Nothing left to offer

As the Middle East changes Lebanon's voice of opposition is barely heard (Photo: Sam Tarling)

Arabs across the Middle East and North Africa took action for social, political and economic change in 2011; the Lebanese, meanwhile, largely stood silently by as their country continued to revel in sectarianism and a sham ‘democracy’. No more can we claim to be more enlightened or forward thinking than our Arab brethren. What has been made clear over the past year is Lebanon’s rot: from its politics, to its economics, its food and even its collective psychology.

The Lebanese should take a lesson in empowerment from the rest of the region; the longer our situation persists, the more backward we are shown to be. If we continue to avoid the needed fundamental structural change, the socioeconomic situation will only deteriorate, putting us at risk of our society snapping — as it has many times before — resulting in sectarian violence.

But toppling the people at the top is not the answer. At the start of the year, the Hariri government came down and by the middle, Mikati’s had emerged. Yet little changed on the ground.

When Hezbollah and its backers pulled out of the cabinet, causing the Hariri government to crumble, the main reason was that Hezbollah could not tolerate being part of a government headed by a man who would accept it being targeted by the Special Tribunal for Lebanon (STL). The manner in which the excuse given for bringing down the government — the controversy over the so-called ‘false witnesses’ issue — was duly swept under the rug by the new government is yet another example of how internal political squabbling produces few results other than personal political gain.

When the Mikati government emerged in June, it was a by-product of both Syrian pressure to have a government in place that could support it as it came under fire for its brutal crackdown on dissent, and Saudi consent for a prime minister that would protect their interests by playing it down the middle.

What these two instances show is that despite people across the region taking to the streets chanting “Al shaab yurid isqat al nizam” — the people want the fall of the regime (or system) — we are still unable to break the cycle of internal stagnation brought on by external influences. What has kept us in our current state is the self-fulfilling mantra that the people alone cannot change the basic realities of life in Lebanon because there are larger tribes outside the country that manipulate our chieftains. We, their subjects, render ourselves helpless and apathetic because we believe any action taken toward change will ultimately fail. This proved to be true this year, when disorganization and internal bickering caused a youth movement that called for secular change to fall apart from the inside.

But, as the external factors began to change in 2011 — most notably on the Syrian front — a unique opportunity to change how the country is run presented itself. During a year when our economic growth has been erased because of failing infrastructure and a region in turmoil, our socioeconomic sectarian system entrenched by the threat of ‘fitna’ — sectarian discord — is proving unable to protect those it claims it does.

In the absence of societal progress and productive economic growth there is little left for sectarian chiefs to dole out to their subjects. Emigration is proving less of an option as the world deals with the global reality of fewer jobs and less pay. Thus, the support mechanism is, in effect, running low on fuel.

The debacle over raising the minimum wage, which erupted in October, is the best example of this. Once the chieftains realized that simply dishing out more cash to their subjects would bring on further, unsustainable demands due to increasing inflation and unemployment, they backtracked and their impotence became apparent.

When the people realize that the problem is the monopolistic structure of the economy, they will also realize that the solutions necessitate changing the economic nizam. This will undoubtedly play itself out in other areas, from the elections to the water supply, as 2012 progresses. To maintain their system, the chieftains will try to use a weapon they know how to wield best to maintain their power: fear. If it does not work, the only other option for them is fitna, because structural change will result in their own self-destruction.

It is up to the rest of us to decide whether we will continue to be duped by the old ways, or turn on our chieftains and hold them to account.

First published in Executive Magazine’s December 2011 issue

Castles made of sand

When i grow up... I want to get the hell out of here (Photo: Sam Tarling)

A failing economy threatens to leave future generations stranded

When future generations of Lebanese look back on 2011, they may remember it as a year when the economy, having driven up the growth graph since the 2006 war, simply ran out of road at the top and headed off a cliff into recession.

How far the economy has fallen and how much further it may dive is a question that will have no certain answers anytime soon. As Executive went to print 2010’s national accounts — the primary method used to calculate the size and relative growth of an economy — had not yet been released by the government, much less those for three first quarters of 2011.

“Every growth estimate is nothing more than a guestimate,” says Jad Chaaban, acting president of the Lebanese Economics Association. As such, in October the International Monetary Fund guesstimated that this year growth had fallen to 1.5 percent from 7.5 percent in 2010. What makes the outlook even more somber is that it was the second time this year the fund had revised growth downwards; previous to April the growth estimate was still hovering between 2.5 and 4 percent, depending on which international organization you chose to cite. By November the fund went even further.

“After four years of strong growth, Lebanon’s economy has lost momentum reflecting domestic political uncertainty and regional unrest,” said an IMF press release marking the end of their annual appraisal visit to Lebanon. “Latest indicators are pointing to some pick-up in activity, and the economy could grow at 1 to 2 percent in 2011, markedly below an average of 8 percent per year during 2007-10.”

Of course the government itself did no better in calculating growth. The previous finance minister’s budget proposal — which like all other budget proposals since 2004 have not made it past Parliament’s sticky gates — estimated growth at 5 percent.

“You are not walking into a certain environment… If the problem gets worse in Syria all of our exports will go down and we could even have the counter effect, with refugees coming into the country and a huge consumption problem,” said Chaaban. “With this uncertainty that is present today, you can’t just have one scenario. It’s more honest as an exercise to do different scenarios. I’ve never seen anyone give you a real plan for something with one scenario, unless they want to sell you the plan.”

This precipitous fall in economic activity was not only a byproduct of the country’s failing infrastructure or lack of official employment, inflation or economic policies. At the start of 2011 Lebanon got a new year’s shock as the cabinet collapsed over the issue of trying ‘false witnesses’ for misleading the Special Tribunal for Lebanon, set-up to investigate the assassination of former Prime Minster Rafiq Hariri and 22 others in a 2005 explosion. Since then, the issue has largely been ignored, but its repercussions are still being felt.

