The privatization law was recently passed through parliament
with a large majority. Although brief and general,
the bill is a signal to investors that the political desire for
privatization is there. The next steps are clear. For each privatization,
the government must design a strategy, draft a bill, and get
parliamentary approval.
Analysts have estimated that selling a majority of the utility sector
would generate $4 billion to $6 billion. For each $1 billion raised
from the private sector, debt to GDP is expected to fall by 6%, according to Marwan
Barakat, head of economic research at Banque Audi. The accumulated effect is
a 30% reduction in the debt, which is currently
about 136% of GDP.
The big question is whether the government
will be able to undertake privatization in
such a way that the benefits will be realized.
Will it be able to ensure that the process will not benefit the political and economic elite at
the expense of the general public? Put simply,
will the government do it right?
To be fair, some of the constraints may be
beyond the scope of the government. For a start, two events may hamper the process.
The Israeli withdrawal and the uncertainty that comes with it will
hardly convince investors to rush into Lebanon. Furthermore,
the parliamentary elections in August will definitely delay the
process and may aggravate the fiscal health of the country.
Fortunately, the impact of these two events will be limited in the
medium and long term.
The more serious challenge lies in the privatization process.
Essentially, it is how the government plans, sells, implements, and
regulates the newly privatized enterprises that will determine the
degree of success and the benefits accrued.
Three major challenges await the government. The first involves
the process of selling the assets to the private sector. There are different
options of mobilizing capital, which range from selling 100%
of the entity to a single buyer to breaking it up and selling the components.
In between lie three alternatives: selling a minority stake,
issuing shares, or a combination of both. The government’s choice
should be based on three criteria: maximizing proceeds; minimizing
the impediments, such as financial information on the companies,
economic and market factors; and minimizing the legal and logistical
complexity.
With a weak capital market and a desperate need
to raise as much revenue as possible, the government will most likely
resort to option one (or a variation thereof), which is selling a large
part of the company to a strategic investor while the state keeps a
small share. This would particularly be the case for strategic
assets such as telecommunications and electricity.
Once the option is selected, the questions mount: How will the bidding
process be handled? How do we make sure that state enterprises
will not be sold to unworthy bidders? If the last few years are any indicator,
we’re in serious trouble. The government essentially handed
contracts and concessions to friends and family with little consideration
for other factors. This point is important. Lebanon has relatively few public enterprises,
so there’s little room for mistakes.
Having said all that, privatization will hardly
reap the desired benefits unless it is complemented
by the twin pillars of a market
economy: competition and regulation. They
are the government’s two biggest and trickiest
tasks, particularly since the record of the Lebanese state — save the banking sector — in doing both or either is poor.
The risks of privatizing public enterprises
without a competition policy in place are high.
We would end up with few gains in efficiency,
prices, and services. What’s more crucial is the timing of introducing competition in the market.
In many instances, it will be essential to do that prior to privatization.
The opposite may be costly, since a privatized monopoly
will try to use its money and political influence to prevent the introduction
of competition later on. This point may be overlooked since
the government’s priority will be fixated on raising cash in the short
run, ignoring the medium- and long-term implications.
The third task awaiting the government is setting up an effective
regulatory framework. Otherwise, political interference in the operation
of the newly privatized firms may reduce large-scale investment,
hence lowering the quality of services in the medium and long
run. Is the state capable of regulating these newly privatized enterprises?
Will it have the autonomy to make independent decisions?
Will political influence be restrained? Will the decision-making
process be transparent? These and others are daunting questions for
Lebanon, where there is little regulatory tradition.
Privatization will reduce the size of the state, but require it to
become a strong one. Its role in the economy will be moved from
direct production of goods and services to supervising and regulating
entire sectors. To think that with privatization the role of the
state will have diminished or even ended is a big mistake.
