minimally improved score and unchaged grade in 2017, and Solidere’s ranking, a D+, was likewise unchanged.

While the short history of the GIR ratings exercise does not constitute sufficient material to talk about trends or confirm sustainable increases in the corporate governance of Lebanese banks, it is notable that the average scores of banks shot up from less than 40 to 63 points, an increase of over 60 percent, to qualify for a B- grade.

Committing to better CG

The IGI signatories include publicly traded as well as unlisted banks. In the latter group are, in order of their signing, First National Bank, Jammal Trust Bank, BBAC Bank, Al-Mawarid Bank and FFA Private Bank. The listed signatories are BLOM and BEMO, the former having been the first bank to sign the IGI declaration and the latter a signatory from April 2017.

BLOM Bank issued a written statement about its CG commitments to Executive last month, just prior to the announcement of the 2017 GIR ratings by Capital Concept’s Akkaoui. In it, the bank said that it “continues to build on its strong corporate governance foundations.” CG measures mentioned in its statement included an update of its Corporate Governance Code in 2016 and several independent board members attending a training session on “Board Level Corporate Governance in Banks,” conducted in fall 2016 at ESA by Nestor Associates, a London-based CG consultancy. The training was held at the initiative of Banque du Liban, Lebanon’s central bank. BLOM added that more executive and independent board members are scheduled to attend similar training in 2017.

In a further note of interest for Lebanese CG practices, a London-based online publication and magazine called Ethical Boardroom declared its 2017 corporate governance winners for the Middle East in eight industry categories last month. Besides seven companies based in the Gulf region — the likes of SABIC, ZAIN, DP World and ALBA were among the winners — the awards contest declared one Lebanese bank to be the regional corporate governance champ in the financial services category: Bank Audi.

Independent and partisan sources both tell Executive that the process of organizing CG training for the board members of Lebanese banks was, and possibly still is, not without its opaque moments. At the same time it seems undeniable that CG standards at Lebanese banks — and, hopefully at other privately held or listed companies — are moving forward.

As CG advocate Krantz emphasized at the close of his Beirut speech, even regulated public markets are human endeavors, and as such are vulnerable to poor or improper behavior. “We simple humans need guidance in the form of regulation,” he said — which in a moderately better world is exactly what corporate governance is all about.

Pushing loans onto consumers has become the fashion among financial service providers — a fashion hardly more concerned with reason and logic than proposing the existence of prefabricated tears and holes around the knees of a new pair of jeans. But, while the latter insanity is only a serious detriment if you want to use your jeans for actual work, like laying bricks on a patio, the former can be ruinous for consumers, as banks push products that carry added risk by catering to advertising-induced, exaggerated, or otherwise non-existential needs. These products are nonetheless well embedded in the profit-seeking culture of contemporary consumerism, in Lebanon as elsewhere. But one Lebanese bank ­— specifically one that can claim to be rooted most deeply in the territory’s history, even before the founding of the Republic — is pursuing a path less trodden.

BSL Bank, which in various earlier phases of its history carried names from Ottoman Imperial Bank to Banque de Syrie et du Liban, has made waves in the market since the beginning of this year. It began by offering the unthinkable: a housing loan with an annual interest burden of practically zero percent. In spring, it followed with a personal loan that proposes an annual percentage rate (APR) of 10.62 percent. APR — which reflects real interest charges and other costs of a loan and is mandated by the central bank to appear in loan advertisements — is not an intuitive concept that lends itself to back-of-the-napkin computation by consumers, but it is easy to compare APRs under the simple rule that lower is better.

By this comparison, most personal loans in Lebanon have, in recent years, been priced at four or more percentage points above BSL’s new offering. According to BSL General Manager Elias Alouf, customers are not eligible for the loan if they are a foreigner (as per every bank in the country) or have too few zeros on their monthly paycheck (the floor for loan qualification is a monthly income equivalent to $2000 or $2,500 for the self-employed). Neither will the loan be approved if the cash is to be blown on a cruise, lavish celebration, high-priced image-boosting car, or some other conspicuous consumption extravaganza. 

At first, this array of lending conditions brings to mind a quote by 20th century American comedian Bob Hope, who famously said that “a bank was a place that will lend you money if you can prove that you don’t need it.” But, Alouf describes the BSL’s approach as a matter of practical prudence — the risks of a low earner defaulting on a loan are exponential when compared with mid-income families, he says. He portrays BSL as balanced between “agile and disciplined,” claiming that this is the bank’s strength. “Being simultaneously agile and disciplined makes a bank flexible and enables it to promote its products and services rapidly, but at the same time we will never forget the basics of banking,” he elaborates. This identity matrix appears to be topped off by classical societal principles, and perhaps, a dose of some patronizing behavior. “We really are orientating the bank toward helping the Lebanese to stay in Lebanon, buy their houses, and create their own business,” he explains.

Next, he lowers his voice to a conspiratorial whisper and apologizes in advance for uttering the “e” word. “Excuse me, this is ethical,” he says when explaining how BSL will not push its customers into borrowing for purposes of conspicuous consumption, leisure, or even the financing of big family events such as weddings and christenings. “These are things that should not be financed by banks. Bank financing is for necessities. For us, everything that is leisure, travel, etc., is not a necessity,” he says.

In his view, people should save if they want to go on a vacation, rather than overburden themselves with debt that can turn a two-week holiday into a years long commitment to loan installments. According to BSL, self-financing such enjoyments is the correct path and it will therefore always inquire of loan applicants their objectives for borrowing before deciding whether to approve the loan.

To entertain such a strategy, a lender has to be selective as well as self-restrictive, and operate on principles that at times are likely to get in the way of maximizing profit. “We don’t want to only be a profit-oriented bank,” Alouf says. “We want to contribute and help people as much as we can. When you look at the basic needs of the population, they need to buy a home, they may need a personal loan to renovate their apartment, they need to educate [their] children, insure retirement and that’s it. I will not finance a lifestyle.”

He acknowledges that this can be viewed as an attempt to change the mentality of Lebanon’s loan-happy consumers, but emphasizes that BSL does not aspire to move behavioral mountains in an instant. “We are a mid-sized bank, not one of the top banks, and we are not going to tell you that we are going to change the mentality of consumers. [But] people will always make comparisons, and they will see a bank that is not [goading] them to take loans, but instead is advising them in certain cases not to take a loan. It will have impact on the consumers, trust me. But not to a very large extent. It is a snowball effect,” he says.

Besides seeking to distinguish their lending through new retail products, Alouf and Youmna el-Khoury, business manager and head of marketing at BSL, tell Executive that the bank is preparing to roll out new digital strategies and new card services by the end of this year. “Consumers are overloaded with products and promises from everywhere. At the end of the day, if you don’t want to fight [over customers] with other banks, you need to find an innovative product for it to be accepted. By year end, BSL wants to be on par with all major banks in its product offerings,” Alouf says.

Khoury, who has banking in her blood as a member of BSL’s main shareholding family, joined the bank’s management team, at the same time as Alouf in June 2016. According to her, BSL is devoting new efforts into building both customer and employee relationships, in a process she estimates will take around three years. “We are starting today, in 2017, to acquire new clients, and we are also building on our relationships with our existing clients. We are also doing a lot of internal work to communicate with our employees and create this relationship because the best advocates of our brand are our client base and our employees,” she says.

As part of the bank’s digitization strategy, last year BSL began to invest substantially in its e-banking systems and online presence, commissioning an international provider for the development of a website that is scheduled to go live soon. Khoury envisions BSL as an interactive bank where physical branches function as digital banking nodes in which electronic knowledge of the consumer is stored. “I see it as the future where people would go into the branch — I’m not talking about eliminating the branch — and it would be a smart branch, [though] not in the sense of an automated branch as you see it today in some banks in Lebanon. When a customer steps in, the employees at the smart branch would know exactly who this customer is, if they have a loan and a need for a new car,” she explains.

Alouf admits that customers will not migrate to BSL if the bank only provides the same offerings as its many competitors in the Lebanese market. Besides rolling out a digital banking strategy and preparing new products on both the lending and savings side, he therefore aims to emphasize BSL’s historical competitive advantage: it was the first banking provider to arrive in some regions of Lebanon 70 years ago. This rootedness shows in BSL’s emphasis on what Alouf calls, “basic banking.” This stands in contrast to the recent growth strategies of some other expansionary banking franchises in the Lebanese market, which have more of a background in wealth and asset management or investment banking. Alouf concedes that BSL might consider adding asset management to its offerings later on, but plans today are to grow into the retail area on the asset and liability side. Relying on his more than 20 years of experience working with strategy, compliance, and international expansion projects at two large groups, Byblos Bank and Bank of Beirut, Alouf says that BSL is planning to pursue its growth domestically and organically, at least for the time being.

In its approach to the business segment, BSL is targeting the commercial middle market of established traders and manufacturers with financing needs of up to $1 million. It aims to serve these clients within its fundamental philosophy of prioritizing the client’s best interest as understood by the bank, even if this means advising a client engrossed with the good performance of his or her business against taking a loan for expansion. “In some cases, expansion carries a danger of reducing profit instead of increasing it, and a banker who notices that a commercial client is heading in such direction has to advise a customer against taking a loan to expand,” notes Alouf.

For the branch network, BSL applies a similar approach of deliberate moderation. Arguing that the current network of 18 branches is sufficient for a proximity banking approach in Lebanon, Alouf wants to expand the bank’s workforce from a current staff of 298 to about 325. He says he will make additional hires in the medium-term only if necessitated by employee departures or substantial increases in client numbers, but is not looking to increase the network by adding new branches in the next one to two years.

According to Alouf, the bank’s performance has advanced in terms of profitability, which before 2016 was below targets and trailed behind sector averages, but has seen notable growth beginning last year and a full-year profit growth of 7 percent in 2016. However, he adds that it was only at this level because exceptional gains had been recorded in 2015. “If you remove this exceptional component from profits and compare 2015 and 2016, we had more than 60 percent increase in operating income but on the bottom line it was a 7 percent increase,” he says.

The bank seeks to expand operational profitability and has had good responses to its new housing finance and personal loan offerings, he says, and expects growth this year to be “in the high double digits,” and to achieve core profitability ratios that are on par with Lebanese Alpha banks. While BSL has a high share of independents on its board (seven out of nine board members), the bank, according to Alouf, does not currently plan to go public.

It is not every day that a world-renowned economist touches down on Lebanese soil, but it should not surprise that such a formidable economist could deliver a presentation less than 24 hours after arriving in Beirut for the first time in his life. It might be expected that he would start with an exercise in affinity, by saying nice things about this country’s welcoming people and surprising allure. But, it was refreshing to meet an acclaimed economist who not only confesses to being no specialist on the local economy (only a fool would claim to understand the jungle that passes as Lebanon’s economy), but who has real expertise on the issues that matter in developing countries. Executive sat down with Peruvian economist Hernando de Soto Polar on the sidelines of an event organized by Banque BEMO at the Ecole Supérieure des Affaires.

