Executive Magazine

The financial situation in Lebanon

by Marwan Barakat December 18, 2018

written by Marwan Barakat

This has been a difficult year for the Lebanese economy, sectors of activity, and financial markets at large. Compounding matters, political uncertainties have grown, especially during the second half of 2018. This year has witnessed a low real GDP growth, which Banque du Liban (BDL), Lebanon’s central bank, estimates at 2 percent and the International Monetary Fund (IMF) estimates at 1 percent. The Lebanese economy needs to grow at no less than 6 percent annually to ensure sufficient job creation to meet the annual demand for jobs by the estimated 30,000 Lebanese joining the labor force each year.

The BDL coincident indicator, a gauge of real sector activity, demonstrated over the first nine months of 2018 a growth speed at half that experienced during the same period in the past five years. The evolution of real sector indicators suggests that almost all economic sectors experienced additional weaknesses this year.

As for financial markets, inflows reported a net contraction this year, weighing on deposit growth, which, though still positive, reported one of its lowest performances in recent years.

The growing political uncertainty over the past year, driven by the delay in cabinet formation, adversely impacted economic conditions in four main ways: (1) Adverse effects on private investment driven by the postponement of investor decisions amid growing uncertainty; (2) Adverse effects on public investment in infrastructure through the non-materialization of CEDRE pledges and the ensuing risk of losing them; (3) Adverse effects on the awaited fiscal reforms to curb Lebanon’s elevated debt and deficit ratios; and (4) Adverse effects on capital inflows that are sorely needed to finance the country’s external deficits.

While the above factors are quite meaningful, the real economy, which slowed down further over the past few months, has not yet fallen into a recessionary trap, as evidenced by a persistently positive—though low—growth rate. This is tied to the quasi-resilience of private consumption, the continuing support of the large Lebanese diaspora, and the stable domestic security conditions in a region characterized by instability.

Macro forecasts for 2019 are based on a 2.5 percent real GDP growth forecast (with 6 percent nominal growth) on the assumption of a successful cabinet formation, along with slow progress in CEDRE reforms and implementation. Nominal growth will be driven by factors that diverge significantly from one another. These factors, as conditioned upon the positive assumption of government formation, will be: (1) A 6.5 percent domestically-driven growth in private consumption; (2) Likely stagnation of private investment at 2018 levels amid politico-economic uncertainties weighing on private investors initiatives; (3) A 24 percent growth in public investment from a relatively low base within the context of the state’s new Capital Investment Plan; and (4) A 14 percent growth in exports on the basis of the recent reopening of Syrian/Jordanian routes for Lebanese land exports (mainly the Nassib border crossing).

In parallel, money supply (M3) will grow by 4 percent on the back of an 8 percent growth in financial inflows that will generate an almost equilibrated balance of payments. It will generate, at the banking sector level, a $7 billion growth in deposits, of which circa 30 percent would be in Lebanese lira and the remaining in foreign currencies.

I do not foresee financial instability in 2019. This expectation comes on the back of strong monetary and financial buffers related to large hard currency (FX) reserves (standing at 80 percent of domestic currency money supply) and abundant bank liquidity (standing at 50 percent of FX deposits).

Elements of positive financial reality notwithstanding, the most significant challenge facing the government is to address the public finance imbalance that today represents the most significant vulnerability in the economy. With the public debt ratio expected next year to exceed 150 percent of GDP (the third highest worldwide) and a fiscal deficit ratio of 10 percent of GDP (in the top ten globally), adjustment reforms are now sorely needed to ensure the soft-landing of the Lebanese economy.

These much-needed reforms include spending rationalization through severe austerity measures, raising domestic resource mobilization, improving tax collection, fighting tax evasion, and reforming the electricity sector, along with a series of growth-oriented measures that aim to improve the overall business environment in Lebanon.

While exits still do exist and require tough economic choices on behalf of policymakers, Lebanon no longer has the luxury of delaying the long-awaited adjustment reforms. Having said that, a tangible advance in reforms, along with the thorough implementation of the CEDRE pledges to finance infrastructure spending, could create positive catalysts that would move Lebanon from an era of widening macro uncertainties to an era of gradual containment of risks and threats, as a prerequisite for economic recovery and the corollary re-alignment of growth with Lebanon’s long-term potential.

December 18, 2018 0 comments

Lebanon’s banks remain stable, seeing moderate growth

by Thomas Schellen December 17, 2018

written by Thomas Schellen

Socioeconomically, Lebanon at the end of 2018 gives the appearance of having experienced a year of only two seasons: an overlong Carnival of political absurdities, and a Halloween of economic horrors. As opposed to the usual cycles of tilling, seeding, ripening, and harvesting, these two seasons of 2018 were profoundly unproductive.

If this failure of productivity has led the country to deteriorate in popular perception into a haunted house with many vacant dwellings, the financial sector nonetheless remains the top-performing attraction in the house of Lebanon. In this sense, banking looks like a huge, flattering, magical mirror right in the hallway of this haunted house that affords those who look into it the best possible reflection of the national economic reality.

International observers, local economists, members of the business community, and broad swaths of the population appear unanimous in their view of the banking sector as the remaining primary motor of the Lebanese economy.

At the same time, however, there are also strong opinions that target banks are at fault for any and everything: from operating as an oligarchic sector and being politically exposed to standing in the way of genuine and equitable economic development.

On yet another perception frontline, views of the banking sector as healthy and pivotal for Lebanon’s economic sustenance are juxtaposed by widespread perceptions that the banks are unfairly siphoning profits away from society (although they are carrying large and increasing tax loads), and growing fears that the course of the monetary system, and the entire banking sector, is either unsustainable or could even comprise a large risk factor in an alleged trajectory toward a crash landing of the Lebanese economic system.

Focus on the data

Compared with the adrenaline rush and emotional thrills that are triggered by horror scenarios like a warning of impending economic doom for Lebanon by way of a currency devaluation or other shocks, a review of the numbers is outright boring. Not only is such brain work inherently tedious, but could be unwelcome to Lebanon’s populists because the analysis of data variations and ratios in the national banking system go a very long way toward tempering any irrational impulse of flight, submission and resignation, unqualified complaint, or blind outrage.

On the upside, a look at the data can sober a person. Taking account of data in general, and of Lebanese banking sector data for 2018 in particular, is not conducive to generating panic. Rather, it is an outright antidote to such outbreaks when examining banking data with a view to economic forecasts on near-term horizons. However, assumption-heavy data speculations over the medium and long term cannot safely be preferred over the reading of coffee residues, tarot cards, or palms.

In 2018, the latest observations by Lebanese financial consultancy BankData available at time of this writing continued to report moderately encouraging growth in banking activity.

According to BankData, assets of the group of 15 Lebanese banks with deposits above $2 billion (alpha banks) grew by 7 percent over the first nine months of 2018, from $232.8 billion in December 2017 to $249.2 billion. At the funding level, the alpha banks’ domestic deposit growth in the period was $3.6 billion, translating to 2.3 percent. Albeit acknowledging that this increase was noticeably below the $6.9 billion growth in the first nine months of 2017, and also lower than the average growth of $5.4 billion in the same period over the past five years, BankData consultants pointed to the environment of political uncertainty. They explained that overall deposit growth was to 72 percent in foreign currency and to 28 percent in Lebanese lira, raising the dollarization ratio of domestic deposits to 67.7 percent in September 2018.

Juxtaposed to lending developments in 2017 as well as lending trends over the past five years, which saw loans to the private sector grow in the first nine months by $1.7 billion and $1.2 billion respectively, the nine-month period in 2018 saw loans to the private sector contract by $1.1 billion, driven by a contraction in private sector loans denoted in a foreign currency. Other data observations by BankData point to increasing average costs of funds for alpha banks in Lebanese lira and in foreign currency by 43 and 24 basis points (bps) respectively, which the consultancy noted was below the rise in the US benchmark rate.

Net contraction of lending portfolios and the imposition of added taxations on banks were reflected in declines of net profits for the alpha banks, even as they increased their efforts to control costs. According to BankData, net profits at the end of September contracted by 13.8 percent overall and 9.7 percent in domestic terms. “As such, alpha banks posted declining profitability ratios, with an annualized return on assets ratio of 0.94 percent against 1.17 percent over the same period last year, and an annualized return on equity ratio of 10.48 percent (11.43 percent for return on common equity), against 12.65 percent (14.01 percent for return on common equity) over the same period last year,” the consultancy said, adding that banking in Lebanon is “showing no sign of caving in, despite an accumulation of domestic economic stresses and external pressures.”

