2010 Investment Climate Statement - Lebanon
Lebanon is a country that is open to foreign direct investment by tradition. Over the last seven years, the GOL has passed several laws and decrees to encourage investment. The Investment Development Law grants the Investment Development Authority of Lebanon (IDAL), a public agency under the Prime Minister, the authority to award licenses and permits for new investments, as well as to grant special incentives, exemptions, and facilities to large projects. In an attempt to attract foreign investments, IDAL launched in 2003 the "Investors Matching Service" to facilitate the creation of strategic international-local partnerships through joint ventures, equity participation, acquisition, and others. IDAL is currently setting up the Investor Support and Information Center (ISIC), a data bank that will provide comprehensive, reliable, and up-to-date investment related information to prospective investors.
Lebanon has many investment enabling strengths that have encouraged foreign companies to set up offices in recent years. Lebanon's key advantages include a free market economy, the absence of controls on the movement of capital and foreign exchange, a highly educated labor force, good quality of life, and limited restrictions on investors.
Moreover, Lebanon has not been affected by the global financial crisis due to sound banking regulations that prohibit investing in structured products. Commercial banks record high liquidity levels.
Although they are the largest lenders to the GOL, commercial banks are interested in financing the government's privatization programs.
Meanwhile, Lebanon is one of the few countries that has benefited from the global financial crisis; the banking sector saw significant capital inflows that reached close to $20 billion in 2009. This is attributed to the fact that Lebanon's banking sector is perceived as relatively safe given its high liquidity and high interest rates on deposits. Moreover, there was a significant influx of tourists in 2009, which led the United Nations World Tourism Organization (UNWTO) to rank Lebanon as number one worldwide in terms of highest growth in number of tourists in 2009.
Banking sources project 2010 will be a good year on the political and economic fronts. The political climate has gradually improved since mid-2009. Parliamentary elections in spring 2009 were peacefully-held; a national unity cabinet was formed in November; domestic political reconciliation continued and culminated with the recent visit of Prime Minister Saad Hariri to Syria in December 2009. These developments have created positive investment sentiment about Lebanon among the Lebanese diaspora as well as among Gulf Arabs and other foreigners. Banks anticipate an increase in capital inflows and foreign direct investment, improvement in exports due to an improvement in the external environment, and an increase in the tourism sector in 2010.
While the public deficit and public debt could be a major issue of concern to investors, the GOL, in line with the IMF, stresses that the debt-to-GDP ratio has been on a downward trend over the last three years, reaching 160 percent in 2009 compared to 180 percent in 2006. The new finance minister is keen to maintain this positive trend. Meanwhile, given high liquidity in the domestic banking sector, the GOL should not face difficulties in rolling over sovereign maturities in 2010.
However, some issues continue to cause frustration among local and foreign businessmen. Impediments include red tape and corruption, arbitrary licensing decisions, complex customs procedures, archaic legislation, an ineffectual judicial system, high taxes and fees, flexible interpretation of laws, and weak enforcement of intellectual property rights. These factors have pushed the International Finance Corporation (IFC) in its 2010 report to rank Lebanon 108 among 183 countries in terms of ease of doing business.
However, the report noted improvements in simplifying mechanisms for paying business taxes and business start-up procedures. The "Doing Business" report ranks economies based on ten indicators: ease of starting a business, dealing with construction permits, employing workers, registering property, access to credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business.
The government continues to express a strong commitment to improving the business environment in its reform program submitted at the Paris III International Donors' Conference in January 2007. In January 2006, the Ministry of Economy and Trade (MOET) signed an agreement with the IFC to help streamline business registration procedures in Lebanon. A short-term business registration simplification solution was endorsed in September 2007 and is expected to reduce time, cost, and number of procedures by 50 percent. The MOET is working on new legislation to further reduce time, costs, and procedures in the long run.
In 2009, thirty-six foreign companies, including four U.S. companies (in the IT and service sector), opened offices or branches in Lebanon, according to statistics from the MOET.
Lebanon received mixed results in the World Bank's latest annual governance survey (issued in 2008), ranking 146 out of 212 countries worldwide and 13 out of 20 MENA countries, on six governance indicators. Compared to the MENA region, Lebanon's rank remained unchanged on government effectiveness, political stability, voice and accountability, and rule of law, while it regressed by one spot in regulatory quality and control of corruption. Lebanon regressed significantly worldwide on the control of corruption indicator, falling by 17 spots.
Privatization is a key component of the current government's economic reform program. But progress on privatization will be dependent on political will, as well as global market conditions.
The GOL is also keen on improving the investment climate through amending existing laws and streamlining administrative procedures as well as encouraging domestic and foreign investment and public-private partnerships. The GOL plans to restructure the telecommunications sector according to Law 431 (on the privatization of telecommunications), improve the landline and mobile network to improve coverage and quality of service, and expand internet bandwidth. Meanwhile, the GOL has delegated management of the two GOL-owned cellular companies to contractors.
In March 2007, Booz Allen Hamilton completed the plan for setting up Liban Telecom by merging MOT directorates and Ogero (the public company in charge of fixed lines maintenance and the country's ADSL provider). Implementation awaits the political nomination of Liban Telecom's board, which will happen on a sectarian basis and therefore is unlikely in the near future. Liban Telecom will also hold a third cellular license and will be open for privatization through the sale of 40 percent of its shares at a first stage.
