Sample Law Essay Paper on Libya’s Economy

Libya’s economy relies heavily on the abundant energy resources particularly the light
low sulphur crude oil and natural gas. Earnings from oil contribute to a high percentage of her
exports and public sector wages. As a result of the country’s high dependence on oil revenues,
her percentage of the Gross Domestic Product (GDP) derived from oil has remained high. The
former President Muammar Qaddafi main economic policy was to reduce the country’s
dependence on oil. However, this was not seen to fruition due to lack of good infrastructure and
water resources 1 .
At the time of Libya’s independence, the country’s economy was majorly based on
agriculture. The country also possessed few minerals for commercial use even though iron ore
was eventually discovered. Due to lack of coal and hydroelectric power, there was little energy
potential that could be used to exploit the few minerals available. As a result, during the 1950’s
and early 60’s, foreign agencies mainly form United States Italy, continued to finance the
country. After petroleum was discovered, petroleum companies employed few Libyans due to
low levels of skill, technical and management expertise 2 . However, the companies paid a portion
of their profits to the government in forms of royalties and taxes. Decisions and financing
concerning the companies came from outside rather than from Libya. This changed with the
military coup d’état in 1969.

1 Otman Wanis & Erling Karlberg, The Libyan Economy: Economic Diversification and International Repositioning,
(Springer, Hiedelberg, 2010), 52.
2 ibid


The new regime headed by Muammar Gaddafi scrapped most the previous frameworks
and the operating oil companies were put on notice that they were overdue on large payments for
unpaid taxes and royalties. The new government embarked on replacing foreigners and foreign-
owned firms in trade with Libyan citizens and companies. The government had by 1974
nationalised oil companies or was a participant in their decisions, production and transportation
facilities. This was better for the government other as compared to the royalties and taxes
remitted by the companies previously. Despite of all this, the country continued to rely on
foreigners for exploitation, management and marketing of oil fields.
Following the shooting down of the Pan AM Flight 103 Lockerbie, Scotland, the UN put
sanctions on Libya in 1992. This isolated the country economically and politically. Gradually
Qaddafi started to rebuild his relationship with the West and the sanctions were suspended in
1999 but were fully lifted in 2003. This was after the country took responsibility for the bombing
and agreed to compensate victim’s relatives. It also agreed to reveal and end its programs to
develop weapons of mass destruction and renounced terrorism. With the US following soon after
in lifting her unilateral sanctions, Libya started attracting foreign direct investment especially in
energy sector 3 .
National Oil Corporation (NOC)
The National Oil Corporation is Libya’s national oil company which was established in
1970 to replace the public Libyan Petroleum Company (LIPETCO). NOC’s responsibility was to
implement policies passed by the Ministry of Petroleum. This Ministry was later dissolved in
1986. The Corporation’s jurisdiction expanded after the nationalisation of foreign owned
3 Edward Schumacher, “The United States and Libya,” Foreign Affairs, 65/2 (1986/87), 336-39.


companies like Esso, Shell and a local company Petro Libya. These companies’ operations
which were transferred to NOC included importing, distribution and selling of refined petroleum
products at subsidized prices within the country 4 . The following year, all these companies were
merged into one marketing company renamed Brega company.
NOC got a greater share in the oil industry besides from nationalization of oil companies
after many American-owned companies pulled out of Libya due to political events in the 1980’s.
After sanctions were lifted and Libya invited foreign investors into her oil industry; companies
that offered NOC a high share of production got oil tender bids. Still, the companies awarded the
tenders bore all the costs on exploration, appraisal and training for minimum of five years while
NOC retained exclusive ownership. NOC owns and operates several refining facilities besides
many other oil and natural gas processing companies.
Former Government’s Role in the Economy
In a bid to stamp out what Gaddafi termed as bourgeois exploitation, in 1978 he
outlawed rental payments for property and changed all residential tenants into landlords. With
this, the private sector and real estate were thus done away with and the new owners were
required to pay mortgages. In the same year, he also urged workers to treat themselves as
partners and not wage labourers where they worked. They were now to involve themselves in
day-to-day management of their places of work 5 . The new regime went further and tried to scrap
off all private commerce in favour of state centralised supermarkets. Further, in 1980 Gaddafi
demonetised all currency notes above one dinar. This was to encourage individuals with large

4 Dirk Vandewalle, A History of Modern Libya, (Cambridge University, Cambridge, 2006), 125.
5 Allan J A, “Libya: The Experience of Oil,” The Maghreb Review, 8/3-4, (1983) 98.


