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The murky waters of the Libyan Investment Authority

The Libyan Investment Authority (LIA) is the sovereign wealth fund (SWF) of Libya. In other words, it is a state-owned institute that is responsible for the proper investment management of Libya’s mounting oil revenue surpluses (any revenue in excess of the subscribed annual fiscal budget for the Libyan Government). According to the official website of the LIA, the fund was established by a General Peoples Committee Decree in December 2006 to “protect and develop the value of Libya’s oil revenue reserves and to diversify the sources of national income away from the dependence on these.”

The Libyan Investment Authority’s main investment classes can be divided into the following: Cash and Certificates of deposits, subsidiary companies owned by the LIA, Equities, alternatives (mainly derivative securities), and bonds including US Treasury securities. As I am writing these research results, I am hardly referring to a source from the LIA’s website, which by the way has been permanently “under construction” since the fund’s inception date in 2006. Most information from the LIA may be found by a simple Google search about the Libyan Investment Authority. Once you’ve done that you will find a bunch of articles from the Financial Times, the Washington Post, the Wall Street Journal, and other research papers made in this regards. If this is telling you anything, then first thing that must come ashore is “no information transparency at all”. Arguably, the last management report to be openly and publicly shared by the LIA was sometime in 2010. That’s about three years ago now.

So why are there such vague and dubious dealings that have almost always been surrounding the LIA? Apparently, after the revolution that toppled the previous dictator, an investigation conducted by Mr. Mahmoud Badi (who was appointed to investigate the LIA’s investment management procedures and dealings by Ali Tarhouni, former Finance Minister in the direct after-math of Libya’s liberation from Qaddafi’s despotic rule) in August 2011 found “misappropriation, misuse, and misconduct of funds” with a staggering amount of $2.9 billion missing from the LIA, without having anyone, as of the moment held accountable for that fiasco. Moreover, Investment banks, Goldman Sachs and Societe Generale, managed to evasively lose $1.7 billion when the two banks, ostensibly invested all the money in derivative securities in 2008, and ended up losing 98%. Derivatives have been infamously quoted by self-made billionaire investor Warren Buffett as “Weapons of Mass Destruction”, due in large part to their hidden tail risk. In, simple words, the use of derivatives may well result in large losses because of the use of leverage (borrowing). Derivative instruments allow investors to earn large returns from small movements in the underlying asset’s price (whatever that asset might be). However, investors could lose large amounts if the price of the underlying asset moves against them significantly, which is exactly what happened in many instances during the 2008 financial crisis. Last year, LIA has requested compensation from both Goldman Sachs and Societe Generale for the losses. But, I certainly doubt they would get any. In other words, the LIA should have properly monitored and co-managed, wisely enough and with proper diversification the billions given out to the Investment banks, instead of foolishly and naively trusting the supposedly “savvy” investment reputation of both Goldman Sachs and Societe Generale. Again, still no-one, from LIA’s part has been held responsible for yet another investment debacle. Additionally, the dysfunction of LIA’s website furthers the argument that the current Libyan government still has done nothing to properly govern the LIA and to make the LIA properly disclose all information about its investment allocation policies and assets through a well-functioning website.

In addition, the Sovereign Wealth Fund Institute states that the LIA has some $65 billion in assets, and allocates the fund a Linaburg-Maduell Transparency Index (LMTI) (4th quarter of 2012) of 1 out of 10, the worst rating, along with Algeria, Brunei, Kiribati, Oman, Venezuela, Nigeria and Mauritania. The Linaburg-Maduell Transparency Index was developed at the Sovereign Wealth Fund Institute (SWF Institute) by Carl Linaburg and Michael Maduell. According to the SWF Institute, “the Linaburg-Maduell transparency index is a method of rating transparency in respect to sovereign wealth funds.” The index is based off ten essential principles that depict sovereign wealth fund transparency to the public (SWF Institute).
According to the Linaburg-Maduell Transparency Index, the following are the ten essential principles with which the LIA has to comply to improve its transparency to the Libyan peoples, first and foremost:

Linaburg-Maduell Index

As you can see, each of the ten essential principles is allocated a score of 1, making the best attainable score a 10, and the least (or worst) possible score a 1. If you analyze and read carefully, you can notice that the LIA complies (partially and not fully) with only one essential principle, which is the first one: “Fund provides history including reason for creation, origins of wealth, and government ownership structure”. One might counter-argue that the LIA is in fact complying with a second LMTI essential principle, which is: “Fund provides main office location and contact information such as telephone and fax.” Not that I have found in of that on LIA’s website. Otherwise, there is absolutely nothing that can support or render the LIA’s transparency more viable.
The issue of information transparency from the LIA is wide open, and answers, improvements, and governance measures are still awaited from the Libyan government. If the LIA still manages to run the fund, without proper governance and with measures that rather further suggest corruption, day-light robbery, and complete mismanagement, then I certainly do not see what use is the LIA for the Libyan people, first and foremost.
I have been researching what the LIA owns in terms of assets (mostly in securities) and will share my findings in future posts as soon as I come up with a trustworthy piece of material to that regard.

About Libyan Analysis (http://libyananalysis.com):

Dear Visitor,

It is with great pleasure that I welcome you to my think-station, Libyan Analysis.

Throughout my think journey, I have come to realize that creating a personal blog should be the most viable solution for any one to express his/her ideas freely, free from censorship and free from fees! (as long as you are taking advantage of blogger’s domain name!).

First and foremost, Libyan Analysis represents my station of free thought and analysis about Libya. You will find posts that analyze various subjects about my home country Libya, from the Libyan Economy, to Libyan Politics, to Libyan Society and Sports.

I am also enthralled to share with you my published Sports articles on the Libya Herald Newspaper. Please feel free to visit http://www.libyaherald.com and type “Mohamed Assed” in the search engine that appears on the top-right corner of the website.

In the hope of enjoying the readings and making the most of the analysis and the ideas I wish to express to you, I will always do my best to produce informative and beneficial material for the sakes of Libya.

Concluding, if you are a Libyan and love Libya, please do your part in being productive for your country and try to forget that Libya has something called “Oil”. Sooner or later, oil resources will vanish. For the sake of the children and grandchildren who will someday inherit our country, do your part in educating yourself and everyone you can reach out for about the urgence of this issue.

Truly Yours,

Mohamed Assed

 

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