MICROFICHE COPY Report No. 10126-LE Type: (ECO) VOYADZIS,S/ X32713 / H10047/ MN2CO Repozt No. IO26LE DOCUMENT OF THE WORLD BANK FOR OFFICIAL USE ONLY REPUBLIC OF LEBANON RECENT ECONOMIC DEVELOPMENTS AND EMERGENCY REHABILITATION AND TECHNICAL ASSISTANCE NEEDS IN SELECTED PRIORITY SECTORS December 3, 1991 COUNTRY OPFRATIONS DIVISION COUNTRY DEPRTMENT MIDDLE EAST AND NORTH AFRICA AEGION This document has a resTicted distribution and may be used by rcmipients only in the perfommnce of their offkial duties. Its contents may no otherwise be disdosed without World Bank authorization s J -gl CURRENCY EOUIVALENTS t. Currency unit: Lebanese Pound (LL) Lebanese Pound Rer US dollar Period End of Period Period Avera2e 1974 2.33 2.33 1978 3.03 2.96 1982 3.81 4.72 1986 87.0 38.4 1987 455.0 224.7 1988 530.0 409.2 1989 505.0 496.5 1990 842.0 701.8 1991 January 1110.0 974.2 February 1060.0 1081.5 March 938.0 980.4 April 932.0 942.1 May 915.0 921.8 June 904.5 909.1 July 893.0 897.0 August 893.0 892.1 September 891.5 890.0 October 883.0 ... List of Abbreviations BdL Banque du Liban; Bank of Lebanon CDR Council for Development and Reconstruction CEGP Conseil Executif des Grands Projets CEGPB Conseil Executif des Grands Projets de Beyrouth EDL Electricite du Liban; Electricity of Lebanon MOHC Ministry of Housing and Cooperatives MHER Ministry of Hydraulic and Electric Resources MPT Ministry of Posts and Telecommunications UNDP United Nations Development Programme UNRWA United Nations Relief and Works Agency for Palestine Refugees This report, has been prepared by a mission that visited Lebanon during October 28-November 9, 1991. The mission was composed of Edmond Asfour (Chief of Mission, consultant); Marcelo Giugale (economist); Gerald Buttex (telecommunications specialist); Youssef Choucair (housing specialist); Lars Rasmusson (water supply specialist); Zvonimir Jovanovic (power specialist consultant); and Thakoor Persaud (institutional development specialist); George Abu Jawdeh and Christian de Clercq (UNDP, Beirut) joined the mission in part of its discussions. - TABLE OF CONTENTS - Cho Title Page No. Executive Summary I. The Econom. 1 A. Population, Output and Growth ..... .............. 1 B. Recent Economic Developments ..... ............... 4 i. Growth ........ ........................ 4 ii. Money and Prices ...................... 4 iii. Public Finance ........................ 7 iv. Balance of Payments and External Debt . 10 C. Economic Prospects ..................,,,.12 D. Financial Needs ........ ......................... 13 II. Sectoral Rehabilitation ....... ........... .............. 16 Introduction ............................................ A. Electricity ...................................... 18 B. Telecommunications ............................... 22 C. Water Supply, Wastewater and Solid Waste .......... 26 D. Housing .......................................... 29 III. Institutional Issues ................................... 33 t.nnexes on the Electricity, Telecommunications, and on Water Supply, Sewerage and Solid Waste may be available at the Paris meeting. - LIST OF TABLES. Tble NO l EaNe. 1. Lebanon's Est:lmated Output by Sector, 1974 and 1988-90 3 2. Lebanon: Monthly Economic Indicators in 1991 5 3. Credit to the Public Sector 6 4. Public Finance, 1987-1991 9 5. Estimates of the Balance of Payments 10 6. Public External Debt, October 31, 1991 11 7. Estimates of Financial Needs for Reconstruction 14 8. Estimated Cost of the Emergency Program for Four Sectors 17 9. Cost Estimate of Rehabilitation Program in Electricity 20 10. Cost Estimate of Rehabilitation Program in Telecommunications 25 11. Cost Estimate of Rehabilitation Program in WSSW 28 12. Cost Estimate of Rehabilitation Program in Housing 32 13. Estimated Cost of Technical Assistance and Studies 34 Executive SaMAry Sapkgrounxd i. A World Bank/UNDP fact finding mission visited Lebanon for two weeks in October/November, 1991 to make a preliminary assessment of the economic situation, and to identify pressing rehabilitation requirements and technical assistance needs in four selected priority sectors: (i) electricity; (ii) telecommunications; (iii) water, waste water and solid waste; and (iv) housing. In addition, the mission made a preliminary examination of the institutional and administrative conditions affecting the planning, implementation and monitoring of a general reconstruction program. The mission also prepared the ground for a full economic assessment planned for early in 1992, and for a special mission that would prepare an emergency rehabilitation operation for possible Bank financing. ii. Lebanon has emerged from a 16-year period of turmoil in which it had suffered from violent civil strife and military occupation, from fragmentation and weakening of government authority, and from widespread physical destruction and deterioration of its capital stock. The destruction, which occurred in several waves and affected different regions at different times, was particularly violent in 1989 and 1990. The war has also resulted in the emigration of a large part of the professional and business class, in a drastic reduction in average incomes (to perhaps one third the pre-war level), and in the displacement of one quarter of the population, who now live in unhealthy shanty towns, in semi destroyed buildings or in other people's homes. It is a tribute to the resilience and dynamism of the Lebanese population that, following the political reconciliation under the Taif Accord, and the spread of government authority in a large part of the country since October 1990, a rapid economic revival has started, led by a dynamic private enterprise sector and supported by an active monetary stabilization policy. The Government, which has lost half its employees and many of its higher level staff, faces a most extraordinary task in planning, financing and executing a program for the reconstruction of the country's infrastructure. It faces, at the same time, the formidable tasks of resolving the housing problems of the displaced population, of developing the poorer regions, and of creating the conditions *for attracting back emigrant professionals and private capital invested abroad. Simultaneously, it has to deal with the serious problem of reducing the unsustainably high fiscal deficit and short term debt accumulation. In these tasks, and particularly in the recovery period, the Government will need international financial support and technical assistance. Economic DeveloRmeiits iii. During the war, Lebanon's gross domestic product (GDP) declined steeply and is estimated to have been about $3.3 billion in 1988, a year of relative calm. On the basis of scarce and preliminary data, and assuming a population of 3.4 million, GDP per capita in 1988 stood at about $960 and gross national product per capita at about $1,160. Due to the deteriorating war situation, ii current dollar GDP declined further between 1988 and 1990; its cumulative decline over those years has been tentatively estimated at 22 percent. iv. The improvement in the security situation since the formation of a national Government in October 1990 has been accompanied by the resumption of communications within the country and with the external world, by a rapid revival in production and trade, and by the effective implementation of an exchange and price stabilization policy. On the basis of a number of output and trade indicators, it is tentatively projected that, in 1991, current dollar GDP may grow by 30 percent or more above its depressed 1990 level, bringing it back close to its 1988. v. Two major achievements in 1991 have been the stabilization of the exchange rate and the parallel reduction in domestic inflation (given the high degree of openness of the economy and the close link between international and domestic prices). The stabilization of the exchange rate and of domestic prices was helped by large inflows of short term capitals, attracted by the high expected dollar returns on local-currency-denominated t-bills (in turn, issued to finance the fiscal deficit). Consequently, official exchange reserves rose to $1.2 billion by the end of October 1991. vi. The gradual spread of Government control in 1991 has enabled the authorities to resume tax collection and to some extent contain fiscal expenditures. Customs duties and other tax rates were partly adjusted to take account of past depreciation and inflation; most subsidies have been removed and hiring has been virtually frozen. The Government has thus been able to check the growth of the budget deficit, which remains large, however--the equivalent of 20 percent of projected GDP. Acting to reduce the high fiscal deficit is critical if the current price stability is to be maintained in the medium- and long run. vii. The rapid growth in domestic public debt in recent years, as a result of large budget deficits represents a serious risk to Lebanon's future financial stability. About half of the budget deficit is accounted for by the interest payments on that debt. Borrowing to finance the deficit has kept interest rates high in real terms and has crowded out private sector investments. Reducing the budget deficit should therefore be a major policy goal not only in order to stimulate private investment, but also to consolidate and protect the exchange and price stability that has been recently achieved. Emergency Rehabilitation Needs viii. It is not possible at present to give a reliable estimate of total physical losses sustained during the past sixteen years, although it can be confidently assumed to be a multiple of the country's current annual income. In addition, the remaining capital stock has aged or has become obsolete during this long period, while new investments (except for housing) have been very small compared with past levels. While restoring buildings and equipment to their previous condition is often appropriate in the short term, their replacement and the use of more modern technologies is sometimes the more efficient approach. Investment requirements of reconstruction are therefore iii not limited td repairing physical damage, but are likely to exceed it substantially. Therefore, in planning a reconstruction program and estimating its cost in a specific sector, there will be a need not only for damage assessment in the sector, but also for a sectoral development plan, which is consistent with the overall development strategy and the future requirements, and which fits in a common macroeconomic framework. Once the outline of the reconstruction program becomes clearer, and the ongoing fiscal reforms take shape, the design and evaluation of a medium term economic framework would also become possible. ix. The preparation of a reconstruction program, based on an adequate analysis of existing damage and future needs, and on appropriate technical and economic feasibility studies of projects, while necessary, should not, however, delay the rehabilitation of essential services and capital but should proceed immediately and in parallel. The most immediate obstacle to economic revival is the inadequacy of the basic infrastructure, which had been seriously affected by the war, particularly in electricity, telecommunications and water supply. One of the most immadiate social problems (besides improving public h:;.