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�FransabankEconomic Bulletin • First Half 2011

Report - Lebanon’s Economic Performance in H1 2011

• ExecutiveSummary 2

• GeneralIntroduction 3

• RealSector 3

• PublicFinances 7

• MonetarySituation 8

• FinancialSector 9

• ForeignSector �0

• EconomicProspects ��

Study - The Importance of Partnership between the Public and Private Sectors for the Lebanese Economy

• Introduction �2

• DefinitionofPartnershipandItsImportance �2

• FormsofPPP �3

• TheChallengesFacingPPP �3

• TheCharacteristicsandAdvantagesofPPP �4

• PPPinLebanon �4

• ConclusionsandRecommendations �5

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2 FransabankEconomic Bulletin • First Half 2011

Lebanon’s Economic Performance in H1 2011

Executive Summary

The Lebanese economy has shown a slowdown in the first half of 2011 relative to the same period of 2010, due to the regional turmoil in several Arab countries, besides the current uncomfortable political situation in the country. Lebanon’s major economic indicators are presented in the following:

• Constructionpermitsincreasedby4.6%.

• Thenumberofreal-estatesalestransactionsdecreasedby�8.6%.

• Thenumberoftouristsdecreasedby�9.7%.

• ThenumberofpassengersattheHaririInternationalAirport(HIA)declinedby0.4%.

• Theamountofclearedchecksincreasedby2.87%.

• Fiscaldeficitincreasedby40.7%.

• Netpublicdebtincreasedby3.3%.

• Inflationroseby6%.

• TheCentralBankofLebanon’sgrossFXassetsdecreasedby�.4%toUSD29.86billion.

• Thebankingsector’stotalassetsgrewby��.3%toUSD135.4billion.

• MarketcapitalizationofBeirutStockExchange(BSE)fellby��.0%toUSD9.78billion.

• Thetradedeficitwidenedby9.9%.

• Capitalinflowsdroppedby��.5%toUSD6.63billion.

• ThebalanceofpaymentsrecordedadeficitofUSD 479 million.

• Economicgrowthisforecastedat�.8%in2011accordingtotheEconomistIntelligence

Unit(EIU).

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3FransabankEconomic Bulletin • First Half 2011

I. General Introduction

The Lebanese economy has witnessed a relativeslowdowninitseconomicactivityduringthefirsthalfof2011relativetothecorrespondingperiodlastyear.

This is shown by the realized drop in most of its mainindicatorsoftherealsector,suchasnumberofpropertysales (-18.6%), number of tourists (-19.7%), number ofpassengersviatheHIA(-0.4%),numberofshipsviaBeirutport(-7.6%),customsreceipts(-21.8%),hoteloccupancy(-3.1%),carsales(-4.3%),andSMEsloans(-9.4%).

Inparallel, inflationroseby6%duringthesameperiod,coupledbyasurgingfiscaldeficit(40.7%),netpublicdebt(3.3%),andtradedeficit(9.9%).

Also,thetotaltradingvolumeatBSEfelldownby48.8%,coupledbylowercapitalinflows(-11.5%),andadeficitofUSD479millioninthebalanceofpayments.

Moreover, the Central Bank’s foreign-currencydenominated assets decreased by 1.4% to USD 29.86billionatend-June2011,whileconsolidatedassetsofthebankingsectorgrewby11.3%toUSD135.4billionduringthesameperiod.

TheEIUforecastsrealGDPgrowthofLebanonatnearly1.8%in2011,withaninflationrateofanannualaverageof5.5%.

II. Real Sector

�- Construction and Real Estate

BasedonthefiguresreleasedbytheOrderofEngineersofBeirutandTripoli,theconstructionpermitstotaled8.81millionsquaremetersinthefirsthalfof2011,upby4.6%from8.43millionsquaremetersinthesameperiodofthepreviousyear.MountLebanonaccountedfor51.1%ofthetotal construction permits, followed by South Lebanonwith 16.5%, North Lebanon with 16.3%, the Beirut with8.8%andBekaawith7.3%.

On the other hand, the number of sales transactionshas decreased by 18.6%, to reach an amount of 37,386transactions in the first half of 2011, as compared to45,928transactionsinthesameperiodof2010.

8.43 8.81

6.26

5.12

H1 2008 H1 2009 H1 2010 H1 20110.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

- Construction Permits (Square meters, million) -

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

H1 2008 H1 2009 H1 2010 H1 2011

- Number of Sales Transactions -

33,380

45,928

37,38637,089

REPORT STUDY


2- Tourism

According to the figures released by the Ministry ofTourism, the number of tourists visiting Lebanondecreasedby19.7%inthefirsthalfof2011relativetothesame period of 2010 to reach 774,214 as compared to964,067inthesameperiodof2010.

As for the distribution of tourists by countries, it showsthatthegreaterpartofvisitorswerefromArabcountrieswith31.9%ofaggregatevisitors,followedbyvisitorsfromEuropewith28.5%,visitorsfromAsiawith19.3%,visitorsfrom the Americas with 13.5%, visitors from Africa with3.6%,andvisitorsfromOceaniawith3.2%.

3- Airport Activity

BasedonthefiguresreleasedbytheHariri InternationalAirport(HIA),thenumberofairportpassengersamountedto2,400,872 in thefirsthalfof2011,adecreaseof0.4%year-on-year. As for the distribution of passengers fromdifferentcountries,passengersfromtheUAEaccountedfor 21.1% of total passengers, followed by those fromSaudi Arabia with 12.6%, France with 9.4% and Kuwaitwith8.3%.

