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 ALGIERS 00001003 004 OF 004 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