In the power sector, in order to privatize power production and distribution at Lebanon's national power company, Electricite du Liban (EDL), the government contracted three separate advisory teams in November 2007 to help corporatize EDL and set up the regulatory framework for its privatization. Moreover, the IFC has helped in preparing the due diligence for an Independent Power Producer (IPP).
In November 2007, the Ministry of Energy and Water (MEW) signed two memoranda of understanding with two separate local private companies to build private power plants, in line with the government's plan to privatize the electricity industry and switch to cheaper and more environmentally friendly fuels. One company is to build a new 50-megawatt plant to supply the national power grid and the other company will construct the country's first wind-powered plant in the Bekaa region. Both projects await issuance of a license and offer good opportunities for U.S. technology and investment.
There are opportunities for attracting foreign investors in infrastructure projects. The government pledged at the Paris III Conference to maintain an appropriate level of investment spending.
The Council for Development and Reconstruction (CDR) is responsible for tendering and procuring funding for government physical infrastructure projects (electricity, telecommunications, roads, and public transport), social infrastructure (education, public health, social and economic development, land use, and environment), basic services (water supply, wastewater, solid waste management), and productive sectors (agriculture, irrigation, ports, airports, tourism, and government buildings). According to the latest CDR progress report of October 2009, there were 1,085 projects in progress valued at $2,450 billion by the end of December 2008.
Public infrastructure opportunities mainly lie in roads and highways, ports, electricity, education, solid waste, wastewater, and water supply. As of the end of 2009, CDR had a total of $1.8 billion in loans and protocols ratified by parliament but not yet disbursed. As of September 2009, CDR had a total of $850 million in loans awaiting parliamentary approval (including financing for the private sector). In addition, the CDR had nearly $600 million in grants mainly related to pledges prior to Paris III and earmarked for public investments for post-July 2006 war reconstruction; CDR has already spent part of this assistance. In addition, donors pledged $2.7 billion in project financing at the Paris III Conference. The CDR has a limited absorptive capacity and targets annual spending at around $750 million.
A foreigner can establish a business under the same conditions that apply to a Lebanese national, provided the business is registered in the Commercial Registry. Foreign investors who do not manage their business in Lebanon do not need to apply for a work permit.
However, foreign investors who own and manage their business in Lebanon must apply for an "Employer Work Permit" and a residency permit. The Employer Work Permit stipulates that the investor's share in the capital not be less than USD 67,000 and that the investor pledges to hire three Lebanese and register them at the National Social Security Fund (NSSF) within six months. All companies established in Lebanon must abide by the Lebanese Commercial Code and regulations and are required to retain the services of a lawyer. The judiciary upholds the sanctity of contracts. There are no sector-specific laws on acquisitions, mergers, or takeovers, except for bank mergers.
Lebanese law does not differentiate between local and foreign investors, except in land acquisition (see property section below).
Foreign investors can generally establish a Lebanese company, participate in a joint venture, or establish a local branch or subsidiary of their company without difficulty. Specific requirements apply for holding and offshore companies, real estate, insurance, media (television and newspapers), and banking.
The establishment of joint-stock corporations, limited liability, and offshore and holding companies are allowed under Lebanese law.
A joint-stock corporation (Societe Anonyme Libanaise - SAL) is governed by Decree Law No. 304, dated January 24, 1942, under the Commercial Code. Limitations related to foreign participation include a general limitation on management participation (Article 144 stipulates that the majority of the Board of Directors should be Lebanese); indirect limitation with regard to acquisition of capital shares (Article 147); limitation on capital shares with regard to public utilities (Article 78); and limitation on capital shares and management with regard to exclusive commercial representation (Decree-law No. 34/67, dated August 5, 1967). In the financial sector, most establishments, including banking and insurance, must take the form of a joint-stock company.
A limited liability company (Societe a Responsabilite Limitee - SARL) is governed by Decree Law No. 35, dated August 5, 1967. It can be fully owned by non-Lebanese and the management of the company can be conferred to non-Lebanese.
Holding and offshore companies follow the legal form of a joint-stock corporation and are governed by Decree Law No. 45 (on holdings) and Decree Law No. 46 (on offshore companies), dated June 24, 1983, and amended by Law No. 19, dated September 5, 2008. A foreign non-resident chairman/general manager of a holding or an offshore company is exempt from the obligation of holding work and residency permits. Law No. 772, dated November 2006, exempts holding companies from the obligation of having two Lebanese persons or legal entities on their Board of Directors. All offshore companies must register with the Beirut Commercial Registry.
Offshore banking, trust, and insurance companies are not permitted in Lebanon.
Law No. 296, dated April 3, 2001, which amended the 1969 Law No.
11614, governs foreign acquisition of property. The new law eased legal limits on foreign ownership of property to encourage investment in Lebanon, especially in industry and tourism; abolished discrimination for property ownership between Arab and non-Arab nationals; and lowered real estate registration fees from six percent for Lebanese and 16 percent for foreigners to five percent for both Lebanese and foreign investors. The law permits foreigners to acquire up to 3,000 square meters of real estate without a permit; acquiring more than 3,000 square meters requires Cabinet approval. Cumulative real estate acquisition by foreigners may not exceed three percent of total land in each district. Cumulative real estate acquisition by foreigners in the Beirut region may not exceed 10 percent of the total land area. The law prohibits acquisition of property by individuals not holding an internationally recognized nationality. This restriction is primarily aimed at Palestinian refugees residing in Lebanon to prevent them from permanently settling in the country.
