British foreign policy and the 'Arab Spring': the transition to democracy

AS 19

Written evidence from the Royal African Society and Libya-Analysis.com

Submission 1: The State of the Transition and Britain’s Role

Contents

1. Executive Summary

2. Introduction

3. Key Issues

3.1 The Appointment of the Cabinet/Interim Government

2.2 British involvement thus far

3.3 Benefits of public vs. private sector involvement

3.4 Elections

3.5 Impact of militias

3.6 Implications of Islamist participation

3.7 Qatari connections

3.8 Managing central and local government structures

1. Executive Summary

This submission presents the issues discussed at a Royal African Society/Africa APPG and Libya-Analysis.com closed briefing held in the House of Commons on November 29th entitled: "The State of the ‘Transition’ and Britain's role". The audience consisted of members of the UK Parliament and the speakers included: an authority on British businesses’ involvement in Libya, a preeminent analyst of Islamist movements in North Africa, and a leading academic of Libyan politics. While it does not conclude with specific recommendations, we believe the meeting raised a number of key questions of relevance to the Foreign Affairs Select Committee’s inquiry on British foreign policy and the 'Arab Spring': the transition to democracy, and we therefore urge the Committee to take these issues into account.

It was agreed that the central struggle facing the Libyan interim authorities is the creation of a functioning government mechanism that can steward Libya through the 'Transition' process. Appointment of the cabinet on November 22nd was certainly an inflection point, and indications are good that many potentially divisive regional interests have been appeased. The UK can help in these processes through reconstruction and job creation efforts. Opinions vary as to whether the private or the public sector should lead the way.

The primary threat to establishing a functioning government is the local militias. Just as there is a struggle for dominance between the militias and the government, there are also indications of a struggle for dominance between President Mustafa Abdul-Jalil and PM Aburahim al-Keib. Abdul-Jalil appears more lenient towards the Islamists and militias while Al-Keib is seen as less influenced by them and more technocratic and Western-leaning. Strengthening the central authority is key to laying the foundations for change, but it is unclear via what levers this strengthening can take place.

2. Introduction

The Royal African Society is Britain’s prime Africa organisation. Now more than 100 years old, its in-depth, long-term knowledge of the continent and its peoples makes the Society the first stop for anyone wishing to know more.

· We foster a better understanding of Africa in the UK and throughout the world-its history, politics, culture, problems and potential.

· We disseminate knowledge and insight to make a positive difference to Africa’s development.

· We celebrate the diversity and depth of African culture.

In Parliament, the Royal African Society provides the administration for the Africa All Party Parliamentary Group (APPG), which was established in January 2003 by Hugh Bayley MP and Lord Lea of Crondall. With a membership of over 80 MPs and Peers, the group is one of the largest APPGs.

In addition to holding regular meetings, the Africa APPG has published a number of reports, most recently a submission to the Strategic Defence Review entitled Security and Africa and an inquiry into the impact of the Bilateral Aid Review on Africa due to be published during December 2011. The Government has responded to each of the Group’s reports in broadly the same way that Ministers respond to Select Committee reports, and important changes in UK Government policy have resulted from this-for instance a quadrupling of our aid for people with HIV/Aids in Africa, a new Bribery Act and funding for Parliamentary capacity building in Africa.

Libya-Analysis.com specialises in helping British and American companies, politicians, and policy makers navigate the history, politics, and business climate of the new Libya. Its President, Jason Pack , is a researcher of Libyan History at Cambridge University. He writes about Libya domestic and international politics for the Wall St. Journal, the Guardian, and Foreign Policy. In September, he led a fact-finding mission to Libya to investigate the relationship between the militias and the central government.

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The Africa APPG and Libya-Analysis.com co-hosted a series of parliamentary events entitled Libya in Transition: Implications and Opportunities for Britain during November and December 2011. This collaboration has benefitted from the Africa APPG’s experience of Parliament and Libya-Analysis.com’s expertise on Libya.

This submission discusses the issues addressed in the first roundtable briefing of the series, entitled The State of the "Transition" and Britain’s Role, which took place on the 29th November 2011. While it does not conclude with specific recommendations, we believe the meeting raised a number of key questions of relevance to the Foreign Affairs Select Committee’s inquiry on British foreign policy and the 'Arab Spring': the transition to democracy, and we therefore urge the Committee to take these issues into account. In particular, the discussions are relevant to the following specific questions which are part of the Select Committee’s inquiry:

· What forces are driving the movement for reform and reconstruction in Libya?

