ADMINISTRATIVE VARIABLES IN RELATION OF FDI A STUDY ON LIBYAN INVESTMENT CLIMATE

Prepared by the researcher : Salem Abdulla – Associate Professor at Azzaytuna University, Libya

Democratic Arab Center

Journal of Afro-Asian Studies : Twelfth Issue – February 2022

A Periodical International Journal published by the “Democratic Arab Center” Germany – Berlin.

https://democraticac.de/wp-content/uploads/2022/02/Journal-of-Afro-Asian-Studies-Twelfth-Issue-%E2%80%93-February-2022.pdf

Abstract

At the beginning of the 21st century Libya declared its intention to liberalise its economy and to integrate into the global economy in order to achieve comprehensive development. This paper aims to investigate and explores whether or not investment climate in Libya in terms of administrative and organisational concerns is appropriate to attract foreign companies, particularly in the non-hydrocarbon sectors.

Paper method used is based on qualitative research through two methods of data collection. A survey which was conducted by using a questionnaire with representatives of the foreign and joint companies. A structured interview technique was also used to gauge the opinions of the senior Libyan officials in improving the investment climate in terms of administrative and organisational situations.

The paper reveals that investment climate in Libya in terms of administrative and organisational situations unfavourable for attracting FDI to the non-oil sectors. Therefore, Libyan development has failed to make use of the information revolution in an effective way to introduce fundamental changes to improve performance.

The paper recommends themes that information technology and e-government are crucial for the development of Libyan investment climate making it more attractive for FDI.

1. Introduction

Economic development needs a capital accumulation, which is no longer an easy task, even for industrialized countries. Although borrowing remains an important alternative, it has proved to be an expensive method in the long run. Consequently, to attract foreign direct investment (FDI), developing countries have been liberalizing their economies, which is expected to contribute to job creation and income generation.

The Libya, as the case with other developing countries, suffers numerous financial and economic problems such as a dependency on the oil and gas sector as the main source of the national income. In addition, the limited capacity of its local market given its relatively small population acts as a constraint on economic growth. However, the huge potential of the hydrocarbon sector, the high levels of financial flows generated from these resources that can provide a reliable source of capital, and the need to develop the country’s infrastructure should make Libya a target for FDI. Such investment is promising for the simple reason that the use of the associated modern technology provides the ideal investment for the local natural resources.

Libya has numerous resources of oil and gas besides other natural resources such as a geographic location, vast arable land, water resources, animal and marine resources not to mention its tourism potentials and the various mineral resources.

Despite the huge economic resources available in Libya, the productive sectors are under-performing by failing to use these resources effectively curtailing output and income. In 2019 the agricultural, the animal resources and maritime sectors contributed only 0.16% to GNP, while the per capita income of agricultural products was equivalent to only US$683m. Despite the long Mediterranean coastal strip and the huge fishery resources production is poor: output was 2.0 metric tonnes in 2019 compared to 1900.0 metric tonnes in Egypt and 1494.7 metric tonnes in Morocco (AMF, 2020:130).

A number of factors curtail output in the agricultural, fishing and animal resource sectors: low rainfall; rapidly moving sand dunes; migration from rural to urban areas; inadequate grazing land; overgrazing of land; a lack of modern techniques in agriculture and fishing; and a lack of trained and skilled labour. Labour is these sectors was around 2.3% of the total labour force in 2018 (AMF, 2020:303)

In the manufacturing sector the situation is even worse, with poor productivity a central feature. In 2019, this sector contributed 2.1% to the GNP compared with 61.9% for oil and gas industries, while the added value for the manufacturing industry was estimated at US$0.908bn and US$26.294bn for the extractive industry ((AMF, 2020: 321). The poor performance of this sector can be attributed to a number of factors. The most important of which is the privatisation programme. In 2003 production was suspended in a number of companies pending changing the ownership to the private sector, which has had negative effects on the productivity in these companies.

Moreover, despite the promising resources in the tourism sector, its performance is still weak, with total revenues of around US$164.0m, contributed 0.24% to the GNP in 2010 (World Bank Group, 2016:43). Many researchers and experts explain the poor productivity of the tourism industry by referring to the inadequate infrastructure including hotels and the telecommunication facilities, and the mismanagement of licensing procedures in the absence of the qualified cadre in of the sector (Shernanna, F& Elfergani, S, 2007:145).

