For those of us who remember what it was like to fly with the national carrier in the 1990s, we recall the painful hours waiting in the plane on the runway for it to take off, the complex and tiresome ticketing process, and the unique elbowing techniques one would employ to get to the front of the check-in booth for a flight that was usually delayed. Thankfully those days are long gone. Today Middle East Airlines (MEA) has once again become a profitable and sound business representing our nation. Last year, when airlines were buckling under the pressure of the downturn, it brought in a record profit of $105 million, increased its passengers by 14.61 percent, and increased its revenue per passenger by 11.8 percent.
It wasn’t always this way. For 26 years until 2002 the airline was posting an annual loss. Ultimately this proved to be a blessing in disguise because when the airline became too much of a burden, and/or our government realized they would never ‘milk the cow,’ a political decision was finally taken to corporatize and downsize the company whilst retaining public ownership through the central bank.
The process was by no means painless and was politically charged from the get-go: around quarter of the company was chopped, routes were cut, many people lost their jobs, and we had to come to terms with the fact that our airline was not what it once was. Be that as it may, it’s better to grow into a profitable business than to whither away slowly in the red.
But to be truly Lebanese you need issues, and MEA has more than a few. Besides the one-day strike in April that cost the airline some $800,000 according to its chairman Mohamad el-Hout, the airline’s successful downsizing under his patronage left a rather dubious trail in its wake. Already this year the parliamentary opposition has lambasted Hout, for, amongst other things, appointing his relatives, friends, as well as members and MPs of the Prime Minister’s party to various positions at the carrier and turning the airline into “family institution first and an institution for the Future Movement second,” according to one opposition paper. In response, Hout argued that the MPs were technically qualified to hold their position and denied charges of nepotism. “I don’t see anything wrong if some of these staff carry the Hout family name,” he was quoted as saying. What the chairman ostensibly doesn’t see is that such statements and appointment do little to ally the fear that MEA is the ‘property’ of Lebanon’s Sunni’s, whether the accusations hold water or not.
In Lebanon once the sectarian ball gets rolling, there is little chance of stopping it. To avoid such a scenario, what should be done is simple: take action that draws MEA away from the sectarian government back to the people of Lebanon. In business terms, that means making good on a promise to offer the people a stake in the company through a public listing. The decision is the central bank’s to make and its governor, Riad Salameh, has already said that he plans to raise $250 million through the sale of a 25 percent stake. What he also told me after the cabinet was formed in November was that he is waiting for “moral approval from the government.”
That approval has not been forthcoming, and neither has the promise of allowing other players to participate in the market once MEA’s monopoly on domestic traffic is up 2012. Indeed the current transport minister is seeking to extend it. But this market distortion makes little sense considering that our “Open Skies” policy allows foreign airlines to fly in and out of the country without restrictions while local airlines cannot. Moreover, Hout expects profits to dive 40 percent this year as a result of increased competition from foreign airlines.
Before that occurs and investment looks less attractive, it would seem logical to start pulling our national carrier away from narrow political and sectarian interests and, eventually, bring it fully into hands it belongs in—those of the people. What better time than now, when our economy is growing and investment is on the rise? If we start with our airline, we may, one day, finish with our country.
UPDATE: According to Bloomberg, on September 7 2010 Riad Salameh, Lebanon’s Central Bank Governor, announced that he was delaying the listing of MEA’s shares because of “unfavorable market conditions” in Arab markets and (for some odd reason) the greek debt crisis. Given that the shares were meant to be listed on the Beirut Stock Exchange, which performs independently of Arab bourses and is so small that it needs large institutional listing, this should be seen as a sure-shot sign that MEA’s patrons have no intention of allowing the people to participate in the ownership of their airline. No surprise there.
Up close Lebanon’s energy overhaul looks like a boon for the sector; but in the distance an uglier reality awaits
Promoting one’s own vested interests has always been the mantra of Lebanese policy makers, and we’ve become accustomed to seeing them endlessly tie up progress until they come to an agreement on how to divvy up the spoils. So alarm bells ring when our so-called leaders finally agree on something.
On the surface the announcement that our cabinet agreed to Energy Minister Gebran Bassil’s 5-year electricity plan looks like a step toward reform. Ostensibly, the plan aims to end the country’s chronic blackouts and relieve the sector’s deficit burden from the government, which amounted to $1.5 billion last year.