CONVERSION AND TRANSFER POLICIES
There are no restrictions on the movement of capital, capital gains, remittances, dividends, or on the inflow and outflow of funds. The conversion of foreign currencies or precious metals is unfettered.
Foreign currencies are widely available and can be purchased from commercial banks or money dealers at market rates. There are no delays in remitting investment returns except for the normal time required by the banks to carry out transactions.
EXPROPRIATION AND COMPENSATION
Land expropriation in Lebanon is relatively rare. The Law on Expropriation (Law No. 58, dated May 29, 1991, Article One), as well as Article 15 of the Constitution, clearly specifies the purpose of expropriation and calls for fair and adequate compensation. The government may expropriate property for public utility projects, such as enlarging highways and streets. Compensation is paid at the time of expropriation and is often perceived as below market value.
The government does not discriminate against U.S. investors, companies or their representatives in expropriation.
The government, with the agreement of the parliament, established three private and public real estate companies to encourage reconstruction and development in Greater Beirut: private corporation "SOLIDERE" for Beirut's downtown commercial center, public company "ELYSSAR" for the southwest suburbs of Beirut, and public company "LINORD" for northern Beirut. While LINORD has been dormant for years, the government is seriously considering reactivating it to attract investors. These companies have been granted the authority to expropriate certain lands for development, although in doing so they have faced serious legal challenges from landowners and squatters. Several court cases are still pending against SOLIDERE after 13 years of litigation.
Over the last few years, the government has faced problems with previously awarded contracts and resorted to international arbitration to resolve them. In 2005, the International Chamber of Commerce's Arbitration Court issued rulings favorable to the two private operators of the cellular network, Cellis (which is two-thirds owned by France Telecom) and Libancell, whose contracts were terminated by the government in 2001. The government negotiated a settlement and paid them compensation. The government has also recently settled a dispute with a Chinese contracting company working to expand the northern port of Tripoli.
Cases in Lebanese courts are not settled rapidly because of archaic procedures, a shortage of judges, inadequate support structures, and a traditional slowness in the handling of cases. Politicians and powerful lobbying groups occasionally interfere in the court system.
Local courts accept investment agreements drafted subject to foreign jurisdiction, if they do not contradict Lebanese law.
Judgments of foreign courts are enforced subject to the "exequatur" obtained.
The commercial code (Book No. 5, Articles 459-668) and the penal code govern insolvency and bankruptcy. By law, a secured creditor has a right to share in the assets of a bankrupt party. Verdicts involving monetary values in contract cases are made according to the currency of the contract or its equivalent in Lebanese pounds at the official conversion rate on the day of the payment.
The "Lebanese Center for Arbitration" became operational on May 8, 1995. Created by local economic organizations, including the four Lebanese Chambers of Commerce and Industry and Agriculture, the Center acts as an arbitrator in solving Lebanese and international conflicts related to trade and investment. Its statutes are similar to those of the International Chamber of Commerce in Paris.
Lebanon has an administrative judicial system that handles all kinds of disputes involving the state. The government accepts binding international arbitration of investment disputes between foreign investors and the state related to contracts. In the case of a concession granted by contract by the state, the government does not accept binding international arbitration unless the contract includes an arbitration clause that obtained prior approval by decree issued by the cabinet. However, there is an exception for investors of countries that have signed an investment protection agreement (ratified by the parliament) that stipulates international arbitration in case of dispute.
Lebanon is a member of the International Center for the Settlement of Investment Disputes (ICSID - Washington Convention). In 2007 Lebanon ratified the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards.
There are no performance requirements on investment imposed by law.
There are no requirements on foreign investors regarding geographic location, amount of local content, import substitution, export expansion, technology transfer, or source of financing. Investors are not required to disclose proprietary information as part of the regulatory approval process, except in the case of banks, which must have the Central Bank's approval for transfer of ownership.
Foreign investors enjoy the same incentives as local investors.
Foreigners doing business in Lebanon through an establishment must have work and residency permits. Registration with a Chamber of Commerce is required for the import and handling of a limited number of products that are subject to control requirements for safety reasons. Products with special import requirements constitute less than one percent of total tradable goods. Registration at the Chambers of Commerce is required for ensuring that established facilities meet safety, handling, and storage requirements.
The Investment Law divides Lebanon into three investment zones located outside Beirut, with different incentives provided in each zone. The law encourages investments in the fields of technology, information, telecommunications and media, tourism, industry, and agriculture. Incentives include: (a) facilitating issuance of permits for foreign labor; (b) tax incentives ranging from 50 percent tax reduction for five years on income tax and tax on the distribution of dividends to total exemption of these taxes for ten years starting from the date of operation (issuance of first invoice); and (c) exempting companies that list 40 percent of their shares on the Beirut Stock Exchange from income tax for two years.
The Investment Law allows the introduction of tailor-made incentives through package deals for large investments projects regardless of the project's location, including tax exemptions for up to 10 years, reductions on construction and work permit fees, and total exemption on land registration fees. IDAL may exempt joint-stock companies that benefit from package deal incentives from the obligation of having a majority of their Board of Directors being Lebanese (Law No. 771, dated November 2006). Investors who seek to benefit from facilities in the issuance of work permits under "package deals" must hire two Lebanese for every foreigner and register them with the NSSF.
