PRIVATE PARTICIPATION IN MEDITERRANEAN INFRASTRUCTURE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PRIVATE PARTICIPATION IN MEDITERRANEAN INFRASTRUCTURE NEWS Programme on Private Participation in Mediterranean Infrastructure World Bank/European Commission Privatisation Egypt Issue no. 1 January 2002 To promote investment in Egypt after the slowdown caused by the September 11 attacks, the government has implemented a new privatization strategy. The strategy focuses on attracting foreign and domestic funds for investment, transferring the leadership/management of enterprises from the public to the private sector, and breaking down of large companies into smaller units. (Al-Hayat, 16/12/01) Jordan The Jordanian government has prepared a two-year economic priority programme designed to overhaul public services, expand the private sector and encourage foreign investment. The programme is spearheaded by private sector energy and water projects with total planned investment of more than 1 billion USD, including the Disi water conveyance system, the Egypt-Jordan gas pipeline and the Iraq-Jordan oil link. (MEED, 23/11/01 Telecom Israel Cellcom Israel Ltd, Partner Communications, and Pelephone Communications Ltd., won third generation frequency tenders. Partner and Cellcom paid (for the frequencies) 220 million Shekels (49 million USD), while Pelephone paid 225 million Shekels (50 million USD). The Ministry s minimum price had been set at a low of 220 million Shekels, and did not expect more due to the global telecom crisis. (Reuters Business Briefings, 18/12/01) Lebanon Lebanese cellphone firm Libancell said it had reached an agreement in principle with the Lebanese government to defuse a long-running legal battle that had led the government to cancel its operating licence. Cellis, the other cellular operator of which France Telecom owns 70%, has not formally announced whether it will reach an agreement with the government. Lebanon is counting on revenue from the telecoms sector to help handle a crippling public debt, but has been locked in a legal squabble with both of its cellular phone operators over alleged violations of their BOT contracts. The 1/6

2 agreement eliminates an important hurdle to the transition to a new regulatory regime and the auctioning of the two licences. (various sources) Morocco ANRT, the telecom regulatory authority, has overseen the sale of a record-breaking GSM license in 1999 and the privatisation of Maroc Telecom in ANRT saw its independence threatened late last year but the government has now adopted amendments to the Telecommunications law that maintain ANRT s independence. (La Vie Economique and other various sources) Tunisia International operators lining up for Tunisia s first private GSM licence have asked the authorities to extend the closing date for offers to allow more time for consideration. The Telecommunications Ministry has postponed the closing date to 9 February (MEED, 21/12/01 Energy Algeria The Algerian parliament has passed in late December a new legislation allowing private investment into the domestic power generation sector. The law will end the monopoly of state-owned institutions Sonatrach and Sonelgaz over the local power and gas market. The law is subject to the final approval of the upper house. (MEED, 4/01/02 Jordan CMS Cameron McKenna is part of the consortium retained by the Hashemite Kingdom to advise on electricity privatisation policy for the government, and to assess the legal, financial and technical situation of Jordan s electricity companies. The World Bank is funding the activity. (Infrastructure Journal, 11/12/01 The government is expected to decide by the end of December whether to accept the latest financial proposal submitted by Belgium s Tractebel for the Kherbet al-samra independent power project (IPP). The cabinet was scheduled to meet in early December to review plans for the IPP, which will be awarded on a build-own-operate basis. (MEED, 14/12/01 West Bank and Gaza The Gaza independent power project is set to produce its first electricity in mid- January despite the collapse of the US Enron Corporation, a shareholder in the project company, Palestine Electric Company (PEC). (MEED, 14/12/01 Water and Solid Waste Morocco A 25-year water and power concession for the cities of Tangiers and Tetouan was sealed by a group lead by French utility Vivendi Environment for 633 million USD. The consortium named Societé des Eaux et d Electricité du Nord (SEEN) also includes CGE Hydro Quebec (Canada), Somed (Morocco and UAE), and ONA conglomerate (Morocco). (Financial Times, 13/12/01) 2/6

