Report - Lebanon s Economic Performance in H1 2011 Executive Summary 2 General Introduction 3 Real Sector 3 Public Finances 7 Monetary Situation 8 Financial Sector 9 Foreign Sector 10 Economic Prospects 11 Study - The Importance of Partnership between the Public and Private Sectors for the Lebanese Economy Introduction 12 Definition of Partnership and Its Importance 12 Forms of PPP 13 The Challenges Facing PPP 13 The Characteristics and Advantages of PPP 14 PPP in Lebanon 14 Conclusions and Recommendations 15
Lebanon s Economic Performance in H1 2011 Executive Summary The Lebanese economy has shown a slowdown in the first half of 2011 relative to the same period of 2010, due to the regional turmoil in several Arab countries, besides the current uncomfortable political situation in the country. Lebanon s major economic indicators are presented in the following: Construction permits increased by 4.6%. The number of real-estate sales transactions decreased by 18.6%. The number of tourists decreased by 19.7%. The number of passengers at the Hariri International Airport (HIA) declined by 0.4%. The amount of cleared checks increased by 2.87%. Fiscal deficit increased by 40.7%. Net public debt increased by 3.3%. Inflation rose by 6%. The Central Bank of Lebanon s gross FX assets decreased by 1.4% to USD 29.86 billion. The banking sector s total assets grew by 11.3% to USD 135.4 billion. Market capitalization of Beirut Stock Exchange (BSE) fell by 11.0% to USD 9.78 billion. The trade deficit widened by 9.9%. Capital inflows dropped by 11.5% to USD 6.63 billion. The balance of payments recorded a deficit of USD 479 million. Economic growth is forecasted at 1.8% in 2011 according to the Economist Intelligence Unit (EIU). 2
I. General Introduction II. Real Sector The Lebanese economy has witnessed a relative slowdown in its economic activity during the first half of 2011 relative to the corresponding period last year. This is shown by the realized drop in most of its main indicators of the real sector, such as number of property sales (-18.6%), number of tourists (-19.7%), number of passengers via the HIA (-0.4%), number of ships via Beirut port (-7.6%), customs receipts (-21.8%), hotel occupancy (-3.1%), car sales (-4.3%), and SMEs loans (-9.4%). 1- Construction and Real Estate Based on the figures released by the Order of Engineers of Beirut and Tripoli, the construction permits totaled 8.81 million square meters in the first half of 2011, up by 4.6% from 8.43 million square meters in the same period of the previous year. Mount Lebanon accounted for 51.1% of the total construction permits, followed by South Lebanon with 16.5%, North Lebanon with 16.3%, the Beirut with 8.8% and Bekaa with 7.3%. In parallel, inflation rose by 6% during the same period, coupled by a surging fiscal deficit (40.7%), net public debt (3.3%), and trade deficit (9.9%). Also, the total trading volume at BSE fell down by 48.8%, coupled by lower capital inflows (-11.5%), and a deficit of USD 479 million in the balance of payments. Moreover, the Central Bank s foreign-currency denominated assets decreased by 1.4% to USD 29.86 billion at end-june 2011, while consolidated assets of the banking sector grew by 11.3% to USD 135.4 billion during the same period. 1 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 - Construction Permits (Square meters, million) - 8.43 8.81 6.26 5.12 The EIU forecasts real GDP growth of Lebanon at nearly 1.8% in 2011, with an inflation rate of an annual average of 5.5%. On the other hand, the number of sales transactions has decreased by 18.6%, to reach an amount of 37,386 transactions in the first half of 2011, as compared to 45,928 transactions in the same period of 2010. - Number of Sales Transactions - 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 45,928 37,089 37,386 33,380 3
2- Tourism According to the figures released by the Ministry of Tourism, the number of tourists visiting Lebanon decreased by 19.7% in the first half of 2011 relative to the same period of 2010 to reach 774,214 as compared to 964,067 in the same period of 2010. As for the distribution of tourists by countries, it shows that the greater part of visitors were from Arab countries with 31.9% of aggregate visitors, followed by visitors from Europe with 28.5%, visitors from Asia with 19.3%, visitors from the Americas with 13.5%, visitors from Africa with 3.6%, and visitors from Oceania with 3.2%. 3,000,000 2,500,000 2,409,359 2,070,819 2,400,872 2,000,000 1,500,000 1,560,527 1,000,000 500,000 0 4- Beirut Port - Passengers at HIA - 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 - Number of Tourists - 964,067 761,415 774,214 473,517 Figures released by the Beirut Port Authority show that the total tonnage of loaded and unloaded merchandise decreased by 1.3% in the first half of 2011 relative to the same period of 2010, to reach 3.24 million tons in June 2011. The number of containers declined by 3.1% in the first half of 2011 as compared to the same period of 2010, to reach 289,554 containers. Also the total number of ships reached 1,087 in the first half of 2011, down by 6.6% as compared to the same period of 2010. Whereas, total transshipments surged by 22% as compared to the same period of 2010, to reach 211,495 containers in the first half of 2011. 