Last updated: January 30, 2013 4:59 pm

Algeria held back by slow speed of reform

Renault auto dealership is seen in Algiers©Reuters

Sales drive: a Renault dealership in Algiers. The French company opens its first factory in Algeria next year

With a population of 37m, its energy wealth and growing demand for modern infrastructure and consumer products, Algeria on paper looks like a spectacular venue for foreign investment and a great economic player in the southern Mediterranean.

But in reality Algeria is one of the toughest places to do business, largely because a tangled postcolonial history has enthroned a secretive leadership atop a Byzantine bureaucracy resistant to change.

Geographically it lies on top of a vast reserve of hydrocarbons that is both a blessing and a curse.

Algeria is mostly an oil and gas exporting economy, and there’s an inverse relationship between oil prices on the one hand and reforms on the other,” says Raif Mokretar-Karroubi, a professor of international finance and banking consultant in Algiers. “Each time the government is rich enough to pay for its mistakes, it slows down reforms.”

Algeria’s foreign investment prospects have been put under a spotlight recently following an attack by Islamist militants on a premier Algerian gas production facility in mid-January, leading to a hostage stand-off that resulted in dozens of deaths, including those of expatriate workers. The attack and far more deadly official rescue attempt at the site, operated by BP, Statoil and state-owned Sonatrach, highlighted not only Algeria’s security weaknesses but its leadership’s lack of transparency and accountability.

After welcoming foreign investors for a brief period early last decade, Algerian authorities flush with growing cash jolted potential foreign investors when they forced Egyptian tycoon Naguib Sawiris to give up his stake in Djezzy, one of two national mobile carriers. Mr Sawiris went public with his complaints, describing Algeria’s leaders as just as corrupt as Muammer Gaddafi and last November initiated a $5bn lawsuit against the government.

Algeria has always been a rough place for both foreign and local investors to do business. The Heritage Foundation’s 2013 index on business freedom ranked the country 145th worldwide, just below communist Laos and above Ethiopia, and 14th out of 15 in the Middle East and north Africa.

“Lingering political uncertainty and a negative attitude toward foreign investment hamper fuller integration into the world economy, and policies to promote or sustain reform measures have been neglected or even reversed,” the report says.

Still, the lure of billions in oil revenues sloshing around have occasionally trumped fears about Algeria’s leadership. Renault has agreed to open a car plant in Algeria in 2014. Starwood Hotels last year opened a hotel and one of the country’s largest convention centres in the number two city of Oran.

“I think it’s a good place for foreign business because the demand is quite high and the local production is very low, especially for consumers,” says Kheiredine Maatalah, professor of economics in Algiers. “Maybe there are some struggles in the political scene. But I think the regime has no choice but to reform because of what happened in Tunisia and Libya. They have to open the economy, because it’s the safest way for them to stay in power.”

The country’s leaders insist they have made a decision to open the economy to foreign investors, but it’s happening at a very slow pace. Take the banking system, a key component for doing business whether as a foreign or local investor. To this day, six publicly owned banks control 90 per cent of the banking sector, while about 20 private banks control little more than 10 per cent. Regulations remain antiquated. Mr Mokretar-Karroubi said he has been waiting five years to obtain a licence for a foreign bank eager to do business in Algeria.

“When you talk to authorities they don’t say ‘no’ they just keep having you wait,” he says.

The government requires foreign companies to find a local partner to take a 51 per cent stake in any enterprise, but there are few local businesses with so much capital that they could afford to take part in any large ventures. Foreign investors end up having to partner with an Algerian sovereign investment fund, effectively going into business with the government.

To speed up reforms, a group of 30 businessmen, scholars and civil society leaders launched an initiative in 2011 called, Our Algeria, Built on New Ideas, known by its French acronym NABNI. They listed 100 quick, easy reforms that could improve Algeria, including establishing a system to stabilise foreign exchange rates to facilitate international investors’ repatriation of profits.

Last month they published a series of white papers urging reform of Algerian institutions, including the economy, governance, education, healthcare and the environment. They urged an easing of investment rules, structural reform of the banking sector, and vitalisation of the local equities market and, above all, a diversification of an economy dependent on hydrocarbons for 98 per cent of its exports.

In meetings with government officials they likened Algeria to the Titanic, which was the subject of a popular documentary aired recently on local television. “The captain had been warned that his route was affected with icebergs, but he said this boat was made for icebergs,” says Mr Mokretar-Karroubi.

“A lot of people say that nothing can happen to us because we have $200bn in foreign reserves and good macroeconomics. But we are completely oil-dependent. If you want to escape danger we need to begin to shift the path now, because it takes more than a few years to change.”

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