VII. INVESTMENT CLIMATE STATEMENT Openness to Foreign Investment As part of its effort to diversify and modernize the Algerian economy, the Government of Algeria (GOA) is placing increasing emphasis on promoting foreign investment. The 1990 Law on Money and Credit first established the principle of foreign investment in Algeria. Foreign investors were allowed to invest either by themselves or with a private or public Algerian partner. The GOA promulgated in October 1993 a new Investment Code which, for the first time, does not distinguish between investments made by foreigners and Algerians. Conscious that Algerian investment promotion efforts had lagged behind those of Tunisia, Morocco, Turkey and others, the Algerian Government studied the investment regimes of these countries, consulted the private sector, and then developed a composite regime that equals or exceeds many of the incentives offered by neighboring countries. The code grants new investors: - a three-year exemption from the value added tax on goods and services acquired locally or imported; - an exemption on property taxes; - a two to five year exemption from corporate income taxes; - the right to pay just 3% in customs duties for 39 different products (for which duties are between 40-60%); and - the right to pay a ceiling of 7% on social security payments for Algerian employees (the normal rate is 23%). - Finally, the incentives are even more attractive for those companies who establish export oriented investments. A sliding scale has been established whereby those firms exporting 100% of their production receive a 100% exemption on all taxes, and pay only the 7% employer contribution to social security. Those exporting 50% of their production, receive a 50% exemption on all taxes and pay the same 7% social security contribution. The Government also has declared its intention to establish a new investment promotion agency to register all investment applications, accord the advantages listed by the Code, and streamline the investment process. GOA officials point out that all investments are pre-approved; the GOA's only role is to determine what advantages a particular investment should receive under the law. The agency responsible for this vetting will be known as the Agence de Promotion et de Soutien de L'Investissement (APSI). It is expected to be established before the end of 1994. Until APSI is established, the Ministry of Small and Medium Sized Industry (known by its French acronym PME) is handling all investment matters. As part of its investment promotion efforts, the Government issued a decree in October 1993 which reduced the income tax paid by foreign technical and supervisory personnel. Whereas most foreign workers previously paid taxes of up to 70 percent on their salaries, personnel employed by foreign companies working in most industrial sectors whose monthly salaries are in excess of 80,000 dinars (approximately $2,200) will now pay a flat rate of 20 percent. Investment Registration Procedure: To register a proposed investment and apply for the advantages listed in the Code, investors must file a "Declaration D'Investissement" and a "Demande D'Avantages" with the PME Ministry. The U.S. Embassy can provide prospective investors with a list of Algerian lawyers who can assist in this task. By law, these two documents must be processed by the GOA within 60 days of their submission. In practice, it normally takes about one month. In determining what level of advantages to accord a given investment, the PME Ministry considers the following five criteria: - whether a given investor is foreign or has a foreign partner; - the extent of self-financing (a firm that itself is financing more than 30% of the total value of the proposed investment receives the maximum advantages); - the dependence on foreign inputs (investments that use more than 50% local inputs or import substitution receive the maximum advantage); - the extent of technology transfer; and employment creation. Results Thus Far: PME Ministry officials report that in the period November 1993 to May 1994, they received 360 proposed investments, representing 33 billion dinar (about $915 million). 30 of these were foreign investments which represented 6.6 billion dinars or 20 percent of the total. Two were American - Coca Cola and DHL. Most of the rest were French, Italian or Spanish investments. Hydrocarbon Investments: Investments in the hydrocarbon sector are governed by the 1986 Law Governing Activities of Exploration, Exploitation, and Pipeline Transportation of Hydrocarbons, and subsequent amendments. The 1986 law allowed foreign companies to enter into joint-venture partnerships with the state hydrocarbons company Sonatrach, and remain in a minority position. The 1986 Law was amended in December 1991 to allow foreign companies to take up to a 49 percent share in production of existing oil fields. It also allows foreign participation in natural gas exploration, and provides extra tax incentives to stimulate hydrocarbon exploration. As a result of these incentives, eight American companies have signed exploration and production contracts with Sonatrach valued at approximately $350 million. Privatization Privatization remains a sensitive issue given Algeria's long experience with a socialist economy but Algerian attitudes and policies are beginning to change. The 1994 Budget Law for the first time provided the legislative authority to open the capital of public sector enterprises to private domestic and foreign investors. However, GOA Ministers have also indicated publicly that privatization will not be undertaken before 1995. At that time, likely sectoral candidates