Public-Private Partnerships in Lebanon

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Pierre El-HnoudSenior Advisor, Leadership & Strategy DevelopmentAdvisor to the Minister of Energy and Water Aug 2010- March 2015.

pierre.elhnoud@yahoo.ca

Lebanon’s 1st Case

Agenda

❖Introduction❖What is the infrastructure problem that the PPP is trying to solve?❖What services are to be provided and are these services affordable?❖What are the reasons that the private sector would want to participate?❖How should these risks be allocated? Consider the country context in

judging the risks and who should take them❖Next steps❖References

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IntroductionPublic-Private Partnerships are critical for a developing country like Lebanon in order to close its Infrastructure Gap.

One of the major gaps that Lebanon is experiencing today relates to the power sector, where current actual capacity is 1650 MW according the Policy Paper for the Electricity Sector (June 2010); which represent 23% deficit (2100 MW required at that time). The country needs to produce around 5000 MW by 2015 in order to meet its demand.

The main consequences were a considerable dependence of the sector on budgetary subsidies estimated by the Ministry of Finance at close to US$1.5 billion in 2006-9 and could reach US$8 billion in 2015 not to mention the impact on the Lebanese economy as a whole which is estimated at US$46 billion.

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What is the infrastructure problem that the PPP is trying to solve?

A major infrastructure problem lies at the Power sector, where supply can barely meet 23% of the demand (2009), and the efficiency of the actual supply is at a 1.5USD$ billion dollar yearly deficit.

This not only have a catastrophic fiscal impact on a small country like Lebanon (GDP of 21.8 billion USD 2006) but also an economical impact on other industries like Tourism, Industrial and agriculture.

Therefore, a decision to build a 1500-2500 MW/IPP under a PPP scheme led to an initial feasibility study as announced at the Beirut Energy Forum on September 2014. This represent an enormous challenge as it would become Lebanon’s first PPP project.

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What services are to be provided?

and are these services affordable?As demand grew substantially and surpassed additional capacity of the current electricity generation levels. Power shortages progressively became the norm with some regions barely receiving 12 hours of electricity supply on some days.

The technical challenges that prevent sufficient volumes of electricity from getting reliably delivered to end-users span across the entire power system value chain: from insufficient capacity to large losses in the transmission and distribution networks and Insufficient Generation Capacity.

So the main challenge is to provide electricity 24/7 at a competitive price to the consumer. With current subsidies from the government, the consumer is paying around 40-60% of the actual cost.

A gradual increase in tariff must take place in order to provide the service at an affordable price.

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Private Sector

What are the reasons that the private sector would want to participate?

It is the World Bank opinion that Lebanon has adopted elements of a pro-PPP policy at official level with attempts to enact a PPP law to institutionalise PPP as a procurement option.

Lebanese banks could have PPP lending capacity but they as well as  government institutions, lack experience of PPP. This is because  there is no PPP project precedents to date in Lebanon to draw upon.

The Lebanese banking industry is financially sound and stable and represent the backbone of the private sector with 141 banks according to the central bank BDL with over US$100 billion that can be tapped into.

Not only they have the cash to invest, but they also have a vested interest in the economy as a whole which is expected to lose US46 by 2015 if nothing is done to close the infrastructure gap with the power sector.

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How should these risks be allocated?

Consider the country context in judging the risks and who should take them

“Allocation of risks between two parties should be based on which entity is best positioned to manage a risk.” PPPMOOC

This is the first PPP in Lebanon and there are no precedent to such endeavour. As the public lack the financial means and men power, the following risks should be allocated as follow:

1.Political risks: the government must take ownership of drafting the Institutional Framework and PPP Law in a way that future government proceed with any launched project in a transparent and seamless way. Political stability and security issues are key factors here and the private sector, beside giving its feedback can do nothing about it.

2.Economical risks: The future of cash flow and capital depends mainly on the Private sector that is required to invest heavily according to current government policy ( minimum 80%), and it is expected to rely on international donors. While the public sector must ensure connect all parties involved in an effective and transparent manner and to provide sovereign guaranties and third parties (i.e. Multilateral Investment Guarantee Agency MIGA and World Bank).

3.Execution risks: the private sector must provide creative solutions and deliver in the most efficient manner and ensure availability of services , while the public sector must provide speed and timely approvals.

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Next Steps

1. Hire a Transaction Advisor (i.e IFC) to launch the tendering process to build a 1500 MW/IPP under a PPP scheme as presented and discussed during the Beirut Energy Forum 2014 in details following the completion of the feasibility study. ( a feasibility study in 2013 financed by the Kuwait Arab Fund and executed by Mott MacDonald and Clyde&Co as external consultant.)

2. Finalise and approve the PPP Law Draft that was submitted to the Council of Ministers for in 2012.

3. Formalise the PPP Policy and Framework to empower the Higher Council for PPP Unit to be active and ready.

4. Continue with the awareness campaign, and get the private sector involved and increase its appetite to invest (as it seemed to be the case during the Beirut Energy Forum)

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ReferencesWORLD BANKhttp://www.worldbank.org/en/results/2014/04/15/restructuring-the-power-sector-in-lebanon

http://ppp.worldbank.org/public-private-partnership/library/study-ppp-legal-financial-frameworks-mediterranean-partner-countries

BEIRUT ENERGY FORUMhttp://www.beirutenergyforum.com/Presentations%20BEF%202014%20PDF/DAY%201-2-3/session%201A/Session%201A%20Sissaf%20EDL%20Pierre%20Hounoud.pdf

http://beirutenergyforum.com/Befpresentation/pdf%20session%202/Dr.Dr.%20Raymond%20Ghajar-Sep-2010.pdf

PPPMOOC https://class.coursera.org/effectiveppp-001

PPIAF http://www.ppiaf.org/sites/ppiaf.org/files/documents/Note-Four-Developing-a-PPP-Framework.pdf

BANK OF LEBANON (BANQUE DU LIBAN) www.bdl.gov.lb/downloads/download/82/en

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