PUBLIC PRIVATE PARTNERSHIP Private Partnership in Lebanon 2011... · PUBLIC – PRIVATE P

PUBLIC –

PRIVATE

PARTNERSHIP

IN LEBANON

Credit Libanais SAL Economic Research Unit

NOVEMBER2011

Credit Libanais Economic Research Unit

IMPORTANT NOTICE

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Opinions and data expressed herein are subject to change without prior notice.

“When spider webs unite,

they can tie up a lion.”


More than two decades have elapsed since the end of the civil war, and yet Lebanon’s infrastructure and the level of basic public services remain substandard. This includes, among other things, daily power shortages that intensify during the summer season, one of the slowest internet connection speeds in the world, and below par mobile services when compared to peers in the region notwithstanding the fact that Lebanese mobile users pay one of the highest bills in the region. This stems mainly from the public sector’s monopoly over most of the basic services, the thing which erodes the healthy benefits associated with competition, coupled with the marginal public sector’s investment in infrastructure, on the back of the constrained public finances and recurrent budget deficits.

Accordingly, the government realized its need for private sector involvement not only for its role in funding prospective ventures but also for its globally proven role in enhancing efficiency and limiting corruption. The privatization concept has first surfaced as a means to tackle the crippling debt burden and improve the quality of rendered public sector services. However, the privatization concept sparked a huge debate that still lingers until the time being between the different political factions over the issue of selling public sector assets to the private sector. This paved the way for the introduction of the Public-Private Partnership (“PPP”) notion which addresses the privatization concept’s shortfalls, namely when it comes to ceding the public assets to the benefit of the private sector. The implementation of the PPP concept in Lebanon received substantial applause, specifically with regards to the efficient private sector management of basic public services. This has materialized with the submission of the draft PPP law before the council of ministers in July 2010 for discussion and approval, coupled with the Lebanese cabinet’s approval of the electricity reform plan on June 22, 2010, which pivots around the participation of the private sector under the umbrella of a PPP venture.

A sound and transparent implementation of PPP schemes in Lebanon, and especially at loss-making public institutions, will be a cornerstone towards addressing Lebanon’s fiscal imbalances and public debt burden through enhancing government revenues, improving efficiency and curbing corruption on the one hand, while catering for improved living conditions and quality of basic services on the other hand.

EXECUTIVE SUMMARY

2012 2013 2014 2012 2013 2014 2012 2013 2014

Electricity Reform Plan AssumptionsElectricity Tariff Rate ($/KWh) 0.0958 0.0958 0.0958 0.1006 0.1086 0.1206 0.1025 0.1128 0.1274

Investment in Electricity Infrastructure ($ Million) - - - 1,400.00 1,735.00 1,735.00 1,400.00 1,735.00 1,735.00

- of which Investment by Government - - - 810.00 370.00 370.00 810.00 370.00 370.00

- of which Private Sector Investment - - - 455.00 932.50 932.50 455.00 932.50 932.50

Projected Macroeconomic Indicators ($ Billion)Projected GDP 45.427 48.283 51.319 46.827 50.018 53.054 46.827 50.018 53.054

Total Gross Debt 61.63 66.57 66.50 62.13 67.87 67.97 61.17 66.44 65.31

Government Revenues 10.13 10.82 11.55 10.13 10.82 11.55 10.13 10.82 11.55

Government Expenditures 13.26 13.37 14.22 12.82 12.82 12.18 12.80 12.76 12.08

of which EDL Transfers 1.73 1.69 1.85 1.23 1.17 0.67 1.22 1.12 0.56

of which Debt Service 4.27 4.25 4.72 4.32 4.32 4.81 4.32 4.32 4.81

Primary Surplus (Deficit) 1.14 1.69 2.05 1.63 2.32 4.18 1.65 2.37 4.29

Total Surplus (Deficit) (3.13) (2.56) (2.67) (2.69) (2.00) (0.64) (2.67) (1.95) (0.53)

Projected Ratios ( %)Debt/GDP 135.67% 137.88% 129.58% 132.68% 135.70% 128.11% 130.62% 132.84% 123.10%

EDL Transfers/Government Revenues 17.04% 15.63% 16.00% 12.18% 10.83% 5.82% 11.99% 10.35% 4.89%

EDL Transfers/Government Expenditures 13.01% 12.64% 13.00% 9.62% 9.14% 5.52% 9.49% 8.77% 4.68%

EDL Transfers/GDP 3.80% 3.50% 3.60% 2.64% 2.34% 1.27% 2.59% 2.24% 1.06%

Debt Service/Government Expenditures 32.19% 31.77% 33.21% 33.68% 33.70% 39.52% 33.73% 33.84% 39.87%

Debt Service/GDP 9.40% 8.80% 9.20% 9.22% 8.64% 9.07% 9.22% 8.64% 9.07%

Primary Surplus /Government Expenditures 8.56% 12.64% 14.44% 12.70% 18.09% 34.30% 12.86% 18.57% 35.50%Source: Lebanese Ministry of Finance, Credit Libanais Economic Research Unit

- Projected figures under the base case scenario are extracted from the Ministry of Finance Report dated May 2011

- Restated macroeconomic figures under the two tariff increase scenarios are projected by the Credit Libanais Research Unit

Electricity Reform Plan Implemented


(No Reform Plan) & 25.88% Tariff Increase InducedBase Case Scenario

& 32.98% Tariff Increase Induced


TABLE OF CONTENTS

I. UNDERSTANDING PRIVATIZATION 1

A. Definition and Types of Privatization Schemes 1

B. Privatization as a Covenant to Paris II & Paris III Summits 2

C. Privatization Law 3

D. Pre-requisites for Implementing Privatization in Lebanon 4

E. Obstacles to Implementing Privatization in Lebanon 7

F. Estimated Proceeds From the Privatization Process 8

II. UNDERSTANDING PUBLIC-PRIVATE PARTNERSHIP 9

A. Definition 9

B. Forms of PPPs 10

C. PPP Key Parameters 11

1) Pricing of Risk 11

2) Risk Sharing and Risk Transfer 12

3) Legal Framework 14

4) Selection of Private Sector Partner 14

5) Conditions for Successful PPP Implementation 16

D. International Cases and Lessons to Learn 19

1) United Kingdom 19

2) Ireland 20

3) Australia 21

E. PPPs In the Aftermath of the Global Financial Crisis 22

III. PPP VS. PRIVATIZATION 23

IV. APPLYING PPP IN LEBANON 24

A. Underlying Rationale 24

1) Enhancing Efficiency 24

2) Limiting Corruption 24

B. Past and Existing PPP Agreements 25

1) Public-Private Partnerships in the Telecommunications Sector 25

a. The Cellis and LibanCell Timeline 25

b. The Alfa and MTC Timeline 30

2) The Postal Code System - The LibanPost Timeline 32

C. Viable Candidates 34

1) The Electricity Sector 34

a. History 34

b. Current Problems 34

i. Supply Gap 34

ii. Cost Structure 37


iii. Losses 40

iv. Administrative Structure 42

v. World Bank Report 42

c. Reform Plan 43

i. Infrastructure (Production, Transmission and Distribution) 43

ii. Supply and Demand 45

iii. Legal Framework 47

iv. Reform Plan Aggregate Investment Cost 47

v. Financial Repercussions 48

vi. Reform Plan Power Production Grid 50

vii. Governmental Approval 50

viii. Envisaged Form of Private Sector Participation 51

2) The Telecommunications Sector 52

a. Challenges 52

b. Opportunities 56

c. Attempts for Reform 57

d. Potential Impact of Introducing Broadband Services 59

e. Mimicking Best International Practices 59

3) The Water Sector 62

4) Middle East Airlines 63

D. Financing PPP Contracts 64

V. FISCAL IMPACT OF THE IMPLEMENTATION OF THE ELECTRICITY REFORM PLAN 66

VI. PPP S.W.O.T ANALYSIS 69

VII. CONCLUSION & RECOMMENDATIONS 70


SYNOPSIS OF TERMS

“Alfa” The Egyptian Based Mobile Operator Orascom Telecom Holding Mandated to Run and Develop the Lebanese Mobile Operator “Alfa”

“ARPU” Average Return per User

“₤” The British Pound

“BBO” Buy Build Operate

“BDO” Build Develop Operate

“BOO” Build Own Operate

“BOOT” Build Own Operate Transfer

“BOT” Build Operate Transfer

“CAC 40” Benchmark French Stock Market Index

“CAGR” Compounded Annual Growth Rate

“CCSI” The Cairo Stock Exchange Index

“CIA” Central Intelligence Agency

“DBO” Design Build Operate

“DCMF” Design Construct Manage Finance

“DJIA” Dow Jones Industrial Average

“EBITDA” Earnings Before Interest Tax Depreciation & Amortization

“EDL” Electricité Du Liban

“€” The Euro Currency

“FDI” Foreign Direct Investment

“FTSE” Share Index of the 100 Most Highly Capitalized Companies Listed on the London Stock Exchange

“GDP” Gross Domestic Product

“HCP” Higher Council for Privatization

“IEA” International Energy Agency

“IPO” Initial Public Offering

“IMF” International Monetary Fund

“LBP” The Lebanese Pound

“LSE” London Stock Exchange

“MEA” Middle East Airlines

“MOT” Ministry of Telecommunications


“MTC” The Kuwaiti Based Mobile Operator Zain Mandated to Run and Develop the Lebanese Mobile Operator “MTC Touch”

“NYSE” New York Stock Exchange

“PPP” Public-Private Partnership

“SIP” Share Issue Privatization

“S&P 500” Standard & Poor’s Index of the Most Widely Traded 500 Stocks on the NYSE

“$” The United States Dollar

“TASI” The Tadawul All Shares Index (Saudi Index)

“TRA” Telecommunications Regulatory Authority

“USD” The United States Dollar


I. UNDERSTANDING PRIVATIZATION

A.

Privatization, also known as denationalization, is the process of transferring a public sector asset or service to the private sector. There are several types of privatization depending on the method of transferring the public asset

Definition and Types of Privatization Schemes

[1]

:

- Share issue privatization

, by far the most common type of privatization, involves the floating and selling of the shares of the public sector’s enterprises on the stock market. Moreover, share issue privatization (“SIP”) and developed capital markets are closely related to each other in the sense that SIPs are contingent upon the existence of developed and efficient capital market conditions, and help improve the liquidity and marketability of the concerned stock exchanges and the overall economy. SIPs are generally conducted on liquid stock exchanges such as the Euronext Stock Exchange, the London Stock Exchange (“LSE”), the New York Stock Exchange (“NYSE”) and the Hong Kong Stock Exchange. Recent examples of share issue privatizations include Brazil’s Vale do Rio Doce €8.68 billion (around $12.06 billion) primary share issue, the biggest SIP in 2008, and that of the Metallurgical Corporation of China in 2009 which was conducted on the basis of a two-tranche IPO for a total consideration of around €3.48 billion (around $5.10 billion).

- Asset sale privatization

, on the other hand, centers upon selling the public organization (or part of it) to a private sector investor mainly through auction. This method is more popular in developing countries characterized by higher levels of political and currency risk, the thing which may dissuade foreign investors. Recent examples of asset sale privatizations entail the sale of the Russian state-owned OAO Ufaorgsintez and Rostelekom for respective considerations of €1.88 billion (around $2.50 billion) and €1.14 billion (around $1.61 billion) in the year 2009.

- Voucher privatization

pivots around the transfer of shares to the concerned countries’ citizens for symbolic prices or free of charge in some cases. Said voucher allows citizens to exchange it for services at a later stage. Voucher privatization was mainly implemented in the transition economies of Eastern and Central Europe such as Russia, Poland, the Czech Republic and Slovakia.

The diagram on the following page sheds the light on the different types of privatization:

[1] Privatization Barometer 2008-2009 Reports

1


B.

Among the various forms of covenants pledged to international donors by the Lebanese government during the Paris I, II, and III aid conventions, privatization of certain public sector assets amassed international attention and was a pre-requisite condition for the disbursement of foreign aid. More specifically, and in 2001, the Higher Council for Privatization (“HCP”) was established through the adoption of privatization law 228 dated May 2000. The HCP is the authority in charge of planning and implementing privatization programs for the government’s assets, namely Eléctricité Du Liban (“EDL”), Société des Eaux de Beyrouth and other water companies, the Beirut International Airport and Lebanese ports (Port of Beirut, Tripoli Port…), the landline and the two mobile networks. The government, however, has focused in its privatization program on both the telecommunication and power sectors, being considered as the government’s largest assets. Privatization aims, in the first place, at reducing the government’s stock of debt and fiscal deficit and helps promote the country’s capital markets, and this according to the Paris II “Request for International Support” report dated November 2002. Subsequently to the Paris III convention dated January 2007, the government appointed the members of the Telecommunications Regulatory Authority (“TRA”), which launched operations in March 2007. The TRA is an independent government agency in charge of liberalizing, regulating and developing telecommunications in Lebanon, through encouraging competition and transparency

Privatization as a Covenant to Paris II & Paris III Summits

[2]

It is worth noting in this perspective, that out of the total $1,737 million of budget support pledged in the Paris III convention, some $520 million are tied to implementing reforms especially in the telecommunications and electricity sectors, to be followed by the actual privatization of said sectors, representing a significant 29.94% of total budget support and some 6.90% of total Paris III pledges. Examples of pledges that are conditional upon implementing major reform measures include among others

.

[2]

- €125 million pledged by France and linked to the adoption of a law that deals with the disposal of the licenses and assets of the two mobile phone networks, and the launching of the related tender process,

:

Share Issue Privatization -Public Enterprise

-Initial Public Offering

-Floating Shares on Market -Improved Liquidity &

Marketability of the Shares

Asset Sale Privatization -Public Enterprise

-State Organizes an Auction -Investors Present their Bids

-Enterprise Awarded to Highest Bidder

Voucher Privatization

-Transferring Public Enterprises' Shares to Citizens

-Said voucher allows citizens to exchange it for services at a later

stage -Mainly Implemented in the

Transition Economies of Eastern and Central Europe

[2] The Lebanese Ministry of Finance

2


Other Paris III Budget Support

70.06%

Paris III Budget Support tied to

Privatization Reforms29.94%

Breakdown of Paris III Budget Support

Source: The Lebanese Ministry of Finance, Credit Libanais Economic Research Unit

- €100 million pledged by France and conditional upon progress in implementing reforms at Electricité du Liban (EDL),

- €40 million pledged by the European Union and linked to preparing the EDL for its corporatization.

C.

As mentioned earlier, the Lebanese parliament ratified during the first tier of the year 2000 law number 228 which regulates the privatization process and specifies its scope of implementation. Said law was divided into two main sections with the first one noticing the establishment of the HCP and organizing its scope of work and the second one identifying the privatization procedures

Privatization Law

[3]

More particularly, the first section pointed out to the establishment of the Higher Council of Privatization headed by the President of the Council of Ministers and composed of the Minister of Justice, the Minister of Finance, the Minister of Economy and Trade, the Minister of Labor in addition to the concerned sector’s minister.

.

Law number 228 entrusted the HCP with the following responsibilities in order to facilitate their implementation of the privatization program [3]

- Preparing the general privatization policy and the means to implement it and then submitting it to the Council of Ministers for approval.

:

- Setting a timetable for the privatization of public enterprises and submitting it to the Council of Ministers for endorsement.

- Issuing the decisions required to adhere to the aforementioned timetable. - Evaluating the concerned public sector enterprises in accordance with internationally approved financial

and economic standards in addition to preparing the “productive budget” of the privatized projects and submitting it to the Council of Ministers.

On the other hand, the second section of law number 228 stipulated that the privatization process should adhere to the following guidelines [3]

- Preserving the best interests of consumers with regards to the quality of rendered services in addition

:

the pricing of said services. - Protecting the rights of the national labor operating in the public enterprise to be privatized.

[3] Higher Council for Privatization

3


- Safeguarding public funds through adequately reflecting the fair market value of state-owned enterprises/projects in accordance with international financial and economic standards.

- Monitoring the proper implementation of the privatization process. - Opening the privatization process to the participation of citizens in an endeavor to avoid any “monopoly

of shares”.

The law went further on to indicate that in the event the licenses were awarded to entities of a monopolistic nature, the following conditions must be met [3]

- The license must indicate a clear mechanism to assess and adjust prices on a regular basis.

:

- The management of the privatized project should extend the monitoring authorities with all relevant data and information.

- The privatized project must be updated with modern technology.

Furthermore, Article 11 of law number 228 allowed the Lebanese republic to maintain a golden share in any privatized project of monopolistic nature or relevant size. Said golden share will furnish the Lebanese republic with “exceptional privileges” to vote on key decisions.

It is worth noting in this perspective that subsequent to ratifying law number 228, the Lebanese parliament passed laws number 431 (23/7/2002) and 462 (5/9/2002) which were concerned with the privatization of the telecommunication and electricity sectors respectively. In brief, electricity law number 462 proposes the unbundling of EDL into three different companies concerned with the production, transmission and distribution of electricity. The transmission function shall be retained by the government while production and distribution companies shall float up to 40% of their shares on the stock market in a form of share issue privatization. In a similar fashion, law number 431 calls for the establishment of Liban Telecom s.a.l., which replaces the two existing mobile phone networks, and privatizing it through a share issue privatization. On the other hand, willing investors in the mobile licenses will be required to purchase the assets of the mobile companies through an asset sale privatization [3]

.

D.

The successful privatization of any sector in Lebanon is bound by the simultaneous availability of three main factors:

Pre-requisites for Implementing Privatization in Lebanon

- Legal and Financial Readiness: The privatization of any public sector/enterprise in Lebanon should be supported by a clear legal platform. For this purpose, and as mentioned before, the Lebanese law makers have passed the general privatization law 228 in the year 2000, and then went further on by ratifying law number 431 and law number 462 which set up for the privatization of the telecommunication and electricity sectors on a respective basis. On the financial front, it is utterly important for a sector to be financially viable to be considered as a candidate for privatization, which is not currently the case for EDL. More particularly, EDL is considered to be a major drain on public finances at present, with government transfers to the EDL attaining $0.98 billion, $1.611 billion, $1.498 billion, $1.192 billion and $684.18 million in 2007, 2008, 2009, 2010 and the first half of the year 2011 on a respective basis owing to the company’s dramatic operating losses [4]

.

- Appropriate Market Conditions: As with any private sector IPO, the government must await appropriate and suitable market conditions to privatize the concerned public sector enterprise in order to maximize the enterprise value. Accordingly, the privatization process was suspended during the 2008-2009 period owing to the ramifications of the global financial crisis, which hampered investors’ appetite and suppressed bidding prices.

[3] Higher Council for Privatization, [4] The Lebanese Ministry of Finance

4


Leg

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Ap

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M

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s

Po

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Co

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s

Successful Privatization

Source: Arab Stock Markets, Credit Libanais Economic Research Unit

- Political Consensus:

One of the most important pillars to successfully implementing privatization in Lebanon is the availability of political consensus on the subject. Nevertheless, the existence of different political factions in Lebanon and the delicate composition of the country’s political system were major impediments towards the realization of privatization.

5

Evolution of P/BV Multiples for Regional Telecommunication Companies

0

1

2

3

4

5

6

7

2006 2007 2008 2009 2010 June End 2011

Mobily (K.S.A) Saudi Telecom (STC) Etisalat (U.A.E) Qatar Telecom MTC K.S.C.

