by Sami Halabi
Lebanon’s new electricity law gives little reason to cheer a decrepid sector
Officially charged with powering the nation, Electricité du Liban (EDL) is today perhaps the epitome of Lebanon’s political ineptitude, and one that nearly pulled the plug on the fledgling cabinet last month.
EDL started with promise in the mid-1960s when architect Pierre Neema modeled headquarters in East Beirut’s Mar Mikhael district in a ‘Brazilesque’ architectural style, symbolizing the progressiveness of the sector and the hope that it would host a catalyst of economic growth for decades to come. Today, illusions have dissipated, and the building, with its few working elevators, its dusty façade and its aging workforce, is nothing less than the embodiment of the dilapidated electricity sector in a country where power cuts are the norm and not the exception.
At present, the sector’s output capacity is roughly half of what it needs to meet current peak consumption demand, and by 2016 will be less than a third of what it needs to be. Supply, transmission, distribution and collection will also have to be improved to counteract the 40 percent annual financial losses the electricity sector accumulates, according to the energy ministry. Those are comprised of 15 percent technical losses due to outdated networks and supply lines, 20 percent in non-technical losses attributed to such things as theft of electricity, as well as another 5 percent from the much-politicized issue of unpaid bills that make headlines every time a collector gets a thumping from neighborhood thugs. The magnitude of the problem notwithstanding, the government has done little to nothing in order to develop the sector since the civil war. Instead, it has spent approximately $16 billion on subsidies, maintenance and the construction of a few insufficient power plants. According to Bank Audi, in the past three years alone the government has spent an average of $1.5 billion on covering the deficit of EDL, mostly as a result of a lack of natural gas supplies and high oil prices. EDL cannot adjust its prices — which are set according to an oil price of just $21 — without a cabinet decision. Losses to the economy due to blackouts and related electricity woes are estimated at around $2.5 billion every year, or about 6 percent of gross domestic product. This year alone the government has already paid out almost $684 million from the public purse to EDL, according to figures released by the finance ministry last month.
To add insult to injury, the combination of these factors has resulted in another political debacle that has gripped the nation and delayed the affairs of parliament — all for a stopgap solution to the country’s most precarious public policy predicament.
The general’s plan
In August, Member of Parliament and Free Patriotic Movement (FPM) leader Michel Aoun submitted a one-page law to Parliament asking the government to budget $1.18 billion for the production, transmission and distribution of 700 megawatts (MW) of electricity capacity to augment the current output capacity of 1500MW, as well as the funding of required consultants, over a period of four years.
The proposal immediately set off political fireworks amongst both the opposition and the parliamentary majority, who decried the proposal as too limited in scope and/or oversight, thus putting it in Lebanon’s overstuffed inbox: the cabinet. But it was when Aoun’s bloc threatened to resign that things became particularly heated and the ‘one color cabinet’ became somewhat kaleidoscopic.
Of course, an additional 700MW is just the tip of the iceberg when it comes to addressing Lebanon’s electrical shortfall. Back in 2009, when FPM Minister of Energy Gebran Bassil unveiled his five-year strategy for the sector, Lebanon’s average consumption stood between 2000MW and 2100MW, peaking at somewhere around 2450MW in the summer months. According to the energy ministry, demand growth in 2009 was around 7 percent annually, or 170MW, at peak consumption. Last month, the minister said that demand grows around 200MW to 300MW per year. Do that math and peak consumption today should stand at around 2900MW, meaning the difference between the capacity to be added (700MW) and what is still needed will be roughly same. Factor in another four years before production comes online and it becomes a small drop in the bucket. “It’s not about the [additional] 700MW; it’s about the 5000MW [projected to be needed after 2015],” says Albert Khoury, deputy general manager of the Electrical Utility of Aley, a concession that distributes electricity to the district of Aley. According to Cesar Abu Khalil, advisor to the Minister of Energy and Water, the reason this plan was proposed was because it could be the most easily implemented. It was the only one ready to go to tender, as the pre-qualification standards and conditions had already been completed, and the $1.8 billion budget had already been agreed upon by the previous cabinet and included as part of the draft budget for 2011, even before the five-year strategy was passed.
Although not mentioned in the proposed legislation — something opposition MPs were quick to note — Abou Khalil explained that the project is in line with the original five-year strategy approved in 2010. According to the energy ministry, the total budget for the project came to $850.4 million for installing Combined Cycle Gas Turbines (CCGT), $247 million for the transportation of power, $38.5 million for distribution and $40 million for consulting. Abou Khalil also stated that these figures are “estimates,” and do not necessarily reflect the money that will actually be spent because tenders have not yet occurred. “The accurate numbers will be released and everybody will know [them] when the tenders are done and the contracts won.” Contrary to what had been reported in the Lebanese press, another power plant in a new location will not actually be built, says Abou Khalil. The additional 700 MW will come from an additional CCGT “set”, the term in the power industry for a subunit of a CCGT power plant, at the Deir Ammar power station, generating between 400MW and 450MW and reciprocating engines in Jiyeh and Zouk. The project will also include the rehabilitation and the addition of power units in Zouk, Jiyeh and Deir Ammar to get to the final 700MW.
