Algeria; current growth pause is a good time for U.S. forms to plan future business

ALGERIA

Although Algeria is presently facing a period of austerity caused by the fall in oil and gas prices, its financial base is solid and enjoys the confidence of the world banking community. Imports are expected to drop about 20 percent this year, from last year's $10 billion import figure. However, the anticipated $8 billion import market is still significant, and one of the most promising in Africa.

Algeria has been forced to tighten its belt, scaling back on industrial projects and curtailing some imports, but it will need to maintain its substantial industrial infrastructure. Opportunities will arise for foreign firms to sell operations and maintenance services, as well as equipment, in many important sectors. The Alegerian government expects oil prices to improve within two years, and for delayed projects to be put back on track. Therefore, it is not too early for U.S. suppliers to begin a dialogue with Algerian agencies with a view to obtaining future business.

Dealing with Algeria requires flexibility and responsiveness, and a persistent sales effort over a sustained period. Algeria has never been considered an easy place to do business, even in the best of times when oil prices were high and Algeria was on a spending spree in its efforts to industrialize. Its socialist leanings, a weighty bureaucracy, an innate distrust of business motives, and the inflexibility of business by committee have caused some U.S. business officials to shy away from the market. Added to the challenge are the necessity of dealing in the French language, the general prohibition on the use of agents or distributors, and the geographic distances involved.

Economic Developments

The hydrocarbons industry is the mainstay of Algeria's economy, accounting last year for about a quarter of GDP, virtually all exports, and over half of tax revenues. Algeria was able to weather the recession of the early 1980s better than many other hydrocarbon producers, due to the diversification of its hydrocarbon export mix and the development of a relatively large industrial sector, but the present oil crisis will be felt more severely.

A "complementary" finance law was passed in June 1986 to revise downward government expenditures envisaged in the 1986 finance law (budget). While the complementary law does not contain specific growth targets, it does reduce overall government spending for the year by about 19 percent, to about $22.2 billion at the current exchange rate. The Algerian government expects that revenues from hydrocarbons will drop by 40 percent, and overall government revenues will drop by about 36 percent, to $19.3 billion. If these projections hold, the government will run a budget deficit in 1986 of around $3 billion, or about 5 percent of projected GDP for the year.

Even before the Algerian government had determined the projected extent of income losses for 1986, it acted to suspend import allocations and took a series of measures to stem the outflow of hard currency. These included suspension of the C.O.D. postal package system (whereby Algerians could order spare parts through the mail and pay for them in dinars which the postal service converted into hard currency). They also included a cut in tourist allowances for Algerians, and in allowances for the pilgrimage to Mecca, as well as enforcement of a requirement that all adult visitors to Algeria change 1,000 dinars of hard currency and that non-residents show proof of currency exchange when they pay their hotel bills in dinars.

Recently, the algerian government has made efforts to introduce greater flexibility into economic management. Laws regarding joint ventures with foreign partners and foreign investment in hydrocarbon exploration are being reexamined. The private sector is being encouraged with fiscal and other incentives to invest in certain activities where the public sector has proved especially inefficient, such as services, housing and light industry, and in disadvantaged geographic areas. On the other hand, some economic controls have been tightened in order to preserve or earn hard currency, and the government is increasingly seeking countertrade arrangements and concessionary financing.

Paying for Imports

A trade practice which has been occurring with increasing regularity is demand for payment on deferred terms, although repeated rumors that the Algerian government has put into law a requirement that all imports be financed is inaccurate. Algerian enterprises resist issuing letters of credit, but will often do so if pressed. Firms should not count on being able to get ready extensions of the L/Cs, and should be prepared to deliver the goods as promised or face considerable delays in payment. Many firms sell to Algerian entities on the basis of cash against documents; this procedure works best if there is a liaison officer in Algeria or nearby in Europe to assist with the paperwork, which frequently gets lost in Algeria's banking system. Unlike European firms, few American firms sell on open account.

Algerian state purchasing organizations are commonly requesting suppliers for delayed payment of up to 120 days, with the actual period of deferment depending on negotiations between the two parties. A common practice reported by American business is sight draft, payable 90 days after receipt of goods. Since on average it takes import monopolies two to three months to clear goods from customs, this means the importing Algerian agency makes payment on receipt.

The Algerian government is also increasingly seeking supplier credits on its trade deals. In its official bilateral discussions with other countries, it has sought multi-year credit lines and concessionary financing in return for an Algerian commitment to purchase that country's goods. It has also sought financing for the 15 percent traditionally paid in cash in commercial transactions.

Algerian interest in countertrade is growing. Countertrade requirements are becoming more systematic, and the value of transactions in which countertrade is requested is becoming lower. The Algerian government hopes to use countertrade to diversify its exports, maintain necessary imports of goods and technology, dispose of surplus oil and gas, limit the outflow of foreign currency, and offset falling income from energy exports. Opinions differ as to whether Algeria will introduce specific countertrade regulations or whether its involvement will remain unofficial in the face of International Monetary Fund and OPEC disapproval. Most observers do agree that countertrade in Algeria is on the increase.

