Economics & PolicyEnergy

Energy and climate change

by Vahakn Kabakian, Jil Amine & Hassan Harajli
written by Vahakn Kabakian, Jil Amine & Hassan Harajli

Lebanon’s commitment to combating or mitigating climate change culminated in December 2015 when Lebanon became a signatory to the Paris Agreement at the United Nations Climate Change Conference (COP21). Lebanon committed to reducing its greenhouse gas emissions by at least 15 percent by 2030 and up to 30 percent conditional upon the provision of international support. This high-level commitment toward a better climate is being converted into action through strategic governmental projects.

Before discussing these initiatives, it is vital to visit the UN’s 17 Sustainable Development Goals (SDGs), which were adopted by world leaders in September 2015, pledging worldwide action amongst governments, businesses, and civil society to end poverty and to create a life of dignity and opportunity for all by the year 2030. Goal 7 of the SDGs, Affordable and Clean Energy, ensures reliable, sustainable, and modern energy for all, while Goal 13, Climate Action, presents solutions to climate change.

How has Lebanon positively contributed to COP21 while remaining consistent with SDGs 7 and 13?

To ensure access to affordable, reliable, sustainable, and modern energy, the Lebanese Ministry of Energy and Water (MoEW) published an energy policy paper in 2010 laying out solutions for electricity in Lebanon; a sector facing up to a 40 percent gap between supply and demand. The policy paper considered a 12 percent commitment for renewable energy by the year 2020. This commitment was put forward at the Copenhagen Summit (COP15), and is projected to reach 15-20 percent by the year 2030.

The National Renewable Energy Action Plans for the Republic of Lebanon (NREAP) 2016-2020 offers a detailed description of the different renewable energy technologies to be developed in Lebanon to meet the 2020 and 2030 commitments of 12 percent and 15 percent respectively, while emphasizing the target of each technology, the financial assessment, and the required budget to keep the plan going. The NREAP’s agenda for 2020 includes: 200 megawatts (MW) of wind energy, 150 MW of solar photovoltaic farms, 100 MW of decentralized solar photovoltaic generation, 50 MW of concentrated solar power, 686 gigawatt-hours (GWh) from solar water heaters, 332 MW of hydroelectricity, 1.3 MW of geothermal energy, and 772 GWh from bioenergy. Lebanon’s demand for electricity reached a peak of 3,460 MW during the summer of 2017, while the power plants’ supply peaked at 2,160 MW.

Strategies in place

With these targets set, Lebanon’s progress toward its climate pledge has been solid. It is anticipated that the cabinet and Électricité du Liban (EDL), in partnership with the private sector, will soon build and operate 200 MW worth of wind energy in the Akkar governorate. In addition, the MoEW launched a Call for Expression of Interest in January 2017 aiming to build up to 180 MW of solar photovoltaic farms in Lebanon. These two initiatives would constitute major milestones in meeting the 2020 targets. This was followed by a massive Call for Expression of Interest (estimated $1.5 billion) in March 2018 for 1. Wind energy (200-400 MW capacity), 2. Solar PV farms (24 farms, 10-15 MW each), 3. PV farms with storage (3 farms, 70-100 MW each, with 70MW/70MWh storage), and 4. Hydropower (300 MW).

In terms of decentralized solar photovoltaic electricity generation, Lebanon has been witnessing triple-digit growth rates for four consecutive years with an installed capacity of 23 MW at the end of 2016.

With the government’s plans for the renewable energy sector along with the private sector’s initiatives, Lebanon stands in agreement with Goal 7 of the SDGs.

While Goal 7 helps reduce Lebanon’s contribution to climate change by introducing renewable energy sources, Goal 13 of the SDGs aims at taking urgent action to tackle climate change and its impacts.

With support from the UNDP, the MoEW has completed several assessments that look at climate change impacts. Historical records of the early 20th century indicate unprecedented high temperatures with an expected warming of 1.7 degrees Celcius by mid-century and of 3.2 ºC by 2100. Also, a decrease in precipitation ranging between 4 and 11 percent with drier conditions is projected by the end of the 21st century (up to 5.8 mm decrease in average monthly precipitation).

Projections for the end of the 21st century confirm a rise in the number of days with temperatures higher than 35 ºC, and an increase in the number of consecutive dry days whenever precipitation reaches below 1 mm. These alterations will produce seasonal prolongation and geographical expansion of drought periods.

This combination of significantly less wet and substantially warmer conditions will result in hotter and drier climate. This switch will bring a reduction in the snow cover by an estimated 40-70 percent (an essential source of water and an important tourism sector) with an expected 2-4 ºC rise in temperature. Less precipitation will fall as snow, with snow that currently falls at 1,500 meters shifting to 1,700 by 2050, and to 1,900 by 2090. This will also be coupled with reduced snow residence time from 110 days to 45 days. Snow will melt earlier in the spring. These changes will affect the recharge of most springs, reduce the supply of water available for irrigation during the summer, and increase winter floods by up to 30 percent. This will have adverse impacts on rivers and groundwater recharge and will affect water availability during the summer season and in drought periods.

The decline in precipitation levels will also exacerbate existing challenges to water availability for agricultural (reduced productivity), commercial, and residential uses. Forest fires will be more common and extreme weather events will be more severe, causing damage to infrastructure.

Cost of climate change

The above-listed impacts are expected to cost the government $610 million in 2020 and $44.3 billion in 2080 from direct damage (storms, floods, drought) and forgone GDP (expected reduction of 3 percent  GDP in 2020 rising to 32 percent  of GDP in 2080). What is even more alarming is the fact that households will also incur costs which are projected to reach $1,500 in 2020 and increase to $107,200 in 2080, with a higher burden on rural households. A greater risk is that of the damage inflicted on individuals’ health. Costs associated with potential increases in the risk of death as a result of heat stress, malnutrition, diarrhea, malaria, floods, and cardiovascular disease are estimated to total $47.2 billion by 2020. In tandem, costs associated with potential increases in illness and disabilities—from the same climate-related factors are projected to amount to $177.9 billion by the same year.

The decrease in agricultural production will knock around $300 million off Lebanon’s GDP by the year 2020. In addition, the expected climate change impacts on global food prices will burden Lebanese consumers with an additional $470 million of costs. Considering the above, Lebanon has produced various strategies and plans, some of which are sector-specific actions that aid in strengthening the adaptive capacity of the country and decrease its vulnerability to climate change. The plans in action include the national biodiversity strategy, the national water sector strategy, the national forest program, the Ministry of Agriculture strategy, the land degradation and desertification action plan, the strategy on health and the environment, and the Paris Pact on water and adaptation. In addition, two water harvesting guidelines have been laid out for the country: one from agriculture greenhouse rooftops and the second from built structures.

In its Intended Nationally Determined Contributions (INDCs), Lebanon has set ambitious mitigation goals with clear sector specific objectives, along with clear indicative adaptation goals. As a matter of fact, strategies and policies subject to modifications will have to meet the national plan; the UNDP will continue to assist the Lebanese government in securing clear directions on the various approaches to be implemented to reduce impacts of climate change and to increase resilience of its most vulnerable sectors.

To facilitate cost-effective deployment of renewable energy technologies in Lebanon, and thus assist the government in meeting its international pledges, the UNDP has commissioned a study on how to reduce the “risks” perceived by the investors. This in turn is an action plan for the government in moving renewable energy forward. These could include instruments, such as well-designed power market regulations, which reduce risk by removing the underlying barriers that create it; financial derisking instruments, such as loan guarantees offered by development or central banks, which transfer risk from the private to the public sector; and financial incentives, such as direct subsidies for sustainable energy, which compensate investors for risk. The outlined action plan was endorsed by the MoEW. Meanwhile, the UNDP along with the MoEW and EDL, prepared the Solar PV and Wind Grid Code of Lebanon—which serves as one of the derisking measures, and when implemented by EDL will allow a larger update of renewable energy sources onto the electricity grid. The ball is in the court of the government, which, armed with the above tools, should follow their implementation to reach its national and international obligations.

0 comments
0 FacebookTwitterPinterestEmail
Economics & PolicyEnergy

Wind farms in Lebanon

by Jil Amine
written by Jil Amine

Earlier this spring, Lebanon signed its first-ever power purchase agreement (PPA) for wind energy with three separate consortiums that will build and operate wind farms in Akkar, in the north of the country. The energy ministry’s signing of the agreements represents Lebanon’s first PPA with the private sector in electricity generation as part of efforts to close an estimated 1 gigawatt gap between current electrical supply and demand in the country. Combined the wind farms will have a total generation capacity of 180 megawatts. Global wind-energy generation capacity reached 487 gigawatts by the end of 2016, according to the renewable energy policy network REN21, up 12 percent since 2015—but for Lebanon’s first venture into wind energy at this scale, many challenges and opportunities await.

One of the main challenges facing the wind energy industry around the world stems from the sheer size and dimensions of wind turbine components. As wind turbine components continue to grow in size and weight, transportation and logistical challenges complicate the components’ delivery to project sites. In Lebanon’s case, most of the components will be imported from Europe, arriving via sea to the Port of Tripoli. The challenge of transporting the long, wide blades—three are required for every wind turbine—is caused by the difficulty of maneuvering the massive trailer trucks carrying them around tight turns, along narrow roads, and beneath bridges and overpasses. The same applies to the large-diameter tower sections, of which three or four are required for every wind turbine, depending on the tower’s height and design. In addition to these geometrical burdens, road-weight limits also complicate the transportation process, due to the heavy weight of the nacelle, a unit that sits on top of the tower and contains the generator and gearbox, which can reach around 80 metric tons for turbines that generate between two to four megawatts.

