US$5bn Lawsuit Reflects BMI's Algerian Risk/Reward Concerns

Weather Investments is launching a US$5bn claim against the government of Algeria, alleging damages to its ability to freely operate its telecommunications businesses in the country over the past 11 years. Although the claim has been registered by the dispute resolution branch of the World Bank , BMI is doubtful the Naguib Sawiris-owned company will succeed in securing a positive result , given the Algerian state's unwillingness to deal openly and fairly with high-profile foreign investors. Sawiris' claims of harassment and improper interference on the part of the government have long been reflected in our Risk/Reward Ratings analysis of the Algerian telecoms market and stand ready to downgrade the country ' s already poor score further still.

Beginning in 2001, subsidiaries of Egypt-based Orascom Telecom have secured licences to build and operate alternative telecommunications networks and services in Algeria, including an advanced mobile network, an international submarine cable system and discrete dedicated data and value-added services platforms. The Djezzy mobile business, in particular, has been a considerable su ccess and serves 17.694 mn Alge rian customers, 47.7 % of the overall mobile market. Meanwhile, the Med Cable system, linking Algeria to France, has provided the country with much-needed international communications capacity at affordable rates.

However, as Weather Investments notes in its claim, the Algerian government has, since 2008, persistently harassed the Orascom businesses, preventing them from operating efficiently and costing Orascom and Weather over US$5bn in lost revenues, ad hoc taxes and financial penalties and costs associated with the implementation of workaround solutions. The list of grievances includes, but is not limited to:

  • t he imposition of more than US$950mn in spurious tax reassessments and penalties on Djezzy covering the 2004-2009 period;

  • t he blocking of payments of dividends to foreign shareholders, including W eather;

  • a n ongoing injunction imposed by the Bank of Algeria from mid - April 2010 restraining all Algerian banks from engaging in any f oreign banking transactions on behalf of Djezzy ;

  • a customs blockade imposed on Djezzy, preventing it from importing network equipment and handset SIM cards essential to ensuring the expansion and stability of its networks and services;

  • periodic closures of the Med Cable and satellite networks over alleged infringements of national security;

  • the interference in, and thwarting of, the sale of Orascom Telecom Holding ( OTH , including Djezzy) to the MTN Group in 2010; and,

  • the imposition of a US$1.3bn fine on Djezzy on the grounds that it breached Algerian foreign exchange regulations, plus threats of future substantial fines yet to be determined.

Weather Investments notes it has attempted, unsuccessfully, to negotiate with the Algerian government over the last six months and has, therefore, resorted to international arbitration.

The sale of selected Orascom Telecom businesses to Russia's Vimpel Communications in 2011 prompted the Algerian government to demand the repatriation of Weather's investment in Djezzy However, the value it has placed on the unit is lower than Weather believes it is worth and a binding sale agreement remains elusive, meaning that Weather remains exposed to further financial harassment by the state. The government is also demanding the repatriation of Kuwait-based Wataniya Telecom's stake in Algeria's second-largest mobile network operator, Nedjma, after Wataniya was acquired by Qatar Telecom earlier in 2012. As the state already owns the incumbent mobile operator, Mobilis, these efforts would effectively bring the entire Algerian telecoms market under state control and potentially unwind all foreign investments in the sector to date.

Sawiris' frustration with the Algerian government has been mounting and we are not surprised Weather has finally turned to the international courts for a speedy resolution. However, the Algerian state's intransigence on these matters and its apparent determination to ignore regional pressures to transparently engage with global investors, pursue economic development and implement reforms attractive to the international business community led BMI long ago to apply some of the lowest Risk/Rewards scores to the country.

Algeria is near the bottom of our Q113 Risk/Reward Ratings league table for the MENA region. If the state refuses to engage with Weather or the international dispute panel and follows through on its threats to impose further ad-hoc fines on Djezzy we will have no choice, but to downgrade the country's Country Rewards and Industry Risks further, which would place it last on the ratings table, possibly on a par with rogue nations such as Syria, which we do not yet cover owing to a lack of meaningful market data. This move also sends a stark warning to investors in other key industry verticals considering investing in the country. If they, too, begin shunning Algeria, the country's economic growth momentum is threatened.

MENA Telecom Risk/Reward Ratings, Q113
Rewards Risks
Scores out of 100, with 100 highest. The Telecoms Risk/Reward Rating comprises two sub-ratings: 'Rewards' and 'Risks'. Scores are weighted as follows: 'Rewards': 70%, of which Industry Rewards 65% an' Country Rewards 35%; 'Risks': 30%, of which Industry Risks 40% and Country Risks 60%. The 'Rewards' rating evaluates the size and growth potential of a telecoms market in any given state, and country's broader economic/socio-demographic characteristics that impact the industry's development; the 'Risks' rating evaluates industry specific dangers and those emanating from the state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation of anticipated returns. Source: BMI
Country Industry Rewards Country Rewards Industry Risks Country Risk Telecoms Rating Regional Rank Previous Rank
Israel 55.0 86.7 80.0 65.6 68.1 1 1
Saudi Arabia 63.3 69.0 60.0 74.5 65.9 2 2
Qatar 55.9 72.0 60.0 76.1 63.1 3 3
Kuwait 57.8 81.0 30.0 69.7 61.1 4 4
Oman 45.0 66.0 50.0 69.4 54.6 5 6
UAE 49.5 72.0 30.0 65.3 54.5 6 5
Bahrain 46.8 60.0 40.0 67.3 52.1 7 8
Iraq 42.5 60.0 40.0 54.8 48.3 8 7
Jordan 42.5 60.0 50.0 44.5 48.2 9 9
Morocco 40.0 56.7 60.0 46.7 48.1 10 10
Iran 50.0 49.7 20.0 51.4 45.6 11 14
Egypt 42.5 43.7 50.0 52.1 45.3 12 11
Tunisia 35.0 56.7 50.0 45.7 44.2 13 12
Algeria 35.0 53.0 30.0 66.1 43.3 14 13
Libya 32.5 70.0 10.0 61.2 42.6 15 15
Average 46.2 63.8 44.0 60.7 52.3
This article is tagged to:
Sector: Telecommunications
Geography: Algeria