Confronting the fiscal crisis through privatisation

The main reason for privatisation is fiscal. Government officials argue that it is the only way out of the debt trap. However, private firms only invest where they expect to make a profit. The private sector, by its nature, prioritises short-term profit over any other social benefit. All in all, the “public good” value of basic services is considered less important than their fiscal potential.

Themain reason for privatisation in Lebanon is fiscal. With 85% of governmentspending going to fixed expenditures (wages and debt servicing), there is littleroom for further austerity. Government officials argue that the proceeds frommassive privatisation were Lebanon’s only way out of the debt trap. The 2003budget draft includes privatisation, securitisation operations, externalfinancing, as well as expenditure cuts and increased taxes.[1]

InMay 2000, Parliament adopted a law that set the framework for privatisation,empowering thegovernment to corporatise State Owned Enterprises (SOE) and allocate proceeds toreduce public debt. The law also created the Higher Council for Privatisation,which determines the SOEs for sale, the time required for restructuring andsale, and the financial value of the institutions. The law also includesprovisions for competition, consumer rights, environmental protection andemployment for nationals. Nevertheless, privatisation decisions prioritised debtreduction at the expense of other economic, social and political goals.

Telecommunications,electricity and air travel

In2002, Parliament passed legislation to allow private sector participation in thetelecommunication and electricity sectors, while a law addressing the watersector and the national airline is still being considered. Privatisation oflarge public utilities like electricity, water and telecommunications servicescan generate significant revenue for debt reduction and reduce the burden on thegovernment’s budget. Nevertheless, these play a special role in a country’seconomy, serving the common interest and providing basic services that areessential to the livelihoods of all. Modern governments have generally assumedthe responsibility for providing at least a minimum level of these services toall citizens regardless of income or location. In Lebanon, the “public good”value of these services was considered less important than their fiscalpotential. The subsequent brief summary of recent developments with Lebanon’stop privatisation candidates will introduce a discussion of privatisation’splausible social side effects, as Lebanon’s decision makers have notinvestigated the policy’s social cost, which remains low on the government’spriority list.

·       Telecommunications(mobile phone sector).This sector is the most profitable SOE, generating around USD 500 million inrevenues with almost 40% going to the government under the management of twoprivate companies that were established in 1995 according to a Build Operate& Transfer (BOT) agreement. Over the six-year period of private management,prices did not fall. After ending this arrangement (mid 2001) with the twoprivate companies, the government attempted to attract international bids by mid2002 for long-term operation licenses. However, no investors were officiallyreported by the set date, and the government decided to redo the licenses’auction towards the end of 2002. Although a State takeover was suggested untilanother auction takes place, operations remained under the management of the twocompanies that operate the network for the account of the government to re-openthe auction at the end of 2002. All revenues from the current operations (untilthe end of 2002) revert to the State, with the latter paying the companies valueof assets’ depreciation and any incidental costs. Thus, the government ensuredeventual licenses’ sales while securing the continuity of the sector andrejecting the possibility of nationalisation.

·       Electricity:Electricté Du Liban. In August 2002, theParliament ratified a law to privatise Electricité Du Liban (EDL), which coststhe government LP 400 billion (the equivalent of around USD 265 million) insubsidies annually. Losses are due to poor bill collection and theft, high costof oil, and technical limitations. The collection ratio currently stands at 51%of the value of power generated and 61% of potential revenues. Consequently,EDL’s deficit alleviation can significantly come from the revenue side. Thelaw separated the electricity sector into two businesses: one for the productionand distribution of electricity, which will be privatised, the other for thetransportation of high voltage electricity, which will remain with the publicsector. Forty percent of the electricity production and distribution companyshares will be sold to the private sector within the next two years. The lawallows for complete privatisation ultimately.

·       AirTravel. Thegovernment did not want to offer (Middle East Airlines) MEA to the privatesector before major restructuring and downsizing. Total wages amounted to USD 70million per year. The airline had cost the government around USD 400 millionsince 1996. The restructuring plan transferred staff to affiliate companies suchas ground and maintenance services, or offered early retirement or unemploymentcompensation with the help of a World Bank loan. About 1,200 employees were laidoff or resigned, triggering conflict between company workers and the government.The dispute was settled by an agreement determining terms of layoffs.

Table1.- Main privatisation candidates

Socialimpact of privatisation

Althoughonly a post-privatisation empirical approach can assess the true impact of thismeasure, the following points aim to draw attention to some possible negativeconsequences that might be the result of privatisation in Lebanon.

Publicfinance and social spending

Thefiscal crisis turned privatisation into a basic instrument to rehabilitatepublic finances. However, because private firms only invest where they expect tomake a profit, they are reluctant to buy enterprises losing money, making majorconcessions necessary. Even in the case of the profitable telecom sector, thelucrative SOE did not attract investors or bids were not up to thegovernment’s expectations, forcing it to extend the deadline. If thisprofitable sector could not attract enough investment, much less should beexpected from ailing SOEs, such as EDL.

