Algeria Investment Climate Assessment

Pilot Investment Climate Assessment

June 2002 Contents ii

Preface v 2.2 On the interpretation of survey data Acknowledgments vi on corruption, illegal behavior, and Acronyms and Abbreviations viii informal activities 23 Executive Summary xi 3.1 A private sector development strategy for Algeria: short-term action plan for 1 Algeria’s Economy: Overview and “quick wins” 40 Recent Developments 1 Growth record and recent economic Figures developments 2 1.1 Annual change in selected economic The enterprise sector 4 indicators, Algeria, 1974–2000 3 The growth challenge 6 1.2 Terms of trade volatility, selected countries, 1974–2000 3 2 The Investment Climate in Algeria 1.3 Average unit labor costs in public and as Lived by 562 Local Firms 8 private manufacturing enterprises, A closer look at the main constraints to 1998–2000 6 doing business 11 2.1 Most severe obstacles to doing business, Productivity and the investment climate 31 Algeria 9 The view of foreign investors 34 2.2 Most severe obstacles to doing business for old and new firms, Algeria 10 3 Looking Ahead: Short- and Medium- 2.3 Most severe obstacles to doing business Term Strategies for Fostering for private and public firms, Algeria 10 Private Sector Development 37 2.4 Most severe obstacles to doing business Designing a private sector development for small and medium-size enterprises and strategy: a tradeoff between large firms, Algeria 10 comprehensiveness and realism 38 2.5 Sources of working capital finance in Initiating a dynamics of reform and working previous three years by type of firm, on a medium-term agenda 39 Algeria 12 Annex 3.1 A private sector development 2.6 Sources of investment finance in previous strategy for Algeria: medium-term policy strategy 44 three years by type of firm, Algeria 12

Appendixes 2.7 Delay in obtaining last loan approval by type of firm, Algeria 13 1 Investment Climate Survey Methodology and Sample 56 2.8 Share of firms required to provide collateral for last loan by type of firm, Algeria 14 2 Technical Appendix on Data Analysis 61 2.9 Collateral required as a share of 3 Cross-Country Investment Climate Indicators investment loan value by type of and Macroeconomic Performance Indicators 73 firm, Algeria 14 Boxes 2.10 Average time required for banking 2.1 Lack of access to industrial land a operations, Algeria 15 constraint to a firm’s ability to invest 2.11 Firms’ sources of finance, selected and grow 17 countries 15 Contents iii

2.12 Firms looking for land or offices and 2.26 Bribes, kickbacks, underreporting, length of search, Algeria 17 and informality, Algeria 24 2.13 Share of firms that are land tenants 2.27 Firms’ perception of the judiciary, Algeria 26 or owners, Algeria 17 2.28 Reasons cited by firms for recruiting 2.14 Firms’ reasons for choice of location, problems, Algeria 27 Algeria 17 2.29 Average education of textile industry 2.15 Delays in obtaining administrative or workers by occupation, selected countries 27 public services, Algeria 17 2.30 Competitors, suppliers, and clients 2.16 Delays in obtaining administrative or of private and public firms, Algeria 28 public services for small and large firms, 2.31 Distribution of sales by type of firm, Algeria 19 Algeria 29 2.17 Power outages and ownership of 2.32 Decisionmaking horizons of generators by type of firm, Algeria, 2001 19 managers of small and large firms, Algeria 30 2.18 Water supply interruptions and ownership 2.33 Productivity of large firms and small and of wells by type of firm, Algeria, 2001 20 medium-size enterprises, Algeria 31 2.19 Share of firms with own generator 2.34 Productivity of public and private or well, selected countries 20 firms with size controlled for, Algeria 32 2.20 Interruptions in telephone and natural 2.35 Productivity of new and old firms, with gas service by type of firm, Algeria, 2001 21 size controlled for, Algeria 32 2.21 Mobile and mainline telephones, 2.36 Productivity of firms by region, Algeria 33 selected countries, 2001 21 2.37 Median value added per worker in the 2.22 Average and longest waits for imports to garment industry, selected countries 33 clear customs by type of firm, Algeria, 2.38 Median wage paid by firms in different 2001 22 investment climates, Algeria 34 2.23 Average and longest waits for imports to clear customs, selected countries 22 Tables 2.24 Main constraints in dealing with the 1.1 Output, prices, and unemployment, tax administration, Algeria 23 Algeria, 1990–2002 4 2.25 Firms’ use of informal payments and 1.2 Formal enterprises and employees connections to obtain services, Algeria 24 by sector, Algeria, 2001 5 iv

What is an investment climate assessment?

Investment climate assessments systematically analyze the conditions for private investment and enterprise growth in a country, drawing on the experience of local firms to pinpoint the areas where reform is most needed to improve the private sector’s productivity and competitiveness. By providing a practical foundation for policy recommendations and involving local partners throughout the process, the assessments are designed to support policy reforms that can speed the private sector’s growth, leading to faster economic growth and poverty reduction. Produced by the World Bank Group in close partnership with a public or private institution in each country, the investment climate assessments are based on a survey of enterprises to find out what difficulties they encounter in starting and running a business—and, if the business fails, in exiting. The survey captures firms’ experience in a range of areas—financing, governance, regulation, tax policy, labor relations, conflict resolution, infrastructure services, supplies and marketing, technology and training. These are areas where difficulties can add substantially to the costs of doing business. The survey attempts to quantify these costs. Using a standard methodology, the assessment then compares the survey findings with those in similar countries to evaluate how the country’s private sector is faring and how well it can compete. The findings of the survey, combined with relevant information from other sources, provide a practical basis for identifying the most important areas for reform aimed at improving the investment climate. The assessments look in detail at policy, regulatory, and institutional factors that hamper the provision of good- quality infrastructure services and the functioning of product, financial, and other markets, linking the constraints to firms’ costs and productivity. In each country the investment climate assessments draw on the guidance and expertise of local partners in government and the business community. The findings and policy recommendations emerging from the assessments are discussed extensively with the private sector and other stakeholders in the country. This broad dissemination of the findings is aimed at engaging not only policymakers but also business leaders, investors, nongovernmental organizations, and the donor community in shaping the national private sector development strategy, forging consensus on the priorities for reform of the investment climate, and laying the groundwork for concrete responses to the problems identified. Updates of the assessment can help track progress in improving the investment climate. Recent investment climate assessments include those for China, Eritrea, India, Morocco, Mozambique, and Pakistan. This report benchmarks Algeria mainly against China, India, and Morocco, countries for which comparable survey data are available. While the selection of comparators is largely a matter of judgment and data availability, international benchmarking against the achievements and constraints of economies at similar levels of development (such as Morocco) helps in inferring what is feasible—or imperative—in Algeria’s economy or in its policy reform. Preface v

This investment climate assessment is part of a series • A survey of 57 foreign investors from France, Italy, of analytical works on Algeria prepared by the World and Spain. All had recently expressed interest in Bank to lay out the basis for its Country Assistance investing in Algeria but had not yet invested, either Strategy for that country. The assessment is based on because they had delayed their decision or, in a three pieces of work undertaken in parallel between few cases, because they had abandoned their in- January 2002 and March 2003: vestment project. This survey used the standard foreign investors questionnaire developed by the • An investment climate survey of 562 Algerian firms Foreign Investment Advisory Service. The main in nine wilayas (administrative regions). The survey survey findings are summarized in this report and covered formal private and public enterprises with detailed in “Algérie: enquête d’image auprès at least five employees, operating in the main d’investisseurs étrangers potentiels” (World Bank, urban centers and in 10 sectors in industry, con- Middle East and North Africa Region, Finance, struction, and services. The sample excludes agri- Private Sector, and Infrastructure Group; and culture, the trade sector, and the hydrocarbon (oil Foreign Investment Advisory Service, Washington, and gas) sector as well as government agencies, D.C., 2003). universities, and research centers (see appendix 1 for details on the sample and methodology). The report also draws on international compara- • A series of four missions to Algeria to assess the tive studies and indicators as well as some World main institutional issues underpinning the con- Bank reports. In particular, the macroeconomic straints to private sector development. Combining overview in chapter 1 draws from the World Bank’s the survey results with this policy work led to the “Medium-Term Macroeconomic Strategy for Algeria” private sector development strategy summarized (Washington, D.C., 2003) and its April 2003 Algeria in chapter 3 of this report and detailed in the Economic Monitoring report. World Bank’s “Algeria Private Sector Development Strategy Note” (Washington, D.C., 2003). Acknowledgments vi

This investment climate assessment was prepared by same team along with Patrick Tardy (consultant) and Najy Benhassine and Christian Schmidt of the World Mohammed Bekhechi (World Bank, Legal Depart- Bank’s Middle East and North Africa Region, Finance, ment, Environment and International Law Unit) as the Private Sector, and Infrastructure Group. Geneviève main authors. That document includes details on the Boyreau-Debray of the World Bank’s Development institutional background, policy issues, and policy Economics Research Group conducted the productiv- recommendations that are not reproduced here (ex- ity analysis and the international comparisons and cept for the summary policy matrix in annex 3.1). wrote the corresponding sections of the report. The report also draws from “Algérie: diagnostic Research assistance and data analysis were provided sur le climat de l’investissement etranger” (Foreign by Nabila Assaf (Middle East and North Africa Region, Investment Advisory Service, Washington, D.C., 2002) Finance, Private Sector, and Infrastructure Group), and “Algérie: enquête d’image auprès d’investisseurs Antoine Frédéric Bozio (Harvard University and Ecole étrangers potentiels” (World Bank, Middle East and Normale Supérieure, Paris), and Sergio Kurlat North Africa Region, Finance, Private Sector, and (Development Economics Research Group). Albert Infrastructure Group; and Foreign Investment Ad- Zeufack (World Bank, East Asia and Pacific Region, visory Service, Washington, D.C., 2003). The foreign Poverty Reduction and Economic Management investors survey was conducted in France, Italy, and Sector Unit) provided guidance in the initial stages Spain during the spring of 2002 by a team of gradu- of the survey launch. Peer reviewers were Uma ate students from HEC Junior Conseil (a students’ Subramanian (World Bank, Private Sector Advisory consulting arm of Ecole des Hautes Etudes Services, Investment Climate Unit) and Samy Boukeila Commerciales, France). The team was led by Brice (of the Algerian business association Cercle d’Action Garnier and Ngoc Tram Lai and carried out its work et de Réflexion autour de l’Entreprise, or CARE). under the supervision and guidance of Najy Ben- The survey was conducted by the National Center hassine. Enumeration in Spain and Italy was con- for Population and Development Studies (Centre tracted out by HEC Junior Conseil to its counterparts National d’Etudes et d’Analyses pour la Population et at the Bocconi University Business School (Milan) and le Développement—CENEAP) between June 2002 ESADE Business School (Barcelona). and March 2003, in collaboration with and under the The team benefited from the support and guid- supervision of the World Bank. Mohammed-Cherif ance of many government officials in Algeria, includ- Belmihoub (Graduate School of Public Administration ing staff from the Ministry of Small and Medium-Size —ENA, Algeria) contributed to its preparation and Enterprises (the official counterpart); the Ministries of launch. The database was provided by the Algerian Industry, Finance, Participation and Investment Pro- National Office of Statistics. Enumeration was con- motion, Commerce, Labor, and Justice; the one-stop- ducted by a group of about 50 graduate students shop investment promotion agency (Agence Na- contracted by CENEAP. The United Nations Develop- tionale de Développement de l’Investissement, or ment Program office in Algiers funded part of the sur- ANDI); and the wilayas of Algiers and Annaba. vey. And the World Bank liaison office in Algiers pro- Moreover, the team benefited from extensive advice vided logistical assistance. and comments during presentations at different Parts of the report build on the “Algeria Private stages of the project at the World Bank and in Algeria. Sector Development Strategy Note” (World Bank, Participants included more than 100 business owners; Washington, D.C., 2003), written in parallel by the representatives from most Algerian banks and the Acknowledgments vii

Algerian bankers association (Association Algérienne search and academic institutions (CENEAP, CREAD, des Banques et Etablissements Financiers); business the University of Algiers, and the business schools of associations (CARE, Forum des Chefs d’Entreprises, Institut Supérieur de Gestion and Ecole Supérieure de Confédération des Entrepreneurs et Industriels de la Commerce d’Alger). Mitidja, Association des Entrepreneurs de la Vallée du Steve W. Wan Yan Lun, Lin Wang Chin, and Mehdi M’Zab, and Savoir et Vouloir Entreprendre, an associ- Benyagoub contributed to the production of the ation of women entrepreneurs); the chambers of com- document. merce and industry of Algiers and Annaba; and re- Acronyms and Abbreviations viii

ANDI Agence Nationale de Développement CPE Conseil des Participations de l’Etat de l’Investissement CREAD Centre de Recherche en Economie CALPI Comité d’Assistance pour la Localisation Appliquée au Développement et la Promotion des Investissements EGZI Entreprise de Gestion des Zones CARE Cercle d’Action et de Réflexion autour Industrielles de l’Entreprise GDP gross domestic product CENEAP Centre National d’Etudes et d’Analyses HEC Ecole des Hautes Etudes Commerciales pour la Population et le Développement (France) CNAS Caisse Nationale de l’Assurance Sociale SGP Société de Gestion des Participations CNRC Centre National du Registre de ZAC Zone d’Activité Commerciale Commerce

Currency equivalents (As of March 9, 2004)

Currency unit: Algerian dinar (DA) Exchange rate: US$1 = DA 78.17

Weights and measures

The metric system is used throughout this report.

Fiscal year

July 1–June 30

Vice president Christiaan J. Poortman Sector director Emmanuel Forestier Country director Theodore Ahlers Sector manager Zoubida Allaoua Task team leaders Najy Benhassine Christian Schmidt Algeria’s Investment Climate at a Glance ix

Algeria’s investment climate at a glance Algeria Morocco India China Indicator 1995 2000 1995 2000 1995 2000 1995 2000 Macroeconomic environment Gross national income per capita (PPP U.S. dollars)a 5,110 5,840 2,860 3,320 1,850 2,340 2,650 3,929 Population (millions) 28.06 30.4 26.40 28.70 929.00 1,016.00 1,205.00 1,262.00 Average annual growth of GDP (percent)b 0.28 3.18 1.13 3.71 5.20 5.70 12.10 8.20 Imports and exports as a percentage of GDP 57.90 63.77 61.50 68.58 25.70 30.50 45.70 49.10 Private investment (percentage of GDP)c 21.86 13.51 17.75 20.74 18.20 17.00 18.60 17.30 Public investment (percentage of GDP)c 7.27 8.03 — — 8.40 7.30 22.20 19.90 Net foreign direct investment inflows (percentage of GDP) 0.00 0.75 0.97 0.43 0.60 0.50 5.10 3.60 Unemployment rate, 2001 (percent) — 27.00 — 19.50 — 9.20 — 9.30 Microeconomic environment Import delays (days) Average wait to clear customs — 11.70 — 5.40 — 10.45 — 7.49 Longest wait to clear customs — 44.40 — 23.20 — 21.20 — 12.50 Export delays (days) Average wait to clear customs — 8.60 — 1.69 — 5.07 — 5.49 Longest wait to clear customs — 14.21 — 2.75 — 9.29 — 8.13 Average years of education by occupation Skilled professionals — 9.40 — 8.00 — 11.30 — — Unskilled workers — 5.00 — 5.50 — 9.50 — — Labor Share of permanent workers who are female (percent) — 13.65 — 47.39 — 18.34 — 44.49 Desired workforce as a percentage of current workforce — 135.51 — 78.77 — 82.76 — 87.45 Share of firms offering formal training (percent) — 31.84 — 16.30 — 27.17 — 69.61 Infrastructure Share of firms with own generator (percent) — 29.00 — 17.00 — 69.00 — 16.00 Share of firms with own well (percent) — 32.00 — 29.00 — 51.00 — 16.00 Mainline telephones per 1,000 people, 2001 — 60.00 — 39.00 — 34.00 — 138.00 Mobile telephones per 1,000 people, 2001 — 3.00 — 157.00 — 6.00 — 112.00 Finance Share of firms with an overdraft or line of credit (percent) — 37.50 — 77.40 — — — 21.80 Share of credit currently unused (percent) — 39.60 — 25.50 — — — 29.70 Share of firms with a loan from a bank or financial institution (percent) — 50.40 — 45.10 — — — 57.00

continued . . . Algeria’s Investment Climate at a Glance x

Algeria’s investment climate at a glance (continued) Algeria Morocco India China Indicator 1995 2000 1995 2000 1995 2000 1995 2000 Share of loans requiring collateral (percent) — 82.39 ———— —82.97 Average value of collateral required (as percentage of loan) — 184.57 ———— —88.87 Average interest rate on loan (percent) — 11.25 ———— —6.58 Equity and retained earnings as a percentage of total liabilities — 95.71 — 28.86 — 44.33 — 42.13 Sources of finance (percent) Retained earnings — 71.60 — 62.00 — 30.40 — 51.50 Banks and other financial institutions — 7.00 — 19.60 — 36.10 — 20.60 Days for clearing a check through financial institution — 23.00 ———— —4.70 Share of land that is owned (percent) — 62.00 ———— —53.98 Share of land that is leased or rented (percent) — 19.30 ———— —25.23 Governance Share of revenue typically reported for tax purposes (percent) — 72.51 ———— —54.91 Control of corruption — –0.62 — 0.44 — –0.39 — –0.30 Rule of law — –0.97 — 0.46 — 0.23 — –0.19 Political stability — –1.27 — 0.16 — 0.39 — –0.05 — Not available. a. PPP U.S. dollars are adjusted for purchasing power parity. b. The data shown for 1995 refer to 1991–95; those shown for 2000 refer to 1996–2000. c. Gross domestic fixed investment. Source: World Bank investment climate surveys, World Development Indicators. Executive Summary xi

Based on large reserves of oil and natural gas, policy uncertainty, corruption, and dealing with Algeria’s economy depends on the hydrocarbon sec- the public administration, the tax authority, and the tor for 95 percent of exports and about 30 percent of judicial system. GDP. Its growth performance has thus fluctuated with the price of oil in recent decades. Still, Algeria per- In addition, firms in France, Italy, and Spain that formed relatively well in the second half of the 1990s, have expressed interest in investing in Algeria, but achieving economic and political stabilization fol- have so far shied away from doing so, cite security as lowed by a recovery of growth. But attracting much- a prominent issue, despite significant improvements needed local and foreign private investment outside in the situation in recent years. the hydrocarbon sector will require a significant im- Consider the implications of some of these bottle- provement in the investment climate. necks. On average, firms are able to finance only 11 Sharply reducing the unemployment rate, now percent of their working capital and 16 percent of their hovering around 26 percent, also must be high on investments through bank credit, and thus must rely Algeria’s economic agenda. With an accelerated tran- on retained earnings for almost 74 percent of all fi- sition to the market and a better investment climate, nancing. Some 37 percent of firms have been search- strong, private sector–led investment could gener- ing for an industrial plot to create a new venture or ex- ate the jobs needed to absorb the growing number pand their business—and have been looking for five of young Algerians entering the labor market every years on average. Registering a firm takes 18 steps year. and 93 days on average, obtaining a construction permit 130 days and other licenses or permits 35 Constraints to private sector development days, and getting a telephone line installed 238 days. and economic growth Not surprisingly, different types of firms both per- Algeria has made a transition from an economy of ceive and experience the constraints in the invest- shortages to one of constraints to growth. A few years ment climate in different ways. Small firms suffer more ago entrepreneurs complained about the lack of raw from the poor business environment than do large materials and other inputs; today they report short- firms. Public firms have better access to infrastructure ages of skilled labor and industrial land. The invest- services and appear to have better access to public ment climate survey (covering 562 Algerian firms), the procurement contracts, while private firms (especially survey of potential foreign investors, and the results of large ones) appear to have better access to credit. focus group meetings with stakeholders all point to And among private firms, older, established ones the same main bottlenecks to the development of complain more about unfair competition than do more enterprises: recently created ones. The constraints in the business environment are • Constraints relating to factor markets—with credit reflected in productivity. Relative to comparator coun- and land topping the list, followed by the labor tries, Algeria has the lowest value added per worker market with its lack of qualified workers, the poor and lowest total factor productivity in the garment infrastructure, and the lack of reliable business industry (selected for ease of comparison). Within information. Algeria, firms facing a better investment climate have • Constraints relating to governance, market institu- higher value added per worker and higher total factor tions, and economic policy—competition issues, productivity—and also pay higher wages. Executive Summary xii

Toward reforms in support of private sector straints. The proposed strategy consists of two development prongs: a short-term (one- to two-year) action plan To increase investment in Algeria in the medium term, with 20 items—all “quick wins”—and a detailed, the government strategy should address the con- medium-term (two- to five-year) policy strategy. straints to enterprise development while simultaneously launching reforms to tackle the underlying insti- Short-term action plan—“quick wins” tutional issues. Even so, the strategy should prioritize The short-term action plan includes measures that and sequence the reforms on the basis of the political would require simple regulatory changes or legislative and institutional context in Algeria and the challenges amendments, as well as limited short-term reforms implied by second-generation reforms. In doing so, such as regional pilots. Only one major reform is pro- the strategy should take into account five issues: posed, the privatization of a public bank in one to two years—a reform that, in addition to its effect on the • Some reforms are politically sensitive and require banking sector, would send an important signal to for- significant consensus building and strong political eign investors and improve the government’s credibil- will, both of which have been lacking or inconsis- ity on its reform agenda. tent in Algeria (in part because of the political dy- Beyond producing immediate effects on the busi- namics, but also because pressure for reform has ness environment, these measures are aimed at: fluctuated with oil prices). • In contrast with first-generation macroeconomic • Initiating a dynamics of reform by helping to reforms, the second-generation reforms for pri- strengthen the government’s credibility and estab- vate sector development require a lot of capacity lish a visible track record of successful actions— building in public agencies to equip them for their or quick wins. new regulatory roles, particularly at the local gov- • Building capacity, support, and knowledge for im- ernment level. They also involve much learning plementing reforms. and fine-tuning during implementation. • Some reforms involve great uncertainty in out- Medium-term policy strategy come and in the effects on different groups. The medium-term strategy covers seven areas of re- • Despite progress in some areas, the government form: the public enterprise sector, the industrial land reform agenda has poor credibility in the eyes of market, the financial sector, administrative constraints both local and foreign investors. to doing business, the tax system, infrastructure, and • Since private sector development is a theme the legal and judicial system. rather than a sector, responsibilities in this area The government of Algeria is already implement- are spread among at least five ministries and ing many of the policy measures in the medium-term one public institution. The government has no sin- strategy, with varying speed and success. The intent gle champion of reform and no natural home of the proposed strategy is not to deny this progress, for coordination and advocacy of private sector but to stress the need for greatly accelerating the re- development. forms and supporting them with a broader range of complementary policy measures, without which they Taking into account these five issues, a private may have only a marginal impact. sector development strategy has been devised that Achieving the reforms to promote enterprise de- addresses the political uncertainty and capacity con- velopment will require changing the role of the state. Executive Summary xiii

Beyond sustaining strong political will to spearhead markets, in the investment process, in the provision of and champion the reforms, the state will need to con- services to enterprises and the provision of infrastruc- front the dual challenge of expanding its role as a reg- ture, and in the production of goods and services ex- ulator while reducing its role as an interventionist. That hibiting no public good or strategic features. will entail increasing its capacity to regulate markets, The coming years will be crucial for Algeria’s un- enforce decisions, and ensure a level playing field for finished transition to a market economy. With rising all market participants by providing strong, effective, political competition foreshadowing the 2004 presi- and reliable public services and market institutions dential elections, the economic reform process seems (such as the customs, tax authority, antitrust agency, to have slowed recently. An improved business envi- and judicial bodies). It will also mean allowing the pri- ronment could play a crucial part in that process. vate sector to play a stronger role in land and credit 1. Algeria’s Economy: Overview and Recent Developments 1

Growth record and recent economic developments 2 The enterprise sector 4 The growth challenge 6 1. Algeria’s Economy: Overview and Recent Developments 2

Successful economic and political stabilization and vived—and often benefited from—central planning. resumed growth—but a complex political economy of As the results of the investment climate survey show, reforms hindering investment the “old” private sector firms appear to differ significantly from more recently created firms, both in their After gaining independence in 1962, Algeria perception of constraints and in their business envi- adopted a centrally planned economic system and ronment. The old and new firms also differ in structure nationalized most economic activities, including agri- and productivity. This divide probably goes much fur- culture and the hydrocarbon (oil and gas) sector.1 The ther than that between public and private enterprises country used its fast-growing oil and gas export rev- in explaining the political economy of the slow reforms enues to finance a development strategy of import to improve Algeria’s poor investment climate. substitution based on large investments in heavy industry. In parallel, heavy public spending in the social sectors led to big improvements in human develop- Growth record and recent economic ment, particularly in health and education. developments Private entrepreneurs were discouraged and mar- ginalized, but some were still able to coexist with the Algeria’s economy grew an average 2.2 percent a state economy. Often close to the state “intelligentsia,” year in the 1960s and 5.1 percent in the 1970s.3 But these entrepreneurs depended on the public sector in the past two decades its growth has been disap- for all economic activities (imports, raw materials, dis- pointing, averaging –0.2 percent a year. Growth col- tribution, demand, and the like). Most suffered from lapsed during the decade after the mid-1980s— state controls, such as administered prices and in- because of the adjustment to the oil price slump, dis- vestment caps. But some flourished in the shadow of ruptions associated with the slow and difficult transi- the socialist economy, thanks to trade protection, low tion from the command economy to the market, and a competition, monopolies in niches left by the public political transition that turned violently unstable during sector,2 and state-guaranteed markets and demand the 1990s. for their products. Poor productive efficiency also contributed to the Early signs of backtracking from this socialist protracted collapse in growth. Growth in total factor strategy appeared in the early 1980s, with the first re- productivity remained negative from the late 1970s to forms of the public sector. The government also re- the mid-1990s as a result of large relative price distor- duced its regulation of private activities, particularly tions in the command economy and limited openness investment. Though still heavily regulated, private in- to trade and foreign direct investment outside the hy- vestment increased and a small class of “socialist era” drocarbon sector. The drop in productivity growth ac- entrepreneurs emerged. The reforms were acceler- counted for about half the 4.2 percentage point de- ated after the decline in oil prices in 1986 and the dra- cline in annual GDP per capita growth between 1985 matic drop in public investment that followed. and 2000 relative to the previous 15-year period. This background on the development of the enter- Shrinking public sector investment in the face of the prise sector is important in understanding Algeria’s slump in hydrocarbon revenues accounted for the rest economy today. In contrast with Eastern Europe’s tran- of the collapse in growth (figure 1.1). sition to the market, Algeria’s has been extremely slow Algeria’s excessive exposure to oil shocks is and has coexisted with an old private sector that sur- among the defining features of its economy (figure 1. Algeria’s Economy: Overview and Recent Developments 3

Figure 1.1 Annual change in selected economic indicators, Algeria, 1974–2000

% Capital stock

Human capital

–4

Total Factor GDP Productivity

–8

1974 1977 1980 1983 1986 1989 1992 1995 1998

Source: World Bank; International Monetary Fund.

