Algeria lags behind on foreign investment

20 August 2015

In the Maghreb, both Morocco and Tunisia outstrip Algeria when it comes to foreign direct investment

  • Over the past two years, more FDI has flowed into Morocco than Algeria, even though the country lacks significant hydrocarbons reserves
  • Even Tunisia, an economy a quarter of the size of Algeria and in the midst of a fragile political transition, attracted more than $1bn of FDI in 2014, compared with Algeria’s $1.5bn
  • But the Algerian government is not prepared to give ground on the 49:51 ownership rule

Policymakers in Algiers have developed a strategy to simplify rules for foreign direct investment (FDI) and enhance the financial incentives on offer to businesses.

In a bid to stimulate inflows of capital and technology that could create jobs and diversify the production base of the economy, it is aiming to strip down the system of administrative approvals and control that so often hampers the implementation of international investors’ proposed projects.

Algeria recognises it must create a more favourable business environment if it is to match the performance of its Maghreb neighbours in attracting FDI into sectors other than oil and gas. Over the past two years, more FDI has flowed into Morocco than Algeria, even though the country lacks significant hydrocarbons reserves. Even Tunisia, an economy a quarter of the size of Algeria and in the midst of a fragile political transition, attracted more than $1bn of FDI in 2014, compared with Algeria’s $1.5bn.

National ownership

There is one issue on which the Algerian government is not prepared to give ground: it will keep the 49:51 rule, which insists on majority national ownership and excludes formal foreign control of any enterprise or project. Indeed, this regulation may be reinforced.

But in other respects the reform strategy takes significant steps towards a more liberal and fiscally helpful investment climate.

The National Investment Council will no longer carry out prior inspections of investment projects or decide whether these are acceptable. Rules governing access to fiscal benefits will be clarified, so that qualification for particular benefits becomes automatic if certain criteria are met.

Also on the agenda is the abolition of a rule that has prevented investors from benefiting simultaneously from general incentives and from those targeted at particular sectors. In the future, where similar types of benefit would apply, the investor may automatically benefit from the more favourable treatment – for example, a greater reduction in customs duties.

Assessing potential

How much more FDI this new regime can attract remains to be seen. The experience of recent years suggests that ultimately the decisive influence over whether or not international investors establish joint ventures in Algeria depends on their assessment of the commercial and long-term business potential.

France’s Peugeot Citroen recently confirmed that it is considering establishing a vehicle plant in Algeria. Even though it would not be able to take majority ownership, this could still make sense because the country is the firm’s main market in the Maghreb and there is long-term potential to increase its sales there.

In a similar vein, France’s Alstom has just invested in a joint-venture factory to build trams. With Algiers planning to build urban rail networks in 14 cities, there is clearly scope for sales growth – and the investment in the plant also fosters a friendly climate for the company to continue selling rolling stock to Algerian railways. So the economics of the direct investment must be understood as part of this wider business context.

Majority control

Luxembourg-based ArcelorMittal opted to remain in Algeria in 2013, even after acceding to government pressure to allow state-owned Sider to take majority control of its operations in the country. But as part of the overall deal, it shrewdly managed to secure a major Algerian state bank loan package for the business.

However, some investors are more reluctant to surrender majority control of what they regard as valuable strategic assets. Russia’s Vimpelcom negotiated long and hard before agreeing the terms under which it would sell majority ownership of the Djezzy mobile network to the state – a transaction finally completed in April 2014.

The 49:51 rule is not the only deterrent to potential FDI. Investors are confronted with complex regulations and administrative lethargy, which hint at a government reluctance to see foreign investors take stakes in strategic sectors of the economy.

Discouraging investment

The US government cites the example of American interests that applied for an investment banking licence in February 2014. Finance Ministry staff in Algiers said the application had been fully completed, and the Bank of Algeria and stock market regulator Organising Committee and Securities and Exchange Surveillance (COSOB) were reportedly quick to confirm their support for the application.

