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Dealing with Libya

This is the handshake that changed the geopolitical landscape.

The gesture in March of this year between revolutionary leader Colonel Muammar Muhammad al-Gadaffi and prime minister Tony Blair was a symbol that relations between the UK and Libya had finally thawed after two decades of mutual loathing. The murder of policewoman Yvonne Fletcher and the Lockerbie bombing were history. Gadaffi had promised to end Libya鈥檚 development of weapons of mass destruction, and this opened the way for the UK and the UN to lift the sanctions that had cost the country 拢17.4bn.

The end of WMD also allowed the European Union to ease its arms embargo on Libya last month. But the country does not need any weapons, according to Gadaffi鈥檚 son and heir, Saif: 鈥淭here is no need for us to spend on military and defence any more; we can instead spend on development issues. Libya is now a safe and stable country.鈥�

It is also a country that UK can do a lot of business in 鈥� not only does it have vast oil reserves, but it has development plans that entail a vast amount of work for the construction industry and its related sectors. Gone are the days when the staff of consultant engineer High Point-Rendel were forced to work in compounds for their own safety. Architect LCE Archimed and consultants Atkins and Mott MacDonald are already there; contractor Laing O鈥橰ourke and support services group Interserve attended a business opportunities conference in Tripoli last month, and even Norman Foster is known to have made a flying visit earlier this year.

So Libya promises great opportunities for UK Construction PLC. But the Libyan market also presents challenges, and the difficulties of establishing a long-term base there are daunting. Despite the liberalisation of the economy, the legacies of 35 years of quasi-socialist rule 鈥� the bureaucracy, hypocrisy and political infighting 鈥� do not end with just one handshake.

Setting foot in Libya

Tripoli Airport is buzzing with Brits. A 6 ft high portrait of Colonel Gadaffi seems to watch over them at passport control, although it is difficult to tell for sure as his eyes are covered by those trademark sunglasses.

These Brits are mainly businessmen, looking to establish trade links with this emerging market. But the problems of doing business in Libya are immediately obvious. After spending weeks trying to obtain visas, many of the applicants face scepticism from Libyan immigration officials when they finally arrive.

Take Harry, for example. He works for security consultant Olive. The company has 300 close-protection gunmen operating in Iraq and has advised architects on methods of designing out terrorism. Harry is the brother of Tiggy Legge-Bourke, the former nanny to Princes William and Harry. But his family connections do him no good here 鈥� his visa is rejected and he is on the next flight back to London. Another only scrapes through when the passport control desk is ordered to do so over the phone by an aide to Saadi Gadaffi, the Colonel鈥檚 footballer son.

The situation has become so acute that the British ambassador has threatened to review a policy allowing Libyans to get visas within 24 hours if a case is urgent, unless authorities relax their own rules.

Never mind doing business here, it鈥檚 tough enough to even set foot in Libya.

Setting up shop

Once passport control has been negotiated, there is the even greater hurdle of setting up shop under an archaic tax regime: if a UK company sets up a branch in Libya it can face being taxed on its turnover. Officials ignore profits in foreign accounts, arguing that they cannot judge what expenses have been incurred offshore. Instead, they judge profit margin on what they reason would be typical for that industry. A consultant would be judged to make 35% profit on their turnover and a cementing company in the oil sector 15%. They are then taxed on this assumed profit, ranging from 15% for the first 200,000 dinars of profit to 40% for anything over 2 million dinars. On top of these rates is a 4% 鈥淛ihad tax鈥�, introduced by the Gadaffi regime in 1970.

Despite this, Atkins is looking to boost its work in Libya by setting up a branch in Tripoli by next summer. Instead of working on projects from the UK, teams of designers could be flown to Tripoli to work on the ground.

A way to avoid some of this tax is for foreign firms to set up under Law 5. This is was passed to encourage inward investment in certain sectors, and it allows a firm to operate tax-free for five years. However, this law is only for certain industries and judges by criteria such as reducing imports, increasing exports or creating training opportunities for Libyans.

