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Oct 27 2005

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Departure to new and unknown territories is much easier when you go with someone you know from home. So when Orascom Telecom (OT) launched its Algerian mobile operations under the local brand name Djezzy, its Egyptian supplier of IT services, Raya, followed. "It was a very easy market entry for us," admits Medhat Khalil, chairman and CEO of Raya Holding. While Raya entered the Algerian market solely to support OT's operations there, it soon discovered a vacuum in IT services. "We found that there weren't any mature local companies that covered the IT spectrum, so we decided to start full-blown operations."

Since 2003, Raya has worked with US technology giant Lucent to implement a large IT infrastructure project for Algeria's Ministry of Telecommunications and has done an enterprise resource planning (ERP) project for Orascom Construction Industries (OCI). Last August, it began full operations with the opening of three retail centers for the distribution of mobile phones and PCs. It also holds a contract for servicing Nokia phones.

Raya currently has 30 employees in Algeria, including three Egyptians. Khalil expects the number could double by the end of the year.

His optimism appears well founded. Algeria is opening up after decades of socialist protection and a civil war that claimed over 100,000 lives and left the economy in shambles. While periodic guerrilla attacks keep risk analysts on edge, the government of President Abdelaziz Bouteflika appears to be charting a course away from the sectarian violence that afflicted the country throughout the 1990s.

Certainly, the country has a long way to go. Khalil compares the country's overtures towards market liberalization to Egypt's transition in the mid-1970s. "They're at the point Egypt was at with its infitah (open door) policy. They're just now opening the economy, taking very aggressive steps in privatization and deregulating the market," he says.

The country of 32 million people has seen significant changes over the past few years. GDP per capita jumped from $1,700 in 2002 to $2,600 in 2004, while the economy has witnessed 4.5 to 6.9 percent growth rates. Foreign direct investment (FDI) did not exceed $390 million in 2004, but analysts expect it to increase strongly this year as investor confidence grows.

Raya's entry into this emerging market came on the tailcoat of OT, which launched Algeria's first GSM network in early 2002. Djezzy, of which OT owns 85.21 percent and Algeria's Cevital SPA the remaining share, has witnessed dizzying growth in three years, grabbing 60 percent of the market share and accounting for 37 percent of OT's revenues in 2004. The precocious upstart got the jump on Algeria's state-run telecom, Algérie Télécom (AT), which received a GSM license in 2000 but did not effectively start mobile operations until August 2004. A third GSM operator, Nedjma, a subsidiary of Kuwait's Wataniya, is also in the market.

And the market appears to have room for all three to grow. According to the Algerian Post & Telecommunications Regulatory Authority, mobile penetration reached just 15.26 percent at the end of 2004. Fixed-line penetration is even lower, estimated at 9.48 percent. Foreign investors have complained that it often takes up to a month to get Internet service at a new office because ISPs depend on AT to supply phone lines.

AT's weakness has become OT's strength. The Egyptian multinational - working in a partnership with Egypt's state-owned fixed-line operator, Telecom Egypt - won a $65 million fixed-line license in early 2005. It plans to launch fixed-line telephone service in November and expand to three cities by mid-2006. The company is also constructing two undersea cables to France that will give the company exclusive connectivity to Europe.

Greasing the machine
Record-high oil prices have given Algeria room to maneuver. The petroleum sector accounts for nearly 40 percent of GDP and the bulk of exports. With crude prices hovering around $70 per barrel, Bouteflika's government has extra cash to spend. It recently initiated a $55 billion public spending program through 2009 that aims to rebuild infrastructure neglected during the political turmoil of the 1990s.

Major investments are under way to upgrade the country's road and rail networks. In Algiers, a French consortium has won a bid to construct the capital's first underground subway line, which was begun in 1982 but halted due to worsening civil unrest. Several airports are being enlarged or newly constructed.

Significant opportunities for foreign investment lie in Algeria's ambitious mega-projects, including the construction of several large dams and canal networks aimed at feeding fresh water to cities and irrigation projects along the country's narrow coastal strip. Algeria also needs electricity networks, oil and gas pipelines, and port facilities. The sheer volume of construction involved has already attracted Cairo-based Arab Contractors, which has been contracted for a number of projects including construction of the futuristic Ministry of Finance building in Algiers.

The Algerian government is also seeking foreign companies to remedy the country's housing shortage. Social housing programs aim at providing no less then one million new units by 2009 - creating numerous opportunities for foreign construction, real estate and building material firms. So far, only Chinese suppliers who fly in their own workers have found it profitable to engage in these low-cost housing programs, though their workers often protest the conditions. Local architects claim the government is creating ghettos. "The standard of living has to relate to the income situation of the people," explained a senior official at a bank that finances social housing.

Egypt's Orascom Construction Industries (OCI) opened a cement factory in late 2003, the first private cement operation in Algeria. Last July, it opened its second production line, increasing its annual capacity to 4.7 million tons. OCI's cement is said to be superior in quality over its Algerian competitors', which helped it secure a 25-percent market share in 2005, up from 15 percent the previous year.

Off the map
Compared to Egypt with its 8 million tourists in 2004, tourism is virtually absent in Algeria. Less then 100,000 tourists came to the country last year, with the bulk of them heading directly for the vast desert in the south of the country. As a result, Algeria lacks tourism infrastructure, with only four major hotels in its capital, all but one being state-run. Analysts predict it could take years before the government is able to put together a coherent tourism development plan.

But international airlines are not waiting. German carrier Lufthansa and Qatar Airlines added Algiers to their scheduled service in summer 2005, entering what was until recently a heavily protected civil aviation market. The government has also offered a majority stake in Tassili Airlines, a charter service specialized in transporting workers to and from oil fields.

For the few intrepid Egyptian firms that have ventured into the Algerian market, timing is key. The country is still largely off the map for western investors, giving Egyptian firms a competitive headstart as the country attempts to rebuild its economy. While significant opportunities exist, investors eyeing the Algerian market must be aware that the country is still tightly wound in red tape.

One of the biggest obstacles is the country's state-dominated banking sector. Often it takes weeks to complete even the most basic of transactions - a detriment to foreign companies that need to inject capital into their operations, pay contracted firms or send revenues home. One Egyptian investor explained that Algeria's state banks offer very little in the way of services. "These banks function more as treasuries - they just keep money," he said. "They don't do what banks are supposed to do, which is
provide the economy with capital."

The bureaucracy, corruption and informal market structure are the by-products of a decades-old centralized, socialist government, explains Raya's Khalil. Yet he sees this not as an obstacle, but rather an advantage for Egyptian investors. "Egyptian companies have an edge here, because we've passed this very same stage. Egypt is also quite a bureaucratic country, so we are well suited to work in Algeria. We also know the culture, and while Arabic language is an asset, we also speak English and French."

Raya's case is a good example. Chinese firms have been extremely aggressive in winning market shares as telecom equipment suppliers, but they've run up against a number of obstacles. Unable to navigate the murky waters of Arab distribution channels, Chinese companies have limited their activities to wholesale. Egyptian companies have succeeded in sale and service, though Khalil is cautious to say it's a cake walk. "If the market were easy, competition would be furious."