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AFC Consultants International

CONCRETE HOLLOW BLOCKS FACTORY

TABLE OF CONTENTS 1 2 EXECUTIVE SUMMARY ...................................................................................... 2 PROJECT DESCRIPTION..................................................................................... 2 2.1 2.2 2.3 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 5 5.1 5.2 5.3 5.4 5.5 5.6 5.7 6 7 FACILITIES AND INITIAL INVESTMENT .................................................................. 2 PRODUCTION PROCESS ......................................................................................... 3 STAFFING STRUCTURE ......................................................................................... 3 PERCEIVED NEEDS ............................................................................................... 5 MAIN COMPETITION ............................................................................................. 6 TARGET MARKET ................................................................................................. 6 SWOT ANALYSIS ................................................................................................ 6 MARKETING STRATEGY ....................................................................................... 7 PRICING ............................................................................................................... 7 SALES CHANNEL.................................................................................................. 7 MAJOR ASSUMPTIONS .......................................................................................... 8 PROJECTED INCOME STATEMENT ......................................................................... 9 PROJECTED BALANCE SHEET .............................................................................. 10 PROJECTED CASH FLOWS.................................................................................... 11 PROJECTED RATIO ANALYSIS ............................................................................. 12 BREAK- EVEN ANALYSIS ..................................................................................... 13 SENSITIVITY ANALYSIS ..................................................................................... 13

MARKET ANALYSIS ............................................................................................. 4

MARKETING PLAN............................................................................................... 7

FINANCIAL PLAN.................................................................................................. 8

CONCLUSION AND RECOMMENDATIONS.................................................. 14 ECONOMIC IMPACT EVALUATION .............................................................. 14

LBN/B7-4100/IB/99/0225/JC20/0105

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Executive Summary

The proposed project consists in establishing a concrete hollow block factory in Marjeyoun town. Large areas of Lebanon and specifically in the South region lie in ruin following the recent Israeli air, sea and land assaults. Therefore, it would be beneficial to invest ventures producing building materials such as a hollow block concrete factory as this type of block is one of the most basic elements in construction. The initial investment is estimated at $123,419, which includes $57,500 for the required equipment and $54,919 for working capital. The projections are taken over a period of 7 years. The plant provides average annual profitability of $31,941. The average return on investment (ROI) is 106%. The concrete hollow block factory provides an internal rate of return (IRR) of 23% and a payback period of 5 years 4 months. These results show that the project is feasible and provides good returns for its shareholders. The concrete hollow block plant will offer 15 job opportunities. As a result, the plant will contribute to the general enhancement of the economic environment in Marjeyoun.

Project description

The project consists in developing a concrete hollow block factory in Marjeyoun caza. The plant will be able to supply concrete hollow blocks to Marjeyoun as well as Bint Jbeil, Hasbaya and Nabatieh regions.

2.1 Facilities and initial investment


The total land area is assumed to be 5,000 m2 out of which 1,125 m2 will be needed for the factory, 125 m2 for the administrative offices, and 3,750 m2 for the warehouse. It is assumed that the land would be rented out at a rate of $1/m2 per year.

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The following table shows the projected equipment and initial investment requirements. The total investment required includes the cost of equipment, vehicles, as well as working capital requirements and amounts to $123,398.

Initial Investment Cost Items Quantity Unit cost Total cost Semi-automatic block factory 1 30,000 30,000 Dumper 1 15,000 15,000 Pallets 50 30 1,500 Total equipment 46,500 Pick up (used) 1 5,000 5,000 Furniture & Fixtures 12,000 Computer & Office Equipment 3,000 Establishment Costs 2,000 Total fixed assets 68,500 Working capital needs 54,919 Total initial investment 123,419
Source: Tony Abi Antoun, Best Concrete

2.2 Production process


The production process involves the following steps: 1. The ingredients (sand, cement, water, etc) are mixed in a special mixer to obtain the mortar. 2. The workers press the mortar through the mechanically operated machines. The pressing process and the ratio of the ingredients mix play an important role in determining the strength of the blocks. 3. The company will have a pick-up to deliver blocks directly to work sites. Blocks can be loaded on pallets or by individual blocks.

