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2013 Investment Climate Statement - Algeria


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report
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Openness to Foreign Investment

Algeria, with its population of more than 37 million, hydrocarbon wealth, expanding infrastructure needs, and growing consumer product demand, is attracting interest from companies around the world. U.S. firms continue to consider Algeria an emerging and growing market. The climate for international firms considering direct investments in Algeria has stabilized in the wake of a series of restrictive foreign investment rules enacted in 2009 and 2010, which imposed a requirement of at least 51 percent Algerian ownership of foreign investments. Foreign Direct Investment (FDI) in Algeria waned as a result of those measures. Investors highlight regulatory uncertainty, tight foreign exchange controls, lax intellectual property rights (IPR) protections, customs delays, and a large informal sector among ongoing commercial challenges. However, the Government of Algeria (GOA) has invested more than USD 286 billion in infrastructure development, making the local market sufficiently profitable for firms adapted to emerging markets to weather those challenges and explore new opportunities, especially in sectors like energy, power, water, health, telecommunications, transportation, and agribusiness.

The number of foreign trade missions to Algeria reportedly grew from 30 in 2010 to 60 in 2012, illustrating the increased focus and competition in the local market. In 2012, Algeria concluded commercial agreements with several Arab and European nations. U.S. firms, such as Northrop Grumman and General Electric won multi-million dollar tenders. President Abdelaziz Bouteflika appointed former Minister of Water Resources, Abdelmalek Sellal, as the new Prime Minister. Sellal is trusted by the political elite and viewed as a pragmatic politician who seeks new economic partnerships to tackle long-standing issues, such as housing shortages and unemployment. Algerian leadership remains focused on building domestic production capacity and reducing imports and seeks U.S. expertise and partnership. Minister of Commerce Mustapha Benbada visited the United States in December 2012 for discussions with the Office of the U.S. Trade Representative related to Algeria’s World Trade Organization (WTO) accession and cooperation under the U.S.-Algeria Trade and Investment Framework Agreement (TIFA).

The signs of change are positive and Algeria’s macroeconomic outlook is stable, but vulnerabilities and challenges persist, including dependence on hydrocarbon revenue and risks posed by rising inflation. The public sector still dominates the economy and inefficient state-owned enterprises are a drag on productivity. The GOA has supported state-owned companies experiencing financial difficulties by cancelling their debts and providing investment credits and technical assistance. Such economic vulnerabilities have prodded the GOA to court FDI and reconsider the importance of private-sector development. This trend should continue through 2013. The longer-term political environment is somewhat clouded by expected presidential elections in 2014, as well as Algeria’s legalistic and bureaucratic regulatory environment and apprehension about foreign exploitation of natural resources.

Third Party Indicators:

Measure

Year

Index/Ranking

TI Corruption Index

2012

105 (out of 176)

Heritage Economic Freedom

2012

140 (out of 183)

World Bank Doing Business

2012

152 (out of 185)

Algeria wants foreign investment but has imposed protectionist policies requiring majority local ownership. In 2009, the government adopted a Complementary Finance Law (CFL) which imposed restrictions on imports and foreign investment. These measures require 51 percent Algerian ownership of new foreign investment, 30 percent Algerian ownership of foreign import companies, and the use of letters of credit for the payment of import bills. The 2010 CFL requires foreign bidders who win construction contracts to invest in a joint venture with a local partner. Another measure in the 2010 CFL gave the government the right of first refusal on sales of companies to foreigners and aimed at controlling the sale of assets to foreigners. The government has maintained its prerogative to exercise this right of first refusal, permitting it to take a majority stake in foreign businesses in Algeria. The 2010 CFL introduced a new tax on private firms’ importation of durum wheat at prices below that of the Algerian market. Durum wheat imported by the Algerian Cereal Agency (OAIC) is exempt from this tax. A 2010 Central Bank regulation stipulated that all invoices must state a due date for payment. Invoices without a due date or a date that exceeds 360 days may not be paid.

