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DE RUEHAS #0153/01 0521652
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FM AMEMBASSY ALGIERS
TO RUEHC/SECSTATE WASHDC 8456
INFO RUCNMGH/MAGHREB COLLECTIVE
RUEHEG/AMEMBASSY CAIRO 0001

C O N F I D E N T I A L ALGIERS 000153 
 
SIPDIS 
 
DEPT FOR NEA/MAG - MNARDI AND JPATTERSON 
 
E.O. 12958: DECL: 02/21/2020 
TAGS: PGOV PREL ECON EINV AG EG
SUBJECT: ORASCOM TELECOM ALGERIE DISPUTE CAUSES WIDESPREAD 
CONTROVERSY 
 
REF: CAIRO 185 AND PREVIOUS 
 
Classified By: Classified By: Ambassador David D. Pearce.  Reasons:  1. 
4 (b), (d) 
 
SUMMARY 
-------- 
 
¶1. (C) Orascom Telecom Algerie (OTA), Algeria's largest 
wireless phone company -- one of the largest and most 
economically productive foreign investments this decade -- 
has been assessed USD 650 million in back taxes via a series 
of assessments dating back to late 2008.  On the face of it, 
many of these assessments appear to be a violation of 
Algerian laws exempting new foreign investments from taxes 
for the first few years.  OTA, a subsidiary of Egypt-based 
Orascom Telecom Holding, may not repatriate dividends while 
its tax dispute remains unresolved.  The Embassy has met with 
OTA and Egyptian Embassy officials to determine the true 
nature of this dispute.  More recently, OTA actions have 
raised questions about its intentions, and rumors are 
circulating anew that the company is actively looking to sell 
out.  OTA and a number of observers believe that nothing less 
than OTA's demise or departure from the Algerian market will 
suffice for the GOA, which seems to have no intention to 
relent on the fine it has levied.  This dispute appears to 
have started as an economically nationalist reaction to the 
company's success and repatriation of profits amounting to 
several hundred million dollars but has become a more 
intractable dispute thanks to recent tensions between Algiers 
and Cairo.  Above all else, it has emerged as the most 
publicized recent major dispute involving foreign holdings to 
tarnish Algeria's already cloudy investment climate.  END 
SUMMARY. 
 
Background 
---------- 
 
¶2. (U) Orascom Telecom Holdings (OTH) is an international 
telecommunications company registered in Egypt that operates 
GSM networks in the Middle East, Africa, and Asia.  Orascom 
Telecom Algerie (OTA), the Algerian subsidiary of OTH, is 
Algeria's largest mobile telephone provider, operating under 
the "Djezzy" brand.  OTA is 98.6 percent owned by OTH and 3.2 
percent by local Algerian investors.  Post understands that 
there is significant U.S.-based investor participation in OTA 
through a number of investment companies.  In July 2001, OTH 
won an auction for the second GSM license in Algeria, paying 
USD 737 million and receiving tax exemptions covering OTA's 
initial five years of operations as well as investment 
protections granted under Algerian and international law. 
Local company representatives tell the Embassy that OTA then 
invested several billion dollars building a wireless network. 
 
 
¶3. (U) That network has since become the largest network in 
the country, providing wireless coverage to 99 percent of the 
population, bringing Algeria into the late 20th century in 
terms of wireless and generating significant revenue and 
profit for the company.  In November 2009, however, OTA was 
assessed tax arrears of approximately USD 600 million for the 
tax years 2005 through 2007, following an assessment in 2008 
of USD 50 million for the tax year 2004.  OTA may not 
repatriate profits while the assessment remains unresolved, 
and it has had to deposit a quarter of the disputed tax 
amount with the GOA pending resolution of the case.  The 
amount of profits currently unrepatriated stands at more than 
USD 250 million. 
 
¶4. (U) On December 28, 2009, OTH announced that OTA had filed 
an administrative appeal against the November reassessment 
received from the Algerian Direction des Grandes Entreprises 
(DGE) for the 2005, 2006, and 2007 tax years.  On January 4, 
Algerian newspaper "El Watan" reported that a source close to 
the Algerian Ministry of Finance estimated that the dispute 
would take four to six months to resolve.  Algerian law 
requires a government dispute commission to complete its 
review of Orascom's complaint within four months.  The tax 
authorities would then have two months to consider the 
commission's findings and make a final determination. 
 
