Home Economics & PolicyAnalysis Of elephants and hot potatoes

Of elephants and hot potatoes

A reshuffle of state-owned enterprises and assets can harness economic viability

by Thomas Schellen

Lebanon is a wealthy country. In principle. It has all sorts of assets – land, water, industry, skilled workers and competitive professionals, a deep education system, touristic and cultural treasures, seasonal agricultural outputs and the related agro-industry, and so forth. Some of the country’s assets are well known to the point of hyperbole, such as the trade-link location at the crossroads of cultures and the marvelously sized external economic network of expatriates. 

Beyond – for a small country sizeable – their number and complexity, Lebanon’s assets have stories that are as disturbing as they are particular. Some publicly controlled assets, for example in telecommunications, are more tangible and quantifiable than others but have underperformed under state tutelage. Other intangible ones, such as the culinary culture and the ability to attract visitors, have shown vacillating performances in reflection of regional and international factors. While the tale of domestic transportation assets has been dominated by informality and confusion over ownership and strategy. Some important human and natural assets could be newly commoditized, but possibly at costs to society that would negate any real benefit from doing so. Other publicly held assets, like electricity production (the default example), have been held captive to partisan interests which blocked their development. Some assets, such as water, have not only suffered decades of state tutelage and politically polluted management but also have barely been assessed in economic terms.

The societal value of the most notoriously unequal assets held in Lebanon, namely the financial assets, has been stifled. From state gold reserves to working people’s retirement savings, legal stipulations for a full generation have restricted the usage of such assets to the people’s disadvantage. Capital markets have been frozen dreams. While the concentration of private deposits and their deployment in unproductive investments, such as luxury real estate, has been allowed without significant attempts at putting them at least in part, to more productive or equitable use. All of this was happening for more than two decades before the crash of the economy. Since the onset of the currency crisis in late 2019, impairment of GDP has exacerbated the detriments that stem from extreme concentration of financial assets in the remaining (and very large) pockets of private wealth. 

In this landscape littered with politically stranded, abused, and underdeveloped assets amidst an encroaching swamp of poisonous inequality, nobody disputes that the land of the cedars is far less affluent than it was just two years ago. (No wonder: printing money and burning reserves on subsidies are two of several great recipes for financial mayhem that have recently been used to excess in the Lebanese fiscal and monetary kitchen.) 

Delivering another confirmation of this economic destruction, the World Bank on July 1 carved a depressing financial marker into its global totem pole of “country classifications” by Gross National Income (GNI). On the 2022 edition of this list, Lebanon is classified as a “lower-middle income country” in a politically correct lingo which encodes the country’s economic degradation in a catchy, albeit simplistic, term.  

“For the eleventh consecutive year, Lebanon’s real GDP per capita fell in 2021, and the country also experienced sharp exchange rate depreciation. Therefore, Lebanon, an upper-middle-income country for almost 25 years, now moves to the lower-middle income group,” notes the entry in the official World Bank Blog.

The downshift in Lebanon’s economic assessment comes with a number: $3,450 GNI per capita for 2021 as of a July 1, 2022 estimate. The year-on-year drop from $5,510 GNI per capita brought Lebanon below the institution’s upper/lower MIC dividing line of $4,255. However, the reclassification is that of a sub-tier: Lebanon is still part (and not near the bottom) of the middle-income countries (MIC) that comprise the bulk of countries in the World Bank’s taxonomy. Numbering well over 100, MICs are the home of more than two thirds of the global population and are sub-categorized according to GNI/capita as upper and lower MICs – in what miraculously turns out to be roughly even proportion. 

Long coming reminder of the need for action on assets

Casino du Liban is majority-owned by a government-controlled company, Intra Investment Company

This reclassification had been expected for more than a year. However helpful, meaningful, or counter-productive the classification may turn out to be, morphing the dry data into policy discourse as indicative of the self-identifications and behaviors of the country’s economic actors highlights our strategic question: how to make better use of Lebanon’s assets? 

Also, besides portraying the assets question as an emergency issue in the context of Lebanon’s needed economic rescue, the World Bank classification is an urgent reminder of the need for a new asset utilization strategy. Even more so considering the World Bank’s observation of 11 consecutive years of contractions in Lebanon’s real GDP.

Three elemental choices of a 21st century political economy are state control, regulated markets with a dominance of private firms, and a mixed economy where private and public interests are pursued through a combination of socialized public mandates and capitalist private ownership rights. Discussions to plot a course for publicly held assets, having been conducted against the background of Lebanon’s free-wheeling mercantile mindset and entrepreneurial zeal, have been tilted towards a system of private markets or a mixed economy solution. 