-Lth and education) is to relocate and house about 800,000 people who have been displaced .y the war or are illegally occupying houses or squatting on state land or in aama2ed buildings; the latter includes squatters in the damaged or destroyed houses and commercial buildings in the Beirut business center. x. The mission has therefore focused on identifying elements of an emergency reh&bilitation program in four priority sectors that can be started in 1992, and on selecting the basic studies, technical assistance and other measures that need to be undertaken in 1992 in order to ensure the efficient planning and implementation of the rehabilitation program in these sectors in 1992-1994, as well as for the planning of a medium term reconstruction program. xi. The cost of the emergency projects identified in the four priority sectors covered in this report has been tentatively estimated by the World Bank/UNDP mission at just over $1 billion for three years (1992-1994), of which $400 million for an initial fund to finance low cost housing, and $59 million for technical assistance (consultants, studies, training and institutional building); in addition, $4 million would be needed for technical assistance to the Statistics Department and the Ministry of Finance. Against the $ 1 billion indicated above, commitments totalling $110 million have been recently made by the Arab Fund and the Kuwait Fund to finance the rehabilitation of the electricity sector. Total Financial Needs for Reconstruction and Creditworthiness xii. The total financial needs of Lebanon's reconstruction have not yet been established. A United Nations Inter-Agency Needs Assessment Mission, which visited Lebanon in July, 1991 reached an indicative estimate of $3.9 billion over a 5-year period (of which $232 million for technical assistance). Consultants of Lebanon's Council for Development and Reconstruction identified projects with a preliminary cost of $2.7 billion, covering a period of 3-5 iv years. Although more definitive figures are needed, these estimates, and the estimates of the mission, based on partial field assessment of a more limited scope, would make it reasonable to assume that financial needs could be in the order of $500 million per year in the first three years (1992-1994). Such expenditures would be about 2.5 times the maximum comparable level in real terms achieved by the public sector before the war; this underlines the importance of the Government's technical assistance needs. xiii. Lebanon's outstanding external debt (excluding military debt) stood at $254 million at the end of October, 1991. By common debt-related indicators, Lebanon would be considered creditworthy: its external debt represents only 8 percent of estimated GDP, and debt service is only 3 percent of exports of goods. Official reserves, excluding gold reached $1.2 billion at the end of October, 1991, equivalent to about 3.8 months of current imports. However, the accumulation of those reserves has been made possible by financially- motivated short-term capital inflows, which are volatile in nature. It would be prudent, then, to keep a high level of reserves in order to defend the exchange stabilization policy, as well as to maintain the ratio of reserves to rapidly growing imports. In the meantime, assuming that the security conditions continue to improve, and that the fiscal deficit continues to shrink, Lebanon should be able to service additional debt. xiv. in addition to the exchange reseives, Lebanon has gold assets valued at $3.3 billion at current market prices. Those assets provided Lebanon with vital financial security as well as currency support throughout the 16 years of war, and despite the fragmentation of governmental authority. It would then seem prudent to avoid engaging the gold assets in any financial operation until full confidence and steady economic growth are restored. Any such engagement is likely to affect the stability of the Lebanese pound, undermine the chances of repatriation of private Lebanese capital, now invested abroad, as well as discourage the return of businessmen and professionals who emigrated during the war. In the end, any financial gains from partially unloading gold might prove too costly in terms of more fundamental, structural needs of the country. xv. With the above conditions in mind, Lebanon should be able to service additional debt to finance the foreign exchange component of the rehabilitation program, even on commercial terms'. Revenue-earning rehabilitation projects, such as electricity, telecommunications and water supply should cover their operating cost and should be able to service regular, long-term development loans. However, a substantial portion of the rehabilitation and reconstruction programs would involve projects which cannot support financing on commercial terms, given the very weak capacity of low- income beneficiaries to repay the full cost of the services provided, at least until economic recovery raises incomes sufficiently. Clear examples of such projects can be found in the social sectors, particularly in education, health I External financing of $300 million a year for three years (at 8 percent interest, and 15 years repayment period, including 4 years grace) would lead to a rise in the debt service ratio of 14 percentage points by the eighth year, assuming an export growth of 5 percent per year. v and low-cost housing. Until the Government's budget can support the implied subsidy in such finarding, and in view of the emergency needs in these sectors, particularly the need to address the socially explosive issue Af the 800,000 displaced persons, foreign aid on concessionary terms would seem necessary for social sector projects. Hanagement of Reconstruction xvi. The Lebanese economy has maintained its traditional openness to free trade, and its strong attachment to property rights and market-determined prices of factors and products. The Government has resumed its t:raditional role of supplying the legal and monetary frameworks, within which the dynamic private sector operates, with minimal regulation, and of supplying and maintaining certain physical infrastructure and public utilities (ports, airports, electricity, telephones, water and sewerage). The exceptional rehabilitation and reconstruction demands that resulted from the war have placed financial and administrative demands on the Government that are far greater than it had ever managed before (para. xii). xvii. Because of the segmentation of government authority and the loss of a large part of its higher-level staff and skilled workers during the civil war, the Government's capacity to regulate, manage and operate several services has been seriously weakened, and this has raised the question of divesting some of the public utility services (e.g. in electricity, telecommunications and water supply) to the private sector. It is clear, however, that to be able to play its role in planning and implementing the complex reconstruction of the infrastructure (as well as to operate or regulate public utilities), the Government would also need substantial technical and training assistance in the short term in specific areas, as well as institutional strengthening, in addition to financial aid. These areas are indicated in the report for the sectors covered, and more comprehensively in the U.N Inter-Agency report. xviii. More generally, to strengthen public administration and attract qualified staff, it would seem necessary, in the medium term, to prepare and implement a wide-ranging administrative reform, as well as an organizational and salary review of government ministries and agencies. The Government has initiated the process by appointing a Minister of Administrative Reform. While much of Lebanon's rehabilitation and reconstruction can be expected to continue to be undertaken by the private sector, that sector would still need support from the government, particularly in maintaining an adequate economic infrastructure, addressing the serious social and regional development issues, and in helping to mobilize term credit to finance part of the private sector's long term investments. Raising the administration's efficiency in these areas would contribute substantially to the rapid reconstruction of Lebanon. I. THE ECONOMY A. POPULTION. OUTPUT AND GROWTH 1. StatisticAl data on the Lebanese economy are scarce and open to a wide margin of error. The Department of Statistics has not functioned since 1975, and its records have been destroyed. The best available estimates of population (the only census was made in 1932, and no reliable estimate of net emigration is available) give a figure of about 3.4 million for both 1988 and 199011. The GDP has declined sharply during the war period, fluctuating widely from year to year. The most reliable estimates in recent yearsZ/ put GDP at about $3.3 billion in 1988, declining, as a result of the 1989/90 war and the effects of the Gulf crisis on trade and remittances, to $2.6 billion in 1990 (Table 1). This is about 22 percent below 1988 and may be as little as one third of the prewar GDP in constant prices.' These preliminary estimates would imply a GDP per capita of $960 in 1988 and about $750 in 1990. The GNP is higher, due to substantial factor income from abroad, and is estimated at $3.9 billion, implying a preliminary estimate of GNP per capita for 1988 of $1,160. 2. The structure of output has traditionally been heavily weighted in favor of trade and services (tourism, housing, transport and communications, banking, education, health and public services). Trade and services accounted for over 70 percent of GDP before the war. As a result of the relative isolation of the population within and outside the country during the war, this share seems to be reduced somewhat, but only to about 60 percent in ;988, while the shares of agriculture and industry seems to have increased from one quarter to one third of GDP, with construction making the balance. More significant than the change in the structure of GDP, however, was its dramatic contraction. 3. Estimates of investment expenditures during the war are not available. However, despite the war, considerable gross investments have been ./ Including about 180,000 Palestinian refugees living in camps (of whom 144,00 were registered with UNRWA in mid-1987). Excluding camp dwellers, the "resident" population has been estimated at 3.2 million. For a review of various population estimates, see Bechtel-Dar Al-Handasah, "The Population of Lebanon," Working Paper 3, August 1991. The paper estimates total population at 3.67 million. 2' UNDP, Lebanon; The Gross-Domestic Product-and Gross National Product for 129 , and Lebanon: Extraoation of GD? for 1989 and 1990, United Nations, DTCD, 1991. 3/ GDP in 1974 was estimated at $3.5 billion. Using the US producer price index for industrial and finished goods to inflate the 1974 estimate, this would be equivalent to $7.6 billion at 1990 prices. -2- made during the period, particularly in building construction by the private sector, but also in electricity and telecommunications. Because of physical destruction and depreciation over a long period, it is most probable that net investment has been negative for most of the period. An estimate of gross fixed capital formation for 1988, a year of economic revival, puts it at almost $1 billion, of which $956 million was by the private sector and only $42 million by the GovernmentWl. The estimate, if accurate, would indicate a high absorptive capacity of the economy for investment (30 percent of GDP or 25 percent of GNP). It also indicates the very small role of the Govevnment and the great importance of building up its capacity to plan and implement investments, if it is to be able to carry out the huge task of reconstruction. UNDP, Lebanon. CUP and GNP for_1988. op. cit., pp 65-66. "3- lablo1.: Lebanon's Estimated Output by Sector, 1974 and 1988-90 (Values in millions of current US$) QU Snl2io m R4 aff Agricuture 324 348 210 184 Manufacturing 587 670 496 365 Construction 141 328 156I' 1811/ Trade 1087 921 755 725 Non financial services (including rent) 950 574 {758a/ {7152/ Financial services 135 261 { { Public administration 314 172 232 388 GNP (Smillion) ;Qna na Sectoral Shares of 5, Agriculture 9.2 10.6 8.1 ManufacturIng 16.6 20.5 19.0 Construction 4.0 10.0 5.9 Non financial services 26.9 17.5 {29.0 F:nancial services 3.8 8.0 Public Administration 8.9 5.3 8.9 Sources: For 1974, Ministry of Planning; for 1988-1990, UNDP, jpbanon. GDP and GNP for 198 and UNDP, Lebanon: Extrapolation of GDP for 1989 and 1990, United Nations, 1991. Notes: 1/ Estimated on the basis of change in licensed construction area over 1988, Xs_ 5% p.a. to allow for inflation in current dollars. 2/ Assumes growth in line with that of the total of all other sectors. -4- B. RECENT ECONOMIC DEVELOPHENTS (i) Grovth 4. Although data, apart from monetary statistics, are very limited, there are several indications that a strong economic recovery from the depressed level of 1989/90 has occurred in 1991, bringing real output back close to the 1988 level and surpassing it in current dollar terms. A tentative forecast, based on these partial indicators, is that GDP may grow by 30 percent or more above the depressed level of 1990, in current dollar terms. Growth in 1991 has been strong in all sectors except in agriculture. 