2.3 Staffing structure


The staff structure will be distributed as follows:

STAFF STRUCTURE Management & Sales Plant Manager Assistant and accountant Drivers Total administrative staff Foreman Daily Workers Total production staff TOTAL

Number of employees

1 1 2 4 1 10 11 15

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Market Analysis

The construction blocks market has been on an increasing trend, mainly driven by the reconstruction efforts in the country. Large areas of Lebanon lie in ruin following the recent Israeli air, sea, and land assaults. Homes and businesses in a number of Lebanese rural and urban villages and towns in South Lebanon are in need of reconstruction. According to the Government assessments, the war has set back the countrys infrastructure for at least 15 years with reconstruction and rehabilitation to be carried out on a large scale basis. There are 15 small concrete hollow block factories in Marjeyoun and 7 small concrete hollow block factories in Hasbaya. Therefore investing in a technically advanced factory producing building materials of high quality and same price would be beneficial for the region. A hollow concrete block factory operating at full capacity would be sufficient in meeting the needs for reconstruction in the Cazas of Marjeyoun, Hasbaya, and Bint Jbeil. Price-wise, the trend has been going upward, especially with the increase in the costs of raw materials including sand, aggregates, etc In fact, the costs of aggregates and sand have increased substantially since the forced shut down of a number of illegal quarries in Lebanon. In addition, the price of cement is quite high because of the duopoly in the cement sector (only 2 companies operate in this sector). More recently, the increased demand created by the reconstruction activities following the July 2006 war has led to cement price hikes by 20% to 25%. The high costs of raw materials are reflected in the selling price. Generally, demand is seasonal, where winter is considered a low season.

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3.1 Perceived Needs


The large scale of destruction has left many towns and villages in the districts of Marjeyoun, Hasbaya and Bint Jbeil in ruins. The following table shows the scale of destruction by selected villages and the surfaces of houses and residences to be rebuilt as well as the amounts of concrete needed for reconstruction. In October 2006, the area to be constructed in the Khiyam region was estimated at 300,000 m2. Up to November 2007, 80% of the ruins have been rebuilt with 60,000 m2 remaining.

Approximate Area to be constructed in m2 60,000 6,000 25,000 20,000 5,000 35,000 4,500 4,500 45,000 3,000 208,000 Bint Jbeil Bint Jbeil 400,000 Ayatroun 34,000 Aynata 105,000 Maroun el Ras 47,000 Blida 22,000 Baraachite 38,000 Ain Ebel 7,500 Rmeich 3,700 Kouneen 28,000 Tebnine 15,700 Shakra 2,700 703,600 Hasbaya Kfarshouba 25,000 Kfaraman 3,000 Rashaya Fokhar 1,500 Hibariyeh 2,000 31,500 Total in need 943,100 District Marjeyoun Town El-Khiyam Kfar Kila Houla Meis el Jabal Jdeidat Debine Blat Kantara Taybee Deirmimas

Estimated Concrete needed in m3 20,000 5,700 24,200 19,000 4,700 34,200 4,200 4,370 42,700 2,800 161,870 370,000 32,750 102,000 45,200 21,300 36,700 7,200 3,500 26,900 15,000 2,500 663,050 24,200 2,800 1,400 1,920 30,320 855,240

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Moreover, the towns of the three mentioned districts have regular and continuous needs arising from population growth. Data on building permits allocated by the Office of Urbanization below is a clear indication.

2000 2001 2002 2003 2004 2005

Bint Jbeil Bldg Permits Surface in m2 N/A N/A 550 390 388 430

N/A N/A 220,000 156,000 212,406 177,000

Marjeyoun & Hasbaya Bldg Permits Surface in m3 122 52,000 271 110,000 339 135,000 234 95,000 232 93,000 240 94,679

Furthermore, unforeseen needs may arise due to the large number of UNIFIL troops that are residing in the South region specifically Bint Jbeil, Marjeyoun, and Hasbaya.

