GAS PIPE DREAMS
Despite excitement over exploration of Lebanon's hydrocarbons, the creation of a sovereign wealth fund, which was included in legislation, has yet to take place. The country faces several obstacles in its path to creating and properly managing a fund.
The debate over the potential exploration of hydrocarbon resources has been a hot topic in Lebanon for the past six years. The implementation of the Offshore Petroleum Resources Law (OPRL) in 2010, the creation of the Lebanese Petroleum Administration (LPA) in 2012, and the preliminary 3D seismic mapping of the country's potential reserves spurred a promising future for the development of the sector. These discoveries offer a glimpse of the end of the energy dependency tunnel that Lebanon has found itself in for decades and encouraged a much-needed source of income in a country with one of the worst debt-to-GDP ratios in the world.
Despite the initial excitement stirred by creation of the LPA—and the first pre-qualification round for bids in 2013, which attracted 52 market titans such as Shell, ExxonMobil, Chevron, Repsol, Statoil, and Total—the second requirement of the OPRL calling for the creation of a sovereign wealth fund has been left in the air. If the prospects of hydrocarbon exploration are to become a reality, the creation of a fund to manage revenues coming from this industry is much needed.
A Lebanese sovereign wealth fund would guarantee the long-term economic functionality of finite natural resources by adequately placing savings for their correct use over time once they are transformed into diversified financial assets. This has been the case in Abu Dhabi, where the Investment Authority has allocated the benefits of its savings fund into equities and investments, as well as in Chile, where the Economic and Social Stabilization Fund has applied policies to insulate the copper industry from international shocks and price falls.
In Lebanon's case, creating a fund would guarantee long-term investment objectives with a significant impact on public finances and balance sheets, two segments in which the country is flat lining. If the fund is properly fitted to the country's policy framework, it will serve to reduce the distortions the current commodity would cause to Lebanon's fiscal accounts if the exploration process is meant to occur before this negative cycle ends. It would also imply larger fiscal inflows coming from excess revenues that will directly impact monetary policy, leveraging the ongoing role of Banque du Liban as a capital injector for initiatives ranging from IT and entrepreneurship to real estate and energy efficiency. Setting up a fund would minimize the potential financial pressures that mid-term capital inflows would cause in aggregate local demand and over-appreciation of the real exchange rate, which would shield Lebanon from the Dutch disease. This final aspect is particularly important for a service-based economy with little experience exporting commodities.
This path, however, will not be exempt from obstacles, and at this early stage, the main challenge for a sovereign wealth fund lays in Lebanon's weak institutions and lack of transparency. For a fund to be successful in any corner of the world, there has to be a fair level of governance and transparent practices in its operations. Cross-country studies reveal that the major risk from the discovery of a resource windfall is the lack of governance, which can bring about negative counter effects in the economy and severely affect the level of government expenditures.
However, as resilient and ever-hopeful as the Lebanese spirit proves to be, there are good opportunities to secure a good level of governance for Lebanon's potential wealth fund if the IMF and World Bank's recommendations for establishing an independent regulating body for the fund are put in place. There is also evidence of well-functioning funds in Azerbaijan and East Timor, countries with similar transparency deficiencies to those of Lebanon.
With pending decrees to license the first round of the tender currently being discussed in Parliament, it is only a matter of time before the LPA and the Ministry of Energy and Water Resources decide on the type of fund that will be more appropriate for the future of the country. On that note, Wissam Zahabi, Chairman of the LPA, told TBY, “We expect to have a dimension of the money that will enter the country as oil and gas revenue to draft the law for a sovereign wealth fund." Now, it is up to political actors to play their parts and accelerate the process.
GAS PIPE DREAMS
TABLE OF CONTENTS
Focus: Lebanese-French Relations
Let’s be Franc
Lebanon shares a close relationship with its former colonizer, both in terms of economic relations and cultural identity among Lebanese. In spite of hardships like the presidential power vacuum and Syrian war next door, the bond is only getting stronger.
read articleFocus: Tripoli Economic Free Zone
The Tripoli Transformation
The Tripoli Special Economic Zone (TSEZ) is one of most ambitious projects in Lebanon at the moment. With an initial cost of USD27 million, it is meant to provide an alternative to the heavily centralized economic activity in Beirut, a new gateway for investments and trade to settle in northern Lebanon, and will transform the image of a long-neglected region.
read articleInterview
Dr. Freddie Baz, Vice Chairman & Group Strategy Director, Bank Audi
TBY talks to Dr. Freddie Baz, Vice Chairman & Group Strategy Director of Bank Audi, on the bank's increase in profits, dealing with currency devaluation, and working to turn the economy into an export-driven one.
read articleReview: Insurance
Life is a Rollercoaster
Unlike many emerging markets, Lebanon enjoys a relatively high insurance penetration rate and strong life segment, buoyed by compulsory lines and bancassurance. Competition remains fierce, however, and reform aimed at encouraging consolidation looks far off.
read articleInterview
Max R. Zaccar, Chairman of Commercial Insurance & President of the Association, Insurance Companies
TBY talks to Max R. Zaccar, Chairman of Commercial Insurance & President of the Association of Insurance Companies, on the resilience of the sector, increasing the already-high penetration rates in the country, and remaining one of the strongest insurance companies in the region.
