ALGERIA: FINANCE LAW HAMPERS FOREIGN INVESTMENT,

C O N F I D E N T I A L ALGIERS 000842 (CORRECTED COPY - RENUMBER PARAGRAPHS) SIPDIS STATE FOR NEA/MAG STATE PASS FOR USTR COMMERCE FOR NATE MASON E.O. 12958: DECL: 09/13/2019 TAGS: EINV EFIN ETRD ECON AG SUBJECT: ALGERIA: FINANCE LAW HAMPERS FOREIGN INVESTMENT, RESTRICTS IMPORTS Classified By: DAVID D. PEARCE, AMBASSADOR. REASON: 1.4 (B),(D) Summary -------------- ¶1. (SBU) A "complementary finance law" (CFL) adopted by presidential decree on 22 July imposes new restrictions on foreign investment, import companies, and domestic consumer credit. It grew out of government preoccupation with lowering Algeria's growing import bill and more tightly controlling foreign investors, along with fears of growing consumer indebtedness. The law requires a minimum of 51 percent Algerian partnership in new foreign investments, a 30 percent Algerian partnership in all foreign import companies, and payment of all imports by letters of credit opened by banks. The law also bans consumer credit except for real estate transactions. On the positive side, this measure increases subsidies to small businesses and the tourism and agriculture sectors. The legislation was drafted in secrecy without consultation with business experts and was adopted by decree while parliament was in recess and most government ministers were on vacation. This law will create shortages, hurt consumers, and further damage Algeria's investment climate. It is a reflexive retreat into statist regulation in response to a deteriorating (but still positive) trade balance largely caused by lower oil revenues, and to increased consumer indebtedness, in the context of the global financial crisis. End Summary Government Drops Fin Law Bombshell, Goes on Vacation -------------- -------------- ¶2. (U) The government adopted by presidential decree a complementary finance law for 2009 on July 22. The new law entered into force on July 26 with its publication in Algeria's Official Journal. The major provisions of the 112-article decree include the following: -- All import firms must have at least 30 percent ownership by an Algerian partner; -- Import companies must conduct import operations through an Algerian bank; a letter of credit is the only allowed means of payment; -- Each import transaction is subject to a 10,000 DZD (approx. USD 150) bank fee; service imports are subject to a three percent fee on each transaction; capital goods and raw materials are exempt from this requirement; -- An import company's manager and the holder of its commercial license are the only persons authorized to arrange import operations; -- Commercial banks may grant loans to individuals only for real estate transactions; -- Foreign investment can be undertaken only in a 49/51 percent partnership with Algerian investors; -- All foreign investment must maintain a positive foreign exchange balance during the lifetime of the project; -- All foreign investment is subject to prior review by the National Investment Council (NCI); -- To obtain Algerian government investment incentives, foreign investors must commit to preferential treatment for Algerian goods and labor; -- Investors benefiting from Algerian government tax exemptions must re-invest the equivalent of their tax exemption inside Algeria within four years after beginning the investment; -- Small businesses and the agriculture and tourism sectors receive tax and customs subsidies; -- Low wage-earners are eligible for mortgage and rent subsidies. Import Curbs Baffle Banks, Set Stage for Shortages -------------- -------------- ¶3. (SBU) The restrictions on import activities reflect the government's deep-seated concern with Algeria's rising import bill (ref. A) as weak oil revenue flows fail to replenish the country's declining but still-sizable $140 billion foreign exchange reserve (equal to over three years of imports). The measure prompting the most concern and confusion among Algerian and foreign firms is Article 69 which makes letters of credit (LOC) the sole legal instrument for paying for imports. Previously, most importers utilized electronic funds transfers (usually via SWIFT) to pay for imports. This allowed importers at least 90 days following the receipt of goods to settle import payments with banks. The LOC requirement will force importers to pay up front for their purchases. The terms of the new law also require that importers maintain bank reserves equal to the amount of the LOC until delivery of the product. This requirement will prove especially difficult for smaller importers who will find it difficult to keep large amounts of cash in bank reserve throughout the 2-3 month average period it takes for delivery of imports. ¶4. (C) According to Citi Algeria Corporate Bank Head Janet Heckman (protect),most banks chose to err on the side of caution by immediately suspending all import financing pending clarification from the government. Banks also began applying the LOC rule to all imports en route to Algeria, forcing shippers to return cargoes to their port of origin to await issuance of a LOC. On August 4, the finance ministry and Algeria's central bank issued a letter instructing banks to apply the letter of credit requirement on all import transactions of goods (but not services) initiated 5 August or later. The letter was the first major clarification issued by the government related to the CFL, and a Citi Algeria official told us on 10 August that the letter helped ease the import logjam in Algerian ports. ¶5. (C) The government's failure to address in its letter the treatment of imported services by the 4 August deadline put most imported services -- dominated by the hydrocarbon sector -- on hold. Akli Brihi (protect),Country President for British Petroleum (BP),told us August 10 that it was too early to see the effects of the CFL on services imports, but he expected some financial losses from the measures since BP imports a large amount of high-tech equipment for use in its domestic hydrocarbon service operations. ¶6. (U) Article 66 also aims to impede imports by designating an import company's manager and holder of the commercial register as the only two individuals authorized to