VOL. XLV
No 18
06
Privatization Moving Ahead As Algeria Signs Free Trade Agreement With EU
The privatization of Algeria’s state-owned industries has recently appeared to be moving ahead more quickly, largely in preparation for the competition that will eventually result from the country’s signature on 22 April of a free trade agreement (FTA) with the European Union. Thus, after coming in for considerable criticism over the last year for the slow pace of its privatization campaign, the Algerian Government now appears to be more serious about pressing ahead with the sale of certain assets. This bodes well for Algeria, which needs to open up its state-controlled industries in order to reduce the country’s dependence on the hydrocarbon sector, which accounts for a staggering 97% of foreign exchange income.
On 19 February the government announced that it planned to privatize 100 state-owned companies, either partially or totally. However, Algerian Interface reported that more recently Privatization Minister Nouredine Boukrouh has drafted a plan which advocates the privatization within the next one-and-a-half years of almost 700 publicly-owned companies and suggests that all EPEs (the acronym used to identify commercially oriented companies) should be eligible for privatization.
A strategy and timetable for the process will be submitted to the Council of Ministers, and the recently created state equity management entities (SGPs) – which replaced the public holding companies that acted as trustees of state-owned businesses for the last seven years – are intended to “assist the Privatization Ministry in its mission to privatize and open capital,” Mr Boukrouh said, according to Algerian Interface. He noted that any business failing to become a viable concern after restructuring would be disbanded, although other solutions, such as a sale to employees, would be considered. President Abdelaziz Bouteflika took a step towards improving the climate for privatization when he signed an executive order on 30 December introducing a new package of incentives for foreign investors and participants in joint ventures, granting them tax exemptions and additional guarantees. The order cuts customs duties and value added tax on capital goods for new projects and gives tax relief on profits for 10 years. The government has also set up a National Investment Council to advise on attracting foreign investment, as well as a National Agency for Investment
Specific Privatization Projects
The government has recently put some companies on the block, and on 10 April in an advertisement in the Financial Times Algeria’s Ministry of Transport invited bids for the concession for the Houari Boumediene International Airport in Algiers. In the advertisement the government said that it was focused on fostering investments and divesting itself of state-owned enterprises, in the hope that this would yield a 7% annual economic growth rate in the next five years. “The government wishes to make the International Airport of Algiers a shining example of a public-private partnership that will position the airport as a leader in the Mediterranean basin,” the advertisement said. It noted that despite the political unrest in Algeria over the last 10 years, the airport handled 4.3mn passengers in 2001, representing a 40.8% increase in domestic use and a 17.6% increase in international use. It claimed the 11 September attacks on the US had little impact, with traffic climbing 59% in the last quarter of 2001. “Traffic is expected to grow significantly in the coming years in light of the positive effects of economic and political reforms favoring private sector development, tourism and increased safety in the country,” the government said. The advertisement noted that in order to meet traffic growth expectations, the government had decided to finish the new terminal, which was 97% complete when construction stopped many years ago. The plan for the terminal, which will be able to handle up to 8mn passengers, also calls for building of aircraft and car parking facilities, and hydrant systems. Bids are due on 18 September. MEES understands the government is also currently studying a part-privatization of Air Algerie and road haulier SNTR.
