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Lebanon's electricity sector and the power of politics.

Summary: I - Introduction A. The sorry state of the power sector in Lebanon has become a major impediment to economic development, putting undue burden on the efficiency and cost structure of Lebanese producers. No less dramatically, it still denies Lebanon's citizens uninterrupted and affordable power supply. B. Following numerous studies over the years

Samir El Daher

I -- Introduction

A. The sorry state of the power sector in Lebanon has become a major impediment to economic development, putting undue burden on the efficiency and cost structure of Lebanese producers. No less dramatically, it still denies Lebanon's citizens uninterrupted and affordable power supply.

B. Following numerous studies over the years, technical problems have been largely identified, and solutions developed to expand generation capacity, reduce technical losses in transmission, and improve operations and accountability in distribution. Yet, two decades after the end of the Civil War, little has been implemented, while vociferous ideological debates rage as to the optimal way of funding the rehabilitation of the electricity network. In particular a sharp divide runs through the political corpus as to the role of the public sector, and more specifically whether private capital should be allowed in the sector.

C. While the budget situation of the government, let alone the financial condition of Electricite du Liban, makes it impossible for the public sector to fund the massive investments now required in the sector -- with most tax receipts tied up in debt service, and inflexible salary and security expenditures -- many fear that allowing private participation in the sector would result in a massive theft of public assets, liquidation of the national power company, emergence of ruthless monopolies, and undue profits for a few greedy capitalists. The price of such theft, it is feared, would be borne by the nation's poor and middle class. Yet, progress and reform should not be held forever hostage to this false debate, as the experiences of other countries, both in industrialized and emerging economies, suggest that other options exist beyond the two stark choices of bankrupt government or robber barons.

II -- Cost of upgrading the power sector

A. Upgrading the power sector in Lebanon would, based on generally accepted estimates of economic growth rates, involve the following:

(i) Adding over the next three to four years, some 2,500 megawatts of generation capacity to the existing 1,500 MW -- at an investment cost of about $2.5 billion.

(ii) Upgrading the high voltage transmission lines to reduce "technical" losses from 16 percent to less than 10 percent in line with international norms -- at an estimated cost of some $300 million.

(iii) Modernizing the distribution network and improving metering, billing and collection systems -- at an estimated cost of some $200-300 million.

A cost envelope of some $3.5 billion (including contingencies), over a period of three to four years.

B. A glance at the government fiscal position clearly shows that such resources are not available. The 2010 budget law, yet to be approved by Parliament, allocates $1.2 billion to the sector over the period 2010-13 -- barely one-third of the funding requirement. The budget law also makes it clear that such "generous" endowment is a one-time allocation that cannot be sustained in future budgets in light, inter alia, of daunting public debt service requirements. The financial situation of EDL is critical as the company has been on continued budget support, draining government resources over the years.

III -- Outline of institutional and funding arrangements for power sector rehabilitation

The following outlines a solution that may ease the fears of both sides to the political and ideological debate, a solution grounded in the nation's economic realities (dearth of public funds, massive private capital inflows, and meaningful savings within Lebanon resident and diaspora communities). It would also yield side benefits in terms of financial market development.

A. Power generation -- For the power generation segment, international tenders would be launched by the Lebanese authorities for three power generation plants of about 800 MW each, to be built and operated by three separate firms, under management contracts for say five years (possibly renewable) after plant completion. The plants would be in competition among themselves, as well as with EDL, precluding the risks of monopoly. An enhanced and empowered regulatory structure -- a necessary condition for a transparent and effective functioning of the sector -- together with the availability of some spare generation capacity at each of the plants, would be necessary to ensure fair competition and somewhat contain the risk of collusion and emergence of a cartel-like behavior. Available public resources could be used -- under a credible rehabilitation plan to which the authorities and other stakeholders would be duly committed -- to strengthen and upgrade EDL's capabilities, performance and effectiveness, and overhaul its corporate structure toward more autonomy and accountability to withstand incoming competition.

