Opening doors: New foreign investment and competition regulations

As a market of about 38m inhabitants with substantial energy resources and steady demand for modern infrastructure supported by massive public investment, Algeria has been attracting strong interest from foreign investors over the last few years. During 2009, in the context of the global economic crisis, Algeria saw a fall in revenues from its oil and gas exports combined with a sharp rise in imports of goods and services, and in dividends distributed to foreign investors. The combination of these three parameters has led to deterioration in the balance of payments and prompted the government to amend the regulations overseeing foreign investment by limiting the participating stake of foreign shareholders in Algerian companies.

After the enactment of these new laws in 2009 and 2010, there has been no significant new law introduced to the foreign investment regime. Indeed, only the Finance Law for 2012 has clarified that the transfer of shares between directors of joint stock companies does not obligate the concerned firm to comply with the limitation on foreign shareholding rule. The foreign investment regime thus remains in step with the spirit of the changes introduced in 2009 and 2010.

INVESTMENT LAW: This was due to the 2009 Complementary Finance Law (2009 CFL). Among the most significant provisions of the new law were:

• The limitation of foreign ownership to 49% in any foreign investment (70% for import firms). Foreign investors are now obliged to create joint ventures in which Algerian partners hold the majority stake;

• The requirement that any foreign investment generate a positive foreign currency balance in Algeria’s favour throughout its realisation, the idea being that only the projects for which the inflows of foreign currency exceed the outflows may be authorised to distribute dividends; and

• The obligation to obtain authorisation from the National Investment Council prior to any foreign investment. According to some reports, the 2014 finance law project could allow for the suppression of the obligation to obtain prior council authorisation when the foreign party investor is not seeking any advantages from the Algerian state. The 2010 Complementary Finance Law (2010 CFL), published on August 29, 2010, is in line with the 2009 CFL and confirms the government’s previous approach.

RETROACTIVITYOF THE RULE: The 2009 CFL introduced in Article 58 the obligation for foreign investors to invest in partnerships with one or several Algerian shareholders, who must hold at least 51% of the share capital (or 30% for activities of import for resale). While this obligation was clearly applicable to investments realised after the publication of the 2009 CFL, there were some doubts as to its application to investments realised before then. In practical terms, the question was whether companies incorporated before the 2009 CFL and 100%-owned by foreign shareholders had to bring themselves into compliance with the new 49/51% rule when modifying their trade register or upon a change in their capital ownership.

CLARIFICATION: This issue was clarified by the publication of the 2010 CFL. Pursuant to Article 45 thereof: “Any modification of the trade register leads to the prior bringing into compliance of the company with the rules governing capital ownership”. However, the following modifications are not subject to this obligation:

• Modifying the share capital (increase or decrease) without entailing a change in the proportions of allocation of the share capital as specified above;

• The transfer or exchange between former and new directors of guarantee shares provided by Article 619 of the Commercial Code, provided that the value does not exceed 1% of the firm’s share capital;

• Removing an activity or adding a related activity;

• Modifying an activity further to the modification of the activities nomenclature;

• Appointing the company’s leadership; and

• Changing the registered office. The National Business Registry (Centre National du Registre du Commerce, CNRC) has not issued a clear definition of “connected activities”. However, on the basis of several informal meetings held at the CNRC, we understand that connected activities are activities belonging to the same economic class or sector.

According to a literal interpretation of this provision, the only event that requires compliance with the 49/51% rule is “the modification of the trade register”. The transfer of shares of an Algerian company does not lead to a modification of the trade register, so it could be argued that the mere transfer of shares as opposed to an increase in share capital does not obligate the company to retroactively comply with the rule. However, it seems clear that the spirit of this provision is that any change in the ownership structure of a company incorporated before the 2009 CFL (whether resulting from a share capital increase or decrease, or from a sale of shares) gives rise to a requirement to bring the company into compliance with the 49/51% rule as of that date. From a practical point of view, the notary in charge of drafting the deed of sale should normally check whether the contemplated sale would lead to noncompliance with the 49/51% rule and refuse to assist with the process should this be the case. The amended right of pre-emption by the state, applicable to any sale of shares in an Algerian company to or by a foreign shareholder, results in the Ministry of Investment being informed in advance of any such sale so that it would have the possibility to intervene should the contemplated sale not comply with the 49/51% rule.