3- Airport Activity - Number of Ships at Beirut Port - Based on the figures released by the Hariri International Airport (HIA), the number of airport passengers amounted to 2,400,872 in the first half of 2011, a decrease of 0.4% year-on-year. As for the distribution of passengers from different countries, passengers from the UAE accounted for 21.1% of total passengers, followed by those from Saudi Arabia with 12.6%, France with 9.4% and Kuwait with 8.3%. 1,250 1,200 1,150 1,100 1,050 1,000 950 900 1,200 1,164 1,087 1,012 The total number of flights reached 29,600 in the first half of 2011, a decrease of 3.2% year-on-year. 5. Customs Receipts Based on the figures released by the customs directorate, customs revenues reached USD 741.20 million in the first half of 2011, down 21.8% from the same period of 2010. 4
1,00 90 80 70 60 50 40 30 20 10 - Customs Receipts (USD, million) - 438.00 876.00 947.90 741.20 The Port of Beirut continues to be the main point of customs revenues, accounting for 86.30% of the total, followed by the Hariri International Airport, the Port of Tripoli, and the Masnaa crossing point with 7.20%, 3.20%, and 2.30% respectively. Overall customs receipts reached USD 1.4 billion in the first half of 2011 when including revenues from the value-added tax that amounted to USD 705 million over that period of time. - Points of Customs Receipts - - Evolution of Clearing Activity (USD, billion) - 35.00 3 25.00 2 15.00 1 5.00 25.18 19.93 5.25 7- Hotel Occupancy 33.15 26.10 According to the survey conducted by STR Global concerning the occupancy rate at hotels, it decreased to reach 64.50% in the first half of 2011, a decrease of 3.1% as compared to the same period last year. Furthermore, revenues per available room decreased by 15.1% as compared to the same period of 2010, reaching a value of USD 136 in the same said period. 7.66 34.10 25.74 H1 2009 H1 2010 H1 2011 Total Amount In FX In LBP 8.36 - Hotels Activity Indicators - 86.30% 2.30% 3.20% 7.20% 165.00 16 155.00 15 145.00 14 135.00 13 157.20 151.30 63.00% 73.00% 160.10 67.60% 64.50% 136.00 74.00% 72.00% 7% 68.00% 66.00% 64.00% 62.00% 125.00 6% 6- Clearing Activity 12 58.00% Based on the figures released by the Lebanese Association of Banks, the value of cleared checks increased by 2.9% as compared to the same period of 2010, to reach USD 34.10 billion in the first half of 2011. The value of cleared checks in Lebanese pounds rose by 9.12% to the equivalent of USD 8.36 billion, while the value of cleared checks in foreign currencies decreased by 1.39% to USD 25.74 billion. The dollarization rate of cleared checks grew from 72.98% to 79.76% year-on-year. 8- Cars Sales Revenues per Room (USD) Hotel Occupancy Based on the figures released by the Association of Automobile Importers in Lebanon, the number of cars sold during the first half of 2011, reached 15,211 new cars, constituting a decrease of 4.3% from the 15,892 cars sold in the same period of 2010. 5
16,500 16,000 15,500 15,000 - Number of Cars Sold - 15,892 15,211 reached 593 in the said period, as compared to 748 in the same period of previous year, a decrease of 20.7%. Whereas, the average loan size increased by 14.9% to reach USD 135,820 in the first half of 2011, as compared to USD 118,172 in the same period of the previous year. 14,500 14,000 14,222 14,691 - Number of Kafalat Loan Guarantees - 13,500 13,000 9- Kafalat Loan Guarantees Based on the figures released by the Kafalat corporation, loans under the guarantee of Kafalat has decreased by 9.4% in the first half of 2011, reaching an amount of USD 80.5 million, as compared to USD 88.8 million in the same period of 2010. The number of loan guarantees 800 700 600 500 400 300 200 100 0 748 593 484 499 Real Sector s Indicators Indicators H1 2011 H1 2010 Variation Construction permits (Square meters, million) 8.81 8.43 4.6% Sales transactions 37,386 45,928-18.6% Number of tourists 774,214 964,067-19.7% Number of passengers at HIA 2,400,872 2,409,359-0.4% Number of containers at Beirut Port 289,554 298,817-3.1% Customs revenues (USD, million) 741.20 947.90-21.8% Cleared checks (USD, billion) 34.10 33.15 2.9% Hotel occupancy rate (%) 64.50 67.60-3.1% Number of car sales 15,211 15,892-4.3% Number of Kafalat guarantees 593 748-20.7% Sources: Official Departments 6
III. Public Finances 1. Fiscal Deficit According to the figures released by the Ministry of Finance, the fiscal deficit has increased by 40.7% as compared the first five months of 2010, to reach an amount of USD 1.21 billion in the same period of 2011. Overall government revenues which include budget and Treasury receipts, decreased by 0.3% relative to the same period of 2010, to reach USD 3.56 billion in the first five months of 2011. Budget revenues increased by 1% to reach USD 3.36 billion due to the increase in tax revenues. Total tax revenues increased by 6%, to reach USD 3 billion. While on the spending side, total public expenditures, which include budgetary and Treasury spending, increased by a yearly 7.6% in the first five months of 2011 to reach USD 4.77 billion, caused mainly by a rise of 10% in budgetary expenditures. 