Almost immediately the readers of Lebanon’s economic crystal balls saw the dark clouds approaching. By the end of the year there was still little consensus over what the ultimate effect was. While the IMF posited a figure of 0.8 percent growth for the first six months of 2011, Finance Minister Mohamad Safadi joined the guessing game in October when he announced that the same period saw no growth and projected a 4 percent outlook for the second half.

“Neither the zero growth for the first half of the year nor the 4 percent for the second are precise or accurate,” says Elie Yachoui, dean of the School of Business Administration and Economics at Lebanon’s Notre Dame University, who agrees that all the indicators suggest that the gross domestic product (GDP) growth for this year will not exceed 2 percent. In an exclusive interview with Executive [see page 84] Safadi explained that the 4 percent projection was based on a “best-case scenario” playing out next year.

“This year [2011] clearly we wasted opportunities from the start, with changes taking place in the Arab world and the collapse of the  government,” said Nassib Ghobril, head of economic research and analysis at Byblos Bank. “If we had a government in place we could have been able to benefit and be on the radar, just like we did in 2008 and 2009 from the global financial crisis. All of this was before Syria. Once that started it affected confidence even more.”

Two months after the government collapsed the situation in Syria erupted, with widespread protests engulfing the nation, which constitutes Lebanon’s only open land border. The effects of the crisis on the economy were palpable, especially over the summer months when many tourists would usually arrive over land. Official figures show a 25 percent yearly contraction in visitors by the end of September — falling to 1.28 million compared to 2010’s year-on-year figure of 1.69 million. The turmoil in Syria was still ongoing as Executive went to print, a fact that Riad Salameh, governor of Banque du Liban (BDL, Lebanon’s central bank, finally admitted last month has hammered Lebanon’s economy.

“Since Lebanon’s economy is so closely intertwined with that of neighboring Syria, the unrest across the border has taken a huge toll on the Lebanese economy,” he said in a television interview in November.

As the terra firma shook under Lebanon’s economy, the structural indicators also gave in. For the first time in many years Lebanon’s balance of payments, a relative measure of money coming in and out of the economy, turned from a surplus to a deficit. A detailed breakdown had not been released by the time Executive went to press (something that used to happen during the days of the surplus) but consolidated figures show that by end-September the deficit had reached $302 million dollars, a far cry from the $186 million surplus posted in September 2010.

In the past the positive balance of payments was heralded as one of the shining beacons of Lebanon’s economic indicators because it overshadowed the balance of trade (the difference between the monetary value of exports and imports in an economy), which subjects Lebanon to a host of economic ailments. All throughout the year the balance of trade was setting record lows, and by the end of September 2011 had reached a five-year nadir of $11.18 billion — constituting a 10 percent increase in the trade deficit on 2010.

That is not withstanding the level of remittances entering the country, which, as Executive went to print, had not yet been released by BDL or the World Bank. Some 45 percent of households have at least one person abroad sending home money, according to research conducted by economist Robert Kasparian, who heads the compilation of Lebanon’s National Accounts.

Last year remittances reached a level of around $8.2 billion, although that figure includes some dubious additions such as payment of salaries from abroad.

“Our economy is more an external economy than an internal economy,” says Notre Dame’s Yachoui. “The remittances of Lebanese workers amount to $8 billion or $9 billion; it’s as if we were exporting such an amount. As long as the global economy is recovering I don’t expect any new crisis in terms of Lebanese employment aboard… unless a new international crisis erupts.” As Executive went to print, the Greek and Italian sovereign debt crises were looming apocalyptically over global markets.

Pressure on the lira

As the rate of growth in the country’s economy nosedived, its currency has felt a downward drag, though, as has been the case since December 1997, the BDL maintained the exchange rate of the lira to the US dollar at 1507.5 through tapping its $30.6 billion war chest of foreign currency reserves. (By the end of September the total foreign assets of the BDL totaled some $32.2 billion, of which $16.2 billion was in gold.)

In the absence of an operational currency exchange market that could be used to value the Lebanese lira, the main indicator of currency pressure is the deposit dollarization rate, which rose during the first three quarters from 63.2 percent to 66.6 percent.

Adding to the weight on the lira and rattling the banking sector earlier this year was the debacle involving the United States Treasury Department and Lebanese Canadian Bank, when the treasury proposed banning US financial institutions from opening or maintaining certain accounts at the bank, in effect forbidding it from using the US dollar. At a time when government was at a standstill, this had reverberating effects on economic confidence due to the suggestion (still unproven) that the bank was working with Hezbollah — which the US has labeled as a terrorist organization — setting off speculation over possible banking sanctions. There are still widespread reports of investigations being carried out by the US treasury into a list of banks, although Lebanese authorities have refuted these. “We have no problems and no issues at all with the American treasury,” insisted Finance Minister Mohamad Safadi when questioned by Executive about his meetings with US officials.

“The dollarization rate is still high but there is no panic or rush to the dollar,” said Ghobril. “There was obviously in the first half of the year, especially during the first few months, but now that is not the case; it’s a stable market. As long as there is no outflow from deposits the [currency] situation will remain stable.” Commercial bank deposits stood at $115.7 billion after the first nine months of 2011, a 6 percent growth year-to-date and a 9.4 percent growth relative to the first nine months of last year.

Feeling the inflation

While exports fell during the first three months of the year, they experienced a relative turn-around over the next two quarters and managed to stay in the black. However, imports have been rising; even in a period of assumed recession when consumption usually falls, the value of imports rose 9 percent year-on-year in the first three quarters.

While on the surface this figure may not seem too much of a worry, it has to be taken into account that Lebanese consumption of imports increased far less than the price they paid for those imports. Fuel prices averaged $113 per barrel in the first nine months of 2011, compared to $77 per barrel in the respective period of 2010, causing fuel imports — which constituted 18.3 percent of all imports by end-September — to rise by 5 percent in value. “Excluding this item, imports that have increased in value are mainly those that are highly affected by the volatility of international prices,” an October trade report issued by the finance ministry said.