Thetotalnumberofflightsreached29,600inthefirsthalfof2011,adecreaseof3.2%year-on-year.

4- Beirut Port

Figures released by the Beirut Port Authority show thatthetotaltonnageofloadedandunloadedmerchandisedecreasedby1.3%inthefirsthalfof2011relativetothesameperiodof2010, to reach3.24million tons in June2011.Thenumberofcontainersdeclinedby3.1%inthefirsthalfof2011ascomparedtothesameperiodof2010,to reach 289,554 containers. Also the total number ofshipsreached1,087inthefirsthalfof2011,downby6.6%ascomparedtothesameperiodof2010.Whereas,totaltransshipmentssurgedby22%ascomparedtothesameperiodof2010,toreach211,495containersinthefirsthalfof2011.

5. Customs Receipts

Basedonthefiguresreleasedbythecustomsdirectorate,customsrevenuesreachedUSD741.20millioninthefirsthalfof2011,down21.8%fromthesameperiodof2010.

- Number of Tourists -

774,214

964,067

473,517

761,415

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

H1 2008 H1 2009 H1 2010 H1 2011

1,560,527

2,070,819

2,409,359

2,400,872

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

H1 2008 H1 2009 H1 2010 H1 2011

- Passengers at HIA -

1,012

1,200

1,164

1,087

900

950

1,000

1,050

1,100

1,150

1,200

1,250

H1 2008 H1 2009 H1 2010 H1 2011

- Number of Ships at Beirut Port -

REPORT STUDY


The Port of Beirut continues to be the main point ofcustoms revenues, accounting for 86.30% of the total,followed by the Hariri International Airport, the Port ofTripoli,andtheMasnaacrossingpointwith7.20%,3.20%,and2.30%respectively.OverallcustomsreceiptsreachedUSD 1.4 billion in the first half of 2011 when includingrevenues from the value-added tax that amounted toUSD705millionoverthatperiodoftime.

6- Clearing Activity

BasedonthefiguresreleasedbytheLebaneseAssociationofBanks, thevalueofclearedchecks increasedby2.9%as compared to the same period of 2010, to reachUSD 34.10 billion in the first half of 2011.The value ofclearedchecksinLebanesepoundsroseby9.12%totheequivalentofUSD8.36billion,whilethevalueofclearedchecks in foreign currencies decreased by 1.39% toUSD25.74billion.Thedollarizationrateofclearedchecksgrewfrom72.98%to79.76%year-on-year.

7- Hotel Occupancy According to the survey conducted by STR Globalconcerningtheoccupancyrateathotels,itdecreasedtoreach64.50%inthefirsthalfof2011,adecreaseof3.1%ascomparedtothesameperiod lastyear.Furthermore,revenues per available room decreased by 15.1% ascomparedtothesameperiodof2010,reachingavalueofUSD136inthesamesaidperiod.

8- Cars Sales

Based on the figures released by the Association ofAutomobile Importers in Lebanon, the number of carssoldduringthefirsthalfof2011,reached15,211newcars,constitutingadecreaseof4.3%fromthe15,892carssoldinthesameperiodof2010.

438.00

741.20

947.90876.00

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

1,000.00

H1 2008 H1 2009 H1 2010 H1 2011

- Customs Receipts (USD, million) -

- Points of Customs Receipts -

7.20%

3.20%

2.30%

86.30%

25.18

19.93

5.25

33.15

26.10

7.66

34.10

25.74

8.36

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

H1 2009 H1 2010 H1 2011

Total Amount In FX In LBP

- Evolution of Clearing Activity (USD, billion) -

136.00

160.10157.20

151.30

63.00%

73.00%

67.60%

64.50%

120.00

125.00

130.00

135.00

140.00

145.00

150.00

155.00

160.00

165.00

H1 2008 H1 2009 H1 2010 H1 201158.00%

60.00%

62.00%

64.00%

66.00%

68.00%

70.00%

72.00%

74.00%

Revenues per Room (USD) Hotel Occupancy

- Hotels Activity Indicators -

REPORT STUDY


9- Kafalat Loan Guarantees

BasedonthefiguresreleasedbytheKafalatcorporation,loans under the guarantee of Kafalat has decreasedby9.4% inthefirsthalfof2011, reachinganamountofUSD80.5million,ascomparedtoUSD88.8millioninthesame period of 2010. The number of loan guarantees

reached 593 in the said period, as compared to 748 inthe same period of previous year, a decrease of 20.7%.Whereas, the average loan size increased by 14.9% toreachUSD135,820inthefirsthalfof2011,ascomparedtoUSD118,172inthesameperiodofthepreviousyear.

15,211

15,892

14,222 14,691

13,000

13,500

14,000

14,500

15,000

15,500

16,000

16,500

H1 2008 H1 2009 H1 2010 H1 2011

- Number of Cars Sold -

484 499

748

593

0

100

200

300

400

500

600

700

800

H1 2008 H1 2009 H1 2010 H1 2011

- Number of Kafalat Loan Guarantees -

Real Sector’s Indicators

Indicators H� 20�� H� 20�0 Variation

Constructionpermits(Squaremeters,million) 8.81 8.43 4.6%Salestransactions 37,386 45,928 -18.6%Numberoftourists 774,214 964,067 -19.7%NumberofpassengersatHIA 2,400,872 2,409,359 -0.4%NumberofcontainersatBeirutPort 289,554 298,817 -3.1%Customsrevenues(USD,million) 741.20 947.90 -21.8%Clearedchecks(USD,billion) 34.10 33.15 2.9%Hoteloccupancyrate(%) 64.50 67.60 -3.1%Numberofcarsales 15,211 15,892 -4.3%NumberofKafalatguarantees 593 748 -20.7%

