UK: Developing The Infrastructure That Keeps The Commercial World Moving

Welcome to the current edition of Clyde & Co's Infrastructure Newsletter, written by our legal experts active in the sector. This newsletter is a regular publication in which we review developments and opportunities globally.

This edition primarily focuses on Libya highlighting opportunities in the market, key legal and regulatory frameworks, as well as practical requirements for doing business in Libya. We opened an office in Tripoli in August 2012, and are the only UK law firm licensed to operate in Libya.

Libyan infrastructure sector

Libya is not an easy market; the security situation remains a challenge and the government is focusing much of its efforts on creating a safe and secure environment for its citizens. The new National Congress is also devoting a lot of its time to constitutional matters and ensuring that its new Ministers and heads of institutions have the right credentials to lead the country forward in a fair and transparent way. Because of these enormous challenges, there has not yet been the level of focus and progress in the planning, development and execution of much needed new infrastructure projects that some had hoped for.

Given the above, consultants, contractors and developers of infrastructure projects should continue to focus their attention on future opportunities in the country. Assuming that the security situation continues to improve, there are going to be tremendous opportunities in just about all sectors. Oil and gas will clearly be a main priority, but education, healthcare, utilities, housing and IT have all been identified as critical needs for the country.

Renewables

The Ministry of Electricity & Renewable Energies in Tripoli have recently announced that they are committed to solar as an energy source, planning for 3% of the country's capacity to be met by renewables by 2015 and 20% by 2020. Libya has the second highest levels of solar radiation in the world, whilst high average wind speeds in several locations also make it an attractive destination for wind farms. Evidence of the government's intentions towards green energy has recently been demonstrated by the Undersecretary's announcement in January 2013 that a new 650 M/W solar plant is to be built in Obari in the south of the country.

More recently, in April 2013, the Ministry of Energy announced that it was preparing tenders for two new solar plants.

Other plans previously announced by the Libyan government for renewable energy include:

• thermal heating plant with annual production capacity of 40,000 units
  
  
• wind farm projects in Dernah, Al Maqrun, Emslatah, Tarhunah, Asaba, Gallo, Almassara, Alkofra, Tazarbo, Aljufra, Ghatt, Ashwairef, and Sebha
  
  
• feasibility studies for a 100MW concentrated solar power plant at Sebha, a 50MW CSP plant in Ghadames, and a 15MW photovoltaic plant in Shahat
  
  

Conventional power

Libya continues to experience a shortfall in power and as the country begins to grow and develop, the country's limited power generation capabilities will come under increasing stress. Grid connections allowing the country to import power from Egypt and Tunisia will provide temporary solutions for the country but going forward, the country will need to build new plants. For the time being, it is almost certainly the case that these new plants will be built on a conventional procurement basis with foreign contractors being asked to tender for the works. Going forward, however, there is some discussion about moving to build-own-transfer style independent power projects. This style of procurement was under discussion prior to the revolution but it is going to be quite a challenge to execute any project on a structured finance basis unless and until various legal reforms are made to the existing legislative framework, including the ability for financial institutions to take a proper security package.

Healthcare

At present, those with the financial resources to do so will almost certainly seek to travel outside the country for healthcare services. Libya's healthcare system prior to the revolution was poor and after the revolution the system has simply been unable to cope. One critical problem is the lack of primary health care facilities, such as local clinics and district hospitals. Libya has less than 1500 of these, for a population of 6.5 million. Additionally, many of the healthcare workers in Libya prior to the revolution were foreign. Most left the country during the revolution and have not returned.

A direct result of the lack of domestic services is that tens of thousands of Libyans are currently receiving healthcare abroad, which costs the Government millions of dollars per day. The system has also been abused by many people who have used the chaotic post-revolution period to make overseas trips and seek expensive overseas treatment in contravention of the policies and guidance laid down by the competent authorities.