E   What brings you to Beirut?

What brought me to Beirut was the invitation by Mr. [Riad] Obegi, and the fact that he told me, ‘Based on your kind of thinking, I’ve got a product that you’ve probably never heard of before, and that is my invention [see box page 56]. Why don’t you come and learn more about it, and at the same time, expose yourself [to the situation in Lebanon]?’ I said fine, and that’s what brought me here.

E  Lebanon is a very small country and there’s often a dichotomy between the local reality and the data and perspectives put forward by popular international economists, who only come for one or two short visits. I understand that you have done more than precursory research on Middle Eastern economies. Have you done any work on Lebanon?

Nothing.

E   So it’s virgin territory for you?

That’s one way of putting it. Total ignorance territory.

E   Knowing what one doesn’t know is a fortunate state of being. You have conducted extensive research  on the informal economy in developing countries, such as your native Peru. The informal economy in Lebanon is a very important part of the national equilibrium. How would it help to integrate into the formal economy a sector that’s barely recorded or taxed?

The advantage could be that you could do many things with your resources. You could work within a large-scale economy. Large-scale is [what was] behind the industrial revolution, and the advantage of this comes if you want to specialize and make combinations [such as products with multiple inputs or components]. Everything around us is the result of a combination, and if you’re in an economy where it’s clear what transactions can be made — because they are governed by laws — you can make much more complex products and fetch more surplus value. [People in the informal economy] aren’t taxed [on their incomes], but in my experience — in a measure that is confirmed in each country — they pay much more than the people who pay taxes.

E   How?

Many taxes are consumption taxes and not on income. Then, you have to pay direct bribes, and this is an irregular [cost] as opposed to a tax, which is set by law. The second thing is, of course, the humbling effect of a father telling his son, ‘We’ll go out and pay some little bribes. That’s the way life is, son.’ This is a very corrupting atmosphere. The other part is bribes that don’t look like bribes, like the amount of untruthful friendships that you keep up just to make sure that you are in touch with everybody. There are many ways of measuring this. For example, in a country like Peru, you have provincial industries, but 90 percent of the managers live in Lima, and not next to their factories, where they could help by supervising. This is true in practically every country that we have been to because it’s much more important to be close to [the] people in power, and make sure the law provides an advantage for you, than to actually supervise your factory. The idea about the formal economy is that it brings you all the advantages that you receive from the ability to have proof of your assets — to guarantee your credit or to pledge them against investments.

E    Financial inclusion and inequality are buzzwords of our time. What could banks contribute to achieving inclusion and overcoming inequality in a country with a very potent banking industry, like Lebanon?

They could do all sorts of things. The question is how many of them have the initiative of someone like Mr. Obegi and try to do something. In places like the United States, the banks haven’t done innovation. It’s been other forms of financing. I’m not sure that banks are in a position [to be innovative] because they tend to be conservative. If they do [participate in the financing of projects], they are in business, and if they don’t, they can be replaced, which is happening in many parts of the world.

E   In Lebanon, there is currently a debate over the validity of juxtaposing capital markets versus debt markets, because most of financing of the public sector and private sector economy is still done via banks and debt markets. Could an increase in capital market activity in a country be beneficial to the economy or would it make no difference?

What you mean by debt and capital markets is investments or loans that don’t come through banking. First of all, I believe in competition. I believe that taking initiatives [in new forms of finance] like Mr. Obegi’s is good, but if they don’t come from banking, they have to come from someplace else. If [this competition to banks] is not there, you have a huge black market with interest rates that go through the ceiling under the fictitious motive of getting to micro credit, which is extremely exploitative. I don’t believe in monopolies of any sort.

E   In one of your works, The Mystery Of Capital, you wrote that ‘The bell jar makes capitalism a private club open only to a privileged few and enrages the billions standing on the outside and looking in.’ Has your assessment changed in any way since you made this statement at the end of the last century?

Unfortunately, I don’t think so. The countries I’ve worked in may be a little more democratic, but [the development] has been too slow to stop terrorism and to stop feelings of inequality, frustration, learned helplessness, whatever you want to call it. My calculation is that people who are outside the bell jar make up 5 billion of the world’s 7.5 billion. When I talk of the 5 billion, I’m not talking about people like me, who can take whatever they want and combine it. The people who can combine things [into economic products] are only 2.5 billion. The other 5 billion are looking in from the outside and are angry like hell. To me, that was part of the [catalyst for] Arab Spring and all terrorist wars.

E   Proponents of contemporary capitalism say that to have 2.5 out of 7.5 billion included in the capitalist model is better than 1,500 or even 150 years ago, when only one out of every 100 people was included. As British economist Joan Robinson famously said in the 1960s, ‘The only thing worse than being exploited by capitalism is not being exploited by capitalism.’

I agree. I absolutely agree. Everything seems to indicate that between the time of Jesus Christ and just after the end of WWII we grew less than between the 1950s and today. The question is what’s politically viable, and we suddenly find that people voted in the United States either for Donald Trump or Bernie Sanders, who both said they want to stop globalization. I’m not criticizing the 2.5 billion. What I’m saying is that maybe we’ve arrived at a moment where the system might not hold unless you give some kind of outlook to the 5 billion who aren’t seeing the light. They’re starting to act up all over the place and go to the right or left [extreme] to topple the system. If that can be done is another story; the fact is that people are genuinely unhappy. The fact is that there is a rising mood on the left and the right against globalization. Let’s call it de-globalization. [In facing this trend], I think it’s a good idea to make the system much more inclusive.

E   We’ve just seen the renewed assertion of an alliance during President Trump’s visit to Saudi Arabia, which resulted in very large bilateral agreements. Do such collaborations between a key country in the Islamic realm and the United States, under a president considered by many to be anti-Islamic, mean that globalization is back on track, and we don’t need to worry anymore about anti-globalization politics in the US? 

I don’t have a view on what the significance of Mr. Trump’s visit is, among other things because we still have yet to find out if it will be a consistent [policy] over time. He seems to be a man who’s finding out that the world isn’t exactly the way he thought, as a result of which he’s improvising solutions at the moment. Some people would say what a practical politician he is, but I don’t think that we can actually see what’s really going to be the outcome of the new proposal because there is nothing in the background of Mr. Trump that you could’ve said would lead to this trip to Saudi Arabia. Obviously his government, or he himself, is still in the learning process, and we don’t have enough evidence to say whether this will look consistent and good. What is obvious is that he’s changing the game, and if his [previous] idea was to isolate the United States, he’s now getting the United States involved in a new war.

E   Are we heading into dangerous times in the global economic and political situation, or are we still proceeding in moderately risky scenarios as we have over the past few years?

In terms of dangers, I think the dangers started way before. I think that we’ve been in dangerous times since the West decided to intervene in Afghanistan [in 2001] in the way it did, since we went into Iraq [in 2003], and since [the financial crisis in] 2008.

E   This recalls sentiments voiced by other economists, who have been warning for some years now that we aren’t in a stable situation.

Yes, we’re off the charts now. That’s quite clear.

E    Do you see yourself in any specific school as an economist, such as behavioral economics, development economics, post-Keynesianism, or what have been called the saltwater (coastal) and freshwater (Chicago) schools in the United States? Do you identify with any of those?

No. At a certain moment of course in Peru, when I saw that people were working in the market, and the law was against the market, my position became very pro-market [with regards to] the countries I worked in. But, if I were a European or an American citizen, I wouldn’t necessarily take that view. [On the other hand], I can’t subscribe to the views of those who classify themselves as liberal in the European sense, or libertarian in the American sense. They assume in everything they talk about — on how to do markets, how you deal with bilateral trade, etc. — that the institutional revolution which occurred in Europe and in North America has also taken place in my part of the world. That’s a wrong perception. If they were [proposing] a system that is built on law and good contracts, copyrights and respect etc., why do they not think of those measures when it comes to a developing country? I don’t agree. I understand the compassion that the left has very strongly, but I don’t like their idea that the solution isn’t the market but the government. I think this is completely off-track. I find it difficult to fall into any specific classification.

E   Would you agree then to be called an undogmatic economist? You’re being hailed as a global influencer in economic thinking, so would that be an undogmatic version of economics? 

I like the word and am flattered. I’m flattered because I just haven’t found one place where to find the whole thing. If you look at The Mystery of Capital, my last chapter is called ‘The Ghost of Marx’ because I don’t think he’s exhausted.

E   In the philosophical or the economic sense?

In the philosophical sense, first of all because he has something over libertarians. By tendency, libertarians ignore the class phenomenon, and I don’t think you can see the big picture without classes. And the classes vary. The philosophical thinking of a great philosopher is helpful, but you have to avoid being captured by the last book you read. And you have to do what happens in revolutionary moments, which was said by the man who invented modern medicine in Britain, Thomas Sydenham, that ‘there is a moment when you have to close your books and open your eyes.’

Since appointing the National Commission on Parliamentary Electoral Law (the Fouad Boutros Commission) in 2005, Lebanese politicians have been “working” on an electoral law that employs proportional representation (PR), a system that allocates seats in Parliament based on the percentage of votes a candidate list receives. PR is more representative than a majoritarian or first-past-the-post voting system. In all past Lebanese elections, the list with the most votes won all the seats on offer, with their opponents getting nothing (even if a competing list received 49 percent of the vote). PR gives voice to that 49 percent and increases the chance for independent candidates to actually get elected. However, it undeniably threatens the established power structure. No surprise then, that after 13 years of studying how to best adopt a PR system for Lebanon, the law unveiled in mid-June introduces PR, but at the same time does its utmost to preserve the interests of the entrenched politico-communal establishment.

First and foremost, for PR to be truly effective, electoral districts must be large. The Lebanese Association for the Democratization of Elections (LADE) set a criteria of 20 seats per electoral district as an ideal standard in any new law. While Executive does not necessarily endorse 20 as a magic number, the laws of math do agree that larger districts lead to more plurality in a PR system than smaller districts. The law agreed last month comes nowhere close to the LADE proposal. While the 26 electoral districts used in the 2009 election have been reduced to 15, the largest of the new electoral districts has 13 seats and the smallest a mere five. Only six of the districts have 10 or more seats and six of the districts have seven or fewer seats.

Additionally, the threshold for a list to receive seats is not only different across the country, in most instances it is far too high for non-establishment candidates to actually stand a chance. A list needs 20 percent of the vote to qualify for a seat in the Saida-Jezzine electoral district. In all but four of 15 electoral districts, the threshold for a seat is 10 percent of the vote or higher. It is for the pundits to debate which political parties benefit most as a result of this uneven playing field, but fairness and equality are clear losers.

The work starts now

For all its flaws, however, this is the law we have to work with. Politicians gave themselves 11 months to crunch numbers and find the best strategies to cling to power. They’ve even legally allowed lists and individual candidates to spend millions of dollars per district on electioneering such as flying voters in from abroad (arguably unnecessary when expatriates are also given the right to vote in their country of residence).

