Chronicle of the Middle East and North Africa

Lebanon’s Public Assets: Risks and Backroom Agreements

Pursuing privatization projects entails relinquishing Lebanon’s public assets through unfair contracts and conditions imposed on the state and public funds.

Lebanon’s Public Assets
French Minister of Transport Jean-Baptiste Djebbari, Lebanese Prime Minister Najib Mikati, Lebanon’s Minister of Public Works and Transportation Ali Hamiyeh and the general manager of Beirut port Omar Itani, are pictured during the signing of a contract assigned to the French container transportation and shipping company CMA CGM to develop and operate the container terminal in the port of Beirut, in the Lebanese capital, on March 10, 2022. ANWAR AMRO / AFP

Ali Noureddine

This article was translated from Arabic.

Lebanese public assets today are increasingly facing unprecedented risks. The country’s banking lobby is exerting pressure to sell public assets and utilities, or invest in contracts with the private sector through designated investment funds, in order to generate monies to offset the losses of the banking sector.

These risks are compounded by the efforts of various foreign countries, particularly France, to leverage their relationships and agreements with the Lebanese political elite to gain control of public assets and utilities, and have them invested by French companies.

However, the greatest cause for concern, is the inadequate governance structures and lack of transparency in state institutions that could lead to the mismanagement of these assets for minimal returns and unclear objectives that do not serve the interests of the Lebanese people.

While collaborating with the private sector to invest in specific public facilities or assets is a common investment strategy used by countries to promote growth and provide high-quality public services at competitive prices, the issue in Lebanon is that the generated revenues, which are public funds, are not intended to support the state budget or establish social protection programs that benefit all citizens.

Rather, they are proposed to support the private sector, specifically the banking sector, and absolve shareholders from taking responsibility for their losses, which ultimately comes at the expense of public funds.

Another issue is the severe financial and economic collapse currently afflicting the country, making privatization a risky proposition. Selling public assets at current prices is likely to result in significant losses, as potential investors are hesitant to invest in Lebanon.

Moreover, partnering with the private sector at this time to invest in certain public facilities would bind Lebanon to long-term agreements that do not provide the best possible returns for the state, given the level of concessions required to attract investors in light of the financial crisis.

Currently, numerous factions within the Lebanese political class are experiencing heightened international isolation, which is pushing them to make further concessions to foreign countries seeking to invest in Lebanese public utilities, in exchange for international support.

This approach will result in public funds being used to prop up the Lebanese political class, which is chiefly responsible for the mismanagement and squandering of state resources. Rather than to hold those responsible for the misuse of public funds accountable, these developments will perpetuate a culture of impunity.

The banking lobby’s ambitions

According to the Lebanese government’s latest financial plans from 2022, the banking sector is facing losses estimated at around $73 billion. To put this in perspective, this figure represents the difference between the banks’ obligations to depositors in hard currency and the remaining liquidity or liquefiable assets in the banking sector.

These massive losses amount to 76 percent of the total deposits in banks and are roughly 3.6 times the value of the country’s gross domestic product. As a result, banks are unable to fulfill their obligations to depositors.

The issue of bank losses is distinct from that of public debt, which came about due to the government’s default on its bonds as of March 2020. The majority of these bank losses stem from the exorbitant interest rates and profits provided by the Central Bank to bank owners and wealthy depositors, in exchange for borrowing more money.

Additional losses resulted from the Central Bank’s sale of dollars at the low official exchange rate, enabling influential depositors to transfer their funds overseas during the time when Lebanon implemented a fixed exchange rate policy.

To put it simply, the budget deficit has accumulated due to operations within the financial sector, specifically between the Central Bank and commercial lenders. It has become evident that these opaque transactions serve the most powerful groups within the financial and political systems, while disadvantaging the vast majority of small and medium depositors.

Such actions have prompted the United Nations Secretary-General, Antonio Guterres, to liken the situation to a Ponzi scheme, making theft and corruption the primary causes of the banking collapse.

The solution to this problem was expected to begin with the restructuring of the entire banking sector, beginning with writing off the capital of the shareholders, who should bear the initial loss as a result of their risky investment of depositors’ funds in pursuit of profits.

Subsequently, the remaining losses should have been assigned to other creditors based on their level of responsibility and involvement in the dubious transactions that occurred. However, this requires an audit of the balance sheets of both banks and the Central Bank that has yet to occur. Following this, the sector could be recapitalized with the infusion of new shareholders, paving the way for the reorganization of the banking industry.

The banking sector predictably rejected any attempts to resolve the crisis by opening their balance sheets and exposing the violations committed in the years leading up to the collapse. As a result, the conditions set by the International Monetary Fund, which required auditing the balance sheets of the 14 largest banks, were not met to pave the way for restructuring the banking sector.

Additionally, the banks outright refused the suggestion that they write off their shareholders’ capital or bring in new shareholders, as it would have potentially changed the composition of the dominant players in the sector. Therefore, the banking interests thwarted the necessary solutions to the crisis.

