The extraordinary story of Libya’s overseas investments and seemingly endless battle over their control
Tim Eaton
PART (III)
Safeguarding a nation’s wealth
‘I took control under chaos’ said Ali Mahmoud when interviewed in January 2021. ‘I inherited a divided management and the LIA had lost control over many of its subsidiaries. There was a lack of information, no audit process and no risk management’.
Mahmoud said his plans for the near future include a programme of internal governance reform in coordination with Oliver Wyman, the conduct of valuation of LIA assets worldwide conducted by Deloitte, and an audit of LIA accounts conducted by EY. He also says a ‘mega-project’ will soon be initiated to consolidate financial statements for LIA funds and investment portfolios.
But despite clear goals, Mahmoud’s comments illustrate that almost ten years on from the ousting of Gaddafi, the LIA is still yet to adequately identify its assets and rationalize its management. The organization has now stated that, following the UK court decision in favour of Mahmoud, it can collect the requisite financial information from its subsidiaries and meet its financial reporting requirements.
But those with a close working knowledge of the LIA are sceptical whether this will happen to the desired standard. Ahmed Jehani says: ‘Although it was founded 14 years ago, the LIA has never published any consolidated accounts, audited or otherwise. There have been elements of the LIA that have produced accounts, but these are the exceptions.’
He argues this will undermine any auditing process as it is not the responsibility of the auditors to prepare accounts, and emphasizes the importance of establishing consolidated accounts which encompass all the LIA’s approximately 550 subsidiaries.
It also means any valuation of the assets made prior to that point could be fundamentally undermined. Abdulmagid Breish says it is relatively easy for the LIA to meet the standards in its own accounting but that the accounts of the subsidiaries need to move several levels up the scale in terms of accountancy practices for the LIA’s accounts to be properly consolidated.77
How much is the LIA worth?
Coming up with an accurate estimate of the value of the LIA is challenging for several reasons: firstly, the LIA does not possess ‘consolidated’ accounts for all of its subsidiaries. This means the value of these companies is in some cases stated as their original ‘book value’, i.e. the amount of investment placed in the company at the outset. This does not account for issues such as asset depreciation or appreciation.
Secondly, the interconnectedness of institutions makes it unclear who owns what. Many LIA entities are jointly financed by other Libyan state institutions. Oilinvest, for example, is jointly owned by LAFICO, the Libyan Foreign Bank (state-owned) and the Libyan National Oil Corporation. A significant sum of LIA cash – around $18 billion – is held at an account within the Central Bank of Libya, but the management of these funds is unclear. The LIA has also reportedly issued loans to a number of its subsidiaries and other state institutions.
Finally, the December 2020 decision to change the official exchange rate of the Libyan dinar to the US dollar
(from 1.4 LYD = 1 USD to 4.48 LYD = 1 USD) significantly affects the dollar valuation of LIA assets held in Libyan dinars. This is notably the case for the Libyan Local Investment and Development Fund, which had its approximate $8 billion of funding transferred into dinars.
Existing estimates of LIA assets seem to remain based on a $67 billion valuation in 2010. In 2016, the UN Panel of Experts concluded that frozen assets had declined in value from $65 billion to around $55-$60 billion. Experts interviewed for this paper projected the LIA’s subsidiaries had declined in value. They note that the historic book value for the subsidiaries ($24.5 billion) is outdated. A 2015 valuation by the Libyan Audit Bureau placed the value at $14.5 billion. The result is significant uncertainty. The LIA says it is soon to publicly release a valuation of its assets.
The next objective for the LIA is to seek amendments to the terms of the asset freeze. A report it commissioned announced in December 2020 that the LIA’s equity investments have underperformed market averages to the tune of $4.1bn since 2011. The LIA complains significant funds are being held in negative equity while investments in bonds that have matured are converted into cash without being reinvested.