1.2). Indeed, its external vulnerabilities have in- exports are among the least diversified among mid- creased over time because the country has been un- dle-income countries (mostly as a result of years of able to diversify its exports. With non-oil exports ac- overvalued real exchange rates, lack of foreign direct counting for less than 3 percent of the total, Algeria’s investment outside the hydrocarbon sector, and dis-

Figure 1.2 Terms of trade volatility, selected countries, 1974–2000 Standard deviation of annual percentage change in terms of trade

Terms of Trade 40

Syria Nigeria Algeria Gabon Egypt Mexico Ecuador MNA Av. Hungary Venezuela Indonesia Colombia Algeria’s Economy: Overview and Recent Developments 4

torted price policies). Half its exports are chemical barriers and the poorly functioning credit and in- and plastic goods, a quarter steel and mechanical dustrial land markets, have weakened the private in- goods, and the rest a mix of agricultural, mining, and vestment response to the improved macroeconomic transformed goods. Three-quarters of its non-oil ex- situation. ports go to only five countries, most in southern Eu- Algeria’s association agreement with the Euro- rope. Most enterprises producing exportable goods pean Union offers a tremendous opportunity for inte- are state owned, enjoying high protection. gration in global trade markets, with new export op- Reforms accelerated in the 1990s—in the midst of portunities in the emerging Euro-Mediterranean free political instability, macroeconomic turmoil, and un- trade zone. But it also raises important challenges. sustainable debt service. Embarking on a series of Once the DAP tariff (droit additionel provisoire)— ambitious reforms, the government achieved much a temporary additional tariff—is removed, import- success in macroeconomic stabilization in the face competing industries will be exposed to greater of volatile oil prices, and some progress in structural competitive pressures. To withstand competition, reforms, including liberalization of prices, trade, and companies in these industries—especially public en- investment. terprises—will need to restructure and to improve their These reforms laid the foundation for a recovery in efficiency. Algeria has moved toward competitive unit growth. GDP grew an average 3 percent a year in labor costs in a number of labor-intensive industries 1999–2002, and the non-hydrocarbon, nonagricultural important for job creation. Consolidating its competi- sector turned in a similar growth performance, led by tive position will require a conducive business envi- 5 percent real growth in value added in private manu- ronment to promote investment and foster productivity facturing (table 1.1). Higher oil prices and tighter de- growth. mand management turned fiscal and current account deficits into sizable surpluses by 2001, the balance of payments averaged a surplus of 11 percent of GDP in The enterprise sector 2000–02, and inflation fell from more than 20 percent in 1994 to 1.4 percent in 2002. Obtaining accurate data on the enterprise sector in Growth in the non-hydrocarbon sector remains Algeria is a challenge. The many different databases fragile, however; fueled mostly by public investment, it on the sector are unreliable, and none are linked. Data is vulnerable to oil price swings. And constraints to on the formal sector from the social security adminis- doing business, particularly the high administrative tration (CNAS), by far the best source of information

Table 1.1 Output, prices, and unemployment, Algeria, 1990–2002 (percent) Indicator 1990–95 1996 1997 1998 1999 2000 2001 2002 Real growth of GDP 0.3 4.1 1.1 5.1 3.2 2.4 2.1 2.1 Real growth of non-hydrocarbon GDP 0.1 3.1 –1.3 5.7 1.7 1.2 4.2 5.5 Inflation rate (consumer price index) 27.3 18.7 8.4 2.3 2.7 0.3 4.2 1.4 Unemployment rate 23 28 28 28 29 29 27 27

Source: World Bank; International Monetary Fund, National Office of Statistics. Algeria’s Economy: Overview and Recent Developments 5

on the formal enterprise sector, show that construction One consequence of this enterprise structure is and industry are predominant (table 1.2). Trade and that most firms focus on their local market. On aver- commerce remain underdeveloped, though many in- age, the 562 firms surveyed transact 60 percent of dividuals and small firms probably operate informally their sales in the local market and 39.2 percent in in these sectors. other regions, exporting only 0.7 percent. Very few Some 95 percent of formal enterprises have fewer firms have developed a national distribution network. than 10 employees.4 These enterprises employ 44 Retail distribution is undeveloped. percent of all registered labor. Among all enterprises, The public sector has a large (though declining) the number of employees averages only 4. Only 518 role in the non-hydrocarbon economy. In 2000 it ac- private enterprises have more than 100 employees. counted for 57.8 percent of total value added, but only Enterprises are concentrated along the coast. 23.8 percent with hydrocarbons excluded. Nonethe- Algiers is by far the most important economic center, less, it still dominated industry, with 65 percent of with 28 percent of registered firms, followed by Oran value added. (7 percent) and six wilayas, or administrative regions But the private sector’s role has grown over the (Setif, Tizi Ouzou, Chlef, Constantine, Bejaia, and past decade, as made clear by national accounts Blida), each accounting for around 4 percent. The data for 1990–2000 from the Algerian National Office South accounts for only 11 percent of enterprises. of Statistics: Algerian businesses are small family affairs, mostly closed to outside investors. Only 3 percent are • Outside the hydrocarbon sector, private enter- joint stock companies, 53 percent are limited liability prises have been generating more value added companies, and the rest are partnerships or single- than the public sector.5 While the non-hydrocar- owner firms. bon value added of public enterprises stayed

Table 1.2 Formal enterprises and employees by sector, Algeria, 2001 Share of total (percent) Sector Firms Workers Firms Workers Construction 51,873 209,621 28.8 28.4 Manufacturing 40,744 189,507 22.6 25.7 Services 36,110 130,783 20.1 17.7 Trade and commerce 29,070 116,982 16.2 15.9 Transport and communications 16,015 38,682 8.9 5.2 Agriculture and fisheries 5,258 38,830 2.9 5.3 Mining 485 4,860 0.3 0.7 Water, energy, and energy services 338 7,797 0.2 1.1 Total 179,893 737,062 100.0 100.0 Source: Algeria, Caisse Nationale de l’Assurance Sociale. 1. Algeria’s Economy: Overview and Recent Developments 6

flat after 1995, it grew steadily in the private The growth challenge sector. • In the early 1990s public enterprises paid more At the top of the economic agenda for Algeria is dras- than twice the aggregate wages paid by the pri- tically reducing the unemployment rate, estimated at vate sector. But by the end of 2000 the aggregate around 27 percent in 2001 (based on data from the wages were about equal (though public enter- National Office of Statistics). With an accelerated tran- prises still pay much higher unit wages, about sition to the market, strong, private sector–led invest- twice as high as those in private enterprises). ment could generate the jobs needed to absorb the • Except in 2000, private firms always generated a unemployed as well as the growing number of young higher operating income (in aggregate) than pub- Algerians entering the labor market every year. lic firms. In several sectors—such as textiles, serv- But accelerated growth in the non-hydrocarbon ices, agro-industries, mechanical industries, and sector will ultimately be sustainable only if Algeria re- leather and shoes—public firms regularly made duces constraints to the efficient use of all production losses. By contrast, the private sector never factors and lessens its exposure to oil price volatility. showed a loss in any sector except in textiles in Only then will the high structural unemployment be re- 1993–94. duced, paving the way for better living conditions for Algerians in the medium term. Thus structural and Unit labor costs in manufacturing are lower on av- macroeconomic policies need to address two simulta- erage in the private sector, reflecting higher produc- neous challenges. tivity—especially in light industries such as textiles First, fostering private sector development by im- and leather and footwear (figure 1.3). proving the investment climate and reducing con-

Figure 1.3 Average unit labor costs in public and private manufacturing enterprises, Algeria, 1998–2000

0.5

0.45 Public Private 0.4

0.35

0.3

0.25

0.2

0.15

0.1

0.05

0 Food Textiles Leather Wood Chemicals, Fabricated Construction Other processing and and products rubber, metals and materials industries clothing footware and paper plastics machinery

Source: Algeria statistical office. 1. Algeria’s Economy: Overview and Recent Developments 7

straints to the efficient use of resources. Public serv- “A Medium-Term Macroeconomic Strategy for ices and markets for labor, credit, land, and informa- Algeria” (Middle East and North Africa Region, tion all suffer from severe inefficiencies, leading to the Social and Economic Development Group, Wash- underutilization of production factors and a growing ington, D.C., 2003). informal sector. The structural reforms needed to cor- 2. Private monopolies existed particularly in the rect these inefficiencies call for fundamentally redefin- poorly capitalized, high-profit sectors where de- ing the state’s role in the economy. And that entails mand was not being met. Private enterprises two major policy shifts, actions on which Algeria has dominated such sectors as retail, services (restau- made little progress: rants, small hotels, computers), printing, leather- work, hardware, land transport, tailoring and • Increasing the state’s capacity to regulate mar- hosiery, finishing work in construction, and pro- kets, enforce decisions, and ensure a level play- cessing of plastics. These enterprises generally ing field for all market participants by providing ef- supplied, subcontracted for, and handled retail fective public services and market institutions. sales for public enterprises (which concentrated • Reducing the state’s intervention in areas where on industry, raw materials processing, and air, rail, private operators should progressively take over, and maritime transport). particularly in the land and credit markets, the 3. The analysis, figures, and estimates in this section provision of infrastructure, and the production of are drawn largely from World Bank, “A Medium- goods and services with no public good or strate- Term Macroeconomic Strategy for Algeria” (Mid- gic features. dle East and North Africa Region, Social and Economic Development Group, Washington, D.C., Second, strengthening the fiscal framework to 2003). better manage volatility and secure medium-term fis- 4. However, regular inspections of a sample of 7,779 cal sustainability. Strengthening fiscal management enterprises in 2001 by the Labor Inspectorate of calls for a multiyear, integrated fiscal framework the Ministry of Labor showed that 41.45 percent of aimed at delinking spending from the volatile hydro- employees were not properly registered. carbon revenues while saving excess revenues for the 5. However, public enterprises still generate more future within an appropriate asset and liability man- value added (in aggregate) in some industrial agement strategy. sectors (mechanical industries, building materials, chemicals, paper and wood).

Notes

1. The analysis, figures, and estimates in this in- troductory section are based on World Bank, 2. The Investment Climate in Algeria as Lived by 562 Local Firms 8

A closer look at the main constraints to doing business 11 Productivity and the investment climate 31 The view of foreign investors 34 2. The Investment Climate in Algeria as Lived by 562 Local Firms 9

Different stories for old and new entrepreneurs, for access to information. Some of these are cross- small and large firms, for publicly and privately owned cutting themes that lie at the heart of the priority prob- enterprises lems above. For example, because the public sector and the administration play the dominant role in man- Clearly identifying barriers to enterprise develop- aging and allocating resources in Algeria, complaints ment and their relative priority is the necessary first about the credit and land markets—and about cor- step toward defining a strategy and action plan for ruption and unfair competition—are directed in part at improving the business environment in Algeria. The in- the public agencies in charge. Similarly, weaknesses vestment climate survey, the survey of foreign inves- in the judiciary and poor access to market and legal tors, and the focus group meetings with stakeholders information are among the main causes of the poor all point to the same main bottlenecks to the develop- functioning of the credit market and the development ment of enterprises—whether private or public, for- of the informal sector and noncompetitive markets. eign or local (figure 2.1): A comparison of these results with those of a similar study conducted in 1998 suggests that there has • Constraints relating to access to factor markets— been a shift in recent years from an economy of short- credit and industrial land.1 ages toward one of constraints to growth (for exam- • Constraints relating to governance and economic ple, almost 40 percent of firms in the sample claim to policy issues—with unfair and informal sector be seeking industrial land to expand their business).3 competition topping the list, followed by the tax This shift probably reflects renewed optimism among rate, policy uncertainty, and corruption.2 investors. Nonetheless, it still calls for urgent and deep structural reforms to reduce the constraints. Businesses also cite other issues as severe ob- Not surprisingly, different types of firms cope dif- stacles (giving them the highest ranking on a scale of ferently with the investment climate. More interestingly, 0–5), but less often than the most important con- they differ not only in how they perceive the intensity straints. These issues include the administration, pub- of the constraints they face, but also in how they rank lic services and the infrastructure, the judiciary, and constraints. For example, “old” firms—those that were

Figure 2.1 Most severe obstacles to doing business, Algeria % 30

28.8 28.2 10 12.9 12.1 7.1 6.3 0 Access to/ Informal Access Tax Policy Corruption cost of credit unfair to land rate uncertainty competition

Source: Algeria Investment Climate Survey (2003) 2. The Investment Climate in Algeria as Lived by 562 Local Firms 10

created before 1990 and grew during the centrally Figure 2.3 Most severe obstacles to doing planned era or the years of reform in the 1980s4— business for private and public firms, Algeria complain more than “new” firms about unfair and in- % 35.7 Private formal sector competition (figure 2.2). For the old 30 Public firms, these complaints probably reflect in part the rise of a more competitive environment than they had ex- 20 19.1 perienced during the early years of reform. In addi- 9.4 tion, old firms complain less about access to credit 10 3.6 4.9 and about corruption. These interesting results res- 1.8 0 onate in the policy debates of a divided private sector Access to/ Tax rate Corruption in Algeria and reflect the complex political economy of cost of credit reform in the country.5 Source: Algeria Investment Climate Survey (2003). Differences in perception and experience with the investment climate also emerge between private and is high) and are more concerned about corruption public firms—and between small and medium-size (which appears to affect proportionally more smaller enterprises and large firms.6 A much larger share of firms, which are usually private). public firms (36 percent) than private (19 percent) cite Interestingly, large firms (those with 100 or more access to or cost of credit as their most severe con- employees) complain much more about unfair and in- straint (figure 2.3). This difference probably reflects re- formal sector competition than do small and medium- cent gains in the independence of public banks, size enterprises (those with fewer than 50 employees): which dominate the Algerian financial sector. These 29 percent of large firms rank this as the most severe banks appear to be allocating credit on a more com- obstacle, compared with 19 percent of smaller firms mercial basis, shifting from their traditional client base (figure 2.4). Part of the story may be that large firms, of state-owned enterprises to the private sector. like old firms, face increased competition from small Meanwhile, private firms complain more about the tax and medium-size enterprises—new competition that rate (tax evasion, prevalent only in the private sector, Figure 2.4 Most severe obstacles to doing business for small and medium-size Figure 2.2 Most severe obstacles to doing enterprises and large firms, Algeria business for old and new firms, Algeria % 30 % 25.8 24.5 28.6

Old 19.2 SME 20 20 Large 16.8 New 15.9

10 10 5.6 5.4 3.7 1.1 0 0 Unfair comp./ Access to/ Corruption Unfair comp./ Corruption informal sect. cost of credit informal sect. Source: Algeria Investment Climate Survey (2003). Source: Algeria Investment Climate Survey (2003). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 11

they may perceive as unfair or as dominated by the in- straints (explicit or implicit) imposed by the banks’ formal sector. state shareholder.8 The public banks have complex and highly centralized decisionmaking processes. And they suffer from a long tradition of state interven- A closer look at the main constraints tion in credit allocation. Although systematic credit to doing business allocation to state-owned enterprises appears to have diminished significantly in recent years, this The following sections on the constraints to enterprise practice has a lasting impact on the way banks con- development roughly reflect their ranking in impor- duct business. tance, with a closer look at cross-cutting themes like The structural problems of the banking sector ex- the administration and public services, governance, plain part of the poor functioning of the credit market and infrastructure. Each gives a short overview of the for enterprises. There are also problems on the bor- main issues at hand, presents the survey evidence on rowers’ side. The following issues are particularly the extent of the constraints while emphasizing the dif- constraining for bankers: ference in effects for different types of firms, and briefly summarizes the main reform challenges (for • Absence of reliable market information. The greater detail, see annex 3.1 at the end of chapter 3). Algerian credit market has frequent episodes of The discussions on access to finance and access to “herding,” where bankers and many investors industrial land are more detailed than others, since over invest in a few activities because they lack these constraints are particularly acute. sectoral information and base investment decisions on imitation. Access to finance • Underdevelopment of the risk and credit informa- Algeria’s financial sector has seen much progress in tion system. The credit information databases of the past decade, including the entry of many small the Central Bank are still in development. private and foreign banks.7 But it remains largely • Lack of qualified financial managers among most dominated by the state, with the seven public banks small and medium-size enterprises and a tradition accounting for 90 percent of bank assets. Obtaining of secrecy among family-owned firms. Most firms access to credit, including short-term working capital underreport sales (see section on corruption and finance, is difficult and time consuming. Leasing, fac- illegal practices in this chapter) and have no cer- toring, venture capital, and export financing instru- tified balance sheets, self-selecting out of the for- ments are all undeveloped. mal credit market. State-owned banks—the only ones with a network • Major deficiencies in the judicial system, which large enough to serve small and medium-size enter- lower the value of collateral or guarantees given to prises, which make up most of the enterprise sector in bankers in case of default. In particular, the judicial Algeria—are bureaucratic, unfriendly to business, and system is very slow; most judges lack training in lacking modern information and payments systems. commercial matters, and the Ministry of Justice’s Their staff lack qualification in modern lending tech- retraining program needs to be scaled up; judges niques and in assessing project risk and return. And are said to systematically take the side of debtors; they have little incentive to take responsibility or man- and there are no mechanisms of alternative dis- age risk, in part because of the bureaucratic human pute resolution and only a few separate commer- resource management but also because of con- cial courts (see the section on the judicial system). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 12

• Inefficiencies in the land and housing markets, percent of investments (figures 2.5 and 2.6). Almost particularly relating to titling and property rights. 74 percent of all financing came from retained earn- These inefficiencies trickle down to the credit mar- ings. As expected, things are worst for small firms ket, since many creditworthy small and medium- (those with 5–19 employees): banks financed only size enterprises that own assets that could be about 7 percent of their working capital and 13 per- pledged as collateral cannot do so. cent of their investments—compared with 13 percent and 29 percent for large firms. Moreover, only 23 per- Survey evidence cent of small firms have overdraft facilities with their Access to credit. The results of the investment cli- banks, compared with 69 percent of large private mate survey reflect the difficulty of obtaining credit. firms. Asked about sources of financing in the previous Public enterprises used bank credit less than did three years, firms reported that bank credit financed large private firms (since most public enterprises are only 11 percent of working capital on average, and 16 large, they need to be compared with equally large

Figure 2.5 Sources of working capital finance in previous three years by type of firm, Algeria

% 100 13.3 16.0 10.9 13.7 7.6 7.3 11.0 Other 80

Friends family 60

Commercial 40 73.9 73.7 74.1 77.0 72.3 72.7 71.1 bank

20 Supplier credit

0 Auto financing All Old (1990–) New (1990+) Small (<20) Large (100+) 100+ public 100+ private

Source: Algeria Investment Climate Survey (2003).

Figure 2.6 Sources of investment finance in previous three years by type of firm, Algeria

100 Other 15.7 18.3 12.9 13.0 80 29.2 23.1 34.2 Friends family 60 Commercial bank 40 73.5 72.9 74.1 75.9 62.2 62.3 61.2 Supplier credit 20

0 Auto financing All Old (1990–) New (1990+) Small (<20) Large (100+) 100+ public 100+ private

Source: Algeria Investment Climate Survey (2003). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 13

private firms). Banks provided only 11 percent of These averages over the three years before the working capital and 23 percent of investment capital survey do not necessarily mean that credit is rationed for public firms, compared with 16 percent and 34 among beneficiaries. It simply reflects the striking fact percent for large private firms. Similarly, while 37 per- that during that time, about 72 percent of the random cent of public firms have overdraft facilities, 69 sample of 562 firms had no access to bank credit to percent of large private firms do. These differences finance their working capital or investment needs. confirm other evidence that in recent years the per- Indeed, the time since their last bank loan had been formance contracts between the state and the public approved averaged 22 months. The situation was banks may have reduced preferential credit allocation worst for small firms: 81 percent of them had no ac- to public enterprises—and that the banks may be cess to bank financing in those three years. making credit decisions on a more commercial basis, Among firms that did have access to one or more shifting away from their traditional public clients to pri- bank loans during that period, banks financed about vate ones. 38 percent of their working capital needs and 60 per- The age of a firm matters in its ability to obtain cent of their investment needs on average. Differ- credit, independent of its size or type of ownership.9 ences persist between small and large firms (and be- Old firms appear to have better access to credit than tween old and new ones), but they are smaller than do new firms. While 44 percent of old firms have over- in the entire sample.10 The problem is the difficulty of draft facilities, only 31 percent of more recently cre- entering the credit market and establishing a track ated firms do. And while old firms obtain about 14 per- record with a bank—not credit rationing among bank- cent of their working capital and 18 percent of their able projects. investment capital from banks, the shares for new firms are about 8 percent and 13 percent. Part of the Delays in obtaining credit. Not only is obtaining explanation clearly lies in the trust that older firms credit difficult, but getting a loan approved takes an have built up with bankers. But these differences also inordinate amount of time: 4.5 months on average for reflect the lack of dynamism and competition in the a working capital loan and 8.8 months for an invest- banking sector. ment loan (figure 2.7). For small firms, getting an in-

Figure 2.7 Delay in obtaining last loan approval by type of firm, Algeria

Delay (last investment credit) Delay (last working capital credit) 12 9.8 10.2 9 8.8 7.9

6.0 6.3 6 4.5 4.8 3.7 3.9 Months delay 3

0 All Old (1990–) New (1990+) Small (<20) Large (100+)

Source: Algeria Investment Climate Survey (2003). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 14

vestment loan approved takes 10.2 months on averaged 194 percent for large private firms (figure 2.9).11 age. The differences between small and large firms (For small firms, the value averaged 202 percent.) and between old and new firms are significant and of The relatively small amount of collateral required the same sign as other financial indicators. for public firms reflects the credibility of the state (sole) shareholder as a guarantor. By contrast, the Collateral requirements. One important factor large amount required for large private firms probably that excludes many firms—particularly small and reflects the inefficiencies of the judicial system. medium-size enterprises—from the credit market is Because of difficulties in enforcement, bankers have the frequent requirement for collateral as a guarantee. little trust in their ability to collect the collateral from About 90 percent of firms that last borrowed for in- defaulting borrowers, especially when the collateral vestment, and 77 percent of those that last borrowed takes the form of land or buildings, as it generally to finance working capital needs, were required to does. provide some sort of collateral, most often land or buildings (figure 2.8). Delays in common banking operations. An- Not surprisingly, and despite the performance other weakness of the Algerian banking system is its contracts between the state and the banks, an ex- poor infrastructure. Cashing a check takes two weeks pectation that the Treasury will bail out defaulting pub- on average between two branches of the same bank lic firms apparently persists. Public firms face less in the same town—and almost five weeks between onerous requirements for collateral. While large public two different banks in two different towns (figure 2.10). firms were required to provide collateral for 80 percent Opening a letter of credit takes almost two weeks on of their investment loans and 70 percent of their work- average. At the time of the survey the Central Bank of ing capital loans, large private firms had to provide Algeria, with the support of the World Bank, launched collateral for 94 percent of their investment loans and a new payments system that should reduce these time 85 percent of their working capital loans. And while lags. the collateral required averaged 60 percent of the investment loan amount for large public firms, it aver- International perspective. Firms in Algeria rely on retained earnings to finance a larger share (74 percent) of their working capital and investment needs Figure 2.8 Share of firms required to provide collateral for last loan by type of firm, Algeria Figure 2.9 Collateral required as a share of Guarantee (investment) investment loan value by type of firm, Algeria % Guarantee (working capital) 100 94.1 % 89.9 85.0 194.1 76.6 80.0 200 70.0 75 158.3 150 50 100 25 60.0 50

0 0 All 100+ public 100+ private All 100+ public 100+ private Source: Algeria Investment Climate Survey (2003). Source: Algeria Investment Climate Survey (2003). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 15

Figure 2.10 Average time required for their organization and decision making pro- banking operations, Algeria cesses, human resources and incentive schemes, information systems, and credit and risk manage- Cashing a check — same bank same town ment techniques. To succeed, the reform needs to Cashing a check — different bank different town ensure full operational independence of the banks Opening letter of credit 6 from their state shareholder, particularly in ap- 4.9 5 pointing senior staff. Privatizing one bank in 2003 4 and preparing for a second privatization in the 3 2.0 1.9 coming years should bring in an international 2 1 bank, on a scale large enough to increase com-

Average delay (weeks) 0 petition and improve banking services. • Speed the reform of the legal framework and the Source: Algeria Investment Climate Survey (2003). judicial system to allow banks to lend without having to require excessive collateral. This in- than do those in such comparator countries as Mo- volves collateral legislation, bankruptcy, alterna- rocco (62 percent), China (52 percent), and India (30 tive dispute resolution, training for judges, and the percent) (figure 2.11). like. • Strengthen the technical infrastructure of the fi- Policy recommendations nancial sector. Both the interbank payments sys- All these findings from the survey point to the poor tem and the intrabank clearing and settlement functioning of the credit market and call for accelerat- system need to be modernized. And public banks ing the reform of the financial sector and the opera- need to upgrade their information systems to in- tional environment of banks.12 More precisely, there is ternational standards. a need to:13 • Develop an economic and financial information system and credit bureaus to improve the knowl- • Accelerate the reform of the banking sector. This edge of credit applicants and the assessment of reform includes restructuring the public banks— credit risk.