Yet the Finance Ministry showed no urgency in processing the application and failed to reply to enquiries about progress; pressed on the issue in a March 2015 bilateral meeting, the minister said the application was incomplete.

The recent reforms show that even while maintaining the 49:51 rule, the Algerian government recognises the need to provide a more attractive climate for FDI, with simpler procedures and stronger fiscal incentives.

Morocco in contrast

However, a fundamental cultural shift towards a more welcoming government mentality still seems far off. Conditions in Algeria contrast strikingly with those of Morocco, where the government sees foreign investment as a critical contributor in the drive to diversify the base of output and employment – and move the economy up the quality and technology scale.

According to the UK’s EY, in 2014, Morocco was Africa’s third-largest recipient of FDI, attracting 67 projects – an increase of more than 50 per cent on the previous year and accounting for 9.1 per cent of all new schemes in Africa and 9.5 per cent of jobs created.

Meanwhile, the number of new FDI projects in Algeria actually fell by 18.8 per cent in 2014 – perhaps in part because weak world energy prices discouraged new developments in the hydrocarbons sector.

Ready access

Like other Maghreb countries, Morocco can offer ready access to the European market, with which it has close cultural and historic ties. Moreover, it has navigated the regional instability of the past five years with relative calm, and there is a large pool of skilled personnel, attuned to international expectations.

Morocco cannot boast a natural resource base to compare with Algeria’s. But the liberal business mindset and keenness to develop new activities provide a welcoming environment for new projects led by foreign partners. Technology, telecoms, media and finance saw particularly strong investment growth last year.

While service sectors are the focus of much FDI, the past seven years have also seen sustained investment in industry, particularly automotive and aeronautics. Morocco has worked hard to attract major international names. Last October, Canada’s Bombardier began production of aerospace components at a new plant in Casablanca. The Tangier car plant opened by France’s Renault in 2012 is one of the group’s most advanced and energy efficient; by May this year, it had produced 400,000 vehicles.

Investors as allies

Morocco is far from being a private sector economy. Parastatal and royal entities play a key strategic role across a range of sectors, but in a proactive rather than defensive way. Foreign investors are seen as allies in helping to diversify the production and employment base.

Agence Marocaine de Developpement des Investissements (AMDI), the government agency charged with attracting FDI, points out that other sectors as diverse as offshoring, renewable energy, agro-food and textiles have also seen an upsurge in foreign investment over recent years.

Working alongside the indigenous private sector as well as other arms of government, AMDI is responsible for developing the structures that welcome investors and familiarise them with the country.

Rising FDI

This approach is certainly paying dividends. Last year, FDI in Morocco rose for the fourth year in succession, according to the UN’s development body Unctad, reaching $3.6bn, up from $3.3bn in 2013.

The trend is clear: Unctad reports that the value of greenfield FDI projects announced in Morocco rose from $2.5bn in 2013 to $4.6bn last year. By contrast, Algeria saw a dramatic fall to $536m, from $4.3bn in 2013.

In a hydrocarbons-fuelled economy, such dramatic fluctuations mainly reflect the uneven pace at which new gas and oil projects are announced, but relative to the overall economy, the scale of FDI in Algeria is far below the levels experienced by its neighbours. By 2012, the total accumulated stock of FDI had still reached only 11.2 per cent of GDP, compared with 49.4 per cent in Morocco and 73.8 per cent in Tunisia.

Tunisia tested

Tunisia saw the value of new FDI projects fall by 42.1 per cent in 2014, as the country navigated the uncertainties of post-revolution transition. The political process was completed only in early 2015, with successful elections and the formation of a new government with a stable parliamentary majority.

This government has continued the commitment to economic reform and maintained close relations with international partners. So some of the conditions that might favour new investment are now in place, despite a persistent terrorism threat. It will be the FDI figures for this year and next that show whether foreign investors have regained confidence in Tunisia.

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