RESURGENCE OF "ECONOMIC PATRIOTISM" TARGETS

C O N F I D E N T I A L SECTION 01 OF 04 ALGIERS 001003

SIPDIS

STATE PASS TO USTR PBURKHEAD AND BGRYNIEWICZ
DEPT ALSO FOR EEB/ESC/IEC/EPC GLENN GRIFFIN

E.O. 12958: DECL: 09/16/2028
TAGS: EINV ETRD EFIN ECON AG
SUBJECT: RESURGENCE OF "ECONOMIC PATRIOTISM" TARGETS
FOREIGN INVESTORS

REF: A. ALGIERS 848

B. ALGIERS 930

C. ALGIERS 773

D. ALGIERS 774

E. 2007 ALGIERS 1748

Classified By: DCM Thomas F. Daughton; reasons 1.4 (b) and (d).


1. (C) SUMMARY: Following President Bouteflika's public
blaming of foreign investors for Algeria's lagging economy
outside of the hydrocarbons sector (ref A),the Algerian
government has begun to impose new taxes and restrictions on
foreign companies doing business here. Apparently sobered by
the global economic crisis, the government is now seeking
refuge in greater control over investment, earnings and land.
The moves are also partly an effort to appease outspoken
Algerian business groups who claim that foreign investors
have enjoyed greater leeway and more incentives for too long.
Instead of raising Algerian businesses to a higher level
through greater economic liberalization, the net effect of
the new policies will be to drag foreign investors down to
the slow, statist level of the domestic Algerian economy,
where everything is linked directly to the national treasury.
The government's desire to capture a bigger percentage of
the profits foreign firms make in Algeria may be politics,
but it also reflects a belief that the answer to stagnant
growth outside the hydrocarbons sector is for the government
to reap greater income from Algeria's own resources and
markets, while insulating Algeria from the global economic
crisis and preventing foreign interests from "taking
advantage" of Algeria's developing economy. END SUMMARY.

BACK TO THE 1970s
--------------


2. (C) In addition to a re-investment tax (ref B),new tax
provisions that affect primarily foreign firms have been
trickling out of the finance ministry on an almost weekly
basis since the end of July, and a new law prohibits foreign
companies from purchasing real property in land auctions that
are specifically designed to spur industrial investment (ref
C). Beginning in 2009, Algeria will tax the revenues of
foreign firms that contract with the government but are not
physically present in the country. The most significant
element of this new trend of what the local press has branded
"economic patriotism" was Prime Minister Ahmed Ouyahia's
announcement that future foreign investments in Algeria will
require a majority Algerian stakeholder. Economist Abdelhak
Lamiri drew a direct link between the recent measures and the
government's public musings about how to use Algeria's vast
financial reserves (currently more than USD 130 billion) to
generate even more wealth. Even though Algeria is currently
earning only about a two-percent return on its reserves,
President Bouteflika stated earlier this month that Algeria
will not create a sovereign wealth fund to invest abroad.
Lamiri told us the government chose to turn inward for
greater returns instead, hence the recent measures designed
to increase the return on investments within the country.

LOOKING FOR...A MAJORITY ALGERIAN PARTNER
--------------


3. (U) Ouyahia's August announcement that Algeria intends to
hold the majority of capital in any future projects involving
foreign investors came in a communique to the government's
administrative organs that was issued to rebut press reports
of a government plan to freeze investment projects across the
country. How the directive is to be implemented remains
unclear, as is the question of whether the Algerian majority
stakeholder in such projects will be the government (already
the case in the hydrocarbons sector) or a private Algerian
stakeholder. The head of a leading Algerian business
association, the Forum des Chefs d'Entreprise (FCE),was
quoted in the independent French daily El Watan on July 28 as
supporting Bouteflika's "diagnosis" of the state of foreign
investment in Algeria, noting that the president's words must

ALGIERS 00001003 002 OF 004


be followed "by tangible solutions for cleaning up the
situation and laying new rules of the game." The FCE head
was also quoted on September 2 in the on-line journal Tout
sur l'Algerie as saying "foreign investments have not brought
anything to Algeria." Khedidja Belhadi, president of a
prominent association of women business owners and managers,
told us on September 2 that her association was also very
much in favor of the government's move. She and her
colleagues denied that the measure would discourage foreign
investment in Algeria because, they claimed, most foreign
firms have experience with this sort of local partnership
requirement in other countries. Indeed, the government and
Algerian business groups publicly insist that such a local
content requirement for investments would be consistent with
international norms, and would make Algerian business
interests more competitive by bringing foreign investors to
their same level.

