China's Investment in Libya
Libya’s civil war affected China’s considerable investment in that country; Michael Kan and Belinda Yan assess what Chinese investors will now do in relation to Libya
China has always been an avid supporter of infrastructure projects in developing countries, including Libya. Backed by immense economic resources, technical know-how and a relatively low cost labour force, Chinese state-owned enterprises and private contractors have penetrated and invested heavily in important industry sectors including real estate and construction, railroad, oil and telecommunications. Bilateral treaties and agreements were entered into between the Chinese and Libyan governments to facilitate this. The aggregate value of those investments exceeded US$20 billion.
Thus, when political unrest and eventually civil war broke out in Libya in 2011, Chinese investors stood to suffer massive economic loss. At the time, the Ministry of Commerce of People’s Republic of China (MOFCOM) announced that China would defer the making of further investments in Libya until the situation is stabilized. Ongoing projects were suspended. More than 35,000 Chinese labourers were evacuated from Libya.
Thankfully, the civil war has now ended. With recovery efforts initiated under the new leadership of the National Transitional Council (NTC), optimism lies ahead for Chinese investors.
Optimism lies ahead
NTC recently estimated that Libya would need to invest up to US$100 billion into local infrastructure projects over the course of the next five years. This is five times more than the aggregate value of China’s investment into Libya. Demand lies not only in traditional industry sectors such as oil and gas and construction, but also in new sectors such as renewable solar and wind energy and tourism.
Chinese investors collectively have the technical expertise and financial resources to meet Libya’s demands in both traditional and new industry sectors. More importantly, at the 2012 third International Infrastructure Investment and Construction Forum of the China International Contractors Association (CHINCA), the message was very clear that Chinese investors have moved away from traditional EPC contracts and are now able to take up more lucrative, but complicated BOT and PPP projects that Libya may well need to offer in order to better manage its financing requirements.
Given China’s track record of investments and ongoing projects in Libya, it comes as no surprise that shortly after the NTC declared the liberation of Libya, the Chinese government confirmed its support for the council and expressed its wish to maintain economic cooperation with the new government. In September 2011, China as a permanent member of the UN Security Council formally recognized the NTC as Libya’s new leader. In return, NTC promised that it would honor past treaties and agreements entered into between Chinese investors and the old Libyan government or its constituents. The path has therefore been paved for Chinese investors to return to Libya, at least insofar as high level governmental policy is concerned.
That is not to say that Chinese investors would flock in droves to Libya in the near future. Far to the contrary, Shen Danyang of MOFCOM cautioned that ‘it remains difficult to predict a clear time for the full return and resumption of work by the Chinese companies’.
Nonetheless, the distinct advantage that China has over its jurisdictional competitors is the prowess of its investors. They are able to strategize and prioritize investment opportunities, and willing to leverage on high levels of commercial risk, all with a conscious view to maximizing gain. These initiatives are then backed by an aggressive workforce committed to strive in strenuous and often unsafe working environments.
A prime example is China’s initiative and efforts to invest into Iraq after the fall of Saddam Hussein’s regime in 2003, notwithstanding the consensus at the time that ongoing, post-war political and economic turmoil made Iraq an unattractive place for business. Those efforts finally bore fruit in 2008. In 2008, PetroChina and China ZhenHua Oil entered into a US$3 billion contract with the Iraqi government for oil exploration rights that will last 23 years - this represented the first major contract awarded to a foreign investor. China is now the biggest investor in Iraq’s oil and gas industry. Moreover, at the invitation of the Iraqi government, Chinese investors are also exploring investment opportunities in other industry sectors, in particular construction and services (including tourism). With careful strategic planning both on the part of the Chinese government and the Chinese investors, China’s success in Iraq could well be replicated in Libya.
As one would expect, the nature of these opportunities is such that potential challenges are inevitable. Challenges common in post-civil war jurisdictions include the need to ensure security and safety of the expatriate workforce amidst militia action and a smooth and credible banking and finance system. Libya is no exception, albeit positive steps are being taken in collaboration with the IMF and World Bank to strengthen public financial management and improved governance of the sovereign wealth fund.
There are then the commercial challenges. Whilst the NTC has promised to honour pre-civil war contracts, the reality is that the terms of each contract would need to be re-negotiated with new government officials, in light of changed circumstances.
The changes in the legal system also pose challenges. The NTC has announced that Shariah law would form the basis of its legal system. It has also promised independence of the judiciary from the executive arm of the government (a feature widely known as lacking at best in the old Libyan government) and that international law would be respected. Whilst these are welcome messages, there is no certainty that they would be observed in practice. The problem is particularly prevalent to Chinese investors who are, as mentioned, prepared to assume high levels of commercial risk in return for business opportunities. As a consequence, their contracts with the government or its constituents would likely have omitted provisions offering performance guarantees such as payment in advance or security deposit. In the event of a contractual dispute, Chinese investors may well experience difficulty in pursuing a claim against the Libyan government or its constituents. Whilst the Chinese approach to dispute resolution has consistently been through amicable discussion of mutually acceptable solutions, legal recourse may be inevitable. The judiciary may however be reluctant to accept a claim against the Libyan government or its constituents, on the ground of sovereign immunity or otherwise. Even if a judgment or an arbitration award could be obtained against Libya, problems of enforcement would arise.
In particular, Libya is currently not a contracting state to the New York Convention. Presumably, the best (and possibly only) short-term solution lies in bilateral treaties to be signed between the Chinese and the new Libyan governments confirming their mutual intention to honour respective contractual obligations and, importantly, judgments and awards arising from breach of those obligations.
Above all, the main challenge is one of political nature - to ensure that the new Libyan government’s intention to maintain close economic cooperation with China is genuinely kept. The NTC once indicated that those countries which supported the revolution would be given preferential treatment in future projects.
China did not offer any support to the revolution, in line with its established foreign policy of non-intervention in a country’s domestic affairs. In fact, China was the last of the five permanent members of the UN Security Council to recognize the NTC. To add insult to the injury, the press reported that at the outbreak of civil war, Chinese companies were negotiating the sale of arms to the old Libyan government which would in itself be, in violation of UN sanctions. No doubt the Chinese government has recognized the need to now take steps to mend any harm done, including sending a high-level trade delegation to Libya to rekindle trade.
The process of resuming full trade and commercial relations between China and Libya will take time. Challenges and difficulties will arise along the way. The fact remains, however, that China has all the resources and technical capabilities it takes to resume its role as an important investor in Libya. Likewise, Libya has the wealth and natural resources, is geographically well-positioned, and requires technical assistance on its infrastructure projects to complement China’s efforts. Careful strategic planning on both sides is required, but a long-term genuine collaboration admits of only one outcome: a win-win outcome.
Michael Kan is an Associate and Belinda Yan is a Solicitor at Brandt Chan & Partners in association with SNR Denton HK LLP