Algeria: Open for business

Author: | Published: 1 Jun 2011
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Algeria is blessed with natural resources; its economy continues to rapidly expand with an expected growth rate of 4% in 2011. Algeria also faces a high youth unemployment rate, a significant rise of basic foodstuff prices and a lack of adequate infrastructure.

In order to address these issues, the Algerian government launched last year a five-year investment plan totaling $286 billion that aims at boosting infrastructure as well as diversifying the country’s economy. This five-year plan will provide opportunities for firms involved with road building, water projects, utilities building/rebuilding, construction (particularly housing) as well as communications equipment. New investments linked to hydrocarbons and related foreign investments of at least $2 billion each year will also present opportunities for companies supplying machinery and equipment goods. A recent $3 billion investment in new gas discoveries is also promising.

At the same time, smoke-and-mirrors politics hiding behind claims of economic patriotism imposed a number of so-called Algerianisation measures to compel foreign investors to partner with Algerian nationals in any investment project. Most recently, Presidential Decree No 10-236 of October 7 2010 on Public Tenders (the new Code) introduced a mandatory commitment for any foreign bidder to invest in a partnership with a local entity.

However, the dwindling number of foreign investment projects (only 11 new projects were submitted to ANDI, the Algerian investment development agency, in 2010) and the impracticability of imposing foreign-Algerian partnerships for any public procurement contract have compelled the Algerian government to somehow relax the new Algerianisation measures in order to restore confidence and bring foreign investors back to Algeria.

In particular, Presidential Decree No 11-98 of March 1 2011, amending and completing the new Code, and other recent legal initiatives clarifying the Algerianisation measures have started to make Algeria a more hospitable place for foreign investors and bidders. More remains to be done, however, if confidence is to be fully restored, as foreign investors remain wary of the obligation introduced by the Supplemental Finance Law for 2009 to set up a 49/51% partnership with a local entity for any investment project, whereby Algerian resident shareholders must own the majority of the capital of the newly-formed entity.

New Code finally in effect

After a six-month hiatus, during which several new projects were frozen due to the failure of the Algerian government to implement the new Code by its effective date (October 7 2010) and the imposition on the foreign bidder of a broadly-worded obligation to commit to a partnership with an Algerian company when bidding on any type of procurement contract (see below), the new Code is finally in effect.

Any contract specifications submitted to a new contract commission after March 31 2011 will be governed by the new Code under the supervision of the new contract commissions established by Ministerial Decree No 11-118 of March 13 2011.

The new Code creates a strong external control mechanism exerted by public agencies and public administrations thanks to an external commission entrusted with the validation of contracts concluded with public enterprises; and several obligations, among which are the obligation to provide the certification of filing of annual accounts, and, if the foreign bidder has previously operated in Algeria, the filing of a declaration of probity as well as tax certificates and social security certificates attesting to the good standing of said bidder. (Articles 2 and 51)

Fighting fraud and corruption remains a priority and a challenge in Algeria in order to restore confidence in the economy and the political system. While well-publicised corruption scandals involving Sonatrach and other public and private entities have resulted in prosecution and sanctions, corruption remains an integral part of the public tendering process.

The new Code steps up the fight against corruption by allowing for the cancellation or termination of a contract in case of bribery and the recordation of the trader on a list of traders banned from bidding on a public tender contract. Moreover, as noted above, the bidder is obliged to subscribe a declaration of probity.

A National Fraud Register has also been created and a code of ethics and deontology in procurement is expected to be adopted by decree. (Articles 52, 60 and 61)

The new Code underlines the will of the Algerian government to Algerianise the economy by adding several measures which favour Algerian enterprises.

These measures include an increase from 15% to 25% of the maximum preference margin granted to local enterprises with a majority of Algerian capital; the use of a national tender process when domestic production or a domestic production tool is able to meet the needs of the customer and, last but not least, the obligation for foreigners bidders to invest through a partnership with an Algerian enterprise(s), as further discussed below.

Relaxation of the mandatory rule of local partnership

In line with the Algerianisation policy of Article 55 of the 2010 Law of Finance, Article 24 of the new Code includes the obligation for the foreign bidder to invest through a partnership, in the same field of activity, with an Algerian enterprise, whose capital is majority-owned by resident nationals.

According to the original text of Article 24 of the new Code, the foreign bidder had to comply with the partnership commitment in regard to any project, supply, design or service contract, without any exception. Moreover, the failure to comply with the investment commitment automatically triggered the termination of the contract, possible monetary penalties of up to 20% of the contract price, and the inclusion of the foreign bidder in a list of companies which are prohibited from bidding on public tender contracts.