Outbreak of the Global Financial Crisis


Stock Market IndicesPre-Crisis (End

September 2007)During the Crisis

(End February 2009)Post Crisis (August

22, 2011)

U.S. IndicesDJIA 13,895.63 7,062.93 10,854.65

S&P 500 1,526.75 735.09 1,123.82

S&P Global Telecommunications (IXP) 66.85 39.09 55.96European Indices

FTSE 100 6,466.80 3,830.10 5,095.30

CAC 40 5,715.69 2,702.48 3,051.36Regional Indices

CCSI (Egyptian Index) 2,929.41 1,310.23 650.53

TASI (Saudi Index) 7,813.12 4,384.59 5,920.73

Saudi Telecommunication Index 2,669.57 1,510.59 1,649.89Source: Credit Libanais Economic Research Unit

On the legal front, neither EDL nor the landline networks are currently considered ready for privatization notwithstanding the presence of laws number 431 and 462. More particularly, law number 462 calls for the corporatization and unbundling of Electricité du Liban into three separate companies, one for the production of electricity, the second for the transmission of electricity (which will not be offered to the private sector due to its critical importance) and the third for the distribution of electricity, a thing which is yet to happen. Similarly, law number 431 advocates the establishment of a new mobile network operator “Liban Telecom” under the umbrella of a Lebanese joint-stock company to replace the two existing mobile networks. This new company requires government licensing to provide telecom services, and looks to float up to 40% of its shares to the public in due course, yet remains a subject of political debate with regards to the legal underpinnings of said privatization process under the provision of law 431 [5]

On the financial front, both the mobile and landline networks are financially appealing to investors and thus are viable candidates for privatization. As far as EDL is concerned, it is imperative to financially reengineer the company in an endeavor to position it more favorably in the eye of the foreign investors prior to opening the bidding door for privatization. This may be concretized in the event the most recent electricity reform plan proposed by the Ministry of Energy and Water sees the light.

.

As far as current market conditions are concerned, capital markets worldwide recouped some of the substantial losses recorded during the global financial crisis, yet remain far from the levels observed in the pre-crisis period. This is further captured by the evolution of stock market indices around the globe as outlined in the table below [6]

:

Another pre-requisite for privatization, namely the existence of favorable market conditions, can be reflected by a recovery in merger and acquisition (“M&A”) transactions in the MENA region during the first half of 2011, with total M&A volume up by 33% year-on-year allocated over 173 deals, and transaction value up by 30.14% to attain $21.17 billion [7]

.

[5] Higher Council for Privatization, [6] Reuters, [7] Zawya - “MENA M&A Report: H1 2011 Update: Shrugging off the Effects of the Arab Spring”

report

6


The following matrix positions concerned sectors for privatization under four different conditional parameters:

E.

Since the dawn of the last decade, Lebanon has been establishing appropriate infrastructure and legal framework to embark in privatization. However, and in spite of the major developments Lebanon has achieved on the privatization platform front, and notwithstanding the recurrent international calls by international agencies and the Paris II and III committees, privatization in Lebanon remains constrained by three major factors:

Obstacles to Implementing Privatization in Lebanon

- Fragile Political Situation: The year 2005 witnessed the assassination of former Prime Minister Mr. Rafik Hariri which was followed by political squabbling, the withdrawal of the Syrian troops and a series of political assassinations. In July 2006, Israel launched an atrocious war on Lebanon which lasted for 33 days, inflicting hundreds of casualties as well as hundreds of millions of dollars ($3.6 billion) in direct damages in infrastructure according to the CIA World Factbook [8]

. In 2008, political tensions continued to escalate, peaking during military clashes in May 2008. All of this contributed to stalling the privatization process, as the intense political situation would have undoubtedly led to deterring some foreign investors and to the undervaluation of the privatized enterprises when accounting for political risk.

- Global Turmoil: The year of 2008 was earmarked by the start of the global financial crisis that plagued several international banking systems across the globe and stirred a wave of bankruptcy filings. This has dragged global equity and commodity markets in a precipitous slide and pushed major world economies into recessionary periods despite several global multi-billion dollar bailout plans. This has led to a drain in global FDI inflows which shed from $2,100 billion in 2007 to $1,744 billion in 2008, $1,185 billion in 2009 and 1,244 billion in 2010 [9]. Accordingly, the then Minister of Telecommunications, Mr. Gebran Bassil, ruled out the privatization of the sector notwithstanding the relative political stability prevailing

[8] CIA World Factbook, [9] UNCTAD, 2010 World Investment Report

7

2,065

1,710

259

566479

743

24173

2,140

127

995

10

32

2421

14 14

106

54

43

31

0

5

10

15

20

25

30

35

1

501

1,001

1,501

2,001

Geographical Breakdown of Target M&A Deals in the MENA region -During the First Half of 2011-

Value (in USD million) Volume

Source: Zawya, Credit Libanais Economic Research Unit

725693 866

675468

634

5,624

84 1

611

129 29 0

22

1815 15

11

9

6

33

22 2

0 0

5

10

15

20

25

0

1,000

2,000

3,000

4,000

5,000

6,000

Geographical Breakdown of Targert M&A Deals in the MENA region -During the First Half of 2010-

Value (in USD million) Volume

Source: Zawya, Credit Libanais Economic Research Unit

Legal Readiness

Financial Readiness

Appropriate Market Conditions

Political Consensus

Mobile License 0 1 0 -1

Land Line License -1 1 0 -1

EDL License -1 -1 0 -1Source: Credit Libanais Economic Research Unit


back then, as the sector would have been privatized at far below its intrinsic value, which would have deprived the Lebanese budget of significant inflows. Said move was echoed on a worldwide basis with worldwide revenues from privatization contracting to around $110.88 billion in the year 2008 down from some $140 billion in the year 2007 [10]

.

- Different Stances from the Privatization Concept:

One of the most important reasons that kept privatization on status quo is the different stances of various political parties vis-à-vis the privatization concept, with said stances ranging from calling for the imminent privatization of the telecommunication and electricity sectors to implementing reforms on said sectors prior to launching privatization with the objective of boosting intrinsic value, keeping in mind that some political parties oppose the privatization concept completely.

F.

The following section highlights the estimated proceeds from privatization of the various economic sectors since the year 2002:

Estimated Proceeds from the Privatization Process

- December 2002: The government envisaged $1 billion per year over the 2003-2004 period from the subsequent sale of shares in the telecommunication and energy sectors [11]

- February 2003: The government projected some $3 billion in proceeds from the privatization of the two mobile networks

.

[11]

- March 2003: IMF projected total privatization proceeds to attain $3.2 billion, out of which $1 billion would be allocated to the energy sector’s power and distribution operations, as compared to a $5 billion target set by the government

.

[12]

- October 2005: The privatization of the two mobile networks and Middle East Airlines is estimated to generate some $2-$3 billion

.

[11]

- November 2007: An equity research report prepared by Credit Suisse estimated proceeds from the privatization of each mobile license to range between $2.4 billion and $3.4 billion

.

[13]

.

[10] Privatization Barometer 2008-2009 Reports, [11] The Lebanese Ministry of Finance, [12] IMF, [13] Credit Suisse

8


II. UNDERSTANDING PUBLIC-PRIVATE PARTNERSHIP

A.

Public-Private Partnership (“PPP”) is an agreement between the public sector on the one hand and private sector companies on the other hand, in which the private sector participates in governmental projects, furnishing as such the public entity with the skills, technical assistance, funds, or any other element constituting an obstacle to the completion of the project. In other words, it is the cooperation of both sectors that characterizes the PPP. In this perspective, the private sector’s contribution can come under the form of management, design and building, maintenance, operation, financing, and sometimes leasing or owning temporarily or even permanently the concerned public entity.

Definition

Applying Public-Private Partnership is associated with several advantages of which we list [14]:

- Reducing capital investment by the government at the expense of the contribution of the private sector;

- A more efficient synchronization of the know-how and strengths of the private and public sectors, adding thus synergies to the partnership;

- Mobilizing any excess or underutilization of assets, thus enhancing asset utilization efficiency; - Timely implementation of projects in the pipeline; - Better environmental compliance; - Enhancing the quality of the services rendered; - Improving service cost effectiveness; - Sharing or allocating risks between the public and the private sector, diminishing therefore the risk

burden on the public sector; - Mutual rewards, with the government having a productive and profitable entity operating more

efficiently and at lower cost, and the private sector benefiting of the returns on its investment.

There are several conditions underpinning the success of PPPs, mainly an appropriate legal and regulatory framework, transparency regarding the related projects’ costs, the associated risks and returns, and stringent monitoring to avoid any unfavorable situation such as monopolies and others.

[14] NCPPP, Fundamentals and Issues of Public-Private Partnerships (PPPs)

9


B.

As conveyed earlier, there are several forms of PPPs, depending on the degree of private sector involvement. This is further elaborated below

Forms of PPPs

[15]

:

•The private company designs, builds, and maintains the public sector’s entity while retaining ownership. In this case, the government leases the entity over the term of the agreement.

Build-Own-Maintain

•The private company is in charge of financing, designing, building, & operating the public entity’s project, while claiming ownership. Therefore, the private company owns the project and bears the commercial risk of operating the facility. There is no transfer of the entity’s ownership to the public sector.

Build-Own-Operate (BOO)

•The private company designs, builds, renovates, modernizes, and operates the public sector’s project for a specified period of time (with no ownership). The private company bears the commercial risk of operating the facility.

Build-Develop-Operate (BDO)

•The private company deals with the financing, the designing, the building, and the management of the public entity’s project for a fixed period of time (with no ownership). The project is then handed back to the government.

Design-Construct-Manage-Finance

(DCMF)

•The private company handles the financing, designing, building, and operating of the public entity’s project, while claiming ownership of that entity. Therefore, the private company owns the project and bears the commercial risk of operating the facility.

Design-Build-Operate (DBO)

•The private company builds and operates the public sector’s entity after gaining ownership of that entity. In this context, the private company takes into charge rehabilitating or expanding it, and improving the way it is operated.

Buy-Build-Operate (BBO)

•The private company leases the public sector’s entity, buys it, and operates it. There is no transfer of the entity’s ownership to the public sector.

Lease-Own-Operate

•The private company designs, builds, renovates, modernizes, and operates the public asset for a specified period of time after leasing it. The private company bears the commercial risk of operating the facility.

Lease-Develop-Operate (LDO)

•The private company assumes the responsibility of financing, designing, building, and operating the public entity’s project for a fixed period of time (with no ownership), and transfers it back to the public sector. The private entity thus bears the commercial risk of operating the facility. The transfer of ownership takes place at a preset price, or at the then-prevailing market price.

Build-Operate-Transfer (BOT)

•The private company finances, builds, and operates the public entity’s project while claiming ownership of that entity for a specific period of time, before transferring it back to the government.

Build-Own-Operate-Transfer (BOOT)

[15] NCPPP -Types of Public-Private Partnerships, U.S. Government Accounting Office -Public-Private Partnerships: Terms Related to Building and Facility

Partnerships, IMF –Public Private Partnerships

10


Degree of Private Sector Involvement

Service Contract

Operation & Maintenance

Lease, Build, Operate

Build, Transfer, Operate

Build-Operate-Transfer (Concession)

Build-Own-Operate (Divestiture)

Deg

ree

of P

riva

te S

ecto

rRis

k

C.

1) Pricing of Risk

PPP Key Parameters

As with any other project, the valuation of a PPP project is generally conducted through the discounting of future cash flows. The discount rate used for that specific purpose is, however, subject of debate between the public sector and the private partner when it comes to the private partner’s calculation of the risk premium element embedded in the discount rate. Accordingly, the pricing of risk is a key element to appraising any PPP project given that a higher perceived riskiness of the project by the private partner calls for a higher discount factor and consequently a lower valuation which yields less revenues to the government. In this perspective, risks are divided into two categories: project-specific risks and market risk. A project-specific risk is a type of unsystematic risk that is diversifiable and can be defined as the “the variations in outcomes for individual projects or groups of related projects”. Project-specific risks do not require pricing by the private partner given their diversifiable nature. Market risk, on the other hand, which is the exposure of all projects to uncertain economic environments, is a systematic, non-diversifiable risk that is priced by the private partner in its calculation of the assumed discount rate.

The government and the private sector generally adopt different methods for evaluating said risks. More particularly, the government opts for discounting projected cash flows associated with the PPP project at the risk-free rate while the private partner adopts a higher discount rate by accounting for the equity risk

•The Build-Lease-Operate-Transfer contract is classified under the category Enhanced Use Leasing (EUL), which also takes into consideration other types of partnerships that include leasing, such as the lease-develop-operate contract. The private company designs and builds the public sector’s entity, leases it, operates it for a fixed period of time, then transfers it back to the government.

Build-Lease-Operate-Transfer (BLOT)

•The private company finances, builds, and operates the public asset for a specific period of time before transferring it back to the government. The private entity can, however, rent said asset from the related public enterprise after the project is successfully implemented.

Build-Rent-Own-Transfer (BROT)

•The private entity renovates, modernizes, and expands the public asset after buying or leasing it. The asset is not necessarily transferred back to the government once the project is achieved.

Wrap-Around Addition (WAA)

11


Project Risk

•Actual Project Cost Might Overshoot Budgeted Costs •Project Time of Completion Might Overrun Time Deadline

Operating Risk

•Operating Risks Exceeding Expected Figures

Demand Risk

•Lower than Expected Demand for Services Technical Risk

•Technical Issues Might Arise During the Flow of the Project

Financing Risk

•Although Private Funding is Much Easier to Raise than Public Funding, the Project Might be Short on Budget

Regulatory Risk

•New Regulations during the Contract Period can Impose Additional Costs

Political Risk

•A New Government can Find the Project not Matching its Interests, so it May Reconsider the Contract or Might Even Cancel or Expropriate the Project

Residual Value Risk

•Significant Decline/Obsolescence of Value of Assets at the End of the Project

Construction Risk

•Possibility of Design Problems, Building Cost Overruns, and Project Delays

Financial Risk

•Risks Related to the Variability of Financing Costs Factors (i.e. Interest & Exchange Rates)

Performance Risk

•Risk Related to the Continuity & Quality of Service Provision •Availability of an Asset

premium. Consequently, some PPP bids that are deemed appealing to the private sector from a pricing and valuation perspective are rejected by the public partner for their less-than-expected intrinsic value. As a consequence, the choice between public financing of a government project and a PPP agreement may discard the participation of the private sector in favor of public investment [16]

2) Risk Sharing and Risk Transfer

.

Public-Private Partnerships, as is the case with any other venture, are generally associated with several types of risks, which are to be borne by the private and public sector according to an agreed-upon scheme. The following table sheds the light on the main risks associated with PPPs and provides a brief explanation on each of said risks [17]:

Source: Public-Private Partnerships: Heather FUSSELL and Charley BRESFORD, Credit Libanais Economic Research Unit

[16] IMF –Public Private Partnerships, [17] Public-Private Partnerships: Heather FUSSELL and Charley BRESFORD

12


Risk Category Public Sector Private Sector

Demand & Revenue Risks X X

Design & Construction Risks X

Operating & Maintenance Risks X

Financial Risks X

Legal Risks X

Political Risks X

Environmental Risks X

Force Majeure X X

Source: Booz & Company, HCP, Credit Libanais Economic Research Unit

When looking at how risks are generally distributed, we can notice that basic and necessary goods and services generally stay under the control of the State whereas domains that require good management, innovation, motivation, creativity and funding, are transferred to the more efficient private sector. As depicted by the below charts, the Government usually bears policy and regulatory risks while the private sector is usually better qualified to manage commercial risks [18]

:

In addition, there is a tight relation between the structure of the partnership and risk allocation. More particularly, the higher the involvement of the private sector, the more risks it should bear. Accordingly, the risks transferred to the private sector in a Buy-Build-Operate contract, where the private sector is entirely involved throughout the stages of the project, exceed and by far the risks transferred to the private sector in a Design- Build-Contract. The chart on the following page illustrates the percentage of risk transferred to the private sector in accordance with the type of PPP agreements [19]

:

[18] Booz & Co., Higher Council For Privatization, [19] Public-Private Partnerships: A Review of Literature and Practice

13

Risks Borne by the Private Sector

Demand&

Revenue Risks

Force Majeure

Legal Risks

Political Risks

Environmental

Risks

Risks Borne by the Public Sector

Design & Construction

Risks

Operating &

Maintenance Risks

Financial Risks


‐ Identification

‐ Option Analysis

‐ Planning & Approval

‐ Implementation

‐ Post‐Transaction

Type of Risk Political Planning Design Construction Maintenance Operational Financial Usage Regulatory

Source: Public Private Partnerships, The Advantages and Disadvantages Examined – G.W.E.B. van HERPEN

Private Private Public/Private PublicPublic Public/Private Private Private PrivatePhaseRisk Bearer

Source: Public-Private Partnerships: A Review of Literature and Practice – Dr. John R. ALLAN, Credit Libanais Economic Research Unit

Finally on the risk sharing/risk transfer front, it is worth highlighting that some types of risks, and owing to their nature, persist throughout the project while other types of risks govern only certain stages of the PPP project. This is further elaborated in the following table [20]:

3) Legal Framework

The draft of Lebanon’s “Public-Private Partnership law” was presented by the Higher Council for Privatization “HCP” during the month of July 2010 before the Council of Ministers for approval.

The law cited the following projects that could be subject to public-private partnerships: thermal plants for power production, renewable energy plants, dams, roads, bridges, railways, ports, airports, car parkings, schools, libraries, hospitals, hospices, sports stadiums, tourist complexes, palaces conferences, natural reserves, prisons, barracks, fire stations, solid waste treatment plants, sewage treatment plants, and other key installations [21].

4) Selection of Private Sector Partner

The National Council for Public-Private Partnerships identified six components that determine a successful PPP, namely project political leadership, public sector involvement, comprehensive plan, dedicated income stream, stakeholder communication, and proper partner selection. Out of the six components, proper partner selection remains the most important element for a successful PPP project. The government usually provides all bidders with project-specific information to the bidding firms for them to set up a partnership plan that benefits the public agency, with the ultimate objective of more efficiently operating the concerned sector [22].

The selection of the private partner is a two-step process that consists of:

100%

90%

80%

70%

60%

50%

45%

40%

30%

20%

10%

1%

Buy‐Build‐Operate

Transfer to Quasi‐Public Authority

Build‐Own‐Operate

Build‐Own‐Operate‐Transfer

Build‐Own‐Transfer

Build‐Transfer‐Operate

Lease‐Develop‐Operate

Design‐Operate

Design‐Build Major Maintenance

Design‐Build

Operation and Maintenance Contract

Contribution Contract

Percentage of Risk Transferred to Private Sector

[20] Public Private Partnerships, The Advantages and Disadvantages Examined – G.W.E.B. van HERPEN, [21] Higher Council for Privatization,

[22] The National Council for Public-Private Partnerships

14


- A Request for Qualifications: to determine qualified candidates - A Request for Proposals: whereby bidders will relay their business plans to the public entity for review

and consideration

There are six other criteria that govern the selection of the private sector partner, namely [23]

a)

:

Each private firm must introduce itself with a complete application file including a company profile, history, ownership structure and partners to go over its past performances. The public agency in its turn assesses the qualifications of the team and its management style and checks for suitability with the existing structure of the public enterprise. In addition, the applying firm must clearly define its objectives to the government for the latter to judge whether they concord with the government’s goals.