In 2020, the Association of Banks in Lebanon put forth an alternative proposal to establish a private investment fund worth $40 billion, consisting of public assets and utilities. Under this plan, the Lebanese state would provide these assets to the fund, which would then entrust their investment to the private sector or privatize them, with the goal of using the fund’s profits to offset bank losses. The banks proposed this plan as a means for the state to take responsibility for addressing the losses, rather than assume the burden themselves.

The banking lobby has worked to promote this proposition through political and media channels since then. Said lobby wields substantial political power, and its goals are aligned with those of the banks’ financially powerful executives. They also have significant sway over traditional media, as banks continue to be the largest advertisers despite the ongoing banking crisis.

The dangers of the Association of Banks’ proposal

The gravity of the Association of Banks’ proposal is evident. If this proposal were to be accepted, it would result in the Lebanese state being stripped of all its assets, including ports, airports, cellular and land communication companies, as well as public resources such as maritime properties, the general aviation company, the post office and other essential institutions that provide public services.

Instead of utilizing the fees collected from public utilities or the returns generated from private-public partnerships to address the societal losses incurred due to the financial collapse, these revenues would be directed toward mitigating the losses incurred by the influential banking sector.

This has resulted in a situation where the Lebanese society has had to bear the brunt of these losses, such as the drastic reduction in the value of wages and compensation for public sector employees, which has declined by 95 percent due to the deterioration of the Lebanese pound’s exchange value. Furthermore, the collapse of social protection networks, deterioration of infrastructure and public services, and a sharp increase in poverty rates have all had a negative impact on society.

In brief, the Association of Banks strives to be prepared for any situation that may emerge in the state, even if it involves taking over basic public sector obligations. However, given the magnitude of the banking losses and the small size of the Lebanese economy, it is likely that the proposed investment fund will take decades to recover these losses. This means that future generations may be unfairly saddled with dealing with the losses of the past.

On the other hand, this proposal could lead to a substantial concentration of wealth in Lebanon. This is because the costs for the facilities that will be invested will be levied on all Lebanese people, benefiting just a small circle of the wealthy elite in the end. Lebanon has long suffered from a serious wealth concentration problem, owing partly to the country’s financial regulations. As a result, just 1% of depositors have bank accounts valued at more than $200,000.

It is also evident that the proposal lacks even a hint of fairness. Rather than distributing losses in accordance with principles of accounting, accountability and responsibility, the Association of Banks’ proposal relies on the notion of holding society at large responsible for the consequences of a banking collapse caused by the wealthiest members of society. As such, the culture of impunity is reinforced, and a repetition of the same scenario in the future become inevitable.

French ambitions

France is widely recognized as a key Western player with a significant interest in investing in public assets and utilities in Lebanon. The country seeks to expand its economic influence and dominance in the region, and is considered a leading Western nation engaged in the Lebanese political landscape, giving it the necessary leverage to pursue these objectives.

Consequently, the French government’s ambitions align with the objectives of the Association of Banks, which seeks to expedite the privatization or investment in public infrastructure and assets, ultimately minimizing banking losses.

From this standpoint, Paris’ support for Lebanese Prime Minister Najib Mikati explains its pragmatic attitude to dealing with Hezbollah, Lebanon’s most powerful political party, in contrast to other Western governments who retain tighter policies.

Following a series of efforts by the French, the prominent company CMA CGM, which is owned by the Saadeh family and has close ties to French President Emmanuel Macron, secured a contract to invest in Lebanon’s postal sector for a duration of nine years. In late March 2023, the company was granted the contract without significant competition, as it was the sole bidder to operate this public facility.

In 2022, the French company secured a 10-year contract to invest in and operate the container terminal at the Port of Beirut without facing any competition as it was the sole bidder. In recent years, the company has expanded its presence in Lebanon further by acquiring the entire contract for investment and operation of the container terminal at the Port of Tripoli. Additionally, it has established logistics centers in various Lebanese regions to expand the reach of its operations within the country.

The company was able to capitalize on the support of the French administration and the personal relationship between Mikati and Macron in all of these transactions.

Additionally, the current financial crisis in Lebanon played a role in the company obtaining favorable terms due to the absence of competition from foreign companies, which have been deterred from investing in the distressed Lebanese economy. This lack of competition has resulted in the outsourcing of these facilities for extended periods in a manner unjust to the Lebanese state as it has not been able to secure the best conditions for the country.

The Lebanese political elite is giving in to pressure from both the banking lobby, which seeks to privatize or sell off public facilities in order to offset banking losses, as well as French ambitions to invest. Pursuing these projects serves the interests of major banking lobbies while also allowing Lebanon’s leadership to secure French assistance and support.

However, this entails relinquishing public assets through unfair contracts and conditions imposed on the state and public funds. Deals are based on political influence and interests, rather than on fair competition that serves Lebanon’s interests.

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