Deal or bust
While those 700MW may be able to at least account for some of the shortfall, the political fiasco over the project can be seen as a sign of things to come on the road to 24-hour power, which will not be reached for another four or five years even if everything goes as planned.
All other cabinet items were delayed and sessions put off due to the ruckus between Aoun’s 10-member bloc, which insisted the measure be passed as it is, and MP and chairman of the Progressive Socialist Party Walid Jumblatt’s bloc. This prompted mediation efforts from Prime Minister Najib Mikati’s ministers, as well as others from the Amal Movement and Hezbollah.
The reasons for opposition to the matter were unclear but revolved around funding the plan from the treasury rather than from international donors offering lower interest rates. It was eventually agreed that this issue would be discussed at a later stage and the debate then turned to the amendment of the existing electricity law, oversight from the cabinet and the creation of the legally mandated regulator, the Electricity Regulatory Authority (ERA).
As the gloves came off, the divisions in cabinet were clear, with reports of the prime minister slamming the table and screaming at the energy minister, levying counter threats that he too would leave the cabinet for good if there was no settlement. “You taught us to sit on the table and say ‘either you give us what we want, or we go.’ Now, I am using the same thing with you, Gebran: Either you go for the proposal, or I go,” Mikati was reported to have said, according to An Nahar newspaper. Obviously he did not go, and a compromise was reached. When the premier emerged from the secret session he announced that the law had been approved, with amendments. One change was to the allocation of money, which it was determined would be spent over four years — $247 million in 2011, $305 million in 2012, $277 million in 2013 and $252 million in 2014. The prime minister also announced an agreement over a regulatory authority to supervise the sector within three months and the appointment of a new board of directors of EDL within two months.
Regulation or removal of authority
But it was not all celebrations and champagne bottles for the energy minister and his party, as the hangover is sure to come. In theory, there is a law that was passed in 2002 that sets out how the sector ought to be restructured and regulated. Law 462, or the electricity law, is meant to replace the existing legal structure that grants EDL a monopoly over production, transmission and distribution of electricity. The law proposes that the sector be unbundled — separated into generation, transmission and distribution functions — and possibly partially privatized so that the private sector would be allowed to generate and distribute electricity to then sell to the government.
Overseeing all of this would be the ERA, which would set standards, give out licenses for production and distribution and set price ceilings and perform tenders. At least that was the rosy picture.
The reality is that since then there has not been one minister or cabinet that sought to introduce the regulator to the sector, as was supposed to happen. Nor were the implementation decrees issued, which should have taken place three months after the law was published in the Official Gazette almost a decade ago.
“We started drafting it in 1996 and it came out in 2002,” says Roudi Baroudi, an independent energy consultant and secretary general of the World Energy Council’s (WEC) Lebanon Member Committee, who worked on drafting the original law. “We should have had an electricity regulator since 2002. The implementation decrees were ready, the [cabinet] appointments were ready.”
While it may be global best practice, the issue of a sector regulator flares tempers amongst politicians. After Lebanon’s Taef agreement, which ended the civil war, most executive powers were transferred to the individual ministers under Article 66, effectively giving them a legal basis to choose to implement or not implement laws.
In his previous post as telecommunications minister, Bassil was involved in a bureaucratic dogfight with the Telecommunications Regulatory Authority over the jurisdictions of each of their mandates. The issue ended up in Lebanon’s supreme court on several occasions. Eventually, the ministry won out and today the TRA is little more than an advisory body to the ministry and practices very few of its legal functions.
The apparent root of the problem in both the telecom and electricity laws is the way they were written, granting the minister the right to set the ‘general policy’ of the sector.
“The difficulty that we have faced in the Lebanese public administration has been: What is general policy?” says Ziad Hayek, secretary general of the Higher Council for Privatization. Abou Khalil adds that there is no specific political ideology held by the minister opposing the formation of the regulator (which PM Mikati announced should be established three months after an agreement on the 700MW law was reached, per the proposal of Bassil) but “under the present constitution, the minister is the head of his ministry and we cannot create any other body that can shackle him or prevent him from exercising his prerogatives.” Khalil called the time limit for establishing a regulator, “not a deadline [but] an encouragement”.
Mohamad Alem, managing partner of Alem & Associates law firm, who specializes in public sector dispute resolution, said that if, after a period of three months, the minister does not propose the names of those persons who would head the ERA, the premier basically has two options: he either assigns the power to appoint the board of the ERA to the cabinet or removes the minister. Either option would be cataclysmic for the cabinet. Minister Bassil is one of the foremost, if not the foremost, minister of the FPM and the bloc controls a third of the cabinet; thus, the loss of one more minister would bring the whole apparatus crumbling down once again. The press office of the Council of Ministers could not be reached for further clarification.