Other laws and legislative decrees provide tax incentives and exemptions depending on the type of investment and its geographical location. Industrial investments in rural areas benefit from tax exemptions of six or ten years, depending on specific criteria (Law No. 27, dated July 19, 1980, Law No. 282, dated December 30, 1993, and Decree No. 127, dated September 16, 1983). Exemptions are also available for investment in south Lebanon, Nabatiyeh, and the Biqa' (Decree No. 3361, dated July, 2, 2000). For example, new industrial establishments manufacturing new products will benefit from a 10-year income tax exemption. Factories currently based on the coast that relocate to rural areas or areas in south Lebanon, Nabatiyeh, and the Biqa' benefit from a six-year income tax exemption.
The government reduces to five percent the tax on dividends for: (a) companies listed on the Beirut Stock Exchange (BSE); (b) companies that open up 20 percent of their capital to Arab companies listed on their country's stock exchange or foreign companies listed on the stock exchange of OECD countries; and (c) companies that issue Global Depository Receipts (GDRs) amounting to a minimum 20 percent of their shares listed on the BSE.
Domestic and foreign investors may benefit from a five to seven percent subsidy on interest on loans amounting to up to USD 10 million provided by banks, financial institutions and leasing companies to industrial, agricultural, tourism, and information technology establishments. The subsidy covers a maximum of seven years. Investors can also benefit from loan guarantees from Kafalat, a semi private financial institution that assists SMEs to access subsidized commercial bank loans.
Domestic and foreign investors may also benefit from new regulations issued by the CBL in summer 2009 exempting commercial banks from obligatory reserves on Lebanese pound and U.S. dollar deposits against new loans for housing, education, and environmentally-friendly projects. This change enables banks to grant loans at lower interest rates.
Custom exemptions are granted to industrial warehouses for export purposes. Companies located in the Beirut Port or Tripoli Port Free Zone benefit from customs exemptions and are exempt from the value-added tax (VAT) for export purposes. They are also not required to register their employees with the NSSF if they provide equal or better benefits.
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
The right to private ownership is respected in Lebanon. Foreign private entities can establish, acquire, and dispose of interests in business enterprises and can engage in all kinds of remunerative activities.
PROTECTION OF PROPERTY RIGHTS
The concept of a mortgage exists, and secured interests in property, both movable and real, are recognized and enforced. Such security interests must be recorded in the Commercial Registry and the Real Estate Registry. Lebanon has a Real Estate Law that governs acquisition and disposition of all property rights by Lebanese nationals; Law No. 296, dated April 3, 2001, governs real estate acquisition by non-Lebanese (see A.1 - property section).
Lebanon has legislation to provide adequate intellectual property rights (IPR) protection. Although progress to enhance IPR enforcement continues to be slow, Lebanon has witnessed some improvement in recent years. In 2008, Lebanon was upgraded to Watch List from Priority Watch List in the United States Trade Representative's annual review of intellectual property protection worldwide. Lebanon is under the Generalized System of Preferences (GSP) review for inadequate enforcement of copyright laws. The Cyber Crime and Intellectual Property Unit, established at the Internal Security Forces (ISF) in 2006 to boost IPR enforcement, has seen some progress. During 2009, the government continued to raid shops and warehouses that were storing or displaying pirated content. Although cable television piracy persists, following a series of lawsuits from major cable TV operators, illegal cable providers are now paying a fee to the respective right holders.
Meanwhile, the International Intellectual Property Alliance (IIPA) estimated 2008 piracy-related losses in Lebanon at $31 million, up from $26.8 million in 2007, and accounting for 4.6 percent of all such losses in the MENA region. The IIPA recognized Lebanon's efforts to improve copyright protection, particularly relating to illegal cable providers, yet noted that copyright infringements remained a "significant hurdle" to doing business for copyright-based industries.
The Business Software Alliance (BSA) ranked Lebanon 19 out of 115 countries with the highest piracy rate worldwide in 2008, compared to 37 out of 108 countries worldwide in 2007. Within the MENA region, Lebanon ranked five in 2008; regressing by one notch compared to 2007. Lebanon's piracy rate grew slightly to 74%, up from 73% in 2007. Meanwhile, piracy-related losses totaled $49 million in 2008, up 11.4 percent from $44 million in 2007.
Unauthorized copies of internationally patented pharmaceuticals continue to be approved by the Ministry of Public Health, although newly approved decree no. 571 contains requirements on the treatment of undisclosed information in registration applications. The judicial system is largely ineffective in deterring IPR crimes.
Existing intellectual property rights laws cover copyright, patent, trademarks, and geographical elements.
-- Lebanon's 1999 copyright law largely complies with WTO regulations and needs minor amendments to become fully compatible.
The new law allows educational institutions and students to copy legitimately acquired software for non-commercial use. Registration of copyrights in Lebanon is not mandatory. Copyright protection is granted without the need for any registration.
-- A modern and TRIPS-compatible Patent Law, approved in 2000, provides general protection for semiconductor chip layout designs, plant varieties, and trade secrets, but no adequate coverage is provided for trade secrets. The issue of undisclosed information is being dealt with as part of a new unfair competition law, which is still being drafted. The Lebanese legal regime does not require examination, prior to registration, of patents for novelty, utility, and innovation. Simple patent deposit is required at the Ministry of Economy and Trade. The application is examined only for conformity with general laws and ethics.