But it is likely intended to preserve the minsters’ own interests — such as reinforcing the pillars of the sectarian system through which they secure their influence — before it serves the needs of the people.
What needs to be done is obvious. In production, transmission and generation the sector needs a complete overhaul, and there needs to be a purging of the political patronage systems endemic at Électricité du Liban, Lebanon’s state-owned electricity provider. To his credit, Bassil’s plan addresses these elements in detail and proposes fixes that, according to most experts, could alleviate our short-circuited sector. But before we start to borrow and spend $4.8 billion, we should ask ourselves if this time we do it by the book, or ‘a la Libanaise’.
The convoluted and dysfunctional process by which decisions in the electricity sector are currently made — or more accurately, not made — between the cabinet, the ministry and parliament, is not going to produce decisions that are free from political and sectarian influence.
For all the positive elements of Bassil’s plan, he is advocating against setting up a regulatory body to oversee the overhaul of the system until many of the changes have been implemented. Without the proper checks and balances we risk repeating the same type of ‘sector suicide’ we experienced with telecommunications, which now plagues our economic competitiveness and makes us the laughing stock of the regional telecom industry.
Allowing government to regulate the sector cannot continue, and yet the cabinet has approved the plan in question, provided that it also has the authority to oversee it.
Aside from the opaque manner in which public borrowing and spending of $2.5 billion to reform electricity is being carried out, if the cabinet is allowed to chaperone implementation, the other $2.3 billion being requested from the private sector will also likely be farmed out to sectarian interests, effectively slicing up our electrical pie. Without conflict of interest legislation and a truly independent regulatory body (not one that is also appointed through sectarian patronage,) the provisioning of electrical production and distribution will be subject to the same nepotistic tendering and distribution of power that typifies our existing institutions.
What’s more, if the practice of local distribution is adopted without ensuring that regional leaders do not monopolize the provisioning of electricity to local populations, there will be nothing to stop them from subjugating the people through greater dependency on them for basic services.
Some have suggested that sectarian loyalties are the only way to guarantee customers actually pay their power bill, but if the cost of tariff collection is strengthening an institution that tore this country to shreds and continues to stunt its potential, then I would personally prefer to live in the dark.
With new legislation covering public-private partnerships (PPP) now making the rounds to include the private sector in electrical reform, we have the opportunity to start protecting our economy from conflicts of interest, not just the “principles of transparency and equality among participants,” as the new PPP draft is proposing.
If we are to take the long strides we need to in order to solve our structural problems, such as electricity, once and for all, we cannot do so while ignoring what produced our predicament in the first place — unless of course we want to protect the candle-makers.
A similar version of this article was published in Executive Magazine’s August 2010 issue
Lebanon’s cabinet approves a plan for an electricity overhaul and opens the door to sectarian influence
Today the Lebanese pay for electricity four times: when the bill collector comes knocking, when the government has to use money collected from the citizens or borrowed in their name to cover losses in the sector, when they pay for private generation, and when the television fizzles out due to power surges.
The situation has persisted since the end of the civil war, with plans to reform the sector coming and going as quickly as Lebanon’s post-war governments.
As such, it would be easy to dismiss the most recent plan issued by Energy Minister Gebran Bassil and approved by the Council of Ministers, Lebanon’s cabinet, as just another chapter in the long running saga that is Lebanese electricity. But given the relative stability of Lebanon’s political scene of late and the broad nature of the new plan, at least comparatively speaking, this time could be different.
The five-year plan, which was intended to start at the beginning of this year, allocates some $4.87 billion to reforms aimed at halting power rationing by 2014 and bringing the sector into the black by 2015, plus a further $1.68 billion investment for the “long term.”
At present, between generation and imports Lebanon effectively has 1,500 megawatts (MW) of electrical capacity, while average demand ranges between 2,000 and 2,100 MW, peaking in the summer at 2,450 MW. To accommodate for expected growth in demand, the new plan proposes to increase generation capacity — which is technically at 1,875 MW but cannot be fully utilized due to technical inefficiencies — by 47 percent to 4,000MW. Demand for electricity between 2008 and 2009 grew by 7 percent, up from 6 percent growth the previous year.
