political risk<\/em>” and that also has a chequered history for protecting foreign investments. Clearly, granting a majority shareholding right to Libyans is no longer an advantage if the Libyan businessman can’t find an international partner to invest, or if there is significantly less capital for these majority Libyan owned companies to use to grow their business. Also, less investment and less capital mean less international expertise and experience brought into the Libyan economy.<\/p>\n\n\n\nOne must not also forget that the foreign partner actually contributes capital disproportionate to their shareholding in the vast majority of joint ventures. In other words, they often fund the Libyan partner. If a foreign investor can only own 49%, then they are unlikely to invest. International companies often have internal policies about whether they can or cannot hold minority interests. Additionally, if they put most of the money into an enterprise, they will inevitably want control over how it is spent and invested. If they can’t get this comfort, then they probably won’t invest. International investors have plenty of global opportunities. They don’t have to come to Libya.<\/p>\n\n\n\n
Foreign partners also often bring with them expertise, governance, controls, frameworks, strategies, new products, and services needed in Libya.<\/p>\n\n\n\n
A 51\/49 rule will also be detrimental to the smaller, newer, entrepreneurial and ambitious Libyan business, not the established Libyan business. Larger Libyan businesses can already afford to invest in enterprises themselves and have less need for a technical foreign partner that can also bring in capital. Young Libyan start-up businesses cannot do this and will be at a disadvantage to the current “economic elite<\/em>” that already controls much of Libya’s private sector.<\/p>\n\n\n\nIf the government wants to retain the 51\/49 rule, perhaps it could consider what Dubai has done. In Dubai, the 51\/49 rule still prevails (although there is intense speculation that this may change in the future). Given the fact that Dubai is very keen to attract FDI, a rule has been implemented that says that although the shareholding percentages must be 51\/49, the JV partners can register a disproportionate dividend entitlement, effectively allowing the foreign partner, in practice, to secure an economic interest of 80%.<\/p>\n\n\n\n
<\/span>International trade considerations<\/span><\/h2>\n\n\n\nLibya applied to join the World Trade Organisation (WTO<\/strong>) in 2004. The process for Libya’s accession to WTO is expected to resume shortly. Libya’s accession to the WTO will be a significant step to make Libya’s integration in the global free trade system irreversible. It is likely to transform the country’s economy and its legal system and its institutions.<\/p>\n\n\n\nTherefore, in our view, as Libya prepares to become a major player in regional and international trade, it will have to come to grips with the demanding task of adapting to WTO standards,\u00a0i.e.<\/em>\u00a0the fair trade rules of genuine partnership on an equal footing. However, the chances that Libya’s accession to the WTO will result in an immediate gain will be quite slim as long as investor confidence remains low and barriers to entry for foreign firms are high. In addition, there will be several changes that Libya will be requested to commit to by other WTO Members upon the accession to WTO. If Libya, after acceding to WTO, continues to impose restrictions that are inconsistent with its market-access commitments, then it may be subject to WTO’s disciplinary process and may be required to adjust its laws retrospectively.<\/p>\n\n\n\nIn this context, the Libyan government may consider a gradual liberalisation of restrictions on its FDI rules as part of the preparation for joining the WTO (or, generally, any bilateral or multilateral trade regime). For instance, full liberalisation (i.e. permitting 100% foreign ownership) may be allowed in certain key sectors where foreign investment and expertise is urgently needed, such as telecommunication, certain technologies, and healthcare. This is the approach that has been taken by many countries that acceded to the WTO in recent years, such as Russia, China, Central Asian countries and Saudi Arabia (see below).<\/p>\n\n\n\n