6.00 5.00 4.00 3.00 2.00 1.00-1.00-2.00-3.00 - Public Finance Indicators (USD, billion) - 2.11 4.54 4.21 5.80 4.43 3.57 (0.86) (1.59) (1.21) (2.43) 5M 2008 5M 2009 5M 2010 5M 2011 Interest payments on domestic and foreign debt decreased by 1.8% as compared to the same period of 3.56 4.77 Government Revenues Government Expenditures Fiscal Deficit Public Finances Indicators 2010, to reach a total of USD 1.6 billion in the first five months of 2011. When excluding debt service, the level of the primary balance registered a cumulative surplus of USD 873 million in the first five months of 2011, as compared to a surplus of USD 1 billion in the same period of 2010. 2. Public Debt Based on the figures issued by the Ministry of Finance, the gross public debt reached USD 52.52 billion at the end of June 2011, constituting an increase of 2.9% from June 2010. - Gross Public Debt (USD, billion) - 6 5 4 3 2 1 43.20 47.80 51.02 52.52 Domestic debt increased by 5.53% to USD 31.81 billion, while external debt decreased by 0.76% annually to USD 20.71 billion. Local currency debt accounted for 57.38% of gross public debt at end-june 2011 compared to 60.26% a year earlier, while foreign currency denominated debt represented 42.62% of the total at the end of June 2011 relative to 39.74% a year earlier. Net public debt, which excludes the public sector s deposits at the Central Bank of Lebanon and at commercial banks from overall debt figures, increased annually by 3.3% to USD 45.58 billion. Indicators st five months 1 st five months Variation 2011 2010 Public revenues (USD, billion) 3.56 3.57-0.3% Public expenditures (USD, billion) 4.77 4.43 7.6% Deficit (USD, billion) 1.21 0.86 40.7% Deficit /expenditures (%) 25.30 19.50 5.8% Gross public indebtedness (USD, billion) - 1 st six months 52.52 51.02 2.9% Net public debt (USD, billion) - 1 st six months 45.58 44.14 3.3% Sources: Ministry of Finance and Central Bank of Lebanon 7
IV. Monetary Situation 1. Money Supply Based on the data issued by the Central Bank of Lebanon, Money supply (M3) expanded broadly to reach USD 91.80 billion over the first half of 2011, an increase of USD 6.84 billion or 8.1% as compared to its level during the corresponding period of 2010. This resulted from an increase in local currency denominated time deposits of USD 300 million, a rise in foreign currency deposits of USD 5.93 billion, and a surge in money supply (M1) of USD 610 million. 10 9 8 7 6 5 4 3 2 1 61.58 2. Consumer Prices - Money Supply (M3) (USD, billion) - 70.52 84.96 91.80 Based on the figures issued by the Central Administration of Statistics, inflation rose by 6% in the first half of 2011. This is due to the increase in prices of most commodities in the Lebanese market, such as prices of clothing and footwear, which increased by 21.1%, followed by prices of water & fuels (13.1%), food and beverages (7.6%), education (6.7%), prices at restaurants & hotels (6%), and transportation (5.8%). Monetary Situation s Indicators 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% % - Consumer Price Index - 5.20% 6.00% 4.50% 3.47% 3. Central Bank Foreign Assets According to the figures released by the Central Bank of Lebanon, its balance sheet reached USD 66.12 billion at the end of the first half of 2011 compared to USD 58.23 billion in the same period of 2010. Assets in foreign currencies decreased by 1.5% to reach USD 29.86 billion, as compared to USD 30.30 billion in the same period of 2010. Its gold reserves increased by 21.5% from its value in the same period of 2010, to reach a value of USD 13.93 billion in the first half of 2011. Also deposits of the financial sector rose by 11.3% in the first half of 2011, to USD 45.2 billion due to capital inflows into the banking sector. - Central Bank s Indicators (USD, billion) - 7 6 5 4 3 2 1 36.50 19.70 8.03 47.20 23.50 8.66 58.23 30.30 11.47 66.12 29.86 13.93 Balance Sheet FX Reserves Gold Reserves Indicators H1 2011 H1 2010 Variation USD/LBP exchange rate 1,507.5 1,507.5 0.0% BDL assets in FX (USD, billion) 29.86 30.30-1.5% BDL gold reserves (USD, billion) 13.93 11.47 21.5% Money supply M3 (USD, billion) 91.80 84.96 8.1% Inflation rate (%) 6.00 4.50 1.5% Sources: Central Bank of Lebanon and Lebanese Association of Banks 8
V. Financial Sector: 1. Banking Sector: Based on the figures released by the Central Bank of Lebanon, the banking sector s total assets reached USD 135.40 billion in the first half of 2011, an increase of 11.4% as compared to the same period of 2010. Private sector deposits have increased by 11.3% from the same period of 2010, to reach USD 111.45 billion. Deposits in Lebanese pounds declined by 1.22% from the same period of 2010, to reach USD 37.05 billion, while deposits in foreign currencies increased by 18.87% from the same period of 2010, to reach USD 49.35 billion. Nonresident deposits had increased by 18.99% from the same period of 2010, to reach USD 19.9 billion. The dollarization rate of deposits increased by 4.23% as compared to the same period of 2010, to reach 66.77% at end-june 2011. Further, loans to private sector have increased by 17.5% in the first half of 2011 as compared to the same period of 2010, to reach USD 37.25 billion. Lending in Lebanese pounds increased by 34.5% in the first half of 2011 to reach USD 7.72 billion as compared to USD 5.74 billion in the same period of 2010. While lending in US dollars increased by 13.7% in the first half of 2011to reach USD 19.58 million as compared to USD 17.22 million in the same period of 2010. The ratio of private sector loans to deposits increased from 1.7% in the first half of 2010 to 33.42% in the first half of 2011. The banks aggregate capital base has increased by 15.7% in the first half of 2011 to reach USD 10.35 billion. 