Libya is a monkey box,” London-based financial adviser Mohammed Rashid told Bloomberg last August, using a local metaphor to describe a chaotic and unpredictable situation.
“You see the chairman of the National Council or whatever it’s called appearing on television wearing slippers and holding a Kalashnikov. They have no idea what they have, and what they have, they steal.”
Rashid, who advises Middle Eastern investors, was reported to have organised meetings between former British prime minister Tony Blair and Saif Al Islam Gaddafi, a son of the late Libyan dictator, in the 2000s when Blair had left office and was working for JP Morgan Chase’s investment banking unit, and Saif was helping to oversee the activities of the stricken nation’s sovereign wealth fund, the Libyan Investment Authority (LIA).
His damning proclamation of the state of Libya’s finances since the Arab Spring (and those that held the purse strings) is just one of the negative public perceptions that the LIA’s new chairman Hassan Bouhadi is working to overturn.
For decades under the destructive rule of colonel Muammar Gaddafi, the LIA was a conduit for Libya’s billions of dollars of oil revenues.
Yet few knew exactly where the money went and how much of it dripped into the pockets of those loyal to the Gaddafi regime. What is certain is that the estimated $67bn fund is failing to adequately shore up the Libyan economy and help to rebuild the country for future generations.
In an interview with Arabian Business, Bouhadi outlines his plans to restructure the ten-year-old LIA to improve governance and transparency, and to maximise investments so they can help reverse the fortunes of a country still mired in political and economic turmoil.
“The LIA has always been a big black hole,” he says. “The Libyan people have always asked, what’s in it for us? We [the LIA] are accountable to the Libyan people and it is up to us to make the right decisions.”
Bouhadi was appointed chairman of the LIA’s board of directors last October by the internationally recognised House of Representatives, based in the eastern city of Tobruk.
He is the third person to head the fund in as many years, after his predecessor Abdul Majeed Breish, appointed in 2013, stepped aside last year under Libya’s Political Isolation Law, designed to prevent those with ties to the Gaddafi regime from holding public office.
Breish was briefly succeeded by government minister Abdulrahman Benyezza, who became acting chairman between July and September 2014, but Bouhadi says he was voted in as a permanent replacement for Breish. Around this time, Islamist militants seized the LIA’s office in Tripoli, which Bouhadi says forced it to relocate to Malta where the chairman and his family are based.
Bouhadi was previously a member of the LIA’s board of directors as well as secretary of the board of trustees. During the Libyan Revolution, he coordinated humanitarian activities with international partners as part of the National Transitional Council (now the House of Representatives).
He was educated at University College London and Imperial College of Science and Technology and held several Middle East-based management positions within multinationals such as GE, Bechtel International and BASF.
Despite his credentials, his appointment was met with resistance by Benyezza and Breish, who is directing a legal challenge against the LIA claiming he was wrongly removed and should be reinstated as chairman.
Bouhadi insists the facts do not support Breish’s case; that Bouhadi was formally appointed by the legitimate board of directors and that, under constitutional law, Breish could have made representations to the LIA asking to be chairman but chose not to. His claim, says Bouhadi, “has no place within the LIA’s governance structure”.
In the meantime, as the country awaits the appointment of a democratic unity government, Bouhadi says he is pressing ahead with his plans for the LIA.
The fund was set up in 2006 to invest and diversify the country’s finances. The investment process started off promisingly. At the time of the LIA’s inception, Libya had accepted responsibility for the 1988 Lockerbie bombing and had agreed to pay $2.7bn in compensation to the victims. In return, the country was voted onto the United Nations Security Council in 2007, sanctions were lifted and foreign investors started doing business with Libya.
The LIA has since accumulated interests in major international corporates, including Pearson, GE, Vodafone, Unichem, Orange, Sony, Finmeccanica and Siemens, among others.
However, the fund soon ran into trouble. It lost billions in derivatives trades made through Goldman Sachs, Société Générale and others when the markets crashed in 2008 — the LIA is suing the two banks for hundreds of millions of pounds in cases set to be heard next year — and the fund was increasingly used as a vehicle for Gaddafi’s own interests. For example, in 2009, Gaddafi was appointed chairman of the African Union and a source reveals he agreed deals with various parties at the time “on pieces of paper or via handshakes, for which the LIA coughed up”.