· What specific assistance can the British Government give to help Libya build the institutions of democracy and civil society, and revive its economy? How can the British Government best work with its allies and through international institutions to support reform in Libya?

· What will be the future role of Islamist movements in the region and what should be the British Government’s stance towards them?

The opinions expressed in this submission do not reflect an official policy position of either the Royal African Society or Libya-Analysis.com, but rather the submission should be considered a discussion of relevant issues.

3. Key Issues

The following issues were raised by participants at the briefing.

3.1 The Appointment of the Cabinet/Interim Government

November saw the rise of tensions between the various militias that helped oust Gaddafi. One month after the declaration of Liberation on 23 October, Prime Minister Al-Keib announced the formation of a government of twenty-four members considered largely secular, technocratic, and Tripolitanian in outlook. Cabinet appointments were used to appease local interests, and potentially divisive personalities were avoided. The head of the Zintani militia, Col. Osama Juwail, was awarded the Ministry of Defence and a high-level Misratan, Fawzi Abdul Aa'aL, was granted the Ministry of the Interior. These appointments can be understood as rewards/patronage for the capturing of Saif al-Islam and Mu'ammar Gaddafi respectively. Despite the exclusion of Islamists from high position in the cabinet, Libya's most prominent Islamist militia leader, Abdel-Hakim Bilhajj has publically pledged his loyalty to the cabinet. These developments signal that key militia and Islamist figures may have been successfully integrated/co-opted to work with the central authorities.

3.2 British involvement thus far

All participants cited the good relations maintained between the NTC and the international community throughout the fighting and in its aftermath. Britain, Qatar, the USA, and France have led international assistance for the new government, with each focused on different sectors. The British role has been largely organized around 'stabilisation.' Britain is not currently focused on preparing the ground for elections. Rather, UK technical experts including a police advisor, public finance management team, civil society experts and a military advisory team are in place. There is important advisory work to be done relating to de-mobilising militias and helping to generate the financial and administrative structure for a new national army. The US appears to be taking a lead role in both issues.

At the moment, the Libyan economy is facing a steep month-to-month deficit, as it has $1 billion of revenue and $3 billion of expenditure. The International Monetary Fund (IMF) sent a team in September to assess the readiness of the interim government to have access to the frozen funds, which reportedly total over 10 billion in Britain and 150 billion worldwide. The British treasury are waiting for UN, IMF, and Libyan advice as to when to release the frozen funds to the temporary financing mechanism. The frozen funds are needed for three main things: Reconstruction of the country from war damage, development which was neglected under Gaddafi, and employment to disband militias and create an army.

Participants urged that UK policy makers should use their influence very cautiously, as all processes must be genuinely Libyan-led to be successful. On the private sector side, it is important that British business does not make the same mistake as other European countries which tried to get involved before it was appropriate, aggravating the Libyans who had other priorities such as concluding the fighting and building a government. There is the possibility of a UK business mission in January. Clearly, the wisdom of such a mission depends on future developments, and has already been postponed twice.

The British private sector can help the UK government in creating jobs in Libya. Currently, the only sector with jobs is security; it is certainly the only sector able to pay salaries on time. Under Gaddafi, about 80% of Libyans were employed by the state, and the question arose whether it would be appropriate to continue paying these citizens-even for doing no work-to prevent a larger crisis of unemployment and anti-government grievances.

3.3 Benefits of public vs. private sector involvement

One speaker asserted that it is desirable for British reconstruction efforts to be government-led, as there is no coordination amongst the many actors in the private sector. Only the FCO has the capacity to devise a master plan for matchmaking between relevant British businesses, NGOs and IGOs, and the appropriate Libyan governmental officials who could benefit from their expertise. Furthermore, only the FCO has the political contacts to coordinate such multi-pronged engagement.

