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What Lebanon can learn from oil-rich states.

Summary: It might seem unusually early in the game to start talking about how to manage Lebanon's oil and gas wealth through a national sovereign wealth fund, given that there has still been no actual discovery of the resource, and any production would take at least five years to start.

BEIRUT: It might seem unusually early in the game to start talking about how to manage Lebanon's oil and gas wealth through a national sovereign wealth fund, given that there has still been no actual discovery of the resource, and any production would take at least five years to start. But experts believe the earlier they begin planning for Lebanon's potential energy revenues, the better off the country will be with managing the resource.

"Look at international experience and tailor-make the Lebanese solution to fit the needs of Lebanon. That's where you start," says Tonje P. Gormley, an attorney at the corporate law firm Antzen de Besche in Norway, the country with the world's largest sovereign wealth fund.

Norway's fund has $998.93 billion in assets under management.

Abu Dhabi has the second-largest fund, with $828 billion.

Gormley has been traveling to Lebanon since 2013, participating in panels on energy governance and sovereign wealth.

"That's the first main question: How do you establish this account? In Norway, we have our account through the central bank. In Alaska, it goes into a trust fund. Other countries have separate accounts offshore," Gormley explains, adding that these countries need to make the decision on where accounts should be.

"Should it be through the central bank or a segregated account somewhere else, held by the Treasury? Should you have it offshore, abroad or in domestic institutions? It depends on competence. The main aim would be to keep the money safe," she adds.

Indeed, the Norwegian model, with its focus on transparency and accountability, clear divisions of roles and responsibilities, operational independence in the fund's management, and its conservative approach of going through its central bank, appears to be the type of sovereign wealth fund preferred by Lebanon, as the nascent oil-producing country lays the initial groundwork for a potential new national financial institution and untapped resource.

Additionally, Lebanon will be looking at other countries' experiences for the types of spending and investments that they make with their energy revenue.

Abu Dhabi's fund, Mubadala, has a policy of only making investments abroad -- a way to diversify investments and keep a stable fund in a volatile region, and prepare for a day when the fund can sustain itself without oil revenues.

"When there are no more natural resources, there are still investments, and that's what Abu Dhabi has done," says Celeste Lo Turco, vice president of corporate strategy at Future Holding UAE. "Lebanon can diversify. When in the future they don't have natural resources, they'll still have good investments."

She adds: "Lebanon can invest abroad to stabilize the economy for future generations, and it can have a development mandate for the national economy. It doesn't have to be one or the other. They can invest both at home and abroad."

The discussion of sovereign wealth is a relatively new conversation in Lebanon.

However, the concept dates back more than a century, when newly wealthy resource-rich countries and areas wanted to sustainably manage the revenues from their newfound resource wealth.

These state-owned investment funds tend to be initiated and sustained through revenues of a national commodity, such as oil and gas, and also largely maintained through various financial investments.

Among the earliest and most successful examples is a fund for education in Texas started in the 1850s, and much more recently, large-scale infrastructure projects supported by funds in the Gulf.

The importance of a country's sovereign wealth fund generally depends on its size and role.

Although any potential Lebanese fund would be far smaller than those of the big oil states, its role could be important, as some experts see this as an opportunity to develop a trustworthy and transparent sector.

"We need to make sure the rules are clear. That's important to the success of the fund," says energy expert Laury Haytayan, MENA regional program manager and senior officer at the Natural Resource Governance Institute, whose primary concerns for Lebanon's potential sovereign wealth fund are transparency and good governance.

She cites Norway as the best example to emulate, while Libya is one to avoid. The former is the highest-rated for transparency by the Sovereign Wealth Fund Institute, a U.S.-based data analysis corporation that ranks funds based on various criteria. Libya is at the bottom of the ratings.

In other cases, such as Kuwait, sovereign wealth funds have lost money due to bad investments, a sign that successfully managing oil wealth isn't a given, even for experienced oil-rich states.

"Lebanese authorities need to admit that they need to learn from other countries' sovereign wealth funds," says Haytayan, adding that "government, Parliament and CSO [civil society organizations] need to be exposed to other experiences; timing, function and governance of sovereign wealth funds are important considerations."

Moving forward, Lebanon will also likely be looking at the changing models of sovereign wealth fund investment strategies, which have become increasingly globalized and intertwined, with funds dabbling in riskier investments and some funds co-investing with other countries.

Ultimately, it will be up to Lebanon's decision-makers to determine how its sovereign wealth fund is structured and administered.

"The biggest mistake you could make is to copy-paste someone else's solutions," Gormley says.

"What can be a risk for Lebanon is the way you structure the establishment, and the rules for establishment and protocols. Either [the fund] isn't open enough, or they make complicated rules surrounding establishment or control, making them vulnerable to political deadlock."

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Publication:The Daily Star (Beirut, Lebanon)
Geographic Code:7LEBA
Date:Nov 21, 2017
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