Executive – Sami Halabi

Less every day

Chabrouh Dam,-13 — The minuscule amount of water in the Chabrouh dam is the only water storage achievement the Lebanese government has made since the 1960s (Photo: Sam Tarling)

Pierre may be covered in grease, but he is a happy man. Since he joined the family business five years ago, this has been his best year to date. “Actually, it’s been one of the best years ever,” he says. Pierre and his family are in the water transport business, and through the summer and into the autumn he has been busier than ever, shuttling from one side of the capital to the other cashing in where successive governments’ lack of policy formulation has left the state unable to adequately provide a basic human necessity.

This year has been particularly dry due to the low amount of snowfall last winter. The season for private water supply typically starts around July and, in theory, ends in October when the first rains start to fall. As Executive went to print at the end of October, Pierre’s business was still booming. Last year, he bought a new water truck and says he has easily covered his investment. That’s because over the course of the peak summer season when water is sparse, prices have risen from a minimum of $6.60 per cubic meter (CM) (depending on whether the water tank is on the ground or on the roof) to reach at least $13.30 per CM and up to $20 per CM at the end of last month, says Pierre with a smirk. His continuing success is not surprising given that the World Bank (WB) estimates that 75 percent of total household water expenditure in Lebanon is spent on water provided by the private water market. The sector as a whole is estimated to rake in some $87 million per year.

In theory, all households should receive an average of 1 CM per day, but in reality the amount of water that comes depends on two factors: the number of hours water is provided by the local water authority, if any, and whether the household decides it wants to follow the law. Because of the government’s previous apparent disinterest in organizing the sector, instead of meters and a pay-as-you-go system, households in Lebanon pay one annual lump sum that is disconnected from actual consumption. The cost ranges from $156.5 in Beirut and Mount Lebanon to $117.4 in the Bekaa. Businesses have a different tariff structure depending on the type of establishment.

The only mechanism in place to regulate supply is a “gauge,” basically a plastic hole fitted to the pipe that brings water to households. “Those who remove the gauge get more and those who keep it get less than 1 CM per day,” says Abdo Tayar, advisor to the minister of energy and water and the person spearheading the country’s water strategy formulation.

Depending on the season and the location, water is supplied daily from three to 22 hours per day, according to data from the Ministry of Energy and Water’s (MoEW) draft water strategy acquired by Executive. Speak to Beirut residents in the summer, however, and it is not uncommon to hear them complain of days on end without water. That’s because, unlike electricity, people outside the capital have considerably better supply than those inside it. Officially, residents of Beirut receive three hours of supply per day in the low season and 13 hours in the high season, while the residents of north Lebanon receive 22 hours of supply year-round. Perhaps due to the fact that a private contractor manages water distribution in Tripoli, the city receives running potable water 24 hours a day.

No good reason
The lack of water at the tap would perhaps be understandable if Lebanon was as arid as Jordan or Saudi Arabia. But Lebanon is the only country in the Middle East that does not contain a desert and comes second only to Iraq in terms of renewable water sources, according to the Food and Agriculture Organization of the United Nations (FAO). The three main river basins cover about 45 percent of the country and Lebanon is littered with springs and small tributaries.
But even with these resources, if water is mismanaged, the Lebanese might as well be living in the middle of the Sahara. According to the World Bank, “if no actions are taken to improve efficiency and increase storage capacity, it is estimated that the seasonal imbalance of water resources will lead to chronic water shortages by 2020.”

According to a report by the global water consultancy Global Water Intelligence, Lebanon is already a water-scarce nation, with renewable water resources estimated at 926 CM per capita per year in 2009: just below the 1,000 CM per capita per year threshold that defines ‘water poverty’. That too is expected to fall to 839 CM per capita per year by 2015 because of population growth, and that’s before climate change is taken into account.

“We are going into a phase where we are going to have less and less snow and more and more rain,” says Nadim Farajallah, professor of hydrology and water resources at the American University of Beirut (AUB). “Snow is what recharges our ground water; rain just runs off into the sea.”

Even with all these signs pointing to impending disaster, the real problem may in fact be far worse, since no one really knows the exact amount of Lebanon’s water resources. In the late 1960s and early 1970s, the United Nations Development Program (UNDP) mapped Lebanon’s underground geological structures, including its aquifers. Until today the country has not performed an assessment of how much water these aquifers actually contain or how they can be exploited, and the UNDP’s maps do not cover all of the country, according to Tayar at the energy and water ministry.

Farajallah adds that, “Money has to be spent on this. We need to look at each aquifer, characterize it, understand how much it yields and what is a safe yield. You have to extract as much as you recharge if you want to sustain your source.”
Lacking this research, Lebanon has to rely solely on geological data and extrapolate using a margin-of-error system to reach ‘guesstimates’ of resource levels. At present a project is being undertaken by the Lebanese Center for Water Management and Conservation, an $1.8 million joint UNDP and MoEW endeavor to turn these geological maps into hydrogeological maps. The Italian Cooperation, Italy’s official development agency, will pick up the tab.

The tables have turned
Meanwhile Lebanon’s water table, the level where groundwater rests in a given area, has been falling drastically across the county. To get an idea of the increasing severity of this problem, one need only consider that the water table at the AUB’s farm in the Bekaa rested at between 5 to 6 meters below ground-level in the 1950s, according to Farajallah; today that level has fallen to between 60 to 70 meters down. “That’s one meter per year or so and that’s a hell of a lot,” he says. The level is falling because the country is extracting more groundwater than can be replenished naturally, especially during a dry year such as this one. Tayar estimates that, on average, groundwater replenishment is around 500 million CM per year. This figure is being exceeded by usage due to drilling of unauthorized wells across the country in addition to lax and corrupt enforcement.

“Now there is a price mechanism! It’s known what the price is for protection from the local law enforcement agent” to tap into the government water source, says Tayar, who laments that the ministry does not have the authority to stop illegal drilling or hookups. Not only do illegal wells deplete the country’s natural resources, over-extraction also irreparably damages geological aquifers, adding to the burden of future generations.

In addition, the lowering of the water table in coastal areas creates a phenomena known as ‘saltwater intrusion,’ whereby water from the sea enters freshwater aquifers because of differences in underground water pressure. The process is very difficult to reverse and, in any case, “the harm has been done,” says Farajallah. “We are in Starbucks right now,” he says during an interview in Hamra. “I suggest you go to the bathroom, wash your hands then taste the water. It’s salty. And this is the case in many coastal areas from Beirut to Choueifat.”

The ministry estimates that the total number of private wells exceeds 42,000, as compared to the 620 officially sanctioned and government-owned wells. Private wells’ total yield is estimated at some 440 million CM per year while the government wells draw only 260 million CM. Due to the illegal nature of these wells, however, Tayar admits that their number could be as much as twice the official estimate.

“At the end of the day we can be as hardheaded as we want but the reason someone drills a well is because the government is not providing them with the right amount of water,” says Tayar. “It all goes back to this vicious cycle. I cannot come today and say, ‘close the wells now and bring the levels to equilibrium,’ because there is no alternative for people.” He adds that the issue will have to be resolved gradually, a process that will take a number of years.

Watch what you eat
Of all the problems illegal drilling causes, the most significant may well be its affect on the quality of groundwater. That quality is getting exponentially worse due to the fact that when many of Beirut’s homes were built, they were not connected to the sewage system. As a result people drilled what are known as dry wells and discarded their sewage into them. “Some people had generous contractors who gifted them a cracked dry well called a shattered well,” says Farajallah sarcastically. “That cracked well connected to subterranean water, groundwater, and this caused most of groundwater to be polluted by sewage.”

Since 52 percent of groundwater in the country is being used for irrigation, this means in some areas water contaminated with sewage is being used to water crops. Hardly an appetizing thought. “The layer above groundwater might be contaminated but soil acts as a filter. But if it’s discharged directly, as is the case with a lot of the dry wells, that’s a major problem,” says Farajallah. “Just look at the number of gastrointestinal flus and problems that we have.”
The logical solution to this problem would be to have a proper wastewater treatment system in the country.

Typically some 80 to 85 percent of household water is returned as wastewater and, of that, anywhere from 60 to 80 percent can be reused and even purified to the point where it is drinkable. To reach that point wastewater requires three levels of treatment — something which does not seem to have been the priority of successive governments. A World Bank report released last year described second level treatment as “inexistent.” Most collected wastewater is discharged untreated into rivers and the sea, costing the country an equivalent of more that 1 percent of GDP (around $340 million) due to environmental degradation, according to the World Bank.

Although the percentage of wastewater network coverage is 6 percent above the Middle East and North Africa average of 48 percent, the portion that actually gets treated is an abysmal 4 percent, according to the MoEW’s estimations. The frequency of bacterial contamination also varies throughout the country, ranging from 0 percent in some rural areas to 90 percent in urban centers, according to official data. According to an international development expert, who requested anonymity due to the sensitivity of their relationship with the government, the amount of coliform bacteria — commonly used as an indicator of sanitary quality — in Beirut’s tap water is around 80,000 particles per milliliter. The expert added that the global standard for potable water is no more than 100 particles per milliliter.

Beach sewage-4 — Sewage and stormwater pour onto the public beach in Beirut (Photo: Sam Tarling)

Surprisingly, the problem is not a lack of funding; “The amount of money spent by donors on wastewater treatment is phenomenal and we have practically nothing to show for it,” says Farajallah. The issue centers on the fact that water laws are not fully applied and there is little coordination between stakeholders, such as international donors, the Council for Development and Reconstruction (CDR), the MoEW, regional Water Establishments (WEs) and municipalities.

In the early part of this decade, laws were passed that created five regional water establishments to operate within policy set by the ministry. Wastewater is a perfect example of how this has not happened. Today, most wastewater services are provided and financed by municipalities and small private sector operators.

Law 221, the most recent water reform law from 2000, says that the MoEW should “design, study, and install major water facilities,” but in practice the CDR oversees the building of wastewater treatment plants and then hands them over to the MoEW, says the World Bank. The latter is also in contravention to the law because WEs are supposed to handle “collection, treatment, and disposal of wastewater,” but do not do so because of a lack of resources and capacity. All institutions were meant to be integrated into the WEs two years after the law was passed, but by that time the WEs had only just been set up.