5. Available indicators of rapid growth in output, trade and services during ;he first nine to ten months of 1991 are presented in Table 2. These show very rapid growth in licensed construction area (at a monthly average rate of 25 percent); oil refining (13 percent per month); the number of inbound flights (10 percent per month); the number of inbound airline passengers (9 percent per month); and in the dollar value of credit to finance trade (almost 5 percent per month). The opening up to the rest of the world is reflected also in the rise in the number of airlines serving Beirut airport from (6 to 19) between January and September 1991; the rise in the number of ships disembarking in Beirut port from (41 to 239) in the same period; and the growth of registered exports (by almost 80 percent) in the first half of 1991, compared with the first half of 1990. Among other reported, but unquantified, developments are: the reopening of closed industrial plants; the substantial growth of trade in transit to Syria, Jordan and the Gulf countries; and the revival of investment in real estate by emigrants and Gulf nationals. (ii) Money And Prices 6. Two major achievements in 1991 have been the stabilization of the value of the Lebanese pound and the parallel stabilization of the price level, following several years of rapid depreciation and price inflation. By the end of 1990, inflation was running at an annual rate of about 75 percent. The main factor behind this inflation was the large fiscal deficit (estimated at about 34 percent of GDP in 1990), which was financed to a large extent by the creation of money. During 1990, the banking system extended LL 470 billion (equivalent to roughly half the initial money supply), of which about 65 percent was in the form of net credit from the central bank, and the rest in the form of treasury bills bought mainly by the commercial banks. Rapid inflation combined with an uncertain political situation undermined confidence in the local currency and led to further depreciation and severe exchange rate volatility. The Lebanese pound depreciated from 505 to 842 to the dollar between the beginning and the end of 1990 and reached a low of 1,110 at the end of January 1991. Large private transactions were usually made in dollars rather than local currency. lab1e 2: Lebanon - Monthly Economic Indicators in 1991 Monthly 1991 av.1990 J F M A M J J A S 0 OUTPUT & TRADE Construc)on permits 182 108 145 264 306 440 435 542 622 656 (000m ) Oil deliveries. Tripoli ... 25 42 24 35 35 26 85 103 67 Refinery, (000 T) Beirut A/P. inbound ... 307 224 258 328 325 447 604 636 643 549 flights (No.) Beirut A/P, inbound ... 23 12 20 25 26 149 62 541 42 31 passengers (000) Beirut Port, incoming 41 54 135 228 247 260 268 264 239 282 ships (No.) Beirut Port, goods ... 97 131 294 197 378 353 382 394 343 325 unloaded (000 T) Containers (000 ... ... ... ... ... ... 7.3 8.2 8.7 7.4 10.0 Documentary letters 122 140 142 158 187 187 184 169 175 of credit (Sm) PRICES Exchange rate" (LL/S) 842 1110 1060 938 932 915 905- 893 893 892 883 Exchange rate (% change) 4.4 23 11 -9 -4 -2 -1 -1 -1 0 -1 Prices, CPI (X change) 4.5 14 7 5 1 -2 -1 0 1 -2 Interest rates (Xp.a.) 1-year TB yield 25 25 25 28 25 25 24 23 22 22 20 Bank credit (w.av.) 41 40 41 42 42 40 40 37 36 Deposits with banks 15 15 15 16 16 15 16 15 15 15 RESERVES Official efyhange 623 550 523 609 632 717 863 1174 1082 1056 1220 reserves (Sm) Sourcesj Lebanese authorities. Note: s End of period. -6- 7. Given the high degree of openness of the Lebanese economy (the sum of imports and exports is larger than GDP, and international capital mobility is totally free), domestic prices tend to closely follow international prices, after adjustment for the exchange rate. Recognizing the rapid transmission of exchange rate fluctuations onto domestic prices, the authorities have sought to reduce inflation through the stabilization of the exchange rate; to that effect they adopted the LL/US$ exchange rate as the system's nominal anchor. Consequently, the Bank of Lebanon intervened heavily in the foreign exchange market during the first quarter of 1991 and, as of the beginning of the second quarter, has managed, in effect, to peg the exchange rate to a smooth and mildly appreciating path (see Table 2). To back this policy, and in order to avoid a drain in reserves, a tighter monetary stance was adopted. Given the lack of a simultaneouis, sufficient fiscal adjustment, that stance took the form of a switch from money creation (i.e., advances from the Bank of Lebanon) to debt creation (i.e., the sale of Treasury bills) as the dominant instrument of fiscal deficit financing (Table 3). High interest rates were offered to make t-bills nmore attractive to inveistors. For instance, the nominal LL return on a six.month t-bill bought at the beginning of April 1991 was 22.2 p.a., which, given the exchange rate appreciation over the period, eventually amounted to a yield in US dollars of about 30 percent p.a. Not_surprisingly, a higher (and currently increasing) proportion of t-bills were sold outside the local commercial banking system, specially to foreign investors and banks. Table 3: Credit to the Public Sect-or (LE billions, unless indicated) Dec 89-Dec.90 Dec-----I Se.2 Net change in credit to public sector by all banks 467 -27 of which: Net credit from the Bank of Lebanon 271 -400 Total t-bill sales (net) 237 888 Share of local banks in t-bill sales 63% 55% Estimated $ yield of one-year t-bill bought at beginning of period (% p.a.) -9.3% 44.5% (assuming LL 890/$ at end 1991) 8. According to preliminary indications, the monetary policies described above have brought about a substantial degree of price stability. Since April 1991, the monthly rate of change in the consumer price index has fluctuated between 1 and -2 (see Table 2). It should be noted, however, that the consumer price index includes several items, particularly rents and utility rates, whose prices have been virtually fixed in nominal terms. Electricity rates have been raised recently; the rent law is under revision; 7- and other rates and import duties are also likely to be revised. The impact of these adjustments on consumer prices is likely to be significant. iii. Public Finanee 9. Public finance in Lebanon covers the central government budget, a number of annexed budgets whose accounts appear in the central budgetV and several autonomous agencies and public enterprises outside the budget.§' In addition, the tr7easury makes extra-budgetary transfers or advances to various ministries and other public agencies and enterprises, to special funds and to local governments. The Lebanese budget has been in chronic deficit in the last decade, as it continued to pay government employees while it lost much of its ability to collect revenues, particularly customs duties and direct taxes (Table 4). In addition, it continued to supply services and certain goods to the public at a loss, which it covered through treasury transfers and advances. These included, in particular, subsidies on fuel, wheat and electricity. Other treasury transfers were made to the Ministry of Defence and to the various development councils (including the servicing of foreign development loans), but also to municipalities and other ministries. The overall deficit has been financed, in the past five years, by a growing recourse to borrowing from the banking sector and directly from the Bank of Lebanon. The large borrowing from the central bank, particularly in 1990 produced rapid monetary expansion and price infl.ation, as mentioned earlier; the servicing of the growing domestic public debt contributed to a growing fiscal deficit and, in turn, to further growth in the public debt. 10. Table 4 shows the rapidly deteriorating situation in the last few years, as borrowing by the Treasury to finance the fiscal deficit rose from LL 112 billion ($500 million) in 1987 to LL 614 billion ($870 million) in 1990. The latter represented 34 percent of GDP in that year, a ratio which is clearly unsustainable. 11. The fiscal situation started to improve significantly in 1991, although it is far from being fully corrected: the overall deficit in the first 10 months of the year is estimated at LL 587 billion (about $630 million), but its growth seems to have been arrested. The fiscal deficit for 1991 is tentatively projected at about $700 million, or 20 percent of the much larger GDP. Revenues grew rapidly in 1991 from a very low base, as the Government regained control of all ports and collected customs revenues at s1 These include: Telecommunications, the National Lottery, tne Office for Cereals and Sugar Beet and The University of Lebanon. 61 These include: "Offices" for Electricity (EDL), the Litani River, Railways, Social Security, Agricultural Research and Fruit, Silk and Animal Production. They also include over a dozen water authorities and several development councils: the Council of Development and Reconstruction (CDR), Conseil Executif des Grands Projets (CEGP), Conseil Executif des Grands Irojets de Beyrouth (CEGPB), the Council for the South and the Council for the Development of Tourism. .8 tariff rates which were partially adjusted to their previous level. In addition, revenues from the profits of the central bank grew in line with the growth of its foreign exchange assets, and a grant of $60 million was received from Saudi Arabia. To raise revenues further, a new airport departure tax was introduced in October, and technical assistance has been requested from the IMF to help in reforming the tax system. There is still scope, however, to raise customs duties substantially by correcting the valuation of imports to reflect their actual, ra'her than an artificially low, value. There is also scope to raise the taxes on fuels, which are extremely low compared to those in European and many developing countries. A raise in fuel taxes may also help to check the uninhibited use of cars and the growth of the heavy fuel import bill ($460 million in 1990). 12. On -he expenditure side, salaries and wages, interest on the public debt anc extra budgetary "advances" by the Treasury (which are not expected to be repaid) are the main items. Salaries and wages, which lagged far behind inflation, have been periodically adjusted and have grown rapidly; a 60 percent raise is to take effect at the beginning of 1992. Interest on the public debt has also risen, probably accounting for over half of the overall fiscal deficit in the first 10 months of 1991. Transfers and subsidies, on the other hand, have been reduced sharply, notably with the removal of the heavy subsidies on fuel and wheat. Also, a large part of the transfers in 1991 (LL 25 billion) were made to the CDR for the repayment of external debt. 13. It is clearly necessary to reduce the interest on the domestic public debt, to control the growth of salaries and wages and to foster the growth of revenues, if the large budget deficit is to be narrowed to a level consistent with price and exchange stability. The stock of Treasury bills has grown rapidly in 1990/91 to reach LL 2,115 billion ($2.4 billion) in October 1991, or about two thirds of projected GDP in 1991. As price stability continues and confidence grows, interest rates on treasury bills issued to refinance maturing debt should be reduced gradually from their present high levels in real terms. 14. Wages and salaries of public employees are relatively low and need to be adjusted, if efficient and qualified staff are to be attracted to the civil service. However, it is preferable to raise salaries, and allow for greater salary differentiation in the framework of a general administrative reform program rather than in response to the higher cost of living. In the short term, it is advisable to spread the already decreed large salary and wage raise over the whole of 1992, in parallel with the growth of revenues, so as to avoid the potential destabilizing effects of an increase in debt or the infusion of new money in the market. -9- Table 4: Lebanon: Public Finance, 1987-1991 (in billions of Lebanese Pounds) Estimated Actuals Jan-Oct 1987 1988 1989 1990 1991 Receipt 20 0 4.. 459 126, 400.1 Indirect taxes 0.7 1.2 3.6 3.7 o/w customs duties (0.5) (0.9) (1.8) (2.3) (64.2) fuel tax (4.5) Direct taxes 1.7 7.1 4.6 37.1 Fees and dues 2.6 5.0 3.8 14.5 Other 15.1 8.1 33.9 71.1 o/w Bdl profits (11.1) (3.9) 28.5) (48.6) (133.7) Saudi Grant (56.0) Total Expenditures 143.5 275.8 509.3 789.1 991!.21 Budgetary ExDenditures 35.6 107,9 186.2 13398 583.5 Salaries and wages 20.6 61.6 94.7 210.0 Capital expenditures 5.1 18.5 32.7 33.1 Advances and transfers 4.4 16.1 34.4 48.2 Other 5.5 11.7 24.4 48.5 Extra-budgetary Expenditures 107.9 167.9 323.1 449.3 407.72 Domestic interest 23.5 78.8 151.3 203.5 313.32 Foreign interest 1.1 1.3 0.7 10.0 12.3 Fuel subsidy 46.9 39.6 99.3 46.0 20.2 Advances 36.4 48.3 71.7 160.8 61.9 Other .. .. 10.7 29.0 Overall Deficit 123.5 254.4 463,4 662.7 591.1 Adjustment -11.7 75.7 -0.2 -48.4 Public Borrowing (Net) 111,8 330.1 463.4 614.3 591.1 Foreign financing (net) .. 1 -2.0 -10,3 -12.3 Domestic financing (net) 111.8 328.0 461.23 604.0 578,82 TB sales to public 3.0 72.8 66.2 31.6 439.9 Bank of Lebanon (TBs & loans) 94.3 -19.6 110.0 411.1 -288.6 Commercial Banks (TBs & loans) 14.5 274.5 284.6 156.0 638.8 Others (TBs) 0.3 0.4 5.3 55.5 less treasury cash balance .. .. .. .. -270.4 Public Debt (end-Reriod) 12. 521,6 9828 1586.8 2436.0 Source: Ministry of Finance and Bank of Lebanon; preliminary mission estimates for 1991. Notes: 1/ Estimated by adding revenues to the overall deficit. 