2011 Investment Climate Statement - Lebanon
Overview of Foreign Investment Climate
Lebanon is a country that, by tradition, remains open to foreign direct investment. Over the last seven years, the Government of Lebanon (GoL) has passed several laws and decrees to encourage such investment. The Investment Development Authority of Lebanon (IDAL) possesses the authority to award licenses and permits for new investments in specific sectors. IDAL also has the authority to grant special incentives, exemptions, and facilities to large projects, whether implemented by local or foreign investors. IDAL's Export-Plus program provides subsidies to encourage agricultural exports, and IDAL’s "Investors Matching Service" facilitates the creation of strategic international-local partnerships through joint ventures, equity participation, acquisition, and other vehicles. IDAL continues to work on setting up its 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 the country. 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.
Lebanon was not severely affected by the global financial crisis due to sound banking regulations that prohibit investing in structured products, and commercial banks continue to record high liquidity levels. Although they are the largest lenders to the GoL, commercial banks also are interested in financing the government's privatization programs. The banking sector continues to record significant capital inflows, albeit at a slower pace than during previous years. Capital inflows reached $14.8 billion for the first eleven months of 2010 and were projected to reach $16-17 billion by the end of 2010. This is attributable to the perception that Lebanon's banking sector is relatively safe, given its high liquidity and high interest rates on deposits. Moreover, the number of tourists in 2010 which rose by 18% over the previous year, contributed to capital inflows.
Banking sources have adopted a "wait and see" attitude to the level of political risk in 2011, but investment and consumption are both expected to continue to grow, albeit at a slower pace. As a result, the Lebanese economy may slow down to five-percent growth (compared with eight-percent growth in 2010). The GoL is expected to increase capital investment in 2011, should it ratify the 2010 budget, which would support growth and increase deposits to the banking sector. Banks anticipate an increase in capital inflows and foreign direct investment, as well as improvement in exports due to an improved external environment in 2011.
While the public deficit and public debt could be a major issue of concern for investors, the GoL -- in line with the IMF -- stresses that the debt-to-GDP ratio has been on a downward trend over the last four years and was projected to reach 134-percent in 2010, down from 160-percent in 2009. While the finance ministry has been keen to maintain this positive trend, banking sources forecast this ratio to remain in the 130-percent range in 2011 due to the anticipated increase in capital spending in the absence of structural reform, thus raising the budget deficit. Given the high liquidity in the domestic banking sector, the GoL should not face difficulties in rolling over sovereign maturities in 2011.
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 2011 report to rank Lebanon 113 out of 183 countries worldwide and 11 out of 19 MENA countries in terms of ease of doing business. The only noticeable improvement was that Lebanon moved up five spots in the “starting a business” category. Entrepreneurs need only five steps to start a business in Lebanon, compared with 8.1 and 5.6 procedures in the MENA region and Organization for Economic Co-operation and Development countries, respectively. However, Lebanon’s scores fell in most other categories, such as dealing with licenses, registering property, getting credit, protecting investors, and paying taxes. Its ranking remained unchanged in the categories of trading across borders, enforcing contracts, and closing a business.
The government continues to express a strong commitment to improving the business environment through its reform program submitted at the Paris III International Donors' Conference in January 2007, although implementation has stalled. 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, but its implementation has stalled. The MoET’s amendments to the Code of Commerce to further streamline business are pending parliamentary approval. In June 2010, a conference was held under the auspices of the Prime Minister, in collaboration with the World Bank and the International Finance Corporation, along with public and private sector stakeholders to review reform measures to streamline business, and a subsequent inter-ministerial committee was established to formulate and implement reforms. In 2010, 56 foreign companies, including six U.S. companies, 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 2009), ranking 147 out of 213 countries worldwide and 14 out of 20 MENA countries, compared to 146 worldwide and 13 out of 20 MENA countries in the 2008 survey. The report noted that the results showed marginal improvement year-on-year but still reflected a weak level of governance in Lebanon. Regarding individual indicators used in the survey, Lebanon improved in terms of political stability, regulatory quality (measuring market-friendly policies and laws), rule of law, and control of corruption and regressed in terms of government effectiveness and voice and accountability indicator (measuring citizens’ ability to participate in government selection, freedom of expression, freedom of association, and a free media).