Theargument that privatisation will generate revenue, which facilitates increasedsocial spending, is particularly weak. Lebanon’s social and human developmentpolicy is “confined to economic considerations and which have remained captiveof sectoral or technical perspectives” as noted in the UNDP Human DevelopmentReport (1997). Whether or not social expenditure is increased, it will notresolve the structural problems of disadvantaged groups if there is no officialdevelopment policy to address such needs.

Investment

Proponentsclaim that privatisation will be designed to attract much more privateinvestment, which would drive domestic growth and strengthen the externalcapital balance in key sectors. However, domestic investors in Lebanon areinhibited by a number of factors that diminish overall economic opportunity:reduced government spending, reduced private consumption resulting fromadditional taxes, a large trade deficit and an investment-savings gap. Althoughthere is no doubt that contractionary measures dampen investment, there are fewprerequisites in the Lebanese context that will increase investment under aprivatisation policy. Indeed, domestic investment has been stagnant over thepast five years.

Similarly,when considering small markets, foreign investors are attracted by stability,high productivity and economic growth, which remain absent in Lebanon. Duringthe 1990s, approximately 90% of net FDI inflows[2]went to real estate, an unproductive sector.

Prices

Privatisationis intended to focus attention on financial performance. Furthermore,improvements in the supply of key services, such as water, electricity andtelecommunications, can have downstream benefits for the wider economy. However,there is no unequivocal evidence that the private sector delivers lower pricesto consumers than the public sector, unless controlled by an autonomous andcapable regulator. Given its profit imperative, private monopolies tend to raiseutility prices, having—in the case of basic utilities—a disproportionatelynegative effect on poor people.

Regardingelectricity, EDL is suffering from huge deficits from low collection rates,which result from widespread violations and political exemptions that thegovernment has been almost unable to eliminate. It is unlikely that the privateinvestors will be able to improve collection, lacking the political power to cutexemptions and violations. Although violations by the public sector proveddifficult to limit, raising prices would be an easier solution to the privatesector to offset this loss because electricity is a basic utility with inelasticdemand.[3] However, this would befelt mostly by lower income households.

Reductionof employment

Whilethe impact of privatisation on employment varies across industries, mostevidence points towards reductions in employment after privatisation. The usualreason cited for large-scale downsising is that public entities are overstaffed.Reductions in the number of staff are seen as boosting productivity. However,overstaffing in Lebanon is not the cause of the low public sector productivity.According to the Civil Service Board, public administration has 24,200 civilservice positions, yet permanent employees amount to 9,851 and temporaryemployees amount to 9,353; i.e. there is a shortage of workers.

Moreover,in Lebanon’s poor economic environment, laid off workers are unlikely to findequivalent employment. Unemployment grew from 8.5% in 1977 to more than 20% in2000, and currently over a quarter of the population suffers from full orpartial unemployment.[4]In addition, layoffs generally hit unskilled labour harder, putting women at ahigher risk because they lack more specialised skills. The risk of layoffs hasled workers to compromise their rights. For instance, in the case of MEA manyemployees were unhappy with the new company’s working conditions and opted forearly retirement. In such an environment, employers can ignore safety and workerregulations and sweep aside or obstruct the formation of trade unions.

Inequality:transfer of assets to the better off

Privatisationprogrammes have done much more to enhance efficiency than equity. The negativewealth distribution effect arises primarily from the transfer of assets to thebetter off. The negative income distribution effect stems from higher prices andlower wages.

Thedistributional impact of price shifts will depend on the extent to whichconsumption of the goods and services in question varies by income group and ifdifferent levels of consumption, or categories of consumers, face differentprices. However, in Lebanon utilities prices are the same regardless of incomegroup. As previously noted, utilities are basic goods with inelastic demand, sochanges in prices will disproportionately affect lower income households.Privatisation might improve access to products by means of business expansion,but in most sectors expansion is almost completed.

Onthe other hand, there are technical problems that would not facilitate anequitable distribution of the SOE shares. The weak capital markets and the verystrong banking sector limit the possibilities for most lower income people toobtain financing. Currently, just 0.6% of all bank accounts hold more than 40%of total deposits, earning interest income free of taxes. Private sectorparticipation in SOE will follow this uneven structure, moving the SOEs frompublic hands into the hands of a very limited segment of society that is able toparticipate in the privatisation process. Privatisation can therefore contributeto a consolidation of economic and political power in the interest of a groupthat rarely represents the poor.

Insummary, there is an inherent conflict between utility privatisation and theinterest of lower income groups because the profit motive—which provides thetheoretical impetus for efficiency improvements—creates upward pressure onprices and downward pressure on costs, including workers’ wages. The privatesector, by its nature, prioritises short-term profit over any other socialbenefit.