sums of dinars to deposit them in the nationalised banks and this would ensure state’s control
over private sector assets.
The 1978 law which allowed workers to be part of decision makers made effective
management almost impossible. The workers’ committees which were mandated with decision
making rarely agreed to economic efficiency or profit making as legitimate objectives thus many
companies no longer had a clear role in the economy. The workers committees’ inefficiency
resulted to stifling dynamism in the private sector. In turn, the government was unable to
accomplish key economic tasks and it had no option but to turn to foreigners 6 .
Due to the government’s policies, many Libyans with managerial experience key to the
economy left the country. This exodus was compounded by sharp drop in oil revenues which
started in the early 1980’s. The drop in revenues indicated that the government was unable to
finance its ambition to drive away the private sector. The foreigners whom the government had
relied on to offer the much needed expertise were expelled to create jobs for Libyans.
Nationalisation and its Demerits
Nationalisation in the petroleum industry started in 1971 when the government
nationalised the British Petroleum share of the British Petroleum-Bunker Hunt Sarir field. Soon
after, still in the same spirit the government demanded a 50% participation in the above
company’s operations. Upon refusal, the company was nationalised and made to be one of
NOC’s subsidiaries. ENI-AGIP, an Italian company agreed upon a 50% government’s
participation in its operations. Occidental, followed soon after and settled for a 51 % of its assets

6 ibid


to be owned by the government. The Oasis Group, which was a conglomeration of many
companies also settled for 51%. In last quarter of 1973, Libyan government unilaterally
announced it was taking over 51% of all remaining oil companies, save for a few small
operators. The government’s position to the companies was they either let the government
participate or face nationalization. Companies that refused like Shell that would not let the
government take its share in the Oasis group was nationalised in 1974. Other companies that
were also nationalised were California Asiatic Company, Texaco and the Libyan-American Oil
Company. However they were compensated three years later 7 .
With nationalization it meant all business licenses were cancelled and the government
was in control of all commercial and industrial operations. As a result of a state run economy,
laissez-faire business practices were in place. Bribery was institutionalised and looting of public
funds became rampant. The country was plunged into political, administrative and economic
Oil Industry
The growth of oil industry since 1960’s has been remarkable in terms of proliferation and
rapidity. Libyan crude oil despite having high wax content, is light and easier to handle than
other most crude oils from other areas. The crude also has a low sulphur content thus making it
easier to be used in internal combustion engines. It is also a less environmental pollutant as
compared to other crudes. For this, Libyan crudes were in demand in Europe from the beginning.
Libya’s topography allows the wells’ output to be piped directly assuring direct supply and this
becomes advantageous since other Mediterranean oil producing countries are not able to. The
7 Alexander Nathan, “Libya: The Continuous Revolution,” Middle Eastern Studies, 17/2, (1981), 210-27


military coup in 1969 brought in a shift in government’s attitude towards the purpose and
function of the foreign operating companies in line with its general nationalist-socialist, political
and socio-economic orientation. Oil prices in Libya have largely been settled in OPEC meetings
which it became a member in 1962 8 .
Petroleum Law of 1955 was still governing petroleum production in 1985. The same law
was however amended in 1961, 1965 and 1971. Under this law and through the Ministry of
Petroleum the government gave concessions to several foreign companies. In order to allow
faster exploitation of deposits, a contract was put in place that called for progressive
nationalisation of Libyan operations headed by foreign corporations over a span of ten years. The
government’s share started at one-fourth and ended at three-fourths. It got its compensation in
the form of product sharing. Esso company was the first to set operations in Libya and was soon
followed by many others when it proved to be a profitable venture 9 . After Lockerside bombing
and the subsequent UN and US sanctions and embargo respectively which prevented any
company from investing or doing business with Libya, the country lost many billions and one the
hardest hit sector was the oil industry.
Legislative Framework
Law no.5/1426 in 1997, Encouragement of Foreign Capitals Investment
After the sanctions and embargo were lifted, Libya entered into an era of trade and
investment promotion. However, Libya is not a simple market for foreign investors due to the

