By Marie-Louise Gumuchian

TRIPOLI (Reuters) - The men, some of them armed, arrived at the gates of the Al Hani General Construction Company compound on the outskirts of the Libyan capital and forced their way into the site.

The 30 former employees charged towards the company's offices, where they demanded wages and other payments they said were due from the North African country's 2011 war, when many firms stopped work.

They threatened two senior employees with a pistol. They kidnapped one of them before freeing him several hours later.

"They were armed and had handcuffs and shouted 'We are coming for the money'," a senior company official said.

The attack on Al Hani, a joint venture between Austrian construction company Strabag and the Libyan Investment and Development Company, is a reminder of the risks foreign investors face here, where armed groups and lawlessness have hobbled governance in the oil-producing state.

In the past year, several foreign firms, including oil producers, have temporarily evacuated staff as the new Libya has seen attacks on diplomats, militias besieging government buildings and full-blown gun battles in the streets.

As a result, Western firms are wary of pouring money into Libya, depriving it of the capital and expertise needed to diversify an economy dominated by oil.

Labor strife, restrictions on foreign ownership and cumbersome bureaucracy have also dampened enthusiasm to do business even though the country has the money to pay for its vast infrastructure, health and education needs.

Two years after Muammar Gaddafi was ousted, investors are still trying to decide whether Libya is on a path to economic liberalization.

"It is taking longer than we thought - business will take years," said Tarek Alwan, managing director of London-based consulting firm SOC Libya.

"Construction, education, health - these are sectors for which it is still difficult to convince companies to go work for in Libya. There is still interest but no commitment yet."

CHALLENGES REMAIN

Gaddafi isolated the economy from much foreign competition, reserving licenses and contracts for his own circle, which makes some sectors attractive now he is gone. But many of the hurdles his government imposed remain in place.

"Business visas are still expensive, bureaucracy is still opaque and time-consuming, the banking system is still weak and the legal framework remains unpredictable," said Alex Warren of advisory group Frontier which runs The Libya Report website.

Other issues included insecurity, Labor unrest and political uncertainty, he said.

Surrounded by cranes that have stood idle for more than two years, road works that are incomplete and hospitals that have yet to be upgraded, Libya's new rulers have been calling on foreign firms to come back and rebuild the country.

The bulk of contracts awarded in Libya were in the public sector and, while some tenders for urgent essential services have been issued, many major projects are still stalled.

In some cases, the authorities say they are reviewing large contracts. So far they have honored Gaddafi-era deals but this is no guarantee the next government - to be elected after a constitution is drafted and approved - will do the same.

But progress resuming work is also slow. The government promises compensation if firms return but some say they cannot resume operations until they are paid.

"For any foreign company that comes back to Libya, 50 percent of their (old) invoices will be paid as soon as they start work and the rest will be divided into amounts to be paid later," Economy Minister Mustafa Abofanas told Reuters.

Libya's 67 billion dinar ($51 billion) budget for this year is strained by subsidies and spending on salaries including those paid to thousands of former rebel fighters. Prime Minister Ali Zeidan has asked for an extra $11 billion. Libya's income largely stems from oil exports of around $4 billion a month.

However workplace protests have cut production and a prolonged drop could be disastrous for state finances.

In a sign that unrest and limited financial incentives are wearing down foreign firms, Marathon Oil Corp of the United States is studying the sale of its stake in an oil consortium.

PRIVATE SECTOR BOOM

While public sector entities await, Libya's private sector is flourishing, although it remains small.

Goods from Italy, Austria, France, Turkey fill supermarket shelves. Shops and cafes are busy.

With their pockets full from state allowances, Libyans are fuelling a consumer boom, shopping in Tripoli branches of British stores Marks & Spencer, Next and Bhs.

"In the private sector business is booming, even though the situation is still highly unpredictable," said Hosni Bey, whose HB Group deals in imports, distribution and logistics. "We don't have reliable indexes, indicators, but by rule of thumb, I would say we have grown by at least 20 percent (2012 vs. 2010)."

Bey said that was being driven by real estate - homes are being built, shops refurbished on a huge scale - and imports of consumer goods, cars and domestic appliances.

"There is a very small private sector and the way forward is to build the economy through the private sector," said Ahmed Ben Halim of Libya Holdings Group.

He said his group had interest from Arab, European and U.S. investors as it looks into sectors such as oil and gas, building materials, financial services and infrastructure management - but all still in the early stages.

Abofonas expects growth of 3 percent this year - more conservative than the International Monetary Fund which said last year Libya's economy was poised to grow 17 percent in 2013 with average growth of 7 percent annually between 2014 and 2017.

Given Libya is still in a transitional period, foreign firms are watching how the landscape will change.

A draft companies law places limits foreign ownership at 49 percent. Under Gaddafi, the rule was for 65 percent, but the new figure may be a deterrent for some.

Alwan said that while some investors were delaying projects others, from Turkey, the Middle East and Asia, were undeterred.

"We've had many drawbacks: blackouts, strikes, unrest and a tough time motivating foreign workers to come back," said a manager of a major European construction firm. "But I am still optimistic - it just depends how you manage it all."

(Additional reporting by Ghaith Shennib; Editing by Giles Elgood)