Algeria: Realities and challenges
Houda Sahri, Jean-Jérôme Khodara and Nahla Djabi of Matouk Bassiouny in association with SH Avocats review the flurry of pro-investment legal developments being ushered in by Algeria’s government.
In February 2019, President Bouteflika's announcement that he would run for a fifth term compelled hundreds of thousands of Algerians to flood the streets of several Algerian cities in opposition to yet another Bouteflika re-election. This so-called Hirak movement led to Bouteflika's resignation and the election of Abdelmajid Tebboune as the new president in December 2019. In addition to the continuing Hirak movement, the new regime also faces oil prices in free fall and a Covid-19 induced global recession.
While discussions are still ongoing and different stakeholders have conflicting visions, there seems to be a consensus that the economic model for Algeria established under Bouteflika, with its restrictions on foreign investment, is in dire need of swift and real change.
With this in mind, the new Algerian authorities have an ambitious structural reform plan to simplify regulations concerning companies, improve governance and transparency, reform the investment legal framework and modernise the financial sector. President Tebboune has announced that Algeria will not turn to external borrowing or increase the money supply as a solution to deal with its financial needs amid the sharp drop in oil prices. In this context, the Algerian political system understood the need to diversify the Algerian economy and become less dependent on the oil and gas industry, which still accounts for 96% of the country's exports.
With this objective in mind, the government has sent clear signals that it intends to boost foreign investment and that it is willing to alleviate some of the significant restrictions to foreign investment, namely the state's pre-emption right on the transfer of shares by or to foreign investors and the so-called 49/51 rule. In this article, we provide a recap of the circumstances which led to the introduction of these restrictions together with an update on the efforts to remove them. Finally, we provide a summary on other recent and live legislative initiatives intended to boost foreign investment in Algeria.
The pre-emption right and 49/51 rule
The state's pre-emption right and the cap on any foreign shareholding in an Algerian company to 49% were initially introduced by the Supplemental Finance Law for 2009 (SFL 2009) on July 22 2009. These new rules were a direct result of Lafarge's 2008 acquisition of Orascom Construction Industries' (OCI) cement assets in Africa and the Middle East (including in Algeria) and led to the introduction of a series of stringent regulations rules in 2009 and 2010 to assert the Algerian government's control over foreign investments.
Since its introduction, the state's pre-emption right has changed several times, reflecting the political and social context in Algeria. Presently, three types of transactions can trigger the state to exercise its pre-emption right. They include the transfer of shares in an Algerian company by and/or to a foreign person or entity; of shares in an offshore company that owns shares in an Algerian company; and of shares in or assets owned by an Algerian company for a consideration deemed by Algerian tax authorities to be undervalued.
From a technical standpoint, several types of transactions that allow a controlling takeover of an Algerian company are omitted from the scope of the state's pre-emption right, for example a capital increase, transfer of business/assets, or contractual arrangements such as management agreements. It is critical to keep in mind the political background when analysing the Algerian state's right of pre-emption. Indeed, the Algerian state has considered exercising its pre-emption right on very few occasions, some of which were politically sensitive or otherwise considered to be strategic for the national economy.
The main purpose of the legislation on pre-emption is to grant the Algerian government a level of oversight on foreign investments in Algerian companies, regardless of whether the investment is structured by a transfer of shares or otherwise. In most cases, the Algerian government has merely threatened to exercise its right of pre-emption as an expression of disapproval, rather than a real intent to purchase. Generally, the Algerian government has resorted to the pre-emption right to veto controversial transactions, as was the case with the Total's recent acquisition of Andarco's assets in the region.
The new Supplemental Finance Law issued on 4 June 2020 (SFL 2020) removed the pre-emption right for all sectors, except for certain "strategic sectors" for which the pre-emption right has been replaced with a prior governmental approval process. Details of its implementation will be released with the upcoming executive regulations.
According to the 2016 Finance Law (FL 2016), "the involvement of foreigners in manufacturing, providing services or importation, is subject to the incorporation of a company whose registered capital shall be at least 51% owned by resident national Algerians". This 49/51 rule was also initially introduced in 2009 by Order 09-01 dated July 22 2009 approving the SFL 2009. Companies incorporated before 2009 with foreign ownership exceeding 49% were exempt from the 49/51 rule, but not allowed to register certain amendments to their commercial register, including any transfer of shares, until they complied with the 49/51 rule.
Once the 49/51 rule was introduced, Algerian foreign investment dropped drastically. The International Monetary Fund viewed the tough new conditions as a deterrent for foreign direct investment. Indeed, statistics show that in the period before the introduction of the rule, during 2007 and 2008, a significant number of investment projects were declared to the national investment authority (ANDI): 93 projects in 2007 and 86 projects in 2008. In the 2009 financial year, when the rule came in, there was a significant decrease in terms of the number of investment projects (four projects) and in terms of the project values and projected jobs.
The 2020 Finance Law (FL 2020), approved in December 2019, slackened the application of the 49/51 rule. The FL 2020 provides that the 49/51 rule will apply only to "production and service activities which are strategic for the national economy". According to the SFL 2020, the list of strategic sectors that will remain subject to the 49/51 rule includes mining, energy, defence, railroad infrastructure, airports, ports, and pharma. The 49/51 Rule has also been maintained for simple distribution activities, including the importation and resale of products in the local market.
