What Should Foreign Investors Make of Libya This Time Around?

As global markets look for new economies in which to invest, Libya is positioning itself as an emerging market not to be overlooked. Although the North African nation of 6.3 million people is home to the largest proven oil reserves in Africa, that ambition goes far beyond the energy market.

A case in point: The country’s Privatization and Investment Board plans to attract up to US$8 billion of foreign investment by 2015, with real estate, transportation and construction being the likeliest sectors targeted for privatization, according to African Economic Outlook, a think tank and research center network. Meanwhile, government officials say US$500 billion will be spent over the next decade to develop infrastructure, and the local private sector has been expanding at a rapid clip. On the political front, the government says it is aiming to move away from a state-managed economic model while adopting a more regulatory role. And as part of its economic reform, Libya hopes to reintegrate itself into the global community by opening up its economy to the West and its Gulf neighbors.

This is not the first time Libya has attempted to become a global hub of investment and finance, which explains a deep skepticism that the nation will be able to follow through with its ambition. “Libya as a financial hub is problematic,” says Dirk Vandewalle, professor of government at Dartmouth College and a Libya expert. “For four decades, Libya’s economy was badly managed by the state. It’s easy now to say that the country wants to open its markets, but it doesn’t have the right underlying institutions and the economic power ultimately remains in the hands of the state and marginally devolves to an elite few.”

Disappointing Track Record

Vandewalle says Libya has had a disappointing track record with foreign investors after U.S. sanctions, which had been in place since the 1980s over suspected terrorist links, were lifted in 2004. Back then, Libya opened itself to a round of bidding for exploration and prodcuction rights by global oil companies. Firms such as BP, Chevron and Exxon rushed to sign up for five-year licenses, in the hope of large-scale discoveries in the relatively under-explored oil fields of Libya.

But the discoveries were modest at best, while the political and regulatory environment remained unpredictable. And when oil finds were successful, state-owned Libyan National Company (LNC) often renegotiated contracts to lower production sharing rates with foreign partners. “Those types of renegotiations didn’t do wonders for faith in [LNC] or Libya’s system of doing business,” says Kristian Ulrichsen, research fellow at London School of Economics. “People have to have faith that potential opportunities are lucrative and transparent and not subject to the whims of the state.”

Experts say the catalyst that may pitch Libya forward this time may be Saif Al-Islam, the son of the country’s long-time leader, Colonel Muammar Gaddafi, who observers expect to take over from his father. Al-Islam has been a vocal advocate of political and economic reform in Libya and it is widely believed that it was at his urging that Libya abandoned its nuclear and chemical weapons program, which then opened the door for the nation to rebuild its relationship with the West. He is also responsible for the National Economic Development Board, which is revamping the country’s regulatory system and has proposed a new penal code involving the crafting of a constitution for Libya.

“He could tip the future of Libya into an institutionalized, judicially independent state with a positive economic and business climate,” Ulrichsen says. “There’s a lot of potential for Libya if they get serious about revamping their systems.”

Against that backdrop, the country is now taking steps to become more attractive to foreign direct investment. “After years and years of isolation and embargos, you’re seeing progress in Tripoli,” says Tarek Alwan, managing director of SOC Libya, a London-based firm advising businesses on investing in Libya. “We’re seeing huge interest in construction, with more than US$130 billion spent on infrastructure and the building of new universities and other projects.”

Comparisons with Dubai

Massive projects are already in the works throughout Libya, largely in anticipation of a growing number of business and leisure travelers. Turkey’s TAV Construction and Athens-based Consolidated Contractors have been contracted to renovate Tripoli’s international airport by 2011 and add two terminals to accommodate 20 million passengers annually. International hospitality chains, such as the Marriott and Intercontinental, are also opening large hotel operations in Tripoli, which will soon dominate the skyline.

“There are big opportunities for contractors and suppliers globally as Libya wants to become the gateway to Africa,” Ulrichsen says. “It has ambitions to become a logistical hub like Dubai.”