Description of the Proposed Partner

b)

One of the main determinants of a successful public-private partnership scheme is the expertise and qualifications the private sector will add to the project. More particularly, private sector experience creates cost-efficiencies, motivation and innovation and allows for better risk transfer. In an endeavor to decide whether a firm is qualified enough to cooperate with the government, it is recommended that the public agency engages in one-on-one interviews for more efficient screening of the know-how and added value of the bidding firms.

Qualifications and Experience

c)

One of the main reasons behind the government’s decision to invite the private sector to participate in a public sector project is the need for financial resources to fund the requisite investments. Accordingly, bidding candidates must be financially sound and should enjoy solid financial standings. The government can request the private sector to provide its audited financial reports, annual budget, and annual reports in an endeavor to more efficiently evaluate the bidding firm’s financial capabilities in handling the concerned PPP project.

Financial Capability

d)

The selection process cannot only be based on documents and evaluations furnished by the candidates. The public agency will have to question their past partners, especially public partners, in order to assess their past performances and evaluate their work and integrity.

References

e)

All criteria discussed above will permit the government to assess whether the firm is able to handle the risk that the public is not capable of managing. One of the principle objectives of a PPP project is the transfer of risks from the public to the private sector firm that is in a better position to handle them.

Risk Transference

f)

At last, the private sector partner should provide the government with information of any previous litigations that may hinder its participation in the PPP venture.

Litigation and Controversy

The following section provides a more exhaustive list of criteria that must be assessed when selecting a private sector partner:

- Expertise - Financial capacity - Acceptance of risk transfer - Demonstrated experience in delivery of similar projects - Demonstrated experience in working with similar public agencies - Capacity to deliver the required quantity and quality of project/services

[23] The National Council for Public-Private Partnerships 15


- Proposed infrastructure and end of term treatment - Proposed timelines for the project - Additional resources and capacity

5) Conditions for Successful PPP Implementation

PPPs can take a variety of structures and contractual forms. Irrespective of the type of PPP, the government must establish a sector road map, write down an action plan and follow standardized steps [24]:

Source: Heather Skilling. 2007, Credit Libanais Economic Research Unit

• Underperforming sector

• Assess sector constraints • Identify sector goals • Set tasks & timetable

• Identify expertise needed • Identify Government

champion • Review options vis-a-vis

sector constraints and goals

• Enabling environment for

PPP in terms of policy and operating environment

• Determine project design • Ensure feasibility and

sustainability • Assign risks • Identify and train for new

roles

• Solicit market interest/feedback on project

• Refine bid package • Develop draft contract • Final definition of process • Train staff in procurement • Transparent process

• Put financing in place • Start transition

arrangement

Decision to Enter PPP Process

Determine the Priority Projects

Sector Diagnostic and Sector Road Map

Define Project Team

Internal and External Advisors

Select and Assign

Transaction Advisory Team

Sector Diagnostic and Sector Road Map

PPP Preparation/Feasibility

Legal/Regulatory

Technical

Institutional

Commercial/Financial/Economic

Procurement Process

Publication/Announcement

PPP Prequalification

Prepare Bidding Package

Terms of Reference

Draft Contract

Bidding Requirements

Conduct Procurement

Bid Evaluation and Award

Negotiation and Contract Signing

[24] Heather Skilling. 2007

16


The implementation of a successful public-private partnership scheme is conditional upon having the following steps satisfied [25]

:

Determining Objectives

•The State must clearly set its goals, objectives, and performance standards in order to find a firm that is able to meet its requirements. During its search for a private sector partner, the government encourages pricing competition between partners under the umbrella of a bidding auction in order to avoid monopoly on the one hand and reduce the government’s cost burden on the other.

Defining Risks

•It is also important to define the risks associated with a PPP project in order to foster the appropriate legal, economic and political environment. In addition, managerial standards must be respected for a better execution of the project.

Establishing an Atmosphere of

Trust

•An atmosphere of trust must be established. Partners must work in full transparency and honesty, especially when the government cedes one of its main responsibilities, offering essential goods and services to the private sector. In an endeavour to enforce an atmosphere of trust, both parties can appeal for third party audit and control.

Continuous Monitoring

•Both sides of the PPP venture must be continuously monitored during the implementation of the contract. More particularly, the government must be inspected by its political components, as much as the private firm must be closely monitored by the concerned regulatory institutions, and this to avoid a monopolistic environment.

Adequate Risk Distribution

•It is essential to distribute the PPP risk in an efficient manner, where each party will be best able to manage it. The best party to handle the risk is the one to minimize it the most and lower the cost of unanticipated outcomes.

Political Commitment

•At last, a major requirement for a successful PPP project is the existence of a political commitment and good governance. Should it be Public-Private Partnership, privatization or any other economic structure, a corrupted system will most certainly ruin the project.

[25] Asian Development Bank, Structuring a PPP: Sector Diagnostic and Sector Road Map

17


•Could “on-time, on-budget” goals be reached through another procurement model, such as a design-build contract? Need

•How long is the procurement process expected to take? How much will it cost? Does the government have sufficient staff resources and in-house expertise to work on the procurement and negotiation of the contract? If not, how will additional hiring affect cost?

Resources

•What risks will the private sector bear? What risks are borne by the local government? Is it realistic to assume that the private partner will be able to manage the risks transferred to it at a lower cost than the government?

Risk

•What will happen if the private partner fails to complete the PPP project and adhere to its terms? Will the government still be on the hook to cover costs?

Responsibility

•How will the government monitor the contract? Can the government afford the additional monitoring costs? What will happen if service quality deteriorates?

Accountability

•How will the job security of current employees be affected by the introduction of a PPP? Jobs

•If future public policy requires a change in the PPP, will the government have the flexibility it needs to meet its goals? Flexibility

•If during the procurement or operation of a PPP it becomes evident that the PPP no longer serves the public interest, what is the government’s exit strategy?

Exit strategy

8 Questions to Assess Whether PPP is Beneficial to Society [26]

[26] Asian Development Bank, Structuring a PPP: Sector Diagnostic and Sector Road Map

18


D.

1. United Kingdom

International Cases and Lessons to Learn

The concept of private financing for public goods or services in the United Kingdom was first introduced in the early 1980s when governments decided to enhance the role of the private sector in the economy through financing public projects. In 1992, the United Kingdom adopted the Private Finance Initiative (“PFI”) for the delivery of public services as a form of public-private partnership on the back of rising concerns regarding declining public investments and social and economic spending. Since then, the number of PFIs has been on the rise to peak in the year 2000. PFI was defined as follows:

- PFI projects pivot around delivering public services and not acquiring public assets; - The private sector should ensure the delivery of public services and the maintenance of public assets for

a long period of time while the public sector undertakes to purchase said rendered services and products;

- The private sector should manage a part of the project-associated risks; - The public project should be subject to a “value for money” (“VFM”) test to decide whether it should be

financed by the public or private sector; and - The PFI project should adhere to the UK government’s efficiency, equity and accountability criteria.

PFI projects in the United Kingdom include all types of public services and products, namely transportation, infrastructure, schools, prisons, courts, hospitals, military equipment, information technology, etc.

According to the United Kingdom’s Treasury statistics, the total number of signed PFI projects in the UK during the 1992-February 2010 period reached 667 projects worth some ₤56.47 billion with the tenor of said PFI contracts ranging between 5 and 46 years.

The below chart reflects the projected annual payments for the United Kingdom’s PFI projects assuming that the government will not engage in new PFI projects [27] :

[27] HM Treasury 2008

19

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031

2034

2037

2040

2043

2046

2049

2052

2055

2058

Mil

lio

ns o

f G

BP

Evolution of Projected Annual Payments for UK's PFI Projects


Since the United Kingdom represents the reference for PPP cases, we will highlight the following case where PPP schemes failed.

UK Passport Agency

In order to reduce the cost for processing passports, the United Kingdom Passport Agency opted to cooperate with the private sector. The project started in June-July 1997 with a total size of £240 million. Siemens and Security Printing & Systems Limited were the private contractors mandated to transact with the authorities. Siemens’ responsibilities revolved around establishing a new computer system and managing the data, while Security Printing & Systems Limited was in charge of the printing process and the Public Agency handling authorizations and legal matters.

The venture, however, didn’t go smoothly with a delay appearing during the design stage which ended in mid April 1998 as opposed to a scheduled completion date of early December 1997. As depicted by the chart above, this forced a delay in all project phases. Accordingly, productivity was far below expectations and some £12.7 million in unexpected costs were incurred by the Public Agency [28].

The first delay during the planning stage caused a perturbation in the progress of the project. The concerned sectors did not anticipate an increase in the demand of passports. There was an inept transfer of risk and responsibilities between private and public sides. Interests of the Agency were not in line with those of the two private partners. The only aim of the public sector was to reduce cost at the expense of quality.

2. Ireland

The Irish economy flourished during the four-year period ending 1998 with real GDP growth accumulating to 40% during the aforementioned period. Said growth, however, was accompanied by infrastructure deficits, driving the Irish government as such to adopt the Public-Private Partnerships (PPP) program in 1998 to finance new public projects. In this perspective, PPPs were officially introduced in public projects packaged under the National Development Plan which was launched in December 1999. The role of PPPs was further emphasized in the Government's National Development Plan 2000-2006 period, which identified PPPs as being essential in helping to deliver much-needed infrastructure required on the national road network.

Source: Public Private Partnerships – Lessons Learned

[28] Public Private Partnerships – Lessons Learned

20


Road Infrastructure

21.67%Prisons3.33%

Transportation6.67%

Education & Science15.00%

Environment & Heritage 48.33%

Arts, Sports & Tourism5.00%

Breakdown of Irish PPP Projects by Type of Project as of March 2010

Concession14.06%

DBF7.81%

DBFM14.06%

DBFOM26.56%

DBM1.56%

DBOM35.94%

Breakdown of Irish PPP Projects by Type of PPP as of March 2010

The number of PPP projects reached 8 “pilot projects” in 1999, namely roads, public transport, schools and waste management projects, before rising to 36 “pilot projects” and more than 100 smaller projects as at the end of the first half of 2003. Said increase in PPP projects is mainly attributed to the improvement in the Irish public finances, high efficiency of PPP projects, and challenges facing some public “pilot projects”.

In 2003, the National Development Finance Agency (“NDFA”) was established with the objective of advising the Irish government on the financing, insurance and risk of different public projects. In addition, all PPP projects which involve private financing should refer to the NDFA. Furthermore, NDFA was assigned a new role in mid 2005 which enables it to undertake the procurement stage of PPP projects on behalf of state authorities.

According to the Irish Finance Minister, total government expenditures are projected to attain €43.5 billion over the 2007-2012 period, of which €5.5 billion (12.64%) are geared towards PPP projects.

The number of major PPP projects reached 65 as at the end of March 2010 with the indicative value of projects ranging between €20 million and €1 billion, depending on the project’s size and scope of rendered services [29]

.

Source: Central PPP Unit Source: Central PPP Unit

3. Australia

The significant case study of the water treatment in Victoria-Australia, shows the efficiency and beneficial concept of the Public-Private Partnership. The Central Highlands Region Water Authority was created in 1994 and was 100% state-owned. However, and due to the weak management, insufficiency of water distribution and a decrease in quality, the state opted to cooperate with the private sector through a PPP venture.

Accordingly, the authorities signed a 25-year BOOT (Build-Own-Operate-Transfer) contract with United Water in 1999. This $50 million project was a resounding success with United Water insuring adequate water distribution for the Ballarat region and with quality attaining high standards.

With the success of the PPP venture in Victoria, the government decided to promote this concept, and accordingly launched a program in the year 2000 to attract private investments into public infrastructure. It is worth highlighting here that the public sector did not encounter any bureaucratic problems or public deficits, yet required the private sector’s assistance due to its efficiency and incremental knowledge and expertise.

The Ballarat Water project posted a solid financial performance during the year 2010 with revenues and Earnings Before Interest Tax Depreciation & Amortization (“EBITDA”) expanding by an annual 6.4% and 7.8% to $7.8 million and $3.5 million on a respective basis [30]

.

[29] Central PPP Unit, [30] Efficiency Unit – Case Summary: Water Treatment Plants by Public Private Partnerships, Central Highlands Region Water

Authority, Victoria, Australia

21


0

50

100

150

200

Energy Telecom Transport Water and sewerage

Number

Status of PPP Projects per Industry in 2009

Canceled

Delayed

No major impact

Project restructuring

Raised financing but at a higher cost

0 10 20 30 40 50 60 70 80 90

Number Status of PPP Projects per Region in 2009

Canceled

Delayed

No major impact

Project restructuring

E. PPPs in the Aftermath of the Global Financial Crisis

Public-Private Partnerships were dealt as severe blow during the global financial crisis on the back of the lack of funding with several international banks being on the verge of bankruptcy, requiring as such immediate government intervention.

In addition, Central Banks imposed tighter loan regulations on banks. According to a study by the University of Greenwich, banks and investors became hesitant to lend to private firms amid the crippling effect of the global financial turmoil.

According to the Private Finance Initiative (“PFI”), only 34 new projects were signed in the United Kingdom in 2008, the lowest number since 1997. A director at the head of the PFI stated that there should be new methods for funding PPPs as banks became reluctant to extend lines of credit to PPP projects [31]

The French government established “plan de reliance” in order to lessen the repercussions of the recession on the economy. The plan was to guarantee bank loans granted to PPP projects, and hence stimulate lending. Public institutions intervened as well to alleviate the burden of the propagating global financial crisis on the financing of private sector projects, and this through special tax allowances and subsidized private loans.

.

In summary, experts are recommending a governmental guarantee of loans extended to private sector partners in PPP projects, the thing which will lower the cost of project financing, making as such the project more financially appealing without halting economic growth.

The following charts depict the status of PPP projects across different industries and regions during the year 2009 amid the turbulent financial markets and world economic recession [32]

:

Source: World Bank Source: World Bank

[31] The Private Finance Initiative (“PFI”), [32] The World Bank

22


Ownership of Asset/Enterprise

Asset ownership is transferred to the private sector against an agreed upon cash consideration to the government.

The asset is usually built/rehabilitated by the private sector in return for a fee over the tenor of the PPP contract and then transfered to the public sector by the end of the contract.

Reimbursment forProviding the Services

The private sector is granted the right to provide the service in exchange for a fee, which will be collected directly from end users.

The public sector reimburses the private sector in exchange for the service it is providing.

Responsibility forProviding the Services

The private sector is responsible for providing the service while the role of the public sector is usually restricted to overall supervision.

The public sector shares the risks and responsibilities of providing the service to end users.

Risk BearingThe private sector bears all the risks associated with the project.

Risk allocation and risk sharing between the private and public partners are agreed upon based on a pre-determined formula.

Involvment in the Output

Product

The private sector solely sets the type and range of services provided in addition to determining the pricing schemes.

The type, range and pricing of services are set by the public sector in the partnership agreement.

Aspect Privatization Public Private Partnership

III. PPP VS. PRIVATIZATION

The following scheme depicts the major differences between PPP and privatization over several aspects [33]

:

[33] Higher Council for Privatization

23


IV. APPLYING PPP IN LEBANON

A.

The role of the private sector in public-private partnerships lies primarily in rendering the services previously catered through the public sector more efficiently in terms of cost-quality trade-off. The following section highlights the areas of improvement brought upon by the private sector when mandated to undertake and/or manage public services:

Underlying Rationale

1) Enhancing Efficiency

Given the more expensive borrowing and transaction costs borne by the private sector when compared to those of the government, the service provider in a PPP contract has interest in improving efficiency both in terms of time and cost throughout the stages of the contract. This can be achieved through a set of methods including: the adoption of higher construction standards, more frequent maintenance, and investments in cost-saving technologies. The private sector operator in a PPP scheme looks to bringing the asset into operation the soonest possible in an attempt to partly finance construction costs from early income generation. As far as maintenance is concerned, the private sector tends to more frequently perform maintenance works on the asset in order to prolong the asset’s life, while on the other hand, the public sector opts to compromise maintenance works in times of financial constraints and austerity. Said facts are supported by statistics showing that 30% of public sector infrastructure projects adhere to the budget and to the time deadline as compared to an excess of 75% rate for PPP projects [34]

It is imperative for the private sector operator in a PPP agreement to render the assigned service to the concerned community and government more efficiently without jeopardizing service quality.

. However, there is no clear evidence, according to market experts, that PPP schemes present greater value for money over public sector projects. Short-term contracts work to the benefit of the government since they can be reviewed, changed and renewed at better terms, when on the other hand, long-term contracts benefit private contractors who tend to act like a monopoly. More particularly, long-term contracts tend to erode competition and increase the expertise and know-how of the private sector contractor.

2) Limiting Corruption One of the main challenges dealt with when it comes to PPP is corruption. As a matter of fact, PPP is considered as a method of fighting corruption that prevails in the public sector, with private entities assigned the management aspect of the operations, the thing which assures a closer monitoring and better control. On the other hand, corruption can be witnessed when a PPP project is under study, particularly when public companies are intentionally undervalued in a bidding process and sold at less than fair market value in deals that involve private ownership of the asset such as BOO contracts. Furthermore, the lack of transparency (unreliable accounting and financial data as well as illicit practices) is one of the recurring problems seen in many nations which hinders the transfer of the public asset to the private sector in certain forms of PPP schemes, and shakes investors’ confidence in the reliability of the information gathered. The risk of corruption gets higher when the related public and private parties in a PPP contract are from the same political, social, or ethnic group, and fears of monopoly can arise in some cases. To address corruption issues, regulatory authorities and anti-corruption agencies have been established in many countries to monitor the activity of most sectors and avoid any abusive practices or breach of the rules of competition [35]

.

[34] Hodge and Greve 2007, [35] United Nations – General Assembly – A/RES/51/191 – U.N. Declaration against Corruption and Bribery in

International Commerce Transactions

24


B.

1) Public-Private Partnerships in the Telecommunications Sector

Past and Existing PPP Agreements

Lebanon’s mobile phone network dates back to March 1993 at a time when the Lebanese government launched a tender bid auction to embark on Global System for Mobile Communications (“GSM”) services in the country. Nearly one year later, two ten-year Build-Operate-Transfer (“BOT”) contracts were awarded to France Telecom Mobile Liban (a joint venture between the French FTMI (67%) and the Mikati Group (33%)) and LibanCell (86% owned by the Dalloul Group and 14% owned by a Finnish operator) to build and run Lebanon’s two mobile phone networks, namely Cellis and LibanCell. Both BOT agreements with the government called back-then for a 50% profit sharing scheme during the term of the agreements.

a- The Cellis and Libancell Timeline [36]

[36] The Lebanese Ministry of Telecommunications, Higher Council for Privatization, Cellis, LibanCell, Reuters, Zawya, EIU, IMF, S&P

25

Year 2000

The Lebanese government accused both cell phone companies of exceeding by far the 250,000 maximum subscriber base stipulated in each of their BOT contracts.

Cellis and LibanCell’s offer to the government consisted of converting their 10-year BOT contracts into 20-year licenses against some $1.35 billion each.

Year 2001

Cancellation of the BOT agreement of LibanCell and Cellis with the Lebanese government.


26

December

Year 2002

A year following the government’s cancellation of the BOT contracts for both mobile phone operators, LibanCell and Cellis, on the back of legal disputes, Cellis and LibanCell both claimed for compensation of $1 billion from the government, accounting for anticipated foregone profits and total investment cost.

