Small-Scale Private Competition and Potential for Returns
Left in the Dark: Small-Scale Private Competition and the Potential for Returns
February 1, 2016
This article has been produced by the efforts of the following members:
I. Jamie Arabi – Leader of the Lebanon Risk Assessment Team
Keywords: Lebanon, political risk, Electritie de Liban, Electritie de Zahle, Zahle, energy risk, mitigation strategies, private security, security, Aggreko, terrorism, electricity generators
Over 40 years ago, Lebanon exported energy to its northern neighbor, Syria. Since Lebanon’s civil war ended in 1990, however, the country has struggled to keep its lights on for hours in the day. Small rolling blackouts typically last only a few hours, while larger ones can persist for over 18 hours. During the summers, when the heat calls for increased air conditioner usage, these numbers increase.
A typical state response to such a problem might be to hire or contract private-sector electricity companies. Unfortunately for the Lebanese populace, establishing small private generator companies is against the law. Thus, individuals have taken the initiative to purchase diesel-fuelled generators and illegally sell electricity by the neighborhood. Currently, about 500,000 private power generators are in use. Since demand for electricity has become increasingly high, illegal entrepreneurs like the ones mentioned above are able to profit greatly. Rather than attempting to enforce the law, the government now regulates the prices of diesel-generated electricity. Despite the efforts of the aforementioned small-time electricity providers, opportunities for large, legitimate private-sector partnerships are in the midst. However, this might come at a cost. The case of Zahle, Lebanon’s fourth largest city, is telling of this cost, and is perhaps indicative of the risks for prospective investors.
Electricite de Zahle (EDZ) is a private energy utility center that distributes electricity over low and medium voltage networks. EDZ is currently able to distribute energy due to strong local support, a concession contract dating from the 1920s, and most importantly, the 3-year contract with Britain’s Aggreko, which maintains the local power plant. In combination with the state’s electricity distributor, Electritie de Liban (EDL), the city’s citizens are able to enjoy 24-hour a day electricity and pay for only one bill, rather than two, resulting in the average household saving approximately 35-45 per cent. However, not everyone is pleased about this.
In February 2015, gunmen opened fire on an electricity transformer in Zahle, leading to periodic blackouts in some districts. Unfortunately, this was not an isolated event. Two more attacks on electricity infrastructure took place weeks later. EDZ’s chief executive officer (CEO), Assaad Nakad, stated that he and his family were threatened over the phone.
Who are the culprits of these attacks and threats? Those individuals that sell electricity from their diesel-generators.
Gilbert, a generator operator, who did not state his last name on the record for obvious reason, claims to be threatened by properly distributed, consistent electricity. The operator stated that one of the neighborhoods he provides energy to experienced a “glitch”: 24 hours of state-distributed energy. This was solved by a simple bribe to artificially produce power cuts.
Investors interested in the private, local energy sector have little to worry about when it comes to bribes. At EDZ in Zahle, most of the day-to-day operations are conducted by locals, who pay taxes in order to sustain the power plant. Thus, the willingness for a power-plant worker to accept bribes is decreased, as they have stakes in their community. This is opposed to workers at EDL, who might not be directly affected by electricity shortages.
A number of private security agencies exist in Lebanon. Thousands of corporations and public institutions, from mosques to banks, employ companies such as Patrick Security and Services Agency (PSAA), and Zodd Security – both of which are native to Lebanon. PSSA, which is certified by the Lebanese government and French police authorities, provides armed personnel with skills from parachuting to open-water diving. Hiring such staff is recommended in case of small-scale attacks. The perpetrators in the aforementioned attacks focused on disrupting the plant’s infrastructure, rather than directly harming individuals. Thus, having armed men surrounding the perimeter of the facility, along with security fences, should act as a strong deterrent.
Companies like Zodd Security sell products, rather than services. The company specializes in equipment such as surveillance cameras, spike and razor concertina, and security fences. It is recommended that, along with the above three products, investors purchase car bomb jammers and vapor explosive detectors (EVDs). The general risk towards power plants like Zahle do not currently warrant a very high degree of defense security; however, these products should be purchased as a means of damage prevention.
Despite the previously discussed risks, there is much room for companies like Aggreko to improve on the quality of Lebanon’s electricity production and distribution. Accordingly, the large population of individuals who lack consistent electricity demonstrates that the potential for large investment returns are great.
