The arrival of a team by the International Monetary Fund (IMF) in Beirut for negotiations on the national need for financial assistance under a rescue package has sparked a wave of discussions on the task. This interest is fueled by widespread concerns that the latest official draft plan—based on a paper by international financial firm Lazard and presented by the Lebanese government on April 30—is only one of several possibilities, despite entailing numerous assurances of it being credible and “the only way.” In discussion are important alternatives for determining the Lebanese societal and economic trajectory for the coming decades, with updated alternative plans being put up for debate in the second week of May by, for example, local media company InfoPro or an outlook of expectations for the IMF negotiations floated under the umbrella of Carnegie Middle East. Executive spoke with Ziad Hayek, privatization and partnership specialist and until February 2019 head of Lebanon’s Higher Council for Privatization and PPP, about the “Proposal to help Lebanon to overcome its financial crisis” that Hayek and French debt restructuring expert Gérard Charvet developed over the past three months.
Two components in your latest concept that strike me as highly interesting were the Lebanon Asset Trust (LAT), and the role of the Lebanese capital markets and the Beirut Stock Exchange, where you used the abbreviation BEX, rather than the well-known BSE moniker. Why did you choose the phrase BEX? Did you envision it to be a revived and privatized BSE, or a privatized BSE working in conjunction with the ETP project, meaning the supposed Electronic Trading Platform, or something totally new?
I was not looking at it from that angle. I just used an abbreviation that I thought to be representative of the capital markets as a whole. I was envisioning capital markets as driven by a new entity that integrates everything that you are talking about, as a place where all the securities will be traded.
As for the LAT, are you proposing it to be established by law as a single entity that will pursue an initial public offering on the Lebanese capital markets and that will involve a strategic investor with the management experience needed to run an entity that will own all the public sector assets of Lebanon?
Not a strategic investor to run the LAT as a listed entity, no. The LAT, as established by law, is a trust—there are trustees. The governance of the trust is a separate matter and has to involve a number of people other than the trustees. There would be a management committee that works in the interest of the trust beneficiaries, who are the trust certificate holders. We are recommending for civil society and multilateral organizations to be represented in that trust management structure. The strategic investor comes into play at the time of privatization—every time that an entity is privatized you find a strategic investor that can take this entity to a world-class level or an acceptable level of performance.
Would the LAT be privatized and put on capital markets as one unit?
No, the LAT is an interim entity. Its task is to restructure and improve the value of the public assets and privatize them within a ten-year period.
So each asset individually?
Exactly. The purpose of the LAT is to safeguard the banks’ balance sheets. The banks today have these eurobonds and BDL CDs (certificates of deposit). If they were to mark them to market, they would have to absorb huge losses, which they would have to take against their equity. Thus, they would basically lose all their equity. To avoid that, we are saying that this trust will be established and the eurobonds exchanged at par, one for one, for trust certificates. Because the trust certificates are not listed or quoted or traded, their value is basically their issuance value, which is one. The banks will carry them on their balance sheets as such. In this way, you will have sanitized the banks’ balance sheets. Now, there are many who say that these [LAT assets] are assets that belong to all the Lebanese people. However, we have put them in a trust, we have not given their ownership to the banks. They are in a trust and still belong to the Lebanese government. At one point in time, when these assets are privatized, the income from this privatization will go to the banks to make them whole. What the banks get paid is principal and a certain amount of profit representing interest that they would have been owed, up to a certain level. Above that, the money goes to the state.
It seems that there is currently skepticism regarding the capacity of the financial sector and the banking industry. Would the banks, as interested parties in the LAT, have to be major trustees of the entity?
No, they are the beneficiaries of the trust, not the trustee. The trust would have to be managed for their benefit by whoever is the trustee and the entity managing the trust. They cannot act against the interest of the banks, but banks would not be managing this thing.
When you look at an entrepreneurship project, the business plan is one thing but the most important thing is the team. In this sense of a trust that has not been existing in the past, do you have an LAT startup team in mind?
We would have to talk about this issue further down the line. First, the trustee would be an international trustee, so not involved in Lebanese matters and people who are managing the trust will not be appointed by Lebanese politicians. This is a third-party trustee. Also, the management of the trust should be open to inspection and transparency, with best practices and multilateral stakeholders. The main thing is that we cannot trust the government to undertake the reforms and the privatization of [state-owned commercial] entities in the way that the Lazard plan said. Their plan is to put these assets into what is called a public asset management company that is owned by the government and managed directly or indirectly by the government. Since Lebanon’s independence in 1943 until today, the Lebanese state has never privatized a single asset. Why should we trust politicians to privatize entities that they consider their own fiefdoms? That is why we are putting it in the hands of a trust.
