E It has been a turbulent year. How did the World Bank respond to the events of February and March and how have these events shaped its policy in Lebanon?
The assassination of the former prime minister [Rafik Hariri] was a watershed in the history of Lebanon. It was the climax of 30 years of instability that started with a civil war and then a [wider] war and then attempts to rebuild the state and the infrastructure under very tense and tenuous political circumstances. Our view, along with the view of the Lebanese government and the Lebanese people is the hope that this event, as painful as it has been, would usher in a new era of governance in Lebanon that will put the issues of economic and social reform back on top of the agenda and enable the government, the private sector and society to move on with these reforms.
E The assassination was nine months ago. What evidence have you seen to show that these reforms are moving forward?
We have seen a higher caliber of individuals coming into government. They have started implementing serious programs in difficult circumstances because the political and security ramifications of the assassination are still with us so they have to juggle the political, security and reform agendas all at once. This has been very difficult.
E Has the World Bank been working with the Lebanese government to create a mechanism to restructure the debt? If so, can you give us any details?
The debt is not the major issue that the World Bank is working on. One of our teams is giving some advisory assistance to the government mainly related to creating a debt management office within the ministry of finance to find the best way to absorb and utilize future capital inflows. We are also working on managing debt on the medium term scenario of reducing the debt servicing. In this sense we are one of many players and the debt will obviously be the focus of any future donor conference.
E Staying with the donor conference, what is your evaluation of its recent postponement? Premier Fouad Seniora has said that his reform agenda will be pushed through by December and implemented by February. How credible is this?
In light of what Lebanon has gone through in the last nine months, these [initial] dates were obviously not realistic and I think the government was more interested in getting the substance and the process right and building national ownership by the private sector and by parliament and civil society, than mechanically sticking to a date. We endorse this view. This is a unique opportunity that should not be squandered. The emphasis should be first to determine what the skeleton of the reform agenda should look like from the fiscal side, from the economic side, the social side in terms of electricity, water, health and education, i.e. the basic sectors that affect daily life and economic growth. Then we should establish a process by which this agenda will be debated by government, in parliament and the private sector and the banking sector in particular. The donor conference would be the culmination of that, so it is dangerous to have the date drive the process rather than the process determine the dates.
E So do you think everything will be in place by February?
That is everybody’s hope.
E What will set this conference apart from the previous donor conference in Paris in late 2002?
It will be very different. Paris II was by and large an attempt to financially engineer the debt. It did have elements of reform, mainly centered on privatization but the focus was debt reduction through donor support. This time the focus will be on long term structural reform to stimulate economic growth, because of the realization by all parties that unless you deal with the underlying causes of the continuous deficits and the growth of debt, you will be back where you started. In 2002, the debt was $21 billion. Today it is double that amount, so the [Paris II] cash injection was nothing more than a temporary shot in the arm.
E Lebanon did not meet all its Paris II obligations. Is there greater confidence now that the political topography has shifted?
I think there is, for several reasons: firstly this conference is about long term reform that will touch every sector and the life of all Lebanese and as such it will require a process of internal dialogue specific to Lebanon that did not take place before. Donor support is likely to be phased in over time rather than be a one shot deal, so there will be a need to establish commitment, one that will be monitored over time as a mechanism for disbursing funds.
E In your second quarter report you detail the steps that need to be taken towards economic reform “stimulating economic growth above 5% over a long period; radically changing the patterns of public expenditure to ensure efficiency and equity of public spending; and dealing with the debt overhang.” This has been repeated ad nauseam. How do you perceive the economic will for reform, especially the much-needed program of privatization?
In terms of privatization, there will not be a blanket program targeting sector after sector just for the sake of privatization by any means. What we expect to happen is that important areas such as telecom and electricity will be turned into productive sectors to help the private sector grow and provide better services. In that sense it will have to vary from one sector to another. In terms of telecoms, the will is there and the privatization process will probably go through with considerable support. With EDL, fully-fledged privatization is not on the cards, especially not in the short term. What we are talking about is improving the management of EDL by “corporatizing” it, by bringing in new management and contracting out essential parts of the operation and maintenance. So we might see the private sector being brought in to collect bills and to handle accounting functions, the types of activities where the private sector can really give value added, so it will be a gradual process.
E So will 2006 be the year of privatization?
2006 needs to be the year of decisive management and the decisive management takeover of public assets, whether it’s total privatization in the case of telecoms or bring in a corporate approach to managing electricity and water, whether it means having balance sheets for certain state owned activities or enterprises. It will vary. It will be the year the government is seen to take charge of state owned assets and puts them on the schedule for reform be it privatization, be it leasing, be it contract management; what ever is appropriate for the specific utility. There is no blanket solution for all.
E The World Bank’s suggestions for a reduction in the size of the public sector labor force are laudable, but how realistic are they?