The default solution under the logic of markets is radical privatization of public assets. The radical opposite, massive nationalization and central planning of the economy, has profoundly lost its appeal during numerous such experiments. One solution, where state ownership of assets is maintained but elements of private enterprise are secured, is the proposition of the sovereign contracting out services through licensing, concessions, and royalty agreements. The licensees and concessioners pay upfront fees, royalties, and taxes during the life of their contracts. A similar and frequently chosen solution with elements of a mixed economy is corporatized state-owned enterprises (SOE), meaning SOEs that are operating according to the practical wisdom of governance, rooted in markets and competition. Finally, and in comparison with SOEs, is a public private partnership or PPP; a less state-affirming solution under the mixed economy model but with many existing sub-models, such as build-operate-transfer (BOT). 

Perspectives on the center-right side of the state-market equation  

As befitting a democracy, Lebanon has proponents of full privatization, fans of models that retain state ownership and advocates of PPPs. Private industry tends to be in the first camp. “I would go for full privatization of public services,” Salim Zenni, the president of the Association of Industrialists, tells Executive. 

To Zenni, the highest plateaus of local efficiency are scaled by the achievements made in the private sector. “I would like to privatize because of the inefficiency of the public sector in Lebanon. [This inefficiency] is so endemic that there is no way for [any sector] to be profitable if it is not run by the private sector,” he reasons. 

Having encountered too many needless costs, their optimization would be a much-needed benefit of privatization of state services for industrial companies, he adds, referring to high public sector fees for conducting trade through Lebanese ports as an example. “In both imports and exports, industrialists are invoiced for services that are not needed. Compared to the quality of these services, both are overpriced,” he complains.

Industrialists have for many years been facing issues with infrastructure, communication, and the supply of electricity, along with absence of state policies. Yet, Zenni says, they have not been deterred, adding that state involvement is not helpful even if it was coming through protectionist measures. “We industrialists have the capacity and capability of competing and this has shown in the past two to three years. What is needed at this stage is to bring down the industrialists’ cost, so that they can compete locally and internationally.”

Khaled Zeidan, an experienced investor and banker, acknowledges that privatization is a contentious issue in Lebanon, but attributes this to misconceptions circulating in the country before the adoption of a privatization law 22 years ago, during the term of Prime Minister Rafik Hariri. “People say no [to privatization] without understanding what they are rejecting,” he says. 

In his view, the privatization law of 2000 has been structured in a good way. The work of the Higher Council for Privatization (HCP, later augmented to include a mandate for public-private-partnerships) since that time has likewise been organized well, he says, and widespread arguments over privatization today are driven by the same mentalities as they were then. “In my opinion, you have those who understand the real value proposition for the country – but [for whom privatization] is in contradiction to their own objective of clientelism and nepotism,” Zeidan argues, who is the chairman and general manager of Beirut-based financial advisory firm Capital EE.  

“Then there are those that are being fed leftist point of views through the media. Why are we suddenly no longer in favor of a clear, transparent process? You sell 49 percent [of a publicly held asset] to investors and retain majority ownership by the state. You sell according to specific rules and regulations and use a process that is managed by an international investment bank or similar. I think simply that there has been a huge amount of misinformation that has trickled into the consciousness of the general public.”

For academic and businessman Fouad Zmokhol, the best path to be trodden under the current circumstances is the one of private sector involvement, in which state ownership of a public asset remains intact. “Personally, I am in favor of BOT, because BOT will keep ownership of the state. It can give the private partner 15 or 20 years but will revert to the state after,” he says, adding wistfully: “And one hopes that by then, a lot will have been achieved and the state will have been improved.”

However, Zmokhol, who wears two hats as dean of the faculty of business administration and management at the University of Saint Joseph (USJ) and as President of the Association of Lebanese Business People in the World (RDCL World), cautions that there are two main issues standing as obstacles to privatization, PPPs, or BOT projects. 

Firstly, any investor into the Lebanese market today would not look so much at a project’s promise of return and its intrinsic risks but examine the worst-case scenario. This is based on the knowledge that an investment in Lebanon can be lost; not over bad investment strategies or wrong management but because of sovereign and political risk. 

According to Zmokhol, assessments of project risks are made worse by the chaotic state of the judicial system. An additional factor against investor involvement is the current inability to predict rational return expectations considering the country’s currency instability and competing parallel currency rates. 

“Given these two main issues, I do not see any investment appetite in the short term. But things can be different after financial rates return,” he says, before elaborating that the third risk factor is the political reality of Lebanon. Since the end of the civil war in the 1990s, the state has been under the sway of a “gang”: people that were involved in the conflict and remain in power with no indication that they will ever relinquish it (as one can argue has been demonstrated in the latest elections and political “negotiations” thereafter). “Taking those three [barriers against investment] into account, I unfortunately don’t see any appetite to invest in the coming years,” Zmokhol repeats.  

Zeidan points out that Lebanon’s market economy has continued to function despite a three-year shrinkage of the economy, which in his view was substantial, but not as bad as presumed by international observers or as expressed in high-level economic ranking numbers. According to him, the bulk of the economy has moved into informality, the size of which institutions such as the World Bank cannot gauge. “The only problem now is to bring credit back, and how to do that. This to me is the biggest challenge. Deposits and Eurobond subscriptions were sources of inflows but both are no longer there. [Access to finance] has to be an essential component of any restructuring plan.” 

