Efforts to seek out foreign investors to contribute technology and transfer knowledge

The hydrocarbons sector continues to absorb the lion’s share of foreign direct investment (FDI), but in recent years the government has sought to channel inflows into the non-oil sector in a bid to encourage greater diversification, increase job creation and strengthen export revenues.

Algeria has the second-largest gas reserves and the fourth-largest reserves of oil on the continent, and is estimated to hold 707trn cu feet of untapped shale oil and gas resources, the third largest in the world, with up to two-thirds of the territory remaining unexplored. While the stream of capital into upstream energy is unlikely to end any time soon, an effort to increase local production in the industry is helping attract capital from more non-traditional sectors. Algeria is working to replace heavy import spending with locally manufactured goods, including automobiles, pharmaceuticals, food products, appliances and other consumer goods. “Companies are investing more and more in advertising to raise consumer awareness and increase their brand equity, with a focus on middle-income households,” Hadj Said, managing director of marketing firm Avenir Decoration, told OBG. “This translates into higher confidence and growing demand for consumer goods.”

In recent years foreign investors have shown particular interest in the economy, whose steady growth and rising consumption have served as a clear contrast to the more muted performances in Europe, but the regulatory environment remains complicated for greenfield projects. According to Arnaud de Rincquesen, managing partner at Deloitte, “The initiatives to develop industry are well received, but there are still gaps in the value chain that limit competitiveness. Both the private and public sectors need to develop complementary local production to wean the country away from importing the inputs needed to create finished agricultural or industrial goods.”

FDI Inflows

Overall FDI inflows have slowed in the last five years, in part as a symptom of decelerating global capital flows. According to data from the World Bank, net FDI inflows slid from a peak of €2.02bn in 2009 to €1.89bn in 2011, followed by a 42% annual drop in 2012 to €1.17bn. The Bank of Algeria did not elaborate on the reasons for this decline, but it fits into an overall 18% decrease in global FDI flows in 2012. Investment inflows rose again to €1.44bn in 2013, according to the central bank, but income in the first half of 2014 was down 5.5% compared to the same point the previous year.

Oil and gas continue to pull in the highest proportion of FDI, although industry is becoming an increasingly important sector. According to data from the National Investment Development Agency (Agence Nationale de Développement de l’Investissement, ANDI) show that from 2002 to 2012, three-quarters of foreign investment was directed to hydrocarbons and other industries, or AD599.2bn (€5.6bn). The services sector absorbed 21% of FDI and smaller amounts were invested over the same period in tourism, AD13.5bn (€125m); construction, AD12bn (€111m); and health care, AD6.2bn (€57.6m), representing less than 10% of FDI combined.

Algerian authorities do not publish a detailed breakdown of foreign investment by country of origin; however, the country’s primary partners include France and other European countries such as Spain and Italy, in addition to newer partners in Asia, primarily China, and in the Gulf, such as Qatar.

Industrial Investment

The African Development Bank estimates that more than 95% of non-oil FDI goes into the industrial sector; several large-scale projects in automobile, machinery and pharmaceuticals manufacturing helped to raise overall FDI levels in 2013 and compensate for lower levels of investment in the oil and gas industry.

A flagship project for the sector, French automobile manufacturer Renault inaugurated an assembly plant in Oran in November 2014 that will produce 25,000 cars per year in the near term. Production will eventually be scaled up to 75,000 vehicles per year, entirely dedicated to domestic sales. In addition, French drugmaker Sanofi Aventis is finalising construction of its €70m plant near Algiers, which will be its largest facility on the continent.

The US manufacturer General Electric also signed a €1.4bn contract with Algeria in September 2013 to provide 26 gas turbines for six combined-cycle power plants to be constructed over the next five years. The project includes the creation of a manufacturing plant in Algeria that will produce up to eight turbines per year at full capacity and support future power generation projects.

Domestic Powerhouse

While foreign investment is crucial to encouraging an increase in non-oil activity, the government remains the largest source of funding in the country, with a large envelope dedicated to capital expenditure.

Thanks to its hydrocarbons wealth, Algeria has considerable financial resources to bear. Indeed, data from ANDI show that FDI between 2002 and 2012 amounted to AD803bn (€7.5bn), one-third of total investment over the decade.