Thus, the problem of import inflation is intensifying. Official figures, which are widely discredited by economists, put the third quarter year-on-year consumer price index (CPI), the major indicator of inflation, at 4.8 percent, while the governor of the central bank estimated it will hit 6 percent by year’s end on the back of rising commodity costs.

There is currently no concrete indication of how much this inflation is due to higher import prices and how much is homegrown. According to a World Bank report issued in May regarding 2010, “imported inflation in Lebanon has a strong impact on the CPI because imports amount to… 50 percent of domestic consumption.”

Still, Chaaban, whose organization is carrying out a study to quantify the sources of inflation, deems that the common estimate thrown around — that import inflation constitutes around 70 percent of inflation — is inaccurate. He estimates the figure somewhere between 50 and 60 percent because of the prevalence of what is commonly referred to as “the cartels.”

“If you look at the structure now — what we call the syndicate of this, or the syndicate of that — it’s basically cartels of this or cartels of that,” said Finance Minister Safadi.

At the crux of the matter is the long-standing issue of exclusive agencies, basically monopolies, enjoyed by importers who can sell a given brand in the country. This is compounded by a lack of legal controls on price fixing and other non-competitive practices such as import bans on certain sectors. Politicians, rich families or religious establishments, whose constituents are usually the same people wearing different hats, often own and control these companies.

“The 500 to 600 families that run the country need to admit to themselves that in order to keep the country running they must open up and partner with new companies and open up their capital,” said Chaaban.

A quick fix would be to pass and implement a comprehensive competition law, something that has been drafted and proposed for years but never made it through parliament. Given the make-up of the Lebanese economy and political circles that may not be such a surprise. “With regards to exclusive agents, you have companies that market thousands and thousands of items and the politicians have connections and interests with the oligarchs,” said Yachoui.

Another concern regarding inflationary pressures in the last quarter of the year was a demand put forth in October by the country’s main labor union to increase the minimum wage. The issue was debated widely in the press and in cabinet until the latter decided to impose an increase on the eve of a general strike. Rather embarrassingly for the cabinet, a later decision by the Shura council, Lebanon’s highest court, threw out the measure shortly afterward because it was deemed contrary to labor law. As Executive went to print negotiations between the labor minister and the unions were ongoing and it was not clear when and if a new minimum wage measure would be passed.

A tool to help possibly ease inflationary pressure would be to de-peg the currency from the US dollar and instead peg it to a basket of currencies of countries where Lebanon sources its imports, such as a mixture of the Chinese yuan, the euro and the dollar. This would allow the exchange rate to ease some of the pressure on prices. The country’s main import currency is the euro with Italy, France, Germany, the Netherlands and Spain constituting 28 percent of all imports from 2006 to Q3 2011, followed by China and the United States with 8 percent, respectively. However, such a move would go against the longstanding policy of the central bank to annul the local currency market in the interests of “currency stability.”

“The banking sector has resistance to venturing into complex schemes even if they would probably be beneficial for us as a country,” said Chaaban in relation to such a proposal.

Add or subtract value?

Another further upward pressure on prices is expected to come in the form of an increased value added tax (VAT), as proposed in the 2012 provisional budget. Yet the budget, as well as its associated revenues, is based on growth, which is anything but assured. Minister Safadi told Executive that all items, including VAT, where up for discussion as long as the end result did not increase the proposed deficit figure of $4.14 billion, an 11.4 percent increase on the 2011 budget, which never reached a vote in Parliament.

In theory, the constitution states that the budget needs to be passed by the end of January at the latest. But if it is not, at least according to minister Safadi, “it’s not a catastrophe.” Lebanon has not managed to propose and pass a budget since 2004 and this year looks no more certain, with a host of new taxes on the banking and real estate sectors set to be debated by many of the very same proprietors of these institutions in both cabinet and Parliament.

What is perhaps nearing catastrophe in Lebanon is the state of its infrastructure, with its insufficient water supply and decrepit transmission network, almost nonexistent wastewater treatment, daily power outages, crumbling roads and insubstantial public transportation system. To amend this, vital infrastructure projects such as power plants and water storage facilities, among others, need to be built. The problem is that, with a widening deficit and a debt-to-GDP ratio of some 140 percent (depending on whose GDP figure you use) financing these projects from the government coffers has become nearly impossible, even if a budget is passed. The electricity sector is projected to need some $6.5 billion in investment and water some $8 billion, just in capital expenditure, according to the Ministry of Energy and Water.

“Very simply, our treasury is no longer able to solve any problem related to any public service — that’s it,” says Yachoui. “We are left with only one solution which is a very ‘light privatization’ where we sign investment and management contracts in all the public service sectors with the private sector without selling any of our public services.”

And that is precisely what has been proposed through a draft public-private partnership law that has been through several drafts, with the reasons for its delayed passing unbeknownst to many, including the finance minister.

Gloom on the horizon

The economy looks set to suffer in the year ahead as harbingers of a precipitous slide have been calling out ever more vociferously. The Beirut Stock Exchange, for instance, lost around 20 percent of its value in the first nine and a half months of 2011. A new listing of the national carrier was put on hold indefinitely by the central bank, which owns the airline, and a new capital markets law passed this summer is still to be implemented.

Unemployment is ostensibly on the rise. Few give credence to the official numbers, which have not been updated since 2007, when the figure was put at 9.2 percent. But, according to a leaked presentation about an unfinished project being conducted by the World Bank, unemployment rates amongst men and women are 10 and 18 percent, respectively, which, when added to those working in the informal sector, make up “close to half the labor force.”

Among the few silver linings is an expected increase in telecom penetration due to broadband infrastructure upgrades. The World Bank estimates that every 10 percent increase in broadband penetration accelerates economic growth by 1.3 percent.

“Any analysis of this sector gives you a stand-alone impact: it gives you the potential but not the real growth after impact,” says Chaaban. “If there are more jobs and profits from this sector and then there is inflationary pressure the net effect is zero.”

