Policy powers gray market in generators

The illegal billion dollar generator business is deemed well worth the risk for many involved in it. (Mahmoud Kheir/The Daily Star)

BEIRUT: From his nondescript office in a shopping center outside Beirut, Samir (not his real name) sits in an Aeron chair and monitors multiple screens displaying a grid of surveillance camera feeds. The cameras have been installed throughout Beirut’s suburbs and surrounding cities, and are trained on a series of generators that provide power to well over a thousand houses.

Samir won’t reveal his real name or any specific details about the scale of his business even though he provides essential power supply to neighborhoods that go without electricity for up to 12 hours per day. Yet his entire operation is illegal according to Lebanese law, which gives the state-run power company, Electricite Du Liban, a monopoly over power production.

However, the company’s failure to supply adequate power – owing to decades of mismanagement and crumbling infrastructure – has spawned a massive gray market in private generation, employing thousands of individuals and valued at over $1 billion annually according to government estimates.

Lucrative as it may be, the private power market, which serves some 85 percent of the Lebanese population, cannot be tapped by just any entrepreneur. Entering the business means carving out a fiefdom of subscribers, a feat that is often enforced by acts of violence and intimidation.

Just last week, a shootout in the Beirut suburb of Fanar reportedly left six persons wounded in a barrage of automatic weapons fire, allegedly sparked by competition among private generator suppliers over subscribers.

But quieter incidents occur on a regular basis, industry insiders say, and messages can be conveyed to rivals in more subtle ways.

From a musty underground workshop, a provider in Beirut (we’ll call him Ahmad) says he faced stiff resistance from an existing neighborhood provider when he purchased his own generator. After signing some 50 subscribers, Ahmad says he was viewed as a threat, and neighborhood ruffians, known locally as “Zara’an” were deployed to disrupt his wires. This was followed by personal visits from such strongmen, but having grown up in the neighborhood, Ahmad says he was able to cultivate his own defense.

“He’s got his bad boys, but I’ve got my bad boys too,” Ahmad says proudly, keeping an eye on a monitor connected to a surveillance camera outside his shop. “Mess with me and I’ll mess with you back.”

According to Ahmad, the street rate charged by such “bad boys,” who sometimes double as bouncers or bodyguards, ranges from $50 for a beating to $100 or more “to send someone to hospital.”

“Once they sent a guy after me and it turned out to be my distant cousin,” he says laughing.

Aside from violence, providers say intimidation can also take bureaucratic forms. Many allege kickback collusion between municipalities and generator providers, with the former allegedly threatening newcomers with fines and forced closures, applying the law where it suits personal interests.

But for those enterprising individuals with means and street know-how, entering the billion dollar generator business may be well worth the risks.

At his sleek office, Samir flips through a thick stack of spreadsheets detailing the output of his fleet of engines across dozens of small towns and neighborhoods.

Business booms in summer, when EDL production barely meets half of demand, setting off a nationwide rationing program. Beirut residents receive preferential treatment, facing a relatively modest three hours per day of outages, while the majority of the population living outside the capital bears the brunt of the supply gap. According to Samir’s figures, some areas show outages up to 350 hours per month.

With no regulations enforced by the state, private operators are free to set and change prices at will, with minimum fees currently amounting to over $100 per month for five amperes of power in many areas. That’s barely enough to power one bedroom-sized air-conditioning unit and a few lights – no small sum for a country with a minimum wage of $330 per month.

And while operators raise prices on a monthly basis in line with the rising fuel costs and duration of cuts, they rarely provide meters to ensure adequate supply, charging a flat rate regardless of consumption.

The generation market is even more bankable when considering that no taxes are paid to the state and no permits or fees are issued as all activity in the sector remains technically illegal. To be fair, operators must foot the cost of maintenance, while an average size generator costs around $50,000 to power some 220 homes. Wiring is an added expense, but providers string up their cables on existing electrical posts, thus bearing little cost in transmission.

Depending on the size of one’s operation, profit margins can run in excess of 20 percent and a return on investment can be achieved in a year and a half or less, industry insiders say.

Acknowledging the need for “illegal providers,” the Energy Ministry says it has tried to remedy price-gouging by creating a recommend formula for monthly fee calculation based on operating costs, daily outage hours and the price of fuel. “It is very fair,” says energy minister advisor Khaled Nakhle of the formula. Yet he admits that the ministry has little ability to monitor or enforce such recommendations and that the memo was curiously not circulated to some municipalities, where prices remain high.