After months of uncertainty, the vague wording and broad scope of the obligation contained in the original text of Article 24 has now been clarified. Indeed, Presidential Decree No 11-98 of March 1 2011 amends and completes Articles 24 and 27 of the new Code to relax the mandatory rule to invest in a partnership (partenariat) with a local company.

The revised Article 24 provides that the investment commitment and the nature of the investment are determined by decision of the authority of the "national institution of State sovereignty, the autonomous national institution, the concerned minister and the institutions and agencies under their control or the Participation Council of the State", as the case may be. Thus, it is expected that the terms of the invitation to tender, as well as the preamble of the signed contract, will clarify whether an investment commitment is required and the nature of said commitment.

Moreover, companies which have previously carried out or committed themselves to an investment in Algeria do not need to commit to a new investment.

In regard to sanctions, the new Article 24 requires that a "formal notice" be sent to the foreign bidder to remedy the failure to invest within a certain period of time. The bidder who fails to comply with the investment commitment will have the chance to comply, failing which the above-mentioned sanctions will apply.

The Presidential Decree also amends Article 27 of the new Code to exclude certain negotiated public tenders which pertain to the "national institutions of State sovereignty" from the commitment to invest.

Further, Article 27 provides that contracts awarded pursuant to the "simple direct negotiation procedure" (gré-à-gré simple) are not bound by the obligation to invest. The simple direct negotiation procedure may be used only in the circumstances listed in Article 43 of the new Code, including when there is a monopoly situation, in case of extreme emergency to a good, property or investment, in case of an urgent supply required to protect the functioning of the economy or the essential needs of the population, or when a preferential project of national importance is involved.

However, contracts awarded pursuant to the direct negotiation procedure "after consultation", with the exception of those which pertain to the "national institutions of State sovereignty", are subject to Article 24 of the present Decree. Such contracts would, for instance, include defence or national security programs.

Based on the revised text of Article 24, it thus appears that a number of contracts will not be subject to the investment commitment or that the investment will be tailored to the specific contract. For example, a pure supply contract may not contain the same investment commitment as an EPC contract. It remains to be seen, however, how the new rules will be applied in practice.

For instance, the form that the "partnership" with a local Algerian company must take remains subject to speculation.

Indeed, the wording of the introductory paragraphs of Article 24 of the CPT leaves room for interpretation: Arguably, the partnership must not itself be structured as a 51/49% joint venture, but the Algerian partner must necessarily be an Algerian incorporated entity owned 51% by Algerian nationals who are also Algerian residents.

If the former interpretation is adopted, the partnership could take a variety of forms, including, in particular, the subcontracting of local content and the training of local subcontractors by the foreign bidder/contractor. This would, in effect, not change much from current tender bids requirements.

However, if the majority requirement applies to the partnership itself, the partnership would have to take the form of a financial/equity investment in a joint venture majority-owned by Algerian nationals resident in Algeria.

Ultimately, however, the contract specifications to be issued pursuant to the new Code should provide guidance as to the practical implementation of the new Code. Accordingly, the coming months should tell us whether the investment commitment was largely designed for political consumption or whether the joint venture requirement that currently applies to oil and gas projects or large manufacturing projects will effectively apply to a number of smaller projects (for instance, pure supply or design contracts).

Other recent developments

  • A Note from the National Bank of Algeria dated March 24 2011 relaxes existing importation rules contained in the Note No 16/DGC of February 16 2009 of the National Bank of Algeria by abolishing the obligation for importers to deliver :
    • a phytosanitary certificate for any food-processing product;
    • a quality certificate; and
    • a certificate of origin.
    Nevertheless, importers remains bound by the obligation listed in Article 12 of the Law No 09-03, of February 25 2009 related to consumer protection and fraud which requires that imported products be subject to analyses, tests or trials before their admission on the national territory. Importers are also required to deliver a certificate of conformity provided by the manufacturer, retailer or any accredited agency or laboratory.
  • Article 28 of the Finance Law for 2010 amends Article 48 of Law 2000-06 and provides a statutory exemption for any income tax, tax on professional activities, and VAT due on "major means and defence work".

    However, the expressions "major means" (moyens majeurs) and "defence work" (ouvrage de defense), leave room for interpretation. Major means could mean any type of significant equipment contract. Defence work could refer to any type of activity involving a military and/or defence project.

