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Diplomacy in Action

2012 Investment Climate Statement - Lebanon


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Openness to, and Restrictions Upon, Foreign Investment

Lebanon is a country that, by tradition, remains open to foreign direct investment. Over the last eight 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 has further expanded its support to encourage agricultural exports through a new program, the Agri-Plus program, providing financial incentives and different promotional and marketing activities to qualified exporters. IDAL also facilitates the creation of strategic international-local partnerships through joint ventures, equity participation, acquisition, and other vehicles.

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 affected by domestic political instability and regional turmoil in 2011, which contributed to a drop in tourism activity, a decline in capital inflows, and a slowdown in new investment. As a result, the International Monetary Fund (IMF) has projected that growth could reach two percent in 2011 (versus an annual average of eight percent during 2007-2010) and three to four percent in 2012. Growth will be driven primarily by private consumption, while private investment is projected to stall. The banking sector continues to record significant capital inflows, albeit at a slower pace than during previous years. Capital inflows dropped by 20 percent in the first eleven months of 2011, reaching approximately $11.9 billion (compared to $14.8 billion for the first eleven months of 2010) due to the decline in tourism activity and foreign direct investment. Remittances, however, remained relatively stable at $7.6 billion, according to the World Bank’s latest estimates. For the first time in nine years, capital inflows could not offset the trade deficit and resulted in a balance of payments deficit of $2.7 billion in the first eleven months of 2011. If domestic and regional conditions remain as is, banking sources do not forecast a further contraction in capital inflows in 2012.

The GoL is expected to increase capital investment in 2012, should it ratify the 2012 budget, which would boost public spending and could have an adverse impact on the budget deficit. 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 five years and was projected to reach 130-percent in 2011, down from 160-percent in 2009. While the finance ministry has been keen to maintain this positive trend, banking sources forecast this ratio to worsen in 2012 due to the anticipated increase in wages and capital spending in the absence of revenue enhancement measures. Given the high liquidity in the domestic banking sector, the GoL should not face difficulties in rolling over sovereign maturities in 2012.

The banking sector has adopted a consolidation strategy, putting on hold domestic and regional expansion given uncertainty about the near term regional outlook. Banking sources believe that prospects for the medium term look encouraging, however, given anticipated significant reforms on the political, economic, and social fronts in addition to improved governance taking place in the region. This is likely to improve economic efficiency with a corollary effect on demand for financial sector services. Lebanese banks that have expanded in the region in recent years could reap the benefits of growth in demand for these services.

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 2012 report to rank Lebanon 104 out of 183 countries worldwide and 11 out of 19 MENA countries in terms of ease of doing business. Lebanon improved in only two out of the ten indicators considered: getting electricity (up five spots) and resolving insolvency (up three spots). Lebanon’s scores fell in the categories of starting a business, dealing with construction permits, getting credit, protecting investors and paying taxes. Its ranking remained unchanged in the categories of registering property, trading across borders and enforcing contracts.

The government continues to express a strong commitment to improving the business environment as well as encouraging domestic and foreign investment and public-private partnerships, but some efforts have slowed. The Ministry of Economy and Trade’s (MoET) amendments to the Code of Commerce to further streamline business are pending parliamentary approval. A revised Public-Private Partnership (PPP) Law has been finalized and is awaiting cabinet’s approval. Ratification of the PPP legislation could open new opportunities for local and international private sector investment in Lebanon. In 2011, 38 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 2010 World Governance Indicators. 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 voice and accountability (measuring citizens’ ability to participate in government selection, freedom of expression, freedom of association, and a free media), government effectiveness, regulatory quality (measuring market-friendly policies and laws) and rule of law and regressed in terms of political stability and control of corruption.

While the priority for the GoL is to maintain stability given regional political turmoil, it recorded progress on sectoral fronts: work continued to upgrade and expand telecommunications services; the cabinet endorsed most of the decrees required to launch the licensing round of bids for oil exploration; and the parliament endorsed a law to increase electricity production by 700 megawatts (MW).

