Doing Business in Algeria
‘Algeria’s economy needs its Belmadi.’[1]
Authors of the article: Idris Negrouche & Oriana Saib.
This article has been written following an interview with Mr. Akli Brihi, the Founder and Managing Partner of KBB Advisory, a ‘consultancy firm capable of accompanying foreign companies willing to invest/grow/consolidate in the Algeria market and this, whatever the political context.’ Prior to that, he had a successful career in the private energy sector in London, Paris and Algiers having worked for multinational companies such as BP, GE Energy and Schneider Electric.
The main goal of this paper is to inform readers who might be considering investing in Algeria, but also those not familiar with this country, about its general framework and economy.
As not everyone may know, Algeria is a North African country. Population: 44 million inhabitants mainly concentrated on the northern coast of the country. Area: 2.382 million km², the largest country in both Africa and the Arab World, the 10th largest in the world and more than five times the size of mainland France. In the North, the country opens onto the Mediterranean Sea with a 1200 km long coastline dotted with around 10 harbours, such as Algiers, Annaba, Bejaïa, Arzew or Skikda. In the South, the country has most of the Sahara Desert, which contains iron, steel, precious metals such as gold and silver, industrial minerals including baryte, bentonite, cement, gravel, gypsum, helium, limestone, marble, nitrogen fertilisers, phosphate, pozzolan, quartz, salt and sand in all its states. Algeria also has large deposits of unexploited minerals such as diamond, manganese, crystalline quartz, rare earth minerals, tungsten and uranium, and silicon. Also and most importantly, Algeria ranks fifteenth in the world and third in Africa with 9.2 billion barrels of oil and proven reserves of 0.9% of the world total, noting that Saharan Blend is ideal thanks to its low sulphur content; and it abounds in of more than 4,500 billion m3 of gas, not to mention shales gas.
What are Algeria's assets when it comes to investment opportunities? In order to answer this question and to better understand the current framework of the Algerian economy, it is first necessary to take a step back in time, right after the independence war. Indeed, as the —a bit modified— title of a major work by Paul Gauguin will remind the readers, it all comes down to two major questions: D’où venons-nous et où allons-nous?[2] Next, the article will focus on a practical statement of what a foreign investor should know.
The Algerian Economy from 1962 to Nowadays [3]
On 3 July 1962, Évian Accords were signed leading to Algeria's official independence a few days later — 5 July. Before that date, the Algerian economy was mainly based on agriculture. For an overview, in 1954, 80.8 % of the Algerian population lived from agriculture,[4] whether it was the culture of cereals such as wheat, vineyards, fruits, especially olives, or livestock breeding.
At the end of the independence war, with Mohammed Ben Bella at the head of the State, the country had to develop other sectors of its economy such as the industry [5] while maintaining the agrarian economy at a high level. Hence, under both Ben Bella and Boumediène presidencies, large industrial sites were created such as the gas liquefaction plant in Azrew inaugurated on 21 February 1978.[6] Around 400 projects including 270 plants started to operate between 1971 and 1977.[7]
At the same time, ideological choices were made in favour of a socialist ideology. Thus, the nationalisation of agricultural colonial land was decided in 1963,[8] and in 1971 for both oil [9] and non-colonial agricultural land.[10]
No need to discuss the fact that oil and gas fields were discovered and/or exploited during the same period thus providing the country with great incomes. The readers will remember for instance that the El Gassi El Agreb oil field was discovered in 1961 while exploitation began that very same year.[11]
Overshadowing a few years, the 1986 and 1993 oil counter-shocks —the price per barrel falls to USD 8 in 1986[12]— hit Algeria which was mainly —almost exclusively– oil and gas dependent. This was closely followed by a period called the ‘Black Decade’, the civil war which took place between 1991 and 2002 and costed the lives of around 250.000 people.[13] Facing these challenges, the country was struggling with an economic crisis. For some figures, during the 1970s the debt amounted to less than USD 5 billion. In the 1990s, it amounted to USD 32 billion.
