Resource allocation in power-sharing arrangements – evidence from Lebanon

Abstract

Power-sharing arrangements allocate not only political power but also economic resources from valuable state functions among powerful elites. Two broad hypotheses emerge from the existing literature regarding how elites allocate such resources: elites either distribute the control over valuable institutions or share the rents they generate. This article investigates which mechanism prevails by focusing on a major source of such resources: public procurement of large infrastructure projects. We analyse an original data set of infrastructure procurement contracts in Lebanon and investigate which politically connected firms receive larger contracts than non-connected firms. We find that firms receive inflated contracts only when they are connected to elites with a ‘seat at the table’ at the board of the implementing agency, rather than the wider set of powerful political elites. We argue that resource distribution depends on elites’ access to important institutional functions, rather than other conceivable mechanisms of resource sharing. By penetrating key positions with loyal personnel, elites serve as brokers in collusive networks, or cartels, that succeed in undermining a process as complex as infrastructure procurement.

Keywords:

• Procurement
• cartels
• politically connected firms
• power-sharing arrangement
• Lebanon

Acknowledgements

The authors thank Ishac Diwan, Jamal Haidar and Moussa Saab; two anonymous reviewers; participants at the Economic Research Forum, International Public Policy Association, and Middle East Economic Association conferences; and workshop participants at Aarhus University for helpful comments and feedback. The authors moreover gratefully acknowledge support from the Lebanese Center for Policy Studies, at which parts of the study were drafted, from the Economic Research Forum, as well as Jamal Haidar, who kindly made the data for this project available following a formal request to the Council for Development and Reconstruction. Data and replication materials are available upon request to the corresponding author.

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 Investigating whether connected firms are more likely to win projects would be an elusive endeavour. Not only does CDR not publish the details of tenders and the individual quotes of firms, but in non-competitive environments, non-connected firms are less likely to bid in the first place. Moreover, price collusion distorts the value of bids. Finally, the allocation of projects might not be exogenous but a function of elite-level influence itself in that elites place projects where their firms have higher chances to win.

2 These members are the president: Nabil El-Jisr, brother of Samir El-Jisr (Member of Parliament for the Future Movement), appointed president by Rafic Hariri in 1995 and again by Fouad Siniora in 2006; Deputy 1: Yasser Berri, brother of Nabih Berri (Amal Movement); Deputy 2: Alain Kordahi (deceased); Secretary General: Ghazi Haddad, close to President Michel Aoun; Board Member: Malek Ayyas, close to Walid Jumblatt; Board Member: Yahya El-Sangari, brother-in-law of Omar Karami; and Deputy to the Government: Walid Safi, close to Walid Jumblatt.

3 The HHI index is calculated as the sum of squares of the percentage share of each competing firm competing in a sector, $\mathit{HHI}={\sum }_1^n{s}_n^2$, and ranges between 10,000 for a perfect monopoly and close to 0 for many firms with equal market shares. An HHI of up to 1,500 is generally considered a competitive market, while scores above 2,500 indicate a highly concentrated market.

4 The calculation is as follows. Table 5 shows the mean values of contracts by political connection. We subtract the mean contract value of PCF1 firms ($15.9 million) from the mean value of all contracts ($10.4 million). We multiply the resulting difference in the univariate results ($5.5 million) by the fraction of the marginal effects (e^0.59/e^0.98 = 0.68 or 68%) to obtain the value of $3.4 million.

Additional information

Funding

The authors gratefully acknowledge funding from the International Growth Centre.

Notes on contributors

Mounir Mahmalat

Dr. Mounir Mahmalat is Senior Researcher at The Policy Initiative. His research focuses on the political economy of reform, conflict and development.

Sami Atallah

Dr. Sami Atallah is Founding Director of The Policy Initiative. His research focuses on political and social sectarianism, the performance of governments, municipal governance, economic diversification, and oil and gas governance.

Wassim Maktabi

Wassim Maktabi is Economist and Researcher at The Policy Initiative. His research interests include political economy, development economics and public finance.