3.2 Main competition


There are around 22 concrete hollow block factories in Marjeyoun and Hasbaya cazas; 15 factories are in Marjeyoun and 7 small factories are in Hasbaya. These factories will not pose a threat to the concrete hollow block plant on condition that the plant will offer high quality blocks at same prices.

3.3 Target market


The factory will be able to accommodate the construction needs of the South region and specifically Marjeyoun, Bint Jbeil, Hasbaya, and other nearby areas.

3.4 SWOT Analysis


STRENGTHS It will be a unique technically advanced factory due to the presence of small traditional factories in the region. It will facilitate construction needs by providing the most basic and needed construction element; concrete hollow block. The factory will have a strategic location in Marjeyoun where there are wide and urgent reconstruction activities. OPPORTUNITIES The construction market is a very active sector and there is a constant demand for construction materials especially in the South. The reconstruction efforts following the July 2006 war are leading to an increase in demand for construction materials. Unforeseen construction needs in addition to the existing urgent construction needs due to the war destruction may arise due to the large number of UNIFIL troops that are residing in the South region specifically Bint Jbeil, Marjeyoun, and Hasbaya. WEAKNESSES Generally, demand is seasonal, where winter is considered a low season.

THREATS Environmental threats include the economic recession in the country and the regions closeness to Israel and the fear of another war. The increase in the cost of labor following the war and the political instabilities. Fluctuations in the prices of raw materials and cements.

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Marketing Plan

The marketing objectives of the concrete hollow block plant consist in capitalizing on its competitive advantages. High quality products. Competitive and attracting prices due to lower transportation costs to neighboring construction sites. Existence of a solid demand for reconstruction efforts specifically post the July 2006 war.

4.1 Marketing Strategy


The concrete hollow block factory will base its marketing strategy on the following: An informative pamphlet could be developed displaying the factorys product. This pamphlet will be distributed to all contractors and consultants working on projects in the South. The concrete hollow block plant manager/owners should develop direct contacts with families looking for rehabilitating their properties in Marjeyoun, Bint Jbeil, Hasbaya, and other nearby areas.

4.2 Pricing
The prices of the concrete hollow blocks will essentially be determined by market conditions. For the study, we assumed the following average pricing structure based on current market prices.

Pricing Block Length 10 cm 15 cm 20 cm

Price ($) 0.23 0.35 0.46

The factory will apply differentiated pricing and discounts according to the quantity of blocks purchased and to the client loyalty.

4.3 Sales Channel


The concrete hollow block plant will establish strategic alliances with consultants, contractors and other professionals and businesses in the construction sector in the South. Promotion of the concrete hollow block products will be done mainly through direct contacts by the owner. The targeted regions will mainly cover Marjeyoun caza and neighboring cazas such as Hasbaya and Bint Jbeil.

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Financial Plan

This section details the calculations, assumptions and methodology used as a basis for the projections of the expected financial performance of the concrete hollow block plant.

5.1 Major assumptions


The projections are based on conservative assumptions as well as market performance. They take into consideration the economic situation in the caza.

The following table shows the sales growth assumptions:

Sales growth

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 10% 5% 5% 3% 2% 0% 0%

The sales growth assumptions are based on plant capacity that starts with 80% of its capacity in the first year and then gradually increases to reach its full capacity by year 7. The following table summarizes the income statement assumptions. The cost of sales and operating charges are mainly based on market levels.

Income Statement Assumptions Cost of materials Average sales price USD Blocks production capacity Maintenance & Repairs Fuel Annual increase in general expenses Increase in salaries Increase in rental expenses Income Tax Rate

64% 0.35 3,500 0.5% 1.7% 4% 2% 5% 2%

of sales per block per day on sales on sales annually annually every 3 years

The plant capacity is assumed to be at 3,500 blocks per day; work days are around 300 days per year. The sales price per block varies depending on the size of the block as displayed in the below table.

Length 10 cm 15 cm 20 cm

Price ($) 0.23 0.35 0.46

Therefore, average sales price accounts for the average of the block sizes that the plant will offer. General expenses are assumed to increase by 4% annually. Salaries are assumed to increase by 2% annually. The income tax rate is estimated at 2% (individual establishment).

