By Georges Pierre Sassine

An Arabic version of this article appeared in the print edition of Annahar Newspaper on December 12, 2011.

Territorial disputes will prevent Lebanon from developing part of its oil and gas resources. While Lebanon is yet to demarcate its maritime borders with Cyprus and Syria, the main area of tension today is with Israel over the discovery of potential offshore petroleum resources. What are the options for Lebanon to resolve its maritime border dispute with Israel? The examination of similar cases sheds light on resolution strategies available to Lebanon.

Maritime boundary disputes are extremely common and are not unique to Lebanon and its neighbors. In each of the world’s major seas such disputes can be found. A prime example is the South China Sea where seven states – China, Indonesia, Malaysia, the Philippines, Taiwan, Vietnam, and Brunei – have laid claim to subsea energy supplies. Other examples include the United States and Canada dispute over the hydrocarbon rich Beaufort Sea; or the Thailand-Cambodia disagreement which is freezing oil and gas exploration in the Gulf of Thailand.

There are about 200 potential maritime boundaries that remain unsettled in the world, but another 200 cases have already been resolved. Five different resolution strategies were adopted by several countries – all within the legal structure of the United Nations Convention on the Law of the Sea (UNCLOS): direct negotiations, third party mediation, joint development agreements, and formal legal proceedings through a judicial tribunal or panel of arbitrators.

Maritime boundary disputes are extremely common and are not unique to Lebanon and its neighbors. In each of the world’s major seas such disputes can be found.Georges Sassine

Direct negotiations and joint development agreements are not options for the Lebanese-Israeli dispute. Both countries are at war and will not negotiate face to face. Joint development of hydrocarbons would let both countries access resources of the disputed area instead of dividing the territory. While such cooperation schemes are encouraged by the international community, they are not applicable to this case.

In addition, Israel has not signed or ratified the UN Law of the Sea, contrary to Lebanon, which means that Lebanon cannot force Israel to court. This leaves Lebanon with one course of action: third party mediation through the United Nations, for example, and if that were to fail pursue an international campaign to get Israel to sign the UN Convention of the Law of the Sea. This would ultimately enable Lebanon to bring Israel before a binding judicial tribunal or panel of arbitrators including the International Court of Justice, the International Tribunal for the Law of the Sea or the Permanent Court of Arbitration.

Israel has not signed the UN Law of the Sea, which means that Lebanon cannot force Israel to resolve maritime disputes through an international tribunal.Georges Sassine

Lebanon’s success will thus depend on its ability to master the rules and procedures of the international law of the sea, and its ability to wage a successful international media and diplomatic campaign.

In the meantime, Israel is in a rush to develop offshore resources, and Lebanon is running behind. Israel is speeding up gas developments in response to increased disruptions to its natural gas supplies, which resulted from nine attacks on Egyptian pipelines to Israel in the past 10 months as well as Egypt’s intention to potentially raise the price of its natural gas supplies. Israel has already licensed fields to oil companies and has started exploration and construction. Lebanon, on the other hand, is progressing at a slow pace and is expected to open exploration license bids in early 2012.

As a result, as Lebanon pursues the lengthy and complex settlement process, it should work in parallel to exploit petroleum resources in areas that are not under dispute. It is in the absolute interest of all Lebanese factions to rise above internal divisions and accelerate the exploitation of undisputed areas.

Georges Pierre Sassine is an energy policy expert, and Harvard University alumnus. The opinions expressed herein are his own. He wrote this commentary for ANNAHAR NEWSPAPER.

An Arabic version of this article appeared in the print edition of Annahar Newspaper on December 12, 2011.

(Annahar Newspaper: http://www.annahar.com/)

 By Georges Pierre Sassine

Background

Prior to the 2006 war, Lebanon’s electricity sector was in a state of disrepair. The damage to the infrastructure induced by the conflict, which amounted to $114 million, exacerbated its condition. But while the Lebanese Government implemented a series of quick-fix solutions, the sector’s true rehabilitation requires long-term reform.

The electricity supply system is dominated by the state-owned Electricite du Liban (EDL), which is a vertically integrated utility. Its installed generation capacity only meets 85% of the electricity needs, electric interconnections and imports from Syria cover about 10% of the demand and the remaining is being generated by the individual enterprises and commercial facilities.

