ORASCOM TELECOM ALGERIE DISPUTE CAUSES WIDESPREAD

C O N F I D E N T I A L ALGIERS 000153

SIPDIS

DEPT FOR NEA/MAG - MNARDI AND JPATTERSON

E.O. 12958: DECL: 02/21/2020
TAGS: PGOV PREL ECON EINV AG EG
SUBJECT: ORASCOM TELECOM ALGERIE DISPUTE CAUSES WIDESPREAD
CONTROVERSY

REF: CAIRO 185 AND PREVIOUS

Classified By: Classified By: Ambassador David D. Pearce. Reasons: 1.
4 (b),(d)

SUMMARY
--------------


1. (C) Orascom Telecom Algerie (OTA),Algeria's largest
wireless phone company -- one of the largest and most
economically productive foreign investments this decade --
has been assessed USD 650 million in back taxes via a series
of assessments dating back to late 2008. On the face of it,
many of these assessments appear to be a violation of
Algerian laws exempting new foreign investments from taxes
for the first few years. OTA, a subsidiary of Egypt-based
Orascom Telecom Holding, may not repatriate dividends while
its tax dispute remains unresolved. The Embassy has met with
OTA and Egyptian Embassy officials to determine the true
nature of this dispute. More recently, OTA actions have
raised questions about its intentions, and rumors are
circulating anew that the company is actively looking to sell
out. OTA and a number of observers believe that nothing less
than OTA's demise or departure from the Algerian market will
suffice for the GOA, which seems to have no intention to
relent on the fine it has levied. This dispute appears to
have started as an economically nationalist reaction to the
company's success and repatriation of profits amounting to
several hundred million dollars but has become a more
intractable dispute thanks to recent tensions between Algiers
and Cairo. Above all else, it has emerged as the most
publicized recent major dispute involving foreign holdings to
tarnish Algeria's already cloudy investment climate. END
SUMMARY.

Background
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2. (U) Orascom Telecom Holdings (OTH) is an international
telecommunications company registered in Egypt that operates
GSM networks in the Middle East, Africa, and Asia. Orascom
Telecom Algerie (OTA),the Algerian subsidiary of OTH, is
Algeria's largest mobile telephone provider, operating under
the "Djezzy" brand. OTA is 98.6 percent owned by OTH and 3.2
percent by local Algerian investors. Post understands that
there is significant U.S.-based investor participation in OTA
through a number of investment companies. In July 2001, OTH
won an auction for the second GSM license in Algeria, paying
USD 737 million and receiving tax exemptions covering OTA's
initial five years of operations as well as investment
protections granted under Algerian and international law.
Local company representatives tell the Embassy that OTA then
invested several billion dollars building a wireless network.



3. (U) That network has since become the largest network in
the country, providing wireless coverage to 99 percent of the
population, bringing Algeria into the late 20th century in
terms of wireless and generating significant revenue and
profit for the company. In November 2009, however, OTA was
assessed tax arrears of approximately USD 600 million for the
tax years 2005 through 2007, following an assessment in 2008
of USD 50 million for the tax year 2004. OTA may not
repatriate profits while the assessment remains unresolved,
and it has had to deposit a quarter of the disputed tax
amount with the GOA pending resolution of the case. The
amount of profits currently unrepatriated stands at more than
USD 250 million.


4. (U) On December 28, 2009, OTH announced that OTA had filed
an administrative appeal against the November reassessment
received from the Algerian Direction des Grandes Entreprises
(DGE) for the 2005, 2006, and 2007 tax years. On January 4,
Algerian newspaper "El Watan" reported that a source close to
the Algerian Ministry of Finance estimated that the dispute
would take four to six months to resolve. Algerian law
requires a government dispute commission to complete its
review of Orascom's complaint within four months. The tax
authorities would then have two months to consider the
commission's findings and make a final determination.

