Getting back down to business

New business contracts are being signed in Libya, despite the government’s review of Gaddafi-era deals and ongoing security fears. Published in MEED, 3 January 2013

According to the Washington-based IMF, Libya’s economy grew by almost 122 per cent in 2012 as oil exports resumed after the revolution that unseated Muammar Gaddafi. It was a remarkably quick turnaround for the economy, which had contracted by 60 per cent the year before as the civil war raged. It also highlights the potential that exists in a nation emerging from more than 40 years of rule under an idiosyncratic and at times chaotic dictatorship.

As the international business community looks to get involved in the Libyan economy once again, the country’s plentiful oil resources are perhaps the most obvious target. But the oil should also provide the finance needed to boost other areas of the economy, leading to opportunities for companies in other sectors too. For all the potential, however, there are also some significant hurdles that the government and the international firms wanting to do business with it, will first have to overcome.

Security concerns

The first and most pressing problem is clearly security. The central government has struggled to impose its authority on the myriad armed militia that fought in the revolution and has yet to restore order to all parts of the country.

Four people died as a result of fighting between militia groups in Tripoli on 4 November and a further two were killed in Jebel Nafusa, to the southeast of the capital on 10 November. Some senior foreign, as well as local figures have become victims of the insecurity. US ambassador Christopher Stevens was killed in Benghazi on 11 September and the local security chief Colonel Farag al-Dersi was assassinated there in November.

More recently, the government has been turning its attention to the southern part of Libya. In December, the General National Congress (GNC), the country’s interim parliament, passed a resolution declaring the southern area of the country a closed military zone. As part of that move it shut Libya’s borders in the area with Algeria, Niger, Chad and Sudan and appointed a military governor for the southern region with full executive powers.

A spokesman for the GNC, Omar Humaidan, explained at a press conference on 18 December, that the measure was a temporary one and had come after a GNC-appointed committee had investigated conditions in the south. He added that it should not have an impact on Libya’s foreign relations with its southern neighbours.

Until the government gets a firm grip on the security situation, many international businesses will be reluctant to put their staff in Libya on a permanent basis, or will at least try to keep their numbers to a minimum.

The second big issue facing international businesses is of a more bureaucratic nature, as the government sorts through the paperwork left behind by the old regime. Up to 10,000 contracts worth tens of billions of dollars in total are on hold in Libya, as the government conducts a mammoth auditing exercise.

The aim of this exercise is to not just to unearth corrupt dealings by officials in the Gaddafi regime, but also to make sure that the projects that the government is funding are aligned with the needs of the country.

The audit is expected to cover contracts across all parts of the economy, ranging from healthcare to education, transport, housing, infrastructure, power, oil and gas, and security. Given the vastly different approaches of the old and new regimes, many of the old contracts may well suffer.

“They are trying to work out what the country needs, which projects serve these needs, which ones they should be doing first and how best to do them,” says one international business executive with a long history of working in Libya. “The government also wants to determine whether some projects could be amalgamated with others. Anti-corruption is just one part of the process, but if you were building a road going nowhere then that project isn’t going to happen.”

Auditing projects

The Planning Ministry is in charge of the exercise, but how much it can do and how quickly remains open to question. It is expected to start tendering for international consultants to offer their auditing services from mid-January, but it is likely to be at least another month before that process has been completed and any of them can be formally hired. In the meantime, the ministry is expected to carry out some initial work on reviewing the contracts.

Beyond that, there is no clear timetable for how long the whole auditing process might take. According to one source, the ministry is expected to divide the auditing task to cover 10 economic sectors, with up to five consultants working in each sector. That means that as many as 50 teams could be brought in to tackle the problem. While this should provide a degree of speed, it will also necessitate careful management to avoid confusion and overlapping work.

Despite the uncertainty that this process creates for firms with outstanding contracts in Libya, the country’s new government has repeatedly voiced its desire to bring overseas businesses back to the country. At a press conference on 19 December, Prime Minister Ali Zeidan said that his government was working on ways to ensure that international companies would return rapidly to the country.

Joint committees

Some international governments have been working to ensure that the auditing exercise goes as smoothly as possibly for their companies. In December, for example, Madrid and Tripoli agreed to set up a joint committee to review Gaddafi-era contracts involving Spanish firms.

In the meantime, some deals in priority areas are still going ahead. “Existing projects are on hold, but there may be priority projects. If there are things that need to happen they may need to go ahead and not wait for this process,” says the international business executive.

The evidence of recent weeks points to a number of areas where the government feels there is a need to press ahead, including elements of the country’s war-damaged infrastructure. In December, state-owned General Electricity Company (Gecol) signed contracts with France’s Alstom and Germany’s Siemens to help improve the country’s national power system. Local press reports also that month indicated that Al-Madar, one of Libya’s two mobile phone networks, had agreed a deal with France’s Alcatel-Lucent and Sweden’s Ericsson to upgrade its network. In addition, Afriqiyah Airways confirmed its orders for four new Airbus A350 planes.

For international companies, the positive news from such deals is that almost all of these companies had all been involved in Libya prior to the 2011 revolution, indicating that there will be no penalty for having had some links to the old regime. That position was more explicitly stated by International Cooperation Minister Mohamed Abdel Aziz at a press conference in Tripoli on 21 December, following talks with Greece’s Foreign Minister Dimitis Avramopoulos.

“We have decided to invite all the foreign enterprises active for many years in Libya to continue the projects they started, while at the same time we welcome new companies that want to become active in Libya for the first time,” said Abdel Aziz.

“Libya is a country with a future in investments and infrastructure, particularly within the framework of Libya’s strategy not to rely solely on petroleum, but to diversify its sources of income.”

However, he also made it clear that some old agreements will need to be revised. “There are a number of memoranda and agreements that were signed in the past. These need to be updated so as to meet the new needs and the new reality in Libya,” he added.

Despite the desire for long-term diversification, the oil and gas industry remains at the heart of the country’s economy and new contracts are likely to be prioritised in this area too. On 16 December, Zeidan and Petroleum Minister Abdelbari al-Arusi held a meeting with Paolo Scaroni, the chief executive officer of Eni, to discuss the Italian oil giant’s existing operations and future plans.

Scaroni presented the government with a $8bn investment plan for the development of ongoing production and new exploration activities over the next 10 years.

A separate $400m memorandum of understanding for social sustainability is also expected to be agreed by the time Zeidan visits Rome in late January.

According to Eni, Zidan asked Scaroni if the Italian firm would be available to develop new downstream projects with the new branch of the National Oil Corporation to be based in Benghazi.

Operations resume

As with the energy and telecoms firms, Eni has had a long history in Libya. It first entered the market in 1959 and has in recent years been the largest international oil company in the country, accounting for around a third of all oil production prior to the revolution.

Other international oil firms are also now bringing their operations back up to speed, including Turkish Petroleum Overseas Company (TPAO) and Algeria’s Sonatrach International Petroleum Exploration and Production Corporation (Sipex).

Scaroni’s visit in December was just one of an ever growing number of visits by international businessmen to Libya, often in the company of senior politicians.

Since Zeidan’s government formally took office in mid-November, there have been high level delegations from France, the UK, Spain and Greece among others.

Given the country’s need for international expertise, if not finance, the reaction of the Tripoli government has been understandably warm to such visitors.

All will have come to the country with a mixture of caution and optimism, given the difficult nature of the market. For Libyans themselves, there is often a more straightforward position to take, given the turmoil and misrule that the country has faced over recent years and decades.

“I’m Libyan so I have to be optimistic. I have no other choice,” says one senior Libyan banker.