Monday, July 31, 2017

The big Lebanese thirst

Fierce competition among bottlers

Executive Magazine


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

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

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

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

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

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

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

Minimal plastic is recycled in Lebanon, ending up in garbage dumps and on beaches, like here in Costa Brava, south of Beirut.

The water knife

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

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

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

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

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

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

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

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


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

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

Such competition extends to imported and sparkling waters. Nestlé had dominated the sparkling water segment with brands Perrier and San Pellegrino, but Rim introduced its own sparkling water brand in 2016, and Tannourine introduced San Benedetto earlier this year. The brands have also ventured into glass bottles to appeal to higher-end consumers, especially at restaurants.
“We consider selling under cost as part of marketing. This is the competition in the market, even to give the bottle for free (to restaurants) as it’s good for our image,” says Tannourine’s Berbery.

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

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

Bad mouthing

Competition is so acute that nearly every bottler had something negative to say about their competitors, ranging from illicit practices and mislabeling, to exposing plastic bottles to the sun, to burning trash during the 2015 crisis.
Sannine was accused of requesting the removal of the manufacturing date on gallon bottles to not be constrained by longevity issues. Tabourian denies this. “There’s no law that states you have to put the date on the container, only for production. We were asking to amend our traceability code in case there’s a problem with a specific lot of orders. It has nothing to do with the consumer, but was blown out of proportion,” he stated in an interview with Joe Maalouf on LBC.

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

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

Photos by Paul Cochrane.

Tuesday, July 11, 2017

Gulf crisis and gas: Why Qatar is boosting output

Economic power is gradually shifting away from oil to gas-rich nations, which favours Qatar in its dispute with Saudi Arabia and UAE

Middle East Eye

Qatar may be under economic siege but it pulled an ace from up its sleeve on 4 July by announcing that it will bolster liquid natural gas production by some 30 percent.
The move will secure Doha's position for years to come as the world's top exporter of LNG.
Naser Tamimi, a Qatari energy analyst, told MEE: "It is a very significant announcement as it will put huge pressure on the LNG projects underway in countries with higher extraction costs. It is also signals that Qatar is fighting for market share."
The announcement is also seen as a shot across the bows of Saudi Arabia and the UAE, the leads in the embargo, that Qatar is not buckling under the pressure.
Roudi Baroudi, the chief executive of Energy & Environment Holding, an independent consultancy in Doha, said: "The bottom line is this was a business decision. If politics had an impact, it was in the timing: it's possible that the move was accelerated in order to signal the country's resolve and ensure that if the siege persists, more revenues will be available to help soften the blow."

To read more go to:

In French, Gaz et crise du Golfe : comment le Qatar pourrait prendre le dessus:

In Arabic,ضربة موجهة للمحاصرين: لماذا تعزز قطر إنتاجها من الغاز؟

In Spanish: Crisis del Golfo y gas: ¿Por qué Qatar aumenta la producción?

Troubled Oasis - Jordan AML and CFT

Money Laundering Bulletin 

The Hashemite Kingdom presents as a haven of calm in a region beset by conflict but all is not as financially clean as the image suggests, reports Paul Cochrane from Beirut. 

WHILE Jordan usually has a reputation for reliability, security and stability, the truth is that the Hashemite Kingdom is behind the compliance curve as regards anti-money laundering (AML) and combating the financing of terrorism (CFT) compared to many of its Middle Eastern peers. Jordan’s government only upgraded outdated anti-money laundering and counter terrorist financing legislation in 2015. Better late than never but the country faces numerous problems, ranging from regional instability and economic malaise, to smuggling, money laundering and corruption. Furthermore, up to 4,000 Jordanians are fighting with the Islamic State group in neighbouring Syria and Iraq, a fact which brings serious terror financing risks in its wake.

Jordan has garnered minimal critical attention from the Financial Action Task Force (FATF) thus far; it is not considered ‘a jurisdiction of primary concern’ by the US, nor is it included in the US State Department’s 2017 International Narcotics Control Strategy Report (INCSR), despite its location in a difficult neighbourhood.(1) The Hashemite Kingdom borders two countries in conflict, Iraq and Syria, while its other three neighbours - Saudi Arabia, Egypt and Israel/the Occupied Palestinian Territories - also have serious terrorism and money laundering problems.

