LEBANON: HIGHER COUNCIL FOR PRIVATIZATION SYG

UNCLAS SECTION 01 OF 03 BEIRUT 000624

SIPDIS

SENSITIVE
SIPDIS

NSC FOR ABRAMS/SINGH/MARCHESE/HARDING, TREASURY FOR MNUGENT
AND BERGER

E.O. 12958: N/A
TAGS: BEXP ECON ECPS ENIV LE PGOV PREL SY
SUBJECT: LEBANON: HIGHER COUNCIL FOR PRIVATIZATION SYG
DOWNBEAT ON PROGRESS

SUMMARY
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1. (SBU) SYG Ziad Hayek does not believe early progress will
be made in the privatization of Lebanon's mobile sector.
There are "technical" solutions, but according to Hayek, PM
Siniora has said he would prefer a new law. Privatization of
the telecommunications fixed sector is also delayed,
principally due to resistance by the Director General of the
Ministry of Telecommunications. Hayek stated that appointing
a Board of Directors, a critical element of the planned
consolidation, will be difficult. Concerning the country's
poorly performing electrical sector, Hayek strongly
recommended that overall reform of its principal components
-- generation, distribution, and financial structure --
should be done all at once. End summary.

SALE OF MOBILE SECTOR MIGHT REQUIRE NEW LAW
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2. (SBU) On 4/26 Secretary General of the Higher Council for
Privatization (HCP) Ziad Hayek, in a frank and open
discussion, told Econoff and Senior Econ Specialist that
there has not been much progress on the privatization of the
cellular network. One of the problems is that PM Siniora has
stated publicly that he wants a new law to enable the sale of
the mobile licenses. Although Hayek agrees with those like
Kamal Shehadi, head of the Telecommunications Regulatory
Authority (TRA),that no new law is required, he thinks the
PM has now boxed himself in. If Parliament does not meet
until the fall, there will be no law this year, but if
Parliament meets in the next two months, a deal could be done
by September. Hayek said that he will not speculate if that
is feasible.

TECHNICAL SCHEMES MIGHT WORK
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3. (SBU) According to Hayek there are other options, and the
GOL may consider them. These are technical and engineering
schemes based on previously enacted Law 431 that may avoid
the need for parliamentary approval. According to Hayek,
this law permits the TRA to issue licenses when the operators
build their own networks. Hayek contended this option is
attractive from an investment point of view because a license
is worth about $2-3 billion, but a network would cost no more
than $100 million to construct. Once completed, the Ministry
of Telecommunications (MOT) would lease the existing network,
or transfer it to Liban Telecom. However, the problem is
whether there are investors willing to buy such an expensive
license from the TRA when the legal basis of such a
transaction is untested.

WHAT VALUE TO PLACE ON THE SALE
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4. (SBU) Under this scenario, Hayek, like others, expects
Arab investors to win the bid no matter how it is offered.
He believes they would be more willing to place higher bids
than Western investors because they have a higher tolerance
for Lebanon's risk level. They also put a higher value on
intangibles, such as their already established brand
recognition in the Middle East. Moreover, he added, Arab
governments are trying to be supportive of the Siniora
government. The winning bidder would be expected to build
its own network. According to Hayek, this process would not
actually be privatization, and therefore, there would be no
need for a new law. Only the TRA and investment banks would
be involved. HCP has already asked several investment banks
to "canvass" the marketplace -- CEOs of telecom companies --
and see if this approach is feasible. Hayek and his HCP team
are working to calcualte an approximate value, but at this
point he could not offer a figure.

NO PROGRESS IN THE FIXED SECTOR EITHER
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5. (SBU) As far as the fixed telecommunications network,
there is also not much progress. Hayek said the HCP has
finished planning work for the merger of Ogero and two
telecom ministry directorates. He indicated that HCP was
supposed to move to the execution phase in early March, but
the DG of Ogero, Abdelmenim Youssef, objected to the action
plan, as well as the creation of a task force to carry out
the necessary consolidation. Youssef took the position that

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the task force would eventually conflict with the authority
of the still-to-be-established Board of Directors for the new
telecommunications entity, but Hayek disputes this. The task
force would have been supervised by a steering committee,
including representatives from the HCP and the Prime
Minister's office, but only until the permanent Board is
created. The Board would thereafter manage the project
management office, as well as Liban Telecom. The Board will
be appointed by the MOT and the Prime Minister, and would not
need approval by Parliament.

MINISTRY DG IS THE PROBLEM
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6. (SBU) Hayek believes that Youssef may be blocking
progress because he would like to be appointed Chairman of
Liban Telecom. "If Youssef is appointed chairman, there will
be no privatization", Hayek stated, pointing out that Youssef
does not want international investors, because of the
requirement that would create for greater transparency.
Hayek stated that Youssef has the firm backing of the MOT.
He contends that the MOT wants Youssef to be a part of the
steering committee, although that, he believes, may be a
conflict of interest. (Note: Youssef was appointed by late
PM Rafiq Hariri as Director General of the Ministry of
Telecommunications in the late 1990s. In 1998, he was tried
and found guilty of violations committed during the
government of the PM Hoss. When Hariri returned to power,
Youssef was released and re-appointed as Director General.
End note.)

NAMING A BOARD WILL BE DIFFICULT
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7. (SBU) Hayek stated that appointing board members will be
a difficult process. "We need to arrange for interviews, but
neither the Prime Minister nor the Telecommunications
Minister have given their authorization to begin the process.
Complicating the situation is a requirement that the five
board members must come from different sectarian groups.
Finally, there is a requirement for Cabinet approval.

POWER SECTOR IS COMPLEX
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8. (SBU) Addressing Lebanon's inefficient and
heavily-subsidized power sector, Hayek stated that progress
here is also behind schedule. The World Bank has funding the
study and actual restructuring costs to modernize the
chronically under-performing electricity company (EDL).
Hayek expects that technical and financial consultants will
be appointed in July. There will be three teams: one
working with HCP for restructuring; one formulating policies;
and the final team working on operations and financial
reform. Hayek said that if the work is begun soon, the
project could be implemented within one year, although the
World Bank contract will be let for two years to allow for
"slippage." He acknowledged there were many problems with
reforming the electricity sector, but argued that dealing
with all sector problems simultaneously -- production,
network upgrades, and financial reforms -- offers the best
chance for success.

TECHNICAL IMPROVEMENTS PLANNED
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9. (SBU) HCP presently has a contract with U.S. consultants
to help with two troublesome areas in the power sector. The
first deals with the installation of remote meters, which
would address heavy non-technical losses. The second project
will try to improve regional management and power
distribution efficiency by using private sector resources. A
proposal still in the planning phase calls for selling the
Deir Ammar power plant in north Lebanon to investors, under
the provision that the purchaser double plant capacity to 900
MGW, and switch generator fuel to natural gas. HCP is
negotiating with IFC to assist with this process. If this
project could be completed by 2010, there would be sufficient
installed capacity to meet anticipated national demand. HCP
is also working on a legal framework for a Public/Private
Partnership law for new, more efficient, small projects.

COMMENT
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10. (SBU) Hayek appears to be a committed, well informed
leader, with an excellent team of young experts - legal,
financial and technical. His team works hard to keep to
their timetable, but they are realists and understand the
complex political environment. They joke casually about the
unlikely success of some of these ventures, but insist they
remain optimistic. End comment.
FELTMAN