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Algeria risk: Legal & regulatory risk(RiskWire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC56C56Legal & regulatory riskD68D68Note: E=most risky; 100=most risky.SUMMARY Algeria signed an Association Accord with the EU in December 2001 and has made clear its commitment to join the World Trade Organisation (though necessary legislation - on intellectual property rights for example - has not been passed). Membership would help bring transparency to the legal process. However, for the moment the proper enforcement of business regulations is patchy and is subject to political pressure, as well as bureaucratic inertia. Algeria's colonial history was bloody and there is perhaps a latent suspicion of foreign motives, but this is not particularly acute. This same history gave rise to a strongly statist/protectionist system of government and this mentality still informs much of the bureaucracy. Consequently, the judiciary is neither nimble nor brave (decisions are often referred upwards). Nor is it particularly well versed in more contemporary issues such as intellectual property rights. Corporate accounting practices also leave much to be desired. SCENARIOS Deregulation of some sectors is blocked by vested interests (High Risk) The government is moving cautiously towards deregulation of certain economic sectors; however, a majority of the military elite are wary of the entry of foreign firms into areas that might threaten their own interests. This means that the government will be forced to "debate" proposed regulatory reforms with various vested interests, leading to their delay and dilution. Even where reforms are passed, their consistent application might be undermined by the vagaries of a legal system that is not well versed in contemporary commercial issues and that remains susceptible to political pressure. Foreign companies should therefore seek to settle disputes through discussion and compromise. However, if local legal arbitration is unavoidable then companies should retain the services of a reputable legal firm with good political connections. Again, the "safest" sectors in this regard are power, water, housing and telecommunications. Implementation of trade agreements is blocked by vested interests (Moderate Risk) Algeria signed an Association Accord with the European Union in December 2001 and has expressed its intention to join the World Trade Organisation (WTO). The Association Accord commits the government to reduce tariff barriers to trade with the EU. However, this process is to be phased in only gradually (up to ten years for some reforms) and--due to political resistance from some quarters--the required reforms may be subject to further delay or uneven application. Foreign firms that feel that EU requirements are not being properly applied should seek to settle disputes amicably, cultivating senior government contacts so that they may in turn put pressure on vested interests. Local legal redress should be sought only with politically connected law firms; canvass opinion among other foreign companies before choosing a firm. Where the local legal system is ineffective, firms should seek redress from the EU or petition their own governments. BACKGROUND (Background material is updated twice yearly. Last update: May 5th, 2005) Enforceability of Contracts Some commercial contracts are subject to commercial law and others to civil law. However, implementation is usually subject to Algerias basic law, the civil law upheld by all Algerian courts. In terms of legal and regulatory risks, analysts say that Algerias judiciary, with its legal structures modelled on French civil law, is inefficient but balanced and generally fair. Business contracts are honoured and, under measures introduced in 1992, disputes under international energy contracts can be taken to international arbitration. The country is also a party to the New York Convention. Algerias laws give protection to foreign investors and to private property, and the latest government reforms are expected to strengthen that protection. A spokesman for PriceWaterhouseCoopers France says that the law upholds the rights of foreign investors and that there is no favouritism in law between a foreign or a local investor. However, it should be noted that a majority of the politically dominant military elite are still hesitant about opening up the economy to foreign investment, especially where this might impinge on their own economic interests. This struggle is at the heart of the conflict between the military and the president, Abdelaziz Bouteflika, and his allies. Consequently, while there has been progress in improving the legal environment for foreign investors, the enforcement of various laws has been and will remain patchy. Although the government has lifted its long-standing ban on foreign companies appointing agents or partners in Algeria, business analysts caution that foreign firms looking for a local partner should take time to choose the right representative--few Algerian companies have experience in this field. Companies exporting to Algeria must obtain form EX-1 to present to customs officials, available either in the country of origin or from the nearest Algerian consulate. Foreign investors in the hydrocarbons