OTA Perspective 
--------------- 
 
¶5. (C) On January 5, DCM, Econoff, and FCS met with the 
Director General of Djezzy, Tamer Mahdi, an Egyptian 
national, to discuss Orascom's tax dispute.  Despite OTA's 
2004-2007 tax exemptions granted to new foreign investors, 
Mahdi confirmed that the tax authority (Direction General des 
 
Impots - DGI) was reviewing the company's revenues.  Mahdi 
explained that the DGI assessment for 2004 revenues resulted 
from accounting errors and different standards applied by OTA 
and the GOA.  This led to an initial tax assessment of USD 50 
million in 2008 that OTA has appealed.  The tax authority 
subsequently extrapolated from the additional revenues it 
uncovered for 2004 to claim that OTA failed to declare all of 
its revenue for 2005-2007 and was stealing from shareholders 
(a charge OTA vigorously rejects).  The DGI assessed back 
taxes of USD 600 million for this alleged infraction.  Mahdi 
confirmed that OTA appealed the 2005-2007 assessment and made 
a payment covering 20 percent of the disputed amount.  This 
latter appeal may take eight months or longer, while a 
decision on the 2004 assessment (for which OTA had earlier 
made an initial payment and filed an appeal) is scheduled for 
the March/April timeframe.  Mahdi said he raised Orascom's 
complaint with Finance Minister Karim Djoudi and has invited 
the government to examine Orascom's financial records.  For 
now, Orascom plans to follow the dispute process established 
by Algerian law.  The GOA, meanwhile, shows no intention of 
backing down or compromising on a settlement.  (Note:  OTA 
CEO Mahdi stopped by the Embassy February 2 and dropped off a 
packet of documents with the Commercial Attache at the 
Embassy entrance but refused to exchange words and quickly 
departed.  The packet contained a company legal brief stating 
OTA's understanding of the facts of the case, copies of OTA 
correspondence with the MFA and the GOA "Direction of Large 
Enterprises," and an unsigned letter on plain paper 
purportedly from TA Associates and Madison Dearborn addressed 
to "His/Her Excellency" (no further addressee) requesting 
that that person write President Bouteflika or Prime Minister 
Ouyahia asking for help resolving the tax dispute.  End note) 
 
 
Egyptian Perspective 
-------------------- 
 
¶6. (C) On January 12, DCM and Econoff had a working lunch 
with Egyptian Embassy then-Charge d'Affaires Hesham Abdel 
Wahab and Commercial Officer Ismail Khozayem to discuss the 
OTA case and the current state of Algerian-Egyptian 
relations.  The Egyptians placed the tax dispute in the 
framework of tensions in Algerian-Egyptian relations, 
aggravated by the bad feeling over the November 2009 World 
Cup soccer qualifying matches.  Wahab informed us that 
Algerian officials suspected an employee associated with OTA 
is related to President Mubarak and that Algeria is using the 
company and the tax problems to "cause harm" to the Egyptian 
president.  Egypt's foreign minister has sent an official 
letter to the Algerian government stating his concerns, but 
there has been no response.  Wahab believed the Algerians 
will not respond until the Egyptian Ambassador returns to 
Algeria.  (Note: The Egyptian Ambassador left Algiers in 
November in the aftermath of the November soccer fallout.  He 
returned the week of February 1.  End note) 
 
¶7. (C) Wahab did not believe the Algerians would compromise 
on OTA's tax obligations, even at the risk of driving OTA out 
of business and doing even greater harm to Algeria's image as 
an investment destination.  He believed that current poor 
relations between Cairo and Algiers would only complicate 
efforts to reach a settlement.  On a slightly brighter note, 
Wahab said that tensions between Algeria and Egypt had 
slightly eased in recent weeks, and most of the estimated 
8,000 Egyptian residents in Algeria who had fled in the wake 
of soccer-fueled violence had returned.  Most Egyptian 
businesses were operating without incident, and trade was 
largely untouched, but the Algerians canceled a munitions 
precursor contract worth several million dollars for no 
apparent reason.  (Note:  the atmosphere leading up to and 
following the January 28 Africa Cup game between Algeria and 
Egypt was far calmer than in November, with the press 
unanimously blaming Algeria's 4-0 defeat on a biased referee. 
 End note) 
 