Nevertheless, crises do not tend to last forever. During the 2000s, the improvement of the oil situation led to some kind of a relaxation of the budgetary constraint. The Bouteflika government passed a USD 7 billion economic recovery support plan (2001-2004), a USD 50 billion growth support plan (2005-2009) — increased to $100 billion in March 2006— and a USD 286 billion development plan (2010-2014). Thus, from 2000 to 2014, the authorities allocated nearly USD 40 billion to the construction of dams and seawater desalination plants, invested in the expansion of water storage, production and distribution capacity which resulted in almost 90% of the population being now connected to the sewerage system. Investments were also made for the access to energy with the construction of power plants and the extension of gas and electricity distribution networks leading to respectively almost 99.4 % and 53% of the households being connected to the electricity and gas networks in 2014. Lastly transport infrastructures were also prioritised with investments amounting to almost USD 35 billion between 2000 and 2014 whether it was for roads, bus stations, tramways, or the upgrading of ports and airports.
To wrap up on that historical overview, nowadays and since the achievement of independence, Algeria is a ‘rentier system’ which is mainly based on oil and gas incomes. Indeed, it accounts for almost 97 % of total exports, two thirds of state revenues and one third of gross domestic product in 2014. However, while a country cannot rest indefinitely on rents which are not infinite by definition, it appears that Algeria is slowly waking up and has implemented some legal reforms in order to diversify its economy, and to catch up.
A Guide for Foreign Investors
Overview of the Algerian Legal Framework for Foreign Direct Investments
The most well-known Algerian regulation on foreign direct investment is surely the ‘49-51 rule’ provided for in Article 58 of the Additional Finance Act for 2009. According to that rule, all foreign operators and Algerians not resident on the national territory must be associated with a local public or private partnership, and may only own a maximum of 49% of the shares in the company or project in question.
This rule was particularly burdensome for the Algerian economy. For instance, foreign direct investments in Algeria in 2018 amounted to USD 1.5 billion, and USD 1.2 billion in 2017. In contrast, foreign direct investments reached USD 7.4 billion in Egypt and USD 3.8 billion in Ethiopia in 2017.
Hence, pursuant to Article 109 of the 2020 Finance Act, Algeria repealed the 49-51 rule except for some strategic sectors. Foreign investors are now free to invest in Algeria thanks to 100% owned vehicles. Only the following sectors remain subject to the rule: the mining sector as well as the energy one, the military industry, railways, ports and airports and the pharmaceutical industry. Other measures were also undertaken, such as the lifting of the state's pre-emptive right on transfers of shares in an Algerian company by or to foreign investors —replaced by an authorisation for the said strategic sectors— and the lifting of the local financing obligation for instance.
Last but not least, it shall be reminded to the readers that Algeria is party to the Washington Convention and signatory to numerous bilateral investment treaties allowing for the settlement of disputes with foreign investors through arbitration and all its benefits.
Foreign Investors’ Reluctance Towards Algeria
According to Mr. Brihi, foreign investors are often still quite reluctant to enter into the Algerian market. There are several reasons explaining the reluctance of the international investment community towards Algeria, but a few stand out: difficult repatriation of dividends; strict foreign exchange control; need for visa and work permits; decrease of oil revenues. Most importantly, the lack of legal stability is the decisive factor when it comes to assessing Algeria’s country risk. Algeria is therefore seen as a risky market by the international investment community. Consequently, the cost of credit for investing in Algeria is high and can discourage foreign financial actors. The country definitely must work on its credit ranking in order to reassure investors.
Covid Impact
As for the Covid impact on the Algerian economy, Mr. Brihi sees the closing of borders as a double-edged sword. Algeria did benefit from this drastic measure in regard to its negative trade balance as imports have sharply decreased making the Algerian economy more resilient than expected. However, foreign investment has been severely hindered by travel restrictions and a drying-up of foreign currency.
