LEBANON: POWER PRIVATIZATION MEETING MILESTONES,

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 001143 SIPDIS SIPDIS NSC FOR ABRAMS/DORAN/MARCHESE/HARDING E.O. 12958: DECL: 07/28/2017 TAGS: PGOV PREL ECON EFIN LE SUBJECT: LEBANON: POWER PRIVATIZATION MEETING MILESTONES, IF NOT CHARGING AHEAD Classified By: Ambassador Jeffrey D. Feltman for reasons 1.4 (b) and (d ). SUMMARY -------------- ¶1. (SBU) Acting Minister of Energy and Water Safadi says the GOL is committed to and is moving as scheduled on power sector reform. He is focused on quickly fixing Electricite du Liban's management and making the company viable for privatization. The GOL has started building financial accounts, lowering production costs by obtaining lower cost fuel, and increasing the efficiency of its existing production facilities. It is also building a national transmission network and control center, and enlisting private sector investment to increase power production. Finally, Safadi requested further donor aid to the power sector. End summary. MEETING MILESTONES, SEEKING SHORTCUTS -------------- ¶2. (SBU) Acting Minister of Energy and Water (MOEW) Mohammad Safadi in mid-July told the DCM said that the GOL is committed to power privatization, is moving ahead as scheduled on its reform program, and wishes it could move faster. Parliament's closure is an obstacle, but existing privatization legislation is adequate to allow the GOL to reform and corporatize Elecitricite du Liban (EDL). Safadi went on to explain that there is no significant popular or political resistance to power sector reform; Lebanon's power sector is so problematic and expensive, Safadi argued, that everyone recognizes reform is needed. Moreover, the opposition voted in parliament for power privatization before it left the government. STRUGGLING TO MAKE EDL A VIABLE BUSINESS -------------- ¶3. (SBU) The GOL is focused on quickly fixing EDL's management and corporatizating the utility. Once EDL is corporatized, the focus will shift to increasing the value of the corporation to make it viable for privatization. The GOL has already taken several steps to make EDL a viable business with profit potential; audits are underway to establish accurate financial records, the basis for a corporate business plan which will enable the GOL to privatize EDL. ¶4. (SBU) The GOL is trying to reduce production costs and stem financial losses by securing less expensive fuel supplies and improving the efficiency of its current plants through maintenance. (Note: To make EDL profitable, the GOL will also have to raise the price EDL charges consumers, but Safadi noted that that is not politically feasible now. End note.) The GOL expects the Egyptian pipeline that currently supplies Damascus can begin supplying the relatively new Baddawi plant (near Tripoli) with lower cost natural gas -- rather than high-sulfur gasoil -- by mid-2008; the use of natural gas will cut the cost of power production by $200 million. Because other countries with rising demand have tapped that pipeline, it may only be able to meet Baddawi's needs for two or three years. The GOL is exploring liquid natural gas shipments to Sidon's Zahrani plant, which won't be connected to the pipeline. (Note: We believe the pipeline, which transits Homs, is completed, but Syria has failed to supply Lebanon with natural gas. End note.) The GOL's shortage of foreign currency is a recent obstacle to securing fuel, Safadi noted. ¶5. (SBU) The GOL is also trying to increase output and improve the efficiency of its current plants through maintenance. As specified in the economic reform program, the MOEW initiated studies to upgrade the 30 year old units at Zouk and Jieyeh (located just north and south of Beirut, respectively),and hired a Korean technical consultant to oversee operations and maintenance at Zahrani and Baddawi. SETTING UP A NATIONAL GRID AND CONTROL CENTER -------------- ¶6. (SBU) Plans to create a national distribution system to transmit power from regions with ample supply to areas with great demand are progressing. Construction of the national BEIRUT 00001143 002 OF 002 220 kilovolt grid has experienced small technical delays and limited social opposition; residents in two areas oppose the installation of high-tension power lines, and those cables will be placed under ground to avoid popular demonstrations. Safadi still plans a National Control Center (NCC) to transfer power between producers and consumers in different regions. He envisions controlling distribution and billing by areas, rather than to individual consumers, via a regional metering system. ENLISTING PRIVATE SECTOR TO INCREASE PRODUCTION -------------- ¶7. (SBU) The GOL is working to increase national power production to meet current and anticipated demand. Demand currently exceeds supply by at least 400 kilowats (KW),even when Lebanon is able to buy up to 140KW in excess power from Syrian producers. (Note: Syrian demand also exceeds supply, and Syria can usually supply only 50KW during Lebanon's peak hours. End note.) The International Finance Corporation is preparing tender documents for private sector construction of a new power plant, expansion of an existing plant, or the sale of Baddawi. Safadi expects that such independent power producers would then sell the resulting power to the NCC, increasing national power supply at no cost to the GOL. SEEKING DONOR SUPPORT -------------- ¶8. (SBU) Finally, Safadi noted that Lebanon still needs financial and technical support for power reform. He estimated the GOL needs $80 million in maintenance work to keep the existing generators running, and that no donor responded to this area of the Paris III appeal. (Note: The World Bank and International Finance Corporation have committed technical assistance. End note.) FELTMAN