Sources:OfficialDepartments

REPORT STUDY


III. Public Finances

�. Fiscal Deficit

According to the figures released by the Ministry ofFinance, the fiscal deficit has increased by 40.7% ascompared the first five months of 2010, to reach anamountofUSD1.21billion inthesameperiodof2011.Overall government revenues which include budgetandTreasury receipts,decreasedby0.3%relative to thesame period of 2010, to reach USD 3.56 billion in thefirstfivemonthsof2011.Budgetrevenues increasedby1% to reach USD 3.36 billion due to the increase in taxrevenues.Total tax revenues increased by 6%, to reachUSD3billion.While on the spending side, total public expenditures,which include budgetary and Treasury spending,increasedbyayearly7.6%inthefirstfivemonthsof2011toreachUSD4.77billion,causedmainlybyariseof10%inbudgetaryexpenditures.

Interest payments on domestic and foreign debtdecreased by 1.8% as compared to the same period of

2010, to reach a total of USD 1.6 billion in the first fivemonthsof2011.When excluding debt service, the level of the primarybalanceregisteredacumulativesurplusofUSD873millioninthefirstfivemonthsof2011,ascomparedtoasurplusofUSD1billioninthesameperiodof2010.

2. Public Debt

Basedon thefigures issuedby theMinistryofFinance, thegross public debt reached USD 52.52 billion at the end ofJune2011,constitutinganincreaseof2.9%fromJune2010.

Domesticdebt increasedby5.53%toUSD31.81billion,while external debt decreased by 0.76% annually toUSD 20.71 billion. Local currency debt accounted for57.38%ofgrosspublicdebtatend-June2011comparedto60.26%ayearearlier,whileforeigncurrencydenominateddebtrepresented42.62%ofthetotalattheendofJune2011relativeto39.74%ayearearlier.

Net public debt, which excludes the public sector’sdepositsattheCentralBankofLebanonandatcommercialbanks from overall debt figures, increased annually by3.3%toUSD45.58billion.

2.11

4.54

(2.43)

4.21

5.80

(1.59)

3.57

4.43

(0.86)

3.56

4.77

(1.21)

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

5M 2008 5M 2009 5M 2010 5M 2011

Government Revenues Government Expenditures Fiscal Deficit

- Public Finance Indicators (USD, billion) -

43.2047.80

51.02 52.52

0.00

10.00

20.00

30.00

40.00

50.00

60.00

H1 2008 H1 2009 H1 2010 H1 2011

- Gross Public Debt (USD, billion) -

Public Finances’ Indicators

Indicators �st five months �st five months Variation 20�� 20�0

Publicrevenues(USD,billion) 3.56 3.57 -0.3%Publicexpenditures(USD,billion) 4.77 4.43 7.6%Deficit(USD,billion) 1.21 0.86 40.7%Deficit/expenditures(%) 25.30 19.50 5.8%Grosspublicindebtedness(USD,billion)-1stsixmonths 52.52 51.02 2.9%Netpublicdebt(USD,billion)-1stsixmonths 45.58 44.14 3.3%

Sources:MinistryofFinanceandCentralBankofLebanon

REPORT STUDY


IV. Monetary Situation

�. Money Supply

Based on the data issued by the Central Bank ofLebanon,Moneysupply(M3)expandedbroadlytoreachUSD91.80billionoverthefirsthalfof2011,anincreaseofUSD6.84billionor8.1%ascomparedtoits levelduringthecorrespondingperiodof2010.Thisresultedfromanincrease in local currency denominated time depositsofUSD300million,ariseinforeigncurrencydepositsofUSD 5.93 billion, and a surge in money supply (M1) ofUSD610million.

2. Consumer Prices

BasedonthefiguresissuedbytheCentralAdministrationofStatistics, inflationroseby6%inthefirsthalfof2011.Thisisduetotheincreaseinpricesofmostcommoditiesin the Lebanese market, such as prices of clothing andfootwear, which increased by 21.1%, followed by pricesof water & fuels (13.1%), food and beverages (7.6%),education(6.7%),pricesatrestaurants&hotels(6%),andtransportation(5.8%).

3. Central Bank Foreign Assets

AccordingtothefiguresreleasedbytheCentralBankofLebanon, itsbalancesheetreachedUSD66.12billionattheendofthefirsthalfof2011comparedtoUSD58.23billioninthesameperiodof2010.Assets in foreigncurrenciesdecreasedby1.5%toreachUSD29.86billion,ascomparedtoUSD30.30billioninthesameperiodof2010.Itsgoldreserves increased by 21.5% from its value in the sameperiodof2010,toreachavalueofUSD13.93billioninthefirsthalfof2011.

Alsodepositsofthefinancialsectorroseby11.3%inthefirsthalfof2011,toUSD45.2billionduetocapitalinflowsintothebankingsector.