Foreign investment, particularly FDI, is not a new phenomenon in Libya. The first law in relation to FDI came into force in Libya on 30 January 1958. This was followed by Law No. 37 of 1968, which was amended by Law No. 5 of 1997 with regard to the encouragement of the foreign capital, and which came to force on 29 May 1997, sometime before the enforcement of its executive regulations. A further limited amendment was implemented by Law No. 7 of 2003, which made it possible for local business using capital in Libyan Dinars (LD) to participate in joint ventures with the foreign companies. This law is mainly concerned at encouraging foreign capital, particularly in relation to projects which benefit from the introduction of new technology, training of local staff, diversification of income, the development of local products to meet international standards or otherwise contributing to local development (Article One of Law No. 7). Moreover, the idea of attracting the FDI into the Libyan economy is not new as it started as early as the 1950s. Thereafter FDI played a major role in the discovery of the huge oil and gas reserves which has contributed to increasing the foreign earnings for the state. These earnings have made it possible for the state to push ahead with its programmes of social and economic development across the economy for almost half a century.

However, despite the aforementioned advantages FDI in areas other than the hydrocarbon sector has rarely been attracted to Libya. Furthermore, FDI has made little contribution towards increasing the rate of capital accumulation in the Libyan economy. FDI has not exceeded 1.99% of total investment in the 1980s and 2000s. In other words that ratio would indicate that only US$199 would become available for every US$10,000 of the total investment required for economic development in Libya. But as yet most of the FDI in Libya has been directed towards the oil and gas sector (Abdulla, 2022).

The Privatization and Investment Board (PIB) was established at the end of 1998 at a time when the business environment was particularly weak. A result, FDI inflows in its early years were slow. However, with the positive political developments in the Libyan-Western relationships since the suspension of UN sanctions in 1999 and the government’s policy to improve the business environment FDI flows into the non-oil sector started from mid-2003.

It should be mentioned that investment projects department at the PIB approves FDI projects and provides the necessary service. It, also, controls and follows up foreign investment projects at the establishment and operational stages through three of its departments; project affairs, investor’s service and control and follow up department.

The key research question in this context is: to what extent that investment climate in terms of administrative and organisational concerns is appropriate to attract foreign companies, particularly in the non-hydrocarbon sectors.

2. Literature Review

The various theories in relation to FDI and economic development discussed previously focused on the pivotal role of the rapid accumulation of capital and other elements (Rosenstein-Rodan, 1943; Lewis, 1954; Rostow, 1960; Leibenstein, 1957; Nurkse, 1943; Bruton, 2001). However, despite the achievement of modern economic growth, these theories have been criticised as they focus on capital investment in cash or in kind.

A number of studies emphasise the importance of administrative stability and the simplification of procedures as a determinant for attracting FDI. Kamaly (2004) highlights the importance of simple and prompt procedures based on a one stop shop in improving the Egyptian investment climate. Hong (2003) reach the same conclusion. Furthermore, Nunnenkamp and Spatz (2000) in their study assessing 28 developing countries spanning 1987 to 2000 established a negative relationship between administrative bottlenecks and the flow of FDI. Moreover, according to a report compiled by the World Economic Forum (2002) the competence of the relevant organisations and institutions plays a major role in enhancing the investment climate in a country, and this competence increases with decreasing procedures associated with the establishment of investment projects and the settlement of disputes. However, Morisset and Neso (2002) point out that administrative procedures differ between countries because of differing structures such as the political system, the level of corruption, the legal system, and public sector wages.

In the case of Libya poor institutional stability has negatively affected the performance of the public administration. The situation has been exacerbated by the many changes to the administrative divisions: the country was initially divided into three regions, then into ten provinces, then 13 counties, and finally 31 counties (Shirnnina and El-Fergani, 2007). The effects of this was emphasised by one senior Libyan official who stating that “we are not sure if the LIB will survive the new restructuring of the state” (Al-Zawi, 2009).

On the other hand, considering the importance of FDI on natural resource development and economic development, this study attempted to establish the opinions of the foreign and the joint companies’ representatives in relation to Libyan natural resources, and if they are satisfied with these resources.

3. Methodology

The paper methods used in this study are based on qualitative research techniques, and consist of two modes of data collection. The first was a questionnaire through which primary data from the representatives of the foreign and joint companies were assembled with the objective of establishing their attitudes towards Libyan business environment. The field research for this study was undertaken at 94 foreign and joint companies registered with the PIB and operating in Libya. To ensure that economic sectors was covered 50% of the research population was taken as a sample.

After selecting the sample target by using a stratified random sampling technique, it was discovered that a number of companies had more than one authorisation. As a result the total number of authorised companies was 83, each of which was sent a questionnaire by post. 72 questionnaires were returned, of which 68 were completed and four were rejected as incomplete. Thus, the questionnaire return rate was 81.9% with 0.818 according to Cronbach’s Alpha scale.

By using SPSS version 26 system, analytical descriptive and statistical analysis was conducted using frequency, chi-square of goodness of fit and cross-tabulation tools by using economic sector as an independent variable.