Figure 2.11 Firms’ sources of finance, selected countries

80 72.7

40 36.1 30.4

20 14.1 11.4 13.0 9.4 6.4 0.0 4.6 1.9 0 Retained Banks, other Trade credit Equity Informal sources Other earnings financial (family & friends) institutions Algeria (working capital financing) Algeria (Investment financing) Morocco China India

Source: World Bank investment climate survey. 2. The Investment Climate in Algeria as Lived by 562 Local Firms 16

• Develop new financing instruments. Export financ- lished in areas chosen on the basis of political rather ing needs to be developed through participation than economic criteria. Moreover, many plots were in risk insurance and the creation of preshipment oversized and designed without regard for actual and general export credit guarantee schemes. needs. The ownership of the land was often unclear, Also needed are leasing, factoring, and equity and two-thirds of it was not properly surveyed and ti- capital funds, which can greatly benefit small and tled at the time of independence. medium-size enterprises with a small capital base Another issue is the complexity and lack of trans- and limited collateral.14 The stock market also parency in the regulatory and institutional arrange- needs to be developed. ments. Too many public organizations share responsibility for owning, developing, managing, and Access to industrial land rehabilitating industrial land. Access to industrial land is constantly cited—by en- As a result of all these issues, acquiring industrial trepreneurs and government officials alike—as an land is an extremely lengthy, costly, and uncertain overwhelming and increasingly severe constraint to process. And with most land allocated by the admin- business development. There is a large unsatisfied istration, corruption is reportedly widespread. The demand for industrial land. Yet at the same time consequences for firms can be fatal, as shown by a around half the serviced land lies idle, either because typical story of a firm that purchased expensive it belongs to bankrupt public enterprises or because equipment only to see it lie idle for seven years be- private owners are holding onto it for speculative pur- cause it could not obtain land—even though large poses. Initial land distribution is subject to administra- plots nearby remain empty even today (box 2.1). tive controls, and there is little secondary trading. The market is segmented, with a large (though diminish- Survey evidence ing) price difference between publicly and privately Of the 562 firms surveyed, 37 percent were searching owned land that fosters speculation and corruption. for an industrial plot to invest in a new venture or to ex- Less than 50 percent of industrial land is properly ti- pand their business. On average, these firms had tled. And the publicly managed industrial parks and been searching for five years (figure 2.12). Not sur- activity areas are unable to recover costs and conse- prisingly, the firms surveyed rank difficulty of access quently lack adequate infrastructure services and to industrial land among the top five constraints to management. business development, with almost 13 percent of Access to industrial land is an extremely complex firms citing it as the most severe obstacle. While these and politically charged issue, with many vested inter- results point to land access as a major bottleneck, ests working to block reform. The issue symbolizes they also indicate a sense of business confidence and the kind of structural adjustment that Algeria will need probably renewed optimism about the country’s eco- to undertake to make greater progress toward a nomic outlook. They also give a sense of how much in- market-based economy. vestment would probably materialize if the availability Understanding the situation today requires some of land improved. A parallel issue is the availability of historical background. Algeria created industrial business offices or commercial buildings: 20 percent parks on publicly owned land in the 1970s and early of the firms interviewed had been searching for office 1980s to accommodate the new state-owned indus- space for more than four years. tries that were at the vanguard of the government’s Inadequate titling and poor protection of property development strategy. Many of these were estab- rights not only lead to a shortage of land. They also 2. The Investment Climate in Algeria as Lived by 562 Local Firms 17

Box 2.1 Lack of access to industrial land a constraint to a firm’s ability to invest and grow

Textibel, a sock manufacturer, has been in the garment assigned years ago to other investors, but no investment business since 1975. In 1989 its founders opened a new had materialized), Textibel had been unable to obtain any factory in El-Achour, a suburb of Algiers. In 1992, with the industrial land. Its new equipment remained in its original company’s business growing, they planned to invest in packaging, leaving almost no space to walk around the new product lines. Since Textibel was surrounded by un- factory. Growing import competition forced Textibel to re- used industrial plots, the owners applied to the local land duce its workforce by 80 percent. If it had been able to administration to buy or get a concession on a plot nearby complete the 1992 investment in new product lines, it or in any other suitable location. At the same time they ob- might have been able to diversify and better absorb the tained a loan under a bilateral German credit line and import competition shock. used it to purchase new equipment from Germany. Today Textibel is essentially out of business, with its Ten years later Textibel faced a critical situation. Even loan unpaid and its equipment deteriorating. though the land around the factory still lay idle (it had been contribute to the slow development of the rental mar- Figure 2.13 Share of firms that are land ket for both land and housing. Despite the inefficiency tenants or owners, Algeria of tying up resources in land, most firms interviewed (62 percent) own their land, while only 19 percent rent % 62.0 it or have a concession on it (figure 2.13). 60 Because of the scarcity of land, investors do not choose where to locate their firm, but instead set it up 40 wherever they find a plot (figure 2.14). The plot they 19.3 20 find is often smaller than their needs, forcing them to scale back their investment plans. 0 Tenants on land Owners of land

Policy recommendations Source: Algeria Investment Climate Survey (2003). With more than half the existing plots lying unused, the scarcity of industrial land appears to be artificial. Figure 2.14 Firms’ reasons for choice of location, Algeria Figure 2.12 Firms looking for land or offices % and length of search, Algeria 80

Percent searching Number of years searching 62.1 Percent respondants 40% 6 37.2% 5.0 40 30% 4.1 4 14.3 20.3% 10.0 20% 4.5 4.3 4.7 0 2 10%

Infrastructure Percent of firms searching 0% 0 Number of years searching Availability of land Supply of materials Building/offices Industrial land Supply of skilled labor Local marketProximity knowledge to local market Source: Algeria Investment Climate Survey (2003). Source: Algeria Investment Climate Survey (2003). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 18

Putting those plots on the market may well satisfy de- havior, red tape, cumbersome and opaque regula- mand, at least in the short run. It would also lower the tions, and endless delays in obtaining clearances, au- price of land, removing a major constraint to invest- thorizations, and access to public services. Though ment. The market needs to be made transparent, hard to measure, corruption appears to be rife, with through wide dissemination of market information and more than 6 percent of entrepreneurs ranking it as the regulations. The market also needs to be properly reg- top constraint to doing business (see figure 2.1). ulated, under a much simpler institutional framework. Barriers are pervasive in all areas of business ac- And property rights need to be protected. tivity. Firms most often mention barriers in clearing im- Private operators should be encouraged to partic- ported goods through customs, obtaining a building ipate in all stages of market development. The state, permit, and registering an enterprise. They also cite as part of its urban development strategy, should tax harassment often. identify urban areas to be developed and invest in the Firms often have poor access to the services pro- primary development of raw land (such as the con- vided by public utilities, and the quality is reportedly struction of major roads and principal connections to low. The services posing the biggest problems are the energy and water networks, all of which works fixed line telecommunications (connections and main- would best be carried out by private operators under tenance), access to water supply, port services, and well-designed schemes for private participation). The management of industrial parks. By contrast, trans- state should then divide the zones into large plots for port and access to energy are not considered major concession or sale to private promoters, who would problems. then be responsible for all the later stages of land development (secondary roads, energy and water con- Survey evidence nections, rehabilitation of existing industrial zones, Public services and the administration. commercialization, management, fee collection, main- Although there has been some improvement over the tenance, and the like).15 years, the Algerian administration is still far from To meet these objectives, it is recommended that friendly to business. About 20 percent of enterprises the government’s strategy focus on: perceive public services as inefficient or totally inefficient (though only 11 percent of public firms do). • Increasing the supply of industrial land that is free Foreign investors complain just as much about the bu- and available, but either untitled or in the process reaucracy. Administrative delays can discourage in- of being legally recovered by the state. vestment: registering a firm takes 18 steps and 93 • Reforming the institutional and regulatory frame- days on average, while getting a construction permit work. takes 130 days, and other licenses or permits 35 days • Fostering private participation in developing, mar- (figure 2.15).16 In 2001 the firms sampled spent an keting, and managing industrial parks and activity average of 90 person-days just dealing with the areas. administration. Small firms suffer more than large ones from de- Access to public services and infrastructure lays in obtaining public services, and the differences The positive change in government policy toward the are large and significant. While getting a telephone private sector has not yet translated into a significant line installed takes 310 days for small firms, it takes 95 change in the attitude of the public administration. days for large firms (figure 2.16). Getting a connection Entrepreneurs still face unfriendly bureaucratic be- to the electric grid takes 118 days for small firms, 30 2. The Investment Climate in Algeria as Lived by 562 Local Firms 19

Figure 2.15 Delays in obtaining administrative or public services, Algeria

250 238

200

150 130

Days 100 93 90 100

50 35 18

0 Installing a Repairing the Connection Getting a Company Longest Men-days telephone telephone to electric construction registration delay of per year line line network permit permit/license dealing with administration Source: Algeria Investment Climate Survey (2003).

days for large ones. And while getting a construction Another indicator of the quality of the network is permit requires 125 days for small firms, it takes only the share of firms owning a power generator. In 60 days for large firms. Algeria that share is 29 percent, compared with 16 percent in China, 17 percent in Morocco, and 69 per- Electricity. The coverage of the electricity network cent in India. Generators are costly investments, so in Algeria is among the highest in the region, but qual- less than 16 percent of small firms in Algeria have ity is a problem. In 2001 firms experienced power out- one—compared with 51 percent of large firms—even ages on nearly 14 days on average (figure 2.17). though small firms face more frequent outages. Small firms, often located outside the industrial zones, suffer slightly more outages (16 days on average) Water. Access to water is notoriously problematic in than large firms (12 days) or public firms (10 days). Algeria. Most urban centers suffer severe shortages,

Figure 2.16 Delays in obtaining Figure 2.17 Power outages and ownership administrative or public services for of generators by type of firm, Algeria, 2001 small and large firms, Algeria Number of days without Have generator

400 Installing a telephone line 20 60% 310 15.8 50.5% Repairing the telephone line 13.9 300 15 Connection to electric network 12.2 40% Getting a construction permit 29.1% 200 10

Days 118 125 15.6% 94.6 20% 100 60 5 15 30 9 0 Number of days without 0 0% Small (<20) Large (100+) All Small (<20) Large (100+) Source: Algeria Investment Climate Survey (2003). Source: Algeria Investment Climate Survey (2003). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 20

with access to potable water rationed to a few hours Figure 2.18. Water supply interruptions and every other day. Firms are equally affected, of course, ownership of wells by type of firm, Algeria, and in 2001 they averaged almost 42 days without 2001 water supply (figure 2.18). As a result, nearly 33 per- #days without Have water well cent have their own well—compared with 16 percent 60 60% in China, 29 percent in Morocco, and 51 percent in 49.1 50.0% India (figure 2.19). Again, small firms suffer more from 50 41.5 the deficiencies. They went almost 50 days without 40 32.6% 40% 30 25.2% water in 2001, compared with 15 days for large firms. 20 14.8 20% Days without And while 25 percent of small firms have wells, 50 10 % with water well percent of large firms do. 0 0% All Small (<20) Large (100+) Natural gas. The supply of natural gas is reliable, Source: Algeria Investment Climate Survey (2003). with firms reporting only six interruptions on average in 2001, and public firms only one (figure 2.20). But Mobile technology has enabled similar countries getting a connection to the grid takes 134 days on to surge past Algeria in telecommunications. In 1990 average. Algeria had a telephone density of 32.3 mainlines per 1,000 inhabitants, exceeding that in India, China, Telecommunications. The density of the telecom- Morocco, and the Arab Republic of Egypt and falling munications network in Algeria is low relative to the just below that in Tunisia. But by 2001 the picture had country’s income and resources and has changed lit- radically changed. In Algeria the number of mainlines tle over the past decade. And having only recently had less than doubled during the decade, and mobile embraced mobile technology, Algeria also has low density remained low, at 3 per 1,000 in 2001. By con- density of mobile telecommunications compared with trast, thanks to the dramatic development in mobile that in other countries. technology, China, Morocco, Tunisia, and Egypt now

Figure 2.19 Share of firms with own generator or well, selected countries

% 80 69

60 51

40 29 33 29

20 17 16 16

0 Algeria Morocco India China Have own generator Have own well

Source: World Bank investment climate surveys. 2. The Investment Climate in Algeria as Lived by 562 Local Firms 21

Figure 2.20 Interruptions in telephone and new regulatory authority—should significantly im- natural gas service by type of firm, Algeria, prove these measures and increase the supply of 2001 mobile and fixed lines. Number of days without phone Number of days without gas

30 26 28 Ports and customs. Port operations in Algeria are 25 slow. Part of the reason is the inefficiency of port op- 20 15 erators, which are all state owned. But another part is 10 10 6 6 the inefficiency of the customs administration (now 5 1 0 undergoing major reforms). In 2001 clearing imported All Public Private goods through customs took 11.7 days on average, Source: Algeria Investment Climate Survey (2003). compared with 3 in Morocco and 8 in China (figures 2.22 and 2.23). On top of this long delay, what is par- had far more developed telecommunications networks ticularly costly for firms is the unpredictability. The than Algeria (figure 2.21). longest delay for firms in 2001 averaged 44.4 days, Reliability and service are also an issue. In 2001 almost four times the average delay. Small firms ex- firms in Algeria experienced 26 days of telephone perience slightly shorter delays than large firms service interruption (see figure 2.20). But public firms, (probably because they import much smaller quanti- with much better access to the public telephone com- ties), but an even higher variation in delays: the ratio pany for repairs, averaged only 10 days of service in- between the longest and the average delay was 5.4 terruption. Getting a telephone line repaired takes 18 for small firms, compared with 2.2 for large ones. days on average, and getting a new line installed an These long delays are often coupled with corrupt astounding 238 days—compared with only 12 days in practices. The evidence is scarce and should be in- China (see figure 2.15). But recent reforms in the sec- terpreted with care, since response rates to questions tor—including establishing a new legal and regulatory on corruption are usually very low. But the 47 (mostly framework, a multi-operator market structure, and a small) firms that gave estimates of informal payments

Figure 2.21 Mobile and mainline telephones, selected countries, 2001 (Per 1,000 inhabitants)

300 Main lines Mobile phones

200 112

43 40 157 100 3 138 6 103 109 60 34 39 0 India Algeria Egypt, Arab Tunisia Morocco China Rep. Source: International Telecommunication Union. 2. The Investment Climate in Algeria as Lived by 562 Local Firms 22

Figure 2.22 Average and longest waits for imports to clear customs by type of firm, Algeria, 2001

Avg. days to clear customs Longest delay to clear customs

60 54.4 50 44.4 40 29.0 30 20 11.7 10.1 13.2 Number of days 10 0 All Small (<20) Large (100+) Source: Algeria Investment Climate Survey (2003).

claimed that they had to pay an average of 8.7 per- take another seven days. And ports lack sufficient cent of the value of their imports to customs officials storage area. in 2001.17 And for the 12 firms giving estimates of bribe payments in a typical import operation, the av- Tax administration. Tax evasion is widespread in erage was 215,000 Algerian dinars—about 1.7 times the private sector. This might seem surprising, since the GDP per capita. corporate tax rates are moderate. But many enter- Progress has been made at the port of Algiers, prises complain about the tax administration. Com- but port services are still considered an important bined with the tax rate, their relationship with the tax cause of delay for imports. Ports are poorly managed. authorities ranks among the top five constraints to Productivity is low. Freight unloading and handling re- doing business. Although firms mention corruption, mains a public monopoly. The waiting time for a berth their main complaint is the arbitrariness of the tax au- can reach seven days for ships, and unloading can thorities; almost 39 percent of firms see this as a major or severe problem in dealing with tax issues (figure 2.24). And this arbitrariness is linked with am- Figure 2.23 Average and longest waits for biguity in the tax legislation, viewed as a major or se- imports to clear customs, selected countries vere problem by 29 percent of firms. (2000–2001)

50 44.4 Corruption and illegal practices. Corruption 40 ranks high among the constraints to doing business— 30 following only access to credit, unfair and informal 21.2 20 sector competition, access to land, and tax issues. 11.7 12.5 10.6 7.9 10 5.4 Indeed, more than 6 percent of firms, most of them 2.7 0 small, cite corruption as their most severe obstacle. Algeria Morocco India China Nonetheless, response rates to the questions on Avg. # of days to clear customs (imports) corruption were low, between 5 and 24 percent. Longest # of days to clear customs (imports) Response rates were higher for some questions that Source: Algeria Investment Climate Survey (2003). related not to corruption per se but to illegal or infor- 2. The Investment Climate in Algeria as Lived by 562 Local Firms 23

Figure 2.24 Main constraints in dealing with the tax administration, Algeria

40 39.0

29.2

23.0 20.2 20

9.1 Percent responses

0 Other of tax Access to information legislation authorities Determining the tax base Ambiguity of Arbitrariness Source: Algeria Investment Climate Survey (2003). mal behavior, ranging between 25 and 50 percent. repaired, and $540 (33 percent of GDP per capita) to Because of the low response rates, the results need to get a construction permit (figure 2.25). be interpreted with care (box 2.2). (For this reason fig- Much more often than direct bribes, however, it is ures 2.25 and 2.26 show the number of observations personal connections in the public administration or and the response rates.) public utility that help get things done. Thanks to such A few numbers give a sense of the amounts in- connections, 49 percent of firms got their telephone volved in bribes to civil servants or public utility em- line installed, 51 percent got their line repaired, 36 ployees to “get things done”: around $210 (13 per- percent got connected to the electric grid, and 34 cent of GDP per capita) to get a telephone line percent obtained a construction permit. installed or to get connected to the electric grid, $30 Aggregate estimates from the survey also sug- (2 percent of GDP per capita) to get a telephone line gest that informal payments to public officials, when

Box 2.2 On the interpretation of survey data on corruption, illegal behavior, and informal activities

That few business managers answered the questions on Nothing can be inferred from these answers. corruption or illegal behavior is unsurprising, even though Focusing only on the positive answers to the ques- the questions did not directly address their own business tions can give a sense of the magnitude of illegal behav- or experience. Instead, the survey asked for their view of ior and of the typical amounts involved when it takes the extent and amounts of corruption in their sector—that place. But these figures give no information on the extent is, what they think others do. of corruption or illegal behavior by the business commu- Given the low response rates (often less than 25 per- nity in dealing with the administration, nor on the average cent) and the sensitivity of the questions, both the non re- amounts involved. The extent of corruption is best illus- sponses and the responses of zero corruption are likely to trated by how high the issue ranks among the constraints be highly biased in directions that can only be guessed. mentioned by business owners. 2. The Investment Climate in Algeria as Lived by 562 Local Firms 24

Figure 2.25 Firms’ use of informal payments and connections to obtain services, Algeria

% [41, 7] [47, 9] [26, 5] [23, 4] % 40 60 49.1 51.2 32.9

36.2 33.9 40 20 12.8 12.4 20 to relations 1.8

0 0 Service obtained thanks Informal payments (if any) [percent GDP per capita] Installing a Repairing the Connection Getting a telephone telephone to electric construction line line network permit

Source: Algeria Investment Climate Survey (2003).

Figure 2.26 Bribes, kickbacks, underreporting, and informality, Algeria

% 80

[132, 24] 61.1 [127, 23] 60 54.2

20 [66, 12] [105, 19] 8.5 9.8

0 Bribes to civil % Turn-over % Employees % Public contract servants (% sales) declared declared kick-back

Source: Algeria Investment Climate Survey (2003).

they happen, can be substantial. About 12 percent of which the response rate was 49 percent). The answer: the firms gave an estimate of the illegal payments 9.8 percent of the value of the contract. made every year to civil servants to “get things done”: Questions about tax evasion and unregistered 8.5 percent of sales on average (figure 2.26). Most of labor generated much higher response rates. About these respondents are small private firms, suggesting 24 percent of firms (47 percent of small firms) claimed that small firms more often face requests for bribes by that most firms in their sector declare less than 100 corrupt public officials. About 19 percent of firms pro- percent of their sales to the tax authorities—61 per- vided estimates of the average kickback on public cent on average. And 23 percent of firms (48 percent works contracts (again mostly small firms, among of small firms) claimed that not all employees are for- 2. The Investment Climate in Algeria as Lived by 562 Local Firms 25

mally registered—estimating that only 54 percent are Survey evidence on average. A well-functioning judiciary is of course critical for business. Recall the large collateral that bankers re- Policy recommendations quire from their clients. Bankers probably discount the Some of the administrative barriers call for urgent true value of the guarantees, since collection through simplification of procedures, for e-enabling of public a court process would be too costly and require too agencies, and for the successful rollout of an effective much time and effort. network of one-stop shops for business registration. When asked how well the judicial system func- In addition, current efforts to improve access to infor- tions on commercial matters, businesses first com- mation need to be scaled up, as do the ongoing re- plained about the slowness of the courts. Fifty-six per- forms of the judiciary, customs, and tax authorities.18 cent of businesses that had not gone to court in the Extending the scope of privatization, special em- previous five years perceived the Algerian judicial phasis should be given to increasing private partici- system as never or rarely quick in processing cases pation in infrastructure services to mobilize the capi- (figure 2.27). Perceptions are even worse among tal and management skills needed to address the businesses that had gone to court: 69 percent judged shortcomings in service delivery. Once air transport, the judicial system to be never or rarely quick. mobile telecommunications, and road transport are Businesses also complained that the judiciary is opened to private operators, the focus should shift to never or rarely able to enforce its decisions, an opin- introducing private participation—through both in- ion held by 34 percent of firms that had gone to court vestments and concessions—in the processing of and 22 percent of those that had not. water, the distribution of water and energy, the deliv- One consequence of these perceptions is that ery of port and airport services, the management of most conflicts are resolved outside the judicial system the industrial parks, and the rehabilitation of their in- (particularly in cases of nonpayment, in which firms frastructure. In parallel, Algeria needs to strengthen go to court only 5.9 percent of the time on average). its regulatory capacity to deepen the private partici- Small firms especially are unlikely to go to court: they pation needed in other infrastructure services. reported resorting to the judicial system only 2.3 percent of the time on average and resolving 93 percent The judicial system of cases through private settlements. Large firms re- The Algerian legal system is becoming progressively sort to courts in 10 percent of disputes, and public more attuned to the requirements of a market econ- firms in 14 percent. omy. But it still functions far from smoothly—because By contrast, firms perceive respect for property of the shortage of qualified commercial judges and rights as relatively good. Most firms view contracts because of the business community’s lack of under- and property as well protected by the state and the ju- standing of instruments that have proved successful diciary, with only 15 percent disagreeing with this per- in other market economies (such as bankruptcy, ception in most cases. Unsurprisingly, small firms collateral legislation, and alternative dispute resolu- appear to feel more vulnerable on this issue than do tion). Moreover, the business community has little large firms. trust in the impartiality of the judicial system and still tends to see it as slow, costly, inefficient, and best Policy recommendations avoided. And corruption and governance problems Algeria’s legal system for commercial matters requires are common. fundamental reform that would dispense with the so- 2. The Investment Climate in Algeria as Lived by 562 Local Firms 26

Figure 2.27 Firms’ perception of the judiciary, Algeria

% Rarely Never 70 69.3 Went to court in the past 5 years 60 55.6 • • • 50 • • • • • • • • • 40 • • • • • • 34.2 • • • 30 • • • 28.6 • • • 22.4 22.9 21.5 20.1 • • • • • • • • • 18.8 19.7 20 • • • • • • • • • • • • • • • • • •

Percent responses • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 10 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 0 • • • • • • • • • • • • { { { { { Quick Can enforce Consistent Fair and Honest, decisions unbiased corrupt free Source: Algeria Investment Climate Survey (2003).

cialist legacy and place the company at the center of sulting services remain underdeveloped. Enterprises economic activity. In the short term the need is to also suffer from excessively high social security taxes speed the judicial reform relating to commercial mat- (currently 33.2 percent) and cumbersome labor ters, particularly setting up independent commercial regulations. courts. Just as urgent is the need to scale up the training program for commercial judges to reach many Survey evidence more beneficiaries, particularly in the areas of collat- Of the firms surveyed, 55 percent reported con- eral legislation, bankruptcy laws, and small-claims straints in recruiting. More than 80 percent of these commercial disputes. In the longer term Algeria firms blamed the lack of qualified labor; 80 percent needs an ambitious and credible strategy to combat also blamed the lack of training that meets their needs corruption. (figure 2.28). Yet less than 32 percent of firms provide formal training to their employees. Only among large Human resources firms, most of them state owned, do a large share (62 The Algerian business community has not yet made percent) provide training. the transition from entrepreneurs who created enterprises and survived in a planned economy to man- International perspective. Comparative data on agers capable of developing firms and innovating in a the education of workers by occupation in the textile market economy. The Algerian labor force appears to industry provide some international perspective. In lack good mid-level staff, such as factory foremen Algeria managers in this industry have 12.8 years of and skilled workers. And finding the new skills education on average, professionals (with a technical needed to compete internationally is difficult. More- degree) 13.6 years, skilled professionals 9.4 years, over, while there is a strong demand for training, the and unskilled workers 5 years (figure 2.29). These fig- Algerian education system does not meet the needs ures are all close to those for Morocco—but markedly of enterprises and post-education training and con- lower than those for India. 2. The Investment Climate in Algeria as Lived by 562 Local Firms 27

Figure 2.28 Reasons cited by firms for recruiting problems, Algeria

% 100 80.0 80.8 75

50 22.8 25.3 25 18.3

0 Inadequate Labor Lack of Unattractive Other training legislation qualified location labor Source: Algeria Investment Climate Survey (2003).