In this regard, the Finance Law for 2012 allows the transfer of the directors’ “guarantee shares”. More precisely, Article 63 specifies that modifications to a company’s trade register further to a “sale or exchange between former and new directors of guarantee shares provided for in Article 619 of the Commercial Code” shall not trigger the 49/51% and 70/30% allocation rules, provided that the value of such shares does not exceed 1% of the company’s share capital. However, one issue remains regarding the transfer of guarantee shares between directors, namely the government’s pre-emption right. As underlined above, the sale of shares in an Algerian company is compulsorily made before a notary and embodied in a notary deed.

Besides, any sale of a stake in an Algerian company by or to a foreign shareholder requires, subject to nullity of the sale, the prior delivery of a certificate from the Ministry of Investment after deliberation by the State Shareholdings Council attesting to the waiver by the government of its pre-emption right. However, the regulatory texts necessary for the implementation of the government’s pre-emption right (pertaining notably to the form to be used by the notary to file the application for the delivery of such waiver certificates, the price at which the government could exercise its preemption right, etc) have not yet been enacted.

In addition, pursuant to the regulations, the absence of an answer from the competent services at the Ministry of Investment within a one-month period from the filing by the notary of the application for the waiver certificate shall be deemed a waiver of the government’s pre-emption right except when the transaction (i) exceeds an amount defined by an order from the Ministry of Investment and (ii) concerns the shares of a company carrying out any of the activities defined in an order. The above order has not yet been enacted by the Ministry of Investment. Hence, there is uncertainty as regards the effect of receiving no reply from the Ministry of Investment following one month and if this can be considered a waiver of the pre-emption right. As a result, in practice, it could be argued that notaries are not able to validly perform any sale of shares involving foreign investors without applying for the waiver of the government’s pre-emption right.

In this respect, the Finance Law for 2012 does not deal with the practical modalities regarding the implementation of the pre-emption right pertaining to the transfer of shares between directors. In conclusion, if the sale of guarantee shares does not prompt the implementation of the 49/51% rule, such sales remain subject to the pre-emption right. Given this doubt, it is still necessary to notify the relevant department of the Ministry of Investment when one or several guarantee shares must be transferred between directors.

POSITIVE FOREIGN CURRENCY BALANCE: According to Article 4 in paragraph five of Ordinance No. 01-03, relating to the development of investment as per the 2009 CFL: “Foreign investment, direct or in partnership, shall generate a positive foreign currency balance in Algeria’s favour throughout the realisation of the project. A regulation of the monetary authority will ensure the practical implementation of this.”

Article 2 of Regulation No. 09-06 of Bank of Algeria dated October 26, 2009 defined the notion of foreign currency balance for any project with regards to either credit or debit elements. With regard to credits (i.e. incoming foreign currency flows on Algerian territory) this includes repatriation deriving from:

• Any contribution linked to the investments, including the share capital;

• The part of the production sold on the national market in substitution of imports;

• Goods and services export revenues; and

• Foreign loans exceptionally raised. In addition to these elements, the valuation of any imported contribution in kind must be added. With regard to debits (i.e. the outgoing foreign currency flows) this includes transfers abroad resulting from:

• The imports of goods and services;

• The profits, dividends, directors’ percentage of profits, directors’ fees, and wages and bonus of expatriate employees;

• The partial transfers of investments;

• Exceptional foreign debt charges; and

• Any other foreign payments. The foreign currency balance is thereby constituted by the difference between the sum of the credits and the sum of the debits. The foreign currency balance must be presented in its equivalent value in Algerian dinars. The idea behind this obligation is that only investments for which the inflows of foreign currency exceed the outflows may be authorised to distribute dividends and also possibly to repatriate sale proceeds. The practical application of this provision is still unclear one year after its introduction. Indeed, in our experience, companies created before the introduction of the 2009 CFL have been able to transfer dividends abroad until now without any check being carried out as to the existence of a positive foreign exchange balance by the authorised intermediary or by the Bank of Algeria. However, this position may change at any time. It should be underlined that “the part of the production sold on the national market in substitution of imports” is to be included in the credit side of the foreign currency balance. Therefore, if a joint venture’s activity is one of production, this will help to maintain a positive foreign currency balance, thus allowing the distribution of dividends.