sector have been granted an exemption from customs duties to import all materials and equipment needed for their projects. UK legal firm Denton Wilde Sapte says that, in the hydrocarbons sector at least, the terms and conditions of import and export taxes and the fiscal regime applied are all spelled out in the initial project documentation, and the relevant contracts usually contain a stabilisation clause. Independence of the Judiciary Algerias 1996 investment code makes no distinction between foreign and domestic investment, prompting the US State Department to pronounce that there are no absolute barriers or limitations on foreign investment in Algeria. Other critics point out that although, constitutionally, the judiciary is independent, the government does not always respect this independence--most notably in human rights issues. Corruption remains an issue, though it is one that comes to the fore more in the practical running of businesses. Setting up a business is still dogged by bureaucracy and red tape. Foreign Investment: Discriminatory Practices Good progress was made in 2001 in many areas of the legal environment for foreign investors. In December of that year the government said it had adopted a new package of incentives for investors. Though the details have yet to be made public, a government official said that the new regulations give more flexibility and fiscal and customs incentives to investors and reinforces the guarantees to repatriate invested capital and profits. The package includes measures to cut taxes on customs duties and VAT for capital goods imports invested in new projects, as well as corporate tax relief on profits for up to ten years. The government has also set up a National Investment Council to give advice on the best ways to attract foreign investment and a National Agency for Investment Development to assist new investors directly. The Agency will open offices in foreign countries to be close to potential investors and explain the changes to them, according to the official. One sector where the government is keen to see foreign investment is mining. A new law, which was approved by both houses of parliament in August 2001, allowed foreign operators to tender for large exploration and exploitation blocks in this largely untapped sector. Similarly, a new electricity and gas law, approved later in the year and effective in January 2002, established the framework for major private investment in the domestic power and gas market through the lifting of the state monopoly. The law committed the government to opening up a minimum of 30% of the market to competition within three years. Again, however, the changes should be seen in the context of the broader struggle between the president and the conservative military elite for control of the economy. The conservative elite will resist the application of similar legal reforms to the sectors of the economy in which they have interests. Consequently, enforcement of new laws in certain sectors is likely to be patchy and/or subject to reverses, depending on the sector in question. Indeed, the extension of new legislation to certain sectors is not guaranteed. There have been recent signs, however, that the climate may be changing. The government claimed in early 2005 that Algeria had received over 600 expressions of interest in 300 saleable state-owned enterprises (around a third of which were from foreign investors). Furthermore, officials are understood to have identified 11 companies that could be readied for an initial public offering (IPO) without too much restructuring. The first wave of four good performers---intended as representatives of their sectors---are the port company Skikda, el-Djazair hotels, the cement company Ain el-Kebira, and the Construction Technical Control Office. The exact timetable for any IPO is as yet unclear---the moribund Algiers Stock Exchange would have to be readied first---but the first could conceivably take place before the end of 2005. More fundamentally, it is often forgotten that the legislative framework for privatisation already exists---it has been in place since the mid-1990s---and consequently parliament, which generally displays a hostile attitude towards privatisation, should not be a factor in holding back the process because it will not (legally at least) need to be consulted. But there remain reasons for caution. The expressions of interest in Algerian firms are a long way from firm financial commitments. Furthermore, although the legislative environment for privatisation is in place, investors will still have to deal with the trade unions---a time consuming and potentially costly exercise. Finally, the fact that Mr Bouteflika, already well into his second term, has only a limited window of opportunity to enact reform before lame duck syndrome sets in might give urgency to reform, but could also play neatly into the hands of his opponents. Conservatives, of which there are many hidden away in the folds of the bureaucracy and the still-influential military elite, might calculate that if they can obstruct the reform effort for a couple of years, then the pressure will start to ease as the next presidential election begins to loom. One of the key battles is over hydrocarbons reform. The energy and mines