61.58

70.5284.96

91.80

0.00

10.0020.00

30.0040.00

50.0060.00

70.00

80.00

90.00100.00

H1 2008 H1 2009 H1 2010 H1 2011

- Money Supply (M3) (USD, billion) -

5.20% 6.00%

4.50%

3.47%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

H1 2008 H1 2009 H1 2010 H1 2011

- Consumer Price Index -

36.50

19.70

8.03

47.20

23.50

8.66

58.23

30.30

11.47

66.12

29.86

13.93

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

H1 2008 H1 2009 H1 2010 H1 2011

Balance Sheet FX Reserves Gold Reserves

- Central Bank’s Indicators (USD, billion) -

Monetary Situation’s Indicators


USD/LBPexchangerate 1,507.5 1,507.5 0.0%BDLassetsinFX(USD,billion) 29.86 30.30 -1.5%BDLgoldreserves(USD,billion) 13.93 11.47 21.5%MoneysupplyM3(USD,billion) 91.80 84.96 8.1%Inflationrate(%) 6.00 4.50 1.5%

Sources:CentralBankofLebanonandLebaneseAssociationofBanks

REPORT STUDY


V. Financial Sector:

�. Banking Sector:

Based on the figures released by the Central Bank ofLebanon, the banking sector’s total assets reachedUSD135.40billioninthefirsthalfof2011,anincreaseof11.4%ascomparedto thesameperiodof2010.Privatesectordepositshaveincreasedby11.3%fromthesameperiodof2010,toreachUSD111.45billion.

Deposits in Lebanese pounds declined by 1.22% fromthesameperiodof2010,toreachUSD37.05billion,whiledeposits inforeigncurrenciesincreasedby18.87%fromthesameperiodof2010,toreachUSD49.35billion.Non-residentdepositshadincreasedby18.99%fromthesameperiodof2010,toreachUSD19.9billion.Thedollarizationrateofdeposits increasedby4.23%ascomparedtothesameperiodof2010,toreach66.77%atend-June2011.

Further, loanstoprivatesectorhave increasedby17.5%inthefirsthalfof2011ascomparedtothesameperiodof2010,toreachUSD37.25billion.LendinginLebanesepounds increased by 34.5% in the first half of 2011 toreach USD 7.72 billion as compared to USD 5.74 billionin thesameperiodof2010.While lending inUSdollarsincreased by 13.7% in the first half of 2011to reachUSD 19.58 million as compared to USD 17.22 million inthesameperiodof2010.

Theratioofprivatesectorloanstodepositsincreasedfrom1.7%inthefirsthalfof2010to33.42%inthefirsthalfof2011.Thebanks’aggregatecapitalbasehasincreasedby15.7%inthefirsthalfof2011toreachUSD10.35billion.

91.70

77.80

101.10

85.80

121.59

100.10

135.40

111.45

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

H1 2008 H1 2009 H1 2010 H1 2011

Total Assets Total Deposits

- Bank Assets and Deposists (USD, billion) -

29.50%

33.42%

31.34% 31.67%

27.00%

28.00%

29.00%

30.00%

31.00%

32.00%

33.00%

34.00%

H1 2008 H1 2009 H1 2010 H1 2011

- Loans to Deposits Ratio -

Banking Sector’s Indicators


Totalassets(USD,billion) 135.40 121.59 11.4%Totaldeposits(USD,billion) 111.45 100.10 11.3%Totalloans(USD,billion) 37.25 31.7 17.5%Ratioofprivatesector’sloanstodeposits(%) 33.42 31.67 1.7%Banks’capitalbase(USD,billion) 10.35 8.94 15.7%

Sources:CentralBankofLebanonandLebaneseAssociationofBanks

REPORT STUDY

�0 FransabankEconomic Bulletin • First Half 2011

2. Capital Market

Figures released by the Beirut Stock Exchange indicatethatthetotaltradingvolumedecreasedby48.8%inthefirsthalfof2011,ascomparedtothecorrespondingperiodof 2010, to reach 53.17 million shares.While aggregateturnoverdeclinedby76.7%toreachanamountofUSD340.52million.

Marketcapitalizationfellby11.0%toUSD9.78billion,ofwhich58.22%was inbankingstocksand40.93%inrealestatestocks.Themarketliquidityratiodecreasedto1.2%,ascomparedto8.90%forthesameperiodof2010.

Theaveragedailytradedvaluefortheperioddecreasedby48.4%toUSD443,042ascomparedtoanaveragedailyvalueofUSD858,209inthesamesaidperiod.

VI. Foreign Sector

�. Foreign Trade

According to figures issued by the Higher CustomsCouncil, imports increased by 7.5% to reach USD 9.22billioninthefirsthalfof2011,whileexportsincreasedby0.1%toreachUSD2.11billioninthesameperiod,leadingtoanincreaseof9.9%intradedeficittoreachUSD7.11billion.Themain sourcesof importsare Italywith10%of totalimports, followedbytheUnitedStatesofAmerica (9%),China (8%), France (8%), and Germany (6%). While the

9.7810.99

16.14

11.30

8.90%

1.20%2.20%

1.50%0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

H1 2008 H1 2009 H1 2010 H1 2011

0.00%1.00%2.00%

3.00%4.00%5.00%6.00%7.00%8.00%9.00%10.00%

Market Capitalization (USD, billion) Market Liquidity

- Stock Market Activity -

BSE Indicators


Marketcapitalization(USD,billion) 9.78 10.99 -11.0%Totaltradingvalue(Shares,million) 53.17 103.84 -48.8%Aggregateturnover(USD,million) 340.52 1,460 -76.7%Averagedailyvalue(USD,thousand) 443,042 858,209 -48.4%

Sources:BSEandCentralBankofLebanon

mainsourcesofexportsareSwitzerlandwith10%oftotalexports,followedbyUAE(8%),SaudiArabia(8%),Turkey(7%),Iraq(6%),andSyria(5%).

