VZCZCXRO4205
PP RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV
DE RUEHLB #0624/01 1230913
ZNR UUUUU ZZH
P 030913Z MAY 07
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC PRIORITY 8084
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 BEIRUT 000624 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR ABRAMS/SINGH/MARCHESE/HARDING, TREASURY FOR MNUGENT 
AND BERGER 
 
E.O. 12958: N/A 
TAGS: BEXP ECON ECPS ENIV LE PGOV PREL SY
SUBJECT: LEBANON:  HIGHER COUNCIL FOR PRIVATIZATION SYG 
DOWNBEAT ON PROGRESS 
 
SUMMARY 
------- 
 
¶1. (SBU)  SYG Ziad Hayek does not believe early progress will 
be made in the privatization of Lebanon's mobile sector. 
There are "technical" solutions, but according to Hayek, PM 
Siniora has said he would prefer a new law.  Privatization of 
the telecommunications fixed sector is also delayed, 
principally due to resistance by the Director General of the 
Ministry of Telecommunications.  Hayek stated that appointing 
a Board of Directors, a critical element of the planned 
consolidation, will be difficult.  Concerning the country's 
poorly performing electrical sector, Hayek strongly 
recommended that overall reform of its principal components 
-- generation, distribution, and financial structure -- 
should be done all at once.  End summary. 
 
SALE OF MOBILE SECTOR MIGHT REQUIRE NEW LAW 
------------------------------------------- 
 
¶2. (SBU)  On 4/26 Secretary General of the Higher Council for 
Privatization (HCP) Ziad Hayek, in a frank and open 
discussion, told Econoff and Senior Econ Specialist that 
there has not been much progress on the privatization of the 
cellular network.  One of the problems is that PM Siniora has 
stated publicly that he wants a new law to enable the sale of 
the mobile licenses.  Although Hayek agrees with those like 
Kamal Shehadi, head of the Telecommunications Regulatory 
Authority (TRA), that no new law is required, he thinks the 
PM has now boxed himself in.  If Parliament does not meet 
until the fall, there will be no law this year, but if 
Parliament meets in the next two months, a deal could be done 
by September.  Hayek said that he will not speculate if that 
is feasible. 
 
TECHNICAL SCHEMES MIGHT WORK 
---------------------------- 
 
¶3. (SBU)  According to Hayek there are other options, and the 
GOL may consider them.  These are technical and engineering 
schemes based on previously enacted Law 431 that may avoid 
the need for parliamentary approval.  According to Hayek, 
this law permits the TRA to issue licenses when the operators 
build their own networks.  Hayek contended this option is 
attractive from an investment point of view because a license 
is worth about $2-3 billion, but a network would cost no more 
than $100 million to construct.  Once completed, the Ministry 
of Telecommunications (MOT) would lease the existing network, 
or transfer it to Liban Telecom.  However, the problem is 
whether there are investors willing to buy such an expensive 
license from the TRA when the legal basis of such a 
transaction is untested. 
 
WHAT VALUE TO PLACE ON THE SALE 
------------------------------- 
 
¶4. (SBU) Under this scenario, Hayek, like others, expects 
Arab investors to win the bid no matter how it is offered. 
He believes they would be more willing to place higher bids 
than Western investors because they have a higher tolerance 
for Lebanon's risk level.  They also put a higher value on 
intangibles, such as their already established brand 
recognition in the Middle East.  Moreover, he added, Arab 
governments are trying to be supportive of the Siniora 
government.  The winning bidder would be expected to build 
its own network.  According to Hayek, this process would not 
actually be privatization, and therefore, there would be no 
need for a new law.  Only the TRA and investment banks would 
be involved.  HCP has already asked several investment banks 
to "canvass" the marketplace -- CEOs of telecom companies -- 
and see if this approach is feasible.  Hayek and his HCP team 
are working to calcualte an approximate value, but at this 
point he could not offer a figure. 
 
