With Lebanon’s national debt currently standing at about 170 per cent of gross domestic product (GDP), Beirut needs to find new sources of revenue. The privatisation of major state-owned companies could be the solution.

The government says it is committed to using the proceeds from any sales to reduce its debt. Several programmes are planned, including the sale of national carrier Middle East Airlines (MEA) and the country’s ports.

But in terms of easing the government’s financial burden, the two most important schemes are in the telecoms and power sectors. Outside of politics, few subjects in Lebanon are as emotive as electricity provision. Irrespective of wealth or religion, Lebanon’s citizens are united in their complaints over the country’s heavily loss-making-power supplier, Electricite du Liban (EDL).

No one in Lebanon is guaranteed 24 hours’ supply of electricity. Most areas only receive 12-16 hours of power a day. In this environment, many in the business community are dependent on their own power generators to light their offices and run their equipment.

Subsidising losses

The swift reform of EDL is one of the major challenges facing Mohamad Chatah, the recently appointed finance minister. So far this year, his department has had to subsidise more than $600m in losses by the utility.

The difficulties at EDL stem from the high cost of production, the widespread theft of electricity and a low tariff for those who do pay. It currently costs EDL about £Leb400 ($0.27) to produce one kilowatt hour of electricity, but the average tariff it charges is just £Leb125 a kWh, according to Ziad Hayek, secretary general of the Higher Council for Privatisation, which is working on the country’s economic reform programme alongside the Council for Development & Reconstruction.

The mismatch between costs and tariffs has led to a significant shortfall in revenue. Chatah’s predecessor, Jihad Azour, says if crude oil prices remain at high levels, the losses at EDL could reach as much as $1.5bn this year, almost one-third of government expenditure.

Clearly, significant reforms are needed to prevent EDL undermining the government’s budget. As with other sectors of the economy, Beirut has decided to opt for privatisation, or something close to it. Its plan to bring in the private sector through a series of independent power projects (IPP) is being encouraged by the World Bank. “We came to a solution, through the political turmoil, [that] instead of full-throttle privatisation, we will go for semi-privatisation, through the IPP programme,” says Nabil Adnan el-Jisr, president of the Council for Development & Reconstruction.

If the plan is successful, there will be a reliable supply of electricity in the country for the first time in decades. In turn, this should allow for growth across the wider economy. Such reforms were a key element in discussions at the Paris III international donor conference, held in January 2007.

“This is linked to our basic needs before Paris III and before anything else,” says El-Jisr. “There is no real development if you don’t have proper power back-up.”

Selling assets

While reform of the power sector is slowly put into place, Beirut is also moving ahead with more conventional privatisations in other areas, particularly telecoms. Given the losses from EDL, successfully selling the mobile phone networks would be a relief for the Finance Ministry.

It is also greatly anticipated by Lebanese consumers, who currently pay among the highest mobile phone rates in the region. Pre-paid calls cost $0.38 a minute at peak periods – far more than rates charged in other countries in the region. In Egypt for example, the cost is just $0.07 a minute at peak times.

The scheme to sell the two mobile networks looks like the most lucrative option available to the country in terms of reducing the national debt. But it has also proved to be the most controversial. Hezbollah, which is part of the recently formed national unity government, has made it clear that it opposes the telecoms privatisation plan, despite having agreed to it in principle while part of the 2006 government led by Prime Minister Fouad Siniora.

Its apparent change of heart is based on the fact that any sale of the networks will lead to the loss of an estimated $1bn in state revenues – one of the largest sources of income for the government. In addition, it will remove a critical strategic asset from state control.

The issue of control over the country’s telecoms assets almost came to a head this year when former telecoms minister Marwan Hamadeh vowed to dismantle Hezbollah’s independently established telecoms network, which operates in the south of the country and parts of the capital. Hamadeh described the existence of the network as a “violation of state rights”. But despite the criticism, Hezbollah had the nerve and power to outflank the government, and its network is still in place.

The loss of income to the Treasury will cause some difficulties, but the more pressing issues are reducing government debt and attracting much-needed investment into the country. Today, most sources in the sector concede that the privatisation will go ahead.

“There is almost unanimous support for the deregulation process,” says Kamal Shehadi, chairman and chief executive officer of the country’s Telecommunications Regulatory Authority. “There are no ideological problems or handicaps. The issue is one of fine-tuning the timing and process. In two to three weeks, we should have a clear timeline.”

According to Shehadi, the transformation of the sector will help Lebanon make up for the opportunities missed over the past few years because of the political disputes over the country’s telecoms policy. The privatisation plan will result in the networks changing from their current status, where they are owned by the government but run by private companies under management contracts, to become privately owned and operated.

The sale of the mobile networks is part of a wider plan to reinvigorate the sector, which will also involve an overhaul of the country’s fixed-line network. The first part of the scheme will involve Ogero, the body that currently runs the country’s fixed-line network, being renamed Liban Telecoms.

After that, up to 40 per cent of the firm will be sold to a strategic investor.

Political delays

Preparations for this were completed in March 2007. However, the Higher Council for Privatisation (HCP) has had to wait for the appointment of a board of directors by the Council of Ministers. The divisive nature of Lebanese politics has meant that there has been a delay in obtaining a consensus on who should sit on the board.

The second phase, which involves the privatisation of the mobile phone networks, has also suffered delays for political reasons. The two networks are currently run on behalf of the government by two private groups: MTC Touch and Alfa. MTC Touch is a subsidiary of Kuwaiti telecoms company Zain, while Alfa is a joint venture of Germany’s Deutsche Telekom and Saudi Arabia’s Fal Holdings.

“Lebanon is one of the few countries in the world where the government owns the mobile infrastructure,” says Hayek. “The idea was for an auction for the sale of the networks and licences in February. But this was postponed as the election of a national unity government took priority before the auction could proceed.”

The creation and sale of a stake in Liban Telecoms, together with the sale of the two mobile networks, will drastically change the way telecoms works in Lebanon. “It could affect 95 per cent of the market, and this will happen in a relatively short space of time,” says Shehadi.

With a government of national unity in place, HCP is ready to start the process. “Assuming they do not change the strategy, we could hold the auction by the end of 2008,” says Hayek.

Shehadi is reluctant to speculate on the amount of money that the auction could generate. “Given a clear signal from the government towards privatisation, the current political situation in Lebanon and the stability that we see at the moment, we will get the best price possible,” he says. “We will get revenues from these transactions that are in the interests of the Treasury, and this far outweighs the continued state ownership of these networks.”

Industry analysts speculate that competition from regional players looking for expansion opportunities could push the value of the mobile networks up to $7bn. So far, Saudi Telecom, the UAE’s Etisalat, Qatar Telecom, Kuwait’s Zain and Egypt’s Orascom Telecom have all publicly stated their interest in buying into the Lebanese mobile phone market.

The Telecommunications Regulatory Authority has the benefit of having seen similar auctions successfully carried out across the world. But with the eyes of the Lebanese public and the international community watching over the entire process, it is important that it is transparent, a fact that is not lost on the regulator.

“From the day of the decision [to go ahead with the sale], it should take two months for bidders to submit financial and technical details,” says Shehadi. “Another two weeks later, we will hold a televised public auction. Some 60-90 days after that, we will complete the handover to the new owner. From the minute the Council of Ministers gives us the go-ahead, we will need about five months to conclude the handover.”