6.30

1.74

(4.56)

7.83

1.69

(6.14)

8.58

2.11

(6.47)

9.22

2.11

(7.11)-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

H1 2008 H1 2009 H1 2010 H1 2011

Exports Trade Deficitmports

- External Sector Indicators (USD, billion) -

REPORT STUDY

��FransabankEconomic Bulletin • First Half 2011

3. Balance of Payments

Based on the figures issued by the Central Bank ofLebanon,Lebanon’sbalanceofpaymentspostedadeficitofUSD479millioninthefirsthalfof2011comparedtoa surplus of USD 1,313 million in the same period lastyear.Thiscumulativedeficitoverthefirsthalfof2011wascaused by a deficit of USD 444.1 million in the CentralBankofLebanon’snetforeignassetsandadeficitofUSD35millioninthoseofbanksandfinancialinstitutions.

2. Capital Inflows

Capitalinflowsdeclinedby11.5%toreachanamountofUSD6.63billion,duetotheexistingregionalturmoilthatdid not yet benefit the Lebanese tourism and financialsector, as tourists’ spending constitutes a major portionoffinancialinflows.

6.63

7.498.24

5.61

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

H1 2008 H1 2009 H1 2010 H1 2011

- Financial Inflows (USD, billion) -

82

2101

1313

(479)

0

500

1000

1500

2000

2500

H1 2008 H1 2009 H1 2010 H1 2011

- Balance of Payments (USD, million) -

500-

Foreign Sector’s Indicators


Tradedeficit(USD,billion) 7.11 6.47 9.9%Exports(USD,billion) 2.110 2.107 0.1%Imports(USD,billion) 9.22 8.58 7.5%Capitalinflows(USD,billion) 6.63 7.49 -11.5%Balanceofpayments(USD,million) -479 1,313 -136.5%

Sources:HigherCustomsCouncilandCentralBankofLebanon

VII. Economic Prospects

The EIU revised Lebanon’s real GDP growth to 1.8%,downfrom7.5%in2010,accordingtoitslatestcountryreport.Thisisduetothecurrentturmoilintheregion,andLebanon’shighdependenceontheservicessector thathighlyreliesonpoliticalstabilityintheregion.

The reportshowedthatprivateconsumptionwouldbeslowerthanin2007-2010,andbusinesseswouldbelesslikelytoinvestinexpandingtheiroperationsgivenweakerconsumerconfidenceintheeconomy.

Moreover, Government spending would be a minimalcontributor to growth as the political impasse is likelyto mean a budget for this year would not be passedquickly.

The report indicated that inflation is forecasted to risetoanannualaverageof5.5%in2011-12asinternationalcommodity prices, particularly for oil and food, whichincreasedsignificantly.Inflationrosetoanaverageof4%in2010.

REPORT STUDY


Introduction

Partnershipbetweenthepublicandprivatesectors(PPP)canbedefinedasacontractbetweenaparty fromthepublicsectorandanotherpartyfromtheprivatesector,inwhichthelastpartyoffersapublicserviceorproject,onthe basis of sharing financial, technical and operationalrisksintheprojectwiththepublicparty.Thisisoneofthemainaspectsofthispartnership,inadditiontoidentifyingthe«ProductionSpecifications».

Thisdefinitionofpartnershiponthebasisofrisksharingfits thepublicobjectives inLebanon,where thisaspectdetermines the partnership system as a mid-distancebetween the contract’s management system that doesnotinvolverisktransfertotheprivatesectorononehand,andprivatizationwhichincludestransferofallriskstotheprivatesectorontheotherhand.

This study also presents some projects that can beimplemented through this partnership system inLebanon, according to the draft-law available todayat the Parliament, including: the thermal plants forelectricity production, renewable energy plants, dams,roads,bridges, railways,ports,airports,garages, schools,libraries,hospitals,sheltersfortheelderly,sportsstadiums,tourist complexes, conference palaces, natural reserves,prisons, barracks, fire stations, treatment plants, solidwastetreatmentplants,sanitationplantsandotherbasicfacilities.

Definition of Partnership and Its Importance

The concept of partnership between the publicand private sectors can be defined as a contractualagreementbetweenthepublicandprivatesectors,withclear objectives, which is related to the contribution ofthe private sector in maintaining, updating, or creatingassets of a public utility, in order to provide services tocitizens. Previously such a service was provided by thegovernmentdirectlytothepeople.

The advantage of this partnership is the re-distributionof roles between the public and private sectors, wherethepublicsectorisresponsibleforformulatingstrategiesandmonitoringtheeconomic,technicalandprofessionalperformance of economic sectors, while the privatesectorisresponsiblefortheoperation,management,anddealing with the public targeting the enhancement oftheperformanceoftheservicesentrustedtoit.

Theconceptofpartnershipisdifferentfromprivatization,as privatization is the process of restructuring theenterprisesownedbythepublicsectororapartnershipwiththeprivatesectortoimplementspecificinvestmentprojectsbyfollowinganyofthemethodsmentionedinthe law. While the partnership is a relatively long-termcontractual agreement between the public and privatesectors in order to provide a public service, where risksarisingfromtheprojectarecarriedbythecapablepartyto bear such risks and to be financed through privatefunding.

The Importance of Partnership between the Public and Private Sectors for the Lebanese Economy

Comparison between Partnership and Privatization

Partnership Privatization

Assetsownership Public PrivateRiskbearing PublicandPrivate PrivateProductspecifications Public PrivateResponsibilitytowardsthepublic Public Private

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Thepartnershipbetweenthepublicandprivatesectorshasmanyobjectivessuchas:

• Adjustingtheeconomicsituation.

