Reconstruction of Syria: A Colossal Task

By Dr Saleh Jallad*

The cost of the socio-economic devastation resulting from the civil and foreign wars in Syria since 2010 has been estimated by various regional and international sources, including the UN and ESCWA, at $200-250bn. Despite political efforts to achieve a final, sustainable solution, uncertainty continues to surround the availability of funds as well as the timeline for reconstruction, the reason being the decisive role played by financial intermediaries, including insurance companies, in the reconstruction process. They are the experts in extending adequate financial services to meet the legal requirements of clients, given a normal risk profile.

Engineering, procurement and construction contracts (EPCs) clearly specify the financial and technical terms and conditions governing the responsibilities and obligations of all parties concerned, including the financial and insurance requirements and the method of payment. Qualified participating bidders are therefore obliged to rely on banks and insurance companies to win and execute contracts according to the contractual obligations.

In the MENA region banks issue at least three types of Standby Letters of Credit (SBLC), known also as bank guarantees, in lieu of advance payment performance and retention by the client. Other crucial credit facilities that financial intermediaries offer under normal conditions include, but are not limited to, funded and unfunded credit facilities, documentary Letters of Credit (LCs), overdrafts, loans and the like. As the size, legal and financial complexity and sophistication of contracts increases, as is the case with Project Finance or BOT schemes and their derivatives, the role of financial institutions can also be expected to intensify. All in all, it might not be an exaggeration to foresee bank facilities exceeding 40% of EPCs in Syria, even if funds are realistically available and mitigated by creditworthy entities.

Based on the various estimates of the cost of infrastructure projects in Syria, the value of the facilities that banks are expected to provide is $40-80bn. However, in the prevailing regional and international financial environment, reconstruction may be unattainable even over many decades, particularly when this figure is related to the $134bn borrowing potential of the MENA region as a whole during 2016, as recently estimated by Standard and Poor’s. In the circumstances, Syria has no chance.

Furthermore, just as the minimum banking facilities are contractually intrinsic to any EPC activity, so are the insurance requirements. The region simply does not have the indigenous reinsurance capability. This is the domain of the industrial countries, which have developed the know-how and financial resources to accept the risk of an enormous range of insurable threats. The range of insurance liabilities that reinsurers as well as insurance companies have to accept will no doubt exceed by some 150% the value of the projects under study, as per Lloyds, as well as the international reinsurance standards of Munich Re, Swiss Re, Allianz and Mitsui, to name a few.

Moreover, under the prevailing international regulatory system, financial intermediaries belong to the most regulated industry in any economy. Risk analysis and management is therefore intrinsic to the process of allocating such facilities to countries, industries and individuals. Deviations from international banking standards are costly and mostly not allowed. Syria is no exception. As the dominant responsibility of banks is to refund their deposits as well as the contracted returns to their account holders, Syria will undergo the normally accepted risk analysis by interested financial intermediaries, and prompt decisions regarding the construction companies and their suppliers will follow. In the absence of reasonable mitigating factors and based on normal risk analysis, the reconstruction of Syria, if ever undertaken, will have to wait.

Even with the remote possibility that adequate funds will be available, the ability and willingness of local, regional and international intermediaries to meet these challenges are open to doubt. Currently, the Syrian banking system is practically destroyed, and it will take a long time to reactivate banking services and implement a monetary policy that can play an enhanced role in the shattered economy.

Furthermore, Syria is incapable of controlling rising inflation and the severe devaluation of its currency. Its foreign currency reserves are extremely low and rapidly diminishing. According to Bloomberg, the Syrian pound has slipped from $1=S£47.4 in October 2010 to $1=S£475 in March of this year.

Besides the Central Bank of Syria (CBS), there were 15 commercial banks before the civil war erupted. Though they still exist and have withstood the severe sanctions imposed on a few, most are relatively dormant for the time being. Six banks are publicly owned and nine are held by private investors and regional financial institutions. The banking system is an oligopoly with the state-owned Commercial Bank of Syria enjoying a concentration ratio of more than 80%. Furthermore, recent statistics from the CBS indicate that the per capita bank services in Syria (1 bank servicing 1.5mn people) have been poor at best, compared to neighboring countries such as Lebanon and Jordan.

The Syrian problem has now grown to involve the entire region and even Europe, where the issue of migration has become a financial, as well as a social and political issue. The burden of the material cost of the war has also spread to the Arab oil producing countries as well as to less fortunate European neighbors. This has resulted in a state of donor exhaustion, despite well publicized attempts to collect billions of financial pledges during well-advertised international conferences.

By default, therefore, the onus of reconstructing of Syria’s economic and social infrastructure is expected to be heavily shared by the international banking systems, in conjunction with at least the top 25 regional financial institutions in the Middle East. Gulf Cooperation Council (GCC) financial institutions as well as others in the region, have acquired the necessary expertise in assessing risk and extending appropriate credit facilities to worthy clients in various fields of economic activity.

Nevertheless, international institutions in conjunction with the warring coalition states have a moral if not legal obligation to guarantee Syria’s economic revival. Whatever the successor regime in Damascus is, the establishment of specialized private construction financial institutions to achieve this revival could be the most efficient means of filling the institutional vacuum. Collectively the IFC, MIGA, ECAs, Regional Specialized Development Funds, as well as the private sector have leading roles to play. If planned well, this could meet the minimum requirements of potential contractors and vendors worldwide in a win-win endeavor for all the parties involved in the Syrian debacle.

*Dr Jallad is the author of ‘Discourses on the Pedagogy of Arab Governance’