Amending the law
Generally, there is an agreement amongst most political circles that Law 462 will need to be amended. One of the agreements made at the September 7 cabinet session was that a committee comprised of PM Mikati, as well as the ministers of finance, health, justice, public works and transport, social affairs, energy and economy and trade would look at the introduction of amendments to Law 462.
According to Hayek there are two major areas where amendments are needed: one is the ERA, the second is the corporatization of EDL. When asked by Executive what the amendments he sought to impose were, Minister Bassil refused to comment in detail, saying only that the proposals were related to distribution, production, the ERA and alternative energy. Abou Khalil also declined to comment but did say that the discussions would begin with the proposed amendments already sent to the previous cabinet by Bassil.
With the issue of the 700MW law out of the cabinet, it is now in the hands of a much less amicable body. As Executive went to print, the bill was making its rounds at the joint parliamentary committees before hitting the general assembly. In the first session there was a heated debate between opposition MPs headed by former Premier Fouad Siniora, who reportedly gave a presentation outlining the opposition’s position (namely that there is no mention of international concessionary loans in the law and no mention of the ERA) and then left the room without hearing Bassil’s response.
Already, the ministry’s arch-nemesis, opposition MP Mohammed Kabbani, is threatening further action against the ministry. Kabbani told Executive that if the ERA is not appointed within three months he will demand a vote of no confidence against the energy minister in parliament.
Part of the five-year strategy is to restructure how electricity is distributed throughout the country. The Distribution Service Provider (DSP) project, carried out under the auspices of EDL, will split Lebanon into three areas where electricity distribution, maintenance and collection operations will be allocated to three contract winners over a four-year period. The DSP is a turnkey project where planning, design, asset management, construction of distribution facilities, meter reading, bill collection and project management are integrated, according to the energy ministry. The project is budgeted in the five-year plan at an estimated $361 million and scheduled to take place between 2011 and 2014, with an additional $50 million budgeted for the upgrade and rehabilitation of the system in 2015.
The tender for the project, which was not announced by the ministry’s media office and only mentioned in passing by the minister last month, has already been completed amongst seven principal bidders: the Arabian Construction Company (ACC), ACE, Batco, Butec, Caporal & Moretti, Debbas and Mercury. Each company has entered into a joint venture with a local partner, such as Khatib & Alami and ACC, as well as E-Aley and Batco.
According to Kabbani, however, the project is “definitely illegal… was it done in a way that allows for oversight? It was a tabkha,” or a cooked up deal.
According to Kabbani, the project involves public funds that will be spent without approval from the parliament, in contravention to the public accounting law, while there is nothing in the contracts that assures the government’s revenue will be protected.
He says because the companies are contractually obligated to install, manage and collect payments from consumers, but do not actually get paid a fee directly from the government, they will have to borrow the money from banks to fund their operations. However, to make back their investments Kabbani says that they will take a percentage of the money they collect from consumers, which should go to the government. That percentage is not yet approved by parliament and forms the crux of his objection. Kabbani, however, admitted that he had not seen the tender.
“There are already contractors for collection at EDL. I have always witnessed MP Kabbani emitting his opinion according to his political stance, not technical stance,” says Cesar Abu Khalil, advisor to the Minister of Energy and Water. “I reiterate for him to read the tender books, and the project, before emitting political opinions on a technical matter.”
According to the energy ministry, payment to service providers will be made up of a direct, set payment from EDL’s budget, and another sum determined by the amount of money saved by allowing the DSP to perform functions, such as installation of meters and collection of bills that EDL would normally do or contract out. “Each component [is] based on unit prices adjusted by key performance indicators which were well-defined during the bidding process and able to be accurately calculated during the implementation process,” the ministry says. The five-year strategy also reiterates this point, stating “the recovery of capital and cost of financing will be paid from improved collection.”
“Our remuneration is dependent on how well we perform or on how badly we perform, [with] huge penalties [if] we do not,” says Albert Khoury, deputy general manager of the Electrical Utility of Aley, a concession that distributes electricity to the district of Aley and who is the local partner on the Butco bid. “We need to have results.” In any case, the final call on the legality of the matter will be decided both by the Minister of Finance and the Audit Court before the contracts can be awarded.
No end in sight
What all this means for the consumer is that they should not expect to be relieved of paying for electricity once to the government, twice to private generators, third in the form of a subsidy and fourth, whenever power surges destroy appliances. The political morass that has obstructed the implementation of any electrical progress for decades has not been cleared. Even if the current project is implemented, there will be no impact for four years; all the while the country’s aging infrastructure continues to deteriorate. In short, “there is no conspiracy,” says Khoury. “There is just rotten politics.”