LOCAL FINANCING: According to Article 4 in paragraph six of Ordinance No. 01-03 (resulting from the 2009 CFL): “Any foreign investment, direct or in partnership, shall, save the constitutive capital, raise exclusively in the local financial market the funds required for its execution, except in particular cases.”

This has not been clarified or otherwise commented on by the authorities. Algerian companies wholly or partly owned by foreign shareholders (thus considered foreign investments) should no longer be able to receive loans from foreign parties, either banks or shareholders. The Bank of Algeria issued a note dated December 9, 2010 in which it made clear that shareholder loans granted by foreign shareholders to Algerian companies were no longer allowed. It also demanded that such shareholder loans already granted be capitalised by December 31, 2010 at the latest. Since this date, it is no longer possible for foreign shareholders to grant loans to their Algerian subsidiaries.

FINANCIAL MODALITIES: Another major change resulting from the 2010 CFL is the financial modalities for the exercise of the new right of pre-emption. Under the new right of pre-emption, the price at which the government may exercise its right is to be fixed through professional valuation. The modalities of such valuation are to be specified by a forthcoming regulation. This raises questions as to whether or not the seller, who had planned to offer a number of shares at a certain price, could be obliged to sell at the price determined by the third party, which could be less than expected.

On the one hand, a negative answer would imply Article 46 of the 2010 CFL only intended to give the state priority negotiation rights, which would seem contradictory to the terms “right of pre-emption” used in the law. On the other hand, a positive answer would mean this provision would have created a case of forced sale, the legality of which is questionable.

This issue may be clarified by the implementing regulation to come. Finally, it should be noted that, even when expressly waiving its right of pre-emption, the state retains the right to pre-empt for one year following the sale in the case of the prices being insufficient ( Article 118 of the Code of Registration). In such a case, the state could only buy the shares from the acquirer by paying the price paid by the latter, plus 10%.

REPURCHASE RIGHTS: The state has the right to purchase shares of an Algerian company in the event of a total or partial sale of its foreign parent company’s shares. According to Article 47 of the 2010 CFL, any transfer of shares in a foreign firm holding shares in an Algerian company which has benefitted from advantages at the time of its establishment is subject to “governmental consultation” and gives rise to a “right to repurchase” by the government. This provision refers to a situation in which the shares of the parent company holding a stake in an Algerian company are sold. The shares of the underlying Algerian company are not the object of the transaction.

It should further be highlighted that this “right to repurchase” by the state is limited to the shares of Algerian firms which have benefitted from advantages – which in the absence of further specifications, may include tax and Customs exemptions, granting of a land concession etc, by the current investment agency, the National Agency for Investment Development (Agence Nationale de Développement de l’ Investissement, ANDI) but also the former, the Investment Promotion Agency. Based on a literal interpretation of the provision, it appears that only the sale of shares in a foreign company holding a direct share in an Algerian company (parent company) is targeted under the law.

In our view, however, such right to repurchase should be extended to sales of shares abroad occurring at the level of the parent company and beyond. Indeed, should a different interpretation be accepted, it would be too easy to circumvent the state’s right to repurchase by interposing different levels of companies.

UNDEFINED CONSEQUENCES: Article 47 of the 2010 CFL does not specify any penalty for conducting transactions involving stakes in an Algerian firm’s parent company that occurs without any prior consultation with the government. In this respect, the timeframe and process for “prior consultation with the Algerian government” is not indicated within the body of the law. It is worth noting that this obligation seems especially difficult to apply with respect to those companies which have shares that are listed on the stock exchange.

FOREIGN SHAREHOLDERS: Article 48 of the 2010 CFL creates an obligation for foreign entities holding shares in companies established in Algeria to annually provide a list of their shareholders which is certified by the body overseeing the trade register in their country of residence. Like Article 47, this provision does not contain any indication as to the penalty in the case of non-compliance. It is worth noting that this regulation is only concerned with a change of shareholders and not with an increase or decrease in their stakes. This provision appears as a means to ensure the enforcement of Article 47 of the 2010 CFL and to allow the authorities to carry out ex post facto checks of compliance with the obligations therein.

