Bridging the divide

Over the course of human history, the politics of regions and tribes have frequently changed; what has remained constant, however, is the need to trade across geographic and political boundaries. Perhaps that is why Hassan Tatanaki, Chairman of Challenger Limited, believes that members of the international business community may have a better understanding of the realities of the Middle East today than many observers, both inside and out.

Take Libya. Once considered to be the pariah of the region, the object of a US trade embargo and crippling UN sanctions, the country is now attracting considerable interest from investors. “Whenever we talk up the region’s markets with investors from the US and Europe it is always Libya they want to talk about,” says Tatanaki. “There seems to be a lot of appetite for getting involved now that the country is opening itself up to outside investment.”

Tatanaki himself has considerable experience as a successful contractor in the country. From its base in Cairo, his business, Challenger, provides oilfield drilling and work-over (repair) services almost exclusively in Libya. Established in the Isle of Man in 1991, the company is now reckoned to be one of the largest privately-held drilling companies in the North Africa region.

According to David Bamford, columnist with OilVoice, the recent steady decline in the price of oil from its high of almost USD 150 a barrel is causing most of the major producers to cut back on exploration and discretionary expenditures such as preventative servicing. He is expecting to see further consolidation among oil and gas companies, as those with surplus funds from the recent period of high prices snap up those with tasty oil reserves but weaker balance sheets, as a way of filling portfolio gaps without having to undertake costly exploration and drilling.

A further prediction is that national oil companies in oil rich countries will become increasingly reluctant to see large sums of money paid to foreign companies, particularly when revenues generated by the oil itself is reduced by price fluctuations. Successful regional contractors, partnered with foreign resources and expertise, are in a strong position to capitalise on these trends, and Challenger is one of them.

By 2004, Challenger had 10 rigs, and with two judiciously chosen investment partners the company has since increased capacity to 29 drilling and work-over rigs, more than doubling turnover and boosting shareholder equity from USD 46m to USD 160m. The first investment deal was with Bahrain-based Venture Capital Bank (VC Bank) and its partner, the US private equity firm Global Emerging Markets, in 2006. VC Bank now holds a 24.5 percent stake in the business.

In early 2008, Challenger announced a second partnership deal with Bronco Drilling Company, Inc, under which the US firm committed to supply six land drills in exchange for a 25 percent stake in the company. Commenting on the deal at the time, Tatanaki said, “This partnership will energise and undoubtedly increase our capacity to expand Challenger activities in both scope and scale. This transaction shows that the growing cooperation amongst Libya, the US and the Middle East is creating an attractive investment environment for US and international companies.”

Economic transformation
The discovery of oil in 1958 transformed Libya from a poor agricultural economy to one of the richest in Africa, but very little of the wealth filtered down to the lower orders of society. In addition to instances of waste and corruption, subsequent governments have used the oil wealth to invest in armaments and donations to developing countries in the region where it wanted to increase Libya’s influence.

But the crippling oil embargo and international trade sanctions of the 1980s and 1990s left the county’s economy increasingly isolated and vulnerable. According to recent statistics, Libya imports 75 percent of its food requirements and unemployment shot up to around 30 percent. Since sanctions began to be lifted in 2003, however, progress has been made on reforms as part of a broader campaign to reintegrate the country into the international fold.

There is a lot to do. Despite efforts to diversify the economy and encourage private sector participation, the established culture of government bureaucracy that led to extensive controls of prices, credit, trade, and foreign exchange needs to be dismantled. “The Libyan government is not accustomed to dealing with the western ways of doing business, so they’re having a problem understanding each other,” says Tatanaki. “Some local government officials think that having no corporation tax is enough. They need to understand that the investors need to make money before they worry about the taxation.”

One reason there is such an appetite for investing in the country is the reputation of its business managers for fair dealing. When the embargo happened in 1981, the foreign oil companies like Occidental and ExxonMobil were no longer allowed to operate in Libya. Instead of nationalising their share of the businesses they left behind, however, the Libyans essentially put it in escrow. At the end of the embargo, foreign companies returned to find their equity share intact and a full accounting of the financial performance of the business since their departure. The challenge now is to break down the bureaucratic hold on government processes and open the doors to greater investment. Libya, Tatanaki points out, has always been a haven for contractors. With little risk to business, a contractor could come in to do a project and then leave.

“I think the Arab world has to realise that you can never be alone,” he says. “No matter what experience you have, you still need access to western expertise. In the 70s it was all the foreign companies developing oilfields; then in the 80s and 90s the Arabs were all trying to localise it. They thought that they could bring technology into the Arab world and then be independent. Technology is always developing, so you always need to be interconnected. Now we realise that what we need is western management know-how and technology, but we need to get the formula right. We need foreign expertise but with local participation.”

In Libya, Gaddafi’s second son, Saif al Islam provides the energy and leadership behind the modernising drive. A graduate of the LSE, he understands the western approach to business, and is actively promoting an open door policy to foreign investors. It will not be a seamless transition. Although many people support his ideas, many government officials do not understand the new ways, and Tatanaki is expecting to see many being replaced over the next few years.

