• Energy
    Jun 01, 2020

    Lebanon’s Power Sector: Making Reforms Work

    • Jessica Obeid
    Lebanon’s Power Sector: Making Reforms Work
    An economic collapse, COVID-19 containment measures, and a subsequent socio-political crisis: Lebanon’s luck dried out all at once and the country can no longer afford the cost of its power sector challenges. The simplistic approach would be to assume that some reforms, mostly technical and financial, are due to take place. The complexity remains that the often overlooked structural issues are rooted in the governance of the sector. Unless this is adequately tackled, and citizens and investors’ trust is secured, reforms are likely to be futile and the fiscal drain is expected to persist.
    Lebanon is embarking toward uncharted territory. The country faces numerous challenges in its confrontation of financial and economic crises, but the reform of the power sector should be one of its priorities. Embarking on the journey of power sector reforms require one of two things: Either political consensus, or the much less desirable unsustainable debt and major economic crisis. As Lebanon recently defaulted on its debt and officially requested the assistance of the IMF, some power sector reforms are essential but face five major risks: 1) The country’s leadership is aiming for quick instead of sustainable results, due to the spreading sense of urgency and having run out of options and foreign currency reserves; 2) the government is unlikely to get a public buy-in for electricity plans in the absence of transparency and accountability, after decades of corruption; 3) the private sector and investors are less likely to commit capital because of the financial crisis; and 4) the local devaluating currency and rising unemployment, make it hard for the government and citizens to foot any major bills, 5) all power sector contracts will be signed in US dollars while collection remain is in the still-devaluation Lebanese pound, maintaining the subsidies even with a tariff hike.
    Lebanon’s power sector: Decades of shortages
    The power sector is characterized by a chronic shortage in electricity supply, high subsidies, and technical and non-technical losses estimated at 36-40%. Lebanon’s power generation relies on inefficient thermal power plants operating on expensive and polluting heavy fuel oil and diesel oil imports. There is not enough power provision: Peak demand is estimated at 3,600MW, which results in a supply shortage of 1,600MW and leads to daily blackouts. Furthermore, the power plants are old and inefficient, and the last one built was commissioned in 1999, 21 years ago.[1] As the shortage of electricity supply has persisted for around three decades and citizens have had to resort to pricey private generators at the cost of approximately $0.30 per kWh, the succeeding governments have not been able to hike the tariff, which has remained subsidized since 1994.
    The regulations have been inconsistent, and the succeeding governments have been cherry-picking which laws to implement. As such, the law 462 issued in 2002 for the establishment of a regulator and the restructure of Electricité du Liban has never been implemented.
    Planning sustainably Lebanon’s power sector is a reflection of the dysfunctional political system built around confessional power sharing and subsequent vested interests.[2] The sector lacks a coherent vision that should be at the core of any regulation or policy. The country’s various governments’ plans have focused on short-term fast actions and temporary power generations, such as power barges, compromising long-term and least-cost planning. The fiscal deficit will persist even with a tariff hike from an average of $0.09 per kWh to an average of $0.144 kWh, until the losses are drastically cut, the fuel is switched to gas, and plants are more efficient. Reaching the lowest cost electricity generation and achieving a tariff reflective of the true cost of electricity are where the majority of power sector reforms in developing countries lag behind. The cost of recovery in Lebanon is high, currently around $0.25-0.27 per kWh. The recovery cost is driven by the elevated technical and non-technical losses including illegal connections, non-billing and non-collection, and the high cost of power generation driven by the quality and quantity of the fuel. In other words, the use of fuel and inefficient, ageing power plants contribute to increasing the recovery costs. These all need to be tackled.
    Experience shows that gradual reforms engaging different stakeholders are better than quick, short-termed, and stealthy reforms.[3] An aspiration for different outcomes should prompt the government to do things differently, such as adopting an inclusive and sustainable approach to reforms. This entails adopting a strategy based on least-cost planning, decreasing political influence, limiting monopoly, promoting decentralization, and involving various actors.
    Setting-up an independent regulator At the core of good governance lie a solid vision and a credible, reliable, and independent regulator that benefits from decision-making autonomy, and is able to bypass political agendas.
    A regulator is neither supposed to be a planning department nor should it be mandated to act as one. The government, however, attempts to do just that by pushing for reducing the mandates of the regulator in favor of the minister’s. The minimum requirements of a functioning regulator are: 1) Financial autonomy not linked to governments budgeting; 2) full licensing mandates and tariff determination that decrease political influence in issuing and canceling licenses and maintaining subsidies; 3) location autonomy; and 4) high qualifications that convey credibility and legitimacy.
    As Lebanon’s power sector already suffers from high political interference, the establishment of a strong independent regulator is a key catalyst to reforms. In fact, several case studies reveal that a major limitation to the implementation of efficient reforms is having weak and non-independent regulatory institutions (such as in Thailand), politically influenced regulators (Ghana), and the inability of the regulator to make independent decisions (Fiji).[4]
    Attracting investors and increasing private sector engagement Past experience in the sector and current actions will dictate future investors’ perception and therefore predict the sector’s trajectory. While investors are currently risk-averse in Lebanon, building for the future necessitates immediate efforts to adopt a solid regulatory framework and transparent procurement processes.
    The country’s economic collapse is reducing funding options for the sector. The government has used this occasion to eliminate competitive auctions even further and is instead pushing for non-transparent direct negotiations. This, along with Lebanon’s weak business climate and track record in non-transparent tenders and contracts, will lower the perception of competition, and may backfire on future projects and the electricity utility restructuring.
    All reforms are inter-linked: The private sector engagement will also depend on the government’s ability to reduce losses and eliminate subsidies, to signal the financial viability and risk reduction in the sector. As this factor is challenging and adds to the political and economic risks of investing in Lebanon, tools promoting transparency, good governance, and solid procurement practices are necessary to reduce the risk premiums and to attract the private sector.
    In the years to come, the government will lack the spending capacity to meet the sector’s investment requirements. At all stages, the performance of the sector will highly depend on the authorities’ ability to engage the private sector and promote a healthy competition, but reforms often fail in addressing that. The World Bank’s global survey on power sector reforms concludes that reforms failed to improve the sector’s underinvestment in most developing countries due to poor performance.[5] Placing investors’ and private sector engagement as a high priority early on is crucial.
    Building citizens’ trust Engaging citizens into the process has been disregarded for decades. Instead, succeeding governments have claimed monopoly over decision-making, with no public consultation, communication, or data dissemination. As the country has gone bankrupt, with the power sector having contributed 43% to the public debt, building citizens’ trust through consultations and promoting transparency is necessary in moving forward.
    In order to keep reforms on track, and to build trust, authorities need to intensify interactions with the population and be transparent.[6] Failure to engage citizens and to build their trust that reforms would be in their own interest will pose a risk of blocking change. For that, launching public consultations, communication campaigns, and making information publicly available are some of the ways to mitigate that risk. A prerequisite for reforms is to secure a buy-in from citizens, but it is only after involving them in the process and gaining their trust that it will be made possible.
    The lower the citizens’ trust is in the state’s ability to provide for them, the lower their incentive to pay for any service provided by the state. This is why subsidies are detrimental to the performance of the sector, and need to be gradually eliminated, even though this is easier planned than implemented even in countries where electricity blackouts are low. The challenge increases when citizens are wary of empty reform promises, which has been the case for decades in Lebanon. In addition to that, poverty is increasing and the share of vulnerable population that requires a safety net through maintaining subsidy or through a targeted social welfare program is skyrocketing. This will lead to less people that are able to afford tariff hikes.
    Ending subsidies will result in tariff hikes. Yet, with, non-technical losses should be reduced, or else the price hike will only increase them. A reduction in non-technical losses requires proper authority, trust, and an overhaul of the billing and collection system. It’s safe to assume these are slow to implement. According to World Bank data of power sector reforms, cost reduction played a bigger role than tariff adjustments in achieving full cost recovery, such as in Vietnam and Peru,[7] especially since tariff restructure are harder to implement. Yet, governments, including Lebanon’s, often under-report the level of non-technical losses and over-estimate their ability to reduce them.
    Lebanon’s perfect storm may lead the way to some immediate actions in the power sector. These would not necessarily fix the sector or end its structural issue. Serious reforms require building the trust of citizens, establishing a clear vision and an independent and credible regulator, planning sustainably, and engaging the private sector through the promoting of transparency, good governance, and solid procurement frameworks. The country still has a long way to go. The government is not yet engaging citizens neither is it publishing documents or data. There is still no vision for the sector and least-cost planning is dismissed. Transparent competitive procurement has been compromised for direct negotiations. Once and when those factors are tackled, this will set the stone to serious reforms, positively impacting the power sector and the economy of the future.