A pipeline of pro-investment legislation
In addition to alleviating general restrictions such as the state's pre-emption right and the 49/51 rule, Algeria is also aiming to open the door to investment in several specific industries, including energy, the agri-food and manufacturing industries, tourism, paper, IT services, agriculture (which recorded a growth of 6.9% in 2018) and large retail outlets. There are a series of laws that have supported this policy.
The new energy law no. 19-14 of 2019 was adopted in December 2019, just a few weeks before the presidential elections, and was warmly welcomed by foreign investors. Although the new energy law maintains the 49/51 rule for the energy industry, it introduces significant tax incentives and new standards of contracts to replace the old concession contracts, which were not considered investor friendly. The new energy law also simplifies administrative procedures for investors.
In the most recent addition to e-commerce legislation no. 18-05 of 2018, a national base of e-suppliers was established within the National Center of Trade Register. The new e-commerce law has formalised e-contracts and clarified the obligations of e-suppliers, with the exception of a few products and services prohibited from e-commerce sale due their sensitive nature within Algerian society, including tobacco, alcoholic beverages and pharmaceutical products. Although the most important challenge for the development of an e-commerce market remains the limitation of online payments, the new legal framework for e-commerce as well as the adoption of an e-signature law no. 15-04 0f 2015 have had a positive impact on the investment environment and facilitated cross-border commercial transactions.
There has also been growing interest in the Islamic banking sector. Through various actions, Algerian authorities have expressed an openness to foreign investment to develop banking activities. The adoption of a new law in March 2020 defining Islamic banking transactions clarified the investment process and encouraged foreign players to enter this large and untapped market. In addition, the Central Bank of Algeria has allowed banks to introduce new products and services through a pre-approval process. We imagine this new framework will enable the strengthening of online payments systems and the introduction of other services including the e-wallet.
Leveraging off this momentum, a new Ministry of Micro-Enterprise and Startups was created to promote start-ups as an important lever for reviving the national economy. The prime minister underlined the importance of incubators, being the nucleus of companies, by promising to allow capital investment for start-ups in order to help meet their financing needs in early phases, particularly with feasibility studies and technical assistance, and diversify the financing tools intended for start-ups via crowdfunding platforms. Efforts are being focused on fostering a favourable climate. A specific legal framework for start-ups and micro-enterprises should be in place sometime in summer 2020, as announced by the minister in charge.
Other sectors also in the focus of the Algerian authorities include the agri-food industry. As commodities and food products remain the foremost items on Algeria's list of imports, and in an effort to rationalise imports, several projects to implement industrial facilities are in the pipeline that would not only serve the local market, but also promote exports to other African countries.
Finally, up until recently, foreign investors were prohibited from using international financing for their investment projects in Algeria and were required to use financing from local lenders. In a move to boost investments, the LF 2020 authorises the use of financing from international development finance institutions for projects that are strategic to the national economy. Furthermore, the SFL 2020 encompasses the right for foreign investors and their local partners to use international financing without the requirement for the project to be considered as strategic. As a result, foreign investors would be authorised to fund their projects in Algeria through facilities granted by foreign banks.
Sending the right signals
Faced with domestic political and social pressure for change and a challenging global environment with falling oil prices and the Covid-19 pandemic, the new Algerian government is sending strong signals that it is willing to attract foreign investors to boost the economy. The contemplated alleviation of the 49/51 rule and of the state's pre-emption right, together with several industry specific pro-investment legislations, may very well pave the way for a successful, and long awaited, opening-up of the Algerian economy, creating major business opportunities for investors in one the largest African markets.
Founding and managing partner, Matouk Bassiouny in association with SH Avocats
Tel: +(213) 23 46 10 55
Houda Sahri is the founding and managing partner of SH-Avocats. Prior to founding SH-Avocats, Houda qualified at the Algerian bar working in several renowned Algerian law firms. She then pursued a career as head of the legal team of KPMG Algeria before becoming general counsel for Algeria at LafargeHolcim and MENA regional counsel at the US group GE for Power. Houda advises on a broad range of corporate, commercial and finance matters. She also regularly handles litigation matters and pleads before Algerian courts.
Partner, Matouk Bassiouny
Tel: + (202) 2796 2042 (ext.731)
Jean-Jérôme Khodara is a partner in Matouk Bassiouny's corporate and M&A practice and head of the firm's Algeria practice. Prior to joining Matouk Bassiouny, Jean-Jérôme worked with the French international law firm Gide Loyrette Nouel and LafargeHolcim, where he was in charge of M&A transactions in Africa & the Middle-East, including for Algeria where he was based for over a year. Jean-Jérôme advises on corporate transactions with a focus on complex cross-border deals. His expertise includes the setting-up of joint-ventures as well as managing all phases of M&A transactions, including structuring, negotiation and drafting the transaction documents.
Senior associate, Matouk Bassiouny in association with SH Avocats
Tel: + (213) 23 46 10 55
Prior to joining Matouk Bassiouny, Nahla worked with several law firms in Cairo and with multinationals including LafargeHolcim, Egyptian Steel and ABB, where she was an in-house counsel. Nahla specialises in M&A transactions, as well as general corporate and commercial matters in Algeria and Egypt. Nahla regularly advises private equity firms on complex M&A transactions.