-- The Council of Ministers approved the draft of a new industrial design and trademark law in October 2007 and a geographical indications law in May 2007. These now await parliamentary ratification. The 1924 Law on Industrial Property does not require examination of trademarks, but it calls for simple deposit.
However, partial examination of trademarks prior to registration became the norm starting in 2001. Registration of industrial trademarks takes about two weeks.
-- Lebanon signed the Singapore Treaty on Trademarks in December 2006, and ratification is awaiting parliamentary approval.
-- Lebanon's cabinet approved adherence to the WIPO Copyright Treaty (WCT) and WIPO Performances and Phonograms Treaty (WPPT) in November 2008, and both are awaiting parliamentary approval.
-- Lebanon signed a Trade and Investment Framework Agreement (TIFA) with the United States in November 2006. (See section B.) -- Lebanon has been pursuing WTO accession since 1999. A USAID-funded technical assistance project with consultants from PricewaterhouseCoopers and Booz Allen Hamilton worked with the GOL from May 2000 to October 2007 (and with Middle East Partnership Initiative funding from November 2007 to September 2009) to revise, update and draft appropriate laws to facilitate WTO accession. In December 2009, USAID renewed this project, contracting Booz Allen Hamilton to continue providing support for Lebanon's WTO accession during the next three years.
TRANSPARENCY OF THE REGULATORY SYSTEM
Private sector companies should be wary when bidding for public projects. Transparency, clear regulations, and fair consideration of bids have never been the rule in Lebanon. There is no one specific law regulating all aspects of government procurement in Lebanon. Government administrations often award contracts by mutual agreement, without calling for a tender, and the government does not always establish "clear rules of the game." In Lebanon, the procedures necessary for business entry, operation, and exit are not streamlined. However, the process does not discriminate against foreign investors.
Red tape plagues bureaucratic procedures. International companies are faced with an unpredictable, opaque operating environment and often encounter unanticipated obstacles or costs late in the process. According to the World Bank's Doing Business 2010 report, Lebanon improved in terms of better mechanisms for paying taxes and business start-up procedures. Opening a business in Lebanon requires 9 days, compared to 13 days in OECD countries. The report may be accessed at http://www.doingbusiness.org.
The government does not publish proposed laws and regulations in draft for public comment. Even so, the normal practice in Lebanon is to form a drafting committee composed of both public and private sector stakeholders when preparing legislation. However, telecom law No. 431 requires the TRA to issue regulations in draft for public consultation in an effort to ensure full transparency and enable the general public to play a role in shaping future regulations. In general, legal, regulatory, and accounting systems are consistent with international norms.
The Ministry of Finance signed a transparency partnership MOU with the Lebanese Transparency Association (LTA) in October 2007 to enhance transparency. LTA is working with the ministry to develop a Citizens' Budget for 2010, making it easy for the ordinary citizen to understand the state budget revenues and spending. LTA has also helped draft a law on access to information, which still awaits parliament's approval.
In 2009, USAID through the Transparency and Accountability Grants (TAG) program, supported Lebanese civil society organizations by providing small grants, allowing them to play a more robust role in advocating for good governance, rule of law, and greater democracy.
During FY 2009, the TAG program funded 15 projects valued at over $780,000.
In FY 2009, the program demonstrated that there is a committed Lebanese constituency that is willing to work creatively to address corruption and promote good governance in all sectors. In light of increasing demands from the civil society, it is anticipated that USAID will continue to support civic organizations' initiatives for enhancing democratic practices in FY 2010 and FY 2011.
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
Lebanon places no restrictions on the movement of capital in or out of the country, whether for investment or other purposes. The government permits the free exchange of currencies, precious metals, and monetary instruments, both domestically and internationally.
According to the World Bank, remittance inflows to Lebanon were estimated at USD 7 billion for 2009, or 22% of total remittances to the MENA region. Lebanon is considered one of the largest recipients of remittances as a share of GDP worldwide at 20 percent.
Credit is allocated on market terms, and foreign investors can get credit facilities on the local market. The private sector has access to overdrafts and discounted treasury bills, in addition to a variety of credit instruments, such as housing, consumer, or personal loans, and loans to small and medium-sized enterprises (SMEs). The International Finance Corporation (IFC) and the European Investment bank (EIB) have been separately extending financial facilities through the Lebanese banking sector to help SMEs in specific productive sectors, such as IT, industry, and tourism. In 2007, the EIB and the French Development Agency (French counterpart of USAID) separately extended loans to the Lebanese banking sector to help the private sector recover from the impact of the July 2006 war. Since 2007, the Overseas Private Investment Corporation (OPIC) extended USD 260 million in credit line guarantees through Citibank to select Lebanese banks for private sector lending.
In 2006, the MOET launched an EU-financed project to upgrade the quality of local manufacturing to match international standards, as well as to build the capacity of manufacturers and producers. The MOET through an EU-financed project also launched incubators for SMEs in four regions in Lebanon (North, South, Mount Lebanon, and the Biqa', although the latter has closed for logistical reasons).
The Beirut Stock Exchange (BSE) quotes six commercial banks, one investment fund, 20 sovereign Eurobond issues (18 in U.S. dollars, one in euros, and one in Lebanese pounds), and four companies, including "SOLIDERE," one of the largest publicly held companies in the region. Trading is a combination of auction and continuous trading. In spring 2008, the BSE authorized on-line trading.
