Privatization in the law

Since the departure of the Salim El Hoss administration, privatization initiatives have been put forward in order to tackle the problem of Lebanon’s rising public debt. Therefore, parliament issued Law No. 228 on May 31, 2000 which established guidelines and outlined potential privatization projects and conditions.

This law is described as a global or general law as it has the characteristics of all-inclusivity and generality, such as in the following instances:

• Protection of the rights of the national workforce that are employed in public projects under view for privatization, in terms of the manner and limits, and in accordance with the basis that the Higher Council for Privatization determines and declares.

• Imposing justice according to regulations stated by parliament.

• The protection of public money with the evaluation of company assets before privatization.

More specifically, the law is open to several interpretations on three essential points:

• The golden share: One share from the company that is created as a result of privatization, which gives the government special voting treatment. This is stated in the contract of establishment and is included in the company’s internal laws.

This allows the government to have a say in the newly established company in order to secure public and consumer interest and many believe this clause should be implemented in all future privatization laws.

• The transfer of ownership of the public project or its public administration to the private sector is undertaken by a law that organizes the relevant sector. This should allow projects to be studied separately under a law applicable to each.

• The net profits of privatization that remain after paying the expenses of privatization operations are transferred to the treasury and directly used to pay off the public debt.

Critics state that in forthcoming privatization laws, the cost of privatization should be more accurately specified and the buyer should bear the cost, as opposed to the government.


Privatization & Public Debt

The government asserts that the option of privatization is one of the ways to decrease Lebanon’s public debt and its cost. By the end of the year 2001, this debt will amount to LL 40,781 billion ($27 billion) and the value of its interest is estimated to be in the region of LL 4,500 billion ($3 billion). This debt increased in 2001 by 16.5% compared to 17.83 % in the previous year.

There are no accurate figures on revenues of privatization and until today the sectors to be considered for privatization have not been specified. However, the cellular and fixed net lines, electricity sector, tobacco regies and the Port of Beirut appear to be the most likely candidates. The following are some projections:

Best Expectations

Prospects in this scenario are that privatization will result in $8 billion in the year 2002, and total public debt will decrease to $19 billion, while the debt service will shrink from LL 4,500 billion ($3 billion) to LL3,000 billion ($2 billion).

This will lead to a budget deficit for the year 2002 (if the expected revenues and expenditures come through) of LL 3,875 billion ($2.6 billion) which would still result in a need for loans in the amount of LL 2,375 billion ($1.6 billion).

Therefore, total public debt will continue to rise, even if it is at lower percentages, since the total debt is very high. Even if it is decreased to $19 billion, it will once again reach its current status in five to seven years, assuming that no restructuring of the public sector is undertaken. However, the chances of realizing expectations in this scenario are close to zero.

Moderate Expectations

Privatization may ensure $5 billion over a three-year period, which would result in $2 billion in each of the first and second years, and $1 billion in the third year.

This would permit a reduction in this year’s public debt by $2 billion and would reduce the interest on the debt by $250 million. Therefore, the budget deficit would fall to LL 3,350 billion ($2.2 billion), with a need to borrow the same amount and again witness the public debt rise.

Not Quite Enough

The trouble is that privatization is not a solution in an environment of high interest rates, since a reduction of one percentage point in the cost of financing the public debt will result in $270 million.

This figure is almost equivalent to the yield from privatization of $1.5 billion.

Based on the above (and taking into account that there has been no lowering of interest rates or restructuring of the public sector) the expenditures in the budget cannot be reduced while interest on the public debt represents 47% of total expenditures and the cost of the public sector represents 44% (forecast figures in the 2002 budget). These figures leave a meager 9% of budget expenditures that can be subject to reduction.

Projects on the agenda

The government has sent a draft law to parliament for the privatization of the electricity sector and ratified two laws for the privatization of the cellular phone and fixed net telephone networks:

• Law No. 393, dated June.1, 2002 permits the government to grant two licenses for mobile phone services.