It may be a surprise, therefore, that Jordan only amended its AML/CFT law in January 2015. The last evaluation report, in 2013, by regional FATF-style body, the Middle East and North Africa Financial Action Task Force (MENAFATF), found the country to be non-compliant and partially compliant with 36 of FATF’s 40 Recommendations and 9 Special Recommendations (overall 12 were non-compliant). (2)

In part, Jordan has escaped the spotlight by virtue of not being a major regional banking centre, unlike the Gulf countries, Lebanon or Egypt. But it is not a minnow – the country has 16 commercial and Islamic banks and nine foreign banks, and the financial sector is closely tied to Saudi Arabia. The country’s leading bank, Arab Bank, dominates the sector, with assets exceeding USD46 billion out of a USD68.2 billion total at the end of 2016, according to Central Bank of Jordan data. (3)

“If you control Arab Bank, you control the [Jordanian] financial sector. The whole banking sector is owned by Saudi interests, which runs the public debt,” said Tariq Tell, a Jordanian professor of politics at the American University of Beirut, in Lebanon.

Strategic allies

Such linkages have led experts to conclude that while Jordan is not a high risk ML/TF jurisdiction, neither is it low risk. The 2016 Basel Anti-Money Laundering (AML) Index ranked Jordan third in the Arab world and 35th internationally. As such, it is a middle risk jurisdiction, but somehow, when it comes to many global banks, Jordan still is not a particularly high concern from a sanctions and AML perspective, noted Eric Lorber, a lawyer at the Financial Integrity Network in Washington DC, who advises financial institutions on US Office of Foreign Assets Control (OFAC) matters. “It doesn’t raise that many red flags, certainly for European or East Asian banks,” he said. “Compared to the United Arab Emirates or other jurisdictions, Jordan presents a lower risk, but also because Jordan is a close ally of the United States, like being part of the coalition against the Islamic State (IS) or being supportive of Israel, so there is a political component at play there.”

Riad al Khouri, director - Middle East at political risk adviser GeoEconomica GmbH in Amman, agrees that geopolitics is one reason why Jordan gets something of an AML pass. Jordan has no energy reserves, with its USD38.7 billion economy dependent on mining, tourism, services and manufacturing. To ensure its survival, Jordan has had to rely on the political and financial support of the Arab Gulf countries and the US, with the latter providing USD$1.25 billion in bilateral aid in 2016.

“The American empire inherited Jordan (from the British) and regards Jordan as a strategic asset, in particular for the defence of Israel. As long as Jordan is supportive, it can get away with many things, including money laundering,” said al Khouri.

Legislation but selective application?

The upgraded AML law has improved compliance within banks, said Oraib Rantawi, director of the Amman-based Al Quds Centre for Political Studies. “There are serious restrictions now with money transfers, and a serious verification process [of clients] under the authority of the Central Bank of Jordan (CBJ),” he explained. The amended legislation is designed to bring Jordanian law into line with FATF standards, such as controls on politically exposed persons (PEPs) and terrorist financing. It also insists that AML/CFT reporting entities adopt a risk-based approach. The new laws also requires all civil society, charitable and non-governmental organisations (NGOs) to make suspicious transaction reports to Jordan’s financial intelligence unit (FIU), the Central Bank of Jordan’s Anti Money Laundering and Counter Terrorist Financing Unit, which operates under the authority of a National Committee for Anti-Money Laundering and Terrorism Funding, headed by the CBJ governor. 

A representative of the Jordan Anti-Corruption Commission now sits on the national AML/CFT committee. The FIU is able to conduct investigations into suspicious transactions, in cooperation with Jordanian law enforcement. The law means that civil society organisations “have to declare where they get money from,” Rantawi remarked.

But while due diligence obligations have been reinforced by the new legislation, corruption and cronyism linked to the royal family and its circle remains less regulated, claimed Khouri. “If, today, you want to transfer USD5 million to a newly opened account in Amman, you’d have questions you may not have had 20 years ago, but to send a large amount of money to government officials, you can cross the border with a suitcase,” said Khouri.

And such problems have been noticed. Jordan dropped five points in Transparency International’s 2016 Corruption Perceptions Index from 2015, ranked 57 out of 176 countries, with an overall score of 48 out of 100 points. Tariq Tell was not surprised, commenting: “It is a garrison state because of kleptocracy, massive corruption and 30 years of major economic crisis.”

Number crunching

Meanwhile, there have been few convictions for money laundering. While the number of suspicious transaction reports (STRs) increased by 48 percent in 2015 compared to the previous year, there were no prosecutions for money laundering in the 12 months; it is not known if there were any in 2016. The CBJ’s Anti Money Laundering and Counter Terrorist Finance Unit has not yet released STR filing data for 2016.

