Libyan Investment Authority: What’s Next?

As Libya’s National Transitional Council (NTC) begins to take over the reins of power in the country, attention is turning to a series of governance issues, and immediately, where the funds are to come for the stabilization and reconstruction of Libya’s infrastructure after months of conflict. With the Qadhafi regime entrenched and crumbling, the allegations of mismanagement of the nation’s sovereign wealth mounts. The TNC has launched an investigation examining possible corruption associated with the management of the Libyan Investment Authority (LIA).

Beyond cleaning up LIA, the international community grapples with other straightforward questions, as the debate in the UN Security Council over the release of US$1.5 billion indicates. Only some days ago, there was considerable uncertainty over who would have authority over the LIA. This question has troubled foreign supporters of the NTC, and questions of who can legitimately accept and invest funds have limited the unfreezing of Libya’s foreign assets. By the end of this week it becomes increasingly obvious that the NTC is beginning to set up its institutional capacity to establish that authority and become the first point of contact for the LIA. The next question is at what point the international community is going to completely lift the sanctions against LIA and other government institutions (leaving Qadhafi’s formal private wealth aside for the time being).

Once there is a government authority and the funds of the LIA (and the central bank) are “unfrozen”, there are a number of scenarios for the future of the LIA that could emerge.

One, and probably the worst outcome, could be that LIA might be simply looted. All different stakeholders ( tribes, clans, etc.) in the Libyan revolution might want to claim their share, either through participating long-term from oil and gas incomes, or short term through compensation provided through the LIA or perhaps the more liquid assets of the central bank. The NTC might be tempted to use this dynamic to strategically co-opt important parts of the Libyan political and societal spectrum and ensure its legitimacy beyond a transitional period. Further pressure on the LIA’s balance sheet might come from the international community, in particular from countries that have lent to the rebel forces taking the country’s financial and oil wealth as a collateral. Yet, we believe that foreign players might hold out for contracts, rather than necessarily loan repayments, but the range of interests could make it difficult to stabilize the country. This rush for the spoils could leave Libya’s assets seriously drained, and leave few funds for reinvestment. Moreover, it would undermine the creation of a sound fiscal framework for channeling future funds.

The second scenario differs from the first as it uses LIA’s funds in a more sophisticated way and turns financial assets into real assets in Libya, such as infrastructure. To some extent, rhetorically, the LIA was being used in part to this end in the past already during the Qadhafi regime, in so far as its investments abroad were in companies that could be interested in business opportunities in Libya. It is difficult to say how large Libya’s infrastructure needs are at present. Libya had a development plan to attract hundreds of billions of dollars before the uprising. These development plans would have to be revised in light of the past months which saw the destruction of much of Libya’s infrastructure, but also in light of the economic priorities of any incoming governments. With six million people Libya is not a huge country in terms of population; therefore infrastructure spending might not reach the levels of more populous GCC countries. Also, given the oil reserves of the country, we estimate that the international investor community is keen to provide project finance, accelerating inward investment. The risk of inflation and monetary mis-management is imminent and will represent a major challenge for the NTC and any government that assumes responsibility thereafter. At present the government has negligible debt either in bank loans or in sovereign bonds, so there is space to raise more capital. However, the NTC would have to choose their partners and the terms of the loans wisely.

Also, there is room for Libyan authorities to reconsider LIA’s and more broadly Libya’s strategic asset allocation, with the objectives to diversify assets. This suggests that investments in domestic infrastructure should be complemented by more strategically positioned foreign acquisitions. Combining direct investments with technology transfers, like other development funds of the GCC have demonstrated, might become a considerable value proposition. Again, this second scenario faces the risk that the aspirations of the different political and societal factions within Libya could further complicate the LIA’s investment objectives and keep it beholden to different leaders.

The third scenario is one whereby the task of any transitional government would be to more or less preserve the current value of the LIA, and leave it to any legitimate incoming government to decide about how LIA’s funds should be allocated. In the end, setting up the LIA and put some money aside for long-term savings was not a bad idea at all. Preserving the current value of the LIA probably means to simplify its asset allocation in line with Libya’s fund management capacity. The two documents about LIA’s books published by Global Witness detailing the portfolio as of June and September 2010, created a lot of noise in the public about the abilities of external fund managers. However, this is not to say that the Libyan authorities should necessarily try to take all management in-house, many SWFs begin with a greater share of the portfolio managed externally, gradually bringing more management internally. Should the transitional government not have the capacity to manage LIA’s funds, it should nevertheless work with an experienced and legitimate fund manager. In selecting such a manager, the representatives of the International Forum for SWFs come to mind as being able to provide trusted advice, as do the World Bank or the IMF, who could share some of the lessons learned from other SWFs. A permanent government should then make sure that the LIA is modeled on the basis of SWF best practice governance, transparency, accountability, etc. Moreover, it should be embedded in a transparent accountable fiscal framework.

Probably the most likely outcome for LIA will be that all three scenarios will play out in the coming 12 months in one way or the other. Any incoming government will not be able to stem against the claims of the Libyan population to be compensated for over forty years under the Qadhafi regime and some transfers will need to be made. Infrastructure investments will be necessary to rebuild. Yet, the idea of long-term saving might also stick around, particularly if the global outlook and that for oil demand remains uncertain. To be sure, any fast decision on the LIA, or its use in potential retribution other than agreeing to ensure preserving LIA’s current value, is likely to be a sub-optimal decision for the Libyan people as a whole. The risk is that it is too tempting for the various political players to claim their rewards. Doing so might leave Libya without the cushion it needs.