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FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC PRIORITY 6324
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUEHFR/AMEMBASSY PARIS 3737
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHAAA/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCNDT/USMISSION USUN NEW YORK 4277

UNCLAS SECTION 01 OF 03 BEIRUT 000035 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND EINT ENRG PGOV PINR KCOR AA LE
SUBJECT: NEW CABINET MINISTERS TACKLE ECONOMIC REFORM 
 
REF: 08 BEIRUT 692 
 
BEIRUT 00000035  001.6 OF 003 
 
 
¶1. (SBU) SUMMARY:  The new ministers of finance, 
telecommunications, and energy were enthusiastic about taking 
on key reform priorities outlined in reftel during separate 
meetings with the Ambassador the week of January 4.  All 
three ministers were confident the GOL would pass a budget in 
2010 for the first time in five years, and all were 
optimistic that in the current political environment they 
would be able to move forward quickly on reform.  Minister of 
Finance Raya el-Hassan said the budget was her top priority, 
and she was looking for ways to bring more spending into it 
while continuing the long process of making it a more 
transparent document. 
 
¶2. (SBU) Telecoms Minister Charbel Nahas said that 
privatization of the mobile phone companies would take time, 
but he planned to provide more transparent accounting of all 
GOL-owned telecom providers while expanding broadband access 
in 2010.  Minister of Energy and Water Gebran Bassil stressed 
the importance of investment and strategic planning in the 
electricity and water sectors, while exploring the 
possibility of finding oil and gas off the Lebanese coast. 
All three ministers were considering the fiscal impact of 
reform, both positive and negative.  Meanwhile, both the 
finance and telecom ministers encouraged the USG to explore 
alternate conditionalities for the disbursement of the final 
$75 million tranche of USG-pledged Paris III budget support. 
End SUMMARY. 
 
FIRST PRIORITY: THE BUDGET 
-------------------------- 
 
¶3. (SBU) Finance Minister Hassan said submitting the 2010 
budget was her top priority, but she was still awaiting 
budget submissions from the fiscally crucial ministries of 
telecommunications and energy.  She noted that the 
ministerial statement had outlined an ambitious agenda for 
the new government, and she worried about where she would 
find funds to jumpstart the economy and "bring growth to the 
people."  She was particularly concerned about the budget 
impact of new projects in the electricity sector. 
Nonetheless, once she receives all the submissions, she 
expects to be able to present the comprehensive document to 
the cabinet within a few weeks, where it should pass after 
several weeks discussion, moving on to the parliament perhaps 
sometime in March. 
 
¶4. (SBU) Telecoms Minister Nahas was also focused on the 
budget, promising that his submission would be in shortly, 
and he hoped that the GOL would be able to pass the full 
budget reasonably quickly.  Energy and Water Minister Bassil 
also indicated his budget submission would be in soon, and 
that he was working hard to give a fair representation of the 
funding needs of his ministry, which has responsibilities 
ranging from electricity production to administration of dams 
to oil and gas exploration. 
 
BRINGING TRANSPARENCY TO THE BUDGET 
----------------------------------- 
 
¶5. (SBU) The Ambassador raised USG concerns about the lack of 
transparency in the GOL budget, and the congressional mandate 
that USG assistance go only to central governments with 
transparent budgets.  Hassan said she would be happy to 
accept help from the USG in this area, though there would 
have to be careful coordination among donors as the World 
Bank had just started a wide-ranging project covering budget 
preparation and execution.  Meanwhile, she assured the 
Ambassador, she was looking for ways to include more GOL 
spending in the 2010 budget.  Later in the week, the minister 
encouraged a delegation from the U.S. Treasury Department's 
Office of Technical Assistance (OTA) to look into assisting 
the ministry's public accounting unit.  The unit's mandate 
includes closing the accounts of Lebanon's so-called "public 
institutions," many of which are not currently accounted for 
in the budget. 
 
¶6. (SBU) Minister Nahas stressed that the delay in his 
ministerial budget submission was the result of his efforts 
to account more carefully for revenue and spending in the 
publicly-owned mobile and fixed-line sectors.  He hoped that 
more rigorous accounting would make clear the source of 
revenues in the telecom sector, showing the degree to which 
taxation and monopoly rents pad the earnings of the sector on 
behalf of the GOL. 
 
BEIRUT 00000035  002 OF 003 
 
 
 
TELECOM PRIVATIZATION WILL "TAKE TIME" 
-------------------------------------- 
 
¶7. (SBU) Nahas asserted that a clear breakdown of income and 
spending, as well as accounting for depreciation of assets, 
was essential to the process of privatization, particularly 
in the mobile sector.  Privatization would therefore "take 
time," and the structure of privatization, whether through a 
straight license auction or some sort of public offeringt"V6Q 
U4sBtQ^Cw!2hange, would need to be discussed in 
cabinet.  In the fixed-line sector, he worried that 
corporatization of the government-owned Ogero in its current 
form would merely create a monopoly that would crush 
competition.  He said he wanted to explore breaking the 
company into its constituent parts before creating Liban 
Telecom, which might use its control of network 
infrastructure to push out competitors. 
 
