News

Maplecroft risk briefing – Libya: open for business?

09/02/2012

Image credit

Whilst the interim National Transitional Council (NTC) sustains only loose control over Libya, the rapid resumption of oil production and the gradual return of foreign oil workers to the country has been hailed as evidence that things are moving in the ‘right direction’. Foreign businesses in other sectors of the economy have also sought to re-enter or explore new opportunities in Libya. They are seeking to benefit from years of under-development and Libya’s post-conflict reconstruction effort. Libya’s infrastructure is in a parlous state and the need for foreign investment and expertise in multiple sectors of the economy is pressing.

Tangible improvements on the ground are lacking and this has diminished the revolutionary euphoria following the toppling of Gaddafi and the liberation of the country in October 2011. Euphoria is being replaced by anxiety over the economic hardships experienced by many Libyans at an ‘everyday’ level. Prior to the revolution, unemployment was rife (officially 26%) and worker strikes have become increasingly commonplace. As such, the NTC is keen to court major foreign firms and investors in a bid to gain a public ‘vote of confidence’ in Libya, but the NTC is hamstrung by its lack of a democratic mandate to sign new contracts. Until elections for a constituent assembly take place, currently planned for June 2012, foreign firms are equally reluctant to commit capital to a country which is still very much in the middle of a post-conflict political transition.  Full parliamentary and presidential elections are not expected until 2013, and as such the political situation will remain dynamic for some time.

Despite short-term opportunities for foreign businesses in Libya, significant risks persist. These need to be considered as Libya moves forward. A range of existent and potential pitfalls are discussed below:

A challenging business environment

• The rapid resumption of oil production and the gradual return of foreign oil and gas workers to Libya have been hailed as evidence that things are moving in the ‘right direction.’ Nonetheless, the damage that the uprisings have wrought on the Libyan economy should not be downplayed. In January, the Libyan National Oil Company claimed that oil production had reached 1.3m barrels per day (b/pd) and it anticipates that the average pre-conflict levels of 1.77m b/pd will be reached in 2012. The rapid resumption of oil production is both a product of Libyan industriousness and the gradual return of foreign oil workers. It is also the result of Libya’s oil fields and infrastructure emerging from the conflict less damaged than originally feared.
• The resumption of Libyan oil exports will also help the government resuscitate its battered economy, though this will be a daunting task. According to the IMF in January 2012, the ‘public sector’s financial situation remains precarious.’ The IMF notes that Libya’s GDP is estimated to have contracted by 60% since the beginning of the uprising and that the Libyan dinar fell 20% against the dollar on the black ‘parallel’ market. Unemployment was officially placed at 26% prior to the uprising and is now likely to be much higher. Consumer prices are up by 14% compared to early 2011 when the uprising began. All this reflects on the systemic socio-economic problems faced by Libya – problems which the government cannot solve in the short-term and will be a contributory factor to social unrest.
• In addition, much of the US$170bn in overseas assets has yet to be absorbed into the economy, despite the bulk of them being unfrozen on 16 December 2011. At an everyday level, the shortage of liquidity means that withdrawals continue to be capped at approximately 500-750 Libyan dinars (Appx. US$400 – US$600) a day and many Libyans do not have sufficient trust in the central bank to start depositing money again.  The penetration of foreign banks in Libya is also low and new licences for banks such as HSBC (which already has a registered office in Libya) are not expected soon.
• As such, the rebound of the oil sector makes it a poor gauge of Libya’s overall business environment and overall attractiveness to foreign investors. Despite a flurry of trade missions from the European Union, Egypt, Turkey and the Emirates, very few long-term commitments are being made by non-oil sector investors until the first round of elections are held. Indeed, whilst some companies are carrying out ‘quick win’, small contracts such as stabilisation projects and tenders for larger projects have not yet taken place and foreign companies are hesitant to make potentially costly moves until an elected government is in place. Furthermore, key features of Libya’s business environment under Gaddafi such as endemic levels of corruption and a notoriously cumbersome bureaucracy will take years to resolve. However, Libyan officials claim that tackling these issues is a priority in the ‘new’ Libya.
• While Libyans remain committed to professionalising the business environment, strong personal connections play an important role in helping secure new business. Relying on these connections is not without risks, however. Not only have foreign companies regularly complained that local ‘fixers’ have proven unreliable, but the purging of individuals considered to be Gaddafi loyalists adds a further degree of uncertainty to the business environment. In addition to high profile individuals in the NTC being forced to resign (such as former minister for the economy Taher Sharkas and former deputy head of the NTC Abdel Hafiz Ghoga), managers in local institutions and businesses are also reported to have been pressured to resign. Nevertheless, many key individuals both in government and the local bureaucracy are likely to retain their roles given their expertise and the broader acknowledgement that social mobility was impossible without outwardly expressing support for the Gaddafi regime.
• Companies which have had a long-standing relationship with the country enjoy an advantage over those looking to enter for the first time. That said, firms from countries that provided continuous and strong support to the rebel movement which opposed Col. Gaddafi may also find themselves in a better position to secure future business. This is nonetheless heavily dependent on the sector. Given China and Russia’s reservations about the NATO-led mission to support the anti-Gaddafi movement, ex-pat workers from these countries are unlikely to be welcomed back by Libyans. This may provide firms from Britain, France and Turkey for instance with a competitive advantage particularly in areas such as construction. Companies should also note however that whilst power was centralised in Tripoli under Gaddafi, Benghazi is likely to become a prominent commercial hub – particularly given its vast oil wealth. On a broader level regional administrations will have greater influence over decision-making processes.