To fund the new plan, the private sector will be asked to put up $2.32 billion to take part in the production and distribution of electricity, while the public sector will retain its infrastructure and control the transmission of electricity from plants to local districts. The rest of the money sought to implement the reforms is to come from the government ($1.55 billion) and international donors ($1 billion). The initial figure does not include the longer-term plans, which are contingent on the private sector shelling out a further $1.2 billion and international donors putting up another $450 million.
“The plan is beautiful, the minister knows where he wants to get,” says Albert Khoury, deputy general manager of E-Aley, an electricity concession that distributes electricity to the district of Aley. “But the devil is in the details.”
Part of Khoury’s reservations stem from the long-standing debate between the energy ministry, the concessionary companies, and Electricite du Liban (EDL), Lebanon’s state-owned electricity provider. The conflict centers on the rate at which the state sells to the concessions and how much the government spends producing electricity, epitomizing just how fiendishly difficult of a task it is to unravel and reshape Lebanon’s medieval electricity sector.
According to Bassil, electricity costs the government $0.17 per kilowatt hour (KWh) to produce and is sold to the concessions — which serve the districts of Bhamdoun, Aley, Zahle and Byblos — at a loss-making rate of $0.05 per KWh. It is then sold onto consumers at around $0.08 per KWh.
Khoury disagrees with the latter figure, protesting that “the government forces us to sell [to consumers]” at between $0.02 per KWh and $0.05 per KWh, which corresponds to the existing tariff structure at EDL, for power consumption of up to 300 KWh monthly.
A World Bank paper that addressed the situation in 2008 stated that “it is unclear how this agreement is regulated and by whom.” What is clear, however, is that the government is losing money to the tune of $20 million per year based on estimated average sales of between 900 to 1000 gigawatt-hours annually, according to the World Bank. This figure is estimated to rise to $40 million per year by 2015 if the situation persists.
“Gebran Bassil is attacking us and he’s misunderstanding the situation,” says Elie Bassil, chairman and managing director of Electricite du Jbeil, the concession in the Byblos district. “They say we’re buying electricity for low prices. Meanwhile, our overhead is increasing. If the cost of energy increases, we’ll be forced to shut down.”
With the government and the World Bank saying one thing, the concessions saying another and no one seeming to know exactly how the whole thing works, the concessionary issue alone would be enough to stymie reform. But it’s just the tip of the iceberg when you consider that last year alone, the government had to pay out $1.5 billion, or around $375 per person, to cover the deficit of the sector.
Paying the real price
For the electricity sector to even become economically feasible, let alone become an attractive investment to the private sector, supply and demand curves will need to reach equilibrium.
At present the price floor set by the existing tariff structure — which was set when a barrel of oil cost $21 dollars in 1996 and has remained unchanged since — has prevented this from happening. The power to change the tariffs lies with the cabinet, which has been unable to address issue because of political squabbling and the sensitive social implications.
The pre-tax tariff structure for low voltage consumption, the type used by most residential consumers, is divided into six price categories for every 100 KWh consumed per month. The lowest amount charged is $0.02 per KWh and the highest is $13.3 per KWh for consumers who used more than 500KWh a month. Public administrations and “handicraft and agriculture” industries pay $9.33 and $7.67 per KWh, respectively.
Under both the scenarios envisaged in the current plan, tariffs will start to rise in the third year. Under the first scenario, tariffs will be increased on average by 43 percent to break even in 2015; the second will increase the price of electricity by 54 percent to start making money in 2015. However, both of these scenarios face potential hurdles.
“The amount that is being asked from the private sector will not come, for the simple reason that tariffs will not change for three or four years,” says Hassan Jaber, energy consultant and vice president of The Lebanese Association for Energy Saving and for Environment (ALMEE).
Asking the private sector to enter into an unprofitable industry is in itself a tall order, let alone one whose eventual profitability is contingent on factors such as a sustained period of peace and political stability, donor willingness, streamlined political decision making and a steady supply of hydrocarbons.
However, Minister Bassil believes that as the private sector is only being asked to provide about a third of new power generation, the impact on retail costs will be limited. Within a few years of the plants being built, the government will be able to make up the difference through the planned tariff increases, he claims.
