The shadows of power

By Sami Halabi

Up close Lebanon’s energy overhaul looks like a boon for the sector; but in the distance an uglier reality awaits

Zouk, Lebanon (Photo: Sam Tarling)

Promoting one’s own vested interests has always been the mantra of Lebanese policy makers, and we’ve become accustomed to seeing them endlessly tie up progress until they come to an agreement on how to divvy up the spoils. So alarm bells ring when our so-called leaders finally agree on something.

On the surface the announcement that our cabinet agreed to Energy Minister Gebran Bassil’s 5-year electricity plan looks like a step toward reform. Ostensibly, the plan aims to end the country’s chronic blackouts and relieve the sector’s deficit burden from the government, which amounted to $1.5 billion last year.

But it is likely intended to preserve the minsters’ own interests — such as reinforcing the pillars of the sectarian system through which they secure their influence — before it serves the needs of the people.

What needs to be done is obvious. In production, transmission and generation the sector needs a complete overhaul, and there needs to be a purging of the political patronage systems endemic at Électricité du Liban, Lebanon’s state-owned electricity provider. To his credit, Bassil’s plan addresses these elements in detail and proposes fixes that, according to most experts, could alleviate our short-circuited sector. But before we start to borrow and spend $4.8 billion, we should ask ourselves if this time we do it by the book, or ‘a la Libanaise’.

The convoluted and dysfunctional process by which decisions in the electricity sector are currently made — or more accurately, not made — between the cabinet, the ministry and parliament, is not going to produce decisions that are free from political and sectarian influence.

For all the positive elements of Bassil’s plan, he is advocating against setting up a regulatory body to oversee the overhaul of the system until many of the changes have been implemented. Without the proper checks and balances we risk repeating the same type of ‘sector suicide’ we experienced with telecommunications, which now plagues our economic competitiveness and makes us the laughing stock of the regional telecom industry.

Allowing government to regulate the sector cannot continue, and yet the cabinet has approved the plan in question, provided that it also has the authority to oversee it.

Aside from the opaque manner in which public borrowing and spending of $2.5 billion to reform electricity is being carried out, if the cabinet is allowed to chaperone implementation, the other $2.3 billion being requested from the private sector will also likely be farmed out to sectarian interests, effectively slicing up our electrical pie. Without conflict of interest legislation and a truly independent regulatory body (not one that is also appointed through sectarian patronage,) the provisioning of electrical production and distribution will be subject to the same nepotistic tendering and distribution of power that typifies our existing institutions.

What’s more, if the practice of local distribution is adopted without ensuring that regional leaders do not monopolize the provisioning of electricity to local populations, there will be nothing to stop them from subjugating the people through greater dependency on them for basic services.

Some have suggested that sectarian loyalties are the only way to guarantee customers actually pay their power bill, but if the cost of tariff collection is strengthening an institution that tore this country to shreds and continues to stunt its potential, then I would personally prefer to live in the dark.

With new legislation covering public-private partnerships (PPP) now making the rounds to include the private sector in electrical reform, we have the opportunity to start protecting our economy from conflicts of interest, not just the “principles of transparency and equality among participants,” as the new PPP draft is proposing.

If we are to take the long strides we need to in order to solve our structural problems, such as electricity, once and for all, we cannot do so while ignoring what produced our predicament in the first place — unless of course we want to protect the candle-makers.

A similar version of this article was published in Executive Magazine’s August 2010 issue

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Leaving the dark ages

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

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

Our daily bread

Lebanon, Lebanon making dough, but can’t catch up to what she owes

Prices of bread rose 4-fold in 2008 because of rapid inflation and increasing food costs (AFP)

Judging an economy solely by the numbers rarely reflects the situation on the ground, especially in Lebanon. In 2009, the country experienced an economic roller-coaster with gross domestic product growth estimates ranging from a pessimistic low of 2.4 percent at the beginning of the year — due to the perceived effects of the international financial meltdown — to the optimistic high-end estimate of 7 percent growth some were proffering by year’s end.
While growth of some sort was almost certain, the Lebanese economy is still vulnerable, especially when it comes to managing or reducing its gargantuan debt.

The greatest success story has been in the banking sector, which has seen a 21 percent rise in deposits from September 2008 to September 2009, reaching $92.2 billion, with total assets rising 16.6 percent to $109.9 billion in the first three quarters of 2009, according to the Association of Banks in Lebanon (ABL). Compare that figure to Lebanon’s GDP projection of $32.7 billion — according to the International Monetary Fund — and, considering that banks and governments around the world were reeling from a lack of liquidity, Lebanon’s situation at the end of 2009 is enviable.

Industrial devolution

But a banking sector alone does not an economy make. The high energy prices in 2008 had a knock-on effect for many in the industrial and manufacturing sectors, who finally threw in the towel in 2009. The most remarkable closure was arguably Uniceramic, one of Lebanon’s flagship manufacturers, which produced 82 percent of the ceramic tile market share in March 2006. The company went bankrupt in September after high energy costs, cheaper imports and being stripped of safeguard measures saw its margins plummet. One of the few companies listed on the Beirut Stock Exchange in its early days after the Civil War, Uniceramic was finally delisted once and for all in November 2009.
Another sector that has seen better days is the agricultural sector, not least because of the scandal that erupted late in the year when lax regulation led to poisoned fruit appearing on local market shelves. The issue prompted many agriculturalists to lambast the government for its lack of focus on a sector that is the main source of labor for much of Lebanon’s rural population.

While reliable figures are not readily available, the sector is estimated to be worth some $1.5 billion by those in the industry, and the Economist Intelligence Unit’s (EIU) latest figures, from 2007, put its share of GDP at some 5.2 percent. According to Bank Audi, Lebanon’s agricultural exports amounted to a meager $69 million in the first six months of 2009.

“The share of GDP that agriculture and industry hold is around 15 percent,” says Kamal Hamdan, economist and managing director of the Consultation and Research Institute. “It’s not at the heart of the club,” he adds, referring to the Lebanese government’s focus on other economic sectors such as banking, real estate and services.
The amalgamation of these two faltering sectors, industry and agriculture, may prove to be their salvation. The agro-industry sector has seen double digit growth in the past few years, as well as in 2009, according to Nabil Itani, chairman and general manager of the Investment Development Authority of Lebanon (IDAL), the governmental institution that promotes investment in the agro-industry sector and other “productive sectors.” Again, exact statistics are unavailable.

“We don’t have industrial, tourist or sectoral censuses. We don’t count the production in each sector,” laments Jad Chaaban, acting president of the Lebanese Economics Association (LEA) and associate professor of economics at the American University of Beirut.

Even without sector specific data, indicators show that the tourism sector has done exceedingly well and real estate held relatively stable in 2009 riding, respectively, the 2 million tourists expected to have visited Lebanon by year’s end and a constant flow of real estate investment from inside and outside the country. According to Byblos Bank, by October 2009, a total of more than 1.4 million tourists had arrived in Lebanon, an increase of 46.3 percent over the same period in 2008.

Real estate sales transactions over the year declined by only 3 percent to total 55,482 in the first three quarters of the year, according to the General Directorate of Land Registry and Cadastre (GDRLC). The figures are a marked decline from the 24 percent yearly growth in transactions from 2007 to 2008. The total value of transactions during the first nine months of the year reached $4.3 billion indicating a 6.4 percent drop over the same period in 2008. Be that as it may, the accuracy of these figures has been questioned by some who deem their source, the GDLRC, as susceptible to false declarations from real estate firms and other obfuscating elements.

