Another challenge is that the State’s assets belong to all the Lebanese citizens, not just to bank depositors (Lebanese and non-Lebanese). One of the remedies for discrimination is future compensation to be determined later.
by Michel Fayad
Source: Annahar
Date added: 4 May 2020
A few days before the appointment of Hassan Diab as Prime minister, I made the following proposal[1] which, I still believe, would help re-structure Lebanon’s finances by generating value. In other words, it would be one of the pieces of the solution, reducing the suffering of everyone concerned by the government’s default, a shortage of US dollars, capital controls, inflation, and the de-facto devaluation of the Lebanese pound.
A law[2] could be drafted to restructure Lebanon’s debt. Part of the debt held by banks must be swapped with shares of a newly established sovereign wealth fund (SWF) – structured and managed like a private company in order to generate value that couldn’t be created till now – that comprises:
- Middle East Airlines (MEA) valued by Central Bank Governor Riad Salameh at $1 billion[3];
- Ogero (telecom landlines) and Touch and Alfa (the two mobile operators) valued by consultancy group McKinsey between $4 billion and $10 billion[4];
- Lebanon’s stake in the future oil and gas revenues of the two blocs awarded for exploration to Total, ENI, and Novatek[5];
- Electricity (Électricité du Liban, EDL) and Water management as well as the future revenues from cannabis for medical use (including the development of the processing industry and a commercial framework);
- The potential funds awarded by the International Monetary Fund (IMF) and others;
- Stakes of the State or Central Bank (Banque du Liban, BdL) in Casino du Liban; Régie des Tabacs et Tombacs; the Beirut, Tripoli, Sidon, and Tyre ports; the Rashid Karami International Fair; the Sport City Center; the real estate development institution Elyssar; in the airports of Koleiat (tourism), Hamate (Private and luxurious planes) and Rayak (fret); and in Intra Investment Company and its banking arm Finance Bank.
There is, however, a legal hurdle to overcome: State and BdL are separate entities. This distinction is important to keep in order to avoid claims by Eurobond holders. A legal opinion should be requested by the Government[6].
Another challenge is that the State’s assets belong to all the Lebanese citizens, not just to bank depositors (Lebanese and non-Lebanese). One of the remedies for discrimination is future compensation to be determined later.
Nevertheless, a SWF could leverage non-traditional financial sources and then invest in worldwide projects and ventures – including some developed by the Lebanese diaspora – with high potential earnings.
Of course, a global plan should also include among others: the progressive end of the peg, the de-dollarization of the economy, loans from the commercial banks to productive (agriculture and industry) and innovative (digital) sectors in order to reduce imports and increase exports and the improvement of the infrastructure (such as the telecoms).
Large deposits would be converted to equity in these banks at fair terms (bail-ins). This would in effect make them the majority owners of the new and healthier banking system. Investigations will have to be held on the accounts of the Politically-Exposed Persons (PEPs) and their families and illegal money should be confiscated and given back to the State.
The new SWF and all Alpha Banks could then be listed on international stock markets including New York, London, Frankfurt, Shanghai, Hong Kong, and Singapore stock exchanges (even if they have to start by secondary markets).
The listings will also force transparency. This, in turn, would bring back credibility and confidence in the new Lebanese banking system. Especially for the Lebanese diaspora and the international financial markets. Through listing, the new SWF would then be able to raise funds.
This new SWF could invest along with the Lebanese entrepreneurs in Lebanon and worldwide in order to generate revenues, profits and growth.
Such a law and the major reduction of Lebanon’s debt would be a positive shock in international markets.
With that proposal, Lebanon might save itself by itself and emerge from a weak financial situation stronger.
This will also be a major political achievement for President Michel Aoun, Prime Minister Diab and the government.
Of course, we need the right people, both competent and honest, to lead this new SWF. We cannot permit incompetent, corrupted and disingenuous people to squander the last jewels of the country.
The Lebanese Government appears to be on the right track. Its latest financial recovery plan (April 30, 2020) touching on the creation of a Public Asset Management Company (PAMC) [7] for holding the key government assets (stakes in companies and in real estate) and the creation of a SWF[8] for managing the oil and gas assets and investing outside Lebanon.
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Michel Fayad is a civil society activist and financial analyst with experience in policy making, global strategy, and business development. He graduated from HEC Paris School of Management, the London School of Economics & Political Science and NYU Stern School of Business.
[1] Published in the English section of the website of An-Nahar: https://www.annahar.com/english/article/1085920-a-proposal-to-restructure-lebanons-debt.
[2] Similar to the “Intra Law”: In 1967, the Lebanese Parliament passed the “Intra Law,” which set down new rules and procedures in the event of bank failures in order to prevent outright bankruptcy and liquidation; Indeed, in 1966, Intra Bank was forced to suspend payments in the wake of a run on the bank that depleted its cash reserves; Intra had only a few large depositors, limited cash reserves and long-term investments in property. This law allowed the restructuring of Intra rather than its pure liquidation: the deposit obligations were replaced with shares in a new financial institution, Intra Investment Company.
[3] https://www.zawya.com/mena/en/business/story/Lebanons_PM_unveils_airport_expansion_initiative-SNG_102671258/.
[4] https://www.economy.gov.lb/media/11893/20181022-1228full-report-en.pdf.
[5] As per the Offshore Petroleum Law which stated in its Article 3 the establishment of a Lebanese SWF.
[6] I recommend reading this text: https://www.lawfareblog.com/sovereign-immunity-foreign-central-bank-assets.
[7] The Lebanese Government’s financial recovery plan (April 30, 2020) mentions a Public Asset Management Company (PAMC) which “will be created by law to hold key government assets (excluding Oil & Gas assets): (i) equity stakes in the main state-owned enterprises and (ii) real estate assets. The government will assign the profits of the PAMC to fund capital increases of BdL allowing it to face its remaining obligations to the banks. The PAMC will be tasked with the restructuring of public companies in its portfolio and their future use over a 10-year period. Real estate assets will be properly managed over the same period of time. The PAMC will be run in full coherence with the authorities’ overall growth promotion strategy. PAMC will adopt a best-in-class governance model, with a management board comprising top-level professionals and a supervisory board representing the shareholders including BdL, civil society, international financial institutions and independent experts. The Government will rely on international expertise for the creation & management of the PAMC and will build-upon lessons learnt from international precedents. It is understood that state-owned enterprises will keep their autonomy throughout the process.”
[8] The Lebanese Government’s financial recovery plan (April 30, 2020) mentions a SWF which “will be established to manage the oil and gas assets. It will be geared toward protecting the rights of future generations. Assets will be invested outside Lebanon and proceeds will be partly used as government revenue, thus keeping Lebanon away from Dutch disease symptoms. The fund will act as a stabilization body during its first five years. A pre-determined share of the Sovereign Wealth Fund is to be channeled for environmental protection and rehabilitation activities through the Ministry of Environment until the by-laws of the National Environment Fund (NEF) established by law 444/2002 are issued.”