The Government therefore urgently needs to build new facilities, manage those facilities properly and train staff to provide the levels of healthcare services that the Libyan people so desperately need. The specific sectors where there appear to be immediate opportunities for international healthcare infrastructure players are building and managing new primary healthcare facilities (possibly on a PPP basis) and providing new laboratory and radiology facilities for the country.

In order to move forward with some of these initiatives, various difficult bureaucratic processes and unclear guidelines need to be addressed by the competent authorities. In particular, the Government needs to give investors comfort that licences granted to private clinics will not be revoked without due cause in accordance with proper due process. At present, many private sector investors are deterred by the fear that their licences may be revoked after they have expended significant time and resources developing new facilities.

On the plus side, the development of a fledgling private healthcare insurance market is sending the right signals to healthcare investors that demand for new private sector facilities will continue to increase in the future, as more individuals take out these types of policies.Telecoms

The two major players in this sector are the General Posts and Telecommunications Company (GPTC) and the Libyan Posts, Telecommunications & Information Company (LPTIC). Both of these are state-owned entities and to date, there is no private sector participation in either the telecoms or internet service provider market. The Government flirted with the idea of bringing in private sector investment expertise prior to the revolution, and is now actively looking at options as to how it might do this.

In April 2013, it was announced that the Libyan Ministry of Communications and Informatics had appointed a high-level committee of telecommunication experts and lawyers from the ministry as well as from outside to draft a new Telecommunication Act that will replace the existing legislation.

The stated aims of the new law are:

• to create an independent telecommunication regulatory authority, with clear and transparent terms of reference that set out the authority's functions and powers
• to promote and protect competition in the telecommunication market
• to ensure delivery of the highest quality of services at competitive prices to end users across the country
• to encourage Libya's private sector to participate in building and improving telecommunication services in the country

It is still uncertain whether private sector participation will be done through issuing new licences to international companies, allowing the private sector to buy into the existing state-owned incumbents, Libyana and Al Madar, or simply by offering management contracts to international companies to come in to re-organise and modernize the existing state owned enterprises. Whichever option is selected by the Government, it seems inevitable that we are going to see opportunities for the private sector to participate in this industry.

In addition, Libya is developing a national frequency plan covering the frequency range from 8.3 kHz to 275 GHz, which is expected to be delivered by mid-May 2013.

Waste management

Rapid population growth, changing consumer habits, transportation difficulties and environmental challenges relating to economic growth have led to a significant increase in the amount of waste produced in Libya and it is currently piling up across the country; at the entrance to cities, on main streets and within residential neighbourhoods. It includes household rubbish, construction rubble, industrial and agricultural waste products and medical and radiological hazards.

Thus far a shortage of (1) machinery and equipment necessary for the process of collection, transport and final disposal, as well as (2) trained and qualified specialists in waste management, means that waste produced is not being effectively managed and is beginning to have a serious detrimental affect on Libya's society and economy.

In July 2012, details emerged that the Libyan government had issued a major waste management tender on a build-own-transfer basis, covering waste collection and management for the entire country for a period of ten years and the government announced prequalification for construction of landfills for hazardous and non-hazardous waste. Earlier this year, the Prime Minister acknowledged the problem of mounting waste in Libya and stated that international companies will be invited to tender if local companies were unable to carry out the work. Banking

The Libyan banking sector is supervised by the Central Bank of Libya, which is responsible for the licensing and supervision of commercial banks and regulating credit and interest. It is also the main shareholder of most banking assets in Libya. While there has been an increase in privatization in banking, much of the sector remains under Government control. Libya has a total of 17 commercial banks but the banking sector remains dominated by four companies, three of which are state-owned: Gumhouria, Sahara, Wahda and National Commercial Bank. These four account for about 90% of total bank assets.

Whilst there is great optimism for the future, the reality is that Libya is a difficult market to operate in. According to the Global Competitiveness Report 2012-2013, Libya is ranked 140 out of 144 in financial market development whilst access to financing is the third most problematic factor for doing business behind corruption and inefficient government bureaucracy. Until a clear regulatory system is established and the commercial banking sector's infrastructure is reformed these problems will continue to restrict growth.