• Achievinghighgrowthratesbystrengtheningtheroleoftheprivatesectorinnationaleconomicactivity.

• Alleviatingthefinancialburdenonthegovernment,especiallyininfrastructureprojects.

• Creatingnewjobopportunities.

• Improvingthepublicservicesprovidedbythegover-nment,byattractinginvestmentsoftheprivatesector.

• Reducingtheinvestmentriskofthegovernment.

• Efficient Management and utilization of economicprojectsusingthelatesttechniques.

Forms of PPP

Forms of partnership differ from one project to another,because the partnership of each project has a differentobjective, in addition to the different nature of the projectwithin the various sectors such as transportation, water,electricity,publictransport,communicationsandmail.Therearealsosomeformsofpartnershipthatmaysuitonecountry,butareunsuitableforanothercountry.Asaresult,partnersmaychoosetoformapartnershipfromthefollowing:

• Management Contract:It is a commitment contract where the public sectortransferstheburdentooperateandmaintainthefacilityto the private sector for a limited time in exchange fora determined and fixed fee. The public sector choosesthese contracts when it is hard to increase the price ofproviding the service for social and political reasons, orduetothenatureofthefacility.Theownershipofassetsandinvestedcapitalisthesoleresponsibilityofthepublicsector.

• Service Contract: Theprivatepartnerisresponsibleforfundingorrenewalof equipment, and expanding it in order to be able toperformtheservice.Thispartywillgetbackitsduesfromtheproceedsofthisserviceorfromthefeescollectedbythebeneficiaries.

• Leasing Contracts:Itisacontractwherebytheassetsofthefacilityareleasedto the private sector for a limited period, which in turnwillbeartheburdenofoperationandmaintenanceofthefacilityduringtheleaseterm.Itwillalsotakeapartofthebusinessriskassociatedwithoperationofthefacility.Thiscontractisusedwhenthefacilityneedsanenhancement

oftheefficiencyofoperation,buttheburdenoffinancinganyexpansionremainsaresponsibilityofthepublicsector.

• BOT Contracts:The private partner finances and completes the newproject, and then it manages and operates this project,and receives total value from its proceedings. After theendofthecontract,theownershipoftheprojectwillbetransferredtothepublicpartner.Thereareseveralformsof contracts for this type of partnership based on thedifferentdetailsbetweenthepublicandprivatesectors.Including:

• Theprivatesectorcreatestheprojecttoexploitandoperateforaspecifictimeandtransfers it tothepublicsectorattheendofthisterm(BOT:Build-Operate-Transfer).

• The private sector establishes the project and givesup ownership of the public sector while retainingtherighttoexploitandoperateitforaspecifictimeperiod(BTO:Build-Transfer-Operate).

• The private sector creates, acquires, exploits andoperates the project on its own, and it keepsownership(BOO:Build-Own-Operate).

• The private sector creates, acquires, exploits andoperatestheproject,butittransfersofownershipofthe project to the public sector (BOOT: Build-Own-Operate-Transfer).

• The private sector rehabilitates and operates theproject,butitreturnsitbacktothepublicsector(ROT:Rehabilitate-Operate-Transfer).

• Build - Own - Operate: the private partner in thiscase builds and operates the public facility withouttransferring its ownership to the concerned publicpartner, but rather keeps its ownership (BOO: Build-Own-Operate).

The Challenges Facing PPP

• The Political Challenges: Thesechallengesarisefromthepoliticalsituationofthehostcountry,andthestabilitylevelinaparticularcountry(nationalizationandconfiscation).

• Economic Challenges: -Raisingthetaxrate. -Fluctuationofthelocalcurrencywhichrepresentsa

majorconcernforinvestors. -Feasibilityandeconomiccostoftheproject. -Risksfacingtheproject. -Lackofliquidity.

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• Cultural and Social Challenges:These might arise after managing and developing theprojectinaninconsistentmannerwiththecultureofthecommunity, which will be rejected by the communitygiven the existence of some inputs that may not beacceptable in that region. Also the applications andservices may be inconsistent in this area (religion,communityculture).

• Environmental Challenges:These challenges arise when the project causesenvironmental damages given its nature, and the highcosttodeveloppreventivemeasures.Thismay leadtheproject to breach the legislation and laws that protecttheenvironment.Asaconsequence,thustheprojectwillbesubjecttolargeadministrativeandfinancialpenaltiesthatmayleadtoitsshutdown.

The Characteristics and Advantages of PPP

Partnershiphasmanycharacteristicsandadvantagesthatcontributetoitssuccessandincreasetheimportanceofitsapplication indevelopingsocieties,and thus it leadsto the mutual benefit of both the public and privatesectors.

Characteristics of Partnership:• Mutualconvergenceandcooperation,whichmeans

theagreementonminimummutual references thatallow understanding and recognition of the higherinterestofthecontractingparties.

• Reciprocalrelationsbetweendealers.

• Dynamisminachievingcommongoals.

• Itisalong-ormedium-termagreementbetweentwoparties,onenationalandtheotherforeigntopracticeaparticularactivityinthehostcountry.

• Thenationalpartymightbeapublicorprivatepartner.

• Partnershipisn’tonlytoprovideapartofthecapital,but it can be done through providing expertise ortransferoftechnologyorknowledge.

• Eachpartymusthavetherighttomanagetheproject(jointmanagement),andtoconvergeandcooperatebased on trust and risk-sharing in order to achievecommongoalsandinterests.

• Objectives of partners must be met, at least in thefieldofactivityundercooperation,whichshouldleadto the integration, and similar treatment based oncontributionsofpartnersandcustomers.