Lebanon is consistently rated near the bottom of the world in terms of internet download speed, but the sector saw some notable improvements during 2011. The Ministry of Telecommunications (MoT) finalized Lebanon’s connection to the submarine IMEWE (India-Middle East-Western Europe) ultra high capacity fiber optic submarine cable, which has gradually resulted in higher internet speeds across the country. The MoT is also working on a comprehensive plan for the telecommunications sector that it expects to launch by mid-2012. The plan would include amendments to Law 431 (on the privatization of telecommunications, endorsed in 2002) taking into consideration new developments in the information technology (IT) sector such as mobile virtual network operators, liberalization of services, content providers, and other issues. The MoT announced an expansion plan for mobile networks, to be completed by August 2012. The MoT is implementing projects to improve landline and mobile network infrastructure, to enhance coverage and quality of service, and to expand internet bandwidth. The MoT started broadband expansion, contracting with two companies to connect local telephone centers with fiber optic networks, and plans to build a new submarine cable with the Republic of Cyprus to secure international bandwidth capacity. In the mobile sector, the MoT launched 3G services in October 2011 with complete coverage across Lebanon expected to be available by May 2012.. Meanwhile, the GoL continues to contract the management of the two government-owned cellular companies to private operators. In December 2011, 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 September 22, 2011, Parliament endorsed a bill to transfer $1.2 billion to the Ministry of Energy and Water (MoEW) for projects to increase electricity production by 700 MW. These projects are part of the MoEW policy paper for the power sector endorsed by the cabinet in June 2010, which aims to reach gradually 4000 MW generation capacity in 2014. These projects offer good opportunities for U.S. technology and investors.

On January 4, 2012, the cabinet endorsed implementation decrees for offshore oil and gas exploration implementing the Hydrocarbon Law the parliament passed in August 2010, and announced that it will appoint the members of the Petroleum Regulatory Authority in one month. Once the Petroleum Authority is in place, the MoEW expects to launch the first round of licensing for offshore oil and gas exploration in the first half of 2012 with the contract award by end 2012/early 2013. Lebanon submitted a unilateral claim of the southern limit of its EEZ to the United Nations in July 2010. Lebanon endorsed the Maritime Law, covering delimitation of maritime borders and its entire EEZ, in August 2011. Despite a maritime dispute between Lebanon and Israel over some 860 square km, the GoL is moving forward with exploratory activities in waters that are not claimed by Israel, which constitute the vast majority of Lebanon’s declared exclusive economic zone.

In October 2011, the MoEW presented to the cabinet a national water strategy that included construction of dams, hill lakes, wastewater treatment plants, transmission and distribution networks, storage tanks and consumer meters. The ministry is keen to attract private sector participation to water projects. If implemented, the plan offers good opportunities for U.S. technology.

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, and solid waste management); and productive sectors (agriculture, irrigation, ports, airports, tourism, and government buildings). Public infrastructure opportunities lie primarily in roads and highways, ports, electricity, education, solid waste management, wastewater, and water supply. As of the end of 2011, the CDR possessed a total of $1.7 billion in loans and protocols ratified by parliament but not yet disbursed. .

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.

Measure

Year

Index/Ranking

TI Corruption Index

2011

134

Heritage Economic Freedom

2012

90

World Bank Doing Business

2012

104

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, Elyssar’s projects have recently stalled. 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 16 years of litigation.

Dispute Settlement

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 sometimes 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.

Performance Requirements/Incentives

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 Banque du Liban’s (BdL) approval for transfer of ownership of shares in most cases (BdL circulars are posted on www.bdl.gov.lb).

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 4.5 percent subsidy on interest on new loans granted after 1/1/2012 amounting to up to $10 million per project (with a ceiling of $40 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 BdL in summer 2009 and valid until December 30, 2012, exempting commercial banks from obligatory reserves on Lebanese Lira and U.S. dollar deposits against new loans for housing, business and educational premises, education, and environmentally friendly projects. This change enables banks to grant loans at lower interest rates, and in the fall 2010, the BdL expanded this program 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.

Right to Private Ownership and Establishment

The right to private ownership is respected in Lebanon. Foreign private entities can establish, acquire, and dispose of interests in business enterprises and can engage in all kinds of remunerative activities.

Protection of Property Rights

The concept of a mortgage exists, and secured interests in property, both movable and real, are recognized and enforced. Such security interests must be recorded in the Commercial Registry and the Real Estate Registry. 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 aims to provide Trade-Related Intellectual Property Rights (TRIPS) intellectual property rights (IPR) protection, although Lebanon is still in the process of acceding to the World Trade Organization (WTO). The MoET Intellectual Property Protection Office (IPPO) has spearheaded efforts to improve the IPR environment, though increased political will and additional resources are needed. In collaboration with WIPO, MoET conducted several public and in-house seminars in 2011, focusing on raising awareness and improving technical capabilities. The IPPO is also collaborating with the European Patent Office to implement the Industrial Property Automation System (IPAS), which is used to automate IPR business and administrative processes from application reception to registration, including post-registration actions such as amendments, assignment, renewal, and annuities.