Wage variations. An analysis of wages paid to Policy recommendations workers in the firms surveyed reveals some interest- In the long term the reform of the education system— ing—though not unexpected—results.19 Women re- particularly at the secondary and university levels— ceive significantly lower wages than men—18 percent should be geared toward producing skills that meet lower when all other factors are controlled for. Workers market demand. More urgent, however, is to reform receive significant returns to education, with each ad- the system of professional training centers, particu- ditional year adding around 4 percent to their wages. larly in management training, by increasing private Wages are also notably higher in northern than in sector involvement and by introducing self-financing southern wilayas, in larger enterprises, and in infor- mechanisms (or carefully designed subsidy mecha- mation services, construction, the chemical and phar- nisms, such as matching grant or voucher schemes maceutical industry, and the mechanical and electri- for small and medium-size enterprises) that would en- cal sector. sure that training responds to market needs.

Figure 2.29 Average education of textile industry workers by occupation, selected countries

15.9 16.1 15 13.6 14.0 13.7 12.8 11.3 10 9.4 9.5 8.0

5.0 5.5 5

Years of education 0 Algeria Morocco India

Management Professionnal Skilled professional Unskilled workers

Source: Algeria Investment Climate Survey (2003). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 28

Competition and market openness Other evidence that public enterprises may re- The Algerian business community cites three types of ceive preferential treatment is their greater access to noncompetitive behavior. First, competition from the government and public contracts. While for all firms informal sector—cited almost as often as access to surveyed the revenue derived from sales to the state, credit as the most severe constraint to business de- local governments, or state-owned enterprises aver- velopment, especially by managers of older firms ages 26.9 percent of the total, the share for public en- (see figure 2.1). Second, competition from importers terprises is nearly twice as large—49.7 percent (figure that are able to smuggle in consumer goods in large 2.31). This difference may reflect several things: First, quantities without paying import duties. Third, the rise public enterprises are bigger and may therefore be of new private import monopolies that appear to have more capable of handling the usually large public replaced the old state trading monopolies. And pri- works or government contracts. Second, public en- vate entrepreneurs often mention lack of access to terprises have been providing goods and services to public procurement contracts. the government and to other state-owned enterprises for decades, and such long-term relationships are Survey evidence usually slow to change, even if bidding for public con- One indication of the competitiveness of a market is tracts is more competitive today. Third, public enter- the average number of competitors, clients, and sup- prises (or large firms) may receive implicit or explicit pliers that each firm deals with. An interesting differ- preferential treatment. ence emerges here between public and private firms: The sales to public clients also give a sense of the state-owned enterprises have far fewer competitors, key role of the state in the Algerian economy. This is suppliers, and clients, suggesting that they operate in one important mechanism through which the vulnera- niches, oligopolistic markets, or protected markets bility of the state budget to oil price movements is with little competition (figure 2.30). Moreover, entry passed on to the real sector. barriers are high, as evidenced by the 93 days on average that it takes to register a business (see figure Policy recommendations 2.15). Some of these issues relating to competition fall into the broader context of governance and transition pol- Figure 2.30 Competitors, suppliers, and itics. Even so, there is a strong need for action in the clients of private and public firms, Algeria short term:

Number of competitors/suppliers/clients • To review public procurement policies with a view 40 35 Competitors toward creating a level playing field for all enter- 30 Suppliers prises, public or private. Clients • To create a legal and fiscal environment to en- 20 17 14 courage informal companies to formalize.

10 5 • To further reduce import duties so as to encour- 2 2 age compliance (firms avoid duties by smuggling 0 Private Public because duties are high and the penalty for avoiding them is low). Source: Algeria Investment Climate Survey (2003). • To strengthen the antitrust agency. 2. The Investment Climate in Algeria as Lived by 562 Local Firms 29

Figure 2.31 Distribution of sales by type of firm, Algeria

Breakdown of sales by client type % 100

80 16.3 12.8 15.5 Other 60 Large firms (100+) 26.9 23.7 Individuals, small retailers 49.7 40 State, local gvt., SOEs

20 40.0 45.0 Retailers 18.4 0 All Public Small (<20)

Source: Algeria Investment Climate Survey (2003).

Access to information and lack A related issue is the lack of business visibility (or of business visibility the ability to foresee economic developments and The administrative difficulties cited by firms (see sec- policy changes) for investors in the government’s eco- tion above on public services) are compounded by nomic policy choices. The Algerian economy’s expo- difficulties in gaining access to information—such in- sure to oil price volatility is compounded by, and prob- formation as statistics, market data, and laws, regula- ably related to, the lack of stability in policymaking. tions, and procedures. The lack of information makes The government has sent mixed signals on its reform it difficult for entrepreneurs to manage their busi- agenda over the years, amending and changing laws nesses and for bankers to evaluate loan requests. frequently and with little consultation with stakehold- Part of the problem is the weak communication net- ers in private sector development. In recent years, in works. The Algerian public administration, chambers the midst of the frequent changes in policy and gov- of commerce, and industry and professional organi- ernment in Algeria, it has become increasingly diffi- zations lack proper, nationwide electronic networks; cult to discern any medium-term strategy in the gov- the only exceptions are the trade registry and the em- ernment’s policy. bryonic network of one-stop shops being developed by the investment promotion agency (Agence Survey evidence Nationale de Développement de l’Investissement, or Firm managers rank economic policy uncertainty high ANDI). And enterprises lack access to databases and on their list of constraints—after access to credit, un- other information centers that could help in conduct- fair and informal sector competition, access to land, ing market research and updating their knowledge of and tax issues and before corruption. Indeed, 7 per- current (and ever changing) laws and regulations, cent rank it as the most severe obstacle to business. new technologies, and foreign markets. It is virtually Nearly 19 percent of firms judge the laws and regula- impossible for an investor, banker, or policymaker to tions that affect their business to be unpredictable or make reasonable estimates of market shares, com- totally unpredictable. This perception is more pro- petitors, output growth, and market players in a nounced among small firms (21.3 percent) than large sector. ones (13.1 percent). The frequent changes in laws 2. The Investment Climate in Algeria as Lived by 562 Local Firms 30

and regulations are clearly a major issue. So is the Policy recommendations scarcity of information about them. In Algeria business information is still regarded as The survey provides interesting evidence of just privileged, and rarely shared. Developing business how extensive the lack of business information is. information is critical, and it must be done systemati- When asked about their local or regional market cally. A few projects are in the making, by the govern- share, in their main product line, firms gave re- ment and by a private business association, Forum sponses averaging around 18 percent. That seems des Chefs d’Entreprises. And the World Bank’s forth- too high for a random sample composed of mostly coming information and communications technology small and medium-size enterprises. These answers project should provide a framework for action. The are probably “guesstimates,” reflecting investors’ public good characteristics of information call for well-documented overconfidence in their relative po- close coordination and public-private partnerships in sition. More interesting is the result when firms were these efforts. They also argue for a strong state role in asked about their national market share: the average, collecting and providing information and making it at 34 percent, is clearly an even less precise estimate. easily available for analysis and dissemination by pri- The lack of reliable information and the uncertainty vate operators. What is required is developing elec- on economic policy are reflected in firms’ time horizon tronic databases and networks. Such efforts will help in making decisions. More than 40 percent of small domestic enterprises compete on a more equal foot- firms do not look beyond a six-month horizon in making with foreign firms. ing decisions on new products or planning human re- Priorities include systematically publishing all sources (figure 2.32). Indeed, less than 20 percent laws, regulations, and procedures. Another is creating look beyond two years. Large firms look at a slightly a high-profile government Internet portal, spelling out longer term, with around 30 percent looking beyond the functions, services, and requirements of all public two years for new product launches, and 55 percent agencies and forming a cornerstone of e-govern- for new investments. By contrast, 30 percent of small ment. Publicly accessible databases on enterprises firms have six-month horizons on investment deci- and on the prices and availability of real estate should sions, and only 35 percent look beyond two years. also be created. For the financial sector, priorities in-

Figure 2.32 Decisionmaking horizons of managers of small and large firms, Algeria

% % 60 60 New product Investments

<6 months 40 40 1–2 years 3–5 years 20 20 >5 years

0 0 Small (<20) Large (100+) Small (<20) Large (100+) Source: Algeria Investment Climate Survey (2003). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 31

clude upgrading the Central Bank’s risk and credit Comparing productivity across groups information system (including the various credit bu- of firms reaus) with reliable information for financial institutions Large firms perform better than small ones. Their me- and businesses about the creditworthiness of their dian value added is 52 percent higher than that for borrowers and clients. small and medium-size enterprises, and their total Reducing policy uncertainty is also critical, be- factor productivity 49 percent higher—and the differ- yond the larger macroeconomic agenda of shielding ences are statistically significant (figure 2.33). Be- the economy from swings in oil prices.20 This calls for sides the effects of increasing returns to scale, one the government to increase transparency on policy obvious explanation of the difference in productivity is choices, involve stakeholders—particularly the pri- that small and medium-size enterprises bear a dis- vate sector—much more in defining policy options proportionate share of the cost of Algeria’s poor busi- and priorities, and clearly state the main lines of a de- ness environment, as shown by all the survey evi- velopment strategy and economic policy, with credi- dence. That implies a higher cost of doing business ble milestones in its reform agenda. for smaller firms, and thus lower factor productivity. The same pattern, though less pronounced, is found by splitting the sample between public and pri- Productivity and the investment climate vate firms: public firms have higher median value added and total factor productivity than private firms The investment climate faced by enterprises directly do. This result is unsurprising, since in this sample affects their costs, their flexibility, and their ability to large firms, with one exception, coincide with public compete. The objective of the productivity analysis is precisely to assess the impact of the investment climate on firm performance. Two indicators were used Figure 2.33 Productivity of large firms and to measure performance. First, value added per small and medium-sized enterprises, Algeria worker, a measure of labor productivity. And second, (index: small and medium-size firms (SME) = 100) total factor productivity, which is measured as the rel- Median value added per worker ative efficiency in generating value added, holding constant the amount of labor (measured by the num- Large (75) 152 ber of employees), capital stock, and sector and re- SME (363) 100 gion fixed effects (see appendix 2 for details on estimating total factor productivity). 0 50 100 150 200 All but one of the large firms in the productivity Median total factor productivity analysis are state owned, because only one large pri- 149 vate firm (with 100 or more employees) provided the Large (75) two-year balance sheets used to compute value SME (363) 100 added per worker and total factor productivity.21 Thus the results need to be carefully interpreted as pro- 0 50 100 150 200 ductivity comparisons between large state-owned en- Note: Figures in parentheses are the number of firms. terprises and private small and medium-size enter- Source: Authors’ calculations based on data from Algeria Investment Climate Survey, 2003. prises (those with 5–99 employees). 2. The Investment Climate in Algeria as Lived by 562 Local Firms 32

firms, and small and medium-size enterprises with ern wilayas, whether in the East or the West (Oran, private firms. Tlemcen, Annaba, and Constantine). Indeed, the me- New firms (created in 1990 or later) outperform dian value added per worker is 48 percent higher in old firms (created before 1990). New firms have a me- the Center than in the East-West region; the South dian value added per worker 7 percent higher than also outperforms the East-West region, though by a that of old firms, though the difference is not statisti- small margin (figure 2.36). Total factor productivity cally significant (figure 2.35). Their total factor pro- data show the same ranking, with productivity in the ductivity is significantly higher—43 percent higher— Center 18 percent higher, and that in the South 11 than that of old firms. percent higher, than in the East-West region. Since public firms are larger on average than the private firms in the sample, this difference in produc- International perspective tivity may be due simply to the size effect evidenced How well do Algerian firms perform compared with above, rather than to the type of ownership. Indeed, firms in other countries? Firm performance in Algeria, when firm size is held constant, the gap in perfor- China, India, and Morocco was compared in the gar- mance between public and private firms is no longer ment industry, a sector well suited to international significant (figure 2.34). comparisons because it produces a standard product Clear differences also emerge among regions. involving few differences in technology or capital- Firms in the Center, which includes the greater capital labor ratios across countries (results should not be city area (the wilayas of Algiers, Blida, and Bou- extrapolated to other sectors). Algeria shows the low- merdès) perform better than those in the southern est value added per worker—94 percent of the me- wilayas (Ouargla and Ghardaïa) and the other north- dian value added in India, taken as the reference. By contrast, both Morocco and China outperform India,

Figure 2.34 Productivity of public and Figure 2.35 Productivity of new and old private firms with size controlled for, Algeria firms with size controlled for, Algeria (index: private firms = 100) (index: old firms = 100) Median value added per worker Median value added per worker Public (54) 105 New (224) 107 Private (384) 100 Old (261) 100

0 20 40 60 80 100 120 0 20 40 60 80 100 120

Median total factor productivity Median total factor productivity Public (54) 87 New (224) 143 Private (384) 100 Old (261) 100

0 20 40 60 80 100 120 0 50 100 150 200 Note: Figures in parentheses are the number of firms. Note: Figures in parentheses are the number of firms. Source: Authors’ calculations based on data from Algeria Source: Authors’ calculations based on data from Algeria Investment Climate Survey, 2003. Investment Climate Survey, 2003. 2. The Investment Climate in Algeria as Lived by 562 Local Firms 33

Figure 2.36 Productivity of firms by region, Algeria (index: East-West firms = 100)

Median value added per worker South (33) 104 Center (294) 148 East-West (111) 100

0 50 100 150 200

Median total factor productivity

South (33) 111 Center (294) 118 East-West (111) 100

0 20 40 60 80 100 120 140 Note: Figures in parentheses are the number of firms. Source: Authors’ calculations based on data from Algeria Investment Climate Survey, 2003.

with a median value added 14 percent and 30 per- how large are the gains that could be expected with cent higher than that of India (figure 2.37).22 a significant improvement in the investment climate? To address these questions, an investment climate index incorporating different measures of the busi- Productivity, wages, and the ness environment was constructed and then related investment climate to firm productivity (see appendix 2 for a description How much does the investment climate matter in im- of the methodology). The results point to two main proving firms’ performance and productivity? And conclusions:

• Improving features of the investment climate— Figure 2.37 Median value added per worker in the garment industry, selected countries such as access to finance, technology, and reli- (index: East-West firms = 100) able and efficient infrastructure—appears to increase the average value added by each worker. Value -added per worker • A significant improvement in the investment cli- Garment industry mate (one that increases the investment climate Algeria (60) 94 index for firms from the 25th percentile to the 75th) Morocco (308) 114 increases the value added per worker by 74 per-

China (136) 130 cent and more than doubles productivity.

India (210) 100 While these estimates should be interpreted with 0 50 100 150 great caution, they do make the case that investment Note: Figures in parentheses are the number of firms. Source: Authors’ calculations based on data from World Bank climate matters and that improving access to finance, investment climate surveys (2000–2003). technology, and reliable and efficient infrastructure 2. The Investment Climate in Algeria as Lived by 562 Local Firms 34

can have a strong impact on private sector efficiency decision or, in a few cases, because they had aban- and thus on economic growth. doned their investment project.23 Another interesting result relates to wages: More The foreign investors, regardless of their country productive enterprises pay significantly higher wages. of origin, share the same views on the strengths of the So do firms facing a better investment climate (figure Algerian market. The strengths cited most often were 2.38). An analysis controlling for many firm and the size of the market and its potential, competitive worker characteristics shows that workers in firms fac- labor and energy costs, attractive government policy ing a good investment climate (defined as firms with toward foreign investors, and geographical and cul- an investment climate index in the top 25 percent) tural proximity to Europe. earn a median wage 26 percent higher than workers The investors also share the same views on the with similar skills and experience in firms facing a bad weaknesses of the Algerian market. Fears of security investment climate (defined as firms with an invest- problems and political instability still deter foreign in- ment climate index in the bottom 25 percent). This vestors, despite major improvements in the situation analysis suggests that improvements in the business in recent years. Because of these same fears, foreign environment have a significant effect on productivity firms also have difficulty finding expatriate staff willing that trickles down to workers through higher wages. to move to Algeria. This perception of remaining political instability (including crime and disorder) tops the investors’ list of constraints to investing in Algeria. The view of foreign investors The other weaknesses most cited by foreign investors closely match those identified by local in- In September 2002, in parallel with the local survey, a vestors: uncertainty on economic policies and the survey was conducted of 57 potential international in- reform agenda, high administrative barriers that con- vestors from France, Italy, and Spain. All had recently tradict the official willingness to attract foreign direct expressed interest in investing in Algeria but had not investment, governance issues (corruption, law en- yet invested, either because they had delayed their forcement, the judicial system), lack of qualified labor, and the inefficient banking sector. Interestingly, firms’ assessments of the constraints and opportunities of investing in Algeria differ de- Figure 2.38 Median wage paid by firms in pending on their past involvement in the country. different investment climates, Algeria Firms that have invested in Algeria or been involved (index: bad investment climate = 100) in some other way in the country have a better perception of the opportunities in the Algerian market Good IC (855) 126% and rate its weaknesses less severely. Algeria suffers from a bad perception, especially on security and Average IC (1,724) 109% governance. Firms considering investing in Algeria rely for in- 100% Bad IC (860) formation primarily on visits to the country, particularly

50% 70% 90% 110% 130% visits to foreign enterprises that have already in- Note: Figures in parentheses are the number of firms. vested. They give little credit to official reports or Source: Authors’ calculations based on data from Algeria events organized by Algerian authorities. The in- Investment Climate Surveys (2003). vestors’ experiences suggest that senior authorities 2. The Investment Climate in Algeria as Lived by 562 Local Firms 35

are eager to attract investors and to facilitate foreign One of the main issues identified in the earlier direct investment, but the day-to-day administrative study was access to inputs. constraints undermine these efforts to promote a 4. The definition of “old” firms as those created be- good image of Algeria abroad. fore 1990, a year often mentioned as a turning Asked to rank Algeria against its neighbors, point in Algeria’s transition to the market, is sub- Morocco and Tunisia, investors ranked Algeria third jective. But this rule divides the sample roughly in on all criteria except market size, labor costs, and en- two, and the results are robust to different cuts ergy costs. Algeria was ranked third even for invest- (such as 1988 or 1992). ment incentives, despite the fact that it offers larger 5. Many private business associations coexist in fiscal incentives for foreign direct investment. That re- Algeria—including an association of young entre- sult suggests that the negative image of its business preneurs—and they are often unable to stand environment overshadows other advantages of invest- united in the (already limited) public-private ing in the country. dialogue. As a result, in September 2002 most firms inter- 6. These differences are all independent from one viewed were adopting a wait-and-see attitude, possi- another and robust to more careful analysis. See bly setting up a representative office rather than appendix 2 for the results of ordinary probit re- deciding on direct investment. Foreign investors gressions that control for sectors and regions and are awaiting strong signals from the Algerian govern- include all three of the dividing variables: old and ment on its agenda for structural reform, including new, public and private, and small and large. privatization. 7. A defining event was the passage of the Law on Money and Credit in 1990, which granted autonomy to the Central Bank, introduced transparent Notes rules in Treasury and Central Bank relations, and stipulated nondiscrimination in commercial bank 1. Responses related to access to credit have been financing of public and private enterprises. combined with those related to the cost of credit. 8. One notable implicit constraint is that branch Interest rates have recently been low in Algeria, managers in the public banks can be charged and these two issues are often mixed. Access to with wasting public resources if a loan goes un- credit is cited more (by 28 percent of firms) than paid. Indeed, a number of bank managers were its cost, so combining these two does not affect convicted of corruption charges in the 1990s, the ranking of constraints. leading to the present situation of extreme risk 2. The tax rate ranks fourth among the constraints to aversion. doing business—surprising, since corporate tax 9. This result is robust to careful analysis. See ap- rates in Algeria are slightly lower than the average pendix table A2.6 for the results of regressions of for the Middle East and North Africa. While ad- the share of bank credit in investment or working dressing the level of taxes is beyond the scope of capital on a dummy variable for firms created be- this assessment, it does give some evidence of fore 1990. These regressions—which control for the problems businesses face in dealing with the firm size, sector, wilaya, firm ownership, and in- tax administration. debtedness—find a statistically significant (at the 3. See World Bank, “Algeria Private Sector Devel- 1 percent level of confidence) and positive coeffi- opment Strategy Note” (Washington, D.C., 1999). cient on the dummy variable for “old.” 2. The Investment Climate in Algeria as Lived by 562 Local Firms 36

10. This last point is evidence that the issue has less the World Bank’s 2003 Doing Business Database to do with small or new firms having less capacity (http://rru.worldbank.org/DoingBusiness). to present meaningful business plans than with 17. These 47 firms make up only 8.3 percent of the reputation and relationships with bankers. sample. The response rate is actually higher, but 11. Public firms also appear to have better terms on most reported zero corruption, answers that are investment loans: 60 months on average for large ignored here for the sake of illustrating the magni- state enterprises, compared with 48.2 months for tude of informal transactions rather than giving large private firms. The average loan term for exact average amounts, which cannot be esti- small firms is even shorter: 34.3 months. These mated (see box 2.2). differences are due in part to the fact that, unlike 18. See annex 3.1 in chapter 3 and the detailed ac- most private firms, state enterprises have “au- tion plan in World Bank, “Algeria Private Sector dited” financial statements that help in credit Development Strategy Note” (Washington, D.C., evaluation. 2003). 12. Policy interventions are also needed on the bor- 19. See appendix 2 for details on the analysis and the rowers’ side, to improve the ability of small and regression results. The results are robust to vari- medium-size enterprises to prepare bankable ous econometric tests and controls, and all differ- business plans and loan applications. These ences are statistically significant at the 5 percent could include well-designed, demand-driven level. schemes—such as vouchers or matching 20. For more details, see World Bank, “A Medium- grants—to foster the development of a market for Term Macroeconomic Strategy for Algeria” affordable consulting and training services for (Middle East and North Africa Region, Social and small firms. Economic Development Group, Washington, 13. These recommendations focus only on issues di- D.C., 2003). rectly relevant to enterprise credit. The much- 21. That all but one large private firm appear to have needed reform of the financial sector includes refused to provide all the financial information other important aspects not addressed here: re- needed to estimate the productivity measures il- source mobilization, banking supervision, pruden- lustrates the poor governance environment in the tial policies, and banking competition (particularly private sector. to limit oligopolistic behavior by public banks). 22. Comparisons are based on value added series 14. Leasing activities have recently developed in expressed in comparable prices from firm surveys Algeria, but some regulatory constraints remain, conducted in these countries as part of the in- particularly in terms of inadequate provisioning, vestment climate program. Reported statistics are amortization, and tax regulations. median values. 15. To promote competition and ensure competitive 23. For more on the survey findings and the question- pricing, large zones should be divided into more naire, see World Bank, “Algérie: enquête d’image than two plots for concession or sale to different auprès d’investisseurs étrangers potentiels” private promoters. In parallel, careful market reg- (Middle East and North Africa Region, Finance, ulation and supervisory institutions should be put Private Sector, and Infrastructure Group; and in place to prevent collusive practices. Foreign Investment Advisory Service, Washing- 16. In principle, completing the 18 steps to register a ton, D.C., 2003). business should take about 29 days, as shown by 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 37 Private Sector Development

Designing a private sector development strategy: a tradeoff between comprehensiveness and realism 38 Initiating a dynamics of reform and working on a medium-term agenda 39 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 38 Private Sector Development

Designing a private sector development • Increasing the state’s capacity to regulate mar- strategy: a tradeoff between kets, enforce decisions, and ensure a level play- comprehensiveness and realism ing field for all market participants by providing strong, effective, and reliable public services and In parallel with the survey, a careful analysis was con- market institutions (such as customs, the tax au- ducted of the institutional underpinnings of some of thority, the antitrust agency, and judicial bodies). the main constraints to business development identi- • Reducing the state’s intervention in areas where fied by the firms in the survey.1 From a policy stand- private operators should progressively take point, the issue is first to identify the most binding over—land and credit markets, the investment constraints and then to identify the key institutional process, the provision of services to enterprises weaknesses that are common to those constraints. and the provision of infrastructure, and the pro- The main challenge, of course, lies in determining duction of goods and services exhibiting no pub- how best to address these weaknesses and how best lic good or strategic features. All this calls for ac- to sequence the reforms in a broad institutional reform celerating privatization and enforcing market agenda. discipline on the “old economy.”

