Power privatization meeting milestones, if not charging ahead

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 001143 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR ABRAMS/DORAN/MARCHESE/HARDING 
 
E.O. 12958: DECL: 07/28/2017 
TAGS: PGOV, PREL, ECON, EFIN, LE 
SUBJECT: LEBANON:  POWER PRIVATIZATION MEETING MILESTONES, 
IF NOT CHARGING AHEAD 
 
 
Classified By: Ambassador Jeffrey D. Feltman for reasons 1.4 (b) and (d 
). 
 
SUMMARY 
------- 
 
1. (SBU) Acting Minister of Energy and Water Safadi says the 
GOL is committed to and is moving as scheduled on power 
sector reform.  He is focused on quickly fixing Electricite 
du Liban's management and making the company viable for 
privatization.  The GOL has started building financial 
accounts, lowering production costs by obtaining lower cost 
fuel, and increasing the efficiency of its existing 
production facilities.  It is also building a national 
transmission network and control center, and enlisting 
private sector investment to increase power production. 
Finally, Safadi requested further donor aid to the power 
sector.  End summary. 
 
MEETING MILESTONES, 
SEEKING SHORTCUTS 
------------------ 
 
2. (SBU) Acting Minister of Energy and Water (MOEW) Mohammad 
Safadi in mid-July told the DCM said that the GOL is 
committed to power privatization, is moving ahead as 
scheduled on its reform program, and wishes it could move 
faster.  Parliament's closure is an obstacle, but existing 
privatization legislation is adequate to allow the GOL to 
reform and corporatize Elecitricite du Liban (EDL).  Safadi 
went on to explain that there is no significant popular or 
political resistance to power sector reform; Lebanon's power 
sector is so problematic and expensive, Safadi argued, that 
everyone recognizes reform is needed.  Moreover, the 
opposition voted in parliament for power privatization before 
it left the government. 
 
STRUGGLING TO MAKE 
EDL A VIABLE BUSINESS 
--------------------- 
 
3. (SBU) The GOL is focused on quickly fixing EDL's 
management and corporatizating the utility.  Once EDL is 
corporatized, the focus will shift to increasing the value of 
the corporation to make it viable for privatization.  The GOL 
has already taken several steps to make EDL a viable business 
with profit potential; audits are underway to establish 
accurate financial records, the basis for a corporate 
business plan which will enable the GOL to privatize EDL. 
 
4. (SBU) The GOL is trying to reduce production costs and 
stem financial losses by securing less expensive fuel 
supplies and improving the efficiency of its current plants 
through maintenance.  (Note:  To make EDL profitable, the GOL 
will also have to raise the price EDL charges consumers, but 
Safadi noted that that is not politically feasible now.  End 
note.)  The GOL expects the Egyptian pipeline that currently 
supplies Damascus can begin supplying the relatively new 
Baddawi plant (near Tripoli) with lower cost natural gas -- 
rather than high-sulfur gasoil -- by mid-2008; the use of 
natural gas will cut the cost of power production by $200 
million.  Because other countries with rising demand have 
tapped that pipeline, it may only be able to meet Baddawi's 
needs for two or three years.  The GOL is exploring liquid 
natural gas shipments to Sidon's Zahrani plant, which won't 
be connected to the pipeline.  (Note:  We believe the 
pipeline, which transits Homs, is completed, but Syria has 
failed to supply Lebanon with natural gas.  End note.)  The 
GOL's shortage of foreign currency is a recent obstacle to 
securing fuel, Safadi noted. 
 
5. (SBU) The GOL is also trying to increase output and 
improve the efficiency of its current plants through 
maintenance.  As specified in the economic reform program, 
the MOEW initiated studies to upgrade the 30 year old units 
at Zouk and Jieyeh (located just north and south of Beirut, 
respectively), and hired a Korean technical consultant to 
oversee operations and maintenance at Zahrani and Baddawi. 
 
SETTING UP A NATIONAL 
GRID AND CONTROL CENTER 
----------------------- 
 
6. (SBU) Plans to create a national distribution system to 
transmit power from regions with ample supply to areas with 
great demand are progressing.  Construction of the national 
 
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220 kilovolt grid has experienced small technical delays and 
limited social opposition; residents in two areas oppose the 
installation of high-tension power lines, and those cables 
will be placed under ground to avoid popular demonstrations. 
Safadi still plans a National Control Center (NCC) to 
transfer power between producers and consumers in different 
regions.  He envisions controlling distribution and billing 
by areas, rather than to individual consumers, via a regional 
metering system. 
 
ENLISTING PRIVATE SECTOR 
TO INCREASE PRODUCTION 
------------------------ 
 
7. (SBU) The GOL is working to increase national power 
production to meet current and anticipated demand.  Demand 
currently exceeds supply by at least 400 kilowats (KW), even 
when Lebanon is able to buy up to 140KW in excess power from 
Syrian producers.  (Note:  Syrian demand also exceeds supply, 
and Syria can usually supply only 50KW during Lebanon's peak 
hours.  End note.)  The International Finance Corporation is 
preparing tender documents for private sector construction of 
a new power plant, expansion of an existing plant, or the 
sale of Baddawi.  Safadi expects that such independent power 
producers would then sell the resulting power to the NCC, 
increasing national power supply at no cost to the GOL. 
 
SEEKING DONOR SUPPORT 
--------------------- 
 
8. (SBU) Finally, Safadi noted that Lebanon still needs 
financial and technical support for power reform.  He 
estimated the GOL needs $80 million in maintenance work to 
keep the existing generators running, and that no donor 
responded to this area of the Paris III appeal.  (Note:  The 
World Bank and International Finance Corporation have 
committed technical assistance.  End note.) 
FELTMAN