Algeria's industrial policy of small business creation and local integration

The 2014 slowdown in oil prices revealed the vulnerability of Algeria’s economy, heavily reliant on hydrocarbons, and highlighted the need for a paradigm shift. The government sees the industrial sector as having the potential to drive diversification and reduce the import bill. In addition to heavy industrial subsectors, such as steel (see analysis) and cement, a number of other industries have the potential to become key exporters, including pharmaceuticals (see analysis), agro-industry and automotive manufacturing, assisted by the country’s strategic geographic location as a gateway to both Europe and Africa.

Structure & Oversight

While the industrial sector accounted for about 20% of the GDP at the beginning of the 1980s, its development was halted by the debt crisis which took place at the end of that decade. In the 1990s, when the country transitioned away from being a planned economy to a market economy, small and medium-sized enterprises (SMEs) played a crucial role, and they are now predominant in manufacturing during its current relaunch phase.

The private sector share in industry value added roughly equals that of the public sector, while private SMEs, of which some 97% are small, account for the bulk of the industrial landscape. The Ministry of Industry and Mining (Ministre de l’Industrie et des Mines, MIM) is responsible for oversight, while investment promotion comes under the purview of the National Investment Development Agency (Agence Nationale de Dé veloppement de l’Investissement, ANDI) and the Algerian Chamber of Commerce and Industry.

Policy

Facing the challenge of promoting national industry in a globalised context, the government made the sector a focus of its five-year investment plan 2015-19, which aims to diversify the economy away from its reliance on hydrocarbons and facilitate growth and job creation in non-oil sectors. The industrial strategy is comprised of three main axes: developing industrial and mining systems, promoting competitiveness, and improving the business environment. This implies the densification of the industrial landscape, restructuring of specific sectors and improvements to the value chain. The plan identified seven priority industries for development, namely, iron and steel; mechanical and metals; electrical and electronics; agri-business; manufacturing; chemicals; plastics and pharmaceuticals; and construction materials. It also set a target of creating 1m SMEs between 2015 and 2019 and initiated a series of incentives to encourage their creation.

To that end, Law No. 17-02 on the development of SMEs was promulgated in June 2017. The law modifies and completes the law of 2001 and aims to foster the establishment of SMEs, improve their competitiveness and capacity to export, and promote the development and integration of a subcontracting ecosystem. To achieve this last goal, the law exempts subcontracting companies from value-added tax (VAT), profit tax, tax on professional activity and property tax in the frame of investment. Additionally, since May 2018 subcontractors in mechanical industries are exempted from VAT and Customs duties for imported or locally procured components and raw materials.

In addition to expanding the role of subcontractors, the government is also moving to improve land access. “A critical challenge to entering the Algerian market is the availability of industrial land,” Marcel El Khoury, CEO of speciality construction chemicals firm Sika El Djazaïr, told OBG. In September 2018 it repurposed farmland in the wilayas (provinces) of Oran, Tebessa and Skikda for three industrial projects: a Peugeot assembly plant In Tarfaou and two phosphate fertiliser facilities.

The move is part of efforts to restructure industrial activity into new industrial zones and clusters. In 2018 three operational clusters were established, in the mechanical, precision mechanics and automotive segments, and two technical centres have been set up – one for mechanical and metals businesses, which is located in the wilaya of Ain Smara, and one for agri-food industries in Boumerdès. The purpose of technical centres is to provide businesses with practical solutions to their technological needs. According to the MIM, there are currently three other industrial technical centres under development in the chemicals, construction materials and electronics segments.

The new industrial strategy has a protectionist orientation, as it looks to promote those industries most suitable for import substitution. In January 2018 the government banned the import of 851 products to encourage local production, with mixed results.

In some segments a shortage of locally produced raw materials left businesses unable to operate, and 34% of companies in the public sector and 19% in the private sector reported demand outpacing supply in the first quarter of that year, according to a survey conducted by the National Statistics Office (Office Nationale des Statistiques, ONS). This situation resulted in a softening of the import-substitution measures, as the government realised that local industry was not yet sufficiently developed to supply the entire production chain for a number of products. For example, some raw materials used in ceramics and earthenware manufacturing were taken off the list of prohibited import products in October 2018. Instead, a tariff of 6% on the value of the imported products has been applied.

