War-torn Libya is land of opportunity

Gulf firms see profit in the battle to return Libya to its pre-revolution peak
War-torn Libya is land of opportunity
By Ed Attwood
Thu 22 Sep 2011 06:15 PM

Not much goes on in the sleepy town of Sabratha, just an hour’s drive on potholed roads from Libya’s capital, Tripoli. But on the north side of town, neatly tucked in against the shores of the Mediterranean, lies one of the most impressive sets of Roman ruins to be found anywhere in the world. Unwary visitors may even find themselves inadvertently stepping on floor mosaics that have lain unprotected amid the dunes for nearly two millennia. Designated a UNESCO World Heritage Site in 1982, the site should be one of the jewels in Libya’s tourism crown. But visitors to the site today will often find themselves completely alone apart from the odd goatherder, and only a tiny souvenir shop and a ramshackle café serve the few who make the short journey from Tripoli.

By contrast, the similarly sized Roman city of Palmyra — over 200 km north east of Damascus and also a World Heritage Site — packed in well over 10,000 visitors in during Eid Al Adha last year. Syria, not to mention countries like Jordan, Tunisia and Egypt, have made the most of their tourism assets, and the industry now makes up a significant chunk of national revenues. Despite the presence of Sabratha and the even larger Roman site of Leptis Magna, to the east of Tripoli, not to mention one of the longest coastlines in the Mediterranean and plentiful eco-tourism opportunities in the deserts of the Sahara, tourism makes up a pitiful 0.8 percent of Libya’s GDP.

Sabratha exemplifies what is wrong with the Libyan economy today; it has massive potential, but is surrounded by dilapidated infrastructure and a lack of investment. If that was the case at the turn of the year, it is even more of a truism now. Located only a few kilometres away from Zawiyah, one of the more hotly-contested cities during this year’s civil war, the town changed hands on two occasions before being won back by rebels in August.

The town’s future, like the rest of Libya, depends on several key issues being resolved at the national level. While the National Transitional Council (NTC) has now assumed control of Libya, the hard work of directing the country’s economic future has only just begun. Already the naysayers are making the obvious comparison between Iraq and Libya; both countries have vast hydrocarbon resources, both have underlying areas of potential sectarian conflict that have been brutally quelled, and both will need emerge from a power vacuum to rebuild their central government structure.

Investors in Libya — a group in which Gulf-based companies and state-owned enterprises may well include themselves — will be asking three main questions before opting either to return to the country or explore for the first time. Firstly, they need to know who is actually in control of the country. In addition, they also need to know what line the NTC, or subsequent government, will take with pre-existing contracts signed under the Gaddafi regime. Lastly, some idea of Libya’s future economic policy is required.

“Pre-existing contracts are probably one of the biggest concerns for investors under the NTC,” says Robert Tashima, regional editor at the Oxford Business Group. “But the NTC is aware of the fact that it will need to kick-start the economy in quite a big way once the violence dies down, not just to get things up and running again but because Libya has also suffered from commodity dependency which has hindered the country’s manufacturing industrial base, which has led to high unemployment. So there are quite a lot of medium to long term issues that are going to have to be addressed.”

Chief among those pre-existing contracts have been those handed out to the big international oil companies (IOCs) during the rapprochement between the Gaddafi regime and the West in the last decade. Although there will be limited opportunities for Gulf energy firms to enter Libya — with many preferring to concentrate on their existing assets at home — Qatar may at least be interested in influencing Libya’s gas policy, as the Gulf state is currently the largest liquefied natural gas producer in the world.

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“One interesting angle for Qatar’s involvement is downstream marketing of oil and refined products, and that is an area where Qatar could really establish itself in Libya,” says Henry Smith, an analyst at Control Risks. “It’s something in which it has substantial experience and a sector where Libya was perhaps lacking.”