A key element of the modernisation programme is the privatisation of many iconic institutions, including the centralised banking system. Plans have been announced to open bidding next year for two or three licences to open new banks, without the usual requirement for a local partner. Access to new, less restricted sources of money is seen as crucial to encouraging foreign investors.

And there are many reasons for choosing to invest in the country. Libya’s geographic position is a clear advantage. Its oilfields, situated in close proximity to Europe and the Middle East, have good access to pipelines, refineries and consumers. At the same time, the country is both a geographic and political gateway into the developing countries in Africa. “Over many years, Colonel Gaddafi developed close relationships with many of the leaders of these African states,” Tatanaki explains. “Libya has already invested USD 7bn in Africa, and there is a strategy for the business elite in the country to prioritise further investment, in partnership with foreign investors who want to go in with local expertise. We can offer that expertise and partnership.”

This summer has seen several marketing initiatives promote Libya. Representatives of the Libyan African Investment Portfolio, with investment funds of up to USD 8bn, were in London in August looking to increase its total investment funds by actively seeking joint venture partners. They met with up to 100 top UK companies that expressed interest in various opportunities. There was also the third annual conference, sponsored by the Middle East Association, entitled ‘Libya Opportunity and Challenge’, and a separate conference called, ‘Libya investing at home, investing abroad: managing resources for future development.’

Tourism
Of course, the government does not want inward investment to be confined to the oil sector, which already accounts for 90 percent of exports and around a quarter of GDP. This level of economic dependence is risky in a world that is increasingly ambivalent about the environmental costs of oil and gas, and where high oil prices fuel long term investment in alternative energy sources.

While investment in sectors like infrastructure, education and healthcare are encouraged, a legacy of policy and bureaucracy can make it difficult. “Take the health industry, for example,” Tatanaki points out. “Libya has free healthcare, which is good for the country, but how can you encourage investment into building a service that is free? The intention is there, but the government is still searching for the right formula that will meet its objectives but also give the investors a return on their capital.”

As with so many other countries that are well endowed with natural and historical sites of interest, Libya is keen to access the investment, employment and foreign exchange tourism can bring. However, the country currently trails its neighbours in the Middle East. Sami Zaptia, writing for the Tripoli Post, notes that in 2007 six million tourists visited Tunisia, spending a total of USD 2.5bn. By contrast, official statistics put the number of tourists visiting Libya between 2004 and 2007 at a maximum of 200,000 per year.

This is partly due to a lack of investment in infrastructure. Until very recently there was only one hotel in the country of five star standard, and airports lacked the capacity to bring in large numbers of visitors. Complicated policies regarding entry requirements also discouraged foreign visitors.

The country has a massive task ahead to build the capacity for attracting its target of 10 million visitors a year, and many insiders argue that a clear strategy is needed to ensure that it gets the right sort of traveller. “The last thing we want to see is Libya becoming a cheap holiday destination like Cyprus or Spain,” Tatanaki says. “We would rather go for quality over quantity, attracting the serious traveller who can appreciate the culture and beauty of the landscape.”
Recently announced investments of over USD 5bn to increase the capacity of the airports, combined with a more open approach to foreign investment, are beginning to attract major brands like Radisson, InterContinental, Sheraton and Movenpick that will draw the higher end tourist. But there is still the problem of Libya’s public image, fuelling traveller’s fears of possible threat from targeted extremism.

“There is no security issue for foreign travellers in Libya, but there is also no question that there is a difference between the image and reality,” Tatanaki states. “If we’re talking about security and safety for westerners to come and go in the country, it’s no different than any other part of the Middle East. I think it’s the infrastructure that gives the feeling of not being so safe rather than the safety itself. For example, when you land in Cairo, you see many business names that you are familiar with, and the queue to get in is full of westerners, so you feel comfort. When you land in Tripoli, you might not see the familiar names and there are only 20 or 30 other westerners in the queue. You feel a bit odd, and that transforms into feeling insecure.”

Open for business
Clearly, it is the misunderstanding between his region and the western world that must be addressed. One of the first difficulties is that the misunderstanding is multi-layered. “On the one hand, you have a misunderstanding between Islam and the West,” he says. “Islam is a religion, and it is a peaceful religion, but it has been used to justify the actions of some fanatics, and therefore portrayed by the media within the western world as a religion of fanatics.”

There has been a further association of extremism with the whole of the Middle East, which, he points out, is a vast and diverse geo-political area. People on both sides, fuelled by the media, generalise the actions of a small group of individuals to apply to an entire population. Thus, the west may associate all Arabs or Muslims with the aggressive actions of a few, and the Arabs may associate entire western populations with the consequences of western response to extremist actions.

“Not only have extremists used their religion to justify their actions, we know they use the media as well,” comments Tatanaki. “They survive on the negative media given in the west because the more you curse them, the more it is to their advantage to go to the fundamentalists and raise the resources they need to continue their campaign. They thrive on fear.”

The solution, he believes, lies in both sides educating their people about the real situation. “People respond to the images that are portrayed in the media and on television,” he says. “People in the west see some Arab women wearing the veil and think that applies to Arab women everywhere. In the Arab countries, we also do not get enough representation of what life is really like in the west. We need to understand that there is an appetite for listening and understanding. The Obama speech made a big difference over here. We need more of that.”

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