Adonis Diaries

Posts Tagged ‘Jeremy Arbid

Interview with Georges Corm

Former finance minister calls for targeted and intelligent tax reform

Targeting empty pockets, and cheese rats have no cheese left to nibble on

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Now that the government has approved the 2017 budget, the question remains as to what new taxes or tax increases might be imposed. As Executive goes to print, the indication is that there will be some introduced, but it is not clear which, and Parliament will have to debate the budget before it is ratified into law.

There appears to be zero studies by the government (or, at least, none that are public, and officials decline to provide details) of expected revenues, their social impacts or the effects to the economy that new taxes might imply (see cover story).

Georges Corm, Lebanon’s minister of finance at the turn of last century, describes to Executive the government and Parliament’s approach to financing public spending as convoluted and misleading. “[It’s] like somebody stumbling through a room without lights,” he says.

  How do you view the government’s proposal of new taxes or tax increases as a new source of revenue to the state?

The tax system is unfortunately not based on any strategic view of what the needs of the Lebanese economy are. What I’ve said repeatedly is that our tax system is putting a burden on people that are in the productive sector.

As soon as you are productive and receive an income from your productive activity you are liable for the income tax. But if you live from your rent revenues, except for the 5% tax on interest income from banking deposits, you have no income tax to pay.

So this is an unfair system and a system that punishes the productive sectors (industry, trade and services) and encourages Lebanese to go more into rent-type activities that are untapped by the government.

When I was minister of finance, I wanted to introduce a general income tax, as our income tax system is fragmented with different tax rates according to different categories of revenues.

In addition, taxpayers have to file separate income tax returns for each kind of taxable income so that income from various sources are not accumulated and assessed to be subject to a general income tax according to the same progressive rate of taxation of the overall income.

This not only causes the treasury to lose a substantial amount of income tax, but it is also a headache for the taxpayers, as they must presently file many different income tax returns it have revenues from different sources.

Therefore, a unified income tax system would make life easier for all taxpayers as many Lebanese have several sources of income that are not taxed together. So having several sources of income that are assessed separately by the tax department is a big headache both for the taxpayers and the tax authority.

  One local bank said in early March that tax evasion amounted to $4.2 billion. Is this figure anywhere near accurate?

These are guesses, we don’t have reliable statistics in Lebanon. What is extremely important is to close the many loopholes in tax legislation that allow revenues to legally escape income tax.

Looking at petty trade activities, it is a loss of time for an income tax department to try to tax them, while what is important is to check that tax collection is properly followed by tax authorities as compared to tax assessments.

In addition, there are a lot of tax breaks, especially for new investments, but it is not transparent and you do not really know who is getting the tax exemption. (The Elite comprador class?)

  In late March the government issued $3 billion in treasury bills which were snapped up by local banks.

The government has no problem in raising the amounts needed to refinance its maturing debt obligations, as a large part of the quite substantial yearly banking profits is due to subscribing and trading T-bills (treasury bills) and Euro-bonds issued by the state.

This is why I would advise the central bank, the Ministry of Finance and the private banking sector to agree to decrease the average interest rate paid by the state on its public debt by around 1% on any new issues.

Such a decline in the cost of servicing public debt to the state would save the treasury a yearly amount of $700 million in a few years time.

One should also mention that Lebanese banks are giving higher interest rates on deposits than anywhere else in the world

  Some of the newly issued debt does replace old debt that was at a higher interest rate. But for Lebanon to get to a more attractive interest rate would that not require a higher sovereign credit rating?

Not necessarily because Lebanon’s public debt is mostly owed domestically, even in respect to dollar denominated debt.

This would affect the profit of the banks only a little bit. They have had such huge and continuously increasing annual profits since the nineties, whatever the economic situation of Lebanon, that a reduction in interest rates paid by the state can be bearable without endangering their profitability.

Whether there is a 1 or an 8%  growth of the economy, bank profits are unaffected by the variation in economic activity because they have this huge portfolio of treasury bills that secure a steady and increasing flow of banking revenues.

  The banks always argue that because they are the most transparent sector, they are penalized and targeted to pay more taxes.

I don’t see how they’re penalized, and I don’t think the banking sector drives the economy.

Yes, Lebanese banks are very good at serving their affluent clientele both inside or outside Lebanon. This is why this contributes partially to attract the big flow of remittances that are sent from our emigrants, remittances being the biggest source of financing of our huge trade deficit.

