Privatizing Lebanon's state electricity company, which loses $1 billion a year, tops the agenda of the cost-conscious government of Fouad Siniora.
Inside the Grand Serail government palace, Prime Minister Fouad Siniora and his cabinet still carry out the business of government despite a year long standoff with the opposition. The seemingly endless political division has hamstrung the government in carrying out the strategy agreed with international donors at the Paris III conference in January 2007, when about $4.3 billion in pledges were allocated for various reforms. Nevertheless Siniora is determined to reduce the country's considerable public debt, in spite of that reform being held up by parliament refusing to go into session.
"The Paris III reforms came out after several years of work, and most factors confronted by the program are objective realities - such as the level of public debt, expenditures and salaries of public s t a ff," said Joseph Saba, the World Bank's director for the Middle East and North Africa, in September. Saba stressed that the electricity sector, which is hemorrhaging money, is among the key concerns of the bank, which pledged $ 700 million in support at Paris III and has already provided a $100 million loan and two smaller grants for social security and public health.
But the government needed little incentive to agree to the privatization of Electricite Du Liban (EDL). The company's annual losses are about $1 billion.
EDL's accumulated losses since 1993 are estimated at more than $11 billion, or one-third of the public debt.
Lebanon's power problems date back to the 1975-90 civil war, which left the electricity grid in ruins. After the conflict ended, a succession of Syria-brokered governments spent more than $2 billion on rehabilitating or constructing power plants and repairing the grid. Government officials in the early 1990s claimed rehabilitation would boost EDL's capacity from between 800 and 1,000 megawatts to more than 2,000 megawatts by 2000. But capacity today stands at about 1,400 megawatts, well short of an estimated national requirement of at least 1,800 megawatts. All plants are operating at below-nominal capacity.
The last outbreak of hostilities with Israel, in July 2006, crippled the electricity infrastructure, with losses in the sector estimated at $180 million by an early report prepared by Lebanon's Development and Construction Council: $ 8 0 million in damages resulted just from the destruction of the airport's fuel depots and the Al-Jiyyeh power plant south of Beirut.
Own worst enemy.
But much of the problem has been self-inflicted. State ownership has encouraged the spread of cronyism, often along sectarian lines. An array of technical and managerial problems has made EDL a huge financial burden. These include aging employees, unreliable accounting, electricity theft, poor bill collection, out-of-date generating stations, and now the rising cost of imported fuel oil.
Few doubt that reform means some kind of privatization. "In order to attract the private sector to energy production and distribution, there should be laws and regulations to create incentives for this sector to invest and contribute in Lebanon," said Riad Chedid, Professor of Electrical Engineering at the American University of Beirut.
Although on the agenda for years, privatization has been held up for political reasons. Both the political opposition and labor unions have used public fears of what it would entail as a stick with which to beat the government. Indeed, the very unreliability of the electricity supply makes it harder for the government to take the tough decisions that are already overdue. If this year's planned VAT increase of 10-12 percent is the most common complaint heard on the streets, people also ask why they should help repay the national debt when they do not even receive 24-hour electricity.
Many say they are paying twice, once to EDL and then again for a supply from a private generator during the all-too-frequent power cuts.
The government has decided an incremental approach is needed. "The first step toward shoring up EDL and cutting mounting losses is to privatize the management," said Mohammad Safadi, acting minister of resources and hydraulics, last November. "Once we privatize the management, then it will be easier to sell the production units and distribution, but the state will keep transmission."
In September, detailed action plans to corporatize EDL were approved by a meeting in the Grand Serail. "A four company alliance in charge of the restructuring will study, for six months, EDL's current processes and previous studies done on the company, to devise a restructuring plan, after which implementation is scheduled to take place," said Ziad Hayek, president of the Higher Council for Privatization, in an interview with TRENDS.
Each of the four companies brings relevant experience. The Spanish Mercados firm is specialized in restructuring of the energy sector, and in providing dvisory services to the electricity and natural gas sectors; Electroconsult Group, the Italian engineering consult a n c y, is knowledgeable in power generation and distribution; Rafi k el-Khoury and Partners, the Lebanese engineering consultancy, has a track record in electromechanical projects; and KPMG, the accounting firm, has a well-established international reputation.
The consortium has 18 months to restructure the electricity sector, after which EDL will become an umbrella organization overseeing distinct, more specialized companies.
Unbundling.
Hayek said the central aim of "corporatization," as he described the restructuring period, is to reshape EDL into a company able to compete on a commercial footing. Each of the company's three divisions generation, transmission and distribution will be unbundled to create a private sectorstyle management in each, prior to generation and distribution being privatized.
During the 18 month period, he explained, smaller units will be created in EDL-owned electricity plants to which current employees will be transferred.
During this interim corporatization, EDL management will create a more effective payroll system, and assign managers to the units.
In some parts of the country, the private sector will also be directly involved in production and distribution, but not transmission.
"The main long-run objective of the program is to eliminate inefficiency while supplying the consumer with a 24/7, reliable and affordable power supply," said Hayek.
At present, frequent power cuts are the norm. EDL's output of about 1,250 megawatts is well below peak demand, which often rises to 1,800 megawatts.
Rationing ranges from 12 hours to 18 hours in most areas, according to company officials. The financial figures are just as bleak. Importing the 2.3 million tons of diesel oil needed for EDL's power plants in 2007 cost the government almost $ 1.2 billion in subsidies. Nearly 70 percent of electricity spending goes to cover the high cost of fuel oil on which most of the country's power plants still run.
One urgent problem is theft. Because scrap copper fetches a good price, thieves have taken to stealing cables, often at considerable risk to themselves, and selling it to scrap merchants. Theft of electricity itself is widespread. In August the government appealed to citizens to desist. "We urge citizens to stop stealing copper from the power lines and hooking cables on the lines because it will force the company to increase electricity rationing," an official bulletin read.
"The Lebanese approach toward the state is still like the one prevailing under the Ottoman Empire and the [French] mandate, [that] it is clever to steal from it," said Hayek. "In some areas they even cut the wires ... and sell them."
Payment problem .
Jihad Azour, the finance minister, said in October that poor payment collection was a significant problem. According to official sources, almost 60 percent of EDL bills are not collected. Politicians have often arranged free electricity for supporters, and some public institutions, such as water utilities and hospitals, are not paying bills or are paying late.
But close to half of the electricity generated by EDL is not even billed.
Tens of thousands of people receive free electricity by tapping illegally into power lines, with culprits coming from a ffluent as well as poorer areas.
Lebanon's newspapers routinely report deaths as people try to tap into the grid, often with the crudest rewiring. "EDL needs 1.2 million new meters that can report electronically to improve bill collection," Hayek said.
As a sign of things to come, in November, Mohammad Safadi, the acting minister of energy and water, highlighted two memoranda of understanding to have a privately owned electricity plant built in Zahleh, the capital of the Beka'a Governorate, and a wind-powered plant built in the Beka'a valley. The wind-powered plant will be the first of its kind in Lebanon. The 50-megawatt electricity plant in Zahleh will be constructed by the privately owned Zahleh Electricity Co., while Lebanon Wind Power will construct the wind turbine.
Zahleh Electricity Co., which was founded in the 1920s, is a private generating and distributing utility company that delivers low- and medium-voltage electricity to the city of Zahleh and surrounding parts of the Beka'a valley.
"What is more important is that the company collects 99 percent of the bills without any problems," Charles Nakad, the company president, told TRENDS.
Safadi added that the government aims to "gradually switch from fuel oil to natural gas to run the power plants because it is cheaper and more environmentally friendly."
Rehabilitating Lebanon's electricity grid is a political as much as an economic challenge. Many environmentalists question the delay in generating electricity from the country's rich endowment of renewables. Precipitation in the form of rain and snow is high enough for hydro generation, the country's abundant sunshine makes solar energy feasible, and wind speeds are sufficient to power turbines, particularly in the numerous alpine valleys.
Green Line, the environmental NGO, believes renewable energy fosters ustainable development and will reduce the adverse environmental e ffects of burning fossil fuels, which accounts for most energy generation in the country. Green Line thinks a gradual shift to renewable energy will contribute to the economy by reducing production costs for industry and households, especially in rural areas, and economic benefits realized through local production of components and job creation.
But even short of such a "green" future, the privatization of EDL will be a litmus test of whether Lebanon can carry out reforms to end the drain on state coffers and offer homes and businesses a reliable energy supply.
By Zeinab Charafeddine
© Arabies Trends 2008
