Established in 2001, the Higher Council of Privatization (HCP) is chaired by the President of the Council of Ministers and consist of four permanent members namely the ministers of Finance, Economy and Trade, Justice and Labor. The Minister in charge of a sector, be it Telecommunications, Energy and Water, Health, or Public Works joins the council as a member when the privatization of such particular sector is being discussed. The HCP’s duties are: • propose the general privatization policy and its means of implementation as well as a timetable for the suggested transactions • take the necessary decisions to complete the privatization operations according to the proposed timetable • evaluate the assets and properties of the public entity to be privatized and determine their budget • propose draft laws and decrees required to guarantee the implementation of the privatization programs
The HCP is assisted by experts in economic policy and privatization processes and responsible for the initiation, development and implementation of privatization programs in Lebanon. The HCP aims to promote partnership between the public and private sectors and enhance the involvement of the latter in the provision of public services
Privatization consists of including the private sector in the management and/or ownership of a public utility so as to improve performance, increase efficiency and attain better results. Privatization usually involves services such as telecommunications, power generation and distribution, and water supply. Such partnership between the private and the public sector has shown to be an engine of economic growth through its role in creating jobs, improving services and encouraging entrepreneurship and investments, for the benefit of all.
Privatization will have numerous positive implications and benefits on the local economy and on the Lebanese themselves. Privatization will create thousands of new jobs for young Lebanese, hence encouraging them to stay in the country and not emigrate. It will also encourage more competition between companies leading to lower prices for consumers. What's more, privatization will lead to a better level of services, be it in telecom, with the introduction of the latest technologies such as G3, or in the electricity sector, as Lebanese should finally be able to enjoy a 24/7 supply of power which will free them of the hassles and costs of subscribing to neighborhood generators. Privatization will reduce the financial drains of state-owned-enterprises and will spare the Lebanese of having to subsidize EDL for up to a billion dollars a year! It will also increase the state’s revenues, trim the public debt, reduce the burden of having an inflated public sector, as well as promote free enterprise and domestic investments. By privatizing the government will attract foreign investments to the country, and will develop further the capital markets and the Beirut Stock Exchange. It will also align Lebanon further with the world economy and will give each citizen a chance to own part of a major Lebanese corporation. Examples abound worldwide on the successes of privatization and on how it led to better and more efficient services for consumers, most often at a lower cost. Even locally, one has only to look at Liban Post or Electricité de Zahlé to see how more proficient the private sector is in comparison to the public sector. Most importantly, with privatization, all Lebanese would be treated equally, under the law, with no favoritism or discrimination based on political affiliations or regional location. Moreover, privatization has now become a necessity with the lamentable state in which some of the public entities are in, EDL being a perfect case in point. It’s important to note that privatized entities will still be subject to government supervision and regulations ensuring that consumers’ interest are always a priority and a must.
Privatization has a lot of benefits for the economy, the state, and the Lebanese themselves. Privatization will: • Create thousands of jobs • Secure better salaries and work conditions • Ensure consistent quality services and products • Increase productivity and innovation • Reduce bureaucracy • Increase competition and lower prices in the long run • Reduce the burden of subsidizing unprofitable companies • Increase government revenues • Trim the public debt • Reduce the public sector’s size • Eliminate political meddling in the public sector • Promote free enterprise and domestic investment • Attract foreign investment • Develop the Capital Markets • Promote a dynamic, open market economy • Position Lebanon again as the business center of the region
Privatization most often leads to price reductions as has been the case with the public utilities that have been privatized in Europe, North America, and especially the Middle East. In the case of the mobile sector, privatization will lead to a definite upgrading and improvement in the networks and the services, which will ensure a higher penetration rate, more subscribers, and lower prices in the long run. In fact, even if the prices remain unchanged in the short term, the introduction of a third operator will surely lead to further competition between the companies and thus to lower prices. As for the electricity, once the sector is privatized, its efficiency and management will significantly improve, waste and corruption will be eliminated, and the collection rate will greatly pick up, guaranteeing that each household is paying exactly what it owes, with no regional or social favoritism, and with offenders on the network being diligently penalized. All these factors will surely lead to cost reductions, especially when considering the savings that households will accumulate by not having to pay any monthly subscriptions for their neighborhood power generators as the power will be supplied 24/7. It should also be added that with the improved services, consumers will be getting more value for their money, as at present they pay relatively high prices for both the mobile and the electricity without getting the corresponding value in terms of quality of service.
Privatization can take many forms. The government can choose to keep the ownership of an entity but concede its management to a private company. This is the current situation of the mobile sector with FalDete and MTC managing the service and the government keeping the ownership of the networks and its related assets. Another form of privatization is the private infrastructure development and operation (BOT, BTO, BOO) whereby the private sector builds, finances and operates public infrastructure until the expiry of a pre-determined contract in which the ownership of the entity reverts to the government, or in the case of a BOO, the private sector retains permanent ownership and operates the facility on contract. The most advanced level of privatization being the complete sale of a state enterprise to the private sector which will own and operate the privatized company in full. It should be noted that there are no ideal types of privatization, as each sector has its own particularities and needs.