The  coming campaign will be long (it’s clearly already started). It will no doubt be very dirty. There will be no shortage of sectarian rhetoric and fear mongering. While Lebanon might not have to fear online meddling and fake news peddling by Russian hackers aimed at influencing the election, there will be deliberate distortions of fact, attempts at voter manipulation, and outright lies — all homegrown and apart from the interference of well-known foreign meddlers which have tried to manipulate every election of the past 25 years.

For two decades Executive has been reporting on and analyzing the economic pulse in this country. There’s no denying that Lebanon is much improved compared to 20 years ago. However, the pace of that improvement has been woefully slow, and far too many promises remain unkept (affordable housing, 24-hour electricity and fast internet, to name a few). The upcoming parliamentary elections offer an opportunity to reverse this momentum, and individual voters have an important role to play in achieving that goal.

While this magazine’s archives are filled with evidence that the country has been very badly mismanaged, it is not our place to suggest for whom readers vote. What we demand, however, is that they think critically. Democratic politics the world over have arguably become (or at least heavily gravitated toward) beauty contests filled with meaningless sound bites. Promises without detailed action plans.

In the articles that follow, we offer a detailed explanation of the new electoral law to help readers understand a somewhat confusing system. Our goal is to inform, and we promise to do our best to hold candidates’ feet to the fire in the coming 10 months. We’ll ask tough questions and won’t be afraid to identify bullshit as such when we smell it. We challenge our readers to do the same whenever and wherever they encounter candidates trying to woo them. Even if this law does not result in a massive shakeup of the parties represented in Parliament, the more we can all steer the discussion over the next few months toward practical ways to improve this country and away from emptiness and vitriol, the better the chance we can build a stronger Lebanon post-election regardless of who wins.

While some of the terminology is the same, in 2018 Lebanon will have an electoral system unlike anything it has ever seen. The new electoral law, approved by Parliament in June, features changes to electoral districts and introduces two new components: proportional representation (PR) and preferential voting. It is certainly more complicated than the electoral systems used in the past, but Executive has prepared a guide to help readers understand both how to cast ballots and how their votes will be counted.

New districts

For administrative purposes, Lebanon is divided into governorates (mohafazat) and districts (kadat). Traditionally, each administrative district has also been an electoral district. In 2009, there were only a few exceptions (Baalbek and Hermel were merged into one electoral district, as were Miniyeh-Danniyeh, West Bekaa-Rashaya, and Marjayoun-Hasbaya).

In 2018, the electoral map will not be drastically different. While the previous 26 electoral districts have been reduced to just 15, the number and sectarian division of seats remains largely unchanged. This means that those electoral districts that have been combined retain the number of seats and the divisions they had in 2009. For example, Bcharre, Batroun, Koura, and Zgharta combined become one electoral district with 10 seats, seven Maronite; three Greek Orthodox. Six of the 2009 electoral districts reappear unchanged.

Beirut underwent the biggest makeover. The city was divided into three electoral districts in 2009. In 2018, it will be two electoral districts. The district known in 2009 as Beirut 2 is gone, with the Medawr neighborhood (see map) now merged with 2009’s Beirut 1 (Ashrafieh, Saifi, Rmeil). The Port (Marfaa) and Bachoura neighborhoods are now part of the remainder of the city in 2018’s new Beirut 2. The city’s upcoming electoral division quite nearly mirrors the so-called “green line” of the civil war. The former Beirut 2’s two Armenian Catholic seats went to Beirut 1, as did the evangelical seat representing Beirut 3 in 2009. Beirut 2’s one Sunni and one Shiite seats each remain in 2018’s Beirut 2.

The lists

In past Lebanese elections, political parties would strike alliances to form lists of candidates in an electoral district. However, there were no pre-printed ballots at voting stations. What this means is voters either entered the polling stations with party-printed lists to place in their voting envelopes, lists they wrote at home (i.e., creating their own lists by choosing their favorite candidates among the competing lists) or nothing, using the blank pieces of paper and pens in the voting booth to handwrite a list of their chosen candidates. The electoral list was a marketing concept, not a legal requirement. Candidates were free to register and run in a constituency even if they were not part of a list, and voters could mix and match among the lists. However, election results proved that most voters opted to choose entire lists. Many argue that this often led to unfair results as a result of close elections (i.e., a list that garnered 51 percent of the votes saw all of its candidates elected, while candidates who attracted 49 percent of voters got nothing).   

Under the new law, lists will be legally set in stone (meaning no more mixing and matching and no more individual candidates), and voters will be handed pre-printed ballots by electoral officials when they enter a polling station. There is no limit for the number of lists that can run in an electoral district, however, there are some rules. Lists can be either complete or incomplete, meaning if an electoral district has 10 seats, the list can either have 10 candidates (a complete list) or fewer (an incomplete list). An incomplete list, however, cannot be a one-person show. Any incomplete list must have at least three candidates or more, up to a minimum of 40 percent of the seats in an electoral district, and — in electoral units comprised of more than one administrative district — one candidate from each kada.

Proportional representation

The new electoral law also introduces proportional representation, an attempt to better represent voters. Tallying the votes and determining how many seats each list will receive is a three-part process. First, all votes cast in an electoral district are counted and then divided by the number of seats to reach an “electoral quotient” (i.e., 100,000 votes cast in a 10-seat electoral district means 10,000 votes is the electoral quotient). Second, the number of votes for each list will be measured against the quotient, and lists below the quotient will be disqualified (in our example, even a list with 9,999 votes wouldn’t make the cut). Third, once lists below the quotient are disqualified, the votes from those lists are subtracted from the overall total of ballots cast and the quotient re-tabulated with seats then distributed to the lists based on the new quotient (see sample ballot).

When allocating seats based on the quotient, the math typically won’t produce “round” numbers (i.e., a list will be allocated 3.567 seats, for example). To handle remainders, lists are first allocated their whole number of seats and the list or lists with the largest remainders get any remaining seats (in a 10-seat district, imagine List 1 gets 4.921 seats; List 2 gets 3.896 seats and List 3 gets 1.895 seats, the final allocation will be: List 1: five seats; List 2: four seats and List 3: one seat).

Voting systems vary across the world, and there’s no absolute best practice for determining an electoral quotient (or threshold) in a PR voting system. In some countries that use party list systems, a percentage of total votes cast is used (i.e., any list with more than X percent of the vote gets at least one seat, with more popular lists getting more seats). This percentage can be high — 10 or 20 percent — which disfavors parties/candidates with limited popularity. It can also be low — 5 percent — to favor the inclusion of less popular parties/candidates. Lebanon’s chosen method of calculation results in varied threshold percentages across the country (i.e., seat distribution is not well-aligned with population distribution, at least according to the imperfect lists of registered voters, meaning that some electoral districts have “more” seats than others based on the comparative populations — see chart).

Preferential votes

The new law also introduces preferential voting, meaning voters can choose their favorite candidate on the list they vote for (provided the candidate is running in the cada where the voter is registered). It’s as if voters get to as vote twice, first for a full list of candidates representing the entire district and second for a specific candidate representing the cada in which the voter is registered. For example, the new electoral district of Batroun-Bcharre-Koura-Zgharta has 10 seats, so the district will see lists with between 4 and 10 candidates. Once a voter has chosen a list representing the entire district, he or she then chooses a favorite candidate from his or her cada (i.e., voters registered in Koura can only cast a preferential vote for candidates running in Koura).

Once all lists passing the threshold have been identified and allocated their number of seats, the job of actually filling the seats comes down to the preferential votes. This, again, involves some math. To seat candidates, they are ranked in order of their popularity (calculated by dividing the number of preferential votes received by the total votes cast in each administrative district (kada), not the wider electoral district). Candidates are then ranked based on these percentages and allocated seats. Because seats are still allocated to religious communities, this does not necessarily mean that the most popular candidates on a list will actually get elected (see sample ballot). If there were no seat allocations for religious communities, the strongest candidates on each list allocated seats would win. Community allocations complicate that, however. Imagine a constituency with two Sunni seats and three lists. List 1 received the most total votes and has the most popular Sunni overall (i.e., the Sunni with the most preferential votes from his or her kada). List 2 received the second-most total votes, and one of its Sunni candidates received the second-most preferential votes. List 3, meanwhile, received the least number of votes, yet the list’s most popular candidate is a Sunni (i.e., one of the list’s Sunni candidates received more preferential votes than any other candidate on list 3). List 3’s star Sunni is guaranteed to lose because the two more popular Sunnis will get the seats first, and all other Sunni candidates will be disqualified once the two Sunni seats are filled.     

An uphill climb

Civil society organizations have long called for proportional representation as a means to wrest some power from the country’s established political parties. This law certainly gives newcomers a better chance at getting elected than all previous electoral laws. However, it arguably is written in a way to decrease that chance as much as possible (see leader). While this law is unlikely to result in drastic changes to the parties and interests filling the seats of Parliament, it offers those hoping to challenge, the establishment a fighting chance.

For the first time since the onset of the war in Syria, there is finally positive news coming from Lebanon’s hospitality sector.

The election of a president and the formation of a government in late 2016, and the lack of major security incidents in Greater Beirut since the second half of 2015, have given Lebanon the stability it needs to be seen as a safe destination once again.

This has had an almost immediate impact on the hospitality sector. Instead of lamenting dwindling tourist numbers and empty hotel rooms, the five star hoteliers interviewed by Executive were only too happy to talk about increased revenues and high occupancy rates (see article page 30). This trend is expected to continue through summer 2017, despite the recent crisis in relations between Qatar and the other GCC countries.

The tourism sector sorely needs a good season. If expectations hold up and summer 2017 is a success, the industry will breathe a collective sigh of relief.

However, the experience of the last five years should not be forgotten in the excitement over one good season. We have seen already what an over-reliance on one segment of the tourism market can do.

Lebanon previously built its tourism strategy on the conventional luxury model, catering mainly to Gulf nationals with a preference for high-end dining and clubbing, executive suites and shopping sprees. When that market began to dry up in 2012, it dragged the Lebanese tourism industry with it.

It took almost three years for the Lebanese hospitality sector to get over the shock of losing this luxury tourism market. Slowly but surely, the industry pulled itself to its feet, dusted itself off, and started assessing ways to revive the sector.

As a tourist destination, Lebanon has much to offer beyond wining and dining in the capital. With the absence of Gulf nationals, the main consumers of this luxury tourism, alternative options were scrutinized and developed at a national level.

Aided by social media accounts such as Live Love Lebanon, and propelled largely by the local market, rural tourism flourished, and staycations in guesthouses became more popular (see article page 50). In 2015, the Ministry of Tourism adopted a national rural tourism strategy in partnership with USAID.