Asset utilization and net operating margins of alpha banks saw declines and overall performances in 2018 and clearly lag behind those of earlier, more glorious periods of growth. However, this is not what one should see as a field littered with macro-economic mines on hair-triggers, especially when assessed in context of Banque du Liban (BDL), Lebanon’s central bank, given its orientation and proven track record as a defender of stability and confidence.

Neither the historic nor present levels of BDL’s hard currency reserves lend credibility to mental assumptions by international banking analysts that the central bank would ever choose to fund the external financing gap purely from its own FX reserves. This would continuously degrade the domestic money supply (M2) to a mere 10 percent by the end of the period over five years between mid-2018 and mid-2023, as a December 2018 report by investment bank Goldman Sachs speculated.

In light of realities, it does not seem appropriate to flatly buy into the twin assumptions by Goldman analysts that, over the next few years, capital inflows to Lebanon will fail to pick up from the 3 percent range of autumn 2018 while the country’s external balance sheet will continue to deteriorate. Predicated on those assumptions, the analysts wrote: “We believe it is only a matter of time before the BDL’s ability to maintain the peg will be widely questioned.”

Contrasting such ‘ifs’ and generally extreme assumptions, there are innumerable signals that the need for reform and the limitations of the (working) tool sets in BDL and commercial banks are increasingly understood across all levels of Lebanon’s monetary and financial decision making, and are even understood by fiscal policymakers. With this in mind, it is prudent to realize that the short-term perspective for the Lebanese banking sector is certainly not littered with risks and red flags anywhere near the extent that the Lebanese natural environment is littered with garbage and exposed to pollutants.

Further domestic and

international contexts

The relative health of the Lebanese banking sector is accentuated in the overall financial markets picture when one expands the consideration to the domestic financial sector and the year’s challenges on emerging markets on the internal and external vision axes respectively.

First, however, any analyst of the banking sector in relation to the whole economy is well-advised to be cognizant of the dangers that come with the sector’s disproportionate role. Namely, there is a danger that policy decision makers look into the banking mirror and forget the need to be prudent in fiscal and economic reform decisions, along with the danger that bankers and their allies might be so over-awed when looking at their own images in this flattering mirror they become desensitized to the needs of the little players in the real economy. In the financial markets, the insurance and capital markets of Lebanon did pirouette through 2018 with less vigor and performance than banking.

International conditions and shifts in the world economy in the course of 2018 were perhaps to the greater or smaller advantage of advanced markets, but the same cannot be said when one considers the pressures that emerging economies and many small countries in the third world were exposed to. From the rising tide of trade conflicts affecting the largest emerging economy, China, and political uncertainties that have been prone to affect developed economies, who for decades had been insulated from heavy domestic and external political shocks, to the currency pains for financially exposed emerging markets that accompanied the normalization efforts of the Federal Reserve in the United States, disruptive impulses radiated throughout the global economy in 2018.

What could be easily overlooked in this regard is that Lebanon, despite its self-induced problems, handled itself not at all badly when compared with larger regional neighbors like Egypt and Turkey in terms of currency pressures, or with similarly sized or positioned countries in terms of income bracket (high middle-income) or their sovereign and financial credit risk ratings.

On the domestic financial economy, the sole underwriting segment of the insurance sector with strong positive outlook for growth as measured by premiums development in 2018 is the medical business line, largely owing to changes relating to guaranteed renewability of medical insurance contracts and improved coverage continuity of employed persons who reach retirement age. Overall, it seems that insurers in Lebanon are faced with enduring international industry challenges, such as the need for digitization, and local ones related to the improvement of insurance awareness and acceptance.

Performance expectations for Lebanese insurers in 2018, apart from the medical line, are at best modest, and reported financial developments leave room for questions. This is even more so the case when the high inflation rates in 2017 and 2018, by local standards, are taken into consideration in conjunction with the sector’s total premiums in 2017—a year in which the sector according to the Association of Insurance Companies in Lebanon (ACAL) achieved written premiums of $1.636 billion, reflecting an increase by 3.45 percent from the previous year—and in 2018, where the Insurance Control Commission (ICC) expects negative growth in life insurance premiums alongside stagnation in the property and casualty lines. The ICC sees this as correlated with the economic situation in the country, and the anemic situation in many sectors.

The picture turns still a few shades darker when looking at the 2018 “performance” of Lebanese capital markets, namely the market capitalization and trade volume developments at the Beirut Stock Exchange (BSE). Total trading volume at the BSE for the first 11 months of 2018 was $349 million, more than 36.5 percent lower than in the first 11 months of 2017. In that period, the total trading volume was $551 million (after having experienced a similar annual weakening from a multi-year high of $885 million in trading volume during 2016). With the market cap hovering up to $1 billion below the $10 billion line in 2018, the BSE represents less and less financial market fire power when one regards its market cap as a share of the official Lebanese GDP that amounts to more than five times this value.

“The anemic performance of the Beirut Stock Exchange stems from two main reasons,” Lebanon’s Capital Market Authority (CMA) tells Executive in response to emailed questions. “First, its current legal structure, which represents a public company that reports to the Ministry of Finance. Second, the rising economic uncertainty and political landscape in Lebanon has dealt a blow to the Beirut Stock Exchange.” CMA also expresses optimism that current “circumstantial performance of the BSE” would return to average performance levels seen over the past seven years, noting that fundamentals of companies listed on BSE have not changed and that the book value of many of these companies—most of which are banks—is higher than market prices of these stocks near the end of 2018 (to the chagrin of bankers).

While mirroring in the first instance the investor perception of listed assets, a fatigued stock market might also be an alert to imbalances in the functionality of the entire economy. The general consideration is that a highly valued or possibly overvalued securities environment is reached when market capitalization at national exchanges equals 120 or more percent of a nation’s GDP and that anything below 50 percent is an indicator of undervaluation of listed companies and the whole market. This could even signal some degree of dysfunctionality of capital markets or a drag on economic development, with the reasoning that highly functional financial systems facilitate better usage of economic growth potentials in economies by enabling the best investment opportunities to receive optimal funding.

Moreover, research conducted since the global financial crisis of 2008 has suggested that stock market performances in emerging markets contribute importantly to economic growth in these economies. Other research has noted that rich countries with large equity markets in relation to their GDP also have high standards of living, while underpowered capital markets tend to correlate with countries underperforming in terms of economic development.

When taken as mirrors of the real economy and signalers of good or ill health in the national context, the persistent and growing disproportionality of the Lebanese banking sector and the other pillars of the financial economy reinforces the acknowledged fact that a continuation of the financial and, by implication monetary, practices of the past quarter century cannot continue indefinitely, and that a reboot, invigoration, and rebalancing in the financial economy deserves a near-term higher ranking on the national to-do list than discussions over currency stability and parity.

The weather is changing

International economists’ collective crystal balling on the coming year is comforting in that, whatever really comes to pass in the global economy in 2019, pressures and national worries are not going to be limited to Lebanon. In a poll of some 500 economists and economic analysts around the world taken by Reuters in September/October of 2018, expectations on a majority of the 44 economies covered in the poll were for unchanged or downward GDP growth rates and unchanged or increased inflation in 2019. By analysts and economic media, the specters of bear markets and recession were raised under questions of when, not if.

Hinting to already materializing risks in the global economy was, for example, the director of the International Monetary Fund (IMF), Christine Lagarde, when she said just in advance of the IMF-World Bank’s convening in Bali for annual meetings in October that it has become more difficult for most countries to deliver greater prosperity because the “global economic weather is beginning to change” when compared with spring of 2018. The IMF’s World Economic Outlook at the same time admonished in further detail that “downside risks to global growth have risen in the past six months and the potential for upside surprises has receded.”

The Organization for Economic Cooperation and Development (OECD) also voiced its concerns in an economic outlook in November. “As central banks progressively, and appropriately, reduce their liquidity support, markets have started re-pricing risks as reflected by the return of volatility and the decline of some asset prices,” the OECD observed.

Pointing to reversing capital flows away from emerging to advanced economies, especially the United States, the report noted the increase of political and geopolitical uncertainty in Europe and the Middle East, along with highlighting the uncertainty caused to businesses by heightened trade tensions and the risk that these tensions could be “disrupting global value chains and investment, especially in regions tightly linked to the United States and China.”

In this broad context of under-optimistic global forecasts for the coming year, trade confrontations between large economic powers, and oil price developments, there is naturally room for nuances in such a vast and challenging landscape of expectations. For example, in its outlook on global markets, Bank of America Merrill Lynch (BofAML), in a research report published in December of 2018, expects 2019 to see “modest gains in equities and credit, a weaker dollar, widening credit spreads, and a flattening to inverted yield curve.” The research team thinks this will translate into a tighter squeeze on liquidity that would likely contribute to higher levels of volatility.

