ALGERIA 2009 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 05 ALGIERS 000164

SENSITIVE
SIPDIS

DEPARTMENT FOR NEA/MAG, PASS TO DOC

E.O. 12958: N/A
TAGS: EFIN EINV ELAB ETRD KTDB OPOC PGOV USTR AG
SUBJECT: ALGERIA 2009 INVESTMENT CLIMATE STATEMENT

REF: 08 STATE 158802


1. (SBU) SUMMARY: Algeria's population of roughly 35
million, its energy wealth, and growing demand for modern
infrastructure and consumer products have generated broad
interest in this market from companies around the world. But
an often difficult business regulatory environment,
symbolized by Algeria's failure to date to join the WTO or to
modernize its banking sector, has impeded significant foreign
investment outside the energy sector. Statements in mid-2008
by the president and prime minister blaming foreign investors
for Algeria's "failed" economic reform measures and
suggestions that future foreign investment will require a
majority Algerian stakeholder signal a renewed government
effort at economic nationalism. This trend began in 2006
with amendments to the hydrocarbons laws that backtracked
from market liberalization and required the national oil
company Sonatrach to be a majority partner in all oil and gas
projects, and imposed a windfall profits tax on oil
production. Financial sector reform is incremental at best,
and the world financial crisis resulted in the indefinite
suspension of the privatization of the state-owned bank
Credit Populaire d'Algerie (CPA). In fact, privatization in
general has stalled across all sectors. Algerian ministers
and government officials, nonetheless, urge U.S.-based
companies to consider projects in Algeria, and they welcome
trade delegations to explore such opportunities. END
SUMMARY.

OPENNESS TO FOREIGN INVESTMENT
--------------


2. (U) While Algerian officials are quick to seek technology
and know-how transfer, they have pursued efforts to secure
greater returns for Algerian interests since the 2006
amendments to the hydrocarbons law. Algerian law now
requires a majority state partnership in all oil and gas
projects and imposes a heavy windfall profits tax on oil
profits when prices are above USD 30 per barrel.


3. (SBU) At least one American company successfully purchased
the majority share of an industrial plant in early 2008, but
statements from the president and prime minister since then
indicate that future foreign investment in some sectors will
require majority Algerian partnership. In July 2008 the
president publicly expressed anger over what he perceived to
be massive profits expropriated to foreign capitals reaped
from investments in Algeria. Since that speech, the tax law
was amended to require companies to re-invest within four
years the equivalent value of any tax benefits they obtain as
incentives to locate in Algeria, and a new 15 percent tax was
imposed on foreign companies transferring profits out of
Algerian.


4. (SBU) Three agencies have mandates to encourage and manage
investment in Algeria. The National Agency for Investment
Development (ANDI) (www.andi.dz) is responsible for
facilitating investments and granting tax exemptions. The
National Investment Council (CNI) was created to define
investment strategies and priorities, and approve special
investment incentives by sector. The Ministry for Industry
and Investment Promotion (www.mipi.dz) maintains an office
for investment policy and one for promotion of privatization.
The privatization process in Algeria has all but stopped,
however, due in part to a lack of interest by foreign firms,
and to a lack of confidence by the government in the process.
The government is now seeking to consolidate state-owned
firms according to sector.

CONVERSION AND TRANSFER POLICIES
--------------


5. (U) The Algerian dinar is considered fully convertible for
all commercial transactions. The Bank of Algeria (Banque
d'AlgQrie, the nation's central bank) manages Algeria's
foreign reserves, controls foreign exchange, and delegates
most of these controls to the banks themselves. Legally
registered economic operators may have access to foreign
currency to make payments, subject to bank domiciliation,
without any pre-authorization. The same transfer procedures
apply to both goods and services, including insurance,
transportation, maintenance, technical assistance, and even
training contracts related to imported or exported goods.


6. (U) Algerian exporters outside the hydrocarbon sector must
repatriate their receipts and can convert only 50 percent

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into hard currency, receiving the other half in local
currency. Hydrocarbon export remuneration, by law, is
remitted 100 percent in Algerian dinars to local accounts.


7. (U) Foreign investors are allowed to repatriate their
profits, even if revenues exceed the original amount
invested. Foreign investors can repatriate dividends,
profits and real net income out of their assets transfer or
through liquidation. In certain cases, due to the
inefficiency of the banking system and the heavy bureaucracy,
it may take longer to obtain official permission from the
central bank to make transfers/payments, or for the local
bank to proceed with the transfer.

EXPROPRIATION AND COMPENSATION
--------------


8. (U) The government of Algeria has not engaged in
expropriation actions against U.S. or other foreign firms.

DISPUTE SETTLEMENT
--------------


9. (U) Algeria is a signatory to the convention of the
Paris-based International Center for the Settlement of
Investment Disputes (http://www.worldbank.org/icsid).
Algeria ratified its accession
(http://arbiter.wipo.int/arbitration) to the New York
Convention on Arbitration and is a member of the Multilateral
Investment Guarantee Agency (http://www.miga.org). The code
of civil procedure allows both private and public sector
companies full recourse to international arbitration.
Algeria permits the inclusion of international arbitration
clauses in contracts.


