External Evaluation of the Fostering Women’s Entrepreneurship in the Middle East Programme for the Cherie Blair Foundation for Women and Tomorrow’s Youth Organisation

TYO LOGO JPGThe report presented the findings of the external evaluation of the Fostering Women’s Entrepreneurship in the Middle East Programme for the Cherie Blair Foundation for Women and Tomorrow’s Youth Organisation. The Programme aimed to foster CBFW_LogoWebentrepreneurship among disadvantaged women in Lebanon and Palestine.  Report findings provided practical recommendations meant to inform future programme expansion through modifications in both design and implementation.

For more information about the report please contact the author. 

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

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

Pandora’s Budget

Tax hikes loom as the Lebanese government faces up to $51 billion in debt

By Sami Halabi

Among the more developed countries of the world it is customary to hold the nation’s constitution as sacrosanct, with governments that violate it swiftly shown the door by way of the ballot. The Lebanese constitution, on the other hand, is more a set of rough guidelines that successive governments have invoked when it suited their purposes, ignoring the tedious elements, such as those that deal with drafting the national budget.

Articles 81 to 86 of the constitution specifically lay out the process for Lebanon’s government to pass a budget. Accordingly, the budget for any year should be proposed by the Council of Ministers, Lebanon’s cabinet, during the second regular session of parliament in October of the preceding year. Negotiations can then be extended until January, at which point, if no agreement is reached, “the Council of Ministers may take a decision, on the basis of which a decree is issued by the president.” This enacts the budget as it was submitted to the Parliament.

“When the constitution states such an article, that means that neither the cabinet nor the parliament can violate it,” said Wassim Mansouri, lawyer and constitutional expert. “What has been happening for years now is that they have been violating this.” According to Mansouri, no legal body can actually punish these constitutional violations because none has jurisdiction to do so; that includes Lebanon’s Constitutional Court, which only deals with issues relating to the elections, not the actual constitution. What successive governments have been doing instead of adhering to the constitution is to follow the rule of the “provisional twelfth,” whereby the government spends the same amount each month as they did in the most recently approved budget — meaning the one passed in 2005.

“Now you tell me that it is mentioned in the constitution, but at that time they did not know that there would be [this amount] of political wrangling,” said Raya Hassan, Lebanon’s finance minister allied with the parliamentary majority. “If there is no budget the only way a country can spend is by the principle of the provisional twelfth, otherwise how would you be able to spend?”

Now that Lebanon has a cabinet, without the excuse of pending elections or a lack of quorum to put off the issue, Hassan has been handed the prickly task of drafting the budget and managing some $51 billion in public debt.

But new projects require new money and that does not grow on olive trees.

Perhaps the most controversial proposal on the table is increasing Lebanon’s value added tax (VAT) from 10 percent to 12 or 15 percent, part of the reforms proposed at the Paris III donor conference, in which Hassan was heavily involved before becoming the finance minister. The proposal is highly unpopular with many segments of society and across the political spectrum.

According to a study by the Lebanese Economics Association (LEA), an increase in VAT by 2 percent would more than double the percentage of the population living below the extreme poverty line from 3 percent to 6.6 percent. People who live in “extreme poverty” are defined as earning less than $2.40 per day and being unable to meet basic food and non-food needs.

A 5 percent rise in VAT would send 8.9 percent of Lebanese into extreme poverty. The number of people living at or under the “upper poverty line” (defined as earning between $2.40 and $4 per day) would also be expected to increase, from the current rate of some 28 percent of Lebanese, to between 30.9 percent (with a 2 percent VAT increase) and 34.7 percent (with a 5 percent increase). What makes matters worse is that most of the revenues from any VAT increase would not come from the poor — it will just create more of them.

“VAT is imposed on consumption, so the more they consume the more they pay; but the poor people don’t consume that much, they don’t really pay a lot of it,” said Jad Chaaban, acting president of the LEA  and co-author of the report. “The problem is whenever they spend a bit more they are immediately subject to the tax.”

While Hassan has not officially announced that she is planning to include a VAT increase in the next budget, she does concede that there is little more she can do to increase government revenues in Lebanon.