read articleInterview
HE Arthur Nazarian, Minister, Energy and Water Resources
TBY talks to HE Arthur Nazarian, Minister of Energy and Water Resources, on the potential offshoots from oil and gas explorations, the country's National Energy Efficiency Action Plan, and attempts to increase renewable energy consumption.
read articleInterview
Wissam Zahabi, Chairman, Board of the Lebanese Petroleum Administration (LPA),
TBY talks to Wissam Zahabi, Chairman of the Board of the Lebanese Petroleum Administration (LPA), on making the investment climate attractive for foreign companies and becoming self-sufficient in energy.
read articleFocus: Sovereign Wealth Funds
Gas Pipe Dreams
Despite excitement over exploration of Lebanon's hydrocarbons, the creation of a sovereign wealth fund, which was included in legislation, has yet to take place. The country faces several obstacles in its path to creating and properly managing a fund.
read articleInterview
Pierre El Khoury, General Director, Lebanese Center for Energy Conservation (LCEC)
TBY talks to Pierre El Khoury, General Director of the Lebanese Center for Energy Conservation (LCEC), on the development of energy efficiency in Lebanon, awareness of energy conservation, and the country's 2020 renewable energy goals.
read articleInterview
Dr. Fady Gemayel, President, Association of Lebanese Industrialists (ALI)
TBY talks to Dr. Fady Gemayel, President of the Association of Lebanese Industrialists (ALI), on the group's work to promote industrialists, new developments in terms of industrial cities, and the future of industry in the country.
read articleFocus: Industrial Cities
Industrial Solution
Domestic and regional events have stifled Lebanon in building a strong national industry to protect and sustain its economy. Four proposed industrial zones throughout the country may provide it with the economic backbone it so desperately needs.
read articleInterview
Marianne Hoayek, Director of the Executive Office, Banque du Liban
TBY talks to Marianne Hoayek, Director of the Executive Office of Banque du Liban, on the roots of the Circular 331 concept, bridging funding gaps throughout the startup lifecycle, and the country's growing knowledge economy.
read articleRoundtable
Thinking It Through
On June 12, TBY and the American-Lebanese Chamber of Commerce (AmCham) organized a roundtable titled “Startup ecosystem sustainability: fostering cooperation to drive entrepreneurship." The participants discussed the impact of Circular 331, an initiative by Bank du Liban, the Lebanese central bank, to inject a potential of USD400 million into the local enterprise market and guarantee 75% of banks' investments in startups and startup support.
read articleFocus: Infrastructure for the startup ecosystem
The New Star
Startups are ubiquitous in Lebanon despite the difficulty of starting a business and the lack of services available to new businesses. However, a number of actors, both public and private, are innovating the environment and allowing startups to fulfill a greater role in the country's economy.
read articleFocus: Maritime Exports Bridge
Bridging The Gap
The conflict in Syria has wrought serious damage on the Lebanese economy, effectively closing off the country's trade routes through Syria. However, a new program geared at balancing the price disparities between land and sea transit is poised to help Lebanese industries.
read articleFocus: Real Estate
A Stimulus For The Rest Of Us
The real estate market in Lebanon is nothing like it used to be. The sector has slowed considerably, and demand has shifted from the traditional center, Beirut. However, stimulus packages from the central bank over the years have proven beneficial for all parties involved.
read articleInterview
Armand Pahrés, President, Lebanese Pharmaceutical Importers Association (LPIA)
TBY talks to Armand Pahrés, President of the Lebanese Pharmaceutical Importers Association (LPIA), on the development of legislation in the sector, boosting further innovation, and opportunities for Lebanon to become more self-sufficient in pharmaceuticals.
read articleFocus: Incentives for pharmaceuticals in Lebanon
Pharma Land
Lebanon has always been the region's leader in all things health related. Its pharmaceutical industry is no exception, and the country's incentives for international pharma companies to operate, manufacture, and distribute in Lebanon are only getting stronger.
read articleInterview
HE Elias Bou Saab, Minister, Education and Higher Education
TBY talks to HE Elias Bou Saab, Minister of Education and Higher Education, on the ministry's initiatives to improve the education system, ensuring access to education for Syrian refugee children, and reversing the brain drain in the country.
read articleInterview
Mohamed Harajli, Provost, American University of Beirut (AUB)
TBY talks to Mohamed Harajli, Provost of the American University of Beirut (AUB), on his upcoming plans for the university, the key role played by the AUB alumni, and fostering an entrepreneurial spirit among students.
read articleFocus: Programs to school Syrian refugee children
High Marks
Proportional to its population, Lebanon has taken in significantly more Syrian refugees than any other country. With the country now facing the problem of placing the tens of thousands of Syrian children in school, international donors and local and foreign organizations are making educational support a priority.
read articleInterview
Joseph G. Jabbra, President, Lebanese American University (LAU)
TBY talks to Joseph G. Jabbra, President of the Lebanese American University (LAU), on embracing technology at the university, the challenges of Lebanon's brain drain, and the importance of having international links with other institutions.
read article