During 2011, the GoL and the U.S. Government began working together to develop an action plan and a bilateral IPR working group to foster ongoing mutual communication and sharing of best practices regarding outstanding IPR issues that keep Lebanon on the Special 301 watch list (the United States Trade Representative-led annual review of intellectual property protection worldwide). The establishment of the Cyber Crime and Intellectual Property Unit at the Internal Security Forces (ISF) in 2006 has led to moderate progress in IPR enforcement. During 2011, the government raided a number of shops and warehouses and seized counterfeit material. 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) noted that the level of software piracy reached 72 percent in 2010 with losses totaling $28 million. According to the IIPA, despite the efforts of Lebanese authorities to improve the intellectual property environment, piracy remains a serious challenge -- particularly in the areas of business software, retail piracy, and growing Internet-based and mobile device piracy.

The Business Software Alliance (BSA) ranked Lebanon 39 worldwide and fifth in the MENA region in terms of software piracy in 2010, unchanged from 2009. The BSA annual report indicated Lebanon’s piracy rate remained unchanged at 72 percent, while piracy-related losses totaled $49 million in 2010, up from $46 million in 2009. Unauthorized copies of internationally patented pharmaceuticals continue to be approved by the Ministry of Public Health, although Decree No. 571 issued in 2008 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. Amendments to the Patent Law, regarding undisclosed information, are still being studied by the relevant ministries.. 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 MoET, 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 and the WIPO Performances and Phonograms Treaty (WPPT) in February 2010. Ratification documents have not yet been deposited with WIPO, however, because implementation of these treaties requires an amendment to Lebanon's copyright law that has been submitted and is awaiting parliament's consideration and passage.

-- 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, with a current emphasis on bolstering the private sector’s capacity to hold the government accountable for needed trade reforms.

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 2012 report, it still takes entrepreneurs five steps and nine days to start a business in Lebanon, compared to the average of 8.2 steps and 20.9 days in the MENA region. The report may be accessed at http://www.doingbusiness.org.

The MoET launched in December 2011 a project to assess and redesign the overall business processes of the ministry, expected to be finalized in mid-2012. The purpose is to improve the quality of the services offered to citizens, reduce the number of complaints and automate value-added processes.

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 (MoF) has increased disclosure and publication of information building up to ten regular publications by 2011 on public finance, debt, foreign trade, and foreign aid, in addition to thematic reports and annual budget brief notes, all available online. The monthly report “Salaries, Wages and Related Benefits” was launched in February 2011. The “Citizen Budget 2010,” developed in collaboration with the Lebanese Transparency Association (LTA) to facilitate the ordinary citizen’s understanding of the government budget revenues and spending was also published and disseminated in 2011.

As part of the National Network for Access to Information, the LTA, MoF and other stakeholders, helped draft laws on access to information and whistleblower protection, both which still await parliamentary ratification.

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.

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’s latest estimates, remittance inflows to Lebanon remained constant at $7.6 billion for 2011,or 21.4 percent of total remittances to the MENA region. Lebanon is considered by the World Bank to be one of the top recipients of remittances among developing countries. Remittances as a share of GDP reached 18 percent in 2011.

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 high-tech, industry, and tourism. Since 2007, the Overseas Private Investment Corporation (OPIC) has extended $300 million in credit line guarantees through Citibank to select Lebanese banks for private sector lending.

The Beirut Stock Exchange (BSE) quotes six commercial banks, one investment fund, 25 sovereign Eurobond issues (22 in U.S. dollars, two 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 e-trading. Legislation allows the listing of tradable stocks or papers on the BSE. On August 4, 2011, the Parliament endorsed both the Insider Trading Law and the Capital Markets Law to regulate and supervise capital market activity. The appointment of the National Council for Financial Markets in Lebanon, which would act similarly to the U.S. Securities and Exchange Commission, awaits political consensus. The Capital Markets Law calls for the corporatization and then privatization of the BSE within a two-year period. The BSE suffers from lack of liquidity and efficiency with low trading volumes in the absence of significant institutional investors. Lebanon 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 BdL 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 2011, the BdL issued three circulars for corporate governance in the banking sector.