Most construction companies are effectively excluded from Law 5 鈥� but not all. One UK-led firm that has taken advantage of the concession is First Engineering. Established in 2002, First has a 70-strong construction arm, but this restricts itself to renovating a few warehouses, and is really a sideline. It qualifies under Law 5 as a service maintenance firm that is bringing over modern technology that will boost the economy, such as machines to repair construction equipment.

Good relations

It can take a long time to become a Law 5 firm 鈥� up to a year 鈥� but First Engineering achieved it in four months, as many of its British staff had operated in the country for more than a decade. 鈥淎 lot of British companies will find it hard to break into this market,鈥� says Paul Austin, the group鈥檚 general manager. 鈥淭here鈥檚 an old-fashioned way of doing business here. Foreign firms can鈥檛 come over once or twice a year for three days 鈥� that鈥檚 the European way of doing business.鈥�

Waleed El-Turki backs this up, saying that face-to-face relationships are vital. El-Turki runs consultant Golden Star with his brother Emad. It covers a range of disciplines, most notably architecture, and it works with LCE Archimed in the UK. Waleed, who is a Libyan national, persuaded the practice鈥檚 directors to expand into the country when he was working for them in Brighton three years ago. The high tax levels deterred LCE from setting up an office, but Golden Star has become something of a sister firm, and they have worked together on projects for the Libyan Olympic Association and the Institute for Petroleum. Libyan designers go over to LCE鈥檚 headquarters in Brighton to develop their skills, and Waleed has helped his British colleagues to understand the Libyan culture. Nick Lomax, director of LCE, accepts the importance of relationship-building and its consequences: 鈥淎nybody who wants to do business in Libya has to be patient.鈥�

Skilled workers

A lot of British companies will find it hard to break into this market. There's an old-fashioned way of doing business here. Foreign firms can't come over once or twice a year for three days 鈥� that's the European way of doing business

Paul Austin, First Engineering

If that businessman is an architect or engineer, they need to broaden their horizons as well as be patient. Engineering and architecture are integrated professions in Libya. 鈥淟ibyans like people who can take on the whole package,鈥� says Waleed.

This has meant that LCE has had to look for engineer partners to pitch for projects, and it is talking to Scott Wilson. Waleed points out a problem with this approach: 鈥淧rojects that are predominantly engineering-based can end up with poor design.鈥�

Architecture as a profession is further weakened by administration from the centre. Waleed鈥檚 education was privately funded, and he was RIBA-qualified when he trained in the UK. In contrast, many Libyan students are sponsored by the government and take masters and doctorates rather than doing professional training. As a result, Waleed says, too many architects in Libya are good historians and bad designers.

He points to much of the country鈥檚 social housing, which has too many steps and decorative features 鈥� very pretty, but also very inefficient, especially so given the ministry for housing鈥檚 estimate that the country needs 40,000 homes a year in the next decade.

At present, local contractors can cope only with about 15,000.

Waleed says Libyan clients will also have to get used to paying higher fees if they want to secure the top-level skills that UK consultants can offer. Typically they would pay about 2-3%,

but the likes of Golden Star will be looking for 9%. This level of fees should provide an attraction to government clients as the engineering profession is understood to be fuelled by back-handers and corruption. Engineers get about 拢80 a month; a family of four needs 拢800 to lead a normal life.

Partners not wage workers

If Libya has problems with its skilled workforce, it faces an even greater crisis with its blue-collar labour. This goes right to the heart of Gadaffi鈥檚 ideology. After deposing King Idris in 1969, he spent most of the remainder of the century taking the country on a perverted variation of socialism, laid out in his Green Book. A key mantra was: 鈥淧artners, not wage workers鈥�.

The meaning of the phrase is that no Libyan would ever be the servant of another. Manual and relatively unskilled jobs effectively became a no-go area for the people. For example, a taxi driver could be seen as a partner, because he was providing a service to the passenger. A construction worker digging a hole was a job anyone could do, and so was considered menial wage labour, and therefore beneath the average Libyan.

