This document is provided as information only and should not be used as a substitute to proper research.
The Legal Environment for Investment in Libya
By Reema Ali
Ali & Partners
Libya is embarking on a new era of world relations and is opening up to foreign investment, but finds itself in a position where it has to undo a great deal of what was done during the “Great Revolution”. Indeed, it finds itself in need of a great deal of catching up in all aspects, but especially in the field of legal reform.
Prior to its revolution, Libya had adopted a legal system based on the Egyptian civil law model. This was the order of the day for most Arab countries and these systems worked to create a secular legal system with a general Islamic flavor. In the 1970s, Libya adopted a new approach to government which had a great impact on its legal system. It changed its name to “Jamahiriya” [People’s Republic] and established what is referred to as the direct rule of the people through a system of pyramidal conferences. The lowest level is a Basic People’s Congress and at the top of the pyramid the General People’s Congress (a parliament-like annual conference comprised of representatives and officials of Popular Committees, appointed by the Basic People’s Congresses and Municipal Congresses, and representatives of popular associations and trade unions). This conferences system was based on the theory that every person of age regardless of gender should participate through direct consultation and consensus building otherwise known in Islamic jurisprudence as ‘Shura’. Each conference/congress at all levels has a committee – a mini government- and a secretariat. At the top of the pyramid of committees is the General People’s Committee (The Cabinet). The Cabinet does not enjoy the normal authorities a government would. It has the authority to recommend to and implement the decisions of General People’s Congress.
In 2000, all executive and legislative authority was decentralized to 26 municipal congresses with the exception of economy, finance, energy, defense and security, infrastructure, foreign affairs, social security and trade. Each local government was given its own budget.
The declared new form of government required that class differences to be eliminated, outside influence to be severed, health and education and all basic amenities to be provided by the state. Women must be given equal opportunity. As everyone was expected to protect the revolution, no regular army should be needed. Each citizen was expected to keep an eye on public funds. Property law as we know it was abolished. Labor as a “master-servant” relationship was eliminated. In the realm of foreign investment, nationalization was the fashion of the day. Commercial agencies were abolished as only the public sector can act in that capacity. In fact all private property rights as we understand them were eliminated with the exception of small self-employed service providers who were not deemed exploitive by their very nature.
As a result of these policies and the international sanctions in place, Libya developed deep-seated problems that require serious and concerted reform efforts.
Against this background Libya has embarked on a series of legal reforms. Of course, legal reforms are only as good as the policies behind them. Polices must be coherent and part of a concerted effort; they cannot be reactive and sporadic. Libyans agree on one thing, the principles of the revolution were great, but the implementation went awry. As a result, there appears to be determination this time to follow good policy with robust implementation.
As part of this reform policy, Libya began enacting various laws in the late 1990s and has continued in the past few years. Chief among these has been Foreign Investment Law No. 5 of 1997, and its amendments and implementing regulations, (“Foreign Investment Law”) which together create the most liberal legal framework for attracting foreign direct investment ever adopted by this Libyan government.
The Foreign Investment Law attempts to cover not only pure foreign investment, but also Libyan private capital abroad. It opens up many sectors that were previously closed to the private sector and to foreign investment. Although it takes a conservative approach and adopts a list of those sectors that are allowable – rather than a negative list which simply opens up all sectors with certain specific exceptions- the list is growing and suggestions continue to be made and viewed with favor. The current list covers Industry, Health, Tourism, Agriculture, Oil related services but not drilling and exploration (these are covered by the Petroleum Law) and any other sector specified by the GPC upon recommendation of the Secretary of the GPC for Planning Economy and Commerce.
The Foreign Investment Law provides the opportunity for 100% foreign equity ownership of companies licensed under the law. It provides for various preferences for licensed projects such as an exemption from corporate income tax for 5 years with a possible extension of 3 years provided net profits are reinvested in the project. It provides for an exemption from customs duties on imports of machinery, tools, and equipment needed for the execution of the project and will continue for a period of 5 years during the operation of the project. It also provides for an exemption from excise taxes on exported goods.