The banking sector is set to undergo a process of modernisation with the introduction of new ICT systems, the launch of new products and services, and the development of a sales and marketing culture. Under the new Libyan authorities, these developments should gather pace. A renewed commitment to improved transparency, the strengthening of internal governance and the creation of a functioning bond market to help smaller businesses raise money to fund new projects and expansion plans will create further opportunities for international partners.

In 2012 an Islamic banking law was approved which will introduce Sharia-compliant banking within the country. The Libyan authorities envisaged several options for Islamic banking services including the granting of licence to conventional banks to open branches or windows for Islamic finance and permitting conventional banks to adopt Islamic banking. In March 2013, the governor of Libya's central bank said the Libyan government will soon be ready to issue licences for Islamic banks. However, as at the date of this article, no such licence has been issued.

Whilst there is great optimism for the future, the reality is that Libya is a difficult market to operate in. According to the Global Competitiveness Report 2012-2013, Libya is ranked 140 out of 144 in financial market development. Furthermore, access to financing is the third most problematic factor for doing business in Libya, behind corruption and inefficient government bureaucracy. Until a clear regulatory system is established and the commercial banking sector's infrastructure is reformed these problems will continue to restrict growth.

A significant development in 2012 was the approval of an Islamic banking law which will introduce Sharia-compliant banking within the country. The Libyan authorities envisaged several options for Islamic banking services, including the granting of licences to conventional banks to open branches or windows for Islamic finance and permitting conventional banks to adopt Islamic banking.

Adrian Creed

Partner, Abu Dhabi

T: +971 2 4943 501 E: adrian.creed@clydeco.com Understanding Libyan production sharing agreements framework

George Booth, Partner, London Amir Kordvani, Associate, Abu Dhabi

This article considers the legal and regulatory framework affecting the oil and gas industry in Libya, and in particular will outline and analyse the material terms of the Exploration and Production Sharing Agreements (EPSAs) that govern the relationships between international oil companies (IOCs) and the Libyan National Oil Company (NOC).

The Libyan Oil Regime: background

Libya's key petroleum legislation is the Petroleum Law No. 25 of 1955, which came into force the same year that saw the first Libyan concessions awarded. In 1974 the Libyan government introduced the first EPSAs. Numerous versions of the EPSA have been released since its inception with the latest being EPSA-IV, introduced for the first time in conjunction with Libya's first post-sanctions licensing round in January 2005.

EPSA-IV terms

Selection criteria

The principal difference between EPSA-IV and its predecessor EPSA-III is that winners of EPSA-IV contract bidding rounds are determined largely based on how high a share of production and the size of signature bonus each IOC is willing to offer the NOC. As a consequence, EPSA-IVs feature significantly higher production shares for the NOC than EPSA-III contracts. This method of determining bid winners is relatively unusual because, normally, the national oil company's production share is pre-determined in a model contract or is determined during the negotiations. Commentators have noted that the average overall NOC take for EPSA-IV blocks is around 88%, which is considered as one of the highest in the world.

Bonus payments

IOCs are required to pay two types of bonuses to the NOC, a signature bonus and a production bonus: a signature bonus is payable as part of the EPSA-IV bidding process whilst the production bonus, variable depending on the level of production, is pre-determined.

Ownership of assets

EPSA-IV contracts do not convey any ownership rights over oil and gas resources to the foreign operating companies. Rather, they are risk-based contracts under which the IOC undertakes to finance and carry out an exploration programme at its own risk, and eventually develop the resources if a commercial discovery occurs. If no commercially viable oil or gas deposits are found, exploration costs are borne entirely by the IOC; the acreage is released and can be offered to another party.

