By Tim Eaton
This article is part of Chatham House’s project exploring the development of Libya’s conflict economy. The key findings are fuel shortages continue, Libyans pay twice, and more transparency needed.
As fuel shortages have emerged and black-market prices have risen within Libya, cross border smuggling has taken a significant hit.
‘There is nothing for me here,’ said a Tunisian man in his early twenties when interviewed in a small town on the Tunisian-Libyan border in February 2019. ‘This town died.’
Overland smuggling of fuel to Tunisia has long been a staple route for fuel smugglers. Yet, because of increased border security within Tunisia and the growth of the black market within Libya, prices for Libyan fuel increased fourfold between 2015 and early 2019.
This has had a major impact on the economy in southern Tunisia. When interviewed, the man said that he used to work at a barber shop in addition to smuggling fuel.
But the collapse of the smuggling sector had meant that the barber shop he used to work in had closed down. This made him solely reliant on fuel smuggling, which is becoming more difficult.
He said that he was forced to deal with militias in Libya, which control the market, while trans-Saharan routes were no longer viable.
The Tunisian army now opens fire on smuggler convoys seeking to sneak fuel across the desert into Tunisia, he claimed. When asked what he was planning to do next, he responded that he was ‘saving for a boat to cross the Mediterranean’.
Some fuel continues to be smuggled to Chad, Niger and Sudan. It has been alleged that some armed groups from those countries that are operating in Libya are being paid in fuel rather than cash. Those groups then transport the fuel to their countries of origin and seek to sell the fuel at a profit.
Libya’s dysfunction has also underpinned the growth of higher-value seaborne fuel smuggling, principally of diesel. These schemes allow refined products to enter international fuel markets.
The investigation surrounding a prominent smuggler, Fahmi Salim Ben Khalifa, known as ‘The Boss’, and his network offers an insight into these operations and to a cast of characters that apparently share little in common.
Khalifa had long been a smuggler of some renown in Libya. Before fuel smuggling ramped up after 2011, he reportedly smuggled drugs.
So prominent were his activities in his hometown of Zuwara that one of the sides of the port had become known as ‘Fahmi’s port.’
Khalifa’s preferred method of illegally obtaining fuel turns the story back to the Zawiya refinery complex, where Khalifa’s network apparently used legitimate paperwork to obtain diesel, only to not deliver it to its official destination.
From Zawiya, the fuel would be taken along the coastline to Zuwara, where onshore pumping stations would fill small boats just off the coast. These small boats would then sail on to be decanted onto tankers.
For the international dimension of the sales, Khalifa needed legal cover. He obtained this through the creation of a front company. A press report that has published a translation of the letter of certification used by Khalifa’s front company indicates that it was signed by Ali Qatrani, a boycotting member of Libya’s Presidency Council with close links to Khalifa Haftar.
Qatrani had apparently signed the letter in 2015 in his capacity as chair of the Economy, Trade and Investment Committee of the House of Representatives, the officially recognized parliament. He has denied wrongdoing.
From the Libyan coast, the fuel went onward to Malta, where individuals with connections to organized crime networks are believed to have facilitated the movement of the fuel onward to Italy.
Once in Italy, mixing agents were added to the low-grade diesel in order to make it compatible with commercial vehicles. It was then distributed by organized crime groups at 60 per cent below the market rate.
Two months after Khalifa’s arrest in Libya in August 2017, Italian police announced the findings of an investigation that had tracked at least $35 million worth of smuggled low-grade Libyan diesel, delivered by Khalifa’s network to petrol stations in Italy and beyond.
Following Khalifa’s arrest, maritime smuggling declined. But the smuggling networks on the northwest coast remain operational and maritime smuggling continues.
Following the money
Since his appointment as head of the official fuel distributor, the Brega Petroleum Marketing Company (BPMC), in 2018, Emad Bencora has been trying to fix some of the flaws in Libya’s leaking fuel distribution network.
Historically, massive shortfalls in income from fuel sales cascade through the system, but as the institutions involved are not subject to profit-and-loss considerations, nothing stops.
It has worked like this: fuel station owners have accrued significant debts to the fuel distribution companies, which in turn have accrued debts to the state-owned entities.
According to the Libyan Audit Bureau, while more than 4 billion dinars ($2.8 billion) was spent on fuel imports to Libya alone in 2017, the amount received by BPMC for all fuel (domestic production and imports) was only 282 million dinars ($200 million).
This illustrates that the lost revenues from sales are relatively small in comparison to the cost of the subsidy. Yet BPMC was estimated to owe the NOC approximately 8.4 billion dinars ($6 billion) for fuel sales over the period 2011–15, according to the Audit Bureau.