8 Allan J A, “Libya: The Experience of Oil,” The Maghreb Review, 8/3 (1981) 186-87.
9 Frank Waddams, The Libyan Petroleum Law of 1955, The Libyan Oil Industry, (Croom Helm, London, 1980), 12


intricate laws and regulations. These laws are also not clear. This notwithstanding, the
government set out to push for an economic liberalisation program which was centred on
attracting foreign investment, modernisation and privatisation. The foreign investments are
considered a good way of developing certain underdeveloped regions, broadening the economy,
creating new jobs and reducing costs of production 10 . Libya ratified laws and regulations aimed
at improving the nation’s business climate and attract foreign investment. Amendments were
made on this law which allowed co-investments between Libya and foreign partners. The law
also touched on activities of foreign investments to the main legal obligations like registration
procedure in trade or industrial registers.
Under the same law, Libyan Foreign Investment Board (LFIB) was set up. Its mission
was to oversee and regulate foreign investment which was then considered aging and obsolete
industrial base. This was characterized by an absence of national industrial planning, obsolete
technology, poor management and, slow or non restructuring and over employment. Besides, it
had other roles:
 The LFIB’s theoretically was to engage in investment promotion, its operations were
generally limited to processing foreign investment inquiries save for tourism related
 Served as the screening mechanism for foreign direct investment.

 The LFIB also disposed imported materials, transferred capital outside of Libya after a
project was completed and employment of foreigners.

10 Bruce Ronald, “Libya: Lockerbie Trial Ends, Sparking New Libyan Initiatives,” Africa Contemporary Record, 28,
(2006), 644-45.


 The board also identifies and promotes investment opportunities by elaborating and
presenting investment plans and economic studies for the country’s development.
 Applications for foreign capital investments are also received and considered by the
 Issue licenses and obtain approvals required for investment projects.
 Develop investment programs and promotional activities to woo investors.

 Receive and investigate on investors’ complaints and protests without interfering with the
complainant’s right to petition on a legal action.
With the LFIB came the one-stop-shop service which was aimed at simplifying procedures in
foreign investment. It gives all services required by foreign investors 11 . These services are
provided by offices within LFIB premises. The offices which provide these one-stop-services
are: Labour force office, Customs office and the Immigration and passports office. These one-
stop-services offer approvals and procedures like: Export and import procedures, license and
permits, import of foreign manpower, renting and ownership of real estate, Complaints,
amendments introduced to project’s procedures and dividend transfer procedures.
On their part under this law, the Libyan government expects foreign investors to:
 Keep and maintain the project’s accounting books and allow the board to review the
books and other related books

11 Ibid


 Make an annual budget and cost-benefit accounts which shall be approved by a Libyan
legal accountant
 Submit reports periodically to the board regarding the project’s progress and its
adheherence to the laid regulations
 Abide by all the country’s regulations and laws and not to practice any other activities
besides the licensed ones
The same law offers incentives and guarantees for foreign investors. Projects are exempted
from income tax for a five-year period from the date production begins. This could be increased
for another three years at the discretion and the decision of the General People Congress and on
the secretary’s request. There is also exemption from import taxes on equipments and
machineries to be used in the project for the first five years 12 .
A foreign investor under provision of the same law is guaranteed the possibilities to:
 Transfer the capital invested in case of total or partial sale in case of liquidation of
closure within six months of investment difficulties emerge or after 5 years from the date
of release of the license
 Transfer profits and relative affairs
 Open an account in convertible currency

 Build or rent necessary immovable properties

12 Ibid, 646


 Employ foreign manpower when the local supply is not enough
 To purchase where the business is located

Unlike before, the new law any possibility of nationalization was prevented: Expropriation is
possible only on the basis of a sentence and after compensation at market price. Where there are
disagreements, one can appeal both to the ordinary magistracy and to international arbitration.
The law also deals with price structure in order to achieve quality by lowering the tax rate on
incomes accrued from work and increase incomes got from capital. General income tax (Super
tax) was again cancelled and new top limit was put on penalties imposed on tax payment delay 13
Free Zones (Law No.11, 2004)
Free zones were put into place under Law No. 11, 2004. This was aimed at diversifying the
economy and income resources. This was to be made possible by the establishment of free zones.
Their creation had been preceded by the Free Trade Act of 1999 which enabled creation of
offshore Free Trade Zones. A public body, the Free Zones Authority was set up to supervise the
free zones and undertake measures to develop the commercial, industrial and service front for the
benefit of the national economy. The authority:
 Lays down general policy and rules that regulate investment in the Free Zones