Fortunately, by the time the Arab Spring broke out in 2011, Law Number 13 had been passed enshrining the LIA in the constitution of the elected House of Representatives, which prevents, claims Bouhadi, an illegitimate rival from wresting control of the fund. “The law sets a clear mandate for the LIA to maintain and grow the Libyan wealth for future generations,” he says.
After the revolution, there was an urgent need to compile a detailed list of the LIA’s assets, verify which were legitimate, then restructure the fund in a way that properly reflected its contents. No financial reports were compiled between 2008 and 2011, and the consolidated books of the LIA have never been disclosed, so the country is in the dark about much of what it owns. Deloitte was appointed in 2012 by the previous LIA leadership and began identifying, verifying and valuing investments.
Bouhadi’s board of directors received the report in 2013 and plans to publish it later this year. He declines to reveal specifics, saying: “This is something we wish to share in full with the Libyan people when we are ready.” However, he agrees to supply general information. Deloitte estimates the LIA’s total value is $67bn, making it the 22nd largest sovereign wealth fund in the world, according to the SWF Institute’s latest ranking.
The majority of the fund comprises a mix of direct equity investments, bonds, real estate, cash and cash equivalents (see table on page 23), but 40.9 percent of the LIA is made up of five subsidiaries, which between them hold 550 companies, some of which are owned outright; some through stakes. This is unusual for sovereign wealth funds, he says, which typically do not act as conglomerates but as fully invested trusts.
The first subsidiary is LAP (the Libyan African Portfolio), which Bouhadi says has significant investments across Africa in everything from telecoms and infrastructure to tourism and mining. It includes companies such as OiLibya, which has a network of 1,000 gas stations across Africa, and telecoms operator Lap Green.
The second is OilInvest, which invests in the hydrocarbons sector outside Libya, including in petrol pump suppliers and manufacturers, refineries, service companies and so on. The third is LAFICO (the Libyan Foreign Investment Company), where 50 percent of the share portfolio (Pearson, GE and so on) is held. These investments are run via agents such as HSBC, Arab Banking Corporation, British Arab Commercial Bank and others. The portfolios are “moderately cautious”, comparable to a fairly aggressive pension fund, Bouhadi says.
The LTP (Long Term Portfolio) comprises ten-to-15-year bonds intended to accrue for future generations in Libya. Finally, there is LLITF (the Libya Local Investment and Development Fund), which has around $6bn held in the Central Bank of Libya. It is a long-term fund intended to help rebuild the country’s infrastructure once a unity government is in place.
Specific GCC interests include 15 percent of First Energy Bank; “sizeable” investments and matured UAE bonds held by Arab Banking Corporation in Bahrain; a $100m stake in a Dubai-based private equity fund the LIA will not name; and a stake in a MENAdrill-owned company based in Bahrain. The headquarters of OiLibya and Lap Green are in Dubai.
However, Deloitte has assessed only 80 percent of the LIA’s assets, Bouhadi reveals. “The rest are smaller ones and they need more time to evaluate and verify them.” Is this because they represent complex, potentially corrupt investments made by the Gaddafi regime?
“It is not for me to say,” Bouhadi says. “Of course if there are indications of corruption following a forensic analysis, this will be highlighted.”
The LIA’s return on investment amounts to roughly 5-6 percent a year, Bouhadi says, but many of its assets have remained unmoved since the fund’s creation almost a decade ago because they were frozen by the UN in 2011 to protect the country’s wealth during the uprising. The Libyan government was given the chance to unfreeze them in 2012, but it took what Bouhadi says was “a wise decision given the political situation now, to keep them frozen until the country is ready”.
It is still not ready, he says, but this is frustrating for the LIA, as it cannot do anything productive with the returns it is making. If a bond matures, or an investment goes up, the coupon will sit in the bank accruing minimal interest — some of them are actually subject to negative interest, says Bouhadi — and the LIA will not be able to use that money. “This does not benefit the Libyan people or their wealth.”
Bouhadi is lobbying the UN for permission to actively manage assets without liquidating them. “We are embarking on a project where we are assessing the effects of the freeze on Libyan assets and seeking permission to ‘ringfence’ certain funds.
“Of course we understand the freeze helped protect Libyan assets, and my position is the country is not ready to unfreeze them. We hope it will be fairly soon. In the meantime we should be trying to actively manage them under the freeze.”