The 49/51 rule remains controversial but foreign investors have adapted. In some cases, foreign firms have partnered with multiple Algerian companies that agree to share the majority percentage, so the foreign partner maintains overall control. Some investors have expressed a preference for working through a local partner, which can help the foreign firm navigate the challenging local bureaucracy and business norms. U.S. investment outside of the oil and gas sector currently consists of a pharmaceutical factory, a desalination plant, a bottling plant, a cable-making factory, and a tractor plant.

As of January 2013, the GOA was finalizing and publishing a new hydrocarbons law and the 2013 Finance Law. Both contain measures relevant to foreign investment and the measures’ full implications were not clear at the drafting of this report. The hydrocarbon law amendments were expected to include provisions to encourage foreign investment, especially in non-conventional hydrocarbons (e.g., shale gas exploration). The 2013 Finance Law reportedly includes measures to ease tax and customs procedures for companies, but accounting firms have requested clarity on provisions in the law relevant to transferring dividends and reinvestment requirements for foreign investors with certain tax benefits. Current tax law has required that investors re-invest within four years the equivalent value of any tax benefits they obtain as incentives to locate in Algeria.

Algerian officials seek technology and know-how transfer and have been pursuing efforts to secure greater returns for Algerian interests since the 2006 amendments to the hydrocarbons law. The amendments required majority state partnership in all oil and gas projects and imposed a heavy windfall profits tax when prices are above USD 30 per barrel. Recent public tenders have included a “localization” component to encourage foreign investors to contribute to local manufacturing or other production-capacity development.

Three agencies have mandates to encourage and manage investment in Algeria. The National Agency for Investment Development (ANDI) (www.andi.dz) is responsible for facilitating investments and granting tax exemptions. The National Investment Council (CNI) under the Ministry of Industry, SME, and Investment Promotion (http://www.mipmepi.gov.dz) was created to define investment strategies and priorities and to approve special investment incentives by sector. In late 2012, the government raised the threshold for investments eligible for CNI investment-promotion benefits from 500 million dinars (USD 6.4 million) to 1.5 billion dinar (USD 19.2 million).

Conversion and Transfer Policies

The Algerian dinar is considered fully convertible for all commercial transactions. The Bank of Algeria (Banque d'Algerie, the nation's central bank) manages Algeria's foreign reserves and controls foreign exchange. The 2010 CFL reinforced the lead role of the Bank of Algeria in overseeing the banking sector. A network of public banks still controls 80 percent of the banking market. International banks in Algeria primarily serve private multinationals and Algerian private-sector firms. Legally registered economic operators can access foreign currency to make payments, subject to bank domiciliation, without pre-authorization. Operators must possess a clean audit report and a certificate from the tax authority in order to repatriate funds. The Central Bank put in place new restrictions on foreign shareholders’ loans to Algerian subsidiaries in December 2010. These new provisions mandate that firms receiving such loans after July 26, 2009 must book them as additions to capital.

Foreign investors can repatriate dividends, profits, and real net income out of their assets through transfers or liquidation. In certain cases, due to the inefficiency of the banking system and the heavy bureaucracy, it may take longer to obtain official permission from the Central Bank to make transfers/payments, or for the local bank to proceed with the transfer. In 2011 and 2012, businesses and international banks faced stricter interpretations of the foreign exchange control rules. Commercial disputes developed because the Central Bank, over reportedly small paperwork details, delayed repatriation of dividends. Certain cases were referred to the courts to reach a resolution. Foreign investors and the international banks serving them are seeking greater clarity on the rules around repatriating dividends, a central concern for foreign investors.

U.S. suppliers can benefit from faster and more predictable payments as a result of the mandatory letter of credit requirement. In addition, payment delays may result due to the new regulation that limits Algerian importers' payment options to letters of credit. Direct wire payments are no longer authorized. Letters of credit are now limited to a maximum of 60 days and are not required for raw material import transactions amounting to less than 4 million DZD (approximately USD 53,000) per year.