The second method of data collection was structured interviews, which were conducted with the senior Libyan officials. The phrase senior officials refer to government officials who hold key supervisory positions at different levels of responsibility from the head of departments up to minister of Libyan economy. Consequently the interview population included 14 individuals, three of whom were from Libyan Ministry of Economy (two were Heads of Department and one was Minister of Libyan economy), and the remaining eleven were from the PIB. By selecting 50% and using a convenience sample technique the research sample was reduced to seven senior officials, one from Libyan Ministry of Economy, and six from the PIB. Due to the small size of the sample, the data was analysed manually through an interpretative technique.

In terms of members of the sample, there were seven Libyan senior officials, one of whom was Minister of Libyan Economy. Of the six based at the PIB, five were heads of departments and one an assistant secretary of the PIB.

4. Results and Discussion

Chi-square of goodness of fit was employed to determine whether or not the observed frequencies are different from what we would expect to find. In relation to perceptions on local natural resources, it is assumed that:

The null hypothesis is: there are approximately equal numbers of cases in each group, and the alternate hypothesis is: there are not equal numbers of cases in each group.

As can be seen from appendix 1, the chi-square value for the initial application factor is 53.676 and 66.382 for application procedures on two degree of freedom. Furthermore, the chi-square value for approval time is 13.912 on four degree of freedom. The P value for the first two factors is 0.000, and 0.008 for the last factor. Because the observed P was less than alpha (alpha = 0.05), the results were considered statistically significant for all factors of the administrative and organisational variables. This means that the cells of a contingency table should be interpreted by using cross tabulation tables.

It can be concluded from the data displayed in appendix 2 that respondents in all three sectors are unhappy, although at varying levels, with the number of documents required for investment in Libya. In this regard, the service sector appears to suffer the worst with the level of dissatisfaction standing at 85.7% as compared to the manufacturing sector with 70.3% of the representatives expressing dissatisfaction. The situation appears to be best for the agricultural sector with one-third of respondents expressing satisfaction. By comparing the percentages with the average, it is apparent that the service sector is the least happy with the situation with a level of dissatisfaction of 85.7% which is above the average of 75.0%.

As can be seen appendix 3 demonstrates the level of satisfaction of FDI Company by sector with the processing of investment applications. The majority of the representatives are not satisfied with the way applications for FDI are processed. Importantly, service companies are the most affected with 82.1% of respondents expressing dissatisfaction with the processing procedures, while 78.4% of industrial companies are dissatisfied. However, the situation is better for the agricultural sector where only two-thirds o expressed discontent. These results are confirmed by comparing the level of satisfaction with the average as the results for the service sector stand well above the average of 79.4%.

Appendix 4 shows the licensing period in terms of company sector. For example, in cases involving manufacturing companies 13.5% of the respondents stated that they obtained their licenses in less than one month while 35.1% obtained their licences within a period of between one and two months, 13.5% between two and three months, 29.7% between three and four months and 8.1 % waited over four months. In the service sector 10.7% of the representatives stated that they obtained their licences within one month, 25.0% between one month and two months, another 25.0% within two to three months, 28.6% had to wait for a period ranging between three and four months while 10.7% had to wait for four months or more. In the agricultural sector two-thirds of respondents obtained their licences within a period of time ranging between one and two months, while the remaining one-third of licences were issued between two to three months.

The key research question is: what are the attitudes of the respondents towards the administrative variables emphasised in the survey.

The results of the survey reveal that investors expressed their dissatisfaction with large number of documents required as well as the way their applications were processed. The levels of dissatisfaction were 75.0% for the number of documents required and 79.4% for the application procedures. Furthermore, the more advanced the stage of decision-making the higher the level of dissatisfaction which increases from 75.5% at the document presentation stage to 79.4% at the application processing stage. In this context one senior Libyan official put the blame on policies on the acquisition of land for tourism activities along the coastal strip as part of the planning scheme.

Two further obstacles are the procedures related to the number of documents and the processing of applications. The fact that more than one office deals with applications increases the number of required documents, and secondly the LIB does not take part in the decision-making process in relation to applications.

Legislation is confined to the administrative procedures of the LIB, stopping short of allowing it to decide on the applications. Thus, the main task of the board is to compile technical reports in relation to FDI applications, whilst decision-making rests with the GPC for Economy, Trade, and Investment after consultation with the GPC. According to the law the board has to provide a report within 60 days of the application to the appropriate authorities. Article seven of the law states that:

The People’s Committee of the board undertakes the task of assessing applications and providing technical reports with the appropriate recommendations including its opinion on the project as to its relevance to the national economy within a maximum of sixty days provided the applicant has presented all the required documents, and that the board has to refer its proposals and recommendations to the secretary of the GPC for Economy, Trade, and Investment to take appropriate decision on the matter (Article Seven of Law No. 5 of 1997).

The level of dissatisfaction of international investors in relation to the organisational and administrative aspects reflects the realities associated with the administrative system which is rife with bureaucracy and corruption. This is despite the efforts of the GPC between 2003 and 2007 when restructuring reduced the number of public institutions, the number of staff and procedures to a minimum.