For Lebanon’s first wind farms, the route between the Port of Tripoli and the project sites in Akkar represents a major challenge. Since the highway connecting the port to Akkar’s main coastal road is not fully built, trucks carrying turbine parts will have to use the narrower Beddawi road, which runs inside an industrial zone and includes tight turns and roadside obstructions. The same issues will reappear when the trucks leave the coastal road and start heading up mountain roads to the project sites in Akrum. To mitigate these transportation problems, the turbine components’ dimensions and weights need to be studied early in the project planning phase so that the roads can be surveyed ahead of time. This will provide advance notice for any necessary road widenings or modifications. The construction of the wind farms is scheduled to begin in April 2019, with the sites planning to begin operations by the end of 2020; if these roads are not upgraded in time, the deliveries risk grinding to a halt. Equally importantly, these upgrades represent much-needed infrastructure investments that will translate into increased local employment and reduced journey times. The cost of road congestion in Lebanon is estimated at $2 billion per year, or nearly 4 percent of GDP, according to BLOM Bank.

Lebanon’s Internal Security Forces will also play an important role in the project, escorting the delivery trucks and facilitating their maneuvering by blocking intersections where necessary and removing vehicles parked on the side of the roads.

These logistical constraints need to be identified and resolved early in the process to prevent bottlenecks in the delivery and installation processes. At the same time, these logistical challenges are opportunities for prospective Lebanese logistics companies, who will have a new market to compete over. Investing in trucks, specialized trailers and cranes, and trained personnel will likely pay off as Lebanon continues to develop its wind energy resources in Akkar and other windy regions.

Developing and operating wind farms can also turn low-income rural areas into prosperous ones through job creation and local economic development. This transformation will begin with the construction of the wind farms, which will require the hiring of hundreds of engineers, skilled tradesmen, and workers to take on the many preparations needed before the wind farms are commissioned and operational. The transformation will continue when the wind farms are up and running, as new permanent jobs will be created to support the operation and maintenance of the farms. It is advisable that a significant share of these jobs be filled by local workers, which will lead to increased social acceptance of the project. This is a huge opportunity for young men and women who are looking for jobs in rural Akkar and the surrounding regions.

Personnel working on site could stimulate the local economy with their spending on accommodation, groceries, and transportation. New businesses such as hotels, restaurants, supermarkets, and other retail outlets would be attracted to the area to serve the local workforce, spurring new economic activity. Moreover, wind farms will provide rural landowners and municipalities with a new income stream through land-lease payments for every wind turbine and access road located on public or private land. Overall, Akkar, which is in great need of local economic development, stands to benefit significantly when wind farms and the required workforce move in.

Power purchase agreements are only the beginning of a long process, which will face many challenges, from planning and construction to commissioning and operation. However, these opportunities will likely prove to outweigh the drawbacks, and will translate into much-needed economic activity in an impoverished area.

0 comments
0 FacebookTwitterPinterestEmail
InsuranceQ&ASpecial Report

The art of insurance

by Thomas Schellen
written by Thomas Schellen

Brokers play an important role in highly functional insurance markets, providing clients with advice on risk and policy choices. They often help clients obtain covers, assist them with claims, and act as intermediaries between clients and insurers. But Lebanon’s insurance brokers have faced several difficult years in a row. To gauge the views of licensed Lebanese brokers on the state of the industry, Executive sat down with Elie Hanna, president of the Lebanese Insurance Brokers’ Syndicate (LIBS).   

E  It appears that the past few years were not extremely profitable for insurance companies. How has development been for brokers and intermediaries?

The fact that many insurance companies have not been making a lot of profit, in my view, is due to the high competition among the many insurers that exist in Lebanon. This is their problem. The insurers have to study the risks and determine their rates in line with the market, whereas we, as brokers, advise our clients and provide consultancy. We sell the most competitive and most suitable policy to the client. As far as the development of our business, brokers have a good share of the market in Lebanon. Things could be better economically, but I am satisfied, except for our need to fight all kinds of illegal brokers and illegal channels for insurance distribution, such as bancassurance [insurance products sold through banks] and mutual insurance cooperatives that work through informal and illegal channels. From our communication with the Insurance Control Commission (ICC) [a regulatory body that operates under the Ministry of Economy and Trade] we know that in 2017 the ICC started banning all illegal brokers, meaning all who are not licensed but sell insurance. We should thank [them] for this and also for working toward a new law that improves the insurance industry in Lebanon.

E  How many licensed brokers and LIBS members do we have in Lebanon right now?

There are brokers who are licensed with the ministry; I don’t have the exact number, but it is around 400 to 500 brokers, both individual and companies. Then, there are about 1,600 to 1,700 agents who represent insurance companies. At LIBS, our number is now about 170 members out of the 400 to 500 brokers. Under our bylaws, only individual brokers and brokerage companies can join. Agents [who represent a single insurer] are not eligible to join, but we are working on the bylaws and [will] hopefully amend them this year so that all brokers, agents, and other intermediaries can come under the umbrella of LIBS as the official representative body of brokers in Lebanon.

E  What are the main targets that are currently being pursued by LIBS?

Our main target is to modernize and upgrade the law as far as insurance broking is concerned. If we can reach an agreement with ACAL [the Association of Insurance Companies in Lebanon] on this and have a joint position on the insurance law, it will be great, but we aim at least to see the law on brokers. The second objective is about digitization, which is very important. In this regard, we have a concern not to be late and out of the market. Another objective, which also would relate to the law, is how to ban or close down all illegal channels, illegal distributors, or brokers. In December 2017, Banque du Liban [BDL] reminded all banks that it is illegal to market, sell, or advertise insurance in banks.

E  Did you see a change of bancassurance-related practices in response to the BDL memo?

It was not 100 percent implemented. We are working very closely with ACAL and the ICC in order to have this BDL instruction applied, especially since it is a reminder from Riad Salameh, the governor of BDL. We discussed this issue with the ICC and informed [them] that we will no longer [allow] the banks to [sell all types of insurances]. We have no problem if the situation is amended under a clear legal provision that defines what policies the banks can sell, such as unit-linked life insurance contracts or policies that are attached to other investment products. But banks must not be allowed to oblige their [loan] clients to buy insurance products through the bank or an insurance or brokerage owned by the bank. As per Article 152 in the law on banking and finance, banks are not allowed to sell any products except for financial products.

E  Are any numbers available yet that would allow an assessment of the degree to which the BDL reminder was adhered to?

The reminder was issued in the last week of 2017, and the ICC issued a memo in 2018 about the issue. This memo did not address the issue to its full extent, and we, as LIBS, informed the ICC that we did not accept the roundabout way in which the memo was formulated. The ICC was perhaps trying to help the brokers, but the memo was not clear to us, and we saw it as unacceptable. We want everything to be very clear. We decided to give the ICC time to review our comments, but informed them in an official letter that LIBS will take the issue to court if the memo is not canceled. We are serious because this is our domain, and our future as brokers, our families, and employees.

E  There is much talk related to oil and gas projects in Lebanon. Do you also expect this new business to help the brokers?

Of course it will help the brokers. We are working to assure that this sector is activated for the benefit of all Lebanese, not only for one group of people.

E  One plan for oil and gas insurance in Lebanon involves a pool of insurance companies and managed by ACAL. What is your position on that idea?

We do not want any pool that will be a monopoly and positions us as brokers outside of the pool. We as brokers should be part of the pool or participate in oil and gas insurance in another way. We are ready to collaborate with the ICC and with ACAL, with the [Lebanese] Petroleum Administration, the Ministry of Energy and Water, everybody. We will fight [to take part in the arranging of oil and gas insurance deals] because this is our future livelihood.

E  Oil and gas insurance is not only a matter of having capacity in underwriting, but it also requires a lot of specialized expertise. What about this aspect?

We brokers have more expertise on this than the insurance companies. Some Lebanese brokers have activities and branches in oil-producing countries like Saudi Arabia, neighboring Gulf countries, Egypt, or in Europe where they do oil and gas insurance. They have experience in handling oil and gas risks, which tend to be very large, and also challenging—more so than the Lebanese insurance companies.

E  I want to ask you about the about the 250 infrastructure projects sought after in Lebanon’s recent Capital Investment Program. How are brokers prepared to deal with such projects, as far as the related insurance needs on the ground?

When any of these infrastructure projects are implemented, many investments will be made with money from abroad. International investors will require insurance against risks such as expropriation or nationalization. Secondly, as per Lebanese law, all insurance of assets on the ground in Lebanon should be issued through licensed Lebanese insurers. In any case, international investors and companies engaging in infrastructure projects should coordinate with somebody who is present in the market. It is better for international companies to deal with someone who knows everything about the market, and as Lebanese brokers, we have experience with arranging insurance of infrastructure projects. It is the law that policies should be issued with licensed Lebanese insurance companies, and international companies have to work with Lebanese insurers and brokers that are licensed in the market.

0 comments
0 FacebookTwitterPinterestEmail
InsuranceOil & gasSpecial Report

Taking risks

by Thomas Schellen
written by Thomas Schellen

Adding to the misty picture of insurance industry prospects in Lebanon are uncertainties over the sector’s ability to exploit three major opportunities which are slowly taking shape inside and outside of Lebanon: energy, infrastructure, and reconstruction. The book of doubts on the purported three new miracles includes some question marks if the industry will be able to develop a profitable pool for energy insurance related to the new oil and gas contracts. However, much more precarious are the opportunity prospects themselves as far as cross-border reconstruction projects in Syria and beyond, oil and gas finds offshore on Lebanon, and, the newest, but existentially old, prospect of insuring infrastructure projects laid out in the recently announced Lebanese Capital Investment Plan (CIP).

Max Zaccar, the president of the Association des Compagnies d’Assurances au Liban (ACAL), current president of the General Arab Insurance Federation (GAIF), and chairman and general manager of Lebanon’s Commercial Insurance, is enthusiastic about all three development prospects. He tells Executive, “Regarding the infrastructure program, everything under the Capital Investment Plan will need insurance, and the CIP projects will bring additional work to the insurance companies. But this is just the tip of the iceberg, because we are all waiting for the reconstruction of Syria and Iraq. Africa is also full of insurance needs where Lebanese companies can play a role. We have to get ready for all this.”

However, his greatest enthusiasm is reserved for the project of constructing the ACAL energy pool for insuring the oil and gas industry locally, on the reasoning that the Lebanese insurance law mandates all assets are insured in Lebanon. “The contract for oil and gas exploration was signed between the government and the operators as of February 2018, which means operators will start drilling in 2019 and should prepare themselves by importing their equipment and materials in 2018.

