2006-0127 Libya NES Report

National Economic Strategy
Completed under the guidance of the International Advisory Board Co-Chairs: Professor Michael E. Porter, Harvard University Dr. Daniel Yergin, Chairman, Cambridge Energy Research Associates (CERA)
MONITOR GROUP
National Economic Strategy

An Assessment of the Competitiveness of the Libyan Arab Jamahiriya
Completed under the guidance of the International Advisory Board Co-Chairs: Professor Michael E. Porter, Harvard University Dr. Daniel Yergin, Chairman, Cambridge Energy Research Associates (CERA)
MONITOR GROUP
The General Planning Council of Libya, 2006. This publication includes copyright and other intellectual property rights used under license from Libyan Renaissance LLP and its affiliates. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in any retrieval system of any nature, without prior written permission. Printed in the United Kingdom
TABLE OF CONTENTS
FOREWORD by the Co-Chairs of the International Advisory Board, NES Project . . . . . . . v ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
1. EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. A UNIQUE MODEL FOR LIBYAN COMPETITIVENESS . . . . . . . . . . . . . . . 9 3. A VISION FOR LIBYA 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4. METHODOLOGY: THE NATIONAL
COMPETITIVENESS FRAMEWORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5. AN ASSESSMENT OF LIBYAS COMPETITIVENESS . . . . . . . . . . . . . . . . . . . 29 5.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.2 Economic Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.3 Economic Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 5.4 The Libyan Business Environment:
Macroeconomic, Political, Social and Legal Context . . . . . . . . . . . . . . . . 39

5.5 The Libyan Business Environment:
Microeconomic Foundations of Competitiveness . . . . . . . . . . . . . . . . . . 42

6. AN ASSESSMENT OF CLUSTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 6.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 6.2 Energy Cluster & Energy-Dependent Industries . . . . . . . . . . . . . . . . . . . . 76 6.3 Tourism Cluster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 6.4 Agriculture Cluster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 6.5 Construction Cluster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 6.6 Transit Trade Cluster . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 6.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
TABLE OF CONTENTS
7. AN ASSESSMENT OF CRITICAL SOCIAL SECTORS . . . . . . . . . . . . . . . . 109

7.1 Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 7.2 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 7.3 Urban Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 8. CONCLUSIONS: KEY THEMES FROM THE
COMPETITIVENESS ASSESSMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

9. THE WAY FORWARD: ACTION AGENDA AND PRESSING ISSUES . . 139 9.1 Approach to Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 9.2 Action Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 9.3 Actions for Pressing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Appendices
APPENDIX A. ANALYSIS OF THE OIL, GAS, AND POWER SECTOR . . . 149 APPENDIX B. LEADERSHIP TRAINING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 APPENDIX C. SOURCES USED AND MEETINGS CONDUCTED . . . . . . 181 APPENDIX D. GLOSSARY & ABBREVIATIONS USED . . . . . . . . . . . . . . . . . . 191
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NATIONAL ECONOMIC STRATEGY
TABLE OF FIGURES
Figure 1. Determinants of Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Figure 2. The Microeconomic Business Environment The Diamond . . . . . . . . . . . . . . . . . . . . 22 Figure 3. Stages of Competitive Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 4. GDP (PPP Adjusted) Performance, 19992004, Libya Relative to Peers . . . . . . . . . . 30 Figure 5. GDP per Worker in Libya, 1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Figure 6. Libyas Exports by Sector, 19972003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Figure 7. Total Foreign Direct Investment Committed, Tourism Sector, 2005 . . . . . . . . . . . . . . . 35 Figure 8. Foreign Assets, Libya, 19992006E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Figure 9. GDP and Employment per Sector, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 10. Oil Exports of MENA Countries, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Figure 11. Key Governance Factors, Libya vs. MENA Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Figure 12. Business Competitiveness Index Ranking, Libya and Selected Countries . . . . . . . 44 Figure 13. The Relationship between Business Competitiveness and GDP per capita . . . . . 45 Figure 14. Company Operations and Strategy Ranking, Libya and Selected Countries . . . . 46 Figure 15. National Business Environment Ranking, Libya and Selected Countries . . . . . . 48 Figure 16. Overall Assessment of the Libyan Business Environment Using The Diamond Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Figure 17. Ranking of Factor Conditions, Libya . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Figure 18. Quality of Physical Infrastructure, Libya and Peers, GCR/LBES, 2005 . . . . . . . . . . 51 Figure 19. Telephone and Internet Usage, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Figure 20. Structure of Libyan ICT Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Figure 21. Challenges for Raising Capital from Libyan Banks, SMEs, 2005 . . . . . . . . . . . . . . . . . . 57 Figure 22. Regulatory Quality, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Figure 23. Time Required to Start a Company, Libya vs. Selected Peer Countries . . . . . . . . . 60 Figure 24. Ranking of Education and Skill Base, Libya . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Figure 25. Ranking of Context for Firm Strategy and Rivalry Indicators, Libya . . . . . . . . . . . . . 64 Figure 26. Ranking of Demand Conditions, Libya . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Figure 27. Ranking of Related and Supporting Industries Indicators, Libya . . . . . . . . . . . . . . . . . . 72 Figure 28. Planned Accommodation Capacity in the Mediterranean Region . . . . . . . . . . . . . . . . 88 Figure 29. Estimated Revenue Potential per Hectare by Agricultural Product . . . . . . . . . . . . . . . 92 Figure 30. Cost of water from the GMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Figure 31. Estimated Investment in Construction in Libya, 2006-2015 . . . . . . . . . . . . . . . . . . . . . . 101 Figure 32. Trade Values & Main Flows in the Mediterranean with Potential for Transit in Libya (USD Bn), 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
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Figure 33. Origin/Destination and Transshipment Supply and Demand Balance, Mediterranean Sea, 19962015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Figure 34. White Goods Case: Last Mile Manufacturing, Libya vs. Italy . . . . . . . . . . . . . . . . . . . . . 106 Figure 35. Physicians per 10,000 of Population, International Comparison . . . . . . . . . . . . . . . . . 110 Figure 36. Health Expenditure, International Comparison, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Figure 37. Administrative and Budgetary Structure of Healthcare in Libya. . . . . . . . . . . . . . . . . . 115 Figure 38. Road Fatalities per 100,000 Population, International Comparison . . . . . . . . . . . . . . 117 Figure 39. Primary & Secondary School Gross Enrolment Ratios, 2001-2002 . . . . . . . . . . . . . . 119 Figure 40. Overview of the Libyan Education System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Figure 41. Teacher Density, International Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Figure A1. Upstream Oil Cost Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Figure A2. Oil Prices used in Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Figure A3.Oil Production Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Figure A4a. Cash Flow to Libya from Oil (USD40) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Figure A4b. Cash Flow to Libya from Oil (USD25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Figure A5. Gas Production Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Figure A6a. Cash Flow to Libya from Gas (USD 40) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Figure A6b. Cash Flow to Libya from Gas (USD 25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Figure A7. Energy Price Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 Figure A8. Domestic Product Imbalance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 Figure A9. Downstream Asset Valuation (100% equity) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 Figure A10. Economic Value Penalty Naptha versus NGL Cracking . . . . . . . . . . . . . . . . . . . . . . 164 Figure A11. Reserve Margin versus non-Oil GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Figure A12. GECOLs Cumulative Revenues versus Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Figure B1. Set of Interlinked Choices that Define a Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Figure B2. The Microeconomic Business Environment The Diamond . . . . . . . . . . . . . . . . . 178 Box 1. Case Study: Corintha BAB Africa Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Box 2. Desalination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Box 3. Policy Instability in Private Health Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Box 4. Specialized Intermediate Schools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
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FOREWORD
by the Co-Chairs of the International Advisory Board, NES Project
Libya is a country with unique values and a distinctive heritage. The country possesses key strengths including an enterprising workforce, rich endowment of natural resources, accumulated capital reserves, and an attractive geographical location linking Europe to Africa. Over the last few years, Libya has made a deliberate choice to develop its prosperity by reintegrating with the international community, while preserving its unique identity. This choice requires deep reflection and analysis of national priorities so that Libya can leverage its opportunities to generate and spread prosperity among all Libyans. With this objective in mind, the National Economic Strategy (NES) was established in 2005 to define a comprehensive and integrated approach to achieving greater and sustained prosperity for Libya. This report is a first step in achieving that goal it outlines a vision and presents a comprehensive assessment of Libyas current competitiveness. The project includes an analysis of the macroeconomic, political and social context and the microeconomic business environment; an analysis of key existing and potential industry clusters; as well as an analysis of critical social sectors such as healthcare, education and urban planning. This study informs an action agenda outlining the near-term choices for Libya to create a more participative, productive and competitive modern economy. In conducting this assessment, the project team adapted the latest thinking on competitiveness and the global economy, combined with an in-depth understanding of the energy sector, to the unique situation of the Libyan economy. The proposed action agenda uses this approach to address the fundamental aspirations of the Libyan people. The development of this report embodies a strong partnership between Libyan and leading foreign experts. The report while written by the Monitor Group and Cambridge Economic Research Associates (CERA), draws on expertise and inputs from a number of Libyan and foreign specialists. The report has also benefited from inputs from a wide range of Libyans, including government officials, policy experts in various sectors, industry leaders and small and big entrepreneurs from both large and small enterprises. In this sense, the report reflects a broad effort by the Libyan people to move the economy forward to strengthen the Jamahiriya. It has helped create a unique knowledge base about Libya, its economy and its structures, critical for defining the action agenda for Libya to achieve its vision. We hope this assessment serves as a catalyst for the required reforms, so that Libya emerges as a stronger and more prosperous nation, achieving its Vision for 2019 the fiftieth anniversary of the Revolution, and in doing so, becomes a role model for other countries in the region.
Professor Michael E. Porter

Co-Chair, International Advisory Board National Economic Strategy Project Bishop William Lawrence University Professor Harvard University
Dr. Daniel Yergin

Co-Chair, International Advisory Board National Economic Strategy Project Chairman Cambridge Energy Research Associates
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ACKNOWLEDGEMENTS
This report is the product of the National Economic Strategy (NES) team, a joint venture effort comprising a group of Libyan and foreign experts, working in conjunction with Monitor Group and CERA, and reporting to the General Planning Council. This report benefits from the leadership of co-chairs Professor Michael Porter of Harvard University, Dr. Daniel Yergin of CERA, as well as the NES Project Steering Committee. The NES Project Steering Committee was led by Dr. Abdelhafez Zlitni, Secretary of the General Planning Council and comprised Dr. Zlitni, Mr. Mohamed Taher Sialla, Deputy Secretary of the General Peoples Committee for Foreign Liaison and International Cooperation; Dr. Al-Tahriri Al-Hadi Al-Juhaymi, Secretary of the General Peoples Committee for Planning; Dr. Ali Shebani, Chairman, National Consulting Bureau; and Mr. Jadallah Talhi, former Secretary of the General Peoples Committee. The NES project was managed by the Executive Committee composed of Professor Omran Bukhres, Professor Mostafa Abushala and Mr. Suleiman Ehtash, who guided a local team managed by Eng. Said M. Elmadani Hoderi. Monitor Group conducted the majority of the research and analysis of the Libyan economy, integrated quantitative and qualitative data, and took a lead in developing the findings and recommendations. Rajeev Singh-Molares served as the overall Project Director for the Monitor Group with Mark Fuller, Jack Koolen, Bruce Allyn, Harald Harvey and Kurt Dassel providing senior guidance. Chris Malone served as overall Project Leader and Gopi Billa as the Project Manager. Thomas Hackel, Nikos Moschos, Paolo de Marino, Florian Lauerbach, Michael Costigan, Vanessa Gerhardy, Nicola Sayers, Claudio Tognella, Varad Pande, Saif Hassan and Paulina Guzman provided research and analytical support. CERA led the research and analysis of the oil, gas and power sectors, and led in developing the findings and recommendations for those sectors as well as contributing to the overall recommendations of the report. Dr. Julian West served as the overall Project Director for CERA, Paul Markwell served as the Project Manager. Leila Benali, Peter Jackson, James Smith and Michael Stoppard provided research and analyses on energy sub-sectors and Vera de Ladoucette provided research and insights. Entisar Elbahi provided local research support and advice to the CERA team. Dr. Christian Ketels and Weifeng Weng at the Insititute for Strategy and Competitiveness, Harvard Business School contributed data, insights and analyses at various stages of the project.
ACKNOWLEDGEMENTS
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The creation of this report is not only a strong example of a partnership between Libyan and foreign experts, but also a broad effort by the Libyan people to develop an economic strategy to open up the next chapter in the countrys development. As such, a broad range of Libyans have been involved in the creation and review of the report. Over 200 Libyan government and business leaders contributed to this project providing important information and their perspectives on the Libyan economy. More than 2,000 small and medium-sized enterprises shared their opinions in a broad-ranging survey on entrepreneurship. More than 60 Libyan and foreign business leaders submitted their opinions in the Libyan Business Executive Survey. The report also benefits from the support it received from several international experts who provided their valuable time for interviews. Tom Craig, Jack Koolen, David Hobbs, Kevin Murphy and James Thorne worked with the Monitor and CERA project team to develop training materials and execute a very successful Leadership Training program. Angela Alexis, Ceridwen Ahern, Harriet Edmonds, Khaled Bukhres, Lyn Pohl and Nadia Elbozidi provided organizational and administrative support. Lily Robles and her colleagues at the Design Studio at Monitor Group illustrated, designed and created the layout of this report. Luke Ryder and his colleagues in CERAs Production Department illustrated Appendix A on energy. While the report tries to reflect the consensus views of all those interviewed and surveyed, it also attempts to be concise. Any errors, omissions or inconsistencies are not the responsibility of any one individual or institution. For further information on this report, please contact Chris Malone or Gopi Billa at Monitor Group (email: cmalone@monitor.com; gbilla@monitor.com) or Paul Markwell at CERA (email: pmarkwell@cera.com).
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EXECUTIVE SUMMARY
Chapter 1.
The National Economic Strategy (NES) seeks to upgrade the global competitiveness of the Libyan economy, while retaining the unique character of the Libyan Jamahiriya. At present, the Libyan economy is heavily dependent on revenue from natural resources. The challenge for Libya is to improve its competitiveness in the energy sector while establishing the conditions throughout the economy that will raise standards of living and allow Libyans themselves to create valuable new products and services. As a starting point for the project, the NES team developed an aspirational vision for 2019the 50th anniversary of the Libyan Revolutionwhich highlights the exceptional economic, social and political opportunities for Libya. This vision is summarized overleaf (see box). The goal of the NES project is to help create a unique model of popular capitalismthat balances market mechanisms with the core values of the Libyan Jamahiriya, to help Libya achieve this aspirational vision. First, some important observations about the Libyan context:
Libya has many outstanding assets that are not fully engaged in its economy: its location,
its unique history and culture, and, most importantly, many of its people.
The Libyan people have an unusually high level of direct involvement in the political
process. This is unique.
However, Libyans have an unusually low level of direct involvement in the productive
economy: most of the countrys wealth is created by the oil and gas sector in which only 3% of its people work. There are several drivers of the current economic situation: - Libya lacks many of the basic building blocks of a positive business environment that would allow private enterprises to thrive. - Outside the energy sector, Libyan policy effectively blocks foreign participation. This keeps out foreign investment, but more importantly deprives Libyan business of access to experts, technology, know-how and resources. - The focus of Libyas top leadership has been on securing the country in which it has been successful and not so much on creating a positive business environment, which must be the next priority.
Chapter 1. EXECUTIVE SUMMARY
A VISION FOR LIBYA 2019

1. Egalitarian: Libya is a leader in social welfare, and known as a nation that cares for and is highly responsive to its people. All citizens control their economic needs, enabling them to enjoy a stable, secure and prosperous environment. Democratic: Libyan direct democracy allows Libyan citizens to efficiently make decisions, and benefit from a responsive government. Productive: Libyas key resourceits peopleare engaged in highly productive activities, with a real employment rate in excess of 90%, and a strong work ethic. International: Libya is an internationally connected nation, with an economy that is fully integrated with global markets and a world-class infrastructure. Competitive: Libya has a thriving diversified economy, with the non-oil GDP reaching more than LD 50Bn. Libyan companies are globally competitive, and foreign firms compete to locate their operations in Libya. Entrepreneurial: Libya is a center of dynamic entrepreneurial activity, with one of the fastest rates of business formation in the world. Skilled: Libya is a leading center of education and training, developing its own people and opening its doors to foreign students. Connected: Libya has a state-of-the-art Information and Communication Technology (ICT) infrastructure. This gives Libyas citizens easy access to information, knowledge, and education, enabling them to take control of their lives. Green: Libya is an environmentally friendly country, protecting its history, heritage and culture and investing in its long-term future. It is a world leader in water management.
2. 3.
4. 5.
6. 7. 8.
9.
10. Regional Leader: Libya is a role model that other countries seek to emulate. It has a leadership role within the region, and contributes to the wealth and stability of surrounding nations.
- There are few incentives to work productively; salaries are the lowest in the region (despite GDP per capita, PPP adjusted, being the highest), and entrepreneurs do not have the active support of the government it takes almost 100 days to start a business.
Due to these factors, much of the productive enterprise takes place in the informal
sector, where it is inefficient, risky and difficult to achieve scale. If Libya were to formally recognize these activities and remove the obstacles to formal enterprise, the size of the non-energy economy could rapidly double or triple. Libya could become an economic leader in the region.
The energy sector will continue to be the lifeblood of the Libyan economy for at least
another two decades; every effort possible should be made to improve its efficiency, competitiveness and speed of decision-making.
METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK

The project applied a conceptual framework on competitiveness developed by Professor Michael E. Porter, which has been successfully applied in many national and regional contexts across the world. According to this framework, increasing productivity is at the core of creating competitiveness and thus prosperity. The total productivity of a nation rests on three factors: (1) the value on world markets of goods and services produced; (2) the efficiency with which they are produced; and (3) the proportion of the labor force engaged in productive economic activity. In the long term, a nations prosperity depends on its ability to create new sources of wealth, as inherited sources of prosperity, such as oil, are often volatile and generally finite. This theory highlights three critical areas for Libya:
The importance of productivity as a key metric of developmental success; The balance between inherited wealth, which is dependent on natural resources, and
created wealth, which is dependent on the ingenuity and innovation of the countrys entrepreneurs; and
The vital importance of both a stable macro-economic environment and strong

micro-economic foundations for the development and growth of private enterprise.
For the Energy Sector, CERA has used a different approach. A cash flow projection for the value chains in oil, gas and power has identified the scope to optimize their development and increase their revenue contribution in the decade ahead. The NES project team also examined five industry clusters that could lead social development and economic growth in Libya agriculture, construction, energy, tourism and transit trade. These clusters were selected on the basis of current size and future potential. A variety of energy-dependent industries were also studied: oilfield-related logistics and services; metals; and polymers and agrochemicals.
Finally, the project team assessed three critical social sectorshealthcare, education and urban planningvital for the quality of life of Libyan citizens, and critical for the countrys long-term economic development.
KEY THEMES FROM THE COMPETITIVE ASSESSMENT

Based on our detailed assessment of the Libyan economy seven key themes emerge: 1. Libya is the wealthiest country in North Africa, and appears to have a relatively equitable distribution of wealth amongst its people; but productivity remains a challenge Libyas prosperity has grown strongly over the last few years, due to oil price increases. Nevertheless, given its available resources, Libya has the potential to increase its prosperity still further and to reduce the gap with the income levels of the most developed countries of the world. Outside the energy sector, labor productivity is particularly low. In effect, Libya has two economies a high value/low employment energy sector and a low value/ high employment non-energy sector. 2. This wealth is inefficiently redistributed through the social sector, which lacks standards and good management Education: Despite high literacy levels and enrolment ratios, the Libyan education system is not providing the skills required to drive the economy forward. The system suffers from poor quality curricula, teachers and infrastructure; and from structural problems such as the lack of objective standards and inefficient allocation of public resources. Healthcare: The healthcare system faces serious challenges: poor service quality in the public health system, particularly in primary healthcare; inefficient allocation and use of public resources, both in the employment of health workers and the purchase of medical supplies. Behavioral risk factors are also increasing, such as the incidence of non-communicable diseases, poor road safety and water contamination. Housing: Poor urban planning has reduced the supply of land available for urban development. The uncertain legal position on property ownership also deters private individuals and companies from investing in residential property construction. 3. Libyas wealth is highly dependent on the energy sector and other high potential clusters are inadequately developed Energy Cluster Libya has the potential to raise oil production above 3 mbd from the current 1.8 mbd, and to meet all domestic needs for gas while doubling current gas exports. A big increase in funding would be neededNOCs capital and operating budget would have to be almost USD 3.5Bn a year, nearly double current levels. Alternatively, Libya could consider different arrangements for dividing future investment between the NOC and the IOCs. Institutional and behavioral changes are also required to facilitate increased production
from existing fields and discoveries, streamline decision-making, and improve access to business information.
The extra cost of expanding production could largely be saved by eliminating growing imports of motor fuel. There are other worthwhile savings to be made in the downstream oil sector. Libya also needs an integrated approach to the development of its gas resources, infrastructure and markets, rapidly to increase its electricity generation capacity, and to use that capacity more effectively, both in generation and transmission.
Finally, Libya needs to re-examine the way in which fuel price subsidies are delivered. Moving away from fixed fees to suppliers would improve resource allocation and efficiency. There would be even greater savings if subsidies were more narrowly targeted. Other Clusters Looking at clusters outside the energy sector, high potential clusters appear inadequately developed.
Tourism could become an important export cluster, driving both economic and employment growth, if Libya were to leverage its vast tourism assets effectively. Fundamental barrierssuch as visa processing bureaucracy and the poor quality of infrastructureneed to be addressed. Agriculture is an important source of employment. Libya could increase overall productivity and reduce support spending through more efficient use of inputs and better crop management and use of technology. Significant demand exists in residential, commercial and infrastructure construction. The development of this cluster could lead local non-energy economic growth and employment generation. There may be opportunities in the transit-trade cluster, especially in trans-shipments and value-add services. Despite Libyas potential geographical advantage, significant investments are required to develop this cluster in the highly competitive Mediterranean environment.
4. Productivity outside the energy sector is very low, and the public sector employs a majority of the formal workforce Libyas non-oil and gas sectors contribute only 40% of Libyas GDP while employing 97% of the formal workforce. If oil wealth were discounted, Libya would have very low GDP per capita, due to the current level of business competitiveness. Public services including education, healthcare and other services contribute only 9% to Libyas GDP , but employ 51% of the formal workforce. 5. The domestic private sector could enhance productivity and prosperity, but it is restricted by an inefficient public sector and a very unfavorable business environment The economy is dominated by state-owned enterprises (SOEs) that are often inefficiently run, inequitable and non-transparent in granting contracts. SOE managers are not
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incentivized to maximize efficiency government salaries are low and not linked to performance. Private businesses are stifled by excessive bureaucracy and an uncertain policy environment. The private sector also finds it difficult to access appropriately-priced capital or basic banking services. This means that many genuine business ideas remain unfunded and this depresses innovation. Due to the barriers to private business most private sector activity is concentrated in the informal economy, estimated to be as much as 30-40% of Libyas official GDP These . small enterprises lack scale and efficiency, avoid paying taxes, and have low standards of quality, all of which hinder productivity. 6. Essential foreign investment is limited, due to the challenges of the business environment and an effectively anti-Foreign Direct Investment (FDI) policy Libya ranks poorly in FDI promotion, and is losing out on investments that could drive its economic development. A 2001 UNCTAD study ranked Libyas FDI potential in the top 50 countries in its sample, but Libyas FDI performance was not even in the top 100. There are several problems: long delays in FDI approvals and restrictions and delays granting work permits and visas for foreign company personnel. The decision to increase the minimum threshold for FDI to USD 50MM effectively excludes many foreign investors who wish to invest smaller amounts; and the uncertain business environment and policy instability weakens the confidence of investors in the Libyan economy and hinders investment by overseas Libyans. 7. Libyas physical infrastructure is weak in many areas and does not provide adequate support to society and commerce Information and Communications Technology (ICT): Information and communication technology (ICT) lags behind regional comparisons. Libyas fixed line telephone and Internet penetration rates were the second lowest in North Africa in 2003, while cellular telephone penetration is growing rapidly but still trails Morocco and Tunisia. Basic business information is poor or non-existent, and business directories and administrative guidelines are either absent or not easily accessible. Transport: The current transportation infrastructure in Libya will not support increased commerce and transit trade activities. Ports are substantially smaller and below the standards of other Mediterranean countries. Neither the airport infrastructureeven the Tripoli International airportnor the road infrastructure measure up to regional standards, and Libya has no railway system. Water: Water supply is the only major infrastructure area where Libya fares well, mainly due to the huge investment made in the Great Man-made River Water Supply Project (GMR). However, the delivery of water to agricultural areas can still be improved. Libya needs to develop an integrated and sustainable water strategy that balances the supply of water with the increasing urban and agricultural demand.
Urban Planning: Urban planning in Libya has not paid sufficient attention to business needs. Facilities that are standard in most countriesdedicated business districts, industrial parks, ICT networks and power suppliesare notably absent in Libya. Urban planning suffers from lack of data, and from coordination difficulties between central institutions, local committees and other agencies. There is widespread contravention of the plans in place, and a lack of serviced urban development land.
THE WAY FORWARD: ACTION AGENDA

Over the last five years, Libya has taken some major steps forward, but reforms have been piecemeal and unsystematic. Libya needs to achieve consensus on a single competitiveness agenda that will become the mandate for senior members of government and for those that lead the change program. The nine priority actions that Libya needs to undertake to improve its competitiveness are:
1. Perfect Libyan democracy, by leveraging ICT and redesigning processes to reduce inefficiencies 2. Enhance the quality of life for every Libyan through targeted interventions in housing and healthcare 3. Drive workforce readiness through a radically improved educational system that is aligned with market needs and new immigrant workforce policies 4. Enhance the performance and productivity of Libyas energy sector by increasing investment and improving business processes 5. Initiate a program to actively diversify the Libyan economy by promoting key clusters 6. Inaugurate a far-reaching entrepreneurship program to catalyze innovation, risktaking and business formation in Libya 7. Develop Libyas vast rural resources through enhancing agriculture and water management 8. Accelerate and organize the reform of the banking sector in Libya in order to channel well-priced capital to productive enterprise 9. Design and implement critical infrastructure and clarify property rights to support economic development
To support these reforms, Libya also needs to take some overarching enabling actions. These are:
1. Launch an information, communication and technology (ICT) revolution 2. Establish a governance structure comprising special purpose entities such as an Economic Council and a Competitiveness Agency that can drive and accelerate the action agenda 3. Educate and empower a new generation of Libyan leaders to rapidly expand the nations capacity to act
In selecting priority actions for 2006, the team has looked for actions which meet a number of criteria. These actions have the greatest potential to generate widespread economic and social benefits through the multiplier effect; are preconditions for other reforms; address the central issue of lack of capacity to act; are new initiatives rather than existing programs; will generate early victories, andimportantlyallow Libyan leadership to demonstrate its commitment to reform. Based on these principles, the NES team proposes the following actions to be launched during 2006:
ACTIONS FOR PRESSING ISSUES 2006

1. Establish and fund a Libyan Economic Development Boardan executive body with strong leadership that is held clearly accountable for driving the reform agenda and for setting up the new governance structure. Establish a Human Assets Office that drives human resource development in Libya, including funding a world-class leadership program to identify and develop young Libyan leaders. Launch a campaign to upgrade the process of direct democracy by leveraging ICT (e-democracy), to allow Libyans in all regions to contribute efficiently and effectively to the program of national development. Announce the creation of special economic status for three high priority sectors Tourism, ICT and Construction and radically upgrade the business environment in these sectors to eliminate the constraints of bureaucracy, patronage and protectionism. Remove the structural, contractual, planning and other obstacles that are preventing Libya from optimizing investment in the energy sector. This sector will continue to be the lifeblood of the economy and must receive immediate attention through an integrated action program. Develop a National Information Strategy that addresses Libyas short and medium term information needs. Undertake a new banking sector reform, which would include the establishment of a world-class Oil Reserve Fund, with funds specifically earmarked to support the economic development plan. Develop blueprints for action that sets the foundations for reforms in social sectors, which have a cross-cutting impact on Libyan society and the economy.
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8.
UNIQUE MODEL FOR LIBYAN COMPETITIVENESS
Chapter 2.
2.1 INTRODUCTION
The National Economic Strategy (NES) seeks to upgrade the global competitiveness of the Libyan economy, while retaining the unique character of the Libyan Jamahiriya based on the core aspiration for direct democracy. At present, the Libyan economy is heavily dependent on revenue from natural resources i.e. on inherited rather than on created prosperity. The challenge facing Libya is how to expand beyond the energy sector to establish the conditions in which Libyans themselves can create valuable products and services through investment and innovation. The goal of the NES project is to assist in the creation of a unique mixed economy model that balances market mechanisms with the core values of the Libyan Jamahiriyaa model that Muammar Qadhafi has referred to as popular capitalismand thus help Libya achieve its aspirational vision for 2019.
2.2 THE LIBYAN JAMAHIRIYA

The Third Universal Theory, first developed by Colonel Qadhafi in The Green Book and realized in practice through the laws and policies of the Libyan General Peoples Congress, is a genuinely radical philosophy. It does not seek to build a typical state, but instead a Jamahiriyaa unique transformative experiment that puts Libyan people in charge of their own political and economic destiny. Qadhafi refers to nations as natural social communities and argues that we should go back to the natural law that governed human relationships before the appearance of class systems and modern states. The Green Book stresses first and foremost the natural law of equality of individuals, expressed through direct democracy in the form of peoples congresses and committees1. This ambivalent attitude toward independent state authority has resulted in highly decentralized, segmented governmental structures, with weak legal and regulatory institutions in Libya.2
1 Muammar al-Qadhafi The Green Book (World Center for the Study and Research of The Green Book: Tripoli Third Edition 1999). See also Interviews with Muammar Gadhafi by Edmond Jouve in My Vision (Blake: UK 2005) 2 Scholars of comparative policies have referred to Libya and other states in the region as society-centered communities that assign a weak independent role to the state
Chapter 2. A UNIQUE MODEL FOR LIBYAN COMPETITIVENESS
In terms of economic philosophy, The Green Book advocates an economy in which all individuals are in control of their own material needs; initially interpreted to mean the right to private ownership of ones home and of goods produced individually and in partnership. These core values are compatible with a range of existing models of mixed economies which combine market mechanisms and socially-oriented policies and institutions. Since the writing of The Green Book, Libyan officials and leaders have consistently emphasized that the application of these aspirations must be pragmatic and adapted to existing realities. Qadhafi himself has frequently pointed out the discrepancy between reality and aspiration in Libyas efforts to realize the values of the Jamahiriya. While Libya has the highest per capita GDP in the region, this wealth is not as evenly distributed as it could have beena million Libyan citizens live in poverty.
2.3 THE DRIVE FOR ECONOMIC COMPETITIVENESS

The Libyan economy is heavily dependent on revenue from extracting and selling natural resources, rather than creating products and services through investment and innovation. In other words, it is an economy based on inherited rather than created prosperity. Libyan leaders have repeatedly stated that the economy must expand beyond the energy sector to create the conditions in which Libyans themselves can create new sources of wealth. In 1993, Colonel Qadhafi stated: This poor oilWe would like it to do everything. You rely on oil, and you do not rely on your efforts at all. Most recently, in September 2005, he asked: With the exception of oil, show me what other goods are produced by Libyans and which can draw money to the country? At the same time, the modern global economy has created new challenges for nations wishing to raise standards of living for their people. Economic power has become increasingly multi-polar, and it is essential for nations to produce goods and services that are globally competitive. Economies such as Singapore and Ireland have emerged through their emphasis on building the competitiveness of their economies in the global market. Libyan government officials clearly understand that they must create the conditions for their citizens to produce products and services that can be sold profitably on the international market. These are the non-negotiable requirements of contemporary economics. Qadhafi has stated it succinctly: We have considered how to raise the income of Libyan citizenswe have to engage in trade. We have to produce and make a profit.3
3 Muammar Qadhafi Op Cit. 2005
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Increased security for Libya on the international scenethe lifting of UN sanctions and the re-establishment of formal relations with formerly hostile stateshas created new opportunities for trade and collaboration. Libyan officials emphasize that the international community now faces common threats that require new levels of international cooperation. Qadhafi has condemned in the strongest terms the politicization of Islam by the Taliban and Al Qaeda. Having acknowledged its former role in supporting revolutionary groups and forms of terrorism in the past, Libya has adopted a new course. Qadhafi stated recently Neither the United States, nor Europe, nor any other state can say nowadays that Libya is a rogue state or a pariah statenow our policies are those of Africa.3
2.4 LESSONS AND CHALLENGES

The experience of economic transition in other countries provides limited insights for Libya. The nature and objectives of the former Soviet economies and their successors, for example, are very different from those of the Jamahiriya. Libya can, however, learn from their mistakes. The post-Soviet experience showed that privatizing loss-making state enterprises frequently led to a short-term increase in unemployment, asset sell-offs and diversion of money into the pockets of a few individuals. Libyan officials stress that this must be avoidedrather, the goal is to expand the peoples ownership. Libya is therefore developing policies to improve the management of the most productive public enterprises, and to privatize remaining state-owned enterprises in a way that is equitable and addresses the needs of redundant workers. Given Libyas unique history and aspirations, key challenges ahead include: defining the role of government in facilitating wealth creation; strengthening incentives to encourage productivity; and managing the transition to a more competitive economy.
2.4.1 Role of Government

Libya has been described as a distributive state in which national and local institutions emerged not to extract wealth (through tax-gathering mechanisms) but to spend it4. Indeed, the primary activity of the Libyan authorities is to distribute budgets, based on requests from local Basic Peoples Congresses. However, a focus on distribution rather than wealth creation typically leads to policies and practices that produce inefficiencies, and subsidies that create market distortions, often damaging the non-resource-driven economy.
4 Dirk Vanderwalle, Libya Since Independence: Oil and State-Building (Cornell University Press: New York, 1998)
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The NES Project aims to move Libya from a distributive economy with under-developed institutions to a unique mixed economy model that balances market mechanisms with the values of The Third Universal Theory. The government has a major role to play: creating political and legal stability, an efficient basic infrastructure and strengthening both the macroeconomic and microeconomic environment for private enterprise to prosper. This will be a critical issue in the Jamahiriya, where state legal and regulatory institutions have traditionally been weak. Libyan leaders also recognize that Libya needs to take steps to ensure more efficient, diverse and open markets. The opening of our markets is irreversible, Qadhafi stated to a group of European businessmen in 2004. The government and private sector are making progress towards increasing local competition (in the airline industry, for example), strengthening incentives to encourage productivity, and developing new economic clusters.
2.4.2 Strengthening Incentives

To move the Libyan Jamahiriya to a more efficient investment-driven economy, increasing incentivesthe profit motivewill be critical. As Colonel Qadhafi puts it: as profit is the driving force of the economic process, it cannot be abolished by decree but rather by the very evolution of socialist production. In other words, the satisfaction of the material needs of society and individuals. It is therefore through the search for greater profit that we will finally manage to abolish profit. Crucially, Libya is now creating a formal legal foundation for key elements of market activity, most notably for the security of private ownership of land and commercial enterprises. On 17 July 2005, Qadhafi called on Libyan producers unions to legalize the right for one Libyan to hire another Libyan on a salary basis if the latter chooses not to be a partner in production. The General Peoples Congress has also moved to legalize every Libyan citizens right to rent a house or apartment to another Libyan. These moves seek to overcome concerns arising from earlier interpretations of The Green Book, that any Libyan hired to work might subsequently claim a share of ownership of the enterprise and assets, or that every Libyan must own the home in which he or she lives at any given time.
2.4.3 Managing the Transition

The NES Project recognizes that there will be serious challenges in managing the process of creating a more competitive Libyan economy. In distributive states, scholars have noted, there is typically resistance to change from those who benefit from the distribution of revenues from natural resources such as oil, import licenses and other
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government-granted privileges. On the other hand, those in government may also be wary of economic reform, knowing that it will create new power centers in civil society which do not depend on government patronage. These challenges are beginning to be addressed. For example, Libyan leaders have emphasized the importance of appointing individuals to key government positions on the basis of merit, rather than wastathe Arabic term for intercession or mediation through a network of patrons and clients. Several key posts in the current Libyan government have been given to individuals with high qualifications in economics and finance.
2.5 NEXT STEPS

Improving Libyas competitiveness requires hard political choices, which in turn requires leadership and vision. Colonel Qadhafi has consistently stated that his objective is to safeguard the well-being of the Libyan people while preserving the fundamental principles in The Green Book. He has made it clear that economic diversification and growth strategies are imperative for the success of a newly emerging Libya, but that these must combine market mechanisms with the principles of The Third Universal Theory to form a unique form of popular capitalism. Qadhafi has called upon the Basic Peoples Congresses to meet and discuss the key policy issues, a bottom-up process which is essential to building national competitiveness, by which Libyans can take responsibility for their future. In the next section, the NES team outlines a vision for the fiftieth anniversary of the Libyan Revolution in 2019 that seeks further realization of the aspirations and values of The Third Universal Theory. The White Paper also includes an assessment of Libyas competitiveness at all levels and across a range of economic sectors. Finally, it outlines an action agenda with concrete steps to realize these aspirations in the next phase of Libyas development.
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VISION FOR LIBYA 2019
Chapter 3.
The vision outlined here has been developed by the NES team to highlight the potential economic, social and political opportunities for Libya. It outlines a set of aspirations which, if achieved, would transform life for all Libyan citizens and businesses. By the 50th anniversary of its Revolution, Libya has substantially realized its major goals and aspirations. Libya is a respected leader in Africa, the Mediterranean, the Middle East and beyond. While incorporating elements from the successful and rapid development of Singapore, Ireland, Malaysia and other countries, Libya has developed its own unique model. It has a globally competitive economy that has significantly raised the standard of living of the Libyan people, while preserving the values and ideals first defined in The Green Book. The Libyan model is distinguished above all by its pioneering development of direct democracy where policy-making is deferred to deliberative bodies of citizens, and by its social welfare system which ensures that all Libyans control and meet their basic economic needs. This model of the unique Libyan social community is supported by a diversified economy with world-class infrastructure and communications technology. By 2019, Libya has created the conditions for its greatest resource its people to flourish. Libyans are developing world-class educational institutions to produce the best workforce in the region, providing the leadership and technical skills for all citizens to participate responsibly in direct democracy. Libyans are leaders in various fields; heading some of the worlds best companies, hosting major international cultural and political events, and preserving and improving the environment thus creating a unique and prosperous social community for the 21st century. There are ten core aspirations that define this vision: 1. Egalitarian: Libya is a leader in social welfare, and is known as a nation that cares for and is highly responsive to its people. The Revolution has achieved its goal of giving all citizens full control of their economic needs, enabling them to enjoy a stable, secure and prosperous environment.
Chapter 3. A VISION FOR LIBYA 2019
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a. The countrys wealth is spread evenly across its population, achieving a Gini index of less than 305, and every Libyan has access to world-class housing, healthcare and education. b. Libyas cities are clean and livable, and its rural areas are developed and well-supplied with water. Crime-rates are the lowest in the Mediterranean.
2. Democratic: Libyan direct democracy, where political and legal decision-making is referred directly to the people for deliberation in Basic Peoples Congresses, allows Libyan citizens to efficiently make decisions, and benefit from a responsive government.
a. Enhanced by the innovative use of information and communication technology (ICT), the Libyan system has overcome earlier inefficiencies and economic loss to achieve a pioneering model that gives citizens greater choice and responsibility through direct participation in key decisions that affect their lives. b. In the executive branch, Libya has achieved a stable, responsive and efficient government, with minimal bureaucratic obstacles and low corruption, ranking highly among the worlds nations.
3. Productive: Libyas key resource its people are engaged in highly productive activities, with a real employment rate in excess of 90%, and a strong work ethic.
a. Libyan workers have the highest productivity measured by GDP per worker in North Africa and the Middle East, and a high percentage of women are also appropriately and actively engaged in the workforce. b. The social sector is efficient and streamlined, and employment continues to shift towards the productive sectors. c. Libyans are known for their hard work, focusing on their primary occupation and maintaining work hours and work efficiency on a par with the most developed economies of the world. d. The Libyan government is responsive and efficient in facilitating enterprise, fighting corruption on behalf of the people and driving out bureaucracy.
4. International: Libya is an internationally connected nation, with an economy that is fully integrated with global markets and has a world-class infrastructure to support the priorities of its people and its businesses.
a. Libya has thriving trading relations with countries around the world and Libyan businesses enjoy free access to major regional markets, including the countries around the Mediterranean basin.
5 The Gini index is an indicator of how evenly income is spread throughout a population. A Gini index of 100 suggests a highly uneven spread with all of the income accruing to one individual and an index of 0 indicates that all individuals have exactly the same income. A score of less than 30 would put Libya at par with Scandinavian countries that display high income equality
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b. A world-class airport, served by the major world airlines, connects Libya to the major cities of all continents. c. A rapid East-West railway connects Libyas coastal cities, fostering transit and trade to its neighbors and improving its ability to serve and control its northern borders.
5. Competitive: Libya has a thriving diversified economy, building from energy into tourism, trade, agriculture and many new areas, with the non-oil GDP reaching more than LYD 50Bn. With an efficient and attractive business environment to support them, Libyan companies are extending their enterprise throughout the region, and foreign firms are competing to locate their operations in Libya.
a. Local firms have a profitable presence in a number of foreign markets, building the countrys reputation abroad and raising levels of prosperity in Libya. b. There is active and healthy competition between the Energy cluster and the ICT cluster for the best engineers, highest investment levels and greatest prestige. c. Libya is talked about in the global media as a preferred destination for foreign investment.
6. Entrepreneurial: Libya is a center of dynamic entrepreneurial activity, with one of the fastest rates of business formation in the world. Young Libyans are known around the world as smart, educated and courageous entrepreneurs who are leading the way in channeling wealth into productive enterprise.
a. It is possible to register and launch a new enterprise in less than a week. b. Libya is a home to innovators in social sector initiativessuch as bringing education to remote communitiesin addition to innovators in commercial enterprise. c. Libyan entrepreneurs are profiled in global media as role models and agents of positive economic change.
7. Skilled: Libya is a leading center of education and training, developing its own people and opening its doors to foreign students who both benefit from and contribute to the learning process.
a. There is at least one major world-class Libyan university with leading faculties in Arab culture, engineering, medicine, applied sciences, political science and the liberal arts. Through visiting appointments in Libyas universities, the best global professors regularly lecture in Europe and Africa in the same week. b. The countrys educational curriculum is designed to be in line with the emerging needs of the job market. c. Libyan skilled professionals are invited to many global forums to share their knowledge and expertise. d. Libya is a sought-after destination for short term training courses, focusing on building workforce skills.
Chapter 3. A VISION FOR LIBYA 2019
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8. Connected: Libya has state-of-the-art Information and Communication Technology (ICT) infrastructure, and is known for showcasing the most modern ICT platforms. This gives Libyas citizens easy access to information, knowledge, and education, enabling them to take control of their lives.
a. Businesses are well connected by world-class ICT networks both locally and around the world, making their businesses more productive. b. Libyas schools and colleges make extensive use of ICT to enhance learning opportunities for their students. c. Every Libyan has a mobile phone, and many are using these as part of the countrys system of direct democracy. d. Setting the standard for the Arab world, 250,000 Libyan women use ICT enabled remote-working solutions and mobile networks to participate in the productive workforce whilst balancing their roles in the family.
9. Green: Libya is an environmentally friendly country, protecting its history, heritage and culture and investing in its long-term future as a home and a tourism destination. It is a world leader in water management, driving innovation that leads the way for other African nations.
a. The Green Coast, a major belt of green arable land that is visible from space, stretches across the northern shores of the country. World-class desalination technology provides extensive opportunities for agriculture and tourism, securing Libyas status as a global leader in water management. b. Tourists seek out Libya for its natural beauty, its world-class antiquities and its safe environment. Libya is home to leading institutions in desert art, music and culture, and hosts an annual film festival that celebrates regional cinema. c. Libya has won many international awards for its efforts in promoting environmentally sensitive and sustainable development.
10. Regional Leader: Libya is a role model that other countries study and seek to emulate. It has a significant leadership role within the region, brokering both trade and diplomatic initiatives, and contributing to the wealth and stability of the surrounding nations.
a. The African Union and the North African headquarters of the Mediterranean Union (Barcelona Process) are located in Libya. b. Libyan direct democracy has become a model for many countries in the Middle East, the Mediterranean, Africa and beyond. c. The successful and active participation of women in the productive economy has made Libya a role model for the entire Middle East and North Africa region.
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METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK
Chapter 4.
A shared view of what competitiveness is and what the main drivers affecting its development are, is critical for a nation to be able to launch an effective campaign to improve the path of economic development. In this chapter we outline the core elements of the conceptual framework on competitiveness that has been widely applied in this project. This framework has been developed by Professor Michael E. Porter and has over the last 15 years been applied in a large number of countries and regions across the world. We also outline the methodology used for doing an analysis of the energy sector in particular, which goes beyond competitiveness, to address future policy and funding issues. Competitiveness is best assessed by looking at the total productivity of a nation. This depends on three factors: the value on world markets of goods and services produced, the efficiency with which they are produced, and the proportion of the labor force engaged in productive economic activity. In the long term, the prosperity of a nation depends on its ability to create new sources of wealth, as inherited sources of prosperity, such as natural resources, are often volatile and generally finite. The NES project team looked at the two key drivers of competitiveness: the macroeconomic, political, legal and social context in which businesses operate, and the microeconomic foundations of company activity, such as local resources and conditions, local demand and the presence of related industries. Having first assessed the Libyan economy at a macroeconomic level and the business environment at a microeconomic level, the team identified clusters of related economic activity, and assessed each cluster against key microeconomic drivers. By looking across the range of economic activity in this way, it is possible to reach a view on Libyas overall stage of economic development, and the future role of government and private sector organizations at all geographic levels in planning and executing a sustainable competitiveness strategy.
4.1 WHAT IS COMPETITIVENESS? 4.1.1 Competitiveness, Productivity, and Prosperity