Libya has been increasingly compared to Dubai, when the glitzy emirate was still growing and aggressive in its attempts to draw business travelers and pleasure-seekers alike. To that end, Libya has made moves to improve infrastructure, including modernizing its outdated sewage systems and renovating its highways and roads. The nation is also building more housing complexes that raise comparisons to the high-end units Dubai promoted in its heyday.

In Tripoli, Turkey’s EMSAS Construction is building a US$1.3 billion luxury high-rise complex, featuring 2,000 apartments, a hospital and a giant mall, complete with an ice-skating rink and bowling alley. According the Associated Press, Los Angeles-based engineering firm AECOM is also overseeing a US$80 billion project to build 160,000 housing units in the city of Benghazi.

But predicting that Libya could be the next Dubai is a stretch, asserts Vandewalle. “Libya doesn’t enjoy the confidence that Dubai had with the rest of the world when it needed to attract investment,” he says. “The country undermined its position in the oil market with its dealings and now needs to attract new capital [through other means] in order to finance the investment it needs to improve its oil system.”

A Pragmatic Approach

Libya produced 1.9 million barrels of oil in 2009 and wants to increase oil production to about three million barrels by 2012. Vandewallen says its most important goal in opening its economy to foreign investment is to decrease its dependence on the oil sector, even as it invests in projects to enhance its oil production. To achieve that goal, Libya will open itself up to both the West and the Gulf.

Libya may be taking a pragmatic approach to embracing the West and its Gulf neighbors, but the interest is reciprocated, particularly from the Gulf countries, which have increasingly seen Libya as a compelling choice for investment in North Africa. The global economic crisis hit the Gulf region’s financial, real estate and construction sectors hard, drying up funds for planned infrastructure projects and pushing the real estate sector into a virtual standstill — especially in Dubai, where house prices plunged 60% from their 2008 peak.

Libya, by comparison, came out of the financial crisis relatively unscathed, due in part to its isolationist policies. Now, its medium-term economic prospects appear promising, thanks to higher oil revenue projections, increased foreign investment and improved public expenditure, according to a report by African Economic Outlook. As a result, GDP is expected to grow 5.2% this year and 6.1% in 2011, forecasts Libya’s central bank.

All this has prompted many Gulf companies to look toward Libya for business. Those include Dubai-based engineering firm Drake & Scull International and developer Al Habtoor Leighton Group, an affiliate of Australia’s Leighton Holding that expects to be in Libya by the end of the year.

Beyond construction and real estate, banking is emerging as a potential investment magnet. The country’s banks were state-owned for decades, but minority stakes are beginning to be sold to foreign entities. Two of the five public commercial banks have sold stakes to foreign banks, with immediate management control and an option to purchase up to 51% of the banks in three to five years.

But the banking sector has its challenges. Government-backed “specialized credit institutions” dominate the credit market. These institutions are said to be crowding out commercial bank credit with zero cost of funding, lax lending standards and minimal interest rates. “There are still some problems in terms of having faith in the business climate to keep the private sector free from the influence of the government,” Ulrichsen says.

But such challenges haven’t seemed to have dampened foreign banking enthusiasm. In February, Libya’s central bank said it would award two new joint venture licenses to foreigners, prompting a flurry of bids from banks across Europe and the Gulf seeking a 49% share in a Libyan financial institution. The six banks shortlisted for the licenses were HSBC and Standard Chartered, both of the U.K., Dubai’s Mashreq Bank, Emirates NBD, Qatar Islamic Bank, and Italy’s UniCredit. Only one license was granted, to UniCredit, in which Libya already owns a 6.7% stake. The unsuccessful bidders are still pursuing other opportunities in North Africa, with a particular eye on Libya.

Now that the central bank has said it would consider another license in the coming months, Vandewalle says Libya is likely to cast its lot with the European banks over the regional players. “Libya wants to be reintegrated into the Western economic system so it would make sense to choose a big international bank over regional Arab banks,” he says.

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