But, one should also mention that Lebanese banks are giving higher interest rates on deposits than anywhere else in the world, which might be the most important drive for the flow of remittances. This is why I believe that they can decrease them a little bit, instead of these endless discussions on how to tax more the banking system.

  What effect might the proposed 2% tax increase on the interest of deposits (a capital gains tax) mean for the banking sector and for the economy?

I am personally not enthusiastic about raising the tax on the interest of banking deposits. But raising this tax from 5 to 7 percent will probably not produce a decline in the amount of deposits in the banking system. If adopted, this measure should not be repeated.

In fact, I believe that a reduction in the average rate of interest paid on public debt would save more money for the treasury than what the increase in the tax would yield as an additional revenue. All these kinds of measures should be studied carefully.

  Would an increase on the corporate tax from 15 to 17 percent discourage Lebanese banks’ appetite to buy locally issued debt?

Certainly not. But again, I prefer the decline in the average interest rate on the public debt. We have almost 4 or 6% differences according to the maturity of the bonds and treasury bills that the state is issuing. If Lebanese today, because they are the subscribers directly or indirectly want to go to foreign banks abroad to place deposits, they will get what? One percent, maybe 1.5?

So you still have quite a margin to have a reasonable decrease. Let’s bring the premium paid on large deposits in Lebanon to 3 or 3.5 percent above average interest rates paid outside Lebanon by international banks on their deposits.

Currently, on average, we’re around 6 to 6.5% paid on Lebanese pound deposits and 4 to 4.5 percent (or sometimes more) on dollar deposits.

For what the state is paying on its debt, if you take out 0.5 or 1 percent it will not be a catastrophe for the banking sector nor for attracting capital from abroad. A decline in interest rates in Lebanon will also be positive for productive activities and new investments as it will also reduce the cost of financing in the economy for the private sector.

 What might be the effect when taxing consumer behavior by raising the Value Added Tax (VAT)?

Nothing has been studied carefully. For VAT you can have two rates, although I do not like that. You can have a 15 percent tax rate on luxury goods for instance, and keep other goods at 10 percent.

There should be a study of the different alternatives to see what  the yield will be to the treasury, but you have a government which did not detail how the proposed 22 new taxes or increases in existing taxes are going to be implemented.

Such a proposal in one shot is unreasonable, especially since most of the proposed taxes are fees and excises. For instance, when the government says it is going to double the fees for public notaries, this will affect all the Lebanese population and will constitute quite a burden on the large poor segment of the Lebanese population. T

he government says they’re going to, and this is a very old issue, tax the resorts along the coast that are not legal, estimating that it will yield 400 billion Lebanese Lira, but how did they arrive at this figure?

And what about raising the very low basis for calculating the rent paid to the state on using legally public domain along the sea or the river coasts? Why did the basis of assessment of this tax not change since the early 1990’s?

A decline in interest rates in Lebanon will also be positive for productive activities and new investments

  Are these figures pulled from thin air, or how has the government arrived at its estimates of revenues for these proposed taxes?

You can do it but you need the statistics, but if you don’t have data how can you have an opinion? The minister of finance says this will bring us a certain number of billions of LBP, but I don’t see how the ministry determined its estimate of the additional income that would accrue to the treasury.

  What effect do you think new or increased taxes might have on consumer behavior?

You have to distinguish between Lebanon’s two separate economies. The economy that is very prosperous – the nice areas of Beirut with the restaurants and hotels and some summer resorts in Mount Lebanon, and where you see luxurious cars and the very affluent part of the population.

I don’t know what percent of Lebanese families are affluent, but my guess is that it can’t be more than 6 or 7 percent. Then you have the other economy that is a deprived one, where people are on the level of poverty, sometimes extreme poverty, and these are not the people that should support additional taxes on consumption or on legal documents they need in their daily life.

This is why we have to stop going to indirect taxes, and to simplify the tax code through a unified income tax, canceling old dated excise taxes or fees (like the stamp duties). In addition, the government can take some additional income tax measures, so that ultra-luxurious villas or apartments are taxed in accordance with the luxury and quality of the residence.

In addition, real estate companies can buy and sell real estate assets just through buying or selling shares, thus escaping the 6.5% registration fee. I tried to introduce a 6 percent tax on the selling or buying of shares of real estate companies so that it is the same as the tax burden that is paid by individuals buying a property. This is a legal loophole.

