Serious questions remain, and after the excitement of the rapid and surprising changes following the rapprochement between Libya and the West in 2004, Libya needs to take care of the details, before it can be considered ready to sustain the foreign investment it wants to attract.
The questions, nevertheless, are mostly in relations to the economy as a whole, because the oil sector has always been run with a different and much more efficient approach. This suggests that while Prime Minister Shukry Ghanem promotes economic reforms aimed at generating a greater role for the private sector internally and attract foreign investors buyers for Libyan state owned enterprises, very basic issues remain that make Libya a difficult proposition. The issues raise doubts about the seriousness with which economic reforms are being pursued.
Algeria, which has also engaged in attracting foreign investors and deregulating the economy, has been doing a far better job to create the necessary conditions to support such investment. Like Libya, Algeria is dependent on oil and has benefited tremendously from the high oil prices in recent years. However, Algeria has been planning its reforms through a strong and, by regional standards, democratic mandate adding institutional strength and credibility. President Abdelaziz Bouteflika of Algeria has won 85% of the vote in recent elections suggesting that the population stands behind the economic reforms, while softening the entrenched opposition posed by the military and bureaucracy establishments. As the violence of the 90's fades, Algeria is on pace to gain access in the WTO and attract investment in non-oil areas of the economy.
The oil revenues are being used wisely to improve its' credit such that its foreign exchange reserves exceed its external debt by a significant margin, and it is leveraging the margin to pay its debts. Moreover, Algeria has been developing its banking sector, which is a crucial tool for economic development in emerging markets. Indeed, despite the recent fraud scandal involving the Khalifa Bank, the reform minded government is promoting the development of private banking and such financial mechanisms as credit cards and mortgages are already being adopted. Banks like Citigroup and Societé Generale of France are already actively pursuing the Algerian market. While these banks still play a minor role compared to state banks, and credit is still not given easily, the structures are in place to support their development. The financial de-regulation is being coupled with reforms in the legal mechanisms governing finance and foreign investments with the training of more magistrates and lawyers in finance law. Consequently, Algeria, which struggled through a bitter civil war, has been actively laying the institutional infrastructure to support the investment it wants. Algeria is serious about attracting investors and developing the private sector, and the United States have been paying attention with steadily increasing cooperation projects in energy as well as other sectors.
As for Libya, market reform remains a promise with no demonstrable progress. Unlike the political and institutional backing for reform enjoyed by Algeria, the face of the reform process has been Col. Qadhafi's son Muhammad. Muhammad, speaking at Davos in February, introduced the wonderful prospects that Libya's economy offers foreign investors. Muhammad does not have an institutional role, and officially, as he himself admits, he is not necessarily slated to inherit his father's role, as the Libyan Jamahiriya system does not envisage succession on that basis - or any other for that matter. Therefore, while Libya talks about being open for foreign direct investment (FDI), there are no structural policies to sustain it. In fact, it may be said that Libya is now competing for FDI with countries like Algeria, yet it faces the disadvantage of an idiosyncratic political institutions. Markets require a sophisticated institutional infrastructure and administration in order to function properly.
The mere modification, by decree, of state dirigisme, as occurred in Libya, is an adequate way of sustaining them.
One of the issues highlighting Libya's failure to ensure foreign investment in ventures beyond the carbon sector is the case involving five Bulgarian nurses and a Palestinian doctor charged with spreading AIDS in a Benghazi hospital in 1999 killing over 400 children. The medics have been sentenced to death and have had numerous postponements of their appeal. The European Union is particularly concerned. After the diplomatic breakthroughs of late 2003 and the frequent visits of European leaders to Tripoli, from Silvio Berlusconi, Tony Blair and Jacques Chirac it seemed as if Libya had succeeded in gaining access to all the privileges of an enhanced relationship with the international community after the obscure decade of sanctions that caused its oil production levels to decline. In the last few months, however, the thorny issue of the Bulgarian nurses, overshadowed by the novelty of recognizing that Libya and the United States had re-established diplomatic and oil industry links has steadily come to the fore. It is important for Libya's relations with the outside world and Europe in particular. The Bulgarian medics and a Palestinian doctor face death sentences by firing squad, even as their confessions were obtained under torture. The Supreme Court in Tripoli will give what could be the final ruling on the matter - lest the Qadhafi himself intervenes - in November. After a protracted diplomatic and humanitarian efforts by lawyers and calls to Libya from world leaders Bulgarian President Georgi Parvanov has strategically chosen to visit Muammar al Qadhafi for the final weekend prior to the Supreme Court's ruling. If Bulgaria might be dismissed before, it carries more diplomatic weight now, as in 2007 it is expected to join the European Union, which has already judged the Libyan verdicts over the medics as "unfair and absurd" insisting the charges be dropped. The EU does not accept the evidence under which the nurses were convicted on scientific grounds, and is opposed to the death penalty in all circumstances. Indeed, the EU External Relations Commissioner Benita Ferrero-Waldner flew to Tripoli before Parvanov's visit to discuss the case with Gaddafi and urge him to free the medical workers.