The government offer consisted of either a bid for two 20-year mobile phone licenses or an international tender to manage the two existing GSM networks.

According to the Higher Council for Privatization, bidders should have a subscriber base exceeding 350,000 subscribers each coupled with a minimum of 5 years of experience in the mobile networks’ management.

Given that the BOT contract stipulates that all mobile phone networks’ equipment and investment are to be returned to the government on the date of the contract’s expiration or termination, the decision was to compensate Cellis for the forfeited profits. It is worth highlighting that the government has collected some $1.5 billion in revenues from the telecommunication sector since the year 1994.

The Lebanese government invited local and international telecommunication companies to participate in the tender bids for the existing mobile networks.

The Lebanese Telecommunications Ministry extended its management contract with LibanCell and Cellis for an additional five-month period, in order to prepare the infrastructure for the sector’s privatization.

The extension of the privatization term of both operators cost the government a total of $15 million so both operators are able to run the networks. In addition, the Ministry of Telecommunications accepted to bear 70 percent of the costs associated with upgrading both cellular networks.

The operating contract between the Lebanese government and the existing GSM networks, LibanCell and Cellis, has been extended till the 30th of June, 2003.

According to the Lebanese government, the firms willing to acquire the licenses to run the LibanCell and Cellis networks will be required to sell 50% of their shares in their domestic operations divided as such:

• 40% sold to the public • 10% sold to the National Social Security Fund (NSSF).

The Lebanese government expected privatization proceeds of the two mobile networks at $3 billion in 2003.

Merrill Lynch expected the privatization plan to be finalized in April 2003, followed a month later by the awarding of the licenses.

The International Monetary Fund (IMF) tied Lebanon’s economic prosperity to the implementation of the “large-scale privatization program”.

Year 2003 - 1st Quarter

January

February

March


27

Lebanon’s Ministry of Telecommunications unveiled the names of the international bidders for the licensing of LibanCell and Cellis: • LibanCell - Lebanon • Orange - France • OTE - Greece • MTC - Kuwait • National Mobile Telecommunications Wataniya Telecom - Kuwait • Investcom Holding S.A - Luxembourg The Lebanese government was expecting up to $3 billion in telecommunications sector privatization proceeds, against some 40% of annual revenue sharing.

The list of the international mobile phones companies previously announced by Lebanon’s Ministry of Telecommunications shriveled down to five names. This came as a result of the withdrawal of the two Kuwaiti firms (MTC and WataniyaTelecom) from managing the two mobile networks for a fee.

Lebanon’s Ministry of Telecommunications stated that LibanCell and Cellis’ revenues increased by 6% after the termination of their BOT agreements. Concurrently, government’s share of revenues recorded an increase of $20 million. Telecommunications Minister communicated the drafting of a new law that calls for the formation of two state-owned joint stock companies which will own and manage the networks, assets and contracts of both mobile phone networks, LibanCell and Cellis. This law was set to be finalized before the tender bid privatization which was scheduled for May 2003.

Due to the regional political instability, the Higher Council for Privatization delayed the award of LibanCell and Cellis’ new licenses till end of June 2003, from a previously scheduled date set for April 2003.

Year 2003 – 2nd Quarter

April

June

May


28

The Lebanese cabinet approved the telecommunications Minister’s plan to create two independent companies that will run LibanCell and Cellis on behalf of the government, in the event of a failure to secure a fair market price from the auction. Besides the Minister’s plan, telecommunication experts revealed that securitization is another possible alternative for the government that could generate up to $5 billion in revenues if applicable.

Network management contracts for LibanCell and Cellis were extended for an additional four months extended between September 2003 and January 31, 2004 in light of the government’s decision to delay the privatization of the sector till 2004. Each of the two mobile companies was to receive $7.5 million in management fee per month.

The Lebanese Higher Council for Privatization decided to launch a two-month review period vis-à-vis the sector’s privatization, during which bidders will have access to the financial statements of the two mobile phone companies before finalizing their bids.

The international rating agency Standard & Poor’s warned in its Bank Industry Risk Analysis update on Lebanon of the possible repercussions associated to delaying the privatization and securitization of public sector enterprises on the profitability of Lebanese commercial banks.

The auction tender is expected to start on the first of October 2003 and to be completed within a four-month period following the renewal of the management contracts for both LibanCell and Cellis until the end of January 2004.

London-based renowned rating agency, “Fitch”, highlighted the importance of accelerating the privatization process, a pre-requisite condition set by international lenders for refinancing part of the country’s debt at cheaper rates as pledged during the Paris II summit.

The Economic Intelligence Unit (“EIU”) stressed on the government’s options to securitize revenues of state-owned enterprises, which could raise up to $8 billion from the securitization of the proceeds of the telecommunications sector over the coming 20 years.

Both the International Monetary Fund (“IMF”) and Standard & Poor’s (“S&P”) warned of the negative impacts of the delays in the privatization of the telecommunications sector on interest rate levels, economic growth and the country’s sovereign ratings.

Year 2003 – 3rd Quarter

September

July


29

According to its 2004 outlook report on Lebanon, the international financial institution JP Morgan associated the delays of the privatization and securitization plans to the political instability and the lack of a well-defined strategy by the government to launch the pledged reform measures.

The international bidders, apart from LibanCell and Investcom Holding S.A. (Luxembourg), withdrew from the tender auction for Lebanon’s mobile phone networks.

Consequently, officials expected the tender bid for the licensing to generate a maximum of $1.2 billion at a time when the Lebanese authorities envisaged up to $3.2 billion.

The Telecommunication Minister invited international players to participate in a tender to manage the two mobile phone networks, LibanCell and Cellis. Once concluded, the auction was expected to save some $3 million in management fees per month to the government, compared to a then-applicable monthly fee of $15 million paid to LibanCell and Cellis.

Willing applicants in the new tender bid should have a subscriber base exceeding 500,000 subscribers.

As reported by the Lebanese Telecommunications Ministry, the Italian firm “Telecom Italia Mobile” had presented the highest bidding price for the Cellis network against $314 million, while the French “Orange” offered the highest price for running the LibanCell network against $331.35 million over a four-year period. It is worth noting that the tender prices came 25% - 30% lower, on average, than the then-prevailing monthly fees of $7.5 million for each network.

Year 2004 – 1st Quarter

January

February

March

The Lebanese Ministry of Telecommunications publicly announced the names of the two mobile phone operators that were awarded the management licences for LibanCell and Cellis for a period of four years are Kuwait’s Mobile Telecommunication Company (MTC) and the German Detecon. More precisely, Detecon which offered the lowest bids for both networks, has chosen the Cellis network against a total management fee of $201 million over four years (i.e. $4.2 million/month), while the Kuwaiti MTC will operate the LibanCell network for a total of $209 million (i.e. $4.4 million/month). This is translated into savings of 46% for Lebanon, considering the two LibanCell and Cellis management contracts of $7.5 million per month each.


April


b- The Alfa and MTC Timeline [37]

[37] The Lebanese Ministry of Telecommunications, Higher Council for Privatization, Alfa, MTC Touch, Zain, Orascom Telecom Holding, Reuters,

Zawya

30

The Lebanese government awarded Zain, a pioneer of mobile telecommunications in the Middle East and Africa, a 4-year contract – effective June 1st – to manage and further develop the country’s Mobile Interim Company 2 – MIC2 network, which was later renamed MTC Touch in November 2004. Zain had pledged to expand MTC Touch’s number of subscribers to some 1.2 million. Said agreement was a bridging measure until the privatization of the telecommunication sector materializes.

The Lebanese government awarded Fal Detecon Telecommunications, a consortium between the Saudi Arabian FAL Holdings Arabia Co. Ltd and the German Detecon International GmbH, a 4-year contract to manage the Mobile Interim Company 1 – MIC1 network based on the lowest bid selection during a tender auction. The new operator’s vision consisted in "retaining mobile market leadership in Lebanon” and this through maximizing the network’s revenues and providing a wide array of innovative telecommunication services at very competitive rates.


June

April

The Lebanese Government was looking to privatize the country’s two mobile networks (MTC Touch & Alfa) under the umbrella of a new company named Liban Telecom Company. The telecom sector was back-then the second largest source of income to the Lebanese government after the VAT, exceeding $1 billion in revenues annually.


March

Qatar Telecommunications Co. (Qtel) revealed its interest in bidding for a stake in one of Lebanon’s two mobile networks (MTC Touch & Alfa) in an endeavor to expand its foothold in the MENA region. Emirates Telecommunications Corp. (Etisalat) had also expressed its eagerness to participate in the tender auction in bidding for a stake in one of Lebanon’s two mobile networks. Nevertheless, Lebanon’s Industrial Association and the General Labor Confederation deemed political stability, transparency and accountability as crucial factors for any privatization success. Moreover, the Association also commented that the privatization of the telecommunication sector could not materialize without the consent and full control of the Telecom Regulatory Authority (TRA). The Lebanese Government expected back-then to raise up to $7 billion from the securitization of the proceeds of the telecommunications sector.

The Higher Council for Privatization (HCP) and the Telecommunications Regulatory Authority (TRA), which consists of an independent public institution assigned to liberalize, regulate, and develop telecommunications in Lebanon, announced that a PPP bidding process was about to take place on February 21st, 2008. Willing bidders were supposed to submit offers in multiple of $5 million. The bidding process consisted of awarding two companies a 20-years license to own, operate and expand (a PPP contract) the two existing mobile networks, MTC Touch and Alfa. The scheme opted to lower mobile service rates, with the securitization proceeds channeled towards reducing the country’s public debt.

Year 2007 – 4th Quarter

December

November


31

Lebanon’s Ministry of Telecommunications has extended Zain’s management contract of MTC Touch mobile network by another year, and awarded Orascom Telecom a license to manage the Alfa network effective as of February 2009. This comes after the termination of the ministry’s previous contract with Fal Dete Telecommunication. Orascom Telecom is a leading international telecommunications company operating GSM (Global System for Mobile Communications) networks in the Middle East, Africa and Asia. The Ministry of Telecommunications awarded Orascom Telecom the license to manage the Alfa network based on a lowest bid selection during a tender auction, and this against an annual management fee of $145 million over a renewable one year period. The remuneration of Orascom Telecom comprises a monthly payment of $2.5 million in addition to a revenue sharing formula on the basis of 8.5% of Alfa turnover. The terms of the PPP agreement imposed certain covenants on Orascom Telecom including the reduction of mobile rates and increasing the number of subscribers form 600,000 to one million by the end of 2009. Said covenants, bound by a set of penalties, aimed at making the mobile network more appealing and valuable for privatization. The MTC Touch and Alfa licenses are a stop-gap tool, pending the sector’s privatization.


January


September

A third mobile network under the denomination Liban Telecom was expected to join Alfa and MTC Touch.

The operating contract between the Lebanese government, Orascom Telecom and Zain has been extended for another one year term, maturing on the 1st of February, 2012. Privatization of both mobile networks, Alfa and MTC Touch, has been postponed yet again on the back of the local and regional political squabbling.


February

Lebanese Internet Service Provider (ISP) and Cedarcom, the alternative Broadband Wireless Data Provider in Lebanon which provides a breadth of data communication and access solutions to the local industry, are suing the two mobile networks, MTC Touch and Alfa, for monopolistic practices which erode competition.


May

The Lebanese Telecommunications Ministry extended its management contract with Orascom Telecom for an additional year ending February 1st, 2011, in order to allocate more time for the operator to expand Alfa’s network to new regions and to broaden Alfa’s line of services especially with the introduction of the third generation mobile communication (3G) application.

The management contract of Zain was renewed for an additional year ending February 1st, 2011. This renewal will allow Zain to upgrade MTC Touch’s network to HSPA+ (High Speed Packet Access) by the end of 2011. After 6 years of managing one of Lebanon’s two mobile networks, Zain had successfully expanded MTC Touch’s network to more than 1.5 million subscribers, controlling some 52% market share.


February

March


Profac SLI Holding s.a.l. Profac BRK Holding s.a.l. Al Qantara Holding s.a.l.

Nassib El-HusseiniSNC Lavalin Canada

LibanPost

50% 17% 33%

c- The Postal Code System - The LibanPost Timeline [38]

The chart below sketches the organizational structure of LibanPost upon company formation:

[38] LibanPost, Lebanon Opportunities

32

Following the end of the civil war, the Lebanese government embarked on the rehabilitation and modernization of the country’s public institutions. Said plan included the assignment of a private operator to manage the national postal services. The Lebanese government signed a 15-year Build-Operate-Transfer (BOT) contract with ProFac Management Group, an SNC-Lavalin joint venture, in partnership with Canada Post International (through LibanPost) with the purpose of rehabilitating, modernizing and operating Lebanon’s postal service as well as contributing to the installation of Lobby Mail Boxes. The consortium was granted $281,000 as foreign aid from the Canadian government to help retain the postal service project. Mr. Nassib El-Husseini was mandated by Canada Post and SNC-Lavalin to consult on the project, and became chairman of the new postal service, named LibanPost. The investment cost for the development of a universal postal service in Lebanon was estimated at $20 million back then in a first stage according to market estimates.

Year 1998

ProFac Management Group (an SNC-Lavalin joint venture) and Canada Post International withdrew from the LibanPost venture as a result of disputes with the government over the terms of the BOT agreement and were replaced by Lebanon Invest as the new shareholder. During the short history of nearly four years since the inception of the joint-venture, the entire country (1 million delivery points) has been postal coded using GIS Technology. LibanPost managed to house a postal counter network comprising 47 corporate offices labeled LibanPost.



33

Lebanon Invest sold its stake in LibanPost to Investcom, a leading telecommunications group owned by the Lebanese Mikati family. LibanPost had accumulated losses since the year 1998 aggregating to around $12 million up to May 2002, prior to the beginning of the new BOT mandate with Investcom.

Year 2002

During the Investcom mandate, and up until today, LibanPost has managed to extend its foothold all over the Lebanese territory to include 71 postal counters. The company has succeeded in broadening its array of products and services to include postal and Xpress services, government and non-government services, vehicles services, financial, and corporate mail related services, insurance services, as well as packaging products, internet and telecommunication products (prepaid cards and others), tourism products (post cards, tourist guides, books, etc.), stamps, and others. LibanPost went on further to provide online services for its customers, enabling them to shop online at competitive rates, and this in collaboration with DHL and Borderlinx.

Year 2011 – 4th Quarter

October


0

500

1000

1500

2000

2500

Average Demand

Average Demand During

Summer

Excess Demand During Summer

Average Capacity and

Imports

2100

2450350

1500

Electricity Demand Spike During the Summer Season in 2009

MW

C.

1) The Electricity Sector

Viable Candidates

a. History

The 15-year civil war has had devastating effects on Lebanon’s infrastructure, inflicting as such crippling damages to Lebanon’s various public sector enterprises including the electricity sector. In addition, the recurrent Israeli aggression on Lebanon’s power stations, as in the years 1996 and 2006 for instance, has further rubbed salt into the wounds of an already ailing power sector. Accordingly, the Lebanese governments’ investments in the electricity sector in the post civil war period were particularly geared towards refurbishing already inflicted damages, the thing which crowded out investments for upgrading the network, leaving as such residents to suffer from severe power outages and prompting them to seek alternative backup arrangements such as power generators, uninterrupted power supplies (“UPS”), etc.

b. Current Problems

i. Supply Gap Lebanon’s electricity sector suffers at present from serious supply shortage relative to the growing demand. This problem is further aggravated during the summer seasons when the supply gap widens on the back of an increased demand for electricity, coupled with a relatively reduced supply. More particularly, and during the year 2009, average capacity including the purchase of electricity from Syria and Egypt stood at some 1,500 MW (Mega Watts), while average demand reached some 2,000-2,100 MW before burgeoning to 2,450 MW in the summer season, propelled mainly by the increased demand for air conditioning. Supply of electricity on the other hand, remains relatively stable, owing mainly to the limited investments made by the government in Electricité Du Liban (“EDL”) ($1.6 billion over the 1992-2009 period of which a shy $50 million over the 2002-2008 period). Overall, demand for energy for the year 2009 rose by 7% on an annual basis to 15,000 GWh (gigawatt hours) while total production and purchases of electricity attained 11,522 GWh (6% annual growth over the year 2008) implying a supply deficit of 3,478 GWh (23%). It is worth highlighting, in this perspective, that the Lebanese government has opted to import power from Syria and Egypt to counter for the electricity supply gap. More particularly, and during the year 2009, Lebanon purchased some 589 GWh from Syria and 527 GWh from Egypt at respective average prices of 0.13$/kWh and 0.11$/kWh. The following charts capture demand and supply of electricity during the year 2009 [39]:

[39] Ministry of Water and Energy – Policy Paper for the Electricity Sector

34


02000400060008000

10000120001400016000

Total Demand for Electrcity

Total Production and Purchases of

Electricity

Electricity Supply Gap

15,000

11,5223,478

Electricity Supply Gap in GWh in 2009

GWh

Country

Population (in million)

Energy Production (in Mtoe a )

Net Imports (in Mtoe)

Total Primary Energy Supply

(in Mtoe)

Total Primary Energy

Supply/Population (in toe b /capita)

Electricity Consumption

(in Terawatt Hour)

Electricity Consumption/Population

(in kWh c /capita)

World 6,761 12,292 - 12,150 1.80 18,456 2,730

OECD 1,225 3,807 1,644 5,238 4.28 9,813 8,012

Non-OECD Europ 335 1,645 (580) 1,050 3.14 1,407 4,200

China 1,338 2,085 305 2,272 1.70 3,545 2,648

Asia 2,208 1,310 203 1,459 0.66 1,637 741

Latin America 451 751 (188) 540 1.20 850 1,884

Africa 1,009 1,133 (452) 673 0.67 566 561

Middle-East 195 1,561 (951) 588 3.03 638 3,278

Bahrain 0.79 17.55 (5.58) 9.47 11.97 10.78 13,625

Iran 72.90 349.78 (132.12) 216.20 2.97 167.69 2,300

Iraq 28.95 119.64 (86.75) 32.17 1.11 33.22 1,148

Jordan 5.95 0.29 7.50 7.45 1.25 12.49 2,099

Kuwait 2.80 130.24 (98.58) 30.17 10.80 46.60 16,673

Lebanon 4.22 0.17 6.67 6.63 1.57 13.14 3,110

Oman 2.85 67.20 (51.03) 15.06 5.29 15.52 5,457

Qatar 1.41 139.95 (115.07) 23.82 16.91 23.04 16,353

Saudi Arabia 25.39 528.38 (371.80) 157.85 6.22 199.12 7,842

Syria 21.09 23.58 (2.82) 22.50 1.07 31.32 1,485

United Arab Em 4.60 168.80 (93.21) 59.59 12.96 79.54 17,296

Yemen 23.58 15.22 (8.00) 7.56 0.32 5.11 216

a: Million Tons Of Oil Equivalent

b: Ton Of Oil Equivalent = 10 kilocalorie

c: Kilowatt Hour

Source: International Energy Agency, Credit Libanais Economic Research Unit

Key Energy Indicators For The Year 2009

In the same context, the International Energy Agency (“IEA”) unveiled in its “Key World Energy Statistics 2011” report published in early October 2011 that Lebanon produced around 0.17 Mtoe (million tons of oil equivalent) of energy during the year 2009, while net energy imports amounted to 6.67 Mtoe. In addition, the report stated that Lebanon had a total electricity consumption of around 13.14 terawatt hour during the year 2009, corresponding accordingly to a level of 3,110 kWh/capita (kilowatt hour/capita), below the Middle East region’s average of 3,278 kWh/capita [40]

.