2/ residual. - 10 - (iV) alance of e a External Debt 15. Data on the external trade of Lebanon are inadequate, and there are no estimates of the other elements of the current account in the balance of payments. A summary balance of payments for the last three years and tentative projections for 1991, based on available data, are given in Table 5. The estimates indicate a rapid growth of both exports and imports in 1991. However, despite an increase of almost 90 percent in exports, led by industrial products (such as food products, clothing, textiles & fertilizers), a deterioration in the trade balance would occur in 1991 due to a surge in imports associated with the economic recovery. IJble_$: Lebanon - Estimates of the Balance of Payments ($ million) Proj. 1988 1989 0 1991 Balance of Merchandise_Trade -1347 -1744 -1886 -2640 Exports 6532/ 502 510 960 Imports 2000 2246 2396 3600 Net Servic,es. Transfers & Factr Incomes. incl. Errors & Omissions I/ 1957 1435 1393 3390 Capital Account Change in commercial banks net foreign assets (-increase) 17 266 68 -250 Overall Balance Change in FX reserves of the Bank of Lebanon (-increase) -627 43 425 -500 Source: IMF and mission estimates. Note 1/ Balancing item. 2/ IMF (D.O.T) figure; the figure for 1988 differs from that of the national accounts as estimated by UNDP, op.cit. 16. Lebanon's medium-and-long term official foreign debt (excluding military debt) amounted to $254.0 million at the end of October 1991. This includes $52.4 million in arrears on principal payments and $27.0 million in interest arrears (see Table 6). In 1991, up to October, service payments on foreign debt amounted to $24.7 million. Undisbursed amounts on contracted - 11 - debt amounted to $153.9 million, mainly on loans from Italy and France. Outstanding debt is owed mainly to France, the USA, the Arab and Abu Dhabi Funds, the European Investment Bank, Italy and Germany. Outstanding loans due to the World Bank amounting to $21.2 million. Tabte 6: Lebanon - Public External Debt, October 31, 1991 tUSS mi i L ioon) Outstanding Principal Interest Total Debt Outstanding & Credi tr a Dgsborsed 1L Arrears Arrears Outstandina Undisbursed WJIL&TERU: 92t 5.2 5. EIB 12.0 1.7 0.6 12.6 IBRD 21.2 0.0 0.0 21.2 ARAB FUND 18.7 0.0 4.6 23.3 BILATERAL: 175.1 50.7 Z1.8 196.9 ABU DHABI FUND 5.6 5.0 1.1 6.7 6.7 BELGIUW 0.7 0.1 0.0 0.7 FRANCE 108.6 34.3 16.0 124.6 29.1 GERMAWY 9.9 0.6 0.2 10.1 ITALY 11.8 6.0 2.0 13.8 118.2 USA 38.5 4.7 2.5 41.0 - TOTAL: 227.0 52.4 27,0 254.0 154.0 17. Although debt-related indicators are based on preliminary estimates, Lebanon would be considered creditworthy on the basis of such indicators: the ratio of outstanding debt to GDP is estimated at 8 percent, and, similarly, the estimated ratio of the debt service to the export of goods in 1991 is less than 3 percent. Official exchange reserves (i.e., excluding $3.3 billion of gold) have grown substantially in the second half of 1991, reaching $1.2 billion at end-October, indicating growing confidence in the Lebanese pound. This is equivalent to 3.8 months imports at the 1991 level. However, the accumulation of these reserves has been made possible by financially motivated short-term capital inflows, which are volatile in nature. Lebanon needs to keep a high level of reserves in order to defend its exchange stabilization policy, as well as to maintain the ratio of reserves to rapidly growing imports. To finance its large reconstruction needs, whose payout period is particularly long, Lebanon needs to borrow long-term capital. In view of its past debt servicing record and its low level of debt, Lebanon has the capacity to service additional external debt. Its creditworthiness will continue to improve as the security situation improves further, assuming that the fiscal deficit continues to be reduced. - 12 - In addition to the foreign exchange reserves, Lebanon has gold assets valued at US$ 3.2 billion at current market prices. Those assets provided Lebanon with vital financial security, as well as currency support, throughout the 16 years of war, and despite the fragmentation of the country's authority. It would then seem prudent to avoid engaging the gold assets in any financial operation until full confidence and steady economic growth are fully restored. Any such engagement is likely to affect the stability of the Lebanese pound, undermine the chances of repatriation of private Lebanese capital held abroad, discourage foreign investment, as well as to prevent the return of qualified Lebanese labor that emigrated during the war. In the end, the financial gains achieved by partially unloading the gold portfolio might become too costly in terms of the more fundamental, structural needs of the economy. C. ECONOMIC PROSPECTS 18. Any quantitative assessment of the economic prospects of Lebanon in the medium term will be premature at this stage and can only be speculative. Economic revival has been too recent to yield firm assumptions as to the future course of the main macroeconomic variables. In addition, there is too little reliable data on which to build projections, particularly concerning the balance of payments and the likely volume of future investments. Only general objectives and constraints can be outlined at this stage. Quantitative projections would be attempted by the Bank's scheduled economic mission early next year. 19. It can be safely assumed that output in 1991 has recovered most of the ground lost in 1989/90 in real terms. Assuming that internal security is consolidated further and that regional political developments allow the peaceful and full reintegration of the southern and eastern parts of the country, it may be possible for the economy to continue its rapid growth and perhaps reach its prewar level of output (but not per capita income level) in the next five to seven years. Reaching that goal in five years would imply a cumulative average real growth of about 16-18 percent per annum, which would be historically very high and would certainly tax the absorptive and administrative capacity of the country, even if adequate financial resources were available. Reaching that goal in seven years would still require an average growth rate of 11-13 percent per annum. The availability of idle capacity in most sectors of the economy, together with active reconstruction efforts may allow for such high growth rates. 20. While higher public investment for rehabilitation and reconstruction would itself be a major source of growth during the period, the private sector would still have to contribute the major part of growth in agriculture, industry, construction, trade and services. However, given the low level of income and domestic savings at present and projected for the next few years, much of private sector financing would probably have to come from abroad, e.g., in direct investment or ioint ventures with emigrant and foreign capital. Some of it, particularly in industry, agriculture and low cost - 13 - housing would also have to come from long-term loans, largely funded by government and foreign aid. 21. Assuming that foreign assistance would become available in the appropriate amounts and at appropriate terms, there would still be two main constraints that have to be removed if such a high rate of growth is to be achieved. One is the weakened capacity of the administration, with its present manpower resources, to manage and implement a large public sector reconstruction program and to run the public administration efficiently. The other is the ability of the Government to reduce the fiscal deficit rapidly and turn it into a surplus in order to gradually reduce the huge public debt burden and its potentially destabilizing effects on the balance of payments and potential foreign investments. 22. There is obviously a conflict between these two objectives since improving the quality of public administration and management would require a substantial rise in the salary levels of professional and skilled workers, in addition to an upgrade in the hiring standards for future employees. A higher tax/income ratio than in the past would seem necessary, if the Government is to be able to raise its salary levels, meet its share of the local currency cost of its large investment program and, at the same time, reduce its domestic borrowing and manage its domestic debt. D. FINANCIAL NEEDS 23. There is as yet no full study or plan that estimates the total financial needs of Lebanon or that reconciles these needs with available resources in a medium-term macroeconomic framework. The UNDP Inter-Agency mission, which visited Lebanon in July 1991, made estimates of technical assistance needs and indicative estimates of capital investment needs of the public sector, covering virtually all sectors over the next five years. These total $3.9 billion, of which $232 million is for technical assistance ($120 million over the next three years). The consultants to the CDR recently presented their preliminary estimates (which are still under review) based on the cost of 134 identified projects in all sectors. The cost of these projects, which would fall mainly in a three-year period but whose completion may extend to five years, is put at $2.7 billion, of which $2.2 billion is for capital formation and technical assistance and about $0.5 billion is for housing and agricultural credit (Table 7). 24. To define an emergency rehabilitation program in the priority sectors over the next three years, the CDR focused on the immediate needs for the rehabilitation of existing damaged facilities, particularly for infrastructural facilities and housing. The estimates, based on a closer examination of specific, high-priority projects in five sectors (electricity, communications, water supply, housing and transport) totals $1.3 billion, of which $0.4 billion is for credit to the housing sector. These estimates are consistent with those of the World Bank/UNDP mission (which totalled over $1 billion) but which excluded transport needs. - 14 - Iab.12_Z: Lebanon - Estimates of Financial Needs for Reconstruction ($ millions) TOTAL NEEDS -5 XEARS UNIter-Agency CDR Coneultants Technical assistance 232 169 Capital investment 3706 2039 Credit ... 512 Housing ... (412) Agriculture ... (100) T2t£a 3930 2720 REHABILITATION NEEDS--3 YEARS Mission Estimate MR Estimate21 1.6. Cagital T.^A Capital Electricity 24 180 ... 160 Telecommunications 12 123 2 123 Water, sewerage & solid Waste 16 273 ... 108 Housing 7 400 4 400 o\w credit fund (400) (400) Statistics & finance 4 10 ... Subtotal 63 986 A id Transport 4 388 Total 10 1309 25. The total public sector financial needs for the reconstruction of Lebanon is, thus, tentatively estimated by the UN interagency mission at up to $780 million per year over the next 5 years (about $3.9 billion for five years). The needs of a more limited rehabilitation program for 1992-94 in the priority sectors are estimated by CDR's consultants at an average of $440 million per year (about $1.3 for 3 years). To this should be added the costs of rehabilitating the education and health sectors and of long term credit to agriculture, industry and tourism. This would bring the average to about $500 million per year in the next three years. This compares with actual capital expenditures by the Government of less than $50 million per year in recent years, and a maximum achieved before the war of about $200 million in current prices1l. Expenditures of over $500 million per year can thus be expected to v Still under review. § The 1991 budget allocated over LL 300 billion ($330 million) for capital formation, but actual expenditure is likely to be far below allocations, partly because of a shortage of domestic revenues and a lack of foreign development aid. - 15 - heavily tax the implementation capacity of the administration, even with substantial technical assistance. 