Turn to Phosphate

After years of standby within the mining sector, the end of 2018 saw the launch of an unprecedented large-scale project in north-eastern Algeria. A memorandum of understanding was signed in November 2018 between Sonatrach and Chinese multinational Citic Construction to set up a joint venture that will construct an integrated complex which will include the extraction, transformation and value addition of phosphate to produce fertilisers, phosphoric and sulphuric acids. In addition, it will transform natural gas to produce ammoniac and derivatives.

This $6bn investment is planned to start operations in 2022 and boost local production of merchant phosphates from 1m tonnes to 6m tonnes per year. “Around 20% of the production will cover the needs of the agriculture sector, a share that might increase with the projects currently ongoing across the country,” Ferhat Ounoughi, head of project for Sonatrach, told OBG. “The rest will be exported, mainly to Asia, including China, which is the leading consumer of phosphate products in the world, but also to Europe, Africa and the Americas.”

Performance

Reflecting its position at the heart of the government’s economic development plans, the industrial sector, although still marginal, is growing. Industry expanded by approximately 4.5% in 2017, above the rate recorded for non-hydrocarbons activities, at 2.2%, and overall GDP, which slowed to 1.4% in that year, according to figures from the ONS. In total the sector accounted for 6.3% of GDP, up from 5.6% in 2016. Industrial output had a value of AD1.1trn (€8bn) in 2017 compared to AD989.7bn (€7.2bn) in 2016 and AD919.3bn (€6.7bn) in 2015.

Industry’s share in value added has fluctuated in recent years, from 5% in 2015 to 3.7% in 2016 and 4.5% in 2017, according to the ONS. Yet, its share in non-hydrocarbons value added has grown at a faster rate, at 7.1% in 2015, 7.2% in 2016 and 7.5% in 2017. However, the sector’s role in the national economy remains modest, lagging behind more developed sectors, such as agriculture or construction.

In the first half of 2018 industry continued to record positive results, expanding by around 4.3% and 2.1% year-on-year (y-o-y) in the first and second quarters, respectively. Once again it outperformed non-hydrocarbons growth, which stood at 1.9% and 2.8%, and the overall economy, at 1.2% and 0.7%. Growth was driven in the second quarter by leather and shoes industries, which recorded y-o-y growth of 4.1%, and agri-business, at 3.6%, followed by water and energy (3.5%), construction materials (3.2%) and steel, metal, mechanical and electrical industries (3.1%). As a sign of its growing attractiveness, 50.7% of investment projects declared to ANDI in 2017 were in the industrial sector, which together accounted for approximately 57.9% of total project value. While the performance in 2017 is an indication of industry’s resilience to that year’s slowdown in economic growth, SMEs – the main component of the sector – were nevertheless affected. “The financial crisis of 2017 has had a big impact on SMEs, Mohamed Bouloudene, managing director of telecommunications infrastructure company BN Electric, told OBG. “Payments have suffered delays, which has impacted the cash flow of these companies.”

Agro-industry

The most developed industrial segment is agro-industry, accounting for approximately 38% of the sector’s value added in 2017. In that year there were 716 new agro-industrial investment projects, accounting for almost 28% of the volume of new industrial projects and 18.05% of their value. The segment, which comprises some 700 companies and has two main subsegments – cereals and beverages – does not have the capacity to meet total domestic demand. In 2017 around 98% of the 4.5m litres of drinks consumed in that year were produced locally, while the remainder was imported. Besides cereals and beverages, other subsegments with development potential include dairies, oils and fats, tinned fruits and vegetables, and frozen products.

Cement

One of Algeria’s fastest-growing segments in recent years is cement. Since 2015, when cement imports peaked at 6m tonnes per annum (tpa), capacity has expanded rapidly, so that production now exceeds demand. “We went from a cement crisis to a production surplus,” Reda Radjradj, business line-manager of mining and rock excavation at Atlas Epiroc, a mining and infrastructure equipment firm, told OBG. In 2018 cement output was hovering at 25m-30m tpa, up from 22m tpa in 2016, with domestic demand at 23m tpa.