The CDR has also built several wastewater treatment plants which lay idle because “of limited capacity and unfinished water supply network,” according to the World Bank. The Bank financed a plant in Baalbek that was supposed to serve 15,000 people, but has remained nothing more than a concrete ornament since 2000 because of delays in the construction of a wastewater network. Other plants suffer the same fate because they don’t have the electricity, the staff, or the money to run them once the funding for construction runs out.Further evidence of the lack of planning or seriousness on the government’s behalf is the number of vacancies at the MoEW and the WEs. Of the 4,050 staff needed, only 1,334 of the positions are filled at present and the government has put a freeze on new hiring.

“Changing the organizational structures of the WEs will be a long process that will require government approval,” says Manfred Scheu, principal advisor at the German Agency for Technical Cooperation, which is currently aiding the ministry in its draft strategy. “We don’t know which way this will go [politically] and the minister also has his own political agenda.”

But even with all these complications, the draft strategy for the sector notes that within the WEs, routine preventative maintenance of the water network can make up as little as 0.1 percent of total capital costs of civil works. Given that around 48 percent of water in the distribution and collection network is unaccounted for due in part to poor maintenance and antiquated infrastructure, that this investment is so meager speaks volumes about the priority of reform. Furthermore, only network assets in Beirut and Mount Lebanon are fully documented, with the average age of pipes in these areas around 30 years old, while Farajallah claims that there is a section of Beirut’s network in the Corniche El Nahr area that dates back to the Ottoman times.“Saving on distribution is similar to trying to find a new resource,” says Tayar. “The customer doesn’t care if you are treating the pipe or building a dam. In the end they care about more clean water in the tap.”

Damn Dams
Ultimately, even if groundwater is managed well, the networks are maintained and upgraded, and the MoEW and WEs are reformed, the country will still need to store and skillfully manage its surface water. At the moment the country has only around 235 million CM of dam storage capacity, which represents some 6 percent of total renewable water resources. The equivalent ratio of dam storage capacity to renewable water resources in neighboring Syria is 117 percent and in Egypt, a country that is mostly desert, that number is 295 percent.

Most of the storage capacity in Lebanon is in an aging dam in the Qaraoun district on the upper Litani River, which has a technical storage capacity of 220 million CM, though the effective storage capacity is 160 million CM. The Qaraoun dam, built in the 1960s, is rarely cleaned, if at all — this causes sediment to build up at a rate of around half a meter per year, decreasing the amount the dam can hold, according to the international development expert.

As Tayar explains, many of the areas that are upstream from the dam also discharge their untreated water into rivers that feed the dam, thus increasing the amount of polluted water that is then siphoned off to citizens for irrigation.
According to the Food and Agriculture Organization of the United Nations, “geological conditions make construction of storage dams difficult.” Lebanon’s newest dam at Chabrouh (with 15 million CM in storage capacity) had to undergo a “surgical operation,” says Tayar, to close off areas of the dam’s basin that contain carbonate rocks that leak water into the ground, significantly increasing the cost.

He estimates that around 60 to 70 percent of Lebanon is covered by such rocks, called karstic formations, which would require reservoir basins to be made watertight to avoid leakage, causing construction costs to skyrocket.
Tayar insists that no dams will be proposed in the upcoming strategy until they are deemed economically and technically feasible. However, the alternative would be to build costly desalination plants on prime real estate next to the sea and pump salt into the ocean, killing sea life and damaging the marine ecosystem, says Farajallah.

At the moment the only completed plan to improve water management comes in the form of a document that covers the period from 2000 to 2010 called the Integrated Water Resource Management (IWRM) plan.
“It wasn’t really a strategy, it was mostly about construction of dams,” says Scheu from the German development agency. The current minister seems to be following this strategy, though he has met much resistance from the finance ministry, who say that these projects are too expensive for the debt-laden state. Currently two dams and their reservoirs are being built at Brissa in North Lebanon and Qaisamani in the Mount Lebanon area with planned completion dates in 2011 and 2013 respectively; their combined storage capacity will be only some 2.5 million CM, according to Tayar.

Dams are costly to build, but they are also costly to maintain. Like wastewater, if a dam is built and there are no staff to run it then the investment effectively becomes money down the drain. “Dams are not necessarily a fix if organizational structures are not addressed,” says Scheu. Moreover, long and expensive conveyance structures will have to be built to transport water from the dams to households and businesses.

Last month the Lebanese press reported that the World Bank had granted Lebanon $200 million to re-route the Awali River, near Saida, to Beirut. When Executive contacted the World Bank for confirmation, it turned out that only the initial proposal specifications had been approved, and the loan application had been sent to the appropriate board of directors for approval.

The CDR has chosen Washington-based consultant MWH to perform a feasibility study for the project, the initial cost of which is estimated at some $350 million and aims bring an extra 260 million liters of water per day to Beirut. This would help close the capital’s water deficit, which in October stood at an estimated 368 million liter per day. That is, of course, if the project receives financing.

Fortunately for Lebanon, it has a host of willing international financiers, many of whom have already pumped millions of dollars into developing the sector. Just last month the energy minister announced that Iran would invest in Lebanon’s energy and water sectors to the tune of around $450 million.

But what Lebanon really needs is technical assistance and organizational reform, which will not always come from donors. “Arab and Iranian donors are different from Western ones and they won’t necessarily insist on organizational reform,” says Scheu.

Other sources of income are being mulled by the MoEW, which is eager to transition away from lump sum payments to metered billing systems. This would naturally bring revenues in line with consumption and create a sense of the economic worth of water among the population. But Tayar insists that this will have to be done gradually and piloted in specific areas that are provided with the 24-hour service first. Currently, only 10 percent of Lebanon’s consumers have meters but they still pay the standard lump-sum fee.

Rain — All that precious water just runs into the sea (Photo: Sam Tarling)

“Starting 2011, if you build a new house, you can no longer apply for a gauge. It will disappear and only meters will be operational,” says Tayar. But it doesn’t necessarily follow that a metered billing system will be in place; it is a highly sensitive political issue and requires a cabinet decision.

Other sources of revenue include a wastewater tariff to cover the costs of managing wastewater, which are now only partially covered by municipal fees. Because irrigation makes up around two-thirds of Lebanon’s total water usage (groundwater plus surface water) and “irrigation practices are much worse than water supply practices,” according to Tayar, improving the efficiency of irrigation tariff collection will go a long way in making Lebanon’s water sector economically viable. Presently, more than half the irrigation schemes in the country do not have “adequate operations and maintenance,” according to the draft strategy, and most small and medium-sized schemes have no formal organization at all.

Southern sabotage
Whatever action Lebanon takes to bring its water sector up to scratch, it still has little control over how Israel will react to developments on this side of the border. The only understanding that exists is a tacit agreement between the Arab League and Israel drafted in the 1950s called the Johnston Plan, whereby Lebanon would draw only 35 million CM from the Hasbani River, which was proposed but never ratified.

In August of 2002, Lebanon announced that it would draw an additional five million CM from the Hasbani River, which is upstream from Israel and forms the headwaters of Lake Tiberius and the Jordan River. Then Israeli Prime Minister Ariel Sharon claimed that the action was a threat to Israel’s security and threatened all out war against Lebanon, prompting a deluge of international mediation to pacify the situation.
“When the Israelis saw that we were taking less than 10 percent of what was allowed, they shut up,” says Farajallah. In the end, Lebanon buckled under the pressure and only partly implemented the project, though Lebanese politicians claimed it a victory over the “Zionist entity.”

“We are not following any plan except for the natural plan. The water is coming up on our land and we have the right to use it according to our needs. No one can tell us how much we can use and there are — to this date —no agreements on how much we can use,” says Tayar defiantly.

The plan of all plans
Many experts have praised the strategy currently being prepared by the ministry as a good first step. So far, a baseline assessment has been completed and supply-demand forecasting is currently being conducted. The ministry aims to complete a comprehensive strategy and investment plan and present it to cabinet for approval by the end of this year. According to Tayar, the plan will include some sort of private sector participation that will likely come in the form of a build-operate-transfer contract. That will also require a draft public-private partnership law to be passed by Lebanon’s sluggish parliament, which has only managed to pass two piecemeal reform laws since it was sworn in well over a year ago.

Even if cabinet approves the plan, it means little by itself, as funding cannot be provided by the state until parliamentary ratification of a national budget, something that has not occurred since 2004. Previous experience shows that this has acted as the main stumbling block to reform; the implementation of the cabinet-approved electricity reform plan is stalled for this very reason. If recent talk of a cabinet reshuffle pans out, any and all cabinet-ratified plans not yet voted on by parliament would promptly be thrown out the window.

Given the abysmal state of the water sector, the answer to why it has not been a priority for successive governments, or the people who voted them into office, may be more entrenched than the problem itself. “Because basically people don’t care,” says Farajallah. “I cannot [think] of another reason.”

First published in Executive Magazine’s November 2010 issue

Leaving the dark ages

By Sami Halabi

Lebanon’s cabinet approves a plan for an electricity overhaul and opens the door to sectarian influence

Zahrani-13 — There's a long road ahead to reform the Zahrani power station (Photo: Sam Tarling)

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.

Legal issues

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.

Gebran Bassil-5 — The minister is not happy with the prospect of a regluator while he implements his plan (Photo: Sam Tarling)

“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

Talking to the reigns of energy policy

By Sami Halabi

Lebanon’s Energy Minister Gebran Bassil offers an in-depth look at his new power plan

The Energy Minister tells all in a one-on-one (Photo: Sam Tarling)

Gebran Bassil is the minister of energy and water and the former minister of telecoms. In June, the cabinet unanimously approved Bassil’s five-year plan to reform the energy sector. I sat down with the minister for an exclusive interview to discuss how he plans to deal with the private sector, corruption and political interests.

Q: You are looking for a large investment from the private sector, around $2.3 billion as a start, but how are you going to strike a balance between your commitment to not increasing tariffs for another three years, and asking the private sector to build a number of power installations before that?

The tariff structure will be fixed in a way to serve two targets: first, to relieve the government’s subsidy of the electrical sector, and second, to take into consideration the poor people and productive sectors. Buying electricity from the private sector [independent power providers] has a direct effect on the final cost of providing power [to the consumer], because the cost [of producing power] changes.

