CONSTRUCTION: Harder going as funds flow more slowly

20 June 1997

LEBANON has been through a massive construction boom since the war ended in 1990. The huge number of new buildings in and around Beirut alone is graphic evidence of the pace of activity. Yet, the same buildings indicate that all is not well. Many are unfinished, and work has ground to a halt. The Lebanese economy has stalled on the road to recovery, and the construction sector is no exception.

Construction and economic growth are so intimately linked that they have prospered and suffered in unison. Following the end of the war, real estate prices shot up as the developers moved in. Money subsequently poured into new construction projects - but high prices and interest rates have conspired to keep new housing stock beyond the reach of most prospective home buyers. Developers now find themselves lumbered with real estate worth an estimated $7,000 million that they cannot sell. And until they can, new schemes will have to remain on hold.

House hunters are not the only victims of this situation. Such was the extent of the building boom that Lebanon's three cement companies - the Cimenterie Nationale, the Sibline Cement Company and Ciments Libanais - all began expansion programmes aimed at lifting their combined production from 3 million tonnes a year (t/y) to more than 5.2 million t/y. However, as demand declines, the expansions may prove to have been unnecessary. Cement deliveries in the first quarter of 1997 fell by more than 32 per cent on the average monthly rate last year. If the decline continues, deliveries this year will total a mere 2.6 million tonnes.

The slowdown in the economy has also deprived public sector reconstruction works of much-needed finance. The government has put a price of $18,000 million on its 12-year 'Horizon 2000' programme for the rehabilitation of Lebanon's infrastructure. But, the Council for Development & Reconstruction (CDR), the government body overseeing most public works, puts the total foreign financing available at the end of 1996 at only $3,125 million. Prime Minister Rafiq Hariri claims that as much again was pledged by donor nations at the 'Friends of Lebanon' meeting in Washington last December. However, the government's subsequent refusal to release further details has fuelled doubts about whether significant amounts of new aid were really pledged at all.

'I was present at the Washington conference,' says Riad Mneimneh, a resident partner of the local Dar al-Handasah (Shair & Partners). 'Much money was promised, but it is unrealistic to expect it to materialise overnight.' He points out that there is usually a bureaucratic lag between the promise of new aid and its allocation to a project. 'Many public projects currently getting underway are financed by loans and grants pledged up to two years ago,' he says, adding that the pledges made in December will become available from late 1997.

Whatever the true extent of the financing available, a number of public projects are moving ahead. Prestigious schemes include the upgrade of Beirut port, awarded to Spain's Entrecanales & Tavora for $102 million. Germany's Ed Zueblin has begun work on the $200 million reconstruction and expansion of the Lebanese University in Hadath, southeast of Beirut.

Among infrastructure works, there has been notable progress in the power sector. The World Bank has agreed to guarantee the principal of a $100 million bond to be issued by the public power authority, Electricite du Liban (EdL). This will be used to finance the construction of substations outside Beirut. Work is also under way on the installation of 250,000 new fixed telephone lines throughout Lebanon, the work being carried out entirely by local contractors in order to reduce the cost.

The record to date is impressive, but by no means complete. 'This country may be small in size, but the size of the work remaining to be done is huge,' says Mneimneh. The CDR is now turning its attention to sectors and areas of the country that were neglected while it concentrated on restoring essential services to the capital. The new priority is the water sector. Most of the largest projects are planned for the main coastal cities, where schemes have attracted finance from donors the - European Investment Bank (EIB) and Japan, in particular - to help reduce pollution in the Mediterranean. Contractors are due to prequalify this summer for the Kesrouan wastewater project, estimated to be worth $120 million. Plans are progressing for the rehabilitation of the Tripoli network, expected to cost $80 million. Similar projects in Sidon, Tyre and Zahle will each cost about $25 million.

However, the government intends that its most ambitious water scheme should go ahead with private finance. The Awali-Beirut water conveyor, designed to bring water to the capital from the Awali river in the south, will proceed on a build-operate-transfer (BOT) basis, with the contractor arranging all of the $150 million finance. The UK's Montgomery Watson has done the designs and is now working on the tender documents, which are expected to be ready towards the end of the year.

The government is turning with increasing frequency to the BOT model as the solution to its financing problems. However, this type of contract is not always the miracle cure it is sometimes seen to be. The most successful BOT contracts carried out to date in Lebanon are the two private cellular phone networks operated by the majority French-owned France Telecom Mobile Liban and the local Libancell. The two networks now have a total of 235,000 lines installed - a density unrivalled in the Arab world.

However, other BOT schemes have been less successful. In late 1995, the government awarded a consortium of Bouygues and Dumez, both of France, the $800 million contract to build the southern section of the Beirut ring road and the Arab Highway, linking Beirut to the Syrian border. Bouygues with two German firms, Dyckerhoff & Widmann and Walter Bau, took the $400 million contract to build the northern section of the ring road. Both consortia were expected to recover their investment from tolls charged to users of the roads. However, the government in May withdrew both contracts, citing unreasonable conditions set by the contractors, including their calls for state subsidies.

The abrupt government decision may discourage contractors from considering other BOT schemes in the country. In addition to the usual hurdles, BOT projects in Lebanon face a particular problem with the payment of charges, a legacy of the war years when it became impossible to bill customers for the use of water, electricity and telephones. Another problem is presented by the plan to impose tolls for the use of facilities, such as the roads, that were previously provided free.

'People here will pay for a good service,' says Youssef Choucair, the director of the state-run Investment Development Authority of Lebanon (IDAL). 'But you have to provide them with something better than what they are getting now, so they can see the difference.' The only BOT contracts placed so far by IDAL, whose function is to attract private finance, have been for the provision of services at Beirut International Airport. Its tender for the construction of a number of free zones in Lebanon received only a lukewarm response.

Even if the government succeeds in getting some of its proposed BOT schemes off the ground, there are many projects that are unsuited to this type of financing, and also hold little attraction for foreign donors. These include numerous inland water schemes, of great significance to local communities, but little interest to the donor community. Such is the feeling of neglect in some parts of the country that Shia Muslim figures from the Beqaa valley threatened in early June to organise a march to Beirut to demand action to improve services.

The Shia inhabitants of the capital will also have to wait for better living conditions, since the government's plans to redevelop the southern suburbs of the city ran into difficulties. In mid-1995, the authorities created Elyssar, a public body to oversee the redevelopment of 560 hectares of the sprawling suburb, a blighted slum mostly built by refugees from the south during the war years. The first phase of infrastructure and low-cost housing construction had been due for completion by mid-1997. Yet no progress has been made since Elyssar invited international contractors to apply to prequalify for the work in early 1996.

Work has been held up by political complications surrounding the relocation of the inhabitants and a lack of funds. Elyssar is now understood to be considering ways of executing the estimated $800 million redevelopment as a BOT scheme. Contractors say that the chances of recouping the investment in such a project are negligible.

Reconstruction work has been the motor of Lebanon's economic recovery over the past five years but the job is only half-finished. Work is continuing through the current recession, but new sources of finance will have to be tapped if the rebuilding programme is to be completed and its benefits extended to include more of the population.

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