Legislation allows the listing of tradable stocks or papers on the BSE. Lebanon now hosts the headquarters of the Arab Stock Exchange Union.
The banking regulatory system is transparent and consistent with international norms. Banks conform to Bank for International Settlement (BIS) standards and International Accounting Standards (IAS). The Banking Control Commission (BCC) has performed a self-assessment on the implementation of the new 25 core principles for effective banking supervision and has started implementing an action plan for compliance in 2009. In September 2009, the CBL, the Banking Control Commission (BCC) and the Association of Banks in Lebanon jointly set up a new committee in charge of preparing new rules for corporate governance in the banking sector.
Lebanon has legislation regulating issuance of and trading in bank equities. Parliament passed law No.308, dated April 3, 2001, on unification of bank shares, whereby banks may increase their capitalization and shareholder base as well as optimize trading of bank shares on the BSE. New laws governing the operation of the stock market, such as the formation of a Financial Market Authority to oversee Lebanon's stock market operations, await parliamentary approval. Parliament ratified in November 2005 a new law on asset securitization. There are no restrictions on portfolio investment; foreign investors can invest in Lebanese equity and fixed income paper.
The banking system is sound and enjoys a high capital adequacy ratio, which reached around 12.1 percent by end of June 2009, compared to eight percent as set by Basel II. As of November 2008, the Lebanese banking sector complied with Pillar I and II of the Basel II Accords(new capital adequacy ratio and supervisory review process on economic capital of banks respectively). The CBL and BCC are currently issuing new circulars requiring banks to comply with Pillar III (transparency and market discipline) of Basel II in 2010.
The CBL and the BCC recently set up a steering committee to follow up on new enhancement measures to the Basel II Accords as set by the Basel Committee in December 2009.
The Lebanese banking sector, encouraged by the CBL, continues to consolidate. Over 25 bank mergers have taken place in the past decade, and additional mergers are anticipated after the parliament approved a revised Bank Mergers' Law and the government issued the implementation decree in November 2008. International firms established in Lebanon, such as Standard Chartered Bank, Emirates Lebanon Bank, HSBC, and Citibank, remain active. Many sectors are dominated by traditional businesses in the hands of commercially powerful families. The government is trying to improve the transparency of such firms in order to help solidify an emerging capital market for company shares.
The total assets of Lebanon's five largest commercial banks reached about USD 67.5 billion in 2008 or 59.2 percent of total banking assets. At the end of 2008, about 10.7 percent of total loans were estimated as non-performing, compared to 13.9 percent at the end of 2007. By the end of September 2009, the total assets of Lebanon's five largest commercial banks reached about USD 78.5 billion. Banks maintained more than 80 percent provisions against non-performing loans as of end-2009, while the remaining 20 percent were covered by adequate collateral.
Lebanon is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) and recently received its first MENAFATF Mutual Evaluation during the Tenth Plenary held November 9-11 in Beirut. Lebanon was upgraded from "Partially Compliant" to "Largely Compliant" on several core recommendations, including timely feedback by the FIU. As a result of this improvement, Lebanon is subject to only a normal review, scheduled for September 2011.
COMPETITION FROM STATE-OWNED ENTREPRISES (SOEs) The GOL has a monopoly in the utility sector (Ogero for telecom landlines, and two mobile companies; EDL for electricity production; and four water authorities); for a casino (Casino du Liban); in tobacco procurement, manufacturing, and sales (La Regie des Tabacs et Tombacs); as well as for the national airline (Middle East Airlines - MEA), whose monopoly expires in 2012. Other SOEs include the Beirut, Tripoli, Sidon & Tyre ports; the Rashid Karami International Fair (in northern Lebanon); the Sport City Center; and two real estate development entities, Elissar (for the southwest suburbs of Beirut) and Linord (for northern Beirut).
While, by law, electricity production is restricted to EDL, there are several private investors operating generators across the country that sell electricity to citizens at much higher prices than EDL during power cuts. This sector remains unregulated. EDL has awarded a few concessions to privately-owned companies for power distribution in specific regions, and these companies have expressed interest in producing electricity to meet customer demand.
The SOEs are subject to oversight by the concerned ministries. They have an independent board with mostly politically-affiliated individuals appointed by cabinet. While the SOEs are required by law to publish an annual report and submit their books to independent audit, this has not always been the case.
The GOL plans to liberalize the telecommunications sector and restructure and corporatize EDL in order to include the private sector in the building and operation of power plants, as well as the distribution of electricity. However, progress on these issues requires political will and consensus. Meanwhile, MEA has plans to list 25 percent of its shares on the Beirut Stock Exchange (BSE) in 2010 as a first step toward privatization.
CORPORATE SOCIAL RESPONSIBILITY (CSR)
In the last two years, Lebanese firms have become increasingly aware of CSR, good governance, and the value of providing information to customers. Firms who pursue CSR are viewed favorably. The American Lebanese Chamber of Commerce has been active in promoting CSR through Better Business Value seminars, and Transparency International's Lebanese chapter reports that more companies are approaching it for corporate governance assessments.