10. (SBU) An American oil company exercised the dispute
settlement mechanism in its contracts with the state oil
company to contest the implementation of a windfall profits
tax that the company argued violates its contract. The
process for negotiation, non-binding conciliation and binding
arbitration has been slow but apparently consistent with the
dispute resolution clauses of the contract.

PERFORMANCE REQUIREMENTS AND INCENTIVES
--------------


11. (U) Algeria does not impose general performance
requirements on foreign investments. However, the national
energy company Sonatrach must be a majority shareholder in
any venture in the hydrocarbons sector. Furthermore,
statements made by the president and prime minister in
mid-2008 suggest that future foreign investments in Algeria
in many sectors will require Algerian majority partnership.


12. (U) The investment code provides a number of incentives
for investment in Algeria, primarily related to VAT and other
tax exemptions for periods of time that are dependent on the
type of investment made and the nature of the package agreed
two between the investor and the National Agency for
Investment Development (ANDI). Changes to ANDI's mandate may
be changed, however, as the President referred to the
agency's results as a "failure" for Algeria in his July 2008
remarks.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
--------------


13. (U) Foreign entities have largely equal rights to
establish and own business enterprises in Algeria, and engage
in most forms of remunerative activity within the framework
of the requirements for Sonatrach participation in
hydrocarbons ventures. Private enterprises have equal status
with public enterprises and compete on an equal basis with
respect to access to markets, credit, and business operations.

PROTECTION OF PROPERTY RIGHTS
--------------


14. (U) Secured interests in property are generally
recognized and enforceable, but court proceedings can be
lengthy and results unpredictable. Most real property in
Algeria remains in government hands, and tumult over the
years has resulted in conflicting claims for real estate
title, making the purchase and financing of real estate
difficult.


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15. (U) As part of Algeria's negotiations for WTO accession,
the government adopted new laws in July 2003 on copyright and
related rights, trademarks, patent and integrated circuits.
Implementation has been inconsistent, and enforcement remains
spotty. Nonetheless, the customs service has stepped-up the
fight against counterfeit products.

TRANSPARENCY OF REGULATORY REFORM
--------------


16. (U) Algeria's regulatory system is largely transparent,
even if decision-making authority remains opaque. Each
ministry defines the rules for doing business in the sectors
it manages, and regulatory bodies are established to
administer them. Challenges arise in managing the
bureaucracy because authority is generally vested at the top
of every organization, and access to decision-makers is often
limited. Furthermore, the bureaucracy is slow and
protocol-oriented, such that even minor deficiencies in
paperwork can lead to significant delays and frustration. In
some cases, authority over a matter may rest within multiple
ministries, adding additional bureaucratic steps and the
likelihood of inaction in the face of a problem or unusual
circumstance. Efforts were undertaken in 2008 and early 2009
to begin modernization of the bureaucracies of the tax
administration and customs service.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
-------------- --------------


17. (U) After ten years, the Algerian stock exchange remains
nascent, with only three companies listed. Long-term
treasury bonds were listed on the stock market in 2008, but
trading seems to have declined sharply due to the increased
number of fees required to trade the bonds. Shorter yield
bonds continue to be managed through bond dealers.


18. (U) To absorb excess liquidity, some stated-owned
companies have launched corporate bonds to finance their
development projects. More recently, Sonatrach projects are
also being financed through a bank investment pool, rather
than bond markets. The pool is guaranteed by the federal
government. Private bond vehicles are launched periodically
for large-scale construction or venture projects, such as a
2009 harbor and marina development that offers the Algerian
public 6.5 percent interest for shares purchased to
capitalize the project.

POLITICAL VIOLENCE
--------------


19. (U) Political violence has declined since the brutal acts
of terror that took place in the 1990s. The government's
efforts to reduce the terrorist threat through military
engagement and societal reconciliation have achieved results.
Algeria has mostly defeated terrorism as a political threat
to the country, but U.S. firms should be aware of the
security risks they face when visiting and working in Algeria.


20. (U) Algerian terrorists aligned themselves with Al Qa'ida
in 2007. Since late 2006, there have been a series of
suicide bombings against mostly government installations, but
also against several foreign targets, including within the
Algiers metropolitan area.


21. (U) The U.S. Embassy in Algiers maintains a high level of
security, and security preparations must be considered when
doing business in Algeria. Visitors should read the State
Department's Consular Information Sheets and Travel Advisory
before traveling to Algeria, at www.travel.state.gov.

CORRUPTION
--------------


22. (U) Corruption is not as blatant of a problem in Algeria
as it is in many countries, and foreign companies generally
do not complain of being asked to pay bribes or that
contracts were lost because of corruption. Algerian citizens
believe that corruption is a problem in the upper reaches of
government, however, and anecdotal evidence suggests that
bribes are used to manage the vast Algerian bureaucracy, or
to avoid the reach of government.


