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C O N F I D E N T I A L SECTION 01 OF 04 ALGIERS 000352 
 
SIPDIS 
 
STATE PASS TO USTR PBURKHEAD 
 
E.O. 12958: DECL: 04/08/2029 
TAGS: EINV ETRD ECON PGOV KPRV AG
SUBJECT: ALGERIA'S ECONOMIC LIBERALS FADE TO THE LEFT 
 
REF: A. 08 ALGIERS 848 
     ¶B. ALGIERS 273 
     ¶C. ALGIERS 316 
     ¶D. 08 ALGIERS 1003 
     ¶E. 05 ALGIERS 638 
     ¶F. 07 ALGIERS 129 
     ¶G. 07 ALGIERS 708 
     ¶H. 08 ALGIERS 24 
     ¶I. ALGIERS 30 
 
Classified By: Ambassador David D. Pearce for reasons 1.4 (b) and (d). 
 
¶1. (C) SUMMARY:  Many observers predict that, as the expected 
winner of the April 9 presidential election, President 
Bouteflika will reshuffle his cabinet again and either move 
or remove certain ministers that were associated with the 
economic liberalization of his first two terms.  Bouteflika 
ranted against foreign investors and what he deemed a failed 
investment policy during a speech in July 2008 (ref A).  His 
prime minister, Ahmed Ouyahia (who assumed the job for a 
third time in the June 2008 ministerial reshuffle), has since 
issued a series of internal government instructions that 
limit foreign investors to a status of minority shareholder 
in any new project in Algeria (ref B).  Implementation of the 
rules remains fuzzy, but as the government and Algerian 
business leaders begin to gel around these policies driven by 
Ouyahia (ref C), those ministers who previously espoused 
economic liberalization seem to have lost political clout, 
and some are rumored to be facing removal when the dust 
settles after the election.  We have heard such rumors 
before, and whether true or not, some younger, seemingly 
modernist ministers have tempered their enthusiasm for 
economic liberalization as Algerians watch the global 
recession deepen, and the nation's economic policies continue 
to pull leftward with a distinctly protectionist, 
nationalistic tone referred to locally as "economic 
patriotism" (ref D). END SUMMARY. 
 
LOOKING BACK, IT ALL STARTED WITH KHALIFA 
----------------------------------------- 
 
¶2. (C) At the start of this decade, as Algeria clawed its way 
out of the violent 1990s, President Bouteflika's economic 
team seemed committed to enacting economic reforms and 
bringing the country to the post-Cold War, trade-based, 
international table (ref E).  The U.S. and other governments 
engaged with Algeria in hopeful projects to help it join the 
World Trade Organization (WTO), modernize its banking system, 
and privatize the hundreds of state-owned enterprises that 
littered the economic landscape.  Investors from Europe and 
elsewhere looked to Algeria as a new and exciting emerging 
market, and regional giants like Egypt's Orascom were 
welcomed by the government as they brought new money, 
expertise and technology to sectors such as 
telecommunications and construction. 
 
¶3. (C) But even as oil profits soared and private enterprises 
based largely on cults of personality thrived, the 
government's old guard was shaken in 2003 by the collapse of 
the expansive Khalifa Group, which was involved in a wide 
range of big-ticket businesses including airlines, banking 
and construction (ref F).  (Note: The distinctive look of 
downtown Algiers -- white buildings with blue trim -- came 
courtesy of the Khalifa Group, which used a massive and 
controversial refurbishment contract to repaint the heart of 
the capital in its corporate colors.  Now, under new 
contracts, buildings are being returned to the more 
traditional color scheme of white with gray trim.  End Note). 
 The loss of public pensions in the Khalifa Bank, coupled 
with a number of other bank scandals and several bailouts of 
public banks, led Ahmed Ouyahia in his second stint as prime 
minister in 2004 to forbid government entities from dealing 
with private banks (ref F).  The myriad Algerian parastatals 
were forced to move their deposits to public banks and to 
negotiate loans and bonds only with those institutions.  More 
bank failures, the Ouyahia decree, and a Central Bank 
clamp-down led to the eventual disappearance of all 
Algerian-owned private banks, leaving only state-owned and 
foreign banks doing business here today.  According to our 
 
ALGIERS 00000352  002 OF 004 
 
 
Treasury Department advisor who is resident at the Central 
Bank, the Khalifa Bank collapse defines the way Algerian 
banking supervision officials do their jobs even today.  He 
told us on April 7 that the heavy-handed treatment of banks 
for even minor administrative infractions, and the strict 
foreign exchange controls under which banks and businesses 
constantly chafe, are examples of the fear of excess and lax 
control that continues to grip the Central Bank and the 
Ministry of Finance. 
 