Religious and cultural tourism have also been further developed, beginning  with the placement of our Lady of Mantra on the International Religious Tourism Map. In May 2017, a $328,000 grant from the Italian Cooperation Office helped to further promote religious tourism through the creation of a coffee table book that maps out of all the religious tourism sites in Lebanon (see article page 40).

These are solid initiatives with the potential to diversify Lebanese tourism and attract new markets. It would be a shame to let them languish in the summer heat simply because we have not learnt our lesson from the past five years.

We should keep these initiatives in mind and continue to work on strategies to develop them, while welcoming what the upcoming season will bring in terms of conventional tourism. Only by working continuously to diversify Lebanon’s tourism portfolio can we hope to achieve a sustainable and economically profitable hospitality sector — one which can withstand whatever is thrown its way. 

The holy month of Ramadan is traditionally a slow one for tourism in the Arab region, and the hot streets of Beirut have been somewhat subdued this June. But among those in the hospitality sector, the sense of expectation and excitement for a busy July and August is so palpable one can almost taste it.

For the past six years, tourism in Lebanon has suffered from local insecurity and regional instability, which have caused the number of tourist arrivals drop from 2.17 million in 2010 — considered one of the golden years for tourism in Lebanon — to 1.5 million in 2015, though a tourist bump at the tail end of 2016 brought numbers back up to 1.7 million.

But with internal security now more or less under control, there are solid indications that summer 2017 will see a significant improvement in terms of tourism — albeit not at the levels of summer 2009 or 2010. 

Back in business

With a new president and government in late 2016, the Lebanese hospitality sector finally saw progress on the internal instability it has blamed for sluggish tourism these past six years.

Indeed, tourism numbers from December 2016 to date reflect a sector starting to get its wings back. According to EY’s Middle East Hotel Benchmark Survey report, room occupancy rates at Lebanon’s five star hotels during December 2016 were at 64 percent, the highest they have been for that month since 2010.

Hotels Executive spoke to noted this uptick as of December last year. “Things started improving in the last quarter of 2016, and that improvement continued over to the first quarter of 2017. So from January 2017 until end of May 2017, we have been way above last year and way above our expectations for this year as well,” says Ramzi Sayess, regional vice president and general manager of the Four Seasons Hotel Beirut.

A bright beginning

This positive momentum has spilled over, with many hotels saying occupancy has been markedly better so far this year.

The Phoenicia Hotel has already added several million dollars in revenue year-on-year from 2016, despite 2016 being “a not bad year all in all,” according to Peter Edholm, cluster director of sales and marketing at Le Vendome and Phoenicia Intercontinental Hotels & Resorts.

Le Gray also started 2017 on a positive note. “The first quarter of 2017 was definitely better than same time last year. We’ve witnessed an increase in occupancy of 18 to 22 percent from first quarter 2016. The first quarter 2017 was positively influenced by the election of the president and the improving security conditions in the country,” explains George Ojeil, general manager of Le Gray Lebanon.

O Monot, a luxury boutique hotel in Ashrafieh, saw a 158 percent increase in room revenue year-on-year from June 2016, according to Michel Boulad, the hotel’s director of sales and marketing. While the Four Seasons’ Sayess says comparing 2017 to 2016 is like comparing day and night, and that the results for the first quarter 2017 are almost double what they were last year.

The newfound sense of security and safety in the country seems to have played the biggest role in these results. “The improvement is because the whole country is now deemed to be safe, as we saw at the Arabian Travel Market (ATM), the perception of Lebanon in terms of the security situation among visitors is changing,” says Boulad.

Sayess notes that it was Egyptian tourists who increased room occupancy at the Four Seasons, both as corporate travelers and as leisure groups. “We had a lot of social groups and weddings from Jordan, Syria, and Egypt … we also had big corporate accounts from Egypt that came to Lebanon for the first time. I assume they used to go to other places such as the GCC or Turkey, and now they’ve shifted to us,” he says.

Phoenicia’s Edholm also notes the positive trend of increased Egyptian leisure and corporate guests in 2016, but cautions that Lebanon might see less of them this summer due to the challenges facing the Egyptian pound.

Take back the gulf

The successful first half of 2017 has brought optimism and positive energy to preparations for the summer season, which effectively started after Eid el Fitr.

Prior to 2012, summers in Lebanon were full of GCC nationals escaping the desert heat in favor of a milder climate, but security incidents over the past six years have caused their visits to dwindle to next to nothing as a result of travel warnings and restrictions.

Hoteliers Executive spoke to are hoping to regain those tourists. “I think with the Gulf markets we’ll for sure recover [from a potential decrease in Egyptian tourists], and add even more. The ban is more or less lifted, although some Gulf countries have more restrictions than others,” says Edholm.

The Gulf countries are Lebanon’s most logical tourists, Pierre Achkar, head of the Syndicate of Hotel Owners, explains. “Across the globe, the best tourists for your country are your neighbors because of the proximity between you means [a] short travel time. Therefore, the Gulf — which is between two to three hours away by plane — has historically constituted the biggest percentage of visitors to Lebanon, and they would come more than once a year and even had investments in the country,” he says.

Ojeil explains that Lebanon holds a unique appeal for GCC nationals, which makes re-attracting them easier. “We don’t need a great effort, if they give us security and safety, it’s enough. In Lebanon, you can live the European experience while speaking Arabic, and this is what the GCC nationals like. They’re always welcomed in Lebanon. We know their habits and can cater to them, and we know the royal families and how to deal with them,” he explains.   

Hotel sales teams have been touring the region ahead of the summer season, promoting Lebanon properties  to tour operators and agents in the GCC. “We worked very actively with our worldwide sales and the regional office, and our sales team was traveling the globe up until two weeks ago. They either targeted new contacts, or touched base with existing ones. But really, the number one goal is to let people know Lebanon is safe, it’s a great place and it has a lot to offer,” explains Sayess.

For O Monot, now in its second year of operation, the GCC is an untapped market which they are exploring for the first time this year through their participation in ATM and other events. “We didn’t go last year because it didn’t make sense to approach the Gulf market when there was a travel ban. Now, they are trusting Lebanon as a destination again, which is what I heard from several airlines that are increasing their flights to Lebanon. So there is much more demand in the country and at the end [of the day] these tourists need hotels. So our expectations are that much [higher] for the summer,” says Boulad, citing Kuwait Airlines, which has scheduled 14 flights per week to Lebanon this summer.

Don’t forget the expats

While the hospitality sector’s efforts may be focused on GCC nationals, they are still keeping their eye on Lebanese expats who may be eager to visit their homeland, now that calm prevails and the garbage is off the streets.

The Phoenicia is predicting that expats who had delayed their visits to Lebanon may choose to come this summer. “Who comes first when a destination comes back? It’s those who are familiar with it, for example, the Lebanese diaspora, and we are seeing a trend there. Maybe they previously postponed their trip due to the garbage crisis or conflicts, but they can’t postpone forever, and now is the time to come back,” says Edholm, predicting that there is going to be an increase in visits to Lebanon from Lebanese expats in South America and Africa.

For O Monot, focusing on attracting GCC nationals and expats makes more sense during this period than working on new markets. “For the moment, our main focus is on reviving the local market of business travelers and that of leisure travelers from the Gulf. Now is not the best time to look at new markets because we can already get a lot from what is available, but which was not accessible to us for a very long time,” explains Boulad.

All are welcome

Gulf tourists and expats are not the only ones visiting Lebanon this summer. The hoteliers interviewed say interest from Europe and America has increased so far this year — and hope that it will continue in the summer.

Speaking for Le Gray, Ojeil says that although they have been making an additional effort to promote the hotel in the GCC region, it is against the hotel’s policy to focus on one market feeder. He explains that they have had more international journalists as guests than they did previously. “Our strategy doesn’t focus on one main market. We’re actually receiving a lot of journalists from many parts of the world, such as the US, Latin America, and Europe, who are reaching out to us to write about the hospitality market in Lebanon,” he says.

The mix of European and Gulf tourists is interesting for a hotel, explains the Four Seasons’ Sayess. “We have bookings from the GCC, from Europe, and from expat Lebanese who come for the holidays. People coming from the Gulf are looking for different accommodation than people coming from Europe — it’s nice to have this balance. You have more suite business for the Gulf tourists and more room business from Europe, but sometimes that can change as well,” he adds.

Exercise cautious optimism

Optimism for a successful summer 2017 is indeed high. Many hotels were already fully booked for the week of Eid el Fitr and are experiencing high demand for July and August, although bookings in the region are usually made last minute. “In this part of the world, we don’t book many months ahead as they do in Europe. In some part, it’s because of the security situation and what is happening in the region, so people fear planning their trip ahead, and then we, in this part of the world, are not planners. It’s always last minute in this region,” explains Le Grey’s Ojeil.

However, no one in the hospitality sector is blind to the fact that the situation both locally and regionally is very different than it was in 2010. Their optimism is mixed with a healthy dose of caution.

To begin with, the Gulf region itself has changed in terms of purchasing power, and its nationals can no longer spend as they used to. “You have to balance the positive trend in the market with the decreasing oil prices and the overall situation in the Gulf, which wasn’t the case when they used to visit Lebanon before,” says Edholm, explaining that although GCC nationals will still visit Lebanon this summer, they will probably book less lavish rooms. “I think we’ll see much more volume than 2016, but I think we’ll sell less champagne bottles than we want,” he adds laughingly.

Ojeil also cautions on the GCC’s purchasing power. “Let’s be conservative in our expectations. I think we will have a good summer but we won’t notice a boom for many reasons. First, back in 2010, as I recall, the oil barrel was at $150, and there was no war in Yemen, Syria, or Iraq. I think the purchasing power of the GCC feeding market is exhausted and that they are not going to spend like they did back in the day,” he says.

There are also repercussions from past years of instability remaining in people’s minds and affecting their perceptions of Lebanon, Ojeil says. “We need to promote more positive news in the country. Lebanon is fantastic and could be a destination for all kinds of tourism from medical to culinary, and it is safe now, so we should be promoting it,” he adds.

Boulad also speaks of the perception of Lebanon among an international audience as the main difficulty he faces in promoting O Monot and Lebanon. “Perception of the security situation is improving, but will always remain a challenge because people don’t see Lebanon as just Lebanon, they see it as part of the region,” he says, adding that negative media focus is a hindrance.

It is with all this in mind that those in the Lebanese hospitality sector are expecting a much improved season — but not a miracle. “For me, if hotels are running at an average of 80 percent occupancy for the whole summer, then I would consider that very good,” concludes Edholm.

The long-awaited electoral law is out. And it’s rigged. The law that was supposed to be our hope for a better future was designed to keep our political class in power. Our democracy is in jeopardy, and we must fight back.

Our political class is comprised largely of killers and thieves. They destroyed this country once. Not with their bullets and bombs — although those claimed far too many victims and left deep scars. They destroyed it by letting our currency collapse, watching our national wealth sink down to hell with it. Despite these unforgivable sins, we let them stay in power. In return, they’ve offered insult and humiliation.

