lebanon – Page 2 – Sami Halabi

Lebanon’s microfinance with marco problems

Access to small-business credit could lift thousands of Lebanese out of poverty

by Sami Halabi

With the United Nations reporting that almost a third of the Lebanese population is living in poverty, and many more are classified as low-income workers, one thing is certain: Lebanon has a huge poverty problem. Yet one of the most efficient ways to address the issue of poverty, and make some money in the process, has not been high on the list of priorities for Lebanon’s government or its private sector.

Microfinance (MF) is the provisioning of financial services to low-income segments of the population with little or no collateral requirements. These clients would otherwise be shunned by traditional financial institutions and banks. The sector has seen substantial growth in Lebanon in recent years and is expected to continue to expand. Nevertheless, the industry remains under-developed and suffers from a lack of regulation.

The concept of microfinance and microcredit came to Lebanon in the mid-1990s, spearheaded by the United States Agency for International Development (USAID), the US government’s development investment arm. While the agency may have its own political agenda, it did lay the groundwork for an industry that has proved to be both a social good and a sound investment opportunity.

The industry itself, however, remains only partially measured. Some of the only reliable figures come from a report conducted in 2008 by the International Finance Corporation (IFC), the arm of the World Bank that provides investments and advisory services to the private sector in developing countries.

According to the report, as of September 2007 the estimated potential market was some $286.1 million, calculated by multiplying the number of “eligible potential borrowers” multiplied by the average loan size of $1,500. As such, the IFC states that only 11.5 percent of potential demand is being met, leaving 88.5 percent of the market untapped, equal to some $2.2 billion. On the lower end of microfinance, loans can be for as little as $300. The requirement for such a loan is simply a viable business plan to be able to pay the money back.

“The market is still way underdeveloped and more people will need microcredit,” said Anwar Jammal, chairman and chief executive officer of Jammal Trust Bank (JTB), which has provided over 45,000 microfinance loans in Lebanon since 1999.

At present, the number of Lebanese who are “unbanked” remains a statistical anomaly since there has not been a study on the matter since 2000 — there has also not been an official population census in the country since 1932. The study conducted by the World Bank in 2000 estimated that the unbanked numbered around 200,000.

Youssef Fawaz, executive director of Al Majmoua, Lebanon’s first formal microfinance institute, estimates that the number of unbanked in the country is much larger, at some 30 to 40 percent of the population, or 1.2 to 1.6 million people. Since 28.5 percent of Lebanon’s population lives below the poverty line, the inherent needs of the people combined with the potential the market offers, could hardly make for a more opportune time to invest in the sector.

What’s wrong with it?

The explanation for why this sector has not been nourished is multi-faceted and reflects many of the socioeconomic and political realities of Lebanon. To begin with, the bulk of the industry is comprised of only five microfinance institutions (MFIs): Al Majmoua, Ameen, Al Qard Al Hassan, the Makhzoumi Foundation, as well as Emkan, which began operations shortly after the June parliamentary elections.

The funds that these organizations use to do business come either from bank loans that carry market interest rates, or from donors, which carry lower interest rates or no interest at all. The situation has pitted a financial model against a philanthropic model in a battle for existing and potential market share.

At present, Ameen is the only MFI in Lebanon that is registered as a financial institution and receives the majority of its funding from banks, including JTB, which it then divvies up and distributes to its clients. The advantage of adopting the financial model is the access to a large pool of funds other organizations don’t have. That also means their cash flow is based on paying back interest set by banks, which are markedly higher than those of MFIs who operate using grants or soft loans.

“Definitely our job is much more difficult because we have a cost of funding the others don’t have, but our pricing to the end client is very similar,” said Ziad Halabi, general manager of Ameen. He explained that Ameen makes up for this through “having more efficiency.” Ameen offers loans between $400 and $15,000 with loan terms between four months and five years, and charges interest rates averaging 12.5 percent.

Samer Safah, deputy general manager of the Makhzoumi Foundation, claims that because his organization does not have to pay dividends to investors or commercial interest rates, they can provide better services such as offering their “beneficiaries” life insurance with each loan. Makhzoumi is currently the smallest market player and offers a maximum interest rate of 1.2 percent.

“Microfinance was not created to make money, it was created to elevate the poor to a better standard of living,” said Safah. Nevertheless, he concedes that “money makes the world go round and money is going to win.”

This has become more evident lately as the donor money, which organizations like Makhzoumi and Al Majmoua depend on, now looks to be in short supply due to the global economic downturn. The billions of dollars lost by investors worldwide because of greed and lack of financial oversight have left less money available for MFIs.

“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.

Safah agreed, noting that, “If you look at the request for proposals at the embassies, there is nothing that has anything to do with microfinance anymore. It wasn’t like two years ago when it was all about microfinance.”

Without international investors, many MF organizations are now looking towards Lebanon’s banking sector, which is full to the brim with liquidity. Today, Al Majmoua is actively seeking bank loans as a source of funding for the first time since its inception in 1994.

“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”

Lebanon’s banks have so far taken little interest in this sector, even when it offers returns of 10 to 15 percent and carries a default rate of 2 percent. The top 20 banks control some 80 percent of the market and their decisions can make the difference.

“The big banks don’t believe in microcredit — we do,” said Jammal.

Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.

“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”

The reason that most banks don’t adopt microfinance as a revenue making initiative seems to be the operational model that microfinance necessitates. By nature the industry is labor and management intensive requiring a ‘hands on’ approach and lots of field work to reach such a low default rate. According to Jammal, the overhead costs of a microfinance loan can vary from 5 to 8 percent as opposed to the overhead of a normal loan which is 1.75 to 2.5 percent.

“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.

Such practices are not what most banks are accustomed to.

“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.

Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.

The Politics

While there may be a sound business case for microfinance in Lebanon, many of the organizations in the market also have a political slant. Emkan is funded by the Hariri Foundation and Al Qard Al Hassan is funded by Hezbollah. Baydas did not comment on how much money has been given to her organization by the Hariri Foundation, but said it was “in the several million dollar range.” She also insisted that having a political interest fund Emkan does not restrict it to concentrating on areas where the Hariri family has political interests.

Al Qard Al Hassan — which translates into English as “the good loan” — offers Sharia compliant loans and uses gold or gold jewelry as collateral. The organization, whose main office was destroyed during the 2006 war with Israel, is estimated to have more than 26,000 clients, and even a “martyr’s fund” to support the families of Hezbollah’s militants killed fighting Israel. Al Qard Al Hassan did not respond to repeated requests to comment for this article.

According to Al Majmoua’s Fawaz, Emkan and Al Qard Al Hassan together make up some 50 percent of the market. Since both organizations are funded by political interests other MFIs say they are able to offer interest rates, or the Sharia compliant equivalent, at lower levels to garner revenue.

As a result, many in the industry have complained that the market is being grossly distorted.

“The biggest challenges for us are to deal with the market distortions that we are seeing from the politically oriented funds and political instability,” said Ameen’s Halabi. Emkan currently offers a flat rate of 10 percent which, Baydas admits, is “a couple of points lower” than the rates of Ameen and Al-Majmoua.

However Baydas, who previously managed Ameen, added that her competitors’ “sources of funds have often been quite subsidized from a number of international political donors,” and that they also carry products that are priced lower than those of Emkan.

The entrance of large subsidized funding in the market could prove fatal for non-subsidized funds. According to Fawaz, political funds will necessarily deplete their funds because the interest they charge is unsustainable, and this could eventually push them out of the market.

“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.

Government support

Not only do Lebanon’s political parties have deep pockets, they also form the government that has done little to encourage growth in the sector. The only form of support has come from the central bank, which has issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, according to one banking executive who spoke off the record, the central bank has been unresponsive to requests to use this liquidity. The central bank did not respond to requests for information on the subject.

What the government does have is a fund called the Economic and Social Development Fund, which is mostly funded by the European Commission and has cooperated with Al Majmoua on some microcredit activities in the past. The fund now concentrates on the small to medium-sized enterprise sector and no longer engages in traditional microfinance.