EDL suffers from poor financial conditions, and is heavily dependent on government budget subsidies for operations and investment. As EDL adopted an electric tariff freeze policy, the government steps in to partially relieve its burdens with the rise in fuel cost; and thus, the power sector is contributing up to an astounding 20% of the national debt burden.

The generation capability itself is characterized by inefficiencies in the power plants and by a lack of available capacity due to aging and unreliable assets. The transmission systems suffer high technical losses (˜ 15%) and the distribution systems from high non-technical losses (˜ 23%), high levels of unbilled electricity consumption and a low collection of electricity bills (˜ 80%).

On top of its ineffective organizational structure, EDL is facing a serious human resources issue with a decrease in its manpower while the number of customers is increasing. The average age of EDL’s personnel is above 51 years and they lack proper qualifications.

The Government of Lebanon was granted multi-million dollar loans in the last sixteen years to reform, restructure as well as to expand electricity transmission. However, the objectives were not completely met and the overall performance of the government was rated highly unsatisfactory. Recent legislations were issued by the Lebanese Parliament (Privatization Law no 228/2000, the law no 462/2002 Organizing the Electricity Sector) and indicated a tendency to promote private sector participation, in line with the international trend. However, no action has been taken so far in that regard.

Since 2000 the Lebanese Parliament issued legislations to promote private sector participation in the electricity sector … No action has been taken so far in that regard.Georges Sassine

Recommendations

The electricity sector reform should adopt the private sector participation which has proven to improve access to public infrastructure services, price and quality.

The private sector participation can take one of many forms but before choosing the most suitable structure there’s a need: First, to develop and establish an efficient regulatory framework that should be governed by an independent and effective regulator. Second, to corporatize the electricity sector which is a prerequisite to any chosen privatization option.

The best privatization option appears to be the unbundling of the Generation from Distribution and to leave Transmission within the government control. The sector needs to be restructured toward a “middle ground” deregulated environment where the regulator controls multiple generators and distributors with one single buyer. This “middle ground” deregulated environment will be an interim step towards an “all level competition” privatization form if seen appropriate later on.

There are no technical barriers to resolve Lebanon’s electricity crisis … reforms can only be meaningful if and only if politicians adopt a serious and determined strategy towards their implementation.Georges Sassine

The Transmission is a natural monopoly and will not be divested in order to remain a neutral ground with open access to all players, which will ensure better competitiveness. The Generation and Distribution on the other hand if split could allow for commercialization of the sector and thus allowing for more competition, an ability to generate profits and thus increase performance, service access, price and quality. The public-private partnership should be properly designed to target poorer population segments and to improve services delivered to them.

A demand-side management strategy should be adopted and the tariff regulation should be amended in a way that would prevent social disturbance and electric bankruptcy. A significant effort should be put in energy efficiency by developing standards, certification and labels, and focusing on public awareness. Renewable and sustainable energies should be encouraged and developed. Solar energy in particular is virtually unexploited and has considerable potential for growth.

This being said, the environmental issue is also important to consider. The Lebanese Government is in the process of adopting the Kyoto Protocol rules and is planning to abide by them.

Conclusion

As outlined earlier, EDL and the Lebanese electricity sector are in significant trouble. In a country where sectarian interests seem to dominate all political and economic decisions, the electricity sector is a highly politicized one. This makes its regulation very hard to reform due to the diversity of stakeholders involved. There are no structural barriers to achieve more efficient public policies, but they can only be meaningful if and only if politicians adopt a serious and determined strategy towards their implementation.

By Georges Pierre Sassine

A version of this article appeared in the print edition of The Daily Star on March 06, 2012, on page 7.

Lebanese are thrilled about the prospect of tapping their recently discovered offshore oil and gas reserves. However, examples from other countries show this could easily turn into a curse and invite corruption.

Economists have a name for this negative phenomenon, namely the “resource curse.” Countries with abundant natural resources such as oil and gas, frequently experience lower economic growth, higher levels of corruption, and in extreme cases civil wars. This has been especially visible in Africa, where the Democratic Republic of the Congo, Sudan and Angola have all been torn by civil unrest.

Nigeria is a prime example where oil has increased the corruption of the political class. Oil exports constitute one-third of Nigeria’s economy. However, contrary to what one would expect, the economy could be worse off if oil prices increase in the long run. Paul Collier of Oxford University recently projected that if oil prices doubled in the next 25 years, Nigeria’s economic output would decrease by two-thirds when compared with what it might otherwise have been.