Another speaker expressed doubt regarding the desirability of a grand UK government-led scheme, preferring a privatised approach. He asserted that only the business community with historical experience of working in Libya has a clear idea of what Libya needs in terms of education, infrastructure, etc. UK Trade and Investment (UKTI), a government organization focused on promoting international and national trade opportunities overseas and in the UK, is looking into taking several missions to Libya. The most immediate needs are in healthcare and in repairing oil infrastructure. Large-scale HMG support of British businesses to incentivize their participation is not politically feasible at this time. Conversely, the private sector has more time, resources, and on the ground know-how so they appear more prepared to lead the relationship. In summation, coordination between the activities of the government and those of the private sector is a critical issue relative to British involvement in Libya.


3.4 Elections

The UN, USAid and the EU have provided voluntary electoral advice. Lacking an electoral law and electoral districts, the best case scenario is that the upcoming elections would not only be overseen but actually run by the United Nations. The NTC stated in its road map in April 2011 that the elections would be run by the UN. Whether promises made back then will now be honoured is impossible to tell. If all goes as promised, UN experts should be able to set up a reasonable system in Libya as the country is a clean slate electorally. This is an advantage as the necessary infrastructure, jurisdictions, and structures can be invented, unlike in Egypt where old systems and structures are impeding the creation of new ones.

What structures are appropriate for Libya remains unclear. The population distribution in Libya presents a problem for future elections, as 95% of the Libyan population live on 5% of the land. For this reason, people from desert areas want federalism so that their regions would be better represented than they would be on a purely proportional system. This is reminiscent of debates about the structure of the new Libyan state between 1949 and 1951. If any complex electoral system or federal system comes into being, gerrymandering could be an issue and inhabitants from Cyrenaica and from the desert will have an incentive to collude to deprive Tripolitania-with 70% of the nation's population-their fair (i.e. demographic) share of representation. Most Libyans wish for a united Libya and do not seek to introduce the destabilizing and centrifugal forces of federalism.

3.5 Impact of militias

Militias remain one of the most prominent issues regarding stability in Libya, as local military councils have overtaken many public sector services including hospitals and media networks. Militias are successfully controlling travel in and out of the country. For example, militiamen in Suq Juma blocked the departure of an Air Tunisia flight from Tripoli, while the Zawaran militias control the Ras Djeir border crossing with Tunisia. Fostering jobs in Libya is a crucial UK interest but the international community is working against the clock, as the militias are increasingly shutting down economic activity and public services in their neighbourhoods to make political demands.

It was suggested by one participant that the traditional paradigm of incorporating militias into the army was flawed. He suggested launching a propaganda campaign against the most potentially destabilizing militias rather than co-opting them. This argumentation suggests that the only way to rein in the militias is to divide and conquer. This was a contentious point as opponents of this view thought that at worst it could lead to immediate civil war or at best it would create an oppositional climate between the militias and the central government.

The analyst who favoured a propaganda campaign against the militias asserted that it is vital to prevent the militias from becoming deeply rooted in society. This means that the interim government could act with outside support while the militias are still vulnerable, before they have taken over the various local political scenes.

A novel approach could be to highlight the human rights abuses of the militias-a form of a PR campaign against them. The analyst suggested that this approach could be remarkably effective in the Libyan context-consider the reaction of the Libyan people and the international community to the human rights abuses carried out by Gaddafi. He pointed out that the recent UN report on the militias highlights their shameful behaviour, including the 7,000 detainees unlawfully arrested by militias with no official accusations against them. Opponents to this approach countered that PR campaigns against the militias would likely make them more secretive and less likely to work with international actors or the central Libyan authorities. Additionally, dealing with the militias is an internal Libyan matter. Outside actors wishing to throw their hats in the ring must act with extreme caution.

According to the proponent of the interventionist approach, the interim government, the ICC and the international community could work together in discrediting the worst of the militias, combined with direct western diplomacy to reach out to the liberal Libyans and make clear to them the ways in which the West may support them in their contest for power against the militias. This could be part of a British policy of aiding aspiring democrats throughout the Arab Spring countries. Strangely, President Abdul-Jalil has appeared to be 'soft' on the militias and is known to have placed Islamists in key positions within the emerging defence hierarchies. It is speculated that he does so at the bidding of Qatar.

3.6 Implications of Islamist participation

The struggle for power is one of the main issues facing Libya today, and the involvement of Islamist groups in politics is simultaneously unavoidable, but also fraught with peril. The primary lesson for Western policy makers that emerged from the session is that the Islamists are here to stay in Libya and that the West and the UK must engage with them. Libyan Islamists come in all shapes and sizes. It is critical to understand the vast differences between the more moderate political Islamists and the more hard line anti-political Salafists.