OTA Perspective
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5. (C) On January 5, DCM, Econoff, and FCS met with the
Director General of Djezzy, Tamer Mahdi, an Egyptian
national, to discuss Orascom's tax dispute. Despite OTA's
2004-2007 tax exemptions granted to new foreign investors,
Mahdi confirmed that the tax authority (Direction General des

Impots - DGI) was reviewing the company's revenues. Mahdi
explained that the DGI assessment for 2004 revenues resulted
from accounting errors and different standards applied by OTA
and the GOA. This led to an initial tax assessment of USD 50
million in 2008 that OTA has appealed. The tax authority
subsequently extrapolated from the additional revenues it
uncovered for 2004 to claim that OTA failed to declare all of
its revenue for 2005-2007 and was stealing from shareholders
(a charge OTA vigorously rejects). The DGI assessed back
taxes of USD 600 million for this alleged infraction. Mahdi
confirmed that OTA appealed the 2005-2007 assessment and made
a payment covering 20 percent of the disputed amount. This
latter appeal may take eight months or longer, while a
decision on the 2004 assessment (for which OTA had earlier
made an initial payment and filed an appeal) is scheduled for
the March/April timeframe. Mahdi said he raised Orascom's
complaint with Finance Minister Karim Djoudi and has invited
the government to examine Orascom's financial records. For
now, Orascom plans to follow the dispute process established
by Algerian law. The GOA, meanwhile, shows no intention of
backing down or compromising on a settlement. (Note: OTA
CEO Mahdi stopped by the Embassy February 2 and dropped off a
packet of documents with the Commercial Attache at the
Embassy entrance but refused to exchange words and quickly
departed. The packet contained a company legal brief stating
OTA's understanding of the facts of the case, copies of OTA
correspondence with the MFA and the GOA "Direction of Large
Enterprises," and an unsigned letter on plain paper
purportedly from TA Associates and Madison Dearborn addressed
to "His/Her Excellency" (no further addressee) requesting
that that person write President Bouteflika or Prime Minister
Ouyahia asking for help resolving the tax dispute. End note)


Egyptian Perspective
--------------


6. (C) On January 12, DCM and Econoff had a working lunch
with Egyptian Embassy then-Charge d'Affaires Hesham Abdel
Wahab and Commercial Officer Ismail Khozayem to discuss the
OTA case and the current state of Algerian-Egyptian
relations. The Egyptians placed the tax dispute in the
framework of tensions in Algerian-Egyptian relations,
aggravated by the bad feeling over the November 2009 World
Cup soccer qualifying matches. Wahab informed us that
Algerian officials suspected an employee associated with OTA
is related to President Mubarak and that Algeria is using the
company and the tax problems to "cause harm" to the Egyptian
president. Egypt's foreign minister has sent an official
letter to the Algerian government stating his concerns, but
there has been no response. Wahab believed the Algerians
will not respond until the Egyptian Ambassador returns to
Algeria. (Note: The Egyptian Ambassador left Algiers in
November in the aftermath of the November soccer fallout. He
returned the week of February 1. End note)


7. (C) Wahab did not believe the Algerians would compromise
on OTA's tax obligations, even at the risk of driving OTA out
of business and doing even greater harm to Algeria's image as
an investment destination. He believed that current poor
relations between Cairo and Algiers would only complicate
efforts to reach a settlement. On a slightly brighter note,
Wahab said that tensions between Algeria and Egypt had
slightly eased in recent weeks, and most of the estimated
8,000 Egyptian residents in Algeria who had fled in the wake
of soccer-fueled violence had returned. Most Egyptian
businesses were operating without incident, and trade was
largely untouched, but the Algerians canceled a munitions
precursor contract worth several million dollars for no
apparent reason. (Note: the atmosphere leading up to and
following the January 28 Africa Cup game between Algeria and
Egypt was far calmer than in November, with the press
unanimously blaming Algeria's 4-0 defeat on a biased referee.
End note)