[40] International Energy Agency

35


Industrial26.25%

Residential38.12%

Commercial and Public Services

16.75%

Other18.88%

Breakdown of Energy Demand in the Year 2008

Thermal Power Plants

91.65%

Hydraulic3.33%

Imports of Energy5.01%

Sources of Energy in the Year 2008

It is worth noting in this perspective, and according to International Energy Agency (“IEA”) statistics, that the bulk (91.65%) of domestic energy supply was provided by thermal power plants in the year 2008 namely the Zouk, Jieh, Beddawi and Zahrani power plants, with the remaining energy supply contribution provided by hydraulic power plants (Litani and Nahr Ibrahim) and imports of energy from Syria and Egypt. This is further depicted by the following pie chart [41]:

Source: International Energy Agency

Statistics released by the IEA also reveal that the majority of demand for electricity was allocated to residential (38.12%) and industrial (26.25%) facilities during the year 2008 as outlined by the chart on the following page:


[41] International Energy Agency

36


Zone

Residential & Commercial

Public Buildings

Industrial & Agricultural

Administration, Public Lighting & Municipalities

Total

Beirut 161,012 404 941

Antelias 148,492 154 1,464

Chiah 218,276 167 815

Bikfaya 62,467 170 257 810 63,704

Jounieh 115,158 287 394 1,070 116,909

Zgharta & Batroun 50,741 80 65 832 51,718

Halba 45,859 114 57 603 46,633

Baalbak 40,007 50 228 689 40,974

Chtoura 30,925 38 162 413 31,538

Jeb Jannine 25,265 46 34 404 25,749

Nabatieh 2 20,572 38 9 380 20,999

Sour 72,849 125 365 868 74,207

Nabatieh 1 57,221 47 290 792 58,350

Saida 64,962 150 613 904 66,629

Aley & Beit Eddine 108,536 119 800 1,214 110,669

Total 1,222,342 1,989 6,494 11,161 1,241,986Source: Ministry of Energy and Water

2,182 533,907

in $ Million 2009 2010Beirut/Chiyyah/Antelias 476.29 497.71Mount Lebanon 109.25 115.49North 20.17 22.02Bekaa 49.49 53.2South 21.56 23.35Total Revenues 676.76 711.77

Breakdown of EDL's Revenues by Region

Beirut/Chiyyah/Antelias69.93%

Mount Lebanon16.23%

North3.09%

Bekaa7.47%

South3.28%

Regional Breakdown of EDL's Revenues in the Year 2010

A regional breakdown of Electricité Du Liban’s customer base as at August 2010 reveals a heavy concentration (around 42.99%) in the Greater Beirut region, followed, and at a remote distance, by the Jounieh area (9.41%) and the Aley & Beit Eddine area (8.91%) [42]

.

The table below highlights EDL’s revenues by region during the 2009-2010 period. More specifically, the bulk of revenues (around 69.93%) emanate from the Beirut/Chiah/Antelias region, further reiterating the high concentration of EDL’s client base in the Greater Beirut area [43]

.

ii. Cost Structure

Another major impediment to the EDL relates to the company’s variable cost structure, which is dependent on global oil prices, with respect to the fixed tariff structure when it comes to pricing, this latter being pegged to the historically low oil prices. More particularly, the average cost of electricity in the year 2009, including fixed costs, stood at some LBP 255 per kilowatt hour, of which a sizeable LBP 162.36 per KWh (62.84%) was allocated to cover the expensive fuel bill with the remainder representing the cost of generation, transmission and distribution of electricity. It is worth noting, in this perspective, that the fuel cost for producing energy in Lebanon’s thermal power plants varies between 0.117$/kWh (Deir Amar power plant) and 0.262$/kWh (Baalbeck power plant). In the aggregate, EDL’s fuel bill

[42] Ministry of Energy and Water, [43] The Executive Magazine

37


Fuel Cost 62.84%

Generation, Transmission

and Distribution

Costs 37.16%

Breakdown of EDL's Costs in 2009

LBP Per KWh USD Per KWh

First 100 Kilo Watts 35 38.5 0.0255

Next 200 Kilo Watts 55 60.5 0.04

Next 100 Kilo Watts 80 88 0.0584

Next 100 Kilo Watts 120 132 0.0875

Above 400 Kilo Watts Increment 200 220 0.146Source: EDL, Credit Libanais Economic Research Unit

Rate Including 10% VATRate LBP per KWhConsumption Tranche

totaled some $1,450 million in the year 2008 before easing to $1,165 million in the year 2009 at a time when oil prices plummeted amid the global recessionary environment and world financial crisis. The following pie chart depicts the breakdown of EDL’s cost structure in the year 2009 [44]

:


EDL’s tariff structure varies in accordance with electricity consumption tranches as outlined in the table below. Said tariff structure is considered fixed in the sense that it has no correlation whatsoever with fluctuating global oil prices. Accordingly, any increase in oil prices will trigger an increase in EDL’s variable costs and eventually magnify the company’s losses, given that the tariff structure will remain unchanged [45]

.

As revealed by the table above, the breakeven point for EDL was far from being reachable even for excess consumption above the 400 Kilo Watt mark, given the substantially high average electricity production cost, which stood at LBP 255 per KWh in the year 2009. In a more detailed sense, and as depicted by the chart on the following page, the EDL tariff is considerably lower than the electricity production cost for the majority of Lebanon’s power plants, except for hydro plants which account for a small and inconsistent form of Lebanon’s overall energy production [46]

.

[44] International Energy Agency, [45] Electricité Du Liban, [46] Hamdan and Hajar, Evaluation of the Energy Policy for Lebanon

38


909981

1,612 1,4981,192

759

18.73%16.90%

23.03%

17.78%

14.17%

13.40%

11.5% 11.7%

16.2%

13.2%

10.5% 11.7%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2006 2007 2008 2009 2010 July-11

EDL Support

EDL Support/total revenues and resources

EDL Support/total expenditures and withdrawals

Millions of USD

Evolution of EDL Support as a Percentage of Fiscal Revenues and Fiscal Expenditures

Source: Hamdan and Hajar, Evaluation of the Energy Policy for Lebanon

Consequently, EDL posted recurrent losses which increased substantially over the past couple of years in light of the frantic rally in the prices of oil. This has necessitated continuous interventions by the Lebanese government to finance EDL’s working capital needs and provide the company with a liquidity buffer in the form of periodical government transfers. Said transfers, however, became a huge burden on government finances and aggravated the recurrent budget deficits. The following chart highlights the transfers of the government to EDL, as well as their contribution to total revenues & resources and total expenditures & withdrawals over the 2006-June 2011 period [47]

:

Source: Ministry of Finance, Credit Libanais Research Unit

As illustrated above, the government spent an astounding $6.887 billion in support to EDL during the 2006-July 2011 period, yet the company still suffers from supply shortages and lack of operating

[47] The Lebanese Ministry of Finance

39

Power Plants Production Cost vs. EDL Tariff Structure


1.45%

6.05% 6.37%7.31% 7.41%

8.40%

10.89% 11.04% 11.53% 11.90%

14.13%15.00%

16.10%

23.68%

25.42%

Bahrain European Union

Iraq UAE Saudi Arabia

World Africa Egypt Kuwait Middle East

Jordan Lebanon Morocco Syria Yemen

Technical Distribution Losses as a % of Total Domestic Production in 2008

efficiency. It is worth noting that in 2008 alone, government support to EDL reached $1.612 billion (23.03% of total revenues and resources) on the back of skyrocketing oil prices which peaked at $147.27 per barrel on July 11, 2008. Government support to EDL constituted some 18.73% and 11.5% of total revenues & resources and total expenditures & withdrawals in the year 2006, before peaking at 23.03% and 16.2% in the year 2008 and leveling at a lower yet hefty 13.40% and 11.70% as at July 2011 on a respective basis.

In a related context, Eléctricité de France and the World Bank recently estimated the “cost of energy not supplied” at around $2.5 billion in Lebanon in the year 2009, out of which $1.3 billion is cannibalized by private power generators and $1.2 billion for direct consumer losses [48]

.

iii. Losses

Another significant issue currently facing EDL that needs to be addressed imminently is the substantial size of losses incurred during the transmission and distribution of electricity. Losses are generally classified into two main categories, technical losses and non-technical losses. According to the definition of the World Bank Group, technical losses “occur naturally and consist mainly of power dissipation in electricity system components such as transmission and distribution lines, transformers and measurement systems”. Non-technical losses, on the other hand, “are caused by actions external to the power system and consist primarily of electricity theft, non-payment by customers and errors in accounting and record-keeping” [49]

Lebanon’s electricity transmission and distribution losses are estimated at 40% of electricity production in the year 2008, broken down into technical losses (15%), non-technical losses (20%) and uncollected bills (5%).

.

Technical losses in Lebanon stem mainly from the awry condition of the aging and poorly maintained Lebanese power plants. According to the International Energy Agency (“IEA”) statistics, Lebanon ranked 12th among 19 covered countries in the MENA region in terms of percentage of distribution losses out of total domestic supply in the year 2008, and trails by quite a distance the Middle East region, Africa, the World, and the European Union as elaborated in the following chart [50]

:

Source: International Energy Agency, Credit Libanais Economic Research Unit

[48] Eléctricité de France and the World Bank, [49] The World Bank Group, [50] The International Energy Agency

40


Country Estimated Non-Technical Losses in

2007PPP per Capita in 2007

India 20% to 40% $2,700

Philippines 3.50% $3,300

Jordan 3% to 5% $4,700

Jamaica 13.20% $4,800

China 10% $5,300

Thailand 0.32% $8,000

Brazil 0.5% to 25% $9,370

Turkey 6% to 64% $9,400

Lebanon 20% $10,400

South Africa 10% $10,600

Venezuela 12.74% $12,800

Russia Around 10% $14,600

UK, Australia and United States

0.2% to 1% > $30,000

Source: AMEU, Lebanese Ministry of Energy and Water, Credit Libanais Economic Research Unit

Lebanon’s non-technical losses, on the other hand, include electric energy lost due to pilferage, tampering of meters, and erroneous meter reading and/or billing. Non-technical losses are considered to be more frequent in developing countries as compared to developed countries where non-technical losses are at very low levels. The following table compares the levels of non-technical losses as a percentage to total production across various countries in the year 2007 [51]

:

As depicted by the above table, and apart from a few exceptions, non-technical losses seem to diminish in countries with a high Purchasing Power Parity (“PPP”) per capita.

It is worth highlighting that in the case of Lebanon, non-technical losses vary across different regions (15% to 78%) and over different provinces (9.6% to 58%) as per the latest reform paper prepared by the Lebanese Ministry of Energy and Water dated June 2010. Similarly, collection rates vary between 83% and 97% across Lebanese provinces and between 62% and 97.5% across Lebanese regions as of year 2010 statistics.

Previously uncollected bills also constitute another important aspect of the losses suffered by EDL. According to Lebanon’s Ministry of Energy and Water, arrears and uncollected bills, which constituted some 5% of total production in the year 2008, surpassed the $1.3 billion mark by the year 2010, 75% of which was allocated over the private sector with the remaining 25% representing the share of the public sector, Palestinian camps and frontier villages of total uncollected bills.

[51] AMEU, The Lebanese Ministry of Energy and Water

41


16.5

11.1 11.79.9

7.7

5.4

0.56

1.8

2.2

0

2

4

6

8

10

12

14

16

18

Installed Capacity

Actual Generation

Capacity

Import of Energy

Total Production and

Purchases

Distributed Power

Billed Power

33% of Energy Lost Due to UnavailableProduction Units

15% inTechnical Losses

18% inNon-Technical Losses, 4% Unpaid Bills

In Billions of KWh

Power Losses Throughout The Production, Transmission & Distribution Phases

The following chart depicts the impact of technical losses, non-technical losses and unpaid bills on the production, distribution and billing of electricity in Lebanon in the year 2008:

Source: Ministry of Energy &Water, Credit Libanais Economic Research Unit

iv. Administrative Structure

The Electricité Du Liban also suffers from a shortage in the taskforce, with the company’s organizational structure noticing 5,027 full time functions, out of which some 63% (3,125) are currently vacant. Furthermore, and according to the Ministry of Energy and Water’s electricity reform plan, the number of total EDL employees has been contracting at an annual rate of around 8%, partly owing to employees reaching their retirement age, with employees’ average age nearing 60 years [52]

.

v. World Bank Report A report published by the World Bank titled “Republic of Lebanon Electricity Sector Public Expenditure Review” and dated January 31, 2008 characterized the electricity sector as being “at the heart of a deep crisis” and a “major drain on government finances”. The report attributed the electricity dilemma in Lebanon to the lack of operating efficiency (the Beddawi and Zahrani power plants are currently operated on gas-oil which is the least economical fuel), failure to add new generation capacity since the installation of two cycle plants in the 1990s, and the prevailing high percentage (15%) of technical losses. The study, which commented that switching fuel at Beddawi and Zahrani is a “high priority”, also suggested that the government should rehabilitate the Jieh and Zouk power plants which together account for around 50% of Lebanon’s power supply, an operation which would cost some $100 million yet can save some $60 million annually over a period of ten years. The report also stressed that EDL should as well strive to trim down the high level of technical losses, indicating that in the event the level of technical losses is dampened from 15% to 10%, some $80-$100 million can be saved. The report also recommended a 99.26% increase in average electricity tariffs, a raise which if coupled with the aforementioned power capacity increase measures, would spare consumers power shortages, blackouts,

[53]

[52] The Lebanese Ministry of Energy and Water, [53] The World Bank - “Republic of Lebanon Electricity Sector Public Expenditure Review”

42


and the cost of alternative power. The report recommended the implementation of the previously mentioned reform steps ahead of any contemplated privatization of the electricity sector.

c. Electricity Sector Reform Plan The Lebanese Minister of Energy and Water, Mr. Gebran Bassil, exposed the Ministry’s ambitious reform plan regarding the electricity sector in a conference held on July 7, 2010 at the UNESCO Palace. According to the Minister, the reform plan revolves around three major strategic pillars, namely resources and demand management, infrastructure, and the regulatory framework. The plan’s initiatives, on the other hand, are geared towards the ten following areas: infrastructure and production, transportation, distribution, energy resources, renewable energy, demand management, tariffs, standards and criteria of distribution among citizens, partnership with Electricité du Liban, and the plan’s legal underpinnings. Moreover, the Minister explained that the reform plan will span over three different time horizons namely a short-term period of one to two years (between 2010 and 2012), a medium-term period of two to four years (between 2012 and 2014), and a long-term period of over five years (for beyond the year 2015) with specific measures applicable during each time horizon. The Minister pointed out that the implementation cost of said plan is estimated at $4.870 billion in the aggregate, out of which $1.550 billion will be financed by the Lebanese government, $2.320 billion will be financed by the private sector, and $1.00 billion to be raised by other governmental and international institutions (mainly the World Bank) in the form of soft loans and donations, with the remaining $1.650 billion to be secured subsequently. This investment in the electricity sector is expected to trim down the $4.4 billion losses projected for the sector for the year 2010 to nearly break-even levels by the year 2014, with chances to start posting gains as of the year 2015. It is worth noting that the electricity sector is projected to register losses of $9.5 billion in the year 2015, had no major reform measures been introduced. The Minister also indicated that the plan will eye investments in alternative energy, namely wind mills and recycled trash, which are expected to contribute to some 12% of Lebanon’s entire power generation as of the year 2014. In addition, the plan perceives 24/7 electricity supply upon full completion of the reform plan. Finally, the Minister outlined that the plan sets a necessary increase in electricity tariffs, yet will spare the citizens the burdensome costs of private generators.

i. Infrastructure (Production, Transmission and Distribution)

On the production front, the plan notices an increase in the installed capacity to 4,000 MW by the year 2014 and 5,000 MW thereafter in order to meet the current load of 2,500 MW (summer 2009), the 500 MW of supply shortage, the 7% annual increase in demand, and a 15% “peak load reserve” [54]

The following section depicts the different steps through which the Ministry of Energy and Water is planning to increase production over the short-term, medium-term and long-term horizons:

.

- Renting some 250 MW (in the form of barges and/or imports from Turkey) to provide a standby capacity for the period during which the existing power plants are being rehabilitated and new power plants are being established.

- Expansion in the installed capacity by 600-700 MW through the use of Combined Cycle Gas Turbine (200 MW – 300 MW) and/or Reciprocating Engines (400 MW – 500 MW), a process that would be financed by the Lebanese government with a possibility of external financing.

- Rehabilitating, maintaining, replacing or upgrading existing power plants in an endeavor to increase their capacity by some 245 MW.

- Establishing new power plants financed in collaboration with the private sector through a Public-Private Partnership scheme. Said project shall be financed by the private sector and by loans from international banks and financial institutions, and aims at increasing capacity by some 1,500 MW by the year 2014 and an additional 1,000 MW afterwards.

- Increasing hydraulic power by 40 MW on the medium-term and by an additional 80 MW for the long term through the maintenance, rehabilitation and/or replacement of existing power plants.

[54] The Lebanese Ministry of Energy and Water – The Electricity Sector Reform Plan

43


From Year

To Year

Barges Lebanese Government 2010 3 110-280 $0.052 per KWh (excluding fuel costs)

Import from Turkey Lebanese Government 2010 3 100-150 $0.1266 per KWhExpanding Existing Power Plants' Capacity Lebanese Government 1 3 600-700 $750 Million-$875 Million

Rehabilitate Zouk, Jieh International Loans 1 5 100 $180 Million

Upgrade Deir Amar, Zahrani Lebanese Government 1 3 75 $108 Million

Add CCGT to Tyr, Baalbeck Lebanese Government 1 2 70 $130 Million

New Power Plants International Loans, Private Sector

0 4 1,500 MW (Additional 1,000 MW Available After 2014)

$1,500 Million (Additional $1,000 Million After 2014)

Hydraulic Power Private Sector/ International Loans

2 5 40 MW (Additional 80 MW on the long run)

$200 Million (Additional $300 Million in the long run)

Wind Power Private Sector 1 3 60-100 $115 Million-$195 MillionWaste to Energy Private Sector 3 4 15-25 $30 Million-$50 MillionSource: Ministry of Energy & Water, Credit Libanais Economic Research Unit

Source of Power Financed byImplementation

Capacity (MW) Estimated Budget

From Year

To Year

220 KV Loop at Mansourieh Lebanese Government 0 1 $1 Million

Infrastructure at KSARA Substation

International Loans 1 2 $20 Million- $30 Million

LENCC International Loans 1 2 $20 Million

Regional Substations Lebanese Government 1 3 $250 Million

Transmission System Expansion International Loans 3 5 $400 Million

Source: Ministry of Energy & Water, Credit Libanais Economic Research Unit

Reform Step Financed by

Implementation

Estimated Budget

- Establishing wind farms via the private sector, the thing which should secure some 60 MW-100 MW of wind power.

- Encouraging the private sector to adopt waste-to-energy technologies, estimated to provide an additional 15 MW-25 MW.

The following table captures the various steps envisaged by the Ministry of Energy and Water and aiming at increasing power production along with respective time frames, projected incremental capacity and estimated budget.

