A step forward for Algerian project finance

Author: | Published: 30 Apr 2013
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Michael Coleman and Celine van Zeebroeck of Baker & McKenzie evaluate the success of steps taken in Algeria to restore the confidence of foreign investors

Recent security issues in the southern part of the country have eclipsed efforts by the Algerian government to attract new investors both inside and outside the oil and gas sector.

In the wake of the attack on the BP plant, the Algerian parliament approved amendments to the Algerian hydrocarbons law to appeal to new bidders.

Outside the oil and gas industry, the government continues to push for durable investments by offering, with some success, generous incentives to support the development of pharmaceutical, telecommunication, construction, chemical, transportation, renewable energy and other infrastructure projects. Noticeably, the pharmaceutical and health sector is set to grow at a steady pace, with an increasing number of partnerships between large multinationals and local public and private manufacturers. Other sectors could follow suit thanks to recent legal changes.


"Energy continues to be the main driver of the Algerian economy"


Although a number of foreign investors have been reluctant to enter the Algerian market following the adoption, in 2009 of the 51/49% rule and the mandatory partnership requirement in public procurement contracts, recent changes brought by the Finance Law for 2013 (Law No 12-12 of December 26 2012) and Presidential Decree No 13-03 of January 13 2013 amending the 2010 Code of Public Tenders (CPT) could trigger a renewed interest for one of the largest African economies.

Aside from tax and customs incentives to attract non-hydrocarbon investors and bring jobs to a large unemployed workforce, however, additional reforms are needed to modernise Algeria's labour, commercial and banking laws.

2013 Finance Law

As noted in previous IFLR contributions, foreign investors wishing to set up an Algerian entity for the purpose of producing and distributing finished goods were not only required to partner with Algerian shareholders holding at least 51% of the capital of the newly formed entity but were also obliged to reinvest in Algeria the sum of the tax exemption on profits granted by the Algerian authorities within four years. The 2013 Finance Law gives a boost to foreign investment projects for the local market, as foreign investors are no longer required to reinvest the exempted tax on profits provided that "the incentives granted have been injected in the price of the finished goods and services". This measure may help guarantee the sustainability of recent pharmaceutical partnerships and encourage foreigners to invest in much needed infrastructure, construction, renewable energy, information technology or communication projects.

The 2013 Finance Law also introduces new tax exemptions by amending the investment law. In particular, the National Council for Investment may grant exemptions or reductions, for a period not to exceed five years, of rights, income taxes or indirect taxes, including the VAT applicable on the price of the goods produced by the investment in the framework of nascent industrial activities (see Article 12ter of Ordinance No 01-03 of August 20 2001, as amended).

Moreover, customs clearance procedures have been simplified and the Algerian government has implemented a simplified declaration process. Indeed, the Finance Law includes measures intended to facilitate export procedures via the establishment of a new "drawback" regime that will enable investors, during the exportation of goods, to obtain either full or partial reimbursement for duties and taxes affecting the importation of any production inputs.

New revisions to public tender rules

Recent revisions to the CPT may also restore the confidence of foreign investors. Indeed, a new Presidential Decree No 13-03 dated January 13, 2013, revises Article 24 of the CPT and excludes economic public enterprises (EPE) from the scope of the Code.


"IThe banking system has not yet embraced debit or credit cards"


Article 24 of the 2010 CPT included 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, the foreign bidder had to comply with the partnership commitment in regard to any project without any exception. Then, in 2011, the rule was relaxed to provide for a number of exceptions to the partnership requirement, including certain negotiated public tenders after consultation (gre-a-gre après consultation) which pertain to the "national institutions of State sovereignty" (such as defence or national security projects) and contracts awarded pursuant to the simple direct negotiation procedure (gre-a-gre simple). In the 2013 version of the CPT, article 24 mentions the partnership obligation but only for those projects identified by the Algerian authorities and it no longer expressly requires a majority Algerian participation (although this could be required by the terms and conditions (cahier des charges) of the contract. These are projects of crucial importance to the national economy, mainly in strategic sectors. Moreover, certain negotiated public tenders remain subject to the exemption.

In addition, pursuant to article 2 of the CPT, EPEs such as Air Algerie, Algerie Telecom, Sonatrach, Sonelgaz, ENNA, the pharmaceutical company Saidal, and other enterprises which are majority owned by the Algerian state or public entities, are no longer subject to the CPT. Although EPEs are nonetheless required to develop procurement procedures that are based upon the principles of free access to orders, equal treatment of candidates, and transparency, to be approved by their corporate bodies and subject to the control of the Court of Auditors and General Inspection of Finance, these procedures can be tailored to match their specificity. This important change should allow EPEs to conduct their business more competitively and address their business needs faster.

Hydrocarbon changes

Energy continues to be the main driver of the Algerian economy but it is unclear whether recent changes to the 2005 Hydrocarbon Law will be sufficient to bring back international investors to meet the country's growing internal consumption and exportation needs. The latest amendment, Law No 13-01 of February 20 2013, leaves intact the very high production sharing percentage (minimum 51%) granted to Sonatrach but the new law links taxes on partners of Sonatrach to net profit (subject to the control of the tax administration and customs) instead of sales. The law also offers easier tax terms and other incentives for foreign companies wishing to invest in unconventional resources such as shale gas and shale oil or in small, unexplored, or difficult-to-reach fields.

Labour, commercial and banking regulations

The anticipated reform of the Labor Code has been in the works for several years and is yet to be presented to the Algerian parliament.

The reform will hopefully be accompanied by the much needed simplification of administrative formalities to bring in foreign experts responsible for the transfer of technologies to the Algerian partner. Although efforts have been made to reduce bureaucracy for foreign investors, administrative formalities remain slow and repetitive, requiring several in person visits to the various administrative agencies.

E-commerce and distance sales regulations could be adopted in the near future despite the efforts of the Algerian government policy to curb imports. However, several practical issues must be solved before any type of online sale can be implemented in practice, including the unreliability of the postal service, an outdated banking system (which has not embraced debit or credit cards) and exchange control limitations (which prevent, for instance, individual customers from making online purchases on foreign websites). The adoption and implementation of these reforms could take a significant amount of time.

A step forward, but …

Algeria is looking forward to presenting long-term investors both in the hydrocarbon and the non-hydrocarbon sector with new tax and customs incentives. The reform of the CPT should also assuage foreign bidders responding to Algerian tenders who had been worried that a simple tender could oblige them to incorporate in Algeria with an Algerian majority partner. Yet, it remains to be seen whether Algeria will be able to quickly modernise its economy by implementing much expected legal reforms.

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), the Algerianisation measures introduced by the 2010 Supplementary Finance Law, the new Code on Public Tenders (2010), and an article on the relaxation of the mandatory partnership rules (2011).

 

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), the Algerianisation measures introduced by the 2010 Supplementary Finance Law, the new Code on Public Tenders (2010), and an article on the relaxation of the mandatory partnership rules (2011).

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 and is currently based in Baker & McKenzie's washington DC office.