It will not affect the private sector because the government will buy the electricity from the private sector for an agreed upon price [which accounts for costs]. This will only constitute 1,500 megawatts out of the 4,000 planned, and will affect the total cost the government pays by 35 percent.

Q: But what about the distribution side? The concessions [private electricity distributors] are saying they want to be service providers but without the ability to change prices, are they going to be willing to make the investments?

The distribution side is not taking a risk and this is not fair. We are not asking them to pay us for the quantity of electricity production. We are asking them to pay us what they are collecting on the end-user side, not on the generation side. This is a major guarantee for them but the state also needs a guarantee that they should pay us what we have been collecting, plus a certain margin, plus an incentive for any margins they would add to us. This should give them enough will to rehabilitate the distribution sector and to speed up the installation of the ‘smart grid’ [which distributes power more efficiently].

Q: Are you asking them to enter into a four-year partnership regardless of the cost structure?

Of course. But this four-year partnership will, later on, allow them to be real partners in the distribution sector. Because later if we decide to sell the network or to license it out, then they will be the most adapted to bid.

Q: So you are looking to annul their concession agreements and move them into service providers. How are you hoping to achieve this?

Yes, we will give [existing concessions] the chance to enter. But there will be other companies that will be willing and they will have to compete. If we can give them enough incentives or a priority, in return they would give up on the concessions. We will see, in a fair way, how we can help them. We are looking to solve a problem that is costing the state a lot of money. We cannot afford it. They are making money, so they can make a little bit less. This situation will not go on as is.

Q: There are a lot of public administrations and politicians that are not paying their bills. You said you would publish their names. Are you going to do this? When is the accountability going to come?

We have already cut the power to 50 percent of them and we made the others pay. This is something that is 90 percent done, we are still closing the file on the other 10 percent because they claimed other rights and protested in front of the courts. Now we have another problem between regions and villages, where in some of them we have a high rate of collection and on others we have a very low one.

In the technical losses we also have a large discrepancy where in some places we have 15 percent losses and in others we have 78 percent. We are trying to achieve a certain level of equality between all regions and people. This will be a real sign of reform and send the right message to the people that they should pay because the state cannot pay anymore. We are asking them to contribute in exchange for relieving them from the private generators.

Q: Unbilled electricity is estimated by some experts at as much as 40 percent of the total. Are you looking to re-enact a principle set by former president Lahoud to allow police to accompany search teams and collectors?

We are approaching it in a quiet way. I know there is a lot to be done and I am following up with judges, the police and everyone involved. Arrears are now paid in installments that reach 72 months. We are facilitating this in order to encourage people to pay their dues. The smartest thing is to have a ‘smart grid’, because this is where you are unbeatable. Now they beat you, and we cannot make the police walk with every collector, it is not possible. In order to have 99 percent efficiency we have to have a system that is controlled by us and not by the consumer.

Q: You have stated that you would like to change Law 462 [the electricity law] in order to accommodate for the new plan, In your opinion what needs to change with regards to Law 462?

This is not the place to specify all the amendments that need to take place. But in principle, do we need to unbundle transmission from distribution? Is it possible in a small country like Lebanon? Are we able to liberalize the distribution sector? In some places we cannot reach more than a 5 percent rate of collection, so how will the private sector come in? There are major strategic questions that need answers.

We will have to look at the law after reading the results of the experience that we will go through during the next four years, where we will see if it is possible to have Electricité du Liban (EDL) as three companies or as one. What is more important is that, as it is now, the law is not applicable. If you want to apply it you have to wait a few years. It’s already been eight years and we have done nothing. The law itself talks of a transition period, so we consider this as the transition period: we work according to the law and amend it, taking what is good from our experience and putting it in the law. We need to give it a high priority because it relates to the future of the sector.

Q: Are you for the creation of an Electricity Regulatory Authority (ERA), as stipulated in the law?

It depends on what are our choices in the sector. If the private sector is involved it would need to be regulated by an ERA. So are we able to appoint it now, then wait two to three years until it has its structure and its bylaws?

Q: You seem like you are describing the Telecom Regulatory Authority now.

We don’t want the same thing to happen. We would be mixed up with two sets of prerogatives and have EDL still working and fixing prices. 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. Do you think that anyone can take the decision now to change tariffs?

Q: Well, the Council of Ministers could do it.

Of course. But this is a major political and social decision that you cannot take when you have a sector that is completely paralyzed. You need to bring it up, restructure it, and then you might say ‘this is what we need and this is what we don’t need.’

Q: In your plan you note that many of EDL’s employees are “political appointees and unqualified workers.” Which political parties are you talking about and how are you going to make sure that these parties will not block the corporatization of EDL?

You can never be sure in Lebanon, and you need to be strong enough to forbid them from doing this. It’s much better to have a consensus on the issue just as we had with the plan. Because we cannot be sure, we are not relating everything to the corporatization or unbundling. If someone wants to hinder the process of corporatization, politically they can because it is mostly related to the employees. Once we have all actions moving together, definitely we will have problems and obstacles that stop some, but the other actions will be moving ahead.

Q: If there is political interference, will you move to expose who is responsible by name?

Yes of course. Now I have a plan that is approved and I am accountable for implementing it.

Q: One of the three zoning scenarios you have outlined has caused concern among many people, including the European Union, because it seems to break up the country into sectarian pieces to be split up between the power brokers of Lebanon. Are we planning the sectarianization of electricity in Lebanon?

Is it the job of the EU to determine how we want to distribute electricity? This was based, only, on the electrical distribution that is adopted now in EDL; it has nothing to do with other issues. You have to work based on what you already have. I cannot decompose them and recompose them now.

Q: The fear is that if you use independent power production (IPP) and the large sectarian influences get involved in each area, they will control electricity provisioning to their respective populations.

For me, when I work in a transparent way, I don’t see things in that way. I don’t see a problem once we create a transparent tender for a company to win. 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 IPP.

Q: Why did you forego the option of coal, seeing as it is the cheapest option and it can be cleaned to limit some of its environmental impact?

I did not exclude it. In a sense it can always be adopted if it proves to be possible. First of all, the main pillar of this policy paper is gas, because we will need gas not only for electricity, we will need it later on for industry, transport and domestic use. Once we expand investment on building infrastructure for gas, we will have the power plants working on them as well. It’s complementary. This is what makes the paper not only a policy paper for electricity but also for energy. Gas is not expensive, and it is the least pollutant, which is not the case with coal. Coal has so many complexities in affording the coal and storing it in a country where you don’t have good monitoring on environmental issues. Another issue is that a coal factory is expensive to build and very long term.

Q: What about the potential of local gas, as we have extraction legislation now that is current being considered?

This is another reason we should rely on gas. If we have gas in our seas, let’s take it out and use it. The law will be adopted the way we are presenting it with minor changes. But we will adopt the law and we will stick to two main rules that can be described as political.

First is to have a committee that is under the minister and reports to the minister, who will report to the Council of Ministers. The decisions will be formed technically and transformed politically through institutional means. This will give a guarantee to both the state and the investor that it is a fair, well controlled and monitored process. Secondly, the revenues coming from gas will be put in a sovereign fund to secure its value.

Q: The plan has been approved by the Council of Ministers but parliament has not yet voted on the new laws to be passed. When do you think this will happen?

What we need now is only one law — and we might not even need it — for the production of energy. For this we prepared a small draft. Or we wait for the public-private partnership (PPP) law, which might include this inside it.

First published in Executive Magazine’s August 2010 issue

Burning a hole

Regie-37 — Lebanon's current tobacco legislation stubs out common sense (Photo: Sam Tarling)

Industry lobbyists fight policy change as farmers’ subsidies smoke millions

by Sami Halabi

The Lebanese government has developed a habitual pattern of behavior in regards to progressive policy: the idea is lit with good intentions, smoked by vested interests and political squabbling, then forgotten like ash flicked away in the wind. When not tossed aside entirely, major policy initiatives are often simply relegated to an indefinite sentence in a bottom drawer somewhere in parliament.

There have been signs recently that government may be trying to curb this damaging addiction, however, in light of the tobacco control legislation currently being mulled by politicians.

The first puff

The draft law on tobacco control was first proposed in 2004 by Member of Parliament Atef Majdalni – who was also the acting chairman of the Public Health Parliamentary Committee at the time — as well as MPs Nasser Kandil, Ghattas Khoury and Ahmad Fatfat, only to find itself promptly shelved.

In March 2004 Lebanon signed, and later ratified, the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC). The country has since missed every deadline for the staged implementation of the convention, with none of its articles having yet been applied (see story on page 76).

In 2006, under a new cabinet and parliament, another draft law was again submitted for consideration, a copy of which was obtained by Executive. This new draft was a diluted version of the first, removing clauses pertaining to testing tobacco before sale and confiscation of materials in contravention of the law, and limiting the authority of inspectors to implement the law.

According to the document, these amendments were made after consulting with the Regie Libanaise du Tabac et Tombacs (Regie) — the Lebanese government entity under the Ministry of Finance in charge of tobacco imports and exports and the licensing of farmers, wholesalers and retailers — as well as the syndicate of advertisers, syndicate of doctors and the Ministry of Public Health (MOPH). Even this watered-down version was shelved, however, as the country spiraled into conflict and political stalemate from 2006 to 2008.

Without the new legislation, Lebanon’s tobacco regulation is based on the six-article long Law 394, issued in 1995, which falls well short of the international obligations mandated in the FCTC. The current law states that health warnings should cover 15 percent of advertising media (print, outdoor, TV and cinema) and read: “The Ministry of Health warns: Smoking leads to serious and fatal diseases.”

Notably, it does not forbid the sale of tobacco to people under the age of 18, but bans handing out free samples to this age group.

Starting again

At the beginning of 2009, the draft law was still gathering dust in a government drawer. Executive’s investigation uncovered that the parliamentary Administration and Justice Committee of the previous government went back to the original 2004 legislation and began the entire amendment process over again – work which has continued under the Administration and Justice Committee of the current government. This amendment process includes “consulting and listening to opinions of stakeholders,” according to a source on the committee, who spoke on condition of anonymity.