26. As stated earlier, Lebanon should be able to service additional debt, even on commercial terms. Revenue earning rehabilitation projects, such as power, telecommunications, and water supply should cover their operating cost and should be able to service regular, long-term development loans. However, a substantial portion of the rehabilitation and reconstruction program involves projects which cannot support financing on commercial terms, given the very weak capacity of low-income beneficiaries to repay the full cost of the services provided. Clear examples of such projects can be found in the social sectors, particularly in education, health and low-cost housing; the local currency component of investment in these sectors will be quite large and will tax the authorities' ability to reduce the budget deficit. Until the Government budget can support these expenditures, and in view of the emergency needs in these sectors (particularly for low-cost housing, to address the socially explosive issue of the 800,000 displaced persons), foreign aid on concessionary terms would seem necessary for social sector projects9l Assuming that external aid in foreign loans and grants covers 60 percent of expenditures under the proposed rehabilitation program, i.e. $300 million per year, that the average loan repayment period would be 15 years, including 4 year grace period, and that the average interest rate would be 8 percent p.a., then the debt service on the new debt (i.e. in addition to outstanding debt) would reach $80 million by the fifth year and $200 million by the eighth year (when the grace period would elapse). Debt service on new debt would then represent 5 percent and 10 percent respectively of projected exports of goods, assuming annual export growth of 10 percent p.a. (or 7 percent and 14 percent if exports grow at only 5 percent p.a.). - 16 - II. SECTORAL REHABILITATION 27. The World Bank/UNDP mission aimed at identifying the urgent rehabilitation needs, and estimating the cost, of an emergency rehabilitation program over the period 1992-1994 in four selected priority sectors: (i) electricity; (ii) telecommunications; (iii) housing; and (iv) water supply, sewerage and solid waste (WSSW). The rehabilitation of these sectors is rightly considered of very high priority by the Government because of the extreme damage they have suffered and because their rebuilding can be expected to facilitate the rapid revival of the dynamic private sector (electricity and telecommunications) and to improve the health, living conditions and social stability of the population (housing and WSSW). The mission examined the main issues facing the quick rehabilitation of these sectors and identified the technical assistance needed (studies consultants, training) to support the Government's efforts to plan and execute the rehabilitation program. 28. The mission did not attempt, in the short time available, to examine other infrastructural requirements (e.g., transport) or other social needs (e.g., health and education). Nor did it examine the measures needed to support agriculture, tourism or the dynamic industrial sector, beyond identifying the general, but clear, need for long-term credit to sustain the rapid growth of industry and industrial exports, and to help revive the potentially rich tourist industry. 29. More comprehensive assessments have been recently made. In July 1991 the United Nations sent an Inter-Agency Needs Assessment mission to Lebanon, which made a preliminary assessment of technical assistance and capital needs in all sectors of the economy. At the same time, Lebanon's Council of Development and Reconstruction commissioned consultants (International Bechtel and Dar Al-Handasah) to prepare a large comprehensive study on Recovery Planning for Reconstruction & Development; the consultants' preliminary report reviews reconstruction needs and identifies a large number of priority rehabilitation and reconstruction projects. 30. The mission's findings confirm that, while the reconstruction needs are large, hard data on the extent of damage, based on field surveys, is missing in most sectors. The mission also found that the preparation and design of specific projects for appraisal by potential donors is only beginning. Based on available data and quick field surveys in three sectors (electricity, telecommunications and WSSW), the mission recommends, as part of the rehabilitation program, the early preparation or completion of sectoral studies (including damage assessments), surveys or master plans, as well as the preparation of specific rehabilitation projects in each sector. Among the four sectors, preparation is most advanced in electricity (where specific activities have been identified and financing is already partly assured from the Arab and Kuwait Funds), followed by telecommunications (where preparatory studies are ongoing). Considerable preparation is still required in housing and WSSW. - 17 31. The three studies (UN, CDR and the mission) also confirm the need for substantial technical assistance in the form of consultant and expert services, not only for studies, but also to support the administration in the tasks of planning, management, information systems, manpower training, etc.. As stated elsewhere in this report, the strengthening of the organizations dealing with the various aspects of the reconstruction program is an essential requirement for the program's early and successful implementation. The mission identifies specific needs in some sectors, and more genieral needs in others. Because of the large and widespread TA requirements, special arrangements may be needed to manage the TA program (see Section III). 32. The following sections present the mission's summary of findings and recommendations in the four sectors. More detailed reports on these sectors are found in a separate Annex. The estimated cost of the emergency rehabilitation program in the four sectors combined amounts to $1,035 million over the period 1992-1994.1A0/ Of this total, $976 million would be for rehabilitation work (equipment, materials and labor) and $59 million for tech-iical assistance (consultants, engineering studies and training)"/. It is also estimated that $653 million, or 63 percent of the total, would be in foreign currency and $382 million, or 37 percent, would be in local currency (Table 8). Table 8: Lebanon - Estimated Cost of the Emergency Programming Four Sectors ($million) Electricity Telecomm. WSSW Housing TOTAL 204 135 289 407 1035 Of which 180 123 273 400 976 Technical Assistance 24 12 16 7 59 Of Which Foreign exchange 175 107 176 195 653 Local currency 29 28 113 212 382 10 This compares with a little under $1 billion recommended by the CDR consultants for projects selected in the four sectors; and a total, including transport, of over $1.3 billion. II/ Excluding $4 million for the Ministry of Finance and the Statistics Department. - 18 - A. THE ELECTRICITY SECTOR Sector Background 33. Lebanon's energy sector consists mainly of two oil refineries, one in Tripoli and the other in Zahrani, and the electric power company, the Electricite du Liban (EDL). In the 1970s, the sector not only met the domestic consumption of petroleum products and electricity but also earned Lebanon foreign exchang- in the form of royalties for the oil pipelines crossing the country and payments for surplus power exported to Syria. 34. The EDL, whose network includes three thermal generating plants and eight hydroelectric stations, supplies about 90 percent of recorded power output in Lebanon. The 16 years of civil war, and particularly the period from 1989 to 1990, caused widespread damage to power stations and transmission lines. Much of the remaining facilities are obsolete or in bad condition, reflecting reluctance to invcet in new capital and/or spend funds on maintenance during the years of conflict. Dismemberment of the national power grid occurred during the 1982 Israeli invasion when plants in the south were disconnected from the grid (these were subsequently integrated into the national grid). Of 1,205 MW of installed capacity, (which is double the pre- war level) only (360-560 MW) is currently available, and EDL is only capable of supplying power for about 6 hours per day. The main 150kV substations are almost nonoperative; the Bekaa 66kV system Is obsolete and unreliable; and various 66kV substations and MV/LV distribution posts are obsolete or severely damaged. In addition war damages, gereral unrest and lawlessness have decimated revenues and crippled the EDL financially. 35. There are also private operators who produce electricity for their own consumption (hospitals, hiotels, small industries; etc.) and those who sell to small commercial and residential consumers with the ability to pay. The largest private utility, Kadisha, is in serious financ!.al difficulties with $150 million of debt owed to an Austrian industrial company. It is estimated that the total of private electricity production is about 50 MW. Institutional and Financial Aspects 36. EDL suffers from a shortage of qualified staff in all operational fields. This is mainly due to the long-term drain of professional and entrepreneurial skills from the country, low salary levels, the retirement or death of many staff due to the war, the severe shortage of training facilities and insufficient technical assistance. 37. EDL faces serious financial difficulties. This is mainly due to very low tariffs (below cost), necessitating transfers from the Treasury to the EDL for current expenses (such as fuel oil purchases and wages and salaries); and to poor revenue collection (only 1 percent of production costs in 1990). It is also estimated that, in spite of low tariffs, only one half of consumers paid their electric bills in 1985-1987 and high (50 percent) power system techiical and non-technical losses, the latter attributable to illegal connections, accounting for the major part of losses. The EDL - 19 - estimates that in the 10 years up to the end of 1985, leaks from its network totalled 6,640 gwh. Damage &gaseMent and Emergencv Recovery Needs 38. To prepare for a rehabilitation program, a full and comprehensive damage assessment is needed; this has not yet been undertaken and wotuld be beyond EDL means under the present circumstances. A contract has been sigrned between EDL/CDR and Electricite de France (EDF) for a study of the rehabilitation of the electricity sector in Lebanon; the report is expected by the end of Januiary 1992 and would include a damage assessment. It is recommended that the rehabilitation study include a loss reduction and component standardization study (the use of 220 kv or 150 kv; of 15, 11 or 20 kv; of 110 or 220 kv). Other future needs for the recovery of the sector are the preparation of a sector master plan, including studies on attracting private sector participation. A Proposed Emer2encv Rehabilitation Program 39. Based on extensive field visits, the mission has identified an emergency rehabilitation program covering the period 1992-1994. The components of this program and the cost estimates are summarized in Table 9. The tota] cost is estimated at $207.5 million, of which $110 million is expecteu to be financed from the Arab Fund and the Kuwait Fund. - 20 - .khLq_: Lebanon - Cost Estimate of a Rehabilitation Program in Electricity ($ in millions) Foreign Local Currency §Mrrency Total 1. Egs ent i_U e.rtu 30 4.0 2. abilitationPower Lant.1s 891 _59 9-5.0 Steam generation Zouk II 24.0 0.9 24.9 Jieh (South) 27.1 1.0 28.1 Hraiche 16.7 0.8 17.5 Gas turbines Zouk II TAG 7.2 0.6 7.8 Hydropower generation Rachmaya (Safa) 2.1 0.2 2.3 Litani 8.0 2.0 10.0 Northern region stations 4 0 0. 4 4_4 3. Transmission and Distribution i72 17 8 85.0 Transmission 30.0 9.0 39.0 Distribution 30.0 5.0 35.0 Telecommunications 7.0 1.0 8.0 Civil works 0 2 2.8 3-0 4. Technical Assistance and Training 1847 4 8 23.5 Technical assistance, Power Plants 9.8 2.2 12.0 Transm. & distr. & distr. 7.9 2.1 10.0 Training 1Q0 Q05 15 TOTAL 178.0 295 5207_5 - 21 - 40. The rehabilitation program comprises four components: (a) the supply of a limited quantity of vital spare parts to EDL, which would allow the company to operate from the present time up to commissioning of the rehabilitation works; (b) the Implementation of rehabilitation projects for all power stations (i) steam generation (Zouk II, Jieh, Hraiche); (ii) gas turbines (Zouk II TAG); hydropower generation (Rachmaya (SAFA), Litani, Al Bared, About Ali, Nahr Ibrahim); and (iv) technical assistance to EDL; (c) the rehabilitation of the transmission and distribution networks and civil works; (d) technical assistance to EDL in components (b) & (c) and the training of EDL staff. (e) the optimization of the system's main features (conductor size, transformer rating, cross-section of underground cables, etc.); 41. The potential for the private sector in the power sector exists, and institutional arrangements put in place during the emergency reconstruction phase shculd not preclude a major role for the private sector in the development of the power sector. However, in light of the Kadisha experience, privatization is a sensitive issue. On November 4, 1991 the Ministry of Hydraulics and Electricity and EDL agreed to commission a study to develop a strategy and an action program to attract private sector participation in power sector development. - 22 - B. TELECOMMICATIONS 42. Telecommunications in Lebanon are a state monopoly that operates under a budget annexed to the national budget. The Ministry of Posts and Telecommunications (MPT) is the supervisory, licensing and regulatory authority as well as the operating entity for both postal and telecoimmunications services. The monopoly lacks financial management, commercial accounting, human resources management and training or commercial approach in dealing with the customers. The organizational set-up, as well as administrative procedures are not appropriate for sound planning and operations of public telecommunications services. 