34.00% 33.00% - Loans to Deposits Ratio - 33.42% - Bank Assets and Deposists (USD, billion) - 14 135.40 121.59 12 111.45 101.10 10 91.70 100.10 85.80 8 77.80 6 4 2 32.00% 31.00% 3% 29.00% 28.00% 27.00% 31.34% 31.67% 29.50% Total Assets Total Deposits Banking Sector s Indicators Indicators H1 2011 H1 2010 Variation Total assets (USD, billion) 135.40 121.59 11.4% Total deposits (USD, billion) 111.45 100.10 11.3% Total loans (USD, billion) 37.25 31.7 17.5% Ratio of private sector s loans to deposits (%) 33.42 31.67 1.7% Banks capital base (USD, billion) 10.35 8.94 15.7% Sources: Central Bank of Lebanon and Lebanese Association of Banks 9
2. Capital Market Figures released by the Beirut Stock Exchange indicate that the total trading volume decreased by 48.8% in the first half of 2011, as compared to the corresponding period of 2010, to reach 53.17 million shares. While aggregate turnover declined by 76.7% to reach an amount of USD 340.52 million. Market capitalization fell by 11.0% to USD 9.78 billion, of which 58.22% was in banking stocks and 40.93% in real estate stocks. The market liquidity ratio decreased to 1.2%, as compared to 8.90% for the same period of 2010. 18.00 16.00 14.00 12.00 1 8.00 6.00 4.00 2.00 16.14 1.50% - Stock Market Activity - 11.30 2.20% 10.99 8.90% 9.78 1.20% Market Capitalization (USD, billion) Market Liquidity 1% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% % The average daily traded value for the period decreased by 48.4% to USD 443,042 as compared to an average daily value of USD 858,209 in the same said period. BSE Indicators Indicators H1 2011 H1 2010 Variation Market capitalization (USD, billion) 9.78 10.99-11.0% Total trading value (Shares, million) 53.17 103.84-48.8% Aggregate turnover (USD, million) 340.52 1,460-76.7% Average daily value (USD, thousand) 443,042 858,209-48.4% Sources: BSE and Central Bank of Lebanon - External Sector Indicators (USD, billion) - VI. Foreign Sector 1. Foreign Trade According to figures issued by the Higher Customs Council, imports increased by 7.5% to reach USD 9.22 billion in the first half of 2011, while exports increased by 0.1% to reach USD 2.11 billion in the same period, leading to an increase of 9.9% in trade deficit to reach USD 7.11 billion. 1 8.00 6.00 4.00 2.00-2.00-4.00-6.00-8.00 8.58 9.22 7.83 6.30 1.74 (4.56) 1.69 2.11 2.11 (6.14) (6.47) (7.11) mports Exports Trade Deficit The main sources of imports are Italy with 10% of total imports, followed by the United States of America (9%), China (8%), France (8%), and Germany (6%). While the main sources of exports are Switzerland with 10% of total exports, followed by UAE (8%), Saudi Arabia (8%), Turkey (7%), Iraq (6%), and Syria (5%). 10
2. Capital Inflows Capital inflows declined by 11.5% to reach an amount of USD 6.63 billion, due to the existing regional turmoil that did not yet benefit the Lebanese tourism and financial sector, as tourists spending constitutes a major portion of financial inflows. 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 5.61 - Financial Inflows (USD, billion) - 8.24 7.49 Foreign Sector s Indicators 6.63 3. Balance of Payments Based on the figures issued by the Central Bank of Lebanon, Lebanon s balance of payments posted a deficit of USD 479 million in the first half of 2011 compared to a surplus of USD 1,313 million in the same period last year. This cumulative deficit over the first half of 2011 was caused by a deficit of USD 444.1 million in the Central Bank of Lebanon s net foreign assets and a deficit of USD 35 million in those of banks and financial institutions. 2500 2000 1500 1000 500 0-500 - Balance of Payments (USD, million) - 82 2101 1313 (479) Indicators H1 2011 H1 2010 Variation Trade deficit (USD, billion) 7.11 6.47 9.9% Exports (USD, billion) 2.110 2.107 0.1% Imports (USD, billion) 9.22 8.58 7.5% Capital inflows (USD, billion) 6.63 7.49-11.5% Balance of payments (USD, million) -479 1,313-136.5% Sources: Higher Customs Council and Central Bank of Lebanon VII. Economic Prospects The EIU revised Lebanon s real GDP growth to 1.8%, down from 7.5 % in 2010, according to its latest country report. This is due to the current turmoil in the region, and Lebanon s high dependence on the services sector that highly relies on political stability in the region. The report showed that private consumption would be slower than in 2007-2010, and businesses would be less likely to invest in expanding their operations given weaker consumer confidence in the economy. Moreover, Government spending would be a minimal contributor to growth as the political impasse is likely to mean a budget for this year would not be passed quickly. The report indicated that inflation is forecasted to rise to an annual average of 5.5% in 2011-12 as international commodity prices, particularly for oil and food, which increased significantly. Inflation rose to an average of 4% in 2010. 11