23. (U) The Algerian government adopted an anti-corruption
bill in 2006. The law reinforced existing legislation to
bring Algeria into compliance with the U.N. Convention

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against Corruption, which Algeria ratified August 25, 2004.
The law was designed to promote transparency in government
and public procurement, introduced new crimes such as illicit
enrichment, and reinforced existing penal sanctions. A
national anti-corruption body under the direction of the
presidency has not yet been established.


24. (U) Algeria is not a financial center and financial
transactions are tightly regulated. However, it is estimated
that half of the country's economic transactions are done
within the informal sector, effectively escaping the purview
of state auditors. The government adopted anti-money
laundering legislation in 2005 and established a financial
intelligence unit to monitor suspicious financial
transactions and refer violations of the law to prosecutorial
magistrates.

BILATERAL INVESTMENT AGREEMENTS
--------------


25. (U) The United States and Algeria signed a Trade and
Investment Framework agreement (TIFA) in 2001 to create a
forum for involved discussion. TIFA council meetings were
held in 2001 and 2004.

Algeria executed a European Union association agreement in

2005. The agreement provides for the gradual removal of
import duties on EU industrial products over twelve years,
and removed duties immediately on 2,000 other products.

Algeria signed bilateral investment agreements for the
protection and promotion of investments with the following
countries in the indicated years: Belgium/Luxembourg (1991),
Italy (1991),France (1993),Romania (1994),Spain (1994),
China (1996),Germany (1996),Jordan (1996),Mali (1996),
Vietnam (1996),Egypt (1997),Bulgaria (1998),Mozambique
(1998),Niger (1998),Turkey (1998),Denmark (1999),Yemen
(1999),Czech Republic (2000),Greece (2000),and Malaysia
(2000). There is no bilateral investment treaty between
Algeria and the United States.

Algeria has also signed bilateral treaties to prevent double
taxation with the following nations: United Kingdom (1981),
France (1982),Tunisia (1985),Libya (1988),Morocco (1990),
Belgium (1991),Italy (1991),Romania (1994),Turkey (1994),
Syrian Arab Republic (1997),Bulgaria (1998),Canada (1999),
Mali (1999),Vietnam (1999),Bahrain (2000),Oman (2000),
Poland (2000),Ethiopia (2002),Lebanon (2002),Spain (2002),
and Yemen (2002). There is no double taxation treaty between
Algeria and the United States.

In 1990, Algeria signed both investment protection and double
taxation agreements with the Arab Maghreb Union (UMA)
countries (Libya, Morocco, Mauritania and Tunisia).

OPIC & OTHER INVESTMENT INSURANCE PROGRAMS
--------------


26. (U) The U.S. Overseas Private Investment Corporation
(OPIC) (http://www.opic.gov),the U.S. Export-Import Bank
(Ex-Im) (http://www.exim.gov),and the U.S. Trade and
Development Agency (USTDA) (http://www.ustda.gov) support
projects in Algeria.

A USD 250-million water desalination project in Algiers was
completed in 2008 with OPIC support, and Ex-Im supported the
U.S. content of a power project in Skikda in 2003.

LABOR
--------------


27. (U) Algeria's labor force consists of roughly 10 million
people out of a total population of some 35 million.
According to the National Office of Statistics, over 70
percent of the population is under age 30. The monthly
minimum wage is DA 12,000 (USD 200). The official
unemployment rate is near 11 percent, but international
organizations speculate it is much higher, perhaps as high as
27 percent.


28. (U) Algeria's labor code sets minimum work standards,
including a minimum work age (16 years),a 40-hour workweek
and rates for overtime pay. Employers pay 26 percent of
gross salaries in social security taxes, including provisions
for both retirement and health/accident insurance.


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29. (U) U.S. companies are able to hire trained technical
staff. However, recruiting and retention have become more
difficult, as well-educated and trained Algerians are
increasingly being lured to higher salaries offered in the
Gulf region. English speakers remain difficult to find.
Arabic is the official language, and French is the most
common language of business.


30. (U) There are no restrictions on the number of expatriate
supervisory personnel a company may establish. Entry visas
for foreign workers must be requested through the Ministry of
Employment and Social Solidarity (http://www.massn.gov.dz).
Foreign workers must then obtain work permits from the
Ministry of Labor (http://www.mtss.gov.dz) and a residency
card from the local police office in the district where they
will be working. The employer is responsible for submitting
all tax payments for individual workers to the proper local
tax collection authorities.

Algerian regulations allow foreigners to repatriate 50
percent of their salaries.

FOREIGN-TRADE ZONES/FREE PORTS
--------------


31. (U) There are currently no free trade zones in Algeria.

FOREIGN DIRECT INVESTMENT STATISTICS
--------------


32. (U) The latest data available from the Central Bank shows
foreign inflow to Algeria was USD 1.8 billion for 2006. The
CIA World Factbook estimates the total FDI stock to be USD
10.6 billion.
PEARCE