REINVESTMENT OBLIGATION: Article 142 of the Direct Tax Code (DTC) provides that a company benefitting from exemptions or reductions as a result of the ANDI regime must reinvest in Algeria the “part of profit that corresponds to these exemptions or reductions” within four years from the end of the fiscal year during which the favourable regime is applied.

This reinvestment may intervene: (i) either as per each fiscal year; or (ii) as per several consecutive fiscal years. In this case, the four-year period starts from the end of the first fiscal year. In the case of non-compliance, the company shall not only be made to repay the taxes from which it was exempted in application of the ANDI regime but also pay a penalty amounting to 30% of said taxes. Article 57 of the 2009 CFL provides that “in addition to the provisions of Article 142 of the DTC, the companies which benefit from exemptions or reductions as regards any duties, taxes, Customs taxes and other levies as a result of the investment incentives regime must reinvest in Algeria the part of the profits corresponding to these exemptions or reductions, within four years as from the end of the fiscal year during which the favourable regime applied.”

These provisions extend the obligation of reinvestment to all the tax advantages granted to a company under the ANDI regime, whereas Article 142 of the DTC only provides for the reinvestment of the corporate tax exemption or reduction. The modalities of reinvestment and the penalties in the case of non-compliance under Article 57 of the 2009 CFL are the same as those provided for by Article 142 of the DTC. However, in September 2013 the finance law project for 2013 that was being reviewed by the members of the Algerian parliament included provisions that would allow for exemptions from this reinvestment obligation.

PUBLIC PROCUREMENT CONTRACTS: The Algerian Public Procurement Code (PPC) comprises Presidential Decrees No. 10-236 of October 7, 2010 as amended by Decrees No. 11-98 dated March 1, 2011 and No. 11-222 dated June 16, 2011; Decree No. 12-23 dated January 18, 2012; and Decree No. 13-03 dated January 13, 2013. The PPC came into force in October 2010. Decree No. 13-03 has reformed the scope of public procurement contracts with a rewriting of Article 2 of the PPC. All procurement contracts entered into by state-owned companies are now exempt from public procurement regulations, whether financed or not with the assistance of the state. Decree No. 13-03 states, “State-owned companies are not subject to the public procurement regulations provided by the present decree.”

However, state-owned companies are still “required to draw up and to obtain the implementation, by their corporate bodies, of public procurement procedures complying with the principles of freedom of access to public sector contracts, equality of treatment of applicants and transparency of procedures.” Consequently, such companies remain subject to the key principles of public procurement regulations. The following elements stem from the new wording of PPC Article 2:

• State-owned companies are no longer subject to specific provisions of the PPC for their procurement contracts, whether directly for those financed by the state or through adaptation of these rules for those self-financing companies.

• State-owned companies shall, however, inevitably define and draw up their own public procurement regulations, with due regard to the general principles governing the regulation of public procurement contracts, namely transparency of procedures, equal ity of treatment of applicants and freedom of access to public sector contracts.

• Compliance with these principles by state-owned companies will be ensured by the joint external control of all state-owned companies, namely control by two statutory auditors – the Court of Accounts and the General Inspectorate of Finance. Within this framework, state-owned companies are now free to define their own procurement regulations. PREFERENTIAL MARGIN OF ALGERIAN PRODUCTS & SERVICES:The PPC strengthened existing provisions intended to favour Algerian bidders. Article 23 of the PPC now provides for a preferential margin of 25% (as compared to 15% previously) for products of Algerian origin and/or for enterprises organised under Algerian law in which resident nationals hold the majority of share capital. The application modalities of this preference margin have been stated in a ministerial order issued by the Ministry of Finance dated March 28, 2011 and which stipulated the following:

• Relating to supply procurements, the 25% preference margin is granted to locally manufactured products upon receipt of a certificate of Algerian origin;

• Relating to procurements of services the preference margin is granted to enterprises under Algerian law and to mixed groups (i.e. comprising both Algerian and foreign members) up to a limit of the part owned by the Algerian enterprise in the group. According to Article 23 of the PPC, in regard to mixed groups, the parts owned by Algerian and foreign enterprises are determined by the works performed by each member and their related amount. In practice, this part is principally determined regarding the amount of the work performed by each member.