Other than that, it seems nothing has been done. The ministry of social affairs, whose job it is to address the issue of poverty, “has not done much and I don’t know why,” said Makhzoumi’s Safah.

One of the main issues that has not been addressed by any government in Lebanon is to actually pass a law that would allow the industry to be regulated. This would involve setting up a credit bureau and potentially allowing MFIs to perform financial intermediation, the process by which funds are channeled between surplus and deficit. Having this would enable MFIs to act as ‘bankers for the poor.’

But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.

“The government is busy trying to establish a government and their thoughts are very far from establishing microfinance legislation,” said Baydas. MFIs in Lebanon, with the exception of Ameen, are currently regulated by the ministry of interior and not the ministry of finance or the central bank.

Plan? What plan?

Given the amount of poverty in Lebanon, the time to enact a clear cut policy could hardly be more critical. But while microfinance may be a tool to help eradicate poverty, people in the industry agree that it is not a panacea. In order to adequately address the matter the next government may have to start enacting a wider policy of poverty alleviation that also incorporates microfinance instead of just ignoring the issue.

“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”

First published in Executive Magazine’s October 2009 issue

What’s wrong with it?

“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.

Potential microfinance market gaps in Lebanon

Microfinance supply in Lebanon, excluding commercial banks

“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”

“The big banks don’t believe in microcredit — we do,” said Jammal.

Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.

“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”

“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.

Such practices are not what most banks are accustomed to.

“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.

This beekeeper in Touline is among the small-business operators whose business is benefiting from microcredit

Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.

The Politics

Calculation of potential eligible microfinance borrowers, September 2007

As a result, many in the industry have complained that the market is being grossly distorted.

“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.

Government support

But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.

Plan? What plan?

“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”

The Big Broadband Joke

Why Lebanon’s Internet sprints at a snail’s pace

by Sami Halabi

The long hours Lebanon’s Internet users spend sitting in front of their computers waiting for content to download is not the fault of some computer conspiracy. The decrepit state of the Internet is the result of poor governance, suffocating bureaucracy, illegal internet providers and sectarian politics.

lebanon slow internet connection

Illegal Internet networks made headlines last month when a microwave transmission connection installed on top of the Barouk Mountain in the Chouf region of Lebanon was alleged to have been taking bandwidth from Israel.
The incident set off a wave of accusations from Member of Parliament Ahmad Houry, part of the March 14 parliamentary bloc that won last June’s elections, against the present care-taker telecom Minister Gebran Bassil, who is part of the Free Patriotic Movement (FPM) opposition party. Houry claimed Minister Bassil was somehow involved in facilitating the illegal connection.

Hezbollah, allies of the FPM, said that the connection was discovered in April but “a large political party” had prevented the station from being raided earlier. The minister, who did not respond to requests for an interview, has denied the allegations. The station was installed in 2006, however, when Marwan Hamade — a March 14 ally — was telecommunications minister.

Sources in the telecommunications industry, who asked not to be identified in order to speak freely, told Executive that the station owner has not been arrested, which is “very weird,” said Habib Torbey, head of the Lebanese Telecommunications Association (LTA).
Mohamad Safa, an adviser to Bassil — who stressed that he speaks for himself and not the minister — said there were “many partners involved” in the Barouk business, which he claims is now being made an issue in order to maintain the “oligopoly” of Lebanon’s legal Internet providers, who are losing market share to unlicensed providers.
“Some of them [the partners] have been arrested and some have not, but there are no real details because these are security-related matters,” he added. “No one will be able to tell you who the ‘godfather’ is, and if they do they are lying.”
Ironically, the Barouk incident has also cast light upon how technically uncomplicated it would be to increase bandwidth in the country.
“The official sector has [a bandwidth of] only 1 gigabit per second (Gbps). The Israeli antenna of Barouk alone had 10 Gbps,” said Riad Bahsoun, telecom expert at the International Telecommunications Union (ITU), a UN agency for information and communications technology; Bahsoun also advises the Lebanese government on telecom issues. Telecom Minister Bassil recently contradicted this statement though, saying the station was only transmitting 300 megabits per second (Mbps).

Does Lebanon have broadband?
Illegal Internet providers in Lebanon service more than half the market, and for good reason — Lebanon’s legal internet is slow. Even with these illegal suppliers, however, Lebanon’s market is grossly undersupplied.
Many Internet service providers, like Cyberia and IDM, as well as state provider Ogero, claim they provide broadband internet service. That assertion is debatable.
“Nothing [in the market] is really broadband,” said the LTA’s Torbey when asked why his company, GlobalCom Data Services, which owns Inconet Data Management (IDM), one of Lebanon’s largest Internet Service Providers, advertises their Internet service as broadband.

The definition of broadband is foggy. The International Telecommunication Union (ITU) defines broadband as a transmission capacity that is 1.5 to 2 megabits per second (Mbps). In the United States, the Federal Communication Commission is currently seeking public comment on what should constitute broadband, with the goal being to help consumers. The current minimum bandwidth to qualify as broadband in the US is 0.75 Mbps. The Organization for Economic Co-operation and Development defines broadband as 0.25 Mbps in at least one direction. This rate is the most common baseline that is marketed as “broadband” around the world.
Salam Yamout, co-founding member of the Lebanese Broadband Stakeholders Group, a local lobby group that pushes for broadband in Lebanon, defines broadband as 100 Mbps “at the access point for businesses and people who require it.”

The Internet speeds available to the Lebanese public today vary from 0.125 Mbps to 2.3 Mbps. Lebanon’s Internet download speed averages 0.59 Mbps, according to Ookla Net Metrics, an Internet diagnostic company. Ookla says the world average is about 10 times that, at 5.5 Mbps.
It’s astonishing to think that these speeds represent major progress since Digital Subscriber Line (DSL) technology became available in the summer of 2007.
“The introduction of DSL was a very good step although it was long, long, long overdue,” said Leila Serhan, country director at Microsoft Lebanon. “It is still a very shy step and [the slow speed] is definitely hindering the introduction of a lot of the services you can get on the Internet.”
That hindrance has led to a low penetration rate for Internet service, resulting in a vast untapped market for broadband Internet. With ADSL penetration, a precursor to broadband Internet, at less than 10 percent of the population and consumers willing to adopt new technologies, there is ample room for the market to grow, yet it has not.
“There is no network and there is no infrastructure,” said a multinational telecommunications executive who asked to remain anonymous in order to speak freely.
The lack of decent Internet has also hindered Lebanon’s business world. Khalil Letayf, deputy general manager of Société Générale de Banque au Liban and a member of the Lebanese Broadband Stakeholders Group, explained that because of the lack of broadband, his bank has to incur extra costs to make physical backups instead of transferring data over the Internet, due to of the lack of reliable infrastructure. He said that, as a result of operating in such an environment, the risk factors associated with all the banks have increased.

Why so slow?
Lebanon’s Internet market does not run on a network made for data, but rather one made for voice. The current network was built by Siemens, Ericsson and Nokia in the early 1990s with $1.3 billion of funding from the World Bank. There has been no comprehensive plan for improving the infrastructure since then.

“What Lebanon has done since 1994 is build [its telecom infrastructure] in blocks,” said the ITU’s Bahsoun. Bahsoun explains that in the 1990s telecom operations like Internet and mobile were separate, and “back then they didn’t know that all these [Internet and communications technology] services, were going to converge.”
Since then, there has been little restructuring and Lebanon’s telecom ministry today is a fragmented body with two general directorates, a separate office that deals with mobile communications and miles of red tape holding it all together.
Meanwhile, regional telecoms have stayed on the cutting edge of Internet technology and service. Telecom services have been combined and broadband with hassle-free, high-speed upload and download is a reality across the region — but not in Lebanon. Transfering data is a costly and cumbersome process that involves the converting the data into a format suitable for transmission over Lebanon’s archaic network. The result for consumers is low quality and speed in tandem with high costs. The economy surely suffers, as broadband penetration has become a key economic indicator. The World Bank estimates that every 10 percent increase in broadband penetration accelerates economic growth by 1.3 percent.