Lebanon has legislation regulating issuance of and trading in bank equities. Law No. 308 on 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. Parliament has 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 11.5 percent in June 2011, 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 BdL 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 BdL and the BCC have established a steering committee to follow up on the new Basel III Accord, as set by the Basel Committee in December 2009. In December 2011, the BdL issued a circular that sets an agenda for the implementation of Pillar I of Basel III with more conservative rules, such as raising total equity capital adequacy ratio to reach progressively 12 percent in 2015 (compared to the eight percent required by Basel III).

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 domestic assets of Lebanon's five largest commercial banks reached about $66.6 billion in 2010 (or about 48 percent of total banking assets) and $73.5 billion by the end of September 2011, according to BdL data. Meanwhile, the total consolidated assets of Lebanon’s five largest commercial banks reached about $89.7 billion in 2010 (or 58% of total banking assets) and $95 billion by the end of September 2011percent. About 3.8 percent of total loans were estimated as non-performing by end-September 2011, compared to 4.3 percent in 2010.. Banks maintained around 81.6 percent provisions against non-performing loans as of September 2011, while the remaining 18.4 percent are 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 was subject to only a normal review, and presented its first Follow Up report highlighting progress achieved during the Fourteenth MENAFATF Plenary in September 2011. The next Follow Up report will be released within 18 months of the previous one.

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 numerous 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 the 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 four 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.

Political Violence

Political violence has declined since the spate of car bombings and assassinations that followed the withdrawal of Syrian forces from Lebanon in 2005. Sporadic clashes between groups from different confessions and political factions continued, however, as the turmoil in neighboring Syria added to Lebanon’s existing fault lines. The public feared that as the crisis in Syria continued to worsen, it would further spill into neighboring Lebanon, and there were numerous instances of incursions by Syrian forces across the border into Lebanese territory (much of the border is undemarcated, contributing to further instability on the border). UNIFIL forces suffered three separate attacks in 2011 – against Italian troops in May, and against French forces in July and December; each attack resulted in injuries but no fatalities. No group admitted responsibility for these attacks, and the perpetrators remain at large.

Lebanon is one of several countries for which the U.S. Department of State has issued Travel Warnings because of long-term, protracted conditions that make a country dangerous or unstable. U.S. companies and visitors are advised to assess carefully the situation in Lebanon by consulting the Department's Travel Warning and its Consular Information Sheet at http://travel.state.gov/. These documents contain essential security and safety information on travel to Lebanon.

The U.S. government considers the potential threat to U.S. Embassy personnel assigned to Beirut sufficiently serious to require them to live and work under significant security restrictions. These practices limit, and may occasionally prevent, the movement of U.S. Embassy officials and the provision of consular services in certain areas of the country. American visitors are encouraged to contact the Embassy's Consular Section for the most recent safety and security information concerning travel to Lebanon.

Corruption

There is rampant corruption when dealing with the public sector. According to Transparency International's (TI) 2011 Corruption Perception Index (CPI), Lebanon ranked 134 out of 183 countries worldwide and 14 out of 20 MENA countries. Although Lebanon’s CPI score remained unchanged from 2010, its scores for the past three years have been the lowest since its inclusion in the index. TI noted that the country’s “deeply entrenched nepotism networks” made civil society efforts against corruption very difficult, while anti-corruption legislation exists but is not properly enforced. The LTA blames political paralysis for preventing the passage of various legal reforms (including draft laws against illicit enrichment, access to information, and whistleblower protection) on which the organization has been closely involved to combat corruption. 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 (IoD, 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. In 2011, the IoD launched a guidebook focused on Corporate Governance stories and solutions in the MENA region.

The LTA held several anti-corruption seminars and awareness campaigns in 2011. Under the framework of the Lebanese Advocacy and Legal Advice Center hotline, the LTA continued to provide free legal advice to victims and witnesses of corruption and to organize outreach sessions to approach marginalized groups. LTA also finalized a 2010 municipal elections monitoring report and took part in the activities of the Civil Campaign for Electoral Reforms.

