.NOTE: (1) TO ENLARGE THE IMAGES KINDLY CLICK ON THEM
(2) KINDLY SCROLL TO THE BOTTOM OF THE BLOG FOR PART ONE.

PART THREE – THE GREEN CHUNK OF THE DONUT

Saving the Lebanese Treasury US108 billion during the next twenty years, through a reduction of 2% of the interest rate

that we should negotiate with the bond holders

In the first two parts of our study we have examined the prospects of saving the Lebanese Treasury a total US $3.7 billion dollars a year, or US$74 billion over the next twenty years.

Under this third initiative, we look forward to save the taxpayers no less than US$108 billion dollars from 2015 until end 2032. As the reader will note, this last proposal aims to benefit the taxpayers forty-six per cent more than the combined contribution of the two previous initiatives. 

A.- The Public Debt from 1993 to 2012 and the causes of its climb

In order to accurately assess the impact of the service of the debt on the Lebanese Treasury one would have to go back twenty years in time, when the Public Debt started to show up in the government’s records. We append for that purpose the chart and the table that illustrate vividly the rise of the Debt from 1993 until 2012. As indicated in these documents, the government undertook to borrow, in 1993, some seven billion US dollars to cover the cost of the post civil-war reconstruction program. The loan was initially burdened with heavy interest charges that were common during that unstable period. It must be recognized that the rate of interest that was unusually high during the first few years was gradually brought down to reach a current present average of 6.5%.

Unfortunately no efforts were made during these two decades to repay, neither the principal, nor the service charges. The Debt rapidly grew, fueled as it was, by the compound nature of the interest.

The Public Debt reached, at the end of 2013, the sum of $65.02 billion US dollars. If there is any small difference between this amount and the one mentioned in the official public records, it may be explained by the fact that some liabilities were not recorded by the Authorities at the end of 2013.

All these movements are clearly depicted in the chart and the table below.

B.- The anticipated movements of the Debt between 2013 and 2032 – two scenarios are contemplated

We contend that the 6.50% rate that is still applied today remains unjustifiably high considering the high degree of solvability of the Lebanese State and the Lebanese banks. Consequently, we recommend that the Authorities should approach the local and the foreign bondholders with a view to come to an agreement with them, whereby they will agree to reduce the average service charges by two per cent.

In the second table and chart that cover the period between 2013 and 2032, we have anticipated two hypothetical scenarios. In the first scenario, we assume that no repayment is contemplated during the next twenty years. The debt will likely reach the astronomical sum of US$181 billions by 2032.

In that same graph we depict the movement of that debt, assuming that the bondholders would agree to reduce the service charges down to 4.5% and that the Lebanese government would undertake to start repaying the debt at the rate of ten billion US dollars every year, starting from 2023., which would be the year during which we expect to start receiving our revenue from the development of our oil and gas resources. If all goes well, we should, thus be in a position to fully repay our debt by 2032, if we wish to.

 The benefits of $108 billion that Lebanon can reap from the reduction of 2% on the future service of the debt) would be much larger than the expected benefits from the two other initiatives. However, the economic and the financial experts who are likely to examine these proposals would readily agree with me that, if one wants to reach some effective results, one would have to implement the three initiatives concurrently, and not separately.

 Let us now consider the actors who would be involved in this proposal and the roles that they would be called upon to play in order to bring about the hoped for results.

Considering that 63% of the Debt is detained by local bondholders, according to the latest official reports from the MOF, the challenge that the government will face would be to convince the foreign bondholders to go along with their Lebanese partners and agree upon the two per cent reduction on the service charges.

 The responsibility for convincing Lebanon’s creditors to agree to this reduction in the interest rate will be shouldered by the Ministry of Finance and the Prime Minister. Obviously a great deal of preliminary work and studies must be undertaken if one wants to reach some satisfactory results. I would assume that our creditors would demand to see some detailed in-depth  studies and plans before agreeing to our demands.

PART TWO - THE RED CHUNK OF THE DONUT

Saving the Lebanese Treasury US$2 billion a year, or US$40 billion during the next twenty years, through the implementation of the 2009 Energy Plan

This second initiative that is likely to save our country's Treasury some $2 billion US dollars a year, amounting to $40 bullion US dollars over the next twenty years has been, contrary to the first one, the subject of numerous discussions in the press and on the small screens.

Furthermore, considering that the subject has been on the agenda of our politicians (governments, parliamentary commissions, and the Chambers of deputies) for the past two decades, one cannot but wonder why no action was taken during all this period to address this unforgivable negligence.

Some citizens and a number of knowledgeable local critics maintain the view that the two gas powered generating plants have not been built because of the opposition of the owners of private generators in Lebanon who stand to lose their investment in case these two plants are built and put into operation.

If that were truly the case then one would wonder how, in a "so-called" democratic system, a few hundred profiteers could hold an entire country hostage to further their narrow interests.

Our previous Minister of Eneergy, HE Gebran Bassil rightly pointed out in his Energy policy of 2009 that, once these two gas powered plants are built, this would save the Lebanese treasury over $2 billion US dollars a year.

However, in spite of all his endeavors, Minister Bassil was unable to execute any of the 25 different initiatives that were included in his 2009 Energy policy, with the possible exception of the 250 MGW that we receive yearly through the two Turkish barges.