Investors are permitted to open an account in convertible currency, to repatriate profits, to employ expatriates when there is no qualified local labor and to own and lease property. They are protected against expropriation and permitted access to arbitration.
Yet despite these incentives and the great opportunities in Libya, foreign direct investment remains low. Those who have seen businessmen return from travel to Libya can see the confusion on their faces. More importantly, statistics show that few projects have been licensed and of those licensed, fewer still are operational.
The problems are multifaceted. The simplest to identify are the flaws in the policy behind the Foreign Investment Law. More difficult are those that result from long-standing policies that cannot easily be reversed. A foreign investor must address these regardless of the form of entry into the market; every investor must proceed with a comprehensive strategy.
Under the Foreign Investment Law, the licensing process is actually a lengthy approval process rather than one in which the Foreign Investment Board verifies compliance of applicants with a list of requirements. It includes an in-depth analysis based on criteria that is unclear to the investor. The minimum capital needed is left to the discretion of the public officials and is not specified in the law. The Board often requires a minimum of Euros 600,000.
In support of this process, the foreign investor must submit an application to the Foreign Investment Board with a detailed feasibility study and a 5 year financial plan which will be reviewed by the Board. The Board, in turn, will make recommendations to the Secretary on the application and the minimum capital required for the company to be formed. This process is uncertain and the investors are given no guidance as to the requirements they are expected to meet to ensure approval.
The sectors that remain closed are the very ones that are attractive to foreign investors. Telecommunications and the financial sector, for example, remain government monopolies. Retail and wholesale operations are restricted to Libyan nationals.
The Law does not afford ‘national treatment’ to Foreign Investment projects. This has a significant impact when these projects have to compete with state enterprises and may have serious indirect implications in the context of dispute resolution in the judicial system. Furthermore Libyan courts would not concede jurisdiction to the foreign courts and Libya is not a member of the New York Convention on Enforcement of Foreign Arbitral Awards, although local courts may defer to arbitral proceedings if there is proof that they will proceed in a timely fashion.
The real problems and obstacle are those that arise from the former policies. These policies go to the root of the ease with which business can be conducted in Libya. As a result of abolishing real property ownership for investment purposes, the commercial real estate market has been completely distorted. There exists now a private land market and a public land market with a price gap that creates considerable uncertainty for both foreign and local investors. Compounding the problem, the Foreign Investment Law is not clear as to whether real property can be used as collateral or even can be freely transferred without government approvals. The government has announced plans to reform the laws governing property and rentals, but their scope is uncertain.
Labor Law and the scarcity of skilled technicians present another serious problem. There are plans to reform the Labor Code to allow a labor relationship that conforms to international labor standards. The Foreign Investment Law currently provides that foreign companies investing in Libya must train local workers to replace their own technically qualified staff, although it allows them to hire foreign labor if there are no qualified local alternatives.
Perhaps the biggest obstacle to a predictable investment environment is the large public administration machinery, with its broad discretionary powers, minimal checks and balances and lengthy approval process. The tedious and discretionary administrative practices often undermine the very solid guarantees afforded by the law. This is particularly true in the light of the committee system adopted in Libya where everyone must agree and, even when they do, their decision is only a recommendation to yet another committee.
Libya has demonstrated its clear intention to reform. It is embarking on accession to the WTO which means that most of it laws will remain in a state of flux as they are reviewed in the context of WTO requirements. It is in the process of dismantling a great deal of its public sector through a vast privatization effort and of providing greater predictability to investors. Whether good policy and good intentions will be accompanied by effective implementation remains to be seen.
High rewards often accompany high risk. In the case of Libya, investors can benefit now if they:
The most lucrative opportunities are usually those seized in times of transition.
These pages contain some basic information about business structure and procedures regarding some key Middle Eastern markets. The following articles are for information only: