Sharing the risks

Photo by: Greg Demarque/Executive

A new law passed this summer could help facilitate sorely needed investment to fix the country’s infrastructure. The legislation, a framework for public-private partnerships (PPP), puts into law new options for sharing risks between companies and the government when investing in, building, and operating new public works.

Ziad Hayek, secretary general of the Higher Council of Privatization (HCP), tells Executive that Lebanon needs at least $6 billion to revitalize its infrastructure. The country’s roads are jammed with traffic, it has no long-term garbage solution, and its electricity supply is unreliable. Amongst other proposed infrastructure projects, the government has recently announced intentions to expand capacity at Beirut’s airport and to re-open Tripoli’s Rene Mouawad Air Base to passenger traffic.

Lebanon has had difficulty structuring PPP projects, and the new legal framework should help clean up that process. Lebanon has already had a few PPPs: Jeita Grotto, the waste treatment plant in Saida, and LibanPost. But judging their success through the lens of the new PPP framework, Hayek says, those examples—at least in the case of LibanPost—have deviated from the terms and conditions of their contracts, and are not great examples. “We want to make sure that when we talk about PPP, we really have fully successful projects that live up to the letter of [the] contract, that provide periodic reports on operation and how they are meeting key performance indicators, that are held responsible for [meeting those] indicators, where any payment from the government is dependent on their meeting those indicators.”

Weak finances

Prime Minister Saad Hariri stressed Lebanon’s desperate need for new infrastructure at an April aid conference in Brussels. There, he asked donors to fund a $12 billion “large-scale capital investment program (CIP)” to help Lebanon rebuild its economy and continue supporting the more than 1 million UNHCR-registered Syrian refugees living in the country. Since then, the government has not articulated any infrastructure investment plan, but has indicated that it wants around 25 percent of financing for the CIP to come from PPP approaches, says Peter Mousley, a PPP specialist at the World Bank’s Beirut office (see Q&A page 30). “We’re anticipating the government will move forward with this CIP, [and] that they will be wanting to reach out more to potential private investors,” he tells Executive.

While the government has known for years that it needs to fix its infrastructure, it has not been able to set much money aside for capital expenditures. According to the most recent numbers from the Ministry of Finance, only 4.4 percent (or less than $600 million) of the more than $13.5 billion in total public spending for 2015 went to capital expenditures, a percentage that has not varied much since at least 2011. Last year, Lebanon spent almost $5 billion more than the revenue it brought in; about a third of that went to interest payments on debt, public worker salaries, benefits, and pensions, and to cover losses by the nation’s electricity utility, Electricité du Liban. The country covers its deficit by issuing debt, which totals nearly $77 billion as of July. In August, Moody’s, a credit rating agency, downgraded Lebanon’s borrowing grade to a B3 rating, indicating that it considers Lebanon’s finances to be weak. In a press release, the company stated, “The principal driver of the downgrade is the rise in the country’s debt burden. Moody’s estimates Lebanon’s 2018 government debt to reach close to 140 percent of GDP […] government debt will remain close to 700 percent of government revenues next year.”

Would Lebanon’s credit rating be an obstacle to financing a PPP project? For the government, such a project can be cash-neutral because it could participate with an in kind contribution, such as land. But when the government contributes financing, it does so by issuing bonds, not debt. The downgrade could have an impact on pricing, says Iyad Boustany, managing director of local investment firm FFA Private Bank. Low credit ratings mean the bond issuer, here the government, offers higher premiums to the investors buying the debt issue. A rating downgrade would “increase cost of funding, as investors would want higher returns for their investment,” Boustany wrote to Executive in an email. The HCP’s Hayek hopes the new law will help Lebanon issue securities and develop a capital market, as the government sells bonds to pay its share of financing a PPP project. Rather than straight debt, bonds are tradeable, and can be moved in a secondary market. For Lebanon, that could mean a reinvigoration of dormant and always-demanded capital markets.

PPP financing, Mousley explains, typically includes equity. “There’s a lot of liquidity in the market, [and] the financial sector is very robust here. But the indications from a lot of the commercial banks here is that they would like to diversify, and PPP gives them that opportunity,” he tells Executive.

Risk, then, is another reason why Lebanon has not poured money into fixing its infrastructure. Hayek tells Executive that PPP is “a partnership in risks.” What he means is that the private company winning the PPP tender, depending on the terms of the agreement, might take on the risk of financing, constructing, and operating the project, while the government deals with revenue guarantees to the company, political risk, or environmental risk. “For each of these risks, then, [comes] a conversation about how you’re going to mitigate it,” Hayek says, adding that transparency is important in the tender process. Companies do not want to invest heavily to prepare bids—designing the project and negotiating financing options with banks can be costly—if the evaluation methodology is not made public and the selection process is opaque. “Obviously [local banks] want to take informed risks,” Mousley says. “Doing it in a PPP framework that takes proper account of the risks involved is liable to create a more enabling environment for infrastructure investment.”

Risk, then, is another reason why Lebanon has not poured money into fixing its infrastructure

Transparency has two parts, according to Hayek. First, the process of preparing to tender the PPP project should involve an open consultation with all stakeholders, public and private, so that expectations regarding deliverables and compensation are determined upfront. “No longer can [tendering] be a black box within a ministry,” he says. Open information matters too: Companies should know how their bids are evaluated, and the model contract should be publicly accessible. Hayek says these conditions are all spelled out in the framework, adding that “transparency is paramount for PPP success.”

The HCP is now scaling up to meet the demands of the new PPP legislation, and Hayek says that it will have the capacity to coordinate up to three projects in the foreseeable future. That is okay, says Mousley of the World Bank. The takeaway from other countries’ experiences with PPP, he says, is that it is best to move slowly and build a pipeline of PPP projects over a long period of time.

As for the HCP’s first PPP project, that depends on the government’s priorities. For now, it has yet to outline a long-term infrastructure investment plan, and the projects it wants—and needs—to undertake. There is an ongoing tender for wind and solar power plants that could benefit from the new PPP framework, though Hayek says the electricity sector is not an area the HCP would recommend—there are too many competing interests to make it a successful first project. Instead, Hayek says that while the HCP has not agreed on which projects it will recommend to the government, his preference is to start with a project related to transportation, a public building like a hospital or school, or a project to rehabilitate a sports facility. “I think one of these will be the way to introduce PPP to the nation,” he says.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.