3.7 Qatari connections

The Islamic fighting groups are heavily funded by Qatar. It was agreed that the Qataris are active in Libya and other Arab spring countries to project power back into the Gulf, especially in Qatar’s competition with Saudi Arabia. They have exhibited a broad policy of building close relationships with Islamist groups in Tunisia, Egypt, and elsewhere, and by making these groups and thus these governments unwilling to engage diplomatically with infidels, forcing them to take the expertise and diplomatic support of Qatar.

3.8 Managing central and local government structures

The Libyan uprising was dominated by the 'periphery'-initially Benghazi and now Jabal Nafusa and Misrata, etc., rather than a Tripoli-based revolt. It was comprised of a series of local uprisings as opposed to one singular anti-Gaddafi revolution. In order for strong institutions to be laid in Libya, the centre (the authorities in Benghazi and Tripoli) must be stronger than the periphery (the militias), which is not currently the case. The interim authorities can work to extend their authority by instigating massive patronage programs, providing Gaddafi-style subsidies and opportunities for employment. Even if these measures are taken it is unclear if the 'victorious' peripheral elements will wish for centralisation of authority or will continue to push for devolution of power to the local level.

The losers of the revolution-the Warfalla of Beni Walid, and the Gadadfa and Megarha of Sirte and Sebha-have a poor relationship with the new government and they are in their own ways on the verge of pushing for federalism or more devolution of power to the local level. It was suggested that the government should incorporate them with extensive patronage networks of money and jobs, and let them run local government themselves.

Until now, no international NGOs have gone to the most benighted parts of the Libyan periphery, such as Sabha or Kufra. It is in these places where it is most urgent to create the same dense international linkages and capacity-building programs as are underway in Tripoli. Tensions in these regions must be assuaged now before political pressure points will grow to create unfixable problems later. To fill the vacuum in the periphery international actors should focus on state-building and stabilisation in Libya.

Furthermore if the West, especially the US and UK, can reach out to the Libyan periphery, that could simultaneously assuage local tensions and be good PR for the West's role in the new Libya.

7 December 2011

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Submission 2: Business Opportunities for British Companies

Contents

1. Executive summary

2. Introduction

3. Key issues

3.1 Frozen funds

3.2 Conducting business in Libya during the transition period

3.3 Nature of the private sector in Libya (foreign and domestic)

3.4 Banking

3.5 Oil

3.6 Potential Destabilising Factors

4. Summary

1. Executive Summary

This submission presents the issues discussed at a Royal African Society/Africa APPG and Libya-Analysis.com closed briefing held in the House of Commons on 7th December 2011 entitled: ‘Business Opportunities for British Companies'. The audience comprised Members of the UK Parliament and the speakers included: a former British ambassador to Libya with particular knowledge of the Libyan business climate, a leading authority on banking in Libya and an expert on British investments in North Africa. While it does not conclude with specific recommendations, we believe the meeting raised a number of key issues of relevance to the Foreign Affairs Select Committee’s inquiry on British foreign policy and the 'Arab Spring': the transition to democracy, in particular those related to the revival of the Libyan economy, and we therefore urge the Committee to take these issues into account.

It was agreed that there is great long-term potential for British business involvement in Libya, yet in the short term there are few opportunities and much uncertainty. During the transition period the Libyans must address immediate political needs and only later, under an elected government, will massive project spending begin. In the short term, the health and reconstruction sectors are paramount, yet in the medium term the new regime will require similar areas of expertise to those sought by Gaddafi.

There is surprising continuity in the current Libyan economic picture from the situation immediately before the crisis.

2. Introduction

The Royal African Society is Britain’s prime Africa organisation. Now more than 100 years old, its in-depth, long-term knowledge of the continent and its peoples makes the Society the first stop for anyone wishing to know more.

· We foster a better understanding of Africa in the UK and throughout the world - its history, politics, culture, problems and potential.

· We disseminate knowledge and insight to make a positive difference to Africa’s development.

· We celebrate the diversity and depth of African culture.