The performance has enabled the industry to begin exporting to both regional and international markets. In the first half of 2018 the state-owned Groupe Industriel des Ciments d’Algérie (GICA) signed a contract with Europe for 200,000 tonnes of grey cement, while LafargeHolcim Algérie exported 30,000 tonnes of Algerian cement to The Gambia. At the same time, the Swiss-headquartered firm announced its intention to export 5m tpa to West Africa by 2020. An urbanising continent with a rapidly growing volume of construction projects, Africa constitutes a booming cement market, importing around 21m tpa as of 2018.

With several cement projects under way, including two new GICA plants in Béchar and Sigus, which are scheduled to be operational in 2020, and an Algerian-Chinese cement plant in Timegtane, the country’s cement production is expected to reach 40.6m tpa by 2020. Of this amount, 20m will be produced by GICA, 11.1m by LafargeHolcim Algérie and 9.5m by other operators. This is expected to create a production surplus of around 12.5-13.5 tpa. “On the domestic market, the building and the renovation of the road network based on new technology cements is the highest potential outlet in the short to medium term,” Serge Dubois, Public Affairs Director, LafargeHolcim Algerie, told OBG.

Automotive

Prior to 2014 the domestic automotive industry was comprised of just one vehicle manufacturer – the Entreprise Nationale de Véhicules Industriels. Since that time, however, the country has become a sought-after vehicle assembly location for international vehicles manufacturers. Renault, Volkswagen, Hyundai and Kia have all established assembly plants in the country, and in 2018 the Algerian car market was the largest car market in the Maghreb and fourth-largest on the continent, with domestic demand estimated at some 500,000 units per year.

Growth has been sustained by increasing urbanisation and underdeveloped public transport systems, as well as government incentives and import restrictions. Quotas on imported vehicles, introduced in 2016, reduced the number of units coming into the country incrementally, from 79,000 in 2016 to 55,000 in 2017 and 50,000 in 2018. At the same time, the number of locally assembled vehicles rose, reaching 110,000 in 2017, according to Youcef Yousfi, minister of industry and mining. Yousfi told local media that output is expected to reach 400,000 units per year by 2020.

Several projects are under way that will help the automotive industry attain this goal, such as a $50m manufacturing and assembly plant for trucks, which is expected to enter into operation in 2018. Located in Annaba, 535 km east of Algiers, the facility is the result of a joint venture (JV) between local car dealership KIV Group and Chinese manufacturer Foton. It plans to have a production capacity of 5000 units in its first year, scaling up to 20,000-30,000 units by 2022. A second heavy-vehicle assembly plant is expected to be operational in January 2020 in the industrial zone of Sidi Khaled. Valued at AD3.4bn (€24.7m), the facility – a partnership between Italian car company Iveco and Ival Group – will have a 4000-unit-per-year capacity.

In 2017 France’s PSA Group, maker of Peugeot, signed a JV with three domestic firms for a €100m car plant in Oran that is expected to be fully operational by 2019, and in late 2018 US carmaker Ford received a permit for a 150,000-unit facility in the Sidi Khettab industrial zone, located 300 km west of the capital. Additionally, following strong sales of its Ibiza model, Spain’s Seat is expanding operations at its Relizane factory to include the Leon and Arona brands. While the wave of new projects is good news for the segment, there is a downside. Imports of car parts, which were valued at $2.1bn in 2017 and grew by 76% in the first eight months of 2018, are weighing on Algeria’s import bill. Furthermore, the integration rate remains low, at around 5%, according to Mohamed Benmeradi, former minister of trade. In response, the government is encouraging the industry to move up the value chain and achieve greater integration by manufacturing car components locally. The rapprochement with African neighbours like Mauritania could also present automakers with new export opportunities. In October 2018 Global Group announced that it plans to export vehicles produced under its Kia brand to Mauritania.

Fertilisers

Another burgeoning segment of industry is fertilisers. Already a large-scale producer of nitrogen fertilisers, Algeria is keen to capitalise on its sizeable phosphate reserves and expand output of the chemical from 1-1.5m tpa to 11m, which will then be processed into fertiliser for export. To this end, a $6bn project is under way to exploit phosphate reserves held in the Bled El Hadba deposit in the country’s north-east. Undertaken in partnership with Chinese firms CITIC and the Wengfu group, the project, which will be spread across four areas and be operational in 2022, aims to export around $2bn of fertiliser each year.