Finding the binding constraints and Prioritizing and sequencing the reforms identifying common underlying issues taking into account the political and The most binding constraints identified by the firms institutional context can be divided into two groups: First, the constraints Structural reforms are complementary. Thus the bind- relating to factor markets, with credit and land at the ing constraints should not be tackled piecemeal, with- top of the list, followed by the labor market with its out addressing their fundamental underpinnings. The lack of qualified workers, the poor infrastructure, and experience of the transition economies in Eastern the lack of reliable business information (information Europe has unambiguously shown the importance of itself can be considered a factor of production). And pursuing rapid reforms on many fronts to send strong, second, constraints relating to governance, market in- credible signals to investors. To increase investment stitutions, and economic policy—competition issues, in Algeria in the medium term, the government strat- policy uncertainty, corruption, and dealing with the egy should therefore address the constraints while public administration, the tax authority, and the judi- simultaneously launching the corresponding reforms. cial system. Even so, the strategy should prioritize and se- The institutional issues underlying the reforms in quence the reforms on the basis of the political and each of these areas all imply fundamentally redefining institutional context in Algeria and the challenges im- the role of the state in the economy. That is what plied by second-generation reforms. In doing so, the makes implementing these reforms complex, politi- strategy should take into account five issues: cally difficult, and lengthy. In Algeria and elsewhere it is now acknowledged that the state should have a lim- • Some reforms are politically sensitive and require ited role in the production of goods and services— significant consensus building and strong political and a strong role in regulation and market institutions. will, both of which have been lacking or inconsis- But Algeria has made little progress in the second- tent in Algeria (in part because of the political dy- generation reforms needed to transform the state’s namics, but also because pressure for reform has role and support private sector development: fluctuated with oil prices). These are particularly 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 39 Private Sector Development

important for reforms relating to the role of the the complex, competitive politics characterizing public sector in factor markets—such as privati- Algeria’s transition to democracy, this diffusion of zation, reforms of the state-owned banks, and lib- responsibilities may explain some of the stagna- eralization of the land and housing markets. tion in reform—as well as the time and advocacy • In contrast with first-generation macroeconomic work it usually takes to act on even easy reforms reforms, these second-generation reforms for pri- representing quick wins. vate sector development require a lot of capacity building in public agencies to equip them for their new regulatory roles, particularly at the local Initiating a dynamics of reform and government level. They also involve much learn- working on a medium-term agenda ing and fine-tuning during implementation. The unique institutional characteristics of every coun- Taking into account these five issues, a private sector try make one-size-fits-all solutions difficult to development strategy has been devised that ad- use. dresses the political uncertainty and capacity con- • Some reforms involve great uncertainty in out- straints. The proposed strategy consists of two come and in the effects on different groups. For prongs: a short-term (one- to two-year) action plan example, both the government and the private with 20 items—all “quick wins”—and a detailed, sector fear that liberalization of the industrial land medium-term (two- to five-year) policy strategy. market may cause land prices to overshoot. • Despite progress in some areas, the government Short-term action plan—“quick wins” reform agenda has poor credibility in the eyes of The short-term action plan includes measures that both local and foreign investors. The track record would require simple regulatory changes or legislative on reform has led to low expectations, making it amendments, as well as limited short-term reforms difficult for the government to convince investors such as regional pilots (box 3.1). Only one major re- and the public of the soundness and credibility of form is proposed, the privatization of a public bank its reform plan and priorities. That creates a vi- within one to two years—a reform that, in addition to cious circle for policymakers, since poor credibil- its effect on the banking sector, would send an impor- ity makes it even more difficult to build consensus tant signal to foreign investors and improve the gov- and support for reform. ernment’s credibility on its reform agenda. • Since private sector development is a theme Beyond producing immediate effects on the busi- rather than a sector, responsibilities in this area ness environment, these measures are aimed at: are spread among at least five ministries and one public institution—the Ministries of Justice, • Initiating a dynamics of reform by helping to Finance, Commerce, Industry, and Small and strengthen the government’s credibility and es- Medium-Size Enterprises and the investment pro- tablish a visible track record of successful ac- motion agency (ANDI), which reports to the prime tions—or quick wins. If the action plan is carefully minister. While this problem occurs in many coun- publicized and inclusive of all stakeholders, it tries, it is particularly acute in Algeria, where the could also help build support for a more aggres- government has no single champion of reform sive agenda of reform. That would require a com- and no natural home for coordination and advo- munication strategy for publicizing the contents of cacy of private sector development. Together with the action plan, a process for broad consultation 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 40 Private Sector Development

Box 3.1 A private sector development strategy for Algeria: short-term action plan for “quick wins”

Reduce administrative constraints 12. Eliminate the constraints on importing services (such as to business development: technical and consulting services) by making foreign 1. Unify all paper requirements from all the administrations currencies available for such imports and by simplifying involved in business creation into one single file. Simplify and clarifying the approval criteria for such transactions, registration in the process. leaving the Central Bank no discretion to refuse a legiti- 2. In the short term, network all agencies involved in busi- mate import operation. ness registration (CNRC, National Office of Statistics, DGI, investment promotion agency, social security ad- Improve access to industrial land: ministration) and the customs administration. 13. Start reforming the industrial land market by focusing on 3. Authorize domiciliation of a new company at the owner’s one or two wilayas (for details, see annex 3.1 at the end private address, for the first two years of operation. of this chapter). This effort could include privatizing one 4. Authorize payment of 15% ownership tax by the tenant if or two of the state-owned enterprises recently created to landlord did not pay it. manage the industrial zones. 5. Allow investors to start operating their business based 14. Speed the upgrading of infrastructure in industrial zones on a simple declaration (déclaration sur l’honneur) while by significantly expanding and accelerating the Ministry giving them a deadline for finalizing the registration of Industry project (possibly by focusing on one or two process. wilayas). 6. As part of the overall administrative reform, require that each agent be made nominatively responsible of his ad- Improve the functioning of the judicial system ministrative duty when dealing with businesses. 15. Accelerate the training of commercial judges (today only 25 judges are in training) and their specialization in dif- Develop economic and financial information: ferent areas of commercial law. 7. Develop a unified national information system, available in 16. Publish (in particular on the Internet) all judiciary deci- raw format to the public (in particular, through the offices sions related to commercial cases.. of the investment promotion agency), by networking and 17. Set-up specialized commercial courts and small-claims unifying the databases of the National Office of Statistics, courts, by focusing on one or two wilayas, on a pilot the CNRC, and the social security administration. basis. 8. Develop a legal and regulatory framework for the pro- 18. Set-up of arbitration units (centres d’arbitrage) in the duction, treatment, access and sharing of national eco- chambers of commerce of these two wilayas, on a pilot nomic information. basis. 9. Make the risk and credit information system, and the credit bureaus of the Central Bank (centrale des risques, Improve access to credit: centrale des bilans, centrale des impayés) operational in 19. Reduce the constraints to the development of leasing ac- the very short term. tivities—by adapting prudential regulations to international standards (the regulations are now the same as Reduce constraints to the development those for any credit transaction), eliminating double tax- of services and distribution activities ation in leaseback transactions (when both ownership 10. Eliminate in the business regulation and the investment transfers are executed), and broadly publicizing leasing code any discrimination between trade and services ac- tax regulations in the tax administration, where they are tivities versus industry. usually misinterpreted. 11. Eliminate constraints to foreign investment in trade, dis- 20. Privatize one large-network commercial public bank over tribution and services, in particular by authorizing the a one- to two-year horizon. transfer abroad of benefits in these sectors. 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 41 Private Sector Development

with representatives of the private sector and management capacity, and involvement and monitor- unions, a timeline for carrying out the action plan, ing by senior officials, particularly at the wilaya level. and information on how the results would be as- Some of the reforms could be implemented gradually sessed (preferably by an independent council of (though still comprehensively), beginning in one or investors). two regions—to build capacity, learn from implemen- • Building capacity, support, and knowledge for im- tation, and build consensus on progress made (for plementing reforms. As noted, some reforms re- examples, see the summary in annex 3.1). quire much capacity building as well as learning during their implementation. Others involve much What does the strategy leave out? uncertainty in their outcome and require demon- The strategy is limited to areas in which reforms can stration effects to gather support. The one- to two- improve the investment climate in the short to medium year action plan includes pilot reforms, possibly term. It gives priority to reforms that are complemen- at a regional level, that would help achieve these tary—such as those in banking, the land market, the objectives. judicial system, and the information system. And it puts less emphasis on some of the longer-term issues Medium-term policy strategy identified in the previous chapter, such as human re- The medium-term strategy for promoting private sec- sources and gender issues. While these issues are tor development covers seven areas of reform: the probably equally important to long-term growth, they public enterprise sector, the industrial land market, require deep, long-term reforms and investments that the financial sector, administrative constraints to do- are beyond the scope of this work. ing business, the tax system, and infrastructure. The One constraint that the strategy does not directly main objectives and the corresponding policy meas- address—though it tops the list of constraints iden- ures are summarized in annex 3.1 at the end of the tified by Algerian firms—is unfair and informal chapter. The summary includes indicators of progress competition. Part of the problem probably relates to for each reform. Many are based on indicators in the governance issues—large trading companies that investment climate survey, suggesting that a new sur- presumably avoid paying tariffs on their imports and vey in a few years could assess the progress of some are therefore able to outperform local producers who of these reforms and their impact on the business en- cannot avoid paying tariffs on inputs. Some of it is due vironment and firms. to the pure informal sector (particularly in the trade The government of Algeria is already implement- sector), estimated to contribute between 10 and 30 ing many of the policy measures, with varying speed percent to GDP. Tax evasion and informal labor also and success.2 The intent of the proposed strategy is number among the competitive practices that are not to deny this progress, but to stress the need for judged unfair—as well as being clearly illegal. None greatly accelerating the reforms and supporting them of the proposed policies directly tackle these con- with a broader range of complementary policy meas- straints. But most of them—particularly those relating ures, without which they may have only a marginal im- to governance, the judiciary, and the strengthening of pact. the antitrust agency—are aimed at improving the in- Implementing this set of reforms effectively will re- vestment climate, which will eventually increase the quire strong political will, ownership, and dedication incentives for businesses to formalize and will reduce in different parts of the government, expert resources, illegal or uncompetitive behavior. 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 42 Private Sector Development

What about interventions targeting small lic contracts, crowding out potentially more efficient and medium-size enterprises? private competitors. And they appear to suffer less The previous chapter identifies strong differences from the current business environment than private among different types of enterprises in the way they firms, except perhaps in access to credit. perceive the investment climate—particularly be- Managers of private firms do not refer directly to tween old and new firms and between small and large the slow privatization as a constraint to their business ones. The strategy does not address these directly, (public enterprises are not the competitors or monop- but instead suggests creating a level playing field olies they used to be). But there are at least three rea- for all firms and strengthening market institutions. sons to accelerate the process, with the appropriate Nonetheless, one area where direct, targeted inter- social safety net in place to ensure social stability: ventions are often popular is the development of small Many public enterprises impose a financial burden on and medium-size enterprises. These enterprises, the state and hamper the ability of some public banks which dominate the Algerian enterprise sector, clearly to extend new credit. Loss-making public enterprises suffer much more from the poor investment climate are tying up resources (land, buildings, human capi- than larger firms do. But without denying that some in- tal). And the slow pace of privatization has adversely terventions targeting small and medium-size enter- affected the credibility of the government’s reform prises could be justified,3 the strategy leaves out such program, especially among foreign investors. Ulti- interventions, because they are likely to have only a mately, the credibility of the government’s reform pro- small impact in Algeria until more fundamental re- gram will hinge on its pursuing rapid privatization forms have succeeded in strengthening the business while ensuring transparency, in order to truly change environment. the incentive structure for privatized entities and mobilize private investment without replacing public Where does privatization fit? monopolies with private ones. This is undoubtedly a Although privatization has been on the agenda in short-term priority in the strategy. Algeria for the past six years, little progress has been made. Four laws were passed, and successive insti- What about industrial policies? tutions were created, then disbanded. In the end only The investment policy debate in Algeria is dominated three privatizations of note were completed. This poor by questions about the international competitiveness performance hurts the credibility of the government’s of different sectors. There is much demand, in Algeria reform agenda, especially among foreign investors. and other countries, to know which sectors will be Moreover, the standstill is having serious side effects. able to compete in a free trade environment—and The unused or oversized land plots of state-owned which will need state intervention to prepare for global enterprises cannot be put on the market. The man- competition. agers of public enterprises appear to be greatly con- The strategy does not address this issue but in- strained not only by weak incentive schemes but also stead focuses on the business environment of firms. by state intervention in their investment and manage- One reason is that the data do not permit such pre- ment decisions—leading in most cases to poorly per- dictions. More important, attempts to predict which forming enterprises, unutilized resources, depreciat- sectors should receive support have generally failed. ing machinery, and huge overstaffing. In addition, as There may be sectors where initial promotion or pro- shown in the previous chapter, public enterprises may tection may be beneficial (that is, infant industries). still benefit from preferential treatment in bids for pub- But these are difficult to identify beforehand, and the 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 43 Private Sector Development

international experience, especially in developing 2. Although, as described in World Bank, “Algeria countries, has been disappointing. In a favorable Private Sector Development Strategy Note” (Wash- business environment investors are best able to iden- ington, D.C., 2003), most of the reform efforts are tify good business opportunities, and Algeria will nat- still too focused on direct state intervention in urally discover what it is good at. Even where general markets. predictions can be made, such as in a resource-rich 3. See in particular Kristin Hallberg, “Small and country like Algeria, the state should in no way favor Medium-Scale Enterprise: A Framework for Inter- one sector or another. That does not mean there is vention” (World Bank, Private Sector Development no room for state intervention to promote investment, Department, Small Enterprise Unit, Washington, but such intervention should not occur at the sector D.C., 1999). level.4 4. State intervention to promote investment might be appropriate, for example, in education and training, in export promotion, and in infrastructure and Notes industrial zoning. And upstream subsidies to improve productivity (such as subsidies for the pur- 1. For more details, see World Bank, “Algeria Private chase of computers) might have economywide Sector Development Strategy Note” (Washington, effects. D.C., 2003). 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 44 Private Sector Development No No Yes No Yes No Yes Yes Potential continued . . . Ministry of Participation and Investment Promotion, other CPE, SGP, stakeholders CPE, other SGP, stakeholders Ministry of Finance (Domaines), wilayas and APCs, Ministry of Justice Ministry of Finance (Domaines), stakeholders EGZIs, Ministry of Industry, Ministry of Finance (Domaines) Ministry of Finance, Ministry of Justice, investment promotion agency (ANDI) Investment promotion Chambers of agency, Commerce Investment promotion Chambers of agency, Commerce exposure and exposure ’ Indicator Main public regional Number of transactions Rate of return of public enterprises and Number of free available plots; price differential investment Improved climate indicators of industrial Share parks privately managed in Improvement banks portfolios; greater to allocation of credit small and medium- size enterprises investment Improved climate indicators Summary ” s direct involvement in the s direct ’ s involvement to its regulatory ’ old sector “ (valeurs mobilières) Improve access to market and credit information access to market and credit Improve Simplify enterprise registration Develop business information Accelerate transparent privatization based on the Accelerate transparent existing legal framework signals by achieving key credible Send strong, successes Discipline the Increase the supply of available public land, and Increase of sell or concession at auction major shares public land to unify the dual market Review the institutional setup of land market, limiting the state function Foster private participation in the development and management of industrial parks Reduce the state regulation financial sector and strengthen Foster legal reform, such as in collateral to and legislation relating legislation, bankruptcy, stocks • • • • • • • • • • • 1. Enforce market 1. Enforce discipline on public enterprises and foster the privatization agenda 2. Reform the institutional setup for the industrial land market to increase the supply of land plots at market rates 3. Accelerate the comprehensive reform of the financial sector 4. Reduce administrative bottlenecks and access to improve information services Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Short- to medium-term objective Short-term policies of progress institutions involved rollout? 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 45 Private Sector Development s ’ No Yes Yes Yes Potential continued . . . with a view to truly — (continued) Ministry of Finance sector Ministry of Industry, ministries Ministry of Industry Ministry of Justice, chambers of commerce, organizations professional (such as notaries) s lag in privatizing industry and the performance gap ’ Indicator Main public regional Reduced number and rates of taxes investment Improved climate indicators investment Improved climate indicators investment Improved climate indicators Summary by moving ahead with the selected pilot transactions (under the World Bank by moving ahead with the selected pilot transactions (under World ” success stories “ Accelerate the schedule for privatization. Given Algeria between public and private enterprises, the planned 10-year time horizon for privatizing enterprises still in public hands appears very of cautious. Accelerating privatization would call for stepped-up restructuring would entail short-term nonviable. That process public enterprises and liquidations of those that are distressed economic and social costs (further payments). But with the labor shedding) as well fiscal costs (redundancy and should be able to rapidly in place, private enterprises would see faster growth right business environment that privatization however, All this would require, tax receipts. jobs and increasing those costs by creating offset manner and on the basis of clear objectives (now established) be pursued in a transparent changing the incentive structure for privatized entities and establishing competition in the market. changing the incentive structure quick Create privatization project) that have economic significance but limited complexity in termsprivatization project) of regulatory needs and being facilitated by specialized investment and social liabilities. Because these transactions are environmental banks and opened to international learning and win over a skeptical investors, they should produce effects public, including the trade union. Market flotation should be avoided (except for minority stakes in context • • Simplify the tax system to pave way for eliminating incentive regimes taxation and payroll Reduce the rates of direct Further facilitate private participation in services infrastructure the to rehabilitate Scale up the ongoing projects in existing industrial zones infrastructure to Foster the ongoing judicial reform relating matters commercial and speed of settlement the effectiveness Improve matters, including by establishing in commercial mechanisms of alternative dispute resolution (arbitration, conciliation, mediation) and of court the enforcement decisions strengthening • • • • • • NFORCE MARKET DISCIPLINE ON PUBLIC ENTERPRISES AND FOSTER THE PRIVATIZATION AGENDA 1: E BJECTIVE Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Short- to medium-term objective and 5. Improve taxation reduce access to 6. Improve quality infrastructure the legal 7. Improve Short-term policiesand judicial system of progress institutions involved Accelerate transparent rollout? privatization based on the existing legal framework credible Send strong, signals by achieving key successes Policy details O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 46 Private Sector Development continued . . . (continued) that is, according to privatization methods, such as that is, according (continued) — Accelerate the restructuring of public enterprises by selling nonperformingAccelerate the restructuring assets, terminating nonviable activities, and liquidating nonviable enterprises. by transferring business, in particular, concentrate public enterprises on their core facilitate restructuring, To for social services and the management of assets to small enterprises that may be responsibility downsizing. staff through created to public enterprises. credits Eliminate fiscal and financial subsidies directed Accelerate the industry on all industrial enterprises to promote level diagnostics impose ISO quality standards Union. trade zone with the European competitiveness in the free budget constraints entails eliminating a wide range of explicit and implicit mechanisms to Imposing hard to enterprises and banks, including tax exemptions, fiscal financial subsidies, channel public resources to do so may put macroeconomic and contingent liabilities. Failure credits, directed budget and tax offsets, stability at risk, as shown by the experience of many transition economies. Transfer the ownership of unused land (including excess public enterprises) to state (Land Transfer A dedicated unit at the Ministry for putting the Administration Office). of Finance would then be responsible public auctions. The ownership rights standard designed and monitored properly land on the market, through Municipalities they originally resided. land in industrial parks should revert to the State, where to recover they created. ownership rights to land located in the industrial activity areas should recover of sales to majority owners), since it raises concerns about the weak governance in Algeria. In most structures developing countries stock market privatizations have led to poorly performing is firms. promising More should be and this approach sales to strategic investors that include managerial control, privatization through used for most of the planned privatizations. and supportHave the Ministry both staff of Participation consider increasing and Investment Promotion sectors to functions itself from equipment and reorienting auctions for small enterprises, batch tendering medium-size large an and nonviable enterprises. Consideration should even be given to spinning off and liquidation for distressed in a public administration to avoid the administrative limitations inherent autonomous privatization agency, because of salary qualified staff limitations). recruiting (such as problems budget constraints on public enterprises: hard Enforce Sharply accelerate the census and titling of unused land owned by public enterprises (unused because may also be required. in peri-urban areas closed, or plots oversized). Accelerating the cadastre enterprises are • • • • • • ” old sector “ EFORM THE INSTITUTIONAL SETUP FOR THE INDUSTRIAL LAND MARKET TO INCREASE THE SUPPLY OF LAND PLOTS AT MARKET RATES NFORCE MARKET DISCIPLINE ON PUBLIC ENTERPRISES AND FOSTER THE PRIVATIZATION AGENDA 1: E 2: R BJECTIVE BJECTIVE Discipline the the supply of Increase industrial land Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Policy details O Short-term policy Description O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 47 Private Sector Development continued . . . could be organized (continued) (continued) Observatory to manage the database on industrial real estate. The database to manage the database on industrial real Observatory of Industrial Land as an agency under the Land Administration and decentralized at wilaya level to allow easier access. the Industrial Directorates through Entrust policy and regulatory functions to the Ministry of Industry, at the industrial zones; carrying out primarywilaya level. Responsibilities should include rehabilitating development termsof new industrial land; establishing a standard of reference for private developers; developing specifications for automatic delivery of building permits; monitoring compliance with the terms of reference, and ensuring compliance with sale or lease contracts issued regulations; including safety and environmental by the Land Administration. easy access to the database managed by Agency to providing of the Investment Promotion Limit the role to land leases and relating Land observatory; disseminating information and procedures on laws, regulations, Agency should not be sales; and helping investors identify obtain land. The Investment Promotion involved in the sale or long-term lease of land. Disband the CALPIs. should be made publicly accessible (including through the Internet).should be made publicly accessible (including through And the Recover unused, privately owned land wherever legally possible, such as where an investor failed to comply legally possible, such as where Recover unused, privately owned land wherever of its investment within a specified with a covenant of long-term realization lease or sale contract requiring to the Land Administration or municipalities. time frame. The ownership rights should be transferred market prices, database on industrial land, including land available for sale, current a comprehensive Create and availability of land titles (pending completion titling). land (public and private) for sale at auction or under long-term sales should be lease. Direct recovered Offer allowed only in exceptional cases (such as for large investments special zones). Regulations and governing established and auctions, long-term sales should be promptly procedures leases, and direct published. the penalty tax on unused land to discourage speculation and accelerate sale of Significantly increase unused land. the supply of industrial land where to increase industrial parks and activity areas more At a later stage, create unsatisfied. The development of new parks should be subcontracted to private demand might remain (see below for details). promoters of ownership rights to industrial estates, including the sale and long-termEntrust the exercise lease of land, to the Land Administration for state-owned land and to municipalities municipally owned land. transactions and public auctions, make laws, regulations, for transparent procedures Establish standard and conducting transactions should easily accessible to all. Implementing these procedures and procedures in each wilaya its representatives of a dedicated unit at the Land Administration, through be the responsibility and at the municipal level. an Create • • • • • • • • • • • EFORM THE INSTITUTIONAL SETUP FOR THE INDUSTRIAL LAND MARKET TO INCREASE THE SUPPLY OF LAND PLOTS AT MARKET RATES 2: R BJECTIVE Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Reform the institutional and regulatory framework Policy details O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 48 Private Sector Development — continued . . . (continued) (continued) could be freed from the requirement to apply for a building permit. the requirement from could be freed — such as those relating to environmental protection, zoning and building standards, and activities zoning and building standards, protection, to environmental such as those relating — Modernize the interbank payments system and intrabank clearing settlement system, based on modern would be essential for information telecommunications facilities. These improvements systems and reliable mobilizing and allocating savings efficiently. collateral legislation, alternative Speed the reform of the legal framework and judicial system (bankruptcy, to stocks and securities), including the training of judges relating legislation and regulations dispute resolution, to new and existing legislation, for implementation and enforcement responsible and legal professionals excessive collateral. financial transactions, and to allow banks lend without having require secure Accelerate the rehabilitation of industrial parks by subcontracting the work to private developers, including Accelerate the rehabilitation ones, under long-term is inadequate, foreign concession contracts. Since public funding for the rehabilitation private funding will be needed. The Ministry of Industry and Land Agencies should continue rehabilitating to private operators. pending full transfer of that role industrial parks and activity areas or should be allowed to bid for the purchase estate. Private promoters Liberalize the market for industrial real privately managed long-term or improving concession of raw or serviced public land, with a view to creating of an investment plan. And should be expected to meet the requirements industrial parks. Private promoters at the wilaya level) and municipalities should be the Ministry of Industry its representative (through implementation of the investment plan. for monitoring proper responsible ones) to private operators (including foreign Entrust the management of industrial parks and activity areas or managers under a long-termeither outside promoters concession or service contract managers hired collectively by occupants of industrial parks and activity areas. Encourage private operators to participate in all stages of market development. The state, as part of its urban to be developed and invest in the primary should identify urban areas development development strategy, and principal connections to the energy water of raw land (such as the construction major roads networks, all of which works would best be carried out by private operators under well-designed schemes for private participation). The state should then divide the zones into large plots for sale or concession to energy and water for all development (secondary roads, who would then be responsible private promoters, connections, management, fee collection, of existing industrial zones, commercialization, rehabilitation maintenance, and the like). Drastically simplify formalities. For example, investors meeting the requirements of termsDrastically simplify formalities. of reference For example, investors meeting the requirements of an industrial park authorized or forbidden within the park • • • • • • • CCELERATE THE COMPREHENSIVE REFORM OF THE FINANCIAL SECTOR EFORM THE INSTITUTIONAL SETUP FOR THE INDUSTRIAL LAND MARKET TO INCREASE THE SUPPLY OF LAND PLOTS AT MARKET RATES 3: A 2: R BJECTIVE BJECTIVE Strengthen the technical Strengthen of the infrastructure financial sector Foster judicial reform Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy O Short-term policy Description Foster private participation in the development, marketing, and management of industrial parks and activity areas Policy details O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 49 Private Sector Development Centres continued . . . (continued) management capacity. ’ within these institutions; expand the ” windows “ in particular, their revenues on the capital quota of leases and their their revenues in particular, (continued) — and transform banking services in non-urban it into a postal bank, so as to increase a critical step as public banks are granted more autonomy and the banking sector moves toward granted more a critical step as public banks are and supporting the banks this change by strengthening — s influence in lending decisions needs to be sharply curtailed to foster the development of a financial — ’ Prepare for the privatization of the banking sector. Algeria has already facilitated the entry Algeria has already of private banks. for the privatization of banking sector. Prepare But these tend to be small banks concentrating on a few low-risk activities. Expanding competitive banking public banks (see privatizing some, if not all, commercial services to the private sector will ultimately require majority equity private banks in purchasing foreign reputable is to interest below). One possible approach in public banks. and thus gaining strategic control shares Modernize of the Basle the regulatory framework of the banking sector in line with recommendations Committee privatization. An important part of this modernization would be tightening reporting and auditing requirements. the fully privatize at least one public bank through develop banking services for the private sector, To banking services to to offer participation banking services, in order of a well-known strategic investor in retail specialized small and medium-size enterprises through des Chèques Postaux to support a program export and mobilize small savings deposits; introduce financing for small and areas Bank project; World medium-size enterprises; reform and develop housing finance in connection with a current because the traditional lack of is recommended and develop expand mutual farm This approach credit. incentives for expanding bank services to households and small medium-size enterprises, the chronic in mobilizing deposits, and the urgent need for institutional reform all raise serious doubts about inefficiency of bank services to the private sector. the capacity of public banks to become competitive providers to traditional subsidies), for the support, legislation and other arrangements (without recourse Provide through development of export financing and leasing equity capital funds. In supporting export financing through laying the participation in political risk insurance, the government example of Tunisia, could follow the recent and general export guarantee schemes. The important for preshipment credit regulatory obstacles groundwork benefit as these instruments can greatly to leasing and equity capital funds should be removed, remaining now small and medium-size enterprises with a capital base limited collateral. These funds are not deposit-taking institutions. They as banks, even though they are subject to the same prudential regulations need to be adapted avoid In addition, tax provisions should instead be subjected to specific regulations. double taxation of leasing companies value added at the acquisition and sale of leased goods. Similarly, regulations should be revised to facilitate should be revised regulations value added at the acquisition and sale of leased goods. Similarly, equity funds in Algeria. off-shore key to promoting capital and income repatriation, Reform the governance framework of the Ministry of Finance, the public banks, and enterprises. The state changing the to private sector needs. Short responsive of full privatization, that will require sector more for operational governance of public banks so as to give their management full responsibility structure decisions • • • • • s direct ’ CCELERATE THE COMPREHENSIVE REFORM OF THE FINANCIAL SECTOR 3: A BJECTIVE Reduce the state involvement in the financial sector while upgrading its regulatory role Expand banking services to the private sector Develop new financing instruments Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Policy details O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 50 Private Sector Development continued . . . (continued) Once step 1 is completed, work could start on (liasse unique). (continued) to give them agreements, identification numbers, and, in some cases, notice of to give them agreements, — s one-stop-shop would then be responsible for sending the informations one-stop-shop would then be responsible to all organizations. ’ usually by mail — payments to be made (such as social security charges). Initially the system would need paper-based, networks within and among public agencies. pending the development of electronic establishing a unified registration file that would satisfy the requirements of all organizations involved, file that would satisfy the requirements establishing a unified registration entrepreneurs of identity from proof For example, all organizations require eliminating redundancies. a new firm. would have to be submitted only once. The investment With a unified file, such proof registering agency promotion fees should also be centralized. Such a system would vastly simplify the The payment of registration would have to deliver only one set of documents place since entrepreneurs process, registration of all the organizations. The organizations could then contact entrepreneurs to satisfy the requirements directly Step 1: Review and simplify the procedures and documents required. Today each organization involved in Today and documents required. Step 1: Review and simplify the procedures should and the documentation required process The entire has its own requirements. enterprise registration there and simplified, to eliminate all unnecessarybe reviewed forms and avoid duplication. In particular, it for other investment files, freeing agency to review should be no need for the investment promotion and be granted activities. Any incentives given to investors should fall under a common legal regime automatically. file Step 2: Establish a unified registration The network of one-stop-shops should eventually be organized so registration. Step 3: Develop electronic a single computerized form, to all could be completed through to be sent electronically that registration Pursue the implementation of the investment promotion agency (ANDI), which is now rightfully focusing on Pursue the implementation of investment promotion But the system being installed developing a nationwide one-stop-shop agency for enterprise registration. recommended: The following actions are needs to be improved. Promote the stock market, including by improving securities regulations and floating shares of privatized and floating shares securities regulations the stock market, including by improving Promote enterprises. This effort would help support private sector development by mobilizing capital, broadening corporate governance.ownership, and improving the knowledge on credit to improve Develop an economic and financial information bureaus system and credit risk. applicants and the assessment of credit better consulting and training supportIncrease to small and medium-size enterprises help them prepare business plans and loan applications. Improve corporate governance in private companies to allow for greater transparency and better assessment of corporate governance transparency Improve in private companies to allow for greater the legal framework under which they operate. their needs and capacities. This effort would involve reviewing • • • • • EDUCE ADMINISTRATIVE BOTTLENECKS AND IMPROVE ACCESS TO INFORMATION SERVICES CCELERATE THE COMPREHENSIVE REFORM OF THE FINANCIAL SECTOR 4: R 3: A BJECTIVE BJECTIVE Simplify enterprise registration Improve the ability of Improve small and medium-size enterprises to present and loan proposals meaningful business plans O Short-term policy Description Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Policy details O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 51 Private Sector Development continued . . . taxe sur l’activité (continued) . To address these issues, the address . To should be further developed, as an — in particular, through PROMEX, the through in particular, — (charges sociales) (continued) such as the Kompass — databases on enterprises, including financial statements. Eventually, — ), the level of some taxes, an overly complex incentive system that can and to form the first cornerstone of e-government in Algeria. — versement forfaitaire and and make publicly accessible — relevant organizations. Such a system should be tested in a few pilot one-stop-shops before being extended organizations. Such a system should be tested in few pilot one-stop-shops before relevant nationwide. Step 4: Expand the network of one-stop-shops. chambers of commerce and industry, Exporters Association (ANEXAL), the Business Linkages Marketplace, and industry, chambers of commerce trade should also be accessible agencies involved in foreign sites of foreign The Web and private providers. these Algerian organizations. through private provision of informationprivate provision about enterprises essential aid to market research. essential aid to market research. Land the proposed Make information estate publicly accessible through on the price and availability of real Observatory. financial institutions and businesses to provide information bureaus) a risk and credit system (credit Create information and clients. about the creditworthiness of their borrowers Develop information markets and potential partnerships about foreign Publish all laws, implementation decrees, and regulations and make them available to the public (such as and regulations Publish all laws, implementation decrees, public access to information, the scope for differing site). Besides improving this would reduce a Web through by enterprises and public agencies. of laws and regulations interpretations spelling out their functions, services, and require- brochures precise public agencies to publish clear, Require site, a high- make such information their own Web ments. Although most agencies already available through a one-stop-shop for governmentprofile Internet investors and entrepreneurs portal to offer should be created accessing such information Improve following actions could be considered: lead to distortions or discretion, and the administrative procedures and interaction between tax authorities lead to distortions and the administrative procedures or discretion, firms. taxes Compounding all this is the high level of payroll Despite efforts to improve relations between corporate taxpayers and tax authorities a income relations Despite efforts to improve tax rate close to the international average, many firms report that the tax system continues to hinder their may include the number of taxes (including of the tax system indicate that problems development. Initial reviews some that many other countries have eliminated or set at much lower levels, such as the professionnelle • • • • • • EDUCE ADMINISTRATIVE BOTTLENECKS AND IMPROVE ACCESS TO INFORMATION SERVICES MPROVE AND REDUCE TAXATION 5: I 4: R BJECTIVE BJECTIVE Simplify the tax system to pave the way for eliminating incentive regimes Reduce the rates of direct taxation and payroll Develop business information O Short-term policy Description Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Policy details O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 52 Private Sector Development continued . . . taxe sur (continued) and progressively reducing the reducing and progressively as an advance payment by firms the corporate toward versement forfaitaire with a view to eliminating it in the medium term. is to A second possible measure taxe sur l’activité professionnelle (continued) l’activité professionnelle the lowered treat income tax, which should help reduce the tax burden. The corporate income tax, though set at a reasonable the tax burden. income tax, which should help reduce and easier redundant level, could be further which would help make the special incentive regimes reduced, over time. to remove with a view to continuing simplify them. In the short term, tax procedures review or useless in a reformed tax environment. made redundant In the medium term, the incentive regimes remove incentives or to delays in in awarding and can lead to discretion complex and generous are The regimes Besides being of doubtful value in attracting new investment, they additional controls). investments (through that the tax burden unhealthy distortions an implicit recognition can create in the economy and also reflect will be no need for special With a simple tax system setting competitive rates, there on firms is too heavy. Any incentive that the government temporarily while the tax system is incentive regimes. wishes to retain as possible. These incentives should be incorporated in the should be as simple and transparent improved legislation (for example, customs incentives in the legislation, and tax relevant to of 2000) and should be automatically awarded legislation) rather than the Investment Code (Decree businesses meeting objective criteria specified in the legislation. The government, the National through Investment Council should define the objectives and priorities of investment incentives as well criteria for their award. The analysis should take into of changes in the tax system on fiscal revenues. analyze the effect Carefully account international developments and rules (on the use of incentives, for example) in such bodies as Organization, and Organisation for Economic Co-operation Development. Trade Union, World European To inform any tax reform, conduct an in-depth review of the tax system for firms and entrepreneurs. The study inform of the tax system for firms any tax reform, conduct an in-depth review and entrepreneurs. To possibly using the taxes, and incentive regimes, taxes, social and payroll should take into account direct the world. It should Algeria with other countries around to compare tax rate approach marginal effective the system, based on international to improve best practices. And it should seek to measures propose and consider alternative of income in case revenue the fiscal impact of these measures sources measure loss for the state. In the short term, consider eliminating the • • • • • MPROVE AND REDUCE TAXATION 5: I BJECTIVE Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Policy details O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 53 Private Sector Development continued . . . valeurs ), laws and (continued) ) and securities ( Journal Officiel and other agents involved in economic (huissiers), faillite et réglement judiciaire ). regulations should be disseminated through organizations, professional journals, organizations, professional and chamber of commerce should be disseminated through regulations bulletins. of economic and financial disputes, institutionalizing strengthening Give specific attention to the resolution training such disputes. Appropriate for resolving courts procedures commercial and developing efficient should be developed for judges, lawyers, bailiffs programs Disseminate drafts of laws and regulations affecting the private sector to allow opportunities affecting for comments and Disseminate drafts of laws and regulations to economic and institutional needs identified by the governmentfor responses and the private sector. adopted to allow enterprises adjust and prepare as soon they are Disclose new laws and regulations gazette ( for compliance. In addition to the traditional publication in official and financial transactions, focusing on legal issues relating to stock management, securities, bankruptcy, and financial transactions, focusing on legal issues relating economic contracts, and comparative law. to bankruptcy ( Review and develop laws relating mobilières to business and simplify or abolish all those constituting related and procedures requirements Assess current starting is to or seen as constituting hindrances to easily and efficiently new businesses. One recommendation establish a single permit, by a one-stop shop, for all new businesses. delivered As part of extending the scope privatization, give special emphasis to further facilitating private participation the shortcomings services, mobilizing the capital and management skills needed to address in in infrastructure Priority should be given to the services posing most important constraints, with a view to service delivery. Priority adequate service delivery. the least regulatory capacity to ensure choosing the arrangements requiring water distribution, electricity generation, and portsectors include water processing, and airport services. sales to private operators or concession contracts. direct Private participation through should be introduced For example, port operations should be subcontracted to private operators under a concession and freight handling should be liberalized. Build the necessary regulatory capacity for extending and deepening private participation in other relevant services. infrastructure zones. in industrial parks and commercial the infrastructure additional public investment to rehabilitating Direct These investments should be accompanied by the much-needed reform of the industrial land market, in by handing over the management of industrial parks to private operators. particular, • • • • • • • • MPROVE THE LEGAL AND JUDICIAL SYSTEM MPROVE ACCESS TO QUALITY INFRASTRUCTURE 7: I 6: I BJECTIVE BJECTIVE Foster the ongoing judicial to reform relating matters commercial the effectiveness Improve and speed of settlement matters, in commercial including by establishing mechanisms of alternative dispute resolution (arbitration, conciliation, mediation) and the strengthening of courtenforcement decisions Further facilitate private participation in servicesinfrastructure Scale up the ongoing the to rehabilitate projects in existing infrastructure industrial zones O Short-term policy Description Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Policy details O Short-term policy Description 3. Looking Ahead: Short- and Medium-Term Strategies for Fostering 54 Private Sector Development (continued) observatoire independent des marchés observatoire Such a watchdog ( (Code des Marchés Publics). (Code des Marchés (continued) ) would not replace existing institutions in charge of monitoring public spending (Cour des Comptes ) would not replace Review the competition law, removing any provision that may limit competition among enterprises and ensuring any provision removing Review the competition law, regulatory institution should be established with the participation An effective of all that the law prohibits. of the government, as well consumer organization, and chamber of commerce stakeholders (representatives which did not fulfill its mandate. the anti-trust agency, to replace as a judge or lawyer to guide the process) all guaranteed to register on collateral and establish a single office Develop specific laws and regulations transactions and collateral pledges. rules under the Establish an independent watchdog to monitor the implementation of public procurement Code Procurement publics nondiscrimination among potential bidders and sound, transparent and IGF) but instead would help ensure processes. public procurement Establish and further develop mechanisms of alternative such as conciliation, mediation, dispute resolution, and and arbitration. The arbitration mechanism being implemented by the Algerian Chamber of Commerce Industry the assistance from with the assistance of International needs more Chamber of Commerce government for training, organization, and other resources. • • • • MPROVE THE LEGAL AND JUDICIAL SYSTEM 7: I BJECTIVE Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy Policy details O Short-term policy Description Appendixes 55