Three laws related to privatization have been enacted to date in Lebanon. • The general privatization law, Law 228 dated 31/5/2000, sets up the general privatization framework by regulating its operations and defining its terms and fields of implementation. This law requires the enactment of a specific law for each sector to be privatized. As such a law determining the basis of transfer is necessary whenever the government intends to transfer the ownership or the management of a public project to the private sector. Among other things, this law also calls for the establishment of independent monitoring bodies to regulate the sector and enforce the provisions of the law. • The telecommunications law, Law 431 dated 23/7/2002, regulates the telecommunications sector and sets the rules of its transfer to the private sector. Moreover, it provides for the formation of a joint stock company, namely Liban Telecom, by virtue of a decree taken by the Council of Ministers, and grants it a 20-year license for the provision of telecom services. As for privatizing telecom services, the law allows the government within a maximum period of two years following the establishment of Liban Telecom, to sell a maximum of 40% of the company’s shares to an experienced and specialized private investor. The remaining shares would be offered for private allocation at a future date determined by the government who would also fix the percentage to be sold, the share price and the means of disposal. Moreover, the law provides for the establishment of a regulatory authority, whose functions include, among others, encouraging competition and transparency and tariffs monitoring. • The electricity law, Law 462 dated 5/9/2002, regulates the electricity sector based on international practice and authorizes its partial sell-off. This law provides for the establishment of an independent body, the electricity regulatory authority, which will be in charge of regulating and controlling the sector in a transparent fashion. In light of this law, the privatization of the sector is based on the separation of the production, transmission and distribution activities, in anticipation of the creation of commercial public corporations responsible for the production and distribution activities. Such corporations will be initially owned by the government for a potential subsequent sale of a maximum of 40% of their shares to private investors. As for the transmission company, it will remain publicly owned with solely its management transferred to the private sector through a management contract.
Properly structured, the sale of assets is not an abdication of national rights. First, Lebanon's privatization program requires the establishment of a regulatory authority for every sector being privatized. The regulatory authority is in charge of regulating the sector and ensuring that the interests of the public are safeguarded. Second, the buyer does not get eternal right-of-use of the assets it acquires. In fact, it is only allowed the use of those assets for the period of the license it acquires from the regulatory authority.
The mobile sector is currently managed by Fal Dete Telecommunications and MTC based on four year management contracts expiring in June 2008. This form of private management lies at the lower end of private sector involvement and is characterized by no investment undertaking by the manager. The assets are owned by the Government who bought them back from FTML and LibanCell at net book value when the BOT contracts were terminated.
With the termination of the mobile network BOT contracts in September 2002, the ownership of the mobile sector assets reverted to the Republic of Lebanon. This led to the creation of two companies, Mobile Interim Company 1 S.A.L. (MIC1) and Mobile Interim Company 2 S.A.L. (MIC2), to hold the related contracts for the management of the mobile businesses at that time. The shares of MIC1 and MIC2 are registered in the name of two banking institutions acting as fiduciaries for the Republic of Lebanon. Under management contracts with the Republic of Lebanon, FALdete currently manages MIC1 and MTC Liban manages MIC2.
Since current operators are working on a management contract basis, no proper investment is being undertaken, and as a result the level of service is deteriorating and Lebanon, who once was the first country to introduce GSM services to the region, is now lagging behind in terms of services and level of technology. In fact, the rates in Lebanon are some of the highest not only in the region but also the world, while in return the services provided are sub-par, especially with the unavailability of the G3 technology and other services.
On the financial level, although the sector is generating significant revenues, it has become a drag on the economy and its development. Significant economic benefits can be obtained from its privatization, and financial flows to the Government can continue by other means – namely, corporate tax revenues and revenue sharing, as well as the reduction in debt service and subsequent savings on interest payments.
The Government has opted to privatize this sector through the issuance of two 20-year licenses and the concurrent sale of the assets of the two networks.
Privatization Law 228 requires that any sale of state-owned assets takes place through an auction process, which is the case with the current sale of mobile assets. It also requires that a separate law be enacted for the privatization of each sector. In the case of the telecommunications sector, the Legislation and Consultation Commission at the Ministry of Justice has opined that this requirement was satisfied by Law 431, which organizes the telecommunications sector and sets out the rules for its transfer or the transfer of its management, in part or in full, to the private sector.
According to the Telecommunications Law (Law 431), once corporatized, Liban Telecom (the fixed line service provider) will be granted a license (to be issued by the TRA) to provide mobile services. The process of corporatization of Liban Telecom is currently underway. Should it be unduly delayed, the TRA may, if market conditions permit, initiate the process for the issuance of a greenfield mobile license.
Sector employees work for the existing private sector operators (MTC Liban and FALDeTe). It is expected that they be treated according to the terms of their employment contracts in regards to such matters as severance and end of service. It is also expected that new entrants will need the services of these employees and would therefore have a strong interest in renewing their contracts. In fact, increased competition in the industry (including the entrance of a third operator) will lead to higher demand for qualified personnel, as companies will have to compete for a limited pool of talent. That in turn should lead to higher salaries and increased benefits aimed at retaining the experienced and competent personnel as well as more opportunities for advancement and growth with major operators, including better training and skills enhancement.
Even though the Government is not, and could not have been expected to be, responsible for employees of the private sector who entered into employment contracts knowing fully well that their employers have time-limited contracts to operate the networks, the Council of Ministers has guaranteed sector employees their salaries for a period of 18 months following the change of control of the networks. This does not imply a guarantee of the same position within the new companies, but rather a guarantee of the same income for that period.
The HCP is keen on always being transparent and open with the public. However, by divulging the amount that the Government hopes to generate from the sale of the licenses and assets, the HCP would be setting certain expectations among bidders and therefore jeopardizing the opportunity to maximize bids in the competitive auction process.
Furthermore, the value of sector businesses and licenses tends to fluctuate depending on the economic situation of the moment. Therefore, a price that might seem reasonable now might not be so in a few months and vice-versa. In that sense, it would be wise not to speculate on the amount to be generated from the sale.
Finally, privatizing the telecom sector has more benefits than purely the financial gains generated by the sale of the mobile licenses. Among others, privatization will greatly improve the quality of services, will trigger further innovation in the sector, will create new job opportunities, will stimulate the local economy and help trim the public debt, and will encourage further development of Lebanon’s capital markets.