Regie-5 — Bales of tobacco are stored at the Regie for sale to international tobacco (Photo: Sam Tarling)

These stakeholders include international tobacco companies whose lobbyists sit in on committee meetings — a fact confirmed by several sources close to the proceedings. Lebanon’s three largest tobacco importers, Philip Morris International, British American Tobacco (BAT) and Japan Tobacco International declined the opportunity to contribute to this article.

“The tobacco lobby, like all the lobbies, will try to stop anything that might threaten their business,” says Yassine Jaber, a former minister of economics and trade and current MP in the Amal party.

George Jabbour, president of the International Advertising Agency’s Lebanon chapter, conceded that members of the advertising industry have also lobbied members of the committee, though he disagrees with the ethics of this.

“You cannot change the facts of life, and this is a fact of life,” said Jabbour. “Today, there is a trend and there are proven facts that cigarettes are not a good thing.”

The source on the committee said civil society groups who work on tobacco control issues were not invited to give their opinions.

They went on to explain that a sub-committee, under former minister and MP Samir al-Jisr, has been formed with the purpose of carrying out proceedings without the involvement of industry lobbyists. This sub-committee met twice in April in the presence of members of the Regie and the MOPH.

The absence of an official tobacco lobby at sub-committee meetings is, however, is a matter of switching hats: an international tobacco lobbyist, who asked not to be identified, confirmed that the Regie asked Jihane el-Murr, BAT’s head of corporate and regulatory affairs, to attend sub-committee sessions under the auspices of a “representative” of the tobacco industry, rather than a lobbyist.

The committee source confirmed that subcommittee negotiations are revolving around the details of the advertising ban, the definition of public space, fines on violators, forbidding sales to persons below 18 and the obvious display of cigarettes at retail points.

Tobacco taxation and smuggling

Notably absent from discussions is a hike in tobacco taxation, normally a cornerstone of tobacco control policy.

According to a Turkish international tobacco representative, when tobacco control legislation was introduced in Turkey — which had comparable smoking incidence to Lebanon — consumption dropped some 5 percent. However, when taxes were applied, the market saw a 20 percent fall in consumption.

The government could have, technically, proposed a budget this year including increased taxes on tobacco — it did not (see page 76). The stated reasoning behind this decision, and the impetus to keep tobacco prices low, is the fear of increased smuggling across Lebanon’s porous borders.

“England, a developed country surrounded by water, has a tobacco market of which 30 percent is supplied through smuggling,” said Mohamad Daher, head of the Regie’s anti-smuggling unit. “What about us, whose sea, land and air borders are completely open? How much smuggling do you think we have?”

In the late 1990s then-Prime Minister Salim el-Hoss spearheaded a raise in the tobacco tax. Smuggling soared and the government lost revenue, forcing Hoss to backtrack on the measure. However, another official present at subcommittee meetings, who also spoke on condition of anonymity, attributed the increase in smuggling to Syrian control over Lebanon’s borders at the time, as well as politicians’ protection of smuggling rackets.

The Regie is the only body in Lebanon authorized to license wholesalers and retailers. Presently, there are around 490 licensed wholesalers in Lebanon, who must pay the Regie $10,000 for a license, prove that they have a place to store merchandise and open their books up for spot inspections, according to Khalil Dugan, legal advisor to Regie Chairman Nasif Siklawi.

But as far as licensing retailers goes, nothing has been done for decades. “Because the amounts are small, [the government] deems them negligible,” says Daher. “If you are going to chase people for one or two cartons then you need 1,000 men, and they don’t exist. If you see cigarettes at smeneihs [stores licensed to sell only food], all those cigarettes are smuggled.” Daher’s unit consists of up to 50 inspectors for all of Lebanon.

Farming fear

The combination of increased smuggling and a decrease in consumption would no doubt have widespread economic, health and social effects on Lebanon. But there is one sector in society that stands to lose out more than anyone else.

According to the Regie, Lebanon currently has 24,000 licensed tobacco farmers spread throughout the country, some 57 percent of whom are located in the south. Farmers receive a subsidized set rate for their crops through the Regie’s ‘Price Support Program,’ depending on the quality and type of tobacco they grow.

The price farmers are paid, however, has not changed for 15 years according to MP Jaber, whose electoral support in the south stems from many of those same farmers. At present, farmers in the south and the Bekaa Valley receive an average of $7.46 and $6.04 per kilogram, respectively, for the same type of tobacco, according to the Regie. Farmers in the north produce another type of tobacco used in the nargile, or water pipe, and are paid an average price $6.04 per kilogram.

The total amount paid out to farmers last year was $52.6 million, according to the Regie, an increase of 3 percent on 2008, with the south counting for 61 percent of production last year. Total production of tobacco in Lebanon last year reached some 7.7 tons.

According to the World Bank, on the international market the average price per metric ton of tobacco is $3,500, meaning that the Regie lost some $3,330 per metric ton of tobacco it sold last year, totaling losses of some $25.6 million.

The tobacco bought by the Regie is sold on to international tobacco companies according to a barter system, whereby international tobacco companies buy a share of Lebanon’s tobacco output equal to that of their present market share.

The arrangement constitutes a net loss for the Regie, which still manages to be a profitable organization through money funneled to it from the finance ministry and other activities, including the sale of the local Cedars brand, which is produced at its headquarters in Haddath using Lebanese tobacco.

Meanwhile, the government raked in around $189 million in tobacco tax revenue in 2008, according to the latest data from the World Bank and Lebanese Customs.

Money ain’t everything

While the arrangement is a monetary loss for Lebanon, it does serve several functions that are socioeconomic and political in nature. Farmers are ensured a fixed and steady income, allowing them to stay on their land. This prevents further migration to Lebanon’s cities, which are already struggling to provide infrastructure for urban living (see ‘Development disorder’ on page 58).

To boot, this arrangement helps the main political parties in the south — Amal and Hezbollah — to provide for their key constituents, both keeping the parties in power and maintaining a population base near to the border to stand against Lebanon’s main military threat — Israel.

“In the south our role was more important during the [Israeli] occupation, and even now it is still important,” said a high-ranking member of the Regie, on condition of anonymity.

In a bargain that is renewed annually, international tobacco companies have, for years, enjoyed secure access to the Lebanese market by buying the country’s relatively low-quality tobacco. Marwan Iskandar, economist and managing director of MI Associates, and several other sources who spoke off the record, said that the companies actually discard a portion of this tobacco due to its poor quality.

“In the north we are planting something that does not have a place in the international market,” said the source at the Regie. “We are trying to sell it to the countries that do not know tobacco well.”

The source added that Lebanon used to lose some 500 percent on sales of northern tobacco, though current losses are between 200 and 300 percent. Abdul Mawla el-Mawla, tobacco technology manager at the Regie who is also responsible for buying and selling all of Lebanon’s tobacco, denies that the tobacco is still being discarded, as he claims quality has increased over the years to a level that “has become acceptable” to international companies.

But if tobacco legislation is enacted and consumption decreases, as is expected, a domino effect may occur.

“The international companies will tell me that ‘you are not selling as much for us,’” says Mawla, implying they will change the arrangement. “If my revenues fall, who is going to take Lebanese tobacco? What do I do with the farmers?”

Irrigation irritation

Amal MP Jaber, who holds a parliamentary seat allocated to the Nabatiye district, says he doesn’t see the link between tobacco legislation and his constituents’ livelihoods. He is, however, aware that the situation cannot continue forever. “Nobody in the south of the country is fond of planting tobacco. Tobacco is the most difficult type of crop you can ever dream of; the whole family works 7 days a week to make it,” he says. “Farmers hate the whole system of [growing] tobacco, they hate the way they have to work so hard and how they are humiliated by having to wait in [long] lines when they sell their crops to the Regie.”

According to the World Bank, the average labor days per hectare needed to cultivate tobacco in Lebanon is 610, as opposed to 25 for cereals and 242 for fruits and vegetables.

The bank also estimates that tobacco constitutes a third of household revenue for tobacco farmers, with around 40 percent of them working off-farm and 23 percent rotating tobacco with other crops such as chickpeas and fava beans. “Why do people [in the South] choose tobacco? Because they have no alternative,” says Jaber. Tobacco is a ‘dry plant’, which means it is rain fed and does not require irrigation, an asset currently lacking in much of South Lebanon.

What is vexing about the situation is that there are solutions and the legal infrastructure to facilitate them is already in place. In 1950’s, the government created the Litani River Authority (LRA), mandated to enact projects along the river and around the region. Later, Law 221 — entitled the Water Authority Law — was passed. Its implementation decrees gave the LRA the mandate to irrigate 42 percent of Lebanon, including all of the south and southern Bekaa, not to mention supplying 7 to 10 percent of the country’s electricity through hydropower and providing potable water to 20 percent of the population.

Apparently, the government had other priorities. “If we calculate over the years how much money we have paid to subsidize the planting of tobacco, we could have done the Litani river project five times over,” says Jaber. “Unfortunately, there has not been a sense of responsibility…”

Environmental experts have begun working with the government on proposals to expand the Litani river projects and Jaber added that after receiving $50 million in funding from Kuwait, “we are halfway there.” Whether it will take another 60 years to make it the rest of the way remains to be seen.

In principal, everyone agrees

All the stakeholders Executive interviewed for this article said they were in favor of enacting the proposed tobacco control law, but its actual application will be another issue.

“We are with stopping smoking, and sections for smokers, and all of the elements of the law, and with a complete awareness program; but we have to be realistic. There are people who are addicted,” said Mawla, who advocates having a grace period to implement the law, as do members of the advertising and hospitality sectors.

Rima Nakkash, assistant research professor at the faculty of health sciences and coordinator of AUB’s Tobacco Research Group believes that a grace period will only allow for piecemeal reforms and give stakeholders the chance to dilly dally around the law and maintain the status quo.

With or without the grace period, if the proposed tobacco control legislation is passed without being neutered by amendments, smoking rates and tobacco consumption will undoubtedly decrease in the mid to long term.

“By that time we will have finished the Litani River project,” said Jaber. “God willing, by that time we won’t need to have tobacco plants.”