The government has further outlined some AD3.9trn (€36bn) in investment spending in 2015, part of a total €192.6bn slated under the 2015-19 five-year investment programme.

51: 49 Rule

While Algeria has seen a spate of new large-scale projects in recent months, FDI in Algeria remains far below the market’s potential. Despite the fact that Algeria has the second-largest economy and the second-biggest population in North Africa, after Egypt, it only accounted for 11.8% of total FDI in the region in 2012.

While net FDI inflows to Algeria rose to about €1.24bn in 2013, they topped €1.24bn in Morocco and €4.04bn in Egypt in the same year. This is due in part to Algeria’s cumbersome investment frameworks and challenging business environment.

Algeria’s 51:49 investment rule, introduced in 2009, is one of the most visible constraints on foreign investment. The regulation requires all foreign investors to form joint ventures with Algerian firms and caps their ownership at 49% of the capital, although many firms opt to work with two Algerian partners, which still allows the foreign firms to be the dominant partner in a joint venture.

Ouahiba Behloul, director of international relations at the Algerian Chamber of Commerce and Industry, told OBG, “Even with the 51:49 rule in place, the size and dynamism of the Algerian market make it an attractive destination for foreign investment. Rather, the primary challenge will be to strengthen the general business climate by streamlining bureaucratic procedures, reducing Customs delays and improving access to financing.”

Algeria’s statist economy is also impacted by a burdensome bureaucracy. According to the World Bank 2014 “Doing Business” report, Algeria ranks 154th out of 189 economies in terms of its ease of doing business, and starting a business can take 22 days – two and a half times longer than in an OECD country, and three days longer than the average in the Middle East and North Africa. Registering property can take 55 days, just under twice as long as the 33-day regional average. Regulation is often applied inconsistently and with limited transparency, which makes it difficult for smaller firms to deal with unforeseen costs or delays.

Attracting Investment

However, the state has implemented several measures that should help to facilitate new investment in the future. Long-awaited revisions to the national Hydrocarbons Code adopted in February 2013 introduced several incentives for oil and gas exploration.

Most notably, the new code allows corporate taxes to be calculated on the basis of a project’s profitability, instead of revenue. The new code also adds special tax breaks for non-conventional projects; however, these tax incentives were revised again in mid-2014 to limit the tax breaks to specific types of horizontal drilling on shale deposits, which will make new exploration less attractive to foreign companies.

The overall Investment Code was also revised in 2014 to include several new measures, including a tax exemption for all investments in industrial research and development. Government officials indicated in mid-2014 that they would consider repealing the 51:49 rule under the new code for non-priority sectors, including small and medium-sized enterprises, with a view to eliminating the rule entirely by 2020. Despite such indications, the final code actually expanded the purview of the 51:49 rule to include retail and wholesale commerce.

ANDI has introduced a one-stop shop for foreign investors, and the creation of a new government agency in 2008, the National Agency for Intermediation and Land Regulation, has helped to organise and accelerate the allocation of public land for industrial projects, with plans already under way to roll out 42 new industrial zones.

Outbound Investment

Expanding access to foreign markets for Algerian companies is also a priority, in part to help encourage broader private sector growth. In September 2014 the central bank moved to relax its foreign exchange controls that have stood for more than a decade, allowing companies to transfer capital abroad to establish foreign subsidiaries or invest in other companies that are complementary to its primary activity. Companies are still required to obtain approval from the Monetary and Credit Council, but the new regulations will make it easier for Algerian firms to invest abroad and foreign companies to transfer capital internationally. In the past, companies have only obtained approval to invest abroad under very limited circumstances, usually for high-priority sectors or companies.

The new ruling falls as the Algerian agro-industry and manufacturing giant Cevital recently moved to acquire the assets of the Italian steel producer Lucchini in November 2014. According to local media reports, the new measures will only allow companies that earn foreign exchange revenue to then reinvest these funds in activities outside of Algeria; however, the central bank is not expected to allow dinar-denominated holdings to be converted and invested abroad. This is in an effort to keep oil revenues on the domestic market.

Work remains to be done to further open Algeria’s investment conditions if it aims to accede to the World Trade Organisation and expand its free trade agreement with the EU, both of which are currently under negotiation. That said, recent improvements are an encouraging move in the right direction.