Despite the lack of official data, money laundering is considered to be pervasive in Jordan: “Everyone thinks there is massive money laundering going on as we’ve no idea where a lot of money comes from,” said Tell. “There are a lot of secondary networks through the Gulf and from Iraq to Jordanian banks. Jordan is a staging post to cash in on deals.”

Indeed, Jordan became a hub for Iraqi cash in the 1990s due to the US and United Nations (UN) sanctions on Iraq, and the UN’s Oil-for-Food Programme, which began in 1996. The programme ended with the US invasion of Iraq in 2003, while a UN investigation accused nearly half of the 4,500 companies involved of paying illegal kickbacks and surcharges to get contracts.(5)

The networks established during this period have remained in place, especially with the autonomous Kurdistan Region in northern Iraq, bolstered by the influx of Iraqi refugees from 2003 onwards.

“Since the 1990s, money laundering has been important in financing Jordan’s economy. I’d say the single most important source is Iraq, then Russia. Since 2011, there is Syria,” said Khouri.

Jordan is currently hosting some 655,399 Syrian refugees registered with the UN. Adding in unregistered refugees, Syrians currently account for an estimated 10% of the 8 million population. Jordan has banned its residents and companies from using the Syrian banking sector and applies restrictions on Syrians opening bank accounts.

Cross-border trade

Smuggling is also a problem, increasing Jordan’s exposure to money laundering with smugglers utilising tribal networks with the Iraqi, Saudi and Syrian borders, and over the Red Sea onto Egypt’s Sinai Peninsula. “We have long borders and desert, so there’s many ways to smuggle, but the good news is there’s limited opportunities to use this cash at a larger scale as it draws the attention of the authorities,” said Rantawi.

Reports that Yemeni Houthis, which are fighting against Saudi-backed Yemeni forces, were using Jordan in 2015 to launder money have been dismissed by the government, however. Flights between the two countries have stopped, said Rantawi, adding: “We have our own security concerns”.

And yes, despite its comparative stability, the conflicts in Iraq and Syria have impacted Jordan, with six terrorist attacks linked to the Islamic State in 2016. The most high-profile was in December, when 10 people were killed in a shootout with Jordanian members of an IS affiliated cell at Kerak Castle, a crusader fortress south of Amman. “It was the worst year for the past decade. At the end of the day we’re in the midst of a chaotic region with Al-Nusra Front and the Islamic State surrounding Jordan,” said Rantawi.

Foreign fighters – return risk

Independent Jordanian reports estimate that between 2,000 to 4,000 Jordanians have joined the Islamic State since 2013, the second highest participation of foreign fighters by nationality after Tunisia. (6)

With Jordan part of the US-led coalition against IS, Amman is concerned about repercussions within the kingdom, especially if IS fighters return home. “There will be huge blowback. Jordan is on the front line of the war on terror, and there’s a problem in their own backyard,” said Tell.

And while IS is heightening terrorism concerns, there is a long presence of Islamic extremism in the country, which dates back to the 1980s, while Abu Musab al-Zarqawi, a Jordanian, was the alleged founder of Al Qaeda in Iraq. “Al-Zarqawi was a rock star of Islamic terror and he had very strong support [here]. ISIS has complicated the picture,” said Khouri.

There are also concerns about terrorist financing connected to Palestinian political parties such as Hamas. The Arab Bank was found liable in 2014 under the US Anti-Terrorist Act for knowingly providing assistance to Hamas, which the US considers a terrorist organisation. A full settlement is still pending.

“The Palestinian angle makes [Jordan’s] compliance picture more vulnerable,” added Khouri. “The overall situation is not good. There is terrorist financing, certainly money laundering, and finally compliance is not as strong as the US or Jordan wants.”


3) A consortium of Arab and Jordanian investors acquired a 20% stake in the Arab Bank Group for USD1.12 billion from Oger Middle East Holding, part of Lebanon’s political-business dynasty, the Hariri family, in February 2017. The bank has assets of more than USD46 billion and 600 branches on five continents. -

4) Jordan: Background and U.S. Relations, Congressional Research Service, January 25, 2017

Photo credit: Ahmed Telfah via Wikicommons

Monday, July 03, 2017

New Cars Increasingly Rare as Syrian Civil War Rages


Due to the tanking economy and widespread violence, more than 4 million people have left Syria, either taking their cars with them to neighboring countries or selling them. The automobile sector slowly has morphed into a used-car market. 

Bureaucrats avoid using official cars in the areas still under government control, instead using yellow cabs, typically Chinese or Iranian brands.