“Under the law, all assets have to be insured in Lebanon, the insurance [for local oil and gas industry assets] has to be made in Lebanon, and we as insurance [providers] have to prepare ourselves to serve this new industry. ACAL wants all interested member companies to participate in this new insurance, and this is why we developed the idea of a pool. The pool should see many companies participate and be managed by ACAL. It will create new job opportunities and expertise for ACAL, and we will export our pool in the future to other Arab countries,” Zaccar says.

Pooling resources

In the overall move to fulfill the national resource dream, an important milestone for implementing the long-awaited exploration and eventual exploitation of Lebanese offshore gas has indeed been reached in the awarding and signing of contracts with the consortium that emerged last year as sole bidder for Block 4 and Block 9 (out of 10 maritime exploration blocks in Lebanon’s Exclusive Economic Zone). Even before these contracts were signed, however, ACAL had been working to ensure the rights of Lebanese insurance companies in the national energy industry.

For at least the past three years, the association centered its outbound lobbying efforts in a dual track emphasizing the law’s requirement for local insurance on the legal side, and the project of an energy insurance pool on the technical side. Additionally, the association made efforts to internally marshal local insurers toward readiness for participation in such a pool, with the rationale that the project would serve the primary purpose of expanding the skills of the local industry, which has never before been exposed to oil and gas risks. With these core messages, ACAL had been vocal through 2015–2017 by participating in or staging dedicated conferences on energy insurance, and by lobbying public officials and stakeholders with the message that Lebanese insurers are ready, willing, and able to take on the responsibility for oil and gas insurance contracts.

According to Zaccar, ACAL’s effort to rally skeptical member companies behind the idea of a pool has borne fruit as demonstrated by a survey earlier this year, in which a majority of the over 50 insurance companies in Lebanon stated their interest to join. “We did a survey with insurance companies about their interest in the pool two months ago and had the support of 31 insurance companies which expressed their interest in taking a $21 million retention,” he told Executive in an interview last month. Equally, while the external lobbying initially had met with lackluster responses from government officials, comments by officials in the Lebanese Petroleum Authority (LPA) since last year turned more favorable to the involvement of Lebanese insurers.

However, that does not mean that all concerns over the idea of an insurance pool as a risk sharing mechanism for Lebanon’s energy assets have vanished. Elie Hanna, the president of the Lebanese Insurance Brokers’ Syndicate (LIBS), tells Executive that some insurance brokers in Lebanon may even have expertise in coverage of oil and gas risks that is superior to that of local insurance companies, and that LIBS would be opposed to any pool that does not include a role for brokers.

More technically, a vehement questioning of an energy pool’s rationale comes from Lebanon’s prominent Chedid group of companies, which includes insurance and reinsurance broking services, and insurance consulting companies in the Middle East. Farid Chedid, the group’s chairman and general manager, details several concerns over the viability and wisdom of having a Lebanese energy insurance pool when taking into account the number of risks that can be insured, the potential for profit or loss from such a pool for insurers, and the circumstances of oil and gas exploration.

“Oil and gas insurance is a global business because you need a large number of homogeneous risks that are diversified globally. You need to spread your risks on a global basis, or you always lose money. I think there is a misunderstanding [in Lebanon] as to the benefit of the pool. You would organize a pool if you have a large number of homogeneous risks that cannot be insured by one or two companies,” he says and explains that the consortium, which won the bids for oil exploration in the two awarded Lebanese offshore Block 4 and Block 9, cannot be expected to deploy more than four or five drilling rigs at most. “This is not a large number, and for Lebanese insurance companies to come and say, ‘We want to insure three or four rigs and want to do a pool,’ I think is a very wrong decision,” he adds.

According to him, the resulting exposure for the Lebanese insurance industry would be huge in relation to the premium incomes that it could achieve. Moreover, the potential to make profits would, at best, be slim, while a loss would potentially be a financial catastrophe as claims incidents in the oil and gas sector can become huge.

“It is in the interest of the international [energy] companies to lure and attract the Lebanese companies [into having a pool]. But it is not in the interest of the Lebanese to be involved in this, because there is a certainty of a loss. Even if [things initially go without accident and claim for years], in case of a loss [event], you have risk for the Lebanese insurance industry to lose $20 million in one event, with zero possibility of payback,” Chedid explains. He reasons that this risk is juxtaposed with a potential to earn only some $200,000 in premiums income (collectively) over 10 loss-free years when prevailing rates in oil and gas insurance are taken into account.

Regarding the circumstances for operating oil projects offshore Lebanon, he points to the fact that the Arabian Gulf region has shallow waters, and an almost total absence of natural perils, whereas Lebanon has deep waters and has to take the possibility of natural perils, such as an earthquake and related floods, into account. In light of the low profit potential, high risks, and overall circumstances of having a Lebanese energy pool, Chedid is openly dismissive of the idea that Lebanese insurers would acquire greater knowledge about oil and gas insurance by operating a pool at a potential cost of millions. He suggests that a company with a small stake in the pool could earn no more in premiums than it would from insuring a single motor vehicle and calls the plan “an absolute waste of time.”

If and if 

It cannot be ruled out at this point that the idea of a Lebanese oil and gas insurance bonanza could, despite all such technical considerations, hold some appeal to local companies in the case that the current scenario of drilling in two blocks by one consortium would result in rich finds, and that subsequent bidding rounds would generate a far-flung industry with a multitude of operators digging and drilling in Lebanese waters. However, this possibility is not one that anyone should be holding their breath for, given that the national reserves are still unclear, and that a large oil industry in Lebanon is, at best, many years away.

Similar to the risk for evanescence of Lebanese energy prospects, recent history can nurture only the most fugacious of hopes for Syria and Iraq to be reconstructed without any delay or backsliding into conflict and violence. As ACAL board member Karim Nasrallah, chairman and general manager of the Lebanese Credit Insurer (LIC), says, “We don’t know when the war next door will end. You don’t want to build your future on the back of the rebuilding of the infrastructure of Syria.”      

So what about insuring the CIP and its legion of hot infrastructure projects? Nasrallah and Chedid are both insurance professionals with direct expertise in the issues that relate to coverage of cross-border investments and loans, which is certain to be one of the first issues of concern for international investors who are looking through the proposed Lebanese infrastructure investments. As a matter of fact, insurance needs for CIP projects will entail two dimensions. Chedid confirms that the first dimension is insurance of assets in Lebanon, with coverage needs stretching from construction related policies, such as Contractors’ All Risk (CAR), to covers protecting equipment and materials during transport, etc. Lebanese insurers are well versed in the issuance of the related policies and highly qualified to insure all first-party assets in Lebanon, which moreover is their prerogative under the Lebanese law.

Contrary to this need for local insurance is the scenario when it comes to safeguarding financial commitments that are dedicated by a foreign investor. The topic then, Chedid says, “is a foreign investment in Lebanon, whether through a loan or through equity. As this is foreign money coming into the country, you can insure it against political risk, such as confiscation, expropriation, and nationalization; you can insure it for inconvertibility of currency, [and] for frustration of contract (breach of contract) that is due to political reasons, [meaning] a political decision in the country to stop the contract. From that perspective, foreign lenders or investors expect their insurance [against political risk] to be done from outside [of Lebanon].”

Beware black swans

Nasrallah, whose company LCI operates as a private sector player in the space of insuring trade and investments, confirms that he has seen “definite appetite for Lebanon” coming from actors in the international cross-border insurance of investment risks, and also says that there is some room for insuring projects of the type listed in the Lebanese Capital Investment Plan (which he had not seen, and which seemed to not have been provided to the relevant local insurance stakeholders by the government’s team). However, according to him, capacity for insuring large infrastructure projects is internationally limited. “The capacity from the private market [for insuring such investments] is small, and the tenor of insurance will be very short. [Such] risks are mainly covered by governmental export credit agencies, or ECAs. ECAs can cover long-term projects that have grace periods built into their repayment plans, and they can cover all these ambitious projects,” Nasrallah tells Executive.

As he explains, international rules for export trade credit are defined according to categories set by the Organization for Economic Cooperation and Development (OECD). One has to differentiate between marketable risks (that can be covered essentially by a provider in the private sector) and non-marketable risks that only are assumed by the insurance units of multilateral agencies, such as the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA), and governmental or quasi-governmental ECAs that have governmental mandates to support exports or foreign direct investments.     

According to Nasrallah, some small short-term Lebanese projects in infrastructure could be syndicated in the private market for political risk insurance, but, by and large, all political risk insurance for projects related to Lebanon is going to be ECA business as long as a cross-border component is involved. “Anything related to infrastructure, anything that goes over seven to 10 years, which will be the case, will be purely for multilaterals and ECAs to cover. This is not something that any insurer in the local market will be involved in. The local market will not benefit from any of this,” he says.

The prospects of insuring the projects related to CIP and the final implementation of infrastructures in Lebanon thus, while this implementation seems not quite to be just around the corner, look to be the bets that the Lebanese insurance sector cannot afford to miss, even as the political risk side of the coverage looks to bypass many local players.  As far as the categories of political risk, Nasrallah says that the main coverage category from a claims point of view for Lebanon would be war and civil unrest, since the track record of Lebanon has been very good in recent years as far as expropriation and breach of contract risks.

Both Chedid and Nasrallah confirm that coverage of political risk in the context of the CIP will be available, and that international trade credit agencies perceive Lebanon as a very insurable market. Chedid additionally emphasizes that, on one hand, investors in Lebanon will expect to be covered against political risk and loss of profits, and that, on the other hand, Lebanon cannot afford going into projects uninsured as they typically represent the risk combination of very low probability coupled with very high severity in case of an event that would qualify as a Black Swan. “On your probability distribution, the Black Swan is the fat tail, something that has a very remote probability of failure, but if you have failure, the consequences are horrendous and catastrophic. For a country like Lebanon, we cannot afford to not insure against fat tails,” he says. Nasrallah, on his part, ends by voicing concerns that more investment and their insurance is needed for the government’s plans to work. “All the CIP projects will be great, but I do not perceive any lender as being comfortable to lend if there are not basic reforms that are done. You cannot pour money into the country as it is today. It needs restructuring.”