Appendix 1: Investment Climate Survey Table A3.4 Firms’ evaluation of general Methodology and Sample 56 constraints to operation in Figure A1.1 Sampled firms by sector 59 Algeria, in international Figure A1.2 Sampled firms by wilaya 59 comparison and by firm Figure A1.3 Sampled firms by number of characteristic 76 employees and private or Table A3.5 Infrastructure performance public ownership 59 indicators in Algeria, in Figure A1.4 Sampled firms by year of creation 60 international comparison and Figure A1.5 Sampled firms by legal form 60 by region 77 Figure A1.6 Destination of sales Table A3.6 Infrastructure performance by sampled firms 60 indicators in Algeria, by firm Appendix 2: Technical Appendix on Data Analysis 61 characteristic 78 Figure A2.1 Productivity of firms in different Table A3.7 Sources of finance for firms investment climate clusters, in Algeria, in international Algeria 62 comparison and by firm Figure A2.2 Estimated gains from improving characteristic 79 the investment climate from bad Table A3.8 Firms’ credit, loans, and liabilities to good 63 in Algeria, in international Table A2.1 Defining investment climate comparison and by firm clusters, Algeria 62 characteristic 80 Table A2.2 The impact of investment climate Table A3.9 Financial sector and property on firms’ productiviy (Algeria) 64 rights indicators in Algeria, in Table A2.3 Test for differences in mean by international comparison and category: value added per worker 65 by firm characteristic 81 Table A2.4 Test for differences in mean by Table A3.10 Regulatory burden and category: total factor productivity 66 administrative delays in Algeria, Table A2.5 Wage regressions 68 in international comparison and Table A2.6 Investment climate constraints by firm characteristic 82 regressions 70 Table A3.11 Indicators of uncertainty and Appendix 3: Cross-Country Investment Climate corruption in Algeria, in Indicators and Macroeconomic 73 international comparison and Table A3.1 Sample structure for Algeria by firm characteristic 84 investment climate survey 73 Table A3.12 Technology indicators in Algeria, Table A3.2 Globalization of markets and in international comparison and inputs in Algeria, in international by firm characteristic 85 comparison and by firm Table A3.13 Labor and training in Algeria, in characteristic 74 international comparison and Table A3.3 Firms’ competitors, suppliers, by firm characteristic 86 and customers in Algeria, in Table A3.14 Main indicators of macro- international comparison and economic performance, by firm characteristic 75 Algeria, 1990–2002 88 Appendix 1: Investment Climate Survey Methodology and Sample 56

The investment climate survey in Algeria was con- South (Ghardaïa, Ouargla). One relatively important ducted on a random sample of 562 firms, both public industrial center—Setif, in the East—was not included, and private, between June 2002 and February 2003. because of the targeted sample size (600). Moreover, Filling out the four-module questionnaire for each firm including it would have given disproportionate weight involved two to three meetings with the business in the sample to the East. owner or manager as well as the accountant and, The sampling methodology was designed to con- where there was one, with the human resource man- struct a sample with the same structure, in terms of ager.1 It also involved interviews with a group of 5–12 sector and size distribution, for each region of the randomly selected workers in each firm, totaling 4,220 country as that of the sample frame. The methodology employees. was as follows:

• The sample of firms was separated by region Sampling methodology and enumeration (East, West, South, and Center). • In each region firms were divided into cells on the The sampling was done on a database of 18,354 for- basis of their sector (10) and their size category mal enterprises. The database, a joint effort of the (5–19 employees, 20–49, 50–99, and 100 or Algerian National Office of Statistics and the tax au- more). thority, is the best available database on enterprises in • In each cell a number of firms were randomly se- Algeria, with comprehensive coverage of the universe lected. The number of firms sampled in each cell of firms that had registered by 2001. was proportional to that cell’s weight (in terms of But the database turned out to have poor-quality number of firms) in the overall sample frame, so as information on addresses and telephone numbers, to obtain the targeted sample size. making the enumeration very lengthy. Moreover, it does not track firms that have exited the market, and around 25 percent of the sampled firms had closed Issues in sampling down or changed sector or location. These firms had For about 27 percent of the database, information on to be randomly replaced. firm size was unavailable. Most (but not all) of the firms in this part of the database were clearly micro- Sampling methodology enterprises. Including these in the sample frame was The 10 sectors with the largest number of registered important to avoid bias. (For example, it could well be establishments were selected. The same sectors that many firms with five or more employees—indeed, would have been selected if the criteria used was the medium-size or larger firms—had refused to give in- sectoral distribution of employment. Contributions to formation on number of employees to the National GDP at this level were not available. The hydrocarbon Office of Statistics. There could be many reasons for sector, the pure trade sector, and government-related this, reasons that would make these firms different institutions were excluded. from those that had provided the information.) Nine wilayas (administrative regions) were se- Because the number of employees was unavailable lected, to cover all areas of the country with major infor these firms, a separate sample frame had to be dustrial concentrations: three in the Center (Algiers, constructed. Blida, Boumerdès), two in the West (Oran, Tlemcen), The relative sizes of the two samples were chosen two in the East (Annaba, Constantine), and two in the on the basis of the estimated number of firms in each Appendix 1: Investment Climate Survey Methodology and Sample 57

with five or more employees (this assumes that the size), and the sample firms were listed in random proportion of firms with five or more employees in the order in each cell (based on wilaya, sector, and firm part of the database with firm size information was the size category except for the second sample, where same as that in the part without firm size information). the cells were based only on wilaya and sector). A first sampling was done on the sample frame based When a firm was rejected for any reason, the re- on the firm size categories (see above). The second placement strategy was simply to pick the first firm in sampling was based on the sectors’ weights. Both the corresponding cell and then delete it from the re- samples turned out to have similar firm size distribu- placement sample. If no replacement firm was avail- tions (except at the upper tail, where there are very able in the same size category, the first one in the ad- few large firms). jacent size category was taken (first the adjacent one One problem in constructing the second sample above, then the one below). If no replacement firm frame was that more than 95 percent of these firms was available in the same sector and wilaya, the miss- were expected to have fewer than five employees, so ing firm was not replaced. Only the project supervisor including all of them in the sample frame would have had access to the replacement sample, and she was led to lengthy fieldwork, with very high rejection and the only one who could replace missing firms. replacement rates.2 To avoid this problem, information on the legal form of the firms was used to identify most Presurvey work and selection and training of the firms for which employee numbers were miss- of the enumeration team ing but that in fact employ five or more workers. First, The questionnaire was adapted to circumstances in all individual companies were rejected from the sam- Algeria. It was tested on 12 firms of different sizes and ple. Second, all stock companies were included in the sectors and subjected to lengthy reviews by many sample, since these usually have more than 10 em- people, including academics, graduate students, and ployees. Finally, a fraction of the limited liability com- staff of the National Center for Population and Devel- panies were included in the sample frame. The size of opment Studies (CENEAP). this fraction was chosen to be equal to the weight of The enumerators were all graduate students in the limited liability companies with five or more em- business or economics. About 30 (from an initial pool ployees, since these appear in the part of the data- of 60) were selected through short, one-on-one inter- base with the information on firm size. views after the training, on the basis of their ability to ask randomly selected questions from the question- Replacement sample naire in mock interviews. Because of the poor quality of the database, it was ex- The training had several parts. A two-day plenary pected that many firms would be out of business, session was held to review the questionnaire in detail. would have changed sector or location (especially Then training was conducted in small groups (essen- small and medium-size enterprises), or would be im- tially mock interviews) under the supervision of CE- possible to locate. Moreover, there was a risk that NEAP controllers. This was followed by about two many would refuse to participate. So, to allow random weeks of field training at the start of the enumeration, replacement of rejected firms, a replacement sample in which controllers accompanied students in the field twice as large as the primary sample was con- and conducted the first interviews. structed. The methodology used was the same as that The World Bank was involved in each step of the described above (including the two separate sam- training, selection, and enumeration. Supervisory vis- plings done because of missing information on firm its to each region were conducted regularly during the Appendix 1: Investment Climate Survey Methodology and Sample 58

enumeration. A local consultant (Mohammed-Cherif • The questionnaire was too long. Because busi- Belmihoub) was recruited to closely follow the work, ness owners were very busy, they often asked for supervise the launch of the survey, and pay visits to interruptions and follow-up visits. Each question- each region. In addition to the main training in Algiers, naire required three to four field visits on average. two other training sessions took place in Constantine • The productivity module was too detailed and far and Oran for the rest of the country. The World Bank too long, leading to many difficulties. Many entre- consultant conducted these training sessions in col- preneurs lost patience and decided to drop out laboration with CENEAP. when they reached that module. During the enu- To establish the right incentives, enumerators and meration a decision was made to shorten the controllers were paid per validated questionnaire. A module to two pages that included only the ques- first validation was conducted at CENEAP, followed by tions needed to estimate the production function. a second at the World Bank. This change greatly improved the situation. • Most small and medium-size enterprises do not Persuading firms to participate have in-house accountants. So separate appoint- Because of the high level of informality in Algeria and ments needed to be made for the productivity part the reluctance of the private sector to share informa- of the questionnaire. tion, special efforts were made to persuade firms to • The enumeration, which started on June 1, slowed participate in the survey. The chamber of commerce significantly between mid-July and mid- and industry in each region contacted its members, September. And it was interrupted by national and a personal letter was sent by fax to each business events such as the international fair and the local owner explaining the objectives, promising that the elections. results would be sent to each firm, and assuring the confidentiality of the information gathered. The letter In addition, some 230 firms had to be recontacted was jointly signed by the United Nations agencies (mostly by telephone) to fill in missing information that coordinator in Algiers (a representative of the United was crucial to estimate the production function. These Nations Development Programme) and the World questionnaires, which the World Bank rejected, had Bank investment climate assessment team leaders. been validated by CENEAP because the World Bank Whenever feasible, the letters were faxed directly had defined no clear validation criteria at the start of from the World Bank office. When no fax number was the survey. This mistake led to an additional one- available, a copy of the letter was delivered by the month delay. enumerator.

Issues in the field Notes Enumeration took much longer than expected, for several main reasons: 1. A French version of the questionnaire can be downloaded from http://www.worldbank.org/ • The contact information in the database was of privatesector/ic/ic_country_report.htm. poor quality. Most phone numbers were wrong, 2. In fact, it would have increased the rejection rate and simply locating the firms often involved of the sample by 0.27*95 percent = 26 percent. lengthy field visits. Appendix 1: Investment Climate Survey Methodology and Sample 59

The sample

Figure A1.1 Sampled firms by sector

Mechanical and electrical Other 1.6% Textiles and garments 26.4% 18.9% Paper BTPH 11.7% Industry 74.6 18.4% Chemicals and pharmaceutica Services 2.8% 12.5% Plastics 11.8% Food processing 8.7% Clay and glass 9.0% 3.3% Leather

Figure A1.2 Sampled firms by wilaya

Ouargla 2% Annaba 4% Tlemcen 4% Ghardaïa 5%

Boumerdes 7% Algiers 48% Constantine 8%

Blida 9%

Oran 13%

Figure A1.3 Sampled firms by number of employees and private or public ownership

Public Private

25% 25.7%

18% 18.3% 11.9%

5–910–19 20–49 50–99 100+ Private 101 140 146 64 50 Public 004753 Appendix 1: Investment Climate Survey Methodology and Sample 60

Figure A1.4 Sampled firms by year of creation

36 32 28 24 20 16 12 8

# firms in sample 4 0

1921 1941 1948 1954 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 Year of creation

Figure A1.5 Sampled firms by legal form

76.6%

9.6% 4.9% 4.9% 3.3% 0.7%

Limited Shareholder EURL SNC Individual Subsidiary liability

Figure A1.6 Destination of sales by sampled firms

% 80

60.0 60

39.2 40

0.7 0 Local market Other regions Export in Algeria Appendix 2: Technical Appendix on Data Analysis 61

Measuring productivity and the • An indicator of use of technology—the share of investment climate employees using a computer. • An indicator of access to finance—a dummy vari- An analysis was carried out to relate the investment able equal to one if the firm has an overdraft facil- climate to firm performance—in particular, to address ity and zero otherwise. these questions: How much does the investment climate matter in improving firms’ performance and pro- Second, a composite index of the investment cli- ductivity? And how large are the gains that could be mate was calculated as a weighted average of the five expected with a significant improvement in the invest- investment climate indicators using principal compo- ment climate? nent analysis. This index shows how good the combi- The results led to two main conclusions: Improve- nation of the five components of investment climate is ments in particular features of the investment climate at the firm level. The cluster of firms facing a bad in- appear to increase the average value added by each vestment climate was defined as the 25th percentile of worker. And a significant improvement in the invest- the index, and the cluster facing a good investment ment climate leads to a 74 percent increase in value climate as the 75th percentile. The average invest- added per worker and a more than doubling of pro- ment climate cluster was defined as the 50 percent of ductivity. These results should be interpreted with firms that are between the two extremes of investment great caution. But they do make the case that invest- climate. ment climate matters—and that improvements in it Thus, for example, firms in the bad investment cli- can have a strong impact on private sector efficiency mate cluster suffer from a median of 20 days of power and thus on economic growth. outages a year, compared with 10 days for those in the good investment climate cluster (table A2.1). Relating the investment climate to firm Similarly, it takes a median of one month for imports to performance clear customs for firms in the bad investment climate The analysis had four main steps. First, a set of five in- cluster, while it takes 12 days for those in the good investment climate indicators were selected, based on vestment climate cluster. And firms in the bad invest- three criteria: The measure can be affected by gov- ment climate cluster have less access to technology ernment policies. It is widely viewed as important. And (using email and computers less) and to finance (with it has important explanatory power. The following indi- most having no overdraft facility, while most firms in cators were used: the good investment climate cluster do have an overdraft facility). • An indicator of physical infrastructure—the num- Third, the analysis evaluated whether differences ber of days of power outages a year. in the investment climate are related to differences • An indicator of the effectiveness of public admin- in firms’ performance. For example, do firms in the istration (customs) as well as infrastructure quality bad investment climate cluster perform different than (ports)—the average number of days for imports those in the good investment climate cluster? The re- to clear customs. sults show that value added per worker in the good in- • An indicator of access to technology—a dummy vestment climate cluster is more than twice as high as variable equal to one if the firm uses email for run- in the bad investment climate cluster—and in the av- ning its business and zero otherwise. erage investment climate cluster 83 percent higher Appendix 2: Technical Appendix on Data Analysis 62

Table A2.1 Defining investment climate clusters, Algeria

Bad Average Good investment investment investment Indicator climate climate climate Investment climate index –0.53 –0.08 0.60 Days of power outages 20 15 10 Days to clear customs 30 15 12 Email? (dummy variable) 0 0 1 Share of employees using a computer (percent) 6 10 20 Overdraft facility? (dummy variable) 0 0 1 Note: The bad investment climate cluster is the 25th percentile of the investment climate index, the good investment climate cluster the 75th percentile. The investment climate index is calculated using principal component analysis of the five indicators of investment climate. The estimated weights are as follows: days of power outages, –0.09; days to clear customs, –0.16; email, 0.29; employees using a computer, 0.25; and overdraft facility, 0.12. Source: Authors’ calculations based on data from World Bank investment climate survey, 2002/03.