Other Segments

Developments are also forging ahead in other high-potential industries, including household goods and electronics, and textiles. In order to take advantage of import restrictions, South Korea’s Samsung, a major player in white goods and electronics in Algeria, opened a smartphone assembly plant in 2018 in partnership with local distributor Timecom. The Algiers-based facility is expected to produce 1.5m phones in its first year and 2.5m in its second.

Meanwhile, operations in the Relizane Textile Complex started in March 2018, following the completion of Algerian-Turkish spinning plant Tayal. The Relizane complex, which is located in Sidi Khettab and valued at AD170bn (€1.2bn), aims to establish eight textile plants in its first phase and a further 10 in its second. The second phase is expected to be completed in 2020.

Further down the line, significant opportunities could present themselves in renewable energy, as it is high on the national agenda. The government aims to capitalise on Algeria’s sunny climate to expand total renewables generation capacity to 22 GW by 2030, and is encouraging a local solar industry to grow by making local procurement a requirement of tenders. At present, production is at an embryonic stage, with two solar module manufacturers operating in 2018 – Aurés Solaire and Condor Electronics.

SME

In recognition of the fact that SMEs form the backbone of the industrial landscape, the government has placed business creation at the heart of its development plans, and aims to establish 1m new companies by 2019. As of mid-2017 there were approximately 92,988 SMEs in the manufacturing industry, of which 92,804 were privately owned and 84 public, according to the MIM. In June 2017 the authorities promulgated Law No. 17-02, which aims to support new business development, improve the competitiveness and export capacity of SMEs, and encourage innovation.

The main instrument for implementing public policy in regards to SMEs is the Agency for the Development of SMEs and Promotion of Innovation (Agence de Dé veloppement de la PME et de la Promotion de l’Innovation, ADPIPME), which was established in 2005. Initiatives implemented by ADPIPME include the Programme for Modernising and Upgrading Algerian SMEs, which financed consultants to work with SMEs on their development and invested in equipment. Another agency – the Youth Employment Support Agency (Agence Nationale de Soutien à l’ Emploi des Jeunes, ANSEJ) – has been created to support entrepreneurship among young people. ANSEJ provides grants and access to loans with subsidised interest rates for projects of up to AD10m (€72,600) in value. Between 2007 and 2013 it supported a total of 292,186 projects, and in 2017-18 it intends to fund 46,000 business creation projects developed by graduates. However, according to some stakeholders, more needs to be done to facilitate development of SMEs, “Regarding the tax regime, there are no real incentives for SMEs. They are taxed around 40%, while their margins are just 30%. They can receive advantages only if they are part of a programme like ANSEJ,” Bouloudene told OBG.

According to Adly Kafafy, managing director of Elsewedy Electric Algérie, an electrical infrastructure firm, new businesses also suffer from a lack of visibility in terms of projects in the industrial sector, which creates a mismatch between supply and market needs, and causes some new businesses to fold in the first few years. “In 2013 there was great demand for electricity cables. Investments were made and new businesses established. Now the market is saturated and prices are very low, which affects return on investment,” he told OBG. However, the mortality rate for SMEs is declining. According to the MIM, in the first half of 2017 a total of 221 registered manufacturing SMEs closed compared to 1433 in the same period of the previous year.

Investment Inflows

In 2017 Algeria’s foreign direct investment (FDI) declined by 26% to $1.2bn, as part of a downturn that saw FDI across Africa decrease by 21%, according to the 2018 “World Investment Report” from the UN Conference on Trade and Development (UNCTAD). Algeria’s performance stemmed from a decline in foreign investment in oil, possibly caused by uncertainty ahead of the new hydrocarbons law, which is expected to be ready in 2019. According to UNCTAD, non-hydrocarbons FDI inflows in 2017 were mainly driven by two industrial projects. The first was Samsung’s smartphone assembly plant in Algiers and the second was Chinese firm Huawei’s installation of its eLTE Rapid Deployment Broadband Trunking System in the Houari Boumediene Airport. Pharmaceuticals manufacturer Sanofi also invested €70m to build its third facility in Algeria, in the pharmaceuticals and biotech cluster at Sidi Abdellah (see analysis). At full capacity, the plant will produce 100m units per year, and is expected to be fully operational in 2019-20. As part of the overall initiative aimed at attracting new FDI, in mid-July 2016 Parliament passed a law modifying the national investment promotion framework, which dates from 2001. Incentives implemented at that time include a 10-year exemption from property tax and VAT, and import duty exemptions for all goods and services acquired for use in an investment project. Such projects are also exempt from corporate tax and professional activity taxes during the first three years of operation. In addition, the law granted further advantages to industrial, agricultural and tourism projects, such as the provision of land in underdeveloped parts of the country at concessionary rates.

