NEW CABINET MINISTERS TACKLE ECONOMIC REFORM

UNCLAS SECTION 01 OF 03 BEIRUT 000035

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN EIND EINT ENRG PGOV PINR KCOR AA LE
SUBJECT: NEW CABINET MINISTERS TACKLE ECONOMIC REFORM

REF: 08 BEIRUT 692

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1. (SBU) SUMMARY: The new ministers of finance,
telecommunications, and energy were enthusiastic about taking
on key reform priorities outlined in reftel during separate
meetings with the Ambassador the week of January 4. All
three ministers were confident the GOL would pass a budget in
2010 for the first time in five years, and all were
optimistic that in the current political environment they
would be able to move forward quickly on reform. Minister of
Finance Raya el-Hassan said the budget was her top priority,
and she was looking for ways to bring more spending into it
while continuing the long process of making it a more
transparent document.


2. (SBU) Telecoms Minister Charbel Nahas said that
privatization of the mobile phone companies would take time,
but he planned to provide more transparent accounting of all
GOL-owned telecom providers while expanding broadband access
in 2010. Minister of Energy and Water Gebran Bassil stressed
the importance of investment and strategic planning in the
electricity and water sectors, while exploring the
possibility of finding oil and gas off the Lebanese coast.
All three ministers were considering the fiscal impact of
reform, both positive and negative. Meanwhile, both the
finance and telecom ministers encouraged the USG to explore
alternate conditionalities for the disbursement of the final
$75 million tranche of USG-pledged Paris III budget support.
End SUMMARY.

FIRST PRIORITY: THE BUDGET
--------------


3. (SBU) Finance Minister Hassan said submitting the 2010
budget was her top priority, but she was still awaiting
budget submissions from the fiscally crucial ministries of
telecommunications and energy. She noted that the
ministerial statement had outlined an ambitious agenda for
the new government, and she worried about where she would
find funds to jumpstart the economy and "bring growth to the
people." She was particularly concerned about the budget
impact of new projects in the electricity sector.
Nonetheless, once she receives all the submissions, she
expects to be able to present the comprehensive document to
the cabinet within a few weeks, where it should pass after
several weeks discussion, moving on to the parliament perhaps
sometime in March.


4. (SBU) Telecoms Minister Nahas was also focused on the
budget, promising that his submission would be in shortly,
and he hoped that the GOL would be able to pass the full
budget reasonably quickly. Energy and Water Minister Bassil
also indicated his budget submission would be in soon, and
that he was working hard to give a fair representation of the
funding needs of his ministry, which has responsibilities
ranging from electricity production to administration of dams
to oil and gas exploration.

BRINGING TRANSPARENCY TO THE BUDGET
--------------


5. (SBU) The Ambassador raised USG concerns about the lack of
transparency in the GOL budget, and the congressional mandate
that USG assistance go only to central governments with
transparent budgets. Hassan said she would be happy to
accept help from the USG in this area, though there would
have to be careful coordination among donors as the World
Bank had just started a wide-ranging project covering budget
preparation and execution. Meanwhile, she assured the
Ambassador, she was looking for ways to include more GOL
spending in the 2010 budget. Later in the week, the minister
encouraged a delegation from the U.S. Treasury Department's
Office of Technical Assistance (OTA) to look into assisting
the ministry's public accounting unit. The unit's mandate
includes closing the accounts of Lebanon's so-called "public
institutions," many of which are not currently accounted for
in the budget.


6. (SBU) Minister Nahas stressed that the delay in his
ministerial budget submission was the result of his efforts
to account more carefully for revenue and spending in the
publicly-owned mobile and fixed-line sectors. He hoped that
more rigorous accounting would make clear the source of
revenues in the telecom sector, showing the degree to which
taxation and monopoly rents pad the earnings of the sector on
behalf of the GOL.

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TELECOM PRIVATIZATION WILL "TAKE TIME"
--------------


7. (SBU) Nahas asserted that a clear breakdown of income and
spending, as well as accounting for depreciation of assets,
was essential to the process of privatization, particularly
in the mobile sector. Privatization would therefore "take
time," and the structure of privatization, whether through a
straight license auction or some sort of public offeringt"V6Q
U4sBtQ^Cw!2hange, would need to be discussed in
cabinet. In the fixed-line sector, he worried that
corporatization of the government-owned Ogero in its current
form would merely create a monopoly that would crush
competition. He said he wanted to explore breaking the
company into its constituent parts before creating Liban
Telecom, which might use its control of network
infrastructure to push out competitors.


