Terrorism Risk & Mitigation Strategies
Terrorism Risks in Lebanon: Mitigation Techniques for Energy and other Investment Types
December 21, 2015
This article has been produced by the efforts of the following members:
I. Jamie Arabi – Leader of the Lebanon Risk Assessment Team
Edited by Hunter Norwick – Undergraduate Researcher
Keywords: Lebanon, political risk, ISIS, terrorist attack, FDI, portfolio investment, energy investment, Lebanese security
In November 2015, 43 innocents were killed in Southern Beirut, and approximately 240 were injured as a result of a double suicide bombing. To no one’s surprise, ISIS has claimed responsibility for the attack. Reading about such atrocities has nevertheless become a stultifying routine in the Middle East. For Lebanon, however, attacks of such calibre have become uncommon since the Civil War ended in 1990. Syria’s five-year civil war has only intermittently inflicted casualties to its eastern neighbour. Nevertheless, now that ISIS and al-Nusra have pledged to retaliate against the Army’s crackdown on jihadi cells, this relative peace may be short-lived.
This assessment will focus on two types of investors: foreign direct investment (FDI) and portfolio investments. Since FDI entails a controlling ownership of an entity in a foreign country, it requires managing day-to-day management and taking into consideration direct liabilities such as employees. Conversely, portfolio investments are typically passive ventures, meaning that they need not consider management activities, among other constraints. The obvious question on the minds of both categories of investors is this: Are the general security risks in Lebanon heightened as a consequence of the recent bombings? If so, are my investments/projects at risk? The questions asked, the risks involved, and the mitigation strategies relevant to both types will be nuanced due to the inherent differences in investment methods. Answers to these questions as well as mitigation strategies will be provided below.
Foreign Direct Investment
FDI investors are typically responsible for their employees, and therefore share an interest in their security, as well as the security of their offices and consumers. Furthermore, since stakes in a foreign company are, by and large, tough to withdraw from as opposed to portfolio investments, shareholders in this category are not typically interested in withdrawing right away. Knowledge of the frequency of violent acts and where they generally occur is therefore important.
Measuring the number of terrorist attacks in Lebanon within the last couple of years is sure to raise skepticism among potential investors. Since January 2013, there have been 29 recorded terrorist attacks. A majority of the attacks throughout this time took place within Syrian border regions such as Arsal and Hermal, as well as southern Beirut suburbs. Of the attacks, nine took place in Beirut: the most heavily invested city by foreign investors. Furthermore, only three attacks transpired in areas within Beirut that are relevant to most commercial FDI. Thus, although the state’s general security risk increased as a result of the recent strikes, Beirut is not representative of this trend.
The above assessment serves as a guide for general investments – especially real estate investment, which is becoming a popular venture in Beirut. The energy sector, on the other hand, which has a considerable portion of its infrastructure in south Beirut, warrants concern. In 2012, the Ministry of Energy and Water spent $850 million (USD) to begin constructing two power plants in the area. Likewise, in some northern cities, energy investment by the state has come into effect within the last four years. Although these projects are funded by the government, the same security risks apply to foreign investors concerned with this sector. This is because regions zoned for industrial use are near energy projects currently under construction. Energy projects in the north of Lebanon near the Syrian border and in southern Beirut are at higher risk because those locations are more prone to conflict. In such regions, this risk is compounded by a plant’s close proximity to commercial and residential districts. Small- to medium-scale terrorist attacks similar to last week’s do not pose a particular threat to the power industry. The bombings usually target a certain group, religious sect, or community. Nonetheless, if such bombings take place in a residential area, where population density is high (and a power plant is nearby), the risk of the plant’s exposure to damage increases. Thus, a simple mitigation tactic is to locate sites that are far from densely populated areas. Moreover, to ensure the safety of employees working within the plant, it is recommended that security fences are built and security personnel hired beyond any standard measure.
Portfolio Investment
Unlike FDI, portfolio investments, such as bonds and other debt investments, treasury bills, and mutual funds, do not require the active engagement necessary for the foregoing type of investment. This kind of investor should be assessing the stability and reliability of Lebanon’s central bank to evaluate whether or not capital can be withdrawn if security risks heighten. It is also worth knowing whether or not attacks such as the one that occurred last week will become commonplace, contributing to a loss.
As mentioned earlier, within the last few years terrorist attacks have been used as a tactic in small conflicts near the Syrian border. It is tough to forecast the frequency of terrorist activity in the country due to the current volatility of the Levant, in general. This precariousness itself is indicative of the geopolitical instability, which of course, should be taken into consideration by investors of both groups.
If one should choose to invest in bonds, or other portfolio investments, they can rest assured that the process of investing is backed by the country’s tradition of free trade and unrestricted exchange. There are no restrictions on the movement of capital, which include but are not limited to the exit of firms or access to foreign exchange. Despite regional and domestic instability, the country recently managed to raise $2.2 billion (USD) of debt at 6.65 and 6.2 per cent, among other Eurobond sales of the like. Its ability to raise this large sum is a testament to Lebanon’s power in the capital markets. Nonetheless, the rate of bond sales is generally decreasing as a consequence of the neighbouring conflict.
It is clear that regardless of regional instability and isolated attacks in Lebanon, foreign investment manages to flow into the country. Although the aforementioned factors have not acted as barriers to investment, investors are able to count on a strong central bank and unrestricted capital policies if security concerns escalate.