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 MoF has implemented reforms aimed at enhancing transparency and fighting corruption including requiring taxpayers to file exclusively through mail and to pay through banks or Liban Post. In 2007, an automated document tracking system for taxpayers’ inquiries was implemented and a 24/7 call center was launched, as well as a service enabling taxpayers to handle the Built Property Tax transactions through Liban Post. In 2008, the Tax Procedures Code was ratified, unifying tax procedures, specifying deadlines for tax transactions and defining taxpayers’ rights and obligations. The Ministry of Finance launched a portal in 2010, providing access to economic, financial and fiscal information. E-registration and e-filing were launched but are yet to be implemented. The MoF also initiated the development and distribution of the tax calendar in order to increase taxpayers’ awareness of their rights and obligations. In 2011, the Revenues and VAT Directorates were merged at the MoF and the collection function was transferred to the regional tax offices. These services are expected to decrease corruption in the tax sector.

On the customs front, and to ensure trade facilitation, transparency, and security, remote filing of manifests and declarations was introduced in 2011. E-payment of customs operations are expected to be operational in 2012. The ASYCUDAWORLD software (Automated System for Customs Data) is continuously updated by adding new functions and modules, such as the temporary declaration module and automatic calculation of some fees and charges. Customs also established an Intelligence Unit to detect counterfeiting and fraudulent operations.

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.

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.

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 and the tariff reductions on imported products from the EU started in 2008. In 2004, Lebanon and the European Free Trade Association (EFTA) signed an FTA. 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 FTAs signed with Arab countries including Tunisia, Morocco, Egypt, Iraq, Jordan, Syria, 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, OPEC Fund, Pakistan, Qatar, Romania, Russia, Slovakia, South Korea, Spain, Sudan, Sultanate of Oman, 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 United States 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 pegged at Lebanese Lira (LL) 1,500 to the dollar for the last 16 years, and trading continues to track closely this official rate. The GoL has repeatedly expressed its commitment to maintaining a stable currency. With record high foreign currency assets of over $32.2 billion as of the end 2011, the BdL has the ability to maintain a stable $/LL rate for some time. Lebanon has one of most heavily dollarized economies in the world; as of November 2011, 66 percent of bank deposits were dollarized, and businesses commonly accepted payment (and returned change) in a combination of LL and U.S. dollars.

Labor

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 1.2 million, including foreign residents but excluding the seasonal work force, according to CAS’s 2011 Labor Market in Lebanon report. CAS estimated Lebanon's population in 2007 at 3.75 million, excluding Palestinians in the refugee camps and seasonal workers. Based on this, the IMF has extrapolated the population estimate to reach 3.96 million for 2011. According to CAS, unemployment (aged 15-64) reached 6 percent in 2009, and rates were higher among women (10 percent) than men (5 percent). The unemployment rate is somewhat attenuated because large numbers of Lebanese citizens seek work outside Lebanon, including in Arab countries and the Gulf.

Local unskilled labor is in short supply. Arab (mainly Palestinian refugees and Syrians), Asian, Indian, and African laborers are hired to work in construction, agriculture, industry, and households.

Lebanon has a General Labor Confederation (CGTL), recognized by the government, whose membership is limited exclusively to Lebanese workers. The CGTL's activities are mainly limited to demanding cost-of-living increases and other social benefits. The government/labor relationship remains difficult. Given its own political bias, the CGTL 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 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 has provided technical assistance to the GoL for preparing a feasibility study for Tripoli SEZ (TSEZ) which was completed at the end of 2011. The next steps for the GoL include appointing the TSEZ Authority and implementing laws and decrees to develop the zone. The feasibility study, which started in July 2010, included 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.

The World Bank estimated FDI in Lebanon at $3.96 billion in 2011 amounting to 9.6% of GDP, constituting a decline of 20.5% from $4.98 billion or 12.7% of GDP in 2010. Separately, the According to the Arab Investment and Export Credit Guarantee Corporation projected that FDI flows in Lebanon would reach $3 billion in 2011, down from $5 billion in 2010, which represents a 39.5 percent drop. Lebanon had been the top per capita recipient of FDI in the region, receiving flows worth an estimated 12.6 percent of GDP in 2010 (versus only 7.2 percent in 2011). FDI inflows to Lebanon were estimated to account for 5.4 percent of total FDI in Arab countries in 2011, down from 7.5 percent of aggregate inflows in 2010. Lebanon is expected to post the fifth steepest drop in FDI in the Arab world and to be among 13 Arab countries that will post a decline in FDI in 2011.

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 the unstable political and security situation in Lebanon that discouraged U.S. companies from bidding on projects, bilateral financial protocols signed between Lebanon and some European countries that provide grants and soft-term loans, or corruption and/or undue influence in bidding and contracting processes. 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.



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