Why Should You Invest in Algeria?
In Mr. Brihi’s opinion, there is no doubt the country is full of opportunities: ‘If you are looking for international expansion in the region of North and West Africa and are familiar with those markets, it is in your best interest to invest in Algeria.’ As one of the largest economies in Africa, and a member-state of the Greater Arab Free Trade Area and African Continental Free Trade Area, Algeria can be seen as a platform to export towards neighbouring markets. A Western company seeking to expand its activities to African markets should definitely invest in Algeria. In order to do so, and according to Mr. Brihi, it can be good to start by setting a foothold in Algeria or by finding a local partner before developing further business strategies in the country. As such, investing in Algeria can be done without a high, and therefore, risky cost.
Mr. Brihi further points out the attractiveness of Algeria’s legal framework which provides one of the most competitive economies in the region. Similarly, the cost of energy is much cheaper in Algeria than in neighbouring countries, such as Morocco or Tunisia. Same goes for the potential of the consuming market. Unfortunately, as much as the legal environment and productive cost can be highly attractive for foreign investors this asset is rarely known by financial actors. The main reason being a lack of national ‘marketing’ on the matter which suffers from a poor image as far as legal stability is concerned.
According to Mr. Brihi, Algeria is definitively seen as a military and diplomatic power in its regional landscape. But the third pillar – the economic power - is lagging by far. That is the key point to make Algeria a promising and attractive land for investment. To do so, Mr. Brihi strongly advocates the government to unleash the potential of its formidable youth by promoting the freedom of entreprise and initiative whilst getting rid of its anachronic bureaucracy. Algeria has everything to succeed: smart people, energy, modern transportation infrastructure and a strategic regional positioning.
Key Sectors
Mr. Brihi views the imperative need for Algeria to build its four ‘independances’ as to not be much dependent from abroad: food & water, healthcare, energy and digital technologies.
Mr. Brihi’s take on key upcoming sectors of the Algerian economy is that foreign investors should assess the needs for the national demand and see how to meet them. Mr. Brihi often advises his clients to start by identifying the sectors that fuel Algerian imports and then evaluate a way to produce locally. Such sectors are likely to encounter a high demand and eventually financial success. More importantly, this follows the political will to boost local production as expressed by President Tebboune’s guideline for a significant decrease in imports. Three main sectors can be identified as promising.
Firstly, agriculture and food processing sectors have unmatched potential as Algeria aims at maintaining its food security and exporting its surplus to neighbouring countries. Products such as cereals, soy or milk are still imported whereas Algeria enjoys a huge area of arable land.
Similarly, the healthcare industry is in need of investments in the country. A local production of treatments for chronic diseases such as diabetes or hypertension is on Algeria’s priorities. New molecules for the production of such medicine will be highly welcomed by the biochemical industry.
Thirdly, chances are that the oil and gas sector still have bright days ahead as domestic energy demand is growing while petroleum and gas remain a huge share (95%) of exports revenues. Yet, major companies are still resorting to costly imports of heavy equipment, such as oil valves or pipework. Once again, Algerian-made supplies in this sector would be a great step forward.
Other interesting sectors include the manufacturing as well as the mining industries without forgetting the new cutting-edge digital technology businesses. In the long run, the tourism industry might eventually take off in Algeria, a country which decided not to develop this ‘unexploited deposit’ so far.
Culture & Investment
Algeria is a quite unique country, with its own specific values and characteristics. For a foreigner to invest there, it is therefore necessary to have a proper understanding of the local ecosystem. The public sector is particularly prevalent, a thing that might be unusual for Westerners who will have to deal with a heavy bureaucracy when investing in Algeria. Carrying out detailed market research is the first step in order to analyze and evaluate the economic environment. This will allow the foreign investor to set an industrial business plan that will determine practical aspects such as the amount of money needed for the project or whether to work with a local partner. If so, due diligence will be notably important to comprehend Algerian ethics and standards when it comes to business transactions.
