VZCZCXRO6202
PP RUEHTRO
DE RUEHAS #0273/01 0801330
ZNR UUUUU ZZH
P 211330Z MAR 09
FM AMEMBASSY ALGIERS
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RUEHDM/AMEMBASSY DAMASCUS 1508
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RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 ALGIERS 000273 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ECON KPRV EIND AG
SUBJECT: FIND A PARTNER: ALGERIA'S NEW INVESTMENT RULES 
 
REF: A. 08 ALGIERS 1003 
     ¶B. 08 ALGIERS 1172 
 
¶1. (SBU) SUMMARY: Algeria has implemented policies that 
require a majority stake be held by Algerian interests in all 
new investments in the country, and a minimum 30-percent 
stake in import businesses.  The policies have taken shape 
through a series of written instructions and guidance sent 
from the prime minister to various government organs since 
July 2008, when President Bouteflika lashed out against 
foreign investors for reaping profits from Algeria's natural 
resources and markets without reinvesting in the country (ref 
A).  The rules also require foreign investors to maintain the 
balance of their earnings in Algeria during the life of the 
investment, and to use Algerian banks for any financing.  In 
many ways these rules match those imposed in 2006 on 
investors in the hydrocarbons sector, except that private 
Algerian businesses may be tapped as partners for projects 
outside of oil and gas development.  Leading Algerian 
business groups favor the rules, and both they and the 
government are quick to say that the rules do not signal a 
retreat from capitalism, but instead represent a more sound 
and deliberate industrial strategy.  We have yet to see 
examples of the rules put into practice, and we have been 
assured that the rules will not be applied retroactively 
except for import businesses.  While some officials maintain 
that the rules are temporary, their scope and intent suggest 
that they should be considered the new Algerian investment 
regime for at least the near future.  END SUMMARY. 
 
FOUR NEW RULES FOR AN OLD-SCHOOL ECONOMY 
---------------------------------------- 
 
¶2. (SBU) Between July and December 2008, Prime Minister Ahmed 
Ouyahia issued a series of written instructions and guidance 
to various government organs outlining a new foreign 
investment framework for Algeria.  Initially described as a 
"national doctrine" defined by the president, the guidance 
established new rules for foreign investment in Algeria, 
whether in the form of partnership, direct foreign investment 
or privatization.  The original guidance envisioned rules 
that would apply to foreign investors contributing at least 
30 percent of the capital to a project, with a maximum 
capital contribution of 49 percent.  Under the guidelines and 
the rules that followed, "Algerian shareholders" would always 
maintain a majority stake in new foreign investment projects. 
 
¶3. (SBU) Ouyahia issued four orders in a circular to 
government authorities dated December 21, 2008.  The first 
requires all foreign investments in Algeria to include one or 
more Algerian partners who contribute a majority of the 
project's capital.  This rule applies to investments 
involving either a single foreign entity or a partnership, 
and envisions the likelihood that multiple Algerian 
shareholders would be needed in order to constitute a 
majority of a project's capital, thus making the foreign 
partner "the first among actors in terms of shareholder 
stakes."  The rule applies to "all sectors of activity, 
including finance and the various branches of the energy 
sector." 
 
¶4. (SBU) The second rule requires investments driven by 
foreign companies to maintain a positive balance of foreign 
currency in Algeria for the life of the project.  This is 
followed by a third rule that requires any tax breaks, 
customs reductions or other financial incentives utilized to 
establish a foreign investment to be deducted before any 
dividends may be repatriated out of the country.  The fourth 
rule requires that any financing needed for a foreign 
investment must be obtained from domestic banks. 
 
30-PERCENT RULE FOR IMPORTERS 
----------------------------- 
 
¶5. (SBU) To address problems associated with what Ouyahia 
described in his circulars as a 300-percent increase in the 
cost of imports over the last six years, the prime minister 
issued a separate set of orders on December 22, 2008, that 
apply specifically to import companies.  Under these rules, 
 
ALGIERS 00000273  002 OF 003 
 
 
any foreign-owned import company established after March 1, 
2009, must have at least 30 percent of its capital owned by 
Algerian interests, which may be either individuals or 
businesses.  In addition, all foreign companies already 
operating import businesses in Algeria must re-capitalize 
with a 30-percent Algerian stake by September 30, 2009. 
 
