All part of the plan: Local industries get a boost as the government seeks to reduce imports and diversify the economy

As part of the 2010-14 National Development Plan Algeria intends to reduce its dependency on oil and gas by nurturing the development of local non-hydrocarbons industries. Initiatives aim to encourage the establishment of value-added industries to meet the needs of the domestic market and gradually replace imports. As part of this effort, since 2009 the government has provided substantial financial resources to reform and redevelop large public companies in the industrial sector.

RECOVERY: The African Development Bank’s “African Economic Outlook, Algeria 2012” pointed to the “start of a recovery in industry” in 2011, noting that the industrial production index rose by nearly 1% in January-September of the year, up from a decline of 2.5% during the same period the previous year. This growth was driven by strong performances from the agri-food and energy segments, up 26.2% and 8.8% respectively. In addition, during the course of 2011, the added value of the manufacturing industry increased by 2.3%, with this “confirming the recovery in the activity of public enterprises”, according to the report, which pegged manufacturing’s contribution to overall GDP at around 5%, a level that has been stable in recent years.

Agribusiness, construction materials and pharmaceuticals are fairly well developed in Algeria, with new industries like the automotive segment receiving close attention and support from the government. “The goal is to turn large-scale corporations into efficient entities which are able to withstand the opening of the economy while at the same strengthening public and private small and medium-sized enterprises (SMEs),” Mohamed Benmeradi, the minister of industry, told OBG.

SUPPORTING SMALL BUSINESS: To achieve this, the government has created a network of industrial technical centres (ITCs) targeting all major industries by providing technical and institutional assistance during the reform process. The ITCs help industries such as electronics and textiles with, for example, profitability studies and regulatory support.

In addition to the ITCs, the Ministry of Industry, SMEs and Investment Promotion (Ministère de l’ Industrie de la Petite et Moyenne Entreprise et de la Promotion de l’Investissement, MIPMEPI) has set up a €3.65bn programme to upgrade enterprises. It runs over a period of five years (2010-14), targeting around 20,000 SMEs and covers sectors such as food processing, fishing, tourism and hospitality, transport and ICT. Algerian companies as defined under Law 01-18 of December 2001 that have at least five employees and are profit-making entities are eligible to apply. The programme offers support for investments in machinery, technology and information systems, as well as sector-specific training. Continuing investment on the part of the government should help the industrial sector stay in line with the needs of the consumer.

LEGISLATION: Various incentives have been introduced to boost investment, including tax breaks on real estate, Customs and company registration fees.

Foreign firms are encouraged to invest in Algeria via an exemption on value-added tax on imported products, and they can also benefit from incentives if they employ more than 100 people.

At the same time, under Algerian law, joint ventures with foreign firms require the local partner to hold at least 51% of the shares, and domestic companies are given priority when bidding for state contracts. According to a new regulation introduced in July 2010, local firms can submit bids that are up to 25% more expensive than their foreign competitors.

The government encourages entrepreneurship through various events dedicated to entrepreneurs and innovation. In addition, its also provides coaching services to create sustainable SMEs. “The need to support SMEs through the process of innovation has become a business imperative since many businesses in Algeria still don’t perceive innovation as having a positive impact on both productivity and customer satisfaction,” Benmeradi told OBG.

INDUSTRIES IN THE MAKING: Most of Algeria’s industrial activity is concentrated along the Mediterranean coast, where most of the population lives and the infrastructure is already well developed. The government is now pushing ahead with large-scale infrastructure projects across the country to facilitate the movement of goods and passengers and improve logistics, leading to heightened demand for construction materials, particularly cement and steel.

Industrial development zones have been established under the umbrella of the National Development Master Plan 2025, and in 2011 there were a total of 77 such zones. In 2012 the Algerian National Investment Council decided to establish a further 42 new generation industrial zones across the country. Etablissement Public à Caractère Industriel et Commercial is responsible for coordinating the six-year development programme, which cover an area of 9582 ha. 27 sites (5600 ha) will be established in the north of the country, while 10 (2720 ha) will be located in close proximity to the Hauts Plateaux Highway and five sites (1262 ha) will be in the south. Many of the new zones will have an industry-specific focus, for example, electronics at Sidi-Bel-Abbès, 80 km south-west of Oran, and agribusiness at Blida, 50 km south-west of Algiers.

CEMENT: In the past few years there has been increased demand for construction materials due to both the broader growth of the economy and the government’s push for infrastructure development, with this leading to shortages of cement in particular. Regular maintenance of existing cement plants has also added to the problem.

In May 2010, Algeria had to import 1.5m tonnes of cement due to severe shortages. According to estimates from Groupe Industriel des Ciments d’Algérie (GICA), the state-owned cement firm, in 2012 the shortfall will total some 2.5m tonnes, resulting in price hikes and speculation. In the first half of 2012 the country’s cement imports more than doubled to 1.22m tonnes at a cost of AD8.45bn (€81.12m), up from 665,500 tonnes and AD4.14bn (€39.74m) during the same period in 2011.