Besides a continuation of late-2018 bear vibes in the US securities markets and a slowing of the US economy overall, BofAML expects global profit growth to decline and global economic growth to decelerate amidst global monetary policy divergences and a weakening dollar. Alongside a “modestly positive” outlook for commodities and projections of strengthening euro and yen, the research team opines that the outlook for emerging markets in this scenario is broadly positive, as EM assets are “cheap and under-owned.”

For the economy of Lebanon—which is neither overly correlated with other emerging markets nor typical by profile—it is not necessarily a bad thing that prominent expectations for geo-economic developments in 2019 are accompanied by narratives of impending risk and uncertainty. It will perhaps be more important that the latest global outlooks have room for factors such as less upward interest rate action by the Fed, and a relaxation of oil prices. Both factors might contribute to relieving external financial pressures on the Lebanese state.

Much more meaningfully, on the domestic front, the potential for improvement has a numerical advantage at the end of 2018. Possibilities of grave shocks always exist, but the hopes for stability have a stronger currency.

Encouragement and room for positive expectations come, for example, from the impact that political constructiveness—a formation and great performance leap on the government level—would have on public investment growth and for financial inflows. News of the past few months have been actually pointing to improvements on some infrastructure fronts such as the PPP outlook, as elusive as parts of it still looks today, and on the internet connectivity side.

Nota bene, one of the side effects of the superb strength of Lebanon’s banking sector as a distorting mirror attracting attention in the economy, is that other aspects of the financial economy, such as development of capital markets and the microfinance industry, can be overlooked and left behind. That is unfortunate, as demonstrated by a report on the current state of stock markets around the world, published in December 2018 by the World Federation of Exchanges (WFE). The report explains how international portfolio investments can be attracted to exchanges in emerging and frontier markets, and how these can then contribute to economic development.

Necessary factors to this development, according to WFE, include adoption of reporting standards (such as IFRS), encouragement of English-language corporate disclosures, and implementation of elevated corporate governance practices. Stating that “the greatest predictor of foreign inflows into emerging markets is emerging market equity returns,” the WFE report notes that an increase of domestic returns on equity by merely 1 percentage point can be associated “with a $24.4 million increase in monthly inflows” to the average market.

In capital markets, we have waited another year for hot news (as Executive expected in our 2017 year end issue). However, the CMA confirms that after having conducted a flurry of other constructive activity throughout 2018, in early December it finally issued its Request for Proposal (RFP) to launch its Electronic Trading Platform (ETP), which the CMA counts on to “significantly improve liquidity in the Lebanese markets, allowing Lebanese diaspora easier access to invest in Lebanon, and contributing to the growth of the economy.”

According to the CMA, the RFP sets the guidelines for developing the ETP and the securities allowed for trading on the platform and thus enables financial institutions that are interested in owning and operating the platform to apply for the license issued by the CMA.

“With the enhancement in the types of securities available for trading by local and international investors, we are certain that the Lebanese capital markets will regain their appeal and attract an enhanced private sector participation given the renewed opportunities that the ETP provides,” the CMA confirms—so, in short, there is finally something moving in regard to the BSE/ETP.

Elsewhere in the financial economy, BDL has sent new and positive impulses that actors in the small, but motivationally important microfinance sector see as encouraging and, along with the arrival of veritable Fintech initiatives in the entrepreneurship ecosystem (see Executive’s November report), some announcements hint at new and improved initiatives in regard to cybersecurity and at least further considerations of digital currency at the central bank level.

This leaves the big long-term task of banks upgrading themselves to contribute to the digital transformation of the economy and activate new thinking in ways that should help in bursting through many current mental and operational idiosyncrasies, barriers that have formed as collateral of the years, while banking was the only reliable engine of the Lebanese economy.

December 17, 2018 0 comments

Economics & Policy Numbers & Figures

Infographics

by Ahmad Barclay & Jeremy Arbid December 17, 2018

written by Ahmad Barclay & Jeremy Arbid

December 17, 2018 0 comments

Economics & Policy Q&A

Ziad Hayek discusses new PPP projects

by Thomas Schellen & Jeremy Arbid December 17, 2018

written by Thomas Schellen & Jeremy Arbid

At the end of October, Executive interviewed Ziad Hayek, secretary general of the High Council of Privatization and PPP (HCP), to learn of proposed public-private partnerships. The HCP had organized stakeholder meetings to discuss public-private partnership (PPP) proposed projects. This interview primarily discussed two PPP projects that are now in the pre-planning phase—the expansion of the Beirut airport and a toll road plus highway extension. A third PPP project, discussed as part of a published interview with Hayek in Executive’s November issue special report on entrepreneurship, concerns the construction of a national data center.

E Two projects—relating to Rafic Hariri Airport, the toll road and highway extension—have been officially mentioned as PPP projects that are underway.

The airport expansion project is to build Terminal 2. This is a longer-term plan for a new terminal and not about the immediate improvements planned for airport Terminal 1. This new terminal will be on your right-hand side if you are going to the airport. Just before you reach the main building, there is an open area on the right, where you nowadays can see some private jets parked. The project is to build a new terminal on this land and build the access roads to it [at an] estimated cost of about $500 million, and we are now at the stage where we have retained the International Finance Corporation (IFC) to advise us. The IFC selected [four] technical consultants and legal advisers, (yet to be announced). We had our kickoff meeting for this project [on October 22], where everybody came together, all the stakeholders in government as well as the consultants. Ministries—the Ministry of Public Works, the airport, the Directorate General of Civil Aviation, Middle East Airlines, Middle East Airport Services, the Ministry of Interior, the Ministry of Tourism, the Ministry of Defense, the Council for Development and Reconstruction—all the stakeholders were there. As of today [October 23], consultants are conducting separate meetings with each stakeholder to gather more information [for] a full-fledged feasibility study, which will include a transaction structure that we can present to the Council of Ministers for approval, at which time we would launch the process starting with requests for expressions of interest, receiving them, prequalifying companies, and then work with [the winners].

E What is the planned timeline for this project?

We hope to be able to go to the Council of Ministers sometime in March [2019].

E A second PPP project under consideration is a toll road from Dbayeh to Nahr Ibrahim including a highway extension from Khalde to Dbayeh, what can you tell us about this?

Our consultants are the European Bank for Reconstruction and Development (EBRD). The total project is more complicated [when compared with the airport project], because we have the [government] decree for expropriation of land for one segment of the [planned highway], but we need [the expropriation decree related to] the second segment as well for it to be a viable project. We are waiting for the new government to come up with that decree. What we have done in the meantime is to optimize the design of this road, which will go from Dbayeh to Okaibe, near Nahr Ibrahim. We optimized the design of this road and made sure that the road will have access points from all roads running from east to west that lead up the mountains in the Keserwan area. We also optimized the design to use tunnels as much as possible, decrease the cost of expropriation, and make traffic flow more smoothly.

E Is there already a map of the planned optimized route?

There is a map, but it is not an official document without the approval of the Council of Ministers. The planned road will be running through a tunnel under the mountain of Harissa. The total project, including the Beirut ring road which is supposed to run from Khalde to Dbayeh, has an estimated cost of about $3 billion.

E Does this include the cost of expropriation of land for the two stretches of highway in Beirut and from Dbayeh to Nahr Ibrahim?

I am including everything in the cost. We are reducing the cost of expropriation by including tunnels, but these are expensive in themselves. The current [draft] expropriation decree covers Dbayeh to Nahr Ibrahim; what we are waiting for is the decree for the route from Khalde to Dbayeh. In this project, we think it will take some time before we can finalize the design because we have to do most of the design. Also, we need to do the expropriation of the land before we can award [the project]. We think it will be about three years before we can award [the project]. If we are lucky, we think construction can commence in 2022, with the road set to be completed in 2030.

E In two large infrastructure projects in Lebanon that were carried out or discussed at the height of the national reconstruction in the 1990s, a very different toll road concept called Altoroc could not be financed with planned private sector participation. The rehabilitation and expansion of the Beirut airport involved late design changes, significant cost overruns, and arbitration with contractors Consolidated Contract Company and Hochtief. As cost overruns are always a danger with large infrastructure projects, what mechanisms can you deploy to counter such tendencies when contractors might bid low and deliver at higher prices when concepts are modified during the contracting period?

We have learned from international best practices, the way we designed the PPP law and our specialist PPP team. The approach is no longer about having a tender for project, awarding it to the lowest bidder, and then bringing in variation orders and all this stuff. [The approach] is slightly different now. First, we have a very strict prequalification process. Then we are sharing the information with all the stakeholders. In the case of the toll road, this involves municipalities and various ministries. From the design of the project, the selection of the prequalified companies, and then the involvment of all bidders in the contract, and by having the contract as part of the tender documents, we are making sure that all elements in the process lead to full transparency and the ability to do a good assessment of the proposals. Thus, it is not necessarily the lowest [bid] that will get awarded. You can have a low price and still lose the tender because of the way that company history, quality, and the other aspects are taken into consideration. There is no foolproof system, but I think with those control mechanisms we are improving the procurement a lot.

E How are you distributing the risk between the public partner and the private ones?

It is exactly a partnership in risks. It is through this process of working with prequalified companies when you determine who is bearing what risk and [who] is best positioned to bear which risk. Generally, with this type of project, the private sector will bear the construction risk, the financing risk, [which includes the] interest rate and exchange rate [risk]. The government will bear the risk of tariffs [related to setting the toll rates], the risk of force majeure, airstrikes, and whatever security issues. There are so many things. When you are starting to talk about risks, the first impression is that there are two or three risks. In reality, there are 20 or 30 risks that you need to deal with.

E How about the operational risk for toll roads, such as working with revenue projections that turn out to be wrong, as it has been seen in some countries in Europe in recent years?

About the toll road tariffs, traffic estimates are always the most difficult thing to deal with. But there are two things to keep in mind. One thing is that you cannot question your decisions. Each one of us will make decisions in our lives, and there is a saying that there is no wrong decision. When you make a decision, you are convinced that this is the best thing to do. To look back and say, ‘We screwed up, this was wrong,’ is fine. There is no shame in having gotten something wrong and we all do in our daily lives. There is shame in not doing your homework, in not considering all the variables and mitigating all the risks. So [in regard to the operational risk of estimating traffic forecasts and setting tolls], I want to say first that the onus is on us, and the private sector companies, to dot all the i’s and cross all the t’s. The second thing is that having a PPP project with a contract that is not flexible enough to deal with changes that will happen in the future, is a badly designed PPP project. PPP projects are meant to last for 20 and 30 years, yet no one has a crystal ball to determine what will happen. For example, now we may be working on a toll road but in 15 or 20 years, roads may be obsolete and we will be using flying cars.

E Some very large multinational companies in the automotive sector are considering trends in automated driving, like autonomous delivery vehicles, as survival issues. Does this suggest that the operational risk in a toll road scheme today is daring from such perspectives?

It is daring. Your PPP contract has to be flexible enough to deal with uncertainty. We are not talking here about having rigid contracts where you end up having to go to court. There are provisions for discussions and arbitration mechanisms; flexibility needs to be built into the contract. Coming back to my point about how one should not be concerned over making the wrong decision but should do their homework, I would add that in case of a toll road, the thing to remember when people later criticize such a road and say there was an overestimation of traffic is that there was a decision made at some point in time whether we need a road or not. If we need a road, there is a cost. If you do it through normal procurement, the government is bearing all the risk. If you do it through PPP, the government is sharing the risks [with the private sector]. PPP will always be better, because you [as a government] are sharing the risks, instead of bearing all the risks yourself.

E Does a successful partnership require goodwill from both sides, with potential asymmetries in mutual readiness to invest goodwill?

Sure. But that is all hypothetical. In practice, the question is, ‘Do we need the road?’ If we say, ‘We don’t need a road, we are fine with the current situation,’ then fine. If we say that, ‘Yes, we need a road,’ the question [for the government] becomes whether you build the road yourself or do it with the private sector. If you have the money to do it yourself, go ahead and do it. It is faster and it is cheaper financing-wise because the government borrows money [at lower rates] than the private sector. If you don’t have access to the money and still want the road, then you should work with the private sector and accept the risks while doing your best to mitigate these risks.

E In regard to doing this homework, have you assessed extreme scenarios, such as radically decreasing amounts of traffic in 10 years because of shifts in mobility and traffic behavior?

We have not done the traffic assessment yet, and we don’t have that expertise. This is what the technical advisers will do. We will be relying on experts to do this. But I venture that the best thing one can usually do is estimate traffic increases based on population increases, urban development, and GDP increases, and then discount that [to allow for these predictions to be inaccurate].

December 17, 2018 0 comments

Economics & Policy Fiscal policy

Lebanon’s financial woes are home spun

by Bassel F. Salloukh December 17, 2018

written by Bassel F. Salloukh

Much like Ebenezer Scrooge’s selfish deeds, Lebanon’s past monetary and fiscal policies have finally come home to roost. As 2018 ends, most Lebanese have but one haunting worry: What kind of economic showdown will 2019 bring? To answer these fears, we first have to look at how we arrived at this wretched economic condition that haunts our future prospects.

There is nothing magical about Lebanon’s present economic crisis. It is rooted in the ghosts of past economic visions and choices. The lopsided pre-war merchant republic was recycled, producing a postwar rentier economy anchored on largely nonproductive tourism, real estate, and financial sectors, regressive tax rates, and depressed wages. High interest rates were the price paid to stabilize the Lebanese lira and ensure a steady increase in bank deposits which, alongside remittances from an ever-growing immigrant population, were used to redress the country’s balance of trade deficit. Considered at the time a necessary short-term measure, this postwar economic philosophy rewarded investments outside the real economy and financed a way of life based on uber-consumption, allowing many Lebanese to live beyond their otherwise logical means. Consumption, rather than saving, became the Lebanese way of life—capital concentration took precedence over sound fiscal policies. Today, we are reaping the results of these past ghosts: 1 percent annual economic growth in 2018; a 6.2 percent average inflation rate year-on-year through July; $83.7 billion public debt as of August 2018 (compared with $3 billion in 1993); a total fiscal deficit at 8.3 percent of GDP through June of 2018; an ‘unsustainable’—as the World Bank keeps reminding us—debt-to-GDP ratio of 155 percent at the end of 2018, expected to rise to 166 percent by 2020; and a trade deficit of $11.7 billion through August 2018.

Alarm bells are ringing

This postwar economic model overlapped with a peculiar political economy incentivizing cronyism, an endemic corruption organically connected to the Taif Accord’s power-sharing arrangement with its massive sectarian redistributive policies and political mobilization along mainly sectarian lines. Nowhere is this more glaringly evident than in the predatory rent-seeking practices of the postwar political elite, a fiscal evasion gap of some $5 billion in 2017, the equivalent of 10 percent of 2017’s GDP, according to Bank Audi estimates, and the ballooning of the public sector’s workforce size and wage bill. Constituting some 300,000 employees in 2017 and representing 35 percent of GDP according to Banque du Liban (BDL), Lebanon’s central bank, the postwar public sector emerged as a source of political rent, part of the sectarian political elite’s ensemble of clientelist networks and strategies deployed to produce docile sectarian subjects. The result is a Lebanese state that looks nothing like the modern Weberian state, with its measure of institutional autonomy from private societal interests. Rather, it is an archipelago of patronage networks that sustains the political economy of sectarianism.

Most worrying today is the insouciance creeping into reactions to persistent International Monetary Fund and World Bank warnings pertaining to the gravity of present economic conditions. This is especially so if we try to peek into our future economic prospects. If we do that, we see three potential but alarming and overlapping trends: 1) increased pressures on BDL’s foreign exchange reserves; 2) a persistent balance of payments deficit exacerbating the country’s perennial balance of trade deficit; and 3) rising debt financing as a result of pressures to raise interest rates and a concomitant increase in the debt-to-GDP ratio which, at least according to analysis of one worst case scenario published in Al Akhbar in November 2018, may reach 215 percent in the next five years.

Now that we can see the specters of our future more clearly, will policymakers, much like Scrooge, see the error of their ways, and start thinking about how to address what is a glaring contradiction between existing monetary policies and the need to reboot the real economy beyond non-productive rentier structures? Will they realize that relying on unorthodox monetary policies to rectify predatory and populist postwar fiscal policies cannot continue indefinitely, especially given new geopolitical realities and emerging market pressures? And if they decide to embark on an economic restructuring beyond the freshman logic guiding the infrastructural projects presented at CEDRE, has anyone paused to think for a minute about how to spread across classes and sectors the inescapable pain and agony that comes with deep economic reforms, particularly the privatization of strategic public services?

It is axiomatic that the postwar political economy, with all its distortions, has now run its course. But to exonerate the average citizen from part of the blame is to miss how the sectarian system operates through a combination of material and immaterial incentives to obviate the emergence of alternative forms of interest-based identities and modes of political mobilization. It is high time we free ourselves from the ghosts of economic policies past, and start making the kind of difficult fiscal choices that can reverse the present meltdown, without torpedoing the livelihoods of the poor and disadvantaged. Anything else would be sheer humbug!

December 17, 2018 2 comments

Economics & Policy Gender inequality

Rape subculture in Lebanon

by Mariam Shour December 17, 2018

written by Mariam Shour

The world over, legal systems are failing victims in cases of sexual violence and rape. In these cases, what should be a simple roadmap to justice takes twisted turns until the victim is blamed and the rapist is cleared. A mixture of lax laws and skewed perceptions of accountability often leave these victims shunned, shamed, and without recourse against their rapist.

Fueled by this harsh reality, ABAAD, a local nonprofit that seeks to empower the marginalized, launched the campaign #ShameOnWho in order to challenge the endemic victim shaming in Lebanese society. ABAAD is calling for more severe penalties against rapists—penalties that actually hold the rapists, not their victims, accountable for their actions.

Law and culture

Through a series of initiatives, including a viral social experiment video, a stunt at the Beirut marathon, and an immersive play open to the public, the organization grabbed much needed attention and debate on the issue. In Lebanon, one in four women are subjected to a form of sexual assault in their lifetime, according to ABAAD.

Rape culture is still very much prevalent both in the laws and the societal attitudes of Lebanon. Just last year, ABAAD’s ran a campaign that was successful in having article 522 of the penal code, which had allowed a rapist to escape punishment if they married their victim, repealed. However, women’s rights organizations argue that the repeal did not go far enough because there are other articles in the penal code that are interpreted in such a way that allow the rapist to escape ciminal charges.

That the previous Parliament would water down proposals from women’s rights groups is not surprising, given that in 2016—at a women’s rights conference, no less—then-Kataeb MP Elie Marouni brazenly stated: “There are certain circumstances where we need to ask ourselves if women have a role in pushing men to rape them.”

The blame game

These attitudes are not only reserved to parliamentarians. In ABAAD’s viral video, a young actress plays the part of a rape victim seeking help on the streets of Beirut. Those who respond to her are all members of the public, and it does not take long for the victim blaming to kick in.

The men and women in the video quickly excuse rape by commenting on the victim’s clothes: “My sister would never wear that,” or: “A girl going out with a guy, looking like that?”

Others make comments on her state of mind: “Are you on something? Did you take drugs? Are you drunk?”

Some make assumptions about her character: “Seems like she goes from one guy to another,” or “She looks like some random hooker.”

And then there is the flat out victim blaming and shaming: “She’s just a slut,” “What does she expect?” “You’re embarrassing yourself, don’t let anyone know what happened.”

It is no wonder that rape goes unreported.

Society has placed all the blame on the victim, her clothing, her choices, her actions, and none on the perpetrator of the crime itself. These attitudes are insidious and can make women falsely believe they might have done something to provoke their attacker. Not only does this undermine the victim’s experience, it also gives rapists a free pass. No one is prosecuted, no one is punished—except, arguably, the victim herself.

But rape happens because of rapists. End of story.

In a society that continues to feed and normalize rape culture, ABAAD’s efforts to break this vicious cycle will only be successful through joint efforts by the public and the government. Rape is a crime and it should be treated as such. It is time to judge the rapist, not the victim.

December 17, 2018 0 comments

Economics & Policy Refugees

The Syrian refugee crisis in Lebanon

by Kareem Chehayeb December 17, 2018

written by Kareem Chehayeb

In 2018, the Syrian popular uprising-turned-civil war entered its eighth year, and so did Lebanon’s refugee crisis. This past year was critical for Lebanon. Not only did the country hold its first parliamentary elections since 2009, it also saw decreased funding for refugees, a highly controversial policy by the country’s General Security to return refugees to Syria, and ongoing tensions between the foreign ministry and the United Nations High Commissioner for Refugees (UNHCR) over refugee returns.

Donor fatigue worsens

With Lebanon hosting, globally, the largest number of Syrian refugees per capita (only Turkey hosts more in absolute terms), it came as no surprise that international aid was more readily supplied during the early years of the conflict. This aid came in the form of not only direct assistance for Syrian refugees, but also funding to help the Lebanese government mitigate the impact of the refugee crisis on its infrastructure and economy. However, as the conflict in Syria drags on, international donations have stagnated.

In fact, the 2018 funding gap for UNHCR in Lebanon is its worst so far. Despite the need steadily rising, this year UNHCR received just $887 million out of a required $2.68 billion. Factoring in a sum of $310 million that carried over from 2017, the total secured funds amounted to only 45 percent of the required funding for the year.

This is not the first time that UNHCR in Lebanon has received less than 50 percent of its required funding. Need is outpacing willingness to donate. In recent years, from 2015 to 2017, UNHCR in Lebanon received roughly $1 billion per annum, but the funding gap has continued to widen. This situation looks set to continue, with the aid requirements of refugees and their local host communities—many of whom reside in impoverished areas—not diminishing.

Lebanon is not alone in coping with the refugee crisis. Jordan and Turkey are also hosting large numbers of Syrians and must contend with shortfalls in international aid. Unfortunately for all the host countries in the region, key donors are continuing to cut foreign aid. The Trump administration recently pulled US funding for UNRWA and is having second thoughts over their Syria aid program, redirecting more than $230 million earlier this year. Meanwhile, Turkey and the EU continue to squabble over the implementation of the 6 billion euro ($6.8 million) aid package signed in 2016.

Going forward, the cuts to US foreign aid under President Donald Trump will have adverse effects on struggling aid and assistance initiatives. In 2017, the US was the largest single state donor by far, providing $1.45 billion to UNHCR. Germany was the next largest, at roughly $477 million.

Stagnated conditions

Given that these funding gaps have existed since 2012, it should come as no surprise that there has been little marked improvement in the socioeconomic conditions of refugees, despite years of aid. In a 2018 update to the UNHCR’s refugee response plan for 2017 to 2020, the agency stated that more than 76 percent of Syrian refugees live below the poverty line, set at $3.84 per day. A whopping 87 percent of them are in debt, with the average debt amounting to $798 per person. Syrian refugees incur significant costs—for example, 18 percent of average monthly expenditure goes toward paying rent, often for overcrowded housing. Meanwhile, food is the largest monthly expenditure, at 44 percent, and accounts for the greatest proportion of debt.

Although the financial situation of Syrian refugees in Lebanon is dire, a thin, unexpected silver lining presents itself in the form of the continued improvement in the performance of the Lebanese health sector. A study by the American University of Beirut, the World Bank, and Lebanon’s Ministry of Public Health (MoPH) revealed that not only has the sector shown resilience during the refugee crisis it has even improved. Walid Ammar, the director general of the MoPH, told Executive in July that public and private health institutions continue to improve in light of the ongoing circumstances.

Meanwhile, the World Bank continues to oversee several projects in collaboration with the state to create more jobs in an attempt to alleviate poverty. The Creating Economic Opportunities program was established prior to the refugee crisis, and original projections sought to create some 52,000 jobs for Lebanese people over a 15-year-period. However, Zeina Khoury, a private sector specialist at the World Bank, told Executive in September that beneficiaries now also include 3,000 Syrian refugees who are to receive training—but not job placement support or wage subsidies—in sectors in which Syrians have the legal right to work in Lebanon. The program has yet to be formally adopted by cabinet and Parliament.

In any case, the sectors in which refugees are allowed to work are extremely limited. And it appears that UN agencies are anticipating further cuts to their aid programs designed to ameliorate the refugee crisis. In a meeting with the Ministry of Social Affairs in October, it was confirmed that UNICEF would discontinue their cash for education programs for refugee students due to insufficient funding. Around 13,000 households will be affected by this measure.

With diminishing funding, the government suspending UNHCR’s ability to register new refugees in 2015, and severe labor restrictions, the socioeconomic wellbeing of Syrian refugees in urban and rural areas is unlikely to improve in 2019. It appears that refugees will continue to rely on borrowed money for subsistence. These unsustainable conditions could also be a catalyst for some to take the risk of returning to Syria, despite the lack of a political solution to the conflict.

Voluntary returns?

Since last spring, General Security has been publicly documenting countrywide refugee returns organized in coordination with Syrian security and government officials. Photo handouts show refugees crowding around white buses provided by the Lebanese state, or the all-too-familiar green buses synonymous with war-time population transfers in Syria. According to statements released by General Security, the buses cross into Syria mostly through the eastern Masna and northern Abboudieh border crossings, with some buses utilizing the al-Zamrani crossing near Arsal.

The number of Syrians who have chosen to voluntarily leave Lebanon is disputed. Despite the presence of a UNHCR representative to monitor returns, confirmed by both General Security and UNHCR Lebanon Representative Mireille Girare, numbers differ between the two organizations. A General Security statement from early November stated that 87,670 Syrian refugees had returned from Lebanon since July. This statement broke down the number of returns into those who had gone back through a General Security return program (7,670) and those the statement said had returned on their own (80,000). This cleared up some confusion that had existed in the local press, as previous statements from General Security had provided breakdowns of their own returns program and an overall total that was much higher, without explaining the discrepancy.