(figure A2.1). With differences in capital and labor in- good investment climate cluster than in the bad one. tensity and sector specifics controlled for, total factor Thus better investment climate features clearly seems productivity appears to be 59 percent higher in the to increase the average value added by each worker. Finally, the analysis estimated the size of the productivity gains firms could expect from a significant Figure A2.1 Productivity of firms in different improvement in their investment climate. To estimate investment climate clusters, Algeria these gains, a regression analysis was conducted to (Index: bad investment climate cluster = 100) evaluate how the productivity measures (value added Median value added per worker per worker and total factor productivity) are affected by the investment climate, holding constant such Good IC (140) 219 basic characteristics as sector and region, firm age, Average IC (193) 183 and firm size (including the initial number of employ-

Bad IC (105) 100 ees and initial sales). (For the regression results, see table A2.6 below.) 050 100 150 200 250 Simulations were then carried out to calculate the Median total factor productivity size of the productivity gains that would be made if

Good IC (135) 159 the bad investment climate cluster could be raised to the level of the good investment climate cluster, keep- Average IC (171) 147 ing other factors constant. In other words, the analy- Bad IC (95) 100 sis estimated the effect on a firm’s performance of re- 0 50 100 150 200 ducing the number of days of power outages from 20

Note: Figures in parentheses are the number of firms. to 10, reducing the number of days to clear customs Source: Authors’ calculations based on data from World Bank from 30 to 12, increasing the use of email and com- Algeria investment climate survey 2003. puters, and increasing the firm’s access to bank fi- Appendix 2: Technical Appendix on Data Analysis 63

nance. The results of the simulation exercise show a ables is statistically significant by itself, so a decision 74 percent increase in value added per worker and a was made not to include such variables by them- more than doubling of productivity (figure A2.2). selves. Total factor productivity is then constructed as ε These estimates should be interpreted with cau- the estimate of it, the part of value added that is not tion: they include a large margin of error and, more im- explained by sector affiliation, capital, and labor. portant, provide no guidance on how to achieve these improvements in the investment climate. But they do Estimating the impact of investment provide a rough idea of how much firms could gain if climate on firm productivity such improvements occurred. To analyze the data more rigorously, several equations were estimated using least squares regression and in- Constructing total factor productivity strumental variables regression to control for endo- Total factor productivity was estimated using the fol- geneity in the investment climate indicators. The base lowing production function: regression is as follows:

J =+βααε + + (A2.1) YXIC=+ββ + β + ε (A2.1)lnVDLKit0 ∑ ijt ( jL ln it jK ln it ) it it01 2 i it j =1 where Y is either value added per worker or total fac- where Vit is value added for firm i and period t, Lit is tor productivity as constructed above, and X is a set the number of employees, and Kit is the capital stock, of control variables, including sector and region proxied by the book value of land, buildings, and pro- dummy variables (to allow the performance to have a duction equipment. Dijt is a dummy variable that is sector-specific mean), the logarithm of the number of equal to one if firm i is affiliated with sector j. Since the initial employees, and the logarithm of initial sales. sample includes 10 sectors, equation A2.1 essentially The last two measures are intended to capture such allows sector-specific shares of labor and capital. A things as economies of scale or any other aspects re- more general specification would allow the intercept lated to scale (market power and the like). IC is a vec- β ( 0) also to be sector specific. But empirical experi- tor of indicators related to investment climate. The re- ments suggest that none of the sector dummy vari- sults are reported in table A2.2.

Figure A2.2 Estimated gains from improving the investment climate from bad to good

Total factor 65% productivity

Value added 74% per worker

60% 65% 70% 75%

Source: Authors’ calculations based on data from World Bank Algeria investment climate survey 2003. Appendix 2: Technical Appendix on Data Analysis 64

Table A2.2 The impact of investment climate on firms’ productiviy (Algeria)

Value added Value added Value added per worker TFP per worker TFP per worker TFP Days of power outages –1,742** 0.011*** (692) (0.003) Days to clear customs –1,196** 0.002 (469) (0.002) Email? 88,899** 0.160 (36,818) (0.120) Share of employees using 216,551 –0.188 a computer (177,438) (0.425) Overdraft facility? 32,833** 0.115 (37,628) (0.105) Investment climate index 147,683*** 0.177* 198,637*** 0.425 (35,921) (0.098) (59,879) (0.198) Adjusted R2 0.36 0.40 0.36 0.36 0.35 0.35 Number of observations 347 338 347 338 347 338 Estimatora OLS OLS OLS OLS IV IV * Significant at the 10 percent level of confidence. ** Significant at the 5 percent level of confidence. *** Significant at the 1 percent level of confidence. Note: Standard errors are in parentheses. All regressions include sector and region dummy variables as well as the logarithm of firm age, initial sales, and initial workforce. To ensure sufficient observations, missing values for investment climate indicators were replaced with the average for the sector and wilaya. a. OLS is ordinary least squares; IV is instrumental variables. In the instrumental variables regressions the investment climate index is instrumented by the average for the sector and wilaya. Source: Authors’ calculations based on data from World Bank Algeria investment climate survey, 2003. Appendix 2: Technical Appendix on Data Analysis 65

Testing for differences in means by category

Table A2.3 Test for differences in mean by category: value added per worker

Standard Category Mean deviation N t-statistic Small 395,212.6 17,546.21 363 32.64** Large 501,216.7 48,533.96 75 Private 409,159.4 17,719.61 384 –9.46** Public 443,262.8 52,850.94 54 Old 414,855.5 22,339.85 261 1.60 New 411,164.5 25,564.6 177 Other 343,826.1 41,354.69 67 –23.24** Limited liability 419,869 19,256.87 328 Other 343,826.1 41,354.69 67 –13.33** Shareholding 472,094 59,554.86 43 Limited liability 419,869 19,256.87 328 –11.90** Shareholding 472,094 59,554.86 43 Center 443,827.6 21,123.58 294 31.85** East-West 355,408.5 32,968.69 111 Center 443,827.6 21,123.58 294 24.63** South 336,901.7 39,891.88 33 East-West 355,408.5 32,968.69 111 2.69** South 336,901.7 39,891.88 33

Controlling for size Private 403,231.3 170,305.5 411 1.13 Public 369,333.1 253,322.2 39

** Significant at the 5 percent level of confidence. Source: Authors’ calculations based on data from World Bank Algeria investment climate survey, 2003. Appendix 2: Technical Appendix on Data Analysis 66

Table A2.4 Test for differences in mean by category: total factor productivity

Standard Category Mean deviation N t-statistic Small 0.0116552 0.0529573 353 6.73** Large –0.0894411 0.2428645 46 Private 0.0137929 0.0561669 361 10.26** Public –0.13103 0.2070507 38 Old –0.0591675 0.0748438 224 –17.45** New 0.0757344 0.0788642 175 Other –0.1958925 0.1559448 61 –20.99** Limited liability 0.0456979 0.0580998 312 Other –0.1958925 0.1559448 61 –2.28** Shareholding –0.0887806 0.2807684 26 Limited liability 0.0456979 0.0580998 312 6.95** Shareholding –0.0887806 0.2807684 26 Center 0.0788385 0.0578017 272 40.08** East-West –0.3496673 0.146692 94 Center 0.0788385 0.0578017 272 –20.65** South 0.3462015 0.1357343 33 East-West –0.3496673 0.146692 94 –23.89** South 0.3462015 0.1357343 33 Controlling for size Private –0.0044675 0.909457 341 –0.30 Public 0.0435259 0.8501563 35

** Significant at the 5 percent level of confidence. Source: Authors’ calculations based on data from World Bank Algeria investment climate survey, 2003.

Econometric results istrative unit (commune) as well as the sector, ownership type, and size of the firm and the education and Table A2.5 summarizes the results of wage regres- experience of the manager. Sector coefficients are sions performed using data from the interviews of calculated relative to the agricultural sector as a base- workers together with the firm-level data. Each column line. Regional coefficients are calculated relative to shows the estimated coefficients from a regression the central region as a baseline. Years of education with the log of wages as the dependent variable. Each are approximated as the age at which the manager regression has a firm-level random effect and controls left school minus six years. Years of experience are for sector and region. To correct for potential endo- approximated as the manager’s age minus the age at geneity, the investment climate index is instrumented which he or she left school minus his or her longest using the average investment climate in each admin- period of unemployment. Appendix 2: Technical Appendix on Data Analysis 67

Table A2.6 shows the results of firm-level regres- confirm the differences among types of firms dis- sions (all controlling for sector and wilaya) in which the cussed in chapter 2 and show that most of these dif- dependent variable is a measure of the investment cli- ferences are significant, at least at the 10 percent mate and the independent variables are firm charac- level of confidence, when other characteristics are teristics with which the investment climate may vary controlled for. (size, ownership, old or new, and the like). The results Appendix 2: Technical Appendix on Data Analysis 68 *** — 0.02%*** – 19.04%*** – continued . . . *** *** — — 0.02%** 0.00% 0.02%** – – 0.01% 0.02%*** – – 15.92%** 17.71%*** – – *** — 0.02%*** 0.02%*** – – 19.81%*** – *** — 0.01% 0.02%*** – – 17.93%*** – *** — 4.35% 4.34% 4.36% 4.79% 0.02%*** 0.02%*** – – 20.31%*** 22.59*** 21.32*** 15.10%*** 18.92%*** – *** *** — — 6.13%*** 6.26%*** 5.83%*** 4.06%** 1.79% 1.81% 1.79% 1.86% 0.01% 0.02%*** – – 0.02%*** 0.01%*** – – 17.98%*** 15.72%*** – – *** — 2.22% 0.02%*** 0.01%*** – – – 18.36%*** – *** — 0.02%*** 0.01%*** – – 16.18%*** – 7.14% 7.02% 7.15% 7.13% 8.56% 7.66% 8.65% 6.95% 8.54% 6.67% 8.58% 0.02%*** 0.01%*** – – 18.27%*** 15.68%** – – *** Sign Sign Sign Sign Sign Sign Sign Sign Sign Sign Sign Sign Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. –— (St. Err.) (St. Err) (St. Err) (St. Err) (St. Err.) (St. Err) (St. Err) (St. Err) (Sf. Err.) (St. Err) (St. Err) (St. Err.) 0.22% 0.23%0.00% 0.23% 0.00%0.13% 0.23% 0.00% 0.13%0.00% 0.23% 0.00% 0.13% 0.00% 0.27% 0.00% 0.13% 0.00% 0.28% 0.01% 0.13% 0.00% 0.27% 0.00% 0.17% 0.00% 0.28% 0.01% 0.16% 0.00% 0.27% 0.00% 0.17% 0.00% 0.28% 0.01% 0.16% 0.00% 0.32% 0.00% 0.17% 0.00 0.01% 0.16% 0.00% 0.19% 0.00 0.00% 0.02%*** 0.01%*** – – 2 2 Table A2.5Table regressions Wage In (size 6.09%*** 6.27%*** 5.43%*** 6.69%*** 5.25%*** 5.79%*** Log Wage Yrs Education 4.52%*** 4.41%*** 4.31%*** 4.41%*** 4.41%*** 4.08%*** 4.23%*** 4.13%*** of female)(effect 4.32%*** 1.76%Enterprise age 4.08%*** of)(effect 1.87% 4.25%** Climate Inv. 3.92%*** Index 1.88%enterprise) 1.87%TF 1.87% 2.19% of South)(effect Public/ 2.24% of SOE)(effect Construction 2.19% 2.25 5.87% 1.33% 5.77% 2.19% 3.52% 5.86% 13.56%* 2.25% 3.24% 11.79%* 5.87% 2.60% 13.74* 6.58% 13.58* 6.31% 12.33% 4.77% 1.93% 6.64% 19.15%** 6.59%* 14.99* 1.43% 6.41% 0.78 14.04%** 3.91% 6.58% 13.35 8.02%** 3.48 6.31% 12.27* 2.56% 6.95% 23.54%*** 3.88% 6.47% 3.47% 1.93% 4.04% 1.43% 2.10% REGION Yrs Education YrsYrs Gender 2.22%*** 2.16%*** 2.14%*** 2.17%*** 2.17%*** 2.39%*** 2.28%*** 2.43%*** 2.35%*** 2.40%*** 2.29%** 2.72%*** Appendix 2: Technical Appendix on Data Analysis 69 4.20% – 14.86% ** — —– 7.59% 9.25% 6.25% 7.02% 1.24% 10.87 – – – 0.87% 2.67% – – 9.01% 7.80% 6.38% 2.51% 13.71* – – – 32.89% 15.75 – 6.46% 4.60% 18.06%*** – – 1.16% – 10.14% 15.87% 4.56% – – 2.30% 5.25% – – 6.06% 9.57% 2.38% 3.91% 0.50% 2.63% – – – 6.96% 3.00% – – 10.22% – 2.71% 8.07% 0.19% 0.48% 3.68% 4.12% 5.81% 9.66% 14.08 9.45% 3.49% 17.64* – – – – (continued) 6.74% 6.65% 6.74% 6.77% 8.24% 6.66% 8.33% 5.84% 8.29% 5.38% 7.67% 6.78% 3.10% – – 12.06% 11.86% 12.06% 12.07% 17.63 12.02 17.75% 11.82% 17.57% 11.44%16.51 19.89% 16.36 16.51% 16.52 19.29 29.50 19.19% 29.69% 19.23 29.31 30.06% 10.15% – Sign Sign Sign Sign Sign Sign Sign Sign Sign Sign Sign Sign Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. 391 3537 3525 3537 3537 2713 3487 271 2487 2713 2487 2014 (St. Err.) (St. Err) (St. Err) (St. Err) (St. Err.) (St. Err) (St. Err) (St. Err) (Sf. Err.) (St. Err) (St. Err) (St. Err.) 3.24% 6.07% 7.47 6.06% 6.34% 9.71% 7.95% 7.77 5.76% 10.18 7.05% 10.46 2 R Other sectors 5.46% 15.07% 5.26% 4.53% 15.93% Metalwork 9.27% 9.65% 9.40% 9.68% 14.52*constant 8.92% 866.28*** 14.50* 865.19*** 844.60*** 3.70% 865.24%** 863.18%*** 839.77 *** 16.12%** 844.58*** 856.42%*** 867.98%*** 1.95% 833.21*** 16.49%** 850.75*** 833.91*** Table A2.5Table regressions Wage Chemical/PharmaceuticalLeather Mech/ElectricalBuilding 7.25% 11.41%Ceramics 13.20%* 7.12%Paper 11.27and Printing 7.25%Plastics and 6.37%Resins 11.79 7.25%Information 6.26%Services 19.37%** 8.65% 3.12% 6.37% 12.64%*Textile 8.42% 7.03% 18.12** 6.91% 6.37% 8.29% 4.15% 8.74% 4.23% 6.82% 7.72% 8.50% 7.70% 37.28%*** 21.49** 6.34% 7.31% 40.14%*** 6.92% 6.35% 8.46% 37.70%*** 4.35% 37.57%***Adjusted 9.98% 8.68 7.19% 41.00%*** 6.91% 10.12% 7.82% 20.58%*# of (employees) 4.40% 9.81% 7.31% 40.45** 8.17% (firms)# of groups 8.39% 5.56% 0.201 12.44% 49 18.28%** 10.02% 10.29 7.32% 6.92% 9.72% 7.72% 0.242 5.86% 9.98% 42.50*** 440 8.52% 8.23% 10.74 7.94% 0.2563 5.00% 11.96% 11.99 7.23% 6.17% 7.34% 11.19% 439 0.242 27.28** 12.09 8.68% 8.16% 10.24 0.243 44 6.58% 10.95% 5.63% 7.63% 0.263 11.94 7.69% 8.57% 9.97% 440 0.317 6.04% 10.15 334 8.03% 0.257 12.22 0.302 301 0.2679 33 0.315 0.316 301 334 30 244 Log Wage Appendix 2: Technical Appendix on Data Analysis 70

Table A2.6 Investment climate constraints regressions

Share of sales to state, local government, or Access to Independent state-owned Access Tax and cost Informal Infra- variable enterprises to land issues of credit Corruption sector structure Firm size 0.00007 –.00009 –.00001 –0.00013 –0.02405*** 0.00073* –0.0016 (0.009123) (0.00070) (0.00059) (0.00042) (0.00914) (0.00040) (0.00302) Public 21.460*** 0.00926 –0.4977 0.55179** 0.16908 –0.22872 –0.22796 (5.235) (0.33041) (0.38445) (0.24953) (0.73766) (0.26839) (0.60853) Small and 3.178 0.01021 0.16209 –0.06527 –1.82501* –0.03997 medium-size (4.994) (0.32536) (0.31330) (0.24593) (1.08062) (0.24561) –.00009 Old 2.738 –0.065 0.10456 –0.29209** 0.15169 0.27401** 0.14398 (2.688) (0.17199) (0.15713) (0.13524) (0.24650) (0.13502) (0.22102) Number of observations 555 434 541 555 372 555 468

Independent Electricity Water Telephone Gas Have Have variable outages shortage outages shortage generator well Firm size –0.01038 0.00219 –0.0173 –0.0066 0.00008 .0000004 (0.01387) (0.02754) (0.02197) (0.01306) (0.00013) (0.00013) Public –4.92812 –18.513 –31.9667** –6.09775 0.0653 –0.17292 (8.09639) (16.07621) (12.82659) (7.62665) (0.07601) (0.07933) Small and –1.60553 20.356 –19.299 –6.0771 0.24116** 0.24885 medium-size (7.59287) (15.07639) (12.02888) (7.15233) (0.0719) (0.07518) Old 7.0252 11.365 8.91267 3.68957 –0.10971*** –0.02533 (4.08668) (8.11451) (6.47426) (3.84957) (0.03844) (0.04091) Number of observations 555 555 555 555 548 520

Self- Self- Commercial Commercial financing financing Self- Self- bank bank Independent working working financing financing working working variable capital capital investment investment capital capital Firm size –0.00413 –0.00784 –0.03410** –0.03494** 0.01192* 0.019164** (0.01479) (0.01285) (0.01736) (0.01525) (0.00985) (0.00856) Public –5.84031 –7.0152 –13.075 –13.2931* –2.3847 –2.4052 (6.43993) (6.01839) (8.21125) (7.92996) (4.29774) (4.01351) Small and –0.04331 1.64588 1.12273 medium-size (6.38898) (7.36856) (4.25382) Small –4.7108 1.38928 1.59448 (3.32853) (4.11274) (2.21971) Old 1.07981 1.05172 3.95233 3.91601 5.34656** 5.33520** (3.13370) (3.12499) (4.01553) (3.99282) (2.08643) (2.0839) Number of observations 508 508 350 350 508 508 continued . . . Appendix 2: Technical Appendix on Data Analysis 71

Table A2.6 Investment climate constraints regressions (continued)

Last Last Waiting Waiting Independent Access to Access to credit credit time time variable overdraft overdraft approved approved for credit for credit Firm size –0.00007 –0.00030** –0.1382 –0.01614** 0.00019 0.0008 (0.00013) (0.00012) (0.00858) (0.00779) (0.00219) (0.00200) Public 0.16448 0.03259 10.4887* 9.27253* –1.2956 –0.95862 (0.08914) (0.07583) (5.58483) (5.30857) (1.28310) (2.18308) Small and 0.27092*** 2.67731 –0.4503 medium-size (0.07705) (4.95361) (1.20330) Small –0.02901 –0.36564 0.45033 (0.04473) (3.31314) (0.69102) Old –0.08243** –0.09128** 0.45361 0.32933 –0.6807 –0.66293 (0.0411) (0.04172) (3.01805) (3.01836) (0.64765) (0.64636) Number of observations 546 546 259 259 555 555

Independent Collateral Collateral Interest Interest variable Collateral Collateral amount amount rate rate Firm size –0.00015 –0.00017 0.04931 0.06967* 0.00122 0.00279 (0.00014) (0.00012) (0.04046) (0.03686) (0.00186) (0.00170) Public 0.22573** 0.21468** –34.097 –22.8014 –1.96098* –1.11665 (0.09003) (0.08504) (23.62077) (21.78171) (1.09177) (1.0138) Small and 0.07192 –17.172 –1.81581* medium-size (0.07821) (22.15174) (1.02300) Small 0.0658 11.2914 0.14214 (0.05220) (12.72243) (0.58753) Old 0.01967 0.021152 13.4566 14.1034 1.64*** 1.69762*** (0.04771) (0.04769) (11.92266) (11.90025) (0.54972) (0.55046) Number of observations 280 280 555 555 552 552 continued . . . Appendix 2: Technical Appendix on Data Analysis 72

Table A2.6 Investment climate constraints regressions (continued)

Commercial Commercial Independent bank/ bank/ Loan Loan Formal Formal variable investment investment period period training training Firm size 0.05379*** 0.06370*** 0.021544** 0.019731*** –0.0002 –0.00037*** (0.01418) (0.01246) (0.00594) (0.00545) (0.00013) (0.00012) Public –8.00705 –5.4812 –5.84759* –1.89434 –0.0714 –0.17473 (6.70993) (6.47982) (3.46833) (3.22101) (0.07738) (0.07236) Small and –5.7809 –8.83915*** 0.27394*** medium-size (6.02132) (3.25262) (0.07309) Small 3.3803 –0.08365 0.0567 (3.36065) (1.88135) (0.04213) Old 0.3717 0.90579 2.00909 2.28896 –0.0072 –0.00394 (3.28134) (3.26266) (1.75065) (1.75977) (0.03915) (0.03949) Number of observations 350 350 555 555 539 539 * Significant at the 10 percent level of confidence. ** Significant at the 5 percent level of confidence. *** Significant at the 1 percent level of confidence. Note: The dependent variable is a measure of the investment climate. Standard errors are in parentheses. Source: Authors’ calculations based on data from World Bank Algeria investment climate survey, 2003. Appendix 3: Cross-Country Investment Climate Indicators and 73 Macroeconomic Performance Indicators

Table A3.1 Sample structure for Algeria investment climate survey

Sample Sample Firm size population Firm activity population Small 408 Food and food processing 51 Medium-size 83 Building and construction 66 Large 46 Chemicals and pharmaceuticals 52 Leather and leather products 14 Mechanical, metal, and electrical products manufacturing 110 Glass and related products 36 Market orientation Commercial printing 77 Exporter 12 Plastics 49 Nonexporter 531 Computer services 15 Textiles 79 Other 7