0 comments
0 FacebookTwitterPinterestEmail
InsuranceOverviewSpecial Report

In the fog

by Thomas Schellen
written by Thomas Schellen

Assessing the insurance industry of Lebanon at the current junction of global insurance challenges, regional vagaries, domestic economic hurdles, and the country’s ongoing political issues is not without difficulty. Just as with the national economy, there are hopes and interesting prospects, but they are mainly just over the horizon—whether in the reconstruction of war-torn Syria and Iraq, in the development of an oil industry, or in the infrastructure and investment programs that are being ambitiously pursued by the Lebanese state. 

In the best of all possible worlds, where “tout est pour le mieux,” as Voltaire’s Pangloss never tires of assuring us, Lebanese insurance would of course be developing relentlessly, and managers would not ask for their companies to be mentioned editorially in magazines they advertise in. Alas, the world being as it is, and the Lebanese insurance sector not having released new performance numbers for about six months, it is difficult to perceive insurance as a growth industry in Lebanon for the current period.

Much of the fog that obscures the insurance industry’s state and future prospects is not generated locally. Challenges from abroad are enough to send the whole industry, including its biggest multinationals, into deep soul-searching. “Insurance company leaders have a lot on their plates,” the accounting firm Deloitte mused at the end of last year in its outlook for the global insurance industry in 2018, pointing to intense insurance technology development, political and regulatory upheavals around the world, an “accelerating evolution” driven by innovation and higher customer expectations, and “disruptive newcomers” who are looking to take market share from incumbent insurers.

Changing attitudes

Existential challenges for the global industry are not rooted in the usual vagaries of managing the impacts of natural or man-made catastrophes. According to research estimates by Swiss Re Sigma, 2017 moved, in a 10-year comparison, from having below-average insured losses in the first six months to above-average losses of $136 billion for the whole year (out of $306 billion total financial cost caused by natural catastrophes). Besides being a testimony to the constant basic reality that the world has its annual share of natural perils, with economic costs that are largely unmitigated by insurance, the catastrophe count of 2017 only reinforces the understanding that the global insurance industry is well-prepared and fully capable of managing its insured risks.

Instead, what has the potential to rock the international insurance industry in its boots during the coming decade are not natural catastrophes, but human behaviors and fundamental changes in attitudes and habits when it comes to everyday activities, such as driving to work. Projections from industry giants such as Allianz Group anticipate that the 20th century norm of people owning cars and buying motor insurance will be replaced by models of non-ownership of cars and abstinence from conventional motor insurance coverage, where digital natives increasingly come to constitute the main economically active strata in the United States and elsewhere, from some point in the next decade onward. Thought leaders in the insurance field often discuss how digitization, cyber risk, and all the unknowns of digital capitalism are approaching their industry with the speed and mass of a bullet train.

The local insurance industry has for the past few years been listening to the messages and predictions related to digitization and cyber risks and is aware of the changes that will be imposed on their businesses. As Lucien Letayf Jr., general manager of Lebanon-based independent regional insurer Libano-Suisse notes to Executive, the spread of digitization and new insurance business models are among the main challenges for his company in Lebanon and regionally. That’s in addition to local challenges like the absence of an advanced insurance law in Lebanon, the weak growth of insurance in the county under the prevailing economic conditions, and a lack of social awareness on the importance and value of insurance.   

On top of these impending changes under the digital reincarnation of capitalism, international moods in the financial industry—and one must not forget that insurers are essential cogs in the machine of global financial markets—are this year beset by political concerns over trade wars and overdrawn self-interests by important players on nation-state levels. Global trade wars are not here yet, and it is difficult to predict, as with all human follies, what courses they might run. But regionally active insurers have already been impacted by localized disturbances and trade conflicts such as the altercation between Qatar and its Gulf neighbors. One does not need to highlight that economies, and with them insurance markets, in the Mashriq region have been impacted very significantly by the various conflicts that have shaken the region since 2011. If all that were not enough, markets are showing increasing impacts this year from the slowdown in economic growth in the Gulf region that has been caused by weakening global oil prices.

As a new market report on money and banking in the United Arab Emirates by the National Bank of Kuwait notes, the effects of the 2014 plunge in oil prices and the resultant slowing of growth in key sectors to the beginning of 2018 has translated into factors such as “disappointingly weak” credit conditions. “Since peaking at 11 percent year-on-year in mid-2015, credit growth has been in more or less consistent decline, standing close to multi-year lows at just 0.5 percent [year-on-year] in January 2018,” the report reads, illustrating some of the reasons why the Beirut-based regional specialized insurance company the Lebanese Credit Insurer (LCI) says it was compelled to shift focus away from some Gulf markets. “We have scaled down our activities in the Gulf region a bit, mainly in Saudi [Arabia] and UAE, because of the problems related to dropping oil prices that led to the stop of infrastructure projects and to crises of finance and banking in Dubai,” Karim Nasrallah, chairman and general manager of LCI, tells Executive.

Several reputed Lebanese insurance-sector companies with regional business in insurance and brokerage, like LCI, tell Executive that 2017 was a difficult year for them. Lebanese insurance companies often do not report on their performance abroad, however, regional markets are very important for many Lebanon-based insurers. As Libano-Suisse’s Letayf points out, the small, crowded national insurance market in Lebanon confronts providers with high costs and low prices, plus Lebanese insurers have long-standing skills which give them an advantage in regional markets.

When taking the regional and international challenges of insurers into account, the domestic market challenges in Lebanon—which are undeniable—appear very manageable and minor, albeit with one main negative characteristic: They are thoroughly entrenched. One might compare the problems of Lebanon’s insurance industry to an annoying allergy against pollen that resurfaces every spring with violent sneezes, or to some fungus that itches under the soles of your feet and reappears year after year. Worst all, the ailments of the Lebanese insurance industry appear perfectly curable, but nonetheless do not receive proper treatment.

One example is motor compulsory insurance, which has yet to be sorted out fully, even though it was mandated four years ago by the then-new Lebanese traffic law. Specifically, third-party liability (TPL) insurance against material damages was made mandatory for all motorists in this law, which was adopted in the summer of 2014 and purportedly started to see widespread enforcement by traffic authorities three years ago this month, in April 2015.

It was clear to key stakeholders in the Ministry of Economy and Trade, in its affiliated Insurance Control Commission (ICC), and in the insurance industry why the sector was not ready to deliver the full compulsory cover in 2015: Experiences with the compulsory TPL against bodily injury, which had been implemented a decade earlier, showed that it would be necessary to modernize motor insurance processes and improve methodologies to combat insurance fraud before the industry could ramp up to the legal mandate of providing traffic participants with better insurance safety. Implementation of this compulsory TPL against material damages was pushed into the future at the time—justifiably so in the eyes of many observers.

Nadine Habbal, the acting head of Lebanon’s ICC, writes in the recently published 2016 Insurance Sector Annual Report that “work on the motor third-party liability (MTPL) track is nearly accomplished” toward aligning the MTPL with international standards. “The key drivers in this context are the adequacy of the benefits paid to the victims of road accidents, the implementation of a centralized risk database, and a sound governance for the stipulations on minimum tariffs,” she writes, affirming the ICC’s determination to combat practices by some insurance industry players that in the past undermined full implementation of MTPL.

Stalled progress

The impression these comments give is nonetheless that almost four years after the adoption of Lebanon’s traffic law, full implementation of TPL against material damages is still not achieved. This impression is strengthened by comments from Fateh Bekdache, head of the National Bureau of Compulsory Insurance and general manager of Arope, a large motor insurer in Lebanon, who explains to Executive that this document did not obtain all the required signatures from the full Council of Ministers, so the terms and conditions imposed on citizens were voided by the Constitutional Court.

According to Bekdache, there are some positive developments in new initiatives to make sure motor vehicles in Lebanon have verifiable road identities. New license plates with tamper-resistant features were introduced just before the beginning of 2018, and these plates are bound to significantly cut down on illicit practices such as swapping plates from vehicles that are presented to motor insurers to vehicles that have been in a collision in order to commit insurance fraud. “It is definitely a plus. We have been suffering for a long time from having the same plates on two or three cars, as there were cars with fake license plates in circulation. It is a very important move to now have measures to make license plates more secure. New regulations are always helpful, but the more important thing is the implementation of such measures by the security forces,” he tells Executive.

However, Bekdache says, a combined policy for the two branches of compulsory motor TPL, sought by motor insurers, has yet to come into existence and is “in the pipeline” under a project to develop the country’s compulsory motor TPL schemes in collaboration with the World Bank. “Until now, there is nothing that can be called compulsory insurance for material damages,” says Bekdache, adding, “We have been promised that we will very soon have the report from the World Bank in order to implement [compulsory motor TPL against material damages].”         

Just as the traffic law and its associated compulsory motor insurance coverage appears to not be fully implemented yet, there are other areas where old grievances seem to linger, and sound insurance development objectives have yet to be implemented. For one, bancassurance—the practice of banks selling insurance—is in need of regulation. A reminder from Banque du Liban to commercial banks at the end of 2017 that bancassurance is not currently legal triggered a curious press release by the ICC highlighting the (uncontested) fact that “insurance companies owned fully or partially by banks form a fundamental pillar of the insurance sector.”

lacking support

Similarly, problems pertaining to insurance sales by mutual insurance societies that operate outside of the overall regulatory framework do not appear to have been resolved, despite many years of efforts from the Association of Insurance Companies in Lebanon, or ACAL. There are numerous further problems about Lebanese insurance practices, the most crucial of which are the failure to adopt a modern and adequate insurance law (a draft law has been in the pipeline of endless delays for almost 15 years), and the need to foster consolidation in the sector through mergers and acquisitions. Wishes voiced by insurance leaders to see the latter, overdue process accelerated with the help of soft loans and incentives from the Lebanese central bank may have been delivered by mistake to the Easter Bunny instead of Santa Claus.   

