Algeria to end 51/49 rule: Doors open to foreign investment?
Abdelmadjid Tebboune’s government has announced the end of the 51/49 rule governing foreign investment. However, a review of the finance law for 2020 raises a number of questions.
Seeking a recovery plan, Algeria’s new government recently went public with its decision to do away with a symbol of its economy.
“One of the measures of the economic recovery plan is the removal of the 51/49 majority ownership rule,” reads the report presenting the draft supplementary finance law for 2020 to MPs, under review at the Algerian Parliament since Tuesday, 26 May.
This famous rule caps foreign ownership of a company incorporated under Algerian law at 49%, versus 51% for a local investor, thereby requiring the foreign investor to form a joint venture with an Algerian company.
The news should have had the effect of a revolution – an economic one this time – in Algeria’s business world. However, the provision has yet to create a lot of buzz. Experts remain in a state of uncertainty. The thing is, this is not the first time that the rule, established by the 2009 finance law to preserve value in Algeria, has been announced as being at its end.
“A very encouraging sign for the Algerian economy”
“It’s certain that Algeria is opening up to foreign investors and it’s a very encouraging sign for the Algerian economy, especially as the list of strategic sectors is rather limited. It’s worth noting that there are two business categories which remain subject to the rule going forward: those relating to strategic sectors and, a less expected area, resale activities,” said Samy Laghouati, Partner and Head of Algeria at the law firm Gide.
However, looking back a little over 10 years since the adoption of the majority ownership rule, a period during which Algeria has given off “the image of a closed country”, according to observers, the situation seems to be in the process of changing, and with good reason – in addition to the removal of the 51/49 majority ownership rule, which contains some exceptions, two other provisions favourable to investment have been added to the new law.
Accordingly, it repeals the state’s right of pre-emption “over all sales of shares or shares in the capital of the company carried out by or for foreign entities” and re-introduces the right to use foreign financing.
Regarding this last point, Algeria’s open approach is clearly stated, as the repeal of the obligation for foreign investors to use local financing is considered “a necessary prerequisite to opening up the country to serious foreign investors with their own capital”, as highlighted by the explanatory statement of the text of the draft supplementary finance law for MPs.
The statement also reads: “the repeal of the 51/49 rule is meaningless if this provision contrary to the national interest is maintained.”
A comeback for foreign direct investment?
Within this framework, if the supplementary finance law is passed in its current form, foreign direct investment (FDI) could make a comeback in the country.
“The law is aimed at investors attracted by the size of our market of nearly 43 million residents, our geographic position – a gateway to Africa reachable by a less than 24-hour boat ride from Marseille – and the quality of our road infrastructure, in particular,” said Mehdi Bendimerad, CEO of SPS (Système Panneaux Sandwichs, a manufacturer specialising in the engineering, production and building of prefabricated facilities) and vice-president of the Algerian Business Coalition (Forum des chefs d’entreprises – FCE), the country’s employers’ organisation.
The executive openly admits that the battle is not over yet, especially given the current widespread crisis induced by the COVID-19 pandemic, which has put the majority of the world’s economies on lockdown and torpedoed the oil-dependent country’s revenues, with prices at all-time lows.
However, with a view to stimulating a recovery and acknowledging the extent of the country’s delay, Bendimerad said that “it’s up to us to be attractive and aggressive.”
“The draft law concedes in its assessment of the 51/49 rule that the number of investment projects went from more than 90 prior to 2009 to about 10 within a year of its enactment. That shows that the rule, which the FCE disapproved of mainly because it was improperly used, wasn’t working,” he added.
Set to be adopted by 29 May, the draft supplementary finance law defines, more or less distinctly, several sectors which will remain guarded by the Algerian state and closed to foreign takeover. These include Algeria’s “strategic sectors”, as stipulated in Article 51 of the draft law.
Carefully assessed strategic sectors
Accordingly, the following sectors are not concerned by the repeal of the 51/49 rule: “national mining operations, as well as underground or surface resources falling within the scope of the extractive industry […]”, “the upstream energy sector and other activities governed by the law on hydrocarbons and the operation of networks for the distribution and transportation of energy […]”, “the defence industry and related activities”, “the transportation infrastructure sector such as railways, ports and airports”, and “the pharmaceutical industry”, excluding the manufacturing of innovative, high value-added products.
The list has left some of the people we interviewed circumspect.
“It seems logical that everything related to national assets, like mining, oil or other Algerian underground assets, remains state controlled,” Omar Berkouk, an Algerian economist and finance expert, said.
“These sectors are still part of the public sector, so to complete a deal, it can’t be done without getting Sonatrach or another special-purpose entity involved. They are also already governed by their own code under which foreign investment is limited to minority ownership,” he added, wondering which sectors will open up and what approach will draw them in to an “entrepreneurial fabric that is very behind in comparison with its North African neighbours, such as in the automotive sector, for instance.”
Just as cautious, Laghouati immediately asks the questions that are likely to quickly arise: “While things are pretty clear for future investments, what will the situation be once these provisions enter into force for existing foreign-controlled companies that have a mix of resale activities and production operations, which are no longer governed by the 51/49 rule? How will they be affected by these new measures? Within the stated strategic sectors, will all business activities be subject to the rule? What will the competent decision-making authority be? What is the timeframe?”
The draft supplementary finance law for 2020 indicates that “the conditions for implementing this measure are specified, where appropriate, by regulations.”
Nevertheless, for another individual familiar with the Algerian legislative system, “many laws have been passed in Algeria without ever being implemented due to a lack of appropriate tools and implementing decrees.”
Market opportunities including energy and road infrastructure
However, the vague parts of the draft law give way to grey areas which seem to benefit foreign investment. This is the case for the energy production sector, which is not mentioned as a strategic sector. Independent power producers (IPPs) are not subject to the 51/49 majority ownership rule.
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According to Aymeric Voisin, an energy and infrastructure lawyer at the firm Linklaters, this exception “could represent a very significant development potential, particularly for renewable, and especially solar, projects, the development of which are part of the government’s ambitions, as it recently reaffirmed its 4 GW plan to expand solar capacity tenfold by 2025.”
“Algeria has always been one of a number of countries identified as having major solar potential. The legal framework for renewable IPP projects adopted in 2017, coupled with the lifting of foreign financing restrictions, could attract many developers,” added Voisin.
He became an authority on Algeria through his past work experience in the country and brings up Morocco as an example as well as the Scaling Solar programme backed by the World Bank (IFC) in sub-Saharan Africa.
There are also signs that the road infrastructure sector is opening up. In the current version of the law, railways, ports and airports continue to be subject to the 51/49 rule.
More broadly speaking, the opening up of other sectors will allow for larger stakes to be acquired in companies, for instance through foreign partnerships with a minority stake held by Algerian shareholders, including, potentially, after privatisations, said Voisin.
The pharmaceutical industry could also benefit from the law. Even though the sector is categorised as “strategic”, just as the natural resources sector, it seems to have learned from the 51/49 rule’s ineffectiveness. Innovation and health care technologies (medtech) are expected to benefit from its repeal.
“Biotechnology investment is difficult to pull off without a foreign partner,” a pharmaceutical industry player told us. “In this context, the 51/49 rule acts like a barrier and multinationals – not wanting to risk divulging their trade secrets – do not venture into such partnerships.”
In other words, Algeria would do better to not implement the rule.
When all is said and done, is the imminent end of the 51/49 rule actually good news for investors, or is it misleading? We will know very soon since the supplementary finance law is set to be definitively adopted, with or without amendments, on 1 June at the latest. On that date, several measures related to boosting household purchasing power will take effect.