B. Transmission and distribution -- As to the transmission and distribution segments, various options could be considered regarding their operation and funding. As EDL itself is a power producer, the best would be for an independent firm to handle transmission -- and in this case fund the development plans. The option however could be explored for EDL to retain responsibility for transmission assuming that conflict of interest issues can be managed by the regulator. Political disagreements about the distribution segment seem to be less acute. Private operators have long been involved in electricity distribution in Lebanon. Their operations and policies, as well as those of new entrants, should be reviewed and upgraded to improve metering, billing and collection, a program that would be funded by the distributors, and involve no public resources.

C. Regulatory apparatus -- A cornerstone in the rehabilitation of the power sector, without which no progress or reform would be feasible, is the emergence of an effective regulatory authority that inter alia would guarantee a competitive environment and fair market practices, set standards of performance, ensure quality of service, follow up on and approve development programs, and review and endorse proposals for tariff structure and change. Lack of progress on enhancing the regulatory framework is less the result of political divide than political will.

D. Funding plan and sources -- The three generation plants would require a $2.5 billion investment, consisting of: (i) $1.1 billion in equity capital; and (ii) $1.4 billion in debt finance. Given the massive liquidity the Lebanese banking sector is now awash with, it would be safe to assume that three consortia of commercial banks would be prepared to take up the equity position -- a consortium each per plant -- an amount which would be equivalent to less than 1 percent of the banking sector $115 billion deposit base. The equity holding by the commercial banks could be structured as a medium-term bridge financing until such time as it is divested and offered for subscription, in part on the Beirut stock exchange, and in part to strategic investors with vested interest and industry knowledge to ensure efficient on-going operations.

Debt could be raised through the issue of low denomination bonds (say $100 face value) secured by tariff collection (so-called "revenue bonds") -- the mainstream instruments for funding power supply, water and sanitation, and mass transit projects in many cities around the world. Such corporate bond issue (which would amount to less than 3 percent of outstanding public debt) would offer individuals alternative placements for their savings, now largely limited to bank deposits, and help develop the domestic bond market exclusively dominated by government debt instruments. The thirst of Lebanon's population for reliable and appropriately-priced electricity after a third of a century of deprivation would strengthen consumers' willingness to pay and therefore the creditworthiness of debt instruments backed by their payments. So would the tightening of metering and collection practices under the proposed plan.

IV -- Contingent benefits and safeguards of proposed funding scheme

A. The equity holding by commercial banks would be subject, after a number of years, to a public offering contributing thereby to the development and growth of the domestic equity market where one company accounts today for some two-thirds of the market capitalization of the Beirut stock exchange. The offering could be structured to appeal to, and be broadly distributed across, a large and diversified group of individual and retail investors. Moreover, limits could be imposed on stock holding so as to ensure that ownership of the power sector is not unduly skewed to benefit but a powerful and well-connected few. However it would be essential to ensure that strategic investors remain involved after bank divestiture.

B. Moreover, the funding structure would have beneficial budget implications as the Lebanese Treasury would be: (i) sparing scarce budget revenues that may be allocated to other priority investments which, unlike power, the private sector would not fund; (ii) increasing its value-added tax receipts on electricity sales, as well as its corporate tax levies on electricity companies profits; and (iii) expanding its tax base and therefore tax income as a result of the virtuous circle of economic growth spurred by improved power supply (lower company production costs, larger turnover, and higher profits C* ).

C. Finally, Lebanese consumers -- households and enterprises alike -- would reap the overdue benefits of a more efficient electricity network, with round-the-clock supply and lower tariff per kWh when compared to their current energy bills. With an expanded base of Lebanese holding a stake in the renovated power sector, citizens would be supportive of such a scheme, while no political group should have reasonable ground to object to it.

Samir El Daher is a former senior financial sector adviser from the World Bank.

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Publication:The Daily Star (Beirut, Lebanon)
Geographic Code:7LEBA
Date:Mar 30, 2011
Words:1598
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