ALGERIA: BUREAUCRACY STIFLES GROWTH

C O N F I D E N T I A L SECTION 01 OF 03 ALGIERS 001206 SIPDIS CAIRO PASS TO TREAS ASEVERENS E.O. 12958: DECL: 11/10/2018 TAGS: EFIN EINV ECON PREL AG SUBJECT: ALGERIA: BUREAUCRACY STIFLES GROWTH REF: A. ALGIERS 825 ¶B. ALGIERS 384 ¶C. 2007 ALGIERS 1748 Classified By: Ambassador David D. Pearce for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: Business leaders told Ambassador and visiting NEA/MAG Director that the government bureaucracy continues to stifle the Algerian economy. Contract tenders are slow to develop, forcing the government to accept bidders who promise speed but who often have cost overruns in the end that exceed the original contract price. The regulatory structure for the financial sector remains burdensome and the judicial system is not equipped to process administrative infractions, forcing banks and bank presidents to spend money and time in endless court hearings. A former president of Sonatrach said that even that company has become inaccessible and lethargic, and has no real long-range vision for oil production. The businessmen also voiced concern that the Algerian education system is not equipped to prepare young Algerians for a modern world, does not develop skills to match the job market, and they were of split opinion as to whether there is a "next generation" of leaders capable of correcting Algeria's lack of economic vision. END SUMMARY. A DEADLY BUREAUCRACY -------------- ¶2. (C) The Ambassador invited several business leaders to a November 3 dinner with visiting NEA/MAG Director to discuss the state of the Algerian economy and the current business climate. Representatives of the oil and gas, finance and IT sectors were present, including past and present presidents of the American Chamber of Commerce (AmCham),and a former minister and president of hydrocarbon parastatal Sonatrach. When the Ambassador asked for their opinions regarding where Algeria's economy stands today, they were unanimous in articulating that there is a lack of economic vision among Algerian leaders, and that commercial activity, while profitable in many sectors, is restricted by an archaic and lethargic bureaucracy that forces companies to waste time and money trying to meet the requirements of an opaque system. ¶3. (C) AmCham President Lahouari Belbari, also managing director of Cisco Systems in Algeria, said that in most ministries, the bureaucracy is very slow to make decisions, which acts as a disincentive for American firms to bid on contracts. For example, he said that when the government announces plans to launch a project, the bureaucracy often moves so slowly that by the time an agency issues a contract tender, so little time is left to complete the project that the most capable American or European firms are unwilling to bid because they know they will be unable to meet the contract timeline within the expected price range. This often leads to cost overruns, as the bidders willing to work under the tight deadlines rarely actually meet them, or stay within budget. EVEN AT SONATRACH -------------- ¶4. (C) Abdelmadjid Attar, an oil and gas consultant who was formerly president of Sonatrach and minister of water resources, lamented that Sonatrach itself has become increasingly opaque and inaccessible since he left it in ¶2000. When the Ambassador asked about the company's long-term plan for oil exploration and development, Attar replied that Sonatrach does not have one. Instead, Sonatrach has resolved itself to the fact that its best oil days are behind it, and that it should develop a more comprehensive gas strategy. Attar said that Sonatrach assumes Algeria has 40 years of oil left, a notion disputed by Hess managing director Peter Bird who suggested that technological innovation continually extends the useful lifespan of global oil reserves. ¶5. (C) Attar and Bird agreed, however, that Sonatrach's lack of vision is evident by the way in which it is ALGIERS 00001206 002 OF 003 conducting its current oil and gas bid round (ref A). Both said that the blocks being offered are perhaps the least attractive in the Algerian desert, and Attar feels that Sonatrach and the Ministry of Energy are mismanaging this bid round, the first since the hydrocarbons law of 2005. Attar said that Algeria should have offered some of its best blocks to generate real international interest and to show that the country is serious about its development and truly open for business. Instead, the low quality of the blocks, coupled with the huge number of bidders that were qualified, has created doubt among the most serious international companies that there will be sufficient return on investment for any of the blocks to be auctioned in December. AND OF COURSE, THE FINANCIAL SECTOR -------------- ¶6. (C) The Ambassador noted that