Where’s the problem?
Because the government only allows Internet service providers (ISPs) a miniscule amount of bandwidth — the measure of available data communication resources — there is no variety in the market. The packages offered by the county’s ISPs are identical in terms of speed, meaning all the options available are relatively similar. What makes matters worse is that the ISPs impose download ceilings or charge for additional downloads above a certain level. This has resulted in a situation where the typical Internet user in Lebanon pays eight times more than a typical user in similar countries like Jordan and Egypt.

Unlike the rest of the telecom sector in Lebanon, which is owned by the government, the retail Internet market does operate under conditions of limited competition. That fact has spurred the growth of several ISPs and Data Service Providers (DSPs). Both are licensed by the Telecom Regulatory Authority (TRA), Lebanon’s telecom regulator — the only difference being that DSPs are assigned a certain frequency they can use to provide services. At present, there are around 20 ISPs and 6 DSPs and many are owned by the same people who typically have connections to politicians. One example is the CableOne DSP, which also owns the Lynx ISP, and is partly owned by Karim Hamade, the son of Lebanon’s previous telecom minister Marwan Hamade. One of the largest DSPs, Sodetel, is half owned by the Ministry of Telecommunications itself and Solidere, the large real estate developer which was founded by the late Prime Minister Rafiq Hariri. The Hariri family also hold a major stake in the Cyberia ISP.
No matter how many connections exist or how much competition there is, without adequate infrastructure and capacity the market cannot grow. The problem is rooted in the amount of available bandwidth in the country and who controls it. Officially, the total amount of bandwidth in the country last january did not exceed 260 Mbps, according to the Telecom Regulatory Authority (TRA), but most observers put the figure today at around one Gbps. This, however, does not take into account the illegal market which controls “40 to 60 percent of the market,” according to Torbey. The Ministry of Telecommunications distributes all the bandwidth in the country and does not release detailed information, even to the TRA.

How to make it better?
In order to legally increase the level of bandwidth however, sizeable investments have to be made to create a “national backbone” in Lebanon. The national backbone will be like an information superhighway that connects the major cities of Lebanon.

“Instead of a superhighway, what you have are small, small roads,” said Kamal Shehadi, chairman of the TRA. “The connectivity between these places is not what it should be.”
Bassil has announced several projects in order to upgrade the current infrastructure, including an upgrade of the existing system like the backbone project.
One development expected to take place is a pilot project in the Hamra and Ashrafieh districts of Beirut that will, in theory, lay down fiber cables. The $14 million project aims to supply better connectivity to residents as well as provide a reference for a previously announced project to build a national backbone that the ministry estimates will cost around $64 million. But even the pilot project has yet to commence and the budget has not been approved by the Council of Ministers.
“They need decisions and they have not got all the decisions,” said the ITU’s Bahsoun.
The decisions in question must be made by the telecom ministry. The telecom ministry today consists of two general directorates, the Directorate of Operations and Maintenance and the Directorate of Construction and Equipment. Moreover, the Directorate of Operations and Maintenance, headed by Abdulmenaim Youssef, also controls the government-owned company that runs the current Internet infrastructure holder, Ogero.

A mess of a ministry
“It is one of the most embarrassing aspects [of Lebanese telecoms] that the person implementing and supervising [the implementation] is the same person,” said Safa, the telecom minister’s advisor.

Youssef did not respond to repeated requests for comment. He was appointed to both posts by Lebanon’s former telecom minister Marwan Hamade in 2005. Beyond being a gross contravention of efficient corporate governance, the position that Youssef maintains has made it almost impossible to ascertain who is in charge of what at the ministry. When Executive called Naji Andraous, the director general of construction and maintenance, to acquire information about the status of the pilot project’s progress, Andaous’ office said that Youssef was in charge.

Kamal Shehadi, chairman of Lebanon’s TRA — Kamal Shehadi is the head of Lebanon's telecomminications regulator

“Abdulmenaim Youssef is reluctant to progress in Lebanon [sic],” claimed Bahsoun.
Youssef held the position of general director of the Directorate of Operations and Maintenance from 1995 to 1999, when he was imprisoned and later released in an extremely politicized struggle for control over the telecom industry. He is widely seen as the representative of current caretaker Prime Minister Fouad Siniora and his political coalition’s interests.
“[Youssef’s] appointments were made at the behest of the previous governments and Prime Minister [Siniora],” says Safa.
It is worth noting that Safa is an advisor to telecom minister Bassil, who is part of the opposition to Siniora’s ruling March 14 coalition. The minister has become the focal point of Lebanon’s most recent political debacle between Michel Aoun, Bassil’s father in-law, and Saad Hariri, the prime minister-designate. Aoun is insisting that Bassil maintain his position at the helm of the telecom ministry.
But the fight over control of the sector seems to run much deeper than the ordinary squabbling between Lebanon’s politicians. Lebanon’s telecom law, Law 431, outlines the legal procedures that should be followed in order to reform the sector. The trouble is that the law has been implemented in pieces, and as such, its interpretation has been a contested topic between the TRA, the telecom ministry and all the political and commercial interests pegged to both bodies.
“If you implement [the law] in parts, especially when politics are involved, you take the parts that you like and the spirit of the law is lost,” said Safa.
The law calls for the creation of a joint stock company called Liban Telecom that will be granted a license to operate for 20 years and provide all other telephony services to the public. Liban Telecom will also acquire the assets of the current operator, Ogero, which includes the current Internet and phone network and any upgrades made to it.

The latest point of contention between the ministry and the TRA is how to increase the bandwidth in the country. Having already announced the expansion projects, the ministry’s current direction is to start by increasing the bandwidth themselves. Critics say the process is hampered by the inner workings of the ministry, especially Youssef’s offices.

Evasive and unaccountable
“The minister asked in a letter about how the E1s are being distributed and the Abdulmenaim Youssef says ‘don’t respond,’” said Bahsoun. (An E1 is a measure of bandwidth equal to 2 Mbps). “When the minister calls [to follow up], he says ‘I don’t know, the letter went missing.’”
Even the Telecom Regulatory Authority’s annual report criticizes the telecom ministry because it will “only release limited information” about the current DSL market, “and as a result, it has been difficult to analyze the root causes of this slow development.” The report goes on to state that “it can be concluded that while some of the problems stem from anti-competitive behavior, others relate to the lack of appropriate investments.”

Factor in the political rivalries in Lebanon and the prospect of broadband becomes even less probable.
“If your objective is to make the minister fail then, you move like a tortoise and tell people that the minister does not act,” said Safa. [As stated above, calls to Youssef’s office to respond to these, and other statements, were not returned].
The other option on the table would be to allow the private sector to install, operate and provision broadband services. However, this too has become a point of contention between Lebanon’s ministry and its regulator.
The TRA wants to offer three “National Broadband Carrier Licenses” to the private sector which would allow them to install the fiber optic cables needed to facilitate broadband Internet and sell the services to end users. One of these licenses would legally have to go to Liban Telecom and other two would be offered in an open international auction. The proposal has been opposed by the minister who has issued his own policy paper stating that he would offer the already existing DSPs (data service providers) one of the two remaining licenses.

TRA vs the telecom minister
The ministry’s position has in part been facilitated by the fact that the law has not been fully implemented and Liban Telecom, the body that the TRA is mandated to regulate, does not exist.

