Algeria’s lessons from ACWA Power

Published February 4th, 2010

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Insight from Christopher Gasson, GWI publisher

Our Maghreb editor, Emilie Filou, who was in Algeria last week, came back with a disturbing description of the economic nationalism which seems to be taking a grip of the country (see GWI’s forthcoming February issue). In recent years, Algeria has been one of the strongest growth markets in the global water industry, with its massive desalination programme and the upgrading of its water and wastewater systems. However, last summer’s Loi de Finance Complémentaire, and amendments to the Code des Marchés, make it very much more difficult for international companies to bid for projects successfully in Algeria.

One can understand where the government is coming from. It has a young population and a high unemployment rate. Popular frustration with the situation seems to be expressing itself in terms of a bitter nationalism, which boiled over into confrontation with Egypt in the play-offs for the football World Cup. Measures which reduce foreign involvement in the economy are politically expedient.

Other countries facing the challenge of translating oil and gas revenues into jobs and higher living standards for the masses have also looked to protectionism as a means of promoting local businesses. Saudi Arabia, for example, followed a similar policy during the 1970s, 80s and 90s. The policy was abandoned in 2000 because it was not working. A small number of trading families did very well living off commissions from foreign companies without doing any real work. Since the law was changed to enable foreigners to own companies in Saudi Arabia, some of the old trading groups have complained about the competition, but others – the truly entrepreneurial ones – have emerged as world beaters.

Take, for example, the story of the Abunayyan Group. Before the reforms, the group made a good living as an agent for foreign water equipment suppliers. After the reforms, Mohammed Abunayyan set up ACWA Power to develop infrastructure projects in the Kingdom. Through its experience of working with foreign developers and competing against them, the company has emerged as one of the most formidable players in the infrastructure development sector. If ACWA Power dominates the Saudi power and water sector today, it is not because the company has enjoyed any favours from the Saudi government. It is because ACWA Power has proved smarter than anything the rest of the world has thrown at it. Now the company is broadening its focus to pursue projects in the rest of the Middle East. It is a far more dynamic and sustainable proposition for providing economic growth and employment opportunities in Saudi Arabia than the alternative engendered through economic protectionism.

If ACWA Power is the story of what you get when you open up the economy, the corruption probe at Sonatrach – Algeria’s national gas production company – is a warning of what can happen if you don’t. CEO Mohamed Meziane and six of his fellow executives have been removed from office while claims that he awarded favourable contracts to companies run by his sons are investigated. When a country takes a decision that expertise and value for money should not count as much as local connections in awarding contracts, it is only a short time before the right connections become the only criteria for awards.

There were just four foreign direct investment projects in Algeria during 2009, compared to 102 during 2008. It is a precipitous fall which can only have reduced the rate at which jobs are created in the Algerian economy. A politician in a less fractious country would see that now is the right time to reverse the restrictions on foreign involvement in the economy. In Algeria, the options are more limited. The only thing we can be grateful for is that Algeria’s experiment with closing its economy to foreigners is unlikely to be repeated by others in the region on the basis of its current record of success.