<\/span>Saudi Arabia model<\/span><\/h2>\n\n\n\nIn the MENA region, Saudi Arabia can provide an excellent example for Libya. The Kingdom started negotiating its membership in 1993. In 2000, the new Foreign Investment Act was introduced. The Saudi Arabian General Investment Authority (SAGIA<\/strong>) was the body in charge of administering the Act under the guidance of the Supreme Economic Council. Several significant changes were made under the Act, which is as follows:<\/p>\n\n\n\nCertain restrictions were made against FDI under the old investment law, including the prohibition of foreigners from investing in sectors that were reserved for the government and domestic investors, such as printing and publishing services, telecommunications services, the transmission and distribution of electrical power, pipeline transmission services, education services, hospital and health services, insurance and the electric power generation. These sectors were no longer closed, and foreign investors were able to invest freely. However, there was an important caveat in that certain sectors were put on a “Negative List<\/em>“. This Negative List is compiled by SAGIA and approved by the Supreme Economic Council. The Negative List is updated and revised from time to time. In 2012, that is 7 years after Saudi Arabia’s accession, there were only three industrial sectors and 13 service sectors still appearing on the Negative List. In all other sectors, 100% foreign ownership is now permitted.<\/p>\n\n\n\nTo various extents, Oman, Egypt, Bahrain, and Qatar have adopted a similar approach to foreign ownership and FDI rules. In the case of the UAE, which has been a WTO member since 1996, the WTO Members have, on various occasions, urged the UAE to relax further its foreign ownership rules outside the free trade zones. So far, the UAE has resisted those calls but has promised to uphold its free-market strategy and will proceed with reviewing all existing policies to make them resilient, adaptable, and responsive to future challenges. The new draft UAE Companies Law still contains 51% local ownership and 49% foreign ownership split. Still, provision is made for Cabinet Resolutions to give exemptions for certain forms of companies, activities or classes. This may either be a full exemption or an increase of 49% foreign ownership.<\/p>\n\n\n\n
In this regard, it should be noted that KSA is ranked 28th<\/sup>\u00a0in the World Bank’s “2013 Doing Business<\/em>” under the “protecting investors<\/em>” criterion, whereas the UAE is ranked 128th<\/sup>. This indicates a higher level of investor confidence in doing business in Saudi Arabia than in the UAE. In the last few years, Saudi has moved from near the bottom to somewhere near the top. Saudi used to suffer from high levels of bureaucracy, high registration fees, protectionism and slow processes. Now they have moved right up the rankings and are trying to get into the world’s top 10 in terms of the easiest place for doing business along with the likes of Singapore. As a result of this, huge investments have been made by foreign investors worldwide, resulting in an increase in private sector activities generally and an increase in job opportunities for Saudi nationals.<\/p>\n\n\n\nWe, therefore, consider that Libya should look at the progress of Saudi Arabia, not just about FDI but about the whole ease of doing business scenario. See attached document at the end of this analysis.<\/p>\n\n\n\n
Saudi Arabia has moved away from its old model of limiting the percentage of foreign ownership because this was killing investment. Instead, they decided that the most important issue for the country is to get Saudis working. Saudi can no longer absorb more people into the public sector, so they have to encourage new businesses (local and foreign) to set up. Rather than focusing on shareholding percentages, they have looked at the workforce. They have introduced a rule that foreign companies can hold up to 100% of equity provided that at least 75% of staff must be Saudis and at least 51% of payroll costs must be payable to Saudi nationals. For us, this is the way that Libya should be going. It is much better for the man on the street and does not block the market for the benefit of the local oligarchs.<\/p>\n\n\n\n
Additionally, even though foreigners can get up to 100% foreign ownership in Saudi Arabia, the reality is that virtually all foreign companies still go in on a joint venture basis with a Saudi partner because their business is far more likely to succeed if they do so. Moreover, foreign investment in joint ventures with Saudi partners has advantages. While foreign partners in a joint venture entity may hold 100% of the equity, there are major commercial advantages in having a local Saudi partner own 50% of the equity or more. For example, if a Saudi national holds 50% of the equity in a joint venture company, it enables the company to obtain an interest-free loan for up to 50% of the project cost, which is repayable over a period of ten years. In addition, most Saudi-owned joint ventures are entitled to preference after wholly Saudi-owned companies in the allotment of government contracts.<\/p>\n\n\n\n
So, in summary, Saudi Arabia has rejected the 51\/49 rule in favour of:<\/p>\n\n\n\n
- 100% foreign ownership;<\/li>
- a fairly limited negative list (in years gone by, the negative list was very extensive, but now it is much shorter);<\/li>
- The requirement for the workforce to be 75% Saudi nationals;<\/li>
- The requirement for payroll costs to be at least 51% payable to Saudis;<\/li>
- soft loans for JV companies where Saudi shareholding is 51% or more; and<\/li>
- pricing preference for bidding on government contracts where the company is at least 51% Saudi owned.<\/li><\/ul>\n\n\n\n