The current status quo is very dangerous. It is an inflated public sector with relatively low salaries for a relatively low number of civil servants, excluding the military and teachers. Therefore the ability of government to handle day-to-day activities to meet with investors and citizens is limited and it shows in all the [economic] indicators. What we are saying is that if Lebanon wants to get out of its debt crisis, it needs to grow and if it needs to grow it needs to grow its public sector. How realistic is this in 2006? It is up to the government to decide but it is precisely why we emphasis the process of dialogue about reform that will take us to the donor conference. Ultimately it is a political economy question and I don’t know the answer but I am hopeful and we need to push things in the right direction, but only the Lebanese can decide this.
E The International Finance Corporation (IFC) is heavily involved in the Lebanese private sector, mainly with banks and financial institutions. How is this a reflection of how the IFC views the potential of the Lebanese private sector? You have helped Uniceramic, Tanmia and Idarat; why not wine, tourism or IT projects?
The IFC has had to take a relatively conservative approach first because of the macro [economic] situation in the country and second, because liquidity did not seem to be an issue in the Lebanese banking sector and the demand for IFC investing in business was not high. The IFC is now launching a very active technical assistance program in which it is interacting with the various sectors such as small and medium enterprises and micro finance and it is considering innovative ways to close the financing gap that smaller investors lack vis-à-vis the bigger investors who have good access to capital. Whether it is done through the banks or directly it remains to be seen, but there is no doubt that the IFC’s activity on this level has increased substantially.
E The International Bank for Reconstruction and Development has so far allocated $321 million for various projects throughout Lebanon. How are these projects chosen and is there a precedent for gauging effectiveness and results?
Projects are chosen through what we call a country assistance strategy. The $321 million in the portfolio are a reflection of a country assistance strategy assessment that was done in 1997. Obviously, it is outdated and so we need to look at the current needs. That’s why we have a new country assistance strategy going to the board by the end of the year hopefully and that will define our program for the next four years. The country assistance strategy defines the main themes for a country and for Lebanon there are three: the first deals with the governance of public finance, issues of budget management, debt management, fiscal management, and statistics and provides a basket of technical assistance and financing to help the government breakdown barriers to competition and economic growth such as monopolies etc. The second is human development and poverty. There, the focus is human capital and we have seen deterioration in the quality of Lebanon’s human capital especially relative to the region, which is catching up while Lebanon remains stagnant. Then there is health. Lebanon spends a lot on health but the results are not commensurate with outcomes in terms of such health indicators as coverage and insurance. Likewise with poverty, the social programs are remnants of the immediate post-war integration of militias and restoring communities to areas from which they were expelled. That is fine in a post-war situation but it needs to be more targeted to current needs. The third pillar is the management of environmental and natural resources, essentially water, wastewater and solid waste. The country has a rich landscape that if left unchecked will deteriorate and if you quantify the cost of this irreversible damage and add it to the debt, because we are talking about lost assets here, it would be tremendous.
E How would you describe the current investment climate? What is the World Bank doing to promote the investment environment? How has the Investcom placement helped Lebanon’s cause with the Multilateral Investment Guarantee Agency (MIGA) and what were the recommendations of MIGA’s needs assessment for attracting FDI carried out in the fall of 2005?
MIGA offers two types of support: one for Lebanese investors seeking opportunities outside Lebanon and one for foreign investors looking for opportunities in Lebanon. The Investcom [telecom] deal was a example of the former but MIGA would like nothing more than to help with the reverse as well and one of the ways is doing this by working directly with IDAL to be Lebanon’s state-of-the-art investment agency. As I mentioned earlier, the IFC is also providing support while the World Bank is carrying out an investment climate assessment survey of the private businesses in terms of the constraints they face with the aim of identifying exactly where we need to invest and trying to remove these constraints, be they administrative barriers or tax disincentives and the like. Finally, the last area is urban infrastructure development. While Beirut’s problems are considerable in terms of investment, they pale when compared to those problems faced by Lebanon’s secondary cities, such as Baalbek, Zahleh, Nabatieh, Tripoli, Sidon and Tyre. We need more employment, investment in agro-industry, in services, in tourism. You need to create a minimum infrastructure for the entry of businesses.
E Jordan has been making great strides in attracting foreign investment. What can Beirut learn from Amman?
It might be unfair to compare the two, given that Lebanon has gone through 30 years of turmoil and Jordan has gone through 30 years of relative stability, but it does go to show that a combination of stability and credible commitment over the medium term can be a magical mix for investors’ appetites in the region. With the liquidity in the Gulf today, there is money searching for investment opportunities. Lebanon has to provide a minimum environment for investors to feel confident over the medium term. The donor conference is an opportunity to break from past false hopes and start on a new path that shows a serious level of broad national support, that Lebanon is a middle income emerging country looking to compete in the region.