The telecom sector cannot save the economy on its own, however, and it should be taken into account that the new infrastructure will be owned and operated by the government, and thus it could quash already limited private sector participation [see page 98].

What’s more, as Executive went to print Prime Minister Najib Mikati had announced on a popular TV show that he would resign if funding for the special tribunal for Lebanon was not provided in some fashion by the end of the month.  If that occured it would result in the same scenario that caused the economy to plummet in 2011; the lack of a cabinet. This time, however, it will be more than just internal strains that the economy will have to bear.

“We are still subject to the problems in Syria and what happened in the first part of the year, from which we still haven’t recovered, so the outlook is tied to that,” says Ghobril. “As for the sources of growth, frankly, I can’t see them.”

First published in Executive Magazine’s December 2011 issue

The master of the nation’s purse strings in the hot seat

Safadi looks on suspiciously as I ask him about the cartels that rule the country's economy (Photo: Sam Tarling)

Tasked with putting together a national budget, managing a crippling public debt, as well as paying for a bloated public sector rife with patronage and sectarianism, Finance Minister Mohamad Safadi sat down with Executive to assess how he has fared since taking the helm, and to get his outlook for the country in 2012. 

E  On what basis are we assuming that gross domestic product growth next year will hit 4 percent in real terms considering the Syrian situation, delayed infrastructure reform, a global economic crisis and the fact that most economists do not agree with your projections? 

The assessment is basically that we had, in the first six months of 2011, zero growth and the economic growth took place in the second six months [during which] we are enjoying 4 percent growth up until now. So in 2011, growth will not be more than 2 percent, at best. As such, we forecast that we should have growth of something like 4 percent in 2012, if things do not deteriorate further, based on the situation today. But later, who knows? In the best-case scenario, we are looking at 4 percent.

E  Without growth the whole logic behind the budget is thrown off. Why do you not use scenarios to look at growth and inflation?

Whatever scenario we use, in any case we do not wish to increase our deficit. We have an increase in wages that we are looking at that we have to give. So technically, on top of the 2012 proposed budget [spending], we are going to introduce extra expenditure of roughly $650 million, which should be accounted for. Basically we are revisiting the entire budget because we are not going to say that we had a deficit of $4 billion and then say that we are going to increase it by $650 million. The deficit is not going to increase so we have to find the $650 million from different sources. Whether you cut some expenditure and increase some taxation, or you do it all by cutting expenditures… it’s a work in progress.

E  If it is not done by January then you will have missed the constitutional deadline, in which case we go another year without a budget… 

Not necessarily. We don’t have to go another year without a budget. Yes, it is supposed to be passed in January but even if you pass it a bit late it’s not a catastrophe.

E  You are giving yourself more time despite the constitutional deadline? 

We are not giving ourselves more time. I know that it is going to take more time in the Council of Ministers and the Parliament. What I am saying is there is an expenditure list, and an income list and a deficit figure. The deficit figure is not open for debate; all the other items are. That’s what we are insisting: that the deficit item is not going to increase.

 You said previously that a minimum wage increase would be approved based on three conditions: first of all that subsidies to the needy would be given out… 

I did not say that. What I said was that it should be done.

E  Ok. The other two stipulations were that the competition law is passed and that inflation does not eat up the [wage] rise. What measures have we taken to get there?

Yes. Yet the competition law is not passed by parliament.

E  So there is no intent to do so? If we want to open the market and allow prices to fall we have to get rid of oligopolies, don’t we? 

Yes. Unfortunately, it’s not on the books yet. The law is…

E  …Too sensitive?

It’s not too sensitive. It should have been passed. It’s stopping us from joining the WTO [World Trade Organization]. It’s stopping us from really using the law to make sure that there are no cartels. If you look at the structure now — what we call the syndicate of this, or the syndicate of that — it’s basically cartels of this or cartels of that. So basically we need to pass this law, and there is a lot of work being done so it is not passed. We cannot keep on going down the same route we are.

E  But as finance minister you can say ‘I won’t accept that it is not passed’ before you sign the minimum wage increase… 

Of course I won’t accept that it is not passed. People say that we need the Ministry of Economy and Trade to get involved to check prices and make sure they are not manipulated. But really, the ministry has no legal tools. You can go and say: ‘Ok fine. You are not supposed to raise the prices.’ He [the trader] says: ‘Ok, but what can you do about it?’ There is nothing you can do about it. There is no law. What can you do? Turn your back to him and that’s it.

E  But obviously inflation will be affected if you increase the minimum wage and even more if you increase value added tax [VAT] as well. This will make poor people more vulnerable.

This is absolute bull, if I may say that. The effect on the poor will not be more than half a percent, and the safety net that we are working on in the 2012 budget will not only compensate for half a percent, it will compensate by far, far more than anything that a VAT rise will produce.

E  But in principle the latest proposals show that the government has an over-reliance on indirect taxes. A progressive income tax would be fairer and probably garner more revenue. How far are we from this on an infrastructure level and in terms of political will? 

It is not just a matter of infrastructure; it’s a matter of ethics. It’s a combination of ethics and infrastructure and unfortunately in certain areas we lack both.

E  Which one do we lack more? 

[Laughs and shrugs shoulders]

E  We have seen the public-private partnership [PPP] law proposed ad nauseam as a way to decrease the burden of infrastructure investments on the treasury. Why is there so much resistance to this? 

There is a misunderstanding about these things. There is a misunderstanding about privatization, and there is a misunderstanding about PPP, even though countries like Egypt and even Syria have passed it. There are a lot of countries that we have always claimed we are ahead of in our economic thinking, and we find out that, in reality, we are lacking in certain areas. The misunderstanding is, basically, that the private sector is going to create a monopoly. I agree that the private sector always has the tendency to create monopolies if we do not have the laws [to prevent that]. But a partnership between the public and private sector makes sure that the private sector cannot create a monopoly. It’s actually exactly the opposite.

E  Since the Egyptians cut off our gas supply, how much of an increase do you anticipate to the Électricité du Liban’s [EDL] subsidy? What was the reason for the cut? And is there a plan to resolve the issue?

A $2.2 billion [increase] this year. What is clear now is that we cannot rely on the Arab gas line. Egypt promised us a good quantity initially, then that was reduced to half, then to a quarter; they gave us that quarter for three to four months and then they stopped it. So basically, we have an empty gas line. Syria was continuing the Arab gas line from Homs all the way up to the Turkish borders and we were happy that we would be connected with Turkey so we could shop for our gas from sources other than Egypt. Unfortunately, with the events that are occurring in Syria they were stopped and we are not sure how long it will be before that gas line is ready to be used.

The idea is to put an LNG [Liquefied Natural Gas] plant in the south and keep the gas line input in the north. So when we have gas from the north it can go all the way to the south, and when we don’t have gas in the north we can actually feed from the south, or a combination of both — whatever makes economic sense. So basically if you look at this it’s the only scenario we can live with, and it’s an expensive one. That is why we have allocated LL255 billion [$170 million] in 2012 to continue the work of extending the gas line from the north to the south. If we increase production of electricity and do not lower the cost of that production it means the deficit is going to increase. It’s going to bite even more.

E  You are part of the committee looking at the amendments to the electricity law and have advocated for the Electricity Regulatory Authority (ERA). What prerogatives will the ERA have and what amendments are being discussed?  

We are not reinventing the engine but we know that there are things that do not work. Take for example that the law talks about restructuring the whole company [EDL] and unbundling it. Basically, it says, without saying it, that Électricité du Liban has got to do that work themselves. Well, they can hardly do their accounts. So basically it does not allow for anything else to be done. But what is really important today is to allow for the privatizing of management. Once you do that, you can do everything else.

E  But the energy minister is worried about the regulator taking over his authority. This is the crux of the issue, is it not? 

Yes, but this can be worked out.

E  Do you have any specifics on how? 

Not yet, but we are meeting and moving forward.

E  In the year to come what needs to be done for the economy to recover?

It’s not going to be an easy year. We have to be watchful on every level. We have to make sure that we do not overspend and that we invest as much as possible in improving our infrastructure.

First published in Executive Magazine’s December 2011 issue

The Chabrouh dam is already leaking into the ground while the country thirsts for water and the money to fund it (Photo: Sam Tarling)

Funding disputes drain Lebanon’s supply of the elixir of life

Every year the rain passes over in Lebanon, endowing it with a resource that much of the Middle East can only dream of. But even as those rains fall and the country’s roads turn to rivers, many Lebanese still look up at the sky and ask why their water tanks are empty and their faucets are spitting out nothing but air.

The reason is that since the end of the civil war little has been done to improve water reuse, although a lot of words have been spent. Only one large dam has been built in the Chabrouh area, 40 km outside the capital, holding a maximum of 15 million cubic meters (MCM). The only other major infrastructure project, the Qaraoun artificial lake, carries a maximum of 300 MCM of water and was built in 1959. Combined, their total storage capacity is less than 6 percent of renewable water resources, compared to 56 percent in Tunisia and 117 percent in Syria.

Thus it is little wonder that the water balance, or the relationship between total supply and demand, is estimated at a deficit of around 420 MCM average per year, with Greater Beirut alone facing a daily shortage that ranges between 145,000 and 275,000 cubic meters.

In 2010 the Ministry of Energy and Water issued its National Water Sector Strategy, which gave an unprecedented look at the state of the country’s water sector. The strategy replaced an older document that explored the idea of building dams between 2000 and 2010. Of course, little of that ever happened.

“To me at least we have a kind of plan for once,” says Nadim Farajallah, professor of hydrology and water resources at the American University of Beirut. “At least we know what we have and how much it’s costing us; what we need to do is move forward.”

This time around the strategy is to build a series of dams, artificial lakes and other infrastructure elements to alleviate the entire water sector from shortages. In total it will cost the country around $7.9 billion (LL11.85 trillion) in capital expenditure and another $2 billion  (LL 3 trillion) in operational expenditure by 2020 to rectify the situation, not just in water supply, but also in wastewater and irrigation. And that’s if Lebanon’s notorious geological formations allow for the dams to be built at cost.

That will also require several initiatives on the financial, regulatory and legal fronts, of which none were started in 2011. To begin with the water establishments (WEs), the public sector administrations dealing with water in each region, will have to be staffed and restructured so they can exercise their prerogatives according to Law 221, which lays out how the sector should be organized. In theory the WEs should be financially and administratively independent, but they are far from it. They are also grossly understaffed, as is the Ministry of Energy and Water and the general directorates within it that are concerned with water management.

Regarding financing, the money for all the infrastructure looks like it will have to come from sources other than the national treasury. The Ministry of Finance has a proposed budget of only $46 million for dams and $4 million for consulting services in the 2012 budget proposal, and this is yet to be hacked away at by cabinet and Parliament. “Concerning the remaining allocations for dams, the Ministry of Finance finds it necessary to resort to donor countries and funds, given their willingness to extend soft loans at much lower interest rates than what it would cost if the projects were funded through budget allocations,” the proposed budget reads.

Conflicting messages

The minister in charge seems to disagree. “It appears that again and again the value of deposits in Lebanon are large and Lebanon secures larger funding than is required… hence all that remains is the decision to invest,” said Gebran Bassil, Lebanon’s minister of energy and water at a press conference in October. He also stated that investment should be “translated fully” in the upcoming budget (if it breaks the mold and passes) and was “awaiting discussions.” Previously, a similar debate over funding Lebanon’s decrepit energy sector almost brought down the cabinet. In the time it takes for the government to haggle over the budget — something that began to happen in November — there is no telling where the debate may take the sector or the country.

