May 2024

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May 2024, N°79
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Here's How We Made a Lasting Impact in May 2024

Municipalities Should Lead Renewable Energy and Waste Management with Private Sector Help

The Minister of Economy and Trade highlighted a Qatari proposal to build solar energy farms, boasting a capacity of 450 megawatts. This proposal, made last December, has not yet been presented to the cabinet. The Minister of Energy and Water replied that the Qatari offer requires legislation, as 11 companies hold exclusive renewable energy licenses in Lebanon, preventing new entrants. These 11 licensed companies have refrained from energy production after the Ministry of Energy and Water set kilowatt-hour prices at 3 to 7 cents.

LIMS weighed on the legal framework contending that if the Qatari offer is a donation, it should not necessitate a legislation. LIMS added that the proposal is not serious, but rather a reminder of Qatar's previous interest in renewable energy in general. Solving Lebanon’s electricity crisis requires cooperation between the private sector and municipalities. The strategy centers on attracting private investments in renewable energy and waste management sectors, traditionally dominated by state-owned entities.

Under this model, municipalities would authorize private enterprises to handle electricity production and distribution, as well as waste management services. This move could break the long-standing monopoly of Électricité du Liban, reducing electricity costs significantly. Renewable energy at the municipal level could provide power at 9 cents per kilowatt-hour, based on the Toula pilot project, compared to 44 cents from private generators and 27 cents from the state utility.

This proposal aims to create a win-win scenario: providing essential services more efficiently while generating new revenue streams for cash-strapped municipalities. This could enable local governments to fund their operations and pay employee salaries without relying on the depleted state coffers or resorting to additional taxation. In fact, the 2002 law facilitated this transition when it broke the electricity monopoly, but it has yet to be fully enacted due to the absence of a regulatory body.

Lebanon's Electricity Crisis: Persistent Mismanagement and Policy Failures

The implementation of the government's 2022 electricity plan, which included a price hike, has failed to address the long-standing mismanagement at Électricité du Liban (EDL). The electricity crisis continues unabated, resulting in severe rationing and significant challenges in bill collection. This issue is further compounded by the increased summer demand due to tourism and the Ministry of Energy and Water's ongoing involvement in deals tainted with irregularities.

LIMS has criticized the 2022 electricity pricing reform as arbitrary, likening it to a tax on households rather than a fair payment for electricity consumed. The current pricing structure imposes a fixed payment on consumers regardless of their usage, which is deemed unjust for both the general public and government agencies. Many government entities and departments are struggling to pay their escalating electricity bills due to insufficient funds. Additionally, long delays in bill collection have led to situations where tenants vacate properties before bills are issued, leaving landlords responsible for unpaid charges.

LIMS has also raised concerns about the lack of oversight and clarity on whether collected bills are sufficient to cover fuel costs. This ambiguity casts doubt on EDL's ability to fulfill its financial obligations for Iraqi fuel. Moreover, EDL's lack of independence remains a significant issue, as it operates under the Ministry of Energy and Water's control. The Minister is currently delaying the disposal of toxic materials at the Zouk power plant, which is located near a residential area that has suffered from harmful emissions for decades. The delay tactics appear to be aimed at facilitating a tender process marked by clientelism and irregularities, favoring a specific company.

LIMS has proposed that opening the electricity sector to competition and decentralizing production to local levels would lead to better service delivery, lower prices, and increased transparency. This approach is essential for addressing the systemic issues plaguing Lebanon's electricity sector.

Winning the Battle of Ideas on Sound Monetary Policy

Acting Governor of the Bank of Lebanon, Wassim Mansouri, has announced a significant reduction in the monetary supply, noting that the quantity of Lebanese lira in circulation has decreased from 82 trillion at the beginning of 2023 to 59 trillion liras. This policy shift has led the central bank to increase its foreign exchange reserves by 1.1 billion US dollars. Governor Mansouri also highlighted the central bank cannot replace the government and warned of the repercussions of delaying solutions to the banking crisis and initiating negotiations with creditors.

