Lebanon: Privatization and its fiscal implications

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The Lebanese government has proudly outlined itsprivatization program in the recovery paper presented toParis III donors, underscoring its crucial role in promotinggrowth, reducing public debt and fiscal deficits. The focusis on the most profitable privatization, the mobile sector,while electricity, the most destitute, is deferred to anundetermined future date.

Contrary to the general perception, these so-calleddinosaurs—or the non-financial public enterprise sector, togive it the boffin name—actually make money for thegovernment in the form of revenues from no-tax revenuetransfers to the treasury and VAT. Income transfers totaledLL8.2 trillion ($5.5 billion) during 2000-2006, mostly fromthe telecom sector. VAT contributions are not separatelycalculated but, at 10% since 2002, should have added sizableamounts to government coffers. EDL contribution has beenlimited only to VAT, due to its perennial losses.

During the same period, government expenditure, in the formof transfers to PES, to EDL in particular, amounted to LL3.5trillion ($2.3 billion). Even without taking VAT intoaccount, the net receipts accruing to the treasury during2000-2006 reached $ 3.2 billion ($5.5 less $2.3 billion).Thus, PES has had a mitigating effect on public finances.

This is not to say that this state of affairs should beapplauded, as the sector has been plagued by a combinationof poor quality, high operating costs and slowing growth,prompting consumers and businesses to call for its drasticreform. EDL alone has been suffering losses close to 40% ofits power generation and MEA (which is much better managed)has yet to make recurrent profits.

High revenues from PES, 28% of the total in 2006, are due tothe high rates (over pricing/taxing). Mobile telephonecompanies charge $0.13 per minute, compared to internationalrates of $0.4-0.5, while EDL’s rates are also high byinternational standards. Public sector privatization wouldlead to a restructuring of revenues in favor of tax receiptsand both would be expected to rise with a growing economy.

A third lump sum source of income would accrue from sale ofexisting PES assets and from licensing. The prime candidatesare telecommunications, electricity and Middle EastAirlines. Licensing, particularly the telecom sector, isexpected to generate most receipts. (The net worth of MTCTouch and Alfa, the two government-owned mobile companies,are not believed to exceed $100 million, as most of theirassets date back to 1994. EDL and Ogero have yet to beaudited, and MEA is burdened with debt.)

According to government sources, mobile licensing couldbring in $2.5-$3.5 billion per license. Two additionallicenses should bring in the same amount. Such high feeswill only be recuperated through high service charges—mobile or kilowatt use—and this will probably have astifling instead of rejuvenating impact on the economy.

An internationally competitive price should guide thedetermination of licensing value. The overriding objectiveof the privatization drive should not be to extract thehighest possible revenue (from sale of assets and licensing)in order to reduce public debt, but rather to provide themost efficient and competitive service to contribute togrowth and eventually enhance government revenue.

A simple proportional adjustment, for instance, in mobilelicensing proceeds, to reflect a reduction in its servicecharge to an international level (to 4 cents from 13 centsat present) could bring down a license value by severalfolds to few hundred million dollars—and rates would stillbe higher than what many countries, determined to providecompetitive service, charge. Furthermore, a priority inprivatization should be to concurrently address the leastprofitable enterprises. Sinking more funds in EDL beforeprivatization could defeat the purpose of reform.

In reality, only reaching a fiscal surplus will reduce debt.Privatization proceeds alone won’t cover cumulative publicfinance deficits—estimated at $11.8 billion—through 2011(see Executive March 2007). Proper accounting stipulatesthat privatization receipts be classified as a fiscalfinancing item, making the that law stipulates theirallocation to debt reduction redundant. The governmentshould focus on improving its public finances throughrecurrent receipts and continued streamlining ofexpenditure, and by seeking to raise the grant element andfiscal support of donors’ pledges. To use privatization as atool to reduce debt and fiscal deficits is a misguidedapproach to reform.

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