WHAT IS PRIVATIZATION

Privatization means ownership transfer of assets and / or business operations from the public sector (government) to the private sector.

There are various degrees of privatization or involvement of the private sector in the delivery of public services. They range from a management contract, to the sale of a stake in a particular operation, to the full sale of such operation. Privatization typically involves services and sectors such as telecommunications, transportation, power generation and distribution, and water and waste water management. Late 1990s were considered the boom years of privatization coinciding with the large privatisation programmes of the formerly communist countries in Central and Eastern Europe, after which privatization activities have been positively correlated to market conditions and equity valuation, especially in the telecommunication sector which is the most price dependent.

There are five methods of privatization:
• Trade sale or asset sale for a cash payment to a strategic investor usually by auction
• Share issue privatization consisting in the sale of some or all of the enterprise holdings to investors through a public share offering
• Mass or voucher privatization, most controversial and dictated by politics, through distribution of asset ownership to a broad cross section of the population for free or at a very low price.
• Privatization from below through the startup of new private businesses
• Management or employee buyout through the distribution of enterprise shares to the management or employees for free or at a very low price.

FRAMEWORK IN LEBANON

Law 228 (ENAR) defines privatization as transferring the ownership or management of a public project, totally or partially, to the private sector, including the concession structure or similar modern structures designed to develop and manage economic projects for a certain period.

This law also sets the principles of privatization, which includes:
– Encouraging competition
– Protecting consumer interests
– Safeguarding the rights of domestic labor in privatized projects
– Protecting public funds while ensuring publicity and disclosure
– Promoting public participation in project ownership and management
– Attracting private investment

The government is allowed to retain a golden share in privatized companies of monopolistic nature or of a significant size impacting the economy. Such share grants the government exceptional privileges in voting on shares ownership or on other strategic decisions.

All privatization proceeds are transferred to the Treasury and earmarked to reimburse public debt. The Council of Ministers may decide, upon proposal from the HCP, to deduct from such proceeds the expenses related to the preparation and implementation of the privatization transactions as well as part or all of the liabilities and obligations of the privatized project.

SECTORS

The privatization framework Law 228 (ENAR) issued in 2000 requires that a sectoral law be issued for each sector to be privatized. Such sectoral law would regulate the sector’s activities and detail the basis of its transfer to the private sector and its regulation by independent regulatory authorities created for this purpose.

To date, three sectoral laws have been issued and provided for the corporatization and privatization of the telecommunications sector (Law 431/2002 ENAR), the electricity sector (Law 462/2002 ENAR) and the civil aviation sector (Law 481/2002 AR).

TELECOMMUNICATIONS

Fixed Line Telecommunications Services

The main  operator of the fixed telecommunications network in Lebanon is  Ogero (Organisme de Gestion et d’Exploitation de l’ex Radio Orient), which is a public establishment of industrial and commercial nature, which was created in 1972 to manage and operate the telegraph and submarine networks of the now defunct Franco-Lebanese Radio Orient company.  Since 1996, fixed telecommunications services have been provided by the MOT through Ogero whose role includes the operation, maintenance, sales, marketing and billing of the fixed line network.

Law 431 (ENAR) calls for the establishment of a state-owned operator, Liban Telecom, through the merger of the operations of Ogero and two directorates of the Ministry of Telecommunications. The new company, Liban Telecom, would be an integrated telecom operator to whom a comprehensive telecommunications license will be issued, allowing it to provide services which include fixed and mobile telephony, local and international communication, voice and data access, pay phones, emergency call services, dial-up and printed directory information services.
It is left to the Telecommunications Regulatory Authority (TRA) discretion to grant to Liban Telecom exclusive rights over basic fixed voice service, public international voice service, telex and telegraph services, for up to five years from the date of its establishment.

Following Liban Telecom’s corporatization, Law 431 (ENAR) calls for its partial privatization through the sale of 40% to its shares to a strategic investor within two years of its establishment. The subsequent sale of the remaining shares is left to the discretion of the Council of Ministers.

Telecommunications Regulatory Authority

Law 431 (ENAR) calls for the establishment of a Telecommunications Regulatory Authority (TRA) endowed with the legal personality, administrative and financial autonomy. The TRA is composed of the Chairman and four members, who should be dedicated to office on full time basis and appointed by Decree in Council of Ministers for a non-renewable, and non-extendable term of five years. The TRA main duties include issuing, amending, suspending, and withdrawing licenses as well as supervising their execution, while encouraging competition and ensuring market transparency.

The Telecommunications Law gives the TRA the mandate and the responsibility to issue regulations pertaining to competition, interconnection, dispute resolution, pricing, quality of service, consumer affairs, spectrum,  and any matter which the TRA considers necessary to meet the objectives of the Telecommunications Law.

The TRA members and chair were appointed in February 2007 for a 5 year term. Since then, several regulations were issued and TRA was fully operational until February 2012, time by which the last board members left office.