In the same Financial Times, the Participation and Reforms Ministry placed an advertisement seeking bids for all of the shares of the breweries, mineral water and carbonated beverage producers of Groupe Industriel de Boissons d’Algerie. Bids for the companies were due on 5 May. The Algerian Government is also seeking to sell 49% of the state-owned shipping firm SNTM, which is the maximum permitted for its shipping business. SNTM owns a fleet of 26 ships, transported 2.7mn tons of merchandise last year and controls 25% of the country’s shipping business. The state is also understood to be looking to privatize three of its nine cement factories and part of its chemical business. The tender document for the cement privatization, which is being run by the Ministry of Privatization with HSBC as the advisor, is expected to be released early summer. An advisor has not yet been selected for the chemical sector privatization, although sources suggest that it could be a consortium of domestic and international banks. MEES understands that 10 of the chemical EPEs are regarded as financially sound. On the pharmaceutical side, SAIDAL has set up venture with foreign firms, but its limited success suggests a further privatization study is needed, while in retail pharmaceuticals, 200 of 1,000 pharmacies have been sold to private owners and the government intends to sell the rest. Mr Boukrouh is also proposing the privatization of EPEs in the agrifood business as quickly as possible, given that they are in urgent need of upgrading and are suffering from an increase in competition from imports. Also, the mining sector is suffering from under-use of plant capacity and needs to develop international partnerships in order to secure investment funds. MEES understands that the government is especially keen to privatize enterprises that are placing heavy burdens on public funds, including companies in the hotel, textile, paper, timber, heavy industry, ceramic, construction and transport sectors.
So far the government has sold 70% of its largest steel mill, Sider, to the Netherlands’ Ispat Group – in November 2001 – and 60% of detergent firm Enad to German company Henkel. Ispat said late last year that it would invest $175mn in its Algerian steel projects, including Sider, which it is managing under the name of Ispat Annaba. The company aims to increase steel output to 1.5mn tons by 2005 from the current level of 700,000 tons. It also wants to double production at the Ouenza and Boukhadra iron ore mines, in which it has bought majority stakes.
Banks Targeted For Privatization
Meanwhile, the government has talked about privatizing Credit Populaire d’Algerie (one of the country’s most profitable banks) and Compagnie Nationale d’Assurances et Reassurances and selling a 20% stake in Banque Nationale d’Algerie (MEES, 12 February 2001), but so far there has been no action. MEES understands that the government is still discussing a partial sale of certain banking assets, although details have yet to emerge. “Some of the banking companies have seen exposure to bad loans and are probably not in a position to privatize,” said one banking source, noting that they will need to go through restructuring before they become attractive to the international investment community. A few months ago, the Ministry of Finance decided to search for a foreign partner for some of its public banks to help with restructuring before sales, said one banker, but privatization is “a question of years away rather than months.” The government has no plans to privatize giant state-owned oil company Sonatrach, although it is being restructured according to the terms of Algeria’s draft hydrocarbon law, which is scheduled to be approved later this year.
On the whole, privatization is moving along, notes one local banker, pointing out that, excluding the hydrocarbon industry, the public sector accounts for about 60% of economic activity, compared with 90% a decade ago. “The privatization laws are liberal and encourage investment in any field, including industrial, agricultural and financial,” notes Houcine Hannachi, chief executive of Arab Bank’s Algerian operations. “Foreign investors can own 100% of a company or mix their holdings with Algerian ownership.” He suggests that there is much foreign interest in privatization, especially from Arab and European countries, adding that Arab Bank, which has been in Algeria for one year, intends to take advantage of the increased business that will be a by-product of privatization and is planning to open a network of 10-15 branches in the medium term. “Now that privatization is set to take place, Algeria needs investors and they are coming gradually,” he said, pointing to improvements in the political and economic landscape.
BNP Paribas, which advised the Algerian Government on the sale of its first GSM license to Egypt’s Orascom Telecom for $737mn last year, found it easy to work with the government and the sale was completed in a very quick six months, noted Keba Keinde, in charge of Africa and the Middle East at BNP Paribas Corporate Finance. The bidding for the GSM license attracted “significant players, which has an extremely important impact in the perception of risk,” he said, noting that in addition to the license sale, the government set up an independent telecom regulatory agency to ensure fair competition in the sector. Mr Keinde expects the government will also look to sell off part of its local telecom operator early next year. BNP Paribas has operated a representative office in Algeria since 1991 and set up a branch which became active at the beginning of this year.
