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Flash info Algeria | Public contracts: regulations implementing the margin of preference for goods and services of Algerian origin

21/07/2011

By his decree of 28 March 2011 (herein after “the Decree”), the Minister of Finances has laid down detailed provisions for the implementation of the margin of preference for Algerian products and/or Algerian companies. This margin is provided for by article 23 of Presidential decree no. 10-236 of 7 October 2010, enacting the Public Contracts Code (hereinafter the PCC).

It may be recalled that, under article 23 of the PCC, the margin of preference has been increased from 15% to 25%. In view of the significant financial implications of this change, we think it is important to consider the Decree in detail, particularly in relation to its scope (Part I) and the calculation of the margin (Part II). 

I. Scope

Article 1 of the Decree provides that the margin of preference applies to Algerian products and/or companies incorporated under Algerian law.

Article 2 distinguishes between public procurement contracts and public works, services and consultancy contracts.

The margin of preference applies:

In relation to public procurement contracts, to Algerian products, manufactured in Algeria, upon production of a certificate of Algerian origin. This certificate is issued by the Chamber of Commerce and Industry concerned. It should be noted that this mechanism for establishing the Algerian origin of products had already been provided for by Ministerial decree of 22 February 2003, made pursuant to article 19 of Presidential decree no. 02-250 of 24 July 2002 (now repealed). In principle, the margin of preference for Algerian products should apply to all tenderers, without discrimination, provided that the products are of Algerian origin.

It should be pointed out, however, that the equal treatment of tenderers may be compromised in practice, due to the following considerations:

  • The applicable exchange controls do not allow a foreign company to be paid in foreign currency where it has tendered for the supply of Algerian products purchased in Algeria. Payment in foreign currency is only permitted for import transactions, and thus not where products are purchased from distributors in Algeria.
  • Realistically, purchase and resale transactions can only be carried out by Algerian companies.

In relation to public works, services and consultancy contracts, the margin of preference does not apply to wholly-owned subsidiaries of foreign companies, or foreign companies which are more than 50% foreign-owned. It does apply to foreign companies which are more than 50% Algerian-owned, though only to the extent of the Algerian ownership.

Thus the margin of preference can only apply where the company is more than 50% Algerian-owned. In practice, Algerian purchase and resale companies founded under the “70/30 rule” are unable to benefit from the margin. By contrast, Algerian companies founded under the “51/49 rule”, can benefit from the margin, though only to the extent that they are Algerian-owned.

II. Calculation

Pure public procurement contracts

Article 2.1 of the Decree provides that “a margin of preference of 25% shall apply to Algerian products…”. However, there is no indication as to how the margin is to be calculated.

Our understanding, subject to the relevant authorities taking a contrary view, is that the margin should be applied by increasing the price of foreign products by 25%, in order to give preferential treatment to tenders relating to Algerian products.

Example: one tenderer offers to supply foreign products at a price of 90, and another tenderer offers to supply Algerian products at a price of 100.

Applying the margin of preference, first tenderer’s price will be recalculated as follows: 90 + 90 x 25% = 112.5

Pure public works, services and consultancy contracts

  • The method for calculating the margin of preference is described in article 3 of the Decree, in terms of: A price increase of 25% (inclusive of tax), applicable to the financial terms of tenders by foreign nationals and companies incorporated under Algerian law but held as to more than 50% by foreign nationals (i.e. tenderers who are excluded from the margin of preference).
  • An downward adjustment to the effective rate for mixed consortiums, made by applying the rate of 25% only to the extent that Algerian companies are participating in the consortium, and to the extent that those companies are Algerian-owned.

Example
An Algerian company which is wholly owned by Algerian nationals, and another Algerian company which is owned as to 80% by foreign nationals, tender for a public works contract at a price of 100. 

The 100% Algerian-owned company’s tender
This benefits from the margin of preference, so the tender price remains at 100.

The 80% foreign-owned company’s tender
Applying the margin of preference, the offer is recalculated as follows: 100 + 100 x 25% = 125. 

Mixed public contracts (contracts involving elements of both procurement and works/services/consultancy)

The process described above cannot be regarded as a model of clarity, and questions arise in respect of its application to mixed public contracts and other situations of even greater complexity.

In other words, questions may arise as to how to apply the two margins based on the origin of the products and the nationality of the tenderer.

We would point out that under article 23 of the PCC, calls for tenders must clearly indicate the applicable margin of preference, as well as the method of assessing and comparing offers which is to be adopted by way of application of that margin.

Authors

Picture of Samir Sayah
Samir Sayah
Partner Africa Practice – Corporate, M&A
Algiers
Jean-Jacques Lecat
Abdessemed-Mourad-Nabil
Mourad Nabil Abdessemed
Head of tax department
Algiers