Mobile Telecommunications Services

The mobile telecommunications sector was launched in Lebanon in 1994 when the Government entered into Build Operate Transfer (BOT) undertakings with two operators, Cellis (67% owned by France Telecom) and LibanCell, to offer GSM services for a period of 10 years and 3 months, with an extension clause for another two years.

In 1998, as this sector witnessed an unforeseen rise in actual demand, dispute arose between the operators and the Government: operators were accused of breaching the contract as the number of subscribers exceeded the 250,000 cap and of transferring revenues falling short of the amount due by revenue sharing scheme. Facing such dispute and its ensuing litigation, the government decided on June 16, 2001 to terminate the BOT contracts prior to their expiration. While their rights to their outstanding claims and a fair and equitable compensation were preserved, the operators brought the dispute to international arbitration. All litigation issues related to the termination of the BOT contracts have been closed to date.

Following the termination of the BOT contracts, two joint stock companies Mobile Interim Company 1 S.A.L. (MIC1) and Mobile Interim Company 2 S.A.L. (MIC2) were established on behalf of the Ministry of Telecommunications to hold the mobile sector assets which reverted to the Government in 2001. The shares of MIC1 and MIC2 are registered in the name of two banking institutions acting as fiduciary for the Republic.

After two attempts of privatization through the sale of assets and issuance of licenses in 2003 and 2007, the mobile telecommunications sector’s network assets remain today fully owned by the government. The Ministry of Telecommunications has been in charge of conducting tenders for the award of management contracts, alternated with frequent extensions to guarantee the continuity of service amidst recurrent delays in tender execution. The two mobile businesses are currently managed by two private mobile operators, Kuwait’s Zain group and Egypt’s Orascom.

ELECTRICITY

Electricité du Liban

Electricité du Liban (EdL), Lebanon’s state-owned public utility, is in charge of the majority of power generation, transmission, and distribution. Other participants in the sector include hydroelectric power plants owned by the Litani River Authority and concessions for hydroelectric power plants such as Nahr Ibrahim and Al Bared.

Law 462/2002 (ENAR) calls for the unbundling of generation, transmission, and distribution activities through their incorporation into separate companies. The companies responsible for the generation and distribution activities would be joint stock companies governed by the provisions of the Commercial Code. While transmission would remain publicly owned, Law 462/2002 (ENAR) calls for the privatization of the generation and distribution activities through the initial sale of up to 40% of their shares within two years of their incorporation date. The subsequent sale of the remaining shares is left to the discretion of the Council of Ministers.

Electricity Regulatory Authority

Law 462 ( ENAR) calls for the establishment of the Electricity Regulatory Authority (ERA) endowed with technical, administrative and financial autonomy. The ERA is composed of a Chairman and four members, who should be dedicated to office on full time basis and appointed by a decree issued by the Council of Ministers for a non-renewable, and non-extendable term of five years. The ERA’s main duties include promoting investments, improving the operational efficiency and guaranteeing the quality of services and good performance, ensuring market transparency and protecting consumers’ interest, encouraging competition, supervising and controlling non- competitive tariffs and issuing licenses and authorizations and controlling the compliance of the license and authorization holders with the terms and conditions, laws, regulations, and agreements, ensuring equal and fair benefit of all licensees and authorization holders of the transmission equipment.

In connection with the licensing of new private production capacity and distribution activities and given the delay in establishing the ERA, Law 775 (AR) was enacted in 2006 to grant the licensing authority to the Council of Ministers temporarily for a period of one year. Subsequently, Law 288/2014 (AR) and Law 54/2015 (AR) were subsequently issued to extend the validity of Law 775/2006 (AR) by two years, rendering it currently effective until April 2018.

ONGOING PROJECTS

There are no ongoing privatization projects in the electricity sector.

OTHER SECTORS

Civil Aviation

Law 481 (AR) aims at the reform of the civil aviation sector through regulating all activities related to management, investment, supervision and monitoring. For this purpose, it calls for the establishment of the civil aviation regulatory authority as an independent entity endowed with legal, administrative and financial autonomy. Among other duties, the authority is tasked with setting the terms of the licenses for building and exploiting civil airports.

As for Rafik Hariri International Airport, Law 481 (AR) allows the government to establish, within one year from the effectiveness of the law, a joint stock company called “Beirut International Airport Company” to provide all services related to airports, civil aviation, communications and air monitoring. This company, initially fully owned by the government, is subject to partial or full privatization through the sale of shares as per the provisions of privatization Law 228 (ENAR), while a percentage of the shares should be floated for the public through Beirut Stock Exchange.

While Law 481 (AR) caps the contract duration at 30 years, it states that any civil airport in Lebanon is subject to the aforementioned corporatization and privatization modes. It also extends the scope of work of established companies to include not only the equipment, operation, maintenance and development of airport facilities, services and activities, but also the management and exploitation of facilities and areas of commercial and industrial nature, such as duty free areas, fueling stations, cargo facilities, and others.

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