  So you are in support of some new taxes?

I am not in favor of imposing 22 new tax measures in a haphazard way just to increase treasury revenues. There should be an intelligent and adapted tax policy that will re-balance the sources of tax revenues between productive and non-productive activities on one hand, and between income tax revenues and consumption taxes or excises and fees on the other hand.

  If the government imposes any of the proposed taxes should projections for economic growth downgrade?

No, because I go back to what I said earlier: we have two economies. A very affluent economy that could support a reasonable increase in the tax burden on income or on luxurious consumption without any problem; and the other which is stagnant where the level of poverty is continuously and dangerously increasing.

Of course, a 1% increase in VAT for this category of people might affect them. In any case, it is urgent that we have enough studies and statistics to study the impact of additional taxation measures.

Today, the staff at the Ministry of Finance is in a black room, pitch black – they act like anybody would in such a case, i.e. behave erratically.

Taxation’s redistribution effect

Kick-starting the process of change? On burdening even further the poorer classes?

Half of Lebanon workforce is in the public sector. That Not a force, it is resistance to reform change.

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Alain Bifani, director general of Lebanon’s finance ministry, tells Executive that newly enacted taxation will shore up revenue in the public coffer. (Yes, but the Lebanese getting poorer by the days can No longer suffer the hundreds of indirect taxes like these stupid stamps for every transaction)

During an interview at the end of August (before the constitutional court froze the new tax measures) Bifani detailed the tax measures and discussed their impact on segments of the population and on the economy.

He said that the new taxation plus the salary scale increase for public sector workers would lead to a redistribution of wealth, but cautioned that this is only a starting point toward leveling a fair system of taxation, and added that now is the time for lawmakers to seriously reform public spending.

  One of the early responses to the tax proposals was that an increase in taxation would have a subduing effect on the national economy. Can you comment on this notion from the perspective of the Ministry of Finance?

I think it’s an idea that is a bit simple because any tax hike has a negative impact on the economy.

But when the economy is suffering from a high deficit, and an increasing public debt, in addition to many other things, then one should expect that the deficit is brought under control, and that, one way or another, we have the breathing space to enable the economy to grow again. (And who brought about this yearly increase in public debt?)

There is an answer that has to come on the revenue side because the government hasn’t been able to contain the expenditures. (Expenditure to filling the coffers of the militia leaders of the civil war?)

To the contrary, we’re seeing a rise in expenditure to debt servicing, a rise in salaries, and a long-awaited wage increase. What can you do to contain the deficit? You either go for tax measures or higher debt. Debt has an even bigger and broader impact on the economy, and on the human beings in this economy. So what do you do? (Stop borrowing at high interest rates from the colonial powers)

Second, how about the loopholes in the system, where you have people bringing in lots of profits and not [being] taxed at all, like capital gains on real estate. This is outrageous. Of course these people are allowed to make profits, and we want them to. (No, we don’t want them to rob us dry)

We want banks to be profitable, we want companies to be profitable, we want individuals to be profitable. But we don’t want biases in the system. (Because we refuse to create a valid State?)

There is no reason why someone who buys and sells plots of land wouldn’t be taxed, whereas someone who invests in companies, creates jobs, and creates values would be. This is something that’s not only good for revenue, but also good for the fairness of the system. (So why this system is Not being applied in new tax scheme?)

There is a kind of redistribution effect when you slightly increase taxes on corporations, and when you bring the banks into the 5 percent tax system now at 7 percent.

Ideally, yes, I’d like to decrease taxes, but we have to face reality — we can’t have the salary scheme coming in, an increase in debt services, transfers to EDL that are crazy, hiring thousands of people in the system, and at the same time, saying ‘we don’t want to increase the burden,’ it’s just impossible. (To whom are you talking? The developed nations?)

  How much added burden does the Value Added Tax (VAT) increase to 11 percent translate for low income households?

On the small income layer the VAT increase is going to have an impact of 0.35 percent, [so] very little, up to $40 [over one year]. If you consider they spend mostly on housing, education, health, public transportation, insurance if they can, and basic foods of course — all of this is exempt from VAT. Clothing is not, and there are some food and beverages that are not. (A lot of crap. VAT is used a seesaw on every product and service and the cumulative 11% on the product reaching the customer is far higher than the 0. 35%)

  New tax revenues have been presented as if they’ll offset spending from the public sector wage increase. Can you tell us the aggregate number that would benefit from the wage increase?

