Christopher Johnson Nov 0504

OPPORTUNITIES AND CHALLENGES IN THE NEW LIBYA Christopher H. Johnson Chairman, US-Libya Chamber of Commerce November 5, 2004 Global Interdependence Center Philadelphia, PA

INTRODUCTION I am the Chairman of the US-Libya Chamber of Commerce, the entity officially recognized by the Libyan Union of Chambers of Commerce to represent American business interests in Libya.

The US-Libya Chamber of Commerce seeks to complement the political rapprochement between our two countries by building bridges of commerce between the U.S. and Libya, one of the brighter prospects for U.S. business in the Arab world.

As sanctions have progressively lifted, Libya is increasingly perceived as one of the few promising new markets in the region.

As in the days of the Oklahoma land runs, American companies have been lining up for business in this virgin market.

Despite the long years of sanctions, American products are well known and respected, including fashion, electronic, audiovisual, software and other products, supplied through “gray markets� in Tunisia, Egypt and other third countries. A steady flow of Libyan tourists regularly visits neighboring countries, to purchase American products. American companies will find a keen awareness and ready demand for their products and services.

There may in some instances be challenges in establishing a position in competition with parallel imports, and in restoring exclusive rights to intellectual property rights.

Three members of our Chamber visited Libya last month, to develop relationships with our counterparts in the local Chambers of Commerce and to assess the experience and opportunities for American business interests. In meeting with various ministers, governors and most importantly business leaders, we encountered a uniformly enthusiastic welcome, and sense that good commercial relations with the U.S. were key to economic prosperity and development. Everyone had suffered from long years of isolation and ostracism, and everyone was eager to put this conflicted past behind and open doors and hearts to a new and better quality of cooperation and mutual acceptance and respect.

To understand the Libya that we saw, press reports from the sanctions period must be heavily discounted. Ordinary Libyan businessmen have many of the same concerns as any other businessmen, as do many ordinary Libyans. Everyone seems to agree that the government’s role in the economy should be curtailed, and the business community empowered.

One question that we heard frequently from our Libyan business counterparts was, why is American business so slow to come. Libya has taken a bold step in seeking to turn swords into plowshares; Al-Jazira and other voices of Arab nationalism have complained that it has little to show in return.

From those American businessmen who had responded to the invitation to do business in Libya, we heard many complaints about difficulties in getting visas, registering branches, clearing goods through customs and generally cutting through red tape. As in many developing countries, it is often difficult to get things done through the formal channels; informal channels become crucial, and we are working hard to identify allies with the access and clout to solve problems.

As you would expect in any relationship being restored after years of conflict and neglect, there remains much misunderstanding and baggage from the past to overcome. Like two long-alienated brothers seeking reconciliation, both parties strongly desire to put past differences aside and reaffirm their mutual respect and commitment.

While our European friends are also stepping up smartly, respect and often preference for American companies is strong.

We are recognized as the dominant or leading player in many key sectors, including energy, information technology, entertainment, telecommunications, agriculture and business services.

Given the many challenges arising from both poles of the relationship, we see a crucial role for our Chamber in bridging differences, in trouble shooting the inevitable glitches and in mediating between the newly-reconciled brothers in commerce.

After thirty years of strong central planning and a relatively underdeveloped private sector, enabling institutions for secure commerce are weak. Local courts have little business experience, and the institutions required for business to develop and prosper are newly-formed.

We discussed with our local Chamber counterparts strategies for mediating between the two sides. One idea that we discussed is creating an arbitration system administered by our Chamber whereby disputes between American companies and their local counterparts could be resolved quickly cheaply, fairly and effectively. We are working with the local chambers and authorities to gain recognition for this new system, and encourage all American companies to incorporate USLCC arbitration clauses in their contracts.

Another service to members that we discussed is an informal vetting system whereby the local chamber leadership would help in investigating the strengths and weaknesses of proposed local agents and business partners. As in most countries in the region, business intelligence is weak, and transparency a new and unfamiliar concept. We hope to help fill this void through our contacts and reliable sources within the local chambers.