The LIA says it is seeking ‘feasible ways to more actively manage’ its portfolio. Although not seeking the removal of the asset freeze, it has prepared a set of proposals to amend the freeze through the creation of a ‘special purpose facility’ under the management of a custodian institution – likely still to be subject to the oversight of the sanctions committee in some fashion. This, argues Mahmoud, would ensure the asset freeze serves its function of protecting, rather than punishing, the LIA and its assets.
But several former senior employees of the LIA have rejected any amendment of the asset freeze, with most suggesting it be strengthened instead. Such a view emphasis the need for the LIA governance to first be improved before the terms of the freeze be considered for change.
In lieu of a change to the asset freeze’s terms, there also remains the potential for the LIA and its subsidiaries to obtain licenses to operate in international jurisdictions. Ali Baruni rejects the argument that licences to operate existing holdings are too difficult to obtain – and in fact, a number of LIA subsidiaries have obtained licences to navigate the freeze such as FM Capital Partners in London.
Next comes the question of how the LIA should position itself for the future. Here, a root and branch reform of the LIA to steer it away from directly managing assets would be in keeping with the operations of other major sovereign wealth funds. Mohsen Derregia highlights the example of LAP Green Networks, where the LIA tried to run a complex telecommunications business in African countries when it could have subcontracted the task to an operator experienced in the sector. Similar examples include managing hotels in Tunisia and office buildings in London.
Among former employees of the LIA, there is a strong sense that the LIA should be an owner not a manager. Rather than being encumbered with the administrative challenges of operating 550 subsidiaries, it would be better served by placing its investments strategically with external fund managers, who can be held to clear performance targets and fired if they perform poorly. The LIA has proven it can do this – the Corinthia hotel chain is part-owned by the LIA but operated by a third-party. Breish says that a report he commissioned from Oliver Wyman in 2014 recommended liquidating 85 per cent of LIA assets.
Removing direct management of the subsidiaries would also reduce potential opportunities for corruption via dispensation of paid positions and contracts. There are various stories of LIA subsidiaries creating their own subsidiaries and refinancing that have not been substantiated. Derregia likens such a process to a ‘Russian doll effect’ because it can help sustain patronage networks.
At times of political upheaval, the cash of the LIA and its subsidiaries can be an enticing potential target for political interests. The dysfunction in Libya and the ongoing competition is so severe that Breish believes the LIA should be ‘totally wound down, [its assets] placed in a fund and accessed in 25 years’.
Regardless of the approach the LIA chooses for the management of its assets, a focus on returning to the strategic priorities outlined at its inception is certainly required – namely to invest the wealth of the Libyan people and to reduce its vulnerability to shifts in the global oil price and dependence on the oil sector. These remain priorities for the Libyan state.
The international community’s approach to freezing assets, developed in the early months of the 2011 uprising, has endured by default because the LIA has not been able to make the case for lifting the freeze. The international community has lessons to learn as illustrated by the inconsistencies in the application of the terms of the freeze and the lack of enforceability in some jurisdictions.
There is an opportunity for the UN Security Council to clarify its stance and remove inconsistencies that linger from previous resolutions over which entities should be affected and which should not. It should learn from the experience of the last decade to seek to close loopholes that have allowed funds to continue flowing to some parts of the LIA but not others, most notably its subsidiaries.
But amendments to the freeze should be contingent on the LIA first delivering on its stated aim of improving the governance and transparency of its holdings. If not, then states whose courtrooms have witnessed a raft of LIA-related litigation, should seek their own clarifications from the Sanctions Committee to reduce the potential for error and avoid any allegations of complicity being levelled at them.
Finally, the asset valuation currently being conducted for the LIA offers a valuable opportunity to bring some clarity and transparency to the fore. Presenting the findings of the assessment to the Libyan people to explain where their assets are being held and their value is a necessary first step in any reform process. The international community should encourage the public release of LIA financial information, especially with regard to subsidiaries operating within their jurisdictions.
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Tim Eaton is a senior research fellow with Chatham House’s MENA Programme. His research focuses on the political economy of the Libyan conflict. In 2018, he authored a report on the development of Libya’s war economy which illustrates how economic activities have become increasingly connected to violence.
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