• Law No. 431 dated July 22, 2002 relating to telecommunications law and to the establishment of a telecommunications company in Lebanon.

Project One: Cellular phone network

This project is very unspecific and subject to interpretation, as was Law No. 218 dated May 13, 1993 which gave the government approval to call for tenders for cellular phone licenses. The lack of clarity in that law (in terms of revenues for the government, number of lines and starting date of the agreement) resulted in disagreements with the government. Again, the country will face a similar situation with the first project and its effects will begin to appear after a few years.

The draft law assigns the license period at 20 years, with a commitment from investors to buy the plant and all available cellular phone equipment. However, critics believe that a 20-year period is too long in such a fast paced sector which experiences constant innovations. The results of such technologies are too unpredictable to assess and the government should not commit over such a long term.

Compensation for the 2 cellular companies

The projected compensation that the government must pay the cellular phone companies differs from one party to another but both companies have called for compensation of $1 billion, based on forfeited profits and investments to date. Yet the government has asked an international institution to assess what would be suitable compensation for the companies, as well as the value of assets to be sold to new investors.

In accordance with figures from the two companies, the investments of LibanCell from 1994 - 2000 have amounted to $280 million and its net profits reached $192 million, while the investments of Cellis have amounted to $374 million and its net profits reached $181 million.

The cellular phone law grants the government the right to retain all equipment and investments upon expiry of the contract (which is for 10 years) so the two companies will only receive the forfeited profits, which amounted to $54 million for Libancell and $57 million for Cellis in the year 2000.

Therefore, the projected profits for four years should not exceed $250 million for Libancell and $265 million for Cellis. That is the maximum limit permitted and anything more will be considered inequitable to the government.

Cost of the Licenses

The new investors are expected to purchase the available equipment at a value in accordance with the investment made, and at a minimum cost of $500 - $600 million.

In spite of the drastic drop in share prices of international telecommunications companies and the decrease in world prices, the cellular phone sector in Lebanon is still attracting investors. This can be attributed to the country’s small size but high number of subscribers ( 780,000 presently, and expected to reach one million within four years). That represents between 21 - 27 lines for each 100 nationals, while in countries such as France and Spain the proportion reaches only 14%, in addition to the high talk time per subscriber.

In accordance with the experiences of Finland, Portugal, Italy and Mexico in the privatization of cellular phones, the sale value of each line was between $5000 - $10,000, resulting in a value of $2 billion - $4 billion for each license.

Finally, critics note that the law should have included a clause barring the two companies from establishing an international communications network as it provides 37% of the revenues of the fixed net phone. If the two cellular firms were to begin providing this service directly, it would reduce the value of the fixed net sector.

Project Two: Fixed Net Communications

Presently, there are 1.1 million lines on the fixed telephone network and each line is valued between $3000-$4000, resulting in a price between $3.3 billion – $4.4 billion.

• The law calls for the sale of 40% of the government's stake in Liban Telecom to the private sector within a two-year time frame. However, it does not specify a date or price bracket for the sale of the remaining 60% government share. Opponents of the law believe the government should continue to maintain a stake in the newly established company, with an ownership figure defined by the law.

• The company holds full monopoly rights for only two years from the date of its establishment, whereas many believe this period should be extended between five to seven years, as the company would otherwise experience a decrease in the value of its shares. Investments made by the government in the field of telecommunications are estimated to be in the region of $700 million, so competition with Liban Telecom would lead to lower bids by potential investors and non-recovery of the government’s investment.

• The company is exempted from registration fees to the government and from stamp duties and fees for the judges and lawyers fund. However, it has been pointed out that this article is unnecessary as the company is a commercial one, with the intent of profit.

Project Three: Electricity Sector

In spite of passing the project for the organization of the electricity sector to parliament seven months ago, the specialized parliamentary committees have not effectively started studying this project so the legal framework will not be ready soon.