The problems with international loans are that they require long and extensive feasibility plans and environmental impact assessments, which take time. In March, Minister Bassil’s advisor Randa Nimer told Executive that the only project which was ready and had received approval was the Greater Beirut Water Supply Project (GBWSP), also known as the Awali project. It aims to provide constant water supply to Baabda, Aley, parts of the Metn/Mount Lebanon region, as well as to an estimated 350,000 low-income residents in Beirut’s  southern suburbs. The total cost would come to approximately $370 million, of which the World Bank would put up $200 million in loans, the Beirut and Mount Lebanon Water Establishment some $140 million and the Lebanese government the rest. It will take 50 MCM of water from the Qaraoun reservoir in the Western Bekaa, fed by the Litani River. The water will then be rerouted to the Awali River, treated and then conveyed to Greater Beirut, where, according to the Ministry of Energy and Water, a new network is currently being built that will distribute it to consumers whose homes are to be fitted with new meters.

The project has come under fire for reasons that range from polluted water in the Qaraoun (which was recently found to contain cancerous trace metals) to reportedly less expensive alternatives, which the ministry says will have to be built anyway. Nevertheless, Lebanon’s cabinet has signed off on a number of projects including the GBWSP and the completion of two major projects for irrigation out of the Qaraoun (Canal 800 and Canal 900).

Furthermore, Minister Bassil highlighted at the press conference that the proposed Bisri dam project between the Shouf and Saida is also an “inseparable and integrated” part of the GBWSP and that moving ahead with the larger project without first building the dam would be “an investment that is useless, resulting in paying a lot of money for a little bit of water.”

However, an official World Bank response to a complaint put in by around 50 residents against the project stated: “The Bisri Dam is not a component of the GBWSP nor is it relevant to, or necessary for, the achievement of the objectives of the GBWSP.” This obviously puts the whole issue in question and thus the only project due to start relieving Beirut of its water woes may just run dry before the tap is even turned on.

 First published in Executive Magazine’s December 2011 issue

Short on solutions

Lebanon flys by and EDL stays the same (Photo: Sam Tarling)

The clock ticks as the nation awaits action

Lebanon has spent enough money to build enough nuclear power plants to power the country several times over and still suffers from chronic power cuts and losses. According to the energy ministry, this year the country should lose around $3.9 billion from inaction in the electricity sector, or almost 10 percent of our economy’s estimated value.

According to Finance Minister Mohammad Safadi, the country will spend up to $2.2 billion to subsidize losses of the publicly owned electricity company Électricité du Liban (EDL) in 2011, constituting a 19 percent rise on the previous year. The reason for the hike is that Lebanon’s power plants are mostly powered by expensive gas oil, while a supply of cheaper natural gas from Egypt has been cut off for unknown reasons, said Safadi. Other potential sourcing from Turkey has been made unavailable because of the uprising in Syria. The cost to the government’s coffers does not factor in the close to $330 million spent by households on private electricity generation, according to the latest World Bank estimates, or the losses incurred by businesses, factories and so on.

The lack of action on the part of the Lebanese government is a result of there having been no definitive plan for the sector before 2009 and no investment in it since the 1990s. Not helping matters is the fact that since 2005 there has been no national budget or exceptional spending (extra-budgetary allocation of money that can be approved by the cabinet) on electricity. In the meantime, the price of publicly supplied electricity has remained stable since 1996 and thus, in effect, it has become less onerous to the consumer with rising inflation.

Time to invest

After years of inaction, 2011 will likely be remembered as the year the proverbial ball was at least picked up and put back at the top of the hill. When it will start rolling, however, is another matter.

A five-year strategy to bring 24-hour power to the country was unveiled by the energy ministry in 2009 and approved by the previous cabinet. But as that cabinet crumbled in January 2011, with it went the plan. The stagnancy persisted until August this year when the issue of spending $1.18 billion from the treasury for the production, transmission and distribution of 700 megawatts (MW) of electricity capacity, to augment the current output capacity of around 1,500 MW, was proposed as a draft law by Free Patriotic Movement Leader and Member of Parliament Michel Aoun.

On the surface, perhaps, the issue should not have proved so divisive. Lebanon will need up to 5,000 MW of additional output from various sources to reach 24-hour power. The extra 700 MW was already part of the approved electricity strategy and had been proposed in the 2011 budget.

But the issue set off a political crisis that almost took down the cabinet. The objections to the plan were both technical and political, as cabinet members tossed and tussled over the draft law in August and September. “We can’t tell what the problem is because every day there is a new issue,” said Minister of Energy and Water Gebran Bassil at a September 2011 press conference.

Many cabinet ministers and opposition MPs decried funding from the treasury as a plot for the energy minister to dole out contracts with little oversight as to where the money was heading. Others pointed out that international funds hold lower interest rates than government bonds, but that the energy minister did not want to take that course because doing so would mean increased financial oversight. In response, the energy minister and his office has rejected the suggestions that there will  be insufficient oversight as politically motivated given that the cabinet will monitor spending, along with the Public Tenders Administration and the Audit Court, Lebanon’s financial supervisory body, and that the time it takes to secure funding from international loans is too long.

According to the energy minister, every 1 percent drop in the interest rate on a loan to finance the sector is equal to the subsidies required for two days without electricity, and, he alleges, it would require 18 months to acquire international funding. In the end the energy minister more or less got his way, and an amended form of the original law was passed to spend the money to generate an additional 700 MW, while the cabinet also reinstated the previous five-year electricity strategy. Nevertheless, still another year has passed with no added output in electricity for the Lebanese.

Lost time

“I think 2011 was a lost year… despite the fact that the minister pushed through the $1.2 billion project,” said Albert Khoury, deputy general manager of the Electrical Utility of Aley, a concession that distributes electricity to the district.

As a mild concession to the demands of the opposition and certain acting ministers, the cabinet also agreed to amend the current electricity law, Law 462, and to appoint members to an independent regulator, the Electricity Regulatory Authority (ERA).