Another way in which Bouhadi is seeking to strengthen the LIA is through legal action to recoup funds it believes it is owed. There are four cases in Africa in which the LIA is arguing that countries took advantage of the political instability in Libya to nationalise LIA investments within their borders. The countries are Rwanda, Zambia, Chad and Niger. The disputes are either being pursued in the relevant country’s high court or subject to a dispute resolution programme, but Bouhadi will not disclose further details.
The Goldman Sachs and Société Générale cases — worth $1.2bn and $2.3bn respectively — are scheduled to be heard next September. It is alleged Goldman “deliberately exploited” its relationship with the LIA to make $350m in profits from a $1bn series of derivatives trades in 2008. The investments became practically worthless when the credit crunch hit later that year. The LIA claims Goldman executives bribed inexperienced officials and pocketed huge advisory fees, but Goldman argues the fund was aware the investments were risky.
Société Générale stands accused of paying $58m in bribes to Libyan officials to sugarcoat trades that lost the LIA hundreds of millions of dollars. Both banks reject the allegations and declined to comment when approached by Arabian Business. Bouhadi declines to comment when asked if the LIA should have been shrewder in recognising the risk attached to the investments.
The LIA is also bringing a case in the Netherlands against an investment agent called Palladyne International over an alleged $700m of assets. And it has been granted permission to appeal a case it lost in June against British investor Glenn Maud, who argued successfully that he does not have to repay a loan he received from the LIA amounting to $31m including interest, on the grounds that the sanctions regime effectively prevents Libya from seeking to recover unpaid debt.
Bouhadi is adamant the ruling must be challenged. “I will not go into our legal strategy, but really for Maud to use the sanctions on Libya to win his case; for the LIA not to get these assets back — this is something we do not accept. This is the wealth of the Libyan people and it has to come home.
“Some people are trying to take advantage of the transition process Libya is going through from a dictatorship regime to a civil democracy and instill doubt in others, and this is unfortunate. We feel the responsibility and accountability for protecting our situation.”
He admits there is a balance to be struck between forking out the fees to pursue legal action, and ensuring the LIA makes best use of its money. “Litigation was not our chosen route. This was the situation we found ourselves in and we are accountable to the Libyan people.
“We are analysing the cost and benefits of such decisions but we need to show that the LIA is taking all measures to protect its assets, because that is something we are mandated with and cannot be seen to be taking it for granted.”
An LIA spokeswoman says: “In many respects the most annoying element of the situation for Bouhadi and the board is false claims in international courts which are a significant distraction from the task in hand.”
Ultimately, Bouhadi’s mission is to restructure the LIA according to proposals by management consultancy Oliver Wyman to hand over a “world-class sovereign wealth fund to rival that of Iceland or Singapore”, he says.
Under his leadership, the LIA has already sought to increase transparency by launching social media accounts and publishing minutes of its board meetings. Under Oliver Wyman’s proposals, the LIA would be split into three funds: the Future Generation Fund, which would make investments to diversify the economy away from oil and gas; the Stabilisation Fund, intended to help the government tackle any deficit in the budget when the oil price drops, and the Local Domestic Fund, which already exists as the LLITF.
The Local Domestic Fund will play a major role in developing the Libyan economy in future, says Bouhadi. “One of the major challenges for Libya is that the Gaddafi regime destroyed the private sector. It lumped the Libyan workforce into the public sector, subsidised the population’s food, fuel, water and energy, and this was actually a way of holding them hostage to the regime. There was no incentive for them to start a business and they were not in control of their economic destiny.
“Education is a good example: [the authorities] neglected this. I remember in secondary school when the English language was abolished and we were told to mount all English books and set fire to them. I was 14 years old,” he says.
“But you can see the sadness of it because the Libyan workforce could not compete on the regional market. They lacked the education to go anywhere else to work and became even more hostage to the regime.
“So although they broke their chains politically in 2011, they still need to break their chains economically.”
The Local Domestic Fund will seek to tackle this by promoting and investing in the private sector, especially SMEs; improving education and other public services, and increasing foreign investment into Libya.
The intention was to restructure the LIA last May, but ongoing political instability has forced the LIA to postpone its plans until the political conflict is resolved and a unity government is appointed. The country is divided between Islamists in Tripoli and the House of Representatives in Tobruk.
Bouhadi is hopeful that at some point in the near future, the dreams of the Libyan people can be realised and peace and prosperity can return.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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