INVESTING IN ALGERIA NOT FOR THE FAINT OF HEART

UNCLAS SECTION 01 OF 03 ALGIERS 001471

SIPDIS

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COMMERCE FOR DAS VINEYARD
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E.O. 12958: N/A
TAGS: EINV ECON EIND AG
SUBJECT: INVESTING IN ALGERIA NOT FOR THE FAINT OF HEART

REF: A. ALGIERS 01123

B. ALGIERS 00708


1. (SBU) SUMMARY: A soon-to-be-released report by the
World Bank uses polling data to rank the main challenges
facing the private sector in Algeria. Among the key
obstacles detailed in the study were credit access and cost,
the role of the informal market, access to land, and
taxation. The broader issues of transparency and access to
capable human resources have also impeded foreign investors.
The study's findings track well with the experience of U.S.
firms over the last few years seeking to play a role in
Algeria's fledgling private sector. END SUMMARY.

EXCHANGE CONTROLS, ACCESS TO CREDIT
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2. (SBU) With a stranglehold by state-run financial
institutions, major foreign exchange controls and the virtual
absence of capital markets, Algeria's financial sector is
perhaps the most underdeveloped in the region (ref A).
Repatriation of profits is one of the biggest obstacles
facing foreign investors. Foreign companies profits' are
taxed 25 percent before they can be repatriated. Since the
Algerian central bank must approve all foreign exchange
transactions, our business contacts tell us that foreign
companies must then wait often up to eight weeks for
transfers that the Algerian government promises will be
complete in four days. Numerous American food and service
franchises as well as international consultancies have eyed
the Algerian marketplace over the last few years but chosen
not to invest because Algeria does not allow any repatriation
of dividends from services. French franchises, of which
there are a handful, have circumvented these restrictions by
under- and over-invoicing as a means of remitting profits to
France.


3. (SBU) Archaic or non-existent credit analysis techniques
effectively block credit access for those who lack political
connections or an already established relationship with
entrenched, state-dominated business interests. While
foreign investors are not mandated to work with a local
agent, not doing so effectively closes the door to domestic
financing. Business community contacts have told us that
lenders' risk aversion to doing business with foreigners has
increased in the last few years following the banking
scandals that brought down Khalifa Bank and a handful of
other financial institutions. An Algerian firm that has
served for over two decades as the local agent for a major
U.S. flooring material firm told us recently that it has been
unable to obtain financing to purchase raw materials from the
U.S. company -- even though it's needed for a contract with
the Algerian government -- because it lacks sufficient clout
with Algerian banks. Embassy Algiers FCS is working with the
firm and Ex-Im Bank to keep the project on track. Meanwhile,
there is a sense in the American business community that the
upcoming privatization of Credit Populaire d'Algerie, one of
Algeria's largest state-run banks, will be the litmus test of
whether meaningful financial reform will finally move
forward.

INFORMAL MARKETS
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4. (SBU) Foreign investors have made some headway against the
glut of both counterfeit and legitimate products that are
smuggled into Algeria. Proctor & Gamble hired an
anti-counterfeiting consultant to work with Algerian customs
to enhance its inspections. The result was a drop in the
share of counterfeit P&G products in the Algerian market from
around 60 percent in 2001 to 20 percent today. Black and
Decker effectively reduced the number of counterfeit products
by opening authorized B&D shops throughout Algeria. The
struggle for Dunlop Tires was not so much counterfeit
products as the influx of real tires through informal
channels. Through outreach to Algerian customs, it reduced
the market share of illegally imported tires from 50 percent

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to about 15 percent over the last few years. Other companies
have not fared as well. Wrigley's chewing gum pulled out of
a USD 40 million investment after it was unable to reduce the
plethora of products coming through informal channels,
estimated at 90 percent of the Algerian market. Imported
generic products have sharply reduced American pharmaceutical
companies' profits in Algeria.