Nevertheless, the overall number of Syrians returned is still disputed, despite the November statement from General Security. Lebanon’s caretaker State Minister for Refugee Affairs Mouin Merhebi claimed in a November interview with AP that only 12,000 Syrians had returned to Syria. Meanwhile, UNHCR tallied 3,100 returns as of October this year, though UNHCR spokeswoman Lisa Abou Khaled told The Daily Star that these figures represented individual returns, not refugees whose return was coordinated by General Security, and that there were additional “spontaneous returns” that UNHCR was not capturing.

UNHCR’s updated numbers indicate that the number of registered Syrian refugees in Lebanon continues to steadily decrease. As of October 31, UNHCR documented 951,629 Syrian refugees in Lebanon, a significant decline from three years ago, when the organization had roughly 1.2 million individuals registered. Despite these developments, the government continues to estimate the number of refugees (both registered and undocumented) to be significantly higher, at 1.5 million. But in his AP interview, Merhebi said that the number of Syrian refugees was now at around 940,000, following returns or resettlements in other countries.

Is Syria safe enough for refugees to return? Many Syrians have expressed concerns over security risks related to arbitrary detentions or forced military conscription by the Syrian army, its allies, or by opposition groups. There is also the question of the ongoing humanitarian and internally displaced people (IDP) crisis within Syria. In October 2018, the UN Office for the Coordination of Humanitarian Affairs documented over 64,000 displacements within Syria, mostly taking place in the Idlib and Aleppo governorates. The UN agency cited that the displacements were the result of Syrians seeking better security and humanitarian conditions. Human Rights Watch and other human rights organizations continue to document airstrikes on IDP camps and ongoing attacks against civilians by numerous forces on the ground. Merhebi also told AP that 20 Syrians had been killed after returning to Syria from Lebanon, but offered no concrete proof to the newswire, and rights groups monitoring the situation have recorded no deaths.

UNHCR dispute

Though the government has not reached a consensus when it comes to the Syrian conflict and the refugee crisis, the foreign ministry continues to butt heads with UNHCR. In May 2015, the government ordered UNHCR to stop registering Syrian refugees. This left sponsorship by a Lebanese employer as the only option for Syrians to obtain legal residence, a difficult path given the need for wasta that colors such arrangements.

In June 2018, caretaker Foreign Minister Gebran Bassil froze the renewal of UNHCR staff residency permits indefinitely. A statement from the foreign ministry cited alleged “intimidation tactics” by UNHCR, which they claimed were aimed at scaring Syrian refugees out of returning to Syria, by notifying them about the risk of military conscription, the poor security situation, and the fact that returns have not been endorsed by the international community. Despite other ministers and government officials condemning Bassil for the unilateral freezing of UNHCR residency permits, the decision still stands. In response, UNHCR stated that they respect the right of refugees to voluntarily return and do not discourage returns based on “individual free and informed decisions.”

With Bassil expected to continue heading the ministry once a cabinet is formed, it is expected that relations between the two will continue to sour. President Michel Aoun, echoing his son-in-law Bassil, said in a November speech that there are forces “stagnating” returns by “intimidating” refugees, arguably pointing fingers at UNHCR and human rights organizations that have expressed concerns about refugee returns at this point in time.

Given the circumstances, it seems the government’s current thinking is affecting the rhetoric coming from UNHCR and similar organizations. In a panel discussion at Saint Joseph University in Beirut in October, Girard appeared to downplay initial concerns about refugee returns to Syria, focusing instead on UNHCR’s role in ensuring their safety on Lebanese and Syrian territory. Meanwhile, Christophe Martin, head of the delegation of the International Committee of the Red Cross, told Prime Minister-designate Saad Hariri in November that the organization supports the return of Syrian refugees, if their security is guaranteed and the non-refoulement principle is respected.

Speaking from eastern Ghouta, near Damascus, the Danish Refugee Council’s Secretary General Christian Bach said in November that the reconstruction effort must get underway, given that many Syrians, refugees, and IDPs alike, are returning to the ruins that were once their homes. It is therefore likely that the narrative will continue to shift in 2019 to focus on the logistics of repatriation, rather than the legality and security of it.

December 17, 2018 0 comments

Economics & Policy Electricity

Lebanon’s electricity crisis

by Jessica Obeid December 17, 2018

written by Jessica Obeid

Lebanon’s power sector is a substantial drain on the state’s treasury, responsible for 40 percent of the country’s fiscal deficit, according to the World Bank. Significant reforms are required to cut the fiscal shortfall and address structural and governance issues at the root of the crisis.

The country’s power generation capacity is nearly 2,050 megawatts (MW), excluding the capacity of two temporary power barges, while the demand is estimated at 3,500 MW. The electricity tariff is largely subsidized; the average tariff of the state-owned electricity utility—Electricite du Liban (EDL)—is 9.5 cents for each kilowatt hour (kWh) consumed, while the cost of generation ranges from 17 to 23 cents/kWh. EDL thus incurs significant financial losses, between $1.5-2 billion annually, depending on oil prices. The country also relies on expensive heavy fuel oil and diesel oil, unlike the rest of the Middle East where natural gas, considered cleaner, and cheaper, is the largest source for electricity generation.

It is obvious, looking at the figures, that fixing the power sector requires increasing the power generation capacity by adding power plants and restructuring the tariff to reflect the true cost of generation—something that the Ministry of Energy and Water (MoEW) is keen to do. But reforming the power sector also entails immediately confronting deep-rooted structural and governance issues.

Increase generation

In 2018, the MoEW took steps to increase the generation capacity through thermal and renewable plants and temporary power barges, and started the process of switching to natural gas through floating storage and regasification units (FSRUs).

Lebanon signed four contracts in 2018, with the aim of adding 752 MW in power generation capacity in the upcoming years. One contract relates to the Deir Ammar thermal plant and the other three deal with wind farms in Akkar. Two expressions of interest (EoI) for a second round of wind and solar development projects ranging between 410-700 MW were also launched.

In February, the MoEW signed 20-year power purchase agreements (PPAs) to develop three wind farms in Akkar with three different joint-ventures: Lebanon Wind Power (60 MW), Sustainable Akkar (82.5 MW), and Hawa Akkar (70 MW), at the cost of 10.75 cents per kWh for the first three years, and 9.6 cents per kWh the remaining years. The first two of these ventures were later bought by a common entity. These farms are a breakthrough for the Lebanese power sector: they enable a new modality where the public utility purchases electricity from the private sector; they reduce dependence on fossil fuels’ price volatility, contributing to Lebanon’s new target of 30 percent renewable energy by 2030; and they will generate cheaper electricity than EDL’s thermal power plants. However, these wind energy initiatives are significantly more expensive than similar projects in the region and across the globe, with the global cost of electricity averaging 6 cents per kWh for onshore wind in 2017. For Lebanon, the higher cost is mainly due to the uncertainty in the sector, which is driving up the risk premium that companies account for in the projects’ finances. These wind farms, planned to be completed by 2020, face the challenge of attracting a required investment of approximately $360 million and risk setback due to political turmoil, following a five-year delay between the launch of the request for proposal and February’s PPA signature.

In May, Lebanon restarted the construction of a 540 MW power plant in the north of Lebanon at Deir Ammar, expected to come online in 2020 under a 20-year build-operate-transfer (BOT) agreement. In October, Lebanon agreed to change the agreement with the international firm initially contracted to build the plant in 2013, into a BOT, following a dispute over payment of value added tax between the firm and Lebanon’s finance and energy ministries.

The year also witnessed a call for EoIs for a second round of wind and solar energy projects, aiming to develop four wind farms with a total capacity ranging between 200-400 MW, and three solar photovoltaic farms with a total battery storage capacity ranging between 210 and 300 MW, through PPAs. The calls resulted in 42 EoIs for the wind projects and 75 for the solar projects. The first round for solar photovoltaic farms, launched in 2017, resulted in 256 EoIs, of which 42 prequalified companies were requested to submit a proposal by October 2017. The awarding of the first solar round is still pending due to regulatory issues and political conflicts, and the next step for the second round of wind and solar projects is still unknown.

The first step in switching to natural gas

While Lebanon is moving forward in renewable energy, the country is also planning the transition of current and future power plants into using cleaner fossil fuel sources.

Adding natural gas to Lebanon’s fuel mix would improve the country’s energy security by diversifying fuel and supply sources, and reduce fuel costs by approximately 40 percent, according to the energy minister. It would also serve to minimize greenhouse gas emissions. The benefit of such a transition would vastly increase if Lebanon finds and develops offshore oil and gas reserves.