Expropriation and Compensation

The government of Algeria has not engaged in expropriation actions against U.S. or other foreign firms.

Dispute Settlement

Algeria is a signatory to the convention on the Paris-based International Center for the Settlement of Investment Disputes (http://www.worldbank.org/icsid). Algeria ratified its accession (http://arbiter.wipo.int/arbitration) to the New York Convention on Arbitration, and is a member of the Multilateral Investment Guarantee Agency (http://www.miga.org). The code of civil procedure allows both private and public-sector companies full recourse to international arbitration. Algeria permits the inclusion of international arbitration clauses in contracts.

In 2010 an American oil company exercised the dispute settlement mechanism in its contracts with the state oil company Sonatrach to contest the implementation of a windfall profits tax imposed long after the company began doing business in Algeria. Negotiations prior to arbitration were very slow. The dispute resolution process, including arbitration, can take 18 to 24 months and in some cases longer.

Performance Requirements and Incentives

Algeria does not impose general performance requirements on foreign investments. However, in accordance with the 2009 Complementary Finance Law, foreign investments in any sector require a 51 percent Algerian partnership.

The investment code provides a number of incentives for investment in Algeria, which are primarily related to VAT and other tax exemptions, for periods of time that are dependent on the type of investment and the nature of the package agreed between the investor and the National Agency for Investment Development (ANDI). The 2009 Complementary Finance Law requires foreign investors to reinvest in Algeria the equivalent of any tax benefits bestowed upon them, in a manner similar to the offset investment requirements commonly seen in Gulf countries.

Right to Private Ownership and Establishment

Foreign entities have largely equal rights to establish and own business enterprises in Algeria and engage in most forms of remunerative activity, within the framework of the requirement for majority (51 percent) Algerian participation in all new foreign investments, including those in the banking sector. Private enterprises formally have equal status with public enterprises and compete on an equal basis with respect to access to markets, credit, and business operations.

Protection of Property Rights

Secured interests in property are generally recognized and enforceable, but court proceedings can be lengthy and results unpredictable. Most real property in Algeria remains in government hands, and controversy over the years has resulted in conflicting claims for real estate titles, which has made purchasing and financing real estate difficult. One prospective U.S. investor seeking to build a factory in Algeria tried in vain for two years to obtain approvals from a local governor to purchase suitable land for the project.

While there is legislation protecting copyright and related rights, trademarks, patents, and integrated circuits, implementation has been inconsistent and enforcement remains spotty. Algeria was again named to the USTR Special 301 Priority Watch List in 2012, notably for insufficient protections for data associated with the development and market approval for pharmaceuticals.

The Ministry of Culture organized a ceremony in October 2012 to highlight its commitment to IPR protections by destroying USD 800,000 worth of counterfeit or pirated fashion, music, and film that had been seized by Algerian customs and border police. However, Algeria’s vast informal economy remains a major source of counterfeit goods, especially in sportswear and consumer goods.

Transparency of Regulatory System

Generally, Algeria's regulatory system is transparent, but decision-making authority remains opaque. Each ministry defines its rules for doing business in the sectors it manages, and regulatory bodies are established to administer them. Challenges arise in managing the bureaucracy, because authority is generally vested at the top of every organization, and access to decision-makers is often limited. Furthermore, the Algerian bureaucracy is slow and protocol-oriented, such that even minor deficiencies in paperwork can lead to significant delays and fines. In some cases, authority over a matter may rest among multiple ministries, which imposes additional bureaucratic steps and the likelihood of inaction due to errors or unusual circumstances.

Efficient Capital Markets & Portfolio Investment

After twelve years, the Algerian stock exchange remains nascent with only six companies listed. In 2010 the Algerian insurance company Alliance held the first private company IPO, which was valued at 1.49 billion dinars (USD19.5 million dollars). Alliance became the seventh firm listed on the Algerian stock exchange in February 2011. Long-term treasury bonds were listed on the stock market in 2008, but trading has sharply declined due to the increased number of fees required to trade the bonds. Shorter yield bonds continue to be managed through bond dealers. Other private bond investment vehicles are occasionally offered to the public for major construction or other ventures.