We also discussed the importance of integrity in business dealings, in the context of the U.S. Foreign Corrupt Practices Act that bars U.S. persons from illicit payments to government officials. Libya is cracking down on such practices; a recent issue of the Benghazi Chamber of Commerce’s magazine has a cover story about a campaign to expose and end such practices. We were assured by our local counterparts of their commitment to help American companies avoid such problems, and told to bring any instances of improper demands being presented to our members to the local chambers to help avoid the problem and protect against any adverse commercial consequences.

OPPORTUNITIES Energy The current round of EPSA (Exploration and Production Sharing Agreements) concessions was designed to be fair and open, and free of opportunity for undue influence. Some complain that too little is on offer, or that the National Oil Company lacks the experience to conclude deals quickly. The will is however there, and should translate into significant opportunities for American companies.

Education and Manpower Development

While Libya has traditionally relied heavily on Egyptians, Tunisians and Africans, it seeks to expand employment opportunities in a modern, globalized economy. Foreign investors are seen as key in transferring technology and generating employment. Both countries have at various times in their history also sent their best and brightest to the U.S. for higher education.

One project that we are promoting in cooperation with the Coordinating Council for International Universities, which is playing a key role in creating a new American university in Kabul, is a new American University in Libya.

Agriculture Libya has invested heavily in agriculture, for national security and self-sufficiency.

The Great Manmade River project promises significant opportunities for the many U.S. global technology leaders in this sector.

Libya is one of only six countries with no milling or refining capabilities for food staples; excellent opportunities arise to team with local businesses to construct and operate milling and pressing operations.

Tourism Libya offers outstanding opportunities in tourism, based on its strong cultural resources, its Mediterranean climate, its long undeveloped coastline and its proximity to Europe. One of our business counterparts in Benghazi for example is negotiating with a Swiss pension fund for a resort on the coast for use by its pensioners during the winter months.

CHALLENGES Traditional vs. Modern Systems Traditional culture remains strong, favoring personal and informal over formal relationships.

While Arab states have gone far towards adopting global economic and regulatory principles, traditional political, religious and cultural values remain strong. Success in business requires appreciation of this conflict between traditional and modern, and the primacy and opacity of the traditional. Problems without solution through official channels can often be solved through strong relationships with key players. Globalization is a relatively new in both countries. It is crucial not only to negotiate a good contract, but also to take full account of the traditional system and ally oneself with appropriate partners, agents and allies, both inside government and without. Since few Western companies have had the opportunity to learn the traditional system, our Chamber can play a crucial role in helping them navigate through the complexities of the traditional local system.

Libya has since the revolution embraced various core Islamic restrictions involving alcohol, interest and dress. Shari’a law remains pivotal: the new government’s theories were for example announced on April 16, 1973, the Prophet Mohammed’s 1,402d birthday. The lunar calendar is used, and all documents must be in Arabic, including passports in applying for visas.

Finance The banking sector remains relatively weak, though some energy surplus will reportedly be reserved for business projects.

We are hoping that the financial services sector will be opened up to U.S. banks, whether to satisfy WTO requirements, or to obtain

the benefits of direct engagement in global financial markets.

While officials have stated that the financial services sector is open to foreign investment, licenses have yet to be issued to foreign institutions.

Rule of Law Libya has developed its own political, economic and legal systems, which in some ways resemble and in some ways differ significantly from other regional and global models. Libya displays less traces of the colonial legacy than say Morocco, Tunisia or Egypt, though it has adapted to its own purposes versions of the French civil code and the Italian criminal code.

While the Saudi Basic Law refers to the Koran as the constitution of the land, the Libyan system is based on the Green Book and the Green Charter of 1988. Both countries lack mature system, structure and mediating institutions, such as professional associations, courts and regulatory agencies. For example, the Benghazi Chamber of Commerce has only existed for two years.

As in Saudi Arabia, Libya has recognized the importance of privatizing and regulating telecommunications, financial services, power and the like. Both countries are only beginning to seriously address rule of law, competition, state and corporate governance, transparency, property rights, taxing and collecting and publishing economic information.