However, one company with extremely close ties to the Gulf is already playing a vital role in Libya’s hydrocarbons sector. Set up in 2009, the Libyan Emirates Oil Refining Company oversees one of the country’s largest refineries in Ras Lanuf. A joint venture between the UAE’s Trasta Energy consortium (led by a subsidiary of Al Ghurair Investment) and Libya’s National Oil Company is pouring $2bn into the expansion of a facility that contributes a massive 60 percent of the country’s refining capacity.

That refinery, which is expected to be back on line in weeks, will play a crucial role in Libya’s development, particularly as the state pushes, as is likely, towards more lucrative downstream industries. Elsewhere, a recent focus on renewable energy means that Abu Dhabi’s Masdar may well decide that solar energy projects in the country are worth some of its significant investment power, particularly if Libya gets fully on board with the multi-billion-dollar Desertec initiative. Outside the energy sector, however, other opportunities for Gulf countries also abound.

“There’s quite a lot of room for investment in Libya, and there was even before the conflict kicked off,” adds Tashima. “If you’re a company or an institution that takes a long-term approach towards investing — which obviously a number of state-owned enterprises in the Gulf do — then I think there is quite a lot of potential there. And given the various mixed messages that have come from Libyan sources, there have been indications that political factors could be taken into consideration.”

Prior to the events of this year, Libya’s wealth had long been coveted by Middle Eastern developers and contractors. As they have sought to diversify their backlogs outside previous hotspots like Dubai, North African nations have come more sharply into focus. But the history of Gulf players in the country has not been entirely successful.

Dubai-based Emaar, by far the region’s biggest listed developer, inked a deal with the Zowara Abou Kamash Development Zone in 2006. The joint venture had planned to develop a stretch of coastline near the border with Tunisia, together with the small but picturesque island of Farwa. At the time, the 380 million sq m project was the largest in Emaar’s portfolio and would have included tourism and industrial components. However, it appears that plans for the site have quietly been shelved, although the firm won’t say when this decision was taken.

“Emaar has no current operations in Libya,” a company spokesperson told this magazine. “As a matter of policy, we do not comment on political situations and their related impact on future business strategy.”

The Emaar experience was replicated by another major Dubai developer, Majid Al Futtaim Properties. Speaking at the end of last year, CEO Peter Walichnowski said that the firm did have a joint venture in a mixed-use project in Libya, but that “it didn’t go forward, so we don’t have Libya as a high priority on our pipeline.”

Al Habtoor Leighton, the Dubai-based contractor that had previously targeted Libya as a market, is similarly reticent to offer any firm indications as to its future role in the country. “We put Libya on the back-burner some time ago, and we won’t be rushing in there just at the moment,” says Chris Gordon, group general manager for strategy and corporate affairs at the company. “It could prove to be a strong market, but there is still a lot to sort out over there, and as such we’ll be keeping a watching brief on it for the moment.”

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Other contractors have done more than express an interest in Libya, however. In 2009, Drake & Scull International confirmed it was setting up an office in the country, but that office was shut down earlier this year despite apparently being on the cusp of winning some large contracts. Also in 2009, Arabtec, the region’s biggest building contractor, earmarked the country as a possible location, but has not managed to pick up any work there. Al Maabar, the Abu Dhabi-based developer, had planned to co-invest in a $750m mixed-use group of towers called Al Waha in Tripoli, although, again, that project has also come under scrutiny since the revolution has taken place.

It all adds up to a tough time for Gulf players, but that does not mean — all being well on the political front — that the opportunities will not be there in the future. The 2010 Libya Build conference attracted 600 companies, with a significant number of these coming from southern Europe. Turkey — which has about $23bn worth of infrastructure investment in the country — Italy and Spain were particularly well represented.

Only fifteen firms from the Gulf turned up to the show, with none of the region’s major developers deciding to take part. Again, if political issues are taken into consideration, and the new government has a close hand in the development of new infrastructure, then the role that the Gulf states have played during the course of the revolution this year could well be recognised.

“Gulf and Turkish developers had interests in large scale real estate projects in Libya before the uprising, and I don’t really see that changing,” says Smith. “Although the Emiratis haven’t been as publically involved in the uprising as the Qataris have, it is interesting to watch is the extent to which they are backing certain personalities in the emerging leadership.”