8. (SBU) While he sorts through these accounting and
structural issues in 2010, Nahas said he would move forward
immediately on expanding internet bandwidth and setting up
broadband sites around the country. This would "show the
people that the state can do something for them," he said,
while the groundwork is laid for privatization.

ELECTRICITY AND WATER:
"ANYTHING WE DO IS BETTER THAN NOTHING"
--------------


9. (SBU) Bassil was still getting a handle on his vast
portfolio, but said his preliminary analysis led him to
conclude that there has been too little investment in the
electricity and water sectors in Lebanon, and it was
important that the government take action immediately. "Any
decision we make will be better than no decision at all, as
we have seen for the past few years." He pointed to the
regional water authorities, which he said had been created
and then starved of material and human resources, resulting
in low collections and massive deficits. "We have water, we
just need to manage it better," and he thanked the Ambassador
for USAID's support to the water authorities, as well as to
municipalities, with whom AID has worked to build waste water
treatment plants. Bassil believed Lebanon needed to invest
in dams, to preserve scarce water resources and open up
opportunities for hydroelectric power.


10. (SBU) Bassil spoke briefly about the possibility of
meeting short-term power needs by purchasing electricity from
Lebanon's neighbors. While Syria and Egypt do not have much
more to sell, he said, Turkey might have an excess, which
might help Lebanon take in the 600MW it needs to make it
through next summer. As for a longer-term solution to the
supply problem, he stressed that the GOL must build new power
plants, and he was looking into funding options. Meanwhile,
he hoped to focus on demand management, encouraging people to
use energy-conserving light bulbs, and on exploring
alternative energy options. When asked if he was looking to
decrease the subsidy on big consumers of electricity, he
replied enthusiastically, "Yes! I will do it. We should not
be in the business of subsidizing the rich."


11. (SBU) Without giving details on his plans, Bassil said he
wanted to pursue oil and gas exploration off Lebanon's coast,
and if resources were found he would recommend that proceeds
from them be put into a special fund, much as Norway does
with its energy revenues. Discovery of natural gas could
open the way to using more gas in electricity production,
which would bring down costs significantly, he noted. He
added that he was in favor of corporatization of Electricite
du Liban (EDL),the state-owned power utility, but that he
would need to learn more and discuss with cabinet colleagues
before moving forward.

FISCAL CONCERNS
--------------


12. (SBU) Bassil acknowledged that he would be asking the
central government for money to invest in improvements in
water and electricity. He claimed that such investment, even
if it raised the deficit in the short term, would yield
returns very quickly, lowering costs in the coming years and
improving Lebanon's fiscal situation. Meanwhile, his talk of
increasing the use of natural gas and raising electricity
prices for large consumers would certainly stem EDL's losses,
which amount to over $1 billion annually. Finance Minister

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Hassan was emphatic that any additional spending must be
funded either through donor contributions or an increase in
taxes, because "I won't let them mess with my debt-to-GDP
ratio," she said. Nahas argued that increased liquidity in
Lebanon's banks opened up breathing space for the GOL to take
on fundamental reforms of the public sector without resorting
to the "emergency approach" of slashing budgets and selling
off assets, though he stressed that privatization was an
essential part of his strategy.

PARIS III: CHANGE IN CONDITIONALITY?
--------------


13. (SBU) COMMENT: Both Hassan and Nahas supported the idea
of extending the Paris III cash transfer MOU between USAID
and the Ministry of Finance until December 2010, but both
also broached the subject of changing its conditionality.
While privatization of the mobile companies is still a
priority for the GOL, it is not likely to happen in 2010, and
when it does, it looks increasingly like a public offering of
some sort may be the preferred structure. We can follow up
with Nahas on his plans in detail, both on structure and
timing. Meanwhile, in order to send a strong message of
support to the new government as it takes on reform in
earnest, we would like to open up an interagency discussion
on the possibility of changing the final condition on our
budget support. Hassan and Nahas both mentioned linking the
assistance to reform in the broadband sector, with the
finance minister pointing to a broadband license auction as a
possible benchmark. If we choose to stay with mobile
privatization as a condition, we may have to consider
altering the language to allow alternative transactions,
rather than only a license auction, while extending the
deadline beyond 2010.

SISON