Who Are the Foreign Investors in Algeria?
Due to historical factors, France remains one of the top investors in the country, ranking as high as the first source of FDIs excluding hydrocarbons. However, this traditional position is being challenged by other countries such as Turkey. While being its top commercial partner, Chinese investments are limited to the imports of made-in-China manufactured products into Algeria.
As for the diaspora’s role in FDIs, it remains negligible. Mr. Brihi, himself a member of the diaspora, calls on the Algerian community abroad to invest back in their homeland and take part in the economic development through FDIs but also technology and know-how transfer. Being optimistic, Mr. Brihi is convinced that if the diaspora is hugely welcomed this would greatly help Algeria to finally reach its outstanding potential.
This article has been written with the collaboration of Oriana Saib and Idris Negrouche.
[1] We would like to express our thanks to Mr. Akli Brihi who kindly granted us an interview which ended with this nice comparison with the national football team, a particularly important sport in Algeria.
[2] “D’où venons-nous ? Que sommes-nous ? Où allons-nous ?”, Paul Gauguin, 1897-1898.
[3] It should be noted that the division between these different time periods was made in accordance with Mr Akli Brihi’s interview and presentation of the Algerian economy's evolution since independence.
[4] “L’agriculture algérienne de 1954 à 1962”, R. Lequy, p. 43. Available at: https://www.persee.fr/doc/remmm_0035-1474_1970_num_8_1_1081.
[5] “Implantations industrielles et aménagement du territoire en Algérie“, G. Mutin, Rev. De Géographie de Lyon, 1980, p. 7. Available at: https://www.persee.fr/doc/geoca_0035-113x_1980_num_55_1_1263
[6] ”A Azrew M. Boumediène a inauguré le plus grand complexe de liquéfaction de gaz du monde”, P. Balta, Le Monde, 23rd February 1978. Available at: https://www.lemonde.fr/archives/article/1978/02/23/a-arzew-m-boumediene-a-inaugure-le-plus-grand-complexe-de-liquefaction-de-gaz-du-monde_3132503_1819218.html
[7] “Implantations industrielles et aménagement du territoire en Algérie“, G. Mutin, op. cit., loc. cit.
[8] “L’Etat et la révolution agraire en Algérie”, G. De Villiers, Revue française de science politique, 1980, p. 112. Available at: https://www.persee.fr/doc/rfsp_0035-2950_1980_num_30_1_393880.
[9] “Algérie : 50 ans après, la nationalisation du pétrole en question“, R. Andrea Mounecif, Le Point, 15 March 2021. Available at: https://www.lepoint.fr/afrique/algerie-50-ans-apres-la-nationalisation-du-petrole-en-question-15-03-2021-2417787_3826.php.
[10] “L’Etat et la révolution agraire en Algérie”, op. cit., loc. cit.
[11] ”Pétrole et gaz naturel au Sahara”, R. Fosset, Annales de Géographie, 1962, pp. 279-308, spec. p. 282. Available at: persee.fr/doc/geo_0003-4010_1962_num_71_385_16198.
[12] ”Pétrole : les cinq dates qui ont marqué l’histoire de l’OPEP”, E. Goetz, Les Echos, 2016. Available at:https://www.lesechos.fr/2016/11/petrole-les-cinq-dates-qui-ont-marque-lhistoire-de-lopep-222302. Also see, ”Chocs et contre-choc pétroliers depuis 1973”. Available at: https://prixdubaril.com/comprendre-petrole-cours-industrie/61826-chocs-et-contre-chocs-petroliers-depuis.html.
[13] “Guerre d'Algérie, combien de morts ?”, L’Histoire, n° 140, janvier 1991. Available at: https://www.lhistoire.fr/guerre-dalg%C3%A9rie-combien-de-morts#:~:text=Le%20nombre%20des%20victimes%20de,000%20bless%C3%A9s%20et%20485%20disparus.