World Bank ‘Satisfied With Progress’
Positive sentiments appear to be shared internationally, and on 28 March World Bank vice-president and chief economist Nicholas Stern said, during a visit to Algeria, that the bank was “very satisfied with progress in the matter of reforms in Algeria and that, although the process is difficult and long, the results are excellent.” Algeria’s progress has been sufficient to prompt commitments of further investment from the international community, and the Algeria-United States Council also said on 10 April that it would pursue a program of commerce and investment. In addition to hydrocarbons, the agreement covers technical assistance, telecommunications, electronics and banking and financial cooperation. In the short term, it was decided to accelerate administrative procedures for US operators, and the US delegation is committing to support Algeria’s membership of the WTO. The US is also looking at converting Algerian debts into investments. Altogether, foreign investment in Algeria’s non-hydrocarbon sector will reach $2bn this year, according to Mr Bouteflika. For purposes of comparison, Sonatrach’s $22bn investment program for 2001-05, yields $4.4bn per year on average.
Following its signing of the Association Agreement with the EU (MEES, 29 April), Algeria will also receive €140mn to help finance different projects related to economic reform, although some funds will go to transport, education and the environment. The Association Agreement, which will gradually reduce import duties for certain European products and in some cases eventually eliminate them in 12 years’ time, is expected to go into effect by the end of this year after it is ratified by parliaments of the 15-member EU and Algeria’s National People’s Assembly.
The EU agreement will lead to a substantial reduction in tariffs, which should increase the competitiveness of the Algerian economy, said JP Morgan in its emerging markets report. JP Morgan forecasts that as a result of this move, the Algerian government will seek a sovereign rating from the major credit rating agencies sometime this year, and will possibly engage in liability management in order to simplify its debt structure and set benchmarks in the international market for corporate borrowing.
Many Obstacles Remain
Despite the progress made, there are still many obstacles for Algeria to overcome in its privatization campaign. UGTA, the main labor union, has expressed some opposition to aspects of Mr Boukrouh’s program, and there are fears that unions may show their resistance through industrial action, especially ahead of the legislative elections set for 30 May. However, bankers say that the elections are unlikely to derail the privatization process, even though Prime Minister Ali Benflis has decided not to stand. “We’ve managed to put most of the difficult conditions behind us, such as terrorism, and I don’t think that the elections will make much difference to the process,” said Mr Hannachi.
Nonetheless, Algeria remains vulnerable to political strife and clashes between insurgents and government forces, which have killed more than 100,000 people since 1992, may continue to discourage investors. And while analysts like JP Morgan are expecting Algeria to request a sovereign rating in the near future, its lack of such a measure of risk is currently harming the country, said one expert. Any rating, even if it was not as high as the government wanted, would be helpful since it would allow investors to assess the country risk, he noted.
Algeria is also saddled with a cumbersome bureaucracy, and while the government appears to be attempting to minimize red tape for investors, this will continue to be an impediment. According to one banker, the country needs to “change its legal framework to make it possible for international groups to implement themselves.”
Algeria appears to have little choice but to press on with privatization if it is to reduce its dependence on oil and cut unemployment (the hydrocarbon sector accounts for 30% of the country’s GDP but provides only 2% of employment (MEES, 4 March). A study by the National Statistics Office in September and October 2001 revealed that 27.3% of Algerians are unemployed, with the under-30s worst affected, accounting for over 70% of Algeria’s jobless. A heavy reliance on one commodity also puts Algeria at the mercy of world oil prices, and a preliminary annual report issued by the National Economic and Social Council of Algeria said that the Algerian economy shrank by 2% in 2001 due to the slump in oil prices towards the end of the year. The value of Algeria’s oil and gas exports fell by 12.3% to $18.5bn last year from $21.1bn in 2000, according to the Ministry of Energy and Mines, mostly on the back of the price fall and also due to a slight slip in volume. Moreover hydrocarbon receipts were $4.15bn in the first quarter of this year, down by $1bn from the previous year, according to Algeria’s customs statistics office.