ExecutiveMagazine - 5/10/2019 11:30:46 AM - GMT (+2 )
The Council of Ministers approved a new electricity policy paper on April 8. Although this was a long-awaited reform, the Lebanese were expecting better governance and more transparency, especially in view of the commitments made at CEDRE. However, the government already seems to be falling short on its promises of reform, with no development of regulatory or procurement frameworks for the electricity sector and contracts being granted without guarantees of transparency or due process.
Efficient regulatory and procurement frameworks are essential for ensuring competitive offers—they incentivise the private sector, increase competition, and de-risk the electricity sector. Yet, to date Lebanon lacks a procurement framework that guarantees transparency and good governance in this sector, and the existing regulatory framework has been consistently breached. Parliament not only extended the mandate of Law 288 (2014) enabling the cabinet to issue licenses for power purchase agreements (PPAs), but also enabled the bypassing of any legal or regulatory framework on tendering procedures. Regulations in Lebanon have become subject to perception and choice, with each entity cherry-picking which laws and provisions to implement, and which to dismiss.
Private sector participation has also been touted as a key component of CEDRE reforms. Lebanon adopted a public-private partnership (PPP) law in 2017, article two of which states that the law applies to public sector projects, including the power sector. However, this law will also be disregarded due to the extension of Law 288 (2014), on the claim that its application, which includes the involvement of the Higher Council for Privatisation and PPP (HCP), would take too long.
The absence of a clear regulatory framework with procurement procedures for private sector participation, forms a barrier to effective competition, especially in the tendering of PPA licenses. These contracts will lock the government into purchasing electricity at an agreed rate for a period of 20-25 years—a deal worth hundreds of millions of dollars. It is therefore vital that the government ensures a highly competitive basis, not only for now, but also for the years to come.
The case of Deir Ammar 2
The evidence so far suggests a lack of transparency and good practice on behalf of the government. Instead of seeking to set a better record in procurement practices, the electricity plan sets out a timetable that includes starting work on the Deir Ammar 2 power plant in the second half of 2020. Behind this proposal are two unpublished agreements: a PPA and an arbitration process, the details of which have not been disclosed.
A quick refresher on the facts: In May 2018, the then-resigned cabinet approved transferring the engineering, procurement and construction (EPC) contract for Deir Ammar 2 into a PPA contract with a build-operate-transfer (BOT) model. The initial EPC contract was awarded to a consortium of Greece’s JP Avax and Sweden’s AF Consult, but was then halted after the government refused to issue the contract’s second payment due to an issue regarding the applicability of VAT. The consortium thus resorted to an arbitration process, the details of which have still not been publicly revealed, despite the cabinet statement last year that announced the intention to transfer the contract to a new company under the BOT model.
The cost of the PPA was not announced at the same time as the cabinet’s decision, but was revealed later that month by former energy minister Cesar Abi Khalil to be 2.95 US cents per kWh. Abi Khalil was tasked with carrying out negotiations and signing the new contract with the new company. However, the name and ownership of the newly awarded company have not been disclosed, let alone the qualification and contract award criteria that the government adopted to select the company.
Moreover, the cabinet chose not to disclose any details regarding the arbitration process or the negotiations that took place. The identity of the newly awarded company and the contract terms, including the rights and duties of each party, also remained undisclosed.
Basic procurement practices entail launching an expression of interest open to local and international firms assessing their technical capacity, experience, and resources, and shortlisting those qualified based on clear criteria. The tender documents are then sent to the qualifying firms, and include the evaluation criteria and the template PPA contract. None of this was done when the cabinet awarded a PPA to an undisclosed entity without any public procurement process; it is therefore unclear how the government ensured that the new contract and the new company were the best choice for the Deir Ammar plant, nor how the project will be financed.
Improving regulations and ensuring transparency and good governance in procurement are not only basic requirements the government should abide by—especially after pledging to implement reforms—but they also serve to increase competition and improve the sector overall. The government has pledged to do things differently, yet based on its actions in the energy sector initial signs are not promising.