The bond market plays a marginal role in the financing of the Algerian economy, which is mainly done through public expenditure or traditional banking credits. Most bonds are issued by public companies; however, a small number of private firms have issued bonds to finance investment in public works projects. In order to finance development projects and absorb excess liquidity, some state-owned companies have launched corporate bonds. Public companies, such as national oil company Sonatrach often choose to finance through a bank investment pool which is guaranteed by the government.

Competition from State-Owned Enterprises

About two thirds of the Algerian economy is state-owned, led by the national oil-and-gas company Sonatrach. Other sectors in which the government operates directly include telecoms with Algerie Telecom and transportation with Air Algerie.

A distinctive feature of the Algerian economy is the 51/49 rule, under which 51 percent of new investments in Algeria must be owned by Algerians. Implemented in 2006 for the hydrocarbons industry, it was expanded in 2009 to cover investments in all sectors of the economy. While the 51/49 rule initially was controversial, foreign firms have adapted to it and formed joint ventures with local partners. In 2012 an Algerian-American joint venture began production of tractors, while the Algerians signed agreements with French, Turkish, and other European companies in the automotive, construction and agricultural sectors.

Corporate Social Responsibility

Multinational firms operating in Algeria are spreading the concept of corporate social responsibility (CSR) practices, which have traditionally been less common among domestic firms. Companies such as Anadarko, Cisco, Microsoft, and Nedjma have supported programs aimed at youth employment and entrepreneurship. CSR activities are gaining acceptance as a way for companies to contribute to local communities while often addressing business needs, such as a better-educated workforce. The national oil and gas company, Sonatrach, funds some social services for its employees and desert communities near production sites. Still, many Algerian companies view social programs as areas of government responsibility and do not consider such activities in their corporate decision-making process.

Political Violence

Political violence has declined since the widespread terrorism of the 1990s. The government's effort to reduce terrorism through military pressure and social reconciliation and reintegration has been markedly effective. However, incidents of terrorism, including suicide bombings against government and international organization installations, occurred in 2006 and 2007, and armed attacks against army and police continue sporadically to this day. In March 2012 a suicide bomber attacked the regional headquarters of the national police in Tamanrasset, a southern city of 75,000. In 2006, a group of Algerian terrorists known as the Salafist Group for Preaching and Combat (French acronym GSPC), formally affiliated itself with al-Qa'ida and assumed the name Al-Qa'ida in the Islamic Maghreb (AQIM).

The U.S. Government considers the potential threat to U.S. Embassy personnel assigned to Algiers sufficiently serious to require them to live and work under significant security restrictions. These practices limit and occasionally prevent the movement of U.S. Embassy officials and the provision of consular services in certain areas of the country. The GOA requires U.S. Embassy personnel to seek permission to travel to the Casbah within Algiers or outside the province of Algiers and to have a security escort. Travel to the military zone established around the Hassi Messaoud oil center requires GOA authorization. Daily movement of Embassy personnel in Algiers is limited, and prudent security practices are required at all times. Travel by Embassy personnel within parts of the city requires prior coordination with the Embassy's Regional Security Office. American visitors are encouraged to contact the Embassy's Consular Section for the most recent safety and security information.

Americans living or traveling in Algeria are encouraged to register with the U.S. Embassy in Algiers through the State Department's travel registration website, https://step.state.gov, and to obtain updated information on travel and security within Algeria. Americans without internet access may register directly with the U.S. Embassy Algiers. By registering, American citizens make it easier for the Embassy to contact them in case of emergency.

Corruption

There is an ongoing government effort to root out corruption, notably in key GOA agencies, such as Customs. Many Algerian citizens believe that corruption is a problem within the upper reaches of government. Some evidence suggests that bribes are paid to bypass Algerian bureaucracy or to avoid government interference.