Competitiveness remains a concept that is not well understood, despite widespread acceptance of its importance. The most intuitive definition of competitiveness is a countrys share of world markets for its products. Unfortunately, this view of
Chapter 4. METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK
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competitiveness is deeply flawed. It treats the ability to sell on world markets as an end goal instead of a tool to achieve prosperity. Exports based on low wages or a cheap currency, however, do not support an attractive standard of living. A much more useful definition identifies a countrys competitiveness with the productivity that companies located there can achieve. A nations standard of living is determined by the productivity of its economy, measured by the value of goods and services produced per unit of the nations human, capital, and natural resources. Productivity depends both on the value of a nations products and services, measured by the prices they can command in open markets, and the efficiency with which they can be produced. A high level of productivity allows a nation to support high wages, a strong currency and attractive returns to capitaland with them a high standard of living. Productivity is the goal, not exports per se. Only if a nation increases exports of products or services in industries with productivity above the national average will national productivity rise. The productivity of a nation then is a function of two elements: the productivity that individuals reach in their economic activities, and the ability to mobilize a large share of the available labor force to engage in productive economic activity instead of being unemployed or otherwise employed outside the formal economy.
4.1.2 Inherited versus Created Prosperity

For Libya, another aspect of the competitiveness discussion deserves special attention: the distinction between inherited prosperity and created prosperity. Inherited prosperity can, for example, result from access to natural resources. It can make a country wealthy, particularly if its natural resource reserves are substantial relative to the size of the population. But inherited prosperity is usually limited, running out when the resources are exhausted or decrease in relation to a growing population. It also makes a country vulnerable to the volatility of prices on global commodity markets. And it tends to focus attention on the distribution of wealth through government institutions rather than on the creation of wealth by private enterprises. Libya needs to move beyond relying on inherited prosperity alone to overcome these challenges that dependence on oil revenue inevitably brings, preparing the ground for what we call created prosperity. Created prosperity is prosperity created by firms offering a product or a service which they are able to sell at more than its cost. This kind of prosperity is limited only by the ability and ingenuity of firms and entrepreneurs, not by a fixed stock of natural resource assets. It puts firms at the center of wealth creation, transforming business-government relations, and focuses on the conditions for productive wealth creation, not on its distribution. Created prosperity, then, is the ultimate sign of a countrys true competitiveness. And it needs to fully mobilize the available labor force of the country, instead of sustaining a dual economy where a small part of the economy creates most of the economic value and the remainder of the countrys economic resources are idle or underutilized.
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4.2 DRIVERS OF COMPETITIVENESS

The multiple influences on competitiveness can be organized into two important groups: the broader macroeconomic, political, legal, and social context in which companies operate, and the microeconomic foundations of company sophistication as well as the quality of the microeconomic business environment. These groups have different but interlinked roles.
Figure 1. Determinants of Competitiveness
4.2.1 Macroeconomic, Political, Legal, and Social Context

Stable political, legal, and social institutions and sound macroeconomic policies create the potential for company productivity and national prosperity. Improving social conditions, in particular, is vital to sustain a competitive economy, and is not a different or even a conflicting objective. Social policies need to be integrated into a competitiveness agenda to increase their effectiveness. A good example is a training program for the socially disadvantaged designed and organized jointly by public educational institutions and the companies where the graduates of the program will have a good chance to find employment. Such programs both increase job opportunities and improve the economic context for firms. Countries at Libyas stage of economic development often register significant weaknesses in these overall context areas. These weaknesses need to be addressed for companies and individuals to be willing to make the long-term investments in skills and capabilities that are critical for higher productivity. Progress on these areas is important for economic reforms to be politically sustainable and economically fully effective.
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4.2.2 Microeconomic Foundations

While the overall context is important, wealth is actually created at the level of an economys microeconomic foundations by firms able to create valuable goods and services through increasingly sophisticated strategies and operations, supported by a strengthening business environment. Countries at Libyas stage of economic development often face challenges in both these elements. Companies tend to work at low levels of operational efficiency and compete on low prices without differentiated market positions. Business environments suffer from wide-spread weaknesses in assets such as infrastructure and skills, and poorly-developed rules and regulations affecting business. At a more detailed level, the business environment can be understood in terms of four interrelated areas: the quality of factor (input) conditions, the context for firm strategy and rivalry, the quality of local demand conditions, and the presence of related and supporting industries. Because of their graphical representation, the four areas have collectively become referred to as The Diamond. Each of these areas consists of a number of categories, and is affected by a different set of institutions, policies, and decisions.
Figure 2. The Microeconomic Business Environment The Diamond
For a country at Libyas stage of development, the attraction of foreign direct investment (FDI) can be a very powerful tool to upgrade the sophistication of companies operating in the country. Foreign investors bring new knowledge, management techniques, and multiple linkages to foreign markets, not just capital. The challenge is to provide an
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environment in which the operational practices of foreign companies spill over to domestic companies existing or newly-started for example, by supplying the foreignowned operations or by being managed by Libyans with experience from working in these foreign companies. Some Libyan peer countries also use special economic zones as a tool to address the widespread weaknesses in the business environment. Such zones allow governments to focus scarce resources on upgrading the physical infrastructure in narrow geographic areas and to learn from changes in rules and regulations governing business in a limited part of the economy. The challenge is to create linkages between these special zones and the rest of the economy, so that they become magnets for the rest of the economy to follow, not isolated islands. An important characteristic of strong business environments are clusters, geographically proximate groups of interconnected companies, suppliers, service providers, and associated institutions in a particular field, which are linked by commonalities and complementarities. Clusters such as software in India or high-performance cars in Germany are often concentrated in a particular region, and sometimes in a single town or city. Clusters affect competitiveness because of their positive impact on company productivity, innovative capacity, and new business formation. For countries at Libyas stage of economic development the challenge is to move from isolated firms to clusters, and to link these clusters to global value chains and markets. Over time, the focus shifts from upgrading the efficiency of activities to generating more distinct value through innovation. As this framework reveals, almost everything matters for competitiveness. Schools matter, roads matter, the financial markets matter, the rules on FDI matter, and the ownership structure of companies matters. The behavior and sophistication of customers also matters, along with many other characteristics which are deeply rooted in a nations history, institutions, people, and culture. Economic development is a process of successive economic upgrading, in which the most limiting weaknesses of the business environment improve over time. For countries like Libya it is crucial to set priorities about areas of the business environment that have to be upgraded first. Ireland, for example, has achieved remarkable success by focusing on those areas that are crucial for foreign investors looking for an efficient location to serve the European markets, e.g. workforce skills, communication and transportation infrastructure, cost of doing business (taxes, etc.), and a very professional interface between potential investors and the Irish public sector. All elements of the diamond will need to be upgraded over time, but doing so in parallel spreads leadership resources as well as capital too thinly to have an impact. Instead, the most pressing current barriers to higher productivity have to be identified and removed one at a time, prioritizing in a very disciplined manner.
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4.3 STAGES OF COMPETITIVE DEVELOPMENT

As economies develop, they progress in terms of their competitive advantages and modes of competing. A useful way to understand the shifting patterns of challenges that countries face along the path of economic development is the notion of stages introduced by Professor Porter in 1990.
Figure 3. Stages of Competitive Development
In the Factor-Driven stage, basic factor conditions such as low-cost labor and unprocessed natural resources are the dominant sources of competitive advantage and exports. Firms produce commodities or relatively simple products designed in other, more advanced countries. Technology is assimilated through imports, supply agreements, foreign direct investment (FDI), and imitation. In this stage, companies typically compete on price and lack direct access to consumers. They have limited roles in the value chain, focusing on assembly, labor-intensive manufacturing, and resource extraction. A Factor-Driven economy is highly sensitive to world economic cycles, commodity prices, and exchange rate fluctuations. In the Investment-Driven stage, efficiency in producing standard products and services becomes the dominant source of competitive advantage. Heavy investment in efficient infrastructure, business-friendly government administration, strong investment incentives, and better access to capital allow major improvements in productivity. The products and services produced become more sophisticated, but technology and designs still largely come from abroad. Technology is accessed through licensing, joint ventures, FDI and imitation. However, nations at this stage not only assimilate foreign technology but also begin to develop the capacity to improve on it. Companies serve a mix of Original Equipment Manufacturer (OEM) customers and end users, and extend their capabilities more widely in the value chain. An Investment-Driven economy is concentrated on manufacturing and on outsourced services exports. It is susceptible to financial crises and external, sector-specific demand shocks. In the Innovation-Driven stage, the ability to produce innovative products and services at the global technology frontier using the most advanced methods becomes the dominant source of competitive advantage. The national business environment is characterized
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by strengths in all areas together with the presence of deep clusters. Institutions and incentives supporting innovation are well developed. Companies compete with unique strategies that are often global in scope. An Innovation-Driven economy has a high proportion of services in the economy and is resilient to external shocks. Countries at Libyas stage of economic development are often best understood as FactorDriven economies, even though their business environments might have some of the characteristics, such as a well educated labor force and access to significant financial resources, which are usually associated with Investment-Driven economies.
4.4 THE PROCESS OF COMPETITIVENESS UPGRADING

Recognizing the importance of the microeconomic foundations of competitiveness does not just highlight new areas beyond fiscal and monetary policy; it also demonstrates the need to adopt a fundamentally different approach to policy making. Economic strategies driven by the central government alone are not sufficient, because a central government cannot understand and control all the complex elements of the microeconomic business environment that affect company productivity. Effective microeconomic reforms need to be built on the cooperation between the private and the public sector to plan and execute a sustainable competitiveness strategy. Government still plays an important role in economic development because it affects many aspects of the business environment. The question is not whether government has a role, but what that role should be and how to coordinate policies across different parts of government. Government must set the right rules and incentives, and make the public investments needed for a productive economy. The private sector is also a crucial actor in improving competitiveness and in setting economic policy. Individual firmswhether domestic or subsidiaries of foreign companiesbenefit themselves and also improve the competitive environment when they take steps to upgrade their internal practices, establish educational programs, attract suppliers, or define standards. Collective bodies such as trade associations and chambers of commerce also have important roles in improving infrastructure, providing training, developing export markets and making efforts to enhance company capabilities, such as quality certification programs and manufacturing assistance centers. Universities and schools are also increasingly important as sources of knowledge and new technology. Finally, a whole class of institutions, which we term Institutions for Collaboration (IFCs), play an important role in competitiveness through connecting different parts of the diamond and fostering efficient collective activities. IFCs organizations such as entrepreneur networks, standard-setting agencies, quality centers, technology networks, and many othersare especially prevalent in the most advanced economies, but also have crucial roles in developing countries.
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4.5 THE ROLE OF DIFFERENT LEVELS OF GEOGRAPHY

The competitiveness of a given location is influenced by policies and decisions at different geographic levels: from cross-national regions, to nations, to states or provinces, and finally to local cities, towns or communities. Policies at the national level have traditionally been at the forefront of the economic debate, and clearly have a strong impact on microeconomic business environments that are reflected in large differences in prosperity between countries. But there are also striking differences in economic performance within countries, not just across national boundaries. An important new direction in competitiveness thinking and practice is therefore the recognition that economic strategies for states, metropolitan regions, and even towns are crucial. True competitiveness needs to be built from the bottom-up, with individual regions and clusters taking charge of their economic destiny. Neighboring countries can also influence national productivity. Economic cooperation among neighbors is an important tool for expanding trade and improving the business environment. Investments that have cross-border impact can be made more efficiently, clusters can develop in natural economic rather than artificial political boundaries, foreign investors can be more easily attracted to a larger integrated economic region, and so on. Countries at Libyas stage of economic development often find it challenging to mobilize all different geographic levels to contribute to higher competitiveness. Sub-national regions tend to have weak institutions and poor capabilities, while cross-border relations may suffer from a lack of trust. Over time, however, it is critical andas many examples showpossible to push the competitiveness effort beyond the national level to include neighbors, regions and communities in different parts of the country.
4.6 METHODOLOGY: ENERGY SECTOR

Libyas energy sectoroil, gas and poweris the dominant sector and the most developed cluster in the Libyan economy today. The countrys remaining oil and gas potential is substantial. Electricity also represents a fundamental building block for broader economic development. Therefore, the energy sector will continue to play an important role in the National Economic Strategy. At the same time, government take from oil and gas will remain a key source of finance for many other sectors across the economy, as well as for social programs. We have therefore extended our analysis beyond the competitiveness of the sector to develop recommendations for optimizing its development in the years ahead, and so for increasing its revenue contribution over that period.
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Our approach has been to look forward for 10 years, and to project:
Annual cash flows from oil and gas production, on two outlooks for international oil and gas prices combined with different levels of upstream investment, and the division of these cash flows between the Libyan government (including NOC) and the international oil companies (IOCs); Similar annual cash flows from the refining, domestic marketing and petrochemical sectors, from the power sector, including generation, transmission and distribution, and for the transmission, distribution and export of natural gas; and Investment plans for the entire value chain (upstream, midstream and downstream in oil gas and power), together with other investment opportunities in Libyas energy value chain that could contribute to the sectors optimal development, even if some of these projects are not currently budgeted or planned.
We have then drawn on this analysis to identify the Pressing Issues for policy change and organizational development that need to be addressed within the energy sector. We have also set out an action program, outlined in Chapter 9, to support these changes. Summaries of the analyses and conclusions specific to the energy sector are included in various parts of this document, and a full report is set out in Appendix A.
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AN
ASSESSMENT OF LIBYAS COMPETITIVENESS
Chapter 5.
5.1 OVERVIEW
This chapter assesses Libyas overall economic performance and employment make-up, and the quality of the business environment both the broader macroeconomic and political context and the microeconomics of individual firms and local demand. Libya is among the most prosperous countries in the region, and its GDP has grown solidly over the past few years. However, when judged against a range of indices, the Libyan economy is not generating the levels of prosperity that might be expected. The overall picture that emerges is one of low levels of productivity, with much of the workforce idle or engaged in low-value activities and negative productivity growth in most sectors other than oil and gas. In effect, the Libyan economy divides into two parts: a high value / low employment energy sector and a low value / high employment non-energy sector. In particular, employment in public services is large and growing. Libya is heavily dependent on oil and gas exports, although Libyas share of the world energy market is declining as other countries increase output. Other exports are negligible and declining, although the tourism sector is growing. Most foreign direct investment (FDI) into Libya is concentrated in the energy sector. In addition, Libya ranks very low on factors that might drive other wealth creation, such as innovation, scientific research, and intellectual property protection. Overall, Libya is an important regional player with a fairly sound macroeconomic situation. It has a stable political system and is making progress on social indicators. That said, administrative hurdles and inefficiencies are materially retarding economic development. Libya also lags its MENA peers on key governance indicators, such as corruption and regulatory quality. Libya must improve in these areas to provide the facilitating environment for greater competitiveness. At the microeconomic level, where wealth is actually created, Libyan companies have a low level of sophistication by international standards across all sectors public, private and small-to-medium enterprises (SMEs). With the exception of its rich natural resource base, Libyas business environment does little to enhance competitiveness. Physical infrastructure and skills both need to be improved. Customer demand is also limited, both naturally by the size of the market and artificially by Libyas historic isolation and the price-focused purchasing policy of government bodies. In many sectors, the environment
Chapter 5. AN ASSESSMENT OF LIBYAS COMPETITIVENESS
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actually limits competition through barriers to entry, such as governmentimposed restrictions on both foreign and domestic competition, and widespread corruption and favoritism. Limited activity in most sectors other than oil, and the lack of a strong banking and business information sector, both hamper industry development.
5.2 ECONOMIC PERFORMANCE 5.2.1 Assessment of Prosperity and Productivity

The prosperity of its citizens is the ultimate benchmark for the success of a countrys economic policies and a reflection of its underlying competitiveness. Measured on GDP per capita, adjusted for purchasing power6, Libya has registered strong prosperity performance over the last few years, with a GDP per capita of about USD 11,000 (see Figure 4). It is among the most prosperous countries in its peer group and has registered solid growth, outpacing a number of comparable countries in the region.
Figure 4. GDP (PPP Adjusted) Performance, 19992004, Libya Relative to Peers
6 Purchasing Power Parity (PPP) is an estimate of the exchange rate required to equalize the purchasing power of different currencies, given the prices of goods and services in the countries concerned. It is designed to accurately reflect the difference in standards of living between countries. Adjusting GDP per capita for PPP is necessary because market exchange rates do not accurately measure differences in income and consumption among countries
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However, the true level of prosperity achieved is a function of three elements:
The extent to which factors of production in the economy are being mobilized,
especially the level of employment in the economy;
The level of productivity, i.e. the GDP generated per factor input, especially per unit
of labor; and
The level of local prices, which determines the standard of living citizens can afford
given their income.
Judged against these indices, the Libyan economy is not generating the levels of prosperity that might be expected. The overall picture that emerges is one of low levels of productivity and factor mobilization outside the energy sector. The level of employment in the Libyan economy is clearly an issue. There is limited data available but there are indications that a large segment of the available labor force in Libya is sitting idle or is engaged in low-value activities below its capabilities. More than 50% of the formal workforce is employed in healthcare, education and other public services. There are also indications that the level of investment in capital goods is low. The level of productivity in the economy is the most critical indicator of performance and competitiveness. This is where business environment and company activities are translated into economic value. While there is little systematic data available, all indications are that productivity is generally low. Internal experts believe that productivity growth outside the oil and gas sector is extremely low, with a senior government official suggesting that it is likely to be little more than zero. Several studies and data corroborate this view. World Bank estimates in 2004 put average annual growth in the productivity of labor in the non-oil sector at minus 2%, with negative productivity growth in manufacturing, agriculture and services since the mid-1990s. Figures from the Central Bank of Libya and the IMF suggest a slight decrease in productivity for oil and gas between 1999 and 2003, with greater declines in other areas. The only exception appears to be construction, although even there the reality is likely to be obscured by a large informal workforce (see Figure 5).
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Figure 5. GDP per Worker in Libya, 1999 and 2003
The level of domestic prices in Libya is the last major element defining prosperity. A high purchasing power of the Libyan Dinar would imply higher prosperity. Although reliable data is not available, there are many indications that purchasing power has declined over the last few years. First, the devaluation of the Libyan Dinar in 2002 increased the cost of imported products. Second, the increase in non-government retail distribution, while providing better availability of imported goods, also means that consumers have to purchase at non-subsidized and often inflated prices.
5.2.2 Impact of Oil

The productivity data above highlights one of the most central features of the Libyan economy the separation of the economy into a high value / low employment energy sector and a low value / high employment non-energy sector. In 2003, the GDP per worker in the oil and gas sector was USD 345,000, but less than USD 22,000 in every other major sector of the economy. Oil and gas accounts for more than 60% of national GDP but only 3% of employment. Oil production in general is an extremely capital-intensive activity with a high level of labor productivity. The large share of this sector in the Libyan economy therefore tends to overstate the underlying level of productivity. The oil economy has not only had a direct impact on the economic performance of the overall economy (our analysis of its strengths and weaknesses is set out in Appendix A), but
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it also affects the quality of the countrys business environment in many ways, including investment and incentives for non-energy sector activities. The experience of many other countries has been that the indirect effect of oil wealth on competitiveness has been decisively negative, and this is a side-effect which Libya also seems to have been unable to avoid. Oil, as a source of wealth for Libya, can provide two significant advantages.
If distributed effectively to the population, oil wealth can have a positive effect on
individual prosperity and therefore the standard of living of all Libyans. Libya has a relatively high PPP adjusted GDP per capita for the region and its apparent income equality would suggest that distribution of oil wealth has been relatively equitable compared to other oil-producing countries.
Oil wealth can provide an important source of investment capital for other industries
and economic development initiatives. Libyas oil wealth has enabled it to build up substantial foreign exchange reserves. These reserves testify to the rapid, pricedriven and therefore unpredictable rise in oil wealth.
In almost all hydrocarbon-rich economies, the presence of substantial oil-derived wealth brings with it a number of significant disadvantages as well.
Libya is a price-taker for the commodity that accounts for the bulk of its income, and
therefore experiences significant price fluctuations. This volatility creates difficulties for long-term planning, consistent management of and responsible investment in the economy.
When most of the wealth generation takes place within one industry, entrepreneurs
and investors have incentives to focus their investment and activity within this one sectorthus increasing dependence and volatility in the economy.
Particularly after a period of growth in oil revenues, the onus is on the government
to enhance its distributive mechanisms so that the people of the country can share in the windfall, particularly those most in need. However the government itself has limited capacity, and the desire for it to redistribute is often greater than the desire to invest in other productive areas. Consequently, supposedly market-oriented institutions, such as import-export banks and licensing agencies, are used instead as tools for redistribution and their resources are diverted away from market-oriented actions (as discussed later in this document). Rapid distributive mechanisms such as regional budgets, subsidies and government employment become the focus of government efforts.
Perhaps the most damaging potential effect is that the people of the country may
develop an expectation that everything is for free and that their time is best spent trying to capture a greater share of the windfalls rather than engaging in productive employment or enterprise.
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5.2.3 Exports and Foreign Investment

The level of exports and inward foreign direct investment (FDI) are useful additional indicators of national competitiveness in the face of international competition. However, they should be evaluated carefully as they may be the result of an undervalued currency or artificially-low factor costs. These indicators do not necessarily accurately reflect the productivity of economic activities in the country, as they may also be profoundly influenced by trade and tariff regimes, and country-to-country agreements. An assessment of exports suggests that Libyas dependence on energy exports is increasing, but is having minimal impact on increasing the competitiveness of the economy. Libyas share in world exports of energy is decreasing as other oil-and-gasproducing countries have increased their production. At the same time, other exports are negligible and declining; only the tourism sector is growing. Libya accounts for 0.185% of the worlds total exports (see Figure 6). More than 95% of these exports are derived from oil and gas in which Libya had a 2.8% market share in 2003. However, even in this sector, Libya lost more than 0.4% share between 1997 and 2003. This is mainly the result of sanctions in place on Libya in the early years of this period.
Figure 6. Libyas Exports by Sector, 1997-2003
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Turning to FDI, one sees that FDI in Libya is concentrated largely in the energy sector. In 2004, Libya received USD 1.3Bn of FDI. The distribution of FDI is heavily skewed towards energy 80% went to the energy sector and the remaining 20% to other sectors of the economy. It appears that government and foreign investors focus on energy has limited the upgrading of the rest of the Libyan economy. The difference between committed and actual investment in the non-energy sector suggests that investors are still reluctant to take investment risks outside of the energy sector. For instance, while more than USD 3Bn in FDI was committed to tourism projects in 2005, almost none of those projects have received funding (see Figure 7). We believe that many international investors are testing the waters through initial FDI commitments, but pulling out once they understand the difficulties involved in operating in the wider Libyan economy.
Figure 7. Total Foreign Direct Investment Committed, Tourism Sector, 2005
As a country blessed with substantial, high-quality oil reserves, Libya has a regular source of income. As a result of the increasing oil price over the last 5 years, there has been a significant build up of foreign reserves, reportedly totaling some USD 33Bn by the end of 20047, and expected to reach around USD 50Bn8 by the end of 2006 (see Figure 8).
7 Central Bank of Libya 8 Ministry of Finance
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Figure 8. Foreign Assets, Libya, 19992006E
The Libyan government has wisely held off investing a significant share of its oil revenues, as it has not yet decided on a consistent strategy on how best to use these assets. Questions need to be addressed such as whether to use the assets for upgrading infrastructure or to build up a managed oil reserve fund. Determining the most productive use of oil revenues will be one of the critical priorities in the future.
5.2.4 Innovation
Innovation activity in Libya appears to be low. Libyas capacity to innovate was ranked lowest among the 111 countries analyzed in the Global Competitiveness Report (GCR) 2005-06 and the Libya Business Executive Survey (LBES), conducted among senior executives in state-owned and private enterprises9. This low level of innovation is also apparent from the number of inventions recorded in Libya7 per annum on average in the last decade. Even these do not all represent real inventions, as many of them are process improvements to available solutions, which already exist outside Libya10. Libya also ranked low among the 111 countries on other factors that influence the economys capability to innovate, such as the quality of scientific research institutions (ranked 84th), the quality of mathematics and science education (87th), and intellectual property protection (92nd).
9 The GCR and LBES are both described in more detail in Section 5.5.2 10 Data from the National Industrial Research Centre. Inventions registered include irrigation units, soaps, and engine parts
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5.3 ECONOMIC COMPOSITION

1.6 million people are employed in Libyas formal economy. Though detailed or reliable statistics are not available for the informal economy, senior government officials estimate another 1.2-1.6 million people are informally employed, mainly in the agriculture, construction and retail trade sectors.
5.3.1 Employment in the Formal Economy

The formal economy is characterized by relatively small numbers (43,000) employed in the oil sector, which produces most of the countrys wealth, and large and growing employment (840,000) in public services (see Figure 9). It appears that the wealth created in the energy sector is redistributed through extensive welfare employment in the public sector, making it much less productive. According to the best available data, the energy sector contributes more than 60% to Libyas GDP but employs only 3% of the formal workforce, despite the fact that employment , in the sector grew an estimated 10% between 1999 and 2003. On the other hand, public services, including education and healthcare, contribute only 9% to Libyas GDP but , employ 51% of the formal workforce. Employment in public services doubled between 1999 and 2003, while overall formal employment grew by only 12%.
Figure 9. GDP and Employment per Sector, 2003
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There is significant over-employment in sectors like hotels, banks and utility companies. For example, hotels owned by the state-operated Social Security Fund, which have service standards equivalent to those at a three-star international hotel, employ more than two staff members per room. Similar employee-room ratios are found only in major five-star international hotels across the world, where price realization is at least five times greater than it is in these state-run hotels. While management may have deliberately chosen a labor-intensive model over a capital-intensive model, due to the low relative cost of labor over capital in Libya, we do not believe that this represents the most profitable way to run these hotels. Likewise, there is significant over-employment in other sectors. Senior government and banking officials estimate that over-employment in the banking sector is at least 3040%. Similarly, over-employment is recognized as an issue in GECOL, the state owned electricity company. Another key characteristic of Libyas skewed formal employment is the existence of welfare employment. Libyan government officials estimate that at least one-third of the 200,000 primary school teachers and 30,000 nurses on government payrolls are inactive, but continue to receive monthly salaries.
5.3.2 Employment in the Informal Economy

While data challenges make it difficult to determine the exact contribution of informal activities to the Libyan economy, the size of the informal economy is estimated to be as much as 30-40% of the official GDP This figure has been arrived at by looking at . various sources and using different methods of estimation. A top-down study11 used a macroeconomic model to compute the size of the informal economy by looking at macroeconomic aggregates such as money supply, official GDP and employment. This provides a top-down estimate of the size of the informal economy. In addition, a bottomup estimate of the size of the informal economy was conducted by the NES team using household income and household consumption data in Libya. These top-down and bottom-up estimates were further validated through interviews and discussions with industry representatives and various other stakeholders in Libya. Informed estimates indicate that the informal workforce is almost entirely employed in agriculture, construction and retail trade sectors. Many Libyans, in addition to their regular jobs with government or state-owned enterprises that they do in the morning (AM economy), supplement their incomes by becoming entrepreneurs in the afternoon (PM economy). The PM economy appears to operate more like a free-market with supply and demand-based pricing and wage mechanisms.
11 Study conducted by Prof. Friedrich Schneider of Johannes Kepler University of Linz, Austria; see Appendix C for exact reference
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5.4 THE LIBYAN BUSINESS ENVIRONMENT: MACROECONOMIC, POLITICAL, SOCIAL AND LEGAL CONTEXT
As discussed in Chapter 4, a competitive economy will have high and increasing levels of productivity and innovation. The national and regional environment is a key factor in encouraging (or stifling) productive activity. In this section, we analyze Libyas broader national context. The next section looks at more detailed microeconomic conditions. Overall, Libya is an important regional player with a fairly sound macroeconomic situation. It has a stable political system and is making progress on social indicators. That said, administrative hurdles and inefficiencies are materially retarding economic development. Libya also lags its MENA peers on key governance indicators, such as corruption and regulatory quality. Libya must improve in these areas to provide the facilitating environment for greater competitiveness.
5.4.1 Macroeconomic Situation

Libyas current macroeconomic situation provides a favorable context for reform efforts, significantly better than that of the early 1990s when Libya previously sought to liberalize the economy. Libyas fiscal position is strong due to continued high oil receipts and ample foreign reserves. These provide a sound basis for macroeconomic management in the next few years, including managing the exchange rate through current official controls.12 To date, Libya has not used an active monetary policy as a management tool though initiatives are underway to develop a more positive monetary stance including marketbased instruments. Despite a projected gradual decline in oil prices in the coming period, the IMF forecasts Libyas macroeconomic position to remain sound, given the projected steady increase in Libyan oil production and a prudent fiscal policy. This forecast takes into account a projected increase in spending on imported inputs for development projects. It also assumes relatively slow progress on key reforms to improve the tax system, strengthen budgetary management, restructure the banking system, and to redesign the subsidy system, as well as other liberalization steps.
5.4.2 Regional Position

Libya is an important regional player. It is a member of regional organizations such as the African Union, the League of Arab States, the Organization of the Islamic Conference, CEN-SAD (The Community of Sahel-Saharan States) and the Arab Maghreb Union.
12 Over the last five years, increase in the oil price has vastly improved Libyas current account balance (surplus). This increase in the oil price has also caused significant upward pressure on the exchange rate. The discrepancy between the official and special market (informal) exchange rates was removed with a 52% devaluation of the Libyan Dinar in 2002. Despite the increasing oil price, the Central Bank has managed to keep the exchange rate relatively constant since the 2002 devaluation.
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It is also an active participant in the region, promoting cooperation and peace among African and Arab countries, and a stronger African representation at the United Nations. To assess Libyas economic role in the MENA region, one can compare its exports with other MENA countries. While Libya accounts for a 4% share of the total MENA exports, its export share in the energy sector almost doubles to 7% (see Figure 10)13.
Figure 10. Oil Exports of MENA Countries, 2004
Libyas import share in MENA is in line with its exports, accounting for 3% of total imports into MENA. However, Libya imports more goods on a per capita basis than most of its peers, in line with its greater prosperity. In terms of trade with neighboring countries, MENA accounts for only 10% of total imports into Libya. However Libya relies more on its MENA neighbors for goods with restricted transportability bulk goods and perishables importing 43% of construction materials and 32% of agricultural products from other MENA countries in 2003.
5.4.3 Governance
To assess the quality of governance in Libya, we used a set of cross-country governance indicators from a study sponsored by the World Bank Institute14. This study uses a broad and comprehensive range of data on perceptions of various aspects of governance such as political stability, rule of law, government effectiveness, corruption, regulatory quality, voice and accountability drawn from 37 separate data sources constructed by 31
13 Countries included in the MENA calculation are Algeria, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, UAE and Yemen 14 Governance Matters IV: Governance Indicators for 1996-2004 by Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi, 2005
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different organizations, which include cross-country surveys of firms, commercial risk-rating agencies, think tanks, government agencies, and international organizations. Using subjective (perceptions) data is useful as this picks up crucial differences between the de jure (in principle) and the de facto (in practice) institutional arrangements, which objective measures do not capture. The indicators cover 209 countries and territories, and assess several hundred individual variables, which are then aggregated into composite measures, making these the most comprehensive and widely used crosscountry indicators of governance available today. Libya lags behind its MENA peers by a substantial margin on all but one of these governance indicators (see Figure 11). It ranks lower than the MENA average on control of corruption, regulatory quality, governance effectiveness, rule of law and voice and accountability. Only on political stability does Libya rank better than the MENA average.
Figure 11: Key Governance Indicators, Libya vs. MENA Countries
Libyas legal system is based on Civil and Islamic Law. Libya is a party to the International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social, and Cultural Rights (ICESCR). Regulatory quality is a critical issue and is discussed in detail in section 5.5.3.4
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5.4.4 Social Issues

Libya has made significant progress on social issues, though there are still significant socio-economic differences between the majority of the population and the approximately one million Libyans who live below the poverty level. It is critical that Libya integrates economic policies with social policies such as housing, healthcare, education, safety and environmental protection, both to share the fruits of rapid development across the population and to secure Libyas future. For example, providing affordable housing will help to accelerate Libyas development by securing greater citizen participation and spurring demand through the multiplier effect on the economy. These housing goals might be achieved by creating mechanisms to encourage home ownership, especially among the poor; reducing barriers to the growth of the construction cluster; and securing property rights to residents and property holders. Another major challenge is to create jobs for a large and growing young population. Population statistics issued by the National Information and Documentation Authority estimate that 80% of Libyans are under 35 years of age and almost 60% are under 25. Despite the challenges Libya faces in providing new jobs to its people, it is a net provider of employment to the region as evidenced by the large immigrant worker population. Libya is the most important destination in the MENA region for migrant Moroccan workers and the second most important destination for migrant Egyptian workers.
5.5 THE LIBYAN BUSINESS ENVIRONMENT: MICROECONOMIC FOUNDATIONS OF COMPETITIVENESS

Stable political, legal and social institutions and sound macroeconomic policies create the potential for productivity and national prosperity. But wealth is actually created at the microeconomic level, when firms create valuable goods and services using efficient strategies and methods. In general, the strategies and operations of Libyan companies are very unsophisticated by international standards, across all sectors public and private, including small and medium-sized enterprises (SMEs). A favorable business environment is also essential if firms are to operate optimally and create wealth. Our analysis shows that in fact Libyas business environment does little to enhance productivity, and that Libya ranks among the lowest in a sample of 111 other countries when assessed on business competitiveness and environment. Physical infrastructure such as roads and ports, and telecommunication networks all need to improve, as do workforce skill levels. Foreign and domestic competition is limited by artificial barriers to entry imposed by the government, and by widespread corruption and favoritism. Demand is also limited, both naturally by the size of the market, as well as artificially by Libyas historical isolation and the price-focused purchasing policy of government bodies, who are the main actors in most markets. The development of related and supporting industries is hampered by a lack of activity in most sectors, apart from oil,
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while the lack of strong banking and business information sectors negatively impacts all sectors of the economy. Both sophistication and business environment are discussed in more detail later in this section. Measuring competitiveness is challenging because of the sheer number and variety of influences that shape national productivity. There are a number of studies that assess the competitiveness of national and regional economies15. They differ widely in their definition of competitiveness, the criteria they consider, and their geographical coverage. The approach of the Business Competitiveness Index (BCI) published annually in the Global Competitiveness Report (GCR) captures the most important elements of competitiveness which are discussed in this document, and is most in line with the underlying theoretical framework of this project. We therefore use the BCI most widely in our analysis. The BCI is based largely on a detailed survey of senior business leaders in more than 100 countries. Since it surveys the perception of key decision-makers, it allows a textured measurement of the competitive environment and company practices across many countries, using the informed judgments of actual participants in these economies. The survey questions provide insights in areas where quantitative data are simply unavailable. The survey responses are also important in their own right, because they reflect the attitudes of the decision makers that ultimately determine economic activity. To derive an overall BCI Index, sub-indices are computed that measure the sophistication of company operations and strategy, and the quality of the national business environment, which is in line with the theoretical foundations of competitiveness outlined in Chapter 4. The weighted average of these two sub-indices is then calculated to produce a countrys BCI score. This BCI score has been shown to be an extremely powerful tool for measuring competitiveness. Comparing a countrys BCI score with its PPP adjusted GDP per capita the best known measure of a nations prosperity the BCI has been shown to explain 80% of variation in PPP adjusted GDP per capita across the more than 100 countries in the sample. The BCI appears to be a very robust measure of competitiveness which we can rely on in our analysis. Some caveats, however, must be remembered. The BCI analysis is pragmatic, making use of the best available data and econometric methods, but both these are not perfect. And, as a survey-based index, in most cases it only captures the perceptions of business leaders on various measures of competitiveness. BCI results and comparisons should therefore be interpreted keeping these caveats in mind. Despite these caveats, and given its ability to explain the variation in prosperity across such a wide range of countries, it is clear that the BCI analysis is a robust measure to analyze a nations competitiveness.
15 The most well known competitiveness publications include the Global Competitiveness Report (World Economic Forum) and the old Competitiveness Yearbook (IMD). The World Bank has also developed a number of very useful data sets on different aspects of microeconomic competitiveness
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For this project, the team conducted a Libyan Business Executive Survey (LBES), along the lines of the GCR, in order to estimate a BCI for Libya, as the most recent GCR (20052006) did not include Libya. Senior executives of domestic and foreign companies active in Libya were interviewed for the LBES. The survey design was similar to the GCR to achieve compatibility of data sets, allowing Libyan results to be compared with other countries studied in the GCR. The project analysis gives Libya a pro forma BCI rank of 110th of the 111 countries surveyed (110 countries included from the GCR plus Libya see Figure 12). Only Paraguay ranks lower than Libya. Various factors at the level of individual firms and the microeconomic business environment have impacted Libyas BCI, and these are discussed in detail in the next two sections.
Figure 12. Business Competitiveness Index Ranking, Libya and Selected Countries
Figure 13 shows the relationship between business competitiveness (measured by BCI) and prosperity (measured by GDP per capita, adjusted for PPP) Libya is located significantly above the regression line, implying that its prosperity is much higher than its BCI would suggest. As discussed earlier, oil wealth is the major driver of this prosperity. Similar observations can be made for countries like Bahrain and the United Arab Emirates. If oil wealth were to be discounted, Libya would be located near the lower bottom of the graph, close to the origin.
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Figure 13. The Relationship between Business Competitiveness and GDP per capita
5.5.1 Sophistication of Company Operations and Strategy