Regulatory framework remains a legal minefield for investors

• Forty two years of Gaddafi’s idiosyncratic and despotic rule has left Libya without a clear regulatory framework, thereby exposing investors to risk and the possibility of old contracts being renegotiated or annulled.  Whilst the NTC has consistently claimed that all ‘legitimate’ contracts will be upheld, the number of probes into deals signed during the Gaddafi era will likely increase. This is due in no small part to the weakness of the central government which can only retain a semblance of legitimacy by tackling emotive issues, such as corruption, which resonate strongly with the public. Nevertheless, the NTC’s mandate and political will to annul major contracts will be tempered against the need to attract foreign businesses. The majority of contracts signed with European countries are not thought to be at risk of being revoked however. Nevertheless, on 21 October it was reported that Libya’s National Oil Company (NOC) summoned Russia’s Gazprom to defend its actions related to an alleged ‘breach of investment obligations’. Specifically, the ‘breach’ revolved around Gazprom’s alleged failure to pay for student education. Whilst the NTC has expressed a willingness to allow Gazprom to rectify the situation, the case reflects the authorities’ will to confront international oil companies for their past actions or failings.
• Ownership and land rights will become an increasingly contentious issue going forward and the promulgation of a new commercial code can be expected in the future. From the perspective of foreign investors, the yet-to-be reformed regulatory environment contains overlapping and contradictory elements. A new commercial code is being developed but there is concern that it will be less favourable to foreign businesses than was previously the case. Specifically, under the old system foreign companies were obliged to set up a branch with a local partner, wherein the foreign investor would hold a controlling 70% stake. Under new proposals, the Libyan partner would retain a 51% controlling stake. The minimum capitalisation required to establish a business in Libya may also increase, which could deter some investors.  Whilst Libya’s real estate and construction market is likely to see rapid development and opportunities emerge in the coming years, investors should note that under Gaddafi large amounts of land and property were expropriated under ‘Law 4’. In the wake of the regime’s collapse, multiple disputes over property rights and ownership have emerged and this may create legal and reputational problems in the future for investors looking to enter this sector.
• Under Gaddafi’s rule, labour rights were poorly designed and enforced and the recent wave of strikes seen in Libya highlight both the potential for supply chains to be disrupted or expose investors to the risk of complicity in labour rights violations. The toppling of the Gaddafi regime has raised hopes amongst workers that Libya may witness a positive shift towards the protection of labour rights, including in relation to access to trade union representation. However, amidst a host of other concerns faced by the NTC at present it is unlikely this situation will change in the short-term. Indeed, although the NTC published a mission statement entitled ‘A Vision of a Democratic Libya’ on 29 March 2011, in which it said that it will guarantee the right of workers to unionise and their right to freedom of expression through protests and sit-ins, the number of strikes in Libya continues to rise despite their on-going illegality. Strikes have been seen in a variety of sectors, with industrial actions taking place in Libya’s airports, ports and oil facilities in recent months. Consequently, businesses can expect supply chain disruptions and operational challenges should workplace standards be inadequate or non-existent and labour rights protection be lacking.  The large number of migrant workers in Libya increases the risk that supply chains may include illegal migrant workers, placing businesses’ reputations at risk.

Security an on-going risk

• Whilst life has returned to normal in most parts of Tripoli, outbreaks of hostilities between militia brigades still constitute a risk. Travel to other parts of Libya is not advised without accompanying security. Since the defeat of Gaddafi’s forces, militia brigades have sought to imprint their authority on the streets of Libya’s main cities. Armed confrontations in Tripoli where they jostle for power have become increasingly common. The most recent gun battle occurred on 1 February in the Tariq al-Shat district of central Tripoli and near to major hotels, highlighting the potential risk to foreigners. Less recently, on 4 January, it was reported that four fighters were killed in a gun battle between militias from Tripoli and Misurata on two of Tripoli’s busiest streets, leading to the closure of roads and undermining NTC claims that it is regaining control of the capital.
• It should be noted that whilst certain militia brigades have been accused of human rights abuses, they are at the same time playing an important role in ensuring Libya’s short-term stability. Local brigades have played a crucial role by working with local councils to provision the resumption of basic services and retain a semblance of order. A major task for any future government will be to disarm the militias and integrate them into the political process and create a national army and police force. This is crucial to Libya’s long term stability, but will remain difficult to achieve prior to elections and in the current atmosphere of mistrust and revenge killings. Despite the challenges implicit in building a police force and unified army, efforts to establish these institutions are underway.

For more information contact info@maplecroft.com or call +44 (0)1225 420000

Register for trial access to see examples of Maplecroft's indices, interactive maps, scorecards, briefings and in-depth reports.