As a consequence of this lamentable situation, we are now faced with a yearly loss of two billion USD for failing to build two generating plants that are expected to cost us some $2.3 billion US$ in all.

In other words we are liable to lose $40 US$ billion dollars over the next twenty years because we are somewhat "UNABLE" to build two gas powered plants that would cost $2.3 billion dollars.

Does it make any sense to anyone who reads this presentation?

Let me add a final remark to this somber outlook. In addition to the heavy costs of operating the current fuel powered turbines, the citizens have to contend with an inefficient and corruption riddled Administration at "Electricite du Liban". This institution can boast of never having had its accounts audited by international auditors since 2001. In addition, it is worthwhile mentioning  that the last international audit report of 2001 had mentioned that the accounts of the company were totally unacceptable because they were very badly kept and managed.

So we can conclude by stating that initiative number two would consist of building the two gas powered plants and introducing some basic reforms at "Electricite du Liban, EDL". The main actors who would be responsible for implementing these reforms would be the Minister of Energy, supported by the Council of Ministers, and the Minister of Finance who would be responsible for finding the 2.3 billion US$ that would be needed to fund these reforms.

But the Institutions who should be held responsible, in the first instance, for putting the project on rail, would be the parliamentary commission on energy and the parliamentary commission on finance who should work day and night to get the project approved in Parliament at the first available opportunity. In exchange for extending their mandate, the least they could do, would be to work hard to see these two vital projects executed by the government, as soon as possible.

HOW TO SAVE $182 BILLION US DOLLARS

In this blog, we shall comment in turn on each one of the three initiatives that are mentioned in the above graphs. In other words, we shall explain why we strongly believe that the Public Authorities in Lebanon are in a position to reduce the public deficit during the next twenty years by some $188 billion US dollars, provided the right corrective measures and the necessary reforms are introduced and implemented.

As shown on the above" donut" illustration, each initiative will tackle a specific aspect of the Reform process. In the blue chunk the object will be to review the entire evaluation system of real estate properties for the purpose of assessing the six per cent Real Estate Registration fees (R.E.R.F.).

PART ONE -THE BLUE CHUNK OF THE DONUT
 THE REAL ESTATE REGISTRATION FEES

INITIATIVE ONE- SAVING $34 BILLION OVER TWENTY YEARS IN REAL ESTATE REGISTRATION FEES

We should correctly assess the properties prior to computing the 6% registration fees, if we wish to save $1.7 billion dollars a year or $34 billion dollars in twenty years

A,- A VINDICATION OF OUR ASSERTION: THE ASSESSMENT OF THE REAL ESTATE REGISTRATION FEES THAT WE OUGHT TO HAVE  COLLECTED IN 2013
To vindicate our assertion, we have taken as an example the registration fees raised in 2013 as per the MOF report and we have attempted to compare that figure with what we believe ought to have been collected instead.

For the purpose of our calculations, we have assumed that, on average, 16 million square meters will keep on being built in Lebanon, as has been the case, on average, during the previous five years (see the reports of the syndicate of Architects for these years).

 We have also assumed that the average market value per square meter will stand around $1,700, as is the case presently (see the article in the Daily Star of the 23rd October 2014 referred to below). Based on these assumptions the total value of real estate properties built in 2013 would have amounted to:

16,000 M2 x $1,700 = $27,200,000,000 and the 6% real estate registration fee would have been$27,200,000,000 x 6% = $1,632,000,000

B.- THE TOTAL AMOUNT OF REAL ESTATE REGISTRATION FEES THAT WERE EFFECTIVELY COLLECTED AND RECORDED IN 2013 (as per the MOF report for that year)

This amount appears in the records of the Ministry of Finance as LP 847 million Lebanese Pound, or. US$564,666

C.-  THE RESULTING SHORTFALL IN 2013

If we deduct from $1,632,000,000 the amount of RERF revenue recorded in the 2013 fiscal accounts or $564,666 we would have a SHORTFALL of $1,631,435,334.

Remarks:

1. The assumed average value of $1700 per square meter that we have adopted in the above example is vindicated in an article written in the Daily Star of the 23^rd October 2014, in which the following is mentioned: “According to a recent study by RAMCO real estate advisers, the starting asking price of an apartment under construction in Beirut varies from $1,925 to $7,647 per square meter”. 

2. For the purpose of this exercise, we have adopted the price of $1,700 per square meter which is even lower than the minimum price quoted by RAMCO. See http://www.dailystar.com.lb/Business/Lebanon/2014/Mar-17/250434-real-estate-demand-shifts-to-suburbs.ashx#axzz3GxzlBcZA

3. We assume in our conclusion, though our assumptions ought to be vindicated by some serious investigations into the matter, that the estimated value of the properties has been constantly highly understated by the commissions entrusted with the evaluation of the properties.

4. We recommend a full review of the entire process by an independent commission appointed for this purpose whose report must be subsequently published in the press, for all the citizens to see.

5. It is worthwhile mentioning that the above estimates do not take into consideration the fact that the real estate registration fees are due whenever a property is sold by the owner to another party. In such a case our estimated revenue would be much higher. All these factors call for greater transparency and an official obligation to publish, in future, all real estate transactions in order to keep the transactions as transparent as possible.

6. Furthermore the registration of all the properties in Lebanon ought to be made compulsory. The Finance Parliamentary Commission should be requested to draw up such a Law and get it voted upon by Parliament as soon as possible.