Understanding the sophistication of firms is the first step in understanding the microeconomic foundations of prosperity. Overall, Libyan firms are significantly less sophisticated than their global and regional counterparts across all sectors: public, private and SMEs. Decades of government dominance in production and distribution, plus the lack of a meaningful private sector, have reduced domestic demand for sophistication. Additionally, isolation from the international community has eroded the ability of firms to be sophisticated suppliers. There are however a few exceptions to this rule. Large companies such as the NOC and GECOL, mainly in the energy sector, are more sophisticated in their operations than their non-energy counterparts in Libya, but in some respects are less sophisticated than their global energy counterparts. There are also some recent examples of private sector firms, such as Al Buraq Airlines, which are becoming more sophisticated by investing in quality and reliability.
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Lack of sophistication in production processes, insufficient employee training, low company spending on R&D, narrow international markets, and limited customer orientation and marketing are some of the key factors contributing to Libyas poor performance as measured by the Company and Operations Strategy (COS) ranking. Libya ranks 107th of the 111 countries ranked on COS (see Figure 14).
Figure 14. Company Operations and Strategy Ranking, Libya and Selected Countries
The majority of Libyan companies currently compete on price, rather than through product differentiation. However their cost position does not really support this strategy. They face strong competition from genuine low cost suppliers from Asia, especially in the construction sector and in consumer goods. In reality, the competitiveness of many Libyan companies is often built on personal networks which allows them to win contracts. There are also a large number of Small and Medium-sized Enterprises (SMEs) in the Libyan economy, though the exact size of the sector is unknown. While 180,000 private enterprises are officially registered with the Libyan tax authorities, senior Libyan government officials believe that there are many other unofficial enterprises. Most smaller enterprises conduct their business outside the formal economy to avoid taxation and other fiscal and regulatory considerations.
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Many of these enterprises are sub-scale and are hence not sophisticated. Our survey of Libyan SMEs shows that:
70% of SMEs report annual sales of less than LYD 50,000, while 80% report net profit
margins of less than 10% and employ less than 5 workers;
46% of entrepreneurs would prefer to be working in a government job. The majority

of these are supplementary entrepreneurs or orphan entrepreneurs; Supplementary Entrepreneurs often have a job with the government but pursue other activities to supplement their incomefor example, an Air Traffic Control Officer at Tripoli International Airport drives taxis during his days off from work to supplement his official income; Orphan Entrepreneurs have started businesses because they cannot find employment in the public sector and often engage in trade or repair services.
A thriving and sophisticated SME sector, populated by enthusiastic entrepreneurs, will drive innovation and productivity, provide employment and create wealth. As such, it is an essential driver of a competitive economy, and needs to be encouraged. MENA countries such as Oman have recognized this need to stimulate SME formation. The Oman government established the SANAD fund to provide seed finance to small projects up to 5,000 Omani Riyal. Omans Ministry of Manpower supervises the fund, and provides training, consultancy services, and technical and administrative support to start-up projects through SANAD Nurseries.
5.5.2 Quality of the Microeconomic Business Environment

The quality of the microeconomic business environment is the other important factor in the microeconomic foundations of prosperity. The Libyan business environment requires significant improvement, as indicated by Libyas National Business Environment (NBE) ranking16. In line with its BCI and COS rankings discussed earlier, Libya is one of the lowest-ranked countries for NBE 109th of the 111 countries for which the NBE was estimated (see Figure 15). Only Albania and Paraguay rank lower.
16 Similar to the BCI, the NBE ranking is also estimated using the GCR and LBES data
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Figure 15. National Business Environment Ranking, Libya and Selected Countries
The challenges of the Libyan business environment are discussed below, using the Diamond framework outlined in Chapter 4 (Figure 16).
Figure 16. Overall Assessment of the Libyan Business Environment Using The Diamond Framework
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With the exception of its rich natural resource base, Libyas business environment does little to enhance competitiveness. In many sectors, the environment actually limits competition through barriers to entry. Factor conditions such as access to capital and business information, the skill base of the population, and particularly physical infrastructure, such as roads and ports, require significant improvement. Libya is not a large market, given the size of its population, and this reduces its attractiveness to foreign companies. Libyan customers are catching up with other countries in their demand patterns, following their long international isolation. They do not yet initiate new trends. Only the energy sector is supported by several international and domestic suppliers catering to its needs. However, NOC enjoys significant bargaining power over its suppliers, as it is by the far the most important customer for all suppliers both through its subsidiaries and joint ventures with international energy companies.
It is worth noting that there are three domains in the Libyan economy, which each operate under very different conditions:
The energy clusterwhere active foreign participation, high levels of investment and
strong human resources are more prevalent than in other sectors, but the challenges for conducting business are very much the same;
The non-energy clusterswhere foreign participation, investment and levels of

economic activity are lower than in the oil sector; and
The informal economyin which most Libyans participate, either as a consumer or a

supplier, where there is significant foreign participation in terms of low-skill labor, and where regulation and taxation are considerably less effective.
The following sections provide a more detailed assessment of each element of Libyas competitive diamondfactor conditions, the context for firm strategy and rivalry, demand conditions, and related and supporting industries.
5.5.3 Factor Conditions

With a few exceptions, factor (or input) conditions in Libya are far from suitable for conducting business. In the BCI analysis, Libya ranks among the bottom one-third countries on almost all factor conditions (see Figure 17). Libyas legal system ranks relatively better, with Libya ranking in the mid-60s on judicial independence, followed by some aspects of education. Physical infrastructure and financial markets rank low, sometimes at the bottom of the global league tables.
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Figure 17. Ranking of Factor Conditions, Libya17
The following sections assess some specific factor conditions that are critical components of a modern competitive economy: physical infrastructure, information technology, financial services, administrative infrastructure and workforce skills.
5.5.3.1 PHYSICAL INFRASTRUCTURE

An efficient physical infrastructure is vital for competitive businesses to emerge and grow. Libyas overall physical infrastructure is poor, with Libya ranking very low on all metrics of physical infrastructure quality (see Figure 18). Aside from electricity and water, the provision of other basic infrastructure, specifically transport and communication links, leaves much room for improvement.
17 The figure shows Libyas rank on individual Factor Conditions within the sample of 111 countries. A factor is considered a competitive advantage if a countrys ranking on that factor is better than its ranking of PPP adjusted GDP per capita, and a competitive disadvantage if a countrys ranking on that factor is worse than its ranking of PPP adjusted GDP per capita. In the case of Libya, its GDP per capita adjusted for PPP rank is 46, so any factor on which Libya ranks better than 46 is a competitive advantage, and on any factor that it ranks lower than 46 is a competitive disadvantage Ranking on individual elements can be higher than the overall rank because the overall rank is calculated based on a countrys average scores and not on its average ranks. Thus, for an element on which Libya ranks high (Judicial independence), the dispersion of scores might be small, meaning that the difference between Libya and the lowest ranked country might be very little. Similarly on other elements where Libya is ranked very low (Quality of management schools) its score may be considerably worse than the majority of countries. Hence it is possible for a country to score much higher on individual elements than its overall rank
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Figure 18. Quality of Physical Infrastructure, Libya and Peers, GCR/LBES, 2005
Libya ranks among the bottom of the countries surveyed on air transport quality (ranked 103rd). The quality of port infrastructure is also a disadvantage (ranked 88th); Libyan ports are significantly smaller than other ports in the Northern Mediterranean such as Alexandria and Trieste. Tripoli, the largest Libyan port, handles less than a quarter of the traffic handled by Alexandria. Despite occasional black-outs, electricity supply is less of a disadvantage for Libya (ranked 75th). Water supply is the only major infrastructure factor where Libya fares relatively better than its peers. This is primarily due to the investment of USD 37Bn in the Great Man-made River Water Supply Project (GMR) that aims to provide the Libyan population with fresh water. These weaknesses reflect lower levels of public investment and a lack of private investment in infrastructure development. With the exception of the GMR, public investment in physical infrastructure over the last decade has been very low. Overall, Libya remains a challenging environment for all kinds of infrastructure developments. Sprawling urban settlements are spread over arid, desertified areas and there are limited supplies of local ground water.
5.5.3.2 ICT INFRASTRUCTURE

Information and Communication Technology (ICT) constitutes an essential part of a nations physical infrastructure, and represents one of the most significant factor conditions for business and entrepreneurship. The Libyan telecommunications network is poor, and has suffered badly from lack of competition and expertise. The government is taking
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some steps to improve the industrys structure and encourage foreign input, but this remains a priority area. This section looks at the performance of the ICT infrastructure, and at industry structure and regulations.
(i) Performance and Penetration

As Figure 18 shows, Libya ranks particularly poorly on the quality of its ICT infrastructure (110th of 111 countries). Building an adequate telecommunications network will be a considerable challenge, given the physical size of the country, its dispersed population and other physical infrastructure limitations. This challenge has been made more difficult by restrictions on local supplies of technology and expertise during the period of sanctions. The core of the ICT sector is the telecommunications network that supports voice and data traffic throughout the country. Whilst there has been rapid increases in network capacity and coverage in the last 2-3 years in particular with mobile networks Libya still suffers from low levels of ICT penetration and chronic problems in network performance. While mobile penetration reported by the General Post and Telecommunication Company (GPTC) has recently surpassed 2004 penetration levels for Egypt and Algeria, Libyan mobile use is still low compared to Tunisia and Morocco (see Figure 19). Libyas fixed line use is more on a par with the low levels seen in the rest of the region. This low level restricts both voice communications and internet usage.
Figure 19. Telephone and Internet Usage, 2004
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A more recent view on the development of ICT can be derived from the Small and Medium-sized Enterprise (SME) survey conducted in Libya in the third quarter of 2005. 51% of SMEs had access to a fixed line phone and 65% had access to a mobile phone. This suggests that mobile technology is helping businesses to deal with the problem of limited fixed line development for voice communications. However, 25% of businesses stated that they did not have access to either. Finally, Internet penetration remained poor with 75% of SMEs stating they did not have access to the Internet or email. Network performance in both fixed and mobile telephony remains a major challenge for Libya today, and this may be the primary driver of the low ratings for telephone and fax quality. Consumers complain of low coverage, poor connections and dropped calls at peak times, while industry leaders complain that consumers and businesses use the network selfishly. These problems are considerably more acute for both inbound and outbound international calls.
(ii) Industry Structure and Regulations

The sector has been handicapped by lack of competition, a government-controlled and managed industry and the absence of world class suppliers of technology and expertise. These represent the most important opportunities for the growth of the Libyan ICT sector in the future. The full responsibility for investment and management of the ICT industry lies with the government, which operates a monopoly on the various ICT divisions. Through the Libyan Post, Telecommunications and Information Technology (LPTIT), the government controls all fixed line, mobile, Internet and postal communications across the country. There are two government owned mobile companies, Libyana and Almadar. The absence of real competition between Libyan service providers appears to have held back development of the ICT infrastructure. According to Law #8 (1990) and its subsequent revisions, there are no official barriers to private sector ICT enterprises operating in Libya. There are similarly no restrictions for foreign investment in the ICT industry as per Law #5 (1997). However, lack of clarity in both the provisions and the implementation of these laws appears to have prevented any meaningful private or foreign enterprise. Industry structure is another important challenge facing the industry (see Figure 20). There is no separation of roles between the policy maker, regulator and operators. In the past, the General Authority for Information and Telecommunication (GAIT) has been responsible for all policy, regulation and monitoring activities, whilst the holding company LPTIT which reports to GAIT controls all ICT operations through its various subsidiaries.
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Figure 20: Structure of the Libyan ICT Sector
Judged by recent actions, the Libyan government clearly recognizes and is acting on many of these challenges. There are proposals to improve the regulation of the industry by carving out an independent regulatory body from GAIT; a revision of the telecommunications law is also underway. In the last few months, GAIT has awarded a contract to Huawei, a Chinese vendor, to roll out 1.25 million new GSM subscriber lines with guarantees of network performance at peak capacity. GPTC has also awarded a USD 68MM contract to Ericsson to provide infrastructure capable of supporting 3G mobile voice and data services. Whilst these are positive developments, ICT still remains one of the areas of greatest opportunity for improvement, especially given its poor performance today.
5.5.3.3 FINANCIAL SERVICES, BANKING AND ACCESS TO CAPITAL

The overall quality of financial markets is poor equity markets do not exist and debt markets are immature. The LBES and GCR surveys show that Libya ranks last among the survey countries on financial market sophistication, and 105th among the 111 countries on local equity market access. In the absence of strong financial markets, the banking sector has to shoulder a major responsibility for Libyas rapid development. At present Libyans face problems with both banking process and access to capital. For the economy to rapidly develop, banks need to increase access to payments systems and financial products that are commonplace in other countries, and access to funds for the private sector, especially SMEs. This section provides a detailed analysis of Libyas banking sector, followed by a discussion of access to capital.
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(i) Banking Sector

The Libyan banking sector is highly concentrated. In 2004, total banking assets amounted to LYD 17.6Bn, of which LYD 15.2Bn were held by the six commercial banks. Of these six banks, five are owned by the Central Bank. Libya also has three specialized banks (Agricultural Bank, Bank for Real Estate Investment and Savings, Development Bank), which aim to support the development of key economic sectors. In addition, there are 45 regional banks that are coordinated by the National Banking Corporation. This corporation provides corporate services like accounting and training to the regional banks. Two banking services that are critical to the health of the economy are efficient intermediation of funds and quick, reliable payments systems. At present, intermediation and payments facilitation is still primitive in Libya. The vast majority of payment transactions are carried out in cash. In addition, the state dominated banking system in Libya has failed to offer its clients products and services comparable to developed economies. Processes are heavily paper-based with little use of IT, causing long delays (e.g., check clearance can take up to 30 days). There is also inadequate ATM coverage, with less than 20 ATMs in all of Libya, and limited facilitation of credit card payments. This means higher transaction costs for all users, and makes it cumbersome to conduct business in Libya. Libya has taken some steps to reform its banking system. The most visible has been the adoption of the new Banking Law, which became effective in January 2005. The main objectives of the new Banking Law18 are:
Emphasizing the independence of the Central Bank in line with international best
practices;
Improving the capital adequacy ratio of commercial banks; Strengthening the competitiveness of domestic banks, eventually leading to the
participation of foreign banks in the domestic banking market;
Extending the domain of Central Bank supervision to include all banks including
the three specialized banks (Agricultural Bank, Bank for Real Estate Investment and Savings, Development Bank), which were previously excluded from its supervisory domain;
Adopting Basel II principles on effective banking supervision; and Improving standards of and requirements for supervisory disclosure by the banks.
The new Banking Law seems to have incorporated many of the recommendations from international agencies like the IMF. However, Libya has not yet implemented a critical recommendation to separate the Central Banks ownership and supervisory functions
18 Dr. Mohamed A. Abusneina, Director of Banking Supervision & Exchange Control Department, Central Bank of Libya
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regarding commercial banks. This is necessary to ensure that there are no potential conflicts of interest in the operation of the Central Bank. Whether these reform efforts succeed or not will depend on the steps the Central Bank of Libya takes to transform the possibilities of the Banking Law into actual practices. Banking reform also needs to go hand in hand with corporate reform, as banks can only operate successfully if they have sound clients to work with. Corporate reforms are needed to remove impediments to competition and private sector activity, improve accounting and reporting standards and provide a predictable legal framework. In particular, regulations are needed on bankruptcy, reorganization and liquidation of companies.
(ii) Access to Capital

Easy access to capital is a fundamental requirement in a modern productive economy. The private sector (corporate customers) needs capital to invest in new business formation and expansion, and for the day-to-day running of business. The household sector (retail customers) needs access to housing mortgages and loans to buy larger goods, such as vehicles. However, access to capital is a major problem at present, particularly for SMEs. At present, the government is by far the most important source of capital. Investments are funded through state-dominated commercial banks and specialized sector banks, and via public sector entities like the Social Security Fund. The governments funding power is backed by substantial foreign exchange reserves. Over the past few years, the government has bolstered the balance sheets of the specialized banks to stimulate loan disbursements. For example, the Agriculture Bank received a capital injection of USD 400MM in 2005 to finance housing and agricultural projects. As a result, Libyan banks have substantial liquidity in their books. However, despite the availability of these funds, banks are often unwilling to disburse loans to the private sector. According to the LBES and GCR surveys, Libya ranks 98th of 111 countries on ease of access to loans. Even this bank lending is largely available only for State-Owned Enterprises (SOEs). Libyan SMEs have been more or less excluded from the market with 65% of SMEs surveyed having faced major difficulties in accessing capital from government banks (see Figure 21).
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Figure 21. Challenges for Raising Capital from Libyan Banks, SMEs, 2005
The situation is slightly better for the privately owned companies in the energy sector given the state of development, relative sophistication and profitability of the energy sector, it is easier for companies in this sector to access formal capital. However, NOC and GECOL both suffer from chronic restrictions on their access to capital as a result of government controls on their borrowing. There are several reasons for the lack of access to banking capital for the private sector, especially SMEs. First, banks have difficulties in assessing the riskiness of loans, since they lack standardized and reliable information on the financial conditions of borrowers, and market data. In the absence of robust risk assessment systems, financial institutions have adopted alternative procedures to mitigate lending risks. For example, Libyan banks disburse loans primarily to customers whom bank employees know personally. For customers without personal connections, banks demand substantial collateralas much as 125% of the total loan amount in some cases. As Figure 21 shows, in the SME survey Libyan SMEs identified banks tendency to lend only to those known personally, and to demand large collateral, as the two main difficulties in raising capital from government banks. Second, small borrowers often do not have adequate collateral to offer when taking loans. The low availability of privately owned land with clear undisputed titles of ownership which could be offered as collateral is a major cause of this collateral shortfall. Third, bank managers have very few incentives to actively make loans to the private sector and increase the loan book. They have no prospect of financial rewards if they
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disburse good loans, and face severe penalties in case of bad debts. Consequently, banks tend to follow a defensive lending policy, holding substantial funds in liquid assets. It is estimated that 40% of commercial banks assets are held in cash or short term deposits. For example, Gumhouria Bank has a reported balance sheet of LYD 3.4Bn, but its loan book is only LYD 1.4Bn, which is about 40% of its balance sheetwell below international benchmarks. This again limits the amount of capital that is available to the private sector, especially to SMEs. This mismatch of supply and demand in the Libyan capital market has been highly unproductive for Libyan business. Many genuine business ideas remain unfunded. Given the lack of credible investment opportunities at home, capital flight out of the country is a very real risk, in spite of regulations which forbid investing abroad. Despite all these allocation inefficiencies, there are some positive examples of private entrepreneurs who have found sources of financing, e.g. through state-controlled commercial banks or high net-worth individuals. Al Buraq Airlines a private Libyan airline is an example of a primarily bank-financed start-up, where a major commercial bank provided almost three-quarters of the capital. A syndicated loan for USD 100MM has also recently been approved that will allow the airline to buy new aircraft to expand its operations. However, Al Buraq Airlines has substantial new assets (aircraft) to offer as securitythis kind of asset is not available to the most entrepreneurs. Other than the government, there are three potential sources of capital in Libya: private households, foreign capital from international companies and investors, and foreign capital from the Libyan diaspora. Substantial amounts of capital are provided by private households, with more than 90% of SMEs using personal savings and funds from family and friends to start and operate their businesses. There is no reliable data on the amount of private capital invested in enterprises; however, high-level estimates done by the NES team indicate that SMEs receive between USD 0.5-1.2Bn in private funding. Foreign direct investment (FDI) constitutes another important source of capital. In the non-energy sectors, Libya received approximately USD 1.4Bn of foreign investment in the last 5 years. About halfUSD 700MMwas received in 2005 alone, mainly for a waste management project. The energy sector is estimated to have received around USD 1Bn of investment in 2005. The Libyan diaspora also has the potential to contribute additional capital. Official figures suggest that there are approximately 19,000 people of Libyan origin currently living in the US and UK. There are likely to be several thousand more living in neighboring MENA countries. Many of these Libyans seem to be successful as their average income in the US is above the US country average19, and some of them might be interested in investing time and resources in Libya. Given the geographical spread of the Libyan diaspora and lack of data on them, it is difficult to quantify the potential investment that they could make.
19 According to US Census, 2000
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5.5.3.4 ADMINISTRATIVE INFRASTRUCTURE

The administrative infrastructure in Libya is weak when compared internationally, and the high administrative burden is a barrier to competitiveness. Although Libya performs relatively better on some indicators, such as quality of legal framework and reliability of police services, the burden of bureaucratic red tape is immense. In this assessment of administrative infrastructure, we draw upon a variety of sources. We use internationally accepted measures of administrative infrastructure, the results of the GCR and LBES surveys, and data from a variety of interviews and discussions conducted in Libya. Libya ranks low in the World Bank Institute-sponsored Governance Indicators study which compares regulatory quality across countries, (see Figure 22). Libya ranks below countries like Nigeria, Algeria, Kazakhstan, Egypt, Morocco and Tunisia. As discussed in Section 5.4.3, this study provides the most comprehensive and widely used cross-country indicators of governance available today. The regulatory quality index is a comprehensive measure, covering a variety of indicators of administrative and regulatory burden, such as regulatory costs imposed on businesses, the extent of government restrictions on trade, legal hurdles to starting new businesses, and so forth.
Figure 22. Regulatory Quality, 2004
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On some indicators of administrative infrastructure, Libya performs slightly better. According to the LBES and GCR, Libya performs relatively better on judicial independence (ranked 65th), efficiency of the legal framework (75th), and reliability of police services (80th). However, it is still among the bottom half of countries on all these measures. On individual human rights, international monitoring groups like Amnesty International have recently said that, although serious problems remain, there has been significant recent progress. The most important weakness of the Libyan administrative system is the extent of bureaucratic red tape. According to the LBES and GCR, Libya ranks the lowest (111th of 111 countries) on this measure. Despite senior Libyan government officials increasingly positive attitude towards private business, widespread bureaucratic hurdles remain. Libyan business people feel that there is little standardization of procedures, and decisions are often made on an ad hoc basis, based on the discretion of the particular official in-charge. They also feel that policy procedures are changed frequently and without notice. This high level of bureaucratic burden manifests itself in various forms.
Barriers to new business formation. Heavy bureaucratic and procedural

requirements for registering a new business mean that the process takes on an average 100 days in Libyathe longest amongst MENA-member countries (see Figure 23). The procedure is long and arduous and requires potential entrepreneurs to submit a request to operate. These requests have to include an assessment of the proposed business viability and the personal qualifications and health record of the entrepreneur. Shabia committees decide on the request based on unclear and sometimes arbitrary criteria. A recent decree of the General Peoples Congress (Decree 169/2005) has stipulated that it should not take longer than 10 days from the day a company files for registration, until a final decision is taken. This is a step in the right direction, but it remains to be seen how effective this new decree will be in practice.
Figure 23. Time Required to Start a Company, Libya vs. Selected Peer Countries
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Irregular government payments. The government is the largest consumer of

goods and services in Libya, but irregular government payments to vendors have led to inefficiencies in the supply chain, poor quality products, and cash-strapped businesses.
Barriers to foreign businesses. Foreign businesses face additional barriers due to

government requirements. The visa application process remains complicated and it can take up to 4 weeks for eligible business visitors to get a visa. Getting residency and work permits is even more complicated and time-consuming. Because there are no standard guidelines for FDI, applications by interested investors have to be cleared by the Foreign Investment Board on a caseby-case basis. The final decision on whether to grant access is made by the General Peoples Committee for Economy and Trade. Although the process is supposed to take three to six months, the heavy bureaucratic requirements have been known to cause delays of up to one year. Foreign construction companies, in particular, face a barrage of bureaucratic hurdles, as they are required to register for each sector in which they are interested in operating, i.e. tourism, infrastructure or housing.
It is important to note, however, that there are some differences between the energy and non-energy sectors. Administrative capacity appears to be somewhat better in the energy sector, where visas are easier to obtain and government approvals for FDI are sometimes faster. However, these are not sufficient to prevent administrative obstacles from affecting the extent and pace of progress on restructuring in the energy sector, and the overall picture continues to be of high administrative burden. This burden is largely due to Libyas inefficient structures for decision-making. A critical problem is the frequent and unpredictable structural changes in the administrative and policy-making structure. These constant changes create uncertainty, promote ad hoc decision-making, limit the governments ability to gather data and consistently implement policies, and hinder productivity and competitiveness. For example, in 1977, a Baladiya (municipalities) system was introduced that divided the country into a network of 10 Muhafadas (districts), 46 Baladiyas and 174 Baladiya branches20. This composition was constantly changed until 1992, when the Baladiya system was entirely abolished. The country was divided into 13 areas, and the Basic Peoples Congresses (BPCs) became the key administrative units. Finally, a Shabia structure was introduced in 1998, and their number has also changed constantly. Similarly, the General Peoples Committees reportedly went through 18 structural changes up to 2003.
20 All references to changes to administrative boundaries come from El-Megherbi, Dr Mohamed Zahi; The Effect of the Organizational Changes on the Formulation and the Implementation of Public Policy in Libya (1977-2003), 2004
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The economic policy-making structure has also gone through several changes. For example, the General Peoples Committee for Economy and Trade has gone through various manifestationsbeing created, then abolished, and then later being re-instated. Similarly, moves such as the devolution of powers to the Shabias in 2002, without clear provisions for central oversight on standards, procedures, and quality control, create uncertainty and institutional instability. All successful models of decentralization around the world have a strong central control on standard setting, quality control and monitoring and evaluation. This has not been done adequately in Libya.
5.5.3.5 HUMAN RESOURCES AND SKILLS

Although the Libyan workforce has a good basic level of education and high literacy rates, there is a shortage of more advanced skills required in the job market. This is a major constraint to Libyas development which needs to be addressed urgently. The recent government restrictions on foreign labor, which reduces availability of skills in the short-run, adds to this challenge. Steps to address the human capital challenge could include job-relevant training for the average Libyan worker, and leveraging the skills and expertise of the Libyan diaspora. According to the LBES and GCR, Libya performs poorly in terms of the overall quality of the educational system, ranking 110th out of the 111 countries (see Figure 24). On all indicators of education and skills measured in these surveys, Libya ranks among the bottom one-third of countries surveyed.
Figure 24. Ranking of Education and Skill Base, Libya
On the positive side, most of the domestic workforce seems to have a reasonable basic education. Libyas literacy rate is one of the highest in the Arab world (82% of all adults, 97% in the 15-24 age group). However, the education curriculum is outdated and has not yet been fully updated to include recent developments in basic and applied sciences, as well as computer and language training.
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As a result of the poor standards of education and training, the workforce is composed overwhelmingly of under-qualified workers. This has created a significant skill gap across almost all sectors of the Libyan economy. In over two-thirds of SMEs in Libya, less than half of the employees have received sufficient vocational training in their field of work. Libyan businessmen often cite the disconnect between the skills they require for the job market, and the skills that the Libyan workers brings to the table. Due to the salary structure in the public sector, which has remained largely unchanged for the past few decades, and little investment in training, the workforce is also under-incentivized in addition to being under-qualified. As a result, many of Libyas highest-skilled people have emigrated. Engineering and technical skills are an exception to the general shortage of skills, especially in the energy sector where there are many qualified engineers and technicians. This is due to the demand for such technical people from both state-owned enterprises like the NOC, and from foreign oil companies, which increases salaries, enabling Libyan oil workers to earn more than the average Libyan. Even so, the sector remains dependent on expatriates with technical skills in key areas, and the number of well-qualified Libyans is reportedly declining. As a result of the shortage of skilled workers in the domestic workforce, the Libyan private sector has had to employ foreign workers. There is a small group of highly-skilled foreign workers concentrated primarily in the energy sector, and a large majority of low-skilled workers concentrated primarily in construction and trade sectors. Recently the government has begun to place restrictions on foreign workers, especially those with skills. Recent circulars specify the jobs in which foreign workers can and cannot be employed. In addition the government has adopted a tight regimen on work permits and residencies to make it difficult for companies to import foreign labor. These restrictions are discussed in greater detail in the Legal and Regulatory Review in 5.5.4.1. The impact on the foreign workforce has been two-fold. On the one hand, highly-skilled foreign workers are leaving the country to look for employment elsewhere, reducing the skills base in the country, while on the other hand, foreign low-skilled workers are being forced to work illegally in the informal economy. Given limited skills among the domestic workforce, such restrictions on foreign workers will harm the competitiveness of Libyas private sector in the short run. The Libyan diaspora offers one option to strengthen the human capital base of the Libyan economy. As discussed earlier, many people of Libyan origin are living in countries like the US and UK, and in neighboring MENA countries. This diaspora could be a means to bring additional knowledge, skills and expertise into Libya. For example, organizations such as the Libyan Doctors Society, which has a membership of more than 110 doctors of Libyan origin in the UK alone, could offer valuable know-how and skills to the Libyan medical community.
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5.5.4 Context for Firm Strategy and Rivalry

The defining aspect of firm structure, strategy and rivalry in Libya is that the majority of enterprises are owned and operated by the state. These state-owned enterprises (SOEs) are subject to the inevitable tensions between policy-driven objectives, such as creating employment and providing low-priced goods and services, and market-driven objectives, such as profitability and productivity. Despite the fact that many SOEs have official monopolies, they face increasing competition from the private and informal sectors for access to resources and revenues. There are examples of a general lack of SOE profitability across sectors, and a specific case of bankruptcy in the SOE retailing sector. The role of government ownership in SOEs is discussed in more detail in Section 5.5.4.3. According to the LBES and GCR, Libya ranks low on most indicators of the Context for Firm Strategy and Rivalry (see Figure 25).
Figure 25. Ranking of Context for Firm Strategy and Rivalry Indicators, Libya
Given the central role of the state in the Libyan economy, the activities and weaknesses of public institutions have a disproportionate influence on firm context, as discussed earlier in the section on administrative infrastructure. Policy instability and arbitrary local decisions are problems for both domestic and foreign investors. Another serious problem is low and highly regulated wages in the public sector, which depress productivity and encourage corruption.
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These institutional weaknesses lead to barriers for the development of formal business activity in Libya. One outcome is to force business activity into the informal sector, where private businesses can operate despite the institutional weaknesses. Personal networks affect even the most basic operations in Libya. Government and licensing bodies lack objective decision-making and explicit guidelines as a result. Where personal networks are not enough, the use of bribes to accelerate procedures is reportedly commonplace. The protection of intellectual and physical property rights in Libya is also underdeveloped Libya ranks 92nd among the 111 countries in the GCR analysis on intellectual property protection. There are no stringent procedures in place for enforcing intellectual property rights in Libya. These rights are discussed in more detail in the next section on Legal and Regulatory Review and the construction cluster assessment in Section 6.5. Whilst institutional weakness represents a real cost to Libyan businesses, there is a more fundamental damaging effect. When combined with The Green Books strong emphasis on social issues and equality, the difficult business context can be interpreted by Libyan business people as evidence that they cannot rely on consistent support from the government, thus limiting the development of entrepreneurship. It is therefore hardly surprising that Libyan business people cite Policy Instability as one of the top business challenges in Libya. This is discussed in the next section.
5.5.4.1 LEGAL AND REGULATORY REVIEW

To make the transition to an Investment-Driven economy, Libya needs to provide a stable legal framework for domestic and foreign investment, and an efficient regulatory environment. Libya has recently taken some major steps to create a more stable legal environment and to rationalize its regulatory regimes, but there is still a long way to go. There are still areas where necessary laws do not exist (e.g. competition law), or where existing laws are contradictory, or need to be upgraded to meet current international best practices. Given the rapid pace of change in Libyan legal and regulatory policies, Libya urgently needs to develop a data-bank of all laws and work toward their reconciliation. The final challenge will be to achieve fair and efficient implementation of law and regulations at all levels. Policy instability and inefficient government bureaucracy currently rank as the top challenges for doing business in Libya, negatively impacting both foreign and local businesses. Foreign investment can be especially valuable to Libya because it provides additional benefits such as management and technical expertise, technology transfer, and employee training. However, faced with policy instability, foreign investors will typically avoid the
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market altogether, or ask for higher rates of return. They will also choose investments that minimize risk even in the short-term, and they will be wary of added costs associated with training or use of newer technology. The SME sector also needs a stable legal framework and efficient regulation; policy instability also restricts this domestic private sector development, forcing it into the informal economy. Stability would allow the many micro-enterprises, traders and artisans in the informal economy to develop into more productive SMEs, providing jobs and creating wealth for Libyans in both the short-term and long-term. Our analysis focuses on seven key areas of law and regulation where international best practices are required to upgrade the competitiveness of the Libyan economy.
(i) Legal Framework for Investment (A) Law on foreign investment

Law #5/1997 (On Encouragement of Foreign Capital Investment) and its amendments provide the primary framework for foreign investment. The benefits granted under Law #5 are in accordance with international best practice. Further, the Law allows 100% foreign ownership in Libyan companies. However, problems arise from two sources: restrictive amendments in Law #5, and practical obstacles faced by foreign investors. An amendment in July 2005 to limit FDI projects to those in excess of USD 50MM has disqualified most potential investment projects at the outset. In addition, there is a de facto limiting of FDI to specified sectors, excluding the trade/distribution sector (both retail and wholesale), telecommunications and the banking and financial sector (The new Bank Law #1/2005 does, however, open the possibility of foreign banks entering the Libyan market). For those foreign companies that do seek to enter the market, there is a lengthy and cumbersome approval process, abolished by states such as Egypt and Turkey in favor of a simple notification or registration system21. Only Libyan branch offices of foreign companies enjoy a national treatment guarantee. Finally, the recent law on public procurement allows all international companies to participate equally with national companies in open tenders, with publicly accessible, published results. However, our research reveals problems such as short deadlines to submit proposals, advance information to well-connected competitors and requests for facilitation fees.
(B) Law on property rights and rental

A key requirement for domestic and foreign investors is confidence that they have secure property rights over land or business assets in which they have invested. In Laws #4 and #7/1978, all land beyond that on which an individual Libyan house stands, was declared public. Law #7 has subsequently been amended, and, with the passing of Law #3/2004,
21 For further detail, see Country Economic Report, World Bank Draft Report No: 30295-LY October 2004
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Libyans can now own more than one piece of land and invest in property to sell or lease. Foreigners other than nationals from a few states in the region such as Tunisia, Egypt and Syria cannot directly own land. Libya has laws prohibiting the expropriation of private property, namely Law #20/1991 Art.12 and Law #5 Art. 25. However, there is some contradiction in the legislative position since Law #3/1978 and the amendments noted above to Law 7/1978 have not clearly revoked the public land provisions of Laws #4 and #7/1978. The security of property rights could be strengthened with a constitutional prohibition on the expropriation of property. The difficulty is that Libyas Constitutional Proclamation of 1969 has not yet been superseded by a written constitution, leaving the judiciary without a constitutional authority to consult for definitive rulings on the interpretation of law. Policy uncertainty is exacerbated by the fact that the Constitutional Proclamation can be superseded by laws passed by the General Peoples Congress (GPC), a number of current laws are contradictory, and the most recent law passed by the GPC takes precedence in case of conflict. There are currently debates in the GPC, and support from top Libyan government officials, to adopt a final draft of a new Libyan Constitution. A final issue relates to the allocation of subsidized public land to buyers. There is significant market distortion and potential for corruption because prices are decided at the Shabia level, and not governed by clear and transparent processes.
(ii) Law and Regulations to Start a Business

Libya urgently needs to simplify business entry. In particular, it needs to reduce the discretionary authority and approval processes of local authorities, who are empowered to assess both the feasibility of a project and to judge the suitability of the investors. This obviously creates opportunity for abuse at the local level. Libyan regulations currently require an entrepreneur to request approval to operate. By comparison, international best practice is that business entry in unregulated sectors should be made on a declarative basis, with a clear list of required documents that give automatic right to a business license. A declarative system can be administered in a decentralized fashion, with a central appeal system for rejected applicants. As discussed in the section on administrative infrastructure (Section 5.5.3.4), a recent decree of the GPC (Decree 169/2005) stipulates a maximum of 10 days for a decision on company registration. It remains to be seen how effective this new decree will be in practice.
(iii) Commercial and Labor Codes

Libya has taken steps to make it easier to employ workers. There are still issues that need to be addressed around the use of foreign labor and wage levels in the public sector. Recent reforms allow all company types, including Partnerships, to employ salaried workers. An important step was the recent lowering of requirement for Joint Stock
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Companies from a minimum of 25 partners to 10 (Law #1/2005) and the strengthening of Limited Liability Companies (Decision #34 in 2005 of the GPC). The planned reform of the labor code will allow for regular labor contracts between employers and employees in share-holding (Mushahama) firms. Law #31/1993 on private sector wages allows salaries to be freely determined by firms and bound only by the minimum wage. Law #58/1970 allows the use of foreign labor only if there are no Libyans with similar qualifications. As many foreign companies prefer to enter the market with their own experienced employees, the restrictions in Law #58 have had a negative impact. A further negative is that the General Peoples Committee on Manpower and Training decides whether foreign labor can be employed. Their database is far from complete, and decisions are necessarily taken by officials on a discretionary basis. There are also strict requirements for foreign firms to conduct mandatory training for Libyans. A serious problem arises from Law #15/1981 on public sector wages, which has not been revised since 1981. The low level of controlled wages depresses motivation for productive work in the public sector. Specifically, it encourages corruption and leads many Libyans to take a second job in the informal economy, which is both illegal and reduces productivity still further.
(iv) Competition Law

A draft competition law has been prepared to create competitive markets, by facilitating the entry and growth of new companies into a market currently dominated by monopolistic and oligopolistic State Owned Enterprises (SOEs).
(v) Trade Regime

Tariff protection has been significantly lowered since 2002. Significant progress has been made to move import licensing procedures toward compliance with WTO rules. State import monopolies have been reduced and now face competition from private companiesthe remaining exceptions are raw gold, tobacco, veterinary medicines and vaccines, and oil and security-related products.
(vi) Taxation
Libya took a very positive step with the recent reduction of marginal corporate tax and personal tax rates. The primary deviation from international best practice is the current deemed profits system, where tax authorities assess the profit that a company is deemed to have made, based on its size and the sector in which it operates. This creates uncertainty for potential investors, as they cannot predict their tax burden. In addition, companies with good informal relations with tax authorities are known to receive preferential treatment.
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(vii) Arbitration
The Libyan Center for Reconciliation and Arbitration was established based on Decision No. 89/GPC in 2005. However, this has limited effect. Approval from the GPC must be obtained to include provisions for arbitration in administrative contracts. Disputes with state-owned enterprises, which constitute the overwhelming majority of economic activities, are heard in Libyan courts rather than going to arbitration. Libya could advance toward international best practice by becoming party to the 1958 New York Convention and 1965 ICSID Convention.
5.5.4.2 COMPETITION
The formal economy is characterized by low levels of competitive intensity. The LBES and GCR surveys show that Libya ranks 110th out of the 111 countries in the sample, in terms of intensity of local competition. Libya also ranks a low 95th on effectiveness of antitrust policy, which is a pre-requisite for competition to thrive. The only real competition in the formal economy is emerging in the energy sector, due to recent interest from foreign oil companies in entering Libya. Most production in the formal economy is dominated by state-owned enterprises that have no incentive to be efficient. In fact, in some of these enterprises, such as specialized banks, profit objectives do not even exist. Some competition may also exist in the SME sector and in the informal economy, where there are many small and sub-scale private enterprises. These enterprises operate mostly in sectors like construction and retail trade.
5.5.4.3 ROLE OF GOVERNMENT OWNERSHIP

The Libyan government controls, directly or indirectly, the majority of assets and enterprises in Libya, through a substantial portfolio consisting of industries, financial institutions and real estate. In total it controls more than 360 State Owned Enterprises (SOEs), five State Commercial Banks (SCBs), three specialized banks, one insurance company and two specialized investment vehicles, plus a large real estate portfolio. Responsibility for managing the portfolio is spread across a wide number of different institutions and ministries, including the Central Bank, Inspectorate for Industry, the Social Security Fund, Inspectorate for Education, Inspectorate for Health, Civil Aviation Department, the Authority for Transportation, and a range of Ministries. The direct and indirect ownership and management of real estate assets seems to be spread over almost the entire government sector. In addition there are at least two advisory bodiesthe General Board for Transfer of Ownership (GBOT) and the Deputy Prime Minsters Officewhich have significant influence on the governance of the Portfolio and its underlying assets. There are many inefficiencies in the SOE sector, which greatly reduces the productivity of the Libyan economy. Reportedly, very few, if any, of these SOEs are profitable. The reason for the inefficient performance of this portfolio is three-fold.
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First, such a diverse ownership structure inevitably fails to develop the specialist knowledge required to be a professional owner and manager in a complex economy. Second, ownership by the state creates mixed objectives for their decision makers, as the government forces them to pursue different, and often diverging objectives. On the one hand, some of these enterprises must increasingly compete in commercial markets where they face external influences and some private sector competitors. On the other hand, these enterprises are often the vehicles through which the government generates employment and distributes wealth to the population. These enterprises are also the means by which the government supplies raw materials to the local market and provides infrastructure. Third, SOE managers are not suitably incentivized to maximize efficiency in operations government salaries are low and unlinked to performance, so there is no incentive to improve performance efficiency. In addition, many of the SOEs also have a poor record of paying their suppliers on time. As the SOEs are the key customers for most private suppliers, this creates serious working capital issues and capital allocation inefficiencies in the private sector.
5.5.5 Demand Conditions