Karim Makarem, director at Ramco, a Lebanese real estate advisory company, says that one reason for this is because many sales are made off-plan and don’t get registered until buildings are completed.
“Transactions may be done a long time before [they are registered],” he says. “So you might have a situation where the real estate market is very stagnant and the figures being released are ever increasing.”

An elusive formula
When all the figures are tallied, Lebanon’s real economy is expected to have recorded bumper growth in 2009, albeit less than the IMF’s figure of 8.5 percent seen in 2008. The real amount of growth, however, is a contentious topic in the country’s economic community. The latest figures from the IMF predict a total growth of 7 percent for 2009. However, according to Bank Audi’s  research department, the last GDP figures provided by the government are those from 2007.

“You have several problems with estimating GDP. Even the government accounts are not up to date because they run on arrears,” says Chaaban. He predicts that 5 percent GDP growth is a more accurate number considering that “too few companies report their accurate figures. Even when it comes to real estate registration, hardly anyone puts in the right figure. You end up with a system of estimation and not accurate measurement.”

Much of the debate over the country’s accurate GDP centers on methodology. According to Hamdan, the government is currently using the French National Institute for Statistics and Economic Studies’ (INSEE) methodology to calculate GDP. This method offers three different ways to calculate GDP (see box on next page) and uses several parameters that cannot be calculated if sectoral or income-based reporting does not exist or is indeed inaccurate.

“Unfortunately we have no surveys which confirm the situation at the level of the economic sector,” says Hamdan.
The difference in methodologies has prompted organizations such as the EIU to maintain an estimation of 5.1 percent real GDP growth in 2009 as of end-October.

Marwan Iskandar, economist and managing director of MI Associates, however, agrees with the 7 percent IMF estimate made in early October, saying that the figure is not  just down to a bumper tourist season and real estate investments.

“The financial crisis had a beneficiary effect on the Lebanese economy because many Lebanese felt that their money abroad was not that safe, brought it back and are now looking at possibilities,” he says.
Iskandar’s point is substantiated by the fact that recent remittance figures have allayed fears of a decline in non-resident inflows to the country. According to the IMF’s most recent projections, Lebanon will attract a total of $7 billion worth of remittances in 2009, registering a contraction of only 2.5 percent on the previous year. According to Hamdan, some of this is a result of assets being liquidated by non-resident Lebanese, which could result in this phenomena being a one off.

The prognosis of many experts however, is that remittance levels will remain relatively stable in 2010, as the global economy is expected to see some kind of recovery and Lebanon has not seen the massive influx of expats from the Gulf that were expected due to the global downturn.

“There was a presumption that there was going to be massive unemployment in the Gulf and the reality was that while growth was stunted, massive unemployment was not created,” says Rabea Ataya, chief executive officer of Bayt.com, one of the largest recruitment firms in the Middle East.

The increased non-resident interest in Lebanon is also reflected in the growing amount of foreign direct investment in the country. In 2008, FDI reached $3.61 billion, according to a statement made by the United Nations Conference on Trade and Development, and is expected to hit $4 billion this year, says IDAL’s Itani.

Certain elements of Lebanon’s investment climate helped as well, such as the number of procedures needed to start a new business, which remain at five, lower than the Middle East and North Africa’s average of 7.9, according to the World Bank’s “Doing Business Report.” The report also stated that the time needed to complete these procedures had decreased from 11 to nine days in 2009 compared to a regional average of 20.7 days.

Despite the increasingly friendly investment environment, legal recourse in the country remains an obstacle for investors, because of Lebanon’s infamously tedious litigation process and inefficient judiciary.
“For the last 10 years, investors have depended on arbitration [instead of judicial process]. This is a solution because time is money,” says Itani.

As Executive went to press, the Court of Accounts — the judicial body responsible for Lebanon’s Financial Court — had not yet submitted its annual reports for the years 2006 to 2008. Neither had it appointed a new president. The president’s post has been vacant since 2007.

Moreover, the special economic zone in Tripoli that was slated for construction at the end of 2008 was not created, although Itani expects it will be completed by the end of 2010.

Balance it out
One thing the Lebanese economy can also count on is a large and positive balance of payments (BOP) boosted by inflows of remittances, non-resident investment and a positive net increase in the foreign assets of the central bank.
According to the ABL, the first nine months of 2009 saw the BOP come in at a record $4.84 billion with the trade deficit narrowing to reach $952 million in September. Speaking at the Union of Arab Banks annual conference in November, Central Bank Governor Riad Salameh even stated that the balance of payments had reached $6 billion in October.

That bloody debt
As for public finances, there has been little progress. Lebanon’s gross public debt, which is held in most part by local commercial banks, continues to mount and is expected to reach $50.46 billion by the end of 2009, according to Byblos Bank projections. The cost of interest payments on the debt is the heaviest burden the government carries. According to Lebanon’s finance ministry, debt servicing amounted to $2.91 billion in the first nine months of 2009 alone, well on its way to the 2009 budget’s target of $4 billion for the year. That budget, released in August 2009, is just a proposal, however, and has no legal bearing since no budget has been ratified since 2005 by the Lebanese Parliament.

Iskandar predicts that the final amount of debt for the year will come to around $4.4 billion, but he insists the situation is not “destitute” except when it comes to political decisions.

“The government can do something about it [the debt] but they don’t because the political system is based on clientelism and nepotism, not achievement or performance,” he says. Still, Iskandar believes that the situation is better than the numbers suggest, because 83 percent of the debt is held by both Lebanese individuals and institutions that have an interest in continuing to hold this debt, because “it pays rates that you don’t get anywhere else in the world.”

According to Byblos Bank’s estimates, return on Eurobonds ranged between 7.25 percent and 7.35 percent in November 2009. “As long as they are getting their interest and the principal is being paid by issuing [more instruments]…they don’t want to unload because they are earning,” says Iskandar.

Some even suggest that the real burden of the gross public debt is much less than the expected 154.3 percent of GDP projected by Byblos Bank at year’s end. The IMF says that if the government continues to enact “unchanged policies” the ratio could decrease to 151 percent by the end of the year.

Shortage and spending
Even if the country is not on the verge of financial collapse, the real problem of the debt is that servicing it does not allow the government to close the “black holes” that absorb so much of its current spending. The public electricity company, Electricité du Liban (EDL), is a case in point, as it is expected to drain some $1.5 billion from government coffers, according to Mohamad Chatah when he was finance minister in 2009. In the first three quarters of 2009, the government had already spent $1.16 billion on EDL, according to the finance ministry. The budgeted amount to be spent on EDL in 2009 was $1.23 billion, which will likely be overshot by the end of the year.

Most of EDL’s expenditure continues to be allocated to fuel oil imports that are shipped instead of piped, causing them to be even more costly. In September 2009, after repeated delays over issues relating to pricing and quantity, Lebanon began to receive cheaper and more environmentally friendly natural gas piped from Egypt via Syria to run its power plants. The agreement spans 15 years and stipulates that Egypt will supply Syria with 250 million cubic meters (mcm) of gas every year. In turn, Syria will pass on an equivalent amount to Lebanon whose total should eventually increase to 600 mcm per year. In total, the gas is expected to save Lebanon around $240 million based on an oil price of $75 per barrel, according to the investment bank EFG-Hermes, which also owns a minority stake in Bank Audi.

“It’s good to take gas from the Egyptians because the Syrians cannot interfere with it. This is a multilateral agreement and that is the only reason why we received the gas,” says Iskandar.