RIGHT OF FIRST REFUSAL
--------------


4. (C) In addition to the requirement that new investments in
Algeria require a majority Algerian stakeholder, the on-line
journal Tout sur l'Algerie reported September 8 that the
government also plans to require foreign companies looking to
sell their assets in Algeria to offer a right of first
refusal to the state. This appears to be in reaction to the
sale of several Algerian cement plants by the Egyptian
Orascom Group to the French construction giant LaFarge.
While the Orascom-LaFarge deal was global in scope -- Orascom
sold all of its international cement holdings to LaFarge --
the Algerians took the transfers of their plants very
personally, and the announcement was followed by weeks of
intensive press coverage and public criticism of the deal
from government officials and others.

NEW CONTRACT TAX LEVELS THE PLAYING FIELD?
--------------


5. (U) The 2009 Algerian finance law unveiled in mid-August
contained a new tax on foreign firms that do business in
Algeria but are not established here. Brahim Benali,
director of communication at the Algerian tax administration,
told us recently that beginning in 2009 the government will
impose a 15-percent tax on the transfer of any revenues
earned in Algeria by foreign firms that do not have a legal
presence in the country. Benali said the provision was
designed to correct a "well-hidden discrimination" in
Algerian tax law that allows non-resident foreign firms to
expatriate tax-free the income they receive from contracts in
Algeria, such as in the public works sector, while companies
established under Algerian law are taxed on similar revenue
transfers.

REINVESTMENT TAX
--------------


6. (U) As we previously reported (ref B),foreign firms that
take advantage of tax incentives to locate in Algeria are now
required to reinvest from their profits the value of those
tax benefits within four years, or face a 30-percent penalty.
The change was confirmed to us by Benali at the tax
administration. Press reports in early August indicated that
tax auditors were being deployed to scour the books of
foreign firms looking for expatriated revenues in order to
assess the rate at which foreign companies re-invest in
Algeria.

NO LAND FOR FOREIGN COMPANIES
--------------


7. (C) The Council of Ministers amended the laws on
industrial land transfers on August 31 to prohibit foreign
entities from purchasing real estate designated for
industrial development. The new ordinance, which must be
ratified by parliament, allows foreign industrial investors

ALGIERS 00001003 003 OF 004


to enter into land concessions ranging from 33 to 99 years,
but not to acquire actual title. Foreign companies had
previously been welcome to bid at public land auctions
designed to spur industrial development (ref C). Ahmed Sadi,
Director of Statistics and Investor Relations at the
newly-created National Agency for Land Intermediation and
Regulation (ANREF),told us that the new restriction was
designed to reduce land speculation and money laundering via
real estate transactions (ref D). Sadi said the new 2008
industrial land ordinance replaced the 2007 version which
allowed land transfer to investors as well as the possibility
of applying the mutual agreement rule when selling lands to
investors, based on the nature and location of a project. In
practice, investors were able to purchase land by mutual
agreement if the land was located in an area in need of
development -- not in Algiers and other metropolitan areas.
Sadi confirmed that, under the revised ordinance, the mutual
agreement stipulation would theoretically remain in effect,
but that each case would have to be approved by the Council
of Ministers, chaired by President Bouteflika.

NO PRE-SALES OF HOMES ON PUBLIC LANDS
--------------


8. (C) The on-line journal Tout sur l'Algerie recently quoted
government sources as saying that a rule will be announced
shortly prohibiting foreign companies that develop housing
projects on public lands from raising capital for their
projects by accepting pre-payment for homes. ANREF's Sadi
confirmed this meant foreign firms must invest their own
money in these projects and then sell the homes to Algerian
families to recoup their investment costs, rather than
financing the project "on the backs of Algerian families."
Separately, however, the deputy director of the massive
state-owned developer EPLF told us on September 8 that they
had not yet received any directive concerning such a change.