for privatization include food distribution, inter-urban transport, tourism, and housing public enterprises. Conversion and Transfer Policies For investments made in hard currency, the new Investment Code authorizes the investor to repatriate, within 60 days of a request for capital repatriation, all capital, revenues, as well as the net proceeds of the transfer, even if the latter are higher than the original amount invested. Foreign Exchange Access: The Algerian dinar remains a non-convertible currency. One of the goals of the GOA's economic reform program is to reduce administrative controls over access to hard currency. The GOA abolished the infamous "Ad Hoc Committee" which was set up in August 1992 to approve all imports over $100,000 in value. The GOA also announced that importers would henceforth have free access to foreign exchange through the five state commercial banks (there are no wholly private banks established yet in Algeria). Thus far, no specific information has been released about what guidelines the banks will operate under in making foreign exchange available to their clients. Expropriation and Compensation The Embassy is not aware of any recent expropriation cases involving U.S. or any other foreign firm. Dispute Settlement Algeria is a signatory to the Convention of the Paris-based International Center for Settlement of Investment Disputes. Algeria also ratified its accession to the New York Convention in 1989. Finally, the GOA expects shortly to adhere to the Multilateral Investment Guarantee Agency (MIGA). The Algerian Code of Civil Procedure also allows both private and public sector companies in Algeria to seek international arbitration. Algeria also allows local contracts to contain international arbitration clauses. Although foreign investors have full recourse to international arbitration under Algerian law, the Embassy is not aware of any recent case in which a U.S. or other foreign company has had to seek such arbitration. Algerians tend to be tough negotiators but also have a good record of adhering to agreements once they are signed. Performance Requirements and Incentives As part of Algeria's efforts to develop an attractive investment promotion regime, foreign investors in Algeria are not subject to any performance requirements or incentives. Right to Private Ownership Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of business activity. Protection of Property Rights Patents: Patents are protected by the law of December 7, 1993 and administered by the Institut Algerien de Normalisation et de Propriete Industrielle (INAPI). The December 7 law reaffirms Algeria's ratification in 1975 of the Paris Convention and its subsequent revisions. Patents are granted for 20 years from the date the patent request is filed and are available for all areas of technology. For further information, please contact Mr. Mohamed Younsi, Directeur de la Protection Industrielle, 42 Rue Larbi Ben Mhidi, Algiers (tel: 213 2 73 55 81). Trademark Protection: Trademark protection is afforded by the Laws of March 19, 1966 and of July 16, 1976. In 1986, authority for granting and enforcement of trademark protection was transferred from INAPI to the Centre National du Registre du Commerce (CNRC). INAPI sources indicate that a new law is under consideration which would transfer trademark authority back to INAPI. For further information, please contact Ms. Farida Bouzid, Directeur des Marques, CNRC, R.N. 24 - BP 18 Bordj El Kiffan (Tel: 70 23 03). Copyright Protection: Algeria ratified in 1973 the 1952 Convention on copyrights. The Government also passed on April 3, 1973 a law to provide copyright protection for books, plays, musical compositions, films, paintings, sculpture and photographs. The law also confers on the author the right to control the commercial exploitation or marketing of the above products. A new law is now being drafted to update the 1973 law to include protection for (among other things) videos and radio programs. Copyright protection is managed by the Office National du Droit d'Auteur (ONDA). For further information, please contact Mr. Amar Lakhal, Directeur de la Repartition et de la Documentation, 6 Blvd. du 11 D cembre, 1960 (Tel: 92 13 08). Regulatory System: Laws and Procedures The GOA is in the process of putting in place the framework to transform the Algerian economy from a centrally-planned economy in which the public sector generates 60% of GDP to one based on free market principles. The GOA signed a one-year Stand-By agreement with the International Monetary Fund in May 1994 in which the GOA undertook to put in place a wide spectrum of policies designed to restore medium term equilibrium to its domestic budget and its balance of payments. Among the principal goals of the GOA's economic reform program will be efforts to reduce Government controls over the economy, apply market principles to the management of public sector enterprises, and encourage the development of a dynamic private sector. Efficient Capital Markets and Portfolio Investment The Algerian banking system consists of the Central Bank (the Bank of Algeria), five state banks, one development bank, one national savings bank, and one private bank that is owned jointly by one of the state banks and the Saudi Al Baraka Group. Public enterprises long enjoyed privileged access to credit from Algeria's state banks. As a result, the banking system in Algeria is severely handicapped by the prevalence of non-performing public sector enterprise debt. The GOA is developing plans to reform both the nation's public sector enterprises and the banking system. In the case of the latter, the goal will be to encourage