Revenue and costs

Under EPSA-IV, the NOC normally takes around 80-90% of the oil and gas production, while the foreign company must recover capital and operating costs and eventually make a profit from the remaining share in production. Under these agreements, the developer bears all exploration and appraisal costs. Development costs are to be shared 50:50 between the NOC and the developer. Operating costs are shared on the basis of the primary production allocation.

While under previous EPSA agreements the IOCs had enjoyed deals based on fixed margins, insulating them from fluctuations in the market price of oil, EPSA-IV terms are much more dependent upon market fluctuations which, whilst advantageous during high oil prices makes future returns more uncertain.

The Libyan government also has complete control, via the NOC and the Ministry of Finance, over exploration and development plans and budgets (which have to be pre-approved), capital and operational expenditure (which has to be certified to become eligible for reimbursement) and oil exports (for which a quota must be approved and separate loading schedule granted for each cargo).Arbitration

Under the EPSA-IV, disputes between the parties will be dealt with under the Rules of Arbitration of the International Chamber of Commerce (ICC) in Paris. The incorporation of an arbitration clause raises the feasibility of enforcing an arbitral award against a government entity, given its sovereign status and ability to influence the decisions of local courts.

For instance, if the NOC refuses to comply with an arbitral award in favour of the IOC, the IOC may encounter difficulties enforcing the award in Libya given that Libya is not yet a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention)1. Nor is Libya a signatory to the "International Centre for Settlement of Investment Disputes Convention", the primary purpose of which is to provide facilities for conciliation and arbitration of international investment disputes between states and nationals of other states.

In principle, enforcing an award should be possible via recourse to arbitration provisions under the Libyan Civil and Commercial Code but, in practice, this may not be a workable option, However, it is hoped that this situation may change under the new government.

It is worth noting that, under the New York Convention, if the NOC has assets in a New York Convention ratifying state, particularly illiquid assets, then the IOC may be able to enforce the arbitral award in that ratifying state.

One other possible solution is to secure a judgment or arbitral award in a State that is a signatory to the 1983 Convention on Judicial Cooperation between States of the Arab League (the Riyadh Convention). The Riyadh Convention applies to foreign judgments and arbitral awards and consequently an award from an arbitration conducted in a ratifying country would be the best possible option to enforce an award in Libya2. However, as far as we are aware this strategy has never been successfully applied in Libya.

Force majeure

The force majeure provision in the EPSA-IV contract allows for a suspension of performance of obligations whilst force majeure circumstances exist. The model EPSA-IV 2006 states: "Any failure or delay on the part of a Party in the performance of its obligations or duties hereunder shall be excused to the extent attributable to force majeure. Force majeure shall include, without limitation: Acts of God; insurrection; riots; war; and any unforeseen circumstances and acts beyond the control of such Party which render the performance of its obligations impossible." In the majority of instances, IOCs relied on this clause during the turmoil of 2011.

Investor protection

IOCs may have their investments protected under bilateral investment treaties (BITs) signed between Libya and numerous other nations. As of the date of this article, Libya had entered into thirty-three BITs with countries such as Jordan, Slovakia, Turkey, Singapore, Italy, Austria, Morocco, Croatia, Portugal, Switzerland, Belgium, Luxembourg and France. There are no BITs with the US or the United Kingdom.

BITs provide certain guarantees to investors of both parties to the treaty. Most importantly, an investment treaty restricts a contracting party from taking any action to deprive and limit the ownership of investors from the other contracting party. Were such a deprivation to take place, an investor from a contracting party would be entitled to initiate arbitration proceedings.

Recent developments

It has been reported that Libya is holding its own corruption review of the Gaddafi-era oil contracts. The National Transitional Council (NTC) announced that it was setting up an NTC Oil Committee with the power to end, amend or renegotiate current contracts if corruption is discovered.

However, the NTC tried not to worry established investors in Libya over the proposed review. It emphasised that all agreements and contracts that were signed with the old regime would be "respected" and that it had no intention of "nationalising or doing anything radical". It further stated that if a contract was found to be "unfair", then the Libyan authorities would work with the counter-parties to achieve an agreed solution.