Telecommunications Minister Gebran Bassil — Bassil was telecom minisiter until late 2009

“The [ministry’s policy paper] has a schizophrenic nature,” said Shehadi. “On the one hand it said the TRA is not respecting the law and it is being autonomous. On the other hand it said clearly ‘I want to change the law to make the TRA depend on and report to the minister.’”
Law 431 does say the minister is granted the authority to “establish the general rules for the regulation of telecommunications services in Lebanon” but it also says the TRA has the authority to “organize the bidding process, and issue, execute, oversee, amend, enforce, suspend and revoke licenses.” The minister’s policy paper also criticizes the TRA for not issuing licenses.
“That is bull,” said Shehadi angrily. “The TRA prepared the tender for the mobile licenses and this process was suspended by political decision, not by the TRA. The TRA has [also] issued licenses to about 6 DSPs and about 20 ISPs.”
Shehadi also criticized the minister for not forwarding the TRA’s draft licensing regulation to the Shura council, Lebanon’s highest court, in order to begin the bidding process. Safa defended the minister’s right to amend the legislation if he sees fit.
As far as the DSPs are concerned, they are happy to go along with the minister’s policy because it serves their purposes by protecting them from large international players.
Shehadi, on the other hand, says this policy and the position of the DSPs are putting Lebanon’s economic future at risk by erecting barriers to trade and going against the government’s stated liberalization policy.
“The four wireless service providers who claim, pretend or call for protection from foreign investors are jeopardizing Lebanon’s accession to the World Trade Organization, and Lebanon’s trade commitments to the European Union and to all of our trading partners, for very specific, vary narrow private interests,” Shehadi said, adding that any international player in his right mind “will ally with one of the incumbents,” so they should not fear international entrants.
“We are not trying to recreate a new monopoly or oligopoly,” protests the LTA’s Torbey. “We do believe in competition and free markets. He said that the TRA “cannot start with a clean slate as if nothing has happened in the past,” referring to their presence in the market and the preferential treatment they seek to gain.
Law 431, however, does state that “no discrimination or restrictions shall be imposed on providing the services, as no such restrictions shall be imposed on owning or operating the necessary infrastructure to provide these services.”
But it seems politics have once again stunted the implementation of the law. “In principle the TRA is right, but the minister is the political representative and implements the politics of the government,” said Safa.

Liban Telecom and sectarian politics
When it comes to political appointments in Lebanon, horse trading is commonplace and as such the country’s politicians have yet to come to a consensus over the chairman and board of directors of Liban Telecom. Each delay makes the situation in the telecom industry worse and facilitates the wrangling for power over the sector. So why hasn’t Lebanon Telecom been established?
If it is ever created, Liban Telecom will be regulated by the TRA, thus releasing the control the ministry currently wields over the network as well as dissolving the current operator of the network, Ogero. This will mean that Youssef and the interests that he represents will also have less control over the sector.

Internet service providers (ISPs) in Lebanon

Law 431 also states that the government “may, within a period of two years of the establishment of the company [Liban Telecom], sell a portion not exceeding 40 percent” to a strategic partner. That strategic partner could be anyone from the operators who are present on the market, such as Zain and Orascom, or those allied with political parties in Lebanon that have a stake in the telecom industry.
Whether or not there is a setup in the works may be one thing, but the creation of Liban Telecom also seems to hinge upon another of Lebanon’s more unpleasant sectarian realities.
“The [future] board of Liban Telecom will need to split according to the confessions of the members and a lot of power has been given to the chairman. The chairman will have to be decided on the basis of confession,” said Safa.
Here again there seems to be some horse trading at play because to appoint a member of one confession to a major post means there has to be a balance somewhere else. Sometimes that balance is not maintained and institutions function (or malfunction) without the presence of supervisors, or the intended accountability structures. The Lebanese government to date has failed to even appoint all of its mayors — the very officials who are responsible for providing basic services to the country’s population — let alone appointing the board of a nonexistent entity like Liban Telecom.
“You are in a country where there are sectarian issues,” said the ITU’s Bahsoun. “You have ministers who don’t know why they are ministers; it’s a system.”

Supposing Lebanon’s bickering politicians do eventually work out their differences over the telecom ministry, Liban Telecom, privatization, the national licenses, international commercial interests and the implementation of Law 431, serious work will have to be done to implement a national backbone. This would seem to be a tall order for Lebanon’s politicians who still cannot agree over the formation of a cabinet, let alone implement a progressive economic policy. One can’t forget that the same politicians who are hampering the advancement of an essential economic development tool were also elected last June by the people who still pay exorbitant fees for archaic Internet access.

But, as the ITU’s Bahsoun said: “If the people are happy, what can you do?”

First published in Executive Magazine’s September 2009 issue

The party parade

Lebanon’s nightlife industry booms while its regulation lags behind

by Sami Halabi

Beirut party goers take in the night at Gemmayze’s Torino Express

The festival season is in full swing. American rapper Snoop Dogg is scheduled to play Beirut in August. Visits by Michael Bolton and Paris Hilton, despite one’s personal feelings for the crooner or the spotlight-hungry heiress, are indicators that Lebanon’s summer season is, so far, the most secure since 2004.

The country is expecting “the best tourism season we have ever seen,” says Nada Ghandour, director general at the tourism ministry. According to figures released earlier this year by the ministry, the total number of tourists in 2009 is expected to reach two million, with the majority arriving in the summer months. And Lebanon’s political stability translates not just into a party, but also into cash flowing into the coffers of the country’s quickly expanding nightlife industry.
“Given the amount of people that there are going to be [in Lebanon], everybody will benefit from the season, that’s for sure,” says Oliver Gasnier-Duparc, co-owner and manager of Behind the Green Door, a popular lounge bar in Beirut.
Bars and nightclubs began lighting up Beirut’s nightscape in the mid-1990s on one particular street on the fringes of Beirut’s central district, Monot Street. The allure of untapped market space supplemented by the unquenched thirst of a city without a vibrant nightlife was the perfect recipe for an industry boom. Monot came of age around the turn of the century, with new bars and nightspots sprouting almost weekly.
The phenomenon gave birth to a business model that has been replicated by entrepreneurs looking to make a quick buck.
“You would have a group of five to 10 friends who were ambitious and party animals, and thought ‘let’s each put in $10,000 and open our own bar, and if each one of us brings in just five people every day we will fill up and make money,’” says Ziad Kamel, co-owner of bars Gauche Caviar and Cloud 9 in Beirut’s trendy Gemmayze district. “You see a lot of these kinds of places shutting down and selling off.”
The bars eventually closed and the Monot of today is a skeleton of the once lucrative nighttime hotspot.
“Monot boomed around 1999 to 2000 and now there are only a couple of places left which were the original ones,” says Mark Mouraccade, a long-time bar manager and co-owner of Ferdinand’s bar in Beirut’s Hamra district.
The neighbors were one reason the district ceased to be the epicenter of Beirut’s nightlife — noise complaints forced many clubs to shut down. And then there was the nightlife migration to an older, quainter neighborhood a few blocks away: Gemmayze.

Gemmayze was once a quiet residential area but now has more than 90 bars and restaurants operating in the district. Makram Zeen, president of the Gemmayze Development Committee (GDC), a collective of bars and restaurants in the district, estimates that total yearly revenues of all the bars and restaurants in the area comes to $36 million, or around $400,000 a year for each venue. Zeen, who also owns Le Gardel pub and La Estancia restaurant in Gemmayze, claims the hospitality sector in the district has created between 1,200 and 1,400 jobs and has generated $15 million to $16 million in investment.
The total revenue generated by the nightlife industry in Lebanon is currently not available. When Executive asked Paul Aris, head of the association of restaurants, bars and pastry shops for figures relating to the industry, he laughed and said, “Figures? You must be joking. Even the Ministry of Tourism waits for General Security to give it figures.”

Real estate on the rise
While the nightlife industry has become a welcome addition to Lebanon’s economy, the economics of proximity have also galvanized the real estate sector in areas like Gemmayze and Mar Mikhael. Property in the Gemmayze area is being sold at around $3,000 to $3,500 per square meter, a significant increase from a few years ago, according to research conducted by real estate consultants RAMCO.

