Finding the funds: A rigid investment climate complicates development

Among the important benefits that have made Algeria keen to attract foreign direct investment (FDI) is access to foreign technology and know-how to boost local industry. However, current FDI levels remain low, stymied in part by perceptions that it is difficult to do business in Algeria. There have been calls for changes to measures introduced between 2008 and 2010 that limit the activities of foreign firms in Algeria, though some claim these restrictions are not so grave. However, based on revisions to the country’s hydrocarbons code – particularly for unconventional resources – Algeria appears to be changing track and working to address foreign investors’ concerns.

SLICING THE PIE: According to the National Agency for Investment Development, of AD706bn (€6.8bn) of foreign investment between 2002 and 2010, the bulk – AD528bn (€5.01bn), or 60.8% – went into industry, including AD256bn (€2.46bn) into water and energy and AD137bn (€1.3bn) into chemicals, plastics and rubber. The services sector received 18.3%, while 12.9% was invested in construction and public works.

FDI inflows were €2.05bn in 2011, according to the UN Conference on Trade and Development (UNCTAD) 2012 “World Investment Report”. This was up slightly from €1.8bn in 2010, though down on 2009 figures (€2.2bn). Although somewhat off from UNCTAD figures, according to the Ministry of Finance, net FDI stood at €1.5bn in 2011. FDI stock in 2011 was €17.4bn, a sizable gain on the €2.7bn a decade earlier. France and Spain are among the most important sources of FDI for Algeria, with French capital representing 10% of total FDI stock at €1.9bn at year-end 2010, according to Ubifrance, the French export promotion agency.

These amounts demonstrate relatively low levels of investment; annual FDI has never exceeded 1% of GDP. Growth has been hindered by the perception of a difficult business environment. Indeed, Algeria ranked 148 out of 183 countries in the World Bank’s 2012 “Doing Business” report, compared to 94th and 46th, respectively, for neighbouring Morocco and Tunisia.

OVERSIGHT CHANGE: Major changes to Algeria’s investment regime in 2009 may also have dampened investor sentiment. The 2009 supplementary finance law limited foreign ownership of Algerian businesses to 49%. While the requirements were not retroactive, they become applicable to firms that predate the application in the event of a change in ownership, and give the government the right of first refusal to purchase any foreign ownership stakes up for sale.

The fall in FDI between 2009 and 2010 suggests that the new regime and related developments may have had a negative effect on investment sentiment. Although other factors, like the ongoing impact of the global economic crisis, are also at play, it will still take time before the effects of the law can be properly judged.

Some observers argue that the impact of the changes has been exaggerated and that to a certain extent it is positive for foreign investors. “The 51:49% requirement has been criticised, but it is not blocking serious investors from undertaking projects,” Youcef Mounir Meghlaoui, senior relationship manager for global banking and markets at HSBC Algeria, told OBG, speaking about a controversial law that governs company ownership structures that have both domestic and foreign partners. “Having a local partner also speeds up the learning curve and in some ways reduces investment risk.”

BETTER BALANCE: Nevertheless, in January 2012 the Employers’ Association called for a reform of the investment regime, suggesting, among other reforms, that regulations should be grouped under one law, and that the 51:49% rule should be replaced by a more flexible regime that considers sectors individually, allowing for more investment in budding industries while restricting investment in others that are saturated.

While there are yet no indications of plans to change the law, the government is making efforts to attract capital to priority sectors. A law currently in the works will reportedly seek to stimulate investment in unconventional sectors – like shale – through tax incentives and risk sharing with Algerian energy giant Sonatrach.