In Parliament, the Royal African Society provides the administration for the Africa All Party Parliamentary Group (APPG), which was established in January 2003 by Hugh Bayley MP and Lord Lea of Crondall. With a membership of over 80 MPs and Peers, the group is one of the largest APPGs.

In addition to holding regular meetings, the Africa APPG has published a number of reports, most recently a submission to the Strategic Defence Review entitled Security and Africa and an inquiry into the impact of the Bilateral Aid Review on Africa due to be published during December 2011. The Government has responded to each of the Group’s reports in broadly the same way that Ministers respond to Select Committee reports, and important changes in UK Government policy have resulted from this – for instance a quadrupling of our aid for people with HIV/Aids in Africa, a new Bribery Act and funding for Parliamentary capacity building in Africa.

Libya-Analysis.com specialises in helping British and American companies, politicians, and policy makers navigate the history, politics, and business climate of the new Libya. Its President, Jason Pack , is a researcher of Libyan History at Cambridge University. He writes about Libya domestic and international politics for the Wall St. Journal, the Guardian, and Foreign Policy. In September, he led a fact-finding mission to Libya to investigate the relationship between the militias and the central government.

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The Africa APPG and Libya-Analysis.com co-hosted a series of parliamentary events entitled Libya in Transition: Implications and Opportunities for Britain during November and December 2011. This collaboration has benefitted from the Africa APPG’s experience of Parliament and Libya-Analysis.com’s expertise on Libya.

This submission discusses the issues addressed in the second roundtable briefing of the series, entitled Business Opportunities for British Companies, which took place on the 7th December 2011. While it does not conclude with specific recommendations, we believe the meeting raised a number of key issues of relevance to the Foreign Affairs Select Committee’s inquiry on British foreign policy and the 'Arab Spring': the transition to democracy, in particular those related to the revival of the Libyan economy, and we therefore urge the Committee to take these issues into account. In particular, the discussions are relevant to the following specific questions which are part of the Select Committee’s inquiry:

· What forces are driving the movement for reform and reconstruction in Libya?

· What specific assistance can the British Government give to help Libya revive its economy? How can the British Government best work with its allies and through international institutions to support reform in Libya?

The opinions expressed in this submission do not reflect an official policy position of either the Royal African Society or Libya-Analysis.com, but rather the submission should be considered a discussion of relevant issues.

3. Key Issues

3.1 Frozen funds

The current situation in Libya has generated by far the largest amount of UN frozen assets in history, which have been extremely difficult to administer. The Libyans have not yet demonstrated to the IMF or to Alastair Burt, the UK Minister for Middle East and North Africa, that they are ready to absorb the unfrozen funds. Even when the Libyans improve their central financial system, it may prove difficult to convince the international community’s lawyers that the interim Libyan government has installed the necessary safeguards to ensure transparency and prevent corruption.

The best solution to this impasse was presented as a partial release of funds in a Know Your Customer (KYC) compliant agreement with the Central Bank of Libya. The UK Financial Services Authority (FSA) would support this action. If the UK were to release half or a quarter of the Libyan funds frozen in Britain, this would allow the interim government to begin investing in the Libyan future. While certain Libyan Treasury officials and ambassadors have spoken against funds being unlocked at this stage, former NTC representative to Britain, Guma al-Gamati, has highlighted the urgent need for money in the country. It cannot be disputed that at present the interim authorities can barely pay salaries, and do not possess sufficient funds for medical care, for tackling the unexploded ordnance problem, or reconstruction.

The current mechanism for regulating the uses of unfrozen funds, the Temporary Financing Mechanism (TFM), is seen as fostering corruption within the NTC. There is speculation that Libyans in the financial sector do not wish for the unfrozen funds to be released into the hands of the TFM Advisory Committee which consists in the most part of the Finance, Oil, Economy and Health Ministers of the Interim Government and that it is wise to wait until Libya has an elected government before the majority of funds are released.

3.2 Conducting business during the transition period

No one should doubt the long-term prospects inherent in the Libyan market: the capital expenditure plans for infrastructure under Gaddafi were approximately $240 billion for the years 2008–13, and the need for infrastructure is no less great now, with spending particularly needed to get oil fields functioning. Months ago former NTC PM Mahmoud Gibril spoke about $400 billion in project spending from 2012–17.