“Real estate in the area was being sold for peanuts,” says Zeen. “Now, because of us, the real estate value has increased three-fold.”
While the rising price of property may be one reason most bar owners in Lebanon prefer to rent rather than own, there are other more technical issues to consider. “It’s very complicated to buy properties because usually a building is owned by 15 or 16 people,” says Paddy Cochrane, a bar owner whose family also owns property in Gemmayze.
Sensible or not, the inability or reluctance to buy property has left bar and restaurant owners grappling with soaring rental costs by landlords eager to capitalize on the industry boom. A source who advises bar and restaurant owners on administrative issues said that when one of his clients wanted to renew their rent in Gemmayze, the landlord increased the yearly rate from $40,000 to $120,000.
“There are no rent ceilings imposed by the government,” says Kamel, who is also the treasurer and head of marketing at the GDC. “So if you rented five years ago in Gemmayze for $200 per square meter per year — which you could have easily done — now that your five years are up, the landlord can say ‘you know what I want is $800 to $900.’ [Rent] goes up 400 to 500 percent and all of a sudden it is not feasible for you to run your business.”

The other Gemmayzes
At present the cost of renting a venue for a bar or restaurant in Gemmayze can be “over $900 per square meter [per year],” according to Zeen. As a consequence many entrepreneurs looking to open a nightspot are opting for the adjacent district of Mar Mikhael. “The place was cheap,” says Gasnier-Duparc of Behind the Green Door, who opened last December at the beginning of the Mar Mikhael district. “Most of the people opening up here are doing so because it is cheaper.”

Right now the going rate for a bar or restaurant venue in Mar Mikhael sells at around $450 per square meter per year according to various sources in the nightlife industry.
Another up-and-coming venue for new bars and nightlife is the Hamra district, which housed many bars and restaurants before and shortly after the Lebanese Civil War.
“I ran away from Gemmayze to open here,” says Ferdiand’s Mouraccade. Despite having to pay less rent than bustling Gemmayze, Mouraccade opened his bar in Hamra because he believes the area is “experiencing a revival” and offers a more sustainable business model than other locations. “Hamra is different from the rest because you don’t feel the effect of high season or low season as much,” he says.
Haytham Nasr, who owns and manages the Juniper bar in Gemmayze, believes that because of the district’s increasing costs, entrepreneurs looking to enter the market are now considering other areas. “Any bar owner should maintain their rent at a maximum of 5 to 10 percent of annual revenue and make the initial investment back in a year,” he says. “I don’t see how they are going to profit in Gemmayze.”
Nasr’s new project, called “myBar,” is set to open on the outskirts of Gemmayze around the end of this year. The project is unique in Lebanon because of its business model, operating somewhat like a private equity fund or a public company whereby investors buy “barnotes” that are valued between $2,000 and $20,000 and carry dividends of 0.2 to 2 percent. Nasr’s expected return on investment for co-owners is 274 percent. So far the project has raised more than $650,000 and intends to raise $1 million. “We are very confident that we will reach the $1 million and we are closing off funding in six to eight weeks,” Nasr says.

Saturation point
Although the nightlife industry is currently booming, not all the news coming out of the sector is good. The sheer number of venues opening up has created a substantial increase in the supply of nightspots while rising costs are forcing weaker business models out of the market space.
“Lots of people see that the market is booming, they think it’s easy, open up, and after six months they see that they are not making money and they sell it,” says Mouraccade. Chafic el-Khazen, co-owner and manager of Sky Bar, one of Beirut’s most prestigious sea-side rooftop venues, agrees.
“You know the Lebanese: It’s all about ‘copy-paste’ so there is no creativity,” he says. “The market is over-saturated because it is a lucrative business and everyone will try to get into this industry to make more [than] a little money.”
When a bottle at Sky Bar costs a patron between $200 and $3,000, more than ‘a little money’ becomes a lot of money. Still, Khazen insists that the prices are not unreasonable given the costs he has to cover, which include “over $750,000 a year on fireworks and entertainment.”
For now the alcohol and the money seems to be flowing in Lebanon. However, the industry’s growth is highly volatile and connected to the political situation in the country. “If I showed you a graph of my businesses, in terms of sales and revenues, it looks like a heartbeat,” says Kamel. “Every single time there is a dip, the reason for that dip is political instability and that is true of all the businesses here.”
If the political situation in the country remains relatively stable however, the growth of the industry will show no sign of abating. “It really doesn’t matter who is in power as long as there is stability, security and both parties are in agreement, then everyone benefits,” says Kamel. “This is what the Lebanese have to get into their heads.”

Neighborhood party
But the sector could benefit from an overhaul of regulations that have caused problems as the nightlife sector has blossomed.
“Gemmayze is a residential area” read the signposts that line the streets of Beirut’s Gemmayze district, where some bars and restaurants operate till the early hours of the night.
The loud music, gridlock and rude valet-parking attendants have pitted angry and politically connected Gemmayze residents against equally connected bar owners. The result is that no one has the connections to trump the other, and the law is weak: the regulations regarding the nightlife industry date back to the early 1970s. Thus, a multi-million dollar industry that is a major pillar of the all-important tourism sector suffers from ineffective regulation at almost every level.
“There is nothing in Lebanese law that constitutes a bar and this is where the issue lies,” says Juniper bar’s Nasr.
Now that the nightlife industry is booming and entrepreneurs are eager to enter the market, the economic growth seems to have overstepped the ability of local authorities to effectively regulate the sector within the confines of the old laws.
“You have so many places that open without any licenses and don’t abide by any regulations or law,” says Sky Bar’s Khazen.

Nobody’s law
The existing law that governs the restaurant sector classifies establishments as either restaurants or nightclubs. The law also prohibits nightclubs from opening in residential areas or within 100 meters of a religious building. As a consequence, many bars located in residential areas operate using a restaurant license without actually serving food but having to fulfill all the requirements of Lebanon’s antiquated restaurant laws. What’s more, this also places the establishments at the mercy of the evaluation of inspectors from the tourism ministry or the municipality.

A string of cocktails line the bar at Mar Mikael’s Behind the Green Door

“It’s very hard to meet the requirements that were set in the 1970s for a restaurant,” says Gauche Caviar and Cloud 9’s Kamel. “You are in this gray area which allows the government to blackmail you to decide whether you are legal or not, which results in corruption, bribery, bad regulation and places being shut down that thought they were safe.”

One of the main causes of these ailments is the process by which restaurants obtain their licenses. Licensing proceeds in stages with the first stage constituting a “feasibility study,” says Nada Ghandour, director general of Lebanon’s tourism ministry, one of the government bodies charged with regulating the sector. Bar owners apply to the ministry in order to receive a first stage license on the condition that they will actively seek a second stage license to make them completely legal.

“The first stage [license] is pretty easy to get but almost nobody has the second stage [license] and nobody knows why,” says Ferdinand’s Mouraccade. “We apply and we wait and wait.”

The official line
Tourism ministry Director General Ghandour says that it is not the ministry’s fault that establishments do not receive their final licenses, and lays the blame on Lebanon’s building code implemented by local municipalities and the intransigence of owners.
“They take the first stage license… open and say ‘merci, au revoir ministry of tourism. We don’t need you anymore’,” she says. “The [other] major problem in Gemmayze and Beirut is the building law, because the places that are open in the old buildings are not places that were made to become restaurants.”
In order to “help” the establishments, Ghandour has in the past given out “temporary secondary licenses.” A legal expert who spoke on condition of anonymity says the practice goes against legal procedures. “The secondary license is your final permit so legally it cannot be temporary,” says the source. “The first stage is ‘temporary.’”
Local municipalities also regulate the health and safety of Lebanon’s bars and nightclubs. However, even these important issues seem to have been neglected.
“The law states that the straws at the bar must be protected but nobody does it and for fire, nobody checks,” says Gasiner-Dupar of Behind the Green Door. “They always find something, but after that you deal with them [financially].”
The lack of adequate legislation and enforcement to regulate the sector finally culminated in the ongoing dispute between Gemmayze’s local residents, bar owners and government authorities. After several protests in April 2008, one of which featured residents in pajamas blocking traffic and demanding their right to sleep peacefully, the former Tourism Minister Joe Sarkis finally acted, issuing a decree imposing a curfew on all bars and restaurants. The move required many establishments to close during some of their most profitable hours of operation, substantially hurting their businesses.
Kamel claims that the law was completely illegal because it was only applied in one area of the country and was enforced without the consent of the interior ministry and the municipalities, who are responsible for imposing closing times.
“These fanatic residents got together and lobbied against the minister,” says Kamel. “The main people who are bothered are the people on old rent and not benefiting [from the establishments]. If the real residents of Gemmayze, who are the landlords, are bothered then why are they renting the space to everyone?”
During that time, many bars and restaurants were forced to close or threatened with punitive action because they lacked second stage licenses or didn’t have any licenses to begin with. The curfew lasted for around two weeks and eventually dissipated, much to the distress of many local residents and organizations.
“We managed to calm them down for a week or so but they just come back and its worse,” complains Georges Abi Khalil, head of management and coordination at the Gemmayze Development Association (ADG), a local non-governmental organization that works on the preservation and development of the Gemmayze district.
Earlier this year, the current tourism minister, Elie Marouni, along with Interior Minister Ziad Baroud, issued a joint decree reinstating the curfew across Lebanon.
The move set off a wave of protests from local bar, restaurant and nightclub owners who blamed the lack of law enforcement in Gemmayze by local police.

