IFI Op-ed #18: Unfinished Business: Public Utilities and Regulatory Reform in Lebanon in light of CEDRE
Jamal Saghir | Friday, May 31, 2019
The debate on regulatory issues in the telecommunications and energy sector has started in Lebanon, but instead of residing in economy, it took a political turn. Regulation cannot accomplish anything useful unless there is an underlying clear legal, transparent, independent, and commercial framework in place. Regulation does not exist in isolation. It should be an integral part of CEDRE.
Lebanon should learn from the extensive worldwide experience in this area though (1) identifying the underlying objectives to be served; and (2) striking the right balance between regulation and liberalization of a public service.
Where there are structural barriers to entry or conditions of natural monopoly, some regulation is needed to ensure reasonable terms for access to network infrastructure, and guard against abuses of monopoly power.
Suffering from significant deficiencies in key basic infrastructure services, including, electricity, water supply, sanitation, transport, waste management, telecommunications, and others, public utilities in Lebanon provide infrastructure in a market where competition is weak or non-existent. The overall country’s critical financial situation and the lack of fiscal space resulted, in the last 15 years, in a sharp fall in public spending on infrastructural sector.
Gross public debt in Lebanon is estimated at among the highest in the World, around 150 percent of GDP by end-2018 . Debt service for the government reaches about 10 percent of GDP annually, consuming about half of domestic revenues. As a result, Lebanon suffers from a long term and sizable fiscal deficit, which in 2018 reached over 11 percent of GDP. The lack of fiscal space was translated into low government capital expenditures, which, at an average of around 1.5 percent of GDP since 2000, is significantly below comparator countries. As a result of the low public investment in infrastructure, the country’s infrastructure network and quality have deteriorated, particularly electricity, water supply, waste management, transport, as well as basic services important for the population’s well-being. In fact, out of 137 countries, Lebanon ranks 130 in quality of overall infrastructure, with quality of electricity supply at 134, quality of roads at 120, and quality of mobile-cellular telephone subscriptions at 104. 
Besides depriving Lebanon and the private sector of the infrastructure services essential for economic activity, the deterioration of infrastructure services has had three other undesirable effects: (a) unregulated private provision of alternative forms of service (such as diesel generators, or illegal digging of water wells) affordable only to a segment of the population; (b) people’s unwillingness to pay the economic price for public services, at least until they are substantially improved; and (c) lack of understanding of the notion of private ownership in the utility sector, combined with apprehension about protection of the public’s interest. This is probably due to the lack of awareness regarding the wide range of infrastructure services that can be provided more efficiently by the private sector, without a necessary change in ownership, as long as appropriate incentives and regulations are established.
The current regulation of infrastructure in Lebanon is concerned mainly with setting service prices, controlling entry, and setting standards of operations. These are regulated by the respective sector ministries. Pricing policies are formulated by the ministries based on political, not economic consideration and approved by the Council of Ministers. While the Government participation in the rate-making process could be constructive, allowing the incorporation of social and political goals, excessive political influence in the process could lead to inefficiency in the price setting. Political and social pressures may create incentives and opportunities for cross-subsidies that benefit one particular group of customers over another. Furthermore, political influence may tend to delay rate increases when needed (e.g. electricity), thus affecting the financial viability of the company or the sector, and decreasing its attractiveness to potential private investors.
As part of the ambitious CEDRE Capital Investment program, the Government of Lebanon aims to reorganize the public utilities sector; increase the role of the private sector in the provision of infrastructure; and introduce competition therein. Such ambitious investment program should be supported by development of a clear, transparent, and independent regulatoryframework. The primary objectives of such regulation would foster a competitive environment that encourages potential investors and private sector involvement, and maintain financial viability while Moreoever, It will, regulate prices and provideadequate control over the utility to protect consumers. The regulatory setting is also important for investors who need to know in advance the way in which tariffs and/or profits, quality and scope of service. will be regulated. They will in particular want to know what type of entity has been set up to take regulatory decisions, what its composition is, what scope of its attributions is, and what degree of regulatory discretion it possesses.
 World bank Lebanon’s Economic Update.
 World Bank. http://documents.worldbank.org/curated/en/935141522688031167/pdf/124819-REVISED-CIP-Assessment-Final.pdf
 Source: World Economic Forum, Global Competitiveness Index 2017-2018.
ARABIC || العربيّة
Jamal Saghir, Economist, Affiliated Scholar at the Issam Fares Institute for Public Policy and International Affairs, American University of Beirut, Professor of Practice at the Institute for the Study of International Development at McGill University, Montreal, Senior Fellow at the Payne Institute, Colorado School of Mines, and former Director at the World Bank Group, Washington DC.
In line with its commitment to furthering knowledge production, the Issam Fares Institute for Public Policy and International Affairs publishes a series of weekly opinion editorials relevant to public policies.
These articles seek to examine current affairs and build upon the analysis by way of introducing a set of pragmatic recommendations to the year 2019. They also seek to encourage policy and decision makers as well as those concerned, to find solutions to prevalent issues and advance research in a myriad of fields.
The opeds published by IFI do not reflect the views of the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut and are solely those of their authors.