My personal argument is the tax measures are not meant to offset the salary increase.

There is no allocation of resources, those are resources for the budget as a whole.

So it would be unfair to say we are taxing people to pay salaries. We are taxing people because we have a huge deficit and those [salary] increases should’ve happened way before all other expenditures took place and became recurrent. It’s true that the figures are more or less the same, and that was the occasion to pass the tax increase.

Who’s benefiting from [the salary increase]? You have an enormous amount of Lebanese households benefiting — I don’t really have a figure, but it is about 200,000. [Some households have several beneficiaries], roughly 10,000 civil servants, about 53,000 in public education, and about 110,000 in the armed forces, plus about 85,000 pensioners and retirees, you have contractuals, and people who work for public enterprises and municipalities.

It’s unfortunate that we ended up having so many people in the public sector because the private sector is not absorbing the workforce anymore.

But this is a fact, they are here, and by law, they are allowed to have this increase.

The impact is that, somehow, this is going to contribute to bring them up from below the [poverty] line to some sort of a middle class, which the country needs badly.  (Are you kidding us? A slight increase in 11 years would change the class structure in Lebanon?)

This will remain not enough until the government takes the proper steps to unleash the potential of the economy, allow the economy to grow again, and the private sector to be able to absorb the workforce especially [those] at the higher [level of] skills.

What’s badly missing in the country is that we aren’t able to create high value added jobs, and not even low.

  Do you forecast growth to the salary scale increase figure of $1.2 billion?

The $1.2 billion will grow or not depending on the pace of recruitment that we’re witnessing in the public sector, which has been extremely high in the last year.

For good reasons or bad, it doesn’t matter. But what would the good reasons be? For example, the security situation is forcing recruitment in the armed forces — fine. But this doesn’t mean that the solution is always more people. We can be effective differently, and we have to be because Lebanon simply can’t have half of its workforce in the public sector. It’s not normal, it’s not good for the future, and it’s absorbing too much of the meager resources that Lebanon has.

  With the salary increase, would the public sector’s share in the economy grow?

No, I’m not saying that necessarily it’s going to grow, but it’s one first step that is legally binding, and also, very important for the economy.

If you want to increase consumption, you have to increase the number of consumers (with affordable prices?).

When you provide a scale like that, you’re creating the possibility for many Lebanese households to become consumers again. On the other hand, you’re allowing them to live normally, to have their children go to school (in private schools?  Which increase tuition twice the salary increase and every year?), to universities, to be able to create something, and create value.

Once you do that in the public sector, the private sector has to realign. You can’t let the private sector realign on its own, it’s unfair when you have a system that doesn’t help it grow and create jobs. You have to help them, not by giving subsidies or anything like that, but by creating the proper environment for corporations to grow. (Are you insinuating that the business laws are handicapping the economy?)

This is going to be the next challenge. Otherwise, if we really miss that, the load on the private sector is going to be tremendous because those kinds of measures increase the load on them. It’s important on one hand, but it’s very important to have the proper follow up on the other end.

  Is there a tradeoff effect? Will inflation eat up some of these gains that people are looking forward to, and how will that be balanced by the Ministry of Finance?

Very roughly, if we look at inflation per se the figures look very stable, and they’re not likely to be high. We’re in the midst of a very low inflation period in Lebanon. After the whole operations that took place with the banks, the inflation didn’t really move, this is where logically the offset happened. (Thus, banks are the main source of inflation?)

Inflation in general terms, won’t matter a lot. (Since when?) What will matter are specific issues that are going to see hikes. For instance, private schools. It’s clear that if nothing happens, they’re going to increase the fees again. This, and many other issues, will probably eat up something like 15 to 20% of the increase. (Why you intentionally lower this percentage?)

This is a rough estimate, but you will still have about 80 percent net increase for those who are benefiting from the salary increase.

  Are you expecting redistribution of wealth that’s not going to be just on paper?

Between the tax measures and the salary scale, no doubt redistribution is going to happen. Nevertheless, this is a scale that’s far from being ideal, in terms of how fair it is, where and how and who’s getting what.

There are plenty of questions and plenty of things that are still not satisfactory. But again, when you want to start something, you have to have the system move, you have to kickstart the whole process hoping that some kind of positive momentum will take place.

  What kind of GDP growth rate is the ministry calculating for 2018?