3 Bulletin A technical committee set up by the four members of the MAFTA (Mediterranean Arab Free Trade Area) including Jordan, Egypt, Morocco and Tunisia met in Amman to plan the launch of an economic bloc in early The four countries envisioned a creation of a free trade area amongst them, and have encouraged other Arab states, that are party to free trade agreements with the European Union and signatories of the pan-arab free trade agreements, to join in. (Jordan Times, 30/12/01) The European Union concluded negotiations on the Association Agreement with Algeria on December 19, 2001 and with Lebanon on January 10, (Euromed Synopsis no. 166) Strategy Papers ( ) and Indicative Programmes totalling 2.1 billion of MEDA funding for the period were approved by the European Commission on 27 December, The National Indicative Programmes are for 7 Mediterranean Partners (Algeria, Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia) while the Regional Strategy Paper ( ) and the Regional Indicative Programme ( ) cover the whole Mediterranean region. (Euromed Synopsis no. 166) Recent Trends in Electricity Sector Reforms in the Euro-Mediterranean Area By Daniel Müller Jentsch, Economist, PPMI In April 2001, PPMI published a regional report on energy sector reform, entitled "The Development of Electricity Markets in the Euro-Mediterranean Area Trends and Prospects for Liberalization and Regional Integration". 1 The paper shows that the Southern Mediterranean countries are lagging considerably behind in international reform trends but that several of them have recently launched restructuring efforts. It argues that ongoing electricity reforms in the EU Single Market; the reform experience of other developing regions like Latin America or Eastern Europe; and the instruments of the Euro-Med Partnership could help accelerate the adjustment process in the Southern Mediterranean. To prepare their countries for the opportunities and challenges of the Euro-Med freetrade area, the governments of the Southern Mediterranean countries have launched ambitious programs of economic and social adjustment. Energy sector reforms should be an integral part of this process. The objective is to increase economic efficiency, reduce the burden on government budgets, and attract foreign investment for required capacity expansions. In most of the Mediterranean Partners (MPs), electricity reforms have been initiated but are still at an early stage. 2 The majority of energy utilities remain state-owned, vertically integrated monopolies. Few countries in the southern Mediterranean have established energy regulators and, where they have, these institutions remain weak. Competition is virtually absent from the sector and private participation has been 1 World Bank Technical Paper No The 12 MPs are Cyprus, Malta, Turkey, Morocco, Algeria, Tunisia, Egypt, Jordan, Israel, Lebanon, Syria, and West Bank and Gaza. 3/6

4 confined to independent power plants (IPPs), which tend to be introduced into unreformed sectors. The need for further reform is illustrated by various performance indicators. In Lebanon, the annual deficit of the state-utility amounts to $464 million. Network losses are estimated at 25 percent in Syria and Algeria, and between 15 and 20 percent in Turkey, Egypt, and Morocco. In Egypt, the arrears of the electricity utility (i.e. unpaid bills) stood at $2.7 billion. In Algeria, government subsidies to the utility Sonelgaz amounted to $1 billion in 1998 alone. In several MPs, prices below costs still lead to wasteful over-consumption. Most governments in the region, however, have launched electricity sector reform to tackle these problems. Turkey is fully unbundling the sector in accordance with EU rules, plans to privatise most remaining state-owned assets, and has recently established an independent regulator. Jordan has long had private distribution companies, has more recently created a regulatory authority, has modernized sector legislation, and has tendered its first IPP. Egypt and Lebanon want to introduce greater private participation but hesitate to liberalize the sector. Within the European Union, the restructuring of electricity and gas sectors is in full swing, triggered by two EC directives for electricity and gas. All EU countries have unbundled their sector, the vast majority of countries has created independent regulators, and more than two thirds of the EU electricity market has formally been opened to competition. By the time the Euro-Mediterranean free-trade area is completed around 2010, European energy markets are expected to be fully liberalized, privatised, and integrated across borders. Up to 13 accession candidates are expected to have joined the EU by that time and the enlarged EU Single Market for energy will comprise up to 28 countries, with 500 million consumers. If the MPs want to keep up with these developments and successfully participate in this enormous market, they will have to embrace more ambitious reforms. Sector restructuring should include: (i) the unbundling of the electricity sector into generation, transmission, and distribution; (ii) the introduction of competition in generation; (iii) the establishment of a fully independent regulator to ensure fair network access and to oversee monopolistic activities; and (iv) the privatisation of generation and distribution. Disposals of state-owned assets without prior sector reform, however, should be avoided. Egypt has long been regarded as a model case for the introduction of independent power plants (IPPs) in the region. After four currency devaluations of the Egyptian pound in 2001, however, the government has been left with large contingent liabilities from the long-term power purchasing agreements associated with these projects. It has now cancelled all plans for further IPPs. This mirrors developments in East Asia in the mid-1990s, which led these countries to shift from the IPP-approach to more comprehensive strategies of sector reform, with a strong emphasis on liberalization and regulation. Another MP that runs the risk to privatise without genuine sector reforms is Lebanon. The government has ambitious plans to sell the state-owned utility. Even though it is considering to formally unbundle the sector, it also plans to sell all generation and distribution assets to the same company, which might obtain a management contract for the transmission system. This would amount to the privatisation of a vertically integrated monopoly, which would be in contradiction to international best practice and EU rules. Besides domestic policy reforms, physical interconnections and cross-border regulations need to be strengthened to integrate electricity markets in the region. The potential economic benefits of cross-border integration of electricity markets are significant. In the South-African Power Pool, for instance, the economic benefits have been estimated to amount to up to 20 percent of the market volume. 4/6