This has had several knock-on effects. The decision to liberalise the economy in the late 1990s meant that there was less of a nanny state. Unemployment shot up to 30%. Unusually, this is coupled with high levels of underemployment as Libyans, particularly those who have grown up solely under the Gadaffi regime, have refused to take manual jobs.

Adel Zikra runs an architecture and engineering practice of 12 people. He designed most of the government administrative buildings in Sirt, the town where Gadaffi was born, and the iconic five towers development in Tripoli, which was designed in such a way that only four can be seen at any one time. He says: 鈥淎s a Libyan people, we have zero labourers for construction. The main problem is that most of the labour comes from other Arab countries, Africa, south-east Asia or Pakistan and India.鈥�

Looking around Tripoli, it is noticeable how the rubbish collectors and labourers on building sites are almost exclusively black, brought over from southern African countries. Some of these labourers come through labour agencies, and so have experience of working with construction equipment. Others simply come across the border looking for work. Under Libyan law, Africans can move to the country without a visa and can make unchecked claims that they have experience of operating construction equipment. This often leads to shoddy work. It is illegal for companies to simply pick this cheap labour off the street and give them work, but it is a widespread practice: third-country nationals, as they are known, will work for just 拢10 a day.

Nadia Riffatt, head of strategic planning at the Municipality of Tripoli, says: 鈥淭he growing population of migrants is difficult to control.鈥� This may even have contributed to the illegal construction of housing on the outskirts of Tripoli.

Cheap labour is going to become an increasing problem for Libya. Mediterranean contractor J&P has worked there for 28 years, but is believed to be preparing to scale down its workforce from 4000 to fewer than 3000. One reason for this is the influx of Chinese companies to Libya, which bring with them cheap labour, reducing their bid costs for major oil and gas infrastructure projects.

But these low-paid workers are not enough to develop Libya.

As Zikra points out: 鈥淲e need construction people. In the past 35 years we have lost experience for the construction industry, especially new technology.鈥�

The rant

The British ambassador to Libya, Anthony Layden, is angry. He describes the difficulty of obtaining visas as 鈥渁 turn-off鈥� to UK business and tourists. He thinks that UK business might ultimately turn up its nose at Libya. 鈥淭his year we have hosted nine trade missions to Libya for 220 companies. There are three more to come. The results so far have been very disappointing. It has been a bleak year for Libya; the worst in 10 years. UK exports to Libya are 20% down on 2003. Since January I get the feeling that the drive to economic reform of Libya has lessened.鈥�

The deterioration of the Libyan economy can be attributed to government infighting. After 35 years of authoritarian economic control, some senior government figures have found it difficult to let the private sector loose. Others want to drive the reform agenda. The budgets for government ministries were approved in February, but subsequent arguments on the move towards privatisation led to delays in dishing out the cash. Only in the past couple of months have substantial government works projects been given the money allocated to them at the start of the year.

This year we have hosted nine trade missions to Libya for 220 companies. The results have been very disappointing. It has been a bleak year for Libya

Anthony Leyden, ambassador to Libya

It is in this politically divided context that UK contractors and consultants will start their working life in Libya. The situation is made worse by the lack of transparency: it is unclear which body is in charge of which set of works. Layden warns: 鈥淯K business cannot read this economy; it cannot see who in government is responsible for a topic.鈥�

For example, the Municipality of Tripoli was in charge of the restoration and conservation of the city鈥檚 old town, but this role was recently usurped by the minister of culture.

Not that the municipality is without its problems. Five-year development plans for areas in the city are hard to implement because budgets for projects are only drawn up annually. Each ministry within the municipality produces its own masterplan for particular areas, even though there is a specific department to draw up a co-ordinated plan for the whole of the city. As a result, strategic plans for Tripoli are undermined 鈥� plans developed in the early 1980s for satellite cities around Tripoli to cope with urban E E growth were never implemented.