Besides great implications for the banking sector, such as the need to create specialized banks and also draw in international banking players, the finance aspect of any reform and rescue operation is crucial in matters of privatization, along with the activation of PPPs and SOEs as economic drivers. On the other hand, according to Zeidan, local banks would not contribute to the sale or activation of public assets as lead investors, given that investment needs of large projects would be beyond their means. Instead, they would likely be constrained to roles of conduits. 

“If for example [a globally active investment bank] would decide to be involved in the financing of an oil block exploration, specialized funds and regional players would want to get involved, and most probably also some Lebanese banks that take small stakes in a syndicated arrangement,” he says. “To act as agents in PPP and SOE projects you do not need commercial banks but solid, specialized investment and specialized banks across the country. [For this] we need to build new pockets of funding, which were previously ignored.” 

Nuances to boot

Lebanon’s government holds a monopoly over tobacco industry

Within their views that can safely be seen as residing on the center-right side of the socialist-capitalist balance in matters of society and state, the three experts discuss the vast complex of privatization, SOEs, and PPPs in nuanced ways. 

Zenni for example shows himself convinced that investments into telecommunications assets (see special report of May 2022) would not only be suitable for large, internationally active operating groups as strategic partners. “The big players will come, and it will be difficult to compete against them [for winning any telco tenders],” he concedes. However, he emphasizes that open competition on tenders and not political stipulations under joint ventures should involve local shareholders. “We as Lebanese companies are all over the world, having acquired telecom licenses and operating networks. Why should we not be capable of doing that in Lebanon?” 

Albeit Zenni’s acceptance list of solutions for the improvement of public services in Lebanon starts with full privatization, it does not end there. “My opinion: go private, but if the decision is not to go private, PPP is 100 percent better than public [ownership and operation]. [Going] private is better than PPP and PPP is better than public,” he elaborates. On the issue of capital markets and listing of companies, he says that he recognizes the importance of a functioning local capital market, but would prefer listings on international securities exchanges over waiting for an opening of a real capital market for the local economy. “I will not sit doing nothing just waiting for the Lebanese capital market to open,” he says. 

Despite voicing serious doubts about the viability of continued operations of state-owned enterprises and sectors, and also about the possibility of attracting partners for PPPs, Zmokhol explains that from his perspective as a business leader, the situation of Lebanese enterprises and publicly held sectors requires “keeping the headline issues in mind,” while thinking as if there are partners interested to enter into projects like electricity generation. Even if those might be in the ideation phase and need further data requirements before concrete steps can be taken. “It is good to have a discussion over SOEs and develop new ideas, [but] implementation would involve many stages where you have to put at least some dates and a strategy, and guarantees,” he says.

“Noting that fundamental principles of PPP have evolved greatly, there is a lot of research that should be done from the academic side of the PPP proposition,” adding his perspective as an academic. “The law that we have on PPP is basic, and in my view was much more political than actively implemented. According to the research that was done at USJ, the [PPP] law leaves many questions on the issue of governance open. The main issues as far as doing academic research and policy research on PPP, would be governance, management, and [exit options],” Zmokhol opines.

Zeidan on his part puts emphasis on the view that in order to have viable concessions, operator contracts, or a PPP in projects – anywhere from new hydro-power and renewable energy to a port or running a casino – the structure of the project should initially be led by an international agency and also have a local partner as co-lead. In case of a listing, shares would have to be issued locally, he says. All this cannot proceed without a functioning and trustworthy financial sector. But it begins with adoption of a clear vision. “We need to reimagine the banking sector in a way that serves the economy which we want to build,” he advocates.

The mental picture that emerges is that of a never-ending political economy discourse overlaid with the surreal image of a very practical dilemma. In the latter regard, in one side of an imagined hall of resuscitation and new strategy for the economy, are the political, oligarchic, and other, elephants, all with their history of self-interests and narrow group interests which have been pursued at the expense of public interest. On the other side of the same hall, resides a pit full of very hot PPP, SOE, and privatization corporate potatoes which are all different: assets that can deliver benefits to society but need management, governance, regulation, mindset, money and activation. 

Some economists believe Middle East Airlines, Lebanon’s national carrier, should be transferred into the private sector

The barriers against the latter are humongous: barriers that are financial, and barriers that are structural because even the existing SOEs are not transparent and do not have a culture of efficiency and productive collaboration. Add to that the voids in regulation, legislation, oversight, judicial processes and institutions, plus the absence of infrastructure and basic supplies, which PPPs and SOEs would need and that privatized companies also could not do without. 

The elephants, however, are part of the polity, and they need to be brought into productive political order, while the hot potatoes need working solutions: the sooner, the better.

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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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