Greed is the only explanation for the sorry state of our country. It kept the internet slow. It keeps the lights out most of the day in the majority of the country. It keeps water scarce and garbage on the streets. This country has limitless potential that is simply squandered. Our best and brightest take the first ticket out because Lebanon is increasingly unlivable. If tourists return, who among them will not be disgusted enough never to return by the trash piles marring nearly every spit of undeveloped nature in this country.

Our killers and thieves should have written a new electoral law by their original deadline, 2013. Instead, they extended their term in office and instructed their goons to assault anyone who dared protest. After four long years of doing almost nothing, we’re insulted with a law designed to keep anyone with a real vision for this country out of office. The battle lines are drawn, and our killers and thieves have made sure their positions are very well fortified. This will be a very, very dirty fight.

But it’s a fight we can’t avoid, no matter how distant victory seems. We must not forget who we’re fighting. We must unite, be smart and elevate the discussion. We cannot approach the coming election with romantic and naive notions that winning will be easy. Since the war ended, our political class has been poisoning the national discussion with ugly sectarian rhetoric that — whether we admit it or not — has influenced each and every one of us. The first step in preparing for the coming fight is thoughtful self-inspection. We must rid ourselves of any closed-minded visions of this country’s future in order to engage all of our fellow citizens.

The strongest weapons our political class will use are fear and lies. Ours is the miserable slog of our daily lives. They’ve ruined this country, and we must not let a moment pass without pushing that message to the fore. Now is the time for strength and determination. We might not win, but we damn well have to fight.

Mosques, maqams, cathedrals, monasteries, zawiyas, madrassas, a synagogue … the list of 83 historical religious sites selected for an imposing new coffee table book, published as part of the government’s “cultural religious tourism” project, is as varied as Lebanon’s religious landscape. “The book’s title, ‘Lebanon: Celebrating Our Diversity,’ is a message in itself,” says Roula Ajouz, project coordinator of the Cultural Religious Tourism (CRT) unit created by the Prime Minister, which includes representatives from the Ministry of Tourism (MoT) and other ministries. “Enough with the expression ‘inter-religious dialogue.’ It sounds like we’re living together because we have to,” adds Ajouz, who is also the general manager of Cedar Wings, Middle East Airlines’ inflight magazine.

The book was published in English and Arabic, and distributed during the official launch of the religious tourism program at the Grand Serail on May 16. Six regional maps of Lebanon, which pinpoint 250 religious sites of interest, were printed for distribution across the country. A website was launched (www.sacredlebanon.com), and a six-minute documentary produced. All of this work was funded by the Italian Agency for Development Cooperation using $328,000 of a $462,000 grant. “It’s an initiative that can also generate important revenue for local communities and for the state. By developing this particular sector, Lebanon will improve its infrastructure network and create new job opportunities for hostels, museums, craftsmanship, artisans, small shops, and other tourist related activities,” Massimo Marotti, the Italian ambassador, wrote in an email to Executive.

Needs and impact still unclear

There has been no study yet on how many jobs the CRT project will create, but its second phase is already scheduled. “In phase two, which will be completed by the end of October, the experts will focus on two pilot sites: Qana, in south Lebanon, and a mosque in Tripoli. For this phase, Italy will contribute $69,186,” Ambassador Marotti said. According to him, “It’s understood that an approximate budget of $1.3 million will be needed over a period of two years to promote [an] additional 500 religious sites. Additional investments should come from private and public institutions.”

The total amount of such investments remains unclear. Executive was able to consult partial estimates provided by Qabas, a Shiite association that promotes religious tourism. Qabas compiled a list of 24 sites that needed rehabilitation or additional infrastructure, with the total bill amounting to $7.2 million. The only other study that Executive was able to locate was a rural tourism strategy prepared by the United States Agency for International Development (USAID) for the village of Maghdouché near Saida, which houses the popular Christian sanctuary Our Lady of Mantara (Our Lady of Awaiting). The study was compiled after the World Tourism Organization officially declared the site an international religious tourism destination in May 2016. Currently, “Maghdouché lacks the basic tourism services and facilities, especially in terms of accommodation, lodging, and F&B services,” USAID wrote in its report. Among other expenditures, USAID estimates that the renovation and embellishment of the town would cost between $250,000 and $750,000, the creation of a museum would amount to $100,000, and the opening of new restaurants would range between $50,000 and $250,000. One can only speculate how much money would be  needed to rehabilitate the thousands of religious sites scattered throughout Lebanon.

Though it is too early to evaluate the total economic needs and impact of the program, Walid Hussein, a consultant on the CRT project, has compiled the average number of visits to the 39 most visited religious sites in Lebanon. They amount to 5 million, with the top destination being the Shrine of Our Lady of Lebanon in Keserwan’s Harissa, at 2 million visits per year, followed by the sanctuary of Jbeil’s Saint Charbel, which attracts 400,000 visitors per year. The number of  unique visitors was estimated at 4.5 million per year for these same 39 sites.

Out of the 39 sites, 25 are Christian — mainly Maronite sites including St. Rafqa and St. Hardini — and 14 are Islamic (Sunni, Shiite and Druze). According to Pierre Achkar, head of the Syndicate of Hotel Owners in Lebanon, approximately 20,000 foreign tourists visit Lebanon every year for religious purposes. When compared with Hussein’s figures, one can only conclude that the overwhelming majority of visitors to religious sites are Lebanese residents.

The CRT unit believes that increasing the visibility of religious sites will encourage locals to go visit places that are not affiliated with their own religion. “It helps Muslims and Christians understand each other better,” says Ghassan Lakkiss, a mufti from Jbeil who helped the CRT research the history of the city’s mosques. Should this strategy succeed, its economic implications would also be important, argues Hussein. “More than 153,000 Lebanese traveled abroad to visit religious sites last year, according to statistics that I gathered from the Higher Islamic Shiite Council, the Hajj affairs committee, and the (Christian) tour operators Lebanon Roots and Emmanuel Travel. They spent over $300 million in 2016,” says Hussein. According to him, these figures include all Muslim travelers who visited Saudi Arabia, Iran, Iraq, and Europe, but not all Christians travelers, which is why he believes that the Lebanese people probably spent even more than this sum.

Centralizing data

The reason why a lot of data on religious tourism is still missing is that its collation has never been attempted before. Promoting religious tourism, both domestically and abroad and, is normally in the hands of religious associations or tour operators. As a result, sites that are a little off the grid can be difficult to find for inexperienced visitors, as signage is sparse and often in Arabic, and informational brochures are rarely available. Even relatively important sites, such as the imposing Shiite maqam of Sayyida Khawla in Baalbek, which attracts 180,000 visits per year according to statistics gathered by Hussein, does not have brochures onsite in languages other than Arabic. The daunting fortifications and armed guards that surround it also do not help create a tourist-friendly atmosphere.    

“It’s a real problem,” said Father Marwan Saidy, from the monastery of Paulist fathers in Jounieh. He accompanies tourists several times a year to religious sites, both in Lebanon and abroad. “In Lebanon, you need a local to be with you. Foreigners find it difficult to drive if they rent a car. Agencies only organize seasonal tours, not year-round visits,” adding that it is harder to find tours in the winter.

Lebanon as part of the

Holy Land

In addition to attracting tourists and developing local infrastructure, the CRT project is a political statement, argues Ajouz. “For example, we all know that the site of Qana is controversial,” she points out. The village claims to be one where Jesus performed his first miracle of turning water into wine, though it is widely accepted by scholars that the location referred to in Bible is a little further south, in Occupied Palestine. The answer to this question matters little to Ajouz. “Jesus and his apostles walked this land. So how come we are not ready to fight for this on the marketing side?” she asks, pointing to a 1942 map of the Holy Land that she has hung in her office. It includes certain areas of Lebanon, Palestine/Israel, Jordan, and Syria. Local experts like to stress that there are over 96 references to Lebanon in the Bible. “Despite these biblical references, and the many stories of pilgrims and orientalists, the designation of ‘Holy Land’ has been almost exclusively reserved for Palestine/Israel,” wrote one of the CRT unit’s consultants, Nour Farra, in a 2015 article titled, “Case Study 8: Pilgrimages toward South Lebanon: Holy places relocating Lebanon as part of the Holy Land,” published in the book Religious Tourism and Pilgrimage Management, An International Perspective.

Presenting Lebanon, in particular the south, as part of the Holy Land is important for local communities that want to benefit from religious tourism. Qabas printed 25,000 brochures in English, Farsi, and Arabic on the maqam — a site closely associated with the life of a saint in Islam — of Chamoun al-Safa, or Saint Peter for Christians. “Chamoun al-Safa is important for the Shiites because Prophet Muhammad said to Ali, ‘You represent to me what Saint Peter represented to Jesus,’” explains Ali Zreik, program manager at Qabas. “The wife of the 11th Imam Hasan al-Askari was also directly related to Saint Peter.” Other shrines, such as the sanctuary of Our Lady of Mantara in Maghdouché and the maqam of Nabi Omran, said to be the father of the Virgin Mary, have the potential to attract higher numbers of both Muslim and Christian tourists.

The Virgin Mary is a favorite for inter-religious tourism, as she plays an important role in the Quran in addition to being a central figure in Christianity. “She is quoted 36 times in the Quran. No other woman is mentioned by her name,” says Muhammad Nokari, consultant for the CRT unit and ex-director of Dar al Fatwa. In Lebanon, Muslims and Christians celebrate the announcement by the angel Gabriel to the Virgin Mary that she would become the mother of Jesus on March 25. As a result, maqams such as Chamoun al-Safa and Nabi Omran “are the subject of a campaign by the local Shiite communities who preach for their integration into the biblical trails, and hope for their official development. So far, the unstable security situation in the region has impeded the resurgence of tourism, and as a result these maqams are barely promoted at all,” Farra wrote in 2015.

The situation has changed little since the publication of Farra’s article. The main obstacle to developing religious tourism remains the ongoing war in neighboring Syria and the closure of its border with Jordan. The number of tourists has plummeted as a result, and Lebanon has disappeared from regional package tours. “Figures from the Ministry of Tourism show that in 2010, there were 2.2 million tourists, and in 2015, only 1.5 million,” remarks Hussein. The numbers of tourists who come specifically to visit religious sites cannot be analyzed, as official figures don’t exist, but it seems logical that they would have also decreased. “Qana, for example, received 50,000 visitors per year before 2010. Now, they probably have less than 1,000,” Hussein says. According to tour guide François Hobeika, “Some pilgrims still come to Lebanon, but not many. So far this year, I’ve only worked with two groups.” .

Italian Ambassador Marotti, argues that in the meantime, “Lebanon can develop its own itineraries … In the future, Lebanese itineraries could be integrated in regional tours.” The Secretary General of the Federation of Touristic Unions, Jean Beyrouthi, adds that he has been working with the Jordanian Ministry of Tourism to bring down the price of flights between Lebanon and Jordan. The aim is to encourage tourists visiting Jordan to also come to Lebanon. “Currently flights costs between $250 and $400, depending on the season. We would like them to be under $200,” he says. Should the plan succeed, it could be implemented by October.