Algeria produces a total of around 18m tonnes of cement, of which 11.5m is provided by GICA’s 12 plants. To address the shortfall, GICA aims to increase cement production to 20m tonnes in 2016 and 29m tonnes by 2018. GICA’s production will be ramped up as part of an eight-year programme with a budget of AD320bn (€3.1bn). The company has entered into a number of partnerships with investors to build new lines in five cement plants. The sites in question are Beni Saf (Ain Temouchent), Zahana ( Mascara), Meftah (Blida), Ain Kebira (Setif) and Oued Sly (Chlef). Together they will produce an additional 8.5m tonnes of cement a year on top of the current 11.5m tonnes. Further, plans have also been made to expand ready-to-use concrete and aggregates, targeting a total of 7m tonnes of output in the future.

In addition to meeting the growing needs of the domestic market, GICA’s expansion programme will also create jobs (an estimated 2400) and even generate surplus production for export. According to GICA’s CEO, Yahia Bachir, “We will certainly have excess once we achieve all our development programmes; we estimate 4m-5m tonnes will be available for export in the next five years.” This figure only includes public sector plans. There are also a number of private companies that plan to expand production. “Taking into account the production of the private sector, Algeria will have an excess of around 10m tonnes available for export,” Bachir added.

NEW WORKS: New cement works will be built in the southern provinces of Bechar, Andrar and Tamanrasset. Other discussions about the construction of a new joint venture plant with a capacity of 3.5m tonnes near the northern city of Djelfa have yet to be concluded. The Algerian government is negotiating with Egypt’s SEC Cement. The firm entered the market in 2008 by buying a 35% stake in the Zahana cement plant in western Algeria. The plant was recently overhauled; with additional extensions to be completed by 2015, the facility will have a capacity of 3m tonnes of cement, around five times the capacity when ASEC took over in 2008.

France’s Lafarge, the world’s largest cement producer, also has plans to expand capacity; it aims to build two cement plants in Algeria together with local private group Sagremac. The first unit will be located in Biskra in the south-eastern part of the country and the second one will be near Constantine in eastern Algeria. Each plant will cost €307.23m. With the new development Lafarge will be able to strengthen its market leader position in Algeria.

Lafarge also acquired a 35% share in the Meftah cement plant for €43.5m, and signed a management contract with GICA. With the acquisition of Meftah and the purchase of the Algerian Cement Company’s M’sila factory, part of the Lafarge’s $12.8bn purchase of Orascom Cement in 2007, the French group now has the capacity to produce 9m tonnes of cement per year in Algeria.

STEEL: The development of the steel industry is currently a key focus for the government (see analysis). In recent years the segment has had its challenges. In 2007, production peaked at 1.29m tonnes, but then sharply declined to 646,000 tonnes in 2008 and 543,000 in 2009, before slightly recovering in 2010 with 688,000 tonnes. Currently, steel production is estimated to be growing at more than 10%.

Algeria’s only steelmaker, global giant ArcelorMittal, has embarked on a programme to raise steel production in Algeria to 1.4m tonnes by 2014, with an eye towards reducing the country’s dependency on imports. In Algeria, the firm operates under its subsidiary ArcelorMittal Annaba. The company experienced financial difficulties in early 2012, although with reassurance from the Algerian government, bankruptcy was averted. In April 2012, a deal was signed between ArcelorMittal and Banque Extérieure d’Algérie to assist the steelmaker and help boost production to 1.4m tonnes per year.

Another significant investment in steel comes from Qatar. In May 2012, Industries Qatar announced it was investing in a new steel plant in Bellara near Jihel in eastern Algeria with a production capacity of 5m tonnes per year, with the facility set to open as soon as in 2015. Industries Qatar’s local partner in the project will be a state company that will hold the 51% of the shares. Initially, 2.5m tonnes of long steel will be produced, and this will be extended with a further 2.5m tonnes of flat and other steels.

AGRIBUSINESS: Agribusiness is the second-largest industrial contributor to GDP after hydrocarbons, and its contribution is expected to rise going forward in line with the projected increase in agricultural production (see Agriculture chapter).

Despite recent efforts to boost domestic agricultural production, the country is still a major importer of foodstuffs; it imports around €2.55bn worth of food products annually, accounting for about 15% of its total imports, according to estimates. This makes Algeria one of the biggest importers of agricultural products in Africa. The majority of food imports come from Algeria’s traditional trade partners in Europe; however, the country is increasingly building trade links with emerging economies such as Brazil or India as well (see Economy chapter).

Local cereal production increased from an annual average of 2.9m tonnes between 2000 and 2008 to 6.1m tonnes in 2009, before falling to 4.2m tonnes in 2011 due to adverse weather conditions. However, improved access to land and financing is expected to boost output over the next few years.

The government has recently begun to restructure the national food industry in an effort to enhance food security and is planning to open an ITC devoted to agribusiness by the end of 2012. The industry currently employs around 140,000 people, up from 120,000 in 2010. Some segments have performed very well of late, with strong annual growth rates recorded in the dairy (30.1%) and canned fruit and vegetables (11.5%) segments in particular.