43. In 1974, Lebanon had 200,000 connected lines or 7 lines per 100 people. Following the first wave of destructions and subsequent rehabilitation, MPT embarked in 1979 on a large program of extension and modernization to increase the total capacity of the net work to 450,000 lines. To reinforce Lebanon traditional role of major trading center, two additional satellite earth stations were installed and capacities the of submarine and terrestrial routes were to increase international circuits from 600 to 1400. The program has not been completely achieved. However, before 1989, 375,000 lines were connected to subscribers, raising the telephone density to 12.5 per 100. 44. During the war, and specially in 1989 and 1990, a wide range of telecommunication facilities were either destroyed beyond repair or so severely damaged that their operation has been suspended. Up to 180,000 subscriber lines, or 48 percent were out of service due to damage to switching equipment, cables or both. International circuits were cut off with the full destruction of two satellite earth stations, and severe damage to a third station and to the terminal stations of the undersea cables. A more detailed damage assessment is given in a separate annex. In addition to the extensive physical damage, equipment and plants have deteriorated due to lack of maintenance or power breakdowns or lack of air conditioning. Obsolete and worn-out equipment, which should have been replaced in the late 1980s, is still in service and causes additional operational problems. 45. MPT has already started repairing important buildings, switching nodes, junctions, microwave links and primary cables. International traffic has been reopened with a reduced capacity. Some 120,000 connected lines have been out of service (30 percent) for more than two years, and those customers who have access suffer from an extremely low quality of service with call completion rates as low as 10-12 percent (standard being 65-75 percent). Moreover, MPT efforts are seriously impeded by the lack of material, spare parts, tools, vehicles, as well as by depleted staff with low motivation, high absence rate and lack a of incentive. 46. Billing is four years in arrears for domestic telephones and three years in arrears for telexes. Bills for international telephone, service however, have been issued up to mid-1991, but only 40 percent of the amounts billed have been collected. Budgets for 1988 to 1990 have never been issued. There are no accounts for fixed assets, for debts or for stores and receivables. Considering the lack of financial data, the inflation during the - 23 - second half of the 1980s, and the billing and collection problems, the sector financial position cannot be assessed. However, a comparison of the average revenue per line and per year in Lebanon with the average experienced elsewhere shows the magnitude of the losses. In 1989, average revenue billed was US$25.0; in 1991, revenue collected was US$56.0, compared with US$500-600 elsewhere in the world. For a network at 350,000 lines revenue is, thus US$175.0 million per year (LL 154.0 billion) below the norm. In the present circumstances, the telecommunications sector is highly subsidized, while it should be a source of substantial profits for the Treasury. 47. The partial breakdown of the system is not the only cause of low revenues; the domestic tariffs are extremely low. Again, it is a comparison with the outside world shows the discrepancy. In Lebanon, the local call charge is LL 2 (0.23 cents); elsewhere 10-15 cents or 50 times higher. Rental fee is LL 250 per month (US$0.28), compared tc US$15-20 elsewhere (50 times higher also). 48. MPT human resources allocated to telecommunications (i.e. excluding postal services) have been severely depleted. Of 5,352 total staff allocations, there are 3,513 vacancies, 1,921 of which are temporarily filled with daily paid workers and contract employees. MPT has requested to hire 800 staff, which would give, discounting daily paid workers, a staff ratio of 7.9 qualified staff per 1,000 lines. This appears to be a minimum requirement provided that a comprehensive programme of technical assistance and training can be implemented. 49. A full and comprehensive damage assessment would be time-consuming and beyond MPT means. Consequently, a first emergency rehabilitation phase should be launched immediately to restore the maximum of the network, priority being given to strategic facilities. In parallel with this first phase, a full and comprehensive technical audit of all infrastructure, equipment and plants should be made. This technical audit would be the basis of the second phase consisting of the overall network rehabilitation, and would also provide the groundwork for the Telecommunications Master Plan. 50. For the telecommunications sector, the cost of the emergency phase of the rehabilitation program is estimated at US$135.0 million, with a foreign exchange component of US$106 million. Details of the items and costs are given in Table 10. These estimates include $12 million for technical assistance. The rehabilitation program should be carried out by private contractors, either domestic or foreign suppliers, but planned and monitored by MPT assisted by consultants. 51. To help MDT implement the program, a technical assistance program is needed, consisting of three teams of consultants/experts, working in parallel, but with a well defined and separate missions. First, a rehabilitation team would assist in repairing and in providing corrective maintenance for damaged or worn-out facilities and cable networks; second, a technical audit/planning team would assist in assessing equipment and plant, that need short/middle-term replacement, establishing priorities and preparing and monitoring projects; and, third, the training and institution building team assist in the establishment of modern technical, financial and human - 24 - resources management systems and procedures, as well as a data base,; which would be required for the appraisal of the second phase of the rehabilitation and further sector development. 52. -. There is an urgent need for a sector reform in line with the current trend toward sector liberalization and commercialization. MPT has already submitted suitable proposals to the Government. Whatever sector structure the Government may decide for the future (government agency, public corporation or semi-public enterprise), such a reform would require time and careful preparation and planning. The institution building team suggested in the previous paragraph would pave the way towards the commercialization of the telecommunications services. A full sector reform, however, require a different type of expertise, the Bank would be ready to advise the Government on the preparatory work and necessary steps nvolved in such a reform, as well as technical assistance required. - 25 - Tble10: Lebanon - Cost Estimate of the Rehabilitation Program iIn Telecommunications (Cost Estimates in US$ million) Local Foreign Total A. Local Service a) Switching - rehabilitation 2.0 8.0 10.0 - installation stored equipment 3.0 - 3.0 - replacement 70,000 lines 2.5 15.0 17.5 b) Local networks 9.0 26.0 35.0 B. Djmestic Transmission - microwave links 1.0 5.0 6.0 - coaxial cables 1.5 7.5 9.0 C. International Transmission a) microwave links 0.2 1.3 1.5 b) Satellite earth stations - Jouret El Ballout 0.3 1.8 2.1 - new Arbanieh 1.0 8.0 9.0 c) Submarine terminal 0.2 1.0 1.2 D. Telex Service (4000 1. 0.5 4.5 5.0 E. Mobile Cellular (5000 1.) 1.0 9.0 10.0 F. Miscellaneous a) Power plants 1.7 4.0 5.7 b) Air conditioning 1.0 2.0 3.0 c) V'ehicles - 4.5 4.5 d) Tools 0.5 0.5 G. Technical Assistance a) Rehabilitation program 1 4 5 b) Technical audit, planning 1 2 3 c) Institutional building 1 2 3 d) Scheduling Training - 1 1 Total 28.0 106.0 135.0 - 26 - C. WATER SUPPLY. WASTE ER AND SOLID WASTE Sector Conditions 53. Under an Emergency Rehabilitation Program (ERP), watersupply, waste water and solid waste are proposed to be covered in an integrated approach, which would also address, subsequently, major environmental concerns. The majority of the population in Lebanon is connected to public water supply, although often of inadequate quantity and unsatisfactory quality. About 50 percent of the population (virtually 100 percent in Beirut) are connected to public sewerage and sewage disposal systems, with remaining proportion relying on private facilities. The conditions of solid waste collection and disposal in the Beirut area can simply be termed disastrous. 54. The operation and maintenance of the water supply is under the responsibility of different authorities, while wastewater and solid waste are within the realm of the municipalities. At the national level, the division of responsibilities is also fragmented with a number of ministries involved in various functions. Recently a Ministry of Environment was established but its structure and functioning have still to be defined. 55. The justifications for including the water supply, wastewater and the solid waste under proposed ERP are: provision of a sufficient and the safe water supply and the creation of satisfactory sanitary conditions are prerequisites promoting for economic development and for maintaining an acceptable public health standard; under present conditions, with most essential services being deficient, the poverty groups suffer most; they will also benefit most from proposed improvements. These improvements will also set the stage for long-term sector development. 56. The issues affecting the sector can briefly be identified as: (a) for Water SuIDNy: too many water authorities with weak national level and coordination a lack of qualified staffing; unsatisfactory operation and maintenance with high un-accounted for water (40 percent or more) and the delivery of water of unsafe quality; inadequate cost recovery, which has resulted in frequent and also permanent breakdowns; and deferred investments for replacements and for construction of new facilities; (b) for Waste Water: inadequate institutional arrangements and the lack of a revenue base, which has resulted in low operational and maintenance standard; environmental pollution, including water sources used for domestic watersupply, caused by inadequate waste water treatment; and (c) for Solid Waste: inadequate institutional arrangements and lack of a revenue base, which has the contributed to significant environmental degradation. An Emergency Rehabilitation Program 57. The major objectives under the ERP can briefly be summarized as: to develop sector organizations for present and future needs, taking the potential of the private sector into full account; to prepare the basis for financial sustainability of sector operations; and to restore present facilities through rehabilitation and extension to achieve service levels and standards commensurate with, at least, basic demands. - 27 - 58. The implementation of the ERP, for which specific project profiles have been prepared (these are printed in the Annex to the report), should be undertaken as a first step within a framework for long-term sector developmenr. The ERP would be composed of: (a) works rehabilitation and extension; (b) the formulation of a policy framework for sector development; and (c) preparatory works for subsequent investments to take place. Under this approach, the ERP can proceed with the concurrent development of sector policies on institutional and financial matters, which are to be implemented subsequently. 59. The composition of proposed physical works should aim to achieve the following: (a) for Water SuVRpy: improved operation and maintenance; reduced water leakages; improved operational control; improved water quality; and increased water production; (b) for Waste Water: improved operation and maintenance; improved protection of ground, spring and surface waters; improved collection; and improved utilization of investments already made; (c) for Solid Waste: improved and extended collection; improved environmental conditions, including protection of rivers and coastal waters; and improved disposal. To assure the satisfactory operation and maintenance of rehabilitated and/or extended facilities, crash training courses should take place as a forerunner to a larger - scale approach to human resources development, scheduled for in a subsequent phase. 