In June 2012, the Algerian lower court found two Algerian citizens and three Chinese citizens guilty of corruption. The court sentenced the Algerian citizens to 15 years in prison, and sentenced the Chinese citizens in absentia to 10 years in prison and issued an international warrant for their arrest.

The government investigated several high-profile corruption scandals in 2009 and 2010. One investigation implicated officials at the Ministry of Public Works on charges of fraud related to the construction of the East-West highway. Another involved senior officials of the state oil company Sonatrach investigated for corruption in procurement. Several former Sonatrach senior officials are in custody, while others are under investigation. Lower-level investigations involved customs officials and private sector executives charged with embezzlement, illegal currency transfers, and misuse of public funds.

In 2010, GOA created the National Commission for the Prevention and Fight Against Corruption as stipulated in the 2006 anti-corruption law. The Chairman and members of this commission were appointed by a presidential decree. The commission studies financial holdings of public officials and carries out investigations. Algeria is not a financial center, and financial transactions are tightly regulated. However, it is estimated that half of the country's economic transactions are carried out within the informal sector, effectively escaping the purview of state auditors.

In 2006, GOA adopted an anti-corruption bill that reinforced existing legislation and brought Algeria into compliance with the UN Convention against Corruption, which Algeria ratified in August 2004. The law was designed to promote transparency in government and public procurement, introduce new crimes such as illicit enrichment and reinforce existing penal sanctions.

In 2012, the government updated 2005 anti-money laundering and counter-terrorist finance legislation to bolster the authority of the financial intelligence unit to monitor suspicious financial transactions and refer violations of the law to prosecutorial magistrates.

Bilateral Investment Agreements

The United States and Algeria signed a TIFA in 2001 to create a forum for economic and trade discussion. The last TIFA council meeting was held in 2004. The United States and Algeria may hold a TIFA council meeting in 2013.

Algeria executed a European Union association agreement in 2005. The agreement provided for the gradual removal of import duties on EU industrial products over 12 years and removed duties immediately on 2,000 other products. However, the EU complained that some provisions in the 2009 Complementary Finance Law violated that agreement. In December 2010, Algeria requested a three year extension (to 2020) of the deadline for completing the tariff dismantling process with the EU under the EU-Algeria Association Agreement.

Algeria signed bilateral investment agreements for the protection and promotion of investments with the following countries in the indicated years: Belgium/Luxembourg (1991), Italy (1991), France (1993), Romania (1994), Spain (1994), China (1996), Germany (1996), Jordan (1996), Mali (1996), Vietnam (1996), Egypt (1997), Bulgaria (1998), Mozambique (1998), Niger (1998), Turkey (1998), Denmark (1999), Yemen (1999), Czech Republic (2000), Greece (2000), and Malaysia (2000). There is no bilateral investment treaty between Algeria and the United States.

Algeria has also signed bilateral treaties to prevent double taxation with the following nations: United Kingdom (1981), France (1982), Tunisia (1985), Libyan Arab Jamahirya (1988), Morocco (1990), Belgium (1991), Italy (1991), Romania (1994), Turkey (1994), Syrian Arab Republic (1997), Bulgaria (1998), Canada (1999), Mali (1999), Vietnam (1999), Bahrain (2000), Oman (2000), Poland (2000), Ethiopia (2002), Lebanon (2002), Spain (2002), and Yemen (2002). There is no double taxation treaty between Algeria and the United States.

In 1990, Algeria signed both investment protection and double taxation agreements with the Arab Maghreb Union (AMU) countries (Libya, Morocco, Mauritania, and Tunisia).

OPIC & Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) ( http://www.opic.gov), the U.S. Export-Import Bank (Ex-Im)( http://www.exim.gov), and the U.S. Trade and Development Agency (USTDA) (http://www.ustda.gov) have supported projects in Algeria. However, GOA announced in 2009 that all financing for foreign investments in the country must be financed through Algerian banks. There are no projects currently under way in Algeria using support from these programs.