Overall, demand conditions in Libya are very poorly developed. The reasons for this include the small size of the Libyan market, the dominance of the public sector, low regulatory standards, a lack of sophisticated buyers (most of whom are SOEs), and a culture opposed to conspicuous consumption. As a result, Libya ranks among the bottom fifth of countries in the LBES and GCR surveys on all indicators of demand conditions (see Figure 26).
Figure 26. Ranking of Demand Conditions, Libya
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Despite a higher purchasing power relative to its North African neighbors, Libya is a small market mainly due to the small size of its population and the consumption of relatively less sophisticated products by its people. The government is the dominant buyer of goods and services, both inside and outside the energy sector. This creates certain challenges for suppliers. In particular, purchasing is largely price-driven and payment is slow and unreliable. Both these factors discourage firms from engaging with and taking risks on major projects. The energy sector is the most sophisticated consumer of goods and services in the Libyan economy, as a result of its complex technical and operational requirements. It is also one of the largest. However, even in the energy sector, the decision making processes and the regulatory environment restrict the performance and efficiency of both state owned and international oil companies. With Libyan culture opposed to conspicuous consumption, sophisticated consumer demand is limited, with a few exceptions. The most notable exception is residential real estate. With private homes one of the few assets in which Libyans have been able to invest considerable sums of money, there is a strong demand for large, well-designed homes.
5.5.6 Related and Supporting Industries

There is little cluster development in Libya outside the energy cluster. In addition, supporting sectors that are essential for the efficient functioning of a modern productive economysuch as banking and financial services, and business informationare weak in Libya. The lack of accurate business information creates particular problems for Libyans without well-developed informal networks, and for foreign companies. Energy is the most developed cluster in Libya, and the oil sector constitutes the most developed portion of the energy cluster. It features a set of interlocking engineering, production and services activities, most of which are carried out for one customer the National Oil Corporation either directly or for joint ventures with international oil companies (IOCs) in which the NOC has a prominent role. Furthermore, NOC directly or through its affiliates owns service providers for many of these activities, and therefore benefits from the reduced levels of competition associated with being part of a conglomerate. This also inhibits the development of the NOC and its affiliates into commercially competitive entities. The over-riding emphasis of the cluster is upstream and the opportunities for expansion in downstream and related industries are relatively restricted. In the rest of the economy there is limited cluster development at best, and the development of related and supporting industries is poor. Libya ranks among the bottom tenth of the countries in the LBES and GCR on supplier quality, availability of research and training services, and availability of process machinery (see Figure 27).
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Figure 27. Ranking of Related and Supporting Industries Indicators, Libya
As discussed earlier, one underdeveloped sector that should underpin all others is the banking sector. Libya currently lacks sophisticated intermediaries who can channel capital to businesses at a risk-adjusted price. Another key supporting area for business activity is the availability of and access to reliable business information. At present, basic business information resources such as business directories and administrative guidelines either do not exist or are not easily accessible. In particular:
Administrative guidelines outlining the various requirements for business are

rarely available on the Internet in countries with a good business information infrastructure, most relevant information can be found at a single Internet portal;
There are initiatives to generate business directories, but most efforts yield incomplete
resultsa major barrier to the creation of such directories is missing postal addresses for individuals and businesses; and
Key economic data on GDP, employment or investment is based on estimates of varying

qualityfor example, the last detailed collection of GDP data was done in 1999.
Some of the main reasons for these weaknesses in economic and business information are:
Lack of an integrated information strategy determining economic goals, key areas of

interest, responsibilities and data collection processes;
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Frequent changes in the institutional landscape which have led to changes in

responsibilities and which often caused discontinuations of data collection efforts;
Limited and unsophisticated use of information technologyin many cases relevant

data is only available in hardcopy or is on computers which are not hooked up to networks; and
Existence of decentralized administration structures such as the Shabias, which make

data collection and consolidation difficult and time-consuming.
The lack of reliable, comprehensive business information forces business decisionmakers to base their decisions on dated, incomplete and sometimes incorrect data. This negatively impacts the quality of their decisions. That said, Libyan business people are accustomed toand highly skilled atengaging and utilizing informal networks. As a result, they manage to get by in the absence of welldocumented and easily accessible business information. The efficiency of their operations would, nonetheless, be further enhanced by the development of a strong business information network. Foreign companies, which encounter many of the same hurdles as local companies without access to informal networks, find it particularly difficult to orient themselves and find the real opportunities in the market.
5.5.7 Conclusion
Libya clearly needs to improve its business environment significantly, as its ranking of 109th of the 111 countries for which the NBE was estimated indicates. Given the key influence of microeconomic business environment conditions on competitiveness, the challenge for Libya is to identify the most pressing areas for action and the most appropriate sequence in which to address them.
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AN
ASSESSMENT OF CLUSTERS
Chapter 6.
6.1 OVERVIEW
As discussed in Chapter 4, an important characteristic of strong business environments is the presence of clusters: geographically proximate groups of interconnected companies, suppliers, service providers, and associated institutions, which are linked by commonalities and complementarities. Clusters such as software in India or high-performance cars in Germany are often concentrated in a particular region, sometimes in a single town or city. Clusters contribute to competitiveness and growth in a variety of ways: by increasing the productivity of constituent firms and industries; by raising the capacity for innovation and productivity growth; and by stimulating and enabling new business formation. To achieve sustainable prosperity for its people, Libya needs to both grow developed clusters like energy, where it already has a competitive advantage, and stimulate cluster development in areas such as tourism and construction where it needs to build such advantages. In pursuing growth, the government needs to be clear on the clusters it wishes to prioritize, its role in developing those clusters (i.e. producer vs. policy maker vs. regulator), the resources required for development, and the different mechanisms (i.e. government vs. private vs. foreign capital) that will stimulate investment. The government will have a critical impact on all clusters, irrespective of the role it chooses to perform. This is largely because the clusters present in Libya today are allwith the exception of energyat an early stage of development and competitiveness. They will therefore require significant support and upgrading to be competitive, both regionally and globally. The NES project team examined five clusters that could lead social and economic growth in Libya: agriculture, construction, energy, tourism and transit trade. These clusters were selected on the basis of current size and future potential. In addition, a variety of activities in the energy-dependent sector were also studied: oilfield-related logistics and services; the extraction and production of metals; and the production of polymers and agrochemicals. Manufacturing and mining were not considered in the list of clusters assessed in detail, given their current size (4% of GDP) and apparently limited potential for immediate growth.
Chapter 6. AN ASSESSMENT OF CLUSTERS
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Based on a detailed assessment, the team prioritized these five clusters so that the government can focus and sequence its investment, human and other resources on the clusters with the greatest opportunity. The clusters are discussed briefly here, and in more detail later in this chapter, in decreasing order of priority.
1. There are many opportunities to optimize the performance and cash flow contribution of the energy cluster. Significant opportunities exist for increasing oil and gas production, improving the availability of power supplies and reducing downstream costs and losses for all types of energy. In addition, by removing barriers to operational efficiency, the investment environment will be enhanced, both for Libyan companies and for Foreign Direct Investment (FDI). There are also several energy-dependent industries that might be built on the foundations of the energy cluster. Some of these, like polymers and agrochemicals and energy-intensive industries, like the production of aluminum, depend on the availability of affordable feedstock and energy, for which the costs and benefits are potentially worth exploring. In addition, a nitrogen-based fertilizer operation could potentially capture additional added value from by-products, as well make a meaningful contribution to the agriculture sector. 2. Tourism could become an important export cluster, driving both economic and employment growth, if Libya were to leverage its vast tourism assets effectively. 3. Agriculture can play an important role in providing employment. Through more efficient utilization of inputs and better choices around crop management and technology use, Libya has an opportunity to increase overall productivity levels, and reduce the current support spending into the industry. 4. Significant demand exists in residential, commercial and infrastructure construction, and the development of this cluster could lead local non-energy economic growth and employment generation. 5. There may be some opportunities in the transit trade cluster, especially in trans shipments and certain value-add services. Despite Libyas potential geographical advantage, significant investments are required to develop this cluster in the highly competitive Mediterranean environment, which need to be assessed carefully.
6.2 ENERGY CLUSTER & ENERGY-DEPENDENT INDUSTRIES

Given the importance of the energy cluster to the Libyan economy, a detailed assessment of this cluster helps us understand not only the challenges this cluster faces, but also those facing the larger economy. The assessment of the energy cluster includes a detailed discussion on upstream and downstream oil, gas and power. A more detailed analysis of the energy clustercovering upstream and downstream oil, gas, power and petrochemicalsis set out in Appendix A. We also assessed, at a high-level, a distinct but inter-related area: energy dependent industries. These are industries which are either dependent on energy inputs (e.g. metals) or on energy companies that act as suppliers or customers (e.g. oil-field logistics and services).
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Since there are underlying differences in fundamentals across these two areas, we studied them separately.
6.2.1 Energy Cluster

Libyas oil and gas sector has the potential to raise production to above 3 mbd. Libya also has enough gas to meet all domestic needs, as well as doubling the present level of commitments to gas exports. The oil and gas sector can generate an additional USD 9Bn per year of net cash flow, depending on the oil price. However, to achieve this benefit, Libya would need to significantly increase its annual funding for oil and gas upstream activities, to almost USD 3.5Bn. This is nearly double the National Oil Corporations (NOC) current annual budget for capital and operating expenses. Alternatively, Libya could consider different arrangements for dividing the costs of future investment between the NOC and the international oil companies (IOCs).
The under-funding of the NOC has led to sub-optimal development of existing fields and new discoveries. If not reversed, this will lead to declining production levels in the near future. Even with a better balanced approach, 2015 is the earliest date by which 3 mbd is likely to be reached. In addition, institutional and behavioral changes will also be required:
To facilitate increased production from existing fields and discoveries, and to assist
with the development of integrated gas projects;
To streamline the relationship between government and NOC, increasing the NOCs
flexibility, and speeding up decision making in the sector; and
To improve access to key business information that hampers planning when information
is absent.
Much of the extra cost of expanding oil and gas production would be saved by eliminating the need for growing imports of motor fuel, by means of refinery upgrades to keep refined product output as well matched as possible with the level and pattern of domestic demand. Our analysis indicates that the costs of these product imbalances was USD 800MM in 2004. With no change to the domestic refining system, the annual cost of this imbalance could rise to USD 1.5Bn by 2010. In the petrochemicals sector, there are opportunities for economic growth and diversification by switching to the use of Natural Gas Liquids (NGLs) in place of naphtha. NOCs access to a large, low cost resource base of attractively priced NGLs offers the prospect of a strong competitive position in the global chemicals sector. Libya may also possess some logistical advantages over Middle Eastern producers with its low cost feedstock and an emerging petrochemicals sectors. Most of them must bear Suez Canal tariffs for shipments to Europe or the Americas. By contrast, they have an advantage for sales to the Asia Pacific market. Such clear cost advantages in different markets tend to discourage head-to-head competition. In addition, the majority of Libyas maritime exports are currently hydrocarbon liquids whereas its imports are solids that are commonly carried via container freight. Increased participation in the manufacturing of
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certain bulk chemicals such as polyethylene, polypropylene, and polystyrenewhich are all shipped in solid formcould provide Libya with advantaged outbound freight costs in otherwise empty container backhauling. Libya needs to both increase electricity generation capacity, and to use capacity more effectively (in both generation and transmission). Our analysis indicates that the General Electricity Company of Libya (GECOL) will accumulate a deficit of USD 8Bn between 2005 and 2015, taking account of demand growth, investment needs and current pricing policies. This situation undermines any incentives to improve performance. GECOL could save almost USD 500MM per annum by using gas rather than diesel for boiler fuel for about 40% of its output. To further raise effectiveness, GECOL needs to continue its progress on developing its organizational and managerial capabilities. Close coordination will also be needed with the NOC, to plan gas development and infrastructure. Finally, Libya needs to review its approach to fuel price subsidies, which affect all oil products, gas and power supplied to the domestic market. Moving away from fixed fee basis for such supplies would improve resource allocation and efficiency. Consumers would still receive power at a given final price, but at a lower cost to the economy. Libya could achieve even greater savings if the beneficiaries were more narrowly targeted.
6.2.1.1 ENERGY CLUSTER OVERVIEW (i) Upstream Oil

Libyan oil production averaged almost 1.7 mbd in 2005. Without additional investments, it would soon start to decline. However, the countrys resource base in terms of both existing discoveries and the potential yet-to-find is more than adequate to sustain many years of rising production levels in a manner fully consistent with good oilfield practice.
(ii) Gas
Libya is also rich in gas resources, although this gas potential has so far been less fully developed than its oil resources. Gas production can easily be doubled from its current level of around 2 Bcf per day, and could be triple its present levels by 2015.
(iii) Downstream Oil

Libyas five domestic refineries have a capacity of 380,000 barrels per day (bd), much greater than the current level of domestic demand. These refineries are not able to convert heavy fuel oil (HFO) into light products or meet the stringent light product quality standards prevalent in international markets. As a result, they require the NOC to import and export refined products to achieve product balance, while also exposing it to a competitive disadvantage because of its limited conversion and product finishing
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capabilities. Product imports are particularly expensive, because they are purchased at international parity prices and sold domestically, at heavily subsidized prices.
(iv) Petrochemicals
Libyas domestic petrochemicals industry already features significant assets in the ethylene chain, including a naphtha steam cracker and polyethylene manufacturing at Ras Lanuf. These assets are currently naphtha-based. Libya also participates in the manufacture of gas-derived petrochemicals (methanol, ammonia and urea) through its facilities at Marsa Al-Brega.
(v) Electricity
Libyas electricity demand stands at about 12 terawatt hours (TWh). Since 2003, normally available generating capacity has fallen short of peak demand. As of 2005, the shortfall is about 9-10%. Most energy planners would recommend a reserve margin of at least 5 % to ensure supply security. GECOL has embarked on a construction program that could almost double normally available generating capacity by 2011.
(vi) Fuel Price Subsidies

The true cost of Libyas fuel price subsidies is USD 5.5Bn in 2005, using international parity pricing. The oil subsidy is the largest component, at USD 2.3Bn, accounting for 42% of the total. The electricity subsidy is almost as large, amounting to USD 2.2Bn in 2005. This represents a double subsidy on the price of electricity GECOL pays subsidized prices for the oil and gas it burns in generation, and electricity consumers pay less than the subsidized cost of supply. In fact, a high proportion of consumers pay nothing at all; GECOLs transmission and other losses essentially nonpayment for electricity amount to 40%. The subsidy on gas is currently the smallest, at USD 1Bn.
6.2.1.2 ENERGY CLUSTER ECONOMIC PERFORMANCE

As discussed earlier in section 5.2.2, energy is the single most important cluster for Libya in terms of its contribution to GDP foreign investment and exports. Oil and gas accounts , for more than 60% of the national GDP almost 80% of all foreign investment (2003 data) , and over 95% of all Libyan exports (2005 data). However, due to the capital intensive nature of this cluster, it accounts for only 3% of total formal employment. Rising oil and gas prices since 2000, increased production and improved refining margins have led to very attractive financial results for oil companies in the last few years. NOCs performance has been restricted by the controlled prices on domestic sales of refined products (often below the cost of manufacture, even ignoring the value of its crude oil). For GECOL, all of whose sales are to the domestic market at controlled prices, costs habitually exceed revenues.
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6.2.1.3 ENERGY CLUSTERBUSINESS ENVIRONMENT (i) Factor Conditions

Libyas energy sector factor conditions are strong, as it is endowed with extensive high quality oil and gas reserves.
Libya has high quality oil reserves (39 billion barrels proven)providing 60 years of
life at current production levels. Gas reserves are also abundant. There are additional oil and gas reserves within existing fields and many undeveloped discoveries, as well as significant exploration potential.
Libya has a knowledgeable and experienced workforce in the sector, but the number of
energy professionals with modern front rank skills is limited. There is a need to import high-skilled and specialized foreign labor, and to attract and train new Libyan talent.
Libya has sufficient, but aged upstream oil infrastructure (processing facilities,
pipelines, ports, terminals), which operate at medium cost. Gas infrastructure is in place to meet the existing domestic market and exports to Italy via the Greenstream pipeline. However, additional pipeline infrastructure will be required to meet future growth in domestic and export markets. Significant investment is required in the oil downstream, and even more in the power sector.
(ii) Context for Firm Strategy and Rivalry

NOC dominates strategy in the oil and gas sector because it owns all the refineries and has a dominant position in almost all upstream projects. Rivalry within the upstream segment is relatively strong, with a growing number of foreign companies attracted by recent bidding rounds. There are no private sector Libyan oil and gas companies. The cluster needs to address some regulatory and organizational challenges to maximize its potential.
Upstream growth policy is over-reliant on exploration, as compared to increased

production from existing fields and discoveries. This imbalance slows down the rate at which production can be raised. As a result, Libyas announced target of 3 mbd by 2010 is most unlikely to be met until several years later.
EPSA IV bid rounds were conducted as a transparent process and led to high prices
being paid for winning bids (which, given the nature of the EPSA IV contracts, may turn out to be a source of yet further delays to increased production). However, the growing number of successful foreign companies is creating a demand for top talent. To the extent that this is met by Libyans, it will be a further drain on the human resources of the NOC.
In the service sector, there has been limited rivalry in the past few decades with the
state providing a high proportion of support services through the NOC subsidiaries. However, this is already changing as a result of increased upstream activity and new players.
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There is scope for clarifying roles and responsibilities between the government, the
NOC and the IOCsto speed up decision taking, increase flexibility and reduce areas of overlapping authorityas well as streamlining of NOCs organization and management processes.
(iii) Demand Conditions

In addition to strong international demand for Libyan crude oil, the domestic demand for refined products is forecast to grow substantially. Domestic and export gas demand potential is also strong. The demand growth will drive the need for investment across the sectorupstream and downstream oil and gas, and electricity. Fuel price subsidies affect demand for all oil products, as well as gas and power supplied to the domestic market. Due to the absence of a reserve margin for generating capacity and the time required for GECOLs investment program to be completed, there is a danger that power shortages would prevent the non-oil economy from sustaining rates of growth higher than 7.8%. The size of daily peak demand has recently been growing at about this rate, and its duration has been stretching. Interconnections with Egypt and Tunisia can make a contribution to meeting peak demand but cannot be relied on for baseload supplies. Even at 7.8%, nonoil GDP growth, electricity demand would more than double in 10 years.
(iv) Related and Supporting Industries

Related and supporting industries are discussed in more detail in the next section. Some points are worth noting because of their impact on the energy cluster.
Basic oilfield services are low-cost and adequate, but advanced technical services are
mainly imported and local skills are outdated.
The business climate is characterized by slow decision-making, limiting the scope for
effective application of research.
Local suppliers have limited knowledge of international markets and practices although
some do collaborate with international suppliers.
There is a high level of state involvement in the service sector. NOCs service subsidiaries
have enjoyed a protected market in the past decades, so it will be a challenge for them to compete in a new environment of growing demand, new competitors and new oil company clients.
6.2.2 Energy-Dependent Industries

Libyas future diversification program is likely to involve developing industriesand eventually new productive clustersthat build on the favorable factor conditions in its business environment. These factors include the presence of a large energy cluster, the ready supply of hydrocarbons at attractive and controllable prices and the proximity of the country to southern Europe.
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There are a number of high-potential opportunities that build on the energy cluster itself either because they are highly energy-dependent, or because they are complementary with the assets and capabilities within the energy cluster. From our initial assessment, oilfield-related logistics and support services will provide opportunities for growth as the energy sector expands. Other energy-dependent industries which appear promising are the extraction and production of metals, polymers and agrochemicals. However, given the substantial capital investments required for building them, a detailed and rigorous cost benefit analysis is needed to establish the real potential. An important consideration in this assessment will be the Libyan governments policy on providing subsidized energy imports to these industries, which needs to be clarified.
6.2.2.1 ENERGY-DEPENDENT INDUSTRIES

The section below provides further detail on each of the various energy-dependent industries.
(i) Oilfield-Related Logistics and Support Services

Oilfield-related logistics and support services in Libya range from logistics (e.g. transportation, equipment rental, warehousing and procurement), to field works (e.g. well area preparation, operations & maintenance) and camp services (e.g. residential area construction and maintenance, catering, water supply). Foreign companies dominate oilfield-related logistics and services, accounting for almost 90% of the market. Quality-sensitive service components are either kept in-house (e.g. residential containers) by the NOC or sourced from foreign companies when local capabilities do not meet international standards. By contrast, low skill areas such as excavation, security and ground transportation are subcontracted to local suppliers. There are currently three foreign and two Libyan private sector companies operating in this market, together with subsidiaries of the NOC. The NOC is already thinking abut possible privatizations among these subsidiaries they are not part of their core business (as usually defined), and their commercial prospects might in fact be improved if they were independent of their parent. The recommendations in Appendix A for rapid increases in upstream activity in Libya will stimulate demand for oilfield related services. Recent oil and gas exploration bidding rounds are also likely to do so, in due course.
(ii) Metals
Libya has some developed assets and enterprises in metals, but these remain isolated and focused around iron products. The sector is meeting domestic consumption, and exports any surplus produced. Aluminum represents one possible future opportunity to expand. Although there are some limited metal deposits in southern Libya, the sector has developed on the basis of imported primary inputs and subsidized energy. Libyan Iron
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and Steel Company (LISCO) and the General Scrap Metal Company, both state-owned enterprises, are key players. Most of the metal-related activities are concentrated in Misurata, around the LISCO manufacturing site. Aluminum an energy-intensive industry could be a suitable next step for the industry as Libya has both the energy and the location to compete in this area. Aluminum production in Libya is currently low. Other aluminum smelters in the MENA region include Bahrain (800 KT) and Dubai (525 KT), and there are substantial brown and greenfield expansion plans Qatar, Saudi Arabia and Oman are expected to add another 1,500 KT of capacity by 2008-09. The MENA region could become very competitive if all these capacity additions are executed as per plan.
(iii) Polymers
Libya has a number of the key factors for success in the polymer industry: abundant and affordable energy, access to raw material (feedstock), and geographic proximity to European markets. At present, Libya accounts for a tiny share (~2%) of production in MENA. There could therefore be opportunities in polymers that Libya needs to explore in detail. This assessment would need to consider changes occurring in the global polymer industry, as evidenced in significant M&A activity, product substitution (e.g. polypropylene substituting metals in some applications) and capacity build-up in the Far East. It will be paramount for the quality of the attractiveness assessment to avoid a justification based on assuming a subsidized value for the feedstock. Currently, Libya produces only low-margin polyethylene (both HPE and LLPE) and PVC powder, and only in limited quantities. For more than a decade, Libya planned to enter the growing and more profitable polypropylene industry. However, lack of necessary technical skills in Libya and restrictions on importing foreign labor have prevented the implementation of these plans. The NOC plans to add a polypropylene capacity of 170 KT.
(iv) Agrochemicals
Rising global food requirements driven by population growth, especially in Asia, are expected to strengthen demand for fertilizers. In particular, the trend towards greenhouse-based agriculture in North Africa will require additional supplies of sophisticated nitrogen-based products. At present, Libya is a minor player in agrochemicals, with a 6% share of MENA production. Given Libyas strength in hydrocarbons, agrochemicals could be a potential growth industry if Libya takes advantage of its access to high-quality feedstock. Similar to polymers, a final assessment of the opportunity will need to clarify whether it is possible to generate a net value gain to Libya with agrochemicals, without relying on subsidies in feedstock prices.
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The abundance of low-cost hydrocarbons in MENA-member countries has allowed MENA to become a leading player in the international nitrogen fertilizer industry, accounting for approximately 16% of worldwide urea and ammonia capacity. In addition to being a leading supplier, MENA is also generating strong internal demand. By 2010, MENA is expected to be among the fastest growing regions with annual growth rates in ammonia and urea demand of more than 10%. Libya currently provides intermediate products like urea (flakes) and ammonia (shipped as liquefied gas) to nitrogenous fertilizer companies in MENA. However, there is currently no local capability to produce higher-value products such as nitrogen, blended or complex fertilizers.
6.3 TOURISM CLUSTER

Tourism can be an important source of economic and employment growth for developing countries. As a Mediterranean country close to major European outbound tourism markets, there is clear potential for Libya to develop a tourism industry, given its geographical assets and rich cultural heritage. However these natural factor conditions alone are not enough, and the development of the cluster is being seriously hindered by poor infrastructure, a shortage of capital for local tourism companies, and a lack of clear leadership from the public sector. Based on its aspirations for tourism, Libya needs to make clear choices on where and how to focus its future development, and develop a unique Libyan value proposition that leverages both its tourism assets and its unique cultural and social values. These choices need to be rooted in the current reality of the tourism sector, and informed by the challenges encountered in past attempts to upgrade the sector. Irrespective of the choices made, there is an overriding need to improve the tourism infrastructure and to address structural challenges such as the granting of visas, the enforcement of quality standards and the facilitation of private enterprise. This must be the first priority for the cluster.
6.3.1 Tourism ClusterOverview

Tourism in Libya remains underdeveloped, with Libyas 250,000-300,000 foreign visitors per annum accounting for only 0.5% of the tourists visiting MENA countries. These visitors mostly divide between business travelers, who stay in the two principal cities and visit oil-fields, and high-end history-seekers, who visit the many historical and cultural sites in Libya, and explore the Sahara desert.
6.3.2 Tourism ClusterEconomic Performance

Technology-based clusters such as energy have the potential to drive overall prosperity but may not contribute much to employment. By comparison, tourismwhich is more labor-intensiveoffers potential to create sustainable employment. Tourism is known
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to have a large employment multiplier, i.e. for every directly-created job, many more are created indirectly. However, as noted, the tourism cluster in Libya is not fulfilling its economic potential: in 2003 it generated less than 3% of GDP and 4% of employment, and attracted a miniscule share of the tourists visiting the MENA region. Tourism has been identified by foreign investors as the most attractive sector for FDI in the non-energy economy. It has attracted more than USD 3Bn in committed investment in 2005, according to the Tourism Investment and Development Board (TIDB). However, policy uncertainty and administrative difficulties in the FDI approval process, and the lack of confidence this generates among foreign investors, mean that it is unlikely that most of these investments will be realized. The development of a viable tourism cluster could also have other, less obvious, benefits for the Libyan economy. First, tourism can support FDI by making it easier for business people to visit and conduct business in Libya. Improved air access, easier visa processing, and more and better hotels would all make a difference for this group. Second, the development of tourism-related infrastructure, such as roads and airports, and supporting industries, such as improved leisure facilities and financial infrastructure (ATMs, credit cards acceptance), will also improve the local business environment and the general quality of life for the local population.
6.3.3 Tourism ClusterBusiness Environment

(i) Factor Conditions
Despite Libyas attractive location and high quality tourism assets, overall factor conditions for the tourism cluster are currently weak. Libya needs to improve its human and financial capital in this area, as well as the physical infrastructure. Libya has a vast and varied tourism asset base, including the ancient ruins in Leptis Magna and Sebratha, the desert city of Ghadames, 2,000 km of Mediterranean coastline, the picturesque Green Mountains, and the vast Sahara desert, among other attractions. These assets form the basis for the current limited tourism market, but further development of the cluster is hindered by a variety of other factor conditions. The quality of customer service experienced by tourists is poor, both directly in the hospitality sectorhotels, airlines, tour operators and restaurantsand indirectly, through contact with government officials who deal with tourists. The reasons for this include the lack of hospitality training, poor salaries and consequent loss of motivation, especially for public sector employees. The standard of foreign languages spoken is also extremely poor. Existing enterprises find it difficult to scale-up their operations and new enterprises find it difficult to access bank credit and consequently depend on private capital. More than 85% of tourism SMEs (defined as those employing less than 50 staff) do not use bank credit due to difficulties associated with accessing it. More advanced financing options which are more suited to SMEs, such as leasing or venture capital, do not exist.
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The existing road network was developed based on social needs, without considering optimal access to tourist sites. Especially in the south, accommodation facilities are often located far from the tourist sites, leading to unproductive detours and delays for tour operators.

The state is a key determinant of context for firm strategy and rivalry in the tourism cluster, through its influence on policy making, regulation and implementation. However, there is strong evidence that it is not fulfilling any of these roles. In the last decade, the General Peoples Committee for Tourism has made several efforts to improve tourism in Libya, drafting an ambitious Master Plan in 1998, and updating it periodically since then. A further major revision is currently planned. However, the major recommendations of these plans have not been implemented, as consensus was not achieved among the main stakeholders, and clear responsibilities for different aspects of the plan were not defined. It is clear that foreign companies will need to play an important role in the future development of the cluster, given the lack of tourism expertise in the Libyan tourism cluster. However, foreign investors complain that they are faced with many regulatory and institutional hurdles, despite the existence of a dedicated government body to help promote foreign investment in the sector, the TIDB. One example is the complicated procedure for getting FDI approval. As a consequence, although 15 major projects have been announced in 2005, totaling more than USD 3Bn in committed investment, there is widespread skepticism that they will be realized in the near future. Structural challenges are also hindering the development of successful private enterprises in tourism. Although many of these challenges apply across the economy, they are especially relevant for tourism, given the importance of private enterprise in this cluster. For example, the development of local tourism companies is restricted by legal and bureaucratic difficulties in the business environment. As discussed earlier in section 5.5.3.4, it takes almost 100 days to start a new business in Libya, compared to around a month in neighboring tourism destinations like Tunisia and Algeria. In addition, Libyan visas are extremely difficult to get, both for business and leisure visitors, taking between 1 to 4 weeks to be processed. Although some fast-track processing has recently been put in place for large groups of leisure tourists traveling with approved operators, there is a long way to goNorth African countries issue these on arrival. This reduces the attractiveness of Libya as a tourist destination, both for the tour operators and the tourists, and restricts the potential increase in tourist traffic.
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Current demand is characterized by pockets of international opportunity and unsophisticated domestic demand. In the short to medium term, demand from existing segments is likely to grow. Libya could also develop other offers which attract other types of tourists. Tourism in Libya is largely reliant on foreign visitors. Low income levels and the lack of a tourism culture means that there has never been extensive local tourism demand. However, during sanctions in the 1980s and 1990s, Libya effectively disappeared from the international tourist radar, and even business visits were hampered by the lack of access by air. International demand has recovered somewhat in the last couple of years and Libya now receives 250,000-300,000 foreign tourists annually, mainly business travelers and high-end history-seekers. Historically low foreign tourism demand has led to a stagnant, supply-based cluster with little incentive to invest and upgrade. Accreditation schemes for hotels, operators, restaurants and other companies, which could help raise standards and guarantee quality of service for foreign visitors, do not exist. This is due largely to the absence of both foreign operators and an active regulatory influence from the government. Demand from existing segments is likely to increase in the short to medium term. As FDI and the business activities of foreign companies in Libya increase, the business segment should grow. The history-seeking segment also has the potential to develop, as the incredible range of historical assets which Libya possesses becomes more widely known. The Libyan tourism cluster could also consider developing other offerings which leverage other assetssuch as the 2,000km of Mediterranean coastline or the desert to attract other types of tourists to Libya.

Only the most basic foundations of a tourism cluster are present in Libya today. Key cluster participants such as accommodation providers, tour operators, and airlines exist but are weakly linked. Related and supporting industries such as financial services, ground transportation, arts and crafts or catering industries are insufficiently developed and inadequately integrated with other players. Libyas accommodation capacity is the smallest in the Mediterranean region, at 21,000 beds, accounting for only 0.6% of the regions total capacity. The majority of large hotels are owned by the public sector (through the Social Security Fund) and their quality does not measure up to international standards. There is only one hotel that meets international standards in all of Libya. Even if all currently planned tourism investments are realized, Libyas capacity build-up will be moderate compared to the plans of other key players in the Mediterranean region (see Figure 28).
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Figure 28. Planned Accommodation Capacity in the Mediterranean Region
Of the 308 officially-recognized local tour operators in Libya, fewer than 5 are major operators based on the spread of their business activities. Most of the smaller operators work part-time and offer limited tourist services, restricting the delivery capabilities of the domestic travel trade. Libya is not on the radar of any of the major international operators. For these operators, the size of the tourist market and challenges such as obtaining visas for their customers, make Libya a difficult destination to sell. Only a few niche operators, primarily in Italy, are active in this space. International air links to major European and Middle-Eastern destinations do exist. International airlines such as British Airways, Alitalia, Lufthansa, KLM, Gulf Air, and Emirates operate 4-6 flights per week to Libya. The Libyan airlines, Libyan Arab Airways and Air Afriqiyah also operate flights to major European and Middle-Eastern destinations. However, business travelers and Libyans traveling abroad account for the majority of air passengers. Given the vast size of the country, good quality internal air links will also be important for the development of tourism. These have improved with the arrival of new entrants, such as Al-Buraq. Airports, telecommunications, and financial infrastructure are all insufficiently developed for the needs of foreign visitors. For instance, as noted earlier, there are less than 20 ATM machines in Libya, and credit cards can only be used in international airline offices and a few major hotels. Neither broadband Internet access nor roaming for major international mobile networks is commonly available. Despite the lack of a developed tourism cluster, there are a few enterprises which have managed to be successful in their industries, by conforming to international standards.
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The box below describes one of these success stories.
BOX 1. CASE STUDY: CORINTHIA BAB AFRICA HOTEL

Background: A joint venture between Libyan Arab Foreign Investment Company and a Maltese family, Corinthia is the only five-star hotel in Libya. Corinthia started its Tripoli operations in 2003. Business Model: Offer high quality facilities and services and customers will pay. This has helped Corinthia sustain a price that is at least five times higher than its local competition. Key Success Factor: Human capitalCorinthia invests significantly in recruiting, training and retaining its employees. Its employees receive high-quality classroom and on-the-job training.
6.4 AGRICULTURE CLUSTER

Historically, agriculture and livestock have been important components of the Libyan social, political and economic fabric, with more than half the population engaged in agriculture in some form until the 1950s or 1960s. The sector has received generous subsidies in the quest for self-sufficiency. However, it is highly unlikely that agriculture can become a key contributor to exports or the economy overall, as the sector is limited by scarce and expensive factor inputs. The government needs to be clear about the economic and social objectives it wants to achieve through agriculture. Trade-offs between economic and social values should be assessed, and explicitly stated. Because of its central social role, the agriculture sector will continue to play an important, even iconic role in the country far beyond its actual economic contribution for some years to come, as a source of income and employment to an important proportion of the population, especially in rural areas. In this section, in addition to a detailed assessment of the agriculture cluster, we also conducted an assessment of the water supply in Libya and the role of the Great Manmade River Water Supply Project (GMR) in supporting this.
6.4.1 Agriculture ClusterOverview

Only around 4% of the land area of Libya is suitable for grazing, with less than 2%, or 2.2 million hectares, being arable. Most of this land is close to the coast, and the main agricultural areas include Jabal al Akhdar and Cyrenaica in the east of the country, and
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Jabal Nafusah and Jifarah Plain around Tripoli. Rainfall is not sufficient for agricultural purposes and needs to be supplemented with irrigation. 309,000 hectares are currently under irrigation, mainly through groundwater extraction, which now far exceeds replenishment in these coastal areas, and is resulting in groundwater depletion. Government policy has aimed for self-sufficiency in food. As a result, the sector has received generous subsidies and subsidized water. The government sets production targets for different types of produce. Virtually all crops are grown for local consumption. The irrigated cropping pattern consists of about 52% permanent crops including olives, fruit trees, citrus and fodder; with the remaining 48% consisting of annual crops such as wheat, barley, vegetables, potatoes, pulses and others. Local farm production largely satisfies domestic needs for fruits, vegetables and olive oil and provides 20-25% of requirements for grain. The livestock sector is also significant and provides most of the domestic requirements of dairy, eggs and meat, but is limited by the scarcity of grazing lands and fodder. Fisheries experienced rapid government-supported growth in the 1980s, and now employ around 15,000 fishermen on a part- or full-time basis, although most operate on a small scale.
6.4.2 Agriculture ClusterEconomic Performance

Before the discovery of oil and gas reserves, agriculture contributed about 25% of GDP . Official numbers for 2003 indicate that it now represents 4-5% of GDP and 7-8% of total employment. However, our initial high-level assessment shows that many more Libyans are engaged in the sector on a part-time basis. Despite heavy investment in the agricultural sector in the last three decades, including substantial investment in irrigation, the sector grew at just 2.4% annually between 1993 and 1999, while population growth was 3.2% annually over the same period. Libya remains a net food importer, averaging 1.5 million tons of imported wheat annually. In total, about 75% of Libyas food is imported. There is evidence of low efficiency in the performance of publicly managed production projects, as well as the use of outdated technology in irrigation and farming and of older, less productive crop varieties. With the focus on self-sufficiency, potentially viable export commodities such as olives and dates are not exploited, and the only export growth area has been fisheries.
6.4.3 Agriculture ClusterBusiness Environment

Factor conditions for agriculture, livestock and fisheries in Libya other than the existence of basic infrastructure and access to potential export and cheap labor markets appear to be weak.
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Lack of arable land, uncertain rainfall and limited source-to-farm irrigation systems limits the growth of the sector. Arable land in the coastal zone is falling off-line at a regular rate as a result of the decreasing water table and this is resulting in increased salinity of ground water in coastal areas through sea water intrusion. The search for additional water supplies for agriculture and other uses, has led to large-scale extraction of fossil water from the south of the country, via the GMR, although other, potentially cheaper, sources exist. As this is such a key issue, the question of water resources and the role of the GMR are analyzed in detail later in this section. On the positive side, Libya has a large continental shelf abundant with fish, and is close to key potential export markets for goods, and to import markets for cheap labor. The pool of skilled agricultural labor in Libya is extremely shallow. Few immigrants supply knowledge-transfer as they are mainly utilized as low-cost labor. Data we have received suggest that there are currently only eight graduates with Doctorates and sixteen with Masters degrees working in the agricultural sector. Lack of management expertise is a key driver of low farm productivity and inefficient route-to-market. Libyan farmers are not properly trained, especially in the areas of correct selection of crop varieties, efficient management of scarce resources, and investment in technology and irrigation equipment. Basic infrastructure such as roads, water supply and electricity to agriculture is sufficient. Water supply reaches more than 72% of the rural population, and a network of roads and overland transport services links most towns and villages. However, communication and information infrastructure is very poor. Processing capabilities and storage infrastructure are insufficient for all agricultural products, including fruits, vegetables and fish, in both scale and complexity. Financial services are insufficiently developed, and the Agricultural Bank may be crowding out the private sector. Investment is held back, largely because the existing land tenure system does not allow for the use of land as collateral.

There is no overarching strategic plan for agricultural development in Libya at present. In addition, government policies for production and investment are misaligned, and in some cases market-distorting. The government is a key investor in production and marketing, while the private sector has a very small presence. Uncertainty in water distribution and lack of clarity in property rights are holding back private investment. For most of the 1970s and the 1980s, the government invested heavily in the sector, and applied intensive regulations in land ownership and agricultural prices, production and practices. In more recent years, the government has allowed the private sector to engage more actively in both agricultural production and marketing. Unfortunately,
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these government interventions have led to poor utilization of water and land resources, and have discouraged the private sector from large-scale investment in commercial agriculture. The governments capacity to provide strategic direction and to implement sector-wide programs is limited by large-scale decentralization of decision-making. There is no central administration to coordinate budgeting and planning, offer extension services and training, facilitate market information and minimize duplication of support activities. Furthermore, there is no institutional structure which could monitor whether agricultural production and practices comply with international standards. This fragmentation of activities may be costly for the country in terms of wasting water resources, producing commodities in areas with high cost, and crowding markets with over-supplies. Changing government policies on land ownership have negatively affected the performance of the sector. In addition, farms have been subject to division and fragmentation leading to small land-holdings. Family farms are often composed of several scattered plots. 45% of farms are reported to be less than ten hectares, and only 25-30% of all farms are above 30 hectares. The combination of these two factors has reduced investment in farm infrastructure and soil maintenance and in the sustainable use of water. As a result of high set prices and subsidized input costs, crop profitability, and current use of scarce resources are skewed towards lower value grains (see Figure 29). Farmers and investment companies both public and private-public ventures do not pay for the full cost of water or energy. For example, charges for water from the GMR are set at LYD 0.04/m (USD 0.03/m) for irrigation purposes compared with an estimated actual cost of about USD 0.90/m.
Figure 29. Estimated Revenue Potential per Hectare by Agricultural Product
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The fishing industry faces problems of lack of scale and sophistication of operations. Despite the abundance of fish, exports are limited to blue tuna to Japan, and sardines and deep-water fish to neighboring countries.

The system of subsidies and price controls has fostered a price-driven market with very little attention to quality in most agricultural segments. Higher value produce such as olives, grapes and dates are priced according to quality, but even in these segments, prices do not vary significantly. Local supply is unable to meet the quantity and quality requirements of domestic demand and as a result about 75% of Libyas food requirements, including almost all processed and high-quality foodstuffs, are imported. Libyas agricultural sector is poorly adapted to international markets. Increased integration would allow more efficient allocation of scarce resources, both land and water, to produce the most profitable goods. This could enable Libya to develop export-driven activities in high-value agriculture and fishing segments in which it could be competitive, such as dates, olives, olive oil, grapes, tuna, shellfish and shrimp.