Indeed, land access continues to be an area of focus for industry stakeholders today. The Forum of Entrepreneurs is advocating for the creation of free zones in the seaport of Cherchell in the north and in Tamanrasset in the south. The forum said the first would serve to attract industrial FDI while the second would help Algeria establish a trans-Africa trading hub.

The country is home to 72 industrial zones that span some 12,000 ha, as well as 450 activity zones, covering 17,000 ha. Skikda has 26 industrial zones and activity zones, the most of any wilaya. In 2014 the authorities announced a €726.1m development programme aimed at building 42 industrial parks in 34 wilayas, but the plans have yet to be implemented.

Exports

Although still small, manufacturing exports are growing. While non-oil exports accounted for just 5.5% of total export volumes in 2017, they increased by 5.2% over 2016, according to the ANDI. Growth was driven by semi-finished products, which accounted for 73% of non-oil exports and 4% of total exports. In the first half of 2018 non-hydrocarbons grew substantially, by 51.2% y-o-y to $1.3bn, according to the Bank of Algeria, while total exports expanded by 20.8%. Imports declined by approximately $400m in 2017 and $811m in the first half of 2018. This has supported a 54.7% y-o-y reduction of the trade deficit in the first half of 2018 to $3.6bn. Algeria’s biggest export partners in the first eight months of 2018 were Italy, which at $3.94bn accounted for around 13.9% of total exports; and France, with $3.6bn (12.7%). These countries were followed by Spain, the US and the UK, with $3.41bn (12.03%), $2.7bn (9.5%) and $2.1bn (7.3%), respectively. In 2017 Algeria’s main export partners were Italy, with $5.8bn, followed by France ($4.5bn), Spain ($4.1bn), the US ($3.4bn) and Brazil ($2.1bn), according to ANDI.

Logistics & Local Procurement

The steady expansion of exports shows Algeria’s progress in developing local industry, but there are still challenges to overcome. One of the main hurdles is inefficient logistics. “Exports are indeed encouraged, but the logistics chain is currently such a mess that SMEs cannot really compete as they don’t have any internal logistics or transport capacities,” Bouloudene told OBG.

Another significant barrier to export growth is the sector’s low integration rate. Subcontracting accounts for an estimated 10% of industrial activity, Kamel Agsous, president of the Algerian Subcontracting and Partnership Scholarship, told local media in late 2018. This compares to 20% and 28% in neighbouring countries Morocco and Tunisia. The country’s high reliance on imports for spare parts supply is also a challenge. “We import 90% of spare parts,” Kafafy told OBG. Abdelkader Oulhadj, maintenance director at state-owned hydrocarbons firm Sonatrach, said 5% of the $390m that the company spent each year on spare parts in 2015-17 was locally procured.

“Establishing strategic technology partnerships has become more than necessary for Algeria’s industrial sector, as we cannot simply base our production on basic products,” Ali Boumediene, CEO of Algerian electronics manufacturer Bomare Company, told OBG. “We need instead to develop our internal R&D and associate with global leaders to ensure consistent transfers of technology,” he added. In early 2018 it was reported that Samsung had trained 130 Algerian engineers to support its new household appliances plant in Annaba, set to open in late 2018. The automotive industry, whose production is primarily of semi-knocked-down kits, has been set an integration target by the authorities of 15% by 2021 and 40% by 2023.

Outlook

While the sector’s role in the economy remains modest, steady growth and rising export volumes coupled with new investment constitute positive indications that the government’s diversification strategy is paying off. There is a growing tendency of firms building production units in-country in order to sidestep import restrictions. This is likely to give manufacturing a boost, although sustained growth will depend on the extent to which they are able to move up the value chain by, for example, increasing local integration and creating economies of scale. For the sector as a whole, and particularly for small businesses, investment in logistics and transport capacities will be crucial to building a local ecosystem that is robust enough to position industry as a key driver of growth.

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The Report: Algeria 2018

Industry & Mining chapter from The Report: Algeria 2018

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