As far as transmission is concerned, the Ministry’s plan strives to reduce the high level of technical losses, remove bottlenecks, and complete a control facility. More specifically, transmission reform revolves around [55]

- Completing the 220 KV loop in Mansourieh, Mount Lebanon, in the year 2010, which is expected to reduce technical losses by more than 1%.

:

- Finishing works at the 440 KV KSARA sub-station in the Bekaa for the purpose of relaying Lebanon to the Arab interconnection.

- Completing the Lebanese Electricity National Control Center (“LENCC”) by the year 2011. - Establishing regional substations to reduce technical losses and remove bottlenecks and expanding the

transmission system to accommodate for the increase in generation capacity.

This is further elaborated in the following table:


44


From Year

To Year

Bidding Process Lebanese Government 0 1 $1 Million

Distribution Network Facilities, AMR and Billing

Private Sector 2 4 $300 Million

Upgrade/Rehabilitate Distribution System

Private Sector 2 4 $50 Million

Program Management Lebanese Government 2 4 $10 MillionMonitoring Center Private Sector 2 4 $30 Million

Distribution Management Center International Loans 2 4 $25 Million


Key Reform Steps Financed byImplementation

Estimated Budget

629-692 621-684 0 1,250-1,375

205 1,670-1,770 1,200 3,075-3,175

130-140 865 450 1,445-1,455

964-1,037 3,156-3,319 1,650 5,770-6,005Source: Ministry of Energy & Water, Credit Libanais Economic Research Unit

Long-Term Total ($ Million)

Lebanese Government

Private Sector

International Loans

Total ($ Million)

Short-Term Medium-TermPlanningHorizon

Financing Party

On the distribution front, the reform plan calls for improving metering, billing, and collection by investing in state-of-the-art, modern and smart systems. This is further detailed in the section that follows [56]

- Equipping the distribution network for the participation of the private sector in the year 2011 through implementing a series of “quick fixes”.

:

- Setting up the “Terms of Reference” and accordingly initiating a bidding process for the selection of Service Providers (“SP’s”) who will be mainly responsible for providing distribution services, improving quality and adhering to Key Performance Indicators (“KPIs”), the thing which will eventually boost revenues.

- Establishing a center that will enable EDL to monitor Automatic Meter Reading (“AMR”) and perform remote connection/disconnection of supply.

- Introducing new services to consumers such as pre-paid cards. - Launching a Distribution Management Center for the Greater Beirut Area at a first stage and other major

cities at a later stage.

The following table highlights the major elements of the reform plan that are related to the improvement of the distribution network:

The following table sketches the contemplated investment in infrastructure over the short, medium, and long run, together with the financing amounts allocated to the private sector, public sector, and international lenders per financing party:

ii. Supply and Demand

The reform plan notices an overhaul in the sources of energy for the electricity sector, namely fuel oil. The plan, however, eyes a 66.66% reliance on natural gas, a 12% dependence on renewable energy sources (wind farms, photovoltaic farms, waste to energy, hydro power) with the remaining portion allocated over various fuel sources, along with the adoption of technologies that allow switching between gas and fuel oil. For this purpose, the plan proposes installing a gas pipeline along Lebanon’s coastline to supply power plants and possibly residential units with natural gas, while simultaneously constructing a Liquefied Natural Gas marine and gradually converting all power plants to operate on gas.


45


35 20 to 30 0 55 to 65

130 to 370 30 to 260 0 160 to 630

0 0 0 0

165 to 405 50 to 290 0 215 to 695Source: Ministry of Energy & Water, Credit Libanais Economic Research Unit

Long-Term Total ($ Million)

Lebanese Government

Private Sector

International Loans

Total ($ Million)

Short-Term Medium-TermPlanningHorizon

Financing Party

Gas, 66.66%

Renewable Energy, 12%

Others, 21.34%

Electricity Sector's Envisaged Sources of Fuel

From Year

To Year

LNG Terminal Lebanese Government & Private Sector 1 3 $70 Million - $550 Million

Gas Pipeline Lebanese Government & Private Sector 1 3 $120 Million


Source of Energy Financed byImplementation

Estimated Budget

From Year

To Year

LCEC/CFL/SWH/Public Lighting Lebanese Government 0 4 $25 MillionSource: Ministry of Energy & Water, Credit Libanais Economic Research Unit

Reform Step Financed byImplementation

Estimated Budget


The plan also stressed on the need to adopt demand-side management, through the implementation of a set of measures that will aid in effective energy use, peak saving, load shifting and demand growth control. Said measures include adopting the energy conservation law, institutionalizing the Lebanese Center for Energy Conservation (“LCEC”), promoting the use of Compact Fluorescent Lamps (“CFL”) and Solar Water Heaters (“SWH”), as well as encouraging the use of energy saving public lighting [57]

.

Finally, the plan highlighted the urge to increase electricity tariffs in an attempt to eradicate the sector’s financial deficit on the one hand and spare citizens, on the other hand, the burdensome cost of alternative power from private generators. The plan, however, notices reduced tariffs for low income brackets, productive sectors and off peak use.

The following table illustrates the requisite investments on the “Supply and Demand” front and the correspondent sources of financing:


46


115 65 0 180

0 0 0 0

0 0 0 0

115 65 0 180Source: Ministry of Energy & Water, Credit Libanais Economic Research Unit

Private Sector

International Loans

Short-Term Total ($ Million)Medium-Term Long-Term

Total ($ Million)

Lebanese Government

PlanningHorizon

Financing Party

810 740 0 1,550 23.77%

455 1,865 1,200 3,520 53.99%

135 865 450 1,450 22.24%

1,400 3,470 1,650 6,520 100.00%Source: Ministry of Energy & Water, Credit Libanais Economic Research Unit

Total ($ Million)Short-Term

Lebanese Government

Private Sector

International Loans

Total ($ Million)

% of Total Contribution

Long-TermMedium-TermPlanningHorizon

Financing Party

Lebanese Government

23.77%

Private Sector53.99%

International Loans

22.24%

Breakdown of Contribution to Electricity Sector Reform Plan by Financing Party

iii. Legal Framework

On the legal front, the Ministry’s reform plan calls for the corporatization of EDL, being the backbone of the power sector, concurrently with the implementation of the aforementioned reforms. More particularly, the plan urges filling vacant functions in EDL through outsourcing contracts (given the company’s severe staff shortage), and stresses on the need to plan and implement the corporatization of the company, while concurrently setting the proper legal platform and preparing EDL for any possible unbundling decision [58]

.

iv. Reform Plan Aggregate Investment Cost

According to the Ministry’s plan, the private sector constitutes the major source of financing for the electricity reform plan, with an aggregate contribution of $3,520 million (53.99% of total investment cost) allocated over the short, medium, and long term horizons, the thing which validates the vital role of the private sector under a Public-Private Partnership scheme. The following section reflects the envisaged investment in the electricity sector over the various implementation phases and the corresponding sources of financing along the investment matrix. Total investment cost is projected to stand at $1.40 billion in the short run, $3.47 billion in the medium run, and $1.65 billion in the long run, thus accumulating to $6.52 billion upon completion of the electricity reform plan [58]

.


47


0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

9,000.00

10,000.00

2009 2010 (proj) 2011 (proj) 2012 (proj) 2013 (proj) 2014 (proj) 2015 (proj)

1,301 1,6912,150

2,6583,218

3,8364,517

1,138

1,479

1,844

2,235

2,653

3,101

3,579

1,500

1,253

1,275

1,321

1,360

1,400

1,441

Cost of Private Generators VOLL Subisidies

3,939

Projected Financial Burden In the Event No Reform Plan is Implmented

4,424

5,269

6,214

7,231

8,337

9,537

USD Million

CAGR: 15.88%

2010 (proj)

2011 (proj)

2012 (proj)

2013 (proj)

2014 (proj)

2015 (proj)

Tariff Rate (USD per KWh) 0.0958 0.0958 0.1006 0.1086 0.1206 0.1375

Annual % Tarriff Rate Increase 0.00% 0.00% 5.01% 7.95% 11.05% 14.01%

Subisidies (USD Million) 1,276.01 1,482.74 1,234.69 1,171.50 672.08 0.00

Economic Losses (USD Million) 2,854.41 1,827.82 2,077.06 980.98 0.00 0.00Total Losses (USD Million) 4,130.42 3,310.56 3,311.75 2,152.48 672.08 0.00


Breakeven Scenario by Year 201543.52% Tariff Rate Increase over 2010-2015

period

v. Financial Repercussions

The ailing condition of EDL, characterized by a high level of technical losses, non-technical losses and unpaid bills, coupled with the deteriorating status of Lebanese power plants, has worsened the financial burden of the electricity sector on the Lebanese economy. Said burden comprises financial losses (subsidies) and economic losses, namely representing the Value of Lost Load (“VOLL”) and the cost of private generators. The following chart sets forth the evolution in EDL’s financial burden on the Lebanese economy over the period 2009-2015, in the absence of any electricity reform plan:

The Ministry foresees a linear increase (CAGR of 15.88%) in financial and economic losses over the 2009-2015 period, from $3.94 billion in 2009 to around $9.54 billion by the year 2015. Accordingly, and in an attempt to counter these losses, EDL is compelled to induce significant incremented tariff increases, reaching 43% over the 5-year period ending 2015, to around $0.1375 per KWh. The Ministry expects, under said scenario, to breakeven in the year 2015 at a tariff rate of $0.1375 per KWh [59]

.

[59] The Lebanese Ministry of Energy and Water

48


2010 (proj)

2011 (proj)

2012 (proj)

2013 (proj)

2014 (proj)

2015 (proj)

Tariff Rate (USD per KWh) 0.0958 0.0958 0.1025 0.1128 0.1274 0.1478

Annual % Tarriff Rate Increase 0.00% 0.00% 6.99% 10.05% 12.94% 16.01%

Subisidies (USD Million) 1,276.01 1,482.74 1,215.93 1,119.45 564.80 -201.07

Economic Losses (USD Million) 2,854.41 1,827.82 2,077.06 980.98 0.00 0.00Total Losses (USD Million) 4,130.42 3,310.56 3,292.99 2,100.43 564.8 -201.1


54.27% Tariff Rate Increase over 2010-2015

period

Profit Making Scenario by Year 2015

The Ministry also studied the outcomes of a more rapid increase in electricity consumption tariff rates over the 2010-2015 period (profit-making scenario), under which it proposes a hike in tariff to $0.1478 per KWh by the year 2015. Said suggested tariff increase, however, would be beneficial for citizens when accounting for cost savings on private generators ($0.5544 per KWh by the year 2015), and would result in profits to EDL in excess of $201 million [60]

.

[60] Hamdan and Hajar, Evaluation of the Energy Policy for Lebanon

49

1,276 1,483 1,235 1,172672

2,8541,828 2,077

981

0.000.100.200.300.400.500.600.700.800.901.00

0500

1,0001,5002,0002,5003,0003,5004,0004,500

2010 (proj) 2011 (proj) 2012 (proj) 2013 (proj) 2014 (proj) 2015 (proj)

Breakeven Scenario Along Increasing Tariff Rate

Subisidies (USD Million) Economic Losses (USD Million)

USD Million

USD per KWh

1,276 1,483 1,216 1,119565

-201

2,8541,828 2,077

981

0.000.100.200.300.400.500.600.700.800.901.00

-5000

5001,0001,5002,0002,5003,0003,5004,0004,500

2010 (proj) 2011 (proj) 2012 (proj) 2013 (proj) 2014 (proj) 2015 (proj)

Profit-Making by Year 2015 Scenario

Subisidies (USD Million) Economic Losses (USD Million)

USD Million

USD per KWh

Negative Losses / Profits


Import of Power

New Power Plants (CCGT/Reciprocating Engine)

Power Plant Rehabilitation

New Power Plants (IPP Modality)

Hydraulic Power

Wind Power

Waste to Energy

380 MW 380 MW 280 MW

325 MW 325 MW

85 MW 85 MW 50 MW 25 MW

1500 MW1000 MW

20 MW 20 MW 80 MW

50 MW 30 MW

10 MW 10 MW

vi. Reform Plan Power Production Grid

The following timeline sketches the tentative power production incremental increases set forth by the Ministry of Energy and Water in its plan dated June 2010 [61]

:

vii. Governmental Approval

The Lebanese government has endorsed on the 7th

of September, 2011 the first implementation phase of the electricity sector reform plan in its amended form. This step calls for reducing energy shortages and this by means of establishing new power plants in an endeavor to increase the installed capacity by 700MW, the bulk of which (63.38%) will be produced by the Beddawi power plant as depicted by the following chart. Said reform plan will cost the government, namely the Ministry of Finance, around $1.2 billion to be transferred in favor of the Ministry of Energy and Water and disbursed over a four-year period. In details, a first installment of $276 million will be made in 2011, followed by a second transfer in 2012 totaling $308 million, a third transfer of $345 million in the year 2013 and a final transfer of $254 million in the year 2014.

1/1/2010 12/30/2016

1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016

Beyond 2015

[61] The Lebanese Ministry of Energy and Water

50


Beddawi63.38%

Zouk25.35%

Jieh11.27%

Geographic Breakdown of Newly Installed Capacity (700 MW)

Source: Ministry of Energy & Water

Moreover, and always on the financing front, the government has an option to finance the reform plan through subsidized loans, or through the issuance of treasury bills in either local or foreign currency. The proper implementation of the plan is expected to cut daily power shortages from an average of 11.33 hours per day to an average of 4.52 hours per day by the year 2013, slashing as such some $1,513 million in private generators’ bills on Lebanese citizens and reducing Value of Lost Load (“VOLL”) by $2,270 million. The government has also considered the formation of a committee chaired by the Prime Minister Nagib Mikati, having as objective to amend electricity law number 462 with regards to the unbundling of EDL into three different companies concerned with the production, transmission and distribution of electricity. The aforementioned committee intends also to establish a regulatory body governing the electricity sector. viii. Envisaged Form of Private Sector Participation The Ministry of Energy and Water is eyeing a Public-Private Partnership form whereby the private sector, and in the form of Independent Power Providers (“IPPs”), assists EDL in power generation through additional power plants in order to dampen and eventually fill the prevailing supply gap. Power generated by said IPPs will then be sold to a Wholesale Purchasing Agency owned by the public sector. The Wholesale Purchasing Agency then transmits and sells the produced energy to Regional Distribution Companies at a price embedding the cost of production and transmission. Regional Distribution Companies will, in their turn, sell energy to their customers, and will be in charge of the metering and billing functions. It is worth highlighting in this perspective that the concept of several Regional Distribution Companies was preferred over that of a single Distribution Company with the aim of improving the metering and collection of said companies. In conclusion, the power generation function will be shared between the public and private sectors, while the transmission function will be solely reserved to the public sector, with the distribution function to be awarded to the private sector P

[62]P.

[62] Kirschen-Strbac Fundamentals of Power System Economics

51


Source: Kirschen-Strbac Fundamentals of Power System Economics, Credit Libanais Economic Research Unit

On the collection and distribution of electricity front, the telecommunications Ministry was discussing a service provider project (“SPP”) through a special committee dedicated for this purpose in the year 2010, in which it was contemplating to divide Lebanon into 15 electricity zones and inviting service providers to participate, through a bidding process, in the collection and distribution areas of the electricity reform plan. More specifically, mandated service providers will be in charge, among other things, of upgrading the existing electricity network design of substations, configuration and new connections to customers, operation and maintenance of meters, setting procedures for meter violations, improving collection and billing efficiency, and enhancing management and periodical reporting to EDL and the Ministry of Telecommunications.

2) The Telecommunications Sector

a. Challenges

Lebanon stands far behind the rest of the region in terms of the array of telecommunication services available to the community. According to experts in the domain, exorbitant fees, bad services, poor governance and lack of an economic perspective and strategy are the main factors hindering the development of the telecommunications sector. In 2010, the mobile market penetration rate in Lebanon stood at around 68% in comparison with a rate in excess of 100% in other parts of the region [63].

[63] Telecommunications Regulatory Authority, International Telecommunications Union (“ITU”)

52

Envisaged Form of Private Sector Participation


232%

186%

166%

142%

120%

106%

105%

96%

94%

68%

63%

52%

0% 50% 100% 150% 200% 250%

UAE

KSA

Qatar

Bahrain

Kuwait

Tunisia

Jordan

Morocco

Egypt

Lebanon

Palestine

Syria

Mobile Penetration Rate in Regional Countries in 2010

Taxes65%

Operating and Commercial

Activities25%

Unbilled Services

10%

Breakdown of Government Revenues from the Telecommunications Sector

Source: Telecommunications Regulatory Authority, Credit Libanais Economic Research Unit

It is worth noting in this perspective that the former Lebanese Minister of Telecommunications Dr. Charbel Nahhas announced in June 2011 that the number of subscribers in Lebanon’s mobile network hit the 3 million mark, as compared to some 2.3 million by year-end 2009, raising as such the mobile penetration rate to around 75%. This owes mainly to the set of incentives and tariff reductions that were offered by the Ministry of Telecommunications over the past two years.

Lebanon’s telecom sector suffers from serious infrastructure problems, with the 14-year old network undergoing minor renovations. The network is government-owned and accordingly its upgrading was mainly hampered by political disagreements and constrained public finances.

Another issue that constrained the development of Lebanon’s telecommunication sector is the fact that nearly all revenues generated from the telecommunications sector are geared towards financing part of the public deficit at the expense of being reinvested in the sector. According to the Minister of Telecommunications, tax revenues from the telecom sector alone amount to $1.2 billion per year. Taxes account for 65% of total revenues from the sector, while the remaining 35% represent operating and commercial activities (25%) and unbilled services (10%) [64]

.

[64] The Lebanese Minister of Telecommunications, Dr. Charbel Nahhas – Lebanese Press

53


37%

73%

64%

90%

100%

100%

63%

27%

36%

10%

0% 20% 40% 60% 80% 100%

E1 Line Provision

Data Services

Internet Services

DSL

GSM Mobile

Fixed

Market Shares in 2010

Private Sector

State

Market Indicators as of end 2010

Penetration Number of providers Private/State-Owned

Level of competition

Mobile Market

68% 2 State-owned Monopoly

Fixed Market 62% 1 State-owned Monopoly Internet Market

31% ~16 Private Competition

Broadband Market

24% ~7 of ADSL and ~16

for wireless Private through MoT Local

Loop/Ogero Limited

Competition

It is worth noting in this perspective that Merrill Lynch anticipated the resumption of the transfer of telecommunication revenues (estimated at $1.5 billion since the end of the year 2009) to the treasury, in the aftermath of the formation of the Mikati government, the thing which would water down Lebanon’s fiscal deficit to GDP ratio for the year 2011 from above 10% to around 8%.