Law 462 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.

The energy minister had been staunchly opposed to the regulator because he viewed its prerogatives as something that would impede his authority. The minister himself has a history of being at loggerheads with regulatory authorities, such as the Telecom Regulatory Authority (TRA) during his tenure as telecommunications minister. “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,” said Cesar Abu Khalil, advisor to the Minister of Energy and Water, to Executive in September. “We can’t create bodies and entities just to complicate things.”

Regardless of the ministry’s objections, the ERA should in theory be formed in December 2011 by the cabinet under the recommendation of a ministerial committee and would submit to parliament amendments to the electricity law by January.

“We are not reinventing the engine but we know that there are things that do not work,” said Finance Minister Safadi, who is on the ministerial committee and close to the prime minister.

“I think that we have conflict between the minister, who is in a sense trying to clip the wings of the ERA, and the prime minister who thinks the sector should be run by professionals,” said Khoury. “I think that the PM will have the upper hand… [and] it will happen in 2012.”

The energy ministry and EDL, like most public administrations in the country, do have professionals working with them but suffer from a lack of staff at all levels.

A major function of the ERA would be to give out licenses for power production and distribution (transmission would remain publicly owned and operated under the law) in order to allow the private sector to participate in the electricity sector.

Waiting again

The five-year strategy also calls for increasing the electricity tariff, something the energy minister says will not happen before more public sector electricity is available. In effect, that means the current level of losses in the sector will increase for the time being, especially as oil prices are expected to stay relatively high.

“You can’t put the carriage before the horse,” said Jad Chaaban, acting president of the Lebanese Economics Association and professor of economics at the American University of Beirut. “People will refuse to pay if they don’t see the change. So it’s probably better to get money for financing and get money from the people later on.”

What are also on the books are laws covering the production of renewable energy and a still-evasive law regarding public-private partnerships that could facilitate further investments in 2012.

Moreover, a new distribution project which splits Lebanon into three parts and allows private companies to conduct planning, design, asset management, construction of distribution facilities, meter reading, bill collection and project management is also on the books, although there are legal issues that are stalling the project being awarded.

“What is really important today is to allow for the privatizing of management,” said Safadi. “Once you do that, you can do everything else.”

All this notwithstanding, the electricity sector is one in which things take time. Increasing capacity by 700 MW alone will take four years to complete, and other projects will also need time and money to tender and construct, not to mention operate and maintain. “We might see results of the $1.2 billion project bid on in 2012,” said Khoury. “We can have all the contracts in the world, but I doubt they will finish anything next year.”

First published in Executive Magazine’s December 2011 issue

Theory of evolution

Lebanon's telecom sector still has that 'vintage' feel to it (Photo: Sam Tarling)

Growing pains abound, but Lebanon’s telecoms sector slowly comes of age

Telecommunications in Lebanon has come to embody the fault line along which Lebanese business and government split. While the people who use the communications networks try to progress and join the information age, the sector has lain dormant for years because of both publicly-owned, ineffective infrastructure, and political scuffles over who should control Lebanon’s most profitable public service. In 2011 the plates on either side of this fault shifted, sending economic shockwaves, both positive and negative, throughout the economy.

It all started in January when the then-caretaker Telecommunications Minister Charbel Nahas announced that third generation mobile Internet (3G) would be introduced to the country. 3G technology is a means of incorporating high-speed Internet with mobile devices such as smartphones or using a ‘dongle’ to enable users to access the service on their computers the way they currently use other wireless Internet products, such as the pervasive Mobi and Wise Box. In September, Nahas (by then labor minister) promised speeds averaging 7 megabits per second (Mbps) and up to 21 Mbps. That would equate to 27 times faster than the speed available at the time via a digital subscriber line (DSL), 70 times faster than those available using the general packet radio service and 500 times faster than those available to ordinary cell phone subscribers, according to Nahas.

The initial deadline set by the previous minister was missed. But by mid-November both of Lebanon’s mobile networks had introduced the service to the public. Even so, the average speed of 7 Mbps was not to be.

“It is a work in progress,” said Claude Bassil, general manager of MTC Touch, one of Lebanon’s two mobile telephone operators, owned by the Kuwaiti telecoms giant Zain. “I cannot promise you that the wireless transmission network, meaning the microwaves, will be capable of providing the maximum capacity [21 Mbps] that the sites can handle,” he said in an interview with Executive. Bassil admitted that it will take a year for the network to reach the promised speeds because the transmission networks between the cell towers that correspond with phones and the Internet network are not optimized.

In the interim, mobile operators will have to connect to existing fiber-optic cables, a process that will take months, according to Bassil. Even when that happens, without a complete fiber-optic network installed in the country — something only the government is legally allowed to do — the full potential of 3G will not be reached.

Ogero and Ministry of Telecoms

The 3G project was made possible by an undersea Internet cable dubbed the ‘India-Middle East-Western Europe 3’ (IMEWE3), which has finally been opened up to Lebanon. It was originally been scheduled to come online in March 2010.

The IMEWE3 cable has a total capacity, shared between the many countries connected, of 3.84 terabytes per second. Lebanon’s allocation is 120 gigabits per second (Gbps), up from around 2 Gbps before the IMEWE3 opened up, with the potential to be upgraded to some 300 Gbps at a later stage. The problem with the cable was, perhaps predictably, politics.

Abdulmenaim Youssef, the head of Lebanon’s publicly-owned fixed line operator Ogero, refused to hand over administration of the cable to Minister Nahas in 2011. Ogero is financially and administratively independent of the ministry and has, for the past several years, been at loggerheads with telecommunications ministers, who have been members of the Free Patriotic Movement, which opposes Youssef. Conveniently, Youssef also occupies the post in the ministry that is supposed to oversee Ogero, something also granted by a previous cabinet headed by the opposition. Speaking to Executive in September, he argued that this is not a conflict of interest because the ministry has annulled all contracts with the company because of a dispute over the way invoicing and receipts were conducted; this, however, was not always the case.