The Importance of Partnership between the Public and Private Sectors for the Lebanese Economy Introduction Partnership between the public and private sectors (PPP) can be defined as a contract between a party from the public sector and another party from the private sector, in which the last party offers a public service or project, on the basis of sharing financial, technical and operational risks in the project with the public party. This is one of the main aspects of this partnership, in addition to identifying the «Production Specifications». This definition of partnership on the basis of risk sharing fits the public objectives in Lebanon, where this aspect determines the partnership system as a mid-distance between the contract s management system that does not involve risk transfer to the private sector on one hand, and privatization which includes transfer of all risks to the private sector on the other hand. This study also presents some projects that can be implemented through this partnership system in Lebanon, according to the draft-law available today at the Parliament, including: the thermal plants for electricity production, renewable energy plants, dams, roads, bridges, railways, ports, airports, garages, schools, libraries, hospitals, shelters for the elderly, sports stadiums, tourist complexes, conference palaces, natural reserves, prisons, barracks, fire stations, treatment plants, solid waste treatment plants, sanitation plants and other basic facilities. Definition of Partnership and Its Importance The concept of partnership between the public and private sectors can be defined as a contractual agreement between the public and private sectors, with clear objectives, which is related to the contribution of the private sector in maintaining, updating, or creating assets of a public utility, in order to provide services to citizens. Previously such a service was provided by the government directly to the people. The advantage of this partnership is the re-distribution of roles between the public and private sectors, where the public sector is responsible for formulating strategies and monitoring the economic, technical and professional performance of economic sectors, while the private sector is responsible for the operation, management, and dealing with the public targeting the enhancement of the performance of the services entrusted to it. The concept of partnership is different from privatization, as privatization is the process of restructuring the enterprises owned by the public sector or a partnership with the private sector to implement specific investment projects by following any of the methods mentioned in the law. While the partnership is a relatively long-term contractual agreement between the public and private sectors in order to provide a public service, where risks arising from the project are carried by the capable party to bear such risks and to be financed through private funding. Comparison between Partnership and Privatization Partnership Privatization Assets ownership Public Private Risk bearing Public and Private Private Product specifications Public Private Responsibility towards the public Public Private 12
The partnership between the public and private sectors has many objectives such as: Adjusting the economic situation. Achieving high growth rates by strengthening the role of the private sector in national economic activity. Alleviating the financial burden on the government, especially in infrastructure projects. Creating new job opportunities. Improving the public services provided by the government, by attracting investments of the private sector. Reducing the investment risk of the government. Efficient Management and utilization of economic projects using the latest techniques. Forms of PPP Forms of partnership differ from one project to another, because the partnership of each project has a different objective, in addition to the different nature of the project within the various sectors such as transportation, water, electricity, public transport, communications and mail. There are also some forms of partnership that may suit one country, but are unsuitable for another country. As a result, partners may choose to form a partnership from the following: Management Contract: It is a commitment contract where the public sector transfers the burden to operate and maintain the facility to the private sector for a limited time in exchange for a determined and fixed fee. The public sector chooses these contracts when it is hard to increase the price of providing the service for social and political reasons, or due to the nature of the facility. The ownership of assets and invested capital is the sole responsibility of the public sector. Service Contract: The private partner is responsible for funding or renewal of equipment, and expanding it in order to be able to perform the service. This party will get back its dues from the proceeds of this service or from the fees collected by the beneficiaries. Leasing Contracts: It is a contract whereby the assets of the facility are leased to the private sector for a limited period, which in turn will bear the burden of operation and maintenance of the facility during the lease term. It will also take a part of the business risk associated with operation of the facility. This contract is used when the facility needs an enhancement of the efficiency of operation, but the burden of financing any expansion remains a responsibility of the public sector. BOT Contracts: The private partner finances and completes the new project, and then it manages and operates this project, and receives total value from its proceedings. After the end of the contract, the ownership of the project will be transferred to the public partner. There are several forms of contracts for this type of partnership based on the different details between the public and private sectors. Including: The private sector creates the project to exploit and operate for a specific time and transfers it to the public sector at the end of this term (BOT: Build-Operate-Transfer). The private sector establishes the project and gives up ownership of the public sector while retaining the right to exploit and operate it for a specific time period (BTO: Build-Transfer-Operate). The private sector creates, acquires, exploits and operates the project on its own, and it keeps ownership (BOO: Build-Own-Operate). The private sector creates, acquires, exploits and operates the project, but it transfers of ownership of the project to the public sector (BOOT: Build-Own- Operate-Transfer). The private sector rehabilitates and operates the project, but it returns it back to the public sector (ROT: Rehabilitate-Operate-Transfer). Build - Own - Operate: the private partner in this case builds and operates the public facility without transferring its ownership to the concerned public partner, but rather keeps its ownership (BOO: Build- Own-Operate). The Challenges Facing PPP The Political Challenges: These challenges arise from the political situation of the host country, and the stability level in a particular country (nationalization and confiscation). Economic Challenges: - Raising the tax rate. - Fluctuation of the local currency which represents a major concern for investors. - Feasibility and economic cost of the project. - Risks facing the project. - Lack of liquidity. 13
Cultural and Social Challenges: These might arise after managing and developing the project in an inconsistent manner with the culture of the community, which will be rejected by the community given the existence of some inputs that may not be acceptable in that region. Also the applications and services may be inconsistent in this area (religion, community culture). Environmental Challenges: These challenges arise when the project causes environmental damages given its nature, and the high cost to develop preventive measures. This may lead the project to breach the legislation and laws that protect the environment. As a consequence, thus the project will be subject to large administrative and financial penalties that may lead to its shutdown. The Characteristics and Advantages of PPP Partnership has many characteristics and advantages that contribute to its success and increase the importance of its application in developing societies, and thus it leads to the mutual benefit of both the public and private sectors. Characteristics of Partnership: Mutual convergence and cooperation, which means the agreement on minimum mutual references that allow understanding and recognition of the higher interest of the contracting parties. Reciprocal relations between dealers. Dynamism in achieving common goals. It is a long-or medium-term agreement between two parties, one national and the other foreign to practice a particular activity in the host country. The national party might be a public or private partner. Partnership isn t only to provide a part of the capital, but it can be done through providing expertise or transfer of technology or knowledge. Each party must have the right to manage the project (joint management), and to converge and cooperate based on trust and risk-sharing in order to achieve common goals and interests. Objectives of partners must be met, at least in the field of activity under cooperation, which should lead to the integration, and similar treatment based on contributions of partners and customers. Coordinating decisions and practices related to the activity under cooperation. Advantages offered by the partnership: Exchange of experiences and technology between head companies in host countries and those arising in various branches in foreign countries. Gaining more experience concerning the conditions of domestic and foreign markets through exports and direct investment. Increasing investment opportunities of national savings and capital, when utilized in the foreign project. Encouraging local individuals and investors to invest their money inside their home countries, as the joint venture strives to achieve the objectives of the national economy. Reducing the burden on the balance of payments that will reduce capital transfers abroad in the form of dividends only to the share of the foreign partner, in case the joint venture s capital was mainly based on national savings. Raising the country s export capacity, reducing imports and providing job opportunities. Encouraging local participation besides the foreign partner, which is a guarantee for the latter and to minimize the risk. Facilitating the entrance to local markets and access to raw materials, patents, innovations and cheap