The weak performance of the telecom sector is also associated with the evident monopoly of the public sector, the thing which erodes the benefits of healthy competition. It is worth noting in this perspective that Lebanon ranked last among Arab countries in the Cellular Competition Intensity Index for the year 2011, with a score of 33.80% way below the regional average of 58.14%, according to the Arab Advisors Group. The following chart depicts the market shares of the government and the private sector in several sub-sectors of Lebanon’s telecommunications sector in the year 2010 [65]

:

Source: World Bank, Credit Libanais Economic Research Unit

Source: TRA Facts and Figures, Credit Libanais Economic Research Unit

The aforementioned monopoly coupled with the high taxes imposed by the government position Lebanon among the countries with the highest mobile bills as a percentage of Gross National Product per capita (4.1% for Lebanon compared to 3.2% for Tunisia, 1.8% for Qatar, 1.0% for Saudi Arabia, 0.7% for Bahrain, and 0.6% for Oman) in the year 2009 [66]

. This is further evidenced by the chart on the following page:

[65] World Bank, [66] International Telecommunications Union

54


14.30%

9.90% 9.20%

4.10% 4.10% 3.40% 3.20% 3.20% 1.80% 1.00% 0.70% 0.60%

0.00% 2.00% 4.00% 6.00% 8.00%

10.00% 12.00% 14.00% 16.00%

Mobile Cellular Basket as a Percentage of GNI per Capita in 2010

Source: ITU: Measuring the Information Society 2010, Credit Libanais Economic Research Unit

The above statistics for Lebanon, however, may be misleading today on the back of the aforementioned series of tariff reductions adopted by the Ministry of Telecommunications (“MoT”) in the year 2011, which may position Lebanon more favorably when compared to other countries in the region in terms of the price of a mobile basket relative to income per capita.

Furthermore in this context, the ITU’s “Measuring the Information Society” report published in mid September 2011, ranked Lebanon 8th regionally and 72nd internationally in terms of information & communication technology prices and affordability, reflecting as such Lebanon’s relatively expensive information & communication prices during the 2008-2010 period [67]

.

On a regional basis, the report ranked the United Arab Emirates first among Arab states and 32nd on a global scale with an IDI value of 6.19 for the year 2010, followed by Qatar with a score of 5.60, ranking 2nd regionally and 44th

Although the Lebanese economy is highly dependent on the tertiary sector (around 60% of GDP) added that Lebanon is considered to be relatively advanced when compared to other developing countries, internet services were until just recently viewed to be far below regional standards. This is further reflected by the chart below, which shows that Lebanon’s internet bandwidth per internet user stood at around 1,908 bit per second in the year 2010 as compared to respective internet bandwidths per internet user of 34,135 bit/second for the UAE, 28,252 bit/second for Saudi Arabia and 20,190 bit/second for Qatar.

globally.

[67] International Telecommunications Union

55

Economy

Regional Rank 2010

Global Rank 2010

IDI 2010Global Rank

2008IDI

2008

Global Rank Change

2008-2010United Arab Emirates 1 32 6.19 32 5.63 0

Qatar 2 44 5.60 48 4.50 4

Bahrain 3 45 5.57 42 5.16 -3Saudi Arabia 4 46 5.42 55 4.13 9Oman 5 60 4.38 68 3.45 8Jordan 6 73 3.83 73 3.29 0Lebanon 7 79 3.57 77 3.12 -2Tunisia 8 84 3.43 82 2.98 -2Morocco 9 90 3.29 100 2.60 10Egypt 10 91 3.28 92 2.73 1Syria 11 96 3.05 96 2.66 0Algeria 12 103 2.82 105 2.41 2Yemen 13 127 1.72 127 1.49 0Comoros 14 128 1.67 130 1.44 2Djibouti 15 129 1.66 124 1.56 -5Mauritania 16 131 1.58 126 1.50 -5Source: International Telecommunication Union, Credit Libanais Economic Research Unit

ICT Development Index (IDI) in the Arab Region


34,135 28,252

20,190

13,275 8,120 6,591 6,380 4,901 4,790 3,120 1,908 1,357

0 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000

International Internet Bandwidth per Internet User (bit/s) in 2010

Speed Capacity (GB) Prices (LBP) Speed Capacity (GB) Prices (LBP)

128 kbps 2 35,000 1 Mbps 4 24,000

256 kbps 3 50,000 1 Mbps 10 38,000

512 kbps 4 70,000 2 Mbps 20 75,000

1,024 kbps 5 115,000 4 Mbps 25 115,000

2,048 kbps 8 300,000 6-8 Mbps 30 172,000

Old Scheme New Scheme

Source: Credit Libanais Economic Research Unit

Source: ITU: Measuring the Information Society 2010, Credit Libanais Economic Research Unit

Nevertheless, the Lebanese Cabinet approved in August 2011 a draft bill proposed by the new Minister of Telecommunications Mr. Nicolas Sehnaoui suggesting drastic reductions in internet tariffs. The bill also notices a fourfold increase in internet speeds up to 8 Mbps in comparison with 2.048 Mbps previously as well as large leaps in download capacity. Said changes became effective as of October 2011 and are undoubtedly expected to position Lebanon more favorably from a regional and global perspective in terms of the quality/price matrix of internet services. The following table elaborates in details the changes in the speed/price matrix of internet services between the old scheme and the new scheme:

b. Opportunities

Notwithstanding the challenges Lebanon’s telecom sector is facing, experts have always mentioned the presence of major opportunities of investing in this market, building on the fact that Lebanon enjoys one of the highest GDP per capita in the Levant area estimated at $10,474 in the year 2011. According to a Credit Suisse report dated November 2007, Lebanon’s telecom market demonstrates real opportunities with low penetration rates (68% in 2010 for the mobile market with expectations to reach 95% in 2011 and 140% in 2027 - 62% for the landline market - 31% for the internet market and 24% for the broadband market in 2010).

In addition, and as reflected by the chart on the following page, the Lebanese mobile market is characterized by one of the highest average monthly returns per user (“ARPU”) in the Middle East region, standing at $35.3 for the Alfa network in March 2011 [68]. The Credit Suisse equity research report dated November 2007 valued each of the two mobile licenses in Lebanon at a price in excess of $3 billion and indicated that, despite that privatization will erode fiscal revenues from telecommunications on the short-term, its long-term benefits will be far more significant through the creation of job opportunities [69].

[68] Orascom Telecom First Quarter 2011 Earnings Release, [69] Credit Suisse

56


0 10 20 30 40

Djezzy (Algeria)

Mobilink (Pakistan)

Mobinil (Egypt)

bangalink (Bangladesh)

koryolink (North Korea)

Wind Canada (Canada)

Alfa (Lebanon)

Mobitel (Sudan)

Zain (Iraq)

Zain (Jordan)

Zain (Bahrain)

Zain (Saudi Arabia)

9.7

2.9

4.9

2.1

14.6

30

38.3

10

11

16

27

19

9.4

2.8

4.2

2

12.7

27.4

35.3

Mar-11 Dec-10

Average Revenue Per User (USD)

Source: Orascom Telecom, Zain, Credit Libanais Economic Research Unit

c. Attempts for Reform

On the telecommunications sector front, several partnership proposals that were considered over the past years would have boosted the sector’s performance in the event they had materialized. More particularly, and during the year 2008, a privatization scheme was proposed for the two Lebanese mobile networks “Alfa” and “MTC Touch”, after the Lebanese government adopted the resolution of initiating a tender bid auction for two 20-year second-generation mobile telephone licenses, including assets, liabilities, and subcontracts. Each successful bidder, back then, was required to establish a Lebanese joint-stock company and temporarily transfer 1/3 of said company’s shares to the government, with expectations to raise some $6 billion in the aggregate from the contemplated auction. The deadline for the submission of bids was February 2008 according to the Higher Council for Privatization (“HCP”) and the Telecom Regulatory Authority (“TRA”), with the three prospective bidders being Egypt’s Orascom Telecom, Kuwait’s Zain Group, and Bahrain’s Batelco.

Orascom Telecom, the 4th

Nevertheless, the aforementioned privatization attempts failed on the back of the political impasse, yet resurged in the aftermath of the Doha accord before being postponed again amid the propagation of the global financial crisis, the thing which distorts bidding prices and fair market valuation.

largest Arab telecommunication company, highlighted Lebanon’s relatively low political risk and expressed its interest in a potential investment in the country’s telecom market; while Kuwait’s Zain Group saw potential investment opportunities in the sector.

As far as Alfa and MTC Touch are concerned, the two companies benefit from a wide customer base estimated at around 2.84 million subscribers as at year-end 2010, with MTC’s market share standing at around 52.76% (1.499 million subscribers) [70] and Alfa accounting for the remaining 47.24% (1.342 million subscribers) [71].

[70] Zain, [71] Orascom Telecom Holding

57


Alfa, 1,342,385, 47.24%

MTC, 1,499,000,

52.76%

Breakdown of MTC and Alfa's Market Share of the Lebanese Mobile Market as of December 31, 2010

Source: Zain, Orascom, Credit Libanais Economic Research Unit

More recently, Lebanon has expressed interest in joining the world’s most developed countries on the telecommunications sector front by implementing the third generation (“3G”) mobile services in the country. In this context, the construction of the new network was handed to Alfa and MTC Touch in partnership with private developers. More particularly, the Swedish company Ericsson was expected to build the Mobile Interim Company One’s 3G network (Alfa) for $36.2 million, and the Chinese Huawei that of the Mobile Interim Company Two (MTC Touch) for $25.6 million. The handling of the control center was left to Nokia-Siemens.

In this context, the then-Lebanese Minister of Telecommunications, Dr. Charbel Nahhas and in April 2011 has successfully test-run 3.5g services in Lebanon via a video-call, and announced that the full-scale implementation of said services in Lebanon is estimated to be completed by September 2011.

As far as internet is concerned, and according to speedtest.net, and prior to the new reforms in the telecommunications sector, Lebanon was reported to have the worst internet service in the world. More specifically, and among 185 covered countries, Lebanon ranked last in terms of downloads (0.47 megabits per second (“Mbps”)) and 184th in terms of uploads (0.1 Mbps). In fact, Lebanon remains far behind the most performing country, South Korea, with 39.26 Mbps download speed and 20.99 Mbps upload speed [72]

Consequently, many measures have been adopted over the last couple of years in an endeavor to improve internet services in Lebanon under the umbrella of some kind of cooperation between international companies that are expert in the telecommunications sector on the one hand (private sector), and the Lebanese Ministry of Telecommunications on the other hand (public sector). More particularly, the Swedish company Ericsson was delegated by the Lebanese Ministry of Telecommunications to renovate the internet infrastructure in Lebanon. According to the Minister, the bid session stopped at the lowest price of $6.3 million. The project is said to ensure a new system of signal transportation through fiber optic cables. Conversely, the project was deemed to be overpriced and poorly structured, and was criticized by the United Nations International Telecommunications Union.

.

On the other hand, the aforementioned implementation of the 3G technology in Lebanon is widely perceived to be a solution for the mediocre internet services, thus improving the speed of data transfer from 0.1 megabits per second to 21 megabits per second.

On September 20, 2011, the Telecommunications Minister Mr. Nicolas Sehnaoui launched the testing phase for the third generation (3G) mobile phone service with 4,000 participants, 25% of which are school and

[72] speedtest.net, [73] The Lebanese Minister of Telecommunications, Dr. Charbel Nahhas – Lebanese Press

58


university students. Mr. Sehnaoui also commented that the gradual implementation of 3G services in Lebanon is expected to be completed by February 20, 2012 [73]

On the penetration front, and as a result of the pricing measures taken by the sequential Ministers of Telecommunications during the years 2009 and 2010, Lebanon’s internet penetration has surged to 31% in the year 2010 up from 23.68% in the year 2009, surpassing as such regional (27.28%) and global averages (30.16%)

.

[74]

.

d. Potential Impact of Introducing Broadband Services According to a study conducted by the World Bank, the implementation of the broadband technology in Lebanon will have a positive impact on private and public sectors’ productivity. More particularly, broadband technology is expected to increase the number of internet subscribers, who will benefit of lower prices with faster data transfer and internet speeds that can reach the 10 Mbps bar for households and the 1 Gbps bar on the corporate front. Furthermore, the study highlighted that a 10% rise in the household broadband penetration rate would increase the country’s GDP by some 1.38% per annum and enhance fiscal revenues by some $78-$98 million on a recurring basis [74]

Similarly, the GSM Association’s “Global Mobile Tax Review 2006-2007” report stated that with liberalization, a 10% increase in mobile penetration would stimulate the country’s GDP by some 1.2%

.

[75]

.

e. Mimicking Best International Practices The Lebanese legislation promotes a dynamic market, characterized by free competition. Licensed competitors operate under the TRA regulations and the Law 431. This is not the case for Alfa and MTC Touch, which are not licensed competitors, and who are regulated by the Ministry of Telecommunications. Nevertheless, opinions vary as to the interpretation of Law 431 and its applicability, and whether the effective authority should be handed to the TRA or the Ministry of Telecommunications.

According to the TRA report, the performance of the Lebanese telecommunications sector is yet to match international standards, with operators lacking the ability to furnish consumers with advanced services and products that meet the dynamic business world of today. In this context, the public sector is the sole party controlling prices and imposing relatively hefty taxes on service providers. The telecommunications sector’s infrastructure suffers from sizeable deficiencies, the thing which hinders the introduction of new technologies. It is worth noting that the development of the telecommunications sector’s infrastructure would pave the way for lower prices and better quality services [76]

Efforts, however, have been noticed in the last couple of years with regards to Lebanon’s mobile prices and array of services covered by the two network providers, catching up with best renamed international service providers.

.

[74] World Bank, [75] The GSM Association - “Global Mobile Tax Review 2006-2007”, [76] TRA

59


Source: TRA, Credit Libanais Economic Research Unit


As far as landline penetration is concerned, Lebanon has demonstrated significant progress when compared to countries in the region, with a fixed line penetration rate of 21% in 2010, lagging only behind UAE’s 32% rate [77].

23.80 24.85

50.19 56.08

83.39

109.84 117.89 119.31

184.01

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

Jordan Algeria Egypt Tunis Libya Morocco Syria Lebanon Palestine

Monthly Price Basket (100 mobile calls/month) in USD (VAT Included)

Av. MENA

Av. OECD

32%

21% 20% 18% 18%

12% 12% 12% 10%

8%

0%

5%

10%

15%

20%

25%

30%

35%

UAE Lebanon Syria Bahrain Qatar Egypt Tunisia Morocco Palestine Jordan

Regional Landline Penetration per Population in 2010

[77] TRA

60


6 6 7 18 24 25 27 34 35

6992 100 102

154 159

205

0

50

100

150

200

250

Public Sector Investments in Broadband Services in 2009 (USD per Capita)


As far as Asymmetric Digital Subscriber Line (“ADSL”) penetration is concerned, Lebanon fared better than several countries in the region, with a penetration rate of 20% in the year 2010, outperforming Jordan’s 16.5%, Oman’s 10.4%, Morocco’s 8%, Egypt’s 7%, Yemen’s 2%, and Syria’s 1.2%.

Developed countries’ governments have always been keen on enhancing and upgrading their broadband infrastructure network throughout the years, and even assumed the role of the private sector in funding said projects when private sector support waned in the light of the global financial crisis. This owes to the significant contribution of advanced broadband infrastructure to the development of economies across the globe [78]

.


98.0%

39.0%

31.0%

21.0%

20.0%

16.5%

10.4%

8.0%

7.0%

2.0%

1.2%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

UAE

Qatar

KSA

Tunisia

Lebanon

Jordan

Oman

Morocco

Egypt

Yemen

Syria

ADSL Penetration per Household in 2010

[78] TRA

61


Region Resources Usage BalanceNorth Lebanon 100 216 -116Mount Lebanon 73 235 -162North Bekaa 21 154 -133South & Central Bekaa 82 174 -92South Lebanon 19 206 -187Total 295 985 -690Source: UN Economic & Social Commission for Western Asia, Credit Libanais Economic Research Unit

Geographical Distribution of Water Resources and Usage (in million m3)

In this context, the Lebanese government should follow the lead of developed countries’ initiatives in developing their broadband infrastructure and promote public-private partnership schemes for this purpose as is the case in most developed countries as outlined in the chart above. In Malaysia, for instance, the government is financing some 30% of the upgrade to Next Generation Networks (“NGN”), with the Japanese government having committed in 2009 to fund broadband infrastructure in the areas that are not financed by private companies. Likewise, the Australian government owns companies that promote the NGN, while the private sector holds a 50% participation that would be transformed into privatization at a later stage.

3) The Water Sector The Republic of Lebanon has been praised throughout the years and up until today for its water abundance as compared to its regional peers, with around 40 major rivers spread over the Lebanese territory, and a relatively high level of precipitation (661 mm of rain during the year 2009). However, many difficulties have started to emerge with the global warming and water supply is expected to become insufficient and unable to meet the demand in the years to come. With the existence of a dry season that extends over seven months per year, and a dense concentration of the population in a limited area (the coast), water resources are facing an increasing pressure to meet demand levels. Another challenge to the water sector in Lebanon is the growing level of pollution and environmental problems, as well as the mismanagement of said resources and the gaps in controlling waste. In addition, and among other factors contributing to the increase in water scarcity and the pressure on water resources, Lebanon has to deal with population growth and widening industrial zones, the residential buildings’ use of private water supply wells, inefficient and uncontrolled agricultural water use, over-usage and unmonitored ground water use, and illicit practices. As a matter of fact, the inefficiency on the agricultural sector front is causing around 50% of the waste in water supply (as at year 2007) [79]

Concurrently, the problem in water availability to consumers is mostly noticeable during the summer season. According to the World Bank, Beirut and the Mount Lebanon region (where some 60% of the population is concentrated) receive 3 hours of water supply per day during the summer period, whereas cities in the surrounding countries receive it on a continuous basis

. In this perspective, it is worth highlighting that said factors are weighing negatively on the quantity and quality of water supplied.

[80]

. In fact, the balance of water demand versus water supply shows a shortage in water availability between the months of July and October of around 690 million m, with an average consumption of 985 million m comparing to an average availability of 295 million m of water during the July-October period.

In this perspective, many solutions are being considered by the Ministry of Energy and Water, with the aim of expanding water resources and increasing its availability, limiting waste and controlling water misuse and over-usage, improving the efficiency of related institutions and entities (whether on the supply and distribution front, or on the agricultural irrigation and other usage front), mainly through enhancing the sector’s management and governance, improving control and monitoring of the sector, and having transparent plans for the future. In the same context, a ten-year plan has been put under study by the Ministry of Energy and Water to limit waste water, save water, and allow more efficient utilization. This plan consists of finding new water resources, and focuses on river and underground water storage through the establishment of dams. Furthermore, the UN paper stresses on the need to embark on public-private partnerships for the development of the water sector in Lebanon, highlighting the urge to delegate the

[79] UN –Water Sector in Lebanon, an Operational Framework for Undertaking Legislative & Institutional Reforms, Dr. Fadi Comair, [80] World Bank,

Republic of Lebanon – Water Sector: Public Expenditure Review, May 17, 2010

62


Year Profits (USD Million)1997 -872003 222004 502005 462006 202007 622008 922009 105

Source: MEA, Credit Libanais Economic Research Unit

MEA Profits Since 2003

operation and maintenance of water supply and sanitation services to the private sector. PPP schemes address the shortfalls of financing the government’s ten-year water reform plan amid the strained political finances.

