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Will latest initiative lead to Electricite du Liban's privatization ?

Lebanon launched a fresh initiative aimed at improving the chances of privatizing the nation's disastrous electricity sector this week. It will consider methods to reform Electricite du Liban's (EDL) operations, which Prime Minister Najib Mikati said needs radical treatment.

But lest anyone get too excited about the prospect of reform, the Cabinet was obliged last week to fork over $36.5 million just to make sure wealthy Arab tourists aren't subjected to Lebanon's persistent rolling power outages this summer, which are a fact of life for many ordinary Lebanese.

At least this latest initiative isn't a knee jerk reaction to international pressure. Consider, for example, the 2002 electricity privatization law cobbled together in response to international demands at the Paris II debt relief conference. No progress has since been made.

There's reason to believe that Mikati's latest demand could be serious, and not just a method to distract attention from the current mess at EDL. In the past, politicians have used talk of privatization as a panacea to avoid tough internal reform.

Lebanon's $35 billion public debt, a staggering 180 percent of GDP, makes selling of huge state assets a necessity. At the same time old elites who milked the system as a dispenser of political patronage have less power now after the Syrian pullout. In the past, some areas of the formally-Syrian controlled Bekaa Valley only paid 20 percent of their electricity bills.

"The government is weaker now," says economist and energy expert Marwan Iskandar. "The new government can't stop the drive toward privatization like before. Privatization is going to happen one way or another."

Despite EDL's problems, Iskandar said, some firms have expressed interest, among them Electricite de France and the U.S. giant American Insurance Group.

"It is possible that there will be an interest in privatizing provided that the government pays for production," Iskandar said. "The government could guarantee payment for production at a lower cost than today." If the government is committed, Iskandar said, electricity privatization could be completed at the earliest by 2006.

The danger is, however, that talk of privatization as if it's the silver bullet will distract the country from the dirty-work that needs to be done before a sale could effectively be pulled off.

EDL loses about $400 million a year and suffers from a rate of theft upward of 20 percent.

"You have all kinds of problems at EDL with governance, commercial losses, and inefficiencies in generation, transmission and distribution," said Sebastien Dessus, a senior economist at The World Bank based in Beirut. "Privatization is a means, not a panacea."

The most looming problem with EDL is its finances.

"No one knows exactly what the finances of EDL are. The last accounts audited date from 2001. EDL does not know who is consuming electricity and where the leaks are," Dessus said.

But to EDL's credit, under its board chairman Kamal Hayek thousands of meters have been installed and illegal connections cut. A deal has also been signed with Syria to bring cheaper natural gas to the Deir Ammar-Beddawi power station near Tripoli which will be shipped undersea to Zahrani in the South.

The reforms, however, aren't exactly whetting the appetite of potential investors.

"The best they can say now is that they've collected more money this year than last year," said Raymond Ghajar, associate professor of electrical engineering at the Lebanese American University. "Some of that, though, could be due to increased consumption. There's still a huge amount not collected."

The next step for Lebanon should be signing a management contract with a private company to clean up the current accounting mess. Talk of privatization years down the road shouldn't distract from immediate reforms.

Beirut 06-06-2005
Will Rasmussen
The Daily Star



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