Late in September, Algerians voted overwhelmingly in favour of a deal to offer an amnesty to all but the worst perpetrators of atrocities committed during the north African country’s decade-long civil war in the 1990s. Despite protestations from human rights campaigners, who say the move simply papers over a wrenching part of the country’s history, the referendum marked another tentative step towards normalisation.
Sustained relative stability has put Algeria back on the investment map, with immediate opportunities in the hydrocarbon sector and shortly a slew of other opportunities on the back of a massive public investment programme. But it is a fragile peace, which is not helped by social tensions that are exacerbated by high unemployment and ongoing sporadic acts of terror by Islamic fundamentalists.
National reconciliation has been a top priority of president Abdelaziz Bouteflika, elected in 1999 in the country’s first presidential elections and again by a wide margin in 2004. Algeria still bears raw scars from the civil war that tore the country apart and caused up to 200,000 deaths. In 1991, the then military-controlled government nullified elections that were heading towards a victory for the fundamentalist Islamic Salvation Front, triggering a civil war that was marked by terror tactics on both sides.
Mr Bouteflika’s other priority has been economic reform. Aided by strong oil and natural gas export revenues and substantial fiscal stimulus, the country is enjoying a significant economic upturn. Real gross domestic product (GDP) growth could reach 6.9% in 2005, following estimated growth of 5.5% in 2004. And all key economic indicators – including inflation, reserves and debt – are healthy.
For his second term, Mr Bouteflika’s main priority has been to transform a centrally-planned economy into a market economy, liberalising trade and harnessing the private sector. Key reform programmes to be pursued include reform of the judiciary; reform of the education system to align it with the needs of the new market and knowledge economy; and redefining the role of the state and modernising the administration. In addition, the government plans to privatise the remaining 1200 state-owned enterprises.
With national coffers swelled by a sustained boom in energy prices, the government is planning to spend $55bn on a public investment programme until 2009. Finance minister Mourad Medelci told fDi the investment would be targeted at infrastructure to support economic growth, including roads, railways, dams and desalination plants, as well as investment in public services such as education and health.
According to Mr Medelci, the capital injection is intended not only to grow the economy, but also to broaden the economic base away from its heavy dependence on the hydrocarbon sector. The aim is to stimulate the domestic private sector but foreign firms will be invited to tender on large-scale projects. As an immediate consequence, Mr Medelci anticipates a strong boost to the construction materials sectors.
Two other key pillars of the government’s reform programme are banking reform and trade liberalisation. With respect to the former, the government plans a gradual privatisation of state-owned banks. Despite a number of privately-owned banks, state-owned banks still control 90% of banking sector assets.
In addition, the central bank is in the process of implementing a modern payments system, due to be in place by 2006, which is an important precursor to banking sector reform.
With respect to trade liberalisation, Algeria and the EU have reached an association agreement after years of negotiations. Under this accord, Algeria will cut tariffs on EU agricultural and industrial products over the next 10 years, and the EU will eliminate duties and quotas on many Algerian agricultural products.
In December 2002, Algeria signed a co-operation pact with the European Free Trade Association (EFTA), providing for expanded and liberalised trade with EFTA members (Iceland, Liechtenstein, Norway and Switzerland). Algeria is also pursuing membership of the World Trade Organization, slated for 2006.
Without doubt, the hydrocarbons sector is the most promising in Algeria. The country is estimated to have 11.8bn barrels of proven oil reserves, the 15th highest in the world. According to the US Department of Energy, with recent oil discoveries and plans for more exploration drilling, proven oil reserve estimates could climb upward in coming years.
Analysts generally consider Algeria to be under-explored, even though the country has produced oil since 1956, and Algeria’s National Council of Energy believes that the country still contains vast hydrocarbon potential. A hint of the potential has been significant new oil and gas discoveries, largely by foreign companies, in the past few years.
Algeria wants to increase its crude oil production capacity significantly over the next few years by attracting more foreign investment. Energy minister Chekib Khelil has stated that his goal is to double the number of companies operating in Algeria, restructure the domestic oil industry, and establish new regulatory bodies independent of the Energy and Mining Ministry. The country’s production goal is 1.5m barrels per day of crude oil by 2005 and 2m barrels per day by 2010, a level it will probably reach at current levels of production growth.
Sonatrach, owned by the Algerian government, dominates the oil sector. However, Algeria has aggressively sought foreign investment in its oil sector and the share of oil production controlled by foreign companies has increased steadily over the past several years; in the third quarter of 2004, foreign companies controlled 44% of its crude oil production.
In March 2005, the Algerian parliament adopted a new law to liberalise the hydrocarbons sector further. The law separates the commercial role of Sonatrach from its previous regulatory and procurement/contracting functions.
Sonatrach is now required to bid on domestic projects alongside foreign firms; it will no longer be an automatic partner in all projects. In tenders that Sonatrach does not win, the company will retain a right to exercise an option of 20%-30% of the equity of the project, allowing it to become a regular stakeholder with the same responsibilities.
Approximately 90% of Algeria’s crude oil exports go to western Europe: Italy is the main recipient, followed by Germany and France. Algeria’s Saharan Blend oil, 45° API with negligible (0.05%) sulphur content, is among the highest quality in the world. Because of this, European countries have relied on Algerian oil to help them meet increasingly stringent EU regulations on sulphur content of petrol and diesel fuel.
In terms of natural gas, Algeria has 160,000bn cubic feet of proven reserves, the eighth largest in the world. Algeria’s recoverable natural gas potential, however, may be as high as 282,000bn cubic feet, according to the US Department of Energy.
Sonatrach dominates natural gas production and wholesale distribution in Algeria, and state-owned Sonelgaz controls retail distribution. Algeria has increasingly allowed greater foreign investment in the sector, though, and foreign gas producers have entered into numerous partnership agreements with Sonatrach.
Algeria is a major natural gas exporter, mostly to Europe and the US, accounting for one-fifth of the EU natural gas imports, second only to Russia.
Algeria has a legislative framework that encourages investment, guaranteeing incentives, free transfers of income, and equal treatment for domestic and foreign investors. Seeking to diversify and modernise the economy, the government has embarked on an aggressive liberalisation programme to attract FDI.
New legislation continues to affect nearly all sectors, including mining, power, banking, telecoms, pharmaceuticals, transportation and tourism.
Although there are still many bureaucratic hurdles to starting a business in Algeria, the investment code clearly lays out the rules for investors.