One feature of the recent demands for counter-purchase is that they are being introduced at a late stage of negotiations, often after prices and financing terms have already been agreed on. Counterpurchase has been demanded on contracts for items such as small bakery ovens, cheese, and timber, and the types of goods which Algeria wishes to include in countertrade arrangements is being expanded. Each public enterprise can produce a long list of such diverse items as wine, mercury, shoes, phosphates, and bathroom fixtures. The value of Algeria's dinar currency is considered by many to be greatly overvalued, and business officials have complained that the prices attached to these commodities are unrealistically high.

ONAFEX (Office National des Foires et Exportations) is responsible for promoting foreign trade and Algeria's export activities (including countertrade). The commercial section of the U.S. Embassy in Algiers plans to prepare a guide to countertrade in Algeria, which will include ONAFEX'S services to American business officials confronting countertrade. The report should be available late next month.

The Anti-Intermediaries Law

Only manufacturers (and in some cases, export management companies), may bid on Algerian government tenders. The use of agents, distributors and other intermediaries is prohibited under the Algerian "anti-intermediary" law. Enforcement of the law has become eroded since its enactment in 1978. Approved representatives who perform value-added services are now acceptable, as are export management firms and incountry liaison offices.

Attitude Toward Foreign Investment

In the past, Algeria was regarded as a difficult, if not hostile, terrain in which to sow investment and reap profits. Before the drop in oil prices early this year, that image had been changing, albeit slowly. There is a growing recognition by the government of the need to attract foreign capital. A new law on hydrocarbons which relaxes many of the restrictive provisions on foreign investment in the Algerian hydrocarbon sector is an example. While the law's implementing regulations are still in the process of development, Algerian officials are considering reducing taxation, providing heavy bonus payments and higher royalties to foreign firms, and sharing the cost for unproductive exploration.

The National Assembly also passed a law in July to amend the 1982 joint venture law, whose restrictive provisions had discouraged foreign companies from investing in Algeria. Unfortunately, the new law offers no fundamental change of interest to foreigners, except for certain additional guarantees of repairiation of invested capital. There is no major exoneration of taxes or of normal foreign exchange requirements. The new law, in contrast to the old, fails to mention anything about intellectual property rights and removes the previous 12-month deadline for indemnity for nationalization. On the other hand, there are certain additional fiscal advantages, and the previous requirement that joint ventures must be in accord with development plan objectives no longer exists. It is rumored that the Algerian government may try for more liberalizations in the next session or two of the National Assembly, where resistance to free-enterprise oriented changes in the law appears to remain strong. Joint ventures may still be formed only with public Algerian entities.

The 1986 finance law gave a nuber of tax write-offs for investment by the private sector in certain high-priority areas, such as housing and non-hydrocarbon export industries, along with additional incentives for investing in underdeveloped geographic areas. These incentives may also be available to "approved" foreign investors.

Promising Sectors

Agricultural Equipment. The current Five-Year Plan (1985-89) sets out ambitious targets in the areas of agriculture and irrigation, two sectors that were neglected in the 1970s in favor of heavy industrial development. In agriculture, the Plan's major goal is to increase the amount of irrigated land and crop production in order to achieve self-sufficiency by the year 2000. Presently, Algeria must import about half of its food requirements. Major programs of agricultural development include the intensification of cereals production, the development of large and small animal husbandry, increased vegetable crop production, and the development of arboriculture to prevent soil erosion and utilize more profitably available resources such as olive trees, date palms, and forests. Algeria currently produces only 50-60 percent of its standard agricultural equipment, including tractors, harvesters, plows, rakes, and certain planting drills.

Water Resources. In 1980, the Algerian government started implementing a long-term plan to develop water resources to remedy severe water shortages, particularly in the largest cities, and to increase the amount of irrigated land for agriculture. Algeria is upgrading water distribution systems and installing large-scale irrigation systems, and has a major dam construction program underway. It is also considering with increasing interest waste water treatment and water desalination. Presently only about 30 percent of the arable land in northern Algeria is adequately irrigated, and a number of large- and small-scale projects are either under development or anticipated. The Algerian government is committed to large-scale installations of center-pivot irrigation systems in the High Plateaux and the desert. Two pilot irrigation projects are already under way with U.S. equipment. Algeria olans to irrigate up to 200,000 hectares in the Sahara, and to build 18 dam projects.

Food Processing and Packaging Equipment. Under the current Plan, about $1.7 billion has been allocated to the food processing industry, of which some $900 million has been earnarked for equipment imports and new projects. Included in the new projects will be four mineral water bottling plants with an annual capacity of 2 million hectoliters, three fish canning plants, and construction of two dairies, financed by a currency swap arranged by First National Bank of Chicago.

