Privatisation has become taboo in Lebanese political circles. The failure to advance a proposed series of state divestments going back more than 10 years represents a failure of political will that has helped paralyse decision-making in Beirut. 

Twelve years ago, a privatisation law was passed, giving the government the right to corporatise state-owned enterprises and allocate the proceeds to reduce public debt. A slate of asset sales was envisaged that would deliver improved services for an economy still recovering from 15 years of civil war, and that would go a long way towards reducing the heavy financial burden on the state.

Politicians [are less keen on] privatisation, since … their support comes through their control of public-sector employees

Lebanon-based banker

Successive budgets made commitments to boost the role of the private sector. Candidates for sales have included, at various times, the flag-carrier Middle East Airlines, Beirut International airport, Electricite du Liban (EDL), and the fixed-line and mobile telecoms sectors. Casino du Liban, as well as government holdings in tobacco processing and the Tripoli and Zahrani oil refineries have also been considered for sell-off.

Partnerships drive in Lebanon

Beyond the creation of postal carrier LibanPost, operated under a management contract, and a clutch of build-operate-transfer contracts in areas such as waste management and tourism, there is little to show for these plans.

Privatisation has failed to gain any serious traction. Even the Higher Council for Privatisation (HCP), a body set up in 2000 under the privatisation law to steer the process, has effectively given up on its initial role. Instead, it is focusing its efforts on advancing public-private partnerships (PPP) as the key method for injecting private-sector dynamism into Lebanon’s sluggish economy.

The country’s obligations to bring forwards a raft of state asset sales in the wake of the ‘Paris III’ funding programme agreed in 2007 has been drained of both substance and momentum. The commitment by sponsor countries to extend $7.6bn in financial support to Beirut following the summer 2006 Israeli bombing campaign, was in part predicated on Lebanon selling off its mobile phone and electricity networks. Five years on, this has not happened.

While Lebanese business leaders pay lip service to the benefits of privatisation, political reluctance has put paid to any chances of even telecoms, the most tempting sector for private investment, being sold off.

One Lebanese banker tells MEED the benefits of privatisation are not sufficiently strong to convince the country’s fractious political class that they should give up on a significant source of power and influence – government ownership of key economic levers. Being able to hand out contracts invests ministers with powers they fear they would be unable to replicate under a privatised economy.

“The public sector reports to the politicians who appoint them,” says the banker. “When these institutions are moved to the private sector, it means these officials no longer have to report to the political paymasters. This leaves politicians much less interested in pushing privatisation, since much of their support comes through their control of public-sector employees.”

As long as privatisation threatens to curb the authority of individual ministers, its advocates will have a hard time selling the process.

Private agenda

The telecoms sector is a case in point. Telecoms Minister Nicolas Sehnaoui belongs to General Michel Aoun’s Free Patriotic Movement (FPM), a faction in alliance with Hezbollah as part of the March 8 coalition that comprises the government. FPM leaders have in the past spoken out against privatisation, even though the telecoms sector represents a prime candidate for divestment. The industry generates revenues estimated at $500m a year, which stand in sharp contrast to heavily loss-making EDL and Middle East Airlines, which had its debts written off. 

PPP is a viable alternative, which is accepted to a large extent by proponents of privatisation

Marwan Barakat, Bank Audi

The sector generates large revenues for the government, estimated by the Washington-based IMF to be worth 3.5 per cent of gross domestic product in 2011. Indeed, the sale of two mobile networks, as set out under Paris III, could have raised up to $7bn in cash, which would have been used to pay off a chunk of Lebanon’s debt.

The government initiated the privatisation of the mobile phone sector in the early 2000s through the issuance of 20-year licences in a process managed by the HCP and the Telecommunications Regulatory Authority (TRA). The HCP was authorised to sell the assets, while the issuance of the licences became the responsibility of the TRA.