13 Deeb Jane Mary, “ Qaddafi’s Changed Policy: Causes and Consequences,” Middle East Policy, 7/2 (20004) 159-


 Considers applications seeking to establish projects in the Free Zones and also divestment
of the same. Once an application is considered it is send to the Director General of the
Customs Authority for issuance of license
 Determines the levy charges for services like storage services and installations rendered
within the zone
 Lays down regulations granting entry, exit and residence permits in the free zone and
make necessary arrangements for the social insurance system and health services in
conjunction with relevant authorities
 Approves the annual balance sheet and final account of the Authority
 Consents the administrative and financial regulations of the Authority and also consents
to loans
Functions of these Free Trade Zones include: Performing industrial processes, offering
financial, banking, insurance and other related services required by investors within the free
zone, unpacking and re-packaging of products within the Free Zone and assuring manufacturers
of the products’ meeting the market demand. Within the Free Zones, investors are offered
privileges, alleviations and exemptions which include: Free repatriation of invested capital and
accrued profits, profits are not subject to any monetary restrictions or monitoring if reinvested.
The same applies to movement of capital and product between the Free Zone and foreign
countries, investors can also transfer losses suffered during exemptions period to the following
year, legal assurance against nationalisation of projects, project’s ownership can be transferred in
full or in part to another investor and easy set up of projects within the Free Zones.


Under the Free Zones, the following services, facilities and utilities are available: Modern
offices and warehouses at reasonable prices, energy, gas, electricity, drinking water and sewage
utilities at also reasonable prices, land plots of different sizes according to the needs of the
investor, banking services that are versatile and modern to suit the investor, modern
telecommunication services, road transport services to neighbouring countries and African
countries, health insurance services to investors and employees working in projects established
in the Free Zone, full insurance covers, legal and other consulting services.
Law No. 9, 2010 (Investment Promotion)
This law is aimed at promoting national and foreign capital investment with the intention
of setting up investment projects. It also aims to promote investment by:
 Upgrading Libya’s status and elevate her efficiency so as to acquire advanced skills and
offer new employment opportunities
 Introducing latest technology which shall be injected into Libyan economy
 Contributing to setting up, developing /rehabilitating economic and production so as to
enable Libya compete in world markets
 Increasing and diversifying income sources

Licensed projects under this law must: Transfer and introduce latest expertise and modern
technology, support ties and create integration between activities and economic projects and
reduce production costs at the same time, assist in raw materials exploitation and utilization,
contribute in development of rural areas, produce commodities that can be exported and help


Libya avoid importation of goods, contribute towards the economy’s improvement, development
and its rehabilitation and provide employment for Libyan people of not less than 30% while
providing training courses to help the masses acquire technical skills and expertise.
In an effort to increase foreign investment, the government in 2004 set out to privatize
360 owned enterprises. Foreign companies were allowed to participate although they were to do
under the local rules which included employment protections of Libyan workers.
Foreigners with residence permits in Libya were permitted to hold foreign currency in the
country’s accounts from 2003. Non-residents working in Libya were also allowed to open
domestic accounts to make deposits.
Another Law No. 443 (2006) altered foreign investment in Libya particularly in oil
services, construction, industries, electricity, communications, transport and the marine sector.
New foreign entrants were required to establish a joint venture with a Libyan corporation. As an
improvement from the previous laws, foreign companies were allowed to retain up to 65%
ownership of the companies. This law has made it possible for qualified Libyan partners in all
sectors a highly valuable commodity for foreign investors, providing ample fuel for rent-seeking
behaviour in many sectors of the economy. In real sense however, this law has restricted the
terms of foreign entry into the market. 14
Law No. 5 has had its benefits and demerits as well. Although there is a provision in the
law that allows foreign rental and ownership of land for project work, it has not been widely

14 Vandewalle, op, cit, 89


observed and as a result national treatment provisions for foreign investors lack. There is still
under the same law a requirement that foreign companies hire Libyan nationals to match the
foreign staff. This has been a problem particularly in the oil sector because the Libyans who seek
employment in that sector lack formal experience or practical experience forcing the companies
to either spend resources on extensive training or hire employees who do not contribute much.
Oil and Gas sector Reforms
Unlike the seemingly uncoordinated reforms approach that was evident in other sectors of
the economy, reforms in oil and gas were more efficient from the beginning. Libya proximity to
European markets made it a viable partner due to relatively production costs and the quality of
the crude oil. With the lifting of the UN sanctions, NOC offered 40 new blocks in 2000 in
addition to the 100 already offered in the previous year. European operators like Royal
Dutch/Shell entered the market 15 .
However it soon became apparent that Libya needed American oil companies to
participate so as to achieve the desired investment level. Libya was in need of cutting-edge
exploration technology and state of the art oil recovery techniques needed to soften the natural
decline in maturing oil fields. In effect, Libya’s renunciation of unconventional weapons in 2003
saw American oil companies’ return to the country after their country lifted the embargoes and
diplomatic ties were restored in 2004. Members of the Oasis group who had left the country in
1986 returned in 2006. Others like Occidental Petroleum did negotiate their return in 2005.

