The promises and perils of Public Private Partnerships in Lebanon

Published November 17th, 2011 - 03:24 GMT
According to experts, PPPs would improve the quality of utilities and transport services while simultaneously promote employment and economic growth
According to experts, PPPs would improve the quality of utilities and transport services while simultaneously promote employment and economic growth

Twenty years of infrastructure neglect are difficult for Lebanon to reverse, but experts say Public Private Partnerships (PPP) hold plenty of promise. After Egypt, UAE, Jordan, Qatar, Saudi Arabia, and virtually every country in the Middle East including Syria, Lebanon is warming to the early 1990s British idea which sees governments and the private sector share the risks of delivering public infrastructure.

Unlike privatization, which involves the outright sale of the state’s assets, a PPP is typically a long-term contract between the government and a consortium of private sector companies through which the private party provides the bulk of financing and assumes technical and operational risks in return for revenues from consumers or the state.

“It’s fantastic if government can spend on infrastructure, but at some point, it becomes more of a burden on the economy than a positive, and we have reached that point in Lebanon, so we need spending on infrastructure from the private sector,” said Ziad Hayek, Secretary General of The Higher Council for Privatization (HCP) in an interview with The Daily Star.

And the needs couldn’t be greater. Twenty years after the civil war, Lebanon still finds itself rationing electricity and water even in the lavish newly reconstructed Downtown Beirut area. During the peak summer season, insufficient and poorly designed highways turn into parking lots as drivers wait for hours to enter and exit the capital.

According to experts, PPPs would improve the quality of utilities and transport services while simultaneously promote employment and economic growth. “The most important objective of PPP is to improve the service to consumers,” said Nassib Ghobril, chief economist at Byblos Bank in an interview with The Daily Star. But quality is hardly the driver for potential PPPs in Lebanon. Finance Minister Mohammad Safadi estimates that the country needs to spend at least $20 billion to improve its basic infrastructure; otherwise the high growth it has been witnessing will “dwindle and vanish.” Instead of rising to the challenge, the response of respective governments since the mid-nineties has been shy at best, sometimes prompted by ideological beliefs and other times by tight public finances, resulting in an allocation of only three to five percent of budgets to infrastructure spending.

“A PPP solution would be ideal for Lebanon where the current level of indebtedness and financial constraints prohibit the government from launching and funding much needed infrastructure projects. This is the most logical route as it alleviates the financial burden on the government and provides much needed infrastructure to support the local population while helping develop the local private sector,” said Dr. Wissam El Solh, an ex-World Bank economist and PPP investor in Qatar in an interview with The Daily Star.

Prime candidates for PPP are the basic sectors of any economy: power, water, transport, and wastewater. Hayek’s potential projects include the production of 1,500 MW of electricity through PPP worth $1.5-$2 billion, at least two to three water dams at an estimated cost of $100 million, and a light rail connection between Jounieh and Beirut, forming a PPP market of approximately $1 billion per annum.

Stuck on theory

Although infrastructure needs are obvious, execution has stumbled on controversial economic paradigms for Lebanon. On the one hand, neo-liberal sympathizers advocate the full privatization of state assets, especially in the telecom and electricity sectors. On the other, several politicians and economists advocate public sector reform before corporatization and the partial sale of state monopolies, in part for fears that corruption would eat up the gains from asset sales.

“The role of government is not in the production and distribution of major products. There are also 50,000 jobs waiting for the telecom sector to be liberalized,” said Mazen Soueid, chief economist at BankMed in an interview with The Daily Star.

In the midst of discussions over liberalization, Lebanon has been supporting a failed electricity company with $1.5-$2 billion a year in subsidies and racking up nearly $53 billion in public debt, or 137% of GDP as of 2010.

The bitter debate, however, has sparred PPPs. Gebran Bassil, Minister of Energy and Water, incorporated partnership with the private sector in the five-year electricity plan and has held several press conferences with bank leaders to promote their participation. But PPPs are more inevitable than a choice. Given the state of public finances, an unmeasured increase in debt levels would inevitably be met with heightened credit risk, further raising Lebanon’s annual debt servicing bill and holding significant macroeconomic implications.

The dangers of credit agency pessimism are only matched by likely public uproars in the event of increased taxation to fund infrastructure. “The Lebanese are not willing to pay more taxes unless the government is giving them something tangible in return, whereas PPP has more positives than negatives compared to the other two options,” said Hayek.

With the government’s hands tied, the benefits to PPPs are numerous, but economists question the availability of financing and the feasibility of large-scale projects in the Lebanese context of political instability, security risks, and corrupt public institutions.

“Based on unacceptable public sector performance, I don’t think the private sector will be very enthusiastic about participating,” said Georges Nehme, economics professor at Antonine University in an interview with The Daily Star.

PPPs are not perfect

Despite their unquestionable advantages, PPPs also have a long history of corruption, and are in many cases just as inefficient as public procurement. As recently as February 2011, the UK government cancelled a $9.5 billion helicopter PPP tender after one of the bidders gained access to bid assessment criteria.

Furthermore, according to a report by the International Growth Center, despite Chile’s rank among the least corrupt in the world and its successful PPP program, “excessive contract renegotiation and high-level corruption have significantly increased the cost borne by the state.”

