How to Attract Massive Foreign Investments to Lebanese

How to Attract Massive Foreign Investments to Lebanese Infrastructure Projects Presented by Mr. Jean Riachi Chairman and Chief Executive Officer, FFA Private Bank Lebanon Investment in Infrastructure Conference March 6, 2018

Conundrum v Lebanon needs money to finance PPP. v Lebanon has limited available liquidity in its banking sector. v Lebanese government cannot take on more debt. v Lebanon needs foreign money to balance its deficits. In conclusion: Lebanon needs to raise Private and Fresh Money for PPP projects Attracting Foreign Investments to Finance Infrastructure Projects

Lebanon needs to raise private and fresh money Private and FDIs money require: 1. Attractive returns 2. Proper structuring and risk mitigation 3. Adequate governance/ transparent framework And result in: 4. Substantial benefits Attracting Foreign Investments to Finance Infrastructure Projects 3

Lebanon needs to raise private and fresh money Private and FDIs money require: 1. Attractive returns Achieved through: v Structuring & tranching 2. Proper structuring and risk mitigation 3. Adequate governance/ transparent framework v Favorable tax treatment v Optimal operation and maintenance expenses And result in: 4. Substantial benefits Attracting Foreign Investments to Finance Infrastructure Projects 4

Lebanon needs to raise private and fresh money Private and FDIs money require: 1. Attractive returns 2. Proper structuring and risk mitigation 3. Adequate governance/ transparent framework And result in: Achieved through: v Ring fencing of the assets away from any claim of any party v Segregation of ownership and operation v Bankruptcy remoteness v Swift ‘out of court’ enforcement process 4. Substantial benefits Attracting Foreign Investments to Finance Infrastructure Projects 5

Lebanon needs to raise private and fresh money Private and FDIs money require: 1. Attractive returns 2. Proper structuring and risk mitigation 3. Adequate governance/ transparent framework And result in: 4. Substantial benefits Achieved through: v Using properly structured SPVs under Lebanese law v “Auto pilot” administration of the assets (gestion liee) v No conflict of interest between owner, operator and contractor v Reporting obligations to investors required by law Attracting Foreign Investments to Finance Infrastructure Projects 6

Lebanon needs to raise private and fresh money Private and FDIs money require: 1. Attractive returns 2. Proper structuring and risk mitigation 3. Adequate governance/ transparent framework And result in: 4. Substantial benefits v Enabling the local banks to participate in long-term financing as it is a marketable security v Ensuring equal investment opportunity to local constituents (the Lebanese population at large) v Attractive to diaspora as the securities channeling the investment to Lebanon are euroclearable v Waiving the “suspicions of corruption” because investment opportunity is open to the public v Ensuring the continuity of the “public service” even in case of litigation or disagreement with operator v Reverting to structured finance to finance PPP in Lebanon is in line with PPP law #48 dated 07/09/2017 as it is enshrined in the law under article 16 Attracting Foreign Investments to Finance Infrastructure Projects 7

Appendix Attracting Foreign Investments to Finance Infrastructure Projects 8

Ballooning Government debt, significant budget deficits and limited resources Gross Government Debt, as % of GDP 160% Government Structural Balance, as % of GDP 2014 2015 2016 e 2017 e 2018 e -10% 150% -15% 140% 130% 2014 2015 2016 e 2017 e 2018 e -20% Source: IMF, World Economic Outlook Database Attracting Foreign Investments to Finance Infrastructure Projects 9

Lack of investment in infrastructure/ Poor quality of infrastructure Current, Capital Expenditures as % of Total Expenditures FDIs concentrated in few sectors and vulnerable to developments in neighboring countries Inward Investment in Lebanon by Sector from Jan 2003 to May 2015 Textiles 1% Business Services 2% Leisure & Environment 2% 100% 80% 60% 40% 20% 0% Transportation 1% Others 5% Communications 2% Metals 2% Financial Services 3% Chemicals 2014 Current Expenditures 2015 2016 Real Estate 48% Hotels & Tourism 31% Other Expenditures Capital Expenditures Source: Ministry of Finance Source: FDI Intelligence, 2015 Attracting Foreign Investments to Finance Infrastructure Projects 10

Decreasing capital inflows amid rising political/economic uncertainty and challenging conditions in neighboring countries Resident and Non-Resident Private Sector Deposits Growth, % 140% 120% 100% 80% 60% 40% 20% 0% 1990 1995 2000 2005 2010 2015 Source: Banque du Liban Attracting Foreign Investments to Finance Infrastructure Projects 11

