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

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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