4) Middle East Airlines Middle East Airlines s.a.l. (“MEA”) is the Lebanese national commercial airliner of Lebanon and is majority owned (99.50%) by the Lebanese Central Bank. In addition, MEA owns three subsidiaries: Middle East Airlines Ground Handling (“MEAG”), Middle East Airports Services (“MEAS”), and Mideast Aircraft Services Company (“MASCO”), in addition to 77.50% of the Lebanese Beirut Airport Catering Company (“LBACC”). The company, which was founded on May 16, 1945, launched operations on January 1, 1946, and has undergone a series of reforms ever since, the most notable being the restructuring plan which took place between the years 1998 and 2002, which revolved around the implementation of several strict measures, including the dismissal of 1,500 employees (40% of the company’s total employees). Said reform plan has drastically improved MEA’s performance, which had been recording losses for the previous 26 years. Consequently, MEA managed to start generating profits since the year 2002, peaking at $105 million in 2009 [81]

Nevertheless, and given that privatization was pledged during the Paris I and II donors’ meetings, MEA was looking in the beginning of 2008 to raise $250 million through a partial initial public offering (“IPO” of 25% of its shares planned for the fourth quarter of 2010). The objective of the company was to further develop its line of services and make it one of the leading airline companies in the region. The plan also called for listing MEA shares on the Beirut Stock Exchange (“BSE”) during the year 2011, capping a single investor ownership at 1% of capital. Nevertheless, the Central Bank Governor, Mr. Riad Salameh, announced in September 2010 that the MEA IPO was postponed due to “unfavorable market conditions” amid turbulent financial markets around the globe.

.

The following table reflects the company’s improved profitability over the years on the back of the internal restructuring program since 2002, coupled with the series of synergetic partnerships and alliances MEA ventured in, added the expansion in fleet from 13 airplanes in 2008 to 16 as of May 2011.

Among the series of strategic alliances penned by MEA over the last couple of years, the latest partnership agreement was with SkyTeam, one of the three largest passenger alliances in the world, during the month of March 2011. Said agreements will enable MEA to have access to 898 destinations in 169 countries in addition to granting MEA’s premium customers access to 420 airport lounges. In addition, said step is anticipated to boost MEA revenues by around 10% to 15%. It is worth noting that SkyTeam Alliance, which currently includes Alitalia, AirEuropa, KLM, Delta Airlines and nine other airline companies, expanded its footprint in the Middle East and North Africa region (“MENA”) this year through the set of agreements signed with both MEA and Saudi Arabian Airlines.

The aforementioned partnerships will certainly position MEA more favorably in the eye of the private sector when privatization or PPP schemes see the light, as said partnerships and alliances foster an increase in

[81] Middle East Airlines

63


flights turnover, world destination coverage, an increase in revenues, and eventually an improved company valuation.

An integral part of applying public-private partnerships in Lebanon, and specifically in the case of MEA, depends on the eagerness of banks to finance the public sector through loans with tenors in excess of 10 years. The financing part did not prove to be an obstacle for MEA, with the single Lebanese bank (Fransabank), for instance, financing the purchase of 4 new airplanes for a total consideration of $157 million, out of a total company fleet of 16. The latest loan agreement signed with Fransabank in April 2011 is a 10 year term-loan facility geared towards financing a 232-320-A Airbus worth $32 million.

D. Whenever a PPP contract is penned, a multitude of financing schemes can be envisaged by the private sector. The most commonly adopted methods are further elaborated below, bearing in mind that the financing method depends on both the size and the complexity of the concerned project

Financing PPP Contracts

[82]

:

- The private entity may revert back to the market to raise funding for the project, providing as collateral the estimated flow of income generated from a concession contract. - The private entity may eye the public sector’s financial contribution which can be provided through a pool of options. In the event the government is the first beneficiary from the services stipulated in the PPP contract, the private entity may receive shadow tolls settlements or service payments, with the former associated with the quantity of services demanded and the latter rather being a function of service supply levels.

- Another financing mode is the direct contribution of the public sector either through equity, loan or subsidy. In the event equity financing is conceived, profits generated from the services rendered will be prorata shared between the public and private sector. The government can also act as a guarantor whenever the private entity is considering the borrowing alternative to finance the PPP project.

- Special Purpose Vehicles (“SPVs”) can also be employed as an alternative to finance a PPP project by raising funds through the issuance of debt or equity securities.

Source: PPP Finance and Legal Issues, Edward Farquharson, 25 July 2006

Equity Credit Agreement Agreement

Contract Contract

Contractor Contractor

SPV LendersShareholders

Facilities Management Construction Management

Government

PPP Contract

Concession Agreement

[82] IMF –Public Private Partnerships

64


- Securitization of a government’s future stream of revenues from a given project can as well be used to finance a PPP project in the pipeline.

Also on the financing front, and according to the Modigliani-Miller theorem, the PPP project cost will vary only upon the riskiness of the concerned project and not upon the way the project is financed. Nonetheless, the project’s source of financing might affect the riskiness of the project, depending whether the funds were raised through complete or incomplete markets. It is worth noting that with complete markets, the project risk is independent of the party which is assuming the risk, while with incomplete markets, the project risk is correlated to the level the risk is spread between the public and private sectors. Conventionally, the government borrows at the risk-free interest rate from the private sector, notwithstanding the riskiness of the project. Nevertheless, projects under PPP contracts usually bear higher financing costs on the back of the private sector’s default risk in the eye of the lender, and this in spite of the fact that PPP projects carry lower default risks.

On a local basis, Lebanon is in dire need for funding investments in infrastructure and development projects in various economic sectors, such as for instance, the electricity, telecommunication, water, and energy sectors. Financing the aforementioned projects remains the principal challenge pertaining to the implementation of said basic infrastructure services.

The relatively liquid banking sector in Lebanon and cost burden of PPP projects position the banking sector more favorably vis-à-vis the mandated service provider as the principle source of financing the rehabilitation of infrastructure and development projects. Owing to the long tenor nature of public-private partnership agreements, some banking sector executives have expressed their preference to finance the private partner in a PPP contract on the back of the wider range of guarantees, undertakings and covenants they can secure. Said banking executives, however, commented on the asset-liability mismatch for banks participating in the financing of PPP projects, owing to the long term nature of the different PPP schemes (in most of the cases exceeding 10 years) versus the relatively short-term nature of customer deposits (the principle source of funds for banks).

As is the case with any corporate borrower, banking executives have stressed on the need to evaluate the financial soundness of any PPP scheme prior to embarking on the financing of the concerned projects. More specifically, banks base their commitment decision on the project’s ability to generate cash flow and repay debt on time [83]

.

[83] IMF –Public Private Partnerships

65


V. FISCAL IMPACT OF THE IMPLEMENTATION OF THE ELECTRICITY REFORM PLAN

The implementation of Public-Private Partnerships in the various economic sectors will assist in addressing Lebanon’s weak public infrastructure problem by leveraging on the financial contribution of the private sector partner on the one hand, and improving efficiency and limiting corruption on the other. Consequently, new job opportunities can be created in the economy, accentuating economic growth and improving public finances.

The following section draws on the possible repercussions associated with the implementation of the electricity reform plan on Lebanon’s public finances and major economic indicators. The choice of the electricity sector is based on the availability of information exposed by the Ministry of Energy and Water’s reform plan for the electricity sector, coupled with the fact that Eléctricité du Liban is a major drain on public finances, necessitating a prompt action by the authorities.

A.

The electricity sector reform plan developed by the Ministry of Energy and Water calls for an increase in tariffs as a prerogative, among other measures related to reducing technical losses and improving metering, in an endeavor to reposition the company more favorably:

Assumptions

- All macroeconomic indicators presented under the base case scenario over the 2012-2014 period are based on Ministry of Finance projections in its “Budget 2012 Instructions” report dated May 2011

- We have only accounted for the direct impact of investments in the electricity sector infrastructure on GDP and ignored the indirect impact which, if accounted for, would further bolster GDP

- We have assumed a per-barrel oil price of $108 in 2012 and $106 in 2013 and 2014 in line with IMF expectations

- We have considered that the reform plan developed by the Energy and Water Ministry will be implemented in a timely manner and without any delays

- We have assumed that the interest rate on new government borrowings is 6%, corresponding to the coupon rate on the latest sovereign ROL Eurobond issue dated May 2011

- We have adopted the figures pertaining to the contraction in EDL losses from the electricity reform plan during the 2012-2014 period, and assumed an equivalent contraction in government transfers to EDL

- We have assumed under the two reform plan scenarios that government debt will increase gradually over the 2012-2014 period by incremental amounts corresponding to the Ministry’s envisaged governmental stake in new capital investments in the electricity sector

- We have also assumed, under the restated debt figures under both tariff reform scenarios, that the outcomes of any contraction in budget deficit over the period emanating from the lower transfers to EDL, is an equivalent cumulative reduction in debt

- The restated consensus GDP figures under both reform plan scenarios did not account for any change in the consumption component (“C”) of GDP

- Our restated GDP figures over the 2012-2014 period under both tariff reform scenarios for the electricity sector also embed the private sector’s investment stake in electricity infrastructure, as elaborated earlier in this report, in accordance with the Ministry of Energy and Water’s reform plan. These figures are outlined in the table on the following page under the investment (“I”) component of GDP.

66


2012 2013 2014 2012 2013 2014 2012 2013 2014

Electricity Reform Plan AssumptionsElectricity Tariff Rate ($/KWh) 0.0958 0.0958 0.0958 0.1006 0.1086 0.1206 0.1025 0.1128 0.1274

Investment in Electricity Infrastructure ($ Million) - - - 1,400.00 1,735.00 1,735.00 1,400.00 1,735.00 1,735.00

- of which Investment by Government - - - 810.00 370.00 370.00 810.00 370.00 370.00

- of which Private Sector Investment - - - 455.00 932.50 932.50 455.00 932.50 932.50

Projected Macroeconomic Indicators ($ Billion)Projected GDP 45.427 48.283 51.319 46.827 50.018 53.054 46.827 50.018 53.054

Total Gross Debt 61.63 66.57 66.50 62.13 67.87 67.97 61.17 66.44 65.31

Government Revenues 10.13 10.82 11.55 10.13 10.82 11.55 10.13 10.82 11.55

Government Expenditures 13.26 13.37 14.22 12.82 12.82 12.18 12.80 12.76 12.08

of which EDL Transfers 1.73 1.69 1.85 1.23 1.17 0.67 1.22 1.12 0.56

of which Debt Service 4.27 4.25 4.72 4.32 4.32 4.81 4.32 4.32 4.81

Primary Surplus (Deficit) 1.14 1.69 2.05 1.63 2.32 4.18 1.65 2.37 4.29

Total Surplus (Deficit) (3.13) (2.56) (2.67) (2.69) (2.00) (0.64) (2.67) (1.95) (0.53)

Projected Ratios ( %)Debt/GDP 135.67% 137.88% 129.58% 132.68% 135.70% 128.11% 130.62% 132.84% 123.10%

EDL Transfers/Government Revenues 17.04% 15.63% 16.00% 12.18% 10.83% 5.82% 11.99% 10.35% 4.89%

EDL Transfers/Government Expenditures 13.01% 12.64% 13.00% 9.62% 9.14% 5.52% 9.49% 8.77% 4.68%

EDL Transfers/GDP 3.80% 3.50% 3.60% 2.64% 2.34% 1.27% 2.59% 2.24% 1.06%

Debt Service/Government Expenditures 32.19% 31.77% 33.21% 33.68% 33.70% 39.52% 33.73% 33.84% 39.87%

Debt Service/GDP 9.40% 8.80% 9.20% 9.22% 8.64% 9.07% 9.22% 8.64% 9.07%

Primary Surplus /Government Expenditures 8.56% 12.64% 14.44% 12.70% 18.09% 34.30% 12.86% 18.57% 35.50%Source: Lebanese Ministry of Finance, Credit Libanais Economic Research Unit



(No Reform Plan) & 25.88% Tariff Increase InducedBase Case Scenario

& 32.98% Tariff Increase Induced

B.

Taking as a benchmark the electricity reform plan guidelines, the following section sketches the outcomes of two tariff increase scenarios, namely a first scenario that centers upon a 25.88% increase over a three-year period from $0.0958 per kilowatt-hour at present to $0.1206 per kilowatt-hour by the year 2014, and a more aggressive second scenario targeting a 32.98% increase in the average tariff rate to $0.1274 per kilowatt-hour by the year 2014.

Outcomes

As depicted by the analysis above, the increase in the productivity of the electricity sector, coupled with the gradual increase in tariff rates, will unquestionably lead to a considerable contraction in government transfers to EDL when compared to the base-case scenario, which rules out any implementation of the electricity reform plan. The increase in the productivity of the electricity sector, nevertheless, is conditional upon the purchase of new power plants and the rehabilitation of existing ones as previously elaborated in this research publication, the thing which necessitates substantial capital investments. According to the Ministry’s reform plan, some $1.55 billion needs to be injected by the Lebanese government over the 2012-2014 period in the electricity sector, and thus may bring upon an increase in total debt and interest service.

Concurrently, some $2.32 billion requires to be financed by the private sector over the 2012-2014 period, propelling the GDP figures under the two reform scenarios. Our restated figures show that the increase in interest servicing, however, will be outweighed by the reduction in transfers to Electricité du Liban, the thing which will lead to a possible drop in projected expenditures and an improvement in the primary surplus and total deficit. More particularly, government expenditures may dwindle from $14.22 billion under the “no reform” scenario in the year 2014 to $12.18 billion in the event a 25.88% tariff increase is levied and $12.08 billion in the event a 32.98% tariff increase is induced. We project the primary surplus for the year 2014 to increase markedly from $2.05 billion as per the Ministry of Finance expectations under the “no reform” scenario to $4.18 billion if a 25.88% tariff increase is triggered, and $4.29 billion had the 32.98% EDL tariff increase been instigated.

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Projected Gross Domestic Product (“GDP”) is also expected to gain stimulus, in the event the Ministry’s electricity reform plan is fully implemented, thanks to the increase in the investment and government expenditures’ components of GDP. The combined effect could be for instance a restated GDP figure of $46.82 billion in 2012 under the 25.88% cumulative tariff increase scenario, compared to a $45.42 billion figure under the “no reform plan” scenario. In addition, we foresee that the projected increase in GDP will outperform the anticipated increase in public debt derived from government investments in electricity infrastructure, the thing which may lead to a dampening debt to GDP ratio from 135.67% in the year 2012 (as per the Ministry of Finance forecast) under the “no reform” scenario to 132.68% in the event a 25.88% tariff increase reform is adopted and 130.62% in the case of a cumulative 32.98% tariff increase.


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1.14

1.692.051.63

2.32

4.18

1.65

2.37

4.29

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2012 2013 2014

Primary Surplus (Base Case) Primary Surplus (25.88% Tariff Increase)

Primary Surplus (32.98% Tariff Increase)

Comparison of Projected Primary Surplus Under the Three Scenarios

135.7%

137.9%

129.6%

132.7%

135.7%

128.1%

130.6%

132.8%

123.1%

115.00%

120.00%

125.00%

130.00%

135.00%

140.00%

2012 2013 2014

Debt/GDP (Base case Scenario) Debt/GDP (25.88% Tariff Increase)

Debt/GDP (32.98% Tariff Increase)

Comparison of Projected Debt/GDP Ratio Under the Three Scenarios


Strengths

- Foreign investors engaging in PPP contracts in partnership with the Lebanese government can exploit the laissez-faire nature of the Lebanese economy, the liberal policies for trade and investment, and reap the rewards of the undevelopped infrastructure (i.e. underground subway, public muting, roads and bridges infrastructure, airlines, etc.)

- The public sector can capitalize on the private sector's skilled, knowledgeable and experienced Human resources

- Government's ownership of land in prime areas alleviates, to some extent, a PPP project's cost burden on the private partner

Weaknesses

- Lack of natural resources in Lebanon (oil, gas, etc ...)

- Project's implementation under a PPP framework often puts up with high operating & infrastructure costs

- Public institutions are generally heterogeneous in the sense that some can be over-staffed, while others are under-staffed

- Lebanon still suffers from the lack of a properly functionning bureaucratic system

Opportunities

- The implementation of Public-Private Partnership is materializing with the Lebanese government ratification of a draft PPP law

- Growing Lebanese population, which implies additional demand for basic services (electricity, telecommunication...)

- Numerous Lebanese banking sector executives expressed their eagerness to finance the private partner in a PPP contract

- The existing PPP contracts, in majority drafted under a BOT agreement with the Lebanese government (case of Alfa and MTC Touch, LibanPost, etc.), have proven to be successful. Said success stories can be replicated under the umbrella of other sectors of interest such as for instance the electricity sector, the water sector, the local airlines company, etc.

Threats

- Lebanon still suffers from relatively weak legal & institutional frameworks (i.e. weak enforcement of rules and laws)

- Highly competitive environment

- Political risk & relatively unstable macroeconomic environment

- The escalating tensions in the region amid the revolutionary changes in political regimes may have their ripple effect on the Lebanese economy, owing to the close proximity to neighboring Syria and the existing bi-lateral trade agreements

VI. PPP S.W.O.T ANALYSIS

The following section evaluates, on the one hand, the strengths and weaknesses of venturing into Public-Private Partnerships in Lebanon, while on the other hand, spotting the opportunities and threats that might arise thereof:

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VII. CONCLUSION & RECOMMENDATIONS

We believe Public-Private Partnerships to be a remedy to Lebanon’s ailing infrastructure to what it can add in benefits of efficient private sector involvement. Furthermore, PPPs will allow for retaining public sector control of the asset at the end of the PPP contract, waiving as such one of the most important shortfalls of privatization, the thing which will ensure a wider political consensus.

The implementation of Public-Private Partnership schemes will reflect positively on the economy in terms of enhancing efficiency, limiting corruption, attracting foreign investments, enhancing private sector participation, creating new job opportunities and subsequently accentuating GDP growth. Embarking aggressively on a set of PPP projects can bring upon a domino effect on public finances through fueling government revenues, increasing efficiency, and trimming expenditures, paving as such the way for the government to tackle its crippling debt burden.

In addition, Public-Private Partnership schemes can help improve the quality of public services through allowing for private sector management of said enterprises. Concurrently, lower levels of job security and better work-related incentives, which are key characteristics of private sector jobs, will foster a more competitive working environment lured by motivation and incentives for creativity.

Nevertheless, it is utterly important to ensure an atmosphere of transparency throughout the various stages of a Public-Private Partnership venture, particularly during the bidding and implementation stages.

Having sketched under section V (Fiscal Impact of the Implementation of the Electricity Reform Plan) of this paper the positive implications of a typical PPP framework, it is wiser to consider medium-term contracts (7 to 10 years), in an attempt to address banks’ concerns from the asset-liability mismatch angle, particularly, the short-term nature of deposits versus the private partner’s inclination and preference for long-term (more than 15 years) financing. Furthermore, medium-term contracts may turn to be more appealing to the public sector since they can be reviewed, amended and renewed more frequently and reflect the ever-changing and dynamic nature of the economy (i.e. interest rates, alternative technology, new infrastructure subsidies, etc.).

70


Credit Libanais SAL Economic Research Unit Tel: +961-1-326 786 Fax: +961-1-326 786 [email protected]

For Your Queries:

Fadlo I. Choueiri, CFA [email protected] Tel: +961-1-200 028 EXT: 235 Jad Abi Haidar

Tel: +961-1-200 028 EXT. 251 [email protected]

Rim Fayad


Joelle Samaha


Jessica Basbous


Alexandre Salha, Trainee

CONTACTS

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Economic Research Unit Sofil Center – Charles Malek Avenue Ashrafieh 1100 2811 P.O.Box 16-6729 Beirut, Lebanon Tel: +961-1-326 786 Fax: +961-1-326 786 E-mail:[email protected] www.creditlibanais.com.lb

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