All the professionals Executive spoke with agree that Lebanon has the potential to develop its religious tourism, and that doing so is important. However, a lack of investment and security problems have historically confined religious tourism to a small number of visitors, mostly pilgrims. With this new project, the government hopes to expand its appeal to tourists interested in Lebanon’s cultural history in a broader sense, and to encourage Lebanese to discover sites of religions other than their own. The government has already reached out to local stakeholders to start centralizing data in order to efficiently promote Lebanon’s varied religious history. However, further developing religious tourism will depend, in great part, on foreign donors’ and private investors’ willingness to contribute to a volatile region.

There is a growing local clientele in Lebanon hungry for a more “authentic” experience of the country. Through word of mouth and social media, rural activities, such as fruit picking and hiking, are slowly moving from small groups of connoisseurs to being embraced by a broader public. Guesthouses across the country, once informal, are becoming a stay-cation preference for Lebanese. In the words of Kamal Mouzawak, founder of Souk El Tayeb — which operates several guesthouses, restaurants, food festivals, and markets throughout the country — more and more Lebanese are seeking “the same experience as going to their grandmother’s house.”

Leaving the capital to visit one’s family home in the mountains may be an age-old tradition in Lebanon, but the institutionalization of rural tourism, with guesthouses, tour guides, and proper signage, is a relatively recent phenomenon.

Fostering rural tourism

In the past, guesthouse owners had been accommodating tourists on an ad hoc basis. Around 2010 they came to the realization that they could turn this activity into a profitable business, according to Martine Btaich, president of the Lebanese Mountain Trail Association (LMTA).

Help and training came from USAID, through Diyafa, a network of rural guesthouses that last year launched an upgraded online booking site, and through the Lebanon – Industry Value Chain Development (LIVCD) project, which began in 2012. Initially billed as five year, $41.7 million project  — “aimed at improving Lebanon’s economic stability and providing income-generating opportunities for small businesses while creating jobs for the rural population, in particular women and youth” LIVCD was recently given a two-year extension till 2019. The hope being that by then, the activities that received funding and support will have become self-sustaining.

From humble beginnings, the number of guesthouses in Lebanon has risen to around 80, per LIVCD figures, though as of yet, no centralized data on guesthouses exists. Petra Obeid, who is in charge of rural tourism at the Ministry of Tourism (MoT), told Executive that figures are currently being collated.

Obeid says that the MoT supports rural tourism through a national strategy developed in tandem with LIVCD and launched in 2015. Among its aims were to promote awareness of rural tourism destinations, institutionalize rural tourism at the community level of local communities, improve and enforce environmental, cultural, historical, and agricultural protections, diversify and modernize rural destinations, improve data collection, develop a culture of rural tourism among the younger generation and improve networking with the diaspora.

According to Btaich, so far the strategy has validated the efforts of tourism stakeholders. “Many new initiatives at the level of municipalities have been done, creating a snowball effect,” she says. “The challenge now is for the strategy not to sit in a drawer.”

Guesthouses: a reasonably profitable venture

The cost of rooms is varied. If booked through L’Hôte Libanais, a website with a network of 16 guesthouses, prices can range from $80 to $250, with the average room going for $100 – $120. Guesthouses that are part of the Diyafa network, tend to be cheaper. According to LIVCD figures, they cost $60 per person on average, and start as low as $40. Orphée Haddad, L’Hôte Libanais’ founder works at the higher end of market, only listing guesthouses that interact with the local community, serve local food, are environmentally friendly, and that, in his eyes, have “character.”

The popularity of guesthouses shows no sign of waning, both for those looking for a place to relax outside the city and for entrepreneurial types eyeing the opportunity to reinvent family property. Philippe Germanos, who co-runs Guita Bed and Bloom, left corporate life a few years ago to return to his family home and develop the declining farming business that he inherited from his great grandfather.

The five rooms of the guesthouse, which cost from $50 to $75 a night per person, were opened to the public in late 2015. Like many other guesthouses, Germanos claims that he is fully booked on weekends during the tourist season (April-November). To help generate income, and tap into a growing market for rural activities, he decided to include agrotourism and recreation into his business, such as yoga retreats.

Reinventing the family home as a rural getaway does not come cheap. To finance these various projects, Germanos took out two loans, totalling $100,000. “I benefitted from special environmental banking loans (subsidized by Lebanon’s central bank) that allowed me to add solar panels, install low consumption taps, and build a warehouse,” he says. 

Other guesthouses resort to private funding, such as Al Haush, which opened its doors a few months ago in the Bekaa. An old family farm, Al Haush mixes luxury guestrooms ($200 a night) with activities such as rosewater making and cherry picking. The owners, the Saab family, invested $60,000 to build their guestrooms. However, the rest of the infrastructure, such as the swimming pool, gardens, and tennis court, were already in place. Like Guita, Al Haush is banking on the public’s interest in agrotouristic activities.

Municipalities aren’t missing out

Private individuals are not the only beneficiaries of the surge in rural tourism. Municipalities are also involved, mostly due to LIVCD funding, which so far has  amounted to $2.25 million and has benefited nine different sites, reserves, and associations in Lebanon.

All the municipalities that Executive spoke to which recieived support from by LIVCD, such as Ehmej and Hadath el Jebbeh, have noticed increasing numbers of visitors over the last few years. Jbeil’s Bentael Nature Reserve is hoping to receive 5,000 visitors this year, a 60 percent increase relative to last year.

Though not funded by LIVCD, the manager of the Chouf reserve, Nizar Hani, has noticed the same trend. “Around 90,000 visitors were recorded last year, which is an increase of 14,000 people in comparison to 2015,” he says. Reserves are the only stakeholders in the rural tourism industry that actually manage to keep track of visitor numbers, through the entrance fees that they charge (under LL10,000 on average).

Lack of a legal framework

Guesthouses are regulated by the only decree that exists regarding rural tourism. Published on September 9, 2011, decree number 6298 describes the conditions that a guesthouse must meet, such as being built in a traditional style, having between one and 10 bedrooms, and respecting health and safety conditions. However, the conditions are not specified further, leaving much room for interpretation. While the MoT sends out a team to inspect guesthouses during registration, and conducts follow-up visits, Obeid notes that the variables  — such as owners having other employment, or guesthouses being seasonal  — make this more difficult.

Regulations are slowly being put into place, but one major obstacle still stands in the way of the sector’s development: the lack of a legal framework. “One cannot promote Lebanon as an alternative tourism destination, or adventure tourism destination, if there’s no work on the law,” argues Gilbert Moukhaiber, director of the tour operator 33 North. “Alternative tour operators that work in any sector outside classical tourism — that is, ecotourism, agrotourism, or adventure tourism — are registered with the MoT as commercial companies, not tour operators,” because no specific licence exists for them. 

As a result, responsibility for training local guides rests on grassroots initiatives, such as 33 North or the LMTA. External donors support some of these training events, but they are commercial activities that need to turn a profit. For example, a three-day course with 33 North on mountain safety costs a little under $250. When asked whether this price excludes guides who cannot afford that kind of expenditure, Moukhaiber maintains it is “equivalent to two-and-a-half-days of work as a guide,” which he believes is reasonable.

Despite its growing popularity, recognition from the government and the increasing know-how of professionals, rural tourism in Lebanon still lacks the proper framework to compete with other international destinations. Should the lack of data and a legal framework remain unchanged, its development will inevitably be undermined. Till now, its growth has been dependent on foreign support, an important part of which has recently been diverted to responding to the Syrian crisis. As the LIVCD project winds down, the next few years will be crucial to determining whether the sector can be self-sustaining.

The decision in early June by the United States to withdraw from the Paris Accord, the latest global effort to combat climate change and adapt to its effects, sent shockwaves of uncertainty around the world. The agreement, which entered into force in November 2016, has the goal of limiting the global temperature rise to two degrees Celsius this century. But there is no reason to panic, says Vahakn Kabakian — Lebanon’s climate change portfolio manager at the United Nations Development Programme (UNDP). Instead, he points out that the American withdrawal may have served to strengthen the resolve of other countries and the international community to reach the commitments they promised toward mitigating climate change.

One of the key takeaways from Paris has been the role the private sector will play in financing the renewable energy projects that governments want to build to reduce greenhouse gas emissions from electricity generation. Lebanon is now awaiting a joint Ministry of Finance (MoF) and Ministry of Energy and Water (MoEW) recommendation to the Council of Ministers for the latter to license the construction of some 200 new megawatts (MW) of wind-generated electricity. In mid-August the MoEW will also begin evaluating offers from companies to construct up to 180 MW of solar-generated electricity. The cost estimates for the construction of these renewables projects have not yet been publicly disclosed, but financing may not be so difficult to find (see story). The new projects would bring Lebanon close to achieving its commitment of having 12 percent renewable energy in the national energy mix by 2020.

E   From what you’ve heard within Lebanon, and from its counterparts regionally and internationally, what has been the reaction to the United States withdrawing from the Paris Accord?

It varies. For the people who are really not into it, they all saw it with an ‘Oh, you guys are screwed’ sort of a reaction, which might be true if you really look at it from a planetary perspective. At Paris we agreed on a target below two degrees Celsius, and that’s in jeopardy if the US is out. Effectively, they won’t be out before November 2020, because there’s a clause in the agreement that you can’t withdraw until three years after it enters into force — [which was] November 2016. So 2019 [would be the earliest the withdrawal could start], and then the process takes around a year, so that’s November 2020, which would probably be after or around election day in the US. And then the incoming president, once they take office, could reverse this in 30 days or so. Now that’s procedure.

E   Has this had a big psychological effect?

No [not just a psychological effect], because if the US re-enters the Paris Agreement in 2020 or 2021, they would have essentially lost four years of efforts toward meeting their 2030 target — 25 to 28 percent below their 2005 emissions. So that lag time, plus if the US actually locks in investments in new fossil-intensive technologies for the coming 20 or 30 years — [that’s] money not spent in the right direction, if in four years time you’re going to reverse [Trump’s decision] and re-enter [the accord].

E   Has the American president’s decision to withdraw from Paris eroded political will to meet climate change commitments?

Now what’s good, and what no one really expected, is that globally there was this amazing solidarity on the Paris Agreement from think-tanks, NGOs, governments, and coalitions of governments, thinking of doing more than what they’ve already committed. France is trying to do that, the EU went to China — there was a summit.

The EU is much more strongly committed now than it was probably before. That’s why there was an EU-China summit — I think it was the next day or so — followed by a French-Indian sort-of summit.  [Everyone], especially China and India, were very much trying to send a message that that’s not true (that America’s withdrawal has scuppered the accord): ‘We’re fully committed.’ That’s on the international level. At the US level, California is leading and Hawaii just passed a climate change law — they’re saying to the federal government, ‘We’re in.’

