Foreign Direct Investment in Libya

Deals and Diligence in a Transitional Economy

Muammar Qaddafi’s recent address to the UN was accorded a cold public reception, but foreign investors are warming to the country’s investment potential. Oil and gas companies seek to develop Libya’s ample reserves – at 45 billion barrels, the largest in Africa – and real estate developers are looking for choice plots along its pristine Mediterranean coast. Yet, while Libya's ruling regime has made overtures to attract foreign investment and has begun some crucial reforms (including the Foreign Investment Law of 1997 and banking reforms) it has been known to respond harshly to perceived wrongs by foreign commercial partners. For example, when one of Qaddafi's sons was arrested last year in Geneva for assault, Libya halted oil shipments to Switzerland and closed Swiss businesses operating in Libya. Furthermore, some countries seeking to do business with Libya have suffered political fallout due to the country’s longtime (but recently disavowed) support for terrorism.

Insights from the Ergo Network

Are there real investment opportunities in Libya, and what are they? What types of investment are most exposed to political risk? Can we expect the investment environment to improve and reforms to continue, or will we see mere window dressing? Ergo asked three experts to shed light on the future of this opaque country and its mercurial leader.

• Expert 1: Representative of regional trade association with strong connections in Libya

  "It is a really challenging environment because the body of commercial law really isn’t in place yet. There aren’t a lot of investment protections, they are not a member of the WTO, and things happen that are very opaque. There are also issues regarding skilled manpower, there are huge difficulties getting visas, there is a difficulty getting skilled laborers. Up until the 1970s there were a fair number of Libyans who were educated abroad. They are only just beginning to send students abroad again, and there are strict rules about pay scales which are not a great motivating factor for having Libyans return. There hasn’t been a mass return to Libya. So quality local labor is going to be difficult to come by for some time.
  
  That said, if you have something that the Libyans’ want – mainly expertise or technology – and you continue with your investment and it matches their plans, then that is usually the best protection. I think they are looking at job-creating projects. There is a huge demand for infrastructure projects, and for tourism development. They are looking for technical expertise, and also for prestige.
  
  [Success] also depends on who is involved. There is a large divide in the country among those who have a vested interest in the status quo and those who are interested in reform and moving forward in these projects. That tends to complicate things. It also, unfortunately, leads to a lot of people claiming that they have special connections, which you see any time there is a situation that is less than transparent. That’s a hard claim to judge.
  
  Outside of oil, you see investors in different areas, like irrigation and infrastructure, that have good relationships because they bring expertise that the Libyans need. But even those that have good relationships still have day-to-day challenges in conducting business, between a lack of coordination among agencies, and the chance that laws will be changed or that regulations will be promulgated that contradict existing ones.”

• Expert 2: Leading Libya analyst and noted journalist

  “It’s often not clear who foreigners should deal with, but it is important to remember that individuals are more important than institutions. You need to have a partner or sponsor who is ‘inside the tent.’ There is only a small subset of people who are ‘inside the tent’. The leader is pretty distant, but his sons, and his sons’ friends, are useful. There are also old guard people who are useful. The relationship between these people is not transparent, and it’s not traceable. Even people who have had promises from Saif al Islam [Qaddafi’s son] find that he can’t deliver on these promises, likely because he has friction with other members of the regime.
  
  A lot of companies have great difficulty getting paid, and the reason is simple: they are so keen to get in with the regime that they will overlook sensible business practice and work on credit. Of course after a year they will look for the money they are owed and there is really no legal recourse in Libya. If you take the legal route, it’s not totally impossible, but you certainly run the risk of never being able to do business in Libya again. In Libya, there’s no way around it – you must work with a Libyan who is influential and with a good reputation.
  
  There is clearly potential for development in tourism, infrastructure, and telecoms. Those should be three obvious sectors. There is also development in the finance sector. There was formerly a state monopoly on banking, but the government plans to sell off a number of state companies including banks. There of course has been well-publicized interest in Libya’s oil wealth, but most people don’t realize that in the future it may be possible to get in involved in the stock market. Qaddafi is now encouraging Libyans to buy shares, although it remains to be seen how long it will be before foreigners can buy shares.”

• Expert 3: Consultant to foreign businesses operating in Libya

  “I don’t put a lot of stock in these reform efforts, mainly because Qaddafi and his inner circle are very wary of messing with a system that works, and they are very wary of the population getting too much money, and of upsetting relationships between different tribes. When you get to Qaddafi’s age, you tend not to want to rock the boat, really. So why risk it? I’ve been looking at investment projects since 2004 in a variety of sectors. It was never very much investment; rather it was about keeping individuals happy. I think Qaddafi and his leadership, they don’t want to be Dubai; they are all rich and pretty happy as they are right now.
  
  You see, Qaddafi himself doesn’t like one of his sons becoming too powerful, and he has a few of the old revolutionary folks around him. I’m not saying Saif won’t be the heir apparent, but he’s got a lot of enemies. Western people like to think that he will be the next leader because they understand him. But it’s all got to do with balance of power within and between the families. ”

Looking Ahead

Libya’s resource-driven development spending poses the most attractive basket of opportunities for investors looking to enter this opening market. Qaddafi has earned the quiescence of the Libyan people by providing well for the country’s relatively small population. However, years of sanctions have left Libyan infrastructure in need of modernization. Although experts do not expect Tripoli to be the next Dubai, iconic infrastructure projects – for example, highways or water-related projects – are what the regime will seek from foreign partners, particularly those that involve skills or technology transfer. Real estate developments also hold promise, particularly along the Mediterranean coastline. But to draw tourists, such projects will require a more robust supporting infrastructure – visa procedures, transportation, and financial services. There are also some signs of an opening of the telecommunications sector. The government announced a float of some shares of state operators al Madar and Libyana on the Libyan Stock Exchange in 2010. Beltone Financial, a Cairo-based investment bank, will soon begin offering brokerage services for the exchange.

It is, however, premature to proclaim a sea change in the general investment environment, which will remain opaque and extremely difficult to navigate. Trajectories of market reform followed by other transitional economies are not a sure indicator of Libya’s path. Its political and market institutions are underdeveloped and steeped in the particular Libyan brand of command economy and state socialism, and are guided by an inner circle of powerbrokers whose vision is decidedly more doctrinaire than laissez-faire. Furthermore, international media tend to exaggerate the totality of Qaddafi’s political power, overlooking the complex web of tribal and family tensions among Libyan elites. The regime’s stability depends on maintaining a balance among these various factions; whatever investment reforms it enacts will be measured against its ability to maintain this balance, and designed to placate rivals with potentially lucrative opportunities.

Successful investors in Libya understand that in any sector, all business is local and personal. In an opaque and evolving market environment with weak institutions, the right local relationships are crucial to ensuring that a project proceeds as envisioned. Some countries have taken a very high-level approach. Italy has agreed to a $5 billion broader investment cooperation framework to include infrastructure projects in Libya sponsored by the Italian government. Qatar has developed strategic investment partnerships with Libya since 2007. Turkey and Libya have announced plans to develop a joint agricultural bank. On an operational level, though, firms that fail to conduct proper diligence on their prospective investments in Libya, to maintain sensible commercial practices in their conduct of business, or to develop relationships of trust with reputable Libyan partners are likely to encounter major impediments to achieving their business objectives.

Ergo has an extensive network of experts and in-country teams in Libya. Their knowledge and access has served as the foundation of our in-depth market studies on energy, infrastructure, and agriculture, and our rapid due diligence on potential local partners.