Fortunately, the resource curse can be avoided and there are many success stories to draw upon. Norway, for instance, used its oil to achieve the world’s highest living standards. Similarly, Malaysia has used its reserves to successfully power a transition out of mass poverty and toward the development of a middle-income economy.

The resource curse can be avoided … Lebanese policymakers should examine lessons from the successes and failures of other countries.Georges Sassine

Lebanese policymakers should examine the lessons from the successes and failures of other resource-rich countries, and understand the key causes of the resource curse in order to avert them. Threats include corruption, poor implementation of regulations, inequitable distribution of oil revenues, volatility of oil prices, non-diversification of the economy and environmental risks.

Success or failure will rely on the ability of the government to manage and regulate these risks. Experts have recognized the main remedies to be transparency and accountability, and a strong system of checks and balances in the governance process. Lebanese should better understand the three major questions shaping the success of the energy industry: How much oil and gas will be produced; how much money it will generate; and how the revenues will be spent.

Corruption should be avoided at both the extraction phase and once revenues start flowing. For starters, it is essential to make extraction contracts public and disclose how much oil will be produced. In Iraq and Nigeria, 40-50 percent of the total oil produced is illegally smuggled and traded in the black market. Failure to monitor and disclose extraction figures facilitates corruption, losing revenues that could potentially benefit Lebanon’s citizens.

Internationally, initiatives are making headway to ensure financial transparency, especially in the oil and gas sector. Lebanon should ratify and implement international standards such as those established by the Extractive Industries Transparency Initiative (EITI), and the United Nations Convention against Corruption (UNCAC). Under EITI standards the government would be required to publish revenues incurred from oil and gas sales. Once these become public knowledge, it would be much more difficult for officials to siphon off money.

However, ratifying international treaties is only the first step toward preventing corruption. For example, Lebanon ratified UNCAC in October 2008, but still lacks the appropriate legal mechanisms to implement it. Parliament must complement these treaties with national legislation and institutions to enforce their regulations.

Given the loopholes in the Lebanese legal system, another means of fighting corruption, in addition to enhancing Lebanese institutions, is through implementation of the regulations in the home countries of oil companies operating in Lebanon. Businesses in the United States and in the Organization for Economic Cooperation and Development countries have recently come under the authority of anti-bribery codes as their own governments have punished them in bribery cases involving foreign government officials.

A third key choice then facing Lebanon is how to manage and spend its oil and gas money. Should the revenues be spent on immediate needs, for instance to reduce the public debt? Or should they be saved for future generations?

Lebanon can significantly grow its economy if the right mechanisms surrounding its oil and gas sector are put in place. This will only happen if Lebanese citizens are active participants in the process, remain informed, and insist on claiming their rights.Georges Sassine

After the bidding process, which is expected to be completed in the next few months, international oil companies will pay the Lebanese government millions of dollars for rights to extract oil and gas. Ideally, this money would be best spent developing Lebanon’s infrastructure. However, realistically, once additional revenues start flowing in, most ministries (and ministers) would want their share of the proceeds: The Labor Ministry might argue for minimum wage increases; the Defense Ministry for increasing military spending; and so on. This would initiate messy political infighting.

Such can be avoided by focusing from the start on infrastructure development. The Lebanese government could auction the extraction rights for infrastructure instead of money. In this case, consortiums of both oil and construction companies would make offers in terms of the number of infrastructure projects prioritized by the Lebanese government, instead of financial compensation.

Nevertheless, the bulk of oil and gas wealth will flow to the Lebanese Treasury. Prime Minister Najib Mikati has announced that funds will go toward reducing the public debt to 60 percent of GDP – from the current 130 percent – before fulfilling other expenditures. However, there has been no mention of earmarking funds for future needs. The state is responsible for saving part of the oil revenues for future generations. A stabilization fund would need to be set up to cushion the economy and avoid deep cuts in government oil revenues in case of sharp declines in international oil and gas prices.

All of these initiatives can be bolstered by a clear system of checks and balances – not only between the executive and legislative branches, but also between the government and society. The core principle here is that natural resources belong to all Lebanese citizens, and the government’s sole responsibility is to manage these resources on our behalf. Lebanese media and civil society should play an important role in preserving our rights, no less than non-governmental organizations and watchdog organizations.