However the new administration is not in a position to sign long-term contracts, as Libyan cabinet ministers do not want to commit their successors or enter contracts that might be undone by the future administration. Companies planning missions to Libya in January must be aware that there is little scope for new business interests to become settled at such an uncertain time politically.

The key immediate Libyan infrastructure investment needs, crucial for Libya’s economic recovery, are power, water, housing and transport. However the medical sector remains the interim government's top priority for political reasons. There have been protests for medical aid and pensions for fighters, and the government is likely to address these before turning to repairing damaged infrastructure.

At the moment, British businesses dealing with the interim authorities are focused on the medical, de-mining and reconstruction sectors. The Libyan authorities see the involvement of other sectors as a nuisance. Indeed other European countries prematurely sent missions to Libya, which adversely affected their relationship with the new cabinet. Britain has been patient, for example the oil and gas mission arranged for January 2012 has been postponed.

The temporary nature of the interim authorities means that many of the Ministers that British companies would meet during missions to Libya at the moment will not be in power next year. It was argued that the existence of the interim authorities only postpones discussions about the distribution of power by either seven months or two years. An example of the ways in which the authorities will change is that there are no overt Islamists in the current ministerial list, other than the Minister for Religion. Many aspiring politicians are not yet involved. The Islamists will presumably bide their time and enter the political process at the most opportune moment.

Currently the role of the Embassy, in terms of business, is to present British business interests, connecting with middle management and mapping out the situation ready for businesses to move in later. The work that the UKTI is doing in Benghazi involves fending off horizontal missions when highly-focused vertical missions are more useful. Despite the changing of the political guard, it is worth establishing contacts now as middle management technocrats are unlikely to change.

3.3 Nature of the private sector in Libya (foreign and domestic)

The British private sector should be able to flourish under the new Government although entirely foreign-run businesses will not be allowed. Employment of local staff and joint ventures will be the norm for British companies, similar to the old Libyan business climate. Historically, companies have seen Libya as a long-term market and have entered it seeking to build relationships first and profit further down the line. However, the UK and US private sectors are more risk averse since the economic downturn and few corporate boards are willing to use this approach in Libya at this time. Therefore, it was argued that Libyan companies will need to pass tests of trust before British companies will agree to work with them.

The nature of the Libyan private sector is also an issue, as many private sector companies are still essentially state run. Ostensibly private companies are often owned by the old Libyan business families, for example the mogul Hosni Bey-owner of the largest private holding company in Libya HB Group-also controls the al-Sayara Trade and Investment Bank even if it appears that it has other ownership. Often examining the so-called nascent private sector reveals essentially state-run companies or companies controlled by the same few tycoons connected to the old regime.

3.4 Banking

It was argued that most of the business available in the banking sphere will remain in the public sector-Islamic banking and trade finance. Sharia finance will certainly grow in Libya although it will not necessarily be compulsory for international banks, despite President Abdel-Jalil's prior pronouncements. Recent events have made Libyan trade opportunities seem more risky to UK banks. As a high-risk environment, the premiums to be made in Libya by foreign banks are higher than in lower risk countries like Tunisia. At present Libyan banks are not issuing credit, one reason the economic recovery is so sluggish.

Many Libyan bankers have been well trained by banks such as Barclays and HSBC, and their systems are generally respectable, for example they have an optical fibre clearing system. There is therefore little need for international consultants; rather there is a risk that an influx of international banks causes unemployment amongst qualified Libyan professionals. Banks will encounter challenges as money comes in, and manoeuvrability will be limited by public ownership. Tajara li-Tanmia is the biggest private bank in Benghazi, and others will follow its lead by diversifying as they accumulate services.

The Libyan government is looking for assistance with asset management for the Central Bank (CBL). It was proposed that the Libyan Investment Authority (LIA) is likely to continue its old investment patterns in Britain and elsewhere until a confusion over which institution has the authority to control the money is resolved. The CBL sees the Libyan Investment Authority as an arm of itself, which is contested by the finance ministry under Hasan Zaghlam and the LIA's old leadership. The CBL's claim to authority comes from its position as the original source of the investment capital, but the law establishing the LIA states that it is not under the Central Bank’s control. Al-Sadiq Omar al-Kabir is currently the head of CBL but it is unclear how much longer he will hold this post. Internationally respected former CBL head Farhat Omar Ben Gdara is unlikely to make a comeback as he is too closely connected to the old regime. To date no one knows how the interim authorities are planning to reconstitute the LIA, who it will be accountable to, and what investment strategy it is likely to pursue.