many of the complaints he has heard regarding the challenges of doing business in Algeria stem from the fact that the financial system is in serious need of reform. Kamel Driss, general director of Citibank Algeria, agreed wholeheartedly, and noted that banks are particularly affected by an ill-equipped finance regulatory system and an untrained judiciary. He recounted how Central Bank auditors essentially worked from his bank's headquarters for one year reviewing every document having to do with the bank's role in clearing clients' imports through Customs (ref B). The examiners filed a number of complaints against the bank, which are heard in court and for which huge fines and criminal liability may be assessed. Driss has successfully countered these claims thus far, but not without significant expense at both the magistrate and appeals levels. Driss said that when he mentioned this to Finance Minister Karim Djoudi earlier in the year, Djoudi replied, "I understand. I have a bank facing the same problem," implying that one of the state-owned banks under his ministry's purview was also facing intense scrutiny by bank examiners and magistrates. ¶7. (C) When the Ambassador asked about the state of financial reform, Driss noted that the failure last year to privatize the state-owned bank Credit Populaire d'Algerie (CPA) (ref C) essentially stalled progress in modernizing the finance sector in Algeria. While it is true, Driss said, that HSBC recently began operations here and several French banks have opened new retail branches, he said that in practice, the state-owned banks that control 90 percent of the market maintain a tight grip on banking practices. For example, he said that Sonatrach continues to do business only with Bank Exterieure D'Algerie (BEA),even though the rule prohibiting parastatals from doing business with private banks was lifted in 2007. Driss said that he recently had dinner with the presidents of two leading French banks in Algeria, who complained that they want to extend retail banking services to Algerian consumers, but that the state-owned banks, flush with liquidity, will not lend money to private banks, all of which are foreign-owned. HOW THE CHINESE COMPETE HERE -------------- ¶8. (C) AmCham's Belbari led a discussion of the growing Chinese influence in Algeria. He noted that Chinese companies are generally the ones willing to meet the unrealistically short deadlines created by government bureaucratic delays in government tenders, and that they do so by importing thousands of workers for construction projects. Attar noted that Chinese firms often have the same problems as companies from other countries regarding clearing goods through Customs because they tend to form local businesses to take advantage of tax incentives, but then run afoul of Customs regulations. Belbari suggested that Chinese firms are generally more amenable to paying bribes or kickbacks to expedite their paperwork through Algerian bureaucratic channels, and that they are cutthroat competitors. Belbari said one of his employees told him that a Chinese competitor offered a bribe to alter a Cisco bid to make it less competitive or to disqualify it altogether from ALGIERS 00001206 003 OF 003 consideration at the technical level. COMMENT: NOTHING NEW, AND NOTHING'S CHANGED -------------- ¶9. (C) The complaints voiced by these well-established business leaders are not new, and we have previously reported versions of the same (reftels). What does seem to be changing are the origins of the foreign players here, as we see an increasing commercial influence here from the Chinese and from Persian Gulf states, and an effort by government agencies to appear modern. As we continue to report, Algerian ministers are quick to ask us for technical assistance for training, the expansion of English language programming, and the promotion of Algerian markets to American firms. However, while we may be seeing a strengthening of elements within the Algerian technocrat corps, the bulk of the Algerian bureaucracy continues to move ponderously, unable to adjust to market demands and make meaningful decisions. Business leaders had no clear answer when the Ambassador asked how change will ultimately occur. AmCham's Belbari lamented that Algerian schools are not well-equipped to teach in a modern world. Citibank's Driss commented at an election-night reception the following evening that many of Algeria's up-and-coming business and government leaders are proteges and relatives of the older generation: for example, he noted that the current finance minister is the son of a former powerful diplomat. "What chance do guys like us have to lend our expertise to the government after years of trying to work here?" he lamented. "And if these same families keep their power, what will change?" PEARCE