Some of the basic requirements for the formation of an agriculture cluster are present in Libya. However, there are substantial gaps in certain areas such as infrastructure and labor, and deficiencies in the coordination between national government and Shabias. These issues need to be addressed before agriculture can operate as an effective cluster. Related and supporting industries are therefore quite weak overall. There are insufficient functioning warehousing and distribution systems, mainly with regards to cold-chain and modern packing capabilities. Poor infrastructure for the storage, packing, handling and transport of agricultural goods and fish creates delays and has a backlash effect on quality. Local markets for fruits and vegetables need upgrading to allow for adequate storage, especially during the high production season when supplies exceed demand. Regional extension services are limited, while crop insurance services are virtually nonexistent.
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6.4.4 Water Resources for Irrigation and the Role of the GMR
The Great Man-made River Water Supply Project (GMR) seeks to overcome the severe water shortages for Libyan agriculture by extracting fossil water from sources in the south. However, it may not make sense to allocate GMR water for the irrigation of low-yield crops, like wheat, barley and pulses, given the high cost of extracting GMR water and the large volume of water required, which means that the true cost of producing these products is often higher than world market prices. Alternative sources of water such as desalination (see Box 2) and treated waste water already provide potentially economically viable options and are expected to become even less expensive as technology advances. Data provided on GMR does not allow for a more detailed assessment of the investment case. However, from the data available it becomes clear that, only high value crops are likely to be an economically viable option for GMR irrigated agriculture, if at all. This could be achieved by allowing water charges for GMR water to more accurately reflect its cost, moving incentives away from the production of low-yield crops towards increasing water efficiency, which must be a long-term goal.
(i) Overview of GMR Objectives

As discussed earlier, there are 309,000 ha currently under irrigation, of which 196,000 ha are in the coastal zones and 113,000 ha are in the southern and central zones. Around 50,000 ha are state-operated, mainly in the southern regions of Murzuq and Al Kufrah, with the remaining 259,000 ha under private ownership. The overwhelming majority of this land is irrigated using tubewells drilled into the ground, reaching deep into the groundwater stock. The need to supplement groundwater extraction is urgent and growing. Total irrigation requirements in coastal areas are estimated at 2,000 MMm3/year although it is estimated that better irrigation management practices could reduce this figure by 20-30%22. The available renewable groundwater supplies are around 400 MMm3/year. Groundwater resources are rapidly depleting in the coastal areas, leading to intrusions of saline water either from the sea or from deeper aquifers, and thereby resulting in the destruction of freshwater aquifers. Potential sources of water include the use of waste-water, desalination of sea water, or the extraction of water from the massive fossil water reservoirs which exist in the south of the country. Waste-water and desalination both exist on a small scale and have potential to expand (see Box 2). However, it is the extraction of fossil groundwater via the GMR that has been the focus of investment to date.
22 Review of Irrigation Methods and Crop Water Requirements, Agricultural Research Centre
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The GMR project is designed to deliver fossil groundwater from areas of abundance in the southtotal reserves are unknown but estimated at 35,000 Bnm3to areas of need in the north. The aim was to provide 70% of extracted water to agriculture, including largescale agricultural projects in the centre and south of the country, with the remaining 30%, going to residential and industrial users. At present, the system has an annual capacity to extract 1,460MMm per annum, scheduled to rise to 2,400MMm3 in the year 2015. At this date, 70% of the projected total annual extraction capacity would be equal to 1,680MMm3/year, which, it was projected, would allow 130,000 ha of land to be irrigated at a rate of 13,000m3/ha/year. Given that current average irrigation water requirements in the coastal area are of only 7,900m3/ha/year, it is clear that the intention was to use the GMR water to help achieve food self-sufficiency by using it for relatively low-yield crops like wheat and barley. It remains to be seen, however, if in fact 70% of GMR water can actually be supplied to agriculture given the increasing requirements for domestic and industrial consumption. A recent publication by the General Water Authority is more cautious as to the agricultural area supplied from the GMR in the future and quotes supplying water for an area of only 75,000 ha, rather than the 130,000 ha mentioned previously.
(ii) Assessment of GMR economics

Given what appear to be increasing demands for water, which might change the optimum allocation of water from the GMR, it makes sense to reappraise the cost of its production and the use to which it is put. Based on the calculations shown below (see Figure 30), the total delivery cost, based on full capacity utilization, is USD 0.90/m.
Figure 30: Cost of Water from the GMR
1 This assumption may be too high for all items such as wells, pumps, etc. Depreciation over an average of only 40 years would increase the annual cost by about USD 100MM 2 Interest on capital cost is taken on 50% of construction cost, due to depreciation of underlying value of the investment 3 Includes pumping cost, roads, electricity supply, etc. A reduction to 4% would reduce the annu cost by about USD 200MM
When farm connection costs are added to the cost of farm water distribution, the total delivered cost is increased to around USD 1.00/m3. If the GMR is operated below full capacity, as it is done today, the delivered cost would be significantly higher. For example, if only one third of capacity were utilized, costs could reach USD 2.50/m. Since the
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GMR delivery capacity today is already 4MMm/day, which considerably exceeds the systems distribution capacity to customers in the north of only about 1.2MMm/day, it is clear that massive investment is required in distribution systems to avoid operations below capacity. With GMR water charges for irrigation set at only LYD 0.04/m3 (USD 0.03/m), this represents an enormous subsidy to the agriculture sector. Given this high cost of GMR water, it is relevant to calculate the water requirements of the major imported agricultural commodities which are wheat, barley and pulses. For instance, if one considers the import of 1.5 million tons of wheat annually, the water required to produce the crop in Libya at an average of about 2,750m/ton would be equivalent to about 4,100MMm for wheat, about 760MMm for barley (at 200,000 tons import) and about 430MMm for pulses (also at 200,000 tons import). The sum of these water requirements amount to about 5,300MMm and would be in addition to the present water requirements of about 4,100MMm. The amount of water required therefore to become self-sufficient in these crops exceeds the potential irrigation water resources of the country. Libya needs to look carefully at both the uses to which GMR water is put, and at alternative options for providing water for lower value crops. Box 2 below provides further detail on one such option, desalination, which is expected to become less expensive and thus more attractive as technology advances.
BOX 2. DESALINATION
With the development of the GMR, Libya has ensured a supply of freshwater to its main cities and many rural areas. However, the current balance of supply and demand remains very tight and as the northern shores continue to develop, there will be areas of agriculture, industry and tourism that will require further increases of supply of fresh water. In many cases, the most cost-effective and sustainable way to supply these coastal locations with water could be desalination. Currently, there are 17 major desalination plants of different scale in Libya, of which three are out of order. The capacity installed amounts to a total of over 100 million cubic meters per annum. However, due to problems encountered in management, maintenance and operations the productive capacity is restricted to an almost insignificant figure of 18 MMm3/year, depending on the source of information23. The cost of desalination internationally is approximately USD 1.00/m3 (depending on scale and technology applied). However, with the efficiency of the process of desalination increasing and the availability of know-how in the region60% of worlds desalination plants are located in the MENA regionthis technology is likely to become an attractive option over the next decade.
23 National Physical Perspective Plan 2000-2025
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6.5 CONSTRUCTION CLUSTER

Construction, more than any sector, is tied to the economic growth and development of a country. Without a strong construction cluster, other important Libyan national economic goals such as better infrastructure, increased supply of public housing and the development of tourism will not be achieved. Over the coming decade, Libya is likely to generate strong demand for housing, infrastructure and possibly commercial developments. However, the cluster must address some serious challenges if it is to meet this demand. Skills and equipment are lacking, companies do not have access to capital, and basic supply inputs such as cement and steel are not consistently available. Both foreign and local companies face a difficult regulatory environment. Foreign companies and workers, which could both help to meet this demand and transfer skills to Libyan companies and workers, are restricted in their ability to operate. At a policy level, uncertainty on land ownership makes real estate development difficult, reducing construction demand. Related and supplier industries such as the education and building supplies sectors are unable to provide the inputs the construction sector requires at present. In the cement and steel industries, non-transparent, non-market-based allocation mechanisms increase uncertainty for companies by creating inefficiencies and opportunities for corruption. These serious challenges make it very unlikely that Libya will be able to develop an exportcompetitive construction cluster in the next ten years. However, strong local demand and reforms in the key areas highlighted above would help improve the productivity of the local construction cluster.
6.5.1 Construction ClusterOverview

The construction sector in Libya has suffered more than most other sectors from Libyas reliance on energy and government control of the economy. The declining oil price in the 1980s and 1990s reduced the capital available for investment in public housing and infrastructure projects. At the same time, lack of development in other areas of the economy starved the Libyan construction sector of work. There is now a strong demand-based logic for increasing construction in Libya, with high oil prices pushing increased government spending, and a growing move to diversify the economy into areas where the private sector will take a larger role.
6.5.2 Construction ClusterEconomic Performance

Construction contributes only about 4% of Libyas official GDP However, it is one of . the fastest growing industries, with a CAGR of 11.6% between 1999 and 2003. With only 50,000 official employees, construction appears to be the second most productive sector after energy, with a GDP per worker of USD 22,000. However real productivity could be
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much, much lower once the informal workforceestimated at 600,000 to 800,000 by the General Peoples Committee for Manpoweris included. In addition, imports of basic construction materials such as cement and steel, and of more advanced equipment, are significant and growing, due to a shortage of locallyavailable inputs. There are no major Libyan construction companies. Several foreign construction companies are active in Libya, often working in partnership with local companies on major projects. FDI will be an important driver of future commercial real estate development in sectors such as tourism, where over USD 3Bn has been committed.
6.5.3 Construction Cluster Business Environment

Although basic inputs are available, some key gaps will need to be overcome in order to keep up with increasing demand. These include access to skills, capital and high-end materials and technology. Government-induced distribution problems and continuing policy uncertainty over land title are also inhibiting the development of this sector. There is a shortage of Libyans with the requisite skills, despite a large workforce of 50,000 formal and 600,000-800,000 informal workers in the sector. Construction companies rely on non-Libyan specialists for high-skilled jobs such as design, architecture and management, and almost all unskilled labor is also foreign. Despite the need for skilled foreign workers, the administrative difficulties of hiring non-Libyans often causes difficulties and delays on major projects. Attempts to address the skills gap by forcing employers to provide vocational training have not worked in practice. The training is expensive to provide and it has proved difficult to find Libyans wishing to take part. Libyan market demand for cement is around 8.5 million tons per annum, but local production is only 4.5 million tons, despite the availability of gypsum. The domestic capacity shortfall is worsened by technical and organizational problems that limit the capacity utilization of the three domestic suppliers to approximately 70%. Distribution of cement is also hampered by a lack of transparency and the use of non-market-based allocation mechanisms. These shortages and distribution problems have created a large informal market for imported cement, resulting in premiums of up to 200% over listed prices, as imports still fail to make up the 4 million ton shortfall. Libya produces enough steel to meet current local demand. However, the use of nonmarket-based allocation mechanisms affects the ability of supply to meet demand. 60% of steel production is given to the Shabias to distribute. Typically bureaucratic and lengthy ordering processes on the part of the Shabias lead to supply shortages. As a result, an informal steel market at prices above the official rate has emerged. The quality of both locally-produced steel and cement is basic. High-end materials such as those required for water-front hotels, marine and port construction are imported.
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Modern construction equipment is difficult to obtain. Local companies lack the financial means to import such equipment. Foreign companies are often forced to use the old and run-down equipment available locally, due to import restrictions and bureaucratic difficulties with customs. As discussed earlier in section 5.5.4.1, an artificial shortage of land exists due to legal restrictions on land ownership, bureaucratic government processes in land transactions and ongoing disputes over land ownership. At the same time, the opening up of the economy has driven up land prices, thus increasing the incentive for Shabias to appropriate land, as is their right in the current regulatory environment. This is leading to widespread corruption. The long-awaited 3G Planning Process will need to clarify the situation with regard to land ownership issues, so that real estate development and construction can develop on a sound footing. In common with other sectors, construction experts indicated that access to capital is a major problem for companies. Banks have little incentive to disburse loans and in the absence of credit information, they are highly risk averse. More advanced financing options such as equipment leasing or venture capital do not exist even though these are ideally suited to the construction sector.

The construction cluster is characterized by fairly high levels of competitive intensity, but a difficult regulatory environment. Local and foreign construction companies differ in size and typically operate in different market segments. While the Libyan companies are usually small and focus primarily on simple projects, the foreign companies operate on a larger scale, and specialize in large and complex projects requiring technical know-how, skills and funding. Operationally, most large foreign companies partner or work jointly with small Libyan firms, to get access to local knowledge. For foreign companies, the regulatory environment is restrictivethere are minimum quotas for Libyan employment, difficulties in getting job visas for foreign workers and restricted areas of activity for operation. For example, foreign companies are not eligible to be the main contractors for residential and commercial projects. However, Libyan contractors often work with foreign sub-contractors on large projects because of their technical expertise and specialized equipment.

Demand appears strong across residential and infrastructure construction, with commercial construction demand more difficult to gauge. Overall construction demand in Libya is unsophisticated, mainly due to a lack of capital. Government is still a major customer through infrastructure and public housing projects. Large international investors are showing interest in commercial construction (e.g. hotels, business centers), but are
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concerned about committing investments before the regulatory environment becomes more business-friendly. Most construction still employs very basic building materials and traditional construction methods, with little use of pre-fabricated materials and more modern construction techniques. FDI projects in both tourism and other sectors represent the best chance of increasing the sophistication of demand. It is difficult to estimate total construction demand as there are no reliable sources providing overall estimates. Based on current plans, about LYD 17Bn is expected to be spent on housing construction over the next 10 years, and around LYD 10Bn on infrastructure. There is an estimated demand for 420,000 housing units over this period, which includes a substantial accumulated deficit. Private residential construction demand is also affected by the shortage of bank credit for housing endcustomers, which, although growing, is still insufficient. Home loans are capped at LYD 40,000 (approximately USD 30,000), which is not enough to cover the cost of house construction or purchases for many families. There are also plans for major investments such as the New Tripoli project, an integrated residential and industrial settlement; and the renewal of the sewage system; each with an estimated LYD 5Bn investment. Substantial future investments have been announced in tourism. Indeed, according to information provided by the General Peoples Committee for Tourism and the Tourism Investment and Development Board, if all tourism investments planned for the next couple of years take place, they would account for more than 50% of total construction investments. In summary, when consolidating estimates on potential construction investments, it is important to recognize that the likelihood of investments being realized varies greatly across sectors (see Figure 31). Housing investments, primarily driven by local demand and government investment, have the highest likelihood of being realized. This is followed by infrastructure investments, dominated by government spending. Commercial investments, especially in the tourism sector, are dominated by FDI commitments, and have the least likelihood of being realized, owing to the structural challenges discussed earlier.
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Figure 31. Estimated Investment in Construction in Libya, 2006-2015

Many of the individual elements of a construction cluster exist in Libya, but they are of low quality and exist in insufficient quantity. The linkages between supporting industries and services and the core elements of the cluster are also weak. There are problems with both the quantity and quality of architects, designers and management. Despite the existence of specialized construction training in schools, vocational schools and universities, these courses appear to lack quality and experiencebased learning content. Enrolment levels are therefore low. The value chain is not efficient and there is significant potential for unproductive rent-seeking middlemen to capture much of the value in the overall system. The inefficiencies in the supplies of basic materials, such as cement and steel, is a prime example of this tendency. Finally, as discussed above, the financial services sectors do not adequately support the sector with the products and services that construction companies require.
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6.6 TRANSIT TRADE CLUSTER

Transit trade cannot currently be said to exist as a cluster in Libya, given very low levels of through-trade and by-trade. Our preliminary analysis suggests that this is not a priority cluster for development in the short-term, as the investments required to develop Libya as a trade hub would be great, and the potential trade that could be captured is unclear. A rigorous cost-benefit analysis should be carried out to confirm this assessment. Our analysis suggests that the volume of through-trade going North-South is simply not sufficient to justify the investment required to build a cluster. Any future transit trade cluster in Libya should focus on the enormous East-West flow through the Mediterranean. That said, Libya faces strong competition from other transit trade hubs in better locations, with better infrastructure and with larger hinterland markets. Extensive investment would be required in ports, roads, warehousing and supply-chain related technology and other infrastructure, and in upgrading skills. However, it should be noted that the development of Libyas economy cannot take place without improved port and other infrastructure, so at least some of the investments required for transit trade will be required anyway, regardless of whether it is deemed a priority cluster. It might also be possible for Libya to provide value-added service offerings, such as final assembly, repackaging or customization of goods en route from China to Europe. Libya may wish to revisit the question of developing a transit trade cluster at a later point, when its infrastructure is better developed, when the Misurata Free Zone (MFZ) is in place, and when Libyan firms have developed stronger trading relations with the outside world.
6.6.1 Transit Trade ClusterOverview

Three types of trade can be considered as part of a potential transit trade cluster: 1. Trade into Libya. Although not strictly transit trade, this is considered here, as it could form the basisin terms of infrastructure, the presence of competitive shipping and handling companies and the existence of related and supporting industriesfor a true transit trade cluster to emerge. 2. Trade through Libya (Through-Trade). This would see Libya acting as a hub through which land-locked parts of Africa, mainly to the south, would trade with Europe and the Middle East. 3. Trade by Libya (By-Trade). By-trade would see Libyan free zones being used for repackaging or final assembly of goods which would then be shipped elsewhere in North Africa, Europe, and the Middle East or further afield. Despite a long trading tradition, Libyan trade volumes are relatively small. In total, Libyan imports account for only 3% of all MENA imports. Similarly, Libya is not a major exporter regionally, with one type of product, hydrocarbons accounting for over 95% of its total
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exports. Furthermore, the specialized ports and pipelines required for hydrocarbon exports are not usable for other trade. At a high-level, it appears that there is a greater opportunity to build a transit trade cluster by focusing on By-Trade than focusing on Through-Trade. Figure 32 shows that trade volumes going East-West (By-Trade) are worth some USD 420Bn, split almost equally between southern European imports from Asia (USD 216Bn) and Middle Eastern imports from the Americas (USD 181Bn). North African imports accounted for 5% of trade volume (USD 21Bn). The vast majority (85%) of the By-Trade going past Libya is shipped in containers, tankers or roll-on/roll-off ships, which means that it bears some potential for transit trade activities. By comparison, the value of trade heading North-South (Through-Trade) totaled just USD 2.4Bn in 2003. This figure is the sum of the combined exports (USD0.9Bn) and imports (USD 1.5Bn) of three landlocked countries south of LibyaNiger, Chad, and the Central African Republic.
Figure 32. Trade Values & Main Flows in the Mediterranean with Potential for Transit in Libya (USD Bn), 2003
6.6.2 Transit Trade ClusterEconomic Performance

Transit trade cannot currently be said to exist as a cluster; hence an analysis of the economic performance of this cluster is not relevant at this point. Some Through-Trade takes place, notably recent aid shipments to Niger and Darfur. However, the ongoing level is extremely low, due to overland transport costs and the existence of alternative routes. Similarly, Libyas By-Trade activities are negligible.
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6.6.3 Transit Trade Cluster Business Environment

The overall factor conditions to develop Libyas transit trade activities are weak, largely as a result of poor physical infrastructure and inadequate human capital, but also due to changes in the structure of world trade. Libyas coastal location has historically made it a natural depot for both East-West and North-South trading. However, East-West trading now dwarfs North-South trading, and with increased volumes has come increased competition. Libyas location, a oneday deviation from the main East-West shipping lane, puts it a disadvantage relative to competitor hubs in the Mediterranean. Libya is neither a major importer nor exporter, and neither does it possess a major transshipment hub. Thus its ports and other infrastructure are relatively undeveloped compared to those of its immediate neighbors. Libyan ports are substantially smaller than in other Mediterranean countries; for example no Libyan port can host big ships (postPanamax Size) due to insufficient draught. Furthermore, Tripoli Port is considered to be dangerous due to several cracks in the breakwater wall. There is no IT infrastructure supporting electronic data exchange between the port and vessel. Quay and yard equipment do not meet transshipment requirements and are often out of order, and inter-modal integration is sporadic, at best. Road infrastructure is reasonable but not on par with the best in the regionfor example, there is no road to the southern border of the country. Finally, despite two decades of planning and discussions, Libya still does not have a railway system. Trading and port activities demand a variety of specialized skills and occupations, which can only be developed through training and experience. Given low trade levels, Libya lacks the specific skills necessary for transshipment and/or value-added service operations.

In terms of competitive intensity, the relevant competitive market for Libyan transit trade is the wider Mediterranean, where fierce competition exists for transshipment business. Libyas transit trade plans face strong competition in this region from already-established free trade zones and transshipment hubs, which are often better-positioned and betterresourced than Libyas ports. Libyas main competitors are Algeciras (25% Mediterranean transshipment share), Gioia Tauro (24%) and Marsaxlokk (12%). These ports benefit from having either a potent hinterland market or from their locations proximity to the main shipping routes through the Mediterranean Sea. In the last few years, there have been some key structural and regulatory developments relevant to transit trade. Recent changes include lifting trade tariffs for most goods imported to Libya as of August 2005, and implementing a law on Free Zones in 2000. The
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Misurata Free Zone (MFZ) is also expected to become operative in 2006. The MFZ is expected to generate developments in steel-and-oil-related activities, due to its proximity to the Libyan Iron and Steel Company (LISCO) and to a local oil refinery. Substantial interest has been shown so far by many foreign companies in engaging in trade and warehousing operations Within Libya, there is little or no competition in the kinds of on-land services required for transit-tradehandling, warehousing, transport and logistics management. However, the Misurata Free Zone is expected to increase competition by both attracting international players and encouraging local companies to develop in these areas.

The volume of transit trade in Libya is negligible at present. However future international demand conditions in transshipments appear positive (see Figure 33). By 2012, there is likely to be a shortage of Mediterranean transshipment capacity if investment does not increase.
Figure 33. Origin/Destination and Transshipment Supply and Demand Balance, Mediterranean Sea, 19962015
Libyas ability to capture this increased transshipment trade may be limited, due to its location, as mentioned earlier. The transshipment business is highly competitive, and shipping lines can easily switch between hubs, unless they have made significant investment in a ports infrastructure. Shipping companies require the latest container handling infrastructure and competitive handling rates; hence ports need substantial scale to be profitable. It may be possible to utilize some of this upgraded storage and handling infrastructure for exporting agricultural produce and fish, to offset the cost of
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investment. Libya might also be able to leverage its advantages in labor cost, energy cost and port lease fees. One possible option for Libya would be to focus its re-export business on value-added service offerings such as final assembly, repackaging, or customization. A preliminary high-level assessment of exports of white goods (e.g. washing machines) from China to southern Europe indicates that final assembly in Libya might be economically viable (see Figure 34).
Figure 34. White Goods Case: Last Mile Manufacturing, Libya vs. Italy
As discussed earlier, the demand for transit trade on the north/south route is limited. According to the biggest trucking co-operative in Libya, there is only one southbound transport of 20 tons per month across the desert. Even considering informal volumes, the low volume of current trade and the lack of infrastructure would make it difficult to generate value from this business. Shipping goods from the Mediterranean to landlocked neighbors in the south is also economically unviable compared to the West Africa route. The higher surface freight rates and lack of infrastructure in the desert offset the benefits of cutting the distance in half.
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A transit trade cluster does not exist yet, and the supporting industries needed to create one, such as transportation, insurance and logistics industries, are still underdeveloped. Establishing the Misurata Free Zone could help stimulate these types of companies to develop and form a cluster over time. There is no domestic shipping capacity of any reasonable size. GNMTC, the national shipping company, has reduced its fleet size over the past several years due to demand reduction under the embargo, and aging ships. It currently owns only 5 ships, 4 of which are operative. Outside the oil and gas sector, there are only a few international shipping companies serving the Libyan market. Road transportation is fragmented and underdeveloped. The transportation sector is dominated by one-man trucking operations, many of which are part of co-operatives, with only two co-operatives of substantial size, with several hundred members. These cooperatives control market access in high-demand areas such as ports. Trucks are generally old and run-down, as their owners cannot afford replacement investments.
6.7 CONCLUSION
Libya has real opportunities to further develop the advanced energy cluster, and to stimulate the formation of new clusters in high potential areas such as tourism and construction. Agriculture offers potential for providing employment and improving productivity levels. There may be some economic opportunities in specific areas in energydependent industries and in the transit-trade cluster, but given the significant investment required in developing these areas, a detailed cost-benefit analysis is required. These new clusters are important potential sources of new economic growth and diversification. Government policy and actions will have a critical impact on all clusters, given Libyas historically state-run economy and the need for significant support to clusters at an early stage of development. Looking across the five clusters discussed in this section, some consistent themes emerge: the need to invest in infrastructure and skills; the need to stimulate competition and demand so that Libyan industry is globally competitive; the need to ensure adequate capital is available for investment; and the vital need to remove legal and administrative obstacles facing participants in all sectors. These themes are discussed in Chapter 8.
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CRITICAL SOCIAL SECTORS
AN ASSESSMENT OF
Chapter 7.
Healthcare, education and urban planning are vital for the quality of life of Libyas citizens. They are also critical to the countrys long-term economic development. In these sections, we analyze the current situation in each of these three social sectors, identifying key issues and challenges they face. The assessment suggests that, in particular, the government needs to address skill gaps and motivation problems among low-paid health and education workers, ensure clearer roles and leadership in the planning process, and improve data collection mechanisms across all these sectors.
7.1 HEALTHCARE
Free healthcare in Libya is guaranteed by the State under the Health Law of 1973 and it appears that the Jamahiriya has been reasonably successful in raising the basic health of its citizens over the last thirty years. However, while official data appear to show the Libyan healthcare system performing more or less adequately within MENA, accurate data collection is rare, and medical professionals agree that official indicators are not accurate. Those within the system believe that it faces a number of serious challenges. First, service quality in the public health sector is poor, particularly in primary health care, owing to low staff motivation and training and to a lack of equipment. This leads to self-referral to secondary and tertiary care, increased use of private clinics and to Libyans traveling abroad for treatment. Second, public resources are being allocated inefficiently, both in the training and employment of health workers and in the purchase of medical supplies. This problem is exacerbated by the lack of central oversight and authority over local-level government. Finally, increasing environmental and behavioral risk factors are threatening the health of Libyans, leading to increased incidence of non-communicable diseases, poor road safety and water quality, and growing TB and AIDS dangers. Concerted action is required in all these areas to that the Jamahiriya can attain the goals it has set itself on health standards for its citizens.
7.1.1 Healthcare Overview

It is difficult to obtain accurate data on healthcare in Libya. This results in confusing information and can make it hard to understand cause and effect relations. A key challenge for Libya is to develop a functioning health information system. The Shabiabased decentralization of health spending has contributed to the data issue; most records were lost at the time, and data collection on subjects as basic as government spending on
Chapter 7. AN ASSESSMENT OF CRITICAL SOCIAL SCIENCES
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healthcare has been lacking ever since. Nevertheless, data collected by the Inspectorate General for Health for 2004 represents a starting point. Given that caveat, this data shows that the Libyan health system seems to be delivering mixed results. Basic health status indicators for Libya are mixed. Life expectancy and Health-Adjusted Life Expectancy (HALE) are among the best in the MENA region at 73 and 64 years respectively. On the other hand, maternal, neonatal, and infant mortality rates 51 per 100,000 live births, 11 per 1,000 total births and 24 per 1,000 live births respectively are on a par with MENA, but far behind the averages in OECD member countries24. Health services coverage is also mixed. Births universally take place in health facilities and are attended by skilled health personnel. However immunization programs have suffered in the last few years25. As a result, TB, measles and DTP vaccination coverage has dropped substantially, from almost universal coverage less than a decade ago. This may be due to difficulties managing the cold chain of vaccine storage at the Shabia level, which leads to vaccines being unavailable at certain times. Headline health systems indicators show Libyas human resources and level of health service delivery to be in line with that of MENA peers. There are 13 physicians, 48 nurses and 34 hospital beds per 10,000 population (see Figure 35) 26. However, the numbers of health professionals vary considerably across Shabias, from 6.3 doctors per 10,000 in Jdbaya to 28.5 per per 10,000 in Benghazi and from 19.4 nurses per 10,000 in Misrata to 275.8 per 10,000 in Ghat. This variation stems from the absence of central guidelines on correct ratios or control over appointments. Libya has a relatively high number of hospital beds, due in part to the size of the country, but experts estimate that occupancy rates are generally below 50%. There appears to be some room for increased efficiency in this area.
Figure 35. Physicians per 10,000 of Population, International Comparison
24 The Organization for Economic Cooperation and Development, comprising 30 European, North American and other developed economies 25 WHO Libya Country Cooperation Strategy, 2005 26 There is a degree of variation across the different MENA countries on specific elements, but Jordan, for example, has 23 physicians, 30 nurses and 17 hospital beds per 10,000 of population
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In comparison to its MENA peers, Libya spends much less on healthcare as a percentage of GDPabout 3.3%but a similar amount in absolute terms. When adjusted for purchasing power differences across countries, Libya spends only USD 222 per person per annum (see Figure 36).
Figure 36. Health Expenditure, International Comparison, 2002
7.1.2 Healthcare Key Issues

Given the mixed picture that emerges from this partial data, and the data collection challenges that exist, the team has spent a considerable amount of time with leading healthcare professionals in Libya, and with Libyan doctors working abroad, to understand the real problems the system faces. The Healthcare Committee team set up by the General Planning Council has proved a key source of knowledge. Our analysis has found that the system is facing three key challenges, that stem from diverse causes and that will require concerted and sustained actions to remedy. These are: Service quality in the public health sector; Inefficient allocation and use of public resources; and Increasing environmental and behavioral risk factors affecting morbidity and mortality. We look at each of these issues in more detail in the following sections.
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7.1.2.1 SERVICE QUALITY IN THE PUBLIC HEALTH SECTOR

Libyan citizens appear to lack confidence in the public health system. In theory, most patient needs should be met at the primary care level, with secondary care accessed through referral when required. However, the absence of an established general physician/family doctor system drives many Libyans to self-refer by presenting themselves at secondary or tertiary care centers for treatment. For example, Tripoli Medical Centre intended as a specialized tertiary and teaching hospitalestimates that up to 40% of its resources are spent providing basic services, such as accident & emergency and maternity, which could be provided just as effectively at lower levels of care. Over the last decade, key health status indicators such as maternal, neonatal and infant mortalities have remained stagnant or even worsened. Until the problems in primary health care are resolved, these indicators are unlikely to improve. Despite guaranteed free medical care in the public sector, Libyans are opting to purchase private medical care, in order to receive a higher level of service. A recent household survey estimated that this spending averages LYD 263 (USD 200) per year per household27. This money is being spent in two main areas. There is a small but growing private healthcare sector in Libya. This mostly provides primary and basic secondary care through 420 outpatient clinics and 60 inpatient clinics, with a bed capacity of 1,084. This small but growing sector is hampered by policy uncertaintysee Box 3. For more serious procedures, Libyans travel abroad for treatment in Tunisia, Jordan, Egypt, or further afield. The size of this market is unknown, but with the average cost of statefunded trips at LYD 15,000 (USD 11,500) in 2004, they represent a considerable expense to the average Libyan28. There are many causes of these quality problems in public healthcare. The first cause, universally identified by interviewees and the literature, is the poor motivation of public sector health workers. This stems from the salary restrictions imposed by Law # 15. Low motivation and the absence of an incentive structure linked to patient satisfaction leads directly to poor quality service, particularly at the primary care level. Low salaries also exacerbate problems in other areas. They contribute to the lack of Libyan doctors in rural areas, as extra incentives are not available to compensate for more difficult postings. They are also directly responsible for the lack of nurses in hospitals, who invariably resign or transfer to primary care on marriage.
27 Inspector General for Health Annual Report 2004 28 The State spent LYD 60MM (USD 46MM) funding treatment abroad for citizens until 2005
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The standard of nursing care in Libya is also inadequate due to poor quality nursing education. Nursing is not taught to degree level, and curricula are out of date and lacking in clinical experience content. Leading Libyan health education professionals believe that nursing education standards have declined since control of Nursing Institutes was devolved to Shabia level. Some small-scale improvements are being achieved through the efforts of individual hospitals that provide training courses for nurses. New, degree-level courses are also planned by the Health Care Planning Authority. However, Libya remains dependent on expensive foreign nurses for almost all quality and specialized nursing care, and for midwifery. The historically high quality of Libyan physicians, achieved through an excellent education system, and testified to by the enormous numbers now working abroad, is also under threat29. Expanding numbers of medical students have put enormous pressure on facilities and equipment, and on teaching resources. Senior medical experts believe this is creating a decline in standards. During the sanctions, Libyan doctors found it hard to obtain high quality continuous education, and although efforts are now being made to redress the situation with help from doctors of Libyan origin working abroad, a knolwedge deficit still remains. Finally, Libya still finds itself lacking in specialists in a number of key areas, such as anesthesia, cardiology and radiology, despite enormous numbers of medical students, and the funds spent on scholarships for doctors to specialize abroad. There are no independent professional accreditation bodies for doctors or nurses, with the power to grant and revoke licenses to practice based on objective, international standards. The availability of equipment in Libyan hospitals is patchy. While some headline equipment such as MRI machines or CAT scans is available in central hospitals in major urban centers, basic equipment is often lacking, especially in outlying areas. This leads to difficulties in both diagnosis and treatment. Even where equipment is in place, it may not be working due to the lack of qualified technicians to maintain and repair it. The level of computerization at all levels of Libyan public healthcare leaves a lot to be desired, yet it is vital for the accurate maintenance of a health information system and for knowledge transfer with health systems in other countries.
29 There are estimated to be 800 Libyan doctors, who completed their undergraduate studies in Libya before moving to the UK to specialize, working in the NHS in the UK alone
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BOX 3. POLICY INSTABILITY IN PRIVATE HEALTH CARE

The small but growing private health sector in Libya continues to be hampered by the lack of an overall policy approach to the sector from the health authorities. In the absence of a clear and consistent government policy, private clinics face deep uncertainty and cannot afford to invest in their expansion and development. There are several ways in which policy instability creates uncertainty. First, these clinics are granted licenses to operate by the Basic Peoples Congresses (BPCs), but without clear criteria or inspection policies. This leads clinics to fear that their license could be revoked arbitrarily by the BPCs. Second, clinics rely on health care professionals who work in the public sector and transfer to the private sector in the PM economy. A recent decree has barred this dual practice from January 2006, which obviously has serious implications for private clinics. This decree is seen as unworkable since most doctors rely on private work for most of their income, but its existence increases uncertainty for private clinics. Finally, the absence of health insurance means that private providers are restricted to basic activities such as simple operations.
7.1.2.2 INEFFICIENT ALLOCATION AND USE OF RESOURCES

The decentralization process has devolved considerable administrative and budgetary power to the Shabia level (see Figure 37). With no authority over Shabia and lowerlevel health committees, the central health authorities are powerless to enforce or monitor spending requirements through formal methods such as the use of certificates of need30. While it makes some sense to bring resource allocation decisions close to their point of impact, this lack of centrally-determined policy guidelines, or oversight and monitoring systems, or organized information systems, has created the unusual situation that the overall allocation of resources within public health care in Libya is simply not known. What is apparent, however, is that there are cases of resources being allocated and used inefficiently.
30 The Certificate of Need concept was developed in the US and is required prior to expanding the type or scope of health servicessuch as the construction or establishment of a new health care facility, the addition of one or more beds, or the acquisition of medical equipment
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Figure 37. Administrative and Budgetary Structure of Healthcare in Libya
The phenomenon of public sector employment being used as a welfare distribution mechanism is common across the Libyan public sector, particularly in Health and Education. Local control of health budgets has enabled some Shabias to increase administrative and nursing staff to extremely suspect levels, as noted by the General Planning Council Healthcare Committee report. According to figures from the Inspector General of Health, in Ghat 65% of registered health workers are nurses versus a country average of 39%, while in Kufra 64% of health workers are administrators versus a country average of 31%, a figure which is considered high by the WHO. Experts estimate that around 30% of all registered nurses are inactive. Not only is it inefficient to spend health funds on these workers, rather than on real healthcare resources, but there is also evidence that their presence negatively affects the quality of service to patients, due to increased bureaucracy. Speaking about central hospitals, one interviewee commented: If you got rid of 70% of administrators, you could improve the level of service by 30%. In medical education, poor policy decisions are leading to inefficient outcomes. As was already mentioned, medical education has expanded massively, placing enormous pressure on scarce resources, with an ensuing decline in quality. Libya is spending too little educating too many doctors. At present Libya has 15,000 students in medical faculties, compared to just over 9,000 practicing doctors, and a total population of around 6 million. It simply does not need to educate this many doctors. At the same time, there is a major lack of other health workers pharmacists, medical technicians and trained paramedics. Furthermore, the expensive funding of Libyan doctors pursuing
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post-graduate specializations abroad has also been inefficient, as Libya has not derived a benefit from their skills. Faced with low salaries at home, they have chosen to make their careers abroad and Libya has been forced to import expensive foreigners to replace them. Finally, the annual tender process by which medicines and medical supplies were purchased centrally and then allocated to hospitals and health centers has also been massively inefficient. In the Tripoli Medical Centre, several truck loads of out-of-date medicines were dumped every year, at enormous cost. The system has recently been changed, but it remains to be seen whether devolving purchase of medicines and medical supplies to Shabias will lead to better outcomes. At present it has only created shortages. The misallocation of resources described above creates two costs for the health care system and thus for Libyan society. First, spending on the wrong areas creates an obvious opportunity costthe money could have been spent more productively elsewhere. Secondly, inefficient spending, even in the right areas, means that less money could have been spent to achieve the same outcome or that the same money could have achieved a better outcome if spent more wisely.
7.1.2.3 INCREASING BEHAVIORAL AND ENVIRONMENTAL RISK FACTORS

Data on Libyan mortality and morbidity are hard to obtainvital registration and disease surveillance are poor by international standardsbut it is clear that new behavioral and environmental risk factors are having a serious impact on both these measures. These include: an increase in non-communicable diseases; poor road safety; questionable water and sanitation quality; and increase in the incidence of communicable diseases. The incidence of non-communicable diseases cardio-vascular diseases, cancer, diabetes, and chronic respiratory diseaseshas increased markedly in the last twenty to thirty years. Cardiac diseases were estimated to be responsible for 37% of deaths in 2004, with cancer accounting for 13%31. This increased incidence is associated with 4 main risk factors smoking, diet, physical inactivity and high blood pressure which are interrelated. Libya needs both better disease surveillance, to understand the causes and enable early detection, and health promotion campaigns to increase risk awareness and promote health-seeking behavior. Road traffic safety is a huge problem in Libya, accounting for 11% of all hospital deaths, with accidents the third highest cause of hospital morbidity. Despite far lower levels of vehicle ownership, Libyas road death rate is more than three times that of the European Union, and almost three times the MENA average (see Figure 38).
31 This data from the Inspector Generals Annual Report 2004 is based solely on deaths in hospitals as general vital registration statistics are not available
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Figure 38. Road Fatalities per 100,000 Population, International Comparison
Overall road traffic risk is based on 4 individual risk elements. The first of these is exposure to risk, which is related to the amount of traffic in the system. With a lower exposure level than the EU due to lower car ownership, Libyas extremely high level of fatalities indicates a very poor performance on the other risk factors. These are: the probability of a crash given a particular exposure, which is related mainly to driver and road quality; the risk of crash severity, which is a function of speed, car safety features and the use of safety belts etc.; and the severity of post-crash injuries, which relates to the capability of the health system to speedily transport crash victims to a health facility where they will be treated properly. The health system much take its share of responsibility for this poor performance, particularly the failure to promote car and driver safety, and to speedily and successfully attend to accident victims. Turning to water quality and sanitation, official figures show Libya scoring extremely well on key measures, with 99% of the population having access to both improved drinking water and improved sanitation32. In reality, urban sprawl, new developments and dispersed settlement patterns have reduced access to sanitation and water networks. According to the National Physical Perspective Plan, even where sanitation networks do exist, not all houses are connected to the system. As a result many houses are tapping the same groundwater resources when extracting water and disposing of sanitation. A major nationwide plan is now underway to upgrade water and sanitation infrastructure, but will not solve the problem: for example, in Benghazi the percentage of houses connected to mains systems is expected to rise from 40% to 75%33. Poor quality drinking water may contribute to gastro-enteritis being the most common complaint of children being treated in primary care centers in Libya. The incidence of major communicable diseases was successfully brought under control in the 1990s, but tuberculosis is on the increase again, possibly as a result of increased
32 Improved drinking water sources are defined by the WHO in terms of the types of technology and levels of services that are more likely to provide safe water than unimproved technologies. Improved sanitation facilities are defined by the WHO in terms of the types of technology and levels of services that are more likely to be sanitary than unimproved technologies. For further details see WHO World Health Statistics 2005 33 Interview with the Secretary of the Peoples Committee for Planning at the Benghazi Shabia
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emigration from Saharan and Sub-Saharan Africa. Official data, which is very limited, does not show a high rate of HIV/AIDS infection, but is widely thought to understate the problem. Both Libyan and international medical experts have expressed concern about the potential for increase in infection, and AIDS is one of 3 priority areas identified by the Centre for Control of Infectious Diseases. With many immigrants arriving in Libya from neighboring countries like Chad, which has an HIV infection rate of over 5%, medical experts believe that Libya needs both a much better understanding of the problem and concerted policy action on prevention.
7.2 EDUCATION
Two important goals of the Libyan education system are to contribute to the economic, social and cultural development of Libyan society, by improving the skills and abilities of Libyans, and to rapidly raise standards of human development in the society34. This section assesses how Libya is performing on these goals. Despite much progress over the last thirty years, and good basic outcomes, the Libyan education system does not yet fulfill the goals it has set itself, including providing the training and skills that are required to drive the economy forward. Poor quality inputs and a number of severe structural challenges are negatively affecting the education system. Since education is a vital driver of competitiveness, and thus of prosperity, these issues must be addressed for the Libyan people and economy to achieve their maximum potential.
7.2.1 Education Overview