The agreement is renewable by mutual consent with pricing renegotiated every three years, meaning that the gas is seen as more of a non-stick band aid than a stitch-up for Lebanon’s electricity finances.
“If the Egyptians suddenly don’t like us, they will shut off the gas,” says Chaaban.

In the short to medium term, the government looks set to implement former energy minister Alain Tabourian’s plan of buying smaller generators, which will cost around the same as the amount the government saves from using Egyptian gas. The agreement comes after months of political quarreling over the issue between the ex-minister and former Prime Minister Fouad Siniora. The generators are expected to produce 300 megawatts of electricity, slated to begin operations in the summer of 2010 during the months of the year when electricity consumption peaks.

Gas in hand, the Lebanese government will have some room to maneuver on the electricity issue. However, to make up much of the lost ground, the government will have to enact reforms, such as remote meter reading to replace the “1,900 people who come to measure your meter,” says Iskandar.

Another option is to increase costs of electricity to consumers, given that 38 percent of electricity in Lebanon is generated by private generators, according to Iskandar, and are much more expensive than state-provided electricity.
The proposal seems to be a sound one, according to Hamdan, who says his firm conducted a survey of 2,500 households in Lebanon, the majority of which stated they would be willing to pay higher prices if they were guaranteed 24-hour a day electricity. According to Hamdan, the sector itself will take about five years to reform if the government is serious about undertaking the task. Time looks to be of essence since he also states that electricity consumption is rising at around 10 to 15 percent a year.

A social insecurity
Another state-owned entity that is draining government finances is the highly politicized National Social Security Fund (NSSF). Iskandar, who previously consulted the government on how to reform the fund, says the NSSF is “cancerous and is not going to improve.” There are no reliable figures that detail the government’s liabilities to the fund. One chief executive officer of a Lebanese bank who spoke off the record stated that in the lead up to 2009, the NSSF’s records had not been audited for eight years.

“It is facing a crisis. They are spending money without accounting for it,” says Chaaban.

The 2009 budget proposal bluntly states, if only in small print, that, “NSSF dues have been paid by the Ministry of Finance in previous years but these amounts were not allocated in the national budget.”

Media reports have suggested that the fund is running a deficit of around $456 million and Chaaban states that only 35 percent of workers are registered in the fund because many employers and employees choose not to register. Another statistic that points to the fund’s inefficiency is that government spending on public health was estimated at 12 percent of total spending, or $820 per capita, while Syria spent only $110 per capita and Jordan $500 per capita in 2005, according to the 2009 UN Arab Human Development Report. Spending on health and the NSSF are accounted for separately in the 2009 budget proposal.

Spending without fixing
The central bank has been swapping short term debt for long term debt to maintain the semblance of financial stability. At present, the Banque du Liban has succeeded in “buying time,” as Hamdan puts it.

Time, however, does not seem to be a luxury the Lebanese government can afford, as it has to budget for an increase in expenditure of 42 percent, or $10.82 billion, even with a budgeted spike in revenues of 36 percent, or $7.55 billion. As Executive went to press, total budget deficit in the first three quarters of 2009 had reached $2.22 billion. As such, it seems highly likely that the budget deficit target of 10.6 percent of GDP set for the Lebanese government by the IMF, could well be met.

Notwithstanding the fact that the government has to bear the burden of interest payments on the debt, the NSSF, EDL and other expenditures, it still ran a primary surplus of $693 million in the first three quarters of 2009 and budgets for $746 million by the end of the year. The government is still using the budget of 2005 as a baseline, according to Chaaban, by allocating what is overspent to the next year; but without the interest payments on the debt, the government would in fact be profitable.

Promises, promises
The Lebanese government has few options to get out from under its mound of debt. It will have to make several political decisions, including those related to the Paris III commitments, the enactment of administrative reforms and privatization of key state-owned enterprises such as telecommunications and electricity, to garner enough revenue to pay off at least some of the debt in the hopes of having it reach a manageable level.
With new finance minister Raya Haffar stating that she will pursue Paris III commitments, there is renewed pressure to enact many of the initiatives proposed. According to the finance ministry, $5.7 billion worth of Paris III pledges have been signed as of end-September 2009, with disbursements increasing by $600 million from April to November 2009.
Paris III’s planned initiatives are expected to be opposed by many — from the parliamentary opposition to local commercial banks.

“The terms were negotiated in a different political atmosphere,” says Iskandar, in a reference to the former Rafiq Hariri government that drew up the initial program. “I don’t think there will be any progress because politically it is not feasible.”

Indeed, considering recent proposals, changes appear unlikely. Increasing the value added tax (VAT) to 12.5 percent is highly unpopular amongst the parliamentary opposition and will require a new law to be drafted and passed. Hamdan says that between 1998 and 2008 the average national wage has increased by only 20 percent, and cumulative inflation by 80 to 90 percent. Thus, he says, it is doubtful that an increase in VAT is possible in the near future.

“I know most of these ministers and I don’t think they will sign onto this approach,” he says.
With the threat of inflation looming because of a falling dollar and rising oil prices, this possibility seems even less likely to be popular with the wider public. Officially, the consumer price index registered at 106.7 in September 2009, according to official figures. Chaaban has little faith in official figures since, he says, a useful methodology was only recently adopted.

“They used to count only Beirut and the basket was not representative of the actual consumption pattern. At some point even housing was not included,” he says, warning that inflation, while steady in 2009, could rise by at least 5 percent in 2010.

While this figure is much less than the rates experienced during the oil boom of 2008, Chaaban says the phenomenon of asymmetric transmission, whereby prices go up but don’t come down, continues to affect Lebanon’s consumers. Even according to official figures, which use December 2007 as a baseline, CPI for the items with some of the highest weights such as housing, food, beverage and transportation have all risen by more than 10 points as of September 2009.

This may not bode well for those keen on implementing the global income tax, for which a draft law currently exists, making it more “possible that it might be implemented with some changes,” says Chaaban.
Increasing taxation rates from 5 to 7.5 percent on interest earned from banks also seems to be a highly unpopular move with many local banks that hold much of the public debt and thus have considerable political influence.

“If there is no reform, the banks will be reluctant to go in this direction,” says Hamdan. The only Paris III earmarked requirements that seem likely to continue are those associated with reforms in the public sector, from which Chaaban believes the government can only receive around $1 billion to reform EDL in 2010.

The only other option seemingly available to decrease the debt is to privatize the telecom and electricity industries. The former looks set to remain a contentious issue between the various national and international players who have diverging opinions on whether the sector should go private or stay public.

“I think that the minister of telecommunication will defend increasing the assets [of the telecom industry],” says Hamdan, in reference to the proposal to increase the assets of the telecom sector by improving its current infrastructure and selling it off at a higher price. That may well prove to be an arduous task if the telecom ministry’s operations continue to be politicized. “Selling it in this form amounts to giving the investor the current structure of prices and revenues, so you are essentially securing the flow of hidden taxes,” says Hamdan, who supports this proposal.

Others, however, disagree. “The sector is not going to move in the right direction without really having momentum from the private sector,” says Kamal Shehadi, chairman of the country’s Telecom Regulatory Authority. “By that I mean all of the economic associations will have to get on board.”

And given the track record of public ownership, his sentiments are echoed by many consumers who are tired of having some of the highest telecom costs in the world.

As Executive went to press, a ministerial policy statement had yet to be approved by the Council of Ministers. Expectations are that it will closely resemble the previous statements adopted by the past two governments.
There is still a sense of optimism that the new government ministers can overcome some of the economic hurdles, even if they will have to fight over details in the process.

