FINAL REPORT: Thinking Ahead - Risks & Mitigation Strategies in the Energy Sector
Introduction
Lebanon, located in the Levant between Israel and Syria, has always possessed elements of political, economic, and social precariousness. The country’s neighbours, as well as regional powers like Saudi Arabia and Iran, have considerable influence on the state, utilizing it for their ends and as a proxy for their affairs. Consequently, a number of wars have ensued, destroying infrastructure, homes, and public buildings. However, since 2006, there has been relative calm, which has led to an increase in foreign investment, infrastructure rebuilding, and the birth of a strong civil society – among other positive consequences.
Despite the country’s faults, its market and investment structures provide a number of strong features. For instance, in relation to other Middle Eastern countries, Lebanon’s debt is centralized, its bond market is stable, and elements such as currency transfer and convertibility are lower risk. Demonstrative of the central bank’s stability is its capacity to obtain annual growth despite the regional instability.
This report will focus on Lebanon’s energy sector and electricity production. This economic area can be described as problematic. From state energy being sold to its citizens at a loss, to lacking twenty-four hour a day electricity, this sector appears to have much to gain from domestic and foreign investment.
Our team’s research analysts have identified the relevant risks pertaining to a wide variety of potential investment situations (outlined in the executive summary). For each risk that is identified, the researchers have provided assessments of the level of that particular risk, as well as a number of mitigation tactics. The research analysts assess the implications of domestic and foreign issues/events, both historical and current, in order to provide a well-rounded guide for prospective investors.
Government Structure
Lebanon’s confessionalism-based government structure has historically played a role in driving domestic instability. However, more recent developments, including the rise of “big boss” politicians and a lackluster proportional representation system, have been the real cause of tension between religious sects and political ideologues. The nation’s regime structure, however, is surprisingly not a significant barrier to foreign investment.
The largest risks identified within the government include market distortion risk/corruption and the potential for harmful man-made events. Both should be addressed through anticipatory measures and investigation.
Private Energy Competition
Due to Lebanon’s inability to provide adequate electricity services to citizens, a growing number of small-scale electricity providers have taken it upon themselves to deliver services at a premium during blackouts throughout the nation. Since these providers are more profitable through sustained energy instability, they pose a significant threat to energy security in Lebanon, going as far as opening fire on the nation’s only 24 hour power plant.
The key risks posed within the energy sector pertain to infrastructure, including environmental/permit risk (as seen through delays in construction) and man-made events (as seen through potential attacks on energy-related infrastructure). Both risks require careful navigation by investors, while the potential for attacks can be addressed through procuring security personnel and anti-terrorism systems.
Terrorism
Despite the number of terrorist attacks within Lebanon and its neighbouring countries, the direct risk to businesses and foreign investors is quite low. Foreign companies operating within the borders must take security measures depending on the size and transparency of their infrastructure and work sites.
Foreign Investment Landscape
While the Investment Development Authority of Lebanon (IDAL) heavily incentivizes foreign businesses to operate within its borders, the most significant challenge for foreign investors is navigating a complex business environment. Poor intellectual property protection, combined with a business landscape marred with informality and local unwritten rules, drive a significant breach of contract risk. However, generous taxation laws, a strong central bank, and high liquidity for foreign currencies bolster Lebanon’s position as an investment destination in the Middle East.
Renewable Energy
Investors may be wary of Lebanon’s electricity transmission systems. Until an energy company in Lebanon is fully privatized, the government takes responsibility for their transmission systems, effectively removing these systems from the hands of the company that owns and operates it. Dialogue pertaining to the development of renewable energy projects has remained stagnant, yet can be an attractive avenue for foreign investment in the future.
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