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Strongest linkage or missing links?

by Thomas Schellen

The list of infrastructure needs is long, yet the wish list of these projects for Lebanon is still very rough, and as Executive noted last month, looks methodologically as messy as a disorganized teenager’s room waiting for an encounter with neatness. As the projects in the vast national infrastructure file may contain some old and technologically obsolete plans or plans of dubious national economic value, any realistic outlook for upgrading Lebanese infrastructure to the levels required for economic sustainability, plus social and environmental compatibility, is clearly more in the mid and long term than in the immediate or short term.

This is without even starting to talk about the systemic challenges of managing projects in public-private-partnerships (PPPs) wisely and with great efficiency, nor about the prioritization, selection, and determination of time frames for specific projects. But within this general perspective, what is the outlook for Lebanese banks’ participation in the finance of the great effort?     

From the perspective of invigorating the Lebanese economy and finance on the macro level through the CEDRE process, the question to the role of local contributions gets a clear answer from Banque du Liban Governor Riad Salameh. “The idea about CEDRE is to fund the projects with international funds, not local funds,” he tells Executive. In his view, the sourcing of funds through local capital market platforms should thus be an exception.

The international angle in the CEDRE context is of primary importance for the economic equation in the country, emphasizes Alain Wanna, deputy general manager and head of group financial markets and institutions at Byblos Bank. “[Lebanese] banks will play a role, but the funding for the infrastructure projects will come from outside of Lebanon, and it is very important that Lebanon receives new funding from outside. For the balance of payments, for currency reserves, [and] for stimulation of growth, it is very important that the money comes from outside the country, and comes at subsidized interest rates,” Wanna says.

financing ppp

He clarifies the expected division of labor between the external funders and the local commercial banks, saying, “International donors and funders will follow the projects [organized under CEDRE] very closely, and they have a key role in this. They will observe the bidding process, study the costing, and monitor the development of the projects. This is important to avoid any notion of corruption. Lebanese banks, within their available liquidity, will be involved with activities such as extending credit lines and providing financing deals to contractors and companies involved in the [infrastructure] projects.”

For Saad Azhari, chairman and general manager of BLOM Bank, Lebanese banks will have a definite role to play in PPP infrastructure projects but he says this must be put into perspective. “In Paris [at CEDRE] they were able to secure long-term financing for those projects. Long-term financing is coming from those specialized international institutions that can give those loans for 20, 25, and 30 years. This is provided.

“When those projects come to be executed, however, private sector involvement will be large. The role of the banks is in this area. The private sector will need [Letters of Credit and] open overdraft facilities, or they might need to get loans, for example for buying a piece of equipment or construction machinery with a three to four-year loan. Thus our role [as commercial lenders] will effectively be in supporting those who are going to execute the projects,” Azhari says, adding that local banks on one hand will benefit in this way from the CEDRE process and on the other hand will be able to ensure that local companies will have the ability to execute infrastructure projects under the plan.

Bank Audi also leaves no doubt that it is ready to be involved in the finance of PPP infrastructure projects in Lebanon, and that participation in the scheme is a no brainer for a large local bank. “Let me start by saying that we have participated in similar deals in other countries in the region. Why would we not be doing this in Lebanon?” Group Chief Strategy Officer Freddy Baz asks rhetorically. As he tells Executive, Bank Audi has already participated in infrastructure projects elsewhere in the Middle East, for “important projects involving electrical central plans, port facilities, etc.” While he refrains from going into greater details regarding these projects “for reasons of confidentiality,” he makes it clear that the bank would look at projects in Lebanon with both great interest and with the eye of a financier. “We will only be driven by financial considerations. We will be looking at the file [of infrastructure projects] as we do for any other corporate file and any other project financing file,” Baz explains.

“What we look at and stress-test and where we challenge our counterparties is the feasibility of the project, and the capacity of the project to generate the cash required for the project to reimburse itself [from operations and operating revenues],” he elaborates, emphasizing that this is not on the basis of any financial guarantees, as requisite as such are for completion of a financing arrangement. “We are never driven by guarantees on our loans even though these guarantees are essential and we never give final approval for a financing arrangement if the guarantees are not adequate. But this is the last part that we look at [in discussing the project],” says Baz.

He explains further that Bank Audi could either get involved directly in projects, by taking an equity stake, or less directly, through financing the contractor or the investor. This does not involve looking through the project list for something that might be to the bank’s taste, however. “We wait until the investor or the contractor comes [to us]. What is requested is for banks to be available and open,” Baz clarifies. He notes that today much confusion remains regarding the Capital Investment Plan espoused at CEDRE, and PPP projects and the PPP law, given that what was presented was a list of projects which the Lebanese government considered to be priorities and are assumed to be capable of generating profitability for the private sector.

The reckoning

From the perspective of FFA Private Bank, the issue of investments under the proposition set forth in the CEDRE conference involves a macro-economic risk for a GDP contraction in the coming few years, given that the Lebanese government’s promises of reform and deficit reduction require a totally new exertion of fiscal discipline. “Should we decide to abide by that discipline, it is likely to push 20 to 30 percent in the weakest segment of the population into deep poverty. This might be a cost that we would be socially unable to bear and that would come with its own social unrest,” warns Iyad Boustany, managing director and head of investment banking at FFA.