“They are not politicians that are there just to oppose each other. Even if they oppose each other they will reach a compromise, as they are technical people who can discuss things,” says Chaaban. “Because the government took so much time to form I think now everybody is expecting it to deliver.”

First published in Executive Magazine’s December 2009 Lebanon issue

Lebanon’s elephant in the room

As the public debt looms, many prefer to look away

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

Lebanon’s microfinance with marco problems

Access to small-business credit could lift thousands of Lebanese out of poverty

by Sami Halabi

With the United Nations reporting that almost a third of the Lebanese population is living in poverty, and many more are classified as low-income workers, one thing is certain: Lebanon has a huge poverty problem. Yet one of the most efficient ways to address the issue of poverty, and make some money in the process, has not been high on the list of priorities for Lebanon’s government or its private sector.

Microfinance (MF) is the provisioning of financial services to low-income segments of the population with little or no collateral requirements. These clients would otherwise be shunned by traditional financial institutions and banks. The sector has seen substantial growth in Lebanon in recent years and is expected to continue to expand. Nevertheless, the industry remains under-developed and suffers from a lack of regulation.

The concept of microfinance and microcredit came to Lebanon in the mid-1990s, spearheaded by the United States Agency for International Development (USAID), the US government’s development investment arm. While the agency may have its own political agenda, it did lay the groundwork for an industry that has proved to be both a social good and a sound investment opportunity.

The industry itself, however, remains only partially measured. Some of the only reliable figures come from a report conducted in 2008 by the International Finance Corporation (IFC), the arm of the World Bank that provides investments and advisory services to the private sector in developing countries.

According to the report, as of September 2007 the estimated potential market was some $286.1 million, calculated by multiplying the number of “eligible potential borrowers” multiplied by the average loan size of $1,500. As such, the IFC states that only 11.5 percent of potential demand is being met, leaving 88.5 percent of the market untapped, equal to some $2.2 billion. On the lower end of microfinance, loans can be for as little as $300. The requirement for such a loan is simply a viable business plan to be able to pay the money back.

“The market is still way underdeveloped and more people will need microcredit,” said Anwar Jammal, chairman and chief executive officer of Jammal Trust Bank (JTB), which has provided over 45,000 microfinance loans in Lebanon since 1999.

At present, the number of Lebanese who are “unbanked” remains a statistical anomaly since there has not been a study on the matter since 2000 — there has also not been an official population census in the country since 1932. The study conducted by the World Bank in 2000 estimated that the unbanked numbered around 200,000.

Youssef Fawaz, executive director of Al Majmoua, Lebanon’s first formal microfinance institute, estimates that the number of unbanked in the country is much larger, at some 30 to 40 percent of the population, or 1.2 to 1.6 million people. Since 28.5 percent of Lebanon’s population lives below the poverty line, the inherent needs of the people combined with the potential the market offers, could hardly make for a more opportune time to invest in the sector.

What’s wrong with it?

The explanation for why this sector has not been nourished is multi-faceted and reflects many of the socioeconomic and political realities of Lebanon. To begin with, the bulk of the industry is comprised of only five microfinance institutions (MFIs): Al Majmoua, Ameen, Al Qard Al Hassan, the Makhzoumi Foundation, as well as Emkan, which began operations shortly after the June parliamentary elections.

The funds that these organizations use to do business come either from bank loans that carry market interest rates, or from donors, which carry lower interest rates or no interest at all. The situation has pitted a financial model against a philanthropic model in a battle for existing and potential market share.

At present, Ameen is the only MFI in Lebanon that is registered as a financial institution and receives the majority of its funding from banks, including JTB, which it then divvies up and distributes to its clients. The advantage of adopting the financial model is the access to a large pool of funds other organizations don’t have. That also means their cash flow is based on paying back interest set by banks, which are markedly higher than those of MFIs who operate using grants or soft loans.

“Definitely our job is much more difficult because we have a cost of funding the others don’t have, but our pricing to the end client is very similar,” said Ziad Halabi, general manager of Ameen. He explained that Ameen makes up for this through “having more efficiency.” Ameen offers loans between $400 and $15,000 with loan terms between four months and five years, and charges interest rates averaging 12.5 percent.

Samer Safah, deputy general manager of the Makhzoumi Foundation, claims that because his organization does not have to pay dividends to investors or commercial interest rates, they can provide better services such as offering their “beneficiaries” life insurance with each loan. Makhzoumi is currently the smallest market player and offers a maximum interest rate of 1.2 percent.

“Microfinance was not created to make money, it was created to elevate the poor to a better standard of living,” said Safah. Nevertheless, he concedes that “money makes the world go round and money is going to win.”

This has become more evident lately as the donor money, which organizations like Makhzoumi and Al Majmoua depend on, now looks to be in short supply due to the global economic downturn. The billions of dollars lost by investors worldwide because of greed and lack of financial oversight have left less money available for MFIs.

“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.

Safah agreed, noting that, “If you look at the request for proposals at the embassies, there is nothing that has anything to do with microfinance anymore. It wasn’t like two years ago when it was all about microfinance.”

Without international investors, many MF organizations are now looking towards Lebanon’s banking sector, which is full to the brim with liquidity. Today, Al Majmoua is actively seeking bank loans as a source of funding for the first time since its inception in 1994.

“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”

Lebanon’s banks have so far taken little interest in this sector, even when it offers returns of 10 to 15 percent and carries a default rate of 2 percent. The top 20 banks control some 80 percent of the market and their decisions can make the difference.

“The big banks don’t believe in microcredit — we do,” said Jammal.

Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.

“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”

The reason that most banks don’t adopt microfinance as a revenue making initiative seems to be the operational model that microfinance necessitates. By nature the industry is labor and management intensive requiring a ‘hands on’ approach and lots of field work to reach such a low default rate. According to Jammal, the overhead costs of a microfinance loan can vary from 5 to 8 percent as opposed to the overhead of a normal loan which is 1.75 to 2.5 percent.

“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.

Such practices are not what most banks are accustomed to.

“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.

Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.

The Politics

While there may be a sound business case for microfinance in Lebanon, many of the organizations  in the market also have a political slant. Emkan is funded by the Hariri Foundation and Al Qard Al Hassan is funded by Hezbollah. Baydas did not comment on how much money has been given to her organization by the Hariri Foundation, but said it was “in the several million dollar range.” She also insisted that having a political interest fund Emkan does not restrict it to concentrating on areas where the Hariri family has political interests.

Al Qard Al Hassan — which translates into English as “the good loan” — offers Sharia compliant loans and uses gold or gold jewelry as collateral. The organization, whose main office was destroyed during the 2006 war with Israel, is estimated to have more than 26,000 clients, and even a “martyr’s fund” to support the families of Hezbollah’s militants killed fighting Israel. Al Qard Al Hassan did not respond to repeated requests to comment for this article.

According to Al Majmoua’s Fawaz, Emkan and Al Qard Al Hassan together make up some 50 percent of the market. Since both organizations are funded by political interests other MFIs say they are able to offer interest rates, or the Sharia compliant equivalent, at lower levels to garner revenue.

As a result, many in the industry have complained that the market is being grossly distorted.

“The biggest challenges for us are to deal with the market distortions that we are seeing from the politically oriented funds and political instability,” said Ameen’s Halabi. Emkan currently offers a flat rate of 10 percent which, Baydas admits, is “a couple of points lower” than the rates of Ameen and Al-Majmoua.