arrange import operations, including payment and compliance with government phytosanitary and customs regulations. Most import firms will have difficulty complying with this regulation, since internal departments and staff normally arrange imports. Some foreign import firms will be at a further disadvantage because the authorized company officials identified in the law often reside outside Algeria. ¶7. (SBU) The new measures likely will continue to slow the flow of imports and prompt a shortage of some products as distributors and retailers deplete stocks, and manufacturers face delays importing raw materials and production inputs. Both Heckman and the Algerian daily El-Khabar have stated that some stocks of medication are beginning to run low because of the difficulties some pharmaceutical manufacturers are experiencing importing inputs. The Confederation of Algerian Industrialists and Producers (CIPA) on 5 August publically denounced article 69 for "penalizing Algerian traders while enriching foreign suppliers." Some economic observers note that foreign banks will be the winners because of the commissions they will collect for issuing LOCs. Importers will be the losers for paying these commissions. "You should not underestimate the potential damage to the Algerian economy from the new import measures," warned Heckman. Restrictions on Foreign Investment, Foreign Import Firms -------------- -------------- ¶8. (U) Article 58 of the CFL requires the over 1,800 foreign importers to divest a minimum 30 percent of their capital to at least one Algerian partner. The article also requires an Algerian national partner to hold at least 51 percent of a foreign investment's total capital. While almost all US businesses that export to Algeria already operate through local Algerian partners, the new 30 percent rule is a major blow to French businesses that dominate the foreign import sector in Algeria. Major French companies like Renault, Peugeot, Lafarge, and Michelin will be unable to import until they acquire an Algerian partner. The sudden necessity of searching out an Algerian partner will be time consuming for many large foreign companies. ¶9. (SBU) Additional measures in the bill mandate: -- Prior GOA approval on all direct foreign investment. Such investments must be submitted to the National Investment Council (CNI) for review. The CNI is composed of representatives from the Ministry of Finance, Ministry of Commerce, Ministry of Industry and the Promotion of Investments, Ministry of Interior, Ministry of Energy and Mines, Ministry for the Promotion of Small and Medium Sized Enterprises, and the Ministry of Environment and Urban Planning. -- A limitation on profit repatriation requiring foreign investors to maintain a foreign exchange balance greater than the value of their profits in Algeria for the duration of their project. All resources required for the investment project, with the exception of starting capital, must be provided from domestic funding sources. -- Domestic content requirements that make any investment tax breaks for foreign investments contingent on a written commitment by the foreign beneficiary to give preference to Algerian products and services. Only acquisitions of Algerian origin will qualify for value-added tax (VAT) exemptions, unless a firm can establish that a particular input is not available through domestic producers. Finally, the CNI can authorize, for a period of five years, exemptions and reductions of duties, taxes, or charges, including VAT, for emerging industrial sectors. State Bans Consumer and Vehicle Loans -------------- ¶10. (SBU) A CFL measure causing anxiety and criticism on the Algerian street is Article 75 which limits consumer lending by banks to real estate transactions -- essentially banning banks from issuing consumer credit, which had become especially widespread in the auto sector. Such loans were the almost exclusive purview of the domestic branches or subsidiaries of foreign banks that make up Algeria's private banking sector. Local observers believe the restriction reflects the government's fear that growing household indebtedness risks increasing the exposure of Algeria's economy to the global financial crisis. On the Positive Side: Subsidies for Homebuyers, Renters -------------- -------------- ¶11. (U) Other measures in the CFL mobilize state funds to alleviate Algeria's ongoing housing crisis, in which plentiful available units are unaffordable to most Algerians, and many housing starts remain unfinished. Article 99 authorizes government home purchase or construction loans at one percent interest to public servants. Article 109 and 110 extend subsidies for housing loans or rent payments to Algerians employed in the private sector whose salaries are a multiple of the national minimum wage to be defined by law. Article 41 grants tax breaks for income from the rental of housing units smaller than 80 square meters, reflecting the government's desire to bring down housing rents, another area subject to major price inflation in recent years. It is far from clear that these subsidies will increase access to housing in the face of housing prices that remain among the highest in Africa. New Mobile Phone Taxes -------------- ¶12. (U) Article 32 fixes a 5 percent tax on the price of pre-paid cards used by cellular providers, and Article 85 assesses a second tax of 0.5 percent on the turnover of mobile operators, paid to the National Fund for the Promotion and the Development of Arts and Letters. The Tax Administration ordered mobile phone providers on August 10 not to pass the new taxes on to consumers through rate increases or higher prices for pre-paid cards. Some Algerian observers believe that the new tax could be part of a government effort to strengthen the market share of the state-backed provider Mobilis and undermine the market position of foreign service providers such as Djezzy (owned by Egypt-based Orascom) and Nedjma (owned by Kuwait-based Wataniya Telcom). Stimuli for Agriculture, Tourism, Domestic Job Creation -------------- -------------- ¶13. (U) The CFL also contains measures to encourage the growth of small- and medium-sized enterprises (SMEs),the development