Lebanon can significantly grow its economy if the right mechanisms surrounding its oil and gas sector are put in place. This will only happen, however, if Lebanese citizens are active participants in the process, remain informed, and insist on claiming their rights.

Georges Pierre Sassine is an energy policy expert, and a Harvard University alumnus. The opinions expressed here are his own. He wrote this commentary for THE DAILY STAR.

A version of this article appeared in the print edition of The Daily Star on March 06, 2012, on page 7.

(The Daily Star: Lebanon News: http://www.dailystar.com.lb)

By Georges Pierre Sassine

A french version of this article appeared in the print edition of L’Orient le Jour on December 9, 2011.

In a time of political upheaval in the Middle East, and changing world economic order, Lebanon needs to adapt both its foreign and economic policies. Lebanon should play the role of “middleman”, an equidistant and honest broker that connects different players with each other.

Lebanon’s foreign policy is presently unsustainable. With no articulated doctrine, the central government relies on ad-hoc tactical moves in conducting its foreign policy. Quick fix solutions in the current environment are inadequate and it is becoming more and more difficult to maintain balance between polarizing forces. A more mature and long-term approach would offer more leverage and opportunities

Lebanon needs a cohesive overall strategy. A strategy guided by the basic goals of internal stability, and economic growth. It has to be a proactive foreign policy that prevents rather than reacts to crises.

This is a different approach from Turkey’s “zero problems” policy and Qatar’s conflict mediator role. Rather than interjecting in conflicts in the Middle East and beyond, as both countries have done, I would suggest a more retracted role considering Lebanon’s more modest resources, a role of silent spectator, carefully managing shifting coalitions.

Lebanon needs a cohesive overall strategy. A strategy guided by the basic goals of internal stability, and economic growth.Georges Sassine

Lebanon should lead with a clear message upfront and declare neutrality as a first and fundamental principle. In the short term, focus should be on vital relationships for our future. By way of illustration, Lebanon should refrain from making a bet on outcomes in Syria and Iran and maintain vagueness and silence. Regarding Saudi Arabia’s unclear leadership succession the Lebanese government should actively maintain relationships with different Saudi stakeholders.

I am suggesting a foreign policy that is consistently carried through. A strategy that employs neutrality as its leading instrument until a clearer future emerges. The risks are too high, and Lebanon will be better off with a pragmatic foreign policy instead of no policy at all.

On the economic front, Lebanon performed remarkably well facing the 2008 global financial crisis, but the risks to Lebanon’s economy lie in long-term changes. As the global economy moves towards greater integration and trade, how will Lebanon win in a more globalized world?

The answer is not in competing head to head with leading economies, but in finding unique opportunities to benefit from the rise of emerging markets.

Commerce corridors are shifting to South-South trade … The new opportunity for Lebanon will be in linking Brazil and China, as well as India and Russia.Georges Sassine

Lebanese businessmen benefited from playing the role of middlemen for decades. Their focus has been on the old economic order as intermediaries between the United States, Europe, and the Middle East. As a multipolar world emerges future opportunities will differ. Commerce corridors are shifting away from North-North and North-South trade, to South-South trade. China, India, and Brazil are trading more with each other as demand from advanced economies is slumping. The new opportunity for Lebanon will be in linking Brazil and China, linking India and Russia, and maybe several developing countries at once.

Take for example, Alibaba.com, an online aggregator where buyers and sellers trade wholesale merchandise. Alibaba connects 42 million users across 240 countries and is a success because it is the most efficient way to trade across borders and link so many people and countries. Similarly, Lebanese middlemen should explore new ventures to profit from globalization trends. The Lebanese government needs to adapt its economic strategy to the changing economic landscape and encourage Lebanese businesses to reap the benefits.

A new reinvigorated vision should prioritize five key initiatives: promote private sector participation and entrepreneurial ventures; remove barriers to doing business; refocus the education system on required skillsets; increase infrastructure investments; and incentivize business with foreign countries.

To achieve stability and long-term growth, Lebanon needs to articulate a clear vision and strategy that harnesses the country’s existing capabilities. It’s a matter of vision, courage and absolute determination.

Georges Pierre Sassine is a public policy expert and Harvard University alumnus. He wrote this commentary for L’Orient Le Jour.

A french version of this article appeared in the print edition of L’Orient le Jour on December 9, 2011. Original title: “Une nouvelle politique économique pour faire face à l’incertitude”

(L’Orient Le Jour: http://www.lorientlejour.com/)