• Coordinating decisions and practices related to theactivityundercooperation.

Advantages offered by the partnership:• Exchange of experiences and technology between

headcompanies inhostcountriesandthosearisinginvariousbranchesinforeigncountries.

• Gainingmoreexperienceconcerningtheconditionsofdomesticandforeignmarketsthroughexportsanddirectinvestment.

• Increasinginvestmentopportunitiesofnationalsavingsandcapital,whenutilizedintheforeignproject.

• Encouraginglocal individualsandinvestorstoinvesttheir money inside their home countries, as thejointventurestrivestoachievetheobjectivesof thenationaleconomy.

• Reducing the burden on the balance of paymentsthat will reduce capital transfers abroad in the formofdividendsonlytotheshareoftheforeignpartner,incasethejointventure’scapitalwasmainlybasedonnationalsavings.

• Raising the country’s export capacity, reducingimportsandprovidingjobopportunities.

• Encouraging local participation besides the foreignpartner, which is a guarantee for the latter and tominimizetherisk.

• Facilitatingtheentrancetolocalmarketsandaccesstorawmaterials,patents,innovationsandcheaplabor.

• Getting privileges and preferential measures in thesecountries,thiscannotbeacquiredintheircountriesoforigin.

• Productioncostsarelow.

• Technology transfer, conversion methods ofmanagementandaccesstofinance.

PPP in Lebanon

Based on resolution of the Council of Ministers No. 2on 25/06/2007, a committee of the Higher Council forPrivatization accomplished a PPP draft law due to thegrowingneedsoftheLebaneseeconomy.Theseincludemodernizingitsinfrastructure,involvingtheprivatesectorin the economic life and benefiting from its practicalexperienceononehand,andgaininginvestmentsforthemodernization and development of public facilities ontheotherhand.

ThehighlightedprovisionsinthePPPdraftlawarelistedasfollows:

• Jointventurescanbedescribedasthefunding,phases

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ofconstruction,renovation,rehabilitation,equippingand maintenance, including the investment andmanagementofeconomicprojectsofpublicbenefit.Thisshouldbedoneunderacontractofpartnershipbetween a public entity (state, municipalities ora federation of municipalities) and the companyexecutingtheproject.

• Identifying projects in accordance with therequirements of public interest and the need for itinpublic services supportedbyeconomic feasibilitystudies.This,inadditiontoexplainingtheadvantagesthatrequireimplementationviapartnership.

• The Council of Ministers is the body authorized todetermine the basis of the feasibility of projectseconomically and technically, besides the relatedproceduresunderthedecreesbasedontheproposalofthePresidentoftheCouncil.Thisbesidestherulesfor selecting the company or group of companieswhich win the project (private partner) on thebasics of control on implementation (the executingcompany).

• Broadpowersof theHigherCouncil forPrivatizationinclude:

-Managementofpartnerselectionproceduresbasedontransparencyandcompetition.

-Receivingprojectsandrelatedtechnicalandeconomic feasibility studies and contracts incollaborationwiththeconcernedpublicparty.

-Follow-upoftheimplementationandperformanceevaluation.

-RaisingreportstothepublicpartyandtotheCabinetwhenneeded.

-PreparingannualreportstotheCabinetabouttheprogressofworkcoupledwithsuggestions.

- Theuseof localandinternationalconsultantsandauditingfirmstocompleteanyassignedjob.

-Thefinalapprovaloftheprojectandthepartnershipcontract is the responsibility of the Council ofMinisters. The Council must coordinate with theMinistryofFinanceinrelationtotheimpactoftheprojectonthegeneralbudget.

• The company or companies that win the project(private partner) should establish an executingcompany,which isa jointstockcompanysubjecttotheTradeActand isexemptedfromtheapplicationoftheprovisionsofArticles78and144,173.MoreovertheexecutingcompanyisnotsubjecttothecontroloftheAuditBureau.

• Thepartnershipcontractisoneofthemostimportantcontentsoftheproject,whichspecifiesthescopeoftheexecutingcompany, its fees,aswellascommonrisks,guarantees,andthemoneyandpublicpropertythat are placed «contrary to any other text for theduration of the contract at the disposal of theexecutingcompany»,andthedurationoftheprojectanditsterminationandsoon.Themaximumdurationofthecontractis35-years.

• TheexpensesoftheprojectarecoveredbytheState’sgeneralbudget.Thecompanywhichwinstheprojector the conglomerate of companies (private partner)as well as the executing company is allowed tobenefitfromincentivesofIDAL.TheGovernmentcanauthorizethe implementingcompanytocollectthefeesandroyaltiesbelongingtotheproject,onbehalfofthepublicpartnerandforitsaccount.

The PPP system should meet the needs to developtheinfrastructureinLebanonandtheestablishmentandmodernizationofpublicfacilitiestoprovidebasicservicestothecitizenswiththebestqualityandtheleast cost. The sectors that have opportunities forpartnershipbetweenpublicandprivatesectorsareasfollows:

-Theelectricitysector. -Thewatersector. -Servicesofthemunicipality. -Publictransportation. -Healthcare. -Education. -Tourism.