labor. Getting privileges and preferential measures in these countries, this cannot be acquired in their countries of origin. Production costs are low. Technology transfer, conversion methods of management and access to finance. PPP in Lebanon Based on resolution of the Council of Ministers No. 2 on 25/06/2007, a committee of the Higher Council for Privatization accomplished a PPP draft law due to the growing needs of the Lebanese economy. These include modernizing its infrastructure, involving the private sector in the economic life and benefiting from its practical experience on one hand, and gaining investments for the modernization and development of public facilities on the other hand. The highlighted provisions in the PPP draft law are listed as follows: Joint ventures can be described as the funding, phases 14
of construction, renovation, rehabilitation, equipping and maintenance, including the investment and management of economic projects of public benefit. This should be done under a contract of partnership between a public entity (state, municipalities or a federation of municipalities) and the company executing the project. Identifying projects in accordance with the requirements of public interest and the need for it in public services supported by economic feasibility studies. This, in addition to explaining the advantages that require implementation via partnership. The Council of Ministers is the body authorized to determine the basis of the feasibility of projects economically and technically, besides the related procedures under the decrees based on the proposal of the President of the Council. This besides the rules for selecting the company or group of companies which win the project (private partner) on the basics of control on implementation (the executing company). Broad powers of the Higher Council for Privatization include: - Management of partner selection procedures based on transparency and competition. - Receiving projects and related technical and economic feasibility studies and contracts in collaboration with the concerned public party. - Follow-up of the implementation and performance evaluation. - Raising reports to the public party and to the Cabinet when needed. - Preparing annual reports to the Cabinet about the progress of work coupled with suggestions. - The use of local and international consultants and auditing firms to complete any assigned job. - The final approval of the project and the partnership contract is the responsibility of the Council of Ministers. The Council must coordinate with the Ministry of Finance in relation to the impact of the project on the general budget. The company or companies that win the project (private partner) should establish an executing company, which is a joint stock company subject to the Trade Act and is exempted from the application of the provisions of Articles 78 and 144, 173. Moreover the executing company is not subject to the control of the Audit Bureau. The partnership contract is one of the most important contents of the project, which specifies the scope of the executing company, its fees, as well as common risks, guarantees, and the money and public property that are placed «contrary to any other text for the duration of the contract at the disposal of the executing company», and the duration of the project and its termination and so on. The maximum duration of the contract is 35-years. The expenses of the project are covered by the State s general budget. The company which wins the project or the conglomerate of companies (private partner) as well as the executing company is allowed to benefit from incentives of IDAL. The Government can authorize the implementing company to collect the fees and royalties belonging to the project, on behalf of the public partner and for its account. The PPP system should meet the needs to develop the infrastructure in Lebanon and the establishment and modernization of public facilities to provide basic services to the citizens with the best quality and the least cost. The sectors that have opportunities for partnership between public and private sectors are as follows: - The electricity sector. - The water sector. - Services of the municipality. - Public transportation. - Health care. - Education. - Tourism. Conclusions and Recommendations The new version of the partnership law in Lebanon constitutes a general framework for a broad partnership concept between the public and private sectors (BOOT, BOT, BOO, direct investment for the public partner in the company... etc.). It determines the details of establishing this partnership, noting the clear differentiation between the concept of privatization and the concept of partnership. Article IX (in paragraphs 9 and 10) emphasizes the process of transferring the project to the public partner after the expiration of the partnership contract (35 years). So here the partnership between the public and private sectors is not privatization, but rather it is a process which comprises the right to benefit of some sort of a temporary ownership of the joint projects, during the contract s term, besides the supervision over production and marketing. The privatization process, on the other 15
