RESEARCH REPORT PRIVATIZATION OF LEBANON’S PUBLIC ASSETS NO MIRACLE SOLUTION TO THE CRISIS Albert Kostanian Beirut, January 2021 © All Rights Reserved. This report is published by the Issam Fares Institute for Public Policy and International Affairs (IFI) at the American University of Beirut (AUB). It can be obtained from IFI or can be downloaded from the following website: http://www.aub.edu.lb/ifi. The views expressed in this document are solely those of the authors, and do not reflect the views of the Issam Fares Institute for Public Policy and International Affairs, or the American University of Beirut. This report or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations. Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut (AUB) Issam Fares Institute Building (Facing the Green Oval) PO Box 11-0236, Riad El-Solh, Beirut 1107 2020, Lebanon +961-1-350000 Ext. 4150 [email protected] www.aub.edu.lb/ifi aub.ifi @ifi_aub @ifi_aub PRIVATIZATION OF LEBANON’S PUBLIC ASSETS NO MIRACLE SOLUTION TO THE CRISIS Albert Kostanian Senior Policy Fellow for Economics at the Issam Fares Institute The Research Team: Maysa Baroud, Program Coordinator, Governance and Policy Lab, IFI Karim Merhej, IFI-Google Policy Fellow, Governance and Policy Lab, IFI Fatima Moussawi, Program Coordinator, Civil Society Actors and Policymaking, IFI 2 Privatization of Lebanon’s public assets: No miracle solution to the crisis Acknowledgements We would like to thank Alexi Touma, formerly a researcher with the Civil Society Actors and Policy-Making program at IFI, and Amira Dabbous and Elina Qureshi, interns at the Governance and Policy Lab at IFI, for their support with background research and data collection. We thank Raghda Jaber Azad, Expert in Land Use Policy, for her valuable insights on State held real estate. We also thank the Beirut Urban Lab at the American University of Beirut for providing us with data on state-owned parcels in Municipal Beirut. We thank Lamia Moubayed and Khalil Gebara for their support and insight at the inception phase of the research. We would like to thank all experts, as well as the representatives from civil society organizations and the private sector, and the academics who attended the validation meeting for contributing to this report by sharing their valuable opinions and expertise. Finally, we thank Alia Moubayed whose constructive and helpful review helped improve the report, and Nasser Yassin, IFI’s interim director 2019-2020 (when the study was launched), and Suzanne Houssari, Communications Manager at IFI, for their active participation towards achieving this report. 3 Privatization of Lebanon’s public assets: No miracle solution to the crisis Acronyms ARPU Average Revenue per User ATI Access to Information BCC Banking Controls Commission BOT Build-Operate-Transfer BSE Beirut Stock Exchange CDL Casino Du Liban CMA Capital Markets Authority DSP Distribution Service Provider EBIDTA Earnings before Interest, Taxes, Depreciation, and Amortization EDL Electricite du Liban EDZ Electricite de Zahle EP Egyptian Pounds EUR Euros GSM Global System for Mobile Communications HRADF Hellenic Republic Asset Development Fund ICT Information and Communications Technology IMF International Monetary Fund IPP Independent Power Producer JSCC Joint Stock Company Concessions KPI Key Performance Indicator LBP Lebanese Pound LIBNOR Lebanese Standards Institution MEA Middle East Airlines MIC Mobile Interim Company MoF Ministry of Finance MoT Ministry of Telecommunications MP Member of Parliament OECD Organization of Economic Cooperation and Development PAMC Public Asset Management Company PHA Publicly Held Asset PPP Public-private Partnership RLTT Regie Libanaise de Tabacs et Tombacs RWE Regional Waters Establishment SME Small- and Medium-sized Enterprise SOE State-owned Enterprise TRA Telecommunications Regulatory Authority TSO Transmission Service Operators USD United States Dollars 4 Privatization of Lebanon’s public assets: No miracle solution to the crisis Table of Contents Acknowledgements ..............................................................2 Acronyms ........................................................................3 Executive Summary ..............................................................5 Introduction ..............................................................................5 Prerequisites for Privatization ............................................................5 Assessing the Potential for Privatization of Select PHAs ..................................6 Introduction ......................................................................8 Objectives................................................................................9 History of Privatization in Lebanon ............................................. 