From Dysfunctional to Functional Corruption:
The Politics of Reform in Lebanon’s Electricity Sector
A working paper by Ali Ahmad, Neil McCulloch, Muzna Al-Masri, and Marc Ayoub
Published December 2020 by ACE SOAS Consortium
Corruption in the electricity sector has been a major constraint to economic and social progress in many countries. In Lebanon, the electricity sector’s dysfunction and inefficiency mask deeper political economy challenges, including rampant rent-seeking, captured institutions and a fractured state. Over decades, corruption and mismanagement in Lebanon’s electricity sector has contributed to the draining of public finances and has deprived the Lebanese people of their right to reliable and affordable electricity. When Lebanon witnessed an uprising in October 2019, electricity (or the lack thereof) was a focal point of public grievance and it remains a central concern amidst the economic crisis that the country currently faces.
Lebanon’s electricity performance is dismal. The state utility – Électricité du Liban (EDL) – covers only 63% of electricity demand, which results in rotating outages. These last longer as one moves away from Beirut’s central district, thus widening social and developmental inequalities. There are also high technical and non-technical losses in power, together amounting to a third of EDL’s total generation. Tariffs have not been adjusted since 1994, and consequently EDL makes huge losses – more than half of all of Lebanon’s national debt stems from losses accrued by EDL.
One consequence of this dysfunction has been the emergence of tens of thousands of private diesel generators which provide power to households and businesses when EDL power is not available. This informal, illegal, and, until recently, unregulated scattering of private generators provides a variable, high-cost, and often low-quality service. In many places, generator owners are regarded as a ‘mafia’ that is both part of, and contributors to, the political patronage system in Lebanon.
Amidst the poor general state of the sector, one area of Lebanon has managed to operate a private utility that provides a reliable and high-quality electricity service – Électricité de Zahlé (EDZ) – which covers the city of Zahle and 16 surrounding villages. EDZ’s technical losses stand at only 5%; it collects 100% of bills and is profitable while providing electricity at an overall cost no higher than that paid by households reliant on private generators to back up EDL’s supply.
Our study explores how it has been possible to establish EDZ’s functional, but problematic, service provision within the complex sectarian political context of Lebanon. We draw on a framework provided by Khan et al. (2019) to understand the rents and types of corruption in the sector and how the changes implemented by EDZ have been consistent with the nature of Lebanon’s political settlement.
Based on extensive interviews with stakeholders in the sector – both at the central level and in Zahle, and including generator owners, politicians, journalists, and civil society groups – we find a complex and sometimes uncomfortable story about how Zahle has achieved its success. We complement this with interviews with ordinary households and business owners, both inside and outside of EDZ’s operating area; to understand what impact EDZ’s service has had on them and their views regarding its operating model.
We find that EDZ’s service provision success is the result of a highly professional technical approach, combined with astute navigation of the political context. Technically, EDZ is able to achieve reliable power by exploiting its century-old concession agreement to contract a private emergency power contractor to provide power for its coverage area when EDL power is not available. However, a key part of EDZ’s business model has been its ability to come to beneficial arrangements with key political actors. Core to EDZ’s profitability is the fact that – when EDL electricity is available – it purchases this electricity at a heavily subsidised rate, while selling it at the much higher EDL tariff. In effect, this is a direct transfer of resources from the central government (which underwrites EDL’s losses) to EDZ.
At the same time, EDZ has been extremely successful at mobilising citizens in Zahle. It has created a strong sense of ownership in the local community around the provision of a reliable and professional service. This, in turn, has helped to ensure continuity – but it has also been instrumental in resisting attempts by central political actors to capture EDZ’s monopoly for their own purposes.
Our interviews at the community level suggest that the overall impact of EDZ’s service has been almost uniformly positive. This positive effect is felt mostly at the household level and that of small businesses, particularly by women in managing domestic affairs. Almost all respondents appreciate the professionalism and quality of the service provided. The main area of concern is cost – EDZ’s new fixed charge, combined with regulations that reveal the high unit charges for EDZ electricity, means that poorer households are paying a higher share of their income on electricity.
Finally, as the EDZ contract comes up for renewal at the end of 2020, we address the issue of whether the EDZ model could, or even should, be replicated elsewhere in Lebanon. Our short answer is ‘not in its current form’. We put forward a model for reform that would allow other areas beyond Zahle to have reliable power supplied by profitable and well-run private utilities, without negative implications for EDL or the Lebanese government. This draws on lessons from EDZ’s approach – how it has leveraged its legal status as a concession, aligned the incentives of key political actors and built supportive coalitions.
In a country riven by sectarian paralysis and dysfunctional corruption, EDZ’s efforts have succeeded in significantly improving the service delivered to its customers. Its approach probably did not reduce corruption, but it achieved a remarkable developmental outcome in a way that was consistent with the complex political settlement of the country. We hope that our analysis will help point to ways in which similar – second-best, but politically feasible – approaches might be implemented throughout Lebanon and, potentially, in other countries too.
[Click here to read the complete working paper.]