This has proved a challenge for Atkins. The consultant has traded well in Libya so far, raking in 拢1m in turnover. It has worked extensively with the Libya Football Federation and National Consultants Bureau, and helped with the country鈥檚 failed football World Cup bid with Tunisia (see case study).

But its plans to masterplan a new central business district in Tripoli have been delayed by political changes at the municipality. The group was about to sign a standard Atkins contract with the governor, when he was replaced. The new governor wanted to change the terms of the contract, which has different tax regimes. The two parties are now trying to iron out a compromise.

Banking on success

Atkins director Adrian Perera acknowledges the difficulties of working in Libya and explains that it may be more two years before the first digger breaks the ground on his project. But he says there are historical parallels with underdeveloped markets that have later become areas of expansion for the construction industry.

鈥淔or the first five years after the fall of the Berlin Wall there was little construction in eastern Europe. Before people were willing to invest they had to be sure it was going to pay 鈥� Western banks wouldn鈥檛 touch it unless they were certain. But there is an excitement of working in an emerging market.鈥�

Perera points to one sector that is showing signs of maturing fast 鈥� tourism. The Corinthia Hotel was built speculatively last year. At first it had an occupancy of roughly just 20%, but the five-star hotel is now approaching full capacity. It has given foreign banks the confidence to invest in the sector 鈥� Libyan banks often prefer to invest outside the country, where returns are greater.

It is thought there is enough room in Tripoli now for two or three more five-star hotels, and this looks likely to start with the upgrade of the one-time centrepiece Alkabir Hotel. Atkins seems likely to design the revamp, having talked to interested Middle and Far Eastern funders. Several operators, including Hilton and Le Meridien, are thought to be interested in running it. The Corinthia and Alkabir should be supplemented by five or more three and four-star hotels in the next 12 months to accommodate the growing number of business travellers.

There is a caveat here though. Many banks are only willing to fund projects upon the production of deeds of ownership. The trouble is that there are potentially two deeds of ownership for any one building or area of land. One set is recognised by the Gadaffi government, the second may be held by those who lost assets when the present regime took power. The issue of previous ownership is a hot one: at least one family-run construction firm that had its equipment nationalised under the Gadaffi regime will not return to work in the area unless it is granted compensation.

Similarly, banks also need guarantees that any project they back will not be nationalised. A group of ex-pats that built a golf course had it taken over by a university to be redeveloped for accommodation. A top-seven oil company wants to lease a headquarters in Libya rather than own it, for fear of losing it.

The future

The challenges are great, but Gadaffi鈥檚 heir, Saif, is aware of this. 鈥淓conomic growth is the lowest in the region for a decade; we are dependent on a volatile oil market 鈥� oil production used to be 3-3.5 million barrel a day, now it is 1.5-1.7. The public sector crowds out the private sector, infrastructure needs upgrading and there is an unfavourable investment climate.鈥�

Saif is setting up a national economic strategy, with reform of legal and regulatory frameworks, new banking systems and prioritising areas for development at its heart. Characteristically, though, it is unclear whether Libya鈥檚 prime minister or the government at large backs the plan.

But Saif tries to woo western firms with the country鈥檚 great advantages: 鈥淟ibya has large oil reserves; a favourable geographic position 鈥� it is just an hour from mainland Europe; it is underpopulated, which is an advantage to reforming the economy; it is also a wealthy country, despite popular belief.鈥�

If reform is possible, Libya will certainly prove attractive. But Saif鈥檚 claim that the country is cash rich confuses some. Tripoli hardly appears burdened by wealth. The vice-president of one US contractor scans the area and says: 鈥淭he question I have is: this country has so much oil, so where did all the money go?鈥�

This man鈥檚 nagging doubts over the Gadaffi regime mean that, for now, he will not allow his company to enter the market.

Blair may embrace Libya; the construction industry may find it harder to do so.