First published in Executive Magazine’s May 2010 issue

Trapped in inertia

Lebanese telecoms remain in tatters while government dithers over reforms

By Sami Halabi

AAAogero (1 of 1) — The Lebanese know little of modern telecommunications due to their governments disinterest in implementing serious reform of the sector (Photo: Sam Tarling)

Shame is a word used to describe the painful feeling arising from the consciousness of something dishonorable, improper or ridiculous. All of which seem to apply to Lebanon’s telecommunications sector — once the beacon of Middle Eastern telecommunications.

To get an idea of how far Lebanese telecommunications has fallen, a small case study can be considered. In January 1995, Lebanon was at the forefront of the regional telecom industry, with some 512,000 mobile subscribers and 612,000 land-line subscribers. At this time the United Arab Emirates had just introduced mobile telephony and had 737,000 fixed service subscribers, according to the International Telecommunications Union (ITU), the United Nations agency for telecommunications which works with governments and the private sector to promote best market practices. Last month, Etisalat, the UAE state-owned mobile telecom company announced that it had reached 100 million subscribers across the 18 countries in which it operates. Lebanon has just reached around 2.4 million subscribers, around half of the population. Fixed line penetration totaled only 750,000 in March 2009 according to the World Bank.

Riad Bahsoun, telecom expert at the ITU, said Lebanon might reach 100 percent market penetration in second-generation mobile telephony in 2014. That is just four years before the end of Global System for Mobile’s (GSM) generation lifecycle, the measure by which a technology can exist as relevant in a market. In other words, it will take Lebanon another four years to fully adopt what is, even now, relatively obsolete technology, and even that limited progress is nowhere near certain.

Bahsoun, previously identified by the media as a contender for telecom minister, estimates that because best practices have not been followed in Lebanon since 1994, some 12,000 potential jobs have been lost and between $10 billion to $12 billion in revenue squandered. Last year Etisalat made $8.4 billion in revenues and reached a mobile penetration rate of over 200 percent in the UAE alone.

“We lost money, we lost chances, we lost jobs and we lost our dignity,” said Bahsoun.

What now?

Whatever the opportunities lost, one thing is for sure: the wholly government-owned and controlled sector has been making a pretty penny off its current pricing structure, which by far exceeds prices offered in neighboring countries.

According to Lebanon’s finance ministry, $1.36 billion was transferred to the national treasury from the telecom sector’s surplus last year, which exceeds the figure of $1.27 in revenues announced to the press by the telecom minister Charbel Nahas in February. The prices of bandwidth in Lebanon are also amongst the highest in the world, with one megabit per second (Mbps) of dedicated bandwidth costing consumers and businesses $1,350 per Mbps per month.

“If an Internet Service Provider (ISP) is located in Kuwait, Qatar, Bahrain, the UAE or Saudi Arabia, the cost [of dedicated bandwidth] is $100 per Mbps per month,” said George Jaber, director of business development and partnerships in the Middle East North Africa at TATA communications.

But it is not just government ownership that impedes the telecommunications sector from achieving rates of growth similar to neighboring countries. All decisions related to pricing and revenue sharing are decided upon by the 30 member Cabinet, comprising Lebanon’s fractious political elements, while the sector’s governance structure has facilitated political interference, allowed the public sector to maintain its grapple-hold, and made decision making a long and tiresome affair.

Thus, it’s little surprise that Abdulmenaim Youssef, the head of Lebanon’s incumbent public operator, Ogero, also heads the Directorate of Operations and Maintenance at the Ministry of Telecommunications (MOT), whose job it is to oversee Ogero’s operations. Youssef has held both positions for half a decade and cannot be removed from either without a cabinet decision.

The current Telecom Minister, Charbel Nahas, was handpicked by the opposition leader Michel Aoun in a long, drawn-out battle that held up the cabinet’s formation for five months. No one from the ministry, including both director generals and the minister, responded to Executive’s repeated requests to comment.

“Ogero has the capacity today to offer more than two megabits per second. [They could offer] up to 4 Mbps, but they cannot do it because they do not have the tariff structure,” said Gaby Deek, president of the Professional Computer Association of Lebanon (PCA), a non-profit ICT association. The tariff structure cannot be put in place until agreed by the cabinet.

The issue becomes even more egregious when one considers that “half of government revenue from telecom last year was taxes,” according to Deek, who is also a member of the Lebanese Broadband Stakeholders Group, a local lobby group that pushes for broadband in Lebanon. Nahas has repeatedly stated that he seeks to separate commercial activities from taxes in the sector, but ultimately it is not his decision alone.

Change price, change structure

The only recent respite for the sector came in February 2009 when the cabinet decreased longstanding tariffs on mobile communications to levels that are still well outside of regional norms.

A recent World Bank report found that “these price reductions combined with MOT investments into mobile networks, together with the new management fee structure (which creates incentives to expand the subscriber base) have resulted in renewed marketing efforts by the managers of the two mobile service providers, a shift from pre-paid to post-paid subscribers, and recent increases in mobile penetration, yet there was no improvement in the quality of service to the consumers who are still suffering poor quality of service.”

The report also stated that a 10 percent increase in broadband penetration would result in gross domestic product growth between 1.2 percent and 1.5 percent “on a recurring basis.”

The “new management fee structure” the World Bank refers to was an agreement between the Lebanese government and the country’s two mobile operators, Alfa and mtc touch, who currently manage the mobile networks. The yearly one-time renewable contracts had accorded Alfa $6.75 per subscriber and mtc $6.66 per subscriber, in tandem with an aggressive expansion plan implemented by the operators and the ministry. As Executive went to print, the expansion was still underway and a second phase “is being discussed with the MOT to increase capacity up to 1.7 million customers,” for each operator, said Claude Bassil, general manager of mtc touch.

The MOT implemented a revenue sharing agreement with the operators for a period of six months, starting February 1, whereby each firm receives a monthly fee of $2.5 million plus 8.5 percent of revenues generated by the networks. The contracts can be renewed twice for a period of three months at a time.

“Since it is a revenue sharing model, the more revenues the MOT gets, the more revenues mtc touch gets,” said Bassil. “It is, however, more challenging than the previous model because then there was latent demand which we were capturing. But now we have to maximize revenues and increase ARPU [average revenue per user], which has never been easy anywhere in the world.”

Bassil’s company has repeatedly stated that it seeks to acquire a mobile license to own and operate their network, but this has not come to pass and Lebanon’s finance minister has stated to the media that privatization would not occur this year and was only a possibility in 2011.

“Until the privatization process is activated, we will do our best to continue managing MIC2 [the official name of mtc’s network],” said Bassil, who claims his company constitutes 57 percent of the mobile market. “Like any reasonable contract, the current management agreement allows for any party to request an adjustment or a review of certain conditions in case of major changes.”

Even though both mobile operators have expressed their continuing “commitment” to the Lebanese market, one can only wonder how long the operators will have the appetite to stay in a market while not being able to own their operations and set their own prices.

A new plan, sort of…

On the surface, not all the news coming out of the sector is disheartening. In late January, Minister Nahas presented a plan to raise the legal bandwidth in Lebanon from 2 Gigabits per second (Gbps) to 120 Gbps, a dramatic increase of Internet capacity in Lebanon. Lebanon’s total bandwidth is unknown due to the presence of grey and black market participants that make up “40 to 60 percent of the market,” according to Habib Torbey, head of the Lebanese Telecommunications Association (LTA).

All of this will come at a cost. Nahas has stated that he and the finance ministry have agreed to spend $166 million on the expansion plan and include the figure in the next budget, which has yet to be approved by the Cabinet or by Parliament. Lebanon is also expecting to finally connect itself to the International Middle East Western Europe 3 (IMEWE3) network by May, according to the minster. A submarine cable extending from Tripoli to Alexandria, Egypt, would link Lebanon to the network and effectively allow the country to stop relying on Cyprus for an international Internet connection via the CADMOS cable.

Despite media reports stating that Lebanon’s bandwidth will increase to 30 Gbps upon connection, documents obtained by Executive show that the actual capacity of the cable is 300 Gbps upon connection and can increase to 3,840 Gbps. An official from one of the companies investing in the cable, who spoke on condition of anonymity, said that Ogero had invested some $45 million in the cable. The official also said that because Lebanon will only be connected via one of the three fiber pairs — a subdivision of a fiber optic cable — the initial capacity Lebanon will have access to is 120 Gbps, which can be upgraded later to 1.2 terabits per second.

Many in the country are welcoming the addition to Lebanon’s infrastructure, yet it is still “not enough to meet current demand, especially if we intend to have real broadband,” said Mahassen Ajam, commissioner of Lebanon’s Telecommunications Regulatory Authority (TRA).

The finance ministry could not confirm, however, either the cost of the expansion plan or that it did indeed include the IMEWE3 connection, as a spokesperson at the ministry said Ogero is given a lump sum each year to spend at its discretion. Moreover, several experts have contested the proposed timeframe for connecting Lebanon to the cable on technical grounds.

Despite repeated requests to the press office at the telecom ministry for details on the expansion plan, none were forthcoming.

“They haven’t given us a single detail [either] which shows you that something is not right,” said Torbey who is also president of GlobalCom Data Services, which owns Inconet Data Management (IDM), one of Lebanon’s largest ISPs. “If we are not up to speed with the details, then that means that there is not much in terms of details.”

According to the PCA’s Deek, the expansion plan is comprised of 23 projects. Contacted directly by Executive, Imad Maatouk, a department head at the general directorate of construction and equipment at the telecom ministry, would not confirm how many projects comprised the expansion plan, but stated that the ministry was still “studying” the plan. Maatouk also explained that the ministry was still in the process of issuing the tender book and added that “the minister is an economist, so surely his budgeting will be based on things that are very clear.”

Nonetheless, the lack of information has led some to cry foul.

“Because of the inaccuracy of the design it plans to use, the telecom ministry will spend a minimum of $166 million on this project, while it can build a more advanced network for a maximum of $40 million,” said Bahsoun, who is also a member of the International Telecom Council of Lebanon (ITCL), a group of Lebanese nationals in the diaspora who are high-level telecom executives and lobby for best practices.

The cost of the project is also much higher than the $64 million scheme proposed by the last Telecom Minister, Gebran Bassil, in March 2009.