However, it is requested that each member performs a determined and identifiable job. This preference margin applies at the financial offers valuation stage. In addition, the currency of the contract does not impact the application of the preference margin, this latter depending only on the nationality of the tenderer.

INTERNATIONAL TENDERS: According to Article 24 of the PPC, within the framework of international invitations to tender, the foreign tenderer can be obliged, within the framework of its response to the invitation to tender, to make a commitment to invest in Algeria. The field of application of this obligation has been significantly limited by Decree No. 13-03.

For contracts submitted to the obligation of investment of the foreign tenderer, under the provisions of Article 24 paragraph one of the PPC, the investment obligation does not apply to all international invitations to tender. Rather it applies only to those related to projects listed by a decision of the relevant authority. Thus, if the specifications of an invitation to tender do not expressly require a commitment, the foreign tenderer would not be subject to the obligation to invest.

To date, no decision on this matter has been made by the relevant authorities, and there is still uncertainty regarding invitations to tender. In this context, one could argue that in the absence of any decision by the relevant authority with regards to projects subject to the obligation of investment, a foreign tenderer should not be obliged to undertake an investment commitment. Moreover, it should be noted that contracts directly awarded (without call for tender) are not subject to these provisions (Article 27 of the PPC). Finally, this obligation seems to apply only to foreign tenderer, not to Algerian tenderers held by foreign capital.

INVESTMENT IN PARTNERSHIP: Under Article 24 paragraph five of the PPC, the application modalities of this obligation shall be specified by an order from the ministries in charge of finance and investment. Nevertheless, at this stage, no text has been passed into law on this matter. Within this framework, any application of this obligation appears impossible.

Regarding the nature of the partnership, the PPC provides no definition. However, under the provisions interesting foreign investors in Algeria and in particular those for the 2009 and 2010 CFL, it could be argued that the notion of partnership targeted by these provisions should cover the creation of a joint venture between the foreign tenderer and one or more Algerian resident investors. Thus, a simple conclusion of agreements with Algerian subcontractors cannot be sufficient to meet this obligation.

TERMS OF INVESTMENT: The investment commitment of the tenderer must be included in their offer and must respect a strict model as determined by the Ministry of Finance order dated March 28, 2011 determining the model of investment. According to Article 24 paragraph three of the PPC, the planning and the methodology of the investment appears to be defined in the specifications of the call for tenders.

PENALTIES FOR NON-COMPLIANCE: The non-compliance by the foreign tenderer with their investment obligation through a partnership is strictly penalised. Thus, if the successful tenderer does not realise its investment, or does not respect the timeline and the methodology set out by the call for tenders, the following penalties could be incurred:

• An application of penalties for delay after unsuccessful formal notice by the contracting service;

• Possibility of unilateral termination of the public procurement to the exclusive fault of the co-contracting party after agreement by the authorities; and/or

• Registration of the failing operator on the list of the economic operators forbidden to tender for procurement contracts.

COMPETITION LAW: The National Competition Council (Conseil National de la Concurrence, CNC) was officially set up in January 2013 and is an independent administrative authority intended, in accordance with Ordinance No. 03-03 dated July 19, 2003, to observe, rule and sanction trade practices and the functioning of the Algerian market. The CNC elaborates its own general doctrine on competition and market matters.

It seems that the CNC currently cooperates with the French, Italian and German competition authorities in continuation of a cooperation programme financed by the European Commission, known as the programme d’appui á l’Accord d’association entre l’Algérie et l’ Union Européenne. This programme, which lasted from January 2011 to December 2012, involved notably the future members of the CNC as the leader and principal partner, as well as its European partners. In this particular context, the CNC may be inspired by European competition regulations. In other words, the CNC may establish a similar case law and suggest draft legislations to align Algerian law with the European competition law. So far, there is no draft legislation relating to the competition pending before Parliament, but the CNC is contemplating publishing rules that would make clarifications regarding some procedural issues. The setting up of the CNC may allow the government to strengthen its role as a strategic regulator. It is worth noting that the government and the CNC both have regulatory powers in competition and market matters.

OBG would like to thank Gide Loyrette Nouel for their contribution to THE REPORT Algeria 2013