No controls
“The street is the busiest street in Lebanon and we don’t even have one security officer in the street, not one traffic cop,” Kamel says of that time. “We don’t have the support of the government to stop double parking or cars going up one way streets and these are all causes of noise.”
After the curfew was reinstated, a delegation of nightlife industry owners visited the interior and tourism ministers and pleaded with them to reconsider. Reports then surfaced about the interior minister standing on the main road in the Gemmayze district asking party goers to reduce their noise levels.

Local band Mashroua Layla performing at the Fête de la Musique in Beirut Central District in June

“We saw him stopping cars, himself,” says Kamel. “Imagine the minister of interior peeps in your window and asks you to lower the music. People apologized to the minister and put their music down.”
Around two weeks after the reported policing by Minister Baroud, the interior ministry issued a clarification to the decree stating that the curfew did not apply to establishments that sound-proofed their bars and restaurants. The party was on again, but the problems didn’t disappear entirely.
On July 10 some residents of the Gemmayze district staged another protest in the main street demanding tougher regulation of establishments.

Problems to solve
“A decision has been taken by the Ministry of Tourism and the Ministry of Interior to let them [entrepreneurs] open as many bars as they like,” claims Fadia Kiwan, a local Gemmayze resident who took part in last month’s protests. The protest eventually turned violent when another local resident, Hadi Souaid, claims he was attacked and beaten by the entire staff of a local bar in Gemmayze. “When the police arrived they did nothing,” says Souaid.
In an attempt to pacify the situation, the Gemmayze Development Committee (which represents the bar owners) has issued a 15 point plan to address the issues facing the district. One of the most important of these is the problem of parking an estimated 1,800 cars that enter the district on any given night. To address the problem, the GDC and the tourism ministry have been lobbying to open the Charles Helou station’s three-floor parking lot and turn it into parking space for Gemmayze’s residents and visitors. Minister of Transport Ghazi Aridi has agreed to the proposal in principle but bar owners say the ministry of transport has yet to act.
“All we hear is talk and empty promises,” says GDC president and local bar owner Makram Zeen.
For now the regulation of the industry remains in disarray and, from the lengthy list of reforms Lebanon’s post-war governments still has to implement, it doesn’t seem likely the sector will receive much attention from any new government. “We are in Lebanon,” says Khazen. “Before [improving the regulation of] this industry, there are so many other things that are [so] much more essential that the [Lebanese] need to do.”

First published in Executive Magazine’s August 2009 issue

TMA’s flight path

The peculiar politics of the cargo business

by Sami Halabi

TMA Lebaon — TMA's aircraft have been grounded for years

If one were to attempt to gauge the progression of Lebanon’s economy from the 1950’s until today, one would do well to observe the trials and tribulations of the region’s first all cargo airline that ebbed and flowed with the country’s fortunes. Trans Mediterranean Airways (TMA) started out as the brainchild of Lebanese entrepreneur Mounir Abu Haidar in 1953. In 1949, Abu-Haidar reportedly gave up a career in medicine to take up a job as a junior clerk at Saudi Aramco. Working his way up the corporate ladder, Abu-Haidar eventually became the head of transportation at Aramco and was assigned the task of providing food and equipment for oil prospectors in the countries now know as the GCC.
Having identified the need for air transportation to service the expansion of Saudi Arabia’s energy behemoth, Abu-Haidar used his contacts at Aramco to obtain a letter of intent from the company to use his still chimerical air charter service to facilitate the operations of the company’s oil prospectors. Letter in hand, he flew to London where he arranged the lease of an aging transport plane — and TMA was born.

Carry anything that pays
TMA literally and figuratively took off, operating out of Lebanon under the license of then independent Air Liban. As TMA grew, it began to diversify its cargo, transporting everything from vegetables to firearms.
“Weapons to me are the same as pieces of lumber. A European government charters one of my planes and asks me to haul rifles to Algeria. What do I do, let someone else have the business?” said Abu-Haidar in an interview with Time Magazine, published June 1968. When British, French, and Israeli forces attacked Egypt in 1956, forcing the closure of the Suez Canal, the need for air transport sky-rocketed, as did TMA’s revenues, which quadrupled in one year to $1.2 million.
By 1967, TMA was operating the world’s longest all-cargo route and by 1971 TMA became the first cargo airline to offer around-the-world service. This achievement came despite the fact that TMA lost two of its aircraft in 1968 when Israeli commandos destroyed 14 civilian aircraft at Beirut International Airport to avenge the hijacking of an El-Al flight earlier that year by the Popular Front for the Liberation of Palestine (PFLP). By the onset of the Lebanese Civil War in 1975, the airline employed around 2,000 people and was a beacon of the Lebanese aviation industry.
As the civil war took its toll on Lebanon’s economy, TMA’s fortunes made an abrupt about-face, ending in the red for the first time in 1979. Faced with an increasingly unstable situation in Lebanon, the airline moved the majority of its operations to the UAE between 1976 and 1986. TMA’s prospects continued to wane as a result of the war and by 1986, after having failed to attain government assistance, the company came under the control of the Lebanese government, then headed by President Amin Gemayel. With the airline now public its fortunes — already dampened by the effects of the Lebanese Civil War — became inseparable from the corruption and nepotism that permeated the Lebanese economic and political landscape during the war-torn 1980s.
The Lebanese government later reversed its decision to bailout TMA and gave five times the amount that Abu-Haidar requested to Jet Holdings, according to Najib Alamuddin, Middle East Airline’s (MEA) chairman for more than 25 years. Jet Holdings’ chairman at the time was the infamous Lebanese business tycoon Roger Tamraz.

Silver-tongued Tamraz
By the time Tamraz took over TMA he had racked up an impressive resume of business mis-adventures, including the embezzlement of hundreds of millions of dollars from various projects, and been sentenced in absentia to 15 years imprisonment by a Lebanese court. Tamraz contested the sentence, claiming he was being politically persecuted
At the time of TMA’s purchase, Tamraz was head of the Intra Investment Company (IIC) and Bank Al Mashrek, the successors to Intra Bank. Based in Beirut, Intra Bank had been the largest financial institution in the Middle East until it collapsed in 1966. The bank — holding about 10 percent of total bank deposits and about 40 percent of Lebanese banks’ deposits — turned out to be carrying about $120 million in essentially non-existent collateral.
The scandal sent shockwaves throughout the Middle East’s financial sector and the Lebanese economy, where it held major stakes in many of the country’s largest companies, including its national air carrier MEA. Fifteen months later, the bank was re-floated by the US investment bank Kinder Peabody & Co. where Tamraz was an executive. Tamraz then took over Intra in August of 1983, three years before it bought TMA through Jet Holdings.
After years of destruction during the war, Beirut International Airport (BIA) eventually re-opened its doors in May of 1987, prompting the return of TMA to Lebanon with a reduced fleet of seven Boeing 707s.
In late 1988, rumors of a liquidity crisis prompted a rush on Bank Al Mashrek and the bank collapsed. During the fallout over Mashrek’s collapse in 1988, Lebanon’s central bank took control of Jet Holdings and, by default, TMA. TMA’s fortunes continued to falter as a result of regular closures at BIA. When the war ended in 1990, the airline was in shambles, its ownership disputed and its routes diminished. TMA had become symbolic of Lebanon’s economy after 15 years of civil war.
In early 1991, a government committee was established to decide TMA’s future. The committee estimated that the company’s debt stood at $80 million, while its assets only totaled $45 million. Under these circumstances the committee proposed that the airline either merge with MEA or be granted a substantial amount of funds in order to resume operations. “There was a concept prompted by Hariri for a merger between MEA and TMA. The concept was that Lebanon needs one airline and MEA needs to be privatized so why not merge TMA and MEA and put them on the marketplace,” says Fadi Saab, CEO of TMA from 1996 to 2008.