Bencora has sought to fix this by ensuring that the fuel distribution companies pay BPMC in advance for the fuel that they receive.
Libya has four fuel distribution companies, created as part of a privatization drive in the fuel sector. But, each of them is beset by governance challenges and are said by a former senior Libyan official to have ‘no chance of being profitable.’
There is a limited margin to be made when the price of fuels are fixed at the low, subsidised rate. Moreover, these fuel distribution companies have lost control of many of the fuel stations that are supposed to be a part of their franchises.
As a result, they are struggling to pay for the fuel, raising the possibility of further shortages at the pump. And in the east of the country, it appears that BPMC is being pressured to release fuel without payment.
Bencora faces an uphill task. There is a huge amount of political pressure to maintain supply of fuel regardless of the lack of payment.
No easy fixes
The ongoing battle for Tripoli, and for control of the country, further complicates the issue.
In early September the NOC announced that it would restrict the distribution of kerosene, used for aviation fuel, in the east ‘until such time that assurances can be met that fuel is only being used for domestic and civilian aviation purposes’.
The NOC reports that consumption of aviation fuel has gone up 80 per cent in 2019 in comparison with the same period in 2018. Such an increase is not explainable by civilian aviation consumption alone; the outbreak of conflict in Tripoli earlier this year is a much likelier reason.
In response, authorities in the east of the country have accused the NOC of being partisan, and of failing to supply the east with adequate quantities of fuel, a charge that NOC vehemently denies.
On 19 September, eastern authorities announced the formation of a rival eastern BPMC, further exacerbating governance and accountability challenges in the fuel sector (particularly given that the LAAF control a significant amount of oil and gas infrastructure).
Meanwhile, the capture of state resources continues apace.
With a population of only 6.5 million, Libya’s per capita GDP is more than 20 per cent higher than that of oil-rich Iraq.
Libya’s oil wealth has long been used as a means of paying off the population, but since 2011, the checks and balances introduced by the Gaddafi regime to keep expenditure under control have eroded.
In 2010, 17 per cent of the Libyan budget was allocated for salaries, while that figure climbed to 58 per cent in 2018.
It is an irony that most of the armed factions battling it out continue to collect state salaries. But this profligacy also extends to the oversight of the costly fuel subsidy: 6.6 billion dinars ($4.7 billion) were set aside for subsidies in 2018.
The existence of large differences between prices at the pump in Libya and neighbouring states has long been seen as an incentive for smugglers.
This is one of the reasons put forward by Libya’s international partners as an argument for the removal expensive subsidies. But clearly the problems run far deeper.
Libya’s governance crisis exacerbates flawed governance structures within state-run and -owned institutions, providing ample opportunity to mask the diversion of fuels into the black market and for the individuals involved to make major profits while defrauding the state.
In many cases, managers of state-run institutions are selling fuel to private companies in which they have a personal stake: a clear conflict of interest.
Indeed, the absence of profit and loss considerations allows the state-run institution to continue making losses, while the private enterprise profits.
Furthermore, the state’s lack of enforcement ability also provides opportunities for armed groups to profit.
Such dynamics indicate that greater emphasis should be placed upon increasing the transparency within the fuel system and attempting to fix flaws in its governance, rather than expecting the removal of subsidies to bring a halt to smuggling and theft.
In the absence of such attempts, as these trends continue, it is Libyans who will foot the bill: at the pump in the short term and in less direct ways in the longer term as the state’s resources are depleted.
Fuel shortages continue
Despite Libya’s oil wealth, governance flaws and a lack of security have led to fuel shortages, especially in the south of the country. Since 2011 fuel has been diverted to the black market in increasing volumes.
Libyans pay twice
The result is that Libyans effectively pay twice – first for the fuel subsidies and second for the growing debts owed by state-owned institutions to the Libyan exchequer – for fuel that often doesn’t even reach their local pump.
In some parts of the country, Libyans to pay up to 15 times the official subsidized rate to refuel their vehicles.
More transparency needed
Such dynamics indicate that greater emphasis should be placed upon increasing the transparency within the fuel system and attempting to fix flaws in its governance, rather than expecting the removal of subsidies alone to bring a halt to smuggling and theft.
This article draws upon analysis and data collected by Valerie Stocker and Hamam al-Fasi for Chatham House’s project exploring the development of Libya’s conflict economy.
Tim Eaton is a research fellow with Chatham House’s MENA Programme. His research focuses on the political economy of the Libyan conflict.