by Carol Ayat, Energy Finance Professional and Investment Banker.
The lights have gone off in Lebanon. The country is battling one of the most severe financial, economic and political crises in its recent history. The crisis has been in the making for years but came hitting like a hurricane like most crises do. Over the last decades, budget deficits and balance of payments sank deeper into the red lines year-on-year, while successive governments failed to implement basic reforms that would reverse the trend.
The crisis has had catastrophic repercussions on Lebanese citizens, who feel a deep sense of despair. Food, educational, health and financial safety are at risk. People have lost access to their savings due to the banking crisis and access to medicine, electricity, and basic items have become a luxury. According to the UN , 74% of the population has fallen below the poverty line and the country is witnessing a wide mass exodus wave among its skilled young professionals.
While the financial and technical deficiency of the Lebanese electricity sector is not the major cause of the crisis, it has certainly accelerated its onset. Since 1992, EDL has failed to secure reliable electricity to consumers and to balance its budget. EDL losses averaged $1.5 billion per year over the last 10 years . This has had ripple effects on economic and social welfare. The lack of reliable and affordable electricity has limited economic growth, and the use of polluting fuels such as Heavy Fuel Oil (HFO) and diesel has large environmental and health repercussions. The financial deficiency of the sector had a dual impact on the fiscal and balance of payment balances. The lack of reforms, transparency and governance have led to a public trust deficit.
Therefore, it comes as no surprise that the reform of the sector is paramount to the sustainability and viability of any restructuring plan. According to the IMF, eliminating electricity subsidies is the “single most important expenditure saving” for the government , and will be an emblematic and major improvement. However, the release of funds by the international community for Lebanon is conditioned on the implementation of a specific list of reforms. For the electricity sector, the appointment of an independent regulator according to electricity law 462/2002 and the implementation of electricity tariffs adjustments are paramount. The electricity reforms are well-known, studied, published, and documented, but remain on paper due to the lack of political will.
Today, the electricity sector is in total collapse. EDL can barely provide 1-3 hours of electricity per day, with chronic blackouts. As a result, consumers are forced to rely on expensive, polluting, and recently unsubsidized diesel generators charging almost 40 $cent/kwh for their electricity supply.
The status quo is no longer an option. Breaking the vicious cycle requires the implementation of a comprehensive solution that is consistent with the political economy reality of the country and aims at providing the base to restructure the sector and enable the deployment of renewables. The main impediment to implementing the needed investments and reforms is the availability of funding. The state has limited ability to obtain financing without implementing all the required reforms and there is currently no appetite for private investment given the multiple crises and high-risk environment the country is witnessing.
Given the importance of restoring sustainable and affordable electricity supply for the economic recovery of Lebanon, this paper proposes a comprehensive project across generation, transmission, and distribution, which leverages the banking sector crisis to find a bespoke and local funding solution. The financing is not contingent on foreign financial aid; therefore, the project can be launched imminently. However, the project requires technical, construction, operation, maintenance, and design assistance from international partners.
The aim is to design a project that forces reforms, and acts as a bridge for the full implementation of electricity law 462/2002, while enabling the deployment of renewables.Read more.