5 Two developments in 2001 highlight the potential for more cross-border trade, investment, and competition in the sector. First, the regional MEDA project to study the technical and policy implications of the closure of the Mediterranean Electricity Ring was launched in Second, in December 2001, Spain and Portugal decided to merge their national markets by An expansion of interconnection capacity is underway and the two countries have signed a protocol that foresees the removal of all legal barriers and calls upon their national regulators to develop common rules for the integrated market. After the Nordic Power Pool, between Norway, Sweden, Finland, and Denmark, this will be the second case of full integration of national markets within the EU. Just as the Nordic Pool is expected to be expanded to the emerging economies of Estonia, Latvia, and Lithuania, it is conceivable that the Iberian market will eventually be opened to participation from the Maghreb countries. Algeria and Morocco already participate in the Spanish spot market in electricity and a second interconnection between Morocco and Spain is under construction. Donor assistance for electricity reforms in the MPs is available. The World Bank has a long track-record of providing policy advise and technical assistance for electricity reforms. The European Commission has extensive experience with electricity sector reforms in the EU Single Market and the assistance instruments of the Euro-Med Partnership can be deployed to support the reform efforts of the MPs. Both institutions have successfully combined their respective strengths to help the countries of Eastern and Central Europe reform their energy sectors and could do the same in the southern Mediterranean region. While donor assistance can act as a powerful catalyst, however, it is up to MP governments to decide and implement electricity reforms. The reform needs are substantial, but the conditions for restructuring are excellent. Global sector reforms, the increased momentum towards an EU Single Market in electricity and natural gas, the availability of donor assistance, and the development of the Euro-Mediterranean free-trade area should all facilitate the adjustment process. It is now up to MP governments to develop clear sector strategies and to call upon donors to assist in their implementation. If you wish to know more about the EC/WB publication "The Development of Electricity Markets in the Euro-Mediterranean Area Trends and Prospects for Liberalization and Regional Integration" please contact the PPMI programme (fax no , ppmi@worldbank.org) Upcoming seminars and training PPI The second European Congress on Private Participation in Infrastructure will be held in Frankfurt, Germany, on January 22 to 23, For more information: Transport Ecole Nationale des Ponts et Chaussées and the World Bank Institute Location: Paris, France Privatization and Regulation of Transport Infrastructure and Services Cost: 3, 000 Euro 5/6

6 Duration: 6 days (April 15-19, 2002) Language: French For more information: Regulation and Competition Public Utility Research Center at the University of Florida and the World Bank International Training Programme on Utility Regulation and Strategy Location: Gainesville, Florida (US) Duration: 2 weeks (January 14-25, 2002) Cost: 4, 600 USD (for regulators); 6, 000 USD (for service providers) Language: English For more information: World Bank Institute Access Pricing for Effective Competition in the Telecommunications Sector Location: Dakar, Senegal Duration: 3 days (March 4-6, 2002) Cost: to be determined Language: French For more information: This newsletter is issued on a monthly basis. All material contained in the newsletter reproduces articles and press releases and is intended to provide information on PPIrelated news in the Maghreb and Mashrek regions. All material is reproduced without any endorsement or value judgment on the part of the World Bank, the European Commission or its staff. If you wish to receive additional information or to subscribe/unsubscribe, please contact us at ppmi@worldbank.org or fax no /6