E   One of the key takeaways from Paris is that this is going to be a big private sector opportunity. So when you see all the huge corporations in the US — the EXXONs and these sorts — stepping up and pledging to reach Paris commitments, does that reassure?

Definitely, the key players in the Paris Agreement are the non-state actors, which, in the US case, are doing what they want to do irrespective of the federal government funding-wise and action-wise. Huge corporations are deciding to go 100 percent renewable, and imagine airlines going for 100 percent biofuel — that’s where we’re heading.

E   Lebanon is now ready to license contracts to build some 200 MW of wind generation and will be licensing up to 180 MW of solar generation. Is Lebanon on track to reach its 2020 goal of having 12 percent of its electricity generated by renewables? 

Existing hydro power is roughly 200 MW. It varies per year depending on how much water we have, but last year we started seeing 0.1 percent for 2015 as a renewable part of the mix other than hydro. That’s in 2015. It was mentioned in the UNDP’s Small Decentralized Renewable Energy Power Generation report for photovoltaic (PV). What we had in 2015 almost doubled by end of 2016, the PV. So that’s good. We installed 10 MW of solar in 2015 and in 2016 installed over 10. And I guess 2017 would be a bit more than that, so, on a yearly basis, we saw those decentralized PVs being installed more and more. If by 2020 we install the wind and we install the 180MW and we end up having around 100 MW of decentralized PV, in terms of MW we [would be] around roughly 200-300-480 MW renewable. Installed capacity-wise that’s good, but generation-wise it’s not 12 percent because we’re still [trying to reach] the 12 percent. Ten percent out of 480 — I hope I did the right calculations — that’s 4800 MW total generation. You know it’s roughly 10 percent if we install the thermal power plant by then. But obviously generation-wise it won’t be 12 percent.

E   So we’re a bit behind schedule is what you’re saying?

Yes and no, because in the 12 percent the Ministry of Energy and Water will be taking into account the solar water heaters because that’s also renewable — you’re generating heat in this case. I don’t have the latest numbers, but the national target is that 1 million square meters of solar water-heating panels, which is roughly 250,000 units I think, will be installed by then, and I don’t know how much that would make in equivalence out of the total 12 percent. So maybe not by 2020, but with the hydro — not upcoming, existing — with solar and solar water heaters it’s a good bet. I would say yes.

E   Lebanon still has not ratified the Paris Agreement. Is that because our politicians have been so focused on finding a new election law and sorting out their own political futures?

Primarily that, yes. The draft law was sent in August-September 2016 to the Parliament. Somewhere at the beginning of the year, the foreign committee at the Parliament very quickly approved the draft law. I don’t think there’s any issue with this draft law, but there’s no clear cut process or procedure for legislation in general. We don’t even know which parliamentary committees will need to approve this. We assume it’s foreign affairs, the finance committee, and environment at least.

E   What is on your wish list for legislation to help Lebanon reach its climate change commitments?

Definitely the ratification of the Paris Agreement into law, because it contains a lot of articles that we would be basing our work on locally. At the end of the day, when the law passes, the articles are binding, and we need those articles to issue decrees and operationalize the entire law gradually. So that’s one thing that I want to see. Another would be having stability in the country, [which] would allow us to take on the environment — but also climate change, at a more serious level.

The Middle East faces an increasingly complex and fragile security situation. The region (defined by authors Swain and Jägerskog to include all Arab countries in Asia, plus Egypt and Occupied Palestine — though I personally might also add Iran and Anatolia) suffers from strained water supplies and limited arable land, along with increasing populations, stagnant agriculture and lacking food supplies. Another issue is large-scale labor migration, along with the huge numbers of forced migrants and refugees coming from the region (not to mention millions of internally displaced persons). The book analyzes such emerging challenges comprehensively and systematically, looking at these Middle East issues from a security perspective, as well as their global context.

Security is increasingly on people’s minds after the Western reaction to the September 11 attacks on the United States exacerbated violence across many parts of West Asia and North Africa, of which the Middle East is the strategic heart. Following 9/11, the US attacked Afghanistan and Iraq, and abetted or otherwise became involved with fighting in Yemen, Libya, and Syria. The legacy of intervention was several failed wars and a lot of other meddling that inflamed an already troubled region, intensifying problems such as forced migration and food insecurity. In their wake, the uprisings of the Arab Spring swept across the Middle East  from late 2010, leading to political transformation.

All of this further eroded stability throughout the Middle East, exacerbating existing long-term security problems. In turn, as the authors note, outside forces, including globalization and climate change, are interacting with this mess, leading to even greater insecurity in a vicious circle. Subtitled ‘The Impact of Climate Change and Globalization,’ the book’s strength is in its linking of the region’s woes with wider international themes. Climate shifts and the impact of globalization are examined in some depth and with critical evaluation. An interesting example of this is the purported connection between the crisis in Syria and that country’s drought of the last decade, given that the Syrian problem now has a strong geopolitical dimension.

The book was published last year, and so it does not account for recent international policy developments on climate change and globalization, such as the US withdrawal from the Paris climate agreement. The new American course cannot bode well for the Middle East, if only because unchecked climate insecurity combined with war may lead to more famine in broken states (as is already the case of Yemen today), with mass migration from and through warzones exacerbating global tensions. The post-9/11 wars led by America took scant account of local interests, with few serious plans for what to do once the fighting ended — ultimately letting chaos reign. In a curious parallel, the new US climate policy also seems to invite chaotic events, which could be problematic for the region.

Globalization has also had a major impact in the Middle East. Global forces have unsettled established politics, altered labor markets, and created more international economic connectedness, shifting the costs and benefits of established socio-economic policy. These problems, some of which are considered by the authors, cannot be solved by any one country alone, but need collective and collaborative action — something that the countries of the neighborhood need to work on if these issues are to be addressed.

The West’s global dominance has been halted with the failure of American economic and security policy over the last two decades or so. The trend regionally, as elsewhere, is toward multipolarity, with the West no longer ascendant. Meanwhile, the integration of refugees and asylum seekers on both sides of the Mediterranean, and the specific barriers such people face, represent a growing challenge. I for one look forward to seeing more on such topics from Swain and Jägerskog.

Breaking out of stasis is neither easy nor instantaneous. Examples of temporarily suspended existence and reemergence in popular fiction range from space travel to medical miracles. Nobody has ever tried it of course, but in theory it makes sense to suspend a body in some sort of stasis for the duration of an interplanetary flight and revive it upon arrival — at least according to countless movie scripts and Hollywood logic.

Much rarer than a cold sleep sci-fi movie plot is the condemnation and rescue of an entire economy from stasis. Economic stagnation and revival has been associated with a single fairytale trope — Sleeping Beauty — many times since the tale was first committed to paper in 17th century France, and further popularized 100 years later as Dornröschen by the German Brothers Grimm. The falling of a whole kingdom’s economy into a deep sleep is only a collateral effect of the young heroine’s affliction, the solution as simple as a kiss that breaks the curse.

In this magic story, the economy-wide reawakening is portrayed as a seamless return rather than as a slow and gradual process of reanimation. This is indubitably more charming than depicting a struggle through a complicated and lengthy recovery, but leaves unresolved the intriguing matter of how one would actually go about reviving a dormant economy.     

Lebanon’s society and economy has not been comatose in recent years, nor has its government been fully paralyzed. Still, it seems that the economy urgently needs to wake up. This makes it prudent to consider the perils that companies will face from an administration that has been stuck for several years in the closest thing to a freeze imaginable in the warmth of the Beirut sun, while the world around kept moving.

While the first Cabinet debates after the adoption of the new electoral law did not hint at a uniform position on economic policy, signs point to a rise in government activity with regard to budgetary decisions and taxation.  Thus, the question is not whether there are new pressures on the horizon, but merely to what extent these pressures will be caused by new taxation, international economics and interest rate environments, increased energy costs and other factors. 

For local companies, this means that new cost pressures will be compounded with existing pressures on profits, which they have felt from domestic and international markets for the past six or seven years. In parallel, the Lebanese body politic, with all its administrative organs, must — if the functioning of state entities is to improve at all — engage in some serious body building, from the activation of dormant fiscal policy muscles to the detoxification of corrupted cells.

These challenges have been on the table since the beginning of the year, piquing Executive’s interest in sustainable business solutions. Cost-cutting is one avenue that companies tend to take when pressures build. But while cost-cutting is a necessary measure  under the capitalist mandate of competition, it also is one of the thorniest undertakings in an economy in need of job creation. It involves taking steps made no nicer by the various euphemisms employed — corporate restructuring, workplace rationalization, personnel efficiency enhancement — and their implied result: redundancies and involuntary separations.    

While considering the prospect that many Lebanese companies may soon face higher taxes and other cost pressures, we were attracted by a new book by Strategy&, a PWC consulting arm known in an earlier incarnation as Booz & Co. Subtitled a “Guide to strategic cost cutting, restructuring and renewal,” we wanted to find out if a book with the title Fit For Growth (FFG) could offer answers to Lebanese companies that might soon face the need to cut costs.

A closer look at FFG showed very quickly that it does not propose a new or revolutionary solution. Rather, the FFG framework is something that Strategy& has talked about for quite some time. Karl Nader, a partner in the company’s Beirut office who leads the FFG practice in the Middle East, quickly confirms that the book was authored by three of the firm’s principals to describe the result of “an evolution” in their work.

The book does not offer — even by the standards of books on management — a particularly gripping narrative. In short, it is a reference guide in three parts (a brief introduction to the concept, a manager’s guide, and a few afterthoughts on the “human element” and keeping up morale) that offers decision-makers access to insights and practices which Strategy& developed over years of strategic consulting. “What we realized over the last couple of decades is that you can’t cut costs independently. We have been doing a lot of work on strategy and on cost, and when the two come together, you get the most value,” Nader says.

The baseline proposition is simple: The book argues that contenders in the globally connected and disintermediated marketplace need to focus on managing cost as much as on growing revenue. “Companies across industries and geographies are realizing that the only way to unleash profitable growth is to cut costs,” it claims.

The trick, however, is how to do this right. Cost reductions are often done under duress, in undifferentiated fashion, and driven by reduction targets or benchmarks focused on matching the competition. In contrast to this blind slashing of numbers, the FFG approach is backed by a strategy; it “protects ‘good costs’ and reduces ‘bad costs.’”

Good costs in this framework are those that strengthen a company’s ability to differentiate itself. All other costs are either “lights-on” costs (needed to keep the company in operation, but that do not distinguish it from the competition), or costs which are not related to the company’s priorities. According to the authors, companies that embark on cost-cutting often focus too much on cost reduction targets, and too little on the development of “differentiating capabilities,” while a better path lies in achieving a balance between the two.