We’re hoping to have 2.5% growth in 2018, but the figure is not yet final. (In which sectors, please?)

  In an op-ed for the September issue of Executive, a former minister of finance wrote that the Lebanese tax policy of the last two decades was not very coherent. What is your comment?

My comment is that he’s right. We have to admit that it’s not only the tax policy, it’s the whole fiscal policy that wasn’t coherent at all.

When you’re making comments, you can say things very clearly because you are commenting, but when you are a player from within, you have to fight to have some kind of coherence and to introduce what you think is required.

For instance, in the tax measures just the capital gain on real estate is something that I’ve been promoting for 17 years, since I joined the ministry. And you have to keep fighting. It was very clear from the beginning, we were a system that taxes labor and investment much more than any kind of windfall income.

And this is also a fight that’s going to take a long time because you’re fighting the main interests in the system. And yes, when you have weak governance, you can’t all of a sudden have something coherent put in place. It takes ages, but you have to keep fighting and pushing.

When you have weak governance, you can’t all of a sudden have something coherent put in place

  Do you see it as your mandate to push for coherence?

One of them, yes. And to tell you that today it’s very satisfactory after all these years? No, it’s far from being satisfactory. We still have a lot to do, but we will keep pushing.

  One of the things that the business community especially is very sensitive to is tax certainty and predictability into the future. What’s most realistic framework for looking ahead?

What happened now is probably something that won’t witness major changes for at least three years. Which, in terms of predictability, is very good; not to mention that, for the business community, the changes are not huge. (Meaning, no more salary increases in the coming 3 years?)

We should keep two things in mind.

The first is that we aren’t in tax hell here. The level of taxation is very reasonable. The citizen of Lebanon complains, and he’s right to complain because of the cost of public services. This is what is extremely high. The real burden on individuals in Lebanon is about the cost of utilities, of public services, everything that forces them to take a big cut on whatever is available to them to live properly.

Of course they call them taxes because all of this is considered as the cut, but if you really look at the tax burden on low income people, it’s practically nothing. (You mean the direct taxing scheme?)

The second, in addition to predictability, fairness is very important. We’re not yet in a very fair system. We know that and it’s our duty to admit it because if we don’t say how things are, then we won’t improve.

But we also have to bear in mind that from 2000 until now, the number of taxpayers in the system has been multiplied by 3.5, which means that the tax authorities are reaching practically everybody now in the system.

Now that we are reaching the margins that we basically have everybody integrated into the tax circle, compliance is also improving. For everybody complaining that the system is not fair and again, she or he are right to complain, and they have to complain because this is how things improve, they also have to realize that the improvement has been tremendous. We’re not coming from nothing, and it’s not still the same system that we used to have.

Those two things in parallel, improving the system as a whole, and improving its administration, are taking place. Maybe too slowly. But at least improvement is taking place on a permanent basis at three levels — policy, administratively, and at the services level.

Now you can settle your taxes, check on them using your mobile and e-services. This makes it easy. At the administrative level, we’re reaching roughly everybody in the country, increasing the compliance of most of the sectors and segments of the economy. At the policy level, we’re dealing with the loopholes, bringing more coherence, and decreasing the gap between windfall income and business and labor income.

  But do you still face challenges like lobbying for or against increases of taxation for products, such as tobacco or alcohol?

Those aren’t really the worst we face, they’re details in the system. Honestly, when it comes to tobacco, it doesn’t have much to do with lobbies. It really has to deal with the fact that the management of tobacco is still very much afraid of smuggling because we had a very tough experience in 1999-2000.

At that time, the interim minister was Nasser Saidi, and he decided to increase the rates, and the fall in income was unbelievable. It took us 11 years to come back to the levels of just before the hike. So this is something that is still in their minds, and they can see it. It’s immediate.

Whenever you increase slightly, you see flows. Again, the Ministry of Finance is not an island, and we can’t work alone. If the borders aren’t well kept, if the judiciary system doesn’t work well, and if the police isn’t able to enforce the law, then of course you take a hit on your revenue.

Alcohol is different. I believe it’s [the approved tax measure is] not adequate. And the text that was voted was not the text prepared by the ministry, it was amended. And I think it needs to be revisited because it’s harmful to imports and to tourism.

But those aren’t the lobbies that we’re fighting everyday.

  Which are those?

You have in the system much stronger lobbies who can twist the system to their benefit, just like in any other country. This is part of the game, and we have to admit that it takes a long time to convince, mobilize, and have lobbies facing lobbies.