ACCESS TO LAND
--------------


5. (SBU) Perhaps oddly given that Algeria is Africa's second
largest country in terms of geographic size, access to land
for industrial development is a huge hurdle, according to
nearly all our Algerian and many American business contacts.
Part of the problem stems from Algeria's lack of port
capacity and the fierce competition to During Algeria's
decades-long experiment with socialism after independence,
the government took control of the vast majority of the
national territory. Aside from holdings by the elites,
private land ownership was banned until 1989 as the country
followed a series of Soviet-style five-year plans to allocate
land for housing, industry, and agriculture. With the debut
of economic reforms in the late 1980s, the Ministry of
Environment and Territorial Planning took charge of the
country's zoning and land redistribution. Would-be investors
complain, however, that in practice access to land for
industrial development depends on such factors as personal
connections, payoffs to key decisionmakers and successful
navigation of overlapping and byzantine bureaucracies. One
Los Angeles-based firm with decades of experience building
class A commercial real estate elsewhere described to us its
efforts to develop office space in two up-and-coming
industrial zones in metropolitan Algiers. After weeks of
trying to contact the manager of the industrial development
zone, the firm was told that it would have to talk to the
wali (provincial governor) of Algiers, who in turn advised
the company to address its request to the Ministry of
Environment. Ultimately, none of the individuals consulted
was able to make a decision on whether the firm could
purchase land. Another U.S. firm is experiencing the same
challenges in acquiring land to build a glass production
factory near Oran.

SHRINKING BUT SOMETIMES ARBITRARY TAXES
--------------


7. (SBU) Although the Algerian taxes exacted on foreign
investors have dropped in the last few years and the
government has tightened some loopholes, the capricious
nature of the Algerian tax code hinders more robust foreign
investment. Compared to other Maghreb countries, Algeria's
taxes are relatively low and have been dropping over the last
few years. Algeria's social security tax (26 percent) is
higher than that of its neighbors but most of its tariffs are
lower and its VAT and corporate profits taxes are lower than
those in Tunisia and Morocco. Algeria closed a loophole in
its tax code that double-taxed dividends for offshore
investors after initially trying to tax American
International Group for its investment in Orascom's Djezzy
mobile telephone network. Other cases have not ended as
successfully. Algeria's imposition of "extraordinary profit"
taxes on certain existing oil contracts, most notably that of
Anadarko Petroleum, has delayed Anadarko's moving ahead with
new investments. Moreover, the new oil profits tax sent
ripples well beyond the hydrocarbon sector (ref B).

TRANSPARENCY IN TENDERING
--------------


8. (SBU) Transparency in tendering is a major problem that
foreign investors expect will only worsen as Algeria embarks
on a USD 100 billion national infrastructure program. The
East/West Highway project, which was widely expected to be
awarded to Bechtel, ultimately went to a Chinese and Japanese
consortium at a price rumored to have included a substantial
payoff to Algerian officials. Other bids disadvantage

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American firms in particular due to the technical standards
written into the project specifications. A project to
rebuild Algeria's railway system was awarded to Germany's
Siemens and France's Alcatel in 2006 after the tender
documents were written specifically to EU standards over
objections from U.S. firms including General Electric.
American Science and Engineering similarly lost out to
Siemens on a contract to provide X-ray machines to Algerian
customs because the specifications were written to European
standards. On another project, a German firm reportedly paid
an Algerian official 500,000 Euro to have specs changed to
European standards. In a more overt example, a Sonatrach
subsidiary demanded a U.S. firm pay a 3 percent cash fee on a
USD 8 million hydraulic pump contract. When the U.S. firm
refused, the tender was ultimately awarded to a
French/Algerian joint venture.

HUMAN RESOURCES
--------------


9. (SBU) While not cited specifically in the World Bank
study, numerous American and Algerian firms have highlighted
the difficulty in finding and retaining skilled human
resources as a major impediment to further investment. Firms
as varied as Microsoft, Honeywell and Brown and Root-Condor
have highlighted to us the tremendous challenge in finding
staff, whether clerical or technical, with sufficient French
or English-language skills. Other firms have lamented the
work ethic of their Algerian staff. Still others note that
as soon as they are able to hire skilled workers, they are
quickly poached by foreign employers.

COMMENT: A ROSE WITH MANY THORNS
--------------


10. (SBU) Despite the many challenges to doing business, not
all experiences have been negative. Citibank, for example,
is very profitable in Algeria and is expanding its presence.
Honeywell's manager also very pleased with their slowly
growing business in the gas processing sector. Money can be
made in Algeria, but it is not for the faint of heart nor for
those looking for a quick turnaround on their investment.
Personal connections, whether to help cut through red tape
and secure credit or in the more pernicious domain of
outright corruption, are critical to doing business. Some
aspects, including the overall tax regime and the role of
informal markets, seem to be improving. The archaic
financial sector, still the least developed in the region, is
on the cusp of moving forward with the impending
privatization of Credit Populaire d'Algerie. Still, an
element of uncertainty brought about by opaque and often
arbitrary decisionmaking looms over the business climate and
remains an obstacle to more robust foreign investment.
FORD