“You have very limited room today to think of any revenue measure except VAT,” said Hassan, who spoke to Executive on condition that figures from the budget would not be released.

In case she does decide to propose an increase, Hassan said she intends to “exempt” those living in extreme poverty and offer upper poverty Lebanese “mitigating” measures. One is exempting certain products from the VAT, and Hassan insisted Lebanon has the largest exemption base on earth.

According to the LEA, the exemptions on food items, which constitute almost twice the percentage of household spending for the poorest families (18 percent) than for the wealthiest (9.2 percent) “appear to be progressive.” However, other exemptions, such as those related to education and books, are “highly regressive.”

Then there are the more striking items which aren’t exactly the target investments of a pauper’s portfolio. Yachts and other excursion boats longer than 15 meters and owned by non-Lebanese are exempt from VAT, as is gambling, air transport, precious stones, sale and rent of built property, as well as banking and financial services. Hassan’s explanation for these exemptions was that they are also exempt in other countries for reasons that are both economic and technical.

The other way

Marwan Iskandar, an economist and managing director of MI Associates, said delaying a VAT increase “can be justified” in part, if the government’s treasury account surplus ($4.3 billion at the end of February) is used to cover half of this year’s projected deficit of some $4.2 billion, according to Byblos Bank. He suggested that the rest of the money could be generated from increasing revenues resulting from general economic growth, as tax revenues have grown 48.7 percent in the last two years. At the end of 2009, government revenue stood at some $8 billion, $5.98 billion of which came from tax revenue. Moreover, Iskandar pointed to another source of funds as being the $480 million currently tied up in the Beirut municipality’s account, due to political wrangling between the mayor and the mouhafiz, or provincial governor. He also reckons that some of the pledges from Paris III can still be secured, but doubts the seriousness of many of the donors since the pledges were made before the onset of the global financial crisis.

“[The government] have no right to tax us when they have assets which are underutilized,” said Iskandar. “They need to think about how they can activate the economy. The solution is not in taxation. The solution is attracting major investments in essential, important projects.”

He stressed the need to develop Lebanon’s water, oil refining and exploration potential — a prospect that is harrowing to others.

“Today we are not taking care of our agriculture, environment or industry,” said the LEA’s Chaaban. “If we find oil we will never take care of it; we’ll become more of a banana republic.”

Talk of increasing taxation seems even less warranted when many of the staples of good financial management are still not in place.  According to the finance ministry, last year the government transferred 4.3 percent of GDP ($1.5 billion dollars) to Électricité du Liban (EDL), the state-owned electricity company, with 94.4 percent of that figure going to reimburse the Kuwait Petroleum Company and Algeria’s Sonatrach, Lebanon’s fuel and oil suppliers, for gas and fuel oil purchases.

Hassan said the country’s primary expenditures were split equally between salaries, debt servicing and the cost of EDL. That being the case, one would think that the government would hedge against any future increase in fuel costs as major airlines do to predict their future financing options. However, the Lebanese government still does not have a program to hedge its fuel purchases, which totaled $1.55 billion in 2009.

“It could be something that needs to be explored but today you have structural problems that you need to address irrespective of hedging against an increase in fuel prices. We don’t even have cost recovery; we are not [even] at this stage,” said Hassan in reference to EDL.

Tax evasion is also rampant in Lebanon, with many businesses and individuals keeping two sets of books, one for themselves and one for government auditors. The government has made some headway in terms of tax collection, with the ratio tax collectors to the general population being within internationally accepted bounds, according to the LEA’s Chaaban. But public auditing methodology is outdated, still following Lebanon’s decades-old public accounting law. The finance ministry is now beginning to implement a risk compliance audit system, whereby auditors are not required to assess each and every business — a task that caused public audits to lag behind their respective tax years — but study only segments of the economy that are prone to tax evasion.