8. (C) On February 9, Egyptian Political Counselor Tomoum
told us that Cairo had not instructed his embassy to
intervene on behalf of OTA. Tomoum understood that Orascom
headquarters in Cairo was deliberating on further steps but
for now was focused on negotiating a solution with Algerian
tax authorities. A market intelligence analyst, meanwhile,
told the DCM on February 10 that a hedge fund he represents
with a huge stake in OTA had asked him to assess prospects
for a settlement of the tax fine. His conclusion is that
such prospects are extremely grim, as the GOA seems to have
decided to force OTA out of the Algerian market. His view
was that OTA's incompetent local management had committed a
number of misdeeds and missteps that upset Algerians,
including the refusal to open the company up to local

investors. More fundamentally, however, OTA's sloppy
bookwork had left it exposed to exactly the sort of scrutiny
and legal action it was facing. He has heard that OTA is
trying to sell out but frustrated that it cannot get the USD
10 billion it thinks the company is worth (current assessed
value is closer to USD 4-5 billion). He says that thoughts
about offering shares on the Algerian stock market are too
little, too late, but a Spanish telephone company is
reportedly coming forward with a strong interest in taking on
OTA's holdings.


9. (U) The Algerian newspaper "El Watan" on February 17
highlighted an interview Orascom Telecom Holding's CEO,
Naguib Sawiris, gave to the "Wall Street Journal" (and
reported in that paper's February 15 edition) to the effect
that his company would sell its Algerian operations if it
receives a "clear sign its investment (there) isn't welcome."
Sawiris stressed OTH's desire to remain in Algeria but
"wouldn't hesitate to sell" if the current tax dispute became
too serious, and he claimed there was "considerable" interest
by other buyers to acquire OTA's assets. In addition,
Sawiris maintained he had opted not to escalate by invoking
OTA's right to seek international arbitration and that OTA
had sufficient cash to operate for two more years. The "El
Watan" article cited an anonymous Algerian official source
who reportedly told Reuters that Sawiris was "intelligent
enough to understand it is time for his company to leave the
Algerian market. ...We don't want Orascom any more." The
same source speculated that the GOA would not explicitly
force Orascom to leave but would resort to indirect pressure
until it pulled out.

Comment
--------------


10. (C) The OTA dispute has become a prime example of the
real problems facing foreign business operating in Algeria,
given the GOA's historically suspicious attitude toward
foreign investors and tendency to adopt measures against
their interests without prior consultation or warning. OTA's
situation is dramatic but not unique, as we have seen this
pattern in other investment disputes. OTA's current problems
are doubtless more acute given the unhappy recent history of
other Orascom subsidiaries operating in Algeria, including
one that spurred the quick march toward economic nationalism
a few years ago over allegedly predatory business practices
and decisions that wounded Algerian amour propre. The
deterioration of Algerian/Egyptian relations over World Cup
soccer qualification intensified the focus on OTA, considered
an Egyptian company, but did not alone make it a target.
Thanks, however, to the still poor state of Algerian/Egyptian
relations, the prospects for an amicable settlement of the
OTA dispute are currently not bright. If relations mend,
chances for a quiet settlement could increase but only if the
Algerians would agree, uncharacteristically, to back down.


11. (C) As with other commercial disputes in Algeria, it is
hard to discern what is going on, who is involved, and the
real motives at play. OTA's CEO and other contacts suggest
PM Ouyahia is orchestrating this campaign in his guise as the
"enemy of success" for any company whose revenue exceeds a
certain level and is not protected by President Bouteflika.
Whatever may be going on politically behind the scenes, it
does look increasingly as though the GOA intends to drive OTA
out without any regard for the billions of dollars it
invested here, the stimulus to development from the extensive
Djezzy wireless network, or the inevitable damage the
company's demise would inflict on Algeria's already troubled
reputation as an investment destination.
PEARCE