The country’s 2010 electricity plan envisioned that two-thirds of the fuel mix would be made up of natural gas from multiple supply sources. To achieve that, Lebanon will need to develop the necessary infrastructure for the supply and distribution of natural gas, and convert and build new power plants operating primarily on natural gas. Two measures were identified that could achieve this over the short term: the procurement of natural gas through an FSRU and the supply of natural gas to the power plants via a coastal gas pipeline. Moored on the coast, the FSRU would be fed with liquefied natural gas (LNG) imported by ship and, following a regasification process, would feed gas to Lebanon’s power plants via a coastal pipeline or, more realistically, via several smaller pipelines that stretch from one plant to another in its vicinity. Last year, Lebanon launched an FSRU tender, its second attempt. While the original tender outlined that one FSRU would be built at Deir Ammar, the updated EoI calls for three FSRUs: one of each to be located at Deir Ammar and Selaata in the north, and one at Zahrani, south of Beirut. In 2018, 13 consortiums were prequalified to participate in the tender of the project, eight of which submitted proposals in late November 2018. Details of the projects related to the source of LNG and the actual cost of energy, driven by the regular necessary shipments remain unclear at this stage.

Future outlook

Past plans by the MoEW have remained mostly on paper, but the alarming fiscal deficit and the growing frustration of unreliable electricity supply may prompt power sector reforms in the near future. The International Monetary Fund stated in February 2018 that “electricity reforms should focus on expanding capacity and eliminating subsidies.” While it does make sense from a purely fiscal perspective to focus on the sector’s drain on the state budget—which should also account for illegal connections and non-billed consumption—the existence of a strong institutional system is a necessity for achieving true reforms, and authorities in the sector must address the underlying structural and governance issues. Otherwise, even with generation increased to match the current peak demand, the sector will encounter the same shortcomings in the future, as a result of growing demand.

Lebanon’s Capital Investment Plan (CIP), presented in April at CEDRE, includes plans to increase generation capacity and upgrade high and medium voltage transmission lines and the low voltage in the distribution network, in line with EDL’s master Plan for 2023-2030.

According to the CIP, four generation plants of approximately 500 MW each are planned to be completed by 2023: two in Selaata, one in Zahrani, and one in Jiyeh (by modernizing the Jiyeh power plant), in addition to the previously mentioned BOT in Deir Ammar—projected to be completed by 2020. If all these plans come to fruition, expected total installed capacity would reach 4,925 MW, combining all renewable energy projects and existing plants. Two more thermal plants and further renewable energy investments are also planned in the long run, for 2027-2030. All new power plants are expected to run primarily on natural gas, with heavy fuel oil as a fallback option in the absence of natural gas.

The reinforcement of the grid is a priority, as the government has not improved the grid network simultaneously with recent contracted improvements to power plants, causing inefficiencies and losses, and hindering the plants’ ability to operate at full capacity, as was the case when a third power barge was connected to the Zouk plant in August 2018.

The government is also planning a tariff hike, based on a price of $60 per oil barrel. Eliminating subsidies is a necessity for the proper functioning of the sector. However, they should be coupled with an increase in power generation and carefully designed to mitigate the impact on vulnerable households and ensure equity. The sector has failed to achieve this in the past few decades, with different areas facing different blackout hours, leading to higher generator bills for those suffering from the highest shortage in EDL supply. Removal of the subsidies should also be coupled with a drastic cut in non-technical losses otherwise illegal connections might increase in the future.

Unsolicited Proposals

The gravity of the situation has prompted several unsolicited proposals (USPs) from international energy firms to improve Lebanon’s power sector. The growing economic crisis might prompt the government to begin direct negotiations pursuing USPs, which would not be an unusual phenomenon in countries with power crises.

While USPs enable governments to identify innovative solutions to severe infrastructure challenges and capture the private sector’s interest in implementing commercially viable projects, they bring their own set of challenges.

These proposals typically do not fall within a government’s planned energy projects, posing the challenge of integrating the proposed solutions within the strategy for the overall energy sector. They are tailored to meet the objectives, equipment, and technologies of the proposing firm, not the citizens, and might compromise air quality. And, most significantly, in the absence of a transparent and true competitive procurement process, their negotiations increase the chance for low governance and low value for money, and heighten the risk for future public-private partnerships. This was the case when Tanzania embarked on direct negotiations to purchase power, which eventually led to arbitration.

Lessons learned from around the globe show that USPs should be channeled into a transparent and competitive process, granting a fair chance to all interested firms, not only a select few. The government should first launch an EoI or request for proposals before entering into direct negotiations, setting guidelines and allowing firms to bid against each other by showcasing their qualifications and innovative solutions with optimized technologies at cost.

The gravity of the sector might also prompt the government to pursue further temporary solutions, further aggravating the deficit.

One thing is certain: The sector needs a comprehensive, optimized strategy that increases power generation and efficiency at the least possible cost and improves the sector’s governance. Such a strategy should be clearly communicated to the Lebanese taxpayers. Implementing electricity Law 462 (2002), which sought to appoint a regulatory authority and “unbundle” EDL into private generation and distribution companies, is necessary to increase confidence, competition, and draw investments in the sector.

Lebanon’s deficit for the year 2018 is estimated at $4.5 billion, though that figure could grow much higher. In the best case scenario, cutting the current EDL deficit of $1.5 billion would be significant, but this is only a first step in addressing Lebanon’s public finance woes. The government needs to address its structural and governance issues across all state institutions—not just in the power sector—and urgency should not compromise transparency or sustainability.

December 17, 2018 0 comments

Comment Economics & Policy

Lebanon’s waste sector at risk of the same mismanagement as electricity

by Paula Yacoubian December 17, 2018

written by Paula Yacoubian

The waste crisis and the mismanagement of the sector have become a symbol of government incompetence and corruption. Millions of dollars have been squandered, and instead of having modern infrastructure, we have been left with an ongoing disaster affecting our health and draining our resources. There are 941 open dumps in Lebanon, more than 150 of which openly burn waste on a weekly basis. We are polluting our surface, groundwater, soil, and air. A Human Rights Watch report quoted an unnamed environmental journalist who said: “It’s as if you’re inhaling your death.”

Apologists for the disastrous status quo keep saying that no one is offering a viable solution, and present incinerators as the magical fix-all that will make the waste problem disappear. This “waste-to-energy” solution will allegedly solve the waste problem and the country’s other lingering crisis, electricity. For proponents, waste will be the new electricity source, whereas, in reality, it will be the new electricity scandal.

Local solutions needed

The waste problem cannot be solved with fragmented solutions or expensive and complicated technologies. Waste management is a social output and should be adapted to local conditions. Waste management solutions cannot be simply copied. What works well in Monaco will not necessarily work in Lebanon. What is needed is a comprehensive solution that takes into consideration our habits, our waste composition, our administrative and legal framework, our financial means, and our geographic and topographic nature.

We need to start working on waste minimization, enacting laws and providing incentives for reducing the use of plastics, for example, and encouraging waste reuse and recycling. We should start to enforce sorting waste at source to improve the value of recyclables and to limit the contamination of organic waste that can be treated biologically and turned into compost, which has commercial value and can improve agricultural soil. We are currently importing compost from abroad to use in our agriculture sector, even though the majority of our waste is composed of organics (more than 53 percent). Recyclables make up to 30 percent of the garbage we produce and can bring an estimated annual benefit of $65-272 million to the Lebanese market. The remaining fraction of the waste that cannot be recycled can be valorized and transformed into lower grade products, such as plastic crates and boards, or it can be placed in a landfill.

Incinerators, or the proposed “waste-to-energy” solution, cannot be considered an option for Lebanon given that most of the prerequisites for their adoption are not met. Waste incineration can be considered in countries where mature and well-operated waste management systems exist and where community planning systems are stable and able to make appropriate long-term planning decisions (for more than 15 years). This is not applicable to Lebanon, a country that has been implementing emergency plans for the past 20 years.

Another condition is that the calorific value of the waste must be high enough to sustain combustion. The high organic and water content of the waste in Lebanon makes it of low calorific value. To increase its calorific value, energy would be spent to dry the organic fraction and recyclables—especially plastics and materials with high calorific content—should be burnt. This will entail losing valuable resources and energy. The energy produced by incinerators will be minimal and not worth the pollution that mismanagement might cause.