In 2009, rocket attacks were launched from southern Lebanon into northern Israel on four different days: on January 8, at least four rockets were launched and Israel returned artillery fire across the border; on January 14, eight more rockets were fired that also prompted an Israeli reprisal; on September 11, two rockets were launched, also prompting Israeli retaliation; and on October 27 a rocket launched into northern Israel elicited another response.
Also in 2009, sporadic clashes were reported between Sunnis and Alawites in the Tripoli region.
There is rampant corruption when dealing with the public sector.
According to Transparency International's (TI) 2009 Corruption Perception Index (CPI), Lebanon ranked 130 out of 180 countries worldwide and 14 out of 20 MENA countries in 2009, compared to 102 worldwide and 11 within MENA countries in 2008 in terms of perception of corruption. The index measures the perception of corruption estimated by public officials and politicians and focuses on corruption in the public sector, defined as an abuse of official power for private interests.
The International Financial Corporation (IFC) and the Lebanese Transparency Association (LTA) signed an MOU on October 11, 2007, to establish the Institute of Directors (on Corporate Governance) in Lebanon. The IFC has provided a USD 250,000 grant for the institute, which will provide training courses on corporate governance, offer consultancy services, carry out research and educational activities, and organize awareness-raising private sector events in Lebanon and the MENA region. The institute will become operational in the first quarter 2010.
The LTA, which held several anti-corruption seminars in 2009, also helped in drafting a law on access to information (which is pending ratification) and is currently working on a draft law for whistleblower protection.
Lebanon has laws and regulations to combat corruption, but these laws are not always enforced. According to Lebanese law, it is a criminal act to give or accept a bribe. The penalty for accepting a bribe is imprisonment for up to three years, with hard labor in some cases, and a fine equal to at least three times the value of the bribe. Bribing a government official is also a criminal act. The Central Inspection Directorate is responsible for combating corruption in the public sector, while the public prosecutor is responsible for combating corruption in the private sector. In April 2009, Lebanon ratified the UN Convention Against Corruption.
Lebanon is not a signatory to the OECD Convention on Combating Bribery.
Corruption is more pervasive in government contracts (primarily in procurement and public works), taxation, and real estate registration than in private sector deals. It is widely believed that investors routinely pay bribes to win government contracts, which are often awarded to companies close to powerful politicians.
The Ministry of Finance (MOF) launched a 24/7 tax call center on December 4, 2008, along with an electronic tax declaration system and a service whereby citizens can handle issues dealing with property tax through the Lebanese postal service, Libanpost. These services are expected to decrease corruption in the tax sector.
BILATERAL INVESTMENT AGREEMENTS
The U.S. has neither a bilateral investment treaty (BIT) with Lebanon, nor an agreement to prevent double taxation. Lebanon has expressed an interest in signing both. Preliminary discussions for a BIT began in 2001 but have been pending ever since. Several politicians have publicly expressed caution regarding a Middle East Free Trade Area.
In November 2006, the United States Trade Representative (USTR) and the MOET signed a Trade and Investment Framework Agreement (TIFA).
Apart from pledging to foster an environment conducive to mutual trade and investment, the TIFA requires both parties to set up a United States-Lebanon Council on Trade and Investment that would meet twice a year or more to consult on trade and investment impediments and any other issues of concern. The council, which has not yet been set up, will seek and consider the views of private sector representatives in both countries. Under the TIFA, the United States and Lebanon agreed to a consultation mechanism that may be activated by either party within 60 days in the event of a dispute or other development affecting trade relations.
At the signing ceremony for the TIFA, the minister of economy expressed interest in signing a Free Trade Agreement (FTA) with the U.S. Government. However, there has been no work toward such an agreement as of this time.
Lebanon has signed bilateral investment agreements with the following countries (in alphabetical order): Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium/Luxemburg, Benin, Bulgaria, Canada, Chad, Chile, China, Cuba, Cyprus, Czech Republic, Egypt, Finland, France, Gabon, Germany, Greece, Guinea, Hungary, Iceland, Iran, Italy, Jordan, Kuwait, Malaysia, Mauritania, Morocco, Netherlands, Oman, Pakistan, Romania, Russia, Slovakia, South Korea, Spain, Sudan, Sweden, Switzerland, Syria, Tunisia, Turkey, Ukraine, the United Arab Emirate, the United Kingdom, and Yemen.
Lebanon has signed bilateral tax conventions with 33 countries but not with the United States.
Lebanon signed the Euro-Mediterranean Partnership agreement in 2002, and the interim agreement entered into force in March 2003. The final agreement came into force in April 2006. In 2004, Lebanon and the European Free Trade Association (EFTA) signed a free trade agreement. Lebanon and Syria have four bilateral cooperation agreements in the fields of economy, transport, agriculture, and health. Lebanon has also signed the Arab Free Trade Zone Agreement, as well as bilateral Free Trade Agreements with Egypt, Iraq, Kuwait, Syria, and the UAE.
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
On February 10, 1981, Lebanon and the U.S. signed an OPIC agreement in Beirut, but no investment using OPIC insurance coverage was undertaken until 1996. OPIC is currently engaged with Lebanon in three areas: insurance, financing, and investment. Since 2006, OPIC has worked with Citibank on a program that offers loans to the private sector (SMEs, retail, and housing) through selected Lebanese commercial banks; this program was first operational in January 2007, and to date OPIC provided USD 260 million in credit line guarantees.