Privatization was a key component of the Hariri government's economic reform program, but it was never implemented. Progress on privatization will be dependent on political will, as well as global market conditions. While the GoL says that it is committed to improving the investment climate by amending existing laws and streamlining administrative procedures, as well as encouraging domestic and foreign investment and public-private partnerships, the paralysis that marked the Hariri government resulted in a virtual freeze in the passage of any legislation, including legislation necessary to improve the business climate. The draft Public-Private Partnership (PPP) Law has been pending in the cabinet since April 2010 because of political disagreements. Ratification of the PPP legislation would open new opportunities for local and international private sector investment in Lebanon.
The GoL insists that it plans to restructure the telecommunications sector in accordance with Law 431 (on the privatization of telecommunications); improve the landline and mobile network infrastructure to improve coverage and quality of service; and expand internet bandwidth. The Ministry of Telecommunications (MOT) has started broadband expansion, contracting with two companies to connect local telephone centers with fiber optic networks, and in the mobile sector it has embarked on a 3G expansion to offer new services and higher bandwidth. Meanwhile, the GoL continues to contract the management of the two government-owned cellular companies to private operators.
In March 2007, Booz Allen Hamilton completed a plan for setting up Liban Telecom by merging MOT directorates and Ogero (the public company in charge of fixed-line maintenance and the country's ADSL provider). This plan has not yet been implemented because of lack of political consensus for the appointment of the Liban Telecom Board and is not expected to come to fruition anytime soon. Law 431 granted Liban Telecom a third cellular license and opens the company for privatization through the sale of 40 percent of its shares in a first stage. In December 2010, the Telecommunications Regulatory Authority (TRA) renewed a total of 22 licenses for data and service providers, and there is potential for additional licensing when political conditions improve.
As for the power sector, on June 21, 2010, the cabinet unanimously endorsed the Ministry of Energy and Water (MoEW) policy paper for the power sector. The paper includes ten strategic initiatives covering development of electricity infrastructure (production, transmission, distribution), supply and demand (fuel sourcing, renewable energy, tariffs, other related issues), and legal framework (corporatization of the national power company Electricite du Liban [EDL], standards, and legal stakes.) The plan’s target is to gradually reach 4000 MGW generation capacity in 2014, thereby providing electricity 24 hours daily. Its total cost of $4.87 billion was projected to be financed jointly by the government, private sector investment, and loans from international donors. The long-term plan includes expanding generation capacity to 5000 MGW after 2015, on the basis of an additional investment of $1.650 billion. Some of the proposals would need cabinet endorsement of relevant decrees, while others would require new legislation endorsed by parliament. If implemented, the plan offers good opportunities for U.S. technology and investors.
Meanwhile, the International Finance Corporation (IFC) has helped in preparing the due diligence report for an independent power producer (IPP) in Deir Ammar. However, after political conflicts put the IPP on hold, the Ministry of Energy and Water (MoEW) opted to resort to public procurement to execute this project.
Lebanon endorsed the Hydrocarbon Law for offshore gas exploration in August 2010, and work has started to prepare implementation decrees. However, the appointment of the members of the Petroleum Regulatory Authority would also necessitate political consensus. Meanwhile, in December 2010, the MoEW publicly announced that the first round of licensing for offshore gas exploration will take place in 2011, with the official tender announcement on the exploration licenses and bid submissions to be announced by the end of November 2011.
In December 2010, the MoEW issued a water strategy that included construction of dams, hill lakes, and wastewater treatment plants, and the ministry is keen to attract private sector participation to water projects. Also in December, the MoEW offered a public presentation to bankers focused on how the private sector can play a role in financing the construction of dams. Senior banking sources indicated that the banking sector in Lebanon has the capacity and is willing to finance private sector entities contracted to execute such projects.