 

Technica: a robotics manufacturer in Lebanon

It is in Lebanon that the tale of Technica unfolds.

The company manufactures and customizes automated end of line solutions — those machines that prepare products after they’ve been individually assembled, or wrapped, for shipping.

So, if you were to say, eat a Twix candy bar in Cairo, it would have been Technica’s machines that prepped the boxes of candy bars for shipping, separating products by the barcode number and sending them to the warehouse by automated conveyor belts.

Or, for example, if you were to pour yourself a glass of milk bottled by Almarai — one of Saudi Arabia’s largest dairies — it would have been Technica’s machines that collected the milk bottles, sanitizing and sorting them before carrying them off to a refrigerator warehouse for shipping — all completed automatically with little human interface. And these machines are all designed and built in Lebanon, who would have thought?

Automating the future

Technica, a robotics manufacturer, expands its factory and begins succession planning

Technica ships its automated factory systems across the world

Technica ships its automated factory systems across the world

Tony Haddad, Technica’s founder and general manager, is on a mission to transform the way other factories package and prepare their products. The family owned business and manufacturer of robotics and automated assembly solutions has completed expansion of its Bikfaya factory with an eye on further entrenchment in the GCC markets and new opportunities in Africa.

Robotic dreams

If adversity produces champions, then Technica is Lebanon’s poster child. Especially as in the world of industrial manufacturing big usually conquers small. But for firms operating in niche fields, such as robotics, small yet aggressive companies can thrive in even the toughest of environment.

Technica is aiming to be the preferred partner for automated solutions in the Middle East and African markets by 2020. According to Technica’s survey of the Middle East market, the sales of automated solutions have reached $10 million annually.

Today, Technica is going head to head with large European players already entrenched in the business

Today, Technica is going head to head with large European players already entrenched in the business, such as Krones (a large German conglomerate) and OCME (an Italian automation firm), as well as a few regional companies offering more niche solutions.

Yet Technica has rooted itself in the Middle East market — its client list stands presently at 276 — serving local divisions of global corporations like Mars, Nestle, Procter & Gamble and Coca Cola, to name a few.

And by 2020 Technica hopes its client base will reach 325, partly driven by further expansion in the GCC markets but also propelled by the push into African markets.

All of this started in a tiny garage during Lebanon’s Civil War. When the war became too intense to continue operations, Haddad packed everything on a boat and moved the business to Cyprus.

When tensions eased in 1991 and the Syrian occupation lent some stability to the country, Haddad moved the company back and began construction of a new factory in Bikfaya — the site of their present operations.

By this point one starts picking up on a recurring theme, and maybe Haddad took note from Warren Buffet — the American billionaire investor — who is famously quoted as saying “Be fearful when others are greedy and greedy when others are fearful.” That is to say that where others in Lebanon have found war and conflict to be insurmountable, Haddad has perceived them as mere “bumps in the road.”

Bumps in the road

In its first two decades Technica’s sales progressed steadily, the company was growing and revenues were roughly doubling every five years. By 2006, with the July War unsettling the country, Haddad set out to again expand operations, adding factory floor space to the existing facility with growth driven by entry into new markets in North Africa.

By 2009 the company’s revenues had reached nearly $8 million.

There have been hiccups along the way

There have been hiccups, Haddad points out, along the way. A broader look at gross revenues shows continuous growth apart from two years, 2009 and 2010, where Haddad admits that the company’s sales were stagnant. He links the issue more to the slowdown of the global economy and a slump in GCC markets — like the slowdown of Dubai’s economy in 2008 — as projects were put on hold or simply canceled.

Likewise in 2013, the worsening of the Syrian conflict halted Technica’s transportation of goods across the territory for delivery to factories in the GCC. Now the company, like other firms in Lebanon, has to export by sea on routes that are just as expensive. But what at first was a negative for the business, Haddad describes, has turned into an advantage — Lebanon’s ports have expanded and the shipping companies have developed their maritime routes.

For Technica, the costs of shipping by sea to the GCC are not substantially different — reliability has become the most important factor. And according to the company, shipping by sea to Jeddah, for instance, now takes only five days when transit times by land were 11 days — “We’re using faster shipping routes now and we’re saving on that in terms of the cost of time. It became an opportunity stemming from a problem,” Haddad explains.