Where are the Institutions?
Libya has experimented on various occasion with the concept of privatization, most recently, prior to the fanfare of 2004, the solution was found in worker cooperatives known as tasharrukiyyat. These entailed a form of privatization that was adapted as best possible to the Green Book's economic ideology. These allow for the sale of state production assets to one or more individuals, who agree to share equally in the management and profits of their enterprise. Largely, this system has not enjoyed much success beyond the small service sector in such areas as appliance or automobile repair, hairdressing shops and photography laboratories where ownership is usually limited to single individuals. The program was not successful, and not only because the small scale production failed to achieve any meaningful diversification of the economy. Indeed, a fundamental pillar of a free market economy, and what Algeria has been working fast to establish, is that property rights were not guaranteed and privatization had not been officially sanctioned in law. There was no regulatory framework to support national markets and no financial, legal, and civil institutions in order to provide a free exchange of information and enforce contracts. Libya's Green Book based constitution remains the obstacle. It is an obstacle also because there is no real executive and the various members of the General People's Committees can override each other's decisions. Moreover, the Revolutionary Committees, which act as the guardians of the Revolution have an interest in maintaining the status quo and any serious attempt to liberalize the economy suggests that the institution of the Revolutionary Committees (RC) be scrapped. The fact that many of the members of the RC come from the Warfalla tribe, means that taking necessary institutional reforms disrupts the tribal balance that represents the heart of the Libyan system. As often said in other updates, the oil sector functions autonomously, and very efficiently, as it is vital. Therefore, until real institutional changes are made, the improved relations with the West will mean largely and exclusively, that investments will remain concentrated in the oil sector, where there is a growing competition building between Europe and America. In the 90's of the sanctions, European companies like Repsol, Total, and Agip were thriving in the absence of American oil companies, even as they recognized the competition they were to face if America returned to Libya...
Europe's Fears Were Right:
US oil companies won almost all the contracts in the first 2005 biding session last February. European oil majors are not willing to remain empty-handed, as it emerged in late June that BP CEO John Browne recently met the Libyan leader Muammar al Qadhafi. Browne discussed the possibility of landing a major, exclusive energy deal. BP was not enthusiastic about Middle Eastern oil in the recent past, but Browne was reportedly anxious to approach Libya, which produces some of the 'cleanest' oil in the world while having promising exploration opportunities.
Browne chose to meet the Libyan leader personally to avoid the competitive auctions for exploration rights. Indeed, BP submitted bids in the recent EPSA IV licensing round but failed to gain any rights. Browne's direct approach was well timed to take advantage of recent Libyan concerns that the EPSA IV terms may be too complex and deter investment, which suggests that Libya may work outside of EPSA to sign agreements with individual companies it is interested to keep in the country. EPSA or 'Exploration and Production Sharing Agreements' agreements provide for foreign oil companies to receive a fixed percentage of the output from the fields involved, negotiated on a case by case basis. EPSA I was the model used in 1974 and EPSA II was used in 1980s, EPSA III was used in early 1990s, and EPSA IV is the current mode. Libya has an ambitious plan to double production from the current 1.5 million bpd to 3 million bpd by 2015 - which is still lower than Libya's peak production rate of 3.28 million bpd in 1970. The US sanctions imposed in 1986 and the sanctions over the Lockerbie airliner crash imposed in 1992 caused Libyan oil production to drop by over 50% over the last decade. Libya needs investment in oil, also because its economy- despite officially stated efforts - has not diversified and the regime's own survival is rooted in additional oil production. Craig McMahon, a Wood Mackenzie energy analyst, in Edinburgh believes BP is pursuing a three-pronged strategy in Libya. BP would like to obtain an important exploration deal. BP might also want to redevelop former Libyan National Oil Company fields from the 1960's or early 1970's, and BP could be seeking access to explore Libyan gas reserves. Shell signed a deal with Libya a few months ago precisely for gas.
Author: Alessandro Bruno