Article 11 of the Green Charter recognizes private property as “sacred and protected”, subject always however to the “public interest”. Important challenges remain in finding the appropriate balance between these sometimes competing principles; success in developing predictable and clear guidelines will go far to encourage and reassure foreign investors and bilateral and multilateral finance institutions to risk their capital and resources.

Many seminal cases in international arbitration arise from the

nationalizations during the early days of the revolution, in which oil concessions were expropriated. This issue remains a work in progress throughout the region. Many of the cases upheld private property rights, and Article 11 reflects a growing understanding of the concept of private property.

Transparency As elsewhere in the region, reliable business intelligence is hard to come by. There are no local credit reporting agencies. The best source of business intelligence comes through reliable contacts, in the case of our Chamber our counterparts at the local chambers.

Human Rights Amnesty International was invited back into the country in February after a fifteen-year absence, and the Centre for International Prison Studies visited last year. While the criminal courts were for a time supplanted by Exceptional People’s Courts, these are being restored along with their wider range of protections for the accused.

Non-Tariff Trade Barriers Globalization Libya applied for WTO membership two years ago, though many major reforms will be required to gain admission, including elimination of the monopoly on trading for local entities consistent with the national treatment principle.

Corruption

One theory for the failure of the 1951 Constitution, which like Iraq’s was drafted under UN auspices, is the conflict between its high aspirations, the country’s enduring tribalism and corruption of senior officials, some of whom left after the revolution for Saudi Arabia.

Visas Visas have proven to be an enduring challenge both for Americans seeking to visit Libya and for Libyans seeking to visit the U.S. Some American exhibitors at Libya Energy Week last month were unable to get into the country, or turned away at the airport.

Our experience getting visas for our members has been excellent; we obtained these overnight for the participants in our recent visit. Libyans visiting the U.S. must travel to Tunis or Malta to apply, since the U.S. liaison office will not be issuing visas until they move into their own facility, which could take months or possibly years.

“Curse” of Energy Wealth Like some Gulf states Libya has been described as a “distributive” state, with public institutions controlling the “commanding heights” of an energy-based economy, with benefits “trickling down” to the people. By contrast the U.S. and Europe have been described as “extractive” economies regulated through taxation, competition policy and rule of law, emphasizing transparency and accountability at every level of public and private economic and political activity. Libya, like Saudi Arabia, now proposes to learn from the Western model.

While most governments build their budgets on revenue and other taxes, in both Libya and Saudi Arabia the fiscal flows go top

down rather than bottom up. Proposals in Libya for handling energy surpluses have included the idea of transferring half the oil revenues directly to the people, as has also been proposed for Iraq and other energy-rich economies.

Central Planning Like other planned economies, the private sector has over the past decades been relatively weak, undeveloped and controlled.

Much of the economy was nationalized in the early 70’s. The national commodities procurement bureau, whose Director we met in Tripoli, purchases commodities on the international market with a budget of $1.3 billion, which it sells on the local market for $300 million. Doctors are limited to about $6 in what they are allowed to charge for a private consultation, with a fixed price list for major procedures. On the other side of the price control scale, mobile telephones were priced at up to $15,000 at the peak according to one source, though this has come down substantially, on the theory that the users must pay for the cost of deploying the network.

70% of the workforce is employed by the government, though plans to revitalize the private sector should reduce this.

Libyan reforms in the late 80’s allowed independent cooperatives and free souqs, liberalized international trading, removed subsidies on key commodities and permitted private practice for professionals. Further reforms would strengthen the private sector; raise fees for public services; reduce the public payroll; end currency controls; remove equipment import restrictions; liberalize the banking system; guarantee foreign investment; and promote tourism. While not all of these measures have been implemented, they do promise significant opportunities in international trade and investment.

ROLE OF CHAMBER

In any traditional society, success in business as in all other things depends on reliable and respected connections that assure local status and access.

Western company seeking to do business in Libya face an obvious disadvantage, lacking as they do any prior network of well-connected locals to help resolve the many challenges that they will inevitably face.

The US-Libya Chamber seeks to bridge the gap for its members through its knowledge of the local system, its network of relationships with the key local players, and its access to decision makers, both public and private, who can make the difference between success or failure at the various stages of selecting and implementing a local commercial strategy.