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Accounts receivable are estimated at 2 months of sales. Inventories are estimated at 2 months of cost of materials. The accounts payable are based on 1 month of cost of materials.

Balance Sheet Assumptions Accounts receivable Inventories Accounts payable Expenses payable

2 2 1 5%

months of sales months of COGS months of COGS of general expenses

The depreciation rates are based on International accounting standards as shown in the below table.

Depreciation rates Plant machinery Fixtures & furniture Vehicles computer & office eqpt Establishment Costs

10% 10% 12% 20% 33%

5.2

Projected income statement


Concrete Hollow Block Plant Income Statement

Sales
Total Revenues Cost of sales

Year 1 294,000 294,000 188,160 40,800 4,998 5,000 1,470 4,350 244,778 49,222 17%

Year 2 323,400 323,400 206,976 41,616 5,498 5,000 1,617 4,350 265,057 58,343 18% 624 1,248 24,480 3,666 1,040 31,058 27,285 546 26,739 8%

Year 3 339,570 339,570 217,325 42,448 5,773 5,000 1,698 4,350 276,594 62,976 19% 649 1,298 24,970 3,668 1,082 31,666 31,310 626 30,684 9%

Year 4 356,549 356,549 228,191 43,297 6,061 5,250 1,783 4,350 288,932 67,616 19% 675 1,350 25,469 3,200 1,125 31,819 35,797 716 35,082 10%

Year 5 367,245 367,245 235,037 44,163 6,243 5,250 1,836 4,350 296,879 70,366 19% 702 1,404 25,978 3,200 1,170 32,454 37,912 758 37,153 10%

Year 6 374,590 374,590 239,738 45,046 6,368 5,250 1,873 4,350 302,625 71,965 19% 730 1,460 26,498 2,600 1,217 32,505 39,460 789 38,671 10%

Year 7 374,590 374,590 239,738 45,947 6,368 5,513 1,873 4,350 303,788 70,801 19% 759 1,518 27,028 2,600 1,265 33,171 37,631 753 36,878 10%

Cost of sales-materials Wages-production Fuel Rent Maintenance & repairs-equipment Depreciation machines & vehicles Total cost of sales
Gross margin Gross profit margin% GENERAL & ADMINISTRATIVE EXPENSES

Electricity charges 600 Telephone charges 1,200 Salaries & Social Security Charges-Administrative 24,000
Depreciation expenses Other expenses Total General & Administrative Exp Earnings Before Tax Tax expenses Net Income Net profit Margin 3,666 1,000 30,466 18,756 375 18,381 6%

The projected income statement shows an increase in net profit margins that reach 10% in the 7th year of operations. These levels are expected to be reached through a gradual increase in sales. The increase in volume of sales is expected to allow higher net earnings, which are projected to reach $36,878 by year 7.

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5.3 Projected balance sheet


The projected balance sheet shows the assets and liabilities of the company based on the feasibility assumptions.

Concrete Hollow Block Plant BALANCE SHEET Cash & banks Accounts receivable Inventory Total current assets Plant machinery Fixtures & furniture Vehicles Computer & Office Equipment Establishment expenses Accumulated depreciation Net fixed assets TOTAL ASSETS LIABILITIES & OWNERS EQUITY Liabilities Accounts payable Expenses Payable Current Liabilities Total liabilities Invested capital Owner's equity Total owners' equity TOTAL LIAB.& OWNERS EQUITY

Year 1 20,265 49,000 31,360 100,625 31,500 12,000 20,000 3,000 2,000 8,016 60,484 161,109

Year 2 24,558 53,900 34,496 112,954 31,500 12,000 20,000 3,000 2,000 16,032 52,468 165,422

Year 3 32,159 56,595 36,221 124,974 31,500 12,000 20,000 3,000 2,000 24,050 44,450 169,424

Year 4 38,568 59,425 38,032 136,024 31,500 12,000 20,000 4,000 2,000 31,600 37,900 173,924

Year 5 47,555 61,207 39,173 147,935 31,500 12,000 20,000 4,000 2,000 39,150 30,350 178,285

