Robert Tashima, OBG Regional Editor speaking at the Algeria Business Briefing at the Middle East Association in London on December 8, 2010.
Thanks to the MEA for having me. It’s a pleasure to speak on Algeria – it’s one of my favourite countries in Africa, due in large part to the Brasserie des Facultes, which serves up incredible lamb in an atmosphere like something out of an old Graham Greene novel.
At any rate, I was asked to talk about Algeria’s changing investment environment, and I think the best way to do that is to indulge in a bit of fantasy.
Now, imagine you had just won the lottery. You toddle off to claim your millions but what are you going to do with all of that cash?
Let’s say you rather like where you live and don’t fancy moving into a 24 bedroom country estate just yet, but the homestead could use a bit of sprucing up.
So you simply throw open your front door and invite all the builders in. “Go to work,” you say, “have at it.” “Do whatever you want”. “Charge me anything”. “Change whatever you fancy”.
It doesn’t make much sense, does it? Why would you do that? You might end up with a fishpond and a duckhouse, when what you really wanted was a new garage and kitchen.
You would be better off to put together a list of potential contractors, go through their references, ask for their proposals, tell them what you want and how you want it, and poke your head in every day to make sure they are doing what you want them to do – after all, it is your house.
That, in a sense, is the same approach taken by Algeria to its foreign investors.
There has been a lot of talk in recent months about the rise of economic nationalism in Algeria, but such discussions miss the point.
Algeria isn’t becoming hostile to foreign investment; it is looking to channel foreign capital in such a way so as to maximise returns in the local economy. Algeria wants to make sure that those builders coming through its front door are doing what it wants them to do.
There is no doubt that investment regulations in Algeria have tightened in recent years, as they have in many other emerging markets. Flush with cash, the government is providing a more deliberate sense of direction to the country’s growth, changing its laws to target corruption, improve the labour pool, strengthen home-grown industry and combat unemployment.
Of course, the regulatory changes have predictably impacted inbound capital flows, as investors seek to gain a better understanding of the new legal framework.
However, the country is very much open for business and – with a population of 35m, huge reserves of liquidity anda long list of needed projects – the local market has immense potential. While newer, stricter regulations have slowed the recovery of post-crisis foreign investment, capital is continuing to pour into the country and ultimately, those investors who enter Algeria with a long-term perspective will be rewarded.
Quite a lot of hay has been made in recent years about the substance of the changes to Algeria’s investment regulations, but they aren’t particularly unusual.
In fact, they very much mirror the trend in many emerging hydrocarbons producers, encouraging diversification and local development through greater domestic ownership.
In Algeria’s flagship energy sector, a set of reforms has revamped the landscape for new foreign entrants, thanks to a 2006 legislative overhaul which gave Sonatrach a 51% stake in every oil and gas contract awarded to foreign firms, encouraging both much-needed skill and technology transfer to the Algerian giant.
Similarly, in 2008 the government imposed a 49 percent cap on the amount of shares a foreign investor can hold in any new investment, ensuring domestic control of all companies operating in Algeria. A year later, the government restricted banks from issuing consumer loans, in order to reduce personal debt and improve the trade balance.
A supplementary budget law for 2010 introduced a raft of additional amendments, with the government seeking to encourage the development of local companies. For example, new rules on public procurement introduced a requirement that foreign contractors must form a joint venture with an Algerian company, and set differentiated ceilings for maximum prices by Algerian and foreign companies.
The 2010 law also provided clarity on state buyouts, ensuring that not only does the state have the right of first refusal during the sale of foreign-held Algerian assets, but also that the price in any such situation will be determined by a third-party valuation.
As you can see, the changes are sizeable, particularly given the relatively short period over which they were introduced.
And it goes without saying that – not unexpectedly – the changing legal framework has obviously caused many foreign investors to pause, in much the same way that a builder would probably have a cup of tea while you figure out where exactly you want the new fireplace put in.
Yet while much is made of the substance of the regulatory changes, in reality, they are not particularly unusual and can be found in similar form around the world – whether it be preferential procurement in the US, or local content regulations in Nigeria or hiring regulations in the UAE.
All of these laws often have similar objectives – to ensure that foreign investment benefits the local economy.
Admittedly, the constant legislative tinkering has made had a discouraging effect. The pace of foreign investment has been slow to recover from the global drop in 2009. In line with countries around the world, capital flows dropped in Algeria last year – rather significantly, by upwards of 60% – but they have been recovering at a more gradual pace this year.
Inbound capital has been increasing at only around 5% this year, and some big name investors have put their projects on hold. The oft-cited case of Orascom is an exception, and is hardly indicative of the broader business climate, but other investors, such as Carrefour and Emaar, have also opted to close their local offices as part of a “wait and see” approach.
However, while investors may face short-term regulatory or business-related issues in the short-term, Algeria nonetheless has huge long-term potential – which is evident by even a cursory glance at the fundamentals. It is not a country where an investor can reap immediate short-term profits, but with the right approach, it offers the prospect of juicy returns.
With 35m people, larger than any of the neighbouring countries, the country has a huge market. Development indicators are constantly improving, with per capita GDP in current dollars rising by nearly $1000 over the past five years alone and the labour force is growing, with nearly 30% of the population under 14.
The economy is also enormously liquid, thanks to the huge flow of hydrocarbon revenues. Sustained oil prices have improved the country’s basic indicators, with substantial trade surpluses and international reserves standing at $157bn. Over the past four years, debt has dropped from 25% of GDP to less than 4%.
There is also a huge need for infrastructure, of all sorts – after all, the Algerians are planning on doing more than adding a lick of paint to their house. The to-do list is incredibly long, and the government has set aside $286bn for major works over the next five years, ranging from cross-country motorways to new schools. Some 2m new housing units and a new railway are among hundreds of planned projects.
Ultimately, even as Algeria seeks to provide more rigid guidelines on foreign investment, it is an emerging market that offers enormous potential for investors from abroad. The cash is there, the projects are there, and the customer base is there. It is far more politically stable than it has been at any time over the past two decades.
And while stricter regulations on foreign firms might make the newspaper headlines, Algeria is not hostile to investment from abroad; indeed, the government is well aware that FDI is needed – which is why it is looking to make sure foreign capital provides maximum returns for the local economy.
For those investors who are looking for a Dubai-like bonanza, Algeria might not be a good fit. However, for those investors who are willing to take the time to get to know the market, to invest in local resources and to establish a long-term strategy, the country offers rich rewards – after all, Algeria has won a rather big lottery, has a rather big house and wants to do rather a lot to it.