Ziad Hayek, secretary general of the Higher Council for Privatization (HCP), the government body in charge of planning, initiation and implementation of privatization programs says that these agreements should not be thought of as all debt or all equity but rather a combination of the two. This, he believes, might make private sector involvement attractive to a certain degree.
The specter of EDL
Supposing all the pieces related to additional generation fall into place, the existing electrical framework will still have to be managed by the EDL, which employs “2000 contractual and daily workers, many of whom are political appointees and unqualified workers,” according to the plan. As to which political parties are impeding progress, “you can never be sure,” says the energy minister.
EDL is supposed to have 5,027 full time employees, but today 3,125 of those posts (63 percent) are vacant, and with an average staff age of 52, the organization suffers from an attrition rate of around 8 percent every year due to retirement. One electricity expert who spoke on condition of anonymity described EDL’s situation “as if you cut off a man’s legs and then tell him to run.”
According to ALMEE’s Jaber, EDL is in such disarray that it “has 200,000 [electricity] meters missing and they don’t have the money to buy them, which means you have 200,000 users that are paying a standard price.” This and other instances where people steal or underpay for electricity are classified as “non-technical losses” and are estimated to constitute half of the $300 million in EDL’s operational losses each year, according the energy ministry.
Uncollected bills, a much heralded and politicized argument for the decrepit nature of Lebanese electrical infrastructure, account for only 12.5 percent of revenue loss; technical losses constitute around 37.5 percent.
Getting the private sector involved in these areas looks like it will be a tough sell for the government. “In some places we cannot reach more than a 5 percent rate of collection, so how will the private sector come in?” asks Bassil.
What adds insult to injury is that if existing electricity legislation passed in 2002 was applicable, EDL as we know it today would not exist. Law 462 mandates that the company be turned into a corporate entity, which would result in the management having control over day-to-day business functions such as hiring and firing of staff, and eventually be partially sold to the private sector in a period of less than two years. Eight years later, not one part of the law has seen the light.
“If someone wants to hinder the process of corporatization, politically they can because it is mostly related to the employees,” says Bassil, whose plan allocates $15 million to reforming human resources at EDL.
Rather than amending law 462, the new plan calls for setting it aside and creating a new structure for the private sector to participate in during the interim period of the plan’s application.
The new arrangement will adopt the principle of Independent Power Producers (IPP), which, in Lebanon’s case, allows private sector players to bid for contracts to enter into Public Private Partnership (PPP) arrangements with the government.
However, a PPP law will have to be passed before any private production of electricity can take place.
Moreover, legislation covering a law for new power plants, effectively breaking the monopoly of EDL, will also have to be passed either as a law on its own or as a part of the PPP law. A draft PPP law has already been submitted to parliament by Amal MP Ali Hassan Khalil and is currently making the rounds in the halls of government.
Applying Law 462 would mandate the unbundling of the sector into production, transmission and distribution segments, which must be up to 40 percent privatized within two years through an international auction. Notably, the plan does include the corporatization of EDL, which should be completed by the end of the third year of implementation at a cost of $165 million.
Having committed to apply the corporatization part of Law 462, Bassil’s position, and ostensibly that of the cabinet who ratified the minister’s new plan, is that Law 462 will be ignored until after the new electrical regime is in place.
“It is fair to say that the minister is not interested in implementing Law 462 as it is because his concerns center on the creation of a regulator [Electricity Regulatory Authority],” says the HCP’s Hayek, whose permanent members are the ministers of finance, economy and trade, justice and labor — all of whom are part of the same political camp opposed to Bassil’s.
Having a regulator would necessarily take away many of the powers of the minister, who states in the last words of the plan: “Exceptional powers should be given to the Minister of Energy and Water and the Council of Ministers.” In his previous post as telecom minister, Bassil was constantly at loggerheads with the Telecom Regulatory Authority over prerogatives in the sector, something he says he wants to avoid while the energy plan is being implemented.
“We would be mixed up with two sets of prerogatives and have EDL still working and fixing the price. We need to prepare the ground for the ERA to come in later on and see what it will need in terms of regulation, then we will decide when to launch it,” he says.
Regulation or sectarianization
Without a regulatory body to uphold the general rules and regulations of the sector, the country and the private sector risk having any plan annulled or changed when a new minister comes in. The constant shuffling of ministers has long been blamed for the discontinuity of policy and reform in the sector; since the beginning of 2008, Lebanon has had three energy ministers.