60. The policy approach on sector development would include an analysis of: (a) water supplY and wastewater. taking into account: the advantages of joint entities for water supply and wastewater; the number and geographical coverage of authority required at the national level; the potential for full commercialization of provided services; degree of autonomy and the scope for privatization; and the need for legislative amendments; (b) solid waste. taking into account: the authorities to be created and their geographical coverage; commercial aspects, including the potential for recycling; the degree of autonomy and the scope for privatization; operation of compost and incineration plants through contracts; and the need for legislative amendments; (c) water resources management, taking into account: the definition of functions and duties; institutional requirements; and legislative arrangements; (d) the Ministry of Environment and taking into account: need for amendments the present legislation; and interactions with the above authorities (under (a), (b), and (c)) on water pollution control and related environmental aspects. The above matters could be dealt with in a specific policy paper to be prepared and submitted to the Government for review and approval. 61. Preparatory works for a subsequent phase should include: (a) studies on institutional development; (b) the updating of the Waste Management Plan; (c) preparations or updating a Water Management Plan; and (d) the preparation of feasibility studies or updating of existing ones and/or detailed engineering designs for the next phase of priority projects. 62. The cost estimates for the ERP are still tentative but would be in the range of US$289 million, would be in, out of which US$113 million would be in local and US$184 million foreign exchange. The investments would be divided between water supply, wastewater and solid wastes, in about the - 28 - following proportions 50 percent, 30 percent and 20 percent. -Of total investments, about US$273 million would be spent on civil works and equipment supplies, with the remaining US$22 million to be used on technical assistance/consultant services (see Table 11). 63. The dispersal of responsibilities and authorities in the sector among a large number of ministries, water authorities and municipalities (para. 54) may hamper the efficient implementation of an integrated program of sectoral rehabilitation. A review of the present implementation capacity of the various authorities involved should be made, with a view to strengthening them for the immediate task of rehabilitation. At the same time, means should be explored that could lead to improving coordination of decisions and efficiency of execution of approved rehabilitation works."/ Table 11: Lebanon - Cost Estimates of the Rehabilitation Program in Water Supply, WasteWater and Solid Waste Program Component Local Foreign Total ------- US$ million ---------- A. Physical Works -water supply 40.0 60.0 100.0 -waste water 24.0 36.0 60.0 -solid waste 15.0 35j. _50_0 Subtotal A 79.0 131.0 210.0 B. Policy Documentation 0.2 0.3 0.5 C. Preparation for 1.0 2.0 3.0 Subsequent Phase D. Consultant Services 9.0 5.3 15.3 (incl. construction supervision) E. Contingencies -physical 13.4 20.8 34.2 -price _10.4 16 6 _27Q GRAND TOTAL 113.0 176.0 289.0 11J In this context, it may be worthwhile to consider establishing a project management unit (PMU) that would be in charge of planning and performing the execution of a sector rehabilitation program, and which would be directed by, and report to, a Higher Committee or Board, composed of representatives of the ministries, water authorities and municipalities involved, with the CDR acting as its secretariat. - 29 - D. THE VQUSING SECTO Present Condition-s 64. The 16 years of hostilities inflicted severe damage on the housing sector, with serious consequences for the social stability and economic recovery of the country. It is estimated that about 170,000 housing units (28 percent of the total housing stock) have been damaged to varying extents, or destroyed, during this period. Of these units, some 70,000 have been rehabilitated during periods of relative calm; the remaining 100,000 units now require either total reconstruction (12 percent), major repair (14 percent) or rehabilitation (74 percent), at a total estimated cost of roughly $1 billion. 65. Equally serious is the displacement of about 800,000 people or 160,000 households (almost one quarter of the population), who sought shelter through squatting in existing dwellings or on state-owned or private land, in unhealthy and overcrowded conditlons. 66. Other, structural, problems affect the housing sector. In ,articular, there is a severe shortage of housing units for the middle-and lower-income groups. It is estimated that the housing deficit accumulated during the war is in the order of 120,000 units. The shortage is causing large numbers of young professionals to emigrate, and discouraging the return of others. The deep decline in the incomes of lower and middle-income groups has reduced their ability to afford adequate housing: for example, a household income of $3,000 per year (the median in 1990) allows only for a dwelling of 40 m2, if financed by a loan at 10 percent interest and repaid in installments of 30 percent of household income over a period of 20 years. The rental market is also highly distorted, due to a virtual freeze, since 1982, on rents in nominal terms, despite the hyperinflation that the pound has suffered; this has discouraged rentals and new construction for rent and has led to lack a of maintenance and the deterioration of a large part of the housing stock 12/ 67. Before the war, the private sector succeeded in financing a housing construction boom, including for the middle-and low-income groups, without the benefit of institutional long-term credit. Attempts during the war to develop housing finance institutions, targeting middle-and low-income groups, have not been successful, due to the lack of sufficient resources and to the effects of hyperinflation on the value of assets: the Housing Fund stopped operations in 1987; the Housing Bank, which is 50 percent owned by tile private sector, urgently requires additional funds from local and foreign sources to avoid a possible collapse by February 1992. U1" About 49 percent of total households live in rented houses (76 percent in Greater Beirut). Draft legislation being considered by the Government would allow rents under existing contracts to be increased by a fixed percentage on the law's adoption, and adjusted annually thereafter in line with the official inflation rate. New contracts would be frozen for three years only and freed totally thereafter. - 30 - 68. The Government also created, in 1980, a Housing Assistance scheme, which is funded from the general budget and is managed by the Ministry of Housing. The Scheme provides loans - against collateral - to all households whose homes were either damaged or destroyed. Loans range from LL 3 million ($3,200) to LL 12 million ($12,200) to be repaid at 4 percent interest over 15 y3ars. So far, some 28,500 loans have been extended. The scheme, however, suffers from several severe problems: (i) its resources are very limited - the budget allocation in 1991 is LL 15 billion ($16 million); (ii) it is not equitable, since it excludes households that are too poor to provide collateral; (iii) it applies uniform repayment conditions on all borrowers, irrespective of their ability to pay; and (iv) it is financially unsustainable, since the interest subsidy over the life of the loan amounts to more than twice the amount of the loan (at current Treasury bill rates). An Emer2encv Program 69. The Government's action plan for national reconciliation called for the return of displaced families to their original homes. This objective implies the return of some 100,000 displaced families and the improvement of the housing conditions of another 60,000 households, which are now in unhealthy and severely overcrowded squatter settlements. The task is complex, politically sensitive and very costly. However, a start in addressing the problem is necessary. It is proposed that an emergency program be prepared to address the needs of 42,000 families who lost their original homes and are now squatting in other people's homes, or in semi-destroyed buildings, or in temporary unhealthy shelters erected on state-owned or private land. 70. The proposed emergency program covering the years 1992-94 would comprise the following components, listed by order of priority, at an estimated total cost of $407 million (see Table 12): (a) Reconstruction or reRair works to rehouse 12.000 families now living in the severely damaged buildings in the Beirut Central Business District (CBD), where major reconstruction works are planned by the private sector. The CBD project has been approved by the Government, and the draft law enabling its implementation was approved by the Parliamentary committee in October 1991. (b) Reconstruction and renair works on 23,000 units belonging to families who are now squatting in other people's homes and are prepared to return to their original homes immediately. (c) Reconstruction works of utility networks in villages where such networks are totally destroyed and need to be rebuilt to permit the return of the displaced families identified in (a) and (b), above. 71. The foreign exchange cost of the program is estimated at $212 million (48 percent of the total), and the local currency cost at $195 (52 percent). - 31 - 72. The implementation of the proposed emergency program would require considerable financial, technical and administrative resources, which extend well beyond the capacity of the Government to supply from its own resources in the next three years. If the program is to address social as well as economic issues, and at the same time to be self-sustaining in the future, it would require external funding on a grant, or a highly concessional basis. To prepare for its implementation, three actions are recommended: (i) undertaking a general housing rehabilitation study; (ii) undertaking a feasibility study for a new housing finance scheme for those able to pay part or all of the cost; and (iii) implementing of a technic .1 assistance program to strengthen the institutions concerned with the management of the housing sector reconstruction. 73. Ibe gouing Rehabilitation_Study comprises (i) a detailed and comprehensive household survey to establish a data base on the number, location, current status, original home and income levels of the displaced familiesWV; (ii) an analysis of these families' capacity to repay a loan at full or partial cost; (iii) criteria for selecting beneficiaries for a direct housing grant, with a focus on the poor, and estimates of the number of these beneficiaries; (iv) the various forms and costs of assistance, whether financial or in kind, required to address the needs of the various groups; (v) designs and cost estimates (using local raw materials and labor) for low-cost housing for potential beneficiaries in the various groups; and (vi) designs, cost estimates and tender documents for rebuilding the utilities in the rehousing areas. The proposed study should provide within four months sufficient information for the appraisal of the housing emergency program by interested donors. Subsequent phases of the study will provide data and detailed designs necessary to implement the program by the end of 1994. The total cost of such a study is estimated at $3.5 million, of which $1 million would be financed by UNFPA and $0.5 million by the Ministry of Housing. The balance would be sought from donors on a grant basis. 74. A Feasibility Study for a new Housing Finance Scheme should be commissioned to coincide with the completion of the first phase (items i,ii & iii) of the Housing Rehabilitation Study and comprises: (i) an appraisal of the existing financial institutions, including the Housing Bank and the Housing Finance Scheme with a view to identify an appropriate institution to supply housing credit to displaced families able to repay part or all of loans advanced for their rehousing; (ii) the identification in detail of the potential beneficiary groups, the lending criteria and loan or grant elements for each grcup; (iii) the terms and the conditions for the financial sustainability of the scheme and the potential use of revolving funds for future operations; and (iv) an organizational structure, budget, draft -W The Ministry of Housing has completed a physical survey of 48,000 damaged units, out of a total of 100,000 units. However, the Ministry's survey does not contain information on the household income and present status (e.g., are the housed in their second homes or illegally occupying other people's homes) and is, therefore, not sufficient for determining priorities and the need for financial assistance. - 32 - lending-policy statement and pro-forma financial projections for the proposed institution. The estimated cost of this feasibility study is $0.5 million. 