All those who worked closely with Prime Minister Saad Hariri in Saudi Arabia when he ran his father’s business empire say the young man loves challenging missions.
For this reason Saad succeeded in doubling the fortune of Saudi Oger and even expanded his business to the Middle East, Europe and Africa.
But the premier, who managed to win the hearts and minds of even his die hard opponents in Lebanon, realize that his efforts to bail out Lebanon from its various economic problems will not be a piece of cake.
Apart from the $49 billion public debt and aging and inefficient public departments which he inherited from all his successors, Saad Hariri realize that the most overwhelming problem he really faces is the cash strapped electricity sector.
Literally, the electricity sector is draining the resources of the already troubled treasury and the Finance Ministry estimate the annual deficit of this sector at more than $1.5 billion, or one third of the government’s revenues.
There are different proposed scenarios for the electricity sector and one of the most publicized ones is privatization.
But what investor in a good state of mind will be willing to risk billions of dollars on a sector which is plagued with huge problems.
Hariri will surely work closely with the new energy and water minister Jebran Bassil to find quick solutions for electricity and at the same time to relief the treasury from the huge losses this sector incurs each year.
"The power sector continues to be one of the most poorly developed in Lebanon and calls for wholesale privatization have been growing louder in recent years, with EDL (Electricite du Liban) hindered by substantial power generation and distribution costs which require crippling subsidies," an energy expert told Business Life Magazine.
He added that some politicians want to throw the problem on the laps of the private sector because they believe that the state does not have the means or the resources to fix this chronic problem.
The expert said the government will tell the Lebanese that the state can’t afford to build more power plants to meet the growing demand and any new project should be solely financed by the private sector.
Over 60 percent of Lebanon’s power is already being generated by the private sector, including a percentage being supplied by energy providers abroad according to Alain Tabourian, energy and water minister in the former government.
Plans to address Lebanon’s electricity crisis were held up in the previous government, but there is now hope that the plan prepared by Tabourian will finally be executed. The ministerial declaration states that 600 Megawatts of new generation capacity is to be immediately installed, and will be on stream by the end of 2010. This was the short-term measure advocated by Tabourian to provide stopgap power, while preparations are made to build efficient and low-cost power stations, something which requires over five years to execute.
The Lebanese electricity situation has been a major talking point for some time with many residents left without power for several hours each day.
Tabourian is very clear about his aims for the energy situation. "I believe the best solution is for the public sector to work hand in hand with the private sector via a Public-Private-Partnership (PPP). Both parties have strengths that, if applied properly, would lead to the lowest cost service." According to Tabourian, "each party has its own competitive advantage. As an example, private companies are more efficient than the state in building and operating power plants, whereas the state has a much lower cost of capital to finance public infrastructure, so let the government finance the project and have the private sector build and operate it." Tabourian believes affordable power and a profitable quality service can be provided through this sort of mechanism.
But according to, secretary general of the higher council of privatization Ziad Hayek, the Lebanese government is not looking to privatize the power sector.
"The power-sector reform includes, in some of its aspects, the involvement of the private sector, but there are no plans to privatize EDL today," says Hayek. "Once the system is healthy, we can consider privatizing it."
Obviously money is at the root of the problem, especially the very high cost of producing electricity.
"Put very simply, EDL has a very high electricity-production cost, as most of the production cost is directly tied to the price of oil derivatives and more than 60 percent of the power is generated using diesel, a very high cost fuel, while 40 percent uses heavy fuel oil, another expensive fuel as compared to natural gas and coal. It costs a lot more to generate electricity than is recouped from selling it and this is because of poor past decisions in terms of the type of power plants that were built and because of the lack of investments in the sector to replace existing plants that are old and very expensive to operate, by new, modern, efficient, low-production cost plants. Electricity is being subsidized, mostly in order for people to have reasonable electricity prices," says Tabourian. "Staff wages and operating and maintenance costs are not the core problem; they account for less than $200 million a year, a very small portion of EDL’s spending. Likewise, electricity theft is a problem, at an annual cost of just over $140 million according to a World Bank study, but even if it were eradicated, it is very small when compared to the billion-dollar-plus deficits that are accrued every year.
Hayek believes the structural problem with the current system is people "not paying the full price." The state provides a subsidy for power, setting a tariff of $25 a barrel while the real cost of oil is $100, meaning everyone in Lebanon receives cut prices for their power.
He also confirms that the reason for the constant power cuts is because" Lebanon produces 800 Megawatts less than it needs due to insufficient power-production capacity.
The financing of new public infrastructure using the private sector is controversial. "The public sector has access to public-infrastructure project financing at less than 2 percent per annum and the latest Eurobond issue was oversubscribed and cost just 7.5 percent for a 15-year note. On the other hand, private sector Independent Power Producers (IPP) requires returns on the order of 15-20 percent and demand government guarantees. The difference in cost is on the order of 15 percent, a huge figure. If the entire sector were privately owned and we were to assume that the required investment to have a properly functioning electrical system, starting from scratch, was on the order of $10 billion, the annual surplus cost to resort to private-sector financing/ownership would be $1.5 billion, as big as the current deficit! An IPP is nothing more than another form of financing, call it structured financing, albeit an expensive one that should be a means of last resort, if the state is not able to raise financing by other more traditional means," said Tabourian.
Hayek said that "we have 10 companies already in the process (of expressing an investment interest). They are all highly respected entities, all qualified with the necessary experience," and adding: "But as long as the system is in the shape it is in today, there are no [interested] investors."
