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Restructuring the Power Sector in Lebanon

Reducing costs and improving supply through institutional reform

April 15, 2014

Lebanon’s electricity sector suffered from lack of investment in operation and maintenance, as well as in new infrastructure.

The project was to accelerate the reforms and the restructuring of Electricite de Liban (EdL -Lebanese Power Company) by enhancing the capacity of Ministry of Energy and Water (MOEW), EdL, and the multi-ministry higher level committee (MMHLC). It also supported strengthening MOEW capacity towards policy reform. The lack of consensus on EdL’s reform led to the project’s restructuring in 2010. This introduced achievable outcomes (i) proceeding with the development of alternate fuel supplies as part of a broad fuel supply diversification strategy; (ii) policy directions outlined in the Government’s Policy Paper for the Electricity Sector (PPES) were taken; and (iii) planning was finalized for EdL’s restructuring and a roadmap agreed on.

At the time of project preparation, in 2006, the Lebanese electricity sector had not been able to resume sustainable reliable and affordable electricity services throughout Lebanon since the end of the 1975-1990 civil war. Lebanon’s electricity sector suffered from years of overall poor governance, weak institutional, management and technical capacity, and a serious lack of investment in operation and maintenance as well as in new infrastructure. This had led to poor quality of service, low consumer confidence in public service provision, high cost of electricity and inadequate cost-recovery.  The main consequences were a considerable dependence of the sector on budgetary subsidies estimated by the Ministry of Finance at close to US$1 billion in 2006. Despite the passing of an Electricity Law in 2002 that laid out the restructuring of EdL-and called for the creation of a regulatory authority and unbundling of all or parts of the sector, as of 2006 there had been no change to the structure or status of EdL.

Solution

The World Bank proposed to focus on three key activities: (i) the start of implementation of cost reduction projects; (ii) EdL restructuring and better management, as well as a more skilled staff base resulting in efficiency and productivity gains; and (iii) the injection of capacity in EdL so that cost reduction projects would be implemented and reliability of supply improved.

There was a clear rationale for the Bank’s intervention under this project and it was in line with the Government’s priorities, both because of the heavy burden of the sector on the Government’s budget, and because of the need to fund other post-war priority reconstruction efforts. This intervention was part of the wider Paris III roadmap agreed between the Government and the donor community.

The difficulty of implementing sector reform projects in Lebanon based on previous experiences was duly acknowledged during project preparation. Similarly, broader lessons learned from the Bank’s experience in implementing projects in post-conflict countries were incorporated.

Results

A key success of this project has been the implementation of the Government’s 2010 Policy Paper for the Electricity Sector (PPES), prepared by the Ministry of Energy and Water (MoEW) and approval by the Council of Ministers.  The PPES serves as a national energy strategy, and broad and significant progress has taken place as a result of its implementation, including: (i) re-gasification plant to import Liquefied Natural Gas (LNG) under tendering process; (ii) distribution service providers’ contracts ongoing; (iii) improvement plan for Deir Ammar and Zahrani under implementation; (iv) improvement rehabilitation plans for Zouk and Jieh under tendering process.  Importantly, a prefeasibility study to construct a LNG marine terminal has been completed, and the request for proposals issued early summer 2013. Since the cost of fuel represents at least two-thirds of the total electricity cost, switching to gas is expected to bring clear cost reductions.

Although a roadmap for EdL restructuring has been finalized and a cross-ministerial committee established to oversee the planning, it has not yet been approved by the Council of Ministers.  Nonetheless, the management of the distribution business of EdL has been turned-over to three distribution service providers under management contracts, and progress has been made in terms of EdL management procedures, such as updated financial audits reporting, financial forecasting and generation of key performance indicators.

Bank Group Contribution

The Project was financed under a grant of US$ 5 million through the Trust Fund for Lebanon, and administered by the International Development Agency (IDA), with the World Bank providing technical assistance. The Trust Fund for Lebanon (TFL) was established by transferring US$70 million from IBRD surplus to the TFL. The TFL, which was administered by IDA, enabled the Bank to finance an emergency recovery program following the 2006 conflict, and to respond rapidly to post-conflict emergency needs in the absence of a country’s access to other available Bank resources.

Partners

The project benefited from a co-financing of US$ 973,000 from the French Development Agency (AFD) which allowed for the service contract giving support to improve EdL’s financial and operational performance to cover a wider scope of activities.

Moving Forward

An urgent follow-up step for EdL is for the Council of Ministers to approve the restructuring roadmap and to provide the necessary budget to start its implementation.  Dialogue is underway on potential World Bank and other donors financing of some of the reform program’s investments under the PPES. This project will have a real impact if the recommendations developed to facilitate the reform process of EdL are used and the reform process is sustained in the medium term. This is likely to be the case for a number of recommendations that are part of the 2010 PPES currently under implementation.

Beneficiaries

While the implementing agency or contracting authority was the Council for Development and Reconstruction, the beneficiaries of the grant were the MOEW, EdL and the Higher Council for Privatization. Indirectly, all the Lebanese population was to benefit from a reformed EdL which is more capable of achieving its mission.