Another key area in which GCC firms have been making slow but steady headway is the banking and capital markets sector. Like Libya’s physical infrastructure, the country’s finance industry is in dire need of reform.

“The banking sector has been incredibly small and very heavily state-dominated,” points out Tashima. “In recent years, prior to the conflict, it went through increasing liberalisation and partial privatisation, particularly as the central bank improved regulatory oversight. But the size of the sector was dramatically out of proportion for what you expect for the amount of liquidity as well as the size of project financing demands in the country.”

Abu Dhabi’s First Gulf Bank (FGB), the UAE’s fourth-largest by assets, was the first Gulf bank to dip its toe in the water of the Libyan banking sector during 2009. Only months ago, the lender opened a second office in Tripoli, although UN sanctions earlier this year meant that FGB was forced to close down its operations. However, as the sector opens up even further to external competition, the bank may actually find itself in an enviable position.

The Abu Dhabi firm was followed by Qatar National Bank, which bought out 49 percent of Libya’s Bank of Commerce and Development in February this year. In a further sign that the sector is hugely attractive to local lenders, Emirates NBD, Mashreqbank and Qatar Islamic Bank all applied for banking licences in 2010, but lost out to Italy’s Unicredit. Again, if calm is restored quickly and competition opens up further, it seems likely that Gulf bankers may well be first in line for the potential riches on offer.

Elsewhere, there are options aplenty in the telecoms field. Although Libya already has two mobile operators, Almadar and Libyana, serving its 6.5 million-strong population, a third licence has been in the pipeline for some time. The UAE’s Etisalat, Qatar Telecom (Qtel) and Turkcell have all thrown their hat into the ring, although the decision — expected last year — was never made.

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However, Etisalat’s standing in the country may well have been enhanced due to a report in the Wall Street Journal about the firm’s role in helping Libyana’s signal stay open as the Gaddafi regime cracked down on communications during the crisis. The report suggested that Etisalat had been crucial in providing expertise and equipment that allowed Libyana to connect to the UAE telco’s network and from there to the rest of the world.

Five months on, Etisalat still refuses to confirm or deny its role in the story. A spokesperson for the company simply says that “there is nothing to comment on”. Is Libya still of interest to the firm? “Etisalat is always in a constant mode to explore new businesses and investment opportunities whenever they arise and match with the company strategies for growth and expansion,” he says. Reading between the lines of corporate pronouncements is never easy, but access to such a relatively immature market certainly should be worthy of consideration.

DP World is another Gulf giant that has hinted at Libya’s potential. The world’s third biggest ports company sees emerging markets as the cornerstone of its business, and is seeing strong returns from investments in infrastructure in Africa, Asia and South America.

“We have been and always would be interested in Libya because of the emerging market potential it offers,” CEO Mohammed Sharaf said during a conference call at the end of August.

The most likely acquisition for the company would seem to be in Misrata, the site of severe fighting during the civil war. The Misrata free zone is the country’s largest, and hosts strong logistics connections, with a major airport only a few kilometres away.

And then, of course, there is tourism. If that sector can account for the ten-percent-plus contribution to GDP that is apparent in neighbouring Tunisia and Egypt, then that goes some way to relieving Libya’s massive reliance on hydrocarbons.

“It’s got some incredible ruins, gorgeous pristine oases in the middle of the desert, and long stretches of coastline which are very pretty,” says Tashima. “Yet the infrastructure there is incredibly underdeveloped; there’s only a smattering of high-end hotels, none of which are really affordable.”

In 20 years’ time, visitors to Sabratha may well find themselves staying in a Jumeirah hotel, eating food that has been shipped to Libya via a DP World-operated port, and having travelled there on a highway built by Saudi Oger. It may seem far-fetched, but if — and it’s a big if — the new government puts the necessary economic reforms into place, there’s a fighting chance Gulf firms could turn out to be the biggest benefactors.

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