BEIRUT - The Syrian car sector has been hit hard by the country's ongoing civil conflict, now into its sixth year.

From nearly 90,000 vehicles being imported into Syria annually before the rebellion against the rule of President Bashar al-Assad started in 2011, imports have plunged to about 1,000 a year. But despite a burgeoning used-car market and rampant smuggling of stolen cars, an agreement was signed this year to locally manufacture China’s Dongfeng Motor DFM brand. Production started in February in the city of Hama, north of Homs, well within the government-controlled zone of Syria.

The country’s once-burgeoning car market had seen sales surge after the government reduced import duties in 2005, from 255% to 60% for cars above 1.6L, and from 145% to 40% for those with smaller engines. Indeed, in 2010, Syria imported some 87,000 cars, double that of neighboring Lebanon, although small on a per-capita basis, given Syria’s population of 18 million compared with Lebanon’s population of 4 million at the time.

European, Japanese, South Korean, Iranian and Chinese cars were selling well, while American models not built in the U.S. also were available in the market (Syria had imposed high customs duties on U.S.-made products).

When anti-Assad demonstrations broke out in March 2011, sales started to plunge due to political instability. “The new-car market has taken a nosedive, as no one is willing to buy a car in case the window is blown in by an explosion or it’s taken at a (military or militia) checkpoint,” says a former car dealer now living in Beirut, Lebanon, who asked to remain anonymous.

Even many bureaucrats avoid using new and official cars in the areas still under government control, instead using yellow cabs, typically Chinese or Iranian brands.

The sanctions imposed on Syria in 2011 by the European Union and the U.S. cut the country out of the Society for Interbank Worldwide Financial Telecommunication transaction network and from using U.S. dollars and euros.

With the Syrian government burning through its foreign reserves, in the fall of 2011 a ban on automobile imports was announced, with the Central Bank of Syria’s governor saying the import ban would save $4.5 billion in scarce foreign currency. The decision was overturned following pressure from car dealerships, says Jihad Yazigi, editor of the Syria Report financial newsletter.

Instead, the government raised tariffs on vehicles, duties that remain in place today – although with sales dwindling they do not raise much revenue. These are now 50% on all cars with engines of 1.6L and under; cars with engine sizes of 1.6L-3.0L, 80%; cars with engines above 3.0L, 120%; and above 4.0L, 150%.

At the same time, the Syrian pound started to depreciate, eventually reaching SYP520:$1 in 2015, from SYP47:$1 in 2011. The pound remains weak, with black-market rates being the key rate given that formal international trading in the currency largely HAS ceased, making imported cars prohibitively expensive for Syrians still earning and using the local currency.

As the conflict spread around the country, sales dropped even further. According to Syrian newspaper Al Watan, about 1,000 cars were imported each year in 2013, 2014 and 2015. Figures for 2016 are not yet available and those statistics cover government-controlled areas only, although the government does officially run the largest population centers, including most of Damascus and Aleppo.

Due to the tanking economy and widespread violence, more than 4 million Syrians have left the country, either taking their cars with them to neighboring countries or selling them.

The automobile sector slowly has morphed into a used-car market. “The used market has been growing the most, and the stolen-car market,” the dealer says. “A lot get stolen in the country and then shipped out, but many are stolen in Lebanon, Turkey and Europe that end up in Syria.”

He adds that his dealership sold just six cars in 2016, all from 2012 inventory. “There’s no way we’d spend hard currency to ship cars to Syria that would sit in a lot waiting to be sold, as anything could happen. The risk is way too high.”
The Syrian government last September banned the importation of cars until the end of the year. No reason was given, but Yazigi believes it was to further reduce imports and retain much-needed foreign currency.

Data on locally produced cars is minimal but is believed to be in the low thousands for Iranian brands Khodro and SAIPA, manufactured through Iranian-Syrian joint ventures in Damascus and Homs. In February, Syrian company Khallouf Trading announced it was starting the production and sales of two new locally assembled cars under license from China’s DFM brand: the S50 sedan, which will be priced at SYP9 million ($18,000), and the all-wheel-drive AX7, priced at SYP13 million ($26,000).

Sales of the new vehicles are expected to be driven by the import ban, bolstered by the availability of spare parts and aftersales service, as spare parts are hard to import into the country due to sanctions.

There is demand for high-end cars from a rising class of war profiteers. “There is a nouveau riche (clientele) buying supercars. It is surprising in a conflict to see a $1 million Bugatti with Syrian license plates,” the dealer says.

Photograph: Damascus, 2008, by Paul Cochrane