More recently, in August 2011, a UK Treasury Select Committee concluded in a report that PPP funding for new infrastructure, including schools and hospitals, does not provide good value for money. The report referred to the higher financing costs associated with private financing relative to public sector debt and the rise in cost of private debt since the financial crisis.

To Hayek, however, PPPs would reduce corruption and improve performance by shifting the decision-making process from one ministry to a committee of ministers. “You can bribe one minister but it’s more difficult to bribe the council of the HCP which has a minimum of six ministers,” said Hayek who is leading the lobbying efforts to turn the HCP into a PPP unit.

But Lebanon’s own experience with PPPs has created some of the country’s most well-known scandals. Lebanese national symbol Jeita Grotto, managed by MAPAS (previously German-based) on a long-term contract after initial rehabilitation in the early 1990s, has been at the center of multiple disputes with local authorities over contract requirements. Similarly, Saida’s infamous garbage mountain is a hallmark of private sector partnership for the construction of a waste management plant.

Acknowledging the failure of earlier projects, Hayek attributed the “controversial” Jeita Grotto case to the lack of consultation with local stakeholders, and blamed missing expertise for the “problematic” Saida scenario, highlighting the importance of the forthcoming new PPP law in preventing similar mistakes.

PPP Law... Remix

Unlike typical economic discourse in politically-charged Lebanon, the PPP law appears to have miraculously escaped the negative sides of public debate. Instead, the original draft was approved by cabinet in 2007 but not taken up by parliament, and two attempts later, draft legislation has been produced and awaits governmental action.

“We have a new text for PPP legislation which we are now waiting for the Prime Minister to add to the agenda of the council of minister. When exactly that is going to happen I don’t know,” said Hayek who hopes legislation would be approved by parliament “no later than the middle of next year.”

Although most parties have opinions on requirements of the forthcoming PPP law, few are aware of its progress. “It’s not clear where they are with the PPP law,” responded Ghobril to our inquiry.

According to Hayek, the proposed law “sets the rules of engagement between the public and private sector, the rules for engaging in output specification, and creates a PPP unit” potentially out of the current HCP.

Hayek’s views were echoed by both Ghobril and El Solh, with the latter emphasizing the importance of putting “the right legislation and supporting governmental framework in place with clear consensus and support across all political lines.”

Indeed, both PPP laws and projects require at least mediocre levels of political and security stability to succeed. In Egypt, less than a year after a PPP law was passed in 2010, political turmoil caused the members of the PPP unit, part of the Ministry of Finance, to quit their positions for fear of retribution by a misinformed public, bringing all PPP projects under negotiation to a halt.

Even in more stable Jordan, the PPP law is yet to be approved after several years of discussion. Latest unrest, a walk in the park by Lebanese standards, has also brought about the delay of virtually all PPP projects, raising questions about the ability of frequently changing governments in Lebanon to implement PPP.

“Political change may lead to obstacles to PPP, but the government cannot stop financing projects to which it has committed,” said Nehme who expressed doubt over the availability of private financing for large projects under current conditions.

Financing is available... Given proper law

On their part, banks, investors, and the HCP point to the PPP law as a centerpiece for the success of future private finance initiatives, expressing little doubt over access to credit from local banks or financing and guarantees from international organizations.

“We are ready to provide adequate funding in size and conditions,” said Joseph Tarabey, the president of the Lebanese Banks Association in reference to PPPs, although during a speech at a PPP conference in October, a deputy head of project finance at one of Lebanon’s three biggest banks promised terms of no more than five years, justifiably prompting a smirk from seasoned international attendees.

The speaker later declined to comment on the subject when contacted by The Daily Star, indicating the topic remains sensitive to banks which ironically stand to benefit tremendously from PPPs. “There is a huge appetite from the Lebanese banking sector. Instead of lending the government at T-bill rates, they have an opportunity to earn more and be more intelligent about pricing risk while also selling ancillary services such as insurance and others,” said Hayek.

But the expected benefits to PPP go beyond the provision of financing. “PPP doesn't just bring funds - projects that utilize this also benefit from bringing in other international standards - like technical expertise that often resides in the international private sector,” said Dubai-based Jonathan Robinson, head of MENA project finance at HSBC, in a written comment to The Daily Star.

Although foreign companies are invited to the PPP party, Hayek’s confidence relies heavily on the availability of domestic financing and skills. According to him, “Lebanon has its own indigenous companies with a lot of expertise and our banking system has ample financing, so we can have a successful PPP program even if international investors hold back.”

Optimal choice but needs education

Few topics in Lebanon are not exploited as juicy material for political debate, so PPPs and with them the country’s infrastructure sector, capital markets, and consumers can claim partial success in finding what may serve as a compromise between privatization and state control.

Yet contrary to popular belief, the next round will not only include the PPP law, but the education of relevant parties and the public about these complex types of delivering infrastructure services. In particular, it is essential to steer the public away from the perception that government is relinquishing its social responsibility by partnering with the private sector, while still being mindful of the ticking clock. “The longer it takes to draft the PPP law, debate, and implement it, the more it costs consumers in terms of service and the government in terms of spending,” said Ghobril.

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