However Baydas, who previously managed Ameen, added that her competitors’ “sources of funds have often been quite subsidized from a number of international political donors,” and that they also carry products that are priced lower than those of Emkan.

The entrance of large subsidized funding in the market could prove fatal for non-subsidized funds. According to Fawaz, political funds will necessarily deplete their funds because the interest they charge is unsustainable, and this could eventually push them out of the market.

“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.

Government support

Not only do Lebanon’s political parties have deep pockets, they also form the government that has done little to encourage growth in the sector. The only form of support has come from the central bank, which has issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, according to one banking executive who spoke off the record, the central bank has been unresponsive to requests to use this liquidity. The central bank did not respond to requests for information on the subject.

What the government does have is a fund called the Economic and Social Development Fund, which is mostly funded by the European Commission and has cooperated with Al Majmoua on some microcredit activities in the past. The fund now concentrates on the small to medium-sized enterprise sector and no longer engages in traditional microfinance.

Other than that, it seems nothing has been done. The ministry of social affairs, whose job it is to address the issue of poverty, “has not done much and I don’t know why,” said Makhzoumi’s Safah.

One of the main issues that has not been addressed by any government in Lebanon is to actually pass a law that would allow the industry to be regulated. This would involve setting up a credit bureau and potentially allowing MFIs to perform financial intermediation, the process by which funds are channeled between surplus and deficit. Having this would enable MFIs to act as ‘bankers for the poor.’

But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.

“The government is busy trying to establish a government and their thoughts are very far from establishing microfinance legislation,” said Baydas. MFIs in Lebanon, with the exception of Ameen, are currently regulated by the ministry of interior and not the ministry of finance or the central bank.

Plan? What plan?

Given the amount of poverty in Lebanon, the time to enact a clear cut policy could hardly be more critical. But while microfinance may be a tool to help eradicate poverty, people in the industry agree that it is not a panacea. In order to adequately address the matter the next government may have to start enacting a wider policy of poverty alleviation that also incorporates microfinance instead of just ignoring the issue.

“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”

First published in Executive Magazine’s October 2009 issue

With the United Nations reporting that almost a third of the Lebanese population is living in poverty, and many more are classified as low-income workers, one thing is certain: Lebanon has a huge poverty problem. Yet one of the most efficient ways to address the issue of poverty, and make some money in the process, has not been high on the list of priorities for Lebanon’s government or its private sector.

Microfinance (MF) is the provisioning of financial services to low-income segments of the population with little or no collateral requirements. These clients would otherwise be shunned by traditional financial institutions and banks. The sector has seen substantial growth in Lebanon in recent years and is expected to continue to expand. Nevertheless, the industry remains under-developed and suffers from a lack of regulation.

The concept of microfinance and microcredit came to Lebanon in the mid-1990s, spearheaded by the United States Agency for International Development (USAID), the US government’s development investment arm. While the agency may have its own political agenda, it did lay the groundwork for an industry that has proved to be both a social good and a sound investment opportunity.

The industry itself, however, remains only partially measured. Some of the only reliable figures come from a report conducted in 2008 by the International Finance Corporation (IFC), the arm of the World Bank that provides investments and advisory services to the private sector in developing countries.

According to the report, as of September 2007 the estimated potential market was some $286.1 million, calculated by multiplying the number of “eligible potential borrowers” multiplied by the average loan size of $1,500. As such, the IFC states that only 11.5 percent of potential demand is being met, leaving 88.5 percent of the market untapped, equal to some $2.2 billion. On the lower end of microfinance, loans can be for as little as $300. The requirement for such a loan is simply a viable business plan to be able to pay the money back.

“The market is still way underdeveloped and more people will need microcredit,” said Anwar Jammal, chairman and chief executive officer of Jammal Trust Bank (JTB), which has provided over 45,000 microfinance loans in Lebanon since 1999.

At present, the number of Lebanese who are “unbanked” remains a statistical anomaly since there has not been a study on the matter since 2000 — there has also not been an official population census in the country since 1932. The study conducted by the World Bank in 2000 estimated that the unbanked numbered around 200,000.

Youssef Fawaz, executive director of Al Majmoua, Lebanon’s first formal microfinance institute, estimates that the number of unbanked in the country is much larger, at some 30 to 40 percent of the population, or 1.2 to 1.6 million people. Since 28.5 percent of Lebanon’s population lives below the poverty line, the inherent needs of the people combined with the potential the market offers, could hardly make for a more opportune time to invest in the sector.

What’s wrong with it?

The explanation for why this sector has not been nourished is multi-faceted and reflects many of the socioeconomic and political realities of Lebanon. To begin with, the bulk of the industry is comprised of only five microfinance institutions (MFIs): Al Majmoua, Ameen, Al Qard Al Hassan, the Makhzoumi Foundation, as well as Emkan, which began operations shortly after the June parliamentary elections.

The funds that these organizations use to do business come either from bank loans that carry market interest rates, or from donors, which carry lower interest rates or no interest at all. The situation has pitted a financial model against a philanthropic model in a battle for existing and potential market share.

At present, Ameen is the only MFI in Lebanon that is registered as a financial institution and receives the majority of its funding from banks, including JTB, which it then divvies up and distributes to its clients. The advantage of adopting the financial model is the access to a large pool of funds other organizations don’t have. That also means their cash flow is based on paying back interest set by banks, which are markedly higher than those of MFIs who operate using grants or soft loans.

“Definitely our job is much more difficult because we have a cost of funding the others don’t have, but our pricing to the end client is very similar,” said Ziad Halabi, general manager of Ameen. He explained that Ameen makes up for this through “having more efficiency.” Ameen offers loans between $400 and $15,000 with loan terms between four months and five years, and charges interest rates averaging 12.5 percent.

Samer Safah, deputy general manager of the Makhzoumi Foundation, claims that because his organization does not have to pay dividends to investors or commercial interest rates, they can provide better services such as offering their “beneficiaries” life insurance with each loan. Makhzoumi is currently the smallest market player and offers a maximum interest rate of 1.2 percent.

“Microfinance was not created to make money, it was created to elevate the poor to a better standard of living,” said Safah. Nevertheless, he concedes that “money makes the world go round and money is going to win.”

This has become more evident lately as the donor money, which organizations like Makhzoumi and Al Majmoua depend on, now looks to be in short supply due to the global economic downturn. The billions of dollars lost by investors worldwide because of greed and lack of financial oversight have left less money available for MFIs.

“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.

Safah agreed, noting that, “If you look at the request for proposals at the embassies, there is nothing that has anything to do with microfinance anymore. It wasn’t like two years ago when it was all about microfinance.”

Potential microfinance market gaps in Lebanon

Potential microfinance market gaps in Lebanon

Microfinance supply in Lebanon, excluding commercial banks

Microfinance supply in Lebanon, excluding commercial banks

Without international investors, many MF organizations are now looking towards Lebanon’s banking sector, which is full to the brim with liquidity. Today, Al Majmoua is actively seeking bank loans as a source of funding for the first time since its inception in 1994.

“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”

Lebanon’s banks have so far taken little interest in this sector, even when it offers returns of 10 to 15 percent and carries a default rate of 2 percent. The top 20 banks control some 80 percent of the market and their decisions can make the difference.

“The big banks don’t believe in microcredit — we do,” said Jammal.

Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.