Year 6 56,833 62,432 39,956 159,221 31,500 12,000 20,000 4,000 2,000 46,100 23,400 182,621

Year 7 66,562 62,432 39,956 168,950 31,500 12,000 20,000 5,000 2,000 53,050 17,450 186,400

15,680 3,630 19,310 19,310 123,419 18,381 141,799 161,109

17,248 3,700 20,948 20,948 123,419 21,055 144,473 165,422

18,110 3,772 21,883 21,883 123,419 24,123 147,542 169,424

19,016 3,858 22,874 22,874 123,419 27,631 151,050 173,924

19,586 3,933 23,520 23,520 123,419 31,347 154,765 178,285

19,978 4,010 23,988 23,988 123,419 35,214 158,632 182,621

19,978 4,102 24,080 24,080 123,419 38,902 162,320 186,400

Owner's equity Begin. Owner's equity Net income Owners' Withdrawals Ending owner's equity

Year 1 18,381 18,381

Year 2 18,381 26,739 24,066 21,055

Year 3 21,055 30,684 27,616 24,123

Year 4 24,123 35,082 31,573 27,631

Year 5 27,631 37,153 33,438 31,347

Year 6 31,347 38,671 34,804 35,214

Year 7 35,214 36,878 33,190 38,902

The owners can start withdrawing cash in year 2.

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5.4 Projected cash flows


Concrete Hollow Block Plant STATEMENT OF CASH FLOWS Net income Adjustments to reconcile net income to cash provided by operating activities Depreciation Changes in receivables Changes in inventories Changes in accounts payables Changes in general expenses Total Adjustments Cash provided by operating activities Cash Flow from Investing Activities Capital expenditures Investment in fixed assets Net cash used in investing activities Cash flow from financing activities Capital Owners' Withdrawals Cash provided by financing activities Cash at beginning of year Changes in cash Cash at end of year

Year 1 18,381

Year 2 26,739

Year 3 30,684

Year 4 35,082

Year 5 37,153

Year 6 38,671

Year 7 36,878

8,016 (49,000) (31,360) 15,680 3,630 (53,034) (34,653)

8,016 (4,900) (3,136) 1,568 70 1,618 28,358

8,018 (2,695) (1,725) 862 72 4,533 35,217

7,550 (2,830) (1,811) 906 86 3,901 38,982

7,550 (1,783) (1,141) 570 75 5,272 42,425

6,950 (1,224) (783) 392 77 5,411 44,082

6,950 91 7,041 43,920

(68,500) (68,500)

(1,000) (1,000)

(1,000) (1,000)

123,419 123,419 20,265 20,265

(24,066) (24,066) 20,265 4,292 24,558

(27,616) (27,616) 24,558 7,601 32,159

(31,573) (31,573) 32,159 6,409 38,568

(33,438) (33,438) 38,568 8,987 47,555

(34,804) (34,804) 47,555 9,278 56,833

(33,190) (33,190) 56,833 9,729 66,562

The projected statement of cash flows shows the initial net investment in fixed assets and the capital expenditures of the projected years. The cash flow statement also shows the net invested capital by the owners. The statement shows the owners withdrawals that start in year 2.

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5.5 Projected ratio analysis


Ratio Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Liquidity Ratios Current Ratio 5.21 5.39 5.71 5.95 6.29 6.64 7.02 Quick Ratio 3.59 3.75 4.06 4.28 4.62 4.97 5.36 Working Capital 81,315 92,005 103,092 113,150 124,415 135,232 144,870 Profitability Ratios Gross Profit Margin 17% 18% 19% 19% 19% 19% 19% Net Profit Margin 6% 8% 9% 10% 10% 10% 10% Financial Strength Total Debt to Owners' Equity 14% 14% 15% 15% 15% 15% 15% Management Effectiveness Return on Assets=ROA 11% 16% 18% 20% 21% 21% 20% Return on Equity=ROE 13% 19% 21% 23% 24% 24% 23% Return on Investment = ROI 30% 51% 69% 93% 122% 165% 211% Sales / Business Days (360) 817 898 943 990 1,020 1,041 1,041 Asset Management (Efficiency) Total Assets Turnover: Sales/tot assets 182% 196% 200% 205% 206% 205% 201% Total Debt to Total Assets 12% 13% 13% 13% 13% 13% 13% Working Capital Cycle Days Sales Outstanding 60 60 60 60 60 60 60 Days of Inventory 60 60 60 60 60 60 60 Days of payables 30 30 30 30 30 30 30 Working Capital Turnover=Sales/Working Capital 3.6 3.5 3.3 3.2 3.0 2.8 2.6

The current ratio, which is computed by dividing current assets by current liabilities, witnesses a major increase over the years led by higher levels of inventories. The quick ratio, which is the same as the current ratio except that it excludes inventories increases rapidly over the years as accounts receivable increase. The current and quick ratios demonstrate the capability of the company to quickly meet its short term liabilities. The return on average assets, which is computed by dividing net profits by total assets, shows how much profit the company is able to achieve from the use of its assets. This ratio fluctuates around an average of 18%. The total assets turnover shows how well the management is making use of its assets. The assets turnover is computed by dividing sales over total assets. It is expected to increase with the growth in sales to reach 201% in year 7. The gross profit margin improves over the years with the growth in sales. The operating margins and the net profit margins improve as well. The return on average equity shows healthy levels fueled by the growth in profitability. Also the return on investment shows increasingly high levels that reach 211% in year 7. The internal rate of return is 22.6% and the payback period, which is the period necessary to pay back the investment, is 5 years 4 months.

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5.6 Break-even analysis


Concrete Hollow Block Plant

Break-even Analysis Total Revenues Total Variable Costs Total Fixed Costs Break-even Revenues

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

294,000 194,628 80,616 238,509

323,400 214,091 82,024 242,675

339,570 224,795 83,464 246,936

356,549 236,035 84,716 250,639

367,245 243,116 86,217 255,080

374,590 247,978 87,151 257,843

374,590 247,978 88,981 263,257

The above table shows the break even revenues required in each year to cover operating expenses. Revenues exceeding these levels start producing net income. Thus, in year 1, revenues of $ 238,509 are needed to break even.

5.7 Sensitivity Analysis


A worst-case scenario is taken by assuming a slower sales growth that even does not reach full capacity by year 7. In this case, the concrete hollow block factory will have an average profitability of $26,246 annually. The internal rate of return is 19%. The payback period is 6 years and 1 month. A best-case scenario is developed considering faster sales growth to reach target where the plant will start operating at full capacity since year 3. This scenario gives an average profitability of $33,706 annually. The internal rate of return is 23% and the payback period is 5 years and 1 month.

Sensitivity Analysis Average yearly sales

Worst-case 329,940

Most-likely 347,135

Best-case 352,464

Average Net Income Average Net profit margin Internal rate of return Payback period in years

26,246 8%

31,941 9%

33,706 9%

19% 23% 23% 6 years 1 month 5 years 4 months 5 years 1 month

These results show that the project is feasible, especially if it is well-managed providing quality at affordable prices and if the marketing and distribution activities are well developed.

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Conclusion and Recommendations

The market for construction materials has been growing over the years. Currently, a major opportunity appeared for faster growth following the war of July 2006 and the reconstruction efforts. In order to achieve good results, there are some essential success factors, which include: A key success ingredient in this sector and especially in the region is the ability to produce concrete hollow blocks of high quality at same prices. The ability to deliver on time good quality products coupled with good servicing is also an important factor for success. The plant should capitalize on its major advantages of proximity to all the cazas in the South where most of the reconstruction activities are taking place.

Economic Impact Evaluation

The concrete hollow block plant in itself will create 15 jobs in Marjeyoun. A hollow concrete block factory operating at full capacity would be sufficient in meeting the needs for reconstruction in the Cazas of Marjeyoun, Hasbaya, and Bint Jbeil where most of the urgent reconstruction activities are. The concrete hollow block is expected to have a positive effect on the whole socio-economic environment of the caza.

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