The key research question is: what challenges face the general administration to minimise the levels of bureaucracy?

Senior Libyan officials believe that the administration needs to speed up procedures in order to make business environment more attractive to investors. This implies raising the competence of the public administration through the training and qualification of the workforce, and the need for a one window policy particularly in relation to taxation, customs, electric power and water services.

Another problem is that the administrative system lacks coordination between different government bodies. This problem goes beyond the one stop shop policy to the establishment of the investment map discussed previously. Since 2007 the LIB has been attempting to introduce the one stop shop policy in response to the GPC resolution No. 150 of 2007, to speed up and simplify FDI applications by reducing bureaucracy through the establishment of a single office (GPC Resolution No. 5 of 2007).

From the field survey the researcher discovered that investors have to deal with more than one office, and that the board plays the role of a mediator to provide investors with the documents required by the various government bodies. The traditional mechanism of the general administration can be blamed for the poor coordination between the various bodies, as well as the inefficiency of the administrative system as reflected by its absolute bureaucratic approach.

Information technology provides a chance for everyone to take part in the process of decision-making, or at least helps to raise the level of public awareness and makes people feels socially active. Also, it can make bureaucratic practices more transparent and therefore it is easier to call the authorities responsible for any malpractices. In this context Warren and Weschler (1991) state that the availability and easy access to information tends to improve the capabilities of all parties involved including lay people in government decisions. The most important aspect in this regard is electronic democracy which endeavours to encourage citizens to take part either directly or indirectly through local opinion polls. For this reason information should be available in order to enable the population to form their opinions about ideas put forward for discussion. At Clift argues: “one must refer to the great difference that exists between making information available following the process of decision-making, and making it available prior to decision-making to encourage the active contribution in the process of decision-making per se” (2001:17). However, Battelle points out that for the time being:

The challenge is to switch from the industrial model of government (centralisation, the hierarchy of authority, and working within a confined economy) to a new model of government taking into account the surrounding realities, globalisation, and a digital economy based on information, and the social change which is taking place (1998:21).

The concept of e-government should mean opening the door for the people and the business sector to interact so that business and government activities will be electronically dependent. As far as Libya is concerned the democratic experience, based on the hierarchy of authority and poor communication between the local government and the people, should mean finding methods that would activate the process of communication creating a fair outflow of information for an effective participation in the process and implementation of decisions. Figure 9.1 shows the advantages and the obstacles of using information technology in e-government and trade.

One of the advantages of the application of e-investment and e-government is the smooth outflow of information to promote mass awareness which raises economic efficiency to international standards. In contrast the most prominent obstacle that can disrupt the progress of the e-trade and e-government programme in Libya is the low penetration rate of the internet and the poor e-infrastructure.

In practice it is necessary that the administrative role should be activated through strategies featuring the application of information technology to assist communication between the different government departments on the one hand and between government departments and the population on the other. Meanwhile, the process of identifying the needs of the population would enable administrators at both the local and central government levels to introduce plans. Moreover, it allows the implementation and the evaluation of the outcome of these plans. However, before this can be achieved billions of dollars need to be invested in the communication sector to improve the passage of information between the different parties involved in the process of planning, monitoring and control in order that anyone can be called to account for any malpractice.

5. Conclusion

The paper examines whether or not investment climate in Libya in terms of administrative and organisational variables is appropriate to attract foreign companies, particularly in the non-hydrocarbon sectors. By using qualitative techniques of data collection and analysis through two methods of data collection. A survey which was conducted by using a questionnaire with representatives of the foreign and joint companies. A structured interview technique was also used to gauge the opinions of the senior Libyan officials in improving the investment climate in terms of administrative and organisational situations.

The paper reveals that investment climate in Libya in terms of administrative and organisational situations unfavourable for attracting FDI to the non-oil sectors. It also found that In this regard, the service sector appears to suffer the worst with the level of dissatisfaction compared to other sectors. Therefore, Libyan development has failed to make use of the information revolution in an effective way, as it failed to capitalise on the earlier industrial revolution. Libya is to a great extent unaware of the advances in information technology in relation to e-government and the subsequent failure of the government system to introduce fundamental changes to improve performance.

The paper recommends themes that information technology and e-government are crucial for the development of the country and making it more attractive for FDI.

6. Appendices

Appendix 1 Chi-Square of Goodness of Fit for Administrative Variables

a  0 cells (.0%) have expected frequencies less than 5. The minimum expected cell

frequency is 22.7.

b  0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 13.6.

Appendix 2: Cross Tabulation of Company Sector and Initial Application

 Appendix 3: Cross Tabulation of Company Sector and Application Procedures

Appendix 4: Cross Tabulation of Company Sector and Approval Time

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