¶8. (SBU) While he sorts through these accounting and 
structural issues in 2010, Nahas said he would move forward 
immediately on expanding internet bandwidth and setting up 
broadband sites around the country.  This would "show the 
people that the state can do something for them," he said, 
while the groundwork is laid for privatization. 
 
ELECTRICITY AND WATER: 
"ANYTHING WE DO IS BETTER THAN NOTHING" 
--------------------------------------- 
 
¶9. (SBU) Bassil was still getting a handle on his vast 
portfolio, but said his preliminary analysis led him to 
conclude that there has been too little investment in the 
electricity and water sectors in Lebanon, and it was 
important that the government take action immediately.  "Any 
decision we make will be better than no decision at all, as 
we have seen for the past few years."  He pointed to the 
regional water authorities, which he said had been created 
and then starved of material and human resources, resulting 
in low collections and massive deficits.  "We have water, we 
just need to manage it better," and he thanked the Ambassador 
for USAID's support to the water authorities, as well as to 
municipalities, with whom AID has worked to build waste water 
treatment plants.  Bassil believed Lebanon needed to invest 
in dams, to preserve scarce water resources and open up 
opportunities for hydroelectric power. 
 
¶10. (SBU) Bassil spoke briefly about the possibility of 
meeting short-term power needs by purchasing electricity from 
Lebanon's neighbors.  While Syria and Egypt do not have much 
more to sell, he said, Turkey might have an excess, which 
might help Lebanon take in the 600MW it needs to make it 
through next summer.  As for a longer-term solution to the 
supply problem, he stressed that the GOL must build new power 
plants, and he was looking into funding options.  Meanwhile, 
he hoped to focus on demand management, encouraging people to 
use energy-conserving light bulbs, and on exploring 
alternative energy options.  When asked if he was looking to 
decrease the subsidy on big consumers of electricity, he 
replied enthusiastically, "Yes!  I will do it.  We should not 
be in the business of subsidizing the rich." 
 
¶11. (SBU) Without giving details on his plans, Bassil said he 
wanted to pursue oil and gas exploration off Lebanon's coast, 
and if resources were found he would recommend that proceeds 
from them be put into a special fund, much as Norway does 
with its energy revenues.  Discovery of natural gas could 
open the way to using more gas in electricity production, 
which would bring down costs significantly, he noted.  He 
added that he was in favor of corporatization of Electricite 
du Liban (EDL), the state-owned power utility, but that he 
would need to learn more and discuss with cabinet colleagues 
before moving forward. 
 
FISCAL CONCERNS 
--------------- 
 
¶12. (SBU) Bassil acknowledged that he would be asking the 
central government for money to invest in improvements in 
water and electricity.  He claimed that such investment, even 
if it raised the deficit in the short term, would yield 
returns very quickly, lowering costs in the coming years and 
improving Lebanon's fiscal situation.  Meanwhile, his talk of 
increasing the use of natural gas and raising electricity 
prices for large consumers would certainly stem EDL's losses, 
which amount to over $1 billion annually.  Finance Minister 
 
BEIRUT 00000035  003.2 OF 003 
 
 
Hassan was emphatic that any additional spending must be 
funded either through donor contributions or an increase in 
taxes, because "I won't let them mess with my debt-to-GDP 
ratio," she said.  Nahas argued that increased liquidity in 
Lebanon's banks opened up breathing space for the GOL to take 
on fundamental reforms of the public sector without resorting 
to the "emergency approach" of slashing budgets and selling 
off assets, though he stressed that privatization was an 
essential part of his strategy. 
 
PARIS III: CHANGE IN CONDITIONALITY? 
------------------------------------ 
 
¶13. (SBU) COMMENT: Both Hassan and Nahas supported the idea 
of extending the Paris III cash transfer MOU between USAID 
and the Ministry of Finance until December 2010, but both 
also broached the subject of changing its conditionality. 
While privatization of the mobile companies is still a 
priority for the GOL, it is not likely to happen in 2010, and 
when it does, it looks increasingly like a public offering of 
some sort may be the preferred structure.  We can follow up 
with Nahas on his plans in detail, both on structure and 
timing.  Meanwhile, in order to send a strong message of 
support to the new government as it takes on reform in 
earnest, we would like to open up an interagency discussion 
on the possibility of changing the final condition on our 
budget support.  Hassan and Nahas both mentioned linking the 
assistance to reform in the broadband sector, with the 
finance minister pointing to a broadband license auction as a 
possible benchmark.  If we choose to stay with mobile 
privatization as a condition, we may have to consider 
altering the language to allow alternative transactions, 
rather than only a license auction, while extending the 
deadline beyond 2010. 
 
SISON