* President seeks inclusive growth through greater economic diversity
* Critics say that oil wealth goes to the elite
* Investors worry public finances under strain, fear tax grabs
* Opponent Jean Ping urges constitutional change
By Emma Farge
LIBREVILLE, June 18 Above the entrance to the towering oil ministry on a sleek boulevard in Gabon's ocean-front capital Libreville hangs a huge banner that reads like a warning: "Oil will run out but innovation is forever".
For nearly four decades, since the discovery of offshore fields in the early 1970s, oil has been the economic lifeblood of this small, central African country. It has brought billions of dollars in investment and accounts for 80 percent of exports.
But production from Gabon's ageing fields has steadily declined for years. President Ali Bongo, who won a contested election in 2009 to succeed his father Omar, has launched a drive to reform and diversify the $20 billion economy.
During his father's 41-year rule, Gabon was seen as a bastion of "Francafrique" - an opaque system by which French companies were handed plum contracts in exchange for security guarantees from the former colonial power.
"Bongo junior", as many Gabonese still call the 55-year-old president, has striven to overhaul his country's image and open it up to fresh sources of investment.
But five years into his term, there are signs that new industries are not growing quickly enough to compensate for falling oil revenues, placing a strain on public finances.
Elected with just over 40 percent of the vote, Bongo faces a stark choice as a fresh poll looms in two years. He cannot afford to push through a planned $12 billion public investment programme while also funding the costly civil service, which his father used to as a way of distributing patronage.
"The fact that Ali Bongo has more financial commitments than his father puts him in a very difficult position," said Ben Payton, senior Africa analyst at risk advisory firm Maplecroft. "Omar Bongo would have made the maintenance of patronage networks his first priority in times of economic difficulty."
With around a third of the population of 1.6 million people still living in poverty despite the country's "upper middle income" status, analysts say economic diversification is essential for Bongo's political survival. Wealth from oil revenues has long flowed mostly into the pockets of the elite.
The opposition is fragmented but would-be candidates for the 2016 election are seeking to capitalise on Bongo' shortcomings. Jean Ping, a former head of the African Union and a one-time ally of Bongo's father, has emerged as a possible leader.
"The opposition will unite around a platform that we all need to accept," Ping told Reuters, urging a constitutional change to limit the number of presidential terms to two.
"Reforms will not be the work of one man but of a new system - a democratic, well-governed system with strong institutions."
TALE OF TWO CITIES
Many in Libreville are angry at the luxurious lifestyles of officials, including Bongo and his entourage. At an investment summit last month, traffic jams clogged city streets as presidential vehicles swept along the coastal road. VIPs drank champagne at a red-carpet gala at a seafront hotel, just blocks from the city's sprawling shanties.
Marc Ona Essangui, head of NGO Brainforest, said authorities should be spending money on honouring pledges to build schools and 5,000 new housing units a year instead of expensive forums.
Education is key to delivering on Bongo's pledge to create opportunities for a growing young population, more than one- third of whom are unemployed. Yet at the state-run Omar Bongo University, the campus is littered with rubber bullets and tear gas canisters after police clashed with students protesting the lack of basics, such as text books and Internet access.
Exam results pinned to a classroom wall showed that just 19 out of 176 students studying for an economy degree had passed.
Like much of the political elite, whose offspring are educated in Europe or the United States, Bongo's son was sent to exclusive British boarding school Eton.
"The authorities don't send their children here. They send them away," said 26-year-old student leader Anatole Nnang Mezui. "They want to keep ruling us just like their fathers did. It's a small elite that's going to rule over the masses."
Gabon says it is providing for future generations by saving oil revenues in a wealth fund, the Gabonese Strategic Investment Fund (FGIS). Its head, Serge Mickoto, says it manages around 600 billion CFA francs ($1.2 billion) for the state and will receive 10 percent of oil revenues each year.
But while FGIS submits reports to parliament, accounts are not published. There is also no mechanism to prevent contributions dipping below 10 percent - a likely scenario given IMF projections for budget deficits to 2015.
OPEN FOR BUSINESS?
France looms large in the economic life of its former colony and has over 100 companies there. As part of his plan to make Gabon an emerging economy by 2025, Bongo is courting capital from other nations, particularly in the industrial sector.
"If we want a chance of reaching that goal, we have to go through manufacturing," he told Reuters in an interview.
A law was recently passed to stop raw timber exports and encourage local processing. Authorities also say companies ready to invest in refining manganese and iron ore locally will be given priority for new concessions.
Gabon is promoting high-end ecotourism in its rainforests, home to elephants as well as chimpanzees and gorillas.
Richard Attias, head of the PR firm that organised May's investment forum, said Bongo needs more time: "You cannot transform a country in less than 10 years. There's no way."
Yet legal uncertainties have delayed investment in flagship projects, like the 1-billion-tonne Belinga iron ore mine.
One of the main complaints of investors is the slowness and inefficiency of bureaucracy. This year, the World Bank ranked Gabon at 163 from 189 countries for ease of doing business.
Several investors who asked to remain anonymous complained of delays of up to two years in refunds of the 18 percent value-added tax, supposed to be reimbursed monthly to exporters.
"My letters to the government have gone unanswered. I've told them I'll have to close," said one timber investor. One diplomat said total arrears for VAT reimbursements exceeded $400 million.
Signs of state cashflow difficulties abound in Libreville. A notice next to a government building lot in the Bessieux district reads: "Construction stopped for non-payment of bills".
The Omar Bongo stadium intended for the 2012 African Cup is still unfinished. One contractor told Reuters that public works agency ANGT was behind on payment.
"We are indebted everywhere - ask the oil companies and private companies - international or national," said Ping.
Many say that government revenues are being drained by a bloated civil service, which pays hefty contracts to around 70,000 people. "Bongo is at the mercy of oil because his father left him an unbearable legacy: the standard of living for the civil service," said another investor.
DEMOCRACY "NOT AN ISSUE"
Energy consultancy Wood Mackenzie expects oil output to edge up next year from the current 290,000 barrels per day of oil equivalent before falling to 260,000 bpd in 2017. Once an OPEC member, Gabon has slipped to sub-Saharan Africa's No.5 producer.
Investors are worried by a series of recent back-tax demands by the state and by Gabon's exit from the Extractive Industries Transparency Initiative (EITI) last year.
In February, the government asked French oil major Total to pay $805 million in back taxes. "It's state banditry," said Ona Essangui, whose organisation campaigns for transparency in the resources sector.
Gabon's one-round electoral system - which hands the presidency to whoever wins the most votes even if it is not a majority - tends to favour the incumbent candidate, particularly if the opposition is divided.
The opposition may struggle to transform discontent into votes in a country where resources are concentrated in the hands of Bongo's family and his Gabonese Democratic Party (PDG).
Cohesion is strong within the PDG - a party associated with freemasons. Bongo himself is the grand master of Gabon's national lodge.
Albertine Maganga Moussavou of the Social Democratic Party, one of just two opposition MPs in the 120-seat parliament, said Gabon was becoming less democratic, with political debate stifled. The government strongly denies this.
"Democracy is not an issue here," said Bongo. "I haven't yet imprisoned one opposition leader for insulting me." ($1 = 484.7800 Central African Cfa Franc Beacs) (Additional reporting by Jean-Rovys Dabany; Editing by Daniel Flynn and Keiron Henderson)