Landing ownership
In the end, the dispute over the airlines’ ownership was finally resolved when a 74 percent stake of TMA was bought by the Lebanese Air Investment Holdings (LAIH) in March of 1993 for $8.5 million, according to Mohamed Kabalan, the longtime head of TMA’s workers’ syndicate. The owner of LAIH was Farid Raphael, currently chairman and general manager of Banque Libano-Française (BLF).
Raphael refused to contribute to this article, stating only “the banks managers and owners do not talk about their personal investments.” At that time many rumors began to spread regarding the company; one of which suggested TMA was actually bought by the late Rafiq Hariri through Raphael and his holding company.
“The rumor has been going around ever since I came aboard that this is a Hariri company. I have not seen any proof that this is a Hariri company,” says Saab. Other factors further obscured the identity of TMA’s true owner. “The address on the letter of purchase was that of BLF, but the name registered was not BLF; it was LAIH,” says Kabalan.
All indicators, however, point to the fact that TMA was bought in order to be sold. “The idea of LAIH was to restructure the company and then sell it to a strategic partner,” explains Saab, a claim denied by his company in the past. In order to prop-up the airline’s prospects and its marketability, the government court appointed to handle the bankruptcy of Bank Al Mashrek forgave a total of $39 million that was owed by TMA to the bank, giving the airline some much needed wiggle room.

TMA time-line
1953 — Mounir Abu-Haidar founds TMA to service Aramco’s oil prospectors
1959 — TMA obtains air proprietary cargo license
1966 — TMA introduces jet service through the acquisition of its first 707s
1968 — Israeli commandos destroy two of TMA’s aircraft in an attack on Beirut International Airport and the airline establishes the longest scheduled air cargo route in the world
1971 — TMA obtains the rights for the first round-the-world all cargo service
1976 — Beirut International Airport closes for 168 days because of Lebanese Civil War and TMA moves its operations to the UAE
1979 — Rights to fly a round-the-world cargo service are withdrawn
1985 — Operations ceased as a result of Lebanese Civil war
and labor disputes
1986 — Lebanese Government takes control of TMA from Abu-Haidar and transfers it to Jet Holdings under Roger Tamraz who moves its operations back to BIA
1988 — Bank Al Mashrek collapses sending Tamraz fleeing and Lebanese Government re-acquires TMA
1993 — A major stake in TMA is purchased by Farid Raphael’s Lebanese Air Investment Holdings
1996 — TMA decides to increase its capital by $40 million as part of a new restructuring program
1999 — TMA comes out of the red for the first time in decades
2000 — Lebanese Government adopts the Open Skies agreement putting TMA at a competitive disadvantage
2002 — TMA’s planes banned from flying over Europe
2005 — The Lebanese Civil Aviation Authority suspends TMA’s Air Operating Certificate, grounding the airline’s planes
2008 — A 99 percent stake in LAIH is sold to entrepreneur Mazen Bsat for a total of $1
Under the aegis of LAIH, the airline began a restructuring program with the hope of pulling the ailing carrier out of the red. After a tragic crash of one of its 707s in 1993, the company decided to reduce its staff, despite staunch opposition from TMA’s labor syndicate. TMA’s staff went from 750 employees in 1993 to around 400 by the end of 1996. With the company again in disarray the prospects of it being sold became negligible. “[Rafiq] Hariri had previously approached Raphael [and] told him to ‘hold off on the kind of reorganization you want to do because we might buy [TMA] from you’. There was political opposition at the time and in 1996 it was apparent that this would lead nowhere,” says Saab. With the prospects of a Hariri buyout all but wiped out and the perpetually unstable labor situation looming, TMA closed its doors from July to October of 1996. The company asked a then little-known consultant to perform a complete audit and create a restructuring plan. The consultant, Fadi Saab, then spent 12 years at the helm of TMA.
At the behest of Saab, LAIH decided to prop up the company with a capital injection that totaled $40 million. “The infusion was done by Farid Raphael’s group and it was done in two phases. The first was $20 million and the second phase was $20 million,” says Saab. Accordingly, Saab promised to get the company out of the red at any cost. “He made all employees sign a two-year salary freeze without the consent of the syndicate. He said that either you sign or you don’t have a job,” claims Kabalan. “The syndicate never accepted conceptually what we were doing and so we took a management decision to freeze salaries. There was no agreement between us and the syndicate,” Saab furthers. The salaries of TMA’s employees have remained frozen ever since.

Back in the air
Nonetheless, Saab managed to bring the company into the green, albeit kicking and screaming and without the kind of support he was looking for from the LAIH injections. “The two injections of capital did not come in time; they came in bits and pieces. They ended up as funding for working capital requirements and not as an investment capital, so we were unable to use the funds ‘front end’. We had to use them to pay bills,” explains Saab. Even so, TMA’s revenues grew by $5 million from 1996 to 1998 and it started to make a profit by 1999.
However, in the typical yo-yo fashion of TMA, things started to go awry again in 2000. One of TMA’s biggest clients was Kuwait Airlines who had leased three of TMA’s 707s to operate its cargo arm. In late 1999 the Kuwaitis requested TMA install the TICAS navigation system on its planes because they needed the system installed by January 1st, 2000 in order to fly over several countries. “We made about $1 million a month from the Kuwaiti contract,” says Kabalan. “Saab didn’t install it until the last minute. The Kuwaitis said they didn’t want to take the planes two or three months later because they had obligations to fulfill in the mean time. They left us for someone else and we lost $1 million per month.” As far as Saab was concerned, Kuwait Airlines were on their way out anyway. “Kuwait Airways were shopping for a replacement for TMA because our planes were old and expensive to operate and maintain. We knew they would cancel.”
External factors and government favoritism also played a major role in TMA’s demise. In 2000, the Lebanese government decided to adopt the Open Skies agreement, effectively opening up Lebanon’s airspace and BIA to all foreign companies with no restrictions on route rights, the number of designated airlines, capacity or frequency. The agreement effectively crippled TMA’s competitive advantage in the Lebanese market and consequently nullified its attractiveness to investors. “Open Skies was one of the main factors why TMA was not able to find an investor. All the international airlines we were talking to said ‘why do we need you anymore?’” says Saab.
Compounding this decision was the government’s longstanding favoritism of MEA, of which it owns 99 percent through the Lebanese central bank, despite several initiatives to privatize the airline. Moreover, MEA still enjoys a monopoly, which expires in 2012, on scheduled air transport of passengers. MEA’s monopoly, which expires in 2012, has curbed the aspirations of many airlines — including TMA — looking to expand into scheduled passenger transport. “In concurrency to Open Skies, the government protected MEA. The government renewed the exclusivity of MEA, erased debt that MEA owed to the government and injected millions of dollars of capital,” explains a high-ranking member of the aviation industry, who spoke on condition of anonymity. “When you tell the government MEA is against the WTO and its unfair competition, they tell you it’s a private company,” the source added.
To date, MEA’s monopoly remains in place, in spite of the International Civil Aviation Organization’s (ICAO) principles, to which the Lebanese Civil Aviation Authority (LCAA) is a member. “Monopoly is out of the question when it comes to civil aviation; its not part of the formula. No one in the world encourages it anymore,” says Mazen Hamdicouk, Head of the LCAA. “However, our position is dictated by the minister [of transport] and the government has to make that decision at the end of the day.”
As far as Lebanese Minister of Transport Ghazi Aridi is concerned, there is no reason why MEA cannot continue to be Lebanon’s only national carrier for some time to come. “Some people think that MEA’s exclusive rights end in 2012, but I think of how to keep protecting the national carrier after this date,” said Aridi at the opening of MEA’s new pilot training center in November 2008. Aridi was unavailable for comment. What’s more, the EU banned TMA’s aging 707s from flying over Europe in 2002 due to requirements on emissions standards eliminating many of TMA’s most profitable routes.