Mansouri’s analysis provides compelling evidence that LIMS has won the battle of ideas on hyperinflation and currency devaluation. When the consensus in Lebanon erroneously attributed currency devaluation to the trade deficit, LIMS, through program ERASE, demonstrated that it was the increasing money supply, not the trade deficit, driving devaluation. We have long argued that reducing the money supply would lead to currency stability and an increase in foreign exchange reserves. We are proud to see that the new acting governor of the central bank is adopting these principles.

However, we must remain vigilant. The proposed salary and wage increase in the 2024 government budget may require the government to seek central bank funding. It is essential to separate the central bank’s monetary policy from the government’s fiscal policy. The central bank must maintain its focus on stabilizing the currency and increasing foreign reserves, not on funding public expenditures.

To regain international trust and balance public finances, the government must implement serious reforms, combat tax evasion, and reduce wasteful spending. Printing more Lebanese pounds to cover deficits devalues the currency and depletes reserves, ultimately harming the population.

EU Offers Lebanon €1 Billion Aid Package to Keep Syrian Refugees from Crossing the Sea

Cyprus has announced it will no longer process asylum applications from Syrians and, in coordination with Lebanon, has tightened maritime policing. In response, European Commission President Ursula von der Leyen has offered a €1 billion aid package to Lebanon, aimed at bolstering border security and facilitating the repatriation of refugees to Lebanon. The announcement has been perceived in Lebanon as a bribe to keep Syrians within its borders and prevent their migration to Europe. Some Lebanese politicians have urged the authorities to allow migrant boats to reach Europe, stating that the €1 billion aid is way below the actual cost of the refugee crisis.

LIMS emphasized that the economic impact of the Syrian war on Lebanon is multifaceted. Economic growth in Lebanon fell from an average of 9% per year before 2011 to an average of 2% per year from 2011 to 2017. This decline reflects the broader costs of the war, including the refugee crisis, disrupted trade routes, and a slowdown in tourism and investment due to increased risks. Isolating the specific cost of hosting refugees from the overall war impact is challenging.

LIMS advocates for a balanced assessment of the Syrian refugee crisis, considering both costs and benefits. Refugees have helped maintain low production costs in Lebanon, preventing the shutdown of many businesses during the economic depression that started in 2019. Some refugees have opened shops and restaurants, contributing to economic activity. Additionally, foreign aid received by Syrian refugees has been spent on rent, education, groceries, and more, injecting much-needed fresh dollars into the Lebanese economy during a critical period.

However, the presence of a large refugee population has put additional pressure on Lebanon's already strained infrastructure, including electricity and waste management. These sectors were struggling due to government mismanagement long before the refugee influx. Selling electricity at a loss and poor waste management practices have been exacerbated by increased demand, but properly managed sectors could have leveraged the additional demand as a revenue opportunity rather than a burden.

LIMS also criticized the rhetoric of populist politicians advocating for sending Syrian refugees to Europe, suggesting their primary aim is to blackmail Europe into providing more funding. There is skepticism about the effective use of any additional funds, given Lebanon’s track record of mismanagement, including the squandering of $80 billion in depositors' funds.
Ultimately, LIMS stresses that without proper management and reforms, even significant financial aid could be wasted, failing to address the underlying issues plaguing Lebanon's economy.

“Estimated Values”: A Tool to Combat Fraud and Collusion in Public Procurement

Under the APPLE C program (Apply Public Procurement Law to End Corruption), LIMS has unveiled a policy brief that exposes the critical challenges confronting Lebanon's public procurement law (Law 224/2021). This report highlights risks associated with the absence of an “estimated value” for public procurement projects. Without an estimated value, it becomes exceedingly difficult to detect collusion among bidders or between bidders and the administration. Collusion can result in inflated bids, which ultimately lead to higher costs for the government and, by extension, the taxpayers.

Without a benchmark, it is challenging to determine if a bid is excessively high when the government is buying and to justify rejecting it. This can result in the government overpaying for goods and services. On the flip side, in cases where the government is selling (public services are auctioned off), the estimated value helps to identify abnormally low bids. Accepting such low bids can lead to lower income for the government. In exceptional circumstances, having an estimated value can also help assess whether a single bid might be acceptable. Additionally, the estimated value plays a crucial role in preventing the division of large projects into smaller parts to avoid oversight by regulatory authorities. This practice, known as bid splitting, can lead to corruption and inefficient use of resources.