minister, Chakib Khelil, is seeking to increase foreign investment in the hydrocarbons sector by levelling the playing field for foreign operators. Foreign investment in any one firm in the hydrocarbons sector is capped at 49%. The state company, Sonatrach, currently acts as both competing firm and regulator in the oil sector, a major disincentive to foreign investment. However, his proposals remained mired in parliament where various interest groups--often responding to pressure from the conservative military elite--are seeking to dilute the potential impact of the reforms to preserve Sonatrachs privileges and so protect their own rent from the firm. The main intention of the reform bill is to liberalise the hydrocarbons sector, primarily by turning Sonatrach into a purely commercial entity and relieving it of its regulatory role, leaving it to win contracts in competition with foreign firms. Mr Khelil has insisted that Sonatrach would not be privatised--nor even reorganised or restructured. The hydrocarbons reform bill was supposed to be passed before the end of 2001, but vested interests have hampered the bills progress. According to the energy and mining minister, Chakib Khelil, the bill is expected to become law by November 2005. Mr Bouteflika announced in October 2004 that the law, which had been shelved in the face of trade union opposition, should be revived without delay. Leaders of the Union Generale des Travailleurs Algeriens (UGTA--the umbrella trade union) have indicated that they are now prepared to support the passage of the law, having previously denounced it as a backdoor attempt to privatise Sonatrach. Mr Khelil said that the revived draft of the bill includes some amendments, but these have yet to be disclosed. Unfair Competitive Practices Despite universal praise for sound macroeconomic management, Algeria has made very slow progress on this type of structural reform (the IMF has described the pace of reform as excessively slow). In particular, the governments ambitious privatisation plans have yet to take off. The government announced in February 2002 that it would privatise, either fully or partially, 100 state-owned firms during the course of the year. These mostly comprised small companies in areas ranging from hotels to food-processing, although they also included the shipping firm SNTM and three medium-sized cement plants. The government reiterated its intentions in late 2004, announcing that some 1,200 state enterprises, including three banks, would eventually be privatised. Yet by early 2005, progress had been minimal and divestments, when they occurred, were small. In November 2004, for example, the pharmaceutical group Saidal sold a 15% stake to the Algeria-Kuwait Investment Fund. There are still restrictions in insurance, finance and banking. There are no minimum requirements to use local content in production, whether raw materials or local staff, but companies that do use local content benefit from government incentives such as tax holidays. Intellectual Property Rights The country is committed, at least in theory, to protecting intellectual property; in practice, levels of piracy remain high, and anti-piracy measures can be half-hearted. The country is a signatory to the 1952 Convention on Copyright and the International Convention for the Protection of Industrial Property and a member of the Paris Industrial Property Convention. Trademark authorisation and enforcement is carried out by the Centre National du Registre du Commerce, and national law provides copyright protection for books and other artistic works, films, sculpture and photographs. In October 2004 the Office National des Droits dAuteur agreed to collaborate with the Business Software Alliance (BSA) to combat software piracy. According to the BSA, Algerias software piracy rate is 84%. Subsidised Algerian foodstuffs are frequently smuggled into neighbouring countries, and smuggling of electronic goods and textiles--both subject to high tariffs--into Algeria is widespread. However, international bodies have praised laws to protect intellectual property rights, saying that enforcement is strict and efficient. Unless there is a reciprocal agreement, foreign brand owners seeking a patent must appoint an Algerian agent resident in Algeria. Patents are generally granted for 20 years, subject to annually renewable fees. Trademarks may be registered for ten years, but must be in use, or the trademark is deemed to have expired. Renewal applications must be submitted at least six months before the trademark registration expires. Price Controls Algeria subsidises basic foodstuffs such as dairy products and wheat, although it is committed to eliminating all subsidies on foodstuffs, as well as those on energy and public transport. There are price controls on certain commodities, such as tobacco, and on certain state-controlled services, such as the transport of hydrocarbons. In effect, companies are free to set prices except on those products that remain subsidised by the government. In January 2005, a government decision to raise fuel prices prompted widespread riots. Algerias parliament had opposed the proposed price hike in December, but the government increase the price of butane gas and fuel oil to AD200 per litre (from AD170 per litre) regardless. |