An indebted surplus

Ultimately, the issue of Lebanon’s public debt is what weighs heaviest on the budget, with interest payments constituting the largest expenditure item in 2009 at some $3.8 billion. In late-February a media frenzy ensued in Lebanon over the financial management of the governments treasury account, the national equivalent of a personal current account. It was then that the account was found to contain a $4.3 billion surplus [6,500 billion Lebanese lira], while at the same time the VAT increase was being floated as an idea to increase government revenue.

“I didn’t understand the logic behind this and neither did many people in the banking sector,” said Nasib Ghobril, chief economist and head of research at Byblos Bank.

The LEA’s Chaaban added that: “If you hold this [borrowed] money and you don’t invest it you are paying [interest] on it anyway, you have to invest it in the right way. They want to keep it as a buffer which doesn’t make sense.”

Responding to such criticism last month, Hassan called a press conference where she stated that the surplus was “pre-funding” that would not increase the amount of payments at the end of the year and would be used as a buffer to pay off future debt for a period of three months.

Back to basics

While media reports have quoted the level of expenditures in the upcoming budget at anywhere from $10 billion to $13.6 billion, the finance ministry has remained tight-lipped on a final figure. Aside from enacting procedural reforms, many other options are also on the table, including raising taxes on interest profits in the banking sector and levying higher taxes on Lebanon’s booming real estate sector.

“Taxation serves as a correction facility for sectors that have gone out of control,” said Chaaban. “You cannot keep taxes low on real estate investment. It’s a crime. It’s wrong.”

Quite predictably, real estate executives have balked at the proposal of raising taxes on their operations. Currently taxes in Lebanon specific to real estate fall on consumers, not developers.

As Executive went to print, Hassan confirmed that individual ministerial budgets had been set. In the end however, any budget that does emerge will not be one based on performance because, with the exception of the education ministry, the finance ministry has yet to implement a performance-based budget using key performance indicators (KPIs) to evaluate expenditures.

Not having such a system in place to appraise a ministry’s performance is tantamount to floating money down a river and hoping it arrives where it is intended. The lack of standards also neuters the public’s ability to judge their ministers’ performance come election time. Making matters worse, state-owned entities like the Regie Libanaise de Tabacs et Tombacs, the body which controls the tobacco trade, and Ogero, the incumbent fixed-line telecom operator, are granted unmonitored lump sum payments by the finance ministry, with any surpluses later annexed to the treasury after these entities close their books.

Lastly, entities such as the Central Fund for the Displaced, the Council for the South, and the Council for Development and Reconstruction are funded outside the budget and approved by special laws and ministerial decrees. While there is some financial rationale behind this, given that some foreign financing must adhere to donor guidelines and not government ones, Hassan believes that the amount of government spending outside the budget could exceed 20 percent of total spending.

With so much at stake, so much being wasted and structural reforms only beginning to emerge, the prospects for Lebanon’s public finances are far from rosy. If no new budget is passed — as has been the case for the last five years — no new major government projects can take place in the country; meaning Lebanon’s people and businesses will have to remain content with the country’s decrepit infrastructure, among a multitude of other failings.

Without a budget, “We will not [be] able to do much,” said Hassan. Indeed if the status quo does persist, Hassan may find herself submitting next year’s budget before this year’s — at least then, it might be constitutional.

First published in Executive Magazine’s April issue.

Trapped in inertia

Lebanese telecoms remain in tatters while government dithers over reforms

By Sami Halabi

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

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

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

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

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

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

What now?

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

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

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

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

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

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

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

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

Change price, change structure

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

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

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

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

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

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

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

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

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

A new plan, sort of…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First published in Executive Magazine’s March Issue

The fall of Lebanon’s ceramics king

Nepotism and energy prices bring down Uniceramic

The cracks began to show when energy prices began to rise and the Lebanese government revoked safeguard measures

by Sami Halabi

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

Today it no longer exists

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Others were less forgiving

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Victim of a crisis

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

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

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

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

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

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

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

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

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

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

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

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

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

A less than level playing field

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First published in Executive Magazine’s January 2010 issue

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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

Politics vs. privatization

Telecom sector perpetually on hold

by Sami Halabi

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First published in Executive Magazine’s December 2009 Lebanon issue