Purge of pilots
With everything seemingly working against TMA, the blow came in 2005 when a row with its pilots over pay resulted in all but a few of its 53 pilots losing their jobs. That same year the LCAA suspended TMA’s Air Operator’s Certificate (AOC), citing the fact that they no longer had the capability to operate effectively, and so the airline ceased flying. The company’s planes currently sit amongst a pile of shrubs on the outskirts of TMA’s facilities at BIA waiting to be scrapped.
By the end of 2005, TMA’s debt stood at $85 million dollars. From 2005 to 2008, the airline managed to bring its down debt to $60 million through renegotiation with its various creditors. The company’s operations are now restricted to maintenance and handling at BIA. TMA needed new blood; it needed a new vision, which came in the form of a one dollar bill.
In late December 2008, LAIH was purchased for $1 from Farid Raphael. The new owner of TMA is Mazen Bsat. The mild-mannered Bsat started his career in his family-owned pharmacy business, which he later took over and built into one of Lebanon’s most successful pharmacy chains — Mazen Pharmacy. Bsat also owns a series of childcare and toy stores around Lebanon, as well as a mall that carries his name — Mazen City — on the outskirts of Beirut.
Bsat first entered the commercial aviation world in 2000, when he opened his charter airline and named it the Flying Carpet — Bsat al-Rih in Arabic. Flying Carpet got its start by flying to Iraq before the American-led invasion in 2003. At the time, there were no direct routes from Beirut to Baghdad and charter service was the only avenue for direct flights between the two cities. From a one plane operation eight years ago, Flying Carpet now operates point-to-point eight times per week to Baghdad, Irbil and Suleimania.
As Flying Carpet expanded in unison with the post-war Iraqi market and it too became marred by the type of controversy that has become synonymous with the country. On 15 January 2004, one of Flying Carpet’s airplanes flew into Beirut carrying $12 million in new Iraqi dinars, the same day the Coalition Provisional Authority (CPA) stopped disseminating the currency in Iraq. The plane, its passengers and its valuable cargo were all seized by the Lebanese authorities who suspected the money was part of widespread smuggling associated with the currency at the time. The authorities also arrested Michel Mkattaf, the owner of a local currency exchange business and the only son-in-law to former president Amin Gemayel. The other passengers were Richard Jusurati and Mohammed Abu Darwich.
The New York Times reported that Bsat was actually flying the plane at the time, a claim he vehemently denies. “I wasn’t flying the plane, I was in Beirut at the time. I don’t have even have a license to fly [commercial aircraft],” says Bsat. “They leased the plane from me to transport cargo and I had no idea what was in the cargo.”
The issue was finally resolved when the Iraqi Ministry of Interior — in effect under the auspices of then head of the CPA Paul Bremer — sent a fax to the Lebanese government stating that the money was being legally transferred for the “urgent purchase” of armored vehicles and “sophisticated equipment intended to confront the dangerous security situation in Iraq,” reported The Independent.
In the end, all the men and the money were released and Bsat claims the entire issue boiled down to the usual political bickering between Lebanon’s politicians. “It was basically political. Mkattaf is the son-in-law of Amin Gemayel. Amin Gemayel and Emile Lahoud [Lebanon’s president at the time] didn’t like each other and this is how it started,” says Bsat, banging his fists together for emphasis. Mkattaf’s legal council could not be reached for comment.
Bsat began his relationship with the TMA in 2001 when he contracted the company to service his fledgling airline. The relationship blossomed and allowed Bsat access to the inner workings of TMA. “I knew TMA inside and out: the structure, the facilities and the manpower. I knew that there was huge potential for TMA,” he says. The potential that Bsat refers to is rooted in TMA’s facilities at BIA, a rare and valuable asset considering the fact that the airport can no longer expand because it is surrounded by residential property and the sea. Furthermore, because Bsat already owns a functioning airline he can benefit from economies of scale by using the same back office to run both TMA and Flying Carpet. But was TMA really worth $60 million of debt?
“Perhaps the company is not worth $60 million and maybe I am buying it for more than its worth,” admits Bsat.
Upon entering TMA’s various facilities, one can clearly see that the company had been neglected by its previous owners. Old telephones and their cords are stacked behind a door in one of the buildings, chips of paint cover the floors inside and outside of the facilities and even the ceiling of the chairman’s office is beginning to cave in. Therefore, it’s little wonder that the first phase of TMA’s restructuring plan under Bsat is to renovate TMA’s buildings and facilities and upgrade maintenance and handling capabilities.

Labor storm
By acquiring TMA, Bsat took on a great deal of financial burden. He also placed himself smack in the middle of the seemingly unending battle between TMA’s labor syndicate and its management. The constant labor disputes at TMA have, in the past, seriously affected the company’s ability to market itself as a reliable carrier. While the decision to upgrade and renovate the facilities may seem to be a logical and necessary step, given their abysmal state, it has angered many of TMA’s employees as well as the country’s labor rights advocates.
“What the administration is doing in reality is making the problems of employees their lowest priority by focusing on fixing the buildings and painting them,” says Ghassan Ghosn, head of Lebanon’s General Confederation of Labor Unions. Ghosn threatened to encourage widespread strikes and protests at TMA, as well as to sue TMA’s administration “if possible,” unless TMA meets the labor syndicate’s demands.
Bsat is dealing with this threat head on. “We have sent the union a rejection letter pertaining to their demands. I told them that it’s not the time for it,” says Bsat. “[Management decisions are] not their business. Their business is to work and ours is to manage.”

The wrap up
Essentially Bsat has paid $60 million, in the form of debt, for TMA. The debt itself is owed to a number of banks and other creditors, including the National Social Security Fund (NSSF) and the LCAA. While the company has managed to make an agreement with the NSSF over how it will pay off the $15.5 million TMA owes. A Lebanese court is considering the amount owed to the LCAA. The main point of contention is whether or not TMA owes the LCAA the total amount of land rented from the LCAA based on the actual land or the built-up area. The outstanding amount has been pending for around 15 years and the difference in calculations stands at around $6 million — $15 million as opposed to $9 million. Bsat has agreed to pay the amount requested by the LCAA because he has “decided to take all the problems out of the way of TMA.” Prior to the decision, Bsat paid the LCAA $1 million dollars as a “goodwill gesture” but he cautions, “at anytime, I can ask the court to be part of the issue again.”
Given TMA’s tumultuous past, its labor issues, its massive debt and the Lebanese governments favoritism of MEA, the odds are against Bsat. Nevertheless, Bsat is determined to expand TMA’s operations, promising to take on new planes once he has completed the first phase of his restructuring program and casting off doubts about the acquisition being merely another ploy to reposition the company for a sale. “I’m in it for the long run,” says Bsat.
So far, Bsat has taken bold steps to address many of the airline’s longstanding issues. With Bsat running the show, TMA now stands to benefit from a new and inspired vision backed by a history of success in the regional aviation industry. How high and how long this new chapter in TMA’s, and Lebanon’s, history will last is anyone’s guess. The two options appear to be up or out. If Bsat’s past is anything to go by, TMA seems to have its sights firmly on the sky.

First Published in Executive Magazine’s March 2009 issue