INDUSTRIAL SOLUTION

Lebanon 2016 | INDUSTRY | FOCUS: INDUSTRIAL CITIES

Domestic and regional events have stifled Lebanon in building a strong national industry to protect and sustain its economy. Four proposed industrial zones throughout the country may provide it with the economic backbone it so desperately needs.

Lebanon has suffered multiple economic shocks in recent history, resulting from an undiversified economy and a lack of a real industrial base. Traditionally, the drivers of economic growth were narrowed to capital inflows coming from the unusually large Lebanese diaspora, tourism, and real estate—three sectors the Lebanese have successfully mastered and that have functioned as lifesavers when needed. This set up, however, has raised concerns about the macroeconomic fragility of the Lebanese economy due to the high exposure of these three sectors to financial imbalances and global destabilization. Moreover, they have worked to distance the country from building a real national industry that could provide stability in the long run.

In 1995, the first attempt to develop a national industry came when the Investment Development Authority of Lebanon (IDAL) called for a more balanced geographical distribution of the country's industrial development and, along with the Ministry of Industry (MoI), pushed for the creation of over 100 small industrial zones across Lebanon. Regardless of how well intentioned the project was, it failed to achieve its goals, since it pushed for the diversification of confined industrial zones with no economic spillover and did not create a path for sustainable industrial development.

Even though Lebanon falls in the upper middle-income group of countries, its industry is comparable to that of low-income nations dominated by agricultural production. While Lebanon's industrial sector accounts for 17.4% of the country's GDP, the figure is 22.2% for Bosnia and Herzegovina, 24.6% for El Salvador, and 26.6% for Jordan; all countries with lower income rates than Lebanon. In terms of exports, Lebanon's figures do not perform any better, representing only 11% of the total GDP. In comparison, the figure is 20% for Bosnia and Herzegovina, 17.2% for El Salvador, and 24% for Jordan. Finally, in terms of FDI, Lebanon's numbers have fallen sharply, from 9.5% of GDP in 2000 to a mere 2.6% at the end of 2014.

It was against this background that the MoI, in partnership with the UN Industrial Development Organization, created the initiative to build industrial cities across the country, namely in areas where economic sources have been historically underdeveloped. After carrying out feasibility studies aided by the Italian government, the MoI identified four areas where the development of industrial cities would likely create a positive environment for investment. These areas are the Shakadif village in southern Lebanon, the Tebna Industrial City near Saida, the Dmoul Industrial City close to Tyre, and the Terbol Industrial City in the Bekaa Valley.

Among the benefits these four industrial cities will accrue is the accumulation of physical capital, an increase in the overall productivity of their respective regions, a raise in exports, an increase in FDI, and most importantly the decrease of overdependence on capital inflows. According to the feasibility studies, these four industrial cities will help assure balanced regional development. This responds to the fact that, despite Lebanon's shortage of landmass, so far the government has not applied any concrete strategy to effectively use land, nor has it set caps for increasingly high prices. By creating these four industrial cities, efficient use of land will be institutionalized by providing the necessary infrastructure to a specific industrial ratio and offer long-term lease permits at competitive prices for those companies willing to settle there.

The creation of the industrial cities also calls for the concentration of specialized infrastructure in a specific zone with all the required resources, services, and supplies any company needs to base its operations. This asset plays a prominent role in attracting local and foreign private sector bearing in mind Lebanon's complexities regarding electricity, road infrastructure, and tax rates. According to the World Bank's Enterprise Survey, the top obstacles cited by Lebanese manufacturing firms apart from corruption and political instability are electricity, tax rates, customs regulations, and transport, with an identification percentage of 55.1%, 27.4%, 25.9%, and 14.7%, respectively.

Another major benefit from industrial cities is a more flexible regulatory framework that would facilitate the establishment of companies, their compliance to legal requirements, and a more attractive fiscal regime with incentives for potential investors. Although still vague in official documents, IDAL has spoken of a 50% tax cut on corporate income tax for the first five years for companies settling in the Tebna Industrial City. It is still yet to see if this incentive will apply to the rest of the industrial zones.

The plan to create these fours industrial cities places Lebanon at the gates of industrial development for the first time in its history. The country needs to act immediately to attract investors and put the right regulation in place in order to capitalize on this endeavor.