A CHASTENED KHELIL 
------------------ 
 
¶4. (C) In the wake of what is now referred to simply as the 
Khalifa scandal, a nationalist economic policy began to 
evolve.  While Energy Minister Chakib Khelil was lauded 
internationally for his 2005 liberalization of the 
hydrocarbons sector (ref G), his efforts were soon undercut 
by a series of amendments in 2006 that returned state-owned 
Sonatrach to a position of majority-stakeholder in all oil 
and gas projects and imposed a burdensome windfall profits 
tax on companies that had not negotiated new contracts more 
favorable to the government.  Khelil wasted little time in 
adjusting his stump speech, complaining to us in 2007 that 
foreign partners had been making "unfair gains" in the 
Algerian market (ref G).  Industry and political insiders 
have suggested that Khelil kept his job because he was 
relatively close to Bouteflika, he was already slated to be 
OPEC president for 2008, and he quickly fell in step with 
nationalist thinkers in the Algerian leadership (the 
"Pouvoir").  Khelil has rejoined the government's chorus 
since 2006, becoming a strong advocate with us as well as 
with visiting U.S. officials and business delegations for the 
proposition that foreign companies should be more willing to 
bring their expertise and technology to Algeria both within 
and outside of the hydrocarbons sector. 
 
¶5. (C) As further proof of Khelil's move away from the 
liberal management model for his sector that he once 
espoused, an oil executive told us in February that Khelil 
has reasserted strong, centralized control over Sonatrach. 
"It has become just like the rest of the Algerian 
bureaucracy" in its slow pace and difficulty in getting 
decisions made, many of which must be reviewed by Khelil 
himself, the oilman told us.  Furthermore, international oil 
company (IOC) representatives largely explain the failure to 
attract more than nine bidders for the December 2008 
exploration round as a result of the GOA over-reaching and 
insisting on contract terms that were simply too stringent 
and unprofitable for most IOCs.  A visiting IOC 
vice-president told us March 23 that although Khelil had 
created a commission to interview company representatives to 
determine what went wrong in the last bid round, Sonatrach 
and energy ministry officials were blaming the lackluster 
bids on the precipitous drop in oil prices in late 2008, and 
even suggesting that the IOCs colluded to undermine the bid 
round in an attempt to regain an upper hand in Algerian 
hydrocarbons exploration. 
 
THE END OF BANK PRIVATIZATION 
----------------------------- 
 
¶6. (C) The looming global financial crisis that started 
taking shape in late 2007 sealed the fate for bank 
privatization in Algeria.  The long-awaited privatization of 
the state-owned bank Credit Populaire d'Algerie (CPA) was put 
on hold indefinitely after Citibank and other Western banks 
ultimately pulled out of the bidding (ref H).  While the 
"Ouyahia banking directive" was rescinded in an effort to 
make CPA more attractive (and drive up bid prices), the 
withdrawal of Citibank in particular left the Algerians with 
a choice between two French banks already present in Algeria. 
 Finance Ministry officials feared that the banks would 
reduce their financial offers significantly in light of the 
sudden lack of competition, and would seek simply to acquire 
the CPA brand, close branches and fire workers.  Thus, it was 
politically more palatable for the GOA to accept 
embarrassment and criticism from the international community 
by "freezing" the CPA privatization than to face a potential 
 
ALGIERS 00000352  003 OF 004 
 
 
domestic backlash from a public impression that CPA was sold 
off cheap to a big French bank. 
 
¶7. (C) Government officials now insist that no Algerian 
public bank will be privatized until the global financial 
situation stabilizes and a fair price can be obtained for 
such important institutions (ref H).  We saw another blow to 
financial sector reform in June 2008, when the president 
eliminated the position of Minister Delegate in Charge of 
Reform at the Ministry of Finance.  Many had high hopes for 
Fatiha Mentouri, who seemed sincere in her desire and 
intellectual capacity to seek reform and to cooperate on 
technical assistance programs (ref H).  Several of our 
pending reform programs evaporated with her removal.  We have 
implemented several other longer-term Treasury Department 
modernization programs under the purview of the finance 
ministry and at the Central Bank.  We have not, however, 
identified a high-level advocate for reform there simlar to 
the now-vanished Mentouri.  Complicating matters further, one 
local newspaper recently identified Finance Minister Karim 
Djoudi as being part of a group of economic liberals who are 
in the prime minister's cross-hairs. 
 