10 What are the Prerequisites for Privatization? ................................... 16 Regulatory Environment ................................................................ 16 Anti-Corruption Laws and Frameworks ................................................. 18 Transparent Procurement Processes ................................................... 19 Selection of Global Privatization Experiences .................................. 23 Assessing the Potential for Privatization of Select PHAs ....................... 28 Conclusion ..................................................................... 54 Appendix. Valuation Methods ................................................. 60 References ..................................................................... 62 List of Boxes Box 1. Telecom: A BOT that Ended in Nationalization ................................... 14 Box 2. Water Management Contracts in Tripoli: A Semi-Failure ......................... 15 Box 3. Various Existing Regulatory Authorities in Lebanon ..............................17 Box 4. Privatization Frameworks ....................................................... 29 Box 5. Intra Bank and its remnants ..................................................... 31 List of Figures Figure 1. Timeline of Paris conferences and privatization laws and regulations ..........11 Figure 2. Selected publicly held assets in Lebanon ..................................... 28 Figure 3. Summary of privatization frameworks ........................................ 29 Figure 4. Middle East Airlines net profits and net shareholders’ equity ................. 30 Figure 5. Government revenues from Casino du Liban (million LBP) .................... 33 Figure 6. Total number of passengers at the Beirut Rafic Hariri International Airport ... 37 Figure 7. Government revenues from Beirut Rafic Hariri International Airport (million LBP) .. 38 Figure 8. Government revenues from the budget savings of the telecommunications budget ........................................................ 46 Figure 9. Case for privatization of different PHAs ....................................... 56 List of Tables Table 1. Share of Port of Beirut’s Total Revenues Received by Lebanese Government Since 2011 ............................................................................. 41 Table 2. Overview of Government-Owned Real Estate (in square meters) ............... 43 Table 3. Number of Water and Wastewater Connections in Lebanon .................... 53 Table 4. Synthesis of privatization models and estimated impacts for each PHA ....... 54 Table 5. Valuation of different PHAs (excluding potential concessions) ................. 58 Table 6. Estimation of gross revenues for the State from privatizations ................. 58 5 Privatization of Lebanon’s public assets: No miracle solution to the crisis Executive Summary INTRODUCTION As Lebanon faces an unprecedented economic and financial crisis, the privatization of Publicly Held Assets (PHA) has been proposed as a silver bullet solution, with little evidence to support such claims. PHAs are the martingale of the debate; a trick that will purportedly ease the government’s proposed plans to get the country out of the current deadlock. Nevertheless, proponents of the debate have generally treated the valuation of PHAs only superficially. While privatization can theoretically alleviate losses borne by the financial system, any decision to sell off state assets must be weighed based on economic and social criteria that will contribute to the long-term objective of improving the population’s overall welfare in a sustainable manner. This study aims at contributing to this debate by assessing the benefits and risks associated with the privatization of selected PHAs in Lebanon using the following framework of criteria: 1) the competitiveness and efficiency brought to the sector by private sector participation, 2) the service or public goods’ accessibility to citizens, and 3) the impact on the treasury. We also attempt to quantify the value of selected PHAs in Lebanon with acceptable accuracy using a best estimation per sector, based on available data. The PHAs included in this study are: Middle East Airlines (MEA), Casino du Liban, Regie Libanaise de Tabacs et Tombacs, Lebanon’s airports and ports, state-owned real estate, the telecommunications sector (fixed and mobile), Electricite du Liban, and the water establishments. PREREQUISITES FOR PRIVATIZATION Lebanon’s recent history of privatization experiences shows that regulatory reforms were closely linked to pressure from international