In defining and developing their differentiating capabilities, organizations need to understand what they are really good at, or what they want to be really good at, Nader explains. This is where consultants can help companies with complex organizations and many stakeholders to prioritize and work through the opportunities they identify.

“The role of a consultant is [to put together] an unbiased view of what is the best model for you as an organization,” he says, citing several examples of large companies in the Arab region that have come under pressure from dropping profits, in areas from luxury retail to distribution. “Across the entire region there are retailers, distributors, and manufacturers who are under pressure.” 

While conceding the existence of economic pressures across the Middle East and the need to cut costs, Nader reiterates that cost-cutting can mean things other than laying off employees. “The economy here is challenged, and companies are challenged, so it’s very easy to conclude that you have to cut costs or optimize operations, but there’s a need to really understand what I’m good at, and what [I’m] not good at, or not so good at, [to ask], ‘Where do I need to further invest to differentiate myself?,’” he says.

The FFG approach emphasizes that such a transformation is not immediate. “With FFG the journey is very long. Working on restructuring is not a one-day event,” Nader confirms. Moreover, it certainly does not appear to be painless, given the book’s references to the need to cope with organizational fears and affirmations that “a Fit for Growth transformation asks a lot from all the employees in the company.”

Finally, the question remains how far the concept is applicable in a small economy in the Middle East. While hiring a large consulting firm to help seems to be the more feasible road for companies in the Gulf region — according to Nader, some 50 percent of Strategy&’s FFG activities are with organizations in Saudi Arabia, and another 25 percent with organizations in the United Arab Emirates — he says SMEs in a smaller economy like Lebanon can apply the FFG approach on their own initiative and do it in-house.

Nader points to a Fit For Service (FFS) advisory practice that is parallel to the FFG approach. According to him, the method is designed to reduce headcounts and improve efficiencies in organizations that are part of public administration (see box).

Executive sadly did not find any evidence of a magic-kiss solution to revive the fortunes of the country’s private or public sector stakeholders, but it seems that available lessons clearly hint that approaches that cut costs in conjunction with the development of productivities and competitive capabilities are preferable.

Explainer:

Fit For Service components

According to comment text by Strategy& partner Salim Ghazaly, the public administration in Lebanon could engage in a four-step process to improve performance and enhance efficiencies:

1) Develop a national socio-economic plan to identify national priorities and mobilize government efforts and expenditures accordingly. This exercise should be structured around the competitive positioning of the Lebanese economy (such as in professional services, tourism, and potentially a new oil sector) and dropping sectors in which the country is not competitive.

2) Focus the role of the government on policy making, regulation and enforcement, and transition its other operations to the private sector — this could be achieved through implementing a national private sector participation program (privatization and PPP). This could result in a leaner and more efficient government, while spurring growth within the private sector. It could also result in Capex and Opex savings, and potential revenue from the sale of selected existing assets. The Lebanese government is well positioned to do this, as it already has a regulatory framework through the Higher Council for Privatization and a PPP law (currently being revised).

3) Launch a culture/management change program across ministries to instill a citizen-service culture — a good example is General Security.

4) Implement cross-sector enablers that contribute to higher efficiency and economic growth, such as digitization.

Not many consumer product segments have steady year-on-year growth regardless of the economic environment. Nor are there many products that are the same price as they were a decade ago. But as the marketing saying goes, water is life, and there is plenty of competition for consumers of bottled water.

“You can consider bottled water in Lebanon as a basic good. You don’t have any alternative for drinking water, so we’ve never really been affected by the political situation, nor the economic situation,” says Merched S. Baaklini, deputy general manager of Bev Holding, producer of Rim.

According to a 2016 Blominvest Bank report, the sector grew in volume by 2 percent in 2013 and 2014, and 5 percent in 2015. In value terms, it averaged 6 percent growth in 2013, 10 percent in 2014, and 6 percent in 2015. 

Sector players attribute the rising demand for bottled water to both the healthy lifestyle trend, with consumers increasingly opting for water over soft drinks, and government mismanagement of the water sector. This ranges from health scares related to the lack of oversight of water companies — especially unlicensed bottlers, — to shortages in government supply. When the taps run dry, consumers are left unsure about the quality of water delivered by truck to their apartments.

The trash crisis of summer 2015 caused another spur in business according to bottlers, fueled by mounting public concern about the government’s inability to deal with waste and environmental degradation. Tests carried out by the Lebanese Agriculture Research Institute (LARI) showed that, in March 2016 — nine months after the trash crisis started — leachate from dumpsites across the country entered the groundwater, with bacteria levels reaching 2,000 trillion per milliliter (ml) the accepted norm being less than 200 per ml.

The Class A bottlers — established brands licensed by the Ministry of Public Health (MoH) — account for an estimated 30 percent of the market, according to industry insiders, valued at around $160 million a year. The remaining 70 percent are more localized in distribution terms and unregulated, with just 42 out of some 1,000 bottlers licensed.

The surge in bottlers is most evident in the supply of 10 liter containers, which, other than the water stores typically found in the suburbs and countryside that fill up 10 and 20 liter jerry cans, are the most economical, costing from LL1,000 to LL1,750. “The big companies never had the 10 liter bottles as part of their portfolio, typically having the 330ml, 500ml, and the 1, 1.5 and 2 liter bottles, then jumping to the 18.9-22 liter size [known as the ‘gallon’]. Today, these companies are tackling the 10 liter market, as it’s an attractive and growing market,” says Roy Hage, manager of Petform, one of the country’s top three manufacturers of consumer grade plastic bottles. Petform produces some 70,000 bottles per hour, and Hage estimates that there are over 250,000 10 liter bottles produced in Lebanon each day.

The water knife

While bottlers have largely dismissed concerns about depleting water tables and the unreliability of snow melt (the source of over 50 percent of the country’s water) Roland Riachi, visiting assistant professor at the Political Studies and Public Administration department at AUB, says that demand will rise due to the depletion of water resources, and that the number of wells has risen from 3,000 in 1970 to 80,000 today, or eight wells per square kilometer. “This will lead to a drop in tap water supply, so there’ll be more demand for water delivery, for drinking, and domestic use,” he adds. LARI estimates that the average depth of groundwater across the whole country has dropped on average by 70 to 80 meters, and projects it will fall further.

The problem is the lack of regulation in the water sector, be it from agricultural use, to tapping wells for drinking water. By law, water companies pay the government LL1,000 for every 1,000 liters extracted, and are limited to withdrawing 100,000 cubed meters a day from a depth of less than 150 meters. Most water companies stated that they pay according to a metered system, but others, such as Tannourine, said the water was free.

The lack of oversight of the overall sector and depleting water resources are already causing logistical issues for companies. Some bottlers concede that they stockpile during the winter months due to shortages in the summer, and even buy water off other bottlers when supplies run low.

“Most water companies are seeing a reduction in water availability. The illegal bottlers are about to cause a catastrophic disaster, as they’re drilling near the shorelines and emptying aquifers,” says Marcel Hage, chairman and CEO of Talaya. “If more people favor natural drinking water, and the supply is short, prices will eventually go up. But if the situation continues as it is now, of ‘water as water,’ no matter where from, prices will remain stable.”

Economics 101 teaches us that with demand outstripping supply, prices should go up. But the theory does not yet apply to local bottlers due to the low cost of extraction, the lack of government oversight, and high competition. “Prices haven’t changed because the price is the cost of the bottle, not the water inside. This is why you see different brands with the same price,” says Reine Berbery, marketing manager at Tannourine.

The number of new entrants into the market is difficult to quantify due to the number of unlicensed bottlers. But, at the higher end, there are still new entrants, such as a $7 million bottling facility in Bekaa’s Yammouneh, announced in May.

Just as Nestle shook up the sector when it bought Sohat and introduced Nestlé Pure Life, Pepsi’s launch of its global brand Aquafina in July 2015 has triggered what players call a price war. “Aquafina has made it harder for everyone, as they have the distribution model, and gave it out for free with Pepsi when they launched,” says Alain Tabourian, chairman and CEO of Interbrand, which owns Sannine.

According to SMLC Pepsi-Cola’s Executive General Manager, Bassem Ali, Aquafina has had “strong double-digit growth” due to the “largest distribution network in the country.” The top seller is the 500ml bottle, but the company is mulling entering the gallon market, which industry insiders estimate at around 25 to 30 percent of the licensed market.

Diversification

Competition to get on supermarket shelves is fierce, as that is where consumers have the most choice, and the best prices for licensed brands. This is down to distribution costs, with home delivery costing more, albeit ensuring more consumer loyalty. Industry players estimate distribution at 30 to 40 percent of operating costs. 

“As long as consumers can easily switch brands, and can’t tell the difference between one water brand and another, the higher the competition,” says Riwa Daou, a research analyst at Blominvest Bank.

Such competition extends to imported and sparkling waters. Nestlé had dominated the sparkling water segment with brands Perrier and San Pellegrino, but Rim introduced its own sparkling water brand in 2016, and Tannourine introduced San Benedetto earlier this year. The brands have also ventured into glass bottles to appeal to higher-end consumers, especially at restaurants.

“We consider selling under cost as part of marketing. This is the competition in the market, even to give the bottle for free (to restaurants) as it’s good for our image,” says Tannourine’s Berbery.

Other brands have also introduced glass bottles, but  only market newcomer Talaya has glass gallons, one of only three companies worldwide to do so. Talaya’s CEO and Chairman, Marcel Hage, says glass gallons have reached 25 percent of their overall sales in less than six months, with overall growth of 50 percent compared to 2016.

Glass gallons are only expected to appeal to a small number of consumers due to the high costs, at LL7,500 for 15 liters, and a $15 deposit fee, compared to LL6,000 for 18.9 liters in plastic gallons, and a similar deposit. Costs are high due to the cost of glass itself, imported from Europe, with the 300,000 gallons estimated to cost over $3 million. 

Bad mouthing

Competition is so acute that nearly every bottler had something negative to say about their competitors, ranging from illicit practices and mislabeling, to exposing plastic bottles to the sun, to burning trash during the 2015 crisis.

Sannine was accused of requesting the removal of the manufacturing date on gallon bottles to not be constrained by longevity issues. Tabourian denies this. “There’s no law that states you have to put the date on the container, only for production. We were asking to amend our traceability code in case there’s a problem with a specific lot of orders. It has nothing to do with the consumer, but was blown out of proportion,” he stated in an interview with Joe Maalouf on LBC.

Nestlé Pure Life was accused of not being correctly licensed, but Nestlé says that both Sohat and Nestlé are licensed by the MoH under the name Société des Eaux Minerales Libanaises, under Natural Mineral Water and Drinking Water respectively.

Such competition among players will continue as consumer demand continues to rise amid ongoing mistrust and mismanagement of public water sources. What may happen is consolidation, whether or not the government clamps down on the several hundred illegal bottlers. “There are enough players in the market, so there will be consolidation. The name of the game is distribution, and moving a lot of product at a low cost,” says Tabourian.