Consumers are also offered little in terms of a mechanism to hold their service providers accountable to the Energy Ministry’s recommended formula since the official reporting of outages remains vague at best. On its website, EDL publishes a daily chart indicating both the “expected” and “actual” number of outage hours. However these numbers do not match up to reality when examining a severe power outage in the Mount Lebanon suburb of Beit Shaar, where thousands of residents recently went without power for three days due to a damaged underground cable. When asked why the outage was not reported in official online statistics, an EDL customer service representative said cable damage does not factor into its reporting. Yet 72 hours of additional generator service was most definitely observed by neighborhood service providers, who raised prices significantly last month as a result.

The three-day Beit Shaar outage, which follows a two-day outage in the town earlier this summer, underscores another EDL failure: transmission.

Cables linking the town to the regional grid date back to the 1960s, according to Beit Shaar Municipal Council member Georges Kawerkian. Despite repeated requests, he says EDL has failed to upgrade the town’s grid connection over the past five decades, where the population has increased from 500 to 25,000 residents and 4,000 new homes were built. Far behind the pace of construction, the aging underground cables are frequently subject to overload damage, which can take days to repair, Kawerkian says.

Ministry advisors and EDL representatives were not able to offer any solid statistics regarding the frequency of such multiday outages due to frequent repair work in cities and towns across the country. While one high level official described them as “rare,” EDL customer service representatives said day-long outages were very common. When asked for a tally of the month’s outages, EDL suggested contacting the regional office but when phoned, an angry regional EDL employee quipped, “What kind of question is that?” before hanging up the phone.

Life without electricity from the government has become an unquestionable norm in Lebanon, feeding not only the gray market in generators, but also the fuel truck distribution business, which makes an equal if not greater amount of deliveries to generators as it does gas stations.

Not surprisingly, the lack of electricity has also helped engender a local expertise in power production, creating jobs for legions of mechanical and electrical engineers and an estimated $100 million local sales market for importers and distributors. In addition to neighborhood suppliers, clients include an increasing number of apartment building owners who are purchasing their own generators.

For Jallad, the local representative of U.S. heavy machinery giant Caterpillar, generators and related products make up 70 percent of business, which has tripled over recent years, according to sales and marketing director Tarek Jallad.

“Lets be honest, it has been good if you are in power business,” he says.

Lebanese firms are also seeing record sales in the generator export market, which is valued at up to $600 million annually, according to Sakr Power Systems, one of around eight local firms involved in engine and power plant assembly.

Ghantous Nakad, the company’s chief operating officer, says Sakr netted half a billion dollars in sales to Iraq since the mid 1990s, although that volume has tapered off recently with the entrance of major Chinese, Indian and American competitors.

Lebanese firms still claim at least 10 percent of the Iraqi market, he estimates, but the focus has recently shifted to emerging markets abroad, particularly Nigeria where Lebanese firms have a significant market share.

“Now the hotspot is Africa,” Ghantous says, putting the value of Nigerian market alone at $400 million.

With Lebanon now falling to some 10 percent of his overall generator sales, Ghantous is not overly concerned with local developments, specifically a recently passed government plan to build new plants, with 24-hour coverage projected by 2014.

“The main people that will be hurt are the ishtirak,” he said, using the colloquial term for neighborhood generator suppliers. “I can recoup [losses in Lebanon] in any small country,” he said.

But Samir and many of the hundreds of providers like him are not worried either. They say vested interests tied to fuel importing, distribution and generation have kept the pace of reform slow over recent decades and will continue to do so in the future.

“There is a diesel mafia,” he says. “Everyone gets their cut.”

A version of this article appeared in the print edition of The Daily Star on September 12, 2011, on page 4.




Your feedback is important to us!

We invite all our readers to share with us their views and comments about this article.

Disclaimer: Comments submitted by third parties on this site are the sole responsibility of the individual(s) whose content is submitted. The Daily Star accepts no responsibility for the content of comment(s), including, without limitation, any error, omission or inaccuracy therein. Please note that your email address will NOT appear on the site.

Alert: If you are facing problems with posting comments, please note that you must verify your email with Disqus prior to posting a comment. follow this link to make sure your account meets the requirements. (http://bit.ly/vDisqus)

comments powered by Disqus



Interested in knowing more about this story?

Click here