The government prepared the ground for telecoms reform. Telecoms Law 431 called for the establishment of a state-owned operator, Liban Telecom (LT), through the merger of the operations of Ogero (a government-owned, fixed-line contractor) and two directorates of the Telecommunications Ministry.

LT would become an integrated telecom operator providing a full complement of services from fixed and mobile telephony through to voice and data access. In 2005, the Council of Ministers adopted a decree approving the by-laws of LT and its creation as a joint-stock company for a period of 99 years. The target date for corporatisation was 2008, after which LT would be prepared for privatisation. To this day, however, LT does not even have a board of directors. 

The government’s reluctance to sell the mobile phone companies boiled down to a concern that it would struggle to fill the gap in the revenue base left by these firms, which accounts for an estimated 40 per cent of state revenues. If telecoms privatisation has proved impossible, there is little hope for less attractive assets.

Alternative private-sector participation models

If the government was serious about privatisation, it would be preparing the companies for sale. In the power sector, for example, tariff reform would enable EDL to recoup more revenue. But rather than make such a politically sensitive move, the cash-strapped government is forced to bail out EDL at a cost of about $1.5bn a year.

Given the failure to make headway, attentions have moved elsewhere. Alternative models of private-sector participation have gained traction in the past couple of years. The government has been working on draft legislation for PPP as an alternative to traditional public procurement or privatisation.

“PPP is a viable alternative, which is accepted to a large extent by the proponents of privatisation,” says Marwan Barakat, chief economist at the local Bank Audi. “It’s a question of having qualified management and reliable cash flow. Banks are willing to finance and get involved if those two key conditions are satisfied.”  

The main focus now is to create supporting legislation for PPP, according to HCP Secretary-General Ziad Hayek.

“Existing PPP-style projects have been done on a one-off basis, so we want to see legislation that gives the framework for a PPP programme and defines the process PPP projects must follow to be awarded,” he says. “At the same time, it must define a programme that encompasses sectors such as energy, transport, water treatment and waste management, and others hopefully to follow in the future.”

Past PPP-style projects in Lebanon include LibanPost, the container terminal at Port of Beirut, a waste treatment plant in Sidon and the Jeita Grotto tourist attraction.

There are clear differences between the strategic goals of PPP and those of the original privatisation programme created 12 years ago.

“With PPP, you are really talking about a partnership of risk,” says Hayek. “What the Lebanese government has traditionally done in working with the private sector is enter into management contracts, where the public sector bears all the risk and the private sector doesn’t bear any risk. In my view, this is unfortunate.”

Only a handful of these public-private management contracts have been truly successful in terms of meeting stated objectives, says Hayek. Most have endured problems related to a lack of experience within the government and the inability to develop true PPP contracts appropriate for the private sector.

The HCP is now aiming to put a PPP law in place so that future projects avoid controversy. Legislation for PPPs has been discussed in recent years, but the constant changes in government have hindered progress. “By the time we get the Council of Ministers to focus on this topic, it falls and we have to go through another period of no governance,” says Hayek.

Transparent process

Getting a major PPP project off the ground would create momentum and build expertise, enabling others to follow. “What is important is that legislation establishes a PPP unit and that this details the process of how PPP projects will be tendered,” says Hayek. “It is absolutely important that it is transparent, otherwise we will never have a successful PPP programme.”

Ensuring transparency in the tendering process would make clear where decision-making is being shared among the various stakeholders, and ensure that no single ministry can monopolise decision-making.

PPP may also be politically easier to sell than outright privatisation, since it lacks the toxic association that selling state assets for private profit has acquired. Analysts see a number of positives in going for PPP.

“It reduces the borrowing needs of government, improves management and improves the quality of service for consumers,” says Nassib Ghobril, head of research at the local Byblos Bank.

On paper, it is an open and shut case. What is needed now is a demonstration how PPP would work in practice.

“The private sector wants to see a clear law with conflict resolution clauses and a clear delineation of responsibilities, where the public sector’s starts and ends, and where the private sector’s starts and ends,” says Ghobril.