of the agricultural and tourism sectors, and domestic job creation programs. --SMEs: The government expanded credit guarantees for SMEs from 50 million dinars ($675,000) to 250 million dinars ($3.4 million). SMEs that reserve part of their benefits for research and development are eligible for a ten percent deduction on fiscal charges not exceeding 100 million dinars ($1.3 million. --Agriculture: VAT on all agricultural sector activity will decline from 17 percent to 7 percent for the next ten years, and materials and equipment for use by the agricultural sector will be exempt from VAT. Government funding for the agricultural sector also will increase. --Tourism: Goods imported for the tourism sector will qualify for a 5 percent customs duty, instead of the regular 30 percent. --Job Creation: Small businesses and employment initiatives that hire at least five permanent employees qualify for an extension of tax exoneration, subject to approval by the National Fund to Support Youth Employment (ANSEJ). Companies that start a business and create over 100 jobs will qualify for a reduced business profits tax for a period of three to five years. The state also will cover a portion of social ecurity contributions by those firms that hire new employees. Negative Public Reaction -------------- ¶14. (U) Most Algerian business groups and employers' associations have come out against the rules and the lack of prior consultation with businesses. The Enterprise Leaders Forum (Forum de Chef d'Enterprises - FCE),one of Algeria's most powerful business associations and seen as close to the government, on August 8 expressed its concern that the CFL would lead to "serious consequences" for the Algerian economy. The group also criticized the government for failing to consult employers' associations in drafting the law and for not giving importers enough time to adjust to the measures. FCE President Reda Hamiani questioned how a bill that places so many restrictions on domestic producers will help Algeria reduce its imports bill. He added that the letter of credit requirement will cause supply disruptions and hurt domestic manufacturers, a view also expressed by other employers' associations such as the Confederation of Algerian Industrialists and Producers (CIPA) and the Algerian Confederation of Employers' Associations (CAP). ¶15. (C) Abdelkrim Dahmane, a former MP and a member of the ruling coalition Movement for Society and Peace (MSP) party, lamented to Econoff the fact that the government adopted the CFL without first consulting parliament. Dahmane acknowledged that MPs input into the legislative process in Algeria is limited, but stressed that debates in parliament have succeeded in moderating the language in previous finance bills. ''When there is no discussion,'' he said, ''we get the worst results.'' Despite quiet calls by some MPs to review the new law during the fall session, Prime Minister Ouyahia used parliamentQ,s opening session on September 2 to state that the government will not reverse its position on the new CFL measures. Following OuyahiaQ,s remarks, lower house president Abdelaziz Ziari and Senate president Abdelkader Bensalah publicly endorsed the CFL measures, which passed both houses with no debate. Comment: Government's Statist Reflex -------------- ¶16. (C) The GOA thought it had to impose tighter controls to counteract a deteriorating trade balance (although it is still positive) brought on by falling oil revenues and rising imports, as well as increased consumer indebtedness. Faced with these challenges in the context of the global financial crisis, the GOA reflexively slapped controls and restrictions on imports, the foreign presence in the economy, and consumer credit. This measure is another warning of the potential pitfalls for foreign investors in Algeria. While Algeria recently has stepped up its courting of US investors (ref. C),its opaque and unpredictable decision-making structure, the widening scope of government oversight and regulation of foreign investment, and its continued insistence that foreign investors should "share" technology and production methods with Algerian partners (in a weak IPR enforcement environment) underscore the risks foreign investors face. ¶17. (C) The CFL already is prompting the reassessment of foreign investment projects. U.S. glass giant Guardian and Kohler, a U.S. fixtures manufacturer, recently put their investment plans on hold due to Algeria's worsening investment climate. L'Quotidien d'Oran on 9 August reported that a Spanish company decided to move its project to Morocco from Algeria following the new rules. During the June 30 - July 1 visit of CODEL Schiff, executives from the US oil production firm Anadarko said that onerous bureaucratic requirements, punitive tax structures for foreign firms, and ever-changing investment and operating rules have constrained investment opportunities and made it more difficult to do business in Algeria. BP's Brihi echoed much of Anadarko's sentiment and added that the new import rules only add to BP's problems since it imports much of the technical equipment used for its operations and expects to face higher costs and delays getting its goods into the country. ¶18. (C) Different Algerian businessmen and economic officials have told us since the CFL's adoption that despite the strict rules in the law, government decision-makers (the most frequently mentioned being Prime Minister Ouyahia) had the ability to "make special exceptions" to the rules to accommodate foreign investment from key countries (such as the US) in partnership with Algerian firms in key sectors (mainly water, industry, and agriculture). Unfortunately, the unwritten, non-legally binding basis of such assurances, while plausible, could prove too risky for most US while plausible, could prove too risky for most US investors. ¶19. (SBU) The Algerian consumer looks to be the main loser from the new rules: housing remains too expensive, consumption and vehicle loans no longer are available, the letter of credit requirement will create consumer goods shortages, and importers and retailers will soon pass on to consumers most of the new costs associated with the CFL. PEARCE