15 Ronald, op, cit, 651


Libya used Exploration and Production Sharing Agreements (EPSA) to stimulate foreign
investment. EPSA was meant to create competitive bidding and enhanced incentives for both gas
and oil explorations. In 2004, Libya announced EPSA 4, which was the fourth since 1973 and
first in the new century. 15 exploration areas were on offer and NOC received applications from
more than 120 companies. When the tenders were eventually awarded, American oil companies
got 11 of the 15 exploration areas. The other winners reflected the global interest in Libyan oil
market. These companies were from Brazil, India, Indonesia, Australia, Canada and Algeria.
The government also targeted reforming the gas sector as well. It initiated the Libya Gas
Project which was designed to move natural gas and condensate from the Wafa onshore field to
offshore Bahr Essalam field off Mediterranean coast. This new bidding process many felt it was
transparent and offered exploration areas on the basis of the financial terms offered by the
bidders. Other EPSA bids were done in 2005, 2006 and 2007 that saw more foreign oil
companies enter the Libyan market.
Libya before the political revolt that hit it, had set up all legislative framework geared
towards reducing the country’s dependence on oil as the sole source of income and increase
foreign investment. Gaddafi’s call for foreign investors was well received and many set up in the
country. However, the former regime was not keen to establish a free political system that
ensured of equal opportunities, fair competition and reduced corruption. The then government
used the up scaled economy to reward friends and use the state’s gains for personal gratification.
Administrative corruption became deep rooted and public funds were misused. These factors led
to the popular revolution that saw ousting of the former regime in 2011 16 . Analysts have also


argued that Libya needs to promote growth in the non-hydrocarbon sector to enhance economic
diversification. The country needs to increase the productivity and competitiveness of its energy
sector. 17
The new Transitional government has embarked on making the country stable and
constitutional. Since Libya is still a third world country, foreign expertise is needed to exploit the
country’s natural resources like oil. The country must institute clear legislation on how to
regulate economic relationship between the country and foreign investors. There must also be
laws that show the procedures for open tendering to ensure transparency. So it remains a waiting
game to what direction things take but as of March 2012, the Transitional National Council
released a statement announcing its decision to establish the Libyan Oil Company to supervise
oil production and policies in the country. It also appointed an interim director general of the
company. The Libyan Oil Company is to replace the National Oil Corporation whose assets were
frozen by the United Nations Security Council.


16 African Development Bank, Libya: Post-war Challenges,” Economic Brief, 21/1 (2012) 5-11
17 Jamahiriya Arab, Khaled Elbeydi, “The Relationship between Export and Economic Growth in Libya,” Theoretical
Applied Economics, 22/1 (2010), 69-76.


Allan, J, A. “Libya: The Experience of Oil,” The Maghreb Review, 8/3-4, (1983) 98.
Alexander, Nathan. “Libya: The Continous Revolution,” Middle Eastern Studies, 17/2, (1981),
Bruce, Ronald. “Libya: Lockerbie Trial Ends, Sparking New Libyan Initiatives,” Africa
Contemporary Record, 28, (2006), 644-45.
Deeb Jane Mary, “ Qaddafi’s Changed Policy: Causes and Consequences,” Middle East Policy,
7/2 (20004) 159-73.
DIRK, Vandewalle. A History of Modern Libya, (Cambridge University, Cambridge, 2006).
Edward, Schumacher. “The United States and Libya,” Foreign Affairs, 65/2 (1986/87), 336-39.
FRANK, Waddams. The Libyan Petroleum Law of 1955: The Libyan Oil Industry. (Croom
Helm, London, 1980).
Jamahiriya, Arab & Khaled, Elbeydi. “The Relationship between Export and Economic Growth
in Libya,” Theoretical Applied Economics, 22/1 (2010), 69-76.
Otman, Wanis & Erling, Karlberg. The Libyan Economy: Economic Diversification and
International Repositioning, (Springer, Hiedelberg, 2010).