A 2005 McKinsey study led to the appointment of Rothschilds as over-seer to the opening of banks with foreign capital of at least  $50 million. Only Unicredit of Italy succeeded in doing this; HSBC was never granted a license, perhaps because they lacked ‘proximity’ to the Gaddafi family. In May 2007, HSBC opened and worked with the authorities until Tim Gray, the Canadian manager on the ground, had to leave during the revolution.

Experts familiar with the Libyan banking system feel that it has not fundamentally changed, nor will it until an elected government comes into office.

3.5 Oil

Libya has few prospects of revenue except from hydrocarbons and the investment profits from its sovereign wealth funds. For example the agriculture sector is in a state of disarray, as Gaddafi’s ideological aim to make Libya self-sufficient in terms of food led to massive inefficient project spending.

Gaddafi did not destroy the oil fields during the months of battle as he appears to have believed he would win the conflicts and regain the support of the Libyan people. Zawaya is an example of a town which is in ruins while its oil refineries and pipelines remain intact. All efforts are being made to restore production levels, with impressive success so far-certain sources report nearly 800,000 barrels a day as a production figure, which is almost half of the previously recorded level of 1.7 million barrels under Gaddafi. The proposed target of 3 million a day, the level reached during the 1970s, is unobtainable in the medium term however, as such a target will take at least three years of political stability and enormous foreign investment.

Expectations for production rates vary considerably-the BBC World Service reported that the Zuwara oil complex is highly functional and could get the country ready to produce two million barrels a day in the first quarter of next year, but such rapid progress is not necessarily taken seriously by oil analysts, despite the fact that post-Gaddafi Libya has so far exceeded all expectations. The oil companies working under Gaddafi are now trying to address shortages and damaged infrastructure. This can be seen as a practical demonstration of business relationships enduring throughout the turmoil. It is quite apparent with ENI.

In summation, there is remarkable continuity between the current Libyan economic picture with that before the crisis. In the short term, the health and reconstruction sectors are paramount, while in the medium term the new regime will require similar areas of expertise as those sought by Gaddafi.

3.6 Potential destabilising influences

A number of potentially destabilising influences were discussed.

It was noted that the reforms implemented during the so-called 'reform process' of 2003–2010 to stimulate economic progress are now derelict. The few functional or semi-functional institutions created by the reform process-such as the Economic Development Board and Libyan Investment Authority-are now without staff and in a state of administrative limbo. Ministers have no staff or ministerial machines-the old Gaddafian adage ‘lijan fi kuli makan’ (Committees everywhere) is applicable-and decisions are taken by committees and stake holders-i.e. wealthy and powerful Libyans, many with ties to the old system.

To help prevent inefficiency and corruption, the commercial law sector was suggested as an area where the UK could become more involved, as previous British work in this sphere has successfully influenced Libyan legislation.

It could be argued that the Libyan economy has reverted to a stage of scarcity, barter, and personal networks. Moreover, Libya's economic recovery could be impeded by 'the fifth column' elements of Gaddafi supporters and family members abroad who have access to many assets previously hidden away. These vast monies and control of many of Libya's quasi-state business could be used to sabotage the Libyan economy and enrich the old elites. There is a concern that if the wrong people who were technocrats under the old regime are allowed to remain influential corruption and nepotism will continue.

Unexploded ordnance is a grave safety concern. Britain and Scandinavian countries in particular are needed to assume their historic roles in demining in Libya.

4. Summary

The primary difference between before and after the revolution from a business point of view is the increased goodwill that exists between Libyans and the members of the NATO-Alliance countries. To capitalize on this goodwill, the experts recommend a light touch. Britain's approach should now be reactive not proactive. British government officials should listen very carefully to the Libyans and relay their stated needs to appropriate members of the private sector. Despite short term difficulties, there are many reasons for optimism.

In many Arab Spring affected countries, a crony-capitalist system has been brought down. In contradistinction, in Libya Gaddafi’s quasi-socialist model has failed. This leaves the possibility of wide spread support for the emergence of an Islamic-capitalist system.

12 December 2011

Prepared 27th January 2012