“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”

The reason that most banks don’t adopt microfinance as a revenue making initiative seems to be the operational model that microfinance necessitates. By nature the industry is labor and management intensive requiring a ‘hands on’ approach and lots of field work to reach such a low default rate. According to Jammal, the overhead costs of a microfinance loan can vary from 5 to 8 percent as opposed to the overhead of a normal loan which is 1.75 to 2.5 percent.

“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.

Such practices are not what most banks are accustomed to.

“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.

This beekeeper in Touline is among the small-business operators whose business is benefiting from microcredit

Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.

The Politics

While there may be a sound business case for microfinance in Lebanon, many of the organizations  in the market also have a political slant. Emkan is funded by the Hariri Foundation and Al Qard Al Hassan is funded by Hezbollah. Baydas did not comment on how much money has been given to her organization by the Hariri Foundation, but said it was “in the several million dollar range.” She also insisted that having a political interest fund Emkan does not restrict it to concentrating on areas where the Hariri family has political interests.

Calculation of potential eligible microfinance borrowers, September 2007

Calculation of potential eligible microfinance borrowers, September 2007

Al Qard Al Hassan — which translates into English as “the good loan” — offers Sharia compliant loans and uses gold or gold jewelry as collateral. The organization, whose main office was destroyed during the 2006 war with Israel, is estimated to have more than 26,000 clients, and even a “martyr’s fund” to support the families of Hezbollah’s militants killed fighting Israel. Al Qard Al Hassan did not respond to repeated requests to comment for this article.

According to Al Majmoua’s Fawaz, Emkan and Al Qard Al Hassan together make up some 50 percent of the market. Since both organizations are funded by political interests other MFIs say they are able to offer interest rates, or the Sharia compliant equivalent, at lower levels to garner revenue.

As a result, many in the industry have complained that the market is being grossly distorted.

“The biggest challenges for us are to deal with the market distortions that we are seeing from the politically oriented funds and political instability,” said Ameen’s Halabi. Emkan currently offers a flat rate of 10 percent which, Baydas admits, is “a couple of points lower” than the rates of Ameen and Al-Majmoua.

However Baydas, who previously managed Ameen, added that her competitors’ “sources of funds have often been quite subsidized from a number of international political donors,” and that they also carry products that are priced lower than those of Emkan.

The entrance of large subsidized funding in the market could prove fatal for non-subsidized funds. According to Fawaz, political funds will necessarily deplete their funds because the interest they charge is unsustainable, and this could eventually push them out of the market.

“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.

Government support

Not only do Lebanon’s political parties have deep pockets, they also form the government that has done little to encourage growth in the sector. The only form of support has come from the central bank, which has issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, according to one banking executive who spoke off the record, the central bank has been unresponsive to requests to use this liquidity. The central bank did not respond to requests for information on the subject.

What the government does have is a fund called the Economic and Social Development Fund, which is mostly funded by the European Commission and has cooperated with Al Majmoua on some microcredit activities in the past. The fund now concentrates on the small to medium-sized enterprise sector and no longer engages in traditional microfinance.

Other than that, it seems nothing has been done. The ministry of social affairs, whose job it is to address the issue of poverty, “has not done much and I don’t know why,” said Makhzoumi’s Safah.

One of the main issues that has not been addressed by any government in Lebanon is to actually pass a law that would allow the industry to be regulated. This would involve setting up a credit bureau and potentially allowing MFIs to perform financial intermediation, the process by which funds are channeled between surplus and deficit. Having this would enable MFIs to act as ‘bankers for the poor.’

But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.

“The government is busy trying to establish a government and their thoughts are very far from establishing microfinance legislation,” said Baydas. MFIs in Lebanon, with the exception of Ameen, are currently regulated by the ministry of interior and not the ministry of finance or the central bank.

Plan? What plan?

Given the amount of poverty in Lebanon, the time to enact a clear cut policy could hardly be more critical. But while microfinance may be a tool to help eradicate poverty, people in the industry agree that it is not a panacea. In order to adequately address the matter the next government may have to start enacting a wider policy of poverty alleviation that also incorporates microfinance instead of just ignoring the issue.

“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”

The Big Broadband Joke

Why Lebanon’s Internet sprints at a snail’s pace

by Sami Halabi

The long hours Lebanon’s Internet users spend sitting in front of their computers waiting for content to download is not the fault of some computer conspiracy. The decrepit state of the Internet is the result of poor governance, suffocating bureaucracy, illegal internet providers and sectarian politics.

lebanon slow internet connection

Illegal Internet networks made headlines last month when a microwave transmission connection installed on top of the Barouk Mountain in the Chouf region of Lebanon was alleged to have been taking bandwidth from Israel.
The incident set off a wave of accusations from Member of Parliament Ahmad Houry, part of the March 14 parliamentary bloc that won last June’s elections, against the present care-taker telecom Minister Gebran Bassil, who is part of the Free Patriotic Movement (FPM) opposition party. Houry claimed Minister Bassil was somehow involved in facilitating the illegal connection.

Hezbollah, allies of the FPM, said that the connection was discovered in April but “a large political party” had prevented the station from being raided earlier. The minister, who did not respond to requests for an interview, has denied the allegations. The station was installed in 2006, however, when Marwan Hamade — a March 14 ally — was telecommunications minister.

Sources in the telecommunications industry, who asked not to be identified in order to speak freely, told Executive that the station owner has not been arrested, which is “very weird,” said Habib Torbey, head of the Lebanese Telecommunications Association (LTA).
Mohamad Safa, an adviser to Bassil — who stressed that he speaks for himself and not the minister — said there were “many partners involved” in the Barouk business, which he claims is now being made an issue in order to maintain the “oligopoly” of Lebanon’s legal Internet providers, who are losing market share to unlicensed providers.
“Some of them [the partners] have been arrested and some have not, but there are no real details because these are security-related matters,” he added. “No one will be able to tell you who the ‘godfather’ is, and if they do they are lying.”
Ironically, the Barouk incident has also cast light upon how technically uncomplicated it would be to increase bandwidth in the country.
“The official sector has [a bandwidth of] only 1 gigabit per second (Gbps). The Israeli antenna of Barouk alone had 10 Gbps,” said Riad Bahsoun, telecom expert at the International Telecommunications Union (ITU), a UN agency for information and communications technology; Bahsoun also advises the Lebanese government on telecom issues. Telecom Minister Bassil recently contradicted this statement though, saying the station was only transmitting 300 megabits per second (Mbps).

Does Lebanon have broadband?
Illegal Internet providers in Lebanon service more than half the market, and for good reason —  Lebanon’s legal internet is slow.  Even with these illegal suppliers, however, Lebanon’s market is grossly undersupplied.
Many Internet service providers, like Cyberia and IDM, as well as state provider Ogero, claim they provide broadband internet service.  That assertion is debatable.
“Nothing [in the market] is really broadband,” said the LTA’s Torbey when asked why his company, GlobalCom Data Services, which owns Inconet Data Management (IDM), one of Lebanon’s largest Internet Service Providers, advertises their Internet service as broadband.

The definition of broadband is foggy. The International Telecommunication Union (ITU) defines broadband as a transmission capacity that is 1.5 to 2 megabits per second (Mbps). In the United States, the Federal Communication Commission is currently seeking public comment on what should constitute broadband, with the goal being to help consumers. The current minimum bandwidth to qualify as broadband in the US is 0.75 Mbps. The Organization for Economic Co-operation and Development defines broadband as 0.25 Mbps in at least one direction. This rate is the most common baseline that is marketed as “broadband” around the world.
Salam Yamout, co-founding member of the Lebanese Broadband Stakeholders Group, a local lobby group that pushes for broadband in Lebanon, defines broadband as 100 Mbps “at the access point for businesses and people who require it.”

