The Devil is in the Details – Lebanon Gets Boost for Infrastructure Development at Paris Donors Conf
The Paris IV conference brought together more than 40 countries and institutions to address the need for funding infrastructure projects in Lebanon. The result, as reported in numerous media accounts, is a commitment to some $11 billion in support, mainly in the form of soft loans and concessionary financing for more than 250 projects presented by the government of Lebanon. While some may see this as a ringing endorsement of Prime Minister Saad Hariri’s efforts to draw attention to the needs to stabilize Lebanon’s economy, whether or not Lebanon is up to the task of managing the commitments has yet to be determined. However, the financing will not come about without hard lessons ahead for Lebanon’s patronage and political wasta system.
According to Chris Jarvis, IMF head of Mission in Lebanon, the funding is conditioned on at least two major steps: the development of a management system to handle the funds, and a clear accountability system that ensures that funds are managed and “really contribute to growth in Lebanon.”
Hariri’s game plan has a number of triggers to attract international investors, particularly the use of Public-Private Partnerships (PPPs) that wed government planning and seed funds with investor expertise and control. The danger is in the low level of expertise in the public sector in negotiating PPPs, which can lead to unjustified risk-taking and risk-allocation by government agencies.
Reuters reported that “Jarvis also pointed out that following the IMF’s proposed measures are fundamental to reduce the government’s budget deficit, which includes raising the VAT rate, reintroducing taxes on petroleum products, and raising electricity tariffs to cut down on the subsidy bill.
“We think stricter structural reforms are very important, especially in stepping up anti-corruption efforts, and improving the electricity sector, so that people get a better supply of what they’re paying for.”
A similar concern was raised in an Asharq Al-Awsat story that “The donors would be very strict in following up the Lebanese performance and how to deal with these funding plans, which will last for six years, including two years devoted to the study of the hundreds of projects submitted, and four years of execution. The discussions revealed a key demand to adopt a ‘follow-up mechanism’ to ensure that the government is serious about implementing two issues: reforms and fighting corruption.”
The donors are well aware of the challenges to Lebanon due to many political shocks of the past decade, the continued security challenges, and the burden of support more than 1.5 million Syrian refugees. “The small Mediterranean country's debt-to-GDP ratio is the third-highest in the world at 148%, and annual growth is projected at around 2% for 2018. Among the major donors was the World Bank, which pledged $4 billion in low-interest-rate loans. Saudi Arabia reactivated a $1 billion line of credit and France pledged $492 million in low-interest-rate loans and $183 million in grants.” The United States committed some $110 million as a grant.
Prime Minister Saad Hariri spelled out the desperate situation, pointing to the impact of Lebanon’s status on the region. “It is not the stability of Lebanon alone. This is the stability of the region and, therefore, of our world,” Hariri said, warning that a collapse in Lebanon could ricochet throughout the Middle East and Europe. Syria’s war has hindered land exports to Jordan, Iraq, and oil-rich Gulf Arab countries. And as The Washington Post added, “Rampant corruption has taken another kind of toll, hollowing out infrastructure and basic services, with frequent water and electricity cutoffs.”
The hard road ahead will only prove more difficult if Lebanon does not adopt needed reforms to make its economy and government more efficient. With a mix of grants, concessionary loans, market loans, and guarantees, having a robust and transparent management system is paramount if Lebanon is to achieve its badly needed economic targets. Estimates are that the first phase of study and initial projects will take four plus years and cost $10 billion, with a total of $17 billion needed over the following seven years.
French President Macron, the host of the conference stressed that “The delivery of the funds is also tied to a series of measures that include public-spending cuts and an assault on corruption. This conference only has a sense if it’s accompanied by your will and your courage, and a precise monitoring of the follow-up,” Macron said in his closing comments. “It only has a purpose if it’s accompanied by a profound transformation.”
Lebanese officials maintain that the private sector would finance around 40 percent of the program, while any grants and loans received would be used for the remaining 60 percent. Yet some view these soft loans - with an interest rate of around 1.5 percent over a period of 20 to 30 years - as an extra layer of debt. Not great news if not properly managed.
Up next is the Brussels conference scheduled later this spring, which will focus on the Syrian refugee crisis.