It’s ‘wise to be wary’ with foreign investment in Algeria

By Wang Jihong and Chen Dingduo, Zhong Lun Law Firm
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In September 2018, China and Algeria signed a memorandum of understanding on the Belt and Road Initiative (BRI), which focuses on strengthening co-operation in the infrastructure and energy sectors. The overall scale of investment in Algeria by Chinese enterprises is relatively small, and is mainly concentrated in the oil and gas, and mining sectors.

王霁虹, Wang Jihong, Partner, Zhong Lun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

At the end of 2018, China’s aggregate direct investment in Algeria amounted to US$2.06 billion. In 2019, China’s direct investment in every industry in Algeria totalled US$59.17 million. In the trading sector, China is Algeria’s largest source of imports. The main categories of Chinese exports to Algeria involve machinery, electrical equipment and vehicles, while the categories of Chinese imports from Algeria mainly involve mineral fuels and bitumen.

Algeria accords national treatment to foreign investors, but restrictions on foreign investment remain in certain specific areas.

Restrictions on equity holding percentage. When investing in sectors of strategic significance to Algeria’s national economy, the 51/49 rule should be kept in mind. That is to say, in all foreign-invested or equity joint venture projects, the Algerian party is required to account for least 51% of the equity.

Pursuant to the Finance Act of 2020, and the Supplementary Rules to the Finance Act of 2020, the specific scope of application is as follows: (1) extraction of mineral resources, and any surface or subsurface resources generated by surface or subsurface extraction activities; (2) upstream industries in the energy sector, and activities governed by regulations relating to the oil and gas sector; (3) distribution and transmission of electricity through fibre-optic cables; (4) transport of oil and natural gas by pipeline; (5) military-related activities; (6) activities relating to railways, ports and airports; and (7) the pharmaceutical industry.

陈丁铎, Chen Dingduo, Associate, Zhong Lun Law Firm
Chen Dingduo
Associate
Zhong Lun Law Firm

Restrictions on equity transfers. When investing in sectors of strategic significance to the national economy, the rule of “prior government authorisation” should also be kept in mind. That is to say, any foreign investor in the above-mentioned sectors is required to secure the approval of the Algerian government for the transfer to another foreign investor of the equity it holds in an entity established under Algerian law.

In addition to the above-mentioned restrictions, the following risks should be borne in mind when investing in Algeria.

Corruption. Corruption is relatively serious in Algeria, however the Algerian government has stepped up its efforts to combat corruption in recent years, and a number of Chinese enterprises have been caught up in relevant investigations. When investing in Algeria, an enterprise should keep a clear head, refuse to engage in corruption-related activities, and keep its distance from bribery and other such non-compliant acts.

Exchange controls. Foreign exchange controls are in place in Algeria, with the central bank exercising overall jurisdiction. With respect to the repatriation of investors’ dividends and investment returns, local banks (that have intermediary qualifications as approved by the central bank) can remit abroad without the approval of the central bank on the income (e.g., dividends, sales income, liquidation proceeds, etc.) derived from investments in companies in the goods production and service sectors, provided that the following conditions are satisfied: (1) the initial investment was made in the form of a cash contribution in foreign exchange, and satisfies the relevant minimum amount shown in the table below; (2) the above-mentioned foreign exchange was remitted inward from abroad; (3) the share capital of the investee Algerian company has been fully paid in; and (4) if the company is eligible for tax breaks, the reinvestment obligations have been performed.

Total investment

Minimum amount

Total investment ≤ DZD100 million (US$780,000)

30% of total investment

DZD100 million total investment ≤ DZD1 billion

15% of total investment

Total investment DZD1 billion

10% of total investment

With the exception of the above-mentioned sectors, repatriation of relevant investment income can only be carried out after approval by the central bank. In practice, there is a lack of express provisions on the scope of funds that can be remitted outward, and the reviews by the central bank usually require a significant amount of time.

When investing in Algeria, the relatively long period required for the review by the central bank should be fully taken into account, reasonable financial arrangements made, and the filing for the repatriation of the investment income made as soon as possible, so as to reduce the risk of being unable to repatriate, or of a delay in repatriating the relevant income.

Restrictions on foreign workers. When hiring foreign workers in Algeria, applying to the competent authority for a foreign worker quota is required, and such applications present various difficulties. With a view to alleviating the pressure on the local employment situation, the Algerian government restricts the entry of foreign workers, and the trend is toward greater stringency. In the housing construction sector, for example, foreign workers formerly accounted for 25% of the workforce, but that has now dropped to around 12-15%.

Local subcontracting. Pursuant to article 85 of the Public Procurement Act, a foreign enterprise that submits a standalone bid is required to subcontract work accounting for at least 30% of the initial contract value to Algerian enterprises, unless it has valid reasons not to do so. Foreign enterprises wishing to participate in relevant bids in Algeria should keep this in mind.

Investing in Algeria presents both opportunity and risk. At the macro level, the Algerian government has been gradually opening up to foreign investment and endeavouring to create a good business environment for foreign investors, but the business environment remains far from ideal.

At the practical level, Algeria still suffers from high levels of corruption in government agencies, and there exist strict exchange controls and localisation requirements. The list could go on and on, so investors wishing to enter the Algerian market would be wise to be wary.

Wang Jihong is a partner and Chen Dingduo is an associate at Zhong Lun Law Firm

Zhong Lun Law Firm

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wangjihong@zhonglun.com

chendingduo@zhonglun.com

 

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