Lebanon: audit of collapsing state power company paves way for regional power deal

Tender documents show that will be the first audit of Electricite du Liban in more than a decade

Lebanese Energy Minister Walid Fayad (C) speaks to the press in Beirut after signing an agreement between Lebanon and Jordan to supply electricity. EPA

Lebanon hopes to boost its ailing power sector by starting a World Bank requested audit of the state electricity company in the coming weeks, Energy Minister Walid Fayad has told The National.

The audit is one of the conditions to pave the way for a loan to buy regional gas supplies and ease its power crisis, allowing roughly six more hours of power a day.

The tender for the audit — the first since 2010 — was launched three months ago by Electricite du Liban. The state institution and the World Bank are currently studying proposals submitted by bidders, said Mr Fayad.

A loan from the World Bank would allow cash-strapped Lebanon to buy gas from Egypt to convert into electricity, and source power from Jordan.

The electricity sector — one of many crisis-hit parts of Lebanon's economy - has contributed to as much as $43 billion in the country's $93bn national debt, said a 2021 report led by the American University of Beirut.

Appointing a consultant to conduct the audit of EDL is one of the World Bank's pre-loan requirements, Mr Fayad said.

Tender documents reviewed by The National show that its objective is to produce “audited financial statements” for 2020, 2021 and 2022, provide a “fixed assets registry” and “perform the valuation of assets of EDL”.

The auditor is expected to submit a report to the World Bank by June 2022 for the year 2020 and an evaluation of EDL’s assets by December 2022.

Dated December 7, the request for expressions of interest states issued by EDL that the auditor will be selected "in accordance with the least cost selection method".

Mr Fayad said the Finance Ministry has a list of “10 or so” approved accounting companies that it invited privately to apply.

“Not enough firms applied so we sent it again to get more participation. I think four or five entities participated. Now they are in the proposal evaluation stage,” said Mr Fayad, who did not know the name of the companies.

The Finance Ministry had not answered questions about the tender process by the time this article was published.

Tender documents show that another World Bank loan allocated to the Energy Ministry will finance the auditor's consulting services. The World Bank said The National should "speak with the borrower", or EDL, for more details.

EDL’s director Kamal Hayek did not answer a number of requests for comment. He asked one of his secretaries to call back to say "work is in progress".

The secretary advised The National "to refer to the World Bank because they are reviewing the tender".

'Lost or damaged' records

EDL has been unable to produce enough power to respond to demand since the end of Lebanon’s 1975-1990 civil war. Its services were further eroded by the country’s economic collapse that started in 2019.

Beirut currently receives between two and three hours of power a day although additional hours can be purchased from expensive and highly polluting private generators.

A policy paper prepared by the Energy Ministry and reviewed by The National shows that EDL’s losses run at more than $800 million a year. Analysts say the losses are due largely to the non-payment of tariffs and a tangle of inefficiency including an opaque fuel procurement process.

The Energy Ministry plans to increase tariffs, which were last amended in 1994, set up a regulatory body and inject $3.5 billion over the next four years to achieve round-the-clock electricity supplies.

The draft reform must still be approved by the Cabinet and is another requirement from the World Bank before moving forward with the loan. It was approved “in principle” and “with minor observations” on February 25, said Mr Fayad, who sent a new version back to Cabinet for discussion.

EDL currently runs its operations from prefabricated offices that were set up next to its headquarters after they were destroyed by the explosion at Beirut’s port in August 2020.

The blast, one of the biggest non-nuclear disasters in recent history, killed several EDL employees on site and more than 215 people in total.

The audit’s terms of reference said “some records may have been lost or damaged” in the explosion.

Marc Ayoub, associate fellow at the American University of Beirut’s Issam Fares Institute for Public Policy and International Affairs, said the audit was essential to evaluate EDL’s assets before the company is restructured and partially privatised.

“It’s a cornerstone to the unbundling of the sector, which will entail a public-private partnership in distribution and generation while the transmission will remain state-run,” he said.

But Mr Ayoub expressed surprise at the audit’s scope, saying it would not “give the whole picture”.

“There’s only been spending on fuel procurement in the past three years. The real spending at EDL started in 2010, when they rented temporary power plants and hired private service providers,” he said.

'Moving forward'

Securing extra power from Egypt and Jordan is crucial for the Energy Ministry to move forward with its planned reforms of EDL and continue receiving international support.

The National previously reported that roughly four extra hours of electricity will come from Egyptian gas that will come through Syria and be converted into power in Lebanon. Jordan will transfer two hours of electricity from its grid via Syria at a later stage.

The deal with Egypt, expected to be financed with a $300m loan from the World Bank, may be put in place before Lebanon’s parliamentary elections scheduled for May, said Mr Fayad.

The US supports the deal and has been working around its own sanctions to allow Jordan and Egypt to give in-kind payment to Syria in the form of gas or electricity without being sanctioned under the Caesar Act.

Issued by the US administration in 2020, it threatens to impose sanctions on people and businesses that work with Damascus in a bid to avoid normalisation with President Bashar Al Assad’s government.

The US in October issued a letter that said the regional contract under scrutiny with the World Bank will not, in principle, be targeted by sanctions.

The US Treasury is expected to grant final approval to the deal once the World Bank has finalised the loan agreement with Egypt.

“We’re still moving forward and are hoping that politics won’t stall [the deal] and that the Americans and World Bank will deliver on the external front,” said Mr Fayad.