The Internet speeds available to the Lebanese public today vary from 0.125 Mbps to 2.3 Mbps.  Lebanon’s Internet download speed averages 0.59 Mbps, according to Ookla Net Metrics, an Internet diagnostic company. Ookla says the world average is about 10 times that, at 5.5 Mbps.
It’s astonishing to think that these speeds represent major  progress since Digital Subscriber Line (DSL) technology became available in the summer of 2007.
“The introduction of DSL was a very good step although it was long, long, long overdue,” said Leila Serhan, country director at Microsoft Lebanon. “It is still a very shy step and [the slow speed] is definitely hindering the introduction of a lot of the services you can get on the Internet.”
That hindrance has led to a low penetration rate for Internet service, resulting in a vast untapped market for broadband Internet. With ADSL penetration, a precursor to broadband Internet, at less than 10 percent of the population and consumers willing to adopt new technologies, there is ample room for the market to grow, yet it has not.
“There is no network and there is no infrastructure,” said a multinational telecommunications executive who asked to remain anonymous in order to speak freely.
The lack of decent Internet has also hindered Lebanon’s business world. Khalil Letayf, deputy general manager of Société Générale de Banque au Liban and a member of the Lebanese Broadband Stakeholders Group, explained that because of the lack of broadband, his bank has to incur extra costs to make physical backups instead of transferring data over the Internet, due to of the lack of reliable infrastructure. He said that, as a result of operating in such an environment, the risk factors associated with all the banks have increased.

Why so slow?
Lebanon’s Internet market does not run on a network made for data, but rather one made for voice. The current network was built by Siemens, Ericsson and Nokia in the early 1990s with $1.3 billion of funding from the World Bank. There has been no comprehensive plan for improving the infrastructure since then.

Lebanon’s telecommunications market
“What Lebanon has done since 1994 is build [its telecom infrastructure] in blocks,” said the ITU’s Bahsoun. Bahsoun explains that in the 1990s telecom operations like Internet and mobile were separate, and “back then they didn’t know that all these [Internet and communications technology] services, were going to converge.”
Since then, there has been little restructuring and Lebanon’s telecom ministry today is a fragmented body with two general directorates, a separate office that deals with mobile communications and miles of red tape holding it all together.
Meanwhile, regional telecoms have stayed on the cutting edge of Internet technology and service. Telecom services have been combined and broadband with hassle-free, high-speed upload and download is a reality across the region — but not in Lebanon. Transfering data is a costly and cumbersome process that involves the converting the data into a format suitable for transmission over Lebanon’s archaic network. The result for consumers is low quality and speed in tandem with high costs. The economy surely suffers, as broadband penetration has become a key economic indicator. The World Bank estimates that every 10 percent increase in broadband penetration accelerates economic growth by 1.3 percent.

Where’s the problem?
Because the government only allows Internet service providers (ISPs) a miniscule amount of bandwidth — the measure of available data communication resources — there is no variety in the market. The packages offered by the county’s ISPs are identical in terms of speed, meaning all the options available are relatively similar. What makes matters worse is that the ISPs impose download ceilings or charge for additional downloads above a certain level. This has resulted in a situation where the typical Internet user in Lebanon pays eight times more than a typical user in similar countries like Jordan and Egypt.

Internet cost of download
Unlike the rest of the telecom sector in Lebanon, which is owned by the government, the retail Internet market does operate under conditions of limited competition. That fact has spurred the growth of several ISPs and Data Service Providers (DSPs). Both are licensed by the Telecom Regulatory Authority (TRA), Lebanon’s telecom regulator — the only difference being that DSPs are assigned a certain frequency they can use to provide services. At present, there are around 20 ISPs and 6 DSPs and many are owned by the same people who typically have connections to politicians. One example is the CableOne DSP, which also owns the Lynx ISP, and is partly owned by Karim Hamade, the son of Lebanon’s previous telecom minister Marwan Hamade. One of the largest DSPs, Sodetel, is half owned by the Ministry of Telecommunications itself and Solidere, the large real estate developer which was founded by the late Prime Minister Rafiq Hariri.  The Hariri family also hold a major stake in the Cyberia ISP.
No matter how many connections exist or how much competition there is, without adequate infrastructure and capacity the market cannot grow. The problem is rooted in the amount of available bandwidth in the country and who controls it. Officially, the total amount of bandwidth in the country last january did not exceed 260 Mbps, according to the Telecom Regulatory Authority (TRA), but most observers put the figure today at around one Gbps. This, however, does not take into account the illegal market which controls “40 to 60 percent of the market,” according to Torbey. The Ministry of Telecommunications distributes all the bandwidth in the country and does not release detailed information, even to the TRA.

How to make it better?
In order to legally increase the level of bandwidth however, sizeable investments have to be made to create a “national backbone” in Lebanon. The national backbone will be like an information superhighway that connects the major cities of Lebanon.

Internet prices in Lebanon
“Instead of a superhighway, what you have are small, small roads,” said Kamal Shehadi, chairman of the TRA. “The connectivity between these places is not what it should be.”
Bassil has announced several projects in order to upgrade the current infrastructure, including an upgrade of the existing system like the backbone project.
One development expected to take place is a pilot project in the Hamra and Ashrafieh districts of Beirut that will, in theory, lay down fiber cables. The $14 million project aims to supply better connectivity to residents as well as provide a reference for a previously announced project to build a national backbone that the ministry estimates will cost around $64 million. But even the pilot project has yet to commence and the budget has not been approved by the Council of Ministers.
“They need decisions and they have not got all the decisions,” said the ITU’s Bahsoun.
The decisions in question must be made by the telecom ministry. The telecom ministry today consists of two general directorates, the Directorate of Operations and Maintenance and the Directorate of Construction and Equipment. Moreover, the Directorate of Operations and Maintenance, headed by Abdulmenaim Youssef, also controls the government-owned company that runs the current Internet infrastructure holder, Ogero.

A mess of a ministry
“It is one of the most embarrassing aspects [of Lebanese telecoms] that the person implementing and supervising [the implementation] is the same person,” said Safa, the telecom minister’s advisor.

Youssef did not respond to repeated requests for comment. He was appointed to both posts by Lebanon’s former telecom minister Marwan Hamade in 2005. Beyond being a gross contravention of efficient corporate governance, the position that Youssef maintains has made it almost impossible to ascertain who is in charge of what at the ministry. When Executive called Naji Andraous, the director general of construction and maintenance, to acquire information about the status of the pilot project’s progress, Andaous’ office said that Youssef was in charge.

Kamal Shehadi, chairman of Lebanon’s TRA
Kamal Shehadi is the head of Lebanon's telecomminications regulator

“Abdulmenaim Youssef is reluctant to progress in Lebanon [sic],” claimed Bahsoun.
Youssef held the position of general director of the Directorate of Operations and Maintenance from 1995 to 1999, when he was imprisoned and later released in an extremely politicized struggle for control over the telecom industry. He is widely seen as the representative of current caretaker Prime Minister Fouad Siniora and his political coalition’s interests.
“[Youssef’s] appointments were made at the behest of the previous governments and Prime Minister [Siniora],” says Safa.
It is worth noting that Safa is an advisor to telecom minister Bassil, who is part of the opposition to Siniora’s ruling March 14 coalition. The minister has become the focal point of Lebanon’s most recent political debacle between Michel Aoun, Bassil’s father in-law, and Saad Hariri, the prime minister-designate. Aoun is insisting that Bassil maintain his position at the helm of the telecom ministry.
But the fight over control of the sector seems to run much deeper than the ordinary squabbling between Lebanon’s politicians. Lebanon’s telecom law, Law 431, outlines the legal procedures that should be followed in order to reform the sector. The trouble is that the law has been implemented in pieces, and as such, its interpretation has been a contested topic between the TRA, the telecom ministry and all the political and commercial interests pegged to both bodies.
“If you implement [the law] in parts, especially when politics are involved, you take the parts that you like and the spirit of the law is lost,” said Safa.
The law calls for the creation of a joint stock company called Liban Telecom that will be granted a license to operate for 20 years and provide all other telephony services to the public. Liban Telecom will also acquire the assets of the current operator, Ogero, which includes the current Internet and phone network and any upgrades made to it.