Libyas public expenditure on education is approximately 4% of GDP which is around , the average for MENA countries. Public expenditure from the administrative budget has averaged LYD 1.2-1.6Bn over the past 5 years, with a further LYD 280MM spent on funding Libyan third-level students studying abroad. One of the key success stories of the Jamahiriya has been the improvement in basic education standards of the Libyan people. Libyas education system does appear to be successful in achieving good basic education outcomes. Reported adult literacy levels are among the highest in the region at 82%; with youth literacy reaching 100% and female literacy considerably better than many MENA peers. Primary and secondary school enrolment ratios are also high (see Figure 39).
34 The Development of Education in the Great Jamahiriya, Libyan National Commission for Education, Culture and Science, presented to the UNESCO International Conference on Education, September 2004
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Figure 39. Primary & Secondary School Gross Enrolment Ratios, 2001-2002
Despite these relatively high scores on basic education metrics, the perception of business people in Libya is that the education system is not providing them with the skills the Libyan economy requires. As discussed earlier, in section 5.5.3.5, the LBES/GCR ranks Libya 110th out of the 111 countries studied on the overall quality of the education system. The quality of its public schools, and the quality of math and science education rank marginally better at 84th and 87th respectively. Although these findings seem to contradict the high reported literacy and enrolment ratios, they are supported by other research. Companies in Libya complain that intermediate and tertiary education graduates in all disciplines usually need extensive retraining to make them productive. According to the SME Survey, SMEs are hampered by the inadequate vocational qualifications of their employees, and poor language skills. Furthermore, the strong links between research institutions and business which are typically seen in developed countriesdo not exist in the Libyan economy. LBES/GCR ranks Libya 97th out of the 111 countries in university/industry research collaboration, indicating a serious disconnect between the education system and the economy awaiting its graduates. The discrepancy between official measures and the unofficial feedback also highlights the absence of accurate, standardized, reliable and objective information on Libyan educational quality. Libya does not participate in comparative international studies on the mathematical and scientific ability of schoolchildren, for example. Furthermore, Libyan school facilities and teaching methods are not regularly benchmarked against those of other countries.
7.2.2 Education Key Issues

Despite the lack of accurate information, it is clear that education in Libya has quality issues. These stem from two sources: problems with the quality of inputs, such as
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curricula, teachers and the educational infrastructure; and a number of structural issues. These include the lack of reliable and objective standards, no central body to provide overall planning and monitoring, inefficient allocation of public resources, and a lack of resources in specific areas.
7.2.2.1 QUALITY OF EDUCATION INPUTS

The problems with teaching quality begin with the teachers education level. First, as they are products of the system themselves, their own education is deficient. Second, the majority of basic school teachers in Libya do not have a university standard qualification, unlike the situation in most OECD countries. At the intermediate level, three-quarters of teachers have a university degree. However, the recent introduction of a highly specialized system, discussed later in this section, means that many teachers require extensive retraining to continue teaching at this level. Third, the continuous education of teachers suffered as a result of sanctions; Libyas global isolation meant that Libyan teachers did not have access to global best-practice developments in pedagogical methods. Finally, low salaries compound all these problems as new graduates are not attracted into teaching, and existing teachers are not motivated to upgrade their skills to match changing requirements. The school curriculum is now being modernized after a period in which isolation and policy changes caused it to fall behind international developments in many fields of knowledge. There is also some evidence that teaching time is too limited. With over 5 months of holidays, and the encroachment of non-educational activities into teaching time, children simply do not spend enough time in the classroom. In terms of content, English and other foreign languages have been reinstated in the curriculum, with English now being taught from Grade 3 the previous removal of English has unfortunately left a generation of Libyans without this essential business communication skill. There is also an increased emphasis on information technology, which is taught to students from Grade 5 onwards. These curriculum changes, while laudable in principle, have proven difficult to implement because of a shortage of teachers qualified to teach these disciplines. There are few IT-qualified teachers at the intermediate school level and English teaching, once reputedly the best in MENA, now suffers from a lack of capable teachers. The grade requirements for entry to tertiary institutions have been rising steadily in recent years, as a result of demographic pressure, increased numbers of intermediate school students in the new specialized system, and a slower increase in the number of seats in the best universities. However, there are signs that the integrity of the grading system is being compromised. Assessment conditions are not standardized across Shabias, leading to corrupt grade inflation by schools and Shabias, and cheating by students. The quality of school facilities and buildings deteriorated markedly during the sanctions, and serious investment is required to bring facilities up to the levels required, particularly at intermediate level (see Box 4). Universities are chronically under-funded given the recent explosion in student numbers, leading to a lack of facilities and equipment. For example, a recent report by a UK publishers association reported a total absence of library
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systems, manual or automatic, in the main universities and no detectable evidence of an acquisitions policy of any kind for public libraries35. Education administration is also poor, with very few trained personnel at any level. The use of computers, multimedia and learning aids in general is also way behind international best practice.
BOX 4. SPECIALIZED INTERMEDIATE SCHOOLS

One important recent change to the Libyan education system is the abolition of General Intermediate Schools and the introduction of a specialized system. It was intended that only the 30% of students destined for university studies would enter the specialized intermediate system, with the rest entering the vocational system. Thus the system would better prepare the most academically minded students for future specialization at university level, and provide the remainder with practical vocational preparation for the labor market. Although a potentially useful reform in theory, the way in which this reform was brought about, without fully understanding the consequences for overall education quality, illustrates some of the issues affecting the quality of Libyan education. At the time the specialized schools were introduced, an adequate curriculum for each of the many specializations did not exist, although this is now being addressed. Furthermore, there were not (and are still not) enough trained teachers capable of delivering these specialized subjects at this level. 56% of all intermediate students are studying in engineering, basic, or life sciences schools, but schools are not equipped with the correct facilities such as laboratories, nor have new funds been made available to upgrade them. The separation of academic and vocational students at the age of 15, and the degree of specialization forced on the academic students, are both controversial. These reforms were not led by education experts within Libya, and the focus on specialization contravenes current best practice thinking on the appropriate way to structure secondary education. The increased emphasis on vocational education has met with strong resistance due to a clash with traditional Arab and Libyan values, which place a premium on academic and theory-based education, and on professional rather than vocational work. The objective of the reforms was to create much-needed, skilled vocational and knowledge workers to better meet the needs of the economy. However, the numbers of intermediate students studying the different specializations does not seem to correlate to the number of places available in these subjects at university or to the requirements for knowledge workers in the Libyan economy. As an example, there are now 88,000 intermediate students studying the medical/life sciences specialization, yet Libya has just 9,000 doctors in total and its annual requirement of new doctors is much less than that. The increased numbers of students studying specific subjects at intermediate school has helped fuel an increase in university student numbers in popular courses such as medicine. Indications are that resource-strapped universities forced to accept a number of students far exceeding their capabilities fail many students in the first year, leading to high drop-out rates.
35 PA Unsupported Mission to Libya, April 2005, UK Publishers Association
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7.2.2.2 STRUCTURAL CHALLENGES IMPACTING QUALITY

A number of structural challenges are damaging Libyas ability to delivery the quality of education the country requires. The most serious negative factor is the absence of any central body with overall responsibility for formulating education policy, setting standards, managing and coordinating the different levels of education provision, and planning for the future requirements of the system. No body is responsible for assessing the future skills requirements of the job market, which need to be balanced with the supply of young people coming through the education system. As discussed earlier in our assessment of the microeconomic business environment, this is one of the main reasons for the large mismatch in skills. Similarly, the kind of integrated thinking required for education reform identifying the implications for curriculum, human resources, teaching resources, school facilities, and communication with parents and students regarding the introduction of specialized intermediate schools, for example simply does not happen. Three main bodiesthe National Centre for Education and Training Planning, the General Peoples Committee for Manpower and Training, and the Secretariat for Higher Educationcurrently share responsibility for the different levels of the system (see Figure 40), but this is coupled with the important decentralized power of the Shabias. The experience of other countries has shown that both a central authority and continuity of institutions are essential for education reform to succeed. This is a key area to be clarified for the education reform process to move forward36. A second barrier is the fact that there are no mechanisms for external stakeholders to give input into education planning and management. A continuously improving education system needs to be open to the views of those within the system, and the views of those who receive its products: industry and the wider economy. Industry has no focal point for coordination and collaboration. Libya also lacks an effective teachers union or a similar body that can communicate bottom-up inputs based on hard facts. Parents also have limited opportunity to contribute to the education debate or influence inputs to the system.
36 Corrales, J. (1999), The Politics of Education Reform: Bolstering the Supply and Demand; Overcoming Institutional Blocks, The Education Reform and Management Series Vol. II No. 1
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Figure 40. Overview of the Libyan Education System
Third, the absence of data on education expenditure allows continuing inefficiencies in resource allocation. As with many other areas of government expenditure, precise data on how education spending breaks into its constituent parts is simply not available. Finally, Libya has too many teachers, too few of whom are actively teaching. Official figures on number of teachers per capita show Libya has many more teachers at both primary and secondary level compared to benchmark countries, with 3,643 primary teachers and 1,051 secondary teachers per 100,000 population (see Figure 41). Teacher absenteeism is a big problem . According to the National Centre for Education and Training Planning, at least one-third of the 194,000 basic education teachers are inactive.
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Figure 41. Teacher Density, International Comparison
There is a significant opportunity cost of employing so many absentee teachers for welfare purposes. It means that Libya is diverting funds which could be more productively spent addressing the quality issues described above. For example, these funds could be used to re-educate existing active teachers, and motivate them to improve by paying them more, and they could be used to address the serious deficiencies in school and university facilities.
7.3 URBAN PLANNING

The conflict between the requirements of land for agriculture and for urban development presents the key challenge for urban planning and development in Libya. Successful planning and implementation requires extensive coordination and datasharing between government and private entities on both a national and local level, but this has proved hard to achieve. Plan formulation has suffered from poor definition of roles and a lack of data, and has not taken into account the requirements of economic development. Plan implementation has not been accorded the necessary level of importance and thus funding, resulting in delays, widespread contravention of the plans, and a lack of serviced urban development land. The 3rd Generation National Physical Development Plan (3GPP), now underway, offers an opportunity to regain control of planning in Libya and lay the foundations for the next stage in the countrys development, which must be grasped.
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7.3.1 Urban Planning Overview

Only a very small percentage of the countrys area the land located along the Mediterranean coast is habitable or agriculturally usable, for physical and climate reasons. As the major urban centers of Tripoli and Benghazi, which together account for around two-thirds of the countrys population, expand, they are encroaching on the two main agriculturally-productive regions in the country, the coastal rain-fed plains of Jifarah and Jabal Al Akhdar.
7.3.2 Urban Planning Key Issues

The physical development planning process is composed of two distinct phases, plan formulation and plan implementation.
Plan formulation involves the drawing up of physical development plans for national, regional, sub-regional and settlement areas. These need to balance the competing spatial requirements of society from government, individuals and businesses against the supply of land, public services and other resources which the country possesses. Plan implementation is the application of the formulated plans. This typically means ensuring that the relevant public services and infrastructure are in place to allow new development, monitoring and controlling land use to ensure that it conforms to the plan, and sanctioning contraventions.
These phases are mutually dependent one cannot be deemed successful without success in the other and both require substantial coordination between different actors, public and private, to achieve developments which benefit the whole of society. The issues associated with both these phases, and with the 3GPP are examined below. ,
7.3.2.1 PLAN FORMULATION

Urban planning in Libya has focused primarily on the first element of urban planning plan formulation. Detailed long-term national, regional, sub-regional and settlement plans were prepared in two previous generations of planning documents, while a delayed 3GPP is now underway. Due to local skills shortages, these plans were often prepared by foreign consultants, in conjunction with the Urban Planning Agency37. Formulation has been seen as a technical rather than strategic process, and has not received the high-level government involvement and support it required. As a result, key questions have been left unaddressedfor example, the conflict between urban and agricultural land use mentioned above, or the vision of how urban development should relate to and support economic development. Consequently, planning has focused on the designation of land for various uses but has paid little attention to the requirements
37 For example the 2nd Generation of Tripoli Region Plans were designed by a Polish consulting company
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of the private sector, in terms of zoned land, and to the economic realities and consequences of development38. Libya suffers from serious deficiencies in data collection in many areas and planning is no exception. Plan formulation has always suffered an absence of accurate data on either the spatial requirements of the different sectors or on the availability of land, public services and other resources to satisfy those requirements. Plan formulation has also suffered from a failure to define clear roles, responsibilities and hierarchies. Planning is a major multi-institution government effort which requires extensive coordination and data-sharing between many different institutions and external actors on both a national and local levels. These institutions and actors include the Urban Planning Agency, General Peoples Committees and their Shabia and Basic Peoples Congress counterparts, Shabia officials, Secretariats of Peoples Committees at the Basic Peoples Congresses, public utilities companies, local and international experts and planning consultants. Without clear roles, the necessary coordination and cooperation has never occurred, and plan formulation has suffered as a result.
7.3.2.2 PLAN IMPLEMENTATION

As noted above, planning effort in Libya has focused on formulation. However, implementation has been a more important challenge, and has suffered from lack of attention and funding. There are several implementation issues which need to be addressed. Clear accountability for implementing and monitoring urban plans has never been established. This problem has been compounded by institutional instability and changing administrative boundaries. The lack of coordination between government providers has hindered provision of the public services and infrastructure outlined in urban plans. Local level institutions are responsible for monitoring urban land use and sanctioning contraventions to existing plans, but do not have adequate funds or personnel for these tasks. Private sector involvement in settlement development is gradually increasing, but is not yet adequate to undertake development activities which have been postponed by the public sector. Skills training in urban development management and professional retraining courses are not widely enough available. These problems, together with a long delay in the 3GPP and policy instability on property ownership, have reduced access to urban development land. This is forcing new developments out into rural areas, which may or may not be zoned for residential development. Agricultural land is thus suffering from creeping urbanization, which
38 National Physical Perspective Plan 2000-2025
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is creating linear coastal belts. It is also causing environmental damage, both through depletion and pollution of underground water resources and the pollution of coastal waters. Furthermore, as urban creep invades the land between settlements, contiguous urban zones are formed, making it more difficult to formulate and implement urban master plans and transport plans.
7.3.2.3 THE 3RD GENERATION PLANNING PROCESS (3GPP)

Libya is currently in the initial phases of the 3rd Generation National Physical Development Plan scheduled for completion in 2008. Discussion of the 3GPP dominates all conversations on planning in Libya today. The 3GPP follows on from the previous generations of plans but has been delayed by several years. This has led to a situation where violations of the plans have been tolerated, particularly the creeping urbanization of agricultural land near cities. It is vitally important that the Libyan government uses this opportunity to recover control of the urban development process, and focuses on improving both plan formulation and implementation. The Libyan government has recognized the need to reform the plan formulation process and the unique opportunity which the 3GPP provides to do this. For the first time, the four national consulting offices are working together to implement a GIS system. This will enable accurate mapping of existing land use and public services and infrastructure availability. This system will prove invaluable to future planning efforts. The forecasting of demand requirements remains a serious problem, however. For example, population and census datavital for any serious forecast of housing demand and economic developmenthas not been updated since 1995. The date for the next census, planned for mid-2006, is still uncertain, due to disputed administrative boundaries. Planning bodies know that a massive housing shortage exists, due to the withdrawal of the state from provision of public housing during the 1980s. Though the General Planning Council estimates that 420,000 housing units will be required over the next 10 years, lack of accurate population data makes it difficult to assess the real housing demand.
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CONCLUSIONS: KEY THEMES FROM THE COMPETITIVE ASSESSMENT
Chapter 8.
Based on our detailed assessment of the Libyan economy (Chapters 5, 6 and 7), seven key themes emerge. These themes are summarized in this chapter. The action program required to address the issues they describe is discussed in Chapter 9.
8.1 Libya is the wealthiest country in North Africa, and appears to have a relatively equitable distribution of wealth amongst its people, but productivity remains a challenge
8.1.1 Libyas per capita income is comparatively high as a result of its oil production and it appears to be doing fairly well in distributing this income among its population
Libya has registered strong growth in prosperity over the last few years, as measured by its GDP per capita, adjusted for purchasing power. It is now among the most prosperous countries in its peer group. Nevertheless, given its available resources, Libya has the potential to increase its prosperity still further and to catch up with the income levels of the most developed countries of the world. Libya appears to be relatively successful in distributing this wealth to its people. The widespread provision of social services such as health care, education and housing is a measure of this equitable distribution, although service quality is less than optimal. At the same time, there are approximately one million needy Libyans, and the government is taking steps to address their needs. If the energy sector was more productive, Libya could have even greater prosperity and the available funds for distribution could be increased further.
8.1.2 High wealth has not translated into high productivity in the economy, which remains a major challenge
Libyas oil wealth has not translated into a high level of productive employment. Outside the oil and gas sector, labor productivity is particularly low. In effect, Libya has two economies: a high value/low employment energy sector and a low value/high employment non-energy sector. While oil accounts for more than 60% of GDP it only , provides employment for 3% of the population.
Chapter 8. CONCLUSIONS: KEY THEMES FROM THE COMPETITIVENESS ASSESSMENT
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While Libya benefits from the advantages of oilincreased prosperity and available capital for investmentit has not been able to avoid the negative effects that are seen in most oil-dependent economies: volatility, increasing dependence on oil, a weakening of market-oriented institutions, and an institutional pre-occupation with wealth distribution. Possibly the most damaging impact of oil is the creation of a mindset among Libyans that the most effective way to improve their prosperity is to capture more handouts, instead of earning or creating wealth through entrepreneurship and productive enterprise. Export figures also support the view that while oil dependence and oil revenues are increasing, there is no positive carry-through to increased exports or productivity in the rest of the economy. In fact, Libyas non-oil exports are very small and declining; only the tourism sector is growing, and this is from a small base of less than 1% of MENAs inbound touristsmost of which are business visitors for the oil industry.
8.2 This wealth is inefficiently redistributed through the social sector, which lacks standards and good management
8.2.1 Basic education enrolment is high, but the sector lacks appropriate standards and there are significant skill gaps in the workforce
A key success story for Libya has been the improvement in the basic education of its people. Literacy levels, along with primary and secondary enrolment ratios, are among the highest in the MENA region. However, the educational system still leaves a lot to be desired, especially at intermediate and third levels. According to the Libya Business Executive Survey (LBES) and the Global Competitiveness Report (GCR), Libya ranks 110th of 111 countries studied on the overall quality of the education system. Job readiness is clearly a major challenge. Companies in Libya complain that the graduates in all fields of study require extensive retraining before they can become productive. These quality problems stem from two sources: fundamental structural problems in the educational system; and the poor quality of inputs such as materials, teachers and educational infrastructure. The structural problems occur throughout the system. There are no objective, reliable standards for achievement and certification, and no central body to manage overall planning and monitoring. Resources are allocated inefficiently at various levels. Devolved decision-makingwhich allows the Shabias to control their own education spending has led to lack of coordination and inefficient allocation of funds. The second source of the quality problemsthe low quality of materials, teachers and the educational infrastructureis also widespread. Too few school teachers are educated to university-level, and there is a shortage of teachers in newer specialized areas. Curricula
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are not fully up-to-date; and the necessary investments in facilities and teaching resources have not been made.
8.2.2 Healthcare has been in decline for more than a decade with many Libyans seeking treatment through the private sector and outside the country
Basic health status indicators for Libya are mixed. For example, official figures show that Libya performs well on life expectancy and availability of doctors and beds per capita, but is below average on maternal, child and infant mortalities, immunization rates and health expenditure. Three major themes emerge in the health sector. First, there is a lack of confidence in the public health system, and Libyans often refer themselves to private hospitals or travel abroad for treatment. A key factor driving this lack of confidence is the low wages paid in the public sector, which lead to low motivation and a shortage of specialists and rural doctors. Other factors include the low quality of nursing care, problems in primary and continuous medical education, and limited access to medical technology, especially outside major cities. Second, public resources are allocated inefficiently. The decentralization of expenditure decisions to the Shabias and BPCs, without clear central guidelines or controls, means that at least some Shabias appear to be spending inefficientlyfor example, the ratio of doctors to other healthcare professionals varies dramatically from one Shabia to another. In addition, Libya is spending too little money educating too many doctors, but not enough on training other healthcare professionals like nurses, paramedics and medical technicians. Third, Libyans are very vulnerable to environmental and behavioral risks. Cases of cardiovascular disease, cancer, diabetes and other non-communicable diseases have risen sharply in the last 20 years, with changing lifestyles. Road safety in Libya is extremely poor, with deaths from road traffic accidents at almost 3 times the MENA average. Access to safe water and sanitation is also a problem; the official figures of high coverage are contradicted by reports from experts and by anecdotal evidence suggesting low access and quality. HIV/AIDS and tuberculosis incidence is also rising.
8.2.3 Housing is constrained and will soon place pressure on living standards, especially in urban areas
Public housing programs were a key feature of in the 1970s, but these programs were suspended in the 1980s when low oil prices reduced government funds. Poor urban planning and, in particular, poor implementation of agreed plans has reduced the supply of land available for urban development. At the same time, the uncertain legal position
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on property ownership makes private individuals and companies unwilling to invest in residential property construction, either for personal use or for the rental market.
8.3 Libyas wealth is highly dependent on the energy sector and other high potential clusters are inadequately developed
8.3.1 The energy cluster is the most productive, but it must address a broad range of issues if it is to optimize its performance and potential to provide funds for the rest of the economy
Libya needs to considerably increase funding for upstream oil and gas activities if the sector is to optimize its output and remain a key source of wealth for Libya. The under-funding of the NOC has led to sub-optimal development of existing oil fields and discoveries. If not reversed, this will lead to declining production levels in the near future. Libya has the potential to raise production above 3 mbd, together with enough gas to meet all domestic needs and double the present level of gas exports. A considerable increase in funding is required to achieve thisthe NOCs annual budget for capital and operating expense would have to be almost USD 3.5Bn a year, nearly double current levels. Alternatively, consideration could be given to different arrangements for dividing the costs of future investment between the NOC and the IOCs. As compared to keeping production flat at todays 1.8 mbd, the benefits to the country could be an additional USD 9Bn per year of net cash flow. However, the under-funding of the NOC has led to sub-optimal development of existing fields and discoveries. If not reversed, this will lead to declining production levels in the near future. Even with a better balanced approach, 2015 is the earliest date by which 3 mbd is likely to be reached. Institutional and behavioral changes will also be required:
with the development of integrated gas projects;
To streamline the relationship between government and the NOC, increasing its
flexibility, and speeding up decision-making in the sector; and
To improve access to key business information that hampers planning when it is

absent.
The extra cost of expanding oil and gas production could largely be saved by eliminating growing imports of motor fuel. This could be done through refinery upgrades to better match product output with domestic demand. Our analysis indicates that these product imbalances cost Libya USD 800MM in 2004. With no change to the domestic refining system, the annual cost of this imbalance could rise to USD 1.5Bn by 2010. In the petrochemicals sector, there are opportunities for economic growth and diversification by switching to the use of Natural Gas Liquids (NGLs) in place of naphtha. NOCs access to a large, low cost resource base of NGLs offers the prospect
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of a strong competitive position in the global chemicals sector. Libya may also possess some logistical advantages over Middle Eastern producers with low cost feedstock and emerging petrochemicals sectors. Libya needs to both increase its electricity generation capacity and to use that capacity more effectively, both in generation and transmission. Our analysis indicates that GECOL will accumulate a deficit of USD 8Bn between 2005 and 2015, taking account of demand growth, investment needs and current pricing policies. This situation undermines any incentives to improve performance. Simply by substituting gas for diesel as a boiler fuel, GECOL could create value of almost USD 500MM per annum. GECOL must also continue to make progress in developing its organizational and managerial capabilities. Close coordination will also be needed with the NOC, in planning gas development and infrastructure. Finally, Libya needs to re-examine its system of fuel price subsidies, which affects all oil products, gas and power supplied to the domestic market. Moving away from fixed fee subsidies would improve resource allocation and efficiency. A given level of final price to consumers could then be achieved at lower cost to the economy. There would be even greater savings if subsidies were more narrowly targeted.
8.3.2 Other high potential clusters like tourism are not adequately developed
Tourism offers direct benefits in terms of generating domestic revenue, but it also creates significant additional spillover benefits for the whole economy. It generates employment, stimulates infrastructure creation such as roads, airports, telecommunications that improves living conditions for local citizens, and leads to a transfer of skills and know-how to local workers and entrepreneurs through foreign investment. Some progress has been made to develop the sector, for example through the Tourism Master Plan of 1998, but the plans major recommendations have not been implemented. Fundamental barrierssuch as visa processing bureaucracy and the poor quality of infrastructure still remain. Other potential clusterslike construction and transit tradeare also poorly developed.
8.4 Productivity outside the energy sector is very low, and the public sector employs a majority of the formal workforce
8.4.1 Productivity outside the energy sector is very low
Libyas non-energy sectors contribute only 40% of Libyas GDP while employing 97% of the formal workforce, which is an extremely low level of productivity. In the past decade, there has been no significant improvement in the efficiency or productivity of business enterprises outside the energy sector. A cross-country analysis shows that Libyas GDP per capita is much higher than its Business Competitiveness Index (BCI) would suggest
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it should be. If oil wealth were to be discounted, Libya would have very low GDP per capita, given its current level of business competitiveness.
8.4.2 The public sector is the primary employer in the formal sector
Public services including education, healthcare and other services contribute only 9% to Libyas GDP but employ 51% of the formal workforce. Employment in public services , doubled between 1999 and 2003, while overall formal employment grew by only 12%.
8.5 The domestic private sector could enhance productivity and prosperity, but is restricted by an inefficient public sector and a very unfavorable business environment
8.5.1 The economy is dominated by state-owned enterprises (SOEs) that are often inefficiently run and do not grant contracts equitably
The vast majority of assets and enterprises in Libya are owned by the government, either directly or indirectly. This portfolio performs inefficiently for a number of reasons. Organizations within it suffer from mixed and sometimes conflicting objectives for decision-makers, with efficiency and profitability goals on the one hand, and other policy aims such as wealth distribution on the other. SOE managers are not encouraged to maximize the efficiency of their operationsgovernment salaries are low and not linked to performance, and give them little incentive to improve performance. SOEs also have a poor record of paying their suppliers on time. Since SOEs are the primary customers for many private suppliers, this creates working capital issues and distorts capital allocation in the private sector. SOEs also get preferential access to credit from banks, siphoning off investable funds that would otherwise be available for the private sector. In addition to being inefficient, the SOEs also operate inequitably. Contracts are often granted through personal and patronage networks, rather than through a fair and transparent process.
8.5.2 A paralyzing combination of regulations and policy instability make it extremely difficult for private business to grow and prosper
Private businesses are being stifled by excessive bureaucratic red tape and an uncertain policy environment. Despite the increasingly positive attitude of senior Libyan officials towards business, potential entrepreneurs face a battery of procedural requirements. On average, it takes 100 days to start a new business in Libyathe longest delay amongst MENA-member countries. A recent decree has stipulated that it should take no more than 10 days from the date a company files for registration until a final decision is taken. It remains to be seen how effective this new decree will be in practice.
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8.5.3 The private sector finds it difficult to access appropriately-priced capital or basic banking services
Lack of ready access to capital is the most serious hurdle for small businesses, with the majority (67%) of SMEs finding it hard to access bank financing. Banks tend to follow a defensive lending policy, holding substantial parts of their funds in liquid assets instead of lending to the private sector. This happens for a few reasons: the lack of standardized and reliable information on the risk profiles of borrowers; the lack of adequate collateral available to small borrowers (itself due to the limited supply of privately owned land with undisputed title); and limited incentives for bank managers to actively make loans. This mismatch of supply and demand means that many genuine business ideas remain unfunded. Also, many foreign investorsincluding the Libyan diasporacontinue to shy away from investing in Libya. In addition, Libyan businesses are frequently unable to access basic banking services that are standard in most developed and emerging countries. The core elements of the financial systemclearing systems and payment facilitation serviceswhich would allow small businesses and consumers to transact quickly, conveniently and at low cost, are very underdeveloped by international standards.
8.5.4 Due to the barriers to private enterprise most private sector activity is concentrated in the informal economy
More than 180,000 private enterprises are officially registered with the Libyan tax authorities. However, there are many more unofficial enterprises, and the size of the informal economy is estimated at 30-40% of Libyas official GDP These small enterprises . lack scale and efficiency, avoid paying taxes, and have low standards of quality, all of which hinder productivity. Many informal, small-scale enterprises are run by public-sector workers, supplementing their low wages. Others are reluctant entrepreneurs46% of the entrepreneurs surveyed would prefer to be working in a government job.
8.5.5 These distortions lead to low levels of innovation, efficiency and productivity in the Libyan economy, and hurt enterprise, job creation and consumer welfare
Due to the distortions discussed, innovation activity in Libya appears to be lowLibyas capacity to innovate was ranked last of 111 countries, according to the GCR and LBES surveys. The result of the distortions is also bad news for Libyan consumers. Monopolies and low levels of competitionLibya ranks 95th and 110th respectively on these measuresreduce choice, raise prices and inhibit the efficiency of society as a whole. Half-hearted attempts at reform and failed privatization efforts, like those initiated in the banking sector, are ultimately counterproductive in as much as they create the appearance of reform but
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fundamentally create no value for the country and its people. The government needs to restructure its approach to SOEs as a cornerstone of building the capacity for Libya to become more innovative. Overall, the lack of a vibrant private sector hurts job creation and diversification of the economy outside of the energy sector.
8.6 Essential foreign investment is limited, due to the challenges of the business environment and an effectively anti-FDI policy
FDI brings an inflow of new technology, business techniques, world-class training and additional access to new export markets, as the examples of other countries like Singapore and Malaysia have shown. However, Libya ranks poorly in FDI promotion, and there is a disconnect between its FDI potential and actual performancea 2001 UNCTAD study ranked Libyas FDI potential in the top 50 countries in its sample, but Libyas FDI performance was not even in the top 100. FDI in Libya is low for many reasons. First, because there are no standard guidelines for FDI, all applications have to be cleared by the Libyan Foreign Investment Board on a case-by-case basis. Although the process is supposed to take three to six months, approvals often take up to a year (compared to a few days or weeks in many emerging economies). Second, a recent decision to increase the minimum threshold for foreign investment to USD 50MM, effectively excludes foreign investors who wish to invest smaller amounts in the past 5 years, most of the FDI projects outside tourism and the energy have been below this threshold. Third, restrictions and delays in granting work permits and business visas, mean that foreign companies cannot get their key personnel in and out of the country without great difficulties. This is despite the fact that most of these companies mainly employ Libyans. Fourth, the uncertain business environment and policy instability weakens the confidence of investors in the Libyan economy. The result of these difficulties is that Libya is losing out on investments that could drive its economic development. It is estimated, for example, that almost none of the substantial FDI committed to tourism projects in 2005 has actually been invested. This represents a lost investment opportunity of USD 3Bn to Libya in one year in this one sector alone.
8.7 Libyas physical infrastructure is weak in many areas and does not provide adequate support to society and commerce
The quality of physical infrastructure in Libya is significantly below regional standards, both with respect to the requirements of the economy and the needs of Libyan citizens.
8.7.1 Information and communication technology (ICT) lags behind regional comparisons and business information is poor or non-existent
ICT facilities are poor in Libya. Fixed line telephone and internet penetration in Libya were the second lowest in North Africa in 2003, while cellular telephone penetration is growing rapidly but is still behind Morocco and Tunisia.
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A key area related to ICT, that underpins the whole economy, is the availability of and access to reliable information. Basic business, statistical and government information resources such as business directories and administrative guidelines either do not exist or are not easily accessible. Hardly any administrative guidelines outlining the various requirements for business are available on the internet Key reasons for the insufficient availability of economic and business information are:
The absence of an integrated information strategy determining economic goals, key

areas of interest, responsibilities and data collection processes;
The frequent changes in the institutional landscape which have lead to changes in
responsibilities and often caused discontinuations of data collection efforts;
The limited and unsophisticated use of information technology: In many cases

relevant data is only available in hardcopy or is on computers which are not hooked up to networks; and
The decentralized administration structures such as the Shabias make data collection
and consolidation difficult and time-consuming.
This highlights the need for Libya to upgrade both the hardware of ICT, but also the way information is collected, distributed and managed. Upgrading Libyas competitiveness can be accelerated through the use of information to facilitate decision-making at an institutional level and risk-taking amongst entrepreneurs.
8.7.2 Physical connectivity through ports, airports infrastructure is weak and requires major upgrading
and
roads
The current transportation infrastructure in Libya will not support increased commerce and transit trade activities. Ports are substantially smaller and below the standards of other Mediterranean countries, and Tripoli Port is considered dangerous due to several cracks in the breakwater wall. Neither the airport infrastructureeven the Tripoli International airportnor the road infrastructure measure up to regional standards. Despite two decades of planning and discussions, Libya still does not have a railway system.
8.7.3 Water supply infrastructure is good at present, but needs to be upgraded to meet the growing demands of the future
Water supply is the only major infrastructure area where Libya fares well, mainly due to the enormous investment made in GMR, the largest public infrastructure investment in the last 10-15 years. However, there are still opportunities to improve the delivery of water to agricultural areas. Most importantly, Libya needs to develop an integrated and sustainable water strategy that balances the supply of water from the GMR, coastal aquifers and desalination plants, with increasing urban and agricultural demand.
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8.7.4 Urban planning has been given insufficient importance

Urban planning in Libya has not paid sufficient attention to the requirements of businesses. Facilities that are standard in most countriessuch as dedicated Central Business Districts in towns and cities, or such out-of-town industrial parks with easy access to transport, good ICT networks and reliable energy and electricity suppliesare notably absent in Libya. This creates difficulties both for local companies wishing to grow, and for foreign companies who might wish to invest. Urban planning has also suffered from lack of data, and from coordination difficulties between central institutions, local committees and other agencies. Most critically, plan implementation has not been accorded sufficient importance and funding. There is widespread contravention of the plans which were made, and a lack of serviced urban development land. The 3GPP which is already delayed, represents an opportunity to , successfully reform both the formulation and implementation processes, and this opportunity must be utilized.
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THE WAY FORWARD: ACTION AGENDA AND PRESSING ISSUES
Chapter 9.
9.1 APPROACH TO ACTION

The purpose of the Action Agenda is to address the key themes and move Libya towards its Vision for 2019, via the intermediate goals that have been set out in this report. This agenda provides a framework and direction for the various specific initiatives that Libya needs to take. Without such a framework there is the risk that the initiatives will contradict each other, or worse still, will give rise to undesirable or unpredictable outcomes that will inhibit the development of the economy as a whole. Over the last five years, Libya has taken some major steps forward, but reforms have been erratic, piecemeal and unsystematic. In some cases, major steps forward have been closely followed by reversals, and there has been little sense of a consistent campaign shared between the government and enterprise, and supported by the Libyan people, to upgrade the economy. Genuinely successful private sector ventures have been exceptions rather than the rule. It is now critical that Libya achieves consensus on one single action agenda that is directionally correct and provides a consistent and coherent program of initiatives. This will become the mandate for the senior members of government and for those that lead the change program. There is a long list of potential actions that Libya can take over the next years to achieve the vision outlined in this document. In choosing and organizing the action agenda, Libya should keep in mind some guiding principles for reform.
Articulate a unique value proposition for Libyai.e. build a unique model with a
distinctive set of goals and actions, rather than emulating other countries too closely.
Identify and build on Libyas existing and potential strengthsan abundant supply
of natural resources, geographical proximity and access to both Europe and Africa, outstanding cultural and historical assets and a ready supply of capitalrather than focusing solely on its weaknesses.
Employ accelerators for developmentsuch as attracting foreign resources

and expertise, engaging the Libyan diaspora, and setting up specialized agenciesto compensate for decades of isolation and enable rapid upgrading of the economy.
Make clear progress on human developmenthealth, basic education, housing and

safety netsin parallel to economic reforms.
Provide migration paths and transition mechanisms for those adversely affected
by the reforms.
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Chapter 9. THE WAY FORWARD: ACTION AGENDA AND PRESSING ISSUES
Ensure cross-country participation through sequenced plans to provide public

services and infrastructure that enfranchise each Shabia and create local ownership.
Some of the reforms will be difficult and painful, and there will undoubtedly be resistance from some quarters to change. However, Libya must change if it is to fulfill its vision. The Basic Peoples Congresses will need to play a central role in deciding exactly which actions should be taken. Leadership will be needed from committed individuals who have the tenacity, vision and courage to carry through the reform agenda. They will need support and resources from the government to succeed in implementing reforms. The senior leadership of the government will need to explicitly show their support for the action agenda, and repeatedly renew this support through reinforcing actions and policy decisions. At the same time, the government will need to monitor the results of the change program and to update the reform agenda on an annual basis as its goals are successively achieved and new objectives arise.
9.2 ACTION AGENDA

There are nine major actions (Key Actions) that Libya needs to undertake to address the competitiveness challenges faced by its economy. In addition, this agenda sets out a number of overarching actions (Key Enablers), which will have a cross-cutting impact on the whole economy
9.2.1 Key Actions

1. Perfect Libyan direct democracy by reducing the current inefficiencies arising from frequent last-minute announcements of the agenda, sub-optimal drafting processes, and the major economic loss incurred by closing businesses for three months of the year. Significant efficiency gains can be achieved through the use of ICT, and by re-designing the structure and processes of the current system. Immediate first steps would be to: a. Conduct a series of pilot projects in several Shabias to disseminate all draft laws to members of BPCs in advance, and allow them to review the laws using web-enabled platforms. b. Move on to stage two of the pilot project by the end of 2006, to include interactive tools that allow greater active citizen participation in preparing draft laws ahead of BPC meetings. 2. Enhance the quality of life for every Libyan through targeted interventions in housing and healthcare. a. Ensure the availability of housing for all Libyans by increasing the efficiency of financing, planning and construction of housing. b. Enable the provision of high quality universal healthcare for all Libyans through new and improved mechanisms for financing, provision and education in healthcare.
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c. Provide social safety nets to those who are adversely affected by the reform process, to help them make the transition smoothly. 3. Drive workforce readiness through a radically improved educational system, that responds to the needs of the job market and through new immigrant workforce policies. a. Initiate targeted improvements to the tertiary and vocational educational system, focusing on ICT, language skills, business management, and hospitality skills. b. Design and roll out a series of online-learning programs that provide low-cost, flexible learning solutions capitalizing on the build-out of Libyas ICT infrastructure. c. Selectively and deliberately recruit the worlds best experts to help develop key areas of the economy where Libya currently lacks resources and expertise. 4. Enhance the productivity and competitiveness of Libyas energy sector. a. Increase investment in oil, gas and power to ensure optimal production levels are achieved quickly, together with adequate transmission and distribution networks. These investments can bring very attractive returns to all Libyans. b. Improve the structure, organization and decision-making processes in the sectorcovering the NOC, GECOL and the government as a wholeto achieve greater speed, efficiency and stability of outcomes. This will mean clarifying roles and responsibilities, raising incentives, providing good quality management information, and improving the techniques used for planning. c. Reduce the growing costs of supply to the domestic market. Refinery upgrades should align output with domestic demand for oil products. Natural gas should replace diesel as a fuel in power stations, and NGLs should replace naphtha as the feedstock for petrochemical expansion. Selling some of Libyas refining and marketing assets overseas could realize good prices and save costs. d. Improve the mechanism for subsidizing domestic prices of oil products, gas and electricity, to improve resource allocation and efficiency. The result would be to achieve a given level of final price to consumers at lower cost to the economy. There would be even greater savings if the beneficiaries were more narrowly targeted. 5. Initiate a program to actively diversify the Libyan economy. a. Design and implement a comprehensive plan to enhance tourism and thus create productive employment for thousands of young Libyans; build regional tourism hubs that will champion the attractions of each area and compete for the most valuable visitors. b. Follow with similar initiatives for other clusters such as construction, energydependent industries, transit trade, etc.
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c. Remove barriers to the flow of goods and resources into Libya by reducing protectionism and promoting an open-skies policy in air transport. d. Set pragmatic and realistic requirements for local employment by new investors, with incentives for increasing employment and a focus on training local citizens. e Assess the potential of regional pacts, such as the Barcelona process, to improve access to major markets for Libyan products and services.
6. Inaugurate a far-reaching entrepreneurship program to catalyze innovation, risk-taking and business formation in Libya, and create the next generation of Libyan entrepreneurs in both commercial and social enterprise sectors. a. Reduce uncertainty in the business environment by ensuring greater stability in both policies and business-relevant administrative infrastructure. b. Undertake a broad-reaching program to drive out inefficiencies and bureaucracy from business-relevant processes. c. Found a Sharia-compliant micro-lending scheme and venture capital fund. d. Promote SMEs through a system of local entrepreneurship centers modeled on successful international models, to ensure training, expertise and capital for entrepreneurship. e. Create a Libyan social entrepreneurship fund to support direct services in healthcare, education, and care for the elderly. 7. Develop Libyas vast rural resources through enhancing agriculture and water management. a. Build and implement an agricultural development plan, focusing on the institutions and standards that will help to re-allocate and upgrade existing agricultural resources, while protecting the environment. b. Design an innovative, pragmatic and sustainable water strategy that enables agricultural development and meets Libyas water needs, while positioning Libya as an emerging centre of water management expertise. 8. Accelerate and organize the reform of the banking sector in Libya to channel well-priced capital to productive enterprise. a. Build a banking infrastructure that meets international standards, with a wide and accessible network, efficient payments and clearing systems, and adequate risk assessment capabilities. b. Give greater autonomy and incentives to state-owned banks to encourage them to lend to the private sector.
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c. Enable the creation of private banks and joint ventures with foreign banks to improve service delivery levels. d. Launch a banking law reform program to address systemic limitations of the present banking laws. e. Promote socially responsible and economically sensible investments of national oil revenues through the creation of a world class Oil Reserve Fund (ORF) for Libyan competitiveness. 9. Design and implement critical infrastructure and clarify property rights to support economic development. a. Ensure master urban and rural plans that reflect the core aspirations for Libya in 2019 are created and implemented in a timely manner. b. Co-ordinate and enhance existing plans for infrastructure, taking into consideration regional needs. c. Identify and speed up the implementation of the high priority items in the master urban plan, in particular the key physical infrastructure such as airports, ports and roads. d. Clarify property rights, so that current uncertainty is dispelled and privately owned land can be leveraged as collateral for loans.
9.2.2 Key Enablers