With all that is not advancing, one cannot but note that there is a certain degree of exasperation in circles of insurance advocates who are desperate to see the insurance industry live up to its potential in Lebanon. However, this is not to imply that the insurance industry in this country is in a bad state when compared with the economy, a fact that has been stressed by local and foreign analysts in several reports over the recent past. BLOM Bank titled a brief on the industry last year “Robust Lebanese Insurance Sector Despite Economic and Political Challenges,” and specialized international insurance ratings agency A.M. Best last month tooted the same horn by titling a research note “Lebanese Insurers Continue To Demonstrate Resilience, Despite Challenging Operating Environment.”

The same is true for some (but in all likelihood not all) insurance companies in Lebanon. Outliers among the more than 50 sector companies innovate, perform, and deliver impressive performances, if one makes allowances for the small size of many of these companies. For example, a vocal company in the domestic market is Securité Assurance, which boasted in a recent self-description of its business of its exceptional growth. “During the first quarter of 2017, the company achieved more growth than in all of 2016,” it claimed in a profile document sent to Executive, adding that its growth in 2016 was more than 10 times industry average, at 30 percent. Securité attributed its ascent to the position of fastest growing insurance company in Lebanon to having incentivized and educated its staff, deployed new apps, stepped up its branding and, as assistant general manager Anthony Khawam tells Executive by phone, to “serving our clients in superior ways.”   

Farid Chedid, chairman and general manager of the Chedid insurance group, tells Executive that a potent local insurance industry would have been a fantastic partner to the country’s current infrastructure development efforts. “The insurance industry in Lebanon is very resilient, and the problems that exist in sectors like motor and health are manageable problems. It is a very good industry,” he affirms, but then cautions that this industry is in need of “help, assistance, and support from the government.”

He explains that an insurance sector, with its need for assets with long-term duration, makes the perfect investor in infrastructure projects, and that infrastructure projects, in turn, are ideal for insurers to invest in (for more on insurance in relation to the Capital Investment Plan of Lebanon, see page 36). The problem, in his view, is that the development of insurance in Lebanon until now was subject to total neglect from the state. “If the [Lebanese government] assists the insurance companies in growing, the insurance companies will be able to invest long-term and will be able to be a major player in the economy of the country. But they are totally neglected, which is a pity,” he says.

As the Lebanese Minister of Economy and Trade, Raed Khoury, concluded in his introduction to the ICC Annual Insurance Sector report for 2016, “Profitable sustained growth in the insurance sector needs to be achieved with an objective to narrow the gap [with the banking industry] and establish a more balanced structure in the financial services sector.” Given the lack of political support and subdued growth record of the insurance industry, which would need to take 10 steps of growth for every single step of advancement by the banking industry, what remains to be added is only one question: How?

0 comments
0 FacebookTwitterPinterestEmail
Economics & PolicyQ&A

Valued opinions

by Thomas Schellen & Jeremy Arbid
written by Thomas Schellen & Jeremy Arbid

After over a decade of dormancy, Lebanon’s Economic and Social Council (ESC) was reactivated last November. The ESC is an advisory body to the government, and its opinons are non-binding. Executive met with the economist Mazen Soueid, one of 71 individuals named to serve on committees of the ESC, to understand how the institution can address both business and civil concerns, prospects for the coming CEDRE infrastructure investment conference (also known as Paris IV) in April, and getting Lebanon’s economy working again.

E   What is your role at the Economic and Social Council?

I’m the president of the committee that looks at the productive sectors: industry, trade, banks, insurance, and the power sector. I think one of the most important achievements of this government and the new presidency was the appointment of the first council in over 17 years.

E   Is the ESC meeting already and, if so, what are the outcomes of these meetings?

Of course, several [times], and there are already some questions that have been sent to the council. Let me explain the process: the government issues decrees, Parliament ratifies laws, and the council issues opinions. These opinions, when they are issued by the council [and published in the Official Gazette following a majority vote by the council’s general assembly], have a very strong moral power and empower the parties that will benefit from such opinions. The council represents various sectors, so it’s a space for economic and social dialogue. And it’s a space where you have controversy. Sometimes, there are decisions that will have winners and losers, and this is the best place to discuss them to see whether the benefits of the winner outweighs the loss of the loser, and how we can mitigate the losses for the loser or ensure they are minimized. The council is the best place for such dialogue, and obviously there is a need to make use of it.

E   It is clear from the indicators that Lebanon’s economy is not in a good way. Is this a recession, or are we nearing the cliff’s edge?

Lebanon has been suffering from a protracted low growth period since 2011, when growth collapsed from over 9 percent to less than 2 percent. We have had six years of recession in the country, and we’ve had two previous recessions: one from 1998 to 2000, and the other in 2005 to 2006. The first recession was because of political shock—the ousting of the late Prime Minister Rafic Hariri—and the second recession was also due to political shock: the assassination of Rafic Hariri, followed by the July War. This [current] recession has eroded a lot of what Lebanon had gained in terms of buffers throughout the times of high growth. The main reason for this long recession is the war in Syria, and it continues to be one very important reason because it has affected key sectors in the Lebanese economy: tourism, exports, and foreign direct investment, especially into real estate. For six years, the largest neighboring country, and the only one with whom Lebanon has a diplomatic relationship, has been at war, and that has affected our economy. Then came, of course, the presidential void for two and a half years, leaving the country without a president and with a paralyzed Parliament and a very weak government. This also eroded confidence and added to the pressure that Lebanon has been facing.

E   The low growth period of the last six or seven years alongside other indicators, such as trade exports, but also anecdotes from business leaders printed in this magazine, suggest that businesses across the private sector are really struggling.

In times of low growth, the cake is shrinking, and in order to keep the same pie, one’s share has to increase. Everybody is trying to increase their share, and I’m not talking here about political parties—that is, of course, taking place—but the Economic and Social Council is concerned with the various sectors [of the economy] and their stakeholders. Today, if you are an industrialist, and the pie is shrinking, the only way you can sell the same is trying to impose some measure in order to substitute import for local production. But then you are stepping on the toes of the traders. Trade is value added at the end because it gives the consumer choice, and this empowers the consumer and the producers because they can import cheaper goods or materials. Today, lots of these sectors are trying to expand at the expense of other sectors, specifically because of the low growth environment. When growth is high, the cake gets bigger, fights are easier. Henry Kissinger used to say, ‘The smaller the stakes, the bigger the fights.’

E   What is your take on April’s CEDRE conference? There are many needed infrastructure projects that are being put forth. But it seems that many of the potential donors from the international community, and also the investors, are expecting some level of structural and administrative reforms.

The CEDRE conference will be a game changer. It will allow funds for infrastructure in Lebanon without having to [further burden] the fiscal situation. It will allow Lebanon to ease a serious supply bottleneck: Growth rates will not rise again to between 7 and 9 percent unless Lebanon increases its infrastructural base. [Lebanon may also need to] allow  Syrian refugees to work again in the construction sectors, rather than competing with Lebanese in the restaurants, or other low paying jobs that usually low-skilled Lebanese work. I think it’s very important for the government to take seriously the call for reforms that international organizations are, I wouldn’t like to say imposing, but requesting, from Lebanon. And even after CEDRE, in order to get disbursements, Lebanon needs to take active reforms. I think the Economic and Social Council should play a very important role in the coming period because we are dealing with six or seven years of a low growth environment and there is lots of pent-up demand. And there is a need, as we saw during the unfortunate events of the garbage problem, to give civil society a space where it can express its opinion rather than take to the streets.

E   What can the ESC do to help the Lebanese deal with the needs and requirements that will be connected to CEDRE? Because evidently it will not happen without reform.

There will be a lot of painful reforms requested by the international community on Lebanon. And Lebanon today has to swallow that bitter pill. It would have been much better if we had swallowed that pill in times of high growth. Now, we have to swallow that pill. Why? We need the international community, and the international community understands that in order for Lebanon to spend efficiently, it has to undergo reform. Reforms by definition are costly, and by definition, entail winners and losers. In order not to create any social pressures by having to conduct reforms, the council can basically build in support for these reforms through economic and social dialogue, where all involved stakeholders are represented to have a buy-in for these reforms.

E   What, in your opinion, is the reform of top priority?

Reforms in Lebanon will have to start with the electricity sector; that is the most urgent need. It is bleeding the budget by around $1.5 to 2 billion per year. [The public utility’s subsidy] is a highly ineffective and highly inequitable subsidy because it goes to the pockets of those who produce electricity, people who live in palaces and villas [and have a] high consumption of electricity, and it significantly reduces the fiscal space in the budget that should go to social spending on education and health. So I think here, rather than increasing tariffs, because the people who are going to immediately feel the heat of paying more are the poor, the council can play a role.

E   Has the ESC discussed reforming the electricity sector?

Not yet. We are still a few months old, and in the end, the process is that the government needs to ask us questions for us to [deliberate]. Then we can go to the general assembly and vote on the opinion that is produced by the committee, and if it is adopted by over 50 percent of the members then it is published in the Official Gazette, and is considered an official opinion. We can generate an opinion without the government asking us, but we the need two-thirds of the assembly to vote.

E   What would you say to those who might think the ESC is populated by 71 highly-paid individuals sitting around and issuing opinions that are not binding?

This is an excellent question because the answer is extremely simple. Members of the council are not paid, we are not on the payroll of the government, we do not get any privileges. It is a favor that you are doing for your own sector and supporting that sector in the place where there is a dialogue on social and economic issues. The overall budget per year of the council, the one that will hopefully be approved, is less than $2.5 million.

E   Going back to CEDRE and the prospect of change, and investment and infrastructure: We heard from some sources that the timeline for implementing any kind of infrastructure improvement after receiving pledges and commitments will still require a multi-year period before shovels hit the dirt on the first projects. Alleviating supply-side bottlenecks that you mention, and the 250 projects in the Capital Investment Plan, compared to the need that Lebanon has and the demands for immediate project implementation: How do these all work together?