How would one find an international trustee? What kind of model that is working elsewhere that you could emulate in the management of such a trust?
There is no need to reinvent the wheel when it comes to trusts. There are trustees for everything and all kinds of trusts that are well-established globally. Costa Rica, for instance, has put its state-owned enterprises in a trust and other countries, including Morocco and Jordan, are forming holding companies for their state-owned enterprises.
According to your latest plan, more than $32 billion of investment is envisioned over ten years. I understood that this is in three tranches, a $10 billion tranche for economic recovery, a $10 billion tranche for infrastructure and development deploying international financial assistance, and a $12 billion welfare fund for employees.
Correct.
I understand that the second $10 billion tranche would come from sources such as the ones in the CEDRE plan. But where is the origin of the first $10 billion dollars, earmarked for economic recovery in your investment?
From public indebtedness.
Does this mean it will increase public sector debt?
Yes. Basically what happens is that after you have solved your situation today, the economy is supposed to grow again and as it grows, you can add debt to it, as long as we put some parameters to it and debt service does not surpass 3 percent of GDP.
How does this entire vision of going forward in the next ten years and realizing economic growth corroborate with the post-corona world with large uncertainties that we are heading into?
As you can see from the worksheets in our presentation in the slide before last, we looked at economic sectors [such as agriculture, industry, IT and communication etc.] and built this growth not hypothetically but based on expected sector growth. Someone can argue with the assumptions that we have made for those sectors and there can be an honest discussion about those but the point is that we have to look at those numbers of growth of the sectors and then decide what the growth is going to be.
What do you feel yourself in this regard? What is your margin of confidence that you have on those growth numbers, such as 168 percent in agriculture, 206 percent in industry, and 149 percent in ICT over the decade to 2030?
I am confident with these numbers and will tell you why. Of course the coronavirus has had a major effect on us. It has had a major effect on the world, but in our case this is exacerbated by our financial crisis. If you like, the difference between our plan and the plan of Lazard is the following: Lazard’s plan is for a U-shaped recovery. You have the country in decline now and this is going to be an accelerated decline. At some point in time, they want to stabilize it with the measures that they have in their plan, and then they want [the country] to resume growth on a normal slope. Ours is a V-shaped recovery. It is a drastic decline that has to do with freeing the exchange rate and [other factors], and an accelerated and quick recovery immediately following.
It looks to be a shock treatment.
It is a shock treatment, exactly. You can see this also in the plan that we will eliminate zeros from the currency. This is not cosmetic. This is intended to change people’s reference point, and then you have a V-shaped recovery, because you bounce back very quickly. And the reason that the growth rate is so high is that you have gone down so low. Then the growth rate becomes very high.
Someone I talked with asked why the IPR note on intellectual property is placed right at the top of your presentation. Is this something that you want to sell as a consulting service?
What we have in this presentation is only part of the total information that we have. We of course want to provide this to Lebanon and help the country for free. What we wouldn’t be happy about would be government consultants, who are paid millions of dollars, taking our ideas and implementing them, getting paid for work that we have done.
How many hours of work have you invested as co-authors of this plan, between you and Gérard Charvet?
We do not stop; we work on it every day.
How many man-hours or workdays?
I don’t know. We have been working every day since February. We were not counting hours.
It certainly looks very impressive as a plan but this raises the question how you will get remunerated for such an effort.
That is not important for us. As I said, we wanted to do something of value here. We just didn’t want other people to profit from our work, but we want Lebanon to profit from our work, for free.
Would you be willing to go into politics in order to make the plan happen?
I have not expected this question. Gérard is French, doesn’t speak Arabic, and would not go into politics here. I myself have left the government a year ago and it is not like I am eager to get back in. But I feel that the experience that I have is valuable in the situation, having restructured the debt of Honduras, Trinidad and Tobago, and Venezuela, and having been an advisor to the Mexican government on the peso crisis in 1994. Also Gérard, having been the guy who thought up the Brady bonds for Latin American debt solutions, we both felt that we have expertise and that it would be a pity not to use that expertise to help Lebanon. We are not thinking beyond that. I am not thinking beyond that.
The reason why I am asking is that the whole discussion of a financial rescue and economic plan is very political and has been so from the beginning—but I do not see anybody who could be the superhero or historic leader to drive this, nor do I see political consensus for working in the best interest of the Lebanese people as much as I would want it to be. I think our politicians in charge are now trying to work in the best interest of the people but ask myself: Are they up to the task in the current scenario?
I agree. These times require a different type of leadership. We are missing that as a country. But to end on an optimistic note, I just want to make sure that our plan is grasped in its entirety; any piece of this plan can be criticized but, taken as a whole, it is very well balanced. That is the important message.
Thomas Schellen is Executive’s editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years
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