    The challenge will be to convince the Algerian customer that the exemption should apply to a particular contract, including in regard to VAT payable to subcontractors hired by a foreign bidder/contractor in Algeria.

    Indeed, nothing is said expressly in the Finance Law for 2010 in regard to the exemption trickling down from the supplier to any of its downstream suppliers or service contractors in Algeria.

    Articles 28 and 34 of the Finance Law for 2011 extend the scope of the VAT exemption applicable to hydrocarbons activities to activities of construction of refineries and operations related to research and/or exploitation, pipeline transportation of oil, gas liquefaction and separation of liquefied petroleum gas. Moreover, shipyard contracts and related activities will benefit under this Law from a reduced 7% VAT.
  • Meanwhile, a draft Supplemental Finance Law was approved by the Algerian Council of Ministers on May 2 2011 to address a recent wave of strikes and social unrest. It increases the budgeted expenditures by approximately 25%. The project mainly contains measures designed to safeguard purchasing power and to enhance professional development and job creation. The draft Law does not appear to amend the rules of foreign investment. It cannot be excluded, however, that the draft would be amended before its adoption this summer.

In conclusion, Algeria is eager to welcome new foreign investors to boost its economy and it appears to show every sign that it will do what it takes to attract them, including, as mentioned in an earlier IFLR article (Algeria: bring back foreign investors, September 1 2010), a further relaxation of the mandatory partnership requirements.

About the author

Michael L Coleman, partner

Michael L Coleman was born and raised in Belgium. He is a graduate of the University of Toronto (BA hons), the School of Law of the University of Brussels (JD magna cum laude) and Tulane Law School (JD; order of the Coif and Editor Tulane Law Review). Michael Coleman joined Baker & McKenzie as an associate in 1973 and was elected partner in 1980. He is now resident in the firm's Chicago office.

 

Since 1973, one of Coleman's areas of concentration has consisted of advising US corporations doing business in and with Algeria, Morocco and Tunisia, and other developing nations in French-speaking Africa, with an emphasis on local corporate, antitrust/competition, labour and tax issues.He has travelled extensively to Algeria counseling US and European-based clients in regard to large infrastructure projects.

 

Coleman authored during the 80s and 90s many articles on the legal and tax treatment of expatriates assigned to Algeria for turnkey projects and on the negotiation of industrial joint-venture agreements in Algeria. More recently, he co-authored with Celine van Zeebroeck, an associate of Baker & McKenzie, two articles on the Algerian Code of Public Tenders of 2002 and the repeal of the statutory ban on the retention of intermediaries, two articles on the new Algerian Hydrocarbons Law of 2005 as amended in 2006, an article on the ins and outs of Algerian project finance in 2007, the effect of the 2009 Supplementary Finance Law on foreign companies (2009) and the Algerianisation measures introduced by the 2010 Supplementary Finance Law, and the new Code on Public Tenders (2010).

 

Coleman is fluent in French and English and has a working knowledge of Dutch.


About the author

Céline van Zeebroeck, special legal consultant

Céline van Zeebroeck, a Belgian licensed attorney, advises US corporations doing business in and with European jurisdictions on local corporate, distribution, labour and tax issues and EC competition matters. She also assists US and foreign corporations doing business in and with Algeria, Morocco and Tunisia, and other developing nations in French-speaking Africa, with an emphasis on local corporate, antitrust/competition, public procurement, labour and tax issues.

Van Zeebroeck has co-authored with Michael Coleman several articles on Algeria concerning the Algerian Code of Public Tenders of 2002, the repeal of the statutory ban on the retention of intermediaries, the tax aspects of the 2005 Hydrocarbons Law as amended in 2006, the ins and outs of Algerian project finance (2007), the effect of the 2009 Supplementary Finance Law on foreign companies (2009) and the Algerianisation measures introduced by the 2010 Supplementary Finance Law and the new Code on Public Tenders (2010).

Her native language is French. In addition, she is fluent in English, Dutch and Spanish. She is a special legal consultant at Baker & McKenzie in Washington, DC. She studied law at the Facultés Universitaires Notre-Dame de la Paix of Namur (Belgium), the Universidad Complutense of Madrid (Spain) and the Catholic University of Leuven (Belgium), where she received her JD. She also obtained a LLM from The University of Chicago.

Before joining the Chicago office of Baker & McKenzie, van Zeebroeck completed her attorney training in Belgium. She is admitted to the Brussels Bar.