    [1] Obeid, J. 2019. ‘Lebanon: Attempts to Fast-Track Electricity Reforms.’ Castlereagh Associates. Available at: https://castlereagh.net/lebanon-attempts-to-fast-track-electricity-reform/
    [2] Obeid, J. 2019. ‘Lebanon: The 3-Decade Impossible Power Sector Reforms.’ The Institute for International Political Studies. Available at: https://www.ispionline.it/it/pubblicazione/lebanon-3-decade-impossible-power-sector-reforms-25377
    [3] Lee, A. D., and Z. Usman. 2018. ‘Taking Stock of the Political Economy of Power Sector Reforms in Developing Countries.’ Policy Research Working Paper, World Bank Group, p.27. Available at: http://documents.worldbank.org/curated/en/431981531320704737/pdf/WPS8518.pdf
    [4] Jamasb, Nepal, et.al. 2015. ‘A Quarter Century Effort Yet to Come of Age A Survey of Power Sector Reforms in Developing Countries.’
    [5] Ibid.
    [6] Foster, V. and A. Rana. 2019. ‘Rethinking Power Sector Reform in the Developing World.’ Conference Edition, World Bank Group, p.93. Available at: https://www.worldbank.org/en/topic/energy/publication/rethinking-power-sector-reform
    [7] Foster and Rana. 2019. ‘Rethinking Power Sector Reform in the Developing World.’
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