MORE OF THE SAME: OUYAHIA BUILDS ON THE HYDROCARBONS MODEL
-------------- --------------


9. (C) The trend of nationalistic economic policies dates to
the 2006 rollback of liberalization measures in the
hydrocarbons sector. Amendments to the 2006 finance law
required a 51-percent government stake in all oil and gas
ventures and imposed a windfall profit tax to capture a
bigger slice of energy company profits as the price of oil
skyrocketed. Economist Lamiri told us many in the Algerian
government have concluded that, since oil is still flowing
and Algeria's coffers are filling up, these economic policies
have succeeded despite an initial investor outcry. That the
implementation of the latest measures began immediately after
the June re-appointment of Ouyahia as prime minister may also
signal a resurgence of the fundamental mistrust of market
economics still nursed in some quarters of the Algerian
government.


10. (C) Ouyahia has played the role of "dirty hands" before,
implementing unpopular or difficult economic policies that
other politicians seemed unwilling to tackle. It was Ouyahia
who, in his first term as prime minister from 1995 to 1997,
pushed through progressive structural adjustment measures
favored by the IMF that resulted in the closure of public
companies and significant layoffs. But it was also Ouyahia
who, in 2004 during his second stint as prime minister,
forbade public entities from using private banks in order to
shield public funds and pensions from market shocks and risky
or illegal behavior by private bankers. The "Ouyahia decree"
was rescinded in 2007 in order to boost the value of the
public bank Credit Populaire d'Algerie (CPA),which had been
slated for a privatization that has still not occurred (ref
E).

DEFENDING ALGERIA'S COMMERCIAL HONOR
--------------


11. (C) Some read these new public pronouncements of economic

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nationalism (one independent paper called it "Algerian
Bolivarism") as part of a pre-election strategy begun by
Bouteflika in anticipation of seeking a third term as
president in 2009. In his July speech the president asserted
that the government's past attempts at economic
liberalization gained little for Algeria, while allowing
foreign interests to reap huge profits from relatively minor
investments. On September 2 El Watan quoted Bouteflika as
saying in his speech (no transcript of which was ever made
available) that Algeria "knows how to defend its rights like
other countries in investment matters, and like all others it
knows how to put a limit on parasitic and speculative
behavior that is a detriment to the public treasury." An
Egyptian diplomat in Algiers told us recently that
Bouteflika's ire seemed to be aimed at Orascom, both for its
sale of the Algerian cement plants to the French and its
rumored pending sale -- publicly denied by Orascom -- of the
Djezzy GSM network to a French telecommunications firm.
Other elements of the tax and land use provisions appear to
be aimed at punishing Gulf state investors, as Kuwaiti and
Emirati firms periodically announce grand, upscale housing
and mixed-use commercial developments that never break
ground. The Arabic-language daily El Khabar, quoting unnamed
government officials "close to the investment portfolio,"
reported on August 31 that USD 50 billion in planned Arab
investment in Algeria has still not materialized.

COMMENT: LOOKING EASTWARD?
--------------


12. (C) The Algerian leadership appears to believe that that
by forcing Algerian participation in all joint ventures
involving foreign investments and by restructuring tax and
land use laws to restrict the activities of foreign firms,
the government can take greater advantage of profits earned
here and prevent the unseemly selling-off of Algerian assets.
Many Algerians see an irony in this new attitude, as Orascom
Telecom (which also attracted Bouteflika's ire in July simply
for making too much money) was perceived as a darling of the
leadership only three years ago. At the time the government
seemed intent on driving state-owned Algerie Telecom out of
business in an effort to open the telecommunications sector
to new technology and services. Now it seems that the
Algerians do not like the other side of the free-market coin,
where private companies that take risks in emerging markets
can reap huge profits with no guarantee of follow-on
investment. An American financial consultant who spent two
years providing technical assistance to the finance ministry
told us September 3 that the Algerians are no longer looking
to the Persian Gulf for examples of successful economic
modernization, but are instead casting an eye further east
toward China as the model of a state-controlled economy that
flourishes in the modern world marketplace. The potential
impact on American companies of these new nationalistic
measures is not yet clear. An executive of a U.S.-based
glass company that had been struggling with the government
for months over the site of a new factory told us in
mid-August that the company is studying closely how its plans
may be affected by the new restrictions on investment.
Meanwhile, French, Italian and Egyptian diplomats have told
us their prospective investors already feel a chill in
Algeria, and are at least thinking about investing their
capital elsewhere.
PEARCE