LIMS's policy brief highlights that the lack of a clear and enforceable estimated value facilitates fraudulent activities, collusion, and evasion. This, in turn, increases government expenses unnecessarily and reduces public revenue. The brief calls for urgent reforms to implement clear guidelines and mechanisms for establishing and enforcing estimated values in all public procurement processes.

Lebanon’s Public Services at Risk: LIMS Calls for Private Sector Engagement

At the First Environmental Conference for the Villages of Coastal Zahrani on May 21, 2024, Mr. Ghassan Baydoun, a policy analyst with the LIMS, delivered a sobering assessment of Lebanon's deteriorating public services. He attributed the decline to the country's ongoing economic crisis. Rather than instilling economic reforms, the crisis has shifted policymakers' focus from welfare provision to revenue collection. This shift, he warned, threatens further disintegration of the state and inefficiency in delivering essential services like electricity and water.

Mr. Baydoun's presentation emphasized the urgent need for administrative decentralization, as outlined in the Taif Agreement. He argued that empowering municipalities to play a developmental role in collaboration with the private sector could significantly improve service delivery. Citing the city of Zahle as a successful example, he described how the municipality there led a policy change that allowed a private company to generate and sell electricity. Through a robust advocacy campaign involving MPs, religious leaders, and the general public, Zahle secured legislation enabling private sector participation in electricity.

Baydoun called for similar initiatives across Lebanon, particularly in renewable energy projects. He highlighted that engaging with the private sector could enhance municipalities' financial independence and their ability to deliver essential services effectively.

The conference underscored the critical need for innovative solutions to address Lebanon's pressing public service challenges. By adopting a more decentralized approach and fostering private sector engagement on the local level, Lebanon can work towards a more resilient and efficient future.

Fostering Economic Mobility and Sustainable Development: Yes We Can

Beirut Arab University recently hosted the International Economic Immigration Conference 2024, titled "Yes We Can." The event aimed to achieve sustainable development in Lebanon, with a particular focus on Tripoli, by revitalizing mobility in the labor market and addressing the challenges faced by Lebanese youth.

Dr. Patrick Mardini, CEO of LIMS, moderated a key session at the conference. His intervention highlighted the significant barriers that young entrepreneurs in Lebanon face when starting a business. It currently takes eight procedures and 15 days to establish a business in Lebanon, at a cost of approximately 42.3% of income per capita. Moreover, even if young entrepreneurs manage to start a business, securing a loan is nearly impossible due to the ongoing banking crisis. They also face persistent challenges such as electricity outages and slow internet, which hinder the successful operation of businesses.

To address these issues, Dr. Mardini proposed simplifying the procedures for starting a business, enabling young entrepreneurs to establish enterprises from their homes with a few clicks online at zero cost. While resolving the banking crisis is essential for improving access to credit, the problems of electricity and internet can be tackled by opening these sectors to competition. Allowing multiple providers of electricity and internet services would enhance service quality and provide the basic infrastructure necessary for entrepreneurs to thrive.

The session underscored the importance of removing bureaucratic hurdles and opening infrastructure sectors to competition in order to foster a more conducive environment for young entrepreneurs in Lebanon. By implementing these reforms, Lebanon can enhance economic mobility and work towards sustainable development, benefiting not only Tripoli but the entire nation.

Gold and Silver Prices Surge Amidst Global Inflation

Lebanon has experienced a rush on gold and silver, coinciding with a significant rise in their prices. LIMS has clarified that the increase in gold and silver prices is primarily due to global inflation eroding the purchasing power of currencies, leading individuals to seek gold as a safe haven. This inflation is rooted in extensive government spending initiated during the COVID-19 pandemic, which has not been curtailed since.

Additionally, fears of a global recession and geopolitical risks, such as the war in Ukraine and the conflict in Gaza, and uncertainties surrounding U.S. elections, are driving investors toward commodities like gold. Central banks' substantial gold purchases to back their currencies further contribute to the high gold prices. These factors collectively drive the demand for gold and silver.

References
LIMS Media Interviews