1 Topic “SPVs” under Lebanese law 2 Equal investment opportunity 3 Maturity mismatching and liquidity General Comment To qualify as a Special Purpose Entity for the purpose of structured financing PPP, the vehicle has to be constrained in its purpose and limitation of scope Allow the general public to invest in and benefit from the PPP/privatized assets Law 705/2005 Law 520/1996 Achievable through Law Possible but with high 705/2005 more specifically degree of structuring as indicated in articles 12 and complexity under and 16 of the law 705/2005 law 520/1996 Achievable through Law 705/2005 more specifically as indicated in articles 13, 14 and 15 of the law 705/2005 PPP projects usually Banks could invest because require long term the instrument is tradable investments. Banks as per article 4 and 11 of cannot be stuck with law 705/2005 long term (30 years) bilateral loans Code of Commerce Not achievable under code of commerce entities. It is very difficult in civil law countries to achieve SPV status using a corporate format under Code of Commerce similar to what is known as “orphan subsidiary” in common law countries Achievable but more Complicated as it impacts complicated under law governance: voting rights, minority 520/1996 rights, assemblies, Board, etc. International listing and trading more difficult to achieve Banks could invest because the instrument is tradable but limited is tradable to 3 xcapital and carrying substantial operating, credit and governance risk Attracting Foreign Investments to Finance Infrastructure Projects 12

4 Topic Fiscal efficiency 5 Bankruptcy remoteness General Comment Law 705/2005 Law 520/1996 Fiscal neutrality concept as Fiscal efficiency detailed in article 41 of law concept as detailed in 705/2005 article 18 of law 520/1996 The concept of Provided in article 3 of law Implied in article 10 bankruptcy 705 and 11 of law 520 remoteness is a word of art 6 Ring fencing of Protecting the assets from the reach of any party Provided in article 7. b of law 705 Implied in law 520 7 Asset Best practice and segregation efficient governance between tool owner/operator Provided in article 12. 2 of law 705 N/A Code of Commerce Subject to existing fiscal pressure Not available and not possible except with very complicated structuring features to create an “orphan subsidiary” in civil law Attracting Foreign Investments to Finance Infrastructure Projects 13

8 9 10 Topic Law 705/2005 Law 520/1996 Code of Commerce Attractive investment to Very attractive because: ring fenced, Attractive because: ring fenced, Not attractive because: not ring diaspora bankruptcy remote, fiscally efficient, bankruptcy remote, fiscally fenced, not bankruptcy remote, not marketable security, euroclearable efficient, marketable security, fiscally efficient euroclearable (but more complex) and limited in volume Enforced governance Commends corporate governance by Commends corporate Does not improve corporate across the life of the design because it is structured governance by design because it governance financing segregating asset owner from asset is structured segregating asset manager and the other features owner from asset manager and including the cash trapping, the other features including the waterfall, the covenants, etc… cash trapping, the waterfall, the covenants, etc… Corruption Silences any accusation -or suspicion - of corruption by allowing the general public to invest in instrument that are under a bank’s oversight/scrutiny Silences any accusation -or Does not silence any accusation -or suspicion- of corruption by suspicion- of corruption because even allowing the general public to it allows the general public (which is invest in instrument that are very difficult as indicated above) the under a bank’s investment would not be under a oversight/scrutiny bank’s oversight/scrutiny Attracting Foreign Investments to Finance Infrastructure Projects 14

Topic 11 Continuity of the “public sector service” even in case of litigation or disagreement with operator Law 705/2005 Continuity of the “public sector service” is guaranteed through the segregation of ownership versus management even in case of litigation or disagreement with operator Law 520/1996 Part of a more complex structure Code of Commerce Disruption in “public sector service” as we have seen in the Telecom, Sukleen, etc…. . Out of court, straight forward enforcement process. Efficient and attractive to –and protective of- investors 13 PPP Law 48 Structures and tools are in line with the spirit and the text of the PPP law 48 as it is enshrined in the law and under article 16 14 Tailored instruments to Financing tailored to specific meet investors needs “pools” of investors (conventional/Islamic, high/Low risk, long/short maturities, fixed/floating rates, USD/LBP, etc……. ) Part of a more complex structure Court driven lengthy and costly enforcement process. Inefficient and not attractive to investors Corporate Structures ill adapted to PPP law and PPP requirements 12 Enforcement process Part of a more complex structure Attracting Foreign Investments to Finance Infrastructure Projects Financing “one size fits all” 15

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