A USD 250 million water desalination project in Algiers was completed in 2008 with OPIC support. Ex-Im Bank supported the U.S. content of a power project in Skikda in 2003. USTDA supplied a grant to the Ministry of Water resources to support a feasibility study of wastewater management practices in Oran in western Algeria in 2010.

Labor

Algeria's labor force consists of roughly 10 million people out of a total population of over 37 million. According to the National Office of Statistics, in 2011 over 55 percent of the population was under age 30. Beginning January 1, 2010 the monthly minimum wage increased to DA 15,000 (USD215) from DA 12,000 (USD170). The official unemployment rate is approximately 10 percent, but international organizations and other observers believe it to be as high as 25 percent.

Algeria's labor code sets minimum work standards, including a minimum work age of 16, a 40-hour workweek, and higher rates for overtime pay. Employers pay 26 percent of gross salaries in social security taxes, including provisions for both retirement and health/accident insurance.

U.S. companies are able to hire trained technical staff. However, recruiting and retention has become more difficult as well-educated and trained Algerians are increasingly lured by higher salaries offered in the Gulf region. English speakers remain difficult to find, but English-language acquisition is increasing among youth. Arabic is Algeria's official language and French is the most common language of business.

There are no restrictions on the number of expatriate supervisory personnel a company may establish as long as they are able to justify that no local persons can be found that meet the requirements for the position. Entry visas for foreign workers can be requested through Algerian embassies overseas with the employer providing, among other requirements, a certified true copy of the work contract or the provisional work permit issued by the Ministry of Labor, Employment and Social Security (MTESS), and an attestation certified by the same authorities stating that the employer will bear the repatriation expenses of the foreign worker once the work relation is completed. Foreign workers must then obtain work permits from MTESS (http://www.mtess.gov.dz/mtss_fr_N/index.htm) and a residency card from the local police office in the district where they will be working. The employer is responsible for submitting all tax payments for individual workers to the proper local tax collection authorities.

Foreign-Trade Zones/Free Trade Zones

There are currently no free trade zones in Algeria.

Foreign Direct Investment Statistics

The World Bank’s latest available FDI figures for Algeria were USD 2.7 billion during 2011, compared to USD 2.3 billion for 2010, 3.1 billion in 2009 and 2.7 billion in 2008.

Web Resources

Algerian government:

Algerian Embassy in Washington, D.C.: http://www.algeria-us.org/
Bank of Algeria (central bank): http://www.bank-of-algeria.dz/
Ministry of Energy and Mines: http://www.mem-algeria.org/
Ministry of Finance: http://www.mf.gov.dz/
Ministry of Labor, Employment and Social Security: http://www.mtess.gov.dz/mtss_fr_N/index.htm
Ministry of Industry, Small and Medium Enterprises and Investment Promotion: http://www.mipmepi.gov.dz
National Investment Development Agency: http://www.andi.dz/
Sonatrach: http://www.sonatrach-dz.com/

United States Government:

U.S. Department of State travel information: http://travel.state.gov/
U.S. Embassy in Algiers: http://algiers.usembassy.gov/
U.S. Department of Commerce: http://www.export.gov/
Export Import Bank: http://www.exim.gov/
Overseas Private Investment Corporation (OPIC): http://www.opic.gov/
U.S. Trade and Development Agency: http://www.ustda.gov/

Non-Governmental:

U.S.-Algeria Business Council: http://www.us-algeria.org/
American Chamber of Commerce in Algiers: www.amcham-algeria.org

International:

E.U. Association Agreement: http://eeas.europa.eu/algeria/agreement/index_en.htm
European Free Trade Association (EFTA): http://www.efta.int/
International Monetary Fund (IMF): http://www.imf.org/
Multilateral Investment Guarantee Agency: http://www.miga.org/
World Bank: http://www.worldbank.org/

Conventions:

New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards:
http://arbiter.wipo.int/arbitration/ny-convention/index.html
Paris-based International Center for the Settlement of Investment Disputes: http://www.worldbank.org/icsid/



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