Incinerators cannot be used without a robust legal and institutional framework that can oversee and monitor the emissions and effluents of this technology, enforce compliance with standards, and apply sanctions and penalties on polluters. Incinerators transform waste from a solid physical form to ash and air emissions. Air emissions from incinerators are highly toxic and carcinogenic. A pollution control system is needed to capture those emissions and the toxic fly ash. Proper monitoring of emissions is needed and proper disposal of fly ash in hazardous waste landfills should be secured. No labs in Lebanon are equipped to test for certain pollutants (such as dioxins and furans) emitted by incinerators, and there is no specifically-designated hazardous waste landfill at the national level. Moreover, air pollution levels in the country already exceed World Health Organization standards and are linked to increased risk of cancer and cardiovascular diseases. We do not need additional cumulative sources of pollution in the country.

Finally, incinerators are among the most expensive technologies, costing between 80 and 200 euros per ton of waste. This technology is usually adopted in communities that are able and willing to pay for the increased treatment cost, for example via management charges, tipping fees, tax-based subsidies, or high electricity feed-in tariffs. With the economic situation in Lebanon and the increasing debt, lending $1.15 billion to adopt incinerators is suicide.

Finding an environmentally friendly alternative

Since the end of the civil war, Lebanon has been suffering from an electricity crisis—despite the investment of billions of dollars and the electricity sector being highly subsidized—costing the country around 25 percent of its annual state budget. Looking forward, the waste sector will be the new electricity sector, and the country will drown further.

There is an immediate need to adopt appropriate solutions to the environmental predicaments facing Lebanon. We need to start with a comprehensive strategy that reduces health and environmental risks, recovers materials, and finds alternatives to the incinerator plan, which would cost more than a billion dollars.

We are facing a classic case of corruption: squandering public money for personal gain.

I was promised a special emergency legislative session by Speaker Nabih Berri to address the country’s environmental challenges. We are preparing tens of draft laws aimed at stopping the deterioration of the environment, which is affecting our health, tourism, and economy, and has become a national crisis. There is an urgent need to pass laws to deal with solid waste and wastewater. Enacting laws is important, but even more important is the enforcement of these laws.

The environmental degradation that we are facing is becoming irreversible. We need to act now. Everyone has a role to play, including citizens, deputies, municipalities, ministries, and judges. This is a battle that we cannot afford to lose. Our children’s future is at stake. Unless we unite and join hands, we cannot prevail over the entrenched forces of darkness.

Do not waste our future, and do not make the waste sector the new electricity crisis, dragging the treasury, and the country, into ruin.

December 17, 2018 0 comments

Economics & Policy Vision 2050

A vision for Lebanon in 2050

by Roy Badaro December 17, 2018

written by Roy Badaro

Everyone is aware that we are in a global world, but awareness of globalization’s causes and consequences is not universal. In my humble understanding, globalization shows that the notion of economic independence has become obsolete and that “consuzenship” (a combination of citizenship and consumerism) has replaced the old concept of citizenship.

Nowadays, people are driven by the pursuit of happiness to move to wherever in the world they can to fulfill their needs. This is the real cause of migration from South America to North America, and from Africa or Afghanistan to Europe, and ultimately from Syria to Lebanon—regardless of economic, political, or security motivations. People are moving from citizenship to the more attractive concept of consuzenship, where individuals search for the best state services on offer—provided they can find a way to migrate to new havens.

Onwards and upwards

The Lebanese who migrate to the developed world do so because they are unhappy with their lot. The original and primary mission of governments in all countries, especially in emerging ones, is to bring prosperity and happiness to their citizens. A few developing countries do so by benchmarking with successful countries and trying to close the gap between their standard of living and that of a similar country in the developed world.

The demise of distance and time have had consequences not only for trade, but also the individual—due to the widespread use of technology, such as the internet and smartphones, linking global citizens. This is where I consider globalization the most effective and visible.

Globalization has a tremendous impact on politics and the economy. The very existence of small countries, such as Lebanon, is at stake. How can small economies survive in a global economy where education, infrastructure, technology, markets, defense, laws, regulations—and all other government services—require both a far-sighted vision and capital that lies beyond their reach? We should acknowledge that Lebanon is only a tiny piece in the global puzzle, and thus needs to reshape itself to fit in to the regional and international map, one way or another.

The main question is how to put Lebanon on the highest possible orbit. We do this by starting with our values. In the process of nation-building, our values are the critical pillars on which a nation is founded.

Unfortunately, following the 1975-1990 civil war and the subsequent Syrian occupation, our values retrograded from the ones that we previously shared with the successful countries of the free world to the ones we currently share with failed states. In order to remedy this situation, Lebanon needs a different breed of leaders and a new mode of political governance, one where authority and responsibility coincide. In Lebanon today, authority is shared by many, and consequently no one is held responsible. This produces an unaccountable government—when one is even formed—and leads to increased waste and corruption. Corruption has become deeply embedded in our cultural landscape.

A new breed of leaders should anchor the country to core humanitarian values—values that have been shaped over time by humanity’s greatest philosophers and brightest minds. These values should be at the heart of citizenry from day one, disseminated starting from early childhood all the way through university. I am fully aware it would take time and tremendous effort to reconstruct our values system, but it is the only way to put our next generations on the right track. Do or die.

Real reform

Having said that, the economy could enjoy an extremely favorable and enabling environment, which would allow us to rethink a new inclusive economic model. A “new political economy,” for which I advocate in my book “Un Projet Une Nation,” means building a society where growth is complemented by inclusion, and where inequality decreases not from unfair compulsory policies that make capital flee, but by a fair taxation and harmonious and balanced growth. I am advocating for an intelligent economy with equal opportunities, not one of unaccountable welfare. Everyone should be responsible and play their part in the growth of this future project.

The aim of all this is to avoid Lebanon becoming a dispensable country, and instead make it one with a message and clear mission that promotes the values of freedom, tolerance, and responsibility toward humankind. Are we capable of leading the charge and becoming the example for countries in our region and elsewhere? This is the issue that any new leadership must address.

Lebanon also has a unique opportunity to be a leading country in building bridges between Christianity and Islam. Our country has the practiced experience and the people to advocate for this noble goal. Let us make it a political priority on our national agenda.

We also need to reengineer the whole political and economic system, starting by defining the mission and role of the new state. What is a state for? It is supposed to free its people from their many chains, not imprison them in outdated and unfair laws. After building a consensus for change, we will need to run national workshops on all issues that have an impact on citizens’ daily life—such as the fiscal code, the budget process, labor law, pension funds, etc.—in order to transform Lebanon into a modern country that meets the needs of its people. The world is moving faster than our parliamentarians can legislate—much faster than many minds can even imagine—and this will only accelerate.

We must reform with the goal of decreasing inequalities, raising living standards, and above all, serving humankind. Our education system should promote critical thinking from an early age and seek to build an individual who is responsible to their fellow citizens and their environment, and tolerant toward all human beings regardless of their nationality, religion, gender, ethnicity, or sexual orientation.

Our economy should seek within the near future to become less reliant on exports to Arab countries, as part of our move toward greater political and economic independence. Having a single land border for exports via Syria makes us very dependant politically, and consequently economically, on the Syrian regime. Instead, we should target value-added services in the knowledge economy, which will be exportable not just across our borders but worldwide via information superhighways.

In the next quarter of a century, we should pursue and target an endogenous growth rate above the hurdle rate of 6 percent in order to overcome the dark outlook of our current path. It is possible, provided we accept that we must reform our system entirely as though starting from scratch.

We should take an active role in the fourth industrial revolution and start building our capacity for the fifth one—we should always anticipate beyond the next big thing, not get bogged down in the past and present. Governing is about planning for the future while mitigating risks and preparing for inevitable uncertainties. Let us focus on what makes us indispensable for the region and the world. We need to think outside our obsolete box, move past our out-of-date beliefs, and look forward toward the future of the future. This is a quantum leap we must accomplish, a leap primarily in our minds: We need to create a new way of forward-thinking and a new culture for Lebanon.

This vision is necessary for the future of our country, not least for those we are already leaving behind.

I have in mind the extreme poverty in Akkar and the northern Bekaa Valley, and in many other places within Lebanon. I feel the burden of not having provided an alternative, leaving many fellow citizens forced to turn to illicit activities in order to live a decent life. We are paying the price for our collective shortsightedness and our inability to share prosperity.

I have in mind all the violence against our children and our wives. I have in mind our youth who migrate far from their families in search of jobs.

I have in mind all the workers and entrepreneurs, all the unemployed, the disabled, the old, and the young, from all regions of Lebanon, all ages, all religions, and all faiths, who suffer from indecency in their daily life.

It is time to enter into our age of enlightenment.

This is not the dream of a member of the intellectual elite of this country. It is the fight that started many years ago, and that will never stop, not so long as there is still hope to advance the values of liberty, humanism, and dignity, and to defeat the vices of violence, ignorance, and poverty.

December 17, 2018 1 comment