Lebanon needs a lot: in the short term, in the medium term, and in the long term. Our infrastructure is significantly degraded, our port and our airport are not enough to support the growing flow of Lebanese and non-Lebanese in and out of the country, electricity is a mess—so you need a lot of short-term and quick infrastructure fixes. I think that the World Bank has already pledged around $4 billion for key sectors, and in order to unlock [World Bank funds], the Lebanese government needs to find the money for expropriation spending, because the World Bank does not pay for [that]. So hopefully Lebanon can use some of the [investments] from CEDRE on expropriations, and that would unlock the $4 billion [from the World Bank].

E   We’ve talked about the donor appetite and their expectations. But what role will the private sector play in financing Lebanese infrastructure, and do the private investors hold dear the same sort of KPIs or reforms as the international community does?

Yes, absolutely. For the banks there is a big role, and now we have a public–private partnership law. So the private sector can play a very important role by funding part of these projects, but it is very important for the government to appoint regulatory authorities that will make sure that these sectors will be run in an efficient and equitable way, and this is one of the requests of the international community.

0 comments
0 FacebookTwitterPinterestEmail
CEDRECover storyQ&A

A window of opportunity

by Jeremy Arbid
written by Jeremy Arbid

Executive met with Christina Lassen, head of the Delegation of the European Union to Lebanon, to discuss the challenges Lebanon is facing, what to expect from the upcoming CEDRE investment conference and Brussels II refugee aid conference, and the outcomes of last month’s Rome security conference.

E   It is an interesting time for Lebanon, given that we have the first opportunity in many years to look at major infrastructure investments with real promise for their realization. As the European Union appears to be a very interested stakeholder in this scenario, let me ask: What is the EU’s official perspective on the Capital Investment Program [CIP] that Lebanon has recently presented?

I think there is a window of opportunity for Lebanon right now. There is international goodwill to support the stability of this country that is perhaps not unprecedented in recent years. At the International Support Group meeting in Paris last December, there was a roadmap laid out for focusing on different aspects of this country’s stability in terms of security, growth of the economy and creation of jobs, and the issue of refugee response.

One of the main pillars for the Lebanese government is the focus on the country’s run-down infrastructure, which—as the government says—has not seen the right investments for decades. Some investments in infrastructure were done after the civil war [in the 1990s], but the level of public investment in infrastructure has been extremely low over the past 10 years or more. There now is a chance with this renewed focus on [infrastructure investments].

The government’s logic behind infrastructure investments is to create jobs and get the economy back on track. The international community has accepted this logic, and we have been looking forward to receiving the formal presentation of the government’s vision, which was finally released [on March 15]. We are now preparing for the [CEDRE] conference in Paris. We now have this package of investments into different infrastructure projects, and at the same time, there is a very important document on the government’s economic vision that contains a broad range of structural and sectoral reforms. We expect a lot from this package, meaning if this is to succeed, achievements have to be made on both sides of the coin.

[CEDRE] is an investment conference. It is not a donor conference. That is why it is not so important what the EU’s official position is. We are positive and, as the saying goes, the EU is open for business, but to that end, investments will depend on private investors and international financial institutions [IFIs]. They need to assess all these projects. Are the projects viable? Do they make sense, in terms of promoting sustainable growth and employment? Are they profitable? They will look at them as investments, and the more economic and structural reforms the government carries out, the more the [investors and institutions] will be interested in investing.

This is where we can [pitch] in and help. What the EU has at hand is to provide assistance that makes these loans more concessional and have better terms. But it has to be attractive to the private sector and the IFIs. This is why we are encouraging the government to carry out the reforms that would make the investments more viable. I think everybody agrees with this logic, and this is also what the [government of Lebanon] says that they want to do, so there is now a chance to have these infrastructure investments, but very importantly, also to have these economic reforms that this country, as everybody acknowledges, has been lacking for a long time.

E   How much leverage do you see the EU as having to incentivize the political establishment in Lebanon to implement the reforms?

It is not what we want, but what is in the country’s interest. A very important point that the French hosts of this conference have proposed, and the government here [in Lebanon] is also talking about, is that there has to be a very clear and effective follow-up mechanism. We will all see what is being proposed now in Paris, and then there will be a follow-up mechanism where everybody can regularly assess what is going on, on both the reform and the investment sides. In terms of leverage, the leverage is, again, with the investors. If the IFIs are to be interested [in financing infrastructure projects in Lebanon] they want to see those reforms. We are not at all talking about conditionality here. Investors want to make sure that they are getting something in return.

E   When were you given access to the CIP document?

All the documents were released on the 15th of March. It has been only a few days, and that is why everyone is now studying [the document], especially the IFIs.

E   Is that not a very short time to go through an extensive document of some 130 pages and study the CIP, which outlines numerous projects in areas such as transport and water on about 50 pages each, in time before the Paris conference?

I think everybody acknowledges that this is the beginning of a process. That is what the government is also saying. They are hoping for positive statements of intent and [financial] commitments, but also commitments to look through this [CIP] with a very open mind, and I think this is what everybody wants. The international community cares about stability in this country, and that is [demonstrated by the interest in CEDRE]. Not every country can get 60 countries to come to a big investment conference. There is a special case here because of the situation of this country. It is the beginning of a process, and yes, it is a short time [to review the documents and projects], and we said it would have been good to get the documents earlier, but we also understand that there has been a huge effort from the Lebanese side to get all of this together. In the Lebanese political system, things take time, and the Council of Ministers has now approved this document, which is a very good development.

E   If I understood correctly, you said that the infrastructure projects and the reforms in Lebanon are seen by the EU very much as parts of one package. In your view, do the Rome and Brussels conferences on security and refugee issues constitute parts of this overall package for development?

We see them as part of the overall roadmap to stability. In this context, it was important to have the Rome conference. It was dealing with investments into the Lebanese security sector, and I think everyone was very impressed with the developments that have been achieved, especially with the Lebanese Armed Forces, but also the other security agencies over the previous years. This conference sent a very strong political signal of support from the international community for Lebanon’s state institutions in the security sector, and also toward helping them to continue these reforms and improvements and capacity building. As the prime minister has said, security and stability is a prerequisite for attracting the investments the government is proposing in the CIP. In that sense, there is a clear link between investments in security and economic growth.

Brussels II is not a conference that will be focused on Lebanon alone, but on the question of the Syrian refugees in the region and also inside Syria. So I think there is a strong link between all three conferences, but they all focus also on different aspects.

E   What is the ratio of support between before the crisis and today, if you compare funding provided under the European Mediterranean Neighborhood Program before the crisis, and the engagement in the past few years, since the crisis erupted?

Before, many of our member states [in the EU] said that Lebanon was not a developing country according to our norms, and we would not have any programs here. Of course, we as the EU were always engaged [with Lebanon], but if you look at our support to Lebanon before the crisis, we were giving around 35 to 40 million euros a year. For the last three years, we have been giving between 280 and 340 million euros a year, so it is a huge increase.

I often hear frustration that Europe is not doing enough, but I think that most people realize deep down that we are here to help and will continue to do so as long as this crisis is going on. And that is why the High Representative [of the European Union for Foreign Affairs and Security Policy, Federica Mogherini,] is hosting the conference in Brussels at the end of April, to make sure that not only the European Union but the whole international community does not lose sight of this crisis. She wants the international community to focus on the need for political solutions [to the Syrian crisis] through the UN track, but also very much—and that is of course what we also focus on from here—on not forgetting the huge needs of [Syria’s] neighboring countries. This is very important, even as we keep in mind that there are many crises in the world right now, and that there is huge pressure on humanitarian support budgets. This crisis is still going on, and we need to continue supporting as long as that is the case.

0 comments
0 FacebookTwitterPinterestEmail
CEDRECommentCover story

Let the sunshine in

by Ali Ahmad
written by Ali Ahmad

Anyone who has lived or spent time in Lebanon is aware of the chronic gaps in the electric grid, which have resulted in regularly scheduled power cuts of three hours a day in Beirut and as much as 12 hours a day outside the capital.

The government has persistently pursued stopgap measures, such as renting power from Turkish generator barges, rather than dealing with the failings in the national grid or looking to increase the country’s use of renewables. The latest plan put forward by Lebanon’s energy ministry to address the country’s electricity woes by 2030 again relies on expensive stopgap solutions while failing to capitalize on the country’s considerable potential for renewable energy generation.

At the moment, private diesel generators cover the daily power cuts, generating about a third of the country’s total electricity. This solution to the chronic power shortage comes with its own set of problems: Consumers often pay inflated prices to private generator owners, and emissions from the generators contribute substantially to the dangerous levels of air pollution in Beirut and other urban areas.

The situation is not sustainable, but neither is the government’s current plan to address the country’s power shortage, which would perpetuate Lebanon’s reliance on polluting fossil fuels to an unnecessary degree and undervalue its true potential for renewable energy.

Polluting proposals

The current plan, prepared by Dar Al-Handasah, an engineering consulting company based in Beirut, and put forward by the Ministry of Energy and Water to the Capital Investment Plan, aims to increase Lebanon’s renewable energy output to 12 to 15 percent of the country’s total by 2030. The modesty of this goal ignores the ideal conditions for renewable energy generation in Lebanon. With about 300 sunny days a year, moderate temperatures, and low levels of dust and sand, Lebanon is very well situated for the development of large-scale solar photovoltaic farms.

A recent study by the Energy Policy and Security Program at the American University of Beirut (AUB) and the National Council for Scientific Research (CNRS), which I co-authored, proposed that Lebanon could build a capacity of at least 1,000 megawatts of solar photovoltaic energy.

From an economic perspective, the benefit of investing in renewables is certainly greater than that of continuing to rely on two rented power-generating barges stationed off the coast, as the energy ministry proposes to do through at least 2022. The total cost of this plan, which has a capacity of 825 megawatts, would be around $2.25 billion.

The same sum could fund the construction of a 3-gigawatt solar power plant equipped with state-of-the-art energy storage technology, which would be able to produce more than three and a half times what the rented electricity barges are capable of. But while the energy barges would remain for only three more years under the energy ministry’s proposal, a solar power plant would continue to generate power over a lifespan of 25 years. (Batteries for storing solar energy would have to be replaced after 15 years.)