Internet speed in Beirut lebanon
The latest point of contention between the ministry and the TRA is how to increase the bandwidth in the country. Having already announced the expansion projects, the ministry’s current direction is to start by increasing the bandwidth themselves. Critics say the process is hampered by the inner workings of the ministry, especially Youssef’s offices.

Evasive and unaccountable
“The minister asked in a letter about how the E1s are being distributed and the Abdulmenaim Youssef says ‘don’t respond,’” said Bahsoun. (An E1 is a measure of bandwidth equal to 2 Mbps). “When the minister calls [to follow up], he says ‘I don’t know, the letter went missing.’”
Even the Telecom Regulatory Authority’s annual report criticizes the telecom ministry because it will “only release limited information” about the current DSL market, “and as a result, it has been difficult to analyze the root causes of this slow development.” The report goes on to state that “it can be concluded that while some of the problems stem from anti-competitive behavior, others relate to the lack of appropriate investments.”

Proposed Telecom Regulatory Authority liberalization scheme
Factor in the political rivalries in Lebanon and the prospect of broadband becomes even less probable.
“If your objective is to make the minister fail then, you move like a tortoise and tell people that the minister does not act,” said Safa. [As stated above, calls to Youssef’s office to respond to these, and other statements, were not returned].
The other option on the table would be to allow the private sector to install, operate and provision broadband services. However, this too has become a point of contention between Lebanon’s ministry and its regulator.
The TRA wants to offer three “National Broadband Carrier Licenses” to the private sector which would allow them to install the fiber optic cables needed to facilitate broadband Internet and sell the services to end users. One of these licenses would legally have to go to Liban Telecom and other two would be offered in an open international auction. The proposal has been opposed by the minister who has issued his own policy paper stating that he would offer the already existing DSPs (data service providers) one of the two remaining licenses.

TRA vs the telecom minister
The ministry’s position has in part been facilitated by the fact that the law has not been fully implemented and Liban Telecom, the body that the TRA is mandated to regulate, does not exist.

Telecommunications Minister Gebran Bassil
Bassil was telecom minisiter until late 2009

“The [ministry’s policy paper] has a schizophrenic nature,” said Shehadi. “On the one hand it said the TRA is not respecting the law and it is being autonomous. On the other hand it said clearly ‘I want to change the law to make the TRA depend on and report to the minister.’”
Law 431 does say the minister is granted the authority to “establish the general rules for the regulation of telecommunications services in Lebanon” but it also says the TRA has the authority to “organize the bidding process, and issue, execute, oversee, amend, enforce, suspend and revoke licenses.” The minister’s policy paper also criticizes the TRA for not issuing licenses.
“That is bull,” said Shehadi angrily. “The TRA prepared the tender for the mobile licenses and this process was suspended by political decision, not by the TRA. The TRA has [also] issued licenses to about 6 DSPs and about 20 ISPs.”
Shehadi also criticized the minister for not forwarding the TRA’s draft licensing regulation to the Shura council, Lebanon’s highest court, in order to begin the bidding process. Safa defended the minister’s right to amend the legislation if he sees fit.
As far as the DSPs are concerned, they are happy to go along with the minister’s policy because it serves their purposes by protecting them from large international players.
Shehadi, on the other hand, says this policy and the position of the DSPs are putting Lebanon’s economic future at risk by erecting barriers to trade and going against the government’s stated liberalization policy.
“The four wireless service providers who claim, pretend or call for protection from foreign investors are jeopardizing Lebanon’s accession to the World Trade Organization, and Lebanon’s trade commitments to the European Union and to all of our trading partners, for very specific, vary narrow private interests,” Shehadi said, adding that any international player in his right mind “will ally with one of the incumbents,” so they should not fear international entrants.
“We are not trying to recreate a new monopoly or oligopoly,” protests the LTA’s Torbey. “We do believe in competition and free markets. He said that the TRA “cannot start with a clean slate as if nothing has happened in the past,” referring to their presence in the market and the preferential treatment they seek to gain.
Law 431, however, does state that “no discrimination or restrictions shall be imposed on providing the services, as no such restrictions shall be imposed on owning or operating the necessary infrastructure to provide these services.”
But it seems politics have once again stunted the implementation of the law. “In principle the TRA is right, but the minister is the political representative and implements the politics of the government,” said Safa.

Liban Telecom and sectarian politics
When it comes to political appointments in Lebanon, horse trading is commonplace and as such the country’s politicians have yet to come to a consensus over the chairman and board of directors of Liban Telecom. Each delay makes the situation in the telecom industry worse and facilitates the wrangling for power over the sector. So why hasn’t Lebanon Telecom been established?
If it is ever created, Liban Telecom will be regulated by the TRA, thus releasing the control the ministry currently wields over the network as well as dissolving the current operator of the network, Ogero. This will mean that Youssef and the interests that he represents will also have less control over the sector.

Internet service providers (ISPs) in Lebanon

Law 431 also states that the government “may, within a period of two years of the establishment of the company [Liban Telecom], sell a portion not exceeding 40 percent” to a strategic partner. That strategic partner could be anyone from the operators who are present on the market, such as Zain and Orascom, or those allied with political parties in Lebanon that have a stake in the telecom industry.
Whether or not there is a setup in the works may be one thing, but the creation of Liban Telecom also seems to hinge upon another of Lebanon’s more unpleasant sectarian realities.
“The [future] board of Liban Telecom will need to split according to the confessions of the members and a lot of power has been given to the chairman. The chairman will have to be decided on the basis of confession,” said Safa.
Here again there seems to be some horse trading at play because to appoint a member of one confession to a major post means there has to be a balance somewhere else. Sometimes that balance is not maintained and institutions function (or malfunction) without the presence of supervisors, or the intended accountability structures. The Lebanese government to date has failed to even appoint all of its mayors — the very officials who are responsible for providing basic services to the country’s population — let alone appointing the board of a nonexistent entity like Liban Telecom.
“You are in a country where there are sectarian issues,” said the ITU’s Bahsoun. “You have ministers who don’t know why they are ministers; it’s a system.”

Supposing Lebanon’s bickering politicians do eventually work out their differences over the telecom ministry, Liban Telecom, privatization, the national licenses, international commercial interests and the implementation of Law 431, serious work will have to be done to implement a national backbone. This would seem to be a tall order for Lebanon’s politicians who still cannot agree over the formation of a cabinet, let alone implement a progressive economic policy. One can’t forget that the same politicians who are hampering the advancement of an essential economic development tool were also elected last June by the people who still pay exorbitant fees for archaic Internet access.

But, as the ITU’s Bahsoun said: “If the people are happy, what can you do?”

First published in Executive Magazine’s September 2009 issue