In the longer term, the algerian food processing industry should expand significantly to meet increasing processed food needs of a population rising at an annual average of 3.2 percent. Moreover, dietary patterns will move toward increased consumption of processed foods, particularly in urban areas.

Presently, most of the algerian market for food processing and packaging equipment is supplied by European manufacturers. However, with sales of $21.2 million in 1985, U.S. exports to Algeria were up 24 percent over the previous year and represented 8.7 percent of total imports in this category. Although Algeria has plans to acquire a food processing equipment capability, imports will still account for most of the equipment to be installed for some years to come.

Oil and Gas Field Equipment. Increased exploration activity is necessary to reverse the decline in Algerian oil and gas revenues. Currently, the total market for oilfield supplies is estimated at over $100 million. Annual imports of wellhead equipment, including blowout preventers, "Christmas trees," and ball valves, are estimated at $20-25 million. Tools and drill bit purchases are around $3-5 million per year.

The bulk of equipment purchases is made in Europe, with an increasing share coming from Japan. Many European and Japanese suppliers are branches or licensees of U.S. manufacturers. Most of the major American firms are active in this market.

Transportation Equipment. By the year 2000, annual demand for vehicles is expected to average 300,000 passenger cars, 200,000 light trucks, 35,000 industrial vehicles, and 5,400 buses. Planning is underway for a number of projects which are being developed by a mechanical engineering enterprise, ENEM (Entreprise Nationale d'Engineering Mecanique), which is also studying projects for the manufacture of a variety of automotive components.

Algeria made great strides in expanding its total rail network during the 1980s, and anticipated an investment program of $3.5 billion during the current Plan period. However, due to budget cuts, it has placed a temporary hold on the major projects, and over the next two to three years, only renovation and modernization work on existing lines will be carried out. Equipment purchases will include the replacement of some 45 mainline diesel electric locomotives and 120 shunters.

Computer Systems. Until 1985, algerian imports of EDP equipment averaged about $70 million per year. Nearly a third of total imports constitute direct purchases by certain end-users and do not appear in official import statistics. The remainder are purchases made by the state import monopoly ENSI (Entreprise Nationale des Systemes Informatiques), which imported $56 million of equipment in 1985. Its purchases are projected to drop to about $30 million in 1986, and increase by a yearly average of 10-20 percent until 1989. In the mainframe and minicomputer market segments where most of the installed equipment will need to be replaced, and in peripherals, such as data communications equipment, and graphics/CAD-CAM systems.

In the course of the current Plan, two projects for the local manufacture of microcomputers and peripherals will be launched: a microcomputer assembly plant with an annual production of 20,000 units run by ENIE (Enterprise Nationale des Industries Electroniques), and a plant to produce 2,000 ENSI-developed microcomputers to satisfy about 30-40 percent of local requirements, along with Arabic/Latin printers, VDUs, and data communications equipment.

ENSI distributes 95 percent of imported equipment to public sector end-users and 5 percent to the private sector. The heaviest users in the institutional sector include financial and insurance services, post and telecommunications, social security services, local authorities, and the elecricity and gas utilities. Some industrial sectors, such as hydrocarbons, steel, and industrial vehicles, have acquired an advanced EDP capability. Private end-users are limited to a handful of businesses, doctors, and lawyers. The consumer market is virtually non-existent and is not likely to develop in any significant way for a number of years. It will then be supplied with locally-manufactured microcomputers. U.S. manufacturers of computer systems have a leading share of the Algerian market.

Education and Training Aids. The algerian government has traditionally devoted vast resources to education and training. During the current Plan, particular attention will be given to the development of technical education and scientific research, vocational training at the company level, industrial training for undergraduates, and the widespread use of data processing. France has a notable presence in this area, and virtually no U.S. firms have been active, but opportunities could arise, particularly in the design and implementation of technical training programs for industry.

Financial Services. With some $10 billion in import trade in 1985 and a foreign debt estimated at about $18 billion, Algeria is a major client for foreign banks. European, U.S., and, recently, Japanese banks, have been involved in arranging loans to Algerian banks to finance investment projects as well as imports of capital equipment.

In recent years, Algerian banks have become more sophisticated, and have followed an increasingly commercially-oriented trend. Most of the financial services have been computerized, and a major effort is under way to attract untapped funds held by individuals as well as private businesses. This year, for the first time, agricultural bonds have been floated, and Algerian nationals have the opportunity to open hard currency bank accounts. There are also indications that the market is opening up for financial services, such as electronic banking, currency swaps, and leasing. Approaches have been made to BEA (Banque Exterieure d'Algerie), the Algerian foreign bank, to adopt an electronic payment system and to adhere to SWIFT.

COPYRIGHT 1986 U.S. Government Printing Office
COPYRIGHT 2004 Gale Group