Is it Possible to Calculate the Value of CEDRE Investments for Lebanon?
A consistent message ATFL hears in meetings with US officials is that the Lebanese government has to be serious about reforms and tackle endemic corruption, administrative malaise, and bureaucratic obstacles. Since Prime Minister Designate Saad Hariri has staked his political future on the implementation of his Capital Investment Plan, relying on CEDRE pledges for funding, this message has greater gravity for Lebanon’s stability.
In a recent press release on the eventual Ministerial Statement, Hariri “pointed out that any government that would be formed will include in its ministerial statement all the reforms and projects of the CEDRE conference, stressing that all political parties have already agreed to this.” The ministerial statement describes the overarching program for the incoming government, so a consensus on forward movement is significant.
Lebanese officials blame the Syria refugee crisis as the main factor in its economic decline; yet its infrastructure and reform needs predate this crisis. Recognizing why Lebanon’s infrastructure is inadequate and how it has failed to exploit earlier support commitments are important for understanding what can be done to advance the likely success of the new agreement.
This blog, the first of two, reviews articles by The Lebanese Center for Political Studies (LCPS) that look beyond the pledged infusion of investment capital to how to derive substantial benefits from the CEDRE process. While there is a general consensus on the need to upgrade Lebanon’s infrastructure, related issues and longer-term socio-economic results are not adequately addressed. Issues include the effort to spur development through debt financing, the likelihood of attracting international capital to projects in a country handicapped by corruption and a weak government structure, and how to actually measure the benefits of the program over time.
It is useful to call the CEDRE conference by its formal name, Paris IV, as it is the fourth conference in which the international donor community determined to support Lebanon based on its reconstruction needs and declining government capacity to solve Lebanon’s economic woes. What happened following similar efforts in 2001, 2002, and 2007 is quite instructive.
To illustrate the need for a strong monitoring mechanism for CEDRE/Paris IV, one of the articles looks at what happened in the aftermath of the 2007/Paris III conference. Besides specific projects, the reform agenda included: privatization, fiscal adjustment, pension reform, and the formulation of strategies for documentation and administrative measures. The overall goal was to alleviate public debt burden, enhance revenues, induce growth, and enhance structural reform.
The Ministry of Finance produced progress reports on both projects and reforms for the $7.6 billion pledges. It issued 11 reports in all, which indicated that after two years, some 25% (26 of 117) of the projects had been started. Of the eventual one-third launched, none were completed by 2009. The Ministry reported on 21 projects, while 70 others were dropped. Meanwhile, only 22% of the reform agenda was completed by 2009, yet Lebanon was able to secure 50% of the related funding.
Another article in the series takes aim at the need to fight corruption to maximize the impact of infrastructure investments. It notes that needed regulations and initiatives include “the adoption of a transparent and competitive procurement process, strong regulatory framework for PPP, and measures to foster the growth of an effective judiciary to protect the public’s interests.” Several have been passed by Parliament but an empowered judiciary is still lacking.
Using comparative data from the World Bank Group, the authors compare Lebanon to its peer group and found that its infrastructure “is in significantly poorer condition” than countries with similar levels of economic development. “Infrastructure deficiencies range from poor quality of roads and frequent electricity cuts, to an inability to properly manage solid waste.”
The Ministry of Environment estimates that poor road infrastructure, construction inefficiencies, weak networks, environmental damage, and lost time routinely cost the country 4-5% of GDP. Similarly, less than half the population (48%) has access to safe drinking water due to “lack of proper management, treatment, and safety control of wastewater resources, leaving 92% of Lebanon’s sewer system not adequately treated.” Insufficient storage capacity means that people have to resort to private vendors, which puts an additional strain on those least able to afford them.
Other negative conditions are also documented and are another reminder, as in Paris III, that greater investment in infrastructure demands greater efficiency if a majority of Lebanon’s population, not just the top 15%, will benefit from these investments, “which requires control of corruption since government has the major role in regulating conditions for investment.” As the article points out, Lebanon ranks among the worst 20% of countries in the world in terms of corruption. “The more corruption there is in a country, the less effective public investment is in improving the quality of infrastructure. Based on Lebanon’s high corruption levels, an increase in public investment is therefore most likely associated with no meaningful infrastructure improvements.”
The companion blog will look at factors behind Lebanon’s fiscal weakness and a realistic projection of what CEDRE can accomplish.