Back to page 1Libya: FS/Doing business

Halah Belazi, Legal Consultant, LibyaAdrian Low, Partner, Dubai

The Libyan General National Congress (GNC) looks to amend regulations of the financial services sector and to introduce Islamic financing into Libya for the first time.

In the past, the banking and finance sector in Libya was very limited and dominated by a few state-owned banks. Libya was primarily a cash based society and people were generally wary of the banking system. As a result, financial services have largely been limited to basic cash deposits and withdrawals to date.

The interim National Transitional Council (NTC) recognised that the country would need to have confidence in the banking sector to facilitate its future redevelopment. In order to help realise this objective, Mustafa Abdul Jalil, the head of the NTC, declared that going forward Libya's banks would begin offering Shariah compliant financial services. This announcement, made to the crowds in Kesh Square in Benghazi, has now been followed by concrete steps; in particular, the Central Bank of Libya (CBL) obtained approval from the NTC to promulgate Law No. 46 of 2012, which formally introduces Islamic banking and finance to Libya for the first time.

The introduction and development of an Islamic banking and finance market took another major step forward on 7 January 2013 when the General National Congress (GNC) promulgated Decree No. 1 of 2013, banning the charging of interest on loans granted to individuals. At the same time, it was further announced by the GNC that the same principles will start to apply to corporate loans from 1 January 2015. Additionally, under this law, a special fund was established to provide interest free loans. This fund is to be under the supervision of the CBL.

This is an extract from the article 'Libya regulation of the financial services sector'. For the full version of this article please see our website.

Libya: FDI/foreign ownership rules

Adrian Creed, Partner, Abu Dhabi

The current foreign investment laws

Although the second anniversary of the February 2011 revolution was recently celebrated in Libya, the momentum for economic reform has largely stalled. This is the result of the introduction of new rules that have significant implications for foreign investors.

The old Libyan regime had been taking steps to improve the investment climate in the country since the early 1990s. In 1997, the Law for Encouragement of Foreign Investment, (commonly known as Law No. 5) was introduced. Under the circumstances, this was a reasonable law, encouraging foreign direct investment (FDI). The legislation detailed the investment procedures, new duties and incentives, including income, import, and capital gains tax concessions. It also allowed foreign investors to own 100% of the company.

In 2006, Decree No. 171 was issued. This law was a significant step forward, making it easier for foreign investors to do business in Libya. It allowed foreign investors to form joint stock companies (JSC) with Libyan shareholders and with a minimum capital of LYD 1 million. It also permitted foreign shareholding of up to 65%, thereby allowing the foreign partners to hold majority control in the entity. Decree No. 171 also states that a minimum of 35% of the capital of the company must be owned by Libyans for the lifetime of the company.

In 2010, Law No. 9 on investment promotion (Investment Law No. 9) came into effect and the Privatisation and Investment Board (PIB) was created. The new law allowed 100% foreign ownership across a wide range of sectors. Companies established under Investment Law No. 9 are also able to benefit from a number of advantages, particularly tax reliefs for investments in specific projects in Libya. Under this law, foreign companies may also have a minimum of two (rather than ten) shareholders. However, the practical effect and application of Investment Law No. 9 remain to be seen as this law was not fully implemented prior to the 2011 revolution.

Since the overthrow of the old regime in 2011, the new Libyan government has issued four ministerial decrees which contain measures affecting FDI in the country.

Under the latest ministerial decrees, foreigners are precluded from establishing a Limited Liability Company (LLC) in Libya. In addition, the Libyan authorities have given a broad interpretation to the current regulations concerning JSCs stating that no one, whether Libyan or foreign entity, or whether a natural person or a company, can have more than a 10% shareholding in a JSC.

Overview of ministerial decrees affecting FDI issued since 2011: