Article does not necessarily represents opinion of khazen.org 

by Talal F. Salman -executive-magazine.com- With the world’s population expected to grow by 2 billion—reaching almost 9.5 billion by 2040—one of the major structural changes that would need to keep pace is the development of infrastructure. The world is expected to need close to 100 trillion dollars worth of infrastructure investment by 2040, mainly in developing countries, according to estimates by the UN and the World Bank. This sum is required to meet the demands of clean water, sanitation, electricity, transport, and telecommunications, in addition to schools and hospitals. The sum is also likely to increase, given the escalating impact of climate change. Around 20 percent of the required funds will not be available if national economies, which are financially interconnected now more than ever, do not plan accordingly. The availability of funds is a blessing that a country such as Lebanon might not realize. While other developing countries might struggle to generate savings or attract investment in their local economies, the Lebanese financial system is sitting on 320 percent of GDP in deposits—one of the highest in the world. There is no doubt that the infrastructure in Lebanon has been severely neglected since the end of the civil war. The lack of proper investment in electricity, telecoms, sanitation, transport, and water is causing major costs to the economy, to the productive capacity of all sectors, to household income, and to the health of every individual. The deposits in the Lebanese financial systems, with the proper use of available cheap international loans and guarantees, can help Lebanon close its infrastructure gap while minimizing borrowing.

Economic Stimulus

The CEDRE investment conference on April 6 was testament to the commitment of the international community in helping Lebanon to achieve the economic security it needs and to compensate for the seven years of near zero growth, due to the impact of the Syrian war. The repercussions for the Lebanese economy—which stands at $53 billion in size currently—is around $30 billion so far, a massive challenge for any country. The support that Lebanon received at CEDRE provides much-needed confidence, and can have great results if properly executed. The right investment in infrastructure is known to boost growth—in the case of Lebanon it could lead to a 3 percent increase in GDP in the current environment. However, the Lebanese economy has the potential to grow at 6 percent a year in the absence of external factors impacting our ability to grow, and within a proper policy-making framework.

The involvement of the private sector through public-private partnerships (PPP) is important to attract capital. However, the cost of infrastructure projects that are not commercially viable and thus not eligible for PPP—$11 billion out of the $17 billion worth of projects proposed—are intended to be financed through concessional loans. This means that even if the cost of debt is low, it is still debt being added to the third most indebted country in the world (Lebanon has a public debt equivalent to 151 percent of GDP). Debt service cost is around 10 percent of GDP, 50 percent of government revenues, and 36 percent of total government expenditures, all among the highest in the world. Therefore, adding debt to the government’s balance sheet does not seem to be the best approach. Let’s take a look at PPP and what is the best model for Lebanon to use the pledged investments from the CEDRE conference to its advantage:

Firstly, PPP is not privatization, which is the complete divestiture of a public asset to the private sector, and it is not a procurement contract where the government hires a private company to construct a road or a power plant for example, or to provide a service. Even though the term is globally used to encompass a wide range of relationships between the public and private sector, a proper partnership is one that defines two major factors needed for the success of infrastructure projects—especially greenfield ones, which are new projects as opposed to upgrades to existing infrastructure. Those two factors are financing and risk. The allocation of financing refers to what portion is to be invested by the private sector and what portion is to be invested by the government. The allocation of risk determines who is responsible for the design, implementation, operation, and maintenance of the project.

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