hand, entails a transfer of ownership of a public utility to the private sector. In the latter case, it comprises the right to benefit it from such ownership, besides marketing its services and products in line with ensuring the economic return against the invested capital. In order to ensure that: There are no compromises on the private sector s constants basics within the executing company, knowing that the Lebanese market is fully open to this sector; and for a real partnership between the public and private sectors to emerge, in the sense that the public partner and private partner are the direct and the only partners in the executing company, it is important to pay attention to the following basic considerations to be very clear and without any ambiguity: The role of the Higher Council for Privatization is to manage the partnership contract and review the implementation according to the tasks listed by the draft law. The public partner has to participate in managing the executing company by the concepts, principles and mentality of the private sector. The private sector involved in the executing company has to take into account that this company s work is done in line with its concepts and practices, and in cooperation with the public partner when managing the executing company in a cost-effective way to ensure the desired economic and financial return that maintains a successful business of this company. Non-Lebanese investors (both Arab and foreign) and financial investment companies might enter into the executing company, besides the public partner. Here the following points could be raised: What are the required profile of investors of different categories and their shares in the executing company? Can the executing company be placed on the stock exchange to go public? What is the public partner s share in the company upon its creation? Will the ownerships for the interest of the executing company be at the expense of the public sector or the company? There is a remark in Article V of the draft law which states that the Higher Council for Privatization evaluates the technical and economic feasibility of the projects submitted by the public partner and the terms of reference list. Here, the following question could be raised: Has the executing company the right to express an opinion on the economic and technical feasibility studies set by the Higher Council for Privatization? It is important to emphasize here the necessity of taking the private sector s opinion in these studies, given the fact that it is a key partner in this company that it is managed according to its principles and mentality. The draft law explains in its Article XIII the right of the main partner and the executing company to benefit from the provisions of Law No. (360) issued in the year 2001 which is related to promoting investments in Lebanon. It may be useful here to review the incentives and facilities granted under this law, to fit well with the size of projects intended for implementation by the companies established under the draft law, and the quality of its work and strategic importance on the economic, social and financial levels. It is also important to determine the quality and nature of the facilities and incentives to be granted to the non- Lebanese partner entering into the company such as the work permits, the proportion of imported labor, and others, where the law didn t cover these issues. It is important to emphasize that the executing company has to finance its operations and activities according to the commercial terms prevailing in the banking and financial market. Moreover, it is needless to emphasize here that the banking sector will finance the company if it is operating according to the concepts and principles of the private sector and within the framework of policies and strategies of banks operating in Lebanon. It may be useful and necessary to form a Commission within the Council of Ministers, headed by President of the Council, to prioritize projects to be implemented in the context of the new partnership between the public and private sectors. This Commission could be delegated by the Higher Council for Privatization to shape mechanisms for implementing partnership contracts for venture companies according to the draft law. This includes the preparation of feasibility studies, terms of reference, choosing the private partner, and the preparation of follow-up reports and others in coordination with the public partner. It is also vital to set in place an appropriate and an effective legal framework to handle on all issues of this partnership between the public and private sectors. The Economic Bulletin is a research document that is owned and published by SAL. This bulletin provides the reader with an overview of the most recent developments in the Lebanese economy and the banking sector in general, coupled with a study on the most prominent emerging developments in the banking and finance sectors both on the local, regional and international aspects. The information and opinions contained in this document has been compiled in good faith from sources deemed reliable. Neither SAL, nor any of its subsidiaries and associate will make any representation or warranty to the accuracy or completeness of the information herein. This document is strictly for information purposes. 16