Furthermore, the government’s plan will exacerbate Lebanon’s already substantial issues with air contamination and other environmental problems. Under the current plan, seven new fossil-fuel-based power plants will be constructed along the Lebanese shore by 2030, worsening the environmental impact of the existing heavy-fuel oil plants and backup diesel generators. Even if fueled with natural gas, which is considered a relatively clean fossil fuel, when these seven plants are all operational, they will emit around 1.3 million tons of carbon dioxide per year as well as a substantial amount of smog-forming nitrous oxide.

Filtered potential land areas for solar PV farms in Lebanon

One proposed site for a thermal fossil fuel-fired power plant, Selaata, is particularly problematic. According to a 2014 report by Mott MacDonald, a British consultancy firm, the site is nominated as a marine protected area with sensitive ecosystem. Moreover, the proposed location is adjacent to archeological sites, which could be rendered inaccessible if the plan materializes.

Lebanon should not give up thermal, fossil-fuel-based electricity generation completely. This is neither reasonable nor practical at present, due to Lebanon’s urgent need to bridge the widening gap between electricity supply and demand, and the need to meet demand around the clock—not only when the sun is shining and the wind is blowing.

However, the government’s arguments against using more renewable energy fall flat. Lebanon’s energy officials generally make two main claims to explain their lack of ambition in this regard: that there is not enough available land suitable for harvesting renewable energy, and that the grid would be unable to handle large loads of the intermittent power generated through renewable sources.

The claim that land is in short supply was debunked by the recent AUB–CNRS study, which showed that there are about 60 square kilometers of suitable land with high levels of solar irradiation (sunlight) that can be used for both solar photovoltaic plants, which directly convert the sun’s light into electricity, plants, and solar thermal, which provides electricity by first converting the sun’s light into heat (see map). The area estimate is actually a conservative one, and the true scale of available land could be double the current estimate.

As for the claim that the grid is not able to carry large loads of intermittent renewable energy, experts who have worked on the grid confirmed that as currently configured, it is suitable to carry renewable loads of up to 300 megawatts in one location. Above that level, upgrades to the grid and the installation of a fiber-optics-based system would be required, but the technology and expertise to do so are available.

Furthermore, as noted in the AUB–CNRS report, given that Electricité du Liban currently provides less than 70 percent of the country’s total energy, with the remainder coming from backup generators, any additional sources of energy—even if intermittent—would be an improvement.

Finally, energy-storage technology is rapidly improving, and its costs are falling. As this trend continues, the intermittency of renewables will become less of an issue, because energy stored in batteries can help cover gaps in energy production during adverse conditions—like cloudy days.

The government plan could be realistically modified to include the construction of at least one large solar photovoltaic power plant by 2020. This would save around $800 million per year in imported electricity from barges and eliminate the need for one new thermal fossil-fueled power plant.

By doing this, Lebanon would save around $3 billion by 2030, increase renewable energy production to 24 percent of the country’s total, produce less harmful and polluting emissions, and improve energy security.

0 comments
0 FacebookTwitterPinterestEmail
AnalysisCEDRECover story

What’s in the Capital Investment Plan?

by Jeremy Arbid
written by Jeremy Arbid

Judging a book by its cover may no longer be common lingo in the digital age, but it seems to be exactly what Lebanon is hoping people will do ahead of the CEDRE investment conference scheduled for early April in Paris: Never mind the details; be impressed by the dazzling overall figures and exciting projects. At CEDRE, Lebanon plans to pitch its development program, the Capital Investment Plan (CIP), to investors in order to finance the rehabilitation of infrastructure that has degraded over the last few decades because of low state investment and overloaded use.

For the most part, investments pledged at Paris could become reality—if the Lebanese state fulfills longstanding, half-hearted promises of reforms. The proposed list of reforms continues to evolve and grow in length, but in general includes changes to legal frameworks, fiscal discipline, and the regulatory environment. The consensus Executive has gathered ahead of CEDRE is that without reforms, pocketbooks in Paris may not readily open (see overview).

The numbers found in the CIP leave one with more questions than answers and an impression that the plan at this stage is more conceptual than set in stone. It is a living document that will evolve over time as investors weigh in, and will probably depend on Lebanon actually fulfilling the reform promises it makes to investors at Paris. Capital investments take time and lots of planning, and so do reforms. “Everybody acknowledges that this is the beginning of a process,” Christina Lassen, head of the European Union delegation to Lebanon, tells Executive. Meanwhile, the general feeling is that CEDRE is Lebanon’s only remaining avenue to finally make credible investments in infrastructure, with the country’s economy teetering on the cliff’s edge and given the state’s proven inability over time to invest for the future on its own.

Altogether, the plan estimates an investment need of $20.4 billion, plus land expropriation costs of $2.6 billion for 250 projects that could generate some 178.3 million labor days. Investments and implementation of projects are envisioned over three phases—cycles 1, 2, and 3—each lasting about four years, from now until 2030. Insiders tell Executive that first phase projects could take one or two years before they are truly “shovel ready”—meaning that feasibility studies, environmental impact assessments, or designs for many of the projects are yet to be prepared—and the general impression is that there is no reliability of the estimated investment needs, expropriation costs, or timeframes. The overall figure of investment need could be much higher, Prime Minister Saad Hariri noted in keynote addresses at local conferences held in Lebanon back in March. Although the CIP will be funded through “external lenders and donors or private investors,” according to the plan, the lack of clarity on real investment costs could eventually plunge Lebanon into further debt to pay for these projects.

Many of the 250 projects have been in the concept books for a long time, some since the late 1990s or early 2000s. Some of the projects appear to be the leftovers from previous development efforts that, for one reason or another, were not funded. The projects are spread across eight different sectors: transport, water and irrigation, wastewater, electricity;, telecom, solid waste; tourism and cultural heritage, and support to industry. For some sectors, the listed projects seem to be divided into separate phases spread across the three cycles.

Projects are scheduled into the different cycles based on their priority rating. The score is based on two factors: one for readiness to implement the project, and one for the expected economic or social impact of the project. The two scores added together can range from 2 (not studied and not ready for implementation) to 6 (all preparations finished and big expected impact).

Transport

The transport sector has 24 projects over the three cycles that together require an estimated investment of $6.9 billion, plus land expropriation costs of $1.9 billion, and could generate some 49.15 million labor days. Top projects by dollar value in the first phase include $500 million for the rehabilitation of the Beirut Rafic Hariri Airport, $500 million for roadwork around the country, and a bus rapid transit system for metropolitan Beirut (for which the World Bank agreed in mid-March to mobilize $259 million in concessional loans). The second cycle includes a phase two for roadworks, a touristic port in Jounieh, the rehabilitation of the Rene Mouawad Airport in north Lebanon, and a railway from Tripoli to the Syrian border. The last phase includes a highway bypassing Saida, expansion of the Saida port, and a final phase of roadwork around the country.

Water and irrigation

The water and irrigation sector has 223 entries that are not all separate projects, but rather segments of projects scheduled over the three cycles. Altogether, the entries require an estimated investment of $4.3 billion plus land expropriation costs estimated at $595 million, and are estimated to generate 40 million labor days. The largest projects by value in cycle 1 include $300 million for construction of the El Bared Dam in Akkar in the north of Lebanon, which would, according to a description of the project’s impact, increase water supply and recharge groundwater, plus $300 million for the construction of irrigation and water supply networks near Nabatieh in south Lebanon that would supply 20,000 cubic meters of water per day and irrigate some 14,000 hectares. Many of the entries described in cycles 2 and 3 are expansion of projects begun in the first phase, such as upgrading water supply networks around the country.

Wastewater

The wastewater sector has 134 entries that will need an estimated $2.6 billion in investments plus land expropriation costs of $57 million, and would generate an estimated 45 million labor days. The largest projects by value in the first cycle include $300 million to upgrade the Daoura wastewater treatment plant in the Metn hills outside of Beirut, and $83 million to build treatment plants and collection networks around Aley. Projects in cycles 2 and 3 are mostly construction of wastewater treatment plants and networks around the country.

Electricity

The plan for the electricity sector calls for 22 projects over the three cycles with an investment need of $5.6 billion, which would generate an estimated 28.8 million labor days. No expropriations estimates were given for any of the projects. The largest project by value is $1.2 billion for 1000 megawatts of electricity-generation capacity spread between two power plants, one at Salaata in north Lebanon and one at Zahrani near the southern city of Saida. There is also a $140 million gas pipeline to feed natural gas and generate electricity at current power plants, but there is no expropriation estimate, and much of the proposed pathway (the report reads “along the coast” ) would cut through built-up area.

Telecom

All eight projects listed for the telecom sector have an estimated investment need of $700 million with no land expropriation figures given. Six of the eight projects list labor needs as minor, while the remaining two projects estimate 700 man-months of generated labor combined (the labor indicator is inconsistent with the CIP methodology). The largest project by value is a national cloud platform requiring an estimated investment of $200 million, and an upgrade of the mobile network to 5G at an estimated investment of $150 million.

Solid waste

Earlier in 2018, the government endorsed the Integrated Solid Waste Management policy, which is designed to decentralize waste management and assigns responsibility to municipalities to deal with their own garbage, as Executive reported in March. A total of $1.4 billion is budgeted for solid waste projects, but there is no specificity about what projects will be funded, where they might be located, or how much labor could be generated. There are also no expropriation costs figured into the $1.4 billion allocation. This all suggests that this part of the plan is completely fluid and will change.

Culture, tourism, and industry

To support the tourism sector, the CIP calls for the restoration of unspecified archaeological sites and heritage buildings, the support of unspecified museums, and allocations of money to cinema, the arts, public libraries, and educational facilities. In total there are 11 entries that have an estimated investment cost of $264 million, with largest allocations by value going to archaeological sites ($70 million) and heritage buildings ($50 million). Support for Lebanon’s manufacturing sector is lumped into this section, with two projects whose investment costs could total $75 million—$50 million for cycle 2 infrastructures for three industrial cities, and $25 million for infrastructure in Tripoli’s special economic zone.