BOUTEFLIKA'S RANT, OUYAHIA'S RULES 
---------------------------------- 
 
¶8. (C) As President Bouteflika began assessing his legacy and 
laying the groundwork for a constitutional amendment that 
would allow him to run for a third term, he unleashed a 
tirade aimed at foreign investors in Algeria during a speech 
in July 2008.  He claimed foreign investors took advantage of 
Algeria's resources and repatriated mass profits back to 
their home countries, but reinvested little in Algeria (ref 
A).  Since then the GOA, through its annual budget law and a 
series of ministerial orders, has implemented new taxes and 
restrictions on the activities of foreign companies (ref D), 
imposed a ban on imported pharmaceuticals (ref I), and laid 
the groundwork for a rule that foreign companies will be 
limited to a minority share of future investments in Algeria 
(ref B). 
 
WHITHER TEMMAR? 
--------------- 
 
¶9. (C) Rumors have once again circulated that Abdelhamid 
Temmar, Minister of Industry and Investment Promotion and a 
childhood friend of Bouteflika, will soon be ousted, this 
time as part of a post-election reshuffle.  Local press 
reported in March that Athmane Bennabi, the current head of 
the government's management company for industrial zones 
(EGZI), would replace Temmar.  Bouteflika specifically 
decried Temmar's policies as a failure in his speech last 
year, and organs of Temmar's ministry are now playing a 
central role in implementing the prime minister's new 
investment directives.  The French-language daily Liberte ran 
a story on the front page of its weekly economic section on 
March 15 describing the policy divergence between Prime 
Minister Ouyahia and Minister Temmar and others seen as 
economic liberals. 
 
¶10. (C) Temmar, however, may be trying to resurrect his 
standing with the prime minister and the Pouvoir.  Several 
newspapers noticed his near-disappearance from public light 
in the fall of 2008 even as the investment strategy of his 
ministry was openly criticized and reshaped by the president 
and prime minister.  But recently, in an interview that ran 
in Liberte on March 25, Temmar called the new investment 
rules "a good deal."  He said that during the president's 
first term, the government's priority was to "restore peace 
and social cohesion," even as it also attempted to establish 
an efficient economic system.  During the second term, "we 
began to seriously implement reforms to the economic system," 
he claimed.  Temmar offered several dubious and largely 
failed efforts as proof, including restructuring the banking 
system, developing a real estate market, and consolidating 
the market for goods and services.  Now, he said, the GOA is 
working to move the economy away from a dependence on the 
hydrocarbons sector, through a transformation of government 
agencies that regulate investment, the development of a 
 
ALGIERS 00000352  004 OF 004 
 
 
competitive public sector, and the expansion of the private 
sector and its production capacity. 
 
¶11. (C) But Temmar has also muddied the waters regarding the 
scope of the new foreign investment rules.  In February he 
told a delegation of American businesspeople that the 
majority-stake rule will be applied only to "big" projects in 
"strategic" sectors, contrary to the prime minister's 
December 21 order that the rule will be applied to "all 
foreign investment in Algeria" and in "all sectors of 
activity" (ref B).  In his March 25 interview, Temmar 
referred repeatedly to a 40/60 split between foreign and 
Algerian investors, and suggested that a foreign investor 
would "maintain a majority stake" in a project because the 
Algerian share would likely be split among several partners 
or would be listed on the stock exchange.  Temmar also went 
so far as to say that the new rules are necessary because 
many foreign investors only want a 30- to 40-percent stake in 
Algerian projects, and often do not want to invest capital at 
all, but rather, simply want to provide technology or other 
"industrial stakes."  Thus, Temmar effectively reiterated the 
public comments and written instructions of Ouyahia, and the 
opinions espoused by well-connected Algerian business leaders 
(ref C). 
 
COMMENT 
------- 
 
¶12. (C) Liberte's March 15 analysis of an Ouyahia/Temmar 
split suggested that the prime minister's new, restrictive 
foreign investment policies were developed in secret and have 
caused a destabilizing effect not only within the government, 
but also among potential foreign investors who no longer know 
what the rules are in Algeria.  Recent events prompt us to 
expect little change or moderation any time soon, even from 
those in the government who once aspired to modern models of 
economic development for Algeria -- assuming they still have 
some role in the third Bouteflika term.  Their future, and 
the scope of implementation of Ouyahia's investment rules, 
remain in doubt in this election year, but the allure of 
protectionism and nationalism, especially during a time of 
global recession, seems impossible for the Algerians to 
resist.  As Liberte concluded, the only certainty remaining 
in the government's investment strategy is that Algerian 
citizens will come out the losers because they will always be 
left "to pay the bills for deals that they are never party 
to, whether by 30 percent or 50 percent." 
PEARCE