1. Launch an information, communication and technology (ICT) revolution. a. Formulate and implement a National Information Strategy that identifies and addresses the countrys emerging information needs. b. Launch an e-government initiative that aims to utilize IT and the internet in all aspects of government work and the citizen-government interface. c. Build a statistical institute, with the first major project being to conduct the national census in line with international best practice. d. Make business information widely and easily available through better data collection and distribution, leveraging technology platforms. e. Introduce international standards in accounting reporting processes for Libyan businesses. f. Review the structure and operations of the Libyan telecommunication companies and how they fit within Libyas overall telecoms strategy, with the intention of building at least one mobile company into a world-class operator.
g. Implement a nationwide Healthcare Information System for better surveillance and coordination of healthcare delivery.
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2. Increase momentum of the change program with the establishment of a governance structure comprising special purpose entities that can drive the reform process, rather than an across-the-board re-organization of government institutions. Set up a Libyan Economic Council to advise on and oversee the new governance structure, and a Libyan Competitiveness Agency to drive the competitiveness agenda. a. Create informal and formal structures to foster productive collaboration between Ministries, drawing on the best examples worldwide, so that there is consistency and stability in economic policies. b. Review the existing legal frameworks to clarify areas of confusion and to remove barriers to enterprise. c. Accelerate the pace of foreign direct investment to attract skills, expertise and technology into the Libyan economy. d. Develop and implement an approach to making SOEs more competitive. e Review and optimize the current portfolio of Libyan offshore assets.
3. Educate and empower a new generation of Libyan leaders to rapidly expand the nations capacity to act. a. Extend and enlarge the Phase I Leadership Program using physical and online learning platforms. b. Establish a Leadership Institute with world class resources for identifying and developing promising business leaders. c. Undertake a campaign to attract the Libyan diaspora back home, and to capitalize on the varied expertise and experience that would come with them.
9.3 ACTIONS FOR PRESSING ISSUES 9.3.1 The Importance of Sequencing

Whilst it is necessary that the competitiveness agenda be comprehensive, it is equally important to recognize that the journey of reform will start with a series of initial steps. In some areas it is appropriate for Libya to take action immediately. In other areas, it will be necessary to delay action until a second phase of implementation that builds on the changes made in the first phase. In a third set of areas, Libya will need to further investigate challenging problems, and to observe the outcomes of initial implementation before taking action. Within a few years, the positive effects of a wellimplemented change program will benefit all economic and social sectors and raise standards of living for all Libyans.
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9.3.2 The Principles of Sequencing

Some guiding principles need to be used for selecting the immediate next steps that will need to be acted upon in 2006, emerging from the comprehensive action agenda outlined in Section 9.2. According to these principles of sequencing, the programs that are selected for immediate action should be those that:
Have cross cutting impact across the economy, being the enablers of the reform program; Have the biggest potential to generate economic and social benefit (multiplier effect); Are preconditions for other initiatives and reforms to be successful; Address the lack of capacity to act in Libya, which is a central issue; Are by themselves new initiatives initially, rather than those that aim to make
wholesale changes to existing programs;
Allow Libya to achieve some early victories in 2006, and thereby create momentum
and consensus around the change program;
Show commitment to the cause of reform and display the courage of Libyas
leadership.
9.3.3 The Immediate Action Agenda

Based on the principles discussed above, the National Economic Strategy proposes the following actions to be launched during 2006: 1. Establish and fund a Libyan Economic Development Boardan executive body with strong leadership, that is held clearly accountable for driving a tightly defined reform agenda and for setting up the new governance structure. This agency will have two sets of roles: a. To play an overarching lead role in driving the change process:
Coordinating the economic development initiatives of various government entities, such that mutually consistent and stable policies for Libyas economic development are implemented; Assisting in the setting up of special purpose entities to drive reformsuch as the Libyan Economic Council and the Libyan Competitiveness Agency that will lead to the right governance structure to advise on and implement the required reforms to facilitate Libyas development; and Transitioning the responsibility for execution, management and funding to government entities (e.g. various Ministries, etc.) or other third parties (e.g. integrated technology providers), as these bodies develop sufficient capacity to drive the change process further ahead over time, and to implement recommendations independently.
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b. To drive a set of immediate key economic actions, necessary to start improving competitiveness of the Libyan economy:
Facilitating one-stop registration of businesses, including processing of all permits and regulatory requirements to establish private business; Promoting foreign direct investment, which generates the flow of technology, expertise and employment for the Libyan population; Investigating the appropriate structure of governance and management for the key Libyan SOEs in the medium-term, setting aside any premature plans for privatization; and Starting a campaign to recruit members of the diaspora back to Libya, to bring valuable expertise back into the country.
2. Establish and fund a world-class leadership institute focused on identifying young Libyan leaders and developing their management and leadership capabilities, developing a platform for broad deployment of training programs and development of a core Libyan faculty. 3. Launch a campaign to upgrade the process of deliberative democracy by leveraging ICT (e-democracy), that will allow Libyans in all regions to contribute efficiently and effectively to the program of national development. 4. Announce the creation of special economic status for some high priority sectors and radically upgrade the business environment in these sectors to enable Libyans to become productive in a fair and equitable environment without the constraints of bureaucracy, patronage and protectionism. Amongst other enhancements, this would entail: a. Introducing standards agencies or regulators where appropriate, to ensure that key policiesbusiness registration, taxation, regulation and dispute resolution are applied in a consistent, fair, transparent and efficient manner; b. Opening doors to foreign expertise, technology and investment, as well as to the Libyan diaspora; c. Introducing less restrictive wage environments that encourage the best young Libyan leaders to seek employment in these areas; d. Prioritizing major infrastructural enhancements, some of which can come from a specially nominated fund within the Oil Reserve Fund once it is restructured; and e. Setting up special economic zonesgeographically enclosed enclavesin each Shabia to swiftly implement the business environment improvements for the special economic status sectors, rather than attempting to enhance infrastructure and services everywhere in the country.
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The NES recommends three sectors as being the most appropriate for granting of special economic status: Tourism, ICT and Construction. i. Tourism is an exceptional area in which Libya has strong fundamental advantages that will allow it to compete on the global market. A well-developed tourism cluster will create prosperity and provide employment for many thousands of young Libyans and will generate upgrades in infrastructure and services in a manner that will have great benefits for the local population. It will create productive enterprise throughout the country, and will be important in showcasing Libyas strengths to the world.
ii. Information and Communication Technology (ICT) will be a powerful enabler of the whole economy, and is fundamental to economic development. Libya has a strong engineering and technical tradition, and must engage both local and foreign experts to make major advances in this sector. An effective telecommunications sector will lower the cost of business, bring new people into the workforce and help foster Libyas connections with other nations. This is a sector that is capable of producing Libyas first regional champion. iii. Construction provides a good complement to both the Oil & Gas and Tourism sectors, and is a critical growth sector as the economy expands and develops. If developed well, it also represents a huge employment opportunity for Libya. A program, that builds on the key challenges for the construction cluster identified in Phase I, integrating and iterating with urban and rural plans, and supporting the evolution of the regulatory frameworks, is necessary if the sector is to be a key facilitator of the growth and development process. 5. Assess and aggressively seek solutions to the governance challenges that are preventing the country from optimizing investment in the energy sector. This sector will continue to be the lifeblood of the economy and must receive immediate attention. An integrated action program is needed to support policy makers in the following areas: a. Restructure the sector by redefining the relationship between the NOC and GECOL, the General Peoples Committee for Energy and the rest of the government, to increase the efficiency with which energy policy is set and supervised (by government) and implemented (by NOC and GECOL). b. Develop a range of upstream contracts to accelerate increased production from existing fields and discoveries, and to allow for future bid rounds without the risk of avoidable delays in bringing new discoveries into production. c. Create planning systems that provide clear investment criteria and allow competing projects to be prioritized effectively, both across the sector as a whole, as well as within individual sub-sectors. This is a key requirement, because of the importance of energy to the Libyan economy and the diversity of energy issues to be addressed.
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d. Improve data management to support improved planning and execution in the sector, by increasing the availability and transparency of energy sector information and, more generally, to allow the development of effective management systems. e. Conduct critical issue workshops for the key energy sector professionals and ongoing training and communication across the sector to raise awareness of the need for change and the available options. 6. Develop a National Information Strategy that addresses Libyas short and medium term information needs. a. Undertake a thorough assessment of the information needs of the various sectors. b. Analyze the existing capabilities in Libya and identify the key gaps. c. Develop a blueprint of the information architecture needed to make information a key facilitator of the development process across the various sectors of the economy. 7. Undertake a new banking sector reform, which would include the establishment of a world class Oil Reserve Fund, including funds specifically earmarked to support the economic development plan. 8. Develop blueprints for action that set the foundations for reforms in social sectors, which will have a cross-cutting impact on Libyan society and the economy. a. Improve the quality of diagnosis and treatment in healthcare by launching a world class continuous education program for all healthcare professionals, introducing standardized job descriptions for all healthcare professionals, and starting professional accreditation bodies. b. Start an integrated education reform program, with training as a top priority for the workforce as a whole. In particular, focus on workforce skills, IT and language training that will re-tool the population and prepare them for the wave of economic development.
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ANALYSIS OF THE OIL, GAS AND POWER SECTOR

prepared by Cambridge Energy Research Associates (CERA)
APPENDIX A.
A.1 SUMMARY AND CONCLUSIONS

Libyas oil and gas sector has the potential to raise production to above 3MM barrels per day (mbd) and about 6.5 billion cubic feet (Bcf) per day by 2015. If oil prices were to remain at USD 40 per barrel, the national share of net cash flows from oil and gas production over the next ten years would be USD 90Bn higher than from keeping production flat. Gas production at this level would be sufficient to meet all domestic needs, as well as doubling the present level of commitments to gas exports. A considerable increase in funding is required for oil and gas upstream activities, in comparison to the recent past. The National Oil Corporations (NOCs) annual budget for capital and operating expense would have to be almost USD 3.5Bn a year. This is nearly double current levels, but could yield attractive returnsi.e., an additional USD 9Bn per year of net cash flow. Consideration could also be given to different arrangements for dividing the costs of future investment between NOC and the international oil companies (IOCs). In any case, an extra USD 500MM per year is needed, compared to present levels, just to keep production from falling. Other institutional and behavioral changes will certainly be required :
with the development of integrated gas projects
To streamline the relationship between government and NOC, increasing its flexibility,
and to speed up decision making in the sector
Much of the extra cost of expanding oil and gas production would be saved by eliminating the need for growing imports of motor fuel (up to USD 1.5Bn per year). NOC plans a major upgrade and expansion of its domestic refinery assets, but there is scope to defer significant spending and to maximize the national benefit by keeping refinery output as well matched as possible with the level and pattern of domestic demand. There are also worthwhile savings to be made by disposing of the European downstream portfolio (perhaps USD 3Bn) and by converting petrochemical manufacture to use natural gas liquids (NGLs) as feedstock, instead of naphtha (USD 2Bn at USD 40 oil price). For the gas sector, the main issue is to ensure an integrated development of upstream, infrastructure, and markets. If the infrastructure for gas transmission and distribution were fully developed and the domestic market for gas were well established, then the task of making the most of Libyas gas resources could be handled in just the same way as
APPENDIX A. Analysis of the Oil, Gas, and Power Sector (prepared by CERA)
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oil. As things stand, over USD 5Bn needs to be spent in the next ten years on mid- and downstream infrastructure for gas. This investment could be very profitable. Libya needs more electricity generation capacity and needs to raise the effectiveness with which that capacity is used (in both generation and transmission). The capital cost will be about USD 6Bn, over the next ten years. Given present pricing policies, General Electric Company of Libya (GECOL) will also accumulate an operating deficit of almost USD 2Bn over that periodthis sum is large enough to undermine any incentives for improved performance. Substituting gas for diesel as a boiler fuel would offset almost half of this deficit. It could also earn Libya enough extra revenue to pay for two thirds of GECOLs capital needs. However, the main contributor to GECOLs operating deficit is that the government sets electricity prices and holds them below the cost of supply. The same is true for NOC and its oil product supplies to the domestic market. Domestic gas prices are also subsidized. The annual cost of all these subsidies is USD 5.5Bn in 2005, compared to international parity prices, and would rise to nearly USD 7Bn by 2010 if oil prices were to stabilize at USD 40. It does not follow that, therefore, the subsidies should all be eliminated (the national share of extra revenues from raising oil and gas production would more than pay for them), but there are benefits to be gained by changing the way in which they are delivered. If NOC and GECOL were not remunerated by fixed fees, the subsidies could be delivered at lower cost to the economy. There would be even greater savings if the beneficiaries were more narrowly targeted. We have had great difficulty in obtaining clear, current, and consistent information on Libyas energy sector. This may be because such information does not exist, or because it is thought too sensitive to share. Either way, the problem is serious. Energy projects are large, long term, and complex. If the basic data are not readily accessible, if there is not open discussion of their strengths and weaknesses, and if forward plans are not rigorous and transparent, the chances of successful planning and execution are greatly reduced, whether in Libya or anywhere else. At first sight, tackling all these pressing issues successfully may appear to be a daunting task. However, it is achievable if an integrated action program is adopted to optimize the performance of Libyas energy sector. We propose five themes for follow-up work to support policy makersto refine the sectors structure, review the format for upstream contracts, develop the sectors planning techniques, enhance its data management systems, and conduct a program of training and critical issue workshops.
A.2 UPSTREAM OIL

Libyan oil production averaged almost 1.7 mbd in 2005. Without additional investments, it would soon start to decline. However, there are many existing discoveries in Libya that have not yet been developed. Suppose that, in addition to existing fields, two of these were to be brought into production each year. Further, suppose that a total of 50 exploration wells were drilled each year (similar to the number drilled in 2004), leading
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to the annual development of four new discoveries. This is about the minimum level of activity required to maintain Libyan oil production more or less flat at around 1.7 mbd. On the other hand, the countrys resource basein terms of both existing discoveries and the potential yet-to-findis more than adequate to sustain many years of rising production levels in a manner fully consistent with good oilfield practice. By way of example, suppose that four existing discoveries per year were developed, instead of two, and seven new discoveries, instead of four. Suppose, also, that there were a significant but reasonable effort to increase recovery from existing fields, without damaging the reservoirs. Libyan oil production would rise steadily from 2006, reaching 3 mbd in 2014. Figure A1 shows the total capital and operating costs associated with upstream oil for these two production profiles40.
Figure A1. Upstream Oil Cost Requirements
For the higher profile, the industry would need to spend over USD 4Bn per year, on averagethat is, USD 1.2Bn more, on average, than is required to keep production flat. The year of peak spending would be 2010, at USD 5.4Bn. NOCs share of these numbers would be some USD 2.5Bn per year, on average, and USD 3.2Bn in 2010. Obviously, the value of the oil will depend on the price. We have examined two oil price cases (see Figure A2).
40 The two profiles are based on data provided by NOC, supplemented by CERAs own research and expert judgment on the feasibility, timing, and costs of future activity levels. They give greater emphasis to increased production from existing fields and discoveries than do NOCs own plans, in order to show the scope for accelerated production growth. In our opinion, growth plans that rely mainly on exploration are likely to take many years to be realized. The base profile assumes development of 20 discoveries over ten years and the higher profile assumes 40. These figures represent only a small fraction of the available economic discoveries
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Figure A2. Oil Prices used in Analysis
CERAs view is that global oil demand will grow more slowly in the next few years than its extraordinary pace of 3.4% in 2004. We also see rising productive capacity for oil, all round the world, and increased investment in refining capacity in key regions. Therefore, we do not expect the oil price levels of 2005 (almost USD 53, on average, for Libyas crude) to be sustained. Our USD 40 case is in line with average prices in 2004the USD 25 case shows the impact if oil prices retreat to levels more characteristic of the period from 1995 to 2004 as a whole. Figure A3 shows the two oil production profiles we have just described, and the two parts of Figure A4 contain the net cash flows for each of them, on our two price cases. By net cash flow, we mean total revenue less capital and operating costs, with domestic sales valued at subsidized prices. Figure A4 also shows the total Libyan share of those cash flows, from NOC and the governments take from the IOCs in taxes, royalties, and bonuses. In total, about 90 to 95% of all oil revenues are taken by the Libyan state.
Figure A3. Oil Production Cases
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Figure A4a. Cash Flow to Libya from Oil (USD 40)
Figure A4b. Cash Flow to Libya from Oil (USD 25)
In short, by finding an extra USD 1Bn or so per year for NOC to invest (i.e., to move from the lower production profile to the higher), the government could benefit from at least USD 50Bn in extra revenue over ten years, in our low case for oil prices. The gain would be USD 80Bn at the higher prices. NOCs investment budget has long been cash constrainedin recent years it has run at less than USD 2Bn. This state of affairs had its roots in the embargo period and in the years of low oil prices in the late 1980s and 1990s. But NOC is responsible for meeting at least 50% of the cost of upstream projects. Therefore, if NOC faces cash constraints, the IOCs activities are also restricted. There is one exception to this cash constraintexploration by the IOCs. Since 1974, they have worked in Libya under contracts with NOC called Exploration & Production
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Sharing Agreements (EPSA). These provide for IOCs to bear all the costs of exploration and for NOC to contribute 50% from the start of development onwards. As a result, there is a greater emphasis on new exploration in Libya than there is on developing existing, but untapped discoveries, or on raising production and recovery from currently producing fields. Of course, continuing exploration is importantto improve NOCs knowledge of the hydrocarbon resource base and to maintain reserves. However, there are strong arguments for giving greater attention to increased production from existing fields and discoveries:
From a national perspective, there is little benefit in oil reserves or production per
se. The main benefit comes from government revenues, which are greatest once production has started. Increased production from existing fields and discoveries is available much more quickly than it is from new explorationin general, from three to eight years sooner.
Oil prices are high today, as is the IOCs interest in making greater investments in
Libya. There is no guarantee that the same conditions will apply in five or ten years time, when the results of new exploration will be ready to start production. Indeed, it is more likely that oil prices and the IOCs level of appetite will both be lower then than they are today.
In any case, if Libya fails to raise its production levels now, while prices are high and
demand is strong, it may face OPEC restrictions on its ability to do so in future, if market conditions are indeed different by then. Other OPEC members are also investing in raising their productive capacities.
OPEC sources give Libyas existing proved reserve base as 39Bn barrels. At current
production rates, this already represents a long reserve life of over 60 years. In addition, these reserve estimates often assume a conservative recovery ratefor example, only 26% for potential reserve additions from exploration. Defining and executing more projects to increase recovery from existing fields would raise production, but they would also improve the recovery rate estimated reserve life might rise, rather than fall with the higher production.
In these circumstances, near-term increases in production from existing fields and discoveries ought surely to be important components of any strategy for optimal resource development in Libya. These types of projects require very careful technical and commercial planning, and we recognize they take time to define well enough that investments can be made. They do get some attention, but our quantitative analysis suggests that they deserve greater emphasis and funding even if accompanied by a somewhat lower level of exploration drilling. The benefits to Libya would be considerable, in terms of increased revenues at the governments disposal, over and above the cost of extra funding for NOC.
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However, additional funding is not the only requirement for making progress in this area. Other changes will also be needed to achieve near-term increases in production from existing fields and discoveries:
Given the current enthusiasm by the IOCs for acquiring acreage in Libya and the rapid pace at which the country wishes to award new licences, there is a good case for continuing to allocate most exploration blocks by competitive bidding. This has advantages in both speed and transparency. However, it is also in Libyas best interests for NOC to be free to enter into direct negotiations with specific IOCs (or, in some cases, with an oilfield service company) over: the development of marginal fields, with which the original licensee will not proceed; enhanced recovery in depleted reservoirs; and optimal exploitation of discoveries that are technically highly challenging, require special skills and experience or proprietary technology. The bid rounds can be used as a reference point for the negotiation of terms. No doubt, there will be some differences to reflect the special circumstances of these projects or partners hence, the reason for negotiated awards. However, the continuing bid rounds will create a market context for measuring the results achieved in out-ofround negotiations. One of the obstacles to negotiations on enhanced recovery, in particular, has been a sense that it is very difficult to define the baseline for future production i.e., what would have been realized in any case, without the enhanced recovery. In our view, this is a manageable problem. The Libyan state receives by far the largest share of all upstream revenues. Therefore, the benefits to Libya from increased recovery do not depend on an aggressive definition of the baseline. The value of higher production will greatly exceed the fractional loss of revenue on any marginal barrels that might have been NOCs but are in fact conceded to the investing IOC. Nevertheless, if NOC and the IOC cannot reach agreement on the baseline, or if an objective definition is required, it can always be set by independent reservoir engineers. Given the fields production history and NOCs baseline capital and operating budget, an expert third party will be able to specify a baseline, in accordance with internationally accepted reporting practice.
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NOC requires a new relationship with the government, to speed up decision taking,
increase flexibility, and reduce areas of overlapping authority41. This will involve some streamlining of NOCs organization and management processes, as well as clarifying roles and responsibilities between NOC, the Secretariat of Energy, and the rest of the government. The results would benefit the economy and the country as a whole. NOC would have greater freedom to work effectively, while still being subject to an appropriate level of supervision and control by the Libyan government.
A.3 GAS
Libya is rich in gas resources, as well as oil, although, up to now, this gas potential has been less fully developed. Existing capacity to burn gas in power generation is around 0.5 Bcf per day, although, at present, the actual use of such gas is much less than this. Approximately 0.4 Bcf per day is consumed in the domestic market. Exports to Italy through the Green Stream pipeline began in 2004 and are ramping up towards a plateau of 0.8 Bcf per day. Figure A5 shows the gas production profiles corresponding to our two outlooks for oil production from Figure A3. Gas production can easily be doubled from its current level of around 2 Bcf per day, to 4.4 Bcf per day by 2015. On the higher profile, this volume could be 5 Bcf per day by 2010, before rising further to 6.4 Bcf per day by 2015.
Figure A5. Gas Production Cases
41 The budget-making and audit processes, limitations on contractual choices, contract and project approvals, fiscal arrangements, and human resource policies (including the constraints of Law #15) are all examples of the areas in which both NOC personnel and the IOCs experience significant problems. While some of these examples are a result of existing legislation and its interpretation, others are a result of procedural and behavioral practices
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Two axioms underlie our thinking on the use of natural gas:
The first priority for using gas should be in the domestic market, to free up as much
oil production as possible for export (because Libyas earnings from oil exports will generally be higher than from gas). When gas production exceeds domestic demand, there will then be a need to prioritize different exports options for gas.
The domestic value of natural gas is the netback equivalent from international gas
prices. For Libya, this is assumed to be a netback from the Italian border price, which consistent with our two oil price cases we have projected to be USD 5.25 per Million British thermal units (MMBtu) and USD 2.75 perMMBtu. This approach to pricing gives Libyan natural gas a higher value than in some countries where it is genuinely stranded.
A comparison of our supply outlooks against demand makes clear that there is only a small risk that, by 2015, 4.4 Bcf per day of gas will fall short of the countrys domestic needs and existing export commitments on our estimates, our base case production level should be sufficient:
We would expect 0.65 Bcf per day to be consumed in the oilfields, although we have
also assumed that gas flaring will be reduced from its current rate of about 0.35 Bcf per day to very low levels.
Our outlook for the power sector (see below on generation, improved transmission,
and suggested fuels strategy, in the section on electricity) would result in a maximum gas demand for generation of 1 Bcf per day by 2015.
Other domestic uses, including for water desalination, are unlikely to be much above
another 1 Bcf per day by 2015.
Green Stream requires 0.8 Bcf per day, and the liquefied natural gas (LNG) plant
at Marsa El Brega will absorb 0.5 Bcf per day, once fully revamped by Shell. Small additional volumes are needed for exports to Tunisia.
Moving to the higher production profile would absorb more gas in the oilfields, including requirements for increased recovery from existing reservoirs. Precise information is unavailable on the scale of these requirements, so we have doubled the low case number, as a representative figure giving 1.3 Bcf per day42. Thus, domestic needs and export commitments would total less than 5 Bcf per day in 2015, compared to expected production of 6.5 Bcf per day. Therefore, on the higher profile, gas availability will be more than sufficient for an aggressive development of the gas sector. The most profitable use of the additional gas would be to loop the Green Stream pipeline, so valorizing about half of the surplus gas. Because Italy is so close to Libya, this market offers the highest netback for Libyas
42 The actual figure for reinjection on the high case profile will most likely be less than 1.3 Bcf per day, given a stated preference where possible to use nitrogen or carbon dioxide instead of natural gas
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gas exports. There would then be scope for an additional export project, unless a rapid expansion in domestic demand was imminent. The export options for Libya can be categorized under four broad headings:
Exports by pipeline to Italy; Greenfield LNG; Exports of embodied gasthis refers to use of natural gas in fertilizer production,
methanol, aluminium, and other gas-intensive products; and
Gas-to-liquids (GTL).
The costbenefit analysis of exporting embodied gas needs further evaluation as described in section 6.2.1 of the main document. GTL projects will generate little economic wealth in a country such as Libya where the natural gas feed has higher-value alternative uses. GTL has the extra disadvantage of competing with Libyas own oil exports. The key policy choice is between expanded pipeline exports and LNG. We would expect that pipelines would continue to offer better netbacks than increased LNG exports, provided that offtakers can be found. Libya has a cost advantage over more distant suppliers to the European market, and Europe needs incremental supply. On the other hand, Libya will need to consider an active downstream marketing strategy, probably in association with partners, to ensure that it can access the wider European market beyond Italy. By contrast, greenfield LNG is, in our view, a higher-cost solution likely to lead to lower netbacks and lower earnings for the Libyan economy. Moreover, Libya does not enjoy a clear cost advantage over other LNG suppliers in West Africa or the Middle East. However, LNG, is more flexible than pipe, is able more easily to access markets of choice and to switch between markets based on favorable prices. Hence, a policy argument can be made that the extra cost of LNG might be justified in view of its greater flexibility. The investment cost of developing the higher gas profile would average USD 1.7Bn per year for the next ten years (USD 400MM per year higher than for the base case profile), of which two-thirds would be upstream capital and operating expense. Mid- and downstream gas infrastructure would cost less than USD 6Bn in total. The two parts of Figure A6 show the corresponding cash flows for each of these gas production profiles, net of all the costs. We have used an international gas price of USD 5.25 perMMBtu as corresponding to our high oil price of USD 40 per barrel. USD 2.75 perMMBtu is the gas equivalent we have taken for the low oil price of USD 25 per barrel. We have also assumed that domestic consumers of gas continue to benefit from current levels of subsidy.
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Figure A6a. Cash Flow to Libya from Gas (USD 40)
Figure A6b. Cash Flow to Libya from Gas (USD 25)
Cash flow is always positive, including that from the lower production profile at the lower gas price (i.e. the base case in Figure A6b). In other words, even on thisleast favorable case, the export revenues from gas more than pay for the domestic subsidy.
A.4 FUEL PRICE SUBSIDIES

Figure A7 sets out the true cost of Libyas fuel price subsidies, in terms of international parity pricing. The total is USD 5.5Bn in 2005. The oil subsidy is the largest component, at USD 2.3Bn, accounting for 42% of the total. In electricity, the subsidy is almost as large, amounting to USD 2.2Bn in 2005. This represents a double subsidy for the price of electricity GECOL pays subsidized prices for the oil and gas it burns in generation, and electricity consumers pay less than the cost of supply, even on that basis. Indeed, a high proportion of consumers pay nothing at all (GECOLs transmission and other lossesessentially, nonpayment for electricity amount to 40%). The subsidy on gas is currently the smallest, at USD 1Bn.
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On our high case for oil prices, the total cost of fuel subsidies would be USD 6.8Bn by 2010 (taking account of rising domestic demand and the changes we propose, below, in GECOLs fuel use). The biggest increase would be seen in the oil subsidy, which would rise to USD 3.6Bn or 53% of the total. If oil prices fall back to USD 25, the cost of subsidies would also declinebut only by 38% to a total of USD 3.8Bn.
Figure A7. Energy Price Subsidies
These are all large numbers and, of course, low prices to Libyan consumers for oil products, gas and power do nothing to discourage rapid growth rates in the domestic market. For example, Libyan demand for gasoline has been growing at 7% per year. Rapid growth rates in domestic energy demand are troubling, given the difficulty and additional expense of meeting that demand, especially for light oil products and electricity. On the other hand, there are two strong arguments in favor of fuel price subsidies in Libya public sector incomes are also constrained, and cheap domestic prices are one way for Libyas citizens to benefit from the countrys resource wealth. After all, on our high oil price outlook, the cost of all fuel subsidies in 2010 will still be only 35% of state cash flow from oil and gas, net of subsidies. However, there is a separate question about the way in which the subsidies are provided. Present arrangements are that the government decides what price consumers will pay, and the state-owned companies, NOC and GECOL, are simply required to supply the domestic market at those prices. This system has a number of disadvantages:
Because the government sets prices, making changes can be controversial. The
domestic market adjusts only slowly, if at all, to changing circumstances. For example, at present, both gasoline and electricity are priced below their respective costs of production. As a result, consumers get very misleading price signals, and, in particular, GECOL finds it difficult to pay its suppliers.
Because the subsidies are applied to the whole of the domestic market, a wide range
of consumers are the beneficiaries. They are not restricted to individual Libyans and Libyan owned commercial concerns that need assistance.
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Indeed, as a result of smuggling, even some nonresidents of Libya are among the
beneficiaries. This is perhaps not a major problem, in itself, except that it tends to encourage wider lawlessness.
Because NOC and GECOL are operating, essentially, on a fixed fee basis, they lack
incentives to minimize costs and maximize performance in the domestic market. There are no price signals for them to calculate their effectiveness, nor the true returns on incremental investment. This has contributed, for example, to the overcapacity in domestic refining.
Therefore, quite independently of the level of fuel subsidies, we believe that there is a case for changing their delivery mechanism. The goal would be to allow NOC, GECOL, and other participants in the domestic energy sector to make decisions about the allocation of economic resources on the basis of market prices. The government can still choose that certain consumers should benefit from subsidies, but the governmentnot the energy companieswould bear the costs.
A.5 DOWNSTREAM OIL

Libyas five domestic refineries have a capacity of 380,000 barrels per day (bd), much greater than the current level of domestic demand. (This was 215,000 bd in 2003 including petrochemical naphtha and is almost 240,000 bd in 2005, on our estimate.) These refineries are not able to convert heavy fuel oil (HFO) into light products or meet the stringent light product quality standards prevalent in international markets. As a result, Libya is unable to manufacture sufficient unleaded gasoline for domestic requirements, but generates surpluses of naphtha, jet fuel and kerosene, and, especially, HFO. Thus, the current configuration of the refineries requires NOC to import and export refined products to achieve product balance, while also exposing it to a competitive disadvantage because of its limited conversion and product finishing capabilities. Surplus products are exported and sold, but it is generally more profitable to sell crude oil than to process it in a simple refinery for export. Transport costs are lower for crude than for refined products, and, given the configuration of Libyas refineries and the high quality of its crudes, domestic refining has neither structural nor operational advantages. Moreover, export refining positions NOC as a marginal supplier in the European market. Libyas product exports amounted to almost 140,000 bd in 2004, realizing about USD 1.8Bn in revenues. However, if the crude oil needed for the manufacture of these products had been exported instead, it would have earned Libya USD 2.1Bn or an additional USD 300MM. Product imports are even more expensive, because they are purchased at international parity prices and sold, domestically, at heavily subsidized prices. Adjusted for freight, the cost of importing 30,000 bd of gasoline in 2004 was over USD 500MM. Hence, the total cost of the product imbalances was USD 800MM. With no change to the domestic refining system, CERAs estimate is that gasoline imports would rise to 55,000 bd by 2010 and that the current small diesel surplus will transform
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into a 20,000 bd deficit by that date. Hence, the total cost of product imbalances is set to rise to nearly USD 1Bn on our low oil price case, and almost to double to USD 1.5Bn on our USD 40 case, taking into account the direct cost of imports as well as the value lost by excess crude oil processing. Clearly, the better situation would be for domestic refining output to match demand more closely. In fact, NOC is planning major changes to the domestic refining system, in the form of multi-phase upgrades to Ras Lanuf and Azzawiya, costing USD 2.6Bn in total43. There is a strong case for such projects, given the expense of the current imbalances and the long-term structural decline of residual fuel oil in the international market. However, the planned projects would create significant product surpluses (and correspondingly reduced crude exports), lasting well beyond 2010. Thus, the key issue is not the attractiveness of the projects per se, but rather their staging relative to Libyas domestic requirements. There is the possibility of economizing on some of this capital expenditure while achieving an even better balance for the next several years between domestic demand and refinery output. Figure A8 illustrates the projected product imbalances if there is no investment, after the full program proposed by NOC, and after two cheaper alternative programs. The first of these alternatives would defer USD 900MM of investment and the second nearly USD 1.3Bn. In each case, the benefits in 2010 would be a little greater than those from the more expensive program with the larger export surplusi.e. annual savings of USD 11.5Bn, depending on the oil price.
Figure A8. Domestic Product Imbalance
43 The first phase of both expansion projects aims to enhance the production and quality of gasoline and other light products, while subsequent phases will reduce production of residual fuel oil to raise light product yields
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NOC is also considering the construction of a small (20,000 bd) new refinery in Sebha, to meet demand in Libyas southwest region without long-haul transfers of supplies. The saving in transport costs could be as much as USD 1.50 per barrel. Even so, the project appears likely to generate negative returns, especially since CERA expects the construction costs in Sebha to be about 60% higher than NOCs current estimate of USD 150MM. It is also intended to stimulate the local economy, but as many or more jobs may be eliminated in transportation as are created by the new refinerya refinery on that scale needs an operating staff of only about 100. As to Libyas international refining and marketing assets, Oilinvest and its Tamoil subsidiary have a considerable portfolio in Europe and Africa. There are three refineries in Europe, with limited complex conversion for residual fuel oil, almost 3,000 retail sites, and a distribution and terminal operation. In Africa, Oilinvest has a distribution and marketing presence in a number of North African countries including Egypt, Chad, Niger, Mali, and Burkina Faso. Other major crude oil exporters have built up international downstream portfolios to secure outlets for their production that would otherwise be difficult to process. This production is often heavy and sour crude oil, in a market where the necessary complex refining capacity is relatively scarce. By contrast, Libyas light, sweet crude exports are widely sought after. Furthermore, even in the current downstream market, which is very favorable to refiners in general, only the more complex facilities in Western Europe have made high returns. During 1998-2003, CERA estimates that gross margins for European complex refineries averaged USD 3.30 a barrel, whereas margins for simple refinery averaged USD 1.25 a barrel. However, over the past two years, average complex margins have risen to USD 6.30 a barrel, while margins for simple refineries have actually fallen to USD 0.60 a barrel. CERA expects this situation to continue. However, even if the European refineries were cash positive, they tie up capital that could otherwise be used within Libya for higher-return projects. In addition, like all European refineries, they will need continuing investment to stay operational. Maintenance costs are approximately USD 100MM per year, and there will also be spending to comply with ever-tightening environmental standards. Current market conditions are very favorable for disposal of Libyas European assets. Despite a lackluster margin environment, asset values for simple facilities have risen sharply. Even at the average valuations of downstream asset sales since 1998, Libyas European portfolio, before consideration of outstanding debt, minority interests, and other factors, would be around USD 2.5Bn, but in todays market, the price might be as much as USD 3Bn (see Table 1). A long-term supply commitment at market prices would add to their attractiveness and avoid raising Libyas exposure to the crude oil markets.
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Figure A9. Downstream Asset Valuation (100% equity)
The value of the African portfolio is much smaller and, so, its opportunity cost is proportionately lower. Demand growth in Africas downstream markets is higher than in Europe, and competition is less intense, as is the investment burden to meet product quality and environmental standards. Hence, there is potential for favorable downstream margins.
A.6 PETROCHEMICALS
Further development of Libyas petrochemicals industry is a potential source of new economic growth and diversification. NOCs access to a large, low-cost resource base of attractively priced NGLs offers the prospect of a strong competitive position in the global chemicals sector. Libya may also possess some logistical advantages over Middle Eastern producers with low-cost feedstock and emerging petrochemicals sectors. Most of them must bear Suez Canal tariffs for shipments to Europe or the Americas. By contrast, they have an advantage for sales to the Asia Pacific market. Such clear cost advantages in different markets tend to discourage head-to-head competition. In addition, the majority
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of Libyas maritime exports are currently hydrocarbon liquids, whereas its imports are commonly carried via container freight. Increased participation in the manufacturing of certain bulk chemicals such as polyethylene, polypropylene, and polystyrenewhich are all shipped in solid formcould provide Libya with advantaged outbound freight costs in otherwise empty container backhauling. Libyas domestic petrochemicals industry already features significant assets in the ethylene chain, including a naphtha steam cracker and polyethylene manufacturing at Ras Lanuf. These assets are currently naphtha based44. As shown in Figure A9, there is potential for Libya to save (a present value of) around USD 2Bn, over the life of the project, by using NGLs as the feedstock for a new steam cracker, as opposed to expanding NOCs currently naphtha-based cracking capacity. The figure of USD 2Bn is derived from our USD 40 oil price case. If oil prices were even higher, so too would be the savings, but at USD 25, the figure falls to USD 500MM.
Figure A10. Economic Value PenaltyNaphtha versus NGL Cracking1
Libya does not have enough refinery naphtha supply to support a large-scale steam cracker. Additional crude runs would add to its product imbalances. It does produce more naphtha than its current needs, but this surplus will be absorbed by the planned refinery expansionsas catalytic reformer feed in Phase I at both Ras Lanuf and Azzawiya. Gasoline production from these projects will reduce Libyas significant import burden,
44 Libya also participates in the manufacture of natural gasderived petrochemicals (methanol, ammonia, and urea) through its facilities at Marsa Al-Brega
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paid for at international market prices. If, instead, this naphtha were diverted to a subscale steam cracker, its unit costs would also be significantly higher. The value of the naphtha feedstock is its international parity, since it can be readily sold to manufacturers overseas. Therefore, the feedstock cost of naphtha-based cracking is comparable to European analogues (excluding freight) and does not provide Libyan petrochemicals with a significant competitive advantage. By contrast, there is potential for a low-cost supply of NGLs to provide a sustainable feedstock advantage. Sufficient volumes are available for a world-scale plant. As the natural gas industry develops, producers will face limitations on their ability to mix NGLs into the gas stream (because of its impact on its heating value) or into crude oil (because it would increase the volatility and evaporative losses). In addition, export costs for ethane and liquid petroleum gas in particular are considerably higher than for crude oil or bulk chemicals, because they require specialized tankers. Thus, the resulting domestic values for NGLs could be highly competitive with chemicals feedstock costs in the major petrochemicals centers of North America, Western Europe, and Asiaespecially during periods of high oil prices and high refining margins. Other producing countries have opted to develop domestic petrochemicals sectors as a means of enhancing the netback value of their NGLs. For example, this has been the experience of similarly positioned Middle Eastern producers, such as Saudi Arabia, Iran, and Qatar. They are all currently cultivating robust petrochemicals sectors and have drawn considerable foreign direct investment into their projects over the past decade. It is also worth noting that a naphtha-based steam cracker produces more co-products that require additional capital investment (about 35% more than for its ethane/propane equivalent) and increase operating costs. Refinery-based propylene and derivatives manufacturing is another option available to NOC. Such development would be contingent on NOC successfully executing the fluidized catalytic cracking (FCC) expansions at Ras Lanuf Refinery. The cost/benefit analysis of the manufacturing of these derivatives needs further evaluation, as described in section 6.2.1 of the main document.
A.7 ELECTRICITY
Libyas electricity demand stands at about 12 terawatt hours (TWh). Since 2003, normally available generating capacity has fallen short of peak demand. As of 2005, the shortfall is about 9-10%. Most energy planners would wish to see a reserve margin of at least 5% in the other directionto ensure supply security. GECOL has embarked on a construction program that we estimate will cost over USD 2Bn (as it stood in its mid-2005 version). This could almost double normally available generating capacity by 2011, if we assume that GECOL will also halve the margin of installed, but normally unavailable, capacity from its current levels of 20%. We have further assumed a fall in transmission and
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nonpayment lossesfrom 40% at present, to 30% by 2010 and 25% by 2015as a result of the estimated USD 3Bn to be invested in transmission.45 The future growth of electricity demand will be a function of the countrys increase in population (we are assuming 8.2MM people by 2015) and the rate of gross domestic product (GDP) growth overall. We have considered various possible rates of increase in non-oil GDP For this analysis (and in estimating domestic gas demand) we have taken a . reference case of 7.8%. Given the likely pace of capacity additions, higher rates of growth would be inconsistent with the restoration of a 5% reserve margin (see Figure A10).46
Figure A11. Reserve Generation Margin versus non-Oil GDP Growth
It is also important to note that the size of daily peak demand has been growing at about this rate, and its duration has been stretching. Interconnections with Egypt and Tunisia can make a contribution to meeting peak demand. Even so, there is a danger that power shortages would prevent the economy from sustaining higher rates of growth. Even at 7.8% non-oil GDP growth, electricity demand would more than double in ten years, reaching 25 TWh by 2015. By way of comparison, when Portugal started on its own rapid growth in the 1990s, electricity demand also (almost) doubled in ten years. It will be difficult to provide enough power for a faster rate of growth, at least in the next few years. The law of long lead times operates on electricity, as elsewhere in the energy sector. It takes two to three years to build a combined-cycle gas turbine. A simple-cycle turbine can be built in less than two years, and is two thirds of the cost, but has only two
45 Current losses are made up of around 8% for plants self consumption, 10% for technical losses, and around 22% for non-payment 46 Most countries try to maintain a 1525% reserve margin in normal operating conditions to ensure security of power supply. In 2004, for instance, Hungary and Belgium were the only European countries that registered less than 15%, with 13 and 8%, respectively. The 5% line in Figure 10 is a signal to invest very urgently in new capacity or to make more capacity available in the short term
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thirds of the thermal efficiency. The additional investment cost is relatively small (USD 100-150MM for a 300 megawatt unit), but incremental supplies would not be available much before 2010. For 2010-15, GECOL needs to install another 2.3 gigawatts (GW) of capacity, over and above its mid-2005 investment program, if the 5% reserve margin is to be sustained and the growth rate of non-oil GDP remains at 7.8%. This would cost another USD 1Bn. (In this context, it may be prudent to settle the question of GECOLs continuing existence beyond 2009 a positive decision is required from the General Peoples Committee.) The addition of 1.2 GW is already proposed, in the form of Libyas first two combined-cycle plants. Figure A11 shows GECOLs total costs and revenues on the basis that these investments are all made. Revenues are projected to cover less than half of total costs, so that, by 2015, the cumulative deficit will be almost USD 8Bn. The government had to settle a similar bill for 1985-2001, but that amounted to only around LYD 2Bn (to GECOL and its suppliers, like NOC, excluding capital costs). Demand growth and the investment requirements have made that sum approximate to the annual deficit, these days.
Figure A12. GECOLs Cumulative Revenues versus Costs
The basic legal framework that governs GECOL gives government the role of setting electricity tariffs, and requires it to fund any resulting deficits. It appears that this arrangement is not yet working quite smoothly (payments are still delayedleading, in turn, to delayed payments from GECOL to NOC for its fuel supplies). Even if all the payments were timely, this arrangement is not conducive to giving GECOL strong incentives to minimize costs and raise its efficiency. We have already mentioned the scope to raise efficiency by reducing transmission losses and the amount of installed, but normally unavailable, generating capacity. Fuel strategy is another area in which such scope exists. GECOL intends that all its new generating plant should be gas-fired. At present, over 40% of its output is fueled by burning diesel (nearly 19 million barrels per year) in turbines designed for gas, because it has not been able to secure a gas supply at the relevant plants.
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Technically, burning diesel in gas turbines is less than ideal, and contributes to holding back GECOLs operational performance. It also has financial implications. At Libyas subsidized domestic prices, the cost of generation is more than doubled. However, the alternative use for both the diesel that is being burned, and the gas that could replace it would be as exports. Therefore, it is more appropriate to value them at international prices (USD 350 per ton for diesel in our USD 40 price outlook, and USD 5.25 perMMBtu for gas). 240 million cubic feet per day would be needed to replace all the diesel. On this basis, the value being lost is almost USD 500MM per year. It is worth noting that, because of price subsidies, the benefits for GECOL of an optimized fuel strategy would be smaller than the benefits for Libya as a whole. GECOLs operating costs would fall by USD 90MM per year if it could burn gas, instead of diesel. NOC would earn an extra USD 400MM, by exporting diesel, instead of gas.
A.8 PRESSING ISSUES IN ENERGY

There are two topics that stand out of our analysis as needing further examination in Libyas upstream oil sector. The first is whether sufficient funds can be available for the development of increased production from existing fields and discoveries. Under present arrangements in which NOC contributes 50% of all joint venture investment with the IOCs, it would need a capital and operating budget averaging about USD 3.5Bn per year. As indicated in this report, while this is nearly double current levels, it could yield an additional USD 9Bn or so per year of net cash flow. However, it may be possible for the total costs of future investment to be divided between NOC and the IOCs in different proportions. Then, there are other institutional and behavioral implications of seeking to change the emphasis in upstream oil policy so that production is increased from existing fields and discoveries are developed more quickly. Simply stating a new policy will not achieve the desired results on its own. The following issues need review and, possibly, amendment:
The bidding basis in future bid rounds for exploration acreage, to maximize government
revenues without creating barriers to the development of new discoveries.
The scope for direct negotiation between NOC and the IOCs, to facilitate the IOCs
participation in the development of existing discoveries and projects to increase recovery from producing fields. (Direct negotiations would also make it easier for NOC to prioritize gas markets, construct integrated gas projects, and choose the right IOC partners for them. As explained below, these are the pressing issues for the development of Libyas gas resources).
The relationship between NOC, the Secretariat, and the rest of the government, so that
policy can be set by government and NOC has enough responsibility and flexibility to carry it out, while remaining properly accountable for its performance.
Organization and management processes within NOC, to clarify roles and

responsibilities and to encourage quick decision making within a clear framework of corporate responsibility.
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Potential pressing issues for downstream oil are the growing cost of the imbalance between domestic refinery output and product demand, and the future of the European downstream portfolio
The cost of product imbalances can be eliminated by a program of refinery upgrades,

and the question is, how large that program should be. Future fuel strategy for petrochemicals is also relevant in this context, because it will make a difference to the requirements for naphtha production and gasoline imports.
The possibility of selling a majority stake in some downstream assets overseas is

already being explored within Libya. Sellers have realized attractive prices for such assets in recent transactions, and a sale could raise significant capital and avoid future expenditure. Therefore, full, rather than partial, disposal is another option to consider, but in either case, market conditions suggest that decisions should be taken and implemented quickly.
Concerning petrochemicals, the question for determination is the right choice of feedstock for future expansion. There appear to be significant benefitshow large depends on future oil pricesfrom using NGLs instead of naphtha. Growing gas production will give Libya a larger supply of NGLs than it can absorb in other uses, and exports have a high transport cost. Naphtha will be needed to raise gasoline yields (and help to eliminate expensive imports of gasoline). To support a policy of emphasizing NGLs as the preferred feedstock will require that planning in the gas sector takes these needs into account. For the gas sector, the main issue is to ensure an integrated development of upstream, infrastructure, and markets. If the infrastructure for gas transmission and distribution were fully developed and the domestic market for gas were well established, then the task of making the most of Libyas gas resources could be handled in just the same way as oil. But today, Libya is not in this position. Middle distillate is being burnt in power stations that lack access to gas, residential and commercial penetration is low, export capacity is unfilled, and meanwhile, gas is being flared at the wellhead. Libyas very large land area, and the distance of the producing basins from centers of population add to the difficulties. The IOCs will not be aggressive in pursuit of gas projects unless they will have timely access to markets, if successful. NOCs arrangements with Agip and Shell are good examples of the sorts of integrated projects that are needed. To go further, it will need to choose which additional markets it will pursue and in which order. It will need, also, to take a view on the right partners with which to work across its portfolio of gas projects. These are important choicese.g. additional pipeline exports to Italy offer higher returns than further LNG projects, but some companies will be more effective than others in providing NOC with access to the Italian market. In the power sector, the first requirement is to create an institutional and financial structure that is viable for the long term. At present, GECOLs existence is uncertain beyond 2009, and its deficits are so large as to distract attention from the importance of operational efficiency. This is an important issue, because the second priority should be to raise the availability of generation plant and to reduce transmission losses. Much
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new investment is needed, in any case, to prevent electricity shortages from restricting economic growth. Therefore, there are obviously large benefits in making better use of what is already there. The next concerns in the power sector are to ensure that there is enough new capacity (costing, perhaps, USD 3Bn over the next ten years), and with the right mix of fuels to minimize the overall costs to the economy. This will require continuing progress with GECOLs existing efforts to develop its organizational and managerial capabilities. Close coordination will also be needed with NOC, in planning gas development and infrastructure. Finally, there are two over-arching questions, setting much of the context in which these more specific pressing issues will fall to be addressed. The first is the question of how fuel price subsidies are to be delivered. This affects all oil products, gas, and power supplied to the domestic market. Moving away from the fixed-fee basis for such supplies would improve resource allocation and efficiency. The result would be to achieve a given level of final price to consumers at lower cost to the economy. There would be even greater savings if the beneficiaries were more narrowly targeted. The second question is about the availability and transparency of information on Libyas energy sector. All we can say, for certain, is that we have had great difficulty in getting hold of clear, current, and consistent data and analysis about basic facts and forward plans. This may be because such information does not exist, or because it is thought too sensitive to share. Either way, the problem is serious. Energy projects are large, long term, and complex. If the basic information is not readily accessibleand without open discussion about its strengths and weaknessesthe chances of successful planning and execution are greatly reduced, whether in Libya or anywhere else.
A.9 RECOMMENDATIONS FOR FOLLOW-UP WORK

Our analysis of Libyas oil, gas, and power sectors has identified a diverse list of pressing issues. These include increasing the pace and funding of upstream oil and gas activity, upgrading refineries, determining the optimal feedstock for petrochemical expansion, integrated gas planning, redesigning the mechanics for the delivery of fuel subsidies, and optimizing investments in the power sector. Dealing with all these issues will require a combination of changes to some policies, institutional arrangements, and organizational practice across the sector. We have also shown that the development and effective implementation of effective solutions would unlock significant value over the next ten years. At first sight, tackling such a wide range of energy issues successfully may appear to be a daunting task. However, our experience shows it to be achievable, if an integrated action program is adopted that provides the appropriate project management and prioritization of efforts. The National Economic Strategy project could play an important role here, by providing oversight and facilitation across all initiatives to address the pressing issues. Some can then be addressed through ongoing efforts by NOC, GECOL, and the Secretariat of Energy, while others will require new initiatives.
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The goal of such an action program is to optimize the performance of Libyas energy sector. Our experience also shows that, if it is to be successful in achieving this goal, three basic principles are important to its design and conduct:
Agree strategydevelop and communicate a shared vision of the sectors goals; Establish systemsensure there are clear responsibilities throughout the sector, with
open access to information; and
Enable processby decision making across the sector that is understandable, quick,
and stable. We propose five themes for follow-up in the energy sector in next phase of the National Economic Strategy project. Together they constitute an integrated action program with the right coverage and priorities to support policymakers in dealing with the pressing issues. At the same time, the action program observes the three basic design principles for the energy sector. The five themes are to refine the sectors structure, review the format for upstream contracts, develop the sectors planning techniques, enhance its data management systems, and conduct a program of training and critical issue workshops.
Refine Sector Structure

This initiative addresses the need as identified in our analysis for changes to the relationship between NOC and GECOL, the Secretariat of Energy, and the rest of the government, with the aim of increasing the efficiency with which energy sector policy is set and supervised (by government) and implemented (by NOC and GECOL). For each organizationthe Secretariat, NOC, and GECOLthe initiative would map out high-level roles and responsibilities and define the organizational elements (structure, processes, and systems) that are critical to those roles and responsibilities. A plan for the implementation of the necessary changes would then be developed. It is envisaged that this initiative would involve the Secretariat of Energy, NOC, and GECOL representatives.
Review Upstream Contract Design

This initiative examines the options available for agreeing contracts between the Secretariat, NOC, and the IOCs. The approach to contracting that will accelerate increased production from existing fields and discoveries is likely to differ from that appropriate for the bidding basis in future bid rounds for exploration acreage. An early step in the initiative would be to review and update EPSA IV bidding terms for exploration acreage. As regards field developments, it will be important to make an inventory of opportunities where international company involvement would be helpful. A contract negotiation program would then be designed, taking into account the
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appropriate contractual structures for each field, and with a timetable that accommodates the technical and commercial work needed prior to awarding a contract. This initiative would involve representatives from NOC and the Secretariat of Energy. Participation by NOCs operating companies and the IOCs is also possible.
Develop Sector Planning Techniques

The diversity of the pressing issues identified for the energy sectorand the fact that they are pressingputs a premium on the quality of planning and strategy setting in the sector. Good and timely decisions need a robust analytical framework that is neither too detailed nor too general, contains clear investment criteria, and allows for competing projects to be prioritized effectively. Comparisons must be possible across the sector as a whole and within individual sub-sectors. The areas in which new planning systems would have most impact concern the pressing issues that relate to increased upstream funding, fuel subsidy delivery, and integrated gas planning. For each of these, this initiative would develop economic criteria and methodologies to enable efficient investment decisions and project ranking. The initiative would also identify project opportunities in each area to pilot test the new approaches to planning. This initiative could involve a range of participants from the Secretariat of Energy, NOC, GECOL, and other government representatives.
Enhance Data Management Systems

Improved availability and transparency of energy sector information was identified as a pressing issue, in particular to support improved planning and execution in the sector and, more generally, to allow the development of effective management systems. Therefore, we recommend a review of existing data management systems and the design of new approaches as necessaryinitially focusing on the critical areas for planning described under sector planning, above. This initiative would involve NOC and GECOL, most likely with representatives of other government institutions.
Conduct Energy Sector Training and Critical Issue Workshops

The four previous initiatives will lead to a variety of changes in the energy sectors strategy and how the sector operates. Understanding and support for these changes, as well as a growing availability of key Libyan professionals with the necessary skills to maintain the sector on its new course, will all depend on an ongoing effort of training and communication. Therefore, we recommend holding training seminars for a broad range of Libyan oil and gas professionals, tailored to address the pressing issues identified
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in Phase 1. Training themes might include market developments in upstream oil (supply, demand, pricing), refined products, European and global gas, exploration and production technology, and power. Clear decisions on the way forward and on priorities are a key component of a successful program to change energy policy as we have recommended in this document and to optimize the energy sectors performance. Therefore, we believe it is very important to hold workshops with all of the Libyan energy sector professionals who would be responsible for or involved in follow-up on the pressing issues we have identified. These workshops would be structured issue by issue and could also include some participants in the National Economic Strategy Phase 1 training program. We see this as a pivotal step in the overall success of the action program.
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LEADERSHIP TRAINING
APPENDIX B.
B.1 OBJECTIVES OF THE LEADERSHIP DEVELOPMENT PROGRAM

The Leadership Development Program has been an integral part of the first phase of the National Economic Strategy (NES) Project. The program was designed to accelerate the upgrading of the managerial, business and competitive capabilities of Libya by:
Exposing a group of high potential Libyan managers in the public and private sectors,
who are engaged in critical industry clusters, to a set of practical, state-of-the art managerial tools and concepts that will enhance their skills;
Helping these managers to apply the tools and concepts to their own most significant
challenges, thereby contributing directly to improving Libyas competitive advantage in the target clusters; and
Introducing the participants to the methodology applied in the NES project and
exposing them to selected first findings. This will enable the participants to actively contribute in the next phase of the project.
In addition, the program has laid the foundations for a broader and more targeted set of training programs in the next phase of the project.
B.2 PROGRAM DESIGN B.2.1 Design Principles of the Training Program

The design of the training program was customized to the particular needs of participants. Specifically, the program:
Focused on targeted, high priority clusters with significant potential for economic
growth and competitiveness;
Applied practical, globally-proven methodologies to the pressing, real-world issues in

these clusters;
Facilitated the participants application of the methodologies to their issues in real life; Addressed, through its content, both the requirements of the cluster groups as well as
the individual learning needs of each participant; and
Reinforced and galvanized the first phase of the project.
APPENDIX B. LEADERSHIP TRAINING
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B.2.2 Concepts, Tools and Methodologies

The training consisted of four modules followed by a final graduation day. To familiarize the participants with the key concepts while ensuring that they could apply them to relevant issues, each module used several educational approaches.
Participants were asked to do a modest amount of pre-work before attending each

session (e.g. reading).
In each module, the faculty delivered content lectures to introduce the core concepts,
tools and methodologies.
Each module incorporated adequate question and answer time to guarantee that the
participants had absorbed the initial content.
A significant portion of each module was devoted to group work designed to apply the
relevant concepts, tools and methodologies to real world issues.
All group work exercises were facilitated by faculty members and concluded with
teams of students presenting their work to the entire student body.
At the end of each module, the participants were asked to complete homework
assignments that were designed to reinforce the key concepts of the module and apply them to real world issues.
The subjects of the modules were carefully selected from the many subjects and content areas that are helpful in promoting cluster competitiveness. The final four modules were Business Strategy, Global Strategy and National Competitiveness, Business Leadership and Entrepreneurship.
MODULE 1: BUSINESS STRATEGY

This module introduced core concepts of competitive strategy and advantage. The faculty demonstrated the importance of having clear objectives that drive individual business strategy. To achieve those objectives, the strategy has to make a multitude of choices. These should build upon a clear understanding of the business external as well as internal factors (see Figure B1).
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Figure B1. Set of Interlinked Choices that Dene a Strategy
Both the objectives and the choices made have to be embraced by every element of an organization for the strategy to work. The faculty illustrated the concepts of business strategy using a variety of examples ranging from the airline industry to military warfare two millennia back. Through group exercises, the participants were asked to describe, analyze and assess the strategy of a chosen organization. This resulted in interesting discussions on both selected companies and clusters.
MODULE 2: GLOBAL STRATEGY AND NATIONAL COMPETITIVENESS

This module built on the previous one to help the participants extend their understanding of how their enterprises fit into the overall Libyan economy, and with Libyas potential competitive position in the global marketplace. One goal was to expand the scope of participants thinking to consider how enterprise and cluster advantages come together to enhance the nations overall competitive performance. The core content was based on Professor Michael E. Porters work on the competitive advantage of nations. The faculty illustrated that the most important sources of prosperity are created and not inherited, and explained how nations or regions compete in offering the most productive environment for business. A core concept used was The Diamond framework developed by Professor Porter that provides a structure to asses an industrys competitiveness (see Figure B2). A more detailed overview of the core concepts covered in this module is outlined in Chapter 4.
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Figure B2. The Microeconomic Business Environment The Diamond
During the group work sessions the participants were asked to:
Apply the Diamond framework to each cluster and to identify strengths and weaknesses
in each of the Diamonds elements;
Draw a map of their existing clusters and think about a vision, as well as the requirements
for relevant institutions and leadership; and
Generate a list of key factors that support the development of their clusters. MODULE 3: BUSINESS LEADERSHIP
The third module focused on concepts around leadership in organizations, and on upgrading the individual participants executive skills and their abilities to lead organizations in competitively relevant ways. Using a variety of examples, the faculty showed that there is no one correct definition of leadership and no one set of required characteristics for a successful business leader. There are many ways to lead, and many leadership styles. Everyone has to find the style that works for her/him. The act of business leadership itself is manifested in interactions with others, while the primary goal of those interactions is to create useful action and change. Building on feedback from several participants, the faculty illustrated that leaders are made, not born, and anyone can improve her/his leadership skills. A leader can always continue to improve. Thus, the leadership development journey never ends.
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During the module the participants shared their own experiences and definitions of business leadership and were asked to reflect upon their own dominant leadership style. Each participant completed a questionnaire on their leadership behavior which was evaluated by the faculty, with feedback provided to participants during the last day of the program.
MODULE 4: ENTREPRENEURSHIP
In the last module, the faculty presented the fundamentals of entrepreneurship and, with the participants, explored the opportunities for entrepreneurial growth in Libya. The importance of entrepreneurship for an economy and the resulting creation of wealth, employment and opportunities were illustrated. Characteristics of entrepreneurs were discussed and examples of successful entrepreneurs were presented. The concept of a business plan was covered in detail at the request of the participants. During interactive sessions, participants shared their definitions of entrepreneurship and their experiences of business creation. The module ended with a business plan challenge during which groups of participants had to develop a business idea, generate a short business plan and present it to the rest of the participants and faculty.
B.2.3 Faculty Composition

The faculty for the program was carefully selected based on their experience in the subject matters of each module as well as their involvement in the NES project. This resulted in the creation of both a Module Lead Faculty and a Cluster Lead Faculty. The Module Lead Faculty was primarily responsible for selecting the content and presenting the modules lectures. It consisted of James Thorne (Module 1), Jack Koolen (Module 2), Tom Craig (Module 3) and Kevin Murphy (Module 4). The Cluster Lead Faculty facilitated all group work sessions and provided cluster-specific knowledge where required. It consisted of Bruce Allyn, Gopi Billa, David Hobbs, Christopher Malone and Paul Markwell.
B.2.4 Participant Selection

The selection of students was critical to guarantee a positive learning experience for all participants. Therefore, the program administrators selected an outstanding group of 49 participants from over 200 applications. The selection process consisted of a review of all applicants resumes and a personal interview. Participants had to satisfy the following criteria:
Experience in a professional role that requires decision-making and action Experience in one of the priority clusters Potential for contribution to the Libyan economic growth Excellent English language comprehension Possession of a graduate degree
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B.3 CONCLUSION
The experience of the program was beneficial for all concerned, and the feedback from participants, members of the NES project team and the faculty was highly positive. The program fulfilled its objectives and generated a close group of participants that will be able to work together efficiently during the next phase of the project. It also laid the foundations for a broader roll-out of the training program as part of the next phase of the project. At the end of each module, participants were asked to provide feedback to the training administrators. Some of the positive aspects mentioned the most included:
The high relevance of the programs content; The quality of the faculty members; The design of the program and the materials used; and The opportunity for interaction and exchange of ideas provided by the program.
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SOURCES USED AND MEETINGS CONDUCTED
APPENDIX C.
C.1 INTERNATIONAL SOURCES

Accor hotel chain: 2004 Annual Report, 2005 Bundesagentur fr Auenwirtschaft (bfai) und Deutscher Industrie- und Handelskammertag (DIHK): Zukunftsmrkte In Der Mena-Region: Chancen Fr Exporteure Und Investoren, 2004 Bundesagentur fr Auenwirtschaft (bfai) und Deutscher Industrie- und Handelskammertag (DIHK): LibyenWirtschaftstrends zum Jahreswechsel 2004/05, 2004 CERA: Proprietary data for power generation and gas infrastructure costs Clark, N.: Education in Libya in World Education News and Reviews, July/August 2004 Destin Report: Trade in the Western Mediterranean, Annex A Drewry Shipping Consultants: Mediterranean Container Ports and Shipping: Traffic Growth Versus Terminal ExpansionAn Impossible Balancing Act?, 2000 Dubai Chamber of Commerce & Industry: Libya on the Right Track to FDI Attraction, 2005 Economist Intelligence Unit (EIU): Country ReportLibya January, February and March, 2005 El Pais: Plan Marshall Autoctono en Argelia, July 2005 Energy Information Administration (EIA): International Energy Outlook 2003, 2003 Energy Information Administration (EIA): Libya Country Analysis Brief , 2005 Energy Information Administration (EIA): World Oil Market and Oil Prices Chronologies, 1970-2004, 2005 European Commission: Tourism Europe: Central European Countries, Mediterranean Countries, Key Figures 20012002, 2004 Food and Agriculture Organization of the United Nations (FAO): Aquastat Report, Libya, 2005 Hilton hotel chain: 2004 Annual Report, 2005 IHS Energy: Proprietary upstream economic and activity data; Libya PEPS & GEPS reports; A$$ET upstream economic evaluation tool output
APPENDIX C: Sources Used and Meetings Conducted
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International Hotel Investment plc: Annual Report 2004, 2005 International Iron And Steel Institute: Steel Statistical Yearbook 2004, 2005 International Monetary Fund (IMF): Country Report No. 05/51: Algeria, Statistical Appendix, 2005 International Monetary Fund (IMF): Country Report No. 05/177: Egypt, Article IV ConsultationStaff Report, 2005 International Monetary Fund (IMF): Country Report No. 05/234: Kuwait, Statistical Appendix, 2005 International Monetary Fund (IMF): Country Report No. 04/136: Morocco, Statistical Appendix, 2004 International Monetary Fund (IMF): Country Report No. 05/83: Socialist Peoples Libyan Arab Jamahiriya, Article IV ConsultationStaff Report, 2005 International Monetary Fund (IMF): Country Report No. 01/37: Tunisia, Statistical Appendix, 2001 International Monetary Fund (IMF): Country Report No. 04/359: Tunisia, Article IV ConsultationStaff Report, 2004 International Monetary Fund (IMF): Country Report No. 04/174: United Arab Emirates, Statistical Appendix, 2004 International Society of Transport Aircraft Trading (ISTAT): Jetrader, various issues Library of CongressFederal Research Division: Libya: A Country Study, 1987 Marriott hotel chain: 2004 Annual Report, 2005 Oil & Gas Journal: Refining capacity survey, ethylene survey, 2005 OPEC: Annual Statistical Bulletin, 2004 Oxford Economic Forecasting: The Contribution of Air Transport to Sustainable Development in Africa, October 2003 Partners for Health Reform: National Health Accounts and its Relevance to Policymaking in the Middle East and North Africa, 2003 Partners for Health Reform: Primer for Policy MakersUnderstanding National Health Accounts, 2003 Publishers Association: PA Unsupported Mission to Libya, April 2005 Schneider, F.: The Size and Development of the Shadow Economy of Libya, Algeria, Chad, Egypt and Niger over the period 1999-2004, 2005 Schneider, F.; Klinglmair, R.: Shadow Economies around the World: What do we know?, 2004 Trailfinders: "Middle East catalogue, 2005"
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Transparency International: 2005 Corruption Perception Index, 2005 UAE Ministry of Information and Culture: UAE Yearbook 2003, 2004, 2005 UNESCO: Education For All (EFA) Global Monitoring Report, 2005, 2005 UNESCO: Global Education Digest 2005, 2005 United Nations Conference on Trade and Development (UNCTAD): Review of Maritime Transport, 2004 United Nations Development ProgrammeProgramme on Governance in the Arab Region (UNDP-POGAR): Libya: Judiciary, 2005 United Nations Development ProgrammeProgramme on Governance in the Arab Region (UNDP-POGAR): Libya: Constitution, 2005 United Nations Development Programme (UNDP): Arab Human Development Report, 2004 US Census Statistics, 2000 US Department of StateBureau of Democracy, Human Rights, and Labor: Country Reports on Human Rights Practices: Libya, 2004, 2005 US Department Of StateBureau Of Public Affairs: Background Notes: Libya, 1994 US Geological Survey: Minerals Yearbook, 2002 USAID: First Agency Health Team Visits Libya in Front Lines, April-May 2004 World Bank GroupOperations Evaluation Department: Precis No. 84, Improving African Transport Corridors, 1995 World Bank GroupSocial and Economic Development Group, MENA Region: Report No: 30295-LY, Socialist Peoples Libyan Arab Jamahiriya: Country Economic Report, 2004 World Bank Group: Pensions in the Middle East and North Africa, 2005 World Bank Institute: Governance Matters IV: Governance Indicators for 1996-2004 by Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi, 2005 World Health OrganizationEastern Mediterranean Regional Office (WHO): Country Cooperation Strategy for the WHO and the Libyan Arab Jamahiriya 20052009, 2005 World Health Organization (WHO) & UNICEF Joint Monitoring Program for Water Supply and Sanitation: Meeting the MDG drinking water and sanitation target: a mid-term assessment of progress, 2004 World Health Organization (WHO): WHO World Health Report 2005, 2005 World Health Organization (WHO): WHO World Health Statistics 2005, 2005 World Investment News: Report on Libya, 2003
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World Tourism Organization: 2002 Inbound Tourism to the Middle East and North Africa Survey, 2003 World Trade Organization (WTO): World Trade Report, 2004, 2004 World Travel & Tourism Council (WTTC): The 2005 Travel & Tourism Economic Research, 2005
C.2 LIBYAN SOURCES C.2.1 Documents

Bank for Real Estate Investment and Savings: Report on Banking Activity, 2002 Bank for Real Estate Investment and Savings: Report on Banking Activity, 2003 Bank for Real Estate Investment and Savings: Report on Banking Activity, 2004 Central Bank of Libya, various reports Customs Department: Report on re-exports to UN, 1981 General Electricity Company of Libya (GECOL): Planning statistics, 2004 General Electricity Company of Libya (GECOL): Selected operational and budget documentation General People's Committee of Planning: Memorandum of Housing File presented to the General Planning Council, 2005 General Planning Council Health Sector Consulting Team: Interim Report, 2005 Inspector General of Health: Annual Report 2004, 2005 Libyan Arab Airlines: Annual Report 2004, 2005 Libyan Foreign Investment Board, various reports Libyan National Commission for Education Culture and Science: The Development of Education in the Great Jamahiriya, September 2004 National Oil Corporation (NOC): Annual Report, 2004, 2005 National Oil Corporation (NOC): Long Term Plans Covering Oil Production, Oil Downstream, Gas Utilisation and Exploration National Oil Corporation (NOC): Brega Annual Report, 2004, 2005 National Oil Corporation (NOC): Libya Gas & Condensate Main Transportation Pipelines Maps National Oil Corporation (NOC): Cost of Oil Barrel in Libya 2000-2004 National Oil Corporation (NOC): Presentation Documents Covering IOR/EOR Potential, Petroleum Agreements and Provisional Strategy for Developing Downstream Activities General Peoples Committee for Tourism: 1998 Tourism Master Plan, 1998
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General Peoples Committee for Tourism: 2004 Report on Hotels, 2004 General Peoples Committee for Tourism: Transformation Plan for Tourism Sector, Period 20062010 General Peoples Committee for Economy and Trade: Import Statistics by Commodity National Centre for Education and Development: Statistics on basic and intermediate level schools, teachers, student numbers etc.., 2003-2005 National Consulting Bureau 3rd Generation Planning Project: Economy and Labor Market (Preliminary Sub-Report), 2005 National Consulting Bureau 3rd Generation Planning Project: Housing (Preliminary Sub-Report), 2005 National Consulting Bureau 3rd Generation Planning Project: Population (Preliminary Sub-Report), 2005 National Consulting Bureau: Misurata Free Trade Zone Study, 2005 National Syndicate for Handicrafts: Artisans Survey Port Authority: Status of Libyan Port Equipment, 2005 Secretariat for Higher Education: statistics on 3rd level institutions, students and teachers Social Security Fund: Annual Report 2004, 2004 Social Security Fund: Report on status of SSF for the year ending 31/12/03 Tourist Investment and Promotion Board: 2005 Brochure Urban Planning Authority: National Physical Perspective Plan 2000-2005
C.2.2 Laws and Regulations

Assistant Secretary for Service Affairs: Decision # 362/ 2003 for Reorganizing the Procedures of In-Service Training, 2003 Act of Civil and Commercial Procedures of 1954, Chapter 4, Articles 739-771, 1954 Commercial Code, Book 7, Preventive Composition and Bankruptcy General People's Committee: Decision # 158/2005 relative to the State Owned Lands Located in Tourist Development and Promotion Areas, 2005 General People's Committee: Decision # 20/2005 for specifying certain provisions for Lending / Loans for Housing and Real Estate purposes and performing Productive, Services and Craft Economic Activities, 2005 General Peoples Committee for Economy and Trade: Decision # 38/2005, 2005 General Peoples Committee for Manpower, Training and Employment: Decision # 15/2005 for Exemption from the Condition of past experience, 2005 Labour Law # 58/1970, 1970
185
Law # 142/1970, 1970 Law # 22/1984 1984 Law # 5/1997, 1997 Law # 7/2004, 2004 Misurata Free Zone Authority: Law # 9/2000 on Transit Trade and Free Zones
C.3 INSTITUTIONS AND COMPANIES INTERVIEWED

Academy for Graduate Studies Agricultural Bank Al-Hadra Hospital Al Mansouri Construction Company Al-Mokhtar Private Clinic Arab Union Contractors Arabic Cement Company (ACC) Asafa (Benghazi Construction Company) Bank of Commerce and Development Benghazi Shabia General Planning Council Benghazi Shabia Peoples Committee Bicex Central Bank of Libya Central Bureau of Information (NIDA) Chamber of Commerce & Industry, Benghazi Civil Aviation Authority: Interview with the head of the Civil Aviation Authority Daewoo Department of Agricultural & Range Development Development Bank DS Construction Limited EDG Executive Committee National Economic Strategy Gama (Turkish Construction Company) General Board for Environment General Board for Ownership Transfer
186
General Electricity Company (GECOL) General Industrialization Corporation General Peoples Assembly General Peoples Committee for Culture General Peoples Committee for Economy and Trade General Peoples Committee for the Environment General Peoples Committee for Finance General People's Committee for Foreign Liaison and International Cooperation General Peoples Committee for Higher Education General Peoples Committee for Manpower, Training and Employment General Peoples Committee for Planning General Peoples Committee for Services Affairs General Peoples Committee for Tourism General Peoples Committee for Transport General Planning Council General Post and Telecommunication Company General Union of the Chamber of Commerce, Industry and Agriculture of the Great Jamahiriya General Water Authority Gumhouria Bank Hotel Corinthia Bab Africa Inspectorate General for Health Libyan Arab Airlines Libyan Arab Broadcasting Company Libyan Arab Foreign Bank Libyan Arab Foreign Investment Company (LAFICO) Libyan Businessmen Council Libyan Foreign Investment Board Libyan Hotels Libyan Iron and Steel Company (LISCO) Libyan Technical Consultancy (LTC) Libyan tour operators
187
Misurata Chamber of Commerce, Industry and Agriculture Misurata Free Zone Authority National Authority for Marine Investment National Center for Educational Planning National Consulting Bureau National Economics Research Center National Industrial Research Center National Investment Company National Oil Corporation (various sub-committees) National Railway Company National Syndicate for Handicrafts Private Libyan builder Real Estate Investments and Savings Bank Sebha Shabia General Planning Council Secretariat of Energy Social Security Fund Taxation Department Tourism Investment and Promotion Board Tripoli Company for Marketing Tripoli Medical Centre Tripoli Planning Council Tripoli Shabia Um Alhouqol Oil & Marine Services Co. Union of Hoteliers and Restaurant Owners Union of Workers in Libya United Insurance Company University of Sebha Urban Planning Agency WHO Representative, Libya Senior personnel with extensive knowledge and experience of working in Libya that are working for, or have recently retired from, IOCs and oilfield service companies
188
C.4 OTHER SOURCES C.4.1 Databases

Economist Intelligence Unit (EIU) Eurostat: External Trade Indicators Online International Labour Organization (ILO): Laborsta (http://laborsta.ilo.org/) International Monetary Fund (IMF): World Economic Outlook Database (http://www. imf.org/external/pubs/ft/weo/2005/01/data/) LOffice National Des Aeroports du Maroc (www.onda.org.ma) Libyainvestment (http://www.libyaninvestment.com/index.php) Saudi Arabia Central Department of Statistics: Online Statistics on GDP by Sector SESRTCIC: Online Indicators The World Bank Group: World Development Indicators Database (http://devdata. worldbank.org/data-query/) UNESCO Institute for Statistics: Online Statistics (www.uis.unesco.org) United Nations Statistics Division: UN Commodity Trade Statistics Database (UN Comtrade) US Census Bureau: Online Statistics for Residents in the US US Department of Agriculture: Online Statistics (www.usda.gov) US Department of State: Online Information for Tourists World Tourism Organization: Facts & Figures - Online Statistics (www.world-tourism. org)
C.4.2 Websites
http://europa.eu.int http://news.bbc.co.uk http://www.aaco.org http://www.aci.it http://www.aeroportsdeparis.fr http://www.africaguide.com http://www.african-events.com http://www.africa-union.org http://www.afrikaverein.de
189
http://www.arableagueonline.org http://www.biztradeshows.com http://www.brookes.ac.uk/worldwise http://www.ccimisrata.org http://www.cma-cgm.com http://www.eia.doe.gov/emeu/cabs/libya http://www.eventseye.com http://www.hafen-hamburg.de http://www.iaea.org http://www.ismliatp.gov.eg http://www.journeys-intl.com http://www.libyabuildexpo.com http://www.libyainvestment.com http://www.maghrebarabe.org http://www.oanda.com http://www.oic-oci.org http://www.pilotguides.com http://www.rafimar.com/alexport.htm http://www.uaeinlibya.com http://www.vistonline.it http://www.wikipedia.org http://www.wto.org
C.4.3 Surveys
Libya Household Survey, 2005 Libya Business Executive Survey, 2005 Libya Small and Medium Enterprises Survey, 2005
190
GLOSSARY & ABBREVIATIONS USED
APPENDIX D
3G Bcf Bcfd BCI bd Bn BPC CAGR CERA COS EPSA EU FDI GBOT GAIT GAIUD GCR GDP GECOL GMR GPC GPTC GW GWh ha HALE HFO HPE ICCPR ICESCR ICT IFC IMF
3rd Generation National Physical Development Plan Billion Cubic Feet Billion Cubic Feet per day Business Competitiveness Index Barrels per Day Billion Basic Peoples Congress Compound Annual Growth Rate Cambridge Energy Research Associates, Inc. Company & Operations Strategy Exploration & Production Sharing Agreements European Union Foreign Direct Investment General Board for Ownership Transfer General Authority for Information and Telecommunications General Authority for Infrastructure and Urban Development Global Competitiveness Report Gross Domestic Product General Electricity Company of Libya Great Man-made River Water Supply Project General Peoples Congress General Post and Telecommunications Company Gigawatts Gigawatt-hours Hectare Health-Adjusted Life Expectancy Heavy Fuel Oil High Performance High Chlorinated Polyethylene International Covenant on Civil and Political Rights International Covenant on Economic, Social, and Cultural Rights Information and Communication Technology Institution for Collaboration International Monetary Fund
APPENDIX D: Glossary & Abbreviations Used
191
IOCs IPRs KT LAFICO LBES LFIB LISCO LLPE LNG LPG LYD Maghreb Mashriq mbd MENA MM MMBtu NBE NES NGLs NOC NPPP OEM OIC PPP PVC Shabia SME SOE TIDB TWh UNCTAD UNDP UNESCO USD WB WBI WEF WHO WTO
192
International Oil Companies Intellectual Property Rights Kilotons Libyan Arab Foreign Investment Company Libyan Business Executive Survey Libyan Foreign Investment Board Libyan Iron and Steel Company Linear Low Density Polyethylene Liquefied Natural Gas Liquefied Petroleum Gas Libyan Dinar Algeria, Morocco and Tunisia Arabic-speaking countries east of Egypt Million Barrels per Day Middle East and North Africa Million Million British Thermal Units National Business Environment National Economic Strategy Natural Gas Liquids National Oil Corporation National Physical Perspective Plan Original Equipment Manufacturer Organization of Islamic Countries Purchasing Power Parity Polyvinyl Chloride Administrative province (Libya has 34 Shabias) Small and Medium-Sized Enterprise State-Owned Enterprise Tourism Investment and Development Board Terawatt Hours United Nations Conference on Trade and Development United National Development Program United Nations Educational, Scientific and Cultural Organization US Dollars World Bank World Bank Institute World Economic Forum World Health Organization World Trade Organization

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National Economic Strategy

National Economic Strategy

Macroeconomic, Political, Social and Legal Context . . . . . . . . . . . . . . . . 39

Microeconomic Foundations of Competitiveness . . . . . . . . . . . . . . . . . . 42

7. AN ASSESSMENT OF CRITICAL SOCIAL SECTORS . . . . . . . . . . . . . . . . 109

COMPETITIVENESS ASSESSMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

NATIONAL ECONOMIC STRATEGY

NATIONAL ECONOMIC STRATEGY

Professor Michael E. Porter

Dr. Daniel Yergin

NATIONAL ECONOMIC STRATEGY

NATIONAL ECONOMIC STRATEGY

Chapter 1. EXECUTIVE SUMMARY

A VISION FOR LIBYA 2019

NATIONAL ECONOMIC STRATEGY

METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK

The vital importance of both a stable macro-economic environment and strong

Chapter 1. EXECUTIVE SUMMARY

KEY THEMES FROM THE COMPETITIVE ASSESSMENT

NATIONAL ECONOMIC STRATEGY

Chapter 1. EXECUTIVE SUMMARY

NATIONAL ECONOMIC STRATEGY

THE WAY FORWARD: ACTION AGENDA

ACTIONS FOR PRESSING ISSUES 2006

NATIONAL ECONOMIC STRATEGY

UNIQUE MODEL FOR LIBYAN COMPETITIVENESS

2.2 THE LIBYAN JAMAHIRIYA

Chapter 2. A UNIQUE MODEL FOR LIBYAN COMPETITIVENESS

2.3 THE DRIVE FOR ECONOMIC COMPETITIVENESS

3 Muammar Qadhafi Op Cit. 2005

NATIONAL ECONOMIC STRATEGY

2.4 LESSONS AND CHALLENGES

2.4.1 Role of Government

Chapter 2. A UNIQUE MODEL FOR LIBYAN COMPETITIVENESS

2.4.2 Strengthening Incentives

2.4.3 Managing the Transition

NATIONAL ECONOMIC STRATEGY

2.5 NEXT STEPS

Chapter 2. A UNIQUE MODEL FOR LIBYAN COMPETITIVENESS

NATIONAL ECONOMIC STRATEGY

VISION FOR LIBYA 2019

Chapter 3. A VISION FOR LIBYA 2019

NATIONAL ECONOMIC STRATEGY

Chapter 3. A VISION FOR LIBYA 2019

NATIONAL ECONOMIC STRATEGY

METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK

4.1 WHAT IS COMPETITIVENESS? 4.1.1 Competitiveness, Productivity, and Prosperity

Chapter 4. METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK

4.1.2 Inherited versus Created Prosperity

NATIONAL ECONOMIC STRATEGY

4.2 DRIVERS OF COMPETITIVENESS

Figure 1. Determinants of Competitiveness

4.2.1 Macroeconomic, Political, Legal, and Social Context

Chapter 4. METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK

4.2.2 Microeconomic Foundations

Figure 2. The Microeconomic Business Environment The Diamond

NATIONAL ECONOMIC STRATEGY

Chapter 4. METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK

4.3 STAGES OF COMPETITIVE DEVELOPMENT

Figure 3. Stages of Competitive Development

NATIONAL ECONOMIC STRATEGY

4.4 THE PROCESS OF COMPETITIVENESS UPGRADING

Chapter 4. METHODOLOGY: THE NATIONAL COMPETITIVENESS FRAMEWORK

4.5 THE ROLE OF DIFFERENT LEVELS OF GEOGRAPHY