Other infrastructure projects also offer opportunities to foreign investors. 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 November 2010, 641 contracts valued at approximately $3 billion were in progress by the end of December 2009. Public infrastructure opportunities lie primarily in roads and highways, ports, electricity, education, solid waste management, wastewater, and water supply. As of the end of 2010, the CDR possessed a total of $2 billion in loans and protocols ratified by parliament but not yet disbursed. As of September 2010, CDR had a total of $337 million in additional loans awaiting parliamentary approval (including financing for the private sector). Furthermore, the CDR had nearly $600 million in grants remaining from pledges offered prior to Paris III and earmarked for public investment for post-July 2006 war reconstruction; the CDR has already spent around half of this assistance. Although donors pledged another $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 from Lebanon do not need to apply for a work permit. However, foreign investors who own and manage their business from 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 $67,000 and that the investor pledge 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 is allowed under Lebanese law. A joint-stock corporation (Societe Anonyme Libanaise - SAL) is governed by Legislative Decree 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 (Legislative Decree 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 Legislative Decree No. 35, dated August 5, 1967. It can be fully owned by non-Lebanese, and the management of the company can be controlled by non-Lebanese.
Holding and offshore companies follow the legal form of a joint-stock corporation and are governed by Legislative Decree No. 45 (on holdings) and Legislative Decree No. 46 (on offshore companies), both 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 preventing Palestinian refugees residing in Lebanon from permanently settling in the country.
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Conversion and Transfer Policies
There are no restrictions on the movement of capital, capital gains, remittances, dividends, or 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 that expropriation must be “for the public utility” and calls for fair and adequate compensation. 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 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 in the process of 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 15 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 Lira at the official conversion rate on the day of the payment.
The Lebanese Center for Arbitration was created by local economic organizations -- including the four Lebanese chambers of commerce, industry, and agriculture --the Center acts as an arbitrator in solving domestic 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 related to contracts between foreign investors and the state. 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 cabinet decree. However, there is an exception for investors of countries that have achieved a signed and ratified investment protection agreement with Lebanon 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. Lebanese law is in conformity with both conventions.
The law imposes no performance requirements on investments. There are no requirements on foreign investors regarding geographic location, amount of local content, import substitution, export expansion, technology transfer, offset requirements, 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 obtain the Bank of Lebanon’s approval for transfer of ownership.
Foreign investors enjoy the same incentives as local investors. Foreigners doing business in Lebanon through a company, factory, or office must have work and residency permits. There are no discriminatory or excessively onerous visa, residence, or work permit requirements. 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, but 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, with different incentives provided in each zone, and it encourages investments in the fields of technology, information, telecommunications and media, tourism, industry, and agriculture and agro-industry. Incentives include facilitating issuance of permits for foreign labor, tax incentives ranging from a 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 (tied to the issuance of the first invoice), and exempting companies that list 40 percent of their shares on the Beirut Stock Exchange from income tax for two years. The Investment Law also allows for 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 a 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 be 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 investments in south Lebanon, Nabatiyeh, and the Bekaa Valley (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 Bekaa Valley benefit from a six-year income tax exemption.
The government reduces to five percent the tax on dividends for companies listed on the Beirut Stock Exchange (BSE), 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 companies that issue Global Depository Receipts (GDRs) amounting to a minimum value of 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 $10 million provided by banks, financial institutions, and leasing companies to industrial, agricultural, tourism, and information technology establishments. The subsidy extends for a maximum of seven years. Investors can also benefit from loan guarantees from Kafalat, a semi private financial institution that assists small and medium-sized enterprises (SME) in accessing subsidized commercial bank loans.
Domestic and foreign investors may also benefit from new regulations issued by the Bank of Lebanon in the summer 2009 and valid until June 30, 2011, exempting commercial banks from obligatory reserves on Lebanese Lira 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, and in the fall 2010, the Bank of Lebanon expanded this circular to help lending for all projects that save energy.
Customs exemptions are granted to industrial warehouses for export purposes. Companies located in the Beirut Port or the 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.
Riight 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. The Real Estate Law governs acquisition and disposition of all property rights by Lebanese nationals, while Law No. 296, dated April 3, 2001, governs real estate acquisition by non-Lebanese (see A.1 - property section).
Lebanon’s legislation generally provides adequate intellectual property rights (IPR) protection and is TRIPS-compliant, although Lebanon is still in the process of acceding to the World
Trade Organization (WTO). Progress on enhancing IPR enforcement continues to be slow, but 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 a Generalized System of Preferences (GSP) review for inadequate enforcement of copyright laws. The establishment of the Cyber Crime and Intellectual Property Unit at the Internal Security Forces (ISF) in 2006 has led to continuous progress in IPR enforcement. During 2010, the government held numerous raids in shops and warehouses, seizing counterfeit material valued at millions of dollars. 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 piracy-related losses incurred in Lebanon by copyright-based industries totaled $29 million in 2009 compared to $31 million in 2008, accounting for 4.2% of total losses in the Middle East. Although the GoL has made significant progress in fighting piracy, the IIPA noted that piracy remains a significant obstacle to legitimate business, and Lebanese courts continue to be weak in enforcing IPR.
The Business Software Alliance (BSA) ranked Lebanon 39th worst worldwide and 5th out of 17 MENA countries in terms of piracy in 2009. The BSA annual report indicated Lebanon’s piracy rate stood at 72%, down from 74% in 2008. Piracy-related dollar losses for Lebanon ranked 73 worldwide and 11 in the MENA region, and they were estimated at $46 million in 2009, down from to $49 million in 2008. 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.
Existing intellectual property rights laws cover copyright, patent, trademarks, and geographical elements.
-- Lebanon's 1999 Copyright Law largely complies with WTO regulations and needs only 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, and 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 and plant varieties, 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, where 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, and both now await parliamentary ratification. While the 1924 Law on Industrial Property does not require examination of trademarks and calls for simple deposit, partial examination of trademarks prior to registration became the norm starting in 2001. Registration of industrial and commercial trademarks takes about two weeks.
-- Lebanon signed the Singapore Treaty on Trademarks in December 2006, and the treaty is awaiting parliamentary ratification.
-- Lebanon's parliament ratified the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT) in February 2010.
-- 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 staffed by 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 for 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. Even so, according to the World Bank's Doing Business 2011 report, Lebanon moved up five spots in the “starting a business” category. Entrepreneurs need only five steps to start a business in Lebanon, compared with 8.1 and 5.6 procedures in the MENA region and OECD countries respectively. 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 when preparing legislation is to form a drafting committee composed of both public and private sector stakeholders. 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 an MOU with the Lebanese Transparency Association (LTA) in October 2007 to enhance transparency and increase government accountability. Within this framework, the LTA developed the “Open Budget Index 2010,” a study on tax reforms, and a Citizens' Budget for 2010, which made it easy for the ordinary citizen to understand the state budget revenues and spending. The LTA also helped draft a law on access to information and on whistleblower protection, which still await parliamentary approval. Under its Lebanon Anti-Bribery Network, the LTA also launched the Code of Ethics and Whistleblower Protection for small and medium enterprises (SMEs) and provided a workshop for owners and directors of companies on the importance of ethics and on ways of applying the code.
In 2010, USAID, through its Transparency and Accountability Grants (TAG) program, supported Lebanese civil society organizations in playing a more robust role in advocating for good governance, transparency, and accountability. During FY2010, the TAG program funded 24 projects valued at $1,137,578. This program demonstrated that there is a committed Lebanese constituency that is willing to work creatively to address corruption and promote good governance in both the public and private sectors.
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 $8.2 billion for 2010, or 22 percent of total remittances to the MENA region. Lebanon is considered one of the largest recipients of remittances as a share of GDP worldwide at 21 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 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 (the 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 $300 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 Bekaa, although the latter has closed for logistical reasons). The Beirut Stock Exchange (BSE) quotes six commercial banks, one investment fund, 18 sovereign Eurobond issues (16 in U.S. Dollars, one in Euros, and one in Lebanese Lira), 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). In September 2010, the Banking Control Commission (BCC) mandated full implementation of International Financial Reporting Standards (IFRS) 9 as of January 1, 2011, for banks and financial institutions operating in Lebanon. The BCC performed a self-assessment on the implementation of the new 25 core principles for effective banking supervision and implemented an action plan for compliance in 2010, and the Bank of Lebanon and BCC are following up preparations by the Financial Stability Board (of Basel) regarding a third version of core principles for effective banking supervision. In September 2009, the Bank of Lebanon, 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. Law No. 308 on the unification of bank shares allows banks to increase their capitalization and shareholder base, as well as to 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 has also ratified a law on asset securitization. There are no restrictions on portfolio investment, and foreign investors can invest in Lebanese equity and fixed income paper.
The banking system enjoys a high capital adequacy ratio, which reached around 13.7 percent in 2010, compared to eight percent as set by Basel II, and the Lebanese banking sector has complied with Pillar I and II of the Basel II Accord (new capital adequacy ratio and supervisory review process on economic capital of banks respectively). The Bank of Lebanon and the BCC will continue issuing new circulars requiring banks to comply with Pillar III (transparency and market discipline) of Basel II and IFRS No. 7 in 2011. The Bank of Lebanon and the BCC have established a steering committee to follow up on new enhancement measures to the Basel III Accord, as set by the Basel Committee in December 2009.
International banks 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 $82.2 billion in 2009 or 71.3 % of total banking assets. At the end of 2009, 5.6% of total loans were estimated as non-performing, compared to 6.8% in 2008. By the end of September 2010, the total assets of Lebanon’s five largest commercial banks reached $88.5 billion. In 2010, about 4.3% of total loans were estimated as non-performing. Banks maintained around 89.3% provisions against non-performing loans as of end-2010, while the remaining 10.7% were covered by adequate collateral.
Lebanon is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) and received its first MENAFATF Mutual Evaluation during the Tenth Plenary held November 9-11, 2009, in Beirut. Lebanon was upgraded from "partially compliant" to "largely compliant" on several core recommendations, including timely feedback by Lebanon’s financial intelligence unit (FIU). As a result of this improvement, Lebanon is subject to only a normal review, scheduled for September 2011.
Competition from State-Owned Enterprises (SOEs)
The GoL has a monopoly in the utility sector (Ogero for telecom landlines, and two mobile companies; Electricite du Liban [EDL] for electricity production and transmission; and four water authorities); for a casino (Casino du Liban, a mixed public-private enterprise); 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 major SOEs include the Beirut, Tripoli, Sidon, and Tyre ports; the Rashid Karami International Fair (in northern Lebanon); the Sport City Center; Intra (a mixed public-private investment company) and two real estate development entities, ELYSSAR and LINORD.
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 independent boards staffed primarily by politically-affiliated individuals appointed by cabinet. The SOEs are required by law to publish an annual report and submit their books for independent audits.
The GoL plans to liberalize the telecommunications sector and restructure and corporatize EDL in order to involve the private sector in the building and operation of power plants, as well as the distribution of electricity. However, progress on these issues has proved elusive, due to the current political climate. Meanwhile, MEA has put on hold its plans to list 25 percent of its shares on the BSE as a first step toward privatization pending an improvement in investor confidence in order to ensure that its shares will not be undervalued when traded on the BSE.
Corporate Social Responsibility
In the last three years, Lebanese firms have become increasingly aware of corporate social responsibility (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 its Better Business Value seminars, and the LTA reports that more companies are approaching it for corporate governance assessments and its corporate governance guidelines and toolkits for family-owned enterprises and listed companies.
The lack of momentum in the national unity government in 2010 delayed efforts to implement necessary legislation to address many of Lebanon’s pending issues. In 2010, there continued to be sporadic clashes between groups from different confessions and political factions. For example, on August 24, a dispute reportedly over a parking space deteriorated into armed street clashes in Burj Abi Haidar, a predominantly Sunni area of Beirut, between supporters of Hizballah and members of Al-Ahbash, a pro-Syrian Sunni group. The clashes left three dead and 11 injured.
There is rampant corruption when dealing with the public sector. According to Transparency International's (TI) 2010 Corruption Perception Index (CPI), Lebanon ranked 127 out of 178 countries worldwide and 13 out of 20 MENA countries. Its 2010 CPI score remained unchanged from 2009, even though Lebanon ranked lower (130 globally and 14 within the MENA) in the 2009 survey and is down three points from the 2008 and 2007 surveys. Lebanon’s CPI score for 2010 and 2009 marked the country’s lowest scores since its inclusion in the index. The index measures the perception of corruption 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 Finance Corporation (IFC) and the LTA signed an MOU on October 11, 2007, to establish the Institute of Directors (on Corporate Governance) in Lebanon, which became operational in 2010. The IFC provided a $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 LTA held several anti-corruption seminars and awareness campaigns in 2010. Under the framework of the Lebanese Advocacy and Legal Advice Center, the LTA established a hotline for citizens to report cases in which they are victims of corruption or have witnessed corruption and to provide free legal assistance. The LTA is currently preparing to expand its hotline service to the private sector. In July 2010, the LTA launched recommendations to inform and empower businesses on their rights when audited by state inspectors. The LTA also helped draft a law on access to information and on whistleblower protection, both which are pending parliament’s approval.
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 in May 2007, along with a service for citizens to address property tax issues through the Lebanese postal service, Libanpost. Additionally, an electronic registration and filing system were also implemented. 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, although 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. Although at the signing ceremony for the TIFA, the minister of economy expressed interest in signing a Free Trade Agreement (FTA) with the U.S., no work has yet been done toward achieving such an agreement.
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. . In November 2010, Lebanon and Turkey signed an association agreement establishing a free trade area that will reduce barriers to the free movement of goods, services, capital, and people between the two countries over the next ten years. Lebanon has also signed the Greater Arab Free Trade Agreement, which gradually replaced the bilateral tree trade agreements signed with Egypt, Iraq, Kuwait, Syria, the UAE, and the Gulf Cooperation Council states. A regional Economic and Trade Association Council between Lebanon, Syria, Jordan, and Turkey was announced in July 2010. .
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, Qatar, 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 32 countries, but not with the United States.
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 began in January 2007, and to date, OPIC has provided $300 million in credit line guarantees.
The Lebanese government's National Investments Guarantee Corporation (NIGC) 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 15 years. The GoL has repeatedly expressed its commitment to maintaining a stable currency. With record high foreign currency assets of over $30.6 billion as of the end 2010, the Banque du Liban has the ability to maintain a stable $/LL rate.
The 1946 Labor Law provides for written and oral contracts and specifies a maximum workweek of 48 hours (with several exceptions, notably in agriculture corporations). 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. It also estimated the unemployment rate (aged 15-64) at 9.2 percent in its 2007 Household Living Conditions survey, which 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 GLC has been sometimes accused of working for its political interests and of being ineffective in fighting for workers' rights.
Foreign 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 WTO-compatible Customs Law issued by Decree No. 4461 fosters the development of free zones. The GoL also 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 other services. Investors will benefit from tax exemptions and other privileges, and USAID is providing technical assistance to the GoL for preparing a feasibility study for Tripoli SEZ. The technical assistance project, which started in July 2010 with an expected duration of one year, includes defining the territorial composition of the zone, assessing the quality and condition of off-site infrastructure, transport logistics, power, telecommunications, water and wastewater requirements, as well as determining administrative, legal, tax, and regulatory barriers for prospective tenants.
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 Arab Investment and Export Credit Guarantee Corporation, FDI in Lebanon reached $4.8 billion in 2009, making it the fifth largest recipient of FDI out of 18 Arab countries. This constituted a rise of 33.2% compared to 2008 and a 10-year high. Lebanon’s share of aggregate Arab FDI reached 5.95% in 2009, up from 3.79% in 2008, and Lebanon was among the few Arab countries witnessing an increase in FDI in 2009. Meanwhile, investment from Lebanon in Arab countries was valued at $725.5 million in 2009, dropping 68.4% compared to 2008, according to the same report, and it was the seventh largest source of inter-Arab investment, accounting for 3.8% of aggregate inter-Arab investment in 2009. Saudi Arabia was the largest destination of Lebanese direct investment, valued at $414 million or 57% of total investment.
According to the UN Conference on Trade and Development (UNCTAD), FDI inflows to Lebanon rose by 10.8% reaching $4.8 billion in 2009, up from $4.3 billion in 2008. The increase was mainly attributed to investments in the real estate sector. Lebanon was the fourth largest recipient of FDI in nominal terms among 20 MENA countries. FDI inflows constituted 14% of GDP in 2009, the highest in the Arab world. Meanwhile, FDI outflows from Lebanon also rose by 14% reaching $1.1 billion in 2009, up from $987 million in 2008.
European and Asian companies have won most of the government contracts in the fields of electricity, water, telecommunications, transportation and infrastructure. This could be attributed to either the unstable political and security situation in Lebanon that discouraged U.S. companies from bidding on projects or bilateral financial protocols signed between Lebanon and some European countries that provide grants and soft-term loans. However, U.S. companies have won contracts in solid waste treatment and landfill and some contracts in the power sector, air transport, and media.
The U.S. Embassy in Beirut tracks U.S. companies' activities in the Lebanese market. The Embassy actively lobbies to support U.S. companies 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 the 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 Economic\Commercial Section for assistance and advocacy.