“Regulatory authorities allow us to transcend the individualization of power, especially in sectors that involve the provision of services because they should not be politicized,” says Hayek.
Another area where a regulator could prevent undue influence is in the distribution sector. Many fear that if local and sectarian leaders are allowed to enter the distribution market, as is being proposed under service provision arrangements, then they would have control over power to local populations, in effect increasing their constituents’ dependence on them.
Under the current plan, three scenarios have been proposed for the break up of Lebanon’s energy distribution into 15 zones. Scenarios one and three have non-contiguous parts, which could make any assessment of individual service providers’ performance difficult, according to Hayek.
The break up of the country in the second scenario seems loosely based on the geographical distribution of Lebanon’s major sects. According to a source involved with the negotiations with foreign funders, European Union representatives working in Lebanon on infrastructural reform are “not happy at all” with this scenario and will have reservations when asked for funding if this sort of distribution is adopted.
“The fewer regions there are the better because these regions should not become local fiefdoms,” adds Hayek. “Once you have vested interests in companies managing these regions, and if money comes to the hands of influential people, we will never be able to reform further.”
Bassil rejects the idea that he formed the areas on the basis of a sectarian break-up and says that the only consideration was the current structure at EDL.
He also added that he has 12 other scenarios that could be employed, giving the feeling that the plan is more of a “roadmap,” as Jaber calls it, than a detailed plan.
Some, however, believe that Lebanon’s fractious sectarian nature makes this kind of arrangement a more viable option than global best practice.
Although Chafic Abi Said, an energy consultant and former director of planning and studies at EDL, also disagrees that the plan was to break up distribution along sectarian lines, he says “it ought to be [this way] because people will stop stealing if they know, for instance, that Hezbollah in a certain area is responsible for the electricity.”
“In the Chouf during the war they were paying [the] Jumblatts’ civil ministry and it was running because Jumblatt was taking care of it,” he adds.
Need to regulate
Another concern is political interests vying for pieces of the generation portfolio that will be up for grabs. Currently there is little to stop influential politicians and their acolytes from using their favorable positions and economies of scale to offer bids that undercut regular market players.
For instance, Prime Minister Saad Hariri and his allies already control the Sidon dump and garbage collection in the greater Beirut area, making them prime candidates to bid for the waste-to-energy project on offer.
Amal and Hezbollah’s influence in the south and the former’s history with the Litani River Project also put them in a good position for the plan’s private-sector hydropower offering. In fact, the former head of the Litani River Authority, Nasser Nasrallah, became an Amal MP in 2005 shortly after leaving the post, according to a source who spoke to Executive off the record.
“I don’t see a problem once we do a transparent tender for a company to win,” says Minister Bassil. “If it is politically backed or not, it is not my problem. My problem is to get the best price, and if we don’t get the best price I won’t accept to proceed with the IPP.”
Better than nothing
For all its potential faults, the plan to reform Lebanon’s most outdated sector can be seen as progress of some sort, considering that this is the first time since the Paris III reform initiatives that a real overhaul of the sector has received the official stamp.
The promise of that earlier reform plan has today faded away, with some $3.8 billion in pledges tied up because Lebanon’s policy makers are not on the same page.
The current electricity reform plan will also need the cabinet, parliament, the HCP and the energy ministry to work hand in hand to rid the Lebanese of what is perhaps the greatest impediment to becoming a modern state — a functioning power grid.
Before any investments can be made this year the national budget, which has eluded the government for the past 5 years, will have to be passed by parliament and continue to be passed for the next five years. In what may be a telling sign of things to come, the finance ministry has announced that they will be proposing the 2011 budget this month, even before the last budget has been passed.
“Success requires continuity of policy and working together, and the second one is more important,” says Hayek. “We will all, the minister included, succeed or fail by the measure of how well we work together.”
If they can’t find a way to do that, Lebanon’s electricity deficit will only increase, meaning in the years to come it will be ever more common for the Lebanese to be applying their make up by flashlight and cooking by candlelight. At least they will know who to blame, that is, of course, if they can find them in the dark.
First published in Executive Magazine’s August 2010 issue