May 2014
Municipalities Need to Attract Capital for Development

Faced with an unprecedented humanitarian crisis stemming from the Syrian conflict, the Lebanese economy is in dire straits. GDP is declining, unemployment rising and number of people living below the poverty line increasing dramatically. The population shock resulting from the massive influx of Syrian refugees has exasperated already acute infrastructural shortcomings. The situation at the local level is particularly austere. The local service delivery system is under immense pressure and investments in local economic development are insufficient. Despite the desperate needs for prompt action, poor public finances and weak political will have rendered the Lebanese central and local governments unable to rise up to the challenge. The Lebanese government needs to urgently implement necessary reforms in the municipal financial system in order to support municipalities through this emergency and encourage their investments in local economic development.

Even before the Syrian crisis, the performance of Lebanese municipalities has been well below its potential. The share of local in central government spending (excluding debt) is equivalent to only 6% in Lebanon, compared to average of 27% in the rest of the world. In addition to the broad range of tasks they are entrusted with by the law, municipalities today are shouldering a disproportionate share of the costs associated with the refugee crisis. Yet municipalities are administratively constrained and fiscally dependent. As a result, they are unable to fulfill even the most basic duties, i.e. service provision and investment in development. The Independent Municipal Fund (IMF) and local taxation system - the two largest sources of municipal revenues - are fraught with many shortcomings. Reforming them will boost local revenues and ensure a greater degree of fiscal autonomy. However, although necessary, these reforms are not sufficient, as they are unlikely to cover the investment needs for municipalities. In order for municipalities to keep pace with increased local demands and provide local development, the reforms of the IMF and taxation system must be complemented with the provision of other fiscal resources.

To address the above challenges, LCPS held a closed roundtable meeting with municipal council presidents, government officials, legal experts and individuals from the private sector on December 19, 2013 to discuss the municipalities' vital role in strengthening local economic development and the potential sources of funds. The discussion chiefly centered around the involvement of the private sector in local development. The major keys issues and policy recommendations drawn from the roundtable are summarized as follows:

Establishing joint projects with the private sector is a potential and important avenue for municipalities to finance investments in local development. Municipalities can benefit from their assets and employ them to enter into partnerships with private firms. These projects will create employment opportunities for the local residents as well as stimulate local production. Furthermore, if investments are made in revenue-generating projects, then they could potentially create new and sustainable sources of income for the municipality in the future. Despite disagreements over the exact form these partnerships would take, all participants including municipal council presidents and government officials echoed the importance of involving the private sector in local development.

Municipalities have a legal right to establish joint projects with the private sector, and in fact many local projects in Lebanon have already been implemented in partnership with private firms. For instance, the Municipal Union of Jezzine has invested in several eco-tourism projects in partnership with the private sector such as “La maison de la foret,” which have subsequently proven to be very successful in generating revenue for the union. El Ghbaire Municipality has also jointly invested in several projects with the private sector including a sports stadium, a disaster council, and a health center among many others. These projects have created numerous employment opportunities for the residents of El Ghbaire as well as boosted local production.

However, despite the legal consent and the successful experiences of some municipalities in cooperating with the private sector, this fiscal resource remains under-utilized. This is to a large part due to municipalities lacking the legal and technical knowledge required to form such partnerships and to the restrictive regulatory system instated by the Lebanese government. The latter, for instance, inhibits certain municipalities from employing their assets, particularly land, and often involves inefficient bureaucratic procedures and an excess of red tape.

Consequently, in order to fill the investment gap in local economic development, it is recommended that the Lebanese government take steps to facilitate the provision of much-needed local fiscal resources. As a first step and in order to formulate more effective policies, the government must take into consideration the past experiences of municipalities working with the private sector. It must encourage the role of that sector in investing in local development while ensuring that municipalities are aware of the full values and costs of such a venture. Barriers obstructing municipalities from making use of their assets must be removed, and bureaucratic procedures need to be streamlined. Furthermore, municipalities must be equipped with the technical and legal knowledge required for establishing fair and fitting contracts with private entities. Finally, the government must encourage municipalities to seek help from the Higher Council for Privatization which provides technical assistance as well as legal consultation to the municipalities on how to collaborate with the private sector.