Youssef — the head of Ogero and the MOT’s directorate of operations and maintenance — and Minister Bassil (Michel Aoun’s Son-in-law) were at loggerheads over implementation of the $64 million project.

An intelligence briefing document from the office of the former telecom minister, dated August 27, 2009, obtained by Executive, states: “The project is opposed…by Dr. Youssef, but this everyone knows [sic].” The document also states that, “The managers who are in charge of implementation, Naji Andraos and Aurore Feghali are apparently deliberately delaying the implementation for political reasons.”

Notably, the $64 million plan did not include details regarding the technology, or cost, of the “access layer,” the final crucial link between the telecom infrastructure and the user. Similarly, the structure of the access layer in the current $166 million plan had yet to be finalized, according to Maatouk.

Regardless of what form the access layer will take, the gap in proposed spending is still significant and unexplained. “It makes a big different because up to three-fourths of the cost of the initial $64 million of what was being proposed was related to digging; now it is $166 million and no one knows why,” said Bahsoun.

He explained that in 2002 the ITU presented the Telecom Ministry with an national backbone plan that did not apply the traditional method of creating several “rings” on the national and metropolitan levels, but instead went from the customer to existing infrastructure while allowing a redundancy buffer to ensure continuous service.

“This is what specialist’s call the cost of ignorance and this explains the large gap between the two budgets for the same project,” said Bahsoun. “As we all know, ignorance indeed is very costly.”

Without proper information, no one knows for sure when Lebanon’s telecom troubles will start to clear. The only thing that is certain is that the longer the current situation persists, the more opportunities the country misses.

“You cannot imagine after the crash of Dubai, how many companies contacted us to evaluate the possibility of switching their headquarters to Beirut,” said Torbey. “The single obstacle that prevented them from doing so was the poor performance and high prices of telecom connections.”

First published in Executive Magazine’s March Issue

The fall of Lebanon’s ceramics king

Nepotism and energy prices bring down Uniceramic

by Sami Halabi

Uniceramic once ruled on high in the Lebanese ceramics market. Established in 1973, the company’s fortunes began to fade as it entered its fourth decade of operations — a combination of subsidized imports, record high energy costs, the removal of safeguard measures and an inability to relocate operations outside Lebanon saw Uniceramic’s market position fade.

Today it no longer exists

According to Lebanon’s Ministry of Economy and Trade (MOET), by mid-2006 the company constituted 82 percent of local ceramics production. While this may be an impressive figure, when the total size of the industry is taken into account, it becomes less awe-inspiring. According to government figures, in 2003 local production of ceramics stood at 48 percent of total market share; by 2005 it had dropped to 31 percent.

“Prices fell even though production costs went up. This was reflected in Uniceramic’s decreased profits and with returns on investment registering losses for three consecutive years,” said an official from the Trade Remedies Investigative Authority (TRIA), who asked for anonymity, as they were not authorized to speak to the press.

The TRIA, overseen by the MOET, is the government body that investigates and makes recommendations as to whether measures should be taken to protect certain strategic industries.

With surging imports of ceramic tiles flooding the market and costs soaring for the energy necessary to fire the ovens used for ceramics manufacturing, Lebanon’s industry simply had no way to compete with countries such as Egypt and China, which enjoy cheaper labor and energy. As such, in March 2006, the Association of Lebanese Industrialists (ALI) put forward a petition to request safeguard measures be applied to the ceramic tile industry. The subsequent TRIA investigation, completed by May of the same year, found that between 2001 and 2005 imports of ceramic tiles had risen by 63 percent, which it classified as a “significant rise.”

A debate over how much and what kind of protection should be adopted promptly ensued. Lebanon is not a member of the World Trade Organization (WTO), mostly due to matters related to intellectual property and other compliance issues. The country does, however, apply many of the organization’s trading rules, as well as those of the Greater Arab Free Trade Area (GAFTA), that seek to eventually abolish tariffs between most Arab nations.

As a safeguard measure, Lebanon decided to adopt the WTO’s “most favored nation” policy that, basically, states that all countries must be treated equally. Accordingly, in September 2006 the MOET, then under Minister Sami Haddad, proposed to the Council of Ministers that an ad valorem safeguard measure of 20 percent, or a minimum of $2 per square meter (whichever was higher) be applied to ceramic imports for a period of three years, even when these were arriving from GAFTA countries. The Council of Ministers agreed to levy the tax but only for a period of one year, according to official documents obtained by Executive. Both Syria and Egypt promptly filed complaints with the Lebanese Government and the Arab League.

This was not the first time the Lebanese government had granted Uniceramic or the ceramics industry its protection.

They also enjoyed protection up until the post-war government headed by Salim el-Hoss “removed customs on everything, even whisky,” said Joseph Ghorra, chairman and largest shareholder of Uniceramic.

Ghorra explained that the political initiative to protect his industry in 2006 came largely from the late Industry Minister Pierre Gemayel, who was also the main proponent of a bill aimed at protecting national industries from cheaper foreign imports.

“If [Gemayel] had not got into a huge political fight with [then Prime Minister] Fouad Siniora, nothing would have happened,” said George Gorayeb, general manager of Lecico, now Lebanon’s largest ceramics manufacturer, which also benefited from the safeguard measure. (Ghorra actually helped setup Lecico and still owns a stake). Gorayeb said Gemayel was able to get the protective measures instituted for one year, but “when he died, so did [the measures].”

Two months after protection was granted, gunmen assassinated Gemayel in his car.

A little more than two weeks later, on December 8, Lebanon replaced its aging anti-dumping legislation with the “Law on the Protection of National Production.” Under the new law Lebanese industries would be protected from dumping, subsidized imports and substantial increases in imports.

The law looked to be a boon for Lebanon’s industrial sector, long overlooked by policy makers as a potential driver of the country’s economy.

“As long as this was in place the company was making money,” said Fadi Abboud, president of the ALI and Lebanon’s current Minister of Tourism, in reference to the safeguard measure. However, even though the safeguard measure may have kept Uniceramic alive, the company wasn’t exactly kicking.

According to disclosure figures obtained from Zawya Dow Jones, the company had managed to accumulate $8.2 million in losses by the end of 2007, despite having enjoyed the safeguard measure until September of that year.

A large part of this loss was seen to be a result of the company’s cost structure, which relied heavily on the consumption of natural gas. The other culprit was Uniceramic’s loss of market share — resulting from cheaper import prices in lower-end ceramic tiles.

“Egypt is the biggest cause of the flood that started in Beirut on the lower-end of the market,” said Gorayeb, whose company also manufactures ceramics in Egypt.

During the period from 2004 to 2007, Egyptian ceramic tiles constituted a total of 37 percent of total imports, with the rest coming from China, Spain, the United Arab Emirates and Italy, according to the TRIA.

Egyptian ceramics producers are the recipients of longstanding government supplied gas subsidies, which rose from $2.6 billion in Egypt’s 2004 fiscal year, to $11.41 billion in the 2008 fiscal year. Gorayeb explains that as of 2009, his Egyptian factories paid 6 cents per cubic meter in costs, while in Lebanon he pays $1. This, he says, allowed Egyptian products to undercut prices and sell at around 50 cents per square meter below Uniceramic’s prices.

When the company did apply for safeguard renewal in August of 2007, one month before the measure was set to expire, the TRIA began a second investigation, covering the period from 2004 to 2007.

“The picture that emerged during this review was that imports continued to grow, though at a slower place, amounting to 32 percent for the entire investigation period — this is almost half the rate of increase under the initial review,” said the TRIA official.

By September of 2007, the safeguard had lapsed and industry leaders began to get jittery as energy prices continued to skyrocket.

“We asked [the MOET] why did you stop [the measures]? This company will go bankrupt,” said Abboud. “They said: ‘We did not stop. When we gave [protection] to Uniceramic, the implementation procedures had not been issued. In the beginning we did it to placate Pierre Gemayel. [Now] we are going to give it back according to the procedures.’”

The implementation procedures, which total 103 articles, were eventually issued detailing how an investigation would proceed. This time it seemed the investigation would not be a short and sweet affair for the ceramics industry.

“They did not implement [the decree]. They kept asking us to give them numbers…and they didn’t implement it,” said Ghorra.

Others were less forgiving

“We put in a million applications but the people at the ministry are liars, and you can write that and underline it three times,” said Gorayeb. “They are trying to impose their own form of neo-liberalism.”

As Executive went to print, the TRIA had not responded to requests for comment.

While the investigation continued into 2008, Uniceramic was trying to keep its head above water. One of the tenets of the safeguard measure was that those enjoying its protection, such as Uniceramic and Lecico, could not raise their prices.

Nevertheless, real estate executives who spoke to Executive on condition of anonymity complained of a “30 percent rise” in Uniceramic’s prices. Ghorra denied this claim, saying that the perceived rise was due to a new product mix focused on the high-end segment, which Uniceramic was attempting to adopt to adapt their model to the new market realities.

However, as Abboud noted: “A factory cannot survive only on the upper-end, you have to have the bread and butter with an olive.”

The price-fix also came at a time when the market price of ceramics was surging. According to TRIA, during the first three months of the safeguard’s application the average price of ceramics had increased by 50 to 70 percent. The measure has been decried by the industry as yet another reason local ceramics could not take advantage of the increased demand and reconstruction subsequent to the July 2006 war.

“For those families that were forced to rebuild their homes, it is part of the Ministry’s responsibility to ensure that they have access to building materials, such as ceramic tiles, at reasonable prices,” said the TRIA official.

Realizing that their model was unsustainable, Uniceramic attempted to move its operations away from Lebanon. Instead of diversifying its product-mix, as Lecico currently does with its Egyptian production, Uniceramic deemed the market oversaturated and the company attempted to set up shop in gas-rich Qatar.

“The Qatari [Energy and industry] Minister Abdullah bin Hamad al-Attiyah was generous enough to give us a license without a Qatari partner,” said Ghorra, though he added that, “When people saw that we did not have a Qatari partner they started to make things complicated.”

Ghorra said Uniceramic is still actively seeking out a Qatari partner to restart the company in the Gulf.