Conclusions and Recommendations

The new version of the partnership law in Lebanonconstitutesageneralframeworkforabroadpartnershipconceptbetweenthepublicandprivatesectors (BOOT,BOT,BOO,directinvestmentforthepublicpartnerinthecompany...etc.). Itdeterminesthedetailsofestablishingthispartnership,notingthecleardifferentiationbetweenthe concept of privatization and the concept ofpartnership.ArticleIX(inparagraphs9and10)emphasizesthe process of transferring the project to the publicpartner after the expiration of the partnership contract(35 years). So here the partnership between the publicandprivatesectors isnotprivatization,but rather it isaprocesswhichcomprisestherighttobenefitofsomesortofatemporaryownershipofthejointprojects,duringthecontract’sterm,besidesthesupervisionoverproductionand marketing. The privatization process, on the other

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hand,entailsatransferofownershipofapublicutilitytotheprivatesector.Inthelattercase,itcomprisestherighttobenefititfromsuchownership,besidesmarketingitsservicesandproductsinlinewithensuringtheeconomicreturnagainsttheinvestedcapital.

In order to ensure that: There are no compromises ontheprivatesector’sconstantsbasicswithintheexecutingcompany,knowingthattheLebanesemarketisfullyopento this sector; and for a real partnership between thepublicandprivatesectorstoemerge,inthesensethatthepublicpartnerandprivatepartnerarethedirectandtheonlypartnersintheexecutingcompany,itisimportanttopayattentiontothefollowingbasicconsiderationstobeveryclearandwithoutanyambiguity:

• The role of the Higher Council for Privatization is tomanage the partnership contract and review theimplementationaccordingto the tasks listedby thedraftlaw.

• Thepublicpartnerhastoparticipateinmanagingtheexecutingcompanyby theconcepts,principlesandmentalityoftheprivatesector.

• Theprivatesectorinvolvedintheexecutingcompanyhastotakeintoaccountthatthiscompany’sworkisdone in line with its concepts and practices, and incooperationwiththepublicpartnerwhenmanagingthe executing company in a cost-effective way toensurethedesiredeconomicandfinancialreturnthatmaintainsasuccessfulbusinessofthiscompany.

Non-Lebanese investors (both Arab and foreign) andfinancial investment companies might enter into theexecutingcompany,besidesthepublicpartner.Herethefollowingpointscouldberaised:

• Whataretherequiredprofileofinvestorsofdifferentcategoriesandtheirsharesintheexecutingcompany?

• Cantheexecutingcompanybeplacedonthestockexchangetogopublic?

• What is the public partner’s share in the companyuponitscreation?

• Willtheownershipsfortheinterestoftheexecutingcompanybeattheexpenseofthepublicsectororthecompany?

There is a remark in Article V of the draft law whichstatesthattheHigherCouncilforPrivatizationevaluatesthe technical and economic feasibility of the projects

submitted by the public partner and the terms ofreference list. Here, the following question could beraised:HastheexecutingcompanytherighttoexpressanopinionontheeconomicandtechnicalfeasibilitystudiessetbytheHigherCouncilforPrivatization?Itisimportantto emphasize here the necessity of taking the privatesector’sopinioninthesestudies,giventhefactthatitisakeypartnerinthiscompanythatitismanagedaccordingtoitsprinciplesandmentality.

ThedraftlawexplainsinitsArticleXIIItherightofthemainpartnerandtheexecutingcompanytobenefitfromtheprovisionsofLawNo.(360)issuedintheyear2001whichisrelatedtopromotinginvestmentsinLebanon.Itmaybeusefulheretoreviewtheincentivesandfacilitiesgrantedunderthislaw,tofitwellwiththesizeofprojectsintendedforimplementationbythecompaniesestablishedunderthe draft law, and the quality of its work and strategicimportanceontheeconomic,socialandfinanciallevels.It isalso importanttodeterminethequalityandnatureofthefacilitiesandincentivestobegrantedtothenon-Lebanese partner entering into the company such astheworkpermits,theproportionofimportedlabor,andothers,wherethelawdidn’tcovertheseissues.

Itisimportanttoemphasizethattheexecutingcompanyhas to finance its operations and activities accordingto the commercial terms prevailing in the banking andfinancial market. Moreover, it is needless to emphasizeherethatthebankingsectorwillfinancethecompanyifit isoperatingaccordingtotheconceptsandprinciplesoftheprivatesectorandwithintheframeworkofpoliciesandstrategiesofbanksoperatinginLebanon.

It may be useful and necessary to form a CommissionwithintheCouncilofMinisters,headedbyPresidentoftheCouncil, toprioritizeprojects tobe implemented in thecontextofthenewpartnershipbetweenthepublicandprivatesectors.ThisCommissioncouldbedelegatedbytheHigherCouncilforPrivatizationtoshapemechanismsfor implementing partnership contracts for venturecompaniesaccordingtothedraft law.This includes thepreparation of feasibility studies, terms of reference,choosing the private partner, and the preparation offollow-up reports and others in coordination with thepublicpartner.Itisalsovitaltosetinplaceanappropriateandaneffectivelegalframeworktohandleonallissuesofthispartnershipbetweenthepublicandprivatesectors.

The Economic Bulletin is a research document that is owned and published by Fransabank SAL.This bulletin provides the reader with an overview of the most recentdevelopmentsintheLebaneseeconomyandthebankingsectoringeneral,coupledwithastudyonthemostprominentemergingdevelopmentsinthebankingandfinancesectorsbothonthelocal,regionalandinternationalaspects.

Theinformationandopinionscontainedinthisdocumenthasbeencompiledingoodfaithfromsourcesdeemedreliable.NeitherFransabankSAL,noranyofitssubsidiariesandassociatewillmakeanyrepresentationorwarrantytotheaccuracyorcompletenessoftheinformationherein.Thisdocumentisstrictlyforinformationpurposes.

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