The Lebanese government's National Investments Guarantee Corporation (NIGC), established in 1977, continues to insure new investments against political risks, riots, losses due to non-convertibility of currencies, and transfer of profits. Other major trade/investment insurance programs operating in Lebanon include COFACE (France), ECGD (UK), HERMES (Germany), SACE (Italian), and IAIGC (Arab Consortium). Lebanon has been a member of the Multilateral Investment Guarantee Agency (MIGA), part of the World Bank, since 1994.
The U.S. dollar value of the local currency has been trading at approximately Lebanese Lira (LL) 1,500 to the dollar for the last 14 years. The GOL has repeatedly expressed its commitment to maintaining a stable currency. With record high foreign currency assets of over USD 28 billion as of end of December 2009, the CBL has the ability to maintain a stable USD/LL rate.
LABOR The 1964 Labor Law provides for written and oral contracts and specifies a maximum workweek of 48 hours (with several exceptions, notably in agriculture and the food service industries). The law provides for the right of association and the right to organize and bargain collectively. Lebanon is a member of the International Labor Organization (ILO) Convention.
Lebanon's working population (aged 15 and above) totals 1.1 million, including foreign residents but excluding the seasonal work force, according to the Central Administration of Statistics' (CAS) 2007 National Survey of Household Living Conditions. CAS estimated Lebanon's population in 2007 at 3.75 million, excluding Palestinians in the camps and seasonal workers. CAS estimated the unemployment rate (aged 15-64) at 9.2 percent in its 2007 Household Living Conditions survey. The CAS Survey showed that the unemployment rate reached 26.1 percent for the 15-19 age group and 20.7 percent for the 20-24 age group. The unemployment rate is somewhat attenuated because about one-third of the total workforce works outside Lebanon, mainly in Arab countries and the Gulf, according to prominent consultants.
Local unskilled labor is in short supply. Arab (mainly Syrians and Palestinian refugees), Asian, Indian, and African laborers are hired to work in construction, agriculture, industry, and households.
Lebanon has a General Labor Confederation (GLC), recognized by the government, whose membership is limited exclusively to Lebanese workers. The GLC's activities are mainly limited to demanding cost-of-living increases and other social benefits. The government/labor relationship has improved compared to previous years, yet it remains difficult. Given its own political bias, the GCL has been sometimes accused of working for its political interests and being ineffective in fighting for workers' rights.
AFOREIGN TRADE ZONES/FREE PORTS
Foreign-owned firms have the same investment opportunities as Lebanese firms. Lebanon has two free zones in operation, the Beirut Port and the Tripoli Port. The reconstruction of a 120,000 square meter free zone at the Beirut Port is complete, and a 6,000-square meter bonded warehouse facility is now available. The new WTO compatible Customs Law issued by decree No. 4461, dated December 15, 2000, fosters the development of free zones (Chapter III, Articles 242-261). The GOL passed law No. 18, dated September 5, 2008, to set up a Special Economic Zone (SEZ) in Tripoli to attract investment in trade, industry, services, storage, and others.
Investment will benefit from tax exemptions and other privileges.
FOREIGN DIRECT INVESTMENT STATISTICS
There are no official statistics available on foreign direct investment (FDI). Banking sources estimated that construction and real estate account for the largest part of foreign investment.
According to the Inter-Arab Investment Guarantee Corporation (IAIGC), foreign direct investment (FDI) in Lebanon totaled $3.2 billion in 2008, a 12.4% increase compared to 2007. IAIGC ranked Lebanon seven out of 17 countries in the MENA region in terms of total FDI. The IAIGC estimated that Arab investment in Lebanon was approximately $2.6 billion in 2008, falling by 20.4% compared to 2007. 82.5% of Arab investment was in the real estate sector.
According to the UN Conference on Trade and Development (UNCTAD) 2009 World Investment Report, FDI in Lebanon rose by 32% in 2008 to around $3.6 billion. Arab countries accounted for 90% of total FDI, mostly in the real estate sector, with 63% of total FDI from Saudi Arabia alone. In nominal terms, Lebanon was the seventh largest recipient of FDI among 20 MENA countries. FDI flows to Lebanon were equivalent to 12.5% of GDP in 2008, the highest in the Arab world.
UNCTAD placed Lebanon in the category of economies where the agricultural sector had a low importance in attracting FDI, while the manufacturing sector was "moderately important." French, Italian, German, British, Korean, and Finnish companies have won most of the government contracts in the fields of electricity, water, telecommunications, and for the Sport City Center and Beirut's international airport projects. This could be attributed to either the travel ban that delayed the physical presence of U.S. nationals representing their companies in the Lebanese market to bid on projects until 1997 or bilateral financial protocols that provide grants and soft-term loans, signed between Lebanon and some European countries. U.S. companies won contracts in solid waste treatment and landfill and some contracts in the power sector, air transport (radar equipment for the airport), and media (equipment for the national broadcaster Radio Lebanon).
The U.S. Embassy in Beirut tracks U.S. companies' activities in the Lebanese market. The Embassy actively lobbies to support U.S. nationals bidding on projects, providing equal support to all U.S. bidders via letters and direct meetings with senior Lebanese government officials, and demanding fair consideration of U.S. companies that are bidding on business opportunities in Lebanon. In some cases, the Embassy and U.S. Department of Commerce have provided higher-level advocacy from Washington. The Embassy encourages U.S. companies bidding on projects to contact the Embassy's Commercial Section for assistance and advocacy.