By 2011 the company was again flush with cash and Haddad announced plans for another expansion of the factory — despite civil unrest budding to the east. With the war raging in Syria, Technica undertook capital expenditures totaling $1.5 million — the expansion was to double the size of the factory while creating an additional 18 technician and engineering jobs.

This latest expansion phase was completed in 2014 and by the end of the fiscal year the company’s revenues had risen to nearly $16 million with exports amounting to 90% of the company’s sales.  

Now Haddad is eyeing new markets in Africa — places like Ghana and Nigeria, which are themselves looking to develop value chains in the production of food products, providing big opportunities for companies like Technica to supply solutions to new and expanding factories.

Ultimately, Haddad says Technica’s strategic vision is to double the size of the company by 2020, with a goal of increasing revenues by 15% each year. This, Haddad says, would give Technica greater capacity to build bigger, more complex automated systems and multiple projects simultaneously.

Into the future

And here’s where Technica’s story gets really interesting. The company has been built by the family from the ground up — yet Haddad has been the integral figure driving Technica’s evolution since its inception in a garage in the early 80’s. So after a 30-plus year career he is starting to think about easing his workload, and with this come questions about executive leadership.

For all businesses, let alone a family owned one, this is an important issue — leadership drives the culture and defines the company’s strategic vision. Yet, if this idea of executive leadership were suggested to Haddad, he’d clarify that his style is to lead from behind. Technica subscribes to what is called servant leadership — a philosophy with its roots in the annals of history but adapted for modern application. In organizations employing the servant leadership philosophy, diffusing power through the organization and the development of employees into top performers are the priorities.

The general notion is that top management serves the middle managers who serve the factory workers so that the entire organization can better serve its customers — similar to an upside down, pyramid structure. Indeed, it was from the factory floor and then the employee cafeteria that Haddad initially spoke with Executive.

The important question is whether Technica, and manufacturers in a similar position, can continue in such a hostile local environment

By 2018, Haddad reaffirms he’ll no longer be Technica’s general manager — and similar to most family businesses, the assumption is that one of his children will take over when Haddad steps back. Yet it is not only the GM position that will need to be filled — Haddad is also Technica’s sales manager.

There are four children in the Haddad family, each owning a 24 percent stake in Technica (Haddad retains a 4 percent minority stake in the company), three of whom work in the family business — Cynthia Haddad Abou Khater as strategy management officer, Cyril Haddad working in customer service, and Michel Haddad in multinational account sales. While being a family member has been a prerequisite to own shares of the factory and receive a dividend, having the same blood has never guaranteed a job in the factory.

“If you have something to bring to the table we want you to work in the company — being a family member is not a guarantee,” Haddad says, somewhat sidestepping the question of who will run the company when he gives up the reins.

Technica has no formal board of directors. Its top management team sets the strategic vision of the company — its managers of operations, finance, human resources, sales and strategy. So while Haddad fills both the role of general manager and sales manager, his daughter, Abou Khater, is the company’s strategy manager.

Currently the team is working internally — Haddad says they might bring in a consultant at a later stage — to develop its corporate governance to formalize succession plans by refining the descriptions for each managerial position while cultivating the leadership attributes desired for the top position.

Haddad says his plan is to continue grooming his replacement so that in three to four years he might be able to step out of daily operations and assume a more strategic advisory role. “I’ve already put the right people in place,” he adds. When reached by telephone Abou Khater tells Executive that the process of succession planning began last year to formalize Technica’s corporate structure — job descriptions were drafted and key attributes to be honed were identified.

But Abou Khater was also vague when discussing who might lead Technica in the years to come, “We would prefer an internal candidate and have shortlisted maybe two or three individuals.”

But Abou Khater also rationalized that the company just isn’t yet in a position to say who will take over when the elder Haddad steps down — some three to four years from now. “We also don’t want the rest of the factory finding out who our next GM might be from a magazine — the candidates names will be announced on our terms.” 

Succession planning aside, the important question is whether Technica, and manufacturers in a similar position, can continue in such a hostile local environment. There is support from the government but it remains limited to plans executable over the long term. The rehashing of policies toward mitigating production costs, the introduction of new industrial zones, and the promotion of links to education have helped manufacturers little in the short term.

According to data published by the World Bank, manufacturing has been contributing less than 10% to national GDP in each year since 2005. For some, long term plans sometimes become indefinite.


adonis49

adonis49

adonis49

August 2020
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