Firm ownership Firm location Private Center 351 Domestic 477 (Algiers, Blida, Boumerdès) Foreign 4 West 98 (Oran, Tlemcen) State 65 East 68 (Constantine, Annaba) Other 4 South 40 (Ghardaïa, Ouargla) Appendix 3: Cross-Country Investment Climate Indicators and 74 Macroeconomic Performance Indicators Algeria, by firm characteristic ———— ———— ———— Bangla- Medium- Non- Low High Algeria desh Morocco China India Small size Large Foreign Domestic Exporter exporter capacity capacity and supplies Table A3.2 Globalization of markets and inputs in Algeria, international comparison and by firm characteristic Table (percent) Disposition of sales Sold domesticallyExported directlyExported indirectly 99.3 of inputs Source 61.2 0.6 0.1 34.7 57.3Domestic sources 4.2 74.1Imported directly 43.1 40.4 27.5Imported indirectly 99.6 18.3 2.3 45.6 52.5— Not available. 10.6 98.8 62.0 7.5 Bank investment climate surveys. World Source: 0.4 40.6 97.8 51.6 8.2 6.8 86.1 1.2 42.9 97.3 0.1 92.1 1.6 7.7 5.6 — 11.6 0.0 99.3 2.8 0.6 — 71.0 — 0.0 99.9 — 0.7 — 99.1 — — 24.9 0.1 — 99.7 — 0.0 — 4.1 — — 0.8 0.0 — — 0.3 0.2 0.0 — Appendix 3: Cross-Country Investment Climate Indicators and 75 Macroeconomic Performance Indicators ———— ———— ———— ———— ———— ———— Algeria, by firm characteristic Bangla- Medium- Non- Low High Algeria desh Morocco China India Small size Large Foreign Domestic Exporter exporter capacity capacity of competitors of suppliers of customers tt-we im3——4505 4224 1 0111 firms10———1130 firms30———24.530.52 A3.3Table Firms’ competitors, suppliers, and customers in Algeria, international comparison and by firm characteristic Median number Domestic private firmsState-owned firms — firmsForeign-owned 50Median number 1 —Domestic private firms — — 0State-owned — 6 firmsForeign-owned — 10Median number — — — — 4 —Domestic private firms — — — —State-owned — — — firmsForeign-owned — 0 — 20 — —— Not available. —n.a. Not applicable. — — — n.a. Bank investment climate surveys. World Source: 1 — — — — — 1 — — — — — — — 0.5 — — — n.a. n.a. — — 0.5 — — — — 0.5 — — n.a. n.a. 1 — — 1 — n.a. 1 Appendix 3: Cross-Country Investment Climate Indicators and 76 Macroeconomic Performance Indicators ———— ———— ———— ———— ———— Algeria, by firm characteristic Bangla- Medium- Non- Low High (percentage of respondents evaluating constraint as major or very of respondents severe) (percentage regulationsof available workers 25.0 25.4 41.9operating permits 19.3 26.7 — — 16.5 21.1 26.7uncertainty — — — 25.6 25.3 15.9instability 24.1 28.9 — 22.2 24.4 29.6 —disorder 44.4 0.0 25.0 19.3 13.3 —informal practices 26.8 25.8 — 38.6 59.9 28.0 —conflict resolution 25.0 25.0 29.3 — — — 28.6 24.7 25.9 26.0 39.2 — — — 27.3 — 27.0 41.7 17.6 — — — 21.6 — 22.9 26.5 — 15.7 — 59.0 — 29.2 — — 62.7 — 21.6 — — — 55.6 — 50.0 — — — — — 60.6 — — 58.3 — — 59.9 — — 65.2 49.0 — Business licensing and Legal system and Macroeconomic Macroeconomic Anticompetitive or — Not available Bank investment climate surveys. World Source: Table A3.4 Firms’ evaluation of general constraints to operation in Algeria, international comparison and by firm Table characteristic ConstraintTelecommunicationsElectricity 15.7 AlgeriaTransport 24.4 deshAccess to land Morocco China ratesTax India — Small administrationTax 11.4 16.5 37.3Customs and trade size 73.2 — Large 27.5 — 35.8 Foreign 16.2 DomesticLabor regulations 24.2 49.8 Exporter exporter 44.6 — capacity capacity Skills and education 16.9 — 28.1 35.4 16.3 12.7 8.9 — — — 19.4 23.7 — 8.3 11.6 — 37.5 — — —Access to financing 34.1 12.0 38.7 36.1Cost of financing — — — 16.7 51.7 6.7 33.3 19.4Regulatory policy 25.3 46.8 41.5 26.7 16.7 — — 25.0 45.5 38.6 — 11.4 49.8 37.8 15.8 — — — 39.6 11.9 16.9 24.1Corruption 25.0 17.5 17.8 — —Crime, theft, and 50.0 37.4 — 16.7 21.6 11.1 46.5 54.4 25.0 37.4 11.3 — 8.3 — 42.2 25.0 46.3 11.5 38.7 34.3 11.4 44.4 36.0 57.8 44.7 48.2 34.0 16.7 10.5 25.0 37.6 33.3 46.8 12.6 — 33.3 25.0 52.4 41.2 22.4 10.9 50.0 — 45.9 13.1 38.0 52.1 58.3 26.5 56.5 45.1 13.3 39.9 48.7 0.0 37.9 36.6 33.3 34.0 37.3 28.1 Appendix 3: Cross-Country Investment Climate Indicators and 77 Macroeconomic Performance Indicators Algeria, by region (average days in previous year)(average days in previous of sales)(as percentage 14.0 249.0 5.3 16.0 3.3 — — — 13.5 1.8 11.0 20.2 — 14.8 5.3 4.9 5.4 5.9 Production lost due to power outages Production Table A3.5 Infrastructure performance A3.5 Infrastructure indicators in Algeria, international comparison and by region Table Indicator of power outages Frequency Firms with own generator (percent)Firms with own well (percent) lost in shipment (percent)Production Days to obtain a telephone connectionDays to obtain an electricity connection 29.5 AlgeriaDays to obtain a water connection Bangladesh 174.3 2.4— Not available. Morocco 124.9 32.9 Bank investment climate surveys. World Source: China 71.5 India 150.4 Center 1.0 — 79.6 54.5 16.7 West East 17.0 South — 29.1 — — 68.5 12.5 — 21.1 18.2 1.2 29.3 — 50.1 — — 33.0 — 200.4 33.0 23.1 105.2 130.1 — 2.7 34.1 33.3 149.0 88.9 37.5 134.3 192.3 1.5 — 21.1 77.2 2.9 — 1.3 — — — Appendix 3: Cross-Country Investment Climate Indicators and 78 Macroeconomic Performance Indicators ————— Medium- Non- Low High (average days in previous year)(average days in previous of sales)(as percentage 14.2 14.0 10.4 5.5 14.6 5.1 2.5 3.6 9.2 5.4 14.0 3.3 15.0 3.3 12.0 5.3 5.8 4.5 Production lost due to power outages Production Table A3.6 Infrastructure performance A3.6 Infrastructure indicators in Algeria, by firm characteristic Table Indicator of power outages Frequency Firms with own generator (percent)Firms with own well (percent) lost in shipment (percent)Production Days to obtain a telephone connectionDays to obtain an electricity connection 22.1Days to obtain a water connection Small 179.4 2.7 48.2— Not available. 122.4 27.3 2002/03. Bank investment climate survey, World Source: 164.7 53.3 size 159.5 1.5 116.2 41.6 Large Domestic 29.8 28.2 Foreign 1.0 — 55.6 183.7 Exporter exporter 25.0 131.5 capacity 90.0 31.7 — 2.6 capacity 50.0 — 50.0 87.0 — 0.0 340.0 29.0 176.8 45.5 2.1 125.1 — 29.3 189.2 32.7 155.9 141.0 2.5 30.1 33.3 63.2 3.1 32.2 0.9 Appendix 3: Cross-Country Investment Climate Indicators and 79 Macroeconomic Performance Indicators Algeria, by firm characteristic Small size Large Exporter exporter Domestic Foreign capacity capacity a India a China a Bangla- Medium- Non- Low High Algeria desh Morocco working capital financial institutions 11.2 33.5 19.6 20.6 36.1investments 9.2 19.0 16.0financial institutions 16.1 21.3 29.7 11.0 — 11.2 — 6.7 — 13.8 11.0 13.8 11.7 42.7 7.5 16.0 15.3 35.0 16.9 15.1 Table A3.7 Sources of finance for firms A3.7 Sources in Algeria, international comparison and by firm characteristic Table (percent) for Sources Retained earningsBanks and other 73.9 creditTrade 55.6Equity 62.0Informal sources 51.5All others 30.4 8.8 for new Sources 75.3 — 4.2 68.8Retained earnings 0.5 66.8 —Banks and other 7.6 4.4 73.4 63.8 0.5 3.5 4.1 creditTrade 59.9 5.8 8.6 —Equity 74.1 2.6 6.4Informal sources 8.4 — 4.9 0.6 74.3All others — 13.0 6.3 — 4.5 9.0 81.7 14.1— Not available. — 14.2 — — of total capital (working and new investment). to shares a. Data refer — 2.6 5.4 74.3 Bank investment climate surveys. 75.4 World Source: 0.3 15.0 — — — 73.6 1.9 74.6 — 3.9 52.5 — 0.4 0.1 8.8 — — — 7.1 81.3 — — 0.0 — — 8.2 — — — 4.1 73.6 — 11.7 4.5 — — — — 7.3 75.1 — 8.4 — 2.9 — 65.0 4.8 — — 4.8 — 8.7 72.5 — 0.0 5.0 — — 1.7 — 74.8 — 5.0 0.0 4.6 — — — 3.5 6.3 — 3.8 — — 0.0 3.9 — — 3.9 4.3 — — 5.4 0.0 — — 4.7 — — 2.2 — Appendix 3: Cross-Country Investment Climate Indicators and 80 Macroeconomic Performance Indicators Algeria, by firm characteristic Bangla- Medium- Non- Low High collateral collateral required, of loanas a share 184.6 82.4rate on loan 94.6 69.9of loan (months) 11.3 — — 25.3 88.9 83.0 12.4 36.5 — — 211.6 80.0 — 59.7 130.1 14.3 6.6 89.3 148.2 85.3 — — 100.0 23.2 11.8 100.0 185.5 26.2 10.4 84.1 133.4 33.4 9.8 100.0 186.8 12.0 10.0 201.6 81.8 24.7 141.7 11.2 83.9 22.7 13.4 80.5 25.2 11.2 25.4 11.8 25.2 9.5 denominated in Average value of Average interest Average duration Average line of credit unusedcurrently a bank or other from 38.6 76.9financial institution 66.2 25.6 50.4 78.9 20.7 58.8 26.6 28.6 — 45.1 — 32.8 57.0 79.9 59.3 — 66.7 52.2 45.1 69.9 25.0 67.5 85.0 71.7 currencyforeign 39.2 76.0 25.0 liabilities as a more) 66.7 of total liabilitiesshare 58.3 51.2 6.1 37.9 10.8 77.2 of total liabilitiesshare 5.4 75.0 34.8 35.8 30.3 77.5earnings as a share 50.3 2.2 26.4 11.3of total liabilities 42.9 77.0 16.8 8.1 50.1 51.8 27.5 3.2 73.6 95.7 51.0 8.5 21.7 4.9 52.9 31.7 17.0 8.6 10.6 28.9 24.4 13.5 42.1 34.5 44.3 0.0 5.0 96.2 56.6 10.1 93.7 6.2 27.8 95.0 17.9 20.8 16.5 75.6 10.0 31.9 5.8 13.2 96.0 31.8 5.2 76.6 6.9 28.0 95.9 8.2 95.8 95.0 an overdraft or an overdraft requiring Share Share of total borrowing of total borrowing Share Share of credit of credit Share of firmsShare with a loan For the most recent Long-term (one year or Short-term liabilities as a Equity and retained — Not available. Bank investment climate surveys. World Source: Table A3.8 Firms’ loans, and liabilities in Algeria, international credit, comparison and by firm characteristic Table otherwise specified) except where (percent, Indicator of firmsShare with Algeria desh Morocco China India Small size Largeloan or overdraft Foreign Domestic Exporter exporter capacity capacity Appendix 3: Cross-Country Investment Climate Indicators and 81 Macroeconomic Performance Indicators towns. Algeria, by firm characteristic 2.9 — 4.7 — — — — — — — — — — Bangla- Medium- Non- Low High a statements (percent) 59.6firms’ financial 68.7institution (days) 68.8 74.8wire —wire 53.0 72.3 89.1 — 66.7(percent) 1.9 — 59.5 (months)or rental 20.6 — 54.1 — 100.0 — 5.3 — 83.5(percent) 27.2 — 3.8 56.2 (months)or rental — — — 69.0 — 106.0 — 25.2 — — — — — 74.3 — — — 37.7 — — — — — — 64.5 — 34.3 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — audited financial Source: World Bank investment climate surveys World Source: Clearance time through Clearance time through currency For foreign Property rights length of lease Average length of lease Average — Not available. a. Clearance time for a check is 14 days two branches of the same bank in town, 35 banks different Table A3.9 Financial sector and property rights indicators in Algeria, international comparison and Table by firm characteristic IndicatorFinancial sector of firmsShare with Algeria desh Morocco China India SmallFor check size Large Exporter exporter Domestic Foreign capacity capacity 14/35 Land owned (percent)Share leased or rented Share — 67.4Buildings — owned (percent)Share 54.0 leased or rented Share — — 62.1 — — — 64.6 — — — — — — — — — — — — — — — — — For domestic currency For domestic currency Appendix 3: Cross-Country Investment Climate Indicators and 82 Macroeconomic Performance Indicators continued . . . ———— ———— ———— Algeria, by firm characteristic Bangla- Medium- Non- Low High predictable (percent)predictable 19.2 time management’s spent dealing with 7.8 (percent)regulations — — 14.7 of sales)percentage 4.2 —reported for tax 7.0 20.2purposes (as — of sales)percentage 2.5 11.5 19.5 10.9 72.5 — — — — 19.3with officials 1.8 — — 0.0 —authorities (percent) 7.5 54.9 — 16.7 — — — 2.3 18.5 71.2 9.9 — 3.8 — 18.3 74.6 4.8 83.1 — 7.5 21.2 — 30.9 1.9 72.9 — — 69.8 — 75.0 — 0.0 80.0 — 7.2 — — 72.5 — 6.6 71.1 — 78.1 6.5 — — — to officials to “get to officials things done” (as inspections by local interpretations of interpretations are regulations consistent and meetings or required Share of senior Share Firm typically revenues Revenues typically paid of meetings or Share Table A3.10 Regulatory and administrative delays in Algeria, international burden comparison and Table by firm characteristic IndicatorFirms that disagreeing Algeria desh Morocco China India Small size Large Domestic Foreign Exporter exporter capacity capacity Inspections Days spent in inspections Appendix 3: Cross-Country Investment Climate Indicators and 83 Macroeconomic Performance Indicators ———— ———— ———— Algeria, by firm characteristic Bangla- Medium- Non- Low High (continued) of sales) (percent)requested of sales)(as percentage — — — — 0.1 0.3customs (days)customs (days) — — — 23.2 0.0 — 0.0 11.7customs (days) 50.2 — — — 23.2 — 2.5customs (days) — — 7.5 8.6 5.6sales (percent) 10.4 — — — 12.2 14.2 8.8 23.9 21.6 — — — 14.0 50.8 23.0 0.7 1.7 19.6 49.5 38.8 2.8 — — 5.5 — 47.8 5.1 8.1 24.1 42.7 — — 10.3 9.3 — 25.9 53.0 12.2 8.8 50.5 3.5 37.0 0.4 14.4 6.8 10.8 29.0 19.1 1.2 23.5 6.6 51.2 2.2 23.7 9.4 — 53.3 22.2 0.7 — 44.8 4.8 2.8 9.6 11.2 29.0 17.5 8.6 0.1 14.3 8.6 14.0 0.9 0.3 which informal payment goods (as percentage goods (as percentage Longest wait to clear Longest wait to clear Exports of as a share — Not available. Bank investment climate surveys. World Source: Share of interactions in Share of informal payments Value Table A3.10 Regulatory and administrative delays in Algeria, international burden comparison and Table by firm characteristic IndicatorCost of fines or seized Algeria desh Morocco China India SmallImport delays size Large Domestic wait to clear Average Foreign Exporter exporter capacity capacity Export delays wait to clear Average Appendix 3: Cross-Country Investment Climate Indicators and 84 Macroeconomic Performance Indicators Algeria, by firm characteristic Bangla- Medium- Non- Low High (percent, except where otherwise specified) except where (percent, predictable in firmreinvested they have confidence 19.2in the judiciary — 7.8 disputes resolved —in court 15.2 —investments (months) 14.7 — 6.9 — — — 20.2 — 11.9 — 4.2of revenues 7.4 19.5 — 0.9 10.9 for gift requirement — —or payment 17.2 — — 16.7 — 7.0connection 13.6 — — 5.4 18.5 2.5 2.3 — — — 19.3 2.9 9.1 — — — 0.0 1.8 — 15.2 8.4 — — —tax purposes 18.3 7.9 15.4 7.5 — — 21.2 — 0.0 0.0 2.3 — 72.5 4.7 — 4.2 3.8 16.0 — — — 15.0 — — 0.0 3.3 — — — — 0.0 54.9 7.2 — — 4.1 — 71.2 7.5 — 74.6 4.0 — — 83.1 — 6.6 80.0 72.5 6.5 — 72.9 — 75.0 — 71.1 — 78.1 interpretations of interpretations are regulations consistent and as a share required typically reported for Share of profits of profits Share Firms that disagreeing of payment Share Planning horizon for of firmsShare reporting For mainline telephone — Not available. Bank investment climate surveys World Source: Table A3.11 Indicators of uncertainty and corruption in Algeria, international comparison and by firm Table characteristic IndicatorUncertainty Firms that disagreeing Algeria desh Morocco China India Small size Large Exporter exporter Domestic Foreign capacity capacity Corruption Informal payments For electricity connectionFor construction permit —For import licenseFor operating license — — of revenue Share — — — — 5.1 — — — — — — — — — 7.9 9.1 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Appendix 3: Cross-Country Investment Climate Indicators and 85 Macroeconomic Performance Indicators Algeria, by firm characteristic Bangla- Medium- Non- Low High ISO certificationinnovations line —produced — 50.4line — partnera foreign — — — — most importantsecond, or third — — 44.7equipment — — — — 39.5 — — —international sources — — — — —domestic sources — — — — —establishment locally 77.4 — — — 5.1 59.7 — — — — 6.4 — 50.9 1.5 23.7 — 34.4 — — — — — — 4.1 73.9 27.0 — — — 3.7 — 79.2 — 91.9 — 68.4 — 10.8 — — — — 31.3 — 5.3 1.5 78.2 — 40.5 — 100.0 — — 0.0 47.4 4.6 100.0 0.0 — — 0.0 — — 35.1 76.3 1.1 — 20.0 0.0 — — 75.4 0.0 20.0 — 4.8 82.8 — 0.0 35.5 5.2 — 35.8 1.6 5.2 31.0 2.2 0.0 has substantially changed the is way the main product technology acquisition as first, Share of firmsShare with technology Developed a major new product Discontinued at least one product with on a new joint venture Agreed Embodied in new machinery or Licensing or turnkey operations from Developed or adapted within the Table A3.12 Technology indicators in Algeria, international comparison and by firm characteristic A3.12 Technology Table (percent) Indicator of firmsShare with lineUpgraded an existing product Algeria a new technology that Introduced desh China — India Small — size Large Domestic — Foreign Exporter exporter capacity — capacity Obtained a new licensing agreement — of firmsShare rating form of — — — — 23.7Hiring key personnel —Licensing or turnkey operations from — — — — — — — company parent from Transferred 60.9All others 11.8 18.9 — —— Not available. — Bank investment climate surveys. World Source: 4.5 — — 19.4 — — — — — 9.0 — 21.6 — 52.8 15.8 85.7 — — 55.9 10.3 — — 100.0 — 52.2 20.0 45.9 — 63.2 11.8 — 10.4 53.4 — 13.8 0.0 100.0 — 52.2 54.5 48.3 Appendix 3: Cross-Country Investment Climate Indicators and 86 Macroeconomic Performance Indicators continued . . . Algeria, by firm characteristic Bangla- Medium- Non- Low High Algeria desh Morocco China India Small size Large Exporter exporter Domestic Foreign capacity capacity are permanentare workers who are female — workers who are 65.3female 69.5skilled workers who 13.7 nationals foreign are 85.9 59.7 38.5 — — of totalshare — 47.4 — 44.5 of totalshare — — 18.3 14.8 — 12.6 —skilled technical 64.1vacancy (weeks) 12.0 20.8 9.3 — 12.4 31.8 — 7.0 — 4.4 11.4 — — — — 5.2 — 3.1 1.8 — 6.2 12.4 — 13.9 12.1 — 3.5 — 0.6 — 12.9 14.6 13.6 — — 13.0 — 24.2 12.0 — — — 8.9 23.9 13.4 — — — 16.2 12.3 14.9 — — — 12.2 12.7 — — — 37.5 12.6 — — 12.1 18.1 — — 14.0 11.7 — — — 13.6 — — — — Share of permanentShare of temporaryShare of permanentShare Employees who left as a time to fill a Average Table A3.13 Labor and training in Algeria, international comparison and by firm characteristic Table otherwise specified) except where (percent, Labor composition of workers who Share Labor turnover New employees as a Appendix 3: Cross-Country Investment Climate Indicators and 87 Macroeconomic Performance Indicators (continued) Algeria, by firm characteristic Bangla- Medium- Non- Low High Algeria desh Morocco China India Small size Large Exporter exporter Domestic Foreign capacity capacity vacancy (weeks) of as a percentage levelcurrent — 1.6 135.5schooling — 99.0 than 12 years’ more 2.9schooling 78.8 — 87.4 trainingreceiving 82.8 — — 145.2formal training — 106.6 — — — 102.0disputes or civil unrest — — — 199.0 — 31.8 4.0 1.7 26.6 134.4 — — — — 4.1 16.3 141.2 45.5 11.4 — 69.6 165.5 — — 0.2 — 27.2 144.7 23.9 0.3 — — — 112.5 — — 51.3 — — — 63.0 4.0 — — — — 66.7 3.3 — 5.5 — 31.0 — — — 1.7 27.2 — — — 75.0 4.0 — — — 29.9 3.9 36.8 — — — 0.0 — — — 4.5 — — 3.2 production or service production less than 6 years’ Table A3.13 Labor and training in Algeria, international comparison and by firm characteristic Table otherwise specified) except where (percent, Desired level of workforce level of workforce Desired with of workforce Share of skilled workers Share of firms Share offering — Not available. Bank investment climate surveys. World Source: Average time to fill a Average and education Training with of workforce Share Labor unrest Days lost to labor Appendix 3: Cross-Country Investment Climate Indicators and 88 Macroeconomic Performance Indicators

Table A3.14 Main indicators of macroeconomic performance, Algeria, 1990–2002

Indicator 1990–95 1996 1997 1998 1999 2000 2001 2002 Real growth of GDP (percent) 0.3 4.1 1.1 5.1 3.2 2.4 2.1 4.1 Real growth of non-hydrocarbon GDP (percent) 0.1 3.1 –1.3 5.7 1.7 1.2 4.5 4.3 Consumer price index (percentage change) — 18.7 5.7 4.2 2.7 0.3 4.3 1.4 Central government finances (percentage of GDP) Total revenue 29.7 32.2 33.5 27.8 30.0 39.2 35.0 33.7 Hydrocarbon revenue 17.6 20.3 21.4 15.3 18.6 30.2 24.0 21.8 Non-hydrocarbon revenue 12.1 11.9 12.1 12.5 11.4 9.1 11.0 11.9 Total expenditure 31.4 29.2 31.2 31.7 30.5 29.3 30.5 34.0 Wages and salaries 9.2 8.3 8.5 9.3 8.8 7.0 7.4 7.4 Interest payments 2.3 3.5 4.0 4.0 4.0 4.0 3.5 3.1 Investment 7.5 6.8 7.3 7.6 5.9 8.0 8.4 10.6 Other expenditures 12.3 10.7 11.4 10.8 11.9 10.3 11.2 12.9 Overall fiscal balance –1.7 2.9 2.4 –3.9 –0.5 9.9 4.3 –0.3 Money and credit (percentage change, except where otherwise specified) Net foreign assets 32.3 409.5 161.4 –19.8 –39.3 355.1 68.9 27.8 Domestic credit 18.5 9.3 10.2 9.3 25.2 –19.5 –3.8 9.8 Credit to government (net) 19.2 –30.2 51.0 28.0 21.5 –23.5 –22.1 13.7 Credit to the economy 18.0 37.3 –4.6 –1.4 27.9 –17.0 8.1 8.0 External sector (billions of U.S. dollars, except where otherwise specified) Merchandise exports 11.1 13.2 13.8 10.1 12.3 21.7 19.1 18.1 Hydrocarbon exports 10.6 12.7 13.2 9.7 11.9 21.1 18.5 17.5 Merchandise imports 8.8 9.1 8.1 8.6 9.0 9.3 9.5 10.8 Interest payments 2.1 2.2 2.1 2.0 1.9 1.9 1.5 1.2 Current account balance 0.3 1.1 3.5 –0.9 0.0 8.9 7.1 4.3 As percentage of GDP 0.3 2.2 7.2 –1.9 0.0 16.7 12.9 7.8 Overall balance –1.7 –2.1 1.2 –1.7 –2.4 7.6 6.2 3.5 As percentage of GDP –4.0 –4.5 2.4 –3.7 –5.1 14.2 11.3 6.2 Reserves, excluding gold 1.6 4.2 8.0 6.8 4.5 12.0 18.1 23.2 In months of imports of goods and services 1.8 4.5 9.4 7.6 4.7 12.3 18.2 20.6 Foreign debt 28.9 33.6 30.9 30.7 28.0 25.3 22.5 21.9 As percentage of GDP 70.2 73.7 65.3 66.6 61.2 47.3 41.0 39.3 continued . . . Appendix 3: Cross-Country Investment Climate Indicators and 89 Macroeconomic Performance Indicators

Table A3.14 Main indicators of macroeconomic performance, Algeria, 1990–2002 (continued)

Indicator 1990–95 1996 1997 1998 1999 2000 2001 2002 Debt service (percentage of exports of goods and services) 64.8 30.1 29.7 47.2 39.8 19.8 21.9 21.0 Memorandum items Oil price for Algeria (U.S. dollars per barrel) 19.4 21.7 19.5 12.9 17.9 28.5 24.8 25.0 Exchange rates for Algerian dinar Per U.S. dollar 25.9 54.7 57.7 58.7 66.6 75.3 77.2 79.2 Per euro 32.3 69.4 65.4 65.8 71.0 69.5 69.2 75.3

— Not available. Source: World Bank, International Monetary Fund; Algerian authorities.