Algeria is one of the region’s largest markets for milk powder, producing an estimated 180m tonnes in 2012. It is expected that the consumption of milk powder will remain stable in the near future. In October 2011 Swiss food giant Nestlé opened a new milk powder factory in Qued Smar to cater to rising domestic demand. Nestlé supplies the country with Nespray and Gloria packaged products from the new facility. Qued Smar is the firm’s second local factory after Nestlé Waters opened in 2008, and it currently employs around 350 people at the two sites.

PHARMACEUTICALS: Efforts are also ongoing to expand the pharmaceuticals sector. Currently, the government is able to supply 27% of medicine requirements using local production, and it is aiming to increase this to 70% by 2014. Local output is expected to be able to meet 100% of market needs by 2020, according to Djamel Ould Abbes, the former minister of health, population and hospital reform.

In 2011 the value of the Algerian pharmaceuticals market reached $2.9bn, of which $1.05bn was made up of products manufactured locally, according to the National Union of Pharmacists. The National Centre for Informatics and Statistics reported that the volume of drug imports increased by nearly 56% in the first nine months of 2012 as compared to the same period the previous year, rising from 16,730 tonnes to 25,884 tonnes. This translated into a higher bill as well, with pharmaceuticals imports costing the country $1.67bn over the nine months, up 26.84% from $1.32bn the previous year.

In a bid to cut costs, the government is aiming to limit imports and build up domestic drug manufacturing capacity. Since 2008 bans have been in place on imported drugs that can be made locally, with the number of products banned set to rise to 800 in 2012.

Foreign direct investment (FDI) into the sector increased to €279.5m in 2010-11, according to Ould Abbes, with this helping to facilitate a number of ventures between foreign and national laboratories. One such venture, a partnership between UAE-based Gulf Pharmaceutical Industries (Julphar) and the Ministry of Health, will see the establishment of a 5000-sq-metre plant in Algiers. Julphar will invest €24.57m in the facility, which will produce medicines in three stages: first 30m medicines, followed by 20m bottles of intravenous fluids and 55m units of injections. Once completed in 2014, the plant will serve the local market as well as neighbouring states.

In another development, AstraZeneca plans to establish a plant in Algiers with local group Biopharm in a partnership worth $60m, with the latter holding 51% of the venture. The facility will produce drugs targeting chronic diseases such as cancer.

FUNDING MODERNISATION: The rise in imports has prompted the government to provide Saidal, a public pharmaceuticals firm, with additional financing to double its output over the next five years. In 2010 Saidal announced that it was to start work on a €1.4m modernisation programme to increase capacity at eight of its manufacturing facilities in Algiers, Cherchell and Medea. The expected improvements, which will be financed by a €180m National Investment Fund loan, will boost drug production capacity from 135m to 298m sales units, while also raising quality standards to European levels.

To strengthen the regulatory framework, the government issued import contracts for pharmaceuticals products to 69 operators in 2012. In addition, to improve the sector’s organisation, the Ministry of Health has established new systems designed to guarantee the sustainability of medicine supplies.

AUTOMOTIVE: To reduce Algeria’s rising volume of automotive imports, the government has decided to try to set up local vehicle production. The development of a domestic automotive sector would not only provide jobs for Algerians, but could also generate knock-on benefits for a range of subcontracting industries, such as vehicle parts. ”It supports the emergence of hundreds of subcontractors specialising in areas such as mechanics, electronics, rubber, glass and plastics,” Benmeradi told OBG.

Following years of discussions, French carmaker Renault signed an agreement in May 2012 with the authorities to build a plant in Algeria. Initial production output is set at 75,000 vehicles per year, with a long-term target of 150,000, depending on the development and viability of suppliers. The majority of the output will be for the domestic market, with some also going towards export later on. Preliminary negotiations about the joint venture were delayed due to disagreements on the exact location of the plant. Renault had favoured a site at Rouiba closer to Algiers, saying it would be easier to find a skilled workforce there. MIPMEPI, however, preferred Belara Industrial Zone in Jilel Province, some 350 km east of Algiers, in line with the government’s strategy of boosting economic development outside Algiers.

Once established, the new plant would produce the saloon version of the Renault Clio 2 called Renault Symbol. Initially, production would be sold locally, unlike the large Renault factory in Tangiers in neighbouring Morocco, where 85% of the production goes towards export markets.

Renault was attracted to Algeria due to its vast growth potential, and at present no other auto manufacturer has operations in the country. Still, Renault is not the only company that has shown interest in manufacturing cars domestically. In 2011 local press reported that German automobile manufacturer Volkswagen was negotiating with the government over a potential factory in Algeria. During the same year, Benmeradi also said that several South Korean automobile companies are interested in setting up local manufacturing operations.

OUTLOOK: The sector is likely to see strong growth ahead, and there are signs that the government’s strategy is boosting the development of value-added and niche segments. The new industrial zones and incentives should help to encourage FDI as well.