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Strategies for electricity privatization (Daily Star)

'The time has come to craft a long-term approach in lebanon'
The role of public-private partnerships needs to be considered


Energy is fundamental to Lebanon's domestic prosperity and national economy. In fact, the ties between energy and national economy have drawn tighter over time.

The advent of globalization, the Euro-Mediterranean partnership, the regional energy (electricity and gas) Mashrek & Maghreb interconnections, the growing gap between rich and poor, the absolute need to protect and safeguard on environment are all interrelated with Lebanon's energy concerns.

Yet the strong debates about Lebanon's energy policy in reaching an acceptable positive and constructive privatization has led to regretful deceptions that the pertinent authorities could have avoided. Experience indicates that careful attention should be paid to the methods of transfer of Lebanon's state owned assets such of EDL after pursuing effective and rigorous methods and gradual the private sector interventions. Countries that have gone through unbundling and privatization process have created distinct types of contracts which corresponded with different degrees of private sector involvement and different contract duration.

The staleness of Lebanon's energy policy dialogue reflects, unfortunately, a failure for a unified approach to recognize the importance of energy to the areas it affects - what Lebanon needs after the Hydrocarbon strategy study offered by the World Bank is an overall focused detailed energy policy serving Lebanon's high interest, its economic advancement, with a clear consensus by different stakeholders.

The pressures generated by electricity needs are such in a way that the Private Sector involvement has become very mandatory knowing that none of its problems can be solved overnight. This will ensure in the long term to take part in the restoration of EDL finance, and attract foreign capital contribution, including the financial securities needed for other important energy related programs such as the National Gas Transmission project development.

With lack of robust strategies and political economy, the passed reform years were confronted with costly bureaucracies, constrained policy makers, lack of responsiveness to end users, political meddling, and the non-safeguarding of the national interests led to the actual high risk situation that the private sector will not deal with at this moment. The challenges can be overcome with politically targeted policy interventions that build on public private partnership and other forms of association.

Growing energy needs explain the diversity of assistance needed in the form of: design semi-privatization, delegated management, and Operating and Maintenance contracts; contracting out incentive contracts, concession BOOT/BOT, leasing (affermage) or concession as a prerequisite to a successful privatization process, and stop the financial drain, but also to assist in an alternate strategy for positive economic development. This could start from a small involvement of the private sector to complete privatization over the years. The gradation of constructive potential solutions could span the entire gamut.

Political-economical condition is needed to bring together a consensus on national energy interests and decision making mechanisms and abandons traditional interested-group wish lists.

The government has to appreciate the successful and the non-successful privatization roads in the world, that has emanated and is illustrated by empirical evidence mainly from English, U.S. or Dutch doctrines and other countries where privatization was at high risk, (i.e. in Chile, Kazakhstan). What Lebanon needs is a long term ambitious plan with a fresh start, credible steps and the assistance of international organization like the World Bank. The World Bank's extensive experience and involvement in successful participation and public private partnerships, delegated management and other forms of cooperation is crucial for Lebanon's energy sector evolvement.

After "Paris II," the government has set a course to adapt technical solutions for the pre-privatization of EDL and the policy preference process was supposed to raise some needed funds for the treasury. Affordable energy prices to all users, contract out the billing and collection, turn around EDL's deliverables, and to raise some private money for EDL's transmission and distribution expansion and return some money back to Banque du Liban were never reached. The comprehensive electricity reform started in 2001 with the promulgation of the electricity law 462, did not produce the predicted results, nor the assessment of the costs and benefits of the break up of EDL was never reached.

As mentioned earlier, the Government should seek out new strategies for effective gradual solutions that could be provided through different and various types of contract, mainly to a problem resolution approach as mentioned earlier.

One of the key approaches is to downplay the theoretical antagonism between these models. Once the actors in this domain have winded up verifying the credibility and re-partition of Lebanon's contractual arrangements, institutional and legal procedures, debt structure and policy makers concern in adopting pragmatic approaches, depending upon EDL's critical problems at hand, should immediately start with:
- Devising well adapted technical solutions for technology development with a balanced cost structure based on a tariff fee affordable to all users.
- Private sector involvement to build on the power market and raise financing for further investments.
- Assist in valuing EDL assets, as it is a delicate operation to protect political decision makers from being criticized.

Secondly, with regard to a possible solution for EDL, the concession approach is a process which allows associating a private partner (foreign and/or local) to EDL. The concession contract, as well as the so-called "public-private partnership" (PPP) contracts are not at all identical to a public procurement inasmuch as their complex nature necessitates a different, customized legal framework that should be elaborated further in the new Electricity Law 462 of 2002. However, the existing legal framework alone is barely sufficient in launching a concession. It is also necessary for the forthcoming regulatory authority and the government backing the adopted plan to exhibit a strong pro-partnership stance and fulfil a series of preliminary technical and financial conditions to EDL. The independent energy regulatory authority will bring closer the revenues and costs of the operating entities, by increasing revenues, lowering costs, protect private sector investors and set a fair of structure level of tariffs, especially encouraging industrial tariffs. These measures will also facilitate competition and transmission, (international electricity trade set to be operational by 2005 through the six-country grid connection between Egypt, Jordan, Iraq, Turkey, Syria and Lebanon).

Moreover, the combination of different types of public entities (EDL, Water Authorities, etc), coupled with the different types of private firms (major industrial group, utilities - or medium sized services firm, etc.) could be used to develop an initial typology of public-private partnership contracts. However, a better approach would surely be to examine the content of public-private partnership contracts with MEW/EDL. As mentioned previously, this content varies widely from one contract to the next, depending on the type of public good like EDL's service under consideration now as well as on the contract's set of objectives.

Furthermore, the public-private partnership will have to address EDL risk through devising formula that: minimize risk, distribute all residual risk "equitably" and/or transfer the risk to an insurer.

In summary the time has come to craft a long term approach to energy in Lebanon where the public-private partnership in EDL's case is in essence the outcome of a search for the most appropriate long-term partner able to provide the necessary expertise to Lebanon's electricity utility. These types of contracts can be distinguished in broad terms from a public procurement contract by the following characteristics:
- The transfer of EDL public service obligations from the concession-granting entity to the concessionaire with respect to public liability and the ensuring breakdown of risks between the two parties;
- To assess the need for capacity building; human capital formation;
- The total or partial assumption of the project's capital investment program by the concessionaire within the scope of a long-term contract, which affords the time span necessary to both fully depreciate this investment and carry out the contractually-stipulated obligations;
- The unique, all encompassing and complex nature of the contract, including design, financing, construction, maintenance, facility operations, service provision, etc., the magnitude of which necessitates in-depth negotiations between the two parties (EDL and the Private Sector) prior to drawing up the contract.

Conclusions:
Privatization strategies need to be tailored to Lebanon's specification needs and be pragmatic.


The services provided models, is good to assemble right approaches from successful lessons drawn from proven experiences coupled with existing models is certainly a good way to reconsider Lebanon state strategy on privatization. The number of multi-sectorial firms created in Europe mainly over the last two decades confirm this way out to reach the government's goal.

In the end, privatization is above all a political, complex and lengthy process. Reluctance so far has hindered government's desire to reduce public debt and meet social objectives. Alternate state privatization strategies should be on Lebanon's political agenda with a broad based cooperative political coalition of economical and political policy makers.

Roudi E. Baroudi is an Energy and Privatization Policy Consultant.

Beirut 21-09-2004
Roudy E. Baroudi
The Daily Star



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