NO PROGRESS IN THE FIXED SECTOR EITHER 
-------------------------------------- 
 
¶5. (SBU)  As far as the fixed telecommunications network, 
there is also not much progress.  Hayek said the HCP has 
finished planning work for the merger of Ogero and two 
telecom ministry directorates.  He indicated that HCP was 
supposed to move to the execution phase in early March, but 
the DG of Ogero, Abdelmenim Youssef, objected to the action 
plan, as well as the creation of a task force to carry out 
the necessary consolidation.  Youssef took the position that 
 
BEIRUT 00000624  002 OF 003 
 
 
the task force would eventually conflict with the authority 
of the still-to-be-established Board of Directors for the new 
telecommunications entity, but Hayek disputes this.  The task 
force would have been supervised by a steering committee, 
including representatives from the HCP and the Prime 
Minister's office, but only until the permanent Board is 
created.  The Board would thereafter manage the project 
management office, as well as Liban Telecom.  The Board will 
be appointed by the MOT and the Prime Minister, and would not 
need approval by Parliament. 
 
MINISTRY DG IS THE PROBLEM 
-------------------------- 
 
¶6. (SBU)  Hayek believes that Youssef may be blocking 
progress because he would like to be appointed Chairman of 
Liban Telecom.  "If Youssef is appointed chairman, there will 
be no privatization", Hayek stated, pointing out that Youssef 
does not want international investors, because of the 
requirement that would create for greater transparency. 
Hayek stated that Youssef has the firm backing of the MOT. 
He contends that the MOT wants Youssef to be a part of the 
steering committee, although that, he believes, may be a 
conflict of interest.  (Note:  Youssef was appointed by late 
PM Rafiq Hariri as Director General of the Ministry of 
Telecommunications in the late 1990s.  In 1998, he was tried 
and found guilty of violations committed during the 
government of the PM Hoss.  When Hariri returned to power, 
Youssef was released and re-appointed as Director General. 
End note.) 
 
NAMING A BOARD WILL BE DIFFICULT 
-------------------------------- 
 
¶7. (SBU)  Hayek stated that appointing board members will be 
a difficult process.  "We need to arrange for interviews, but 
neither the Prime Minister nor the Telecommunications 
Minister have given their authorization to begin the process. 
 Complicating the situation is a requirement that the five 
board members must come from different sectarian groups. 
Finally, there is a requirement for Cabinet approval. 
 
POWER SECTOR IS COMPLEX 
----------------------- 
 
¶8. (SBU)  Addressing Lebanon's inefficient and 
heavily-subsidized power sector, Hayek stated that progress 
here is also behind schedule.  The World Bank has funding the 
study and actual restructuring costs to modernize the 
chronically under-performing electricity company (EDL). 
Hayek expects that technical and financial consultants will 
be appointed in July.  There will be three teams:  one 
working with HCP for restructuring; one formulating policies; 
and the final team working on operations and financial 
reform.  Hayek said that if the work is begun soon, the 
project could be implemented within one year, although the 
World Bank contract will be let for two years to allow for 
"slippage."  He acknowledged there were many problems with 
reforming the electricity sector, but argued that dealing 
with all sector problems simultaneously -- production, 
network upgrades, and financial reforms -- offers the best 
chance for success. 
 
TECHNICAL IMPROVEMENTS PLANNED 
------------------------------ 
 
¶9. (SBU)  HCP presently has a contract with U.S. consultants 
to help with two troublesome areas in the power sector.  The 
first deals with the installation of remote meters, which 
would address heavy non-technical losses.  The second project 
will try to improve regional management and power 
distribution efficiency by using private sector resources.  A 
proposal still in the planning phase calls for selling the 
Deir Ammar power plant in north Lebanon to investors, under 
the provision that the purchaser double plant capacity to 900 
MGW, and switch generator fuel to natural gas.  HCP is 
negotiating with IFC to assist with this process.  If this 
project could be completed by 2010, there would be sufficient 
installed capacity to meet anticipated national demand.  HCP 
is also working on a legal framework for a Public/Private 
Partnership law for new, more efficient, small projects. 
 
COMMENT 
------- 
 
 
BEIRUT 00000624  003 OF 003 
 
 
¶10. (SBU)  Hayek appears to be a committed, well informed 
leader, with an excellent team of young experts - legal, 
financial and technical.  His team works hard to keep to 
their timetable, but they are realists and understand the 
complex political environment.  They joke casually about the 
unlikely success of some of these ventures, but insist they 
remain optimistic.  End comment. 
FELTMAN