By April 2008, the company finally threw up its hands and closed its factories in Lebanon’s Bekaa Valley; it also had let go of the majority of its 450 workers. Media reports at the time stated that the company was losing $15,000 per day.

Uniceramic laid the blame squarely at the feet of the MOET.

“Sami Haddad made us empty promises. He kept promising us till he couldn’t any longer and then he told me to take the machines and work outside Lebanon,” said Ghorra.

Haddad, who is now chairman and general manager of Byblos Invest Bank, denies that he made any such suggestions.

Victim of a crisis

Uniceramic administrative council — Uniceramic's board of directors tried to move its manufacturing plant out of Lebanon

“They know what is in their interest and they don’t need my advice. They can manufacture something else,” said Haddad. “It is not very logical for us to try to compete in producing stable commodities. We cannot decide to produce a good with a higher cost, impose it on the consumer and not face competition.

“Don’t forget we were faced with a very strong inflationary pressure at that time; people were clamoring about and everything was expensive.”

It’s worth noting that while the second investigation was ongoing, Lebanon’s government was in the middle of a full-blown political crisis that culminated in the events of May 7, 2008. Masked gunmen from opposing political parties fought battles in Beirut and in the Chouf region. The fighting stopped a few days later, with Lebanon’s political factions eventually signing the Doha agreement, which paved the way to the formation of a new interim government. In July of 2008, Mohamad Safadi became the Minister of Economics and Trade and extended the investigation period to 18 months until February 2009 — the maximum duration allowed by the implementation decree.

“First it was [Minister] Haddad then [Minister] Safadi who asked us to wait until the elections were over,” said Ghorra, referring to the June 2009 elections.

By February of last year it seemed the final nail in Uniceramic’s coffin had been hammered. The MOET adopted the TRIA’s decision to reject the safeguard petition.

“At that point in time, help for the ceramic tile industry was to be found outside the Law of Protection of National Production, given that the main issue in the Uniceramic case is the high energy costs rather than the increase in imports,” said the TRIA official. The official also stated that price hikes subsequent to the lifting of safeguard measures, and the demand for ceramics after the 2006 war, also contributed to the decision.

Almost instantly, industry leaders cried foul, stating that the subsidies foreign importers were receiving were not taken into consideration in the decision.

When Executive contacted the WTO, a spokesperson confirmed that the organization allows any country to “seek the withdrawal of the subsidy or the removal of its adverse effects, or the country can launch its own investigation and ultimately charge extra [countervailing] duties on subsidized imports that are found to be hurting domestic producers.”

When asked if Egypt’s gas subsidies were legal under WTO standing regulations, the organization declined to comment.

Upsetting Egypt by imposing safeguard duties on their exports may not be a wise choice, given that the same gas Cairo offers at subsidized rates to Egyptian industries is now being piped to Lebanon’s power plants, saving the country’s debt-ridden government around $240 million a year in fuel oil expenditure.

“No one, especially in the Arab world, wants to discuss subsidies. The Ministry of Economy is trying to use every trick in the book and find reasons why we should not give Uniceramic any safeguard measures,” said Abboud, who was chosen for the post of tourism minister by opposition leader Michel Aoun.

The Ministry of Economy and Trade is still headed by Mohamad Safadi, a long-time member of Parliament and part of the ruling March 14 coalition.

A less than level playing field

The more blatant and pressing issue with regard to safeguards in the Lebanese economy relates to which industries are receiving protection from imports. Currently, cement and electric cables both enjoy a ban on imports due to trade licensing agreements issued by the Ministry of Industry in 1992 and 1977 respectively. These industries do not have to go through the laborious process of investigations and petitions that other industries seeking protection must endure.

“They say cement is strategic but are electric cables also? When we look we find out there are a lot of companies that are enjoying safeguard measures,” said Abboud. “There is no economic logic; it looks like it very much depends on who owns what.”

The Ministry of Industry did not respond to requests for comment.

What is even more incredulous is that some of the owners in these industries are the most influential political figures in Lebanon. Walid Jumblat, an MP and head of the Progressive Socialist Party (PSP), is chairman and general manager of Ciment de Sibline, a company with a production capacity of 1 million tons of cement per year. The PSP also currently holds three seats in Lebanon’s Cabinet, including the Ministry of Public Works and Transport, which relies on cement to develop its projects.

Jumblat owns a 19.16 percent stake in the company along with GroupMed, owned by Prime Minister Saad Hariri and his family, which has a 19.65 percent stake.

Holcim Liban, Lebanon’s largest cement producer, is partly owned by the Maronite church, which has a 4.13 percent stake. The company made $167 million of revenues in 2008.

Haddad called the banning of cement imports a “mistake” and agreed that protection was being applied selectively. “Uniceramic has been discriminated against unfavorably; other industries are being positively discriminated for. [In that] there is no doubt,” he said.

In September 2009, Uniceramic finally filed for bankruptcy with $12 million in liabilities. When capital losses are also taken into account, Ghorra says the company is down around $17 million. Uniceramic’s shares were delisted from the Beirut Stock Exchange in November of last year.

Nonetheless, Ghorra insists that since energy prices have now stabilized the company can be profitable once again, citing a study conducted by major international accounting and consulting firm Deloitte & Touche. Deloitte & Touche declined to provide the study due to confidentiality constraints. Ghorra was not available for further comment on the issue. Ghorra said that his company has sold Uniceramic’s name to Qatar for $1 million and is currently seeking both foreign and local investors to buy in.

“We are talking to two parties in order for them to buy the entire company, and we are willing to let them keep a part of the staff,” Ghorra said.

It seems the company is not just targeting the private sector for help.

“We did not knock on the prime minister’s door before, but we are knocking on it now,” he added.

As for Lebanon’s industrial sector, it continues to attract less investment and constitutes a decreasing portion of gross domestic product. It may well be the case that unless companies, let alone sectors, are treated equally then this trend will continue, and the fate of Uniceramic may well be replicated across other industries.

“Uniceramic was around for 30 years; in just a few years, energy prices increased, hit its budget and now it’s gone,” said Gorayeb. “We weren’t born just to close factories. We have to get to a point where we have logical solutions because what is happening is not logical.”

First published in Executive Magazine’s January 2010 issue

Lebanon’s elephant in the room

As the public debt looms, many prefer to look away

LEBANON-POLITICS-GOVERNMENT — Lebanon's new cabinet has $50 billion of debt weighing on its shoulders (AFP)

by Sami Halabi

Lebanon’s relationship with debt closely resembles an addiction to alcohol. For starters, it’s quite evident that the country wasn’t thinking straight when it took out loans with interest rates of more than 35 percent to fund its post-war reconstruction. Then, instead of accepting the inevitable fiscal hangover and reforming its institutions, the country continued to borrow money (mostly from its own banks) and spend it on those same institutions that never shaped-up. In order to remedy this situation, it may be wise to refer to the American Psychological Association’s summary of the ‘12 Step Program’, which has helped many overcome alcoholism. The first step states that recovery requires one to “admit that one cannot control one’s addiction or compulsion.”

Lebanon has yet to truly admit that it has a problem. At nearly $50 billion and 154 percent of Lebanon’s gross domestic product, the debt is mounting and the only policy the Lebanese government has enacted is to swap the short-term debt for long-term debt, in an attempt to keep its head above water just that little bit longer.
Now that Lebanon has a new government, a line is again being drawn in the sand between those who believe reducing the debt is the single largest economic problem the government must deal with, and those who consider it to be “perfectly sustainable,” as does Lebanon’s Central Bank Governor, Riad Salameh.

The “sustainable” theory goes that, given the high liquidity levels in Lebanese banks, they have the cash on hand to continue lending to the government to fund its spending; given Lebanon’s high GDP growth rate, government revenues in the form of taxes will grow, bringing down the yearly deficit and, given that the American dollar is forecast to drop in value and most of Lebanon’s debt is priced in dollars, the value of the debt will fall all by itself anyway. If Lebanon is attracting billions of dollars of investment inflows and registering record growth numbers, then why rock the boat? In time, the debt will reach a manageable ratio relative to GDP and the problem will solve itself.

That’s the rosy version, and a line put forward by prominent members of Lebanon’s banking sector, though such optimism may be easier when they hold around $110 billion in assets and are profiting from much of the debt anyway. The rest of Lebanon, however, hasn’t the luxury to be so cheerful while the country runs a deficit of 10.5 percent of GDP and has spent 20 percent more in the first three quarters of 2009 than it did in 2008. Even though these figures may be within global norms today, one must remember that elsewhere in the world government expenditures have skyrocketed to bailout their economies.

There are only two countries in the world that are in a worse state than Lebanon in terms of their burden of debt — one of them is Zimbabwe, where the local currency value has all but evaporated, and the other is Japan, the world’s second largest economy.

Japan already has some of the best infrastructure in the world; Lebanon doesn’t.

With the debt looming overhead, not only is the Lebanese government less able to provide or upgrade their antiquated public services, they also have less ability to fledge many sectors that people depend on such as agriculture or industry, not to mention protect their strategic and military interests. Lest we also forget that another conflict with Israel would completely wipe out Lebanon’s new-found investor confidence, or the fact that our politicians can hardly be trusted not to start another political debacle, putting us back in a situation of low, no or negative growth.
Those who believe Lebanon’s debt is sustainable because of the country’s economic growth tend to gloss over the fact that growth has not been uniform across all sectors, and that this is resulting in an economy that lacks diversification — the Lebanese are placing all their eggs in just a few very large baskets. To make matters worse, other untapped potential markets for development — such as water resources, refining and hydrocarbon development — are still taboo for Lebanon’s economic policy makers.

Basic economic theory, and history for that matter, dictates that for every boom there is a corresponding trough, which means that at some point in the near future the debt will not seem as manageable as some view it during this current growth cycle. Hence, as one European Commission economist stated last October, Lebanon’s fiscal situation is, and will likely remain, “unsustainable.”

Even the likely privatization of telecoms and electricity, from which the proceeds will go to reducing the principal on the debt, will not prove to be a panacea. At present valuations, Lebanon will not get much in return for these national industries due to their dismal state.

A focus on growth should always be a priority for an economy, but the kind of growth currently on the table boxes the economy in and tries to shield it from the inevitable reality of having to deal with the debt. An economy’s sustainability comes from its versitility and ability to grow on many levels — not just its ability to pay the interest on the debt it hopes will go away.