According to Youssef, Ogero was appointed to carry out negotiations on the IMEWE3 project by the Council of Ministers. The ministry rejects this as they claim that ‘Ogero Telecom’ — the company listed on the contract with IMEWE3 consortium — was never a commercial company and thus control of the cable should have been returned to the ministry. Even so, Youssef said that while the cable may have been ready for operations in December 2010, a commercial agreement had to be worked out by Ogero in Marseille (where the cable ends) to transfer data from there to the rest of the world, something that was completed in May.

Youssef, who in the past was close to the current opposition and is now believed to be supported by Prime Minister Najib Mikati, is in charge of doling out the necessary international capacity to companies such as service providers MIC1, MIC2, the digital signal processors (DSPs) and the Internet service providers (ISPs) at the telecom ministry. This is done by distributing 2 Mbps bandwidth packages to those who request them.

The ministry recently decreased the price of such packages from $2,700 to $420, ostensibly to facilitate the expected consumption increase and sell them to private sector providers. According to the current telecom minister’s advisor Firas Abi Nassif, 10 Gbps of extra capacity have already been opened up through the IMEWE3 cable. This freed up a major bottleneck in Lebanon’s Internet infrastructure and allowed for the telecom minister to announce a new pricing and capacity structure that would be implemented on October 1.

Fixed and constant problems

The date came with mixed results. Some people benefited from the increase while others were still waiting as Executive went to print. The reasons for the delay are many and technical, but the heart of the matter is that, while the ministry decides to implement, Ogero actually carries out the implementation. The ongoing row between the two government bodies has in effect left people waiting and the promises unfulfilled.

Habib Torbey, president of the private sector Lebanese Telecommunications Association (LTA), explained that many of the problems are related to the transmission network between cabinet offices   — equipment in each neighborhood that connects users to the system. “The users that the [Internet Service Provider] has put on the Ogero [infrastructure] have a problem and this is where things get stuck,” he said. “We see a huge delay in the upgrade and we don’t have a lot of visibility as to when this upgrade will occur. Even when it happens, it’s up to 1 Mbps. They are not giving us 2 Mbps and 4 Mbps.”

“Every few days they upgrade four or five [cabinet offices],” he said, adding that he estimated the upgrade to be around 25 percent complete.

Based on current rates, Torbey estimated it will take around six months for the private sector to be let into all the cabinet offices.  Private sector entities have only been allowed into more cabinet offices since November 2010. According to a statement issued by Minister of Telecommunications Nicholas Sehnaoui, the process aims “to break the grapple hold over the private sector by a political group represented by people in the [ministry’s] administration,” a clear reference to Ogero and Youssef, whom the minister has not met with since taking office.

The problems between the two sides also manifested themselves in a lack of modems for new Internet subscriptions and call cards for payphones because of the dispute over Ogero’s budget, which comes through the ministry. The minister has now found a way to issue both through the postal office but, if history is anything to go by, the row seems far from resolved.

The structure

The telecoms industry is still the only public service that is partially privatized, but only on the retail end. This is because the law that is supposed to govern the sector is not fully applied, resulting in a market landscape where the regulator, the Telecom Regulatory Authority (TRA), cannot fulfill its prerogatives or be financially sustainable because it cannot sell the infrastructure licenses that the private sector seeks. Thus, at the end of the day, the TRA and the private sector remain dependent on the ministry, as do public finances. In February 2012 a new board of the TRA will have to be appointed by the cabinet, something that took five years the first (and last) time around.

Give me my cash cow

By August the revenues of the telecom ministry had reached $961 million and the finance ministry’s telecom revenues are predicted to hit $1.2 billion this year, even after it pays off all its contracts and dues. Making sure that the ministry keeps raking in the money for Lebanon’s cash-strapped government has been the driving force behind sky-high prices for telecom services.

Now there has been an agreement between the finance minister and the private sector to keep government revenue stable in order to decrease prices. “Basically what they agreed with us is that they can reduce their prices, and we are for it,” said Finance Minister Mohamad Safadi in an interview with Executive. “In the end we feel that the revenues are not going to be less and there is a very big chance that they will [rise]… because of increased usage. The intention is to open the market [to the private sector] at the end of the day.”

What that will require is that the minister issues his ‘general policy’ so that the TRA can exercise its right to issue long-term licenses to the private sector, which can then start investing in long-gestation infrastructure projects and bring prices down. The law also stipulates the formation of a corporatized company called Liban Telecom that would replace Ogero and would be able to set prices and standards according to business realities and circumstances.

If this does not happen, the progression of government-run 3G, the inclusion of a new fiber-optic backbone due to arrive in September 2012 and a large discrepancy in operating costs due to government-imposed measures (such as a 20 percent revenue share) will likely box-out the private sector because they will not be able to compete.

One company, Cedarcom, jointly owned by Minister of State Marwan Kheireddine and the son of a former telecom minister, has already submitted a case in Lebanon’s highest court over the government’s 3G project because they claim it will destroy their business. The court already ruled that the government had to stop 3G for one month in 2011 to adhere to a request for information. Now the 3G project is back on and the clock is ticking. Other private sector companies are also worried but are looking for a compromise in the form of a Mobile Virtual Network Operator (MVNO) contract, an industry term for a company in agreement with the owners of a telecom asset that performs services ranging from complete resale to merely offering back office services. LTA’s Torbey confirmed that he was still in negotiations but refused to comment on the level of progress. In the end, no matter what the outcome of the case or the MVNO, if the law is not applied, the direction the telecom industry takes in 2012 will likely remain subject to the political winds of change rather than any plotted economic course.

“I sincerely hope that we put new polices and regulations in place to allow the private sector to play,” said Bassil. “The private sector needs to play a lot in this area and the infrastructure is coming. We are not pretending it’s up to scratch, but it’s coming.”

First published in Executive Magazine’s December 2011 issue