Lebanon: Poised for a Massive Reconstruction Undertaking

By Colin MacKinnon

Lebanon really does seem poised for reconstruction. The government has just signed major contracts for power plant rehabilitation and the installation of phone lines and, on Nov. 1, launched a $650 million share-offering, one of the largest ever floated in the Middle East, to finance the rehabilitation and development of Beirut's commercial district.

The company being set up to do the job is called Solidere. It's a joint stock company with broad powers that was brought into being by an act of the Lebanese parliament.

Keep your eye on Solidere: the rehabilitation and development of Beirut's commercial district is the centerpiece of Prime Minister Rafiq Hariri's plans to reconstruct Lebanon, and what happens with this large and controversial project will be a good test of how soon Lebanon can put itself back together.

Sales of shares in Solidere are open to Lebanese nationals and state companies, non-citizens of Lebanese origin, Arab institutions, and nationals of other Arab states. The offer closes Jan. 10. Most observers think it will easily be subscribed.

Solidere's plans are highly ambitious. The company aims at a complete remaking of the shot-out heart of Beirut, from the old Serai Citadel in the west to Martyrs' Square in the east. Development will cover 1.6 million square meters of surface area, including 450,000 square meters reclaimed from the sea. Total floor space will run to 4.4 million square meters.

A financial district with twin towers will be built on the now trash-strewn Normandy land fill.

Also planned for construction are commercial centers, hotels, centers for the arts, a public park, recreational areas on the sea front, and promenades. Half the built-up area will be allocated for housing.

The old souks–Ayyas, Tawilah, EzhZhamil–are to be rebuilt. The neighborhoods of Saifi, Mar Maroun, and Sokak el-Balat will get new housing and new green space.

Traditional old Ottoman houses will be restored. The Greco-Roman archeological site at the Place de l'Etoile is to be integrated into the surrounding area.

The plans sound good and Solidere has put out a spectacular brochure touting them. But Solidere has stirred up major controversy.

The company has been granted power to take over the property rights of the area's owners. The owners are to get company shares in return, based on Solidere's appraisal of individual property values (the total appraisal for the Central District runs to $1.17 billion).

Some property owners, naturally enough, complain about the takeover and forced development, and many Lebanese are suspicious about the possibilities here for financial hanky-panky. Some charge that Hariri, a Sunni Muslim born in Lebanon who made his billions in Saudi Arabia, is out to make a private killing with colleagues from the Kingdom. There are three Saudi nationals on Solidere's board of directors. Others fear that the cultural remains of the area will be destroyed. Still others worry about the forcing out of large numbers of squatters, some of whom are demanding compensation.

Because of its size, sensitivity, and visibility, the Beirut Central District development plan and how Solidere carries it out will be a major test for Hariri and for Lebanon.

Hariri Appointment an Important Step

Hariri's appointment as prime minister in October 1992 was an important step in restoring domestic and international confidence. The appointment triggered a capital inflow of hard currency, which reversed the depreciation of the Lebanese pound and cut inflation. The Central Bank was able to build reserves, the government was able to float T-bills to finance its deficits rather than borrow from the Central Bank.

Shortly after taking office, Hariri announced Horizon 2000, a plan to rehabilitate Lebanon–all of it–over the next decade. The government agency charged with carrying out Horizon 2000 is the Council for Development and Reconstruction. It is headed by economist Nohad Baroudi. The CDR reports to the Council of Ministers through the prime minister's office.

Nedeco of Holland and the British firm KPMG Peat Marwick have been retained to give legal and financial advice.

The CDR has been pre-qualifying firms for massive projects in electricity, telecommunications, water supply, and waste water and solid waste management. The CDR aims to spend $2.5 billion on infrastructure through 1995.

Water and sewage are critical problems. There seem to be no working sewage plants in the whole country. As to water all of the country's treatment plants were damaged in the war. As a result, much of the water supply is dubious if not downright dangerous.

Power outages are a nightly occurrence countrywide. The state-owned electrical utility is weak and lacks competent staff. Billing and collection are ineffective. Whole neighborhoods tap into the network illegally. Because the power supply system is so badly broken down, most commercial and industrial consumers have rigged their own high-cost, low-efficiency generating systems. The electric utility depends on bailouts from the government to keep going and has become a major contributor to the government's deficit.

The phone system is poor. Private entrepreneurs have installed various unlicensed communications systems, most of them highly improvisitory. If you want to call the CDR itself from the U.S., you dial a New York number and get patched through.

Speaking in Washington recently at a conference sponsored by the American Task Force for Lebanon, CDR head Baroudi put the cost of Horizon 2000 at over $10 billion (in 1992 dollars) in government spending with an additional $1 billion of credit support to the private sector.

The CDR wants to restore gross domestic product to its prewar level by 1995 and double real per capita GDP by 2002. If this happens, it would move Lebanon into the range of upper middle income countries. The budget is to be balanced by the end of 1995 and yield surpluses after that, which by the end of the century would be running to 10 percent of GDP. Baroudi is counting on the surpluses to be the main source of financing for Horizon 2000 and for debt service.

Baroudi expects the total debt to average 59 percent of GDP over the next 10 years and says that debt service–principal plus interest–will not exceed six percent.

Lebanon has in hand close to $1 billion in foreign credit, loans, and grants in support of the near- and medium-term work. This includes a $175 million loan from the World Bank, the first in a decade, to rehabilitate infrastructure and to finance new housing.

Since the World Bank is something of a political bellwether, its support is an important sign of an emerging international consensus that at last something can be accomplished in Lebanon. Probably more important than its loan approval is the Bank's recently formed "consultative group" for Lebanon, a committee of international lenders who will give special attention to the country. (This is not to say that the foreign community is bursting with optimism: all the major international export credit agencies, including the U.S.'s Export Import Bank, keep Lebanon off cover.)

Unless U.S. policy changes, direct American private participation in Lebanon's reconstruction will be minimal. U.S. passports are invalid for travel in Lebanon. U.S. air carriers are forbidden to fly in. The U.S. Export-Import Bank can't underwrite sales. The U.S. Overseas Private Investment Corporation can't insure projects. The American Embassy does no real commercial reporting in Lebanon and can't give support to U.S. firms operating there. In order to work in the country, U. S. firms have to use non-American staff or operate offshore or through affiliates and partners in Europe and the region. Some will, most won't.

Realistically, full reconstruction of Lebanon will require the withdrawal of foreign forces, including those of Syria, Israel and Iran. This is not out of the question, but reconstruction in Lebanon will ultimately depend on the larger regional peace process; and take time.

Meanwhile, significant work is beginning to be done in areas where it can be done and those areas are considerable.

Colin MacKinnon is chief editor of the Washington-based Middle East Executive Reports.