This could translate into one of three rather unsavory options, the first being eruption of heated social debates and top-down attempts to have the burden of the economic and administrative restructuring process be borne collectively—which probably would mean an unequal distribution of burdens from rich to poor. Another option—unwise from a banking perspective—would be if attempts were made to use banks as the donkeys for carrying the cost burden related to reforms. This, says Boustany, could happen under a mistaken presumption that banks were the main financial beneficiaries of the past period when fiscal discipline was lacking, with the consequence of society saying that banks should write-off 20 or 30 percent of the Lebanese government’s debt. The third alternative, of not initiating reforms and trying to continue with the unsustainable pre-CEDRE status quo, would be no solution at all. Thus, a period of reckoning, in Boustany’s view, is very likely as result of the fact that Lebanon has been living above its means for a very long time.

To tap into the economic saving potential of infrastructure investment flows and PPP projects, it would, according to FFA Private Bank, be prudent to broaden and deepen the direct flow of investments of all sizes from the Lebanese population and the diaspora. Banks, which have barriers against participation in PPP finance because of the long tenors—infrastructure projects typically require financing for durations upward of seven, 10, or more years—should be disintermediated from the process of direct infrastructure finance, i.e., the middle man should be removed when it comes to financing these projects.

“We are very strongly advocating something that the government should be advocating, [namely] a totally disintermediated, capital market driven infrastructure financing. [This route] could achieve several benefits in one strike, one of them being that it would give small investors equal investment opportunity, something that the World Bank is very vocal about,” Boustany proposes.

Transparency and ppp

He acknowledges that moving to such a model would imply a total shift in the prevailing economic model of Lebanon, away from issuances of debt instruments that channel income to banks and a minimal privileged strata of society. Boustany argues that the present time would be the right moment to change the business model that the Lebanese economy has been operating for three decades and switch to a model where that the vast majority of the people—who have been paying for the party that others were having for the past 20 years—will be enabled to participate and profit directly from buying infrastructure finance instruments with diversified risk profiles and yields.

This, by his reasoning, would also act as support factor in the fight against corruption as people with stakes in project bonds etc. will have incentives to demand greater transparency and improved governance from infrastructure project managers. Despite imperfections, the new PPP law, according to Boustany, supports the development of transparency and governance. 

According to him FFA Private Bank would seek to play a role in promoting investments in infrastructure PPP projects that are carried out through capital markets instruments with ticket sizes that are as small as possible. He says: “We are positioning ourselves toward very strongly advocating the disintermediated model of public finance and PPP financing, creating all the elements and using all the existing tools in order to give life to this model, which we believe for the time being to be the only one viable for channeling vast needed funds into infrastructure projects.”

Open and equal investment

“Money is available in Lebanon. All that is needed is to agree on an arrangement that isn’t one where the [elites] take most of profit and throw a few morsels to the people. [This means that] we have to ensure that all projects will be open to wide and equal investment to the general public, not just the more questionable ones while the political establishment picks and chooses [profitable projects] for themselves. Everybody needs to be provided the legal ability to access and finance projects, whether they look difficult or promising,” Boustany asserts.

Whereas the disintermediated capital markets strategy advocated by FFA would with high probability run against the current interests of many financial players in Lebanon, the viewpoints of other bankers focus on highlighting areas where disruptive market impulses and established models can mesh. Bank Saradar’s Head of Strategy Sami Abou Jouma seeks to balance the reward expectations and risk potentials that relate to the CEDRE scheme. “Implementation of the agreements in the CEDRE initiative will change the equation in the Lebanese market in a positive way, whether in terms of liquidity, corporate lending, or project finance. PPP projects with support from multilateral institutions and international donors will have a spillover effect on the Lebanese economy, and local banks, especially the big banks, will have a role to play in the financing of the wider ecosystem created by PPP [projects], but it is difficult to say today at which level and in which form and amounts,” he explains.

“The three elements needed for the success of the CEDRE concept and PPP are fulfillment of the right reforms, the right governance framework, and the putting in place of checks and balances. If these three things happen, then I think, yes, PPP will be very positive news for the Lebanese economy,” he concludes.

BLOM’s Azhari, who by his own characterization is a perennial optimist, believes that the impact of CEDRE will be reflected in the national GDP and that the country could see a return to growth rates from the strongest upward periods of post-war Lebanon. He concedes that it is currently difficult to anticipate the GDP impacts of different PPP infrastructure projects or the multiplier effect of inflows expected under CEDRE. He would not join speculations, put forward by some in the financial industry, about rates of increase in the lending activity of banks, though he asserted the view that “overall, the impact is definitely going to be positive and the GDP growth is going to be larger than the amounts that are being received.”

Coming to the provisional bottom line on the views and approaches of top bankers in Lebanon (as far as those responsive to Executive) vis-à-vis the value proposition of infrastructure PPP financing, it emerges that a plurality and a possible majority are leaning to the optimistic point of view on CEDRE and the financing of PPP with participation by local banks. This is notwithstanding their awareness that the prospects of the whole endeavor are yet only visible as if through a murky glass. 

As Audi’s Baz views the many vagaries of prospects for anything from deficit reduction to reforms and finance for investments and PPP, he notes, “Markets are tolerant. They do not need ultimate solutions; they need signals that you are again on the right track.” He summarizes his personal outlook from a banker’s perspective by saying: “Our expectations [related to the new Parliament] are not very high but if all of what has been talked about at CEDRE and in the last Councils of Ministers [meetings of the previous government], 50 percent is achieved, it will in my opinion be more than enough to provide sustainability and stability again in the country.”

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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