¶8. (C) On February 9, Egyptian Political Counselor Tomoum 
told us that Cairo had not instructed his embassy to 
intervene on behalf of OTA.  Tomoum understood that Orascom 
headquarters in Cairo was deliberating on further steps but 
for now was focused on negotiating a solution with Algerian 
tax authorities.  A market intelligence analyst, meanwhile, 
told the DCM on February 10 that a hedge fund he represents 
with a huge stake in OTA had asked him to assess prospects 
for a settlement of the tax fine.  His conclusion is that 
such prospects are extremely grim, as the GOA seems to have 
decided to force OTA out of the Algerian market.  His view 
was that OTA's incompetent local management had committed a 
number of misdeeds and missteps that upset Algerians, 
including the refusal to open the company up to local 
 
investors.  More fundamentally, however, OTA's sloppy 
bookwork had left it exposed to exactly the sort of scrutiny 
and legal action it was facing.  He has heard that OTA is 
trying to sell out but frustrated that it cannot get the USD 
10 billion it thinks the company is worth (current assessed 
value is closer to USD 4-5 billion).  He says that thoughts 
about offering shares on the Algerian stock market are too 
little, too late, but a Spanish telephone company is 
reportedly coming forward with a strong interest in taking on 
OTA's holdings. 
 
¶9. (U) The Algerian newspaper "El Watan" on February 17 
highlighted an interview Orascom Telecom Holding's CEO, 
Naguib Sawiris, gave to the "Wall Street Journal" (and 
reported in that paper's February 15 edition) to the effect 
that his company would sell its Algerian operations if it 
receives a "clear sign its investment (there) isn't welcome." 
 Sawiris stressed OTH's desire to remain in Algeria but 
"wouldn't hesitate to sell" if the current tax dispute became 
too serious, and he claimed there was "considerable" interest 
by other buyers to acquire OTA's assets.  In addition, 
Sawiris maintained he had opted not to escalate by invoking 
OTA's right to seek international arbitration and that OTA 
had sufficient cash to operate for two more years.  The "El 
Watan" article cited an anonymous Algerian official source 
who reportedly told Reuters that Sawiris was "intelligent 
enough to understand it is time for his company to leave the 
Algerian market.  ...We don't want Orascom any more."  The 
same source speculated that the GOA would not explicitly 
force Orascom to leave but would resort to indirect pressure 
until it pulled out. 
 
Comment 
------- 
 
¶10. (C) The OTA dispute has become a prime example of the 
real problems facing foreign business operating in Algeria, 
given the GOA's historically suspicious attitude toward 
foreign investors and tendency to adopt measures against 
their interests without prior consultation or warning.  OTA's 
situation is dramatic but not unique, as we have seen this 
pattern in other investment disputes.  OTA's current problems 
are doubtless more acute given the unhappy recent history of 
other Orascom subsidiaries operating in Algeria, including 
one that spurred the quick march toward economic nationalism 
a few years ago over allegedly predatory business practices 
and decisions that wounded Algerian amour propre.  The 
deterioration of Algerian/Egyptian relations over World Cup 
soccer qualification intensified the focus on OTA, considered 
an Egyptian company, but did not alone make it a target. 
Thanks, however, to the still poor state of Algerian/Egyptian 
relations, the prospects for an amicable settlement of the 
OTA dispute are currently not bright.  If relations mend, 
chances for a quiet settlement could increase but only if the 
Algerians would agree, uncharacteristically, to back down. 
 
¶11. (C) As with other commercial disputes in Algeria, it is 
hard to discern what is going on, who is involved, and the 
real motives at play.  OTA's CEO and other contacts suggest 
PM Ouyahia is orchestrating this campaign in his guise as the 
"enemy of success" for any company whose revenue exceeds a 
certain level and is not protected by President Bouteflika. 
Whatever may be going on politically behind the scenes, it 
does look increasingly as though the GOA intends to drive OTA 
out without any regard for the billions of dollars it 
invested here, the stimulus to development from the extensive 
Djezzy wireless network, or the inevitable damage the 
company's demise would inflict on Algeria's already troubled 
reputation as an investment destination. 
PEARCE