The CIP in its current form leaves a lot to be desired: It may not be robust enough for fans of planning and long-term thinking, the penciled-in figures might not impress economists, and the fiscally responsible crowd will probably not be too excited at the prospect of raising more debt. But despite these shortcomings, Lebanon absolutely needs to invest in its infrastructure, and the Paris investment conference offers a first step toward doing that, inshallah.

0 comments
0 FacebookTwitterPinterestEmail
CEDRECover storyOverview

A litmus test in Paris

by Jeremy Arbid
written by Jeremy Arbid

April 6 could be a very good Friday for Lebanon. Not only does it unofficially usher in the fruit season, a symbol of renewal and rebirth, but it is also the day that state officials will pitch a set of large-scale infrastructure projects to the international community and investors at the CEDRE conference in Paris.

CEDRE is just one waypoint on a roadmap for rebuilding confidence in Lebanon and stabilizing the economy. Other points along the route were the mid-March security conference held in Rome, and a regional refugee aid conference in Brussels scheduled for later in April. The response at Rome, says Christina Lassen, head of the European Union delegation to Lebanon, “sent a very strong political signal of support” (see interview). Signs of support for Brussels are also positive. The EU commissioner for European Neighborhood Policy and Enlargement Negotiations, Johannes Hahn, told reporters after a late-March visit with Prime Minister Saad Hariri that Lebanon would receive part of the EU’s pledge to grant 560 million euros for refugee aid in Brussels. The Paris conference, sandwiched in between Rome and Brussels, is the main act before parliamentary elections scheduled for May, and officials will need to wow investors enough to sell the conference as a success back home.

Lebanese officials will arrive in Paris with an infrastructure development program: the Capital Investment Plan (CIP). In its current iteration, the CIP, a development plan that will raise debt to pay for the rehabilitation and expansion of the nation’s infrastructure, was billed by an advisor to the prime minister at a recent closed door meeting as “Lebanon’s biggest-ever investment plan.” The plan, endorsed by cabinet in mid-March, calls for some $20 billion in funding for 250 projects scheduled over the next decade until 2030—though figures, projects, and timelines are likely to change (see CIP story).

Officials will carry with them three additional pillars: an economic vision, fiscal discipline measures (political parties accepting reductions in the 2018 state draft budget is pointed to as the beginning of this process), and an evolving list of structural and sectoral reforms and good governance measures. The economic vision statement is being prepared by McKinsey & Company, a management consulting firm, but the report had not been made public by the time Executive went to print. Officials have said at conferences and closed-door meetings that the vision would address how to grow Lebanon’s current productive sectors and enhance productivity, and recommend what sectors Lebanon should focus on in the future. 

A bleak picture

An official in the prime minister’s office told a gathering of civil society organizations at a late-March closed-door meeting that the CIP was prepared to address specific economic shortcomings: tremendous challenges in public finances, monetary policy that has exhausted all options to maintain stability, low growth rates, high unemployment, increasing levels of poverty, and the balance of payments problem. The public sector, the official said, was reluctant to invest in the economy, and Lebanon’s infrastructure is worn down because of years of low state investment and overstretched because of the large refugee population plus a growing national population.

The indicators are not good. By the end of January, Lebanon’s public debt reached $80.4 billion, or 146 percent of the nation’s gross domestic product, according to Ministry of Finance figures. Lebanon also suffers the weight of multi-billion dollar deficits year after year, thanks in part to interest payments on its debt, which has become as large and flammable as the doomed Hindenburg blimp. According to International Monetary Fund figures, Lebanon’s current account deficit averaged $9 billion per year, or roughly 21 percent of GDP. (Current account is considered an important indicator of a nation’s economic health, and in general compares imports to exports in terms of goods and the large inflow of remittances, which helps maintain the balance of payments. In Lebanon’s case, outflows are much more than inflows, because of interest payments for its debt). “If a country runs a current account deficit as high as 5 percent of GDP each year for five years, then a significant economic slowdown is highly likely, and so is some kind of crisis,” writes Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, in his 2016 book, The Rise and Fall of Nations.

Syria’s civil war cut off Lebanon’s land routes to trading partners in the Gulf. Between 1 and 1.5 million Syrians sought refuge from conflict in Lebanon, making up a significant proportion of a country as small as Lebanon. For both the local and refugee populations, unemployment has risen and poverty rates have skyrocketed, as Executive reported in December.

Mazen Soueid, who in November was appointed to Lebanon’s Economic and Social Council, told Executive that the country’s economy has been battered by both internal and external dynamics.

The growth rate plunged from 8 percent in 2010 to an average of 1.7 percent between 2011 and 2017, due in large part to the compounding effects of the neighboring civil war but also the two-and-a-half-year presidential void, a paralyzed Parliament, and weak governments. He says Lebanon needs to reach 5 percent growth rates per year just to stabilize and 8 percent growth to pay down the public debt (see Mazen Soueid Q&A).

Lebanon is reluctant to commit new money to infrastructure. Between 2010 and 2016, Lebanon allocated just over $500 million per year, a yearly average of 1.25 percent of GDP, to capital investments. (Full 2017 figures were not yet available for this article.) Any country where public debts and primary deficit are massive burdens would expect the state to be reluctant to invest, and officials have expressed this reluctance simply because the state cannot afford large investments.

From the past

Lebanon appears to be in a situation where the water has risen almost above its head and its body is clutching at any chance to grab a life raft. We have been to Paris before, and made reform promises that, for some reason or another, never came to be. But there is a feeling that this time will be different, inshallah.

Lessons from the past show that the political class of Lebanon, when divided, can scupper any chance for reform. In 1998, when the balance between political powers shifted and Syrian influence (by way of then-President Emile Lahoud) was increasing, to the detriment of Rafic Hariri and Western allies, many of the projects in Hariri’s Horizon 2000 plan were put on hold or canceled. Adding in the economic difficulties of the era made for an appetite that was no longer conducive to such ambitious plans. In contrast, the period between 1989 and 1992, after the fall of the Soviet Union and the end of the Cold War, brought changes to the region, and reforms became possible at the beginning of the 1990s that were not during the previous decade. This was derailed later in the decade, when Syrian and Iranian pressure wore down Lebanon, and regional peace initiatives meant to reconcile Israel with its Arab neighbors failed. All the ambitious development that Rafic Hariri was planning was no longer possible.

That is the lesson: If Lebanon now wants to develop the country and invest in infrastructure, the government needs to have a good showing in May in order to see through its reforms. The CIP is needed by politicians aiming for leadership posts in the next government to credibly campaign for reelection. But if they do not have a strong showing in the elections then the development plan may never be heard of again. They need the confidence of the international partners and this confidence will depend to a large extent on how much support they get at the ballot box on May 6. If there is a high level of distrust in the form of low voter turnout, than the probability of implementation may decrease.

Gaining trust

Past experience has taught the private sector to be skeptical about partnering with the Lebanese state. At an investment conference held in early March in Beirut, a Chinese businessman addressed the energy minister, who had earlier spoken about partnering with the private sector to construct power plants. “What guarantees [for] revenue can the government make?” the businessman asked. But the minister had already left, the businessman was told by the panel’s moderator.

Lebanon has had some trouble in partnering with the private sector in the past, and has had zero successful public-private partnerships, remarked Ziad Hayek, secretary-general of Lebanon’s High Council for Privatization and PPP, in a September 2017 interview with Executive. One example from around the turn of the century is the story of Libancell and Cellis, the two cellular companies operating Lebanon’s first-generation mobile network. Their contracts had arbitration clauses, and when the government moved to terminate the contracts prematurely the companies filed for arbitration.

In that case, says Marwan Sakr, a partner at the law firm SAAS Lawyers who specializes in arbitration, the State Council, Lebanon’s highest administrative court, issued an opinion that the arbitration clauses were null and void and that the state could not arbitrate, and ruling instead the court to be the body hearing cases against state entities. In 2002, Lebanon amended its arbitration law to allow arbitration for any state entity, with the Council of Ministers approving the agreement to arbitrate between state entities and other parties, Sakr told Executive. (The number of civil suits against state entities is said to be quite large, according to lawyers Executive interviewed for this story. Executive’s information request to the State Council for the number of civil suits heard by the court against state institutions procuring projects was not answered, and after going to the court after not being able to follow up on the request by telephone, Executive was told that staff are instructed not to pick up the telephone).

It’s not yet clear whether the CIP can prove to investors that Lebanon is worthy of their confidence. Mohammad Alem, a senior partner at the law firm Alem & Associates, told Executive that potential investors the firm had met with had expressed interest in knowing what is in the CIP, and in investing in Lebanon, but few were excited, citing concerns regarding corruption, bureaucracy and red tape, or political interference in bidding processes. He said that foreign investors, including institutional funds, have not shown much appetite yet, and he questions the overall viability of the CIP and its projects.

Investors that Executive spoke with directly were more optimistic. Philippe Ziade, for example, is going to Paris with a wishlist. Ziade, the founder and chairman of Growth Holdings, which on its website claims $3 billion in assets across the real estate, technology, construction, hospitality, and entertainment sectors, wants a robust legal framework for independent power producers to make the market more competitive and to codify the procurement process. He told Executive on the sidelines of an energy conference in mid-March that those measures alone would improve financing costs. Ziade also wants feed-in tariffs to allow anyone to produce electricity (usually in the form of rooftop solar panels) from their home and generate returns by selling power to the state.

Investors and fund managers that show up at CEDRE have the option of investing in Lebanon or investing elsewhere, and they will be looking for jurisdictions that provide lucrative returns and lower levels of risk. Reforms may be a prerequisite to obtaining investors’ commitments, and the list of reforms is long, broad, and ever growing. In general, investors will ask for fiscal discipline, appointment of regulators, and the passing of a backlog of legislation.

The way the state operates must change: that’s the consensus ahead of Paris. Now might be the last chance for serious reforms to prevent the country falling into the abyss, and who knows what would happen to Lebanon deep down in the dark.

0 comments
0 FacebookTwitterPinterestEmail