JUSTIFICATION: REAL THREATS TO THE ECONOMY 
------------------------------------------ 
 
¶6. (SBU) In the December 21 circular addressed to various 
high-level members of government and managers of public 
enterprises, Ouyahia outlined a series of "real threats" 
faced by the Algerian economy, even as he stated that 
Algeria's financial position vis-a-vis the global economic 
crisis would remain positive for at least five years.  The 
identified threats to Algeria's economy included skyrocketing 
import costs and capital flight that Ouyahi said was 
permitted under a particularly lax foreign investment policy. 
 He also noted a decline in national production caused by a 
number of factors including irrational tariffs that favored 
the importation of finished goods over raw materials, credit 
rules that favored trade over production, and fraud committed 
at the customs, tax and social levels.  He stressed the 
necessity to fight waste and fraud along with the need to 
create dynamic advantages for "productive investments," the 
creation of jobs and the diversification of government 
revenue streams. 
 
EFFECTS ON U.S. BUSINESSES 
-------------------------- 
 
¶7. (SBU) We have no way yet to gauge the effect the general 
investment rules will have on U.S. business relations with 
Algeria.  Most U.S.-based investment here has been in the 
hydrocarbons sector, which is already subject to similar 
restrictions on foreign ownership of joint ventures.  It 
seems clear, however, that two major investments finalized in 
2008 by U.S.-based firms, the GE Hamma desalination joint 
venture in Algiers and General Cable's acquisition of a 
state-owned industrial cable plant in Biskra, would have been 
affected had these rules been in effect.  In that regard, the 
original written guidance to government agencies from 
Ouyahia's office and promises made to us by both government 
officials and business leaders close to decisionmakers 
indicate that the 49-percent rule will not be applied 
retroactively. 
 
¶8. (SBU) On the import side, there are few if any U.S.-based 
trading companies in Algeria.  American producers generally 
establish relationships with local distributors for the sales 
of U.S.-made products.  A local newspaper recently reported 
that of the 25,500 import-export businesses throughout 
Algeria, some 1,600 are foreign-owned.  Syrian, French and 
Chinese companies make up almost half of the foreign 
companies that operate trading businesses here, and French 
diplomats tell us their constituents are very concerned by 
the rule requiring them to acquire a 30-percent Algerian 
partner by October. 
 
COMMENT 
------- 
 
¶9. (SBU) Discussion of a new foreign investment policy for 
Algeria began last summer when the president blasted foreign 
firms and called his own government's investment policy "a 
failure."  Some of the elements of Prime Minister Ouyahia's 
rules were floated over the months that followed, both to 
galvanize support among the people and to test the waters for 
effect.  But, because the rules were not officially 
published, confusion has reigned regarding what percentages 
of Algerian partnership were required for various sectors and 
if the Algerian stakeholder could be a private business 
versus a state-owned enterprise.  In fact, our business 
delegations and official visitors have received conflicting 
information from various ministers regarding the impact and 
scope of the rules. 
 
¶10. (SBU) In recent weeks the rules seem to have reached a 
 
ALGIERS 00000273  003 OF 003 
 
 
wider audience, and both government and business leaders have 
moved to assure us that Algeria is not trying to close the 
door to foreign investment but is simply seeking to establish 
more strategic partnerships.  The director of the MFA's 
economic bureau suggested to us this week that the rules may 
be temporary -- a claim we heard during high-level visits in 
the fall of 2008 -- and intended to implement a "small pause" 
in what he called "uncontrolled" foreign investment here. 
The scope and nature of the rules, designed essentially to 
develop an Algerian investor class, nonetheless suggest a 
longer-term commitment.  The use of circulars and orders to 
government agencies rather than decrees that have the weight 
of law has given the prime minister some flexibility in this 
regard: should the rules prove ineffective or politically 
unsound, they can just fade away.  But should the government 
find them useful and effective in leveraging Algerian 
ownership in investments here, the rules can simply stay in 
effect indefinitely. 
PEARCE