The state is asserting its dominance over foreign investors in no uncertain terms in Algiers
If there were any remaining doubts about Algeria’s desire to reassert the primacy of the state over the interests of foreign companies, then the speech to parliament at the end of October by prime minister Ahmed Ouyahia must surely have dispelled them.
Presenting the government’s policy manifesto to the Assemblee Populaire Nationale, Ouyahia was unequivocal. Why should the “dogma of free market enterprise” prevent Algeria from introducing “appropriate correctives”, he asked, particularly in light of a global economic crisis that has “rehabilitated the economic role of the state” and undermined the “primacy of free speculation over the productive economy”.
Isn’t it right, he continued rhetorically, that the state should be able to “regain the majority share in international investments” made by foreigners within Algeria’s borders?” Certain foreign investors, he continued, had been “guided by speculative gain … ignoring the authorities and the sovereignty of the country and trying to violate them with impunity.” The long-term aim, concluded Ouyahia, is “the financial independence of the country”, to be achieved through “a national union for the development of the national economy.”
Ouyahia’s address was tailored to an audience well-disposed to such chest-thumping nationalist language. More concerning for foreign investors in Algeria is not the rhetoric itself, but the actions with which it has been matched.
“Ouyahia’s address was tailored to an audience well-disposed to chest-thumping … language”
In recent weeks, a slew of new regulations introduced in the annual supplementary budget, the government’s treatment of Egypt’s Orascom Telecom, and the state’s apparent interest in buying the share of the UK’s BP in its two largest producing gas fields all point to an administration determined to retrench the role of the state in the local economy. “At the start of the decade, Algeria [began] to promote some pro-market reforms, but in terms of economic governance it has now come back to dirigiste reflexes,” says Philippe Dauba-Pantanacce, senior economist at Standard Chartered.
Among the regulations included in the supplementary budget, passed at the end of August, were a measure to limit foreign financial institutions to a minority share in local operations, the introduction of a government ‘golden share’ in all private banks in the country, the “reinforcement” of the government’s right to the pre-emptive purchase of any shares sold by private companies in the country, and a stipulation that local companies bidding for work in Algeria be awarded contracts if their bids were within 25 per cent of the lowest foreign bidder.
The restriction of foreign banks to a minority share in local companies is a major departure. All overseas banks currently operating in Algeria have a majority interest in their local venture and two - BNP Paribas and Societe Generale - own 100 per cent.
Although the measure does not apply to companies already operating in the country, senior local banking sources say that it is likely to affect the appetite of several banks awaiting authorisation from the central bank to establish subsidiaries. “It’s going to be difficult to implement,” says the local head of one foreign bank. “The public sector already dominates the banking sector and it will be hard for banks to find a local partner.”
The introduction of a golden share will give the government a place on the board - but not voting rights - in all private financial institutions. The measure is designed to improve oversight of the banking sector in the wake of the global financial crisis and the government’s campaign to crack down on corruption. But it also adds to the feeling of increasing state interference in the operations of foreign firms.
The government’s ongoing campaign to buy out Djezzy, the local arm of Egypt’s Orascom Telecom and the largest mobile operator in Algeria, is yet more revealing of the government’s efforts to retrench the role of the state in the local economy.
Orascom’s decision to sell Djezzy in the spring was prompted in no small part by a claim made by the government against the Egyptian firm for an alleged $600m shortfall in the payment of taxes between 2004-07. The government has now claimed a further $230m in unpaid taxes for the period 2008-09, as well as preventing the company from repatriating dividends, banning it from importing network components from overseas, and accusing the company of failing to follow correct procedure in the purchase by Djezzy of services from its parent company in Cairo.
The charges have been denied by Orascom, and referred to the local courts. But whatever the rights and wrongs of the case, it is hard to escape the conclusion that the government is trying to drive out one of the country’s largest investors in the non-hydrocarbons sector with the aim of appropriating its operations.
In April, South Africa’s MTN offered to buy out Djezzy and a number of Orascom’s other overseas operations, but Algiers blocked the sale, claiming it has a pre-emptive right to purchase any shares changing hands in local private companies. In early October, Russia’s Vimpelcom agreed to a merger with Egypt’s Weather Investments, a majority shareholder in Orascom, but the Algerian government insists that it is still pursuing its interest in acquiring Djezzy, casting doubt over the future of the merger.
The government has now issued a tender to appoint advisors to value Djezzy and suggest potential partners for the government in buying out the company. But analysts say that any government offer is unlikely to come close to the $7.8bn at which both MTN and Vimpelcom have valued the local operator. Speaking to MEED in early November, Orascom’s executive chairman Naguib Sawiris said the government is deliberately trying to reduce the market value of Djezzy so that it can buy it cheaply.
Algeria’s motivation to buy out Orascom’s local operations are complex. In part, they are a delayed response to the sale in 2008 of cement production facilities in Algeria owned by Orascom Telecom’s partner company, Orascom Construction Industries, to France’s Lafarge. At the time, Algiers was aggrieved not to benefit financially from the sale, and unhappy to see such an important industry in the hands of its former colonial masters. More broadly, the move is part of a strategic drive to ensure that the government is the primary beneficiary from international investment in the country.
“It’s a sign of the growing interference by the government in foreign companies,” says Cyril Vock, Of Counsel at SNR Denton in Paris.
This strategy is also in evidence in the oil and gas sector. Stringent terms for the licensing of hydrocarbons acreage introduced in 2006 have resulted in scant interest in the most recent two exploration rounds, and little optimism that a current round will be received with any more enthusiasm.
In recent weeks, Algiers has confirmed that negotiations are under way on the potential divestment by BP of two of the largest gas producing fields in the country - In Salah and In Amenas. BP has refused to confirm it is selling the acreage, but such a sale would be consistent with its efforts to raise $30bn to finance the clean-up from the Macondo oil spill by selling off mature fields. Here again, the Algerian government, along with the other international partner on the two fields, Norway’s Statoil, has a pre-emptive right to buy the acreage, and could stand in the way of a rumoured deal in which the UK-Russian firm TNK-BP would buy out the assets.
“Nationalist sentiment remains very strong in Algeria, and is very much in vogue,” says Samuel Ciszuk, Middle East energy analyst at Global Insight. “There is political pressure [for the state] to sweep up anything that is successful.”
Despite a clear drive to enhance the state’s involvement in the Algerian economy, the door is not closed to overseas investors. In his speech to parliament, Ouyahia said that while Algeria has no major need for foreign capital, it is “cruelly lacking” in expertise, technology and modern management. At the same time, Algeria’s substantial natural resources and huge swathes of capital - the government has accumulated $150bn in foreign exchange reserves - mean that it is still somewhere that foreign companies can make money.
Algeria’s problem is that it seems to be doing everything it can to create an image for itself as a difficult and uncertain place to do business. A number of projects have already foundered on the rocks of the country’s difficult regulatory environment. Plans laid out by the UAE’s Emal for a aluminium smelter have come to nothing, while France’s Carrefour pulled out of the country in 2009 saying it was impossible to do business in the food distribution sector.
International companies already established in the market and used to its idiosyncrasies are unlikely to withdraw. But as the global economy begins to pick up and potential new investors are presented with opportunities to take their money elsewhere, Algeria could well get left behind.
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