75. A Technical Assistance Program is also a required component of the emergency program. The T.A. would: (i) strengthen the capacity of the Ministry of Housing in planning and implementing the emergency program, including establishing a computerized data base, an economic analysis unit and an management information system; (ii) implement training programs for its planning, procurement and management staff; and (iii) assist the proposed financial institution in setting up and operating its lending program. The cost of the T.A. program is tentatively estimated at $3 million. 76. It is important to recognize that the success of the emergency program in the housing sector will depend not only on the reconstruction of adequate housing units for the displaced persons in their original villages, but also on the availability of job opportunities in or close to their reconstructed homes. The general economic development of the regions to which the displaced persons return should, therefore, be an integral part of the emergency program. Ia_ble1__: Lebanon - Cost Estimate of a Rehabilitation Program in Housing ($ million) 1992 1993 1994 Total 1. Rehabilitation and Reconstruction of 35,000 units (a) 12,000 units to rehouse squatters in CBD 50 60 '0 120 (b) 23,000 units to rehouse squatters in other people's homes 40 100 90 230 (c) Reconstruction of utility networks 5 25 20 50 2. Housing Study 1.5 2.0 3.5 3. Housing Finance Study 0.5 - - 0.5 4. Technical Assistance Program 1.0 2.0 - 3.0 98.0 189.5 120.5 407.0 33 - III. INSTITUTIONAL ISSUES Introduction 77. The inmplementation of a large public investment program averaging, according to CDR, about $450 million per year in 1992-94 - or more than double the highest real level reached by the public sector before the war - would pose a major challenge to the Government and its agencies, in view of present weakened administrative capacity. Civil public administration and autonomous agencies have emerged from the war with only 40-50 percent of their original posts filled, having lost many experienced higher staff and many skilled workers. The success of the rehabilitation program, therefore, would crucially cLepend on the ability of the Government to rebuild and develop the planning and implementation capacity of those institutions dealing specifically with the planning, design, financing, implementation and follow- up of the reconstruction program. Ideally, this task should be done in the framework of a more comprehensive administrative reform program, the principles of which are being debated within and outside the Government.i4' The design, adoption and implementation of administrative reform in any country are, however, a long-term process, which should not delay the reconstruction effort. 78. The planniing and execution of the emergency rehabilitation program would have to build on existing institutions. In the immediate future, and until qualified staff are engaged and needed skills acquired, it would be necessary to supplement existing resources with substantial technical assistance and consultant services in all the agencies concerned with the reconstruction program. These include, in particular, the Council of Development and Reconstruction (CDR), the Ministry of Finance, the technical ministries and agencies (Electricity and Water, EDL, Post and Telecommunication, Housing, Public Works, etc.). It would also be necessary to ensure the clear allocation of responsibilities to the various groups involved in the planning, financing and executing of the reconstruction program, and to ensure the smooth coordination of these functions among them. 1" The Government is currently considering various civil-service reform measures. Adequate compensation packages, the recruitment of skilled staff, the firing (or retraining) of unqualified ones and the improvement of office environments and equipment should be among high priority measures to be implemented, especially in key ministries and agencies (the Ministry of Finance, Ministry of Economy, CDR, etc.). However, budgetary and other implications of such measures may not facilitate an easy resolution of the problem. To the extent that these issues cannot be resolved, the Government should seriously consider other viable alternatives including such measures as subcontracting out tasks that can be handled efficiently by the private sector (subject to an appropriate transparent selection system and supervisory framework). - 34 - Technical Assistance 79. The requirements of technical assistance for Lebanon, both immediate and in the medium term, were comprehensively reviewed by the United Nations Inter-Agency Needs Assessment Mission to Lebanon in July 1991. These are estimated at about $120 million in the immediate future, and at about $112 million in the medium term. More specific technical assistance programs and technical studies needed in the four sectors covered by the World Bank/UNDP mission in October/November 1991 have been identified by the mission and are described in the previous section. In addition, the mission confirmed the need for technical assistance for the recreation of a Statistics Department1W and for a technical study to computerize the work of the Ministry of Finance. The total estimated cost of the identified program of technical assistance and studies during 1992-94 amounts to $63 million, as follows: Table 13. Lebanon: Estimated Cost of Technical Assistance and Studies S million Electricity 23.5 Telecommunications 12.0 Water Supply, Waste Water and Solid Waste 16.0 Housing 7.0 Ministry of Finance 0.2 Computerization Study 0.2 Department of Statistics 4.0 Total 62.7 1it UNDP is currently providing assistance to CDR to rehabilitate the country's statistical bureau. Given the dearth of reliable data for almost all sectors of the economy, the rehabilitation of this bureau is a very high priority area. With CDR assuming the role of a planning as well as a reconstruction ministry, serious consideration should be given to having the bureau within CDR jurisdiction, or failing this, the bureau should be very closely associated with CDR. Also, the statistics bureau should have close contact with sectoral statistical units, which should be established in the various ministries in order to develop a reliable data base for the country. - 35 - 80. Given the large volume of technical assistance required in the rehabilitation effort and its dispersion in several ministries and agencies, it may be worthwhile to consider the establishment of a trust fund for TA grants to Lebanon (for consultant services, sector studies, feasibility studies, training and institution building). If there is interest in this approach there would be need to define the sectors to be covered, the arrangements for a trust fund administrator and the executing agency in charge of the TA program's implementation. Coordination of Reconstruction Task 81. The Government created the Council for Development Reconstruction (CDR) in 1977, to replace the Planning Ministry, and endowed it with extensive powers to prepare a general plan and programs for development and reconstruction; recommend appropriate economic, financial and social policies to the Council of Ministers; enter into intermational agreements for economic and technical assistance and establish project implementation units (with Council of Ministers' approval); extend concessionary loans to private and public sector development projects; finance any assigned project or program and contract both internal and external loans amounting up to 15 percent of the Government's total budget. 82. Since 1977 the CDR has spent $1.1 billion in local and foreign resources for various capital, credit and relief programs in almost all sectors of Lebanon. The volume and quality of its output and operations went through several cycles reflecting unreliable funding sources, the worsening of security conditions, and other problems in several areas of CDR operation. Nevertheless, it performed a very useful function and kept many vital services running during a very difficult period, albeit at a cost. Recently, measures have been taken to reorganize the CDR and improve its image, including a change in its managing board and executive officers, the modification of its organizational structure and a closer scrutiny by the Council of Ministers of its borrowing activities. 83. The CDR has both planning and execution authorities. With the return of normalcy, and as line ministries are rebuilt, the CDR should work with the ministries to assist them assume their customary roles. As stated in the CDR September 1988 progress report, the CDR "role as an execution agency will decline as routine investment activity reverts to the public authorities and line ministries, or possibly to local government units." The missions discussions with various line ministries indicated that they feel prepared to begin reconstruction works shortly, once they implement certain strengthening measures with the help of consultants. Apart from timing, there seems to be general agreement that the CDR should work to secure and coordinate financial resources and assist in the coordination of the reconstruction effort through appropriate guidelines, monitoring and follow-up actions, while execution should be the responsibility of the line ministries and agencies>/' Et Other institutions such as the CEGP and the CEGPB are currently budgeting funds and resources for several works, which should be considered under the overall reconstruction program. Institutions such as these, and the various - 36 - 84. Assuming the line ministries' capacity for project planning, execution and control are strengthened with appropriate staff and technical assistance, the mission recommends that the CDR focus on the basic functions of planning, external finance coordination, monitoring and follow-up. For this purpose, the CDR needs to work closely with the relevant ministries and agencies, in particular, to: Mi) provide them with updated economic data and projections and medium-term goals for sectoral planning; (ii) identify the ministries' requirements for technical assistance, consultants, studies and computer equipment; (iii) initiate and develop a consensus on the criteria to be used in the selection of projects; (iv) formulate common guidelines and procedures for bidding, the evaluation of bids, the award of tenders and procurement; and provide models of bidding documents that are compatible with aid donors' requirements; (v) agree on a standard periodic reporting system on financial and physical achievement in projects, TA and studies, to help in monitoring and in the design of follow-up actions; and (vi) Establish an audit system for reconstruction projects financed through the CDR 85. With a view to strengthen its own management, the CDR is in the process of contracting consultants to undertake two studies that are expected to further define its role. The first will focus on a review of CDR regulations and is expected to define staff roles, job descriptions and other tasks consistent with CDR planning, financing, coordinating, monitoring and implementing roles. The second study will focus on systems, procedures and guidelines, which are to be utilized by CDR to assist in a as definition of criteria for formulating priority investment plans, project identification, contracting, auditing and monitoring systems, etc. CDR has funding for these two studies, and it expects to have the works contracted and completed by mid- 1992. 86. Management Information System. The CDR and all of the ministries and other relevant entities urgently need a well-functioning management information system (MIS) in order to facilitate their tasks, which are special committees and councils, should be studied with the view of assessing their relevance in light of the roles of the CDR and the line ministries. - 37 - expected to increase significantly in both volume and complexity as a new reconstruction program gets underway. Systems have been developed for use in emergency reconstruction programs involving micro-computers and a custom-made software program to present maps, graphs, charts, tables, etc., with a very wide array of summary as well as detailed information for decision makers and technical staff at various levels of the planning and implementing process. The program has the additional advantage of record standardization and easy access at various levels (which can be controlled by access codes). The MIS is a very useful tool; however, it would need high-quality data input and initial training for users. 87. When considering automation of the various ministries and other public offices, due consideration should be given to ensuring equipment and system compatibility and standardization to the extent possible. Technical assistance for this task should be considered since the country is in a unique position to build up a well-integrated system that could save considerable resources, both human and financial.