greater competition, private sector participation, and the development of a secondary money market and a stock exchange. Political Violence Shootings and other politically-motivated violence have occurred almost daily since early 1992. Beginning in September 1993, a series of incidents occurred against foreigners including kidnappings and murders. Armed Islamic groups exercise effective control over some parts of the country, particularly in northern Algeria. The GOA has mounted a vigorous anti-terrorist campaign and maintains a late-night curfew in the central region around Algiers. The GOA also has demonstrated its desire to work closely with U.S. companies to develop appropriate security measures. The U.S. Department of State has warned U.S. citizens to avoid travel to Algeria. It has further recommended that those Americans in Algeria whose circumstances do not afford them effective protection, depart Algeria. All U.S. companies considering investing in Algeria are strongly advised first to contact the economic and security sections of the American Embassy in Algiers for a full briefing on appropriate security precautions for their personnel and their investments. Bilateral Investment Treaties Algeria has bilateral investment treaties with France, Italy, and Belgium. Treaties with Turkey, Indonesia, and Romania have been signed but not ratified by at least one of the parties. It is also negotiating treaties with Canada, Russia, Portugal, and India. Most of these investment treaties contain double taxation provisions. The U.S. has begun discussions with Algeria on a double taxation treaty. OPIC Programs Algeria signed in 1990 an accord with the U.S. allowing the Overseas Private Investment Corporation (OPIC) to operate and offer its services to U.S. investors in Algeria. For U.S. firms contemplating new investments in Algeria, OPIC provides insurance for U.S. equity investments and loans against the risks of political violence, expropriation, and currency inconvertibility. OPIC also operates special insurance programs to encourage petroleum exploration, development and production in developing countries. Finally, OPIC also insures U.S. contractors and exporters against: 1) wrongful calling of bid, performance, or advance payment guaranties; 2) loss of physical assets and bank accounts due to confiscation or political violence; or 3) losses due to unresolved contractual disputes with foreign buyers. Investors are required to register projects with OPIC before the investment has been made or irrevocably committed. Registration is free of charge and treated as privileged business information. To register, please submit a Request for Registration for Political Risk Investment Insurance (OPIC form 50), available by calling the OPIC Facts Line (202-336-8700). OPIC also provides up to $200 million in medium to long term financing for investment projects involving significant equity or management participation by U.S. businesses through loan guarantees and/or direct loans. OPIC will participate in up to 50% of the total project cost for a new venture, while a somewhat higher participation may be considered in the case of an expansion of a successful existing business. Further information on OPIC financing programs may be obtained by calling the OPIC Info Line (202-336-8799). The Preliminary Application for Financing (form 115) may be obtained by calling the OPIC Facts Line (202-336-8700). For further information on OPIC programs in Algeria, please contact James Williams, OPIC Insurance Officer at 202-336-8575. Labor Algeria's work force only numbers 6.4 million people out of a total population of 27 million because of the predominance of youth in the age structure of the population. 24% of the population is unemployed, according to the latest Government estimates. Wages average only 8,228 dinars ($230) per month reflecting the low average productivity of most Algerian workers. Technical and basic education have lagged in recent years. Economic austerity also has forced the Government to reduce considerably the number of students it sponsors to receive university or advanced degrees overseas. Despite these factors, U.S. companies in Algeria have been able to hire qualified Algerian workers and there are no restrictions on the number of expatriate supervisory personnel. (For more information, see section II of the Country Commercial Guide.) Free Trade Zones The GOA has stated its intention to establish one or more free trade zones in Algeria but has yet to announce where these will be located. It is likely that one will be established on the international fairgrounds of Algiers, perhaps in the next year. As indicated earlier, foreign investments in any free trade zone will be exempt from all taxes and customs duties. Foreign Direct Investment Statistics The Government does not publish summary statistics on total foreign direct investment in Algeria. However, a recent Central Bank study analyzed the kinds of foreign investments that had been approved by the Council on Money Credit (which was responsible for approving all new foreign investments until the new Investment Code transferred this authority to the Industry for Small and Medium Sized Industry). From July 1, 1990 to October 13, 1993, a total of 184 new investments in Algeria were approved involving 14.3 billion dinars and $2.6 billion in foreign exchange. These investments were concentrated in the sectors of hydrocarbons, agriculture, construction, steel, and petrochemicals. French companies accounted for 38 of the investments, mostly in the hydrocarbon sector. Italian companies accounted for 21 investments, mostly in agriculture and fisheries.