First published in Executive Magazine’s December 2009 Middle East issue

As the public debt looms many prefer to look away

Politics vs. privatization

Telecom sector perpetually on hold

by Sami Halabi

Lebanon is now one of the most expensive places in the world to make a phone call (AFP)

Lebanon knows very little of the advances the telecommunications industry has experienced over the past decade in other Middle Eastern and North African countries. The sector is still wholly owned and controlled by the Lebanese government, meaning there is little industry to speak of.

Throughout 2009, the structure of the industry has hardly changed. Ogero, the government-owned fixed-line operator, remained under the management of the director general of Operations and Maintenance at the telecom ministry, the same body that oversees and issues contracts to Ogero — a setup in gross violation of corporate governance principles.

Profits from telecommunications operations remain a lucrative source of income for the government and the telecom ministry. According to the finance ministry’s 2009 budget proposal, revenues from telecommunications were expected to reach $1.6 billion by the end of the year.

Another front that has seen little if any progress in 2009 is the implementation of Telecommunications Law 431, which calls for the creation of a joint stock company named Liban Telecom (LT). The company would inherit the different areas of Lebanon’s telecom infrastructure from the telecom ministry and merge them into a corporatized entity, paving the way for privatization of up to 40 percent of Lebanon’s telecom landscape within two years.

Kamal Shehadi, chairman of Lebanon’s Telecom Regulatory Authority (TRA), blames former Minister of Telecom Gebran Bassil (who is now Minister of Energy and Water) and the council of ministers (COM) for delaying the appointment of the board of LT that would, effectively, start the process of reform in the sector.

“This is the single most important reform that they…should have done in 2009,” says Shehadi. Without a corporatized body to regulate, the TRA must wrest control of the industry away from the telecom ministry and assert its authority as granted by stipulations in the telecom law. The trouble is, the telecom law itself is written in generalities, such as one, cited by many who support the minister’s authority over the TRA, stating that the minister has the power to establish the “general rules of Telecommunications Services in Lebanon, supervision of such application through reports submitted to him by the Authority [TRA].”

This caused quarrels over prerogatives in 2009, such as the licensing of data service providers and funding to allow the TRA to “create and manage” a national numbering plan, as stated by Law 431.

The law also states, however, that the TRA’s role is to “prepare the draft decrees and regulations” related to the implementation of the law, “and submit them to the minister and give an opinion on draft laws and decrees relevant to the telecommunications sector” — which would require the minister’s pre-approval before any action.
With these issues in the way, the TRA and the ministry have had to refer to the Shura council — Lebanon’s highest court — for a final verdict on who would be granted what authority. The council has yet to make a decision on many of the outstanding issues.

It has, however, passed a verdict on one related to prefixes of mobile telephone numbers, which relates to the quantity of mobile numbers allocated to each of the country’s two contracted operators, Alfa, owned by Orascom Telecom, and MTC, owned by Zain. The decision granted the TRA the legal mandate to dictate to the mobile operators that “71” prefixes would be granted to MTC and “72” prefixes to Alfa in tranches of 1 million numbers at a time, which would allow the TRA greater control over numbering, as opposed to the previous practice of giving out 100,000 at a time. The problem is that before the decision was taken, Alfa had already issued 200,000 numbers with the prefixes of “717” and “716” in accordance with the previous numbering rules set by the ministry.

The decision was made by the Shura council in July, but as Executive went to press, no action had yet been taken to roll back these numbers and Alfa is still “awaiting instructions,” according to its Chairman and Chief Executive Officer Samer Salameh. (No one from MTC was available to comment for this article.)

The numbering issue is just one of many that have made life difficult for Lebanon’s telecom players, who are eager to expand and grow the industry. Both Alfa and MTC need more numbers to distribute now that they have completed an “aggressive plan done on short notice” to increase their capacity, according to Wassim Mansour, country director at Nokia Siemens Networks. By the end of 2009, both operators had expanded their networks from 600,000 subscribers to more than one million each. Salameh says that his company is looking to reach 1.5 million by next year, as the new infrastructure allows them to increase capacity “almost like a software upload.”

The expansion is one part of new management contracts that were signed in February 2009 with Lebanon’s two mobile operators, after the previous government shelved plans to privatize the sector in 2008 on fears that the international financial crisis would sink the offering price of the sector if it were put up for tender.

“There was no decision so there was no alternative,” said Shehadi in April. “The management contacts and their renewal were the only option left. ” The management contracts, which do not allow the operators to set their own prices, are yearly one-time renewable contracts that accord Alfa $6.75 per subscriber and MTC $6.66 per subscriber. Hence, expanding the networks, whose capital expenditures were footed by the government at around “$100 million,” according to Salameh, became a key profit-making opportunity for the two mobile operators.

The problem is that a profitable model does not necessarily entail profits in the real world, at least not in this case.
“Based on that price [$6.75 per subscriber] our speculation was that we were going to lose a significant amount of money in the first year,” said Salameh. “The good news is we lost a bit of money, but far less than expected because we were able to acquire customers faster than we had hoped.”

Salameh stressed that Orascom does not usually pursue management contracts, but did so in Lebanon’s case in order to position itself for eventual privatization of the mobile telecom sector.

Along with the decision to expand the network, the government also enacted a new pricing structure that lowered prices for prepaid monthly subscriptions ($45 to $25), prepaid minute rates ($0.50 to $0.36), monthly subscription fees ($25 to $15) and postpaid minute rates ($0.13 to $0.11), facilitating higher market penetration.
The average expenditure per user dropped from $75 in August of 2008 to the current rate of $50, according to statements Bassil made as he handed over the telecom ministry in November to the new minister, Charbel Nahas. Bassil also stated that throughout his tenure, mobile penetration rates increased from 32 percent to 50 percent, though still significantly below the regional average.

MTC introduced Blackberry to the Lebanese market in February 2009, and Alfa is slated to do the same this December, according to Salameh. In order to encourage adoption, the government lowered prices on service fees (from $45 to $40 per month) and increased usage capacity per user from 20 megabytes to 100 megabytes for both mobile operators.

Fixed line follow-up
Now that the expansion of
mobile networks has been completed, the country’s fixed telecom operations seem ripe for expansion as well.
One project that has been approved by the COM is the $14 million pilot project to lay fiber optic cables in the Hamra and Ashrafieh districts of Beirut. The project will enable the residents of both areas to have faster Internet speeds and will be a litmus test for the implementation of broadband nationwide.

For this project to proceed, however, a long overdue tender would have to be issued by the Department of Operations and Maintenance at the telecom ministry and contracted to the incumbent operator, Ogero. Abdulmineim Youssef, who has close ties to the parliamentary majority, heads both of these entities and many in the parliamentary opposition have accused him of stalling progress at the level of the telecom ministry. Youssef did not respond to Executive’s requests for an interview.

“For the time being, there has been no tender or anything issued,” says Roger Ghorayeb, country
senior officer for Lebanon and Syria at Alcatel-Lucent, the global technology firm responsible for the construction of much of Lebanon’s telecommunications infrastructure.

Privatize or politicize
Authentic competition in Lebanon’s telecommunications market is widely recognized as a necessary condition for the sector to advance, and both mobile operators, Alfa and MTC, have expressed interest in acquiring a stake in any eventual privatization of the industry. Political leaders in Lebanon, however, also own stakes in the same regional and global telecom companies to which the country’s telecommunications sector may be sold, which has prompted criticism as there may be a conflict of interest afoot.

For instance, Prime Minister Saad Hariri is the director and general manager of Saudi Oger, which he owns along with other members of his family. Saudi Oger holds a 41.9 percent stake in Oger Telecom, where it partners with the majority Saudi government-owned Saudi Telecom Company (STC) that owns a 35 percent stake in the company. Oger Telecom is already active in the Lebanese telecom market, where it is majority owner of the Lebanese Internet service provider Cyberia, along with Saudi Oger. Oger Telecom’s chairman is Mohamad Hariri, who is also the chairman and general manager of GroupMed, which owns Lebanon’s BankMed.

Another political figure, former prime minister Najib Mikati and his family, through their M1 Group, are the second largest corporate shareholders in the multinational Mobile Telephone Networks (MTN), which runs operations in Cyprus, Syria, Dubai, Yemen, Iran and several African countries.

In mid-November, Charbel Nahas, a former economist and consultant to the World Bank allied with the parliamentary opposition’s Free Patriotic Movement (FPM), took over the post of telecom minister from Gebran Bassil (FPM leader Michel Aoun’s son-in-law). As Executive went to print, Nahas was involved in drafting Lebanon’s ministerial policy statement and was not available for comment.

Nonetheless, the stage looks set for a bitter battle between those who advocate the speedy privatization of the industry against those who believe that the assets of the telecom industry should be increased before privatization in order to bolster the selling price of the industry.

Paris III advocates the privatization of the telecom sector, as do many within the parliamentary majority. Hezbollah — the lead opposition party which also happens to run its own telecommunications network separate from that of the state’s — has come out against privatization, stressing “the preservation of this national wealth through the sector’s development and improving its services” in its electoral platform prior to the June 2009 elections.

While the new minister had not explicitly stated his position on the matter of privatization as Executive went to print, he has hinted at adopting the latter position, stating that he will not allow the state’s monopoly to turn into a private monopoly, and said he will focus on increasing the assets of the industry.

Even if privatization is not adopted, liberalization and the creation of LT are all viable options for the COM to take. The Shura council will also need to make decisions regarding the dispute over prerogatives concerning licensing regulations. With a new government and a new minister in place, there is some optimism, if not momentum, for telecom sector reforms to finally begin.

“It’s obvious that change is coming and the government is serious,” says Sami al-Basheer al-Morshid, director of the Telecommunications Development Bureau at the International Telecommunications Union, which works with governments and the private sector to promote best practices in the market. However he cautions that expectations “should be realistic.”

“By the end of 2010 we will be asking different types of questions, that is for sure,” he says. It seems 2010 will be another year where the Lebanese will have to wait and see whether their new government takes the call from the telecom sector, or keeps it on hold.

First published in Executive Magazine’s December 2009 Lebanon issue