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Algeria risk: Infrastructure risk(RiskWire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC56C56Infrastructure riskD66D66Note: E=most risky; 100=most risky.SUMMARY Algeria's infrastructure risk is high--reflecting a hiatus of investment during the civil war ravaged 1990s--though the government has begun to spend money on its improvement. The road network is sparse and in disrepair in many areas. Construction and repairs have been hampered by the threat of Islamist attacks, particularly in the west of the country. The country's port facilities are reasonable, if poorly managed, but air links are poor, if improving--both Air France and British Airways have restored direct routes to Algeria. After years of neglect, Algeria's telecoms infrastructure is beginning to be upgraded, though most of the effort has focused on upgrading the cellphone network, which has expanded rapidly. Land-line connections remain meagre and unreliable and Internet use is still in its infancy. Water supply is being upgraded, but from a very low base. A severe earthquake in May 2003 further debilitated the housing stock. SCENARIOS Under-investment in infrastructure continues (Moderate Risk) After years of under-investment, infrastructure of all types (water and sewerage, transport and telecoms) is in need of a major overhaul. Water shortages are common in the capital during the summer. Transport infrastructure is relatively well developed in the coastal region, but poor road and rail links between the ports and the mineral-rich south of the country have inhibited the development of the mining sector. The road network has been extended only slightly since 1970. Telephone lines in many parts of the country are analogue. The government of President Abdelaziz Bouteflika has made infrastructure investment a priority, and there are now robust levels of foreign investment flowing into telecoms, power, water and housing. Nevertheless, infrastructural stagnation and further decay are possible in other sectors, particularly if oil prices decline. Companies should keep an eye open for signs of a slowdown or halt to the government's infrastructure push. Companies involved in infrastructure development, particularly those outside the power and telecoms and hydrocarbons sectors, should keep abreast of all oil price forecasts. Algeria continues to be hampered by poor air links (Low Risk) Algeria received a major vote of confidence when Air France resumed air links to the country in 2003; this was followed by an announcement from British Airways that it would also resume direct links. Since then, a number of European airlines have started or re-started routes. As investor interest in Algeria grows, so new connections to Algeria are likely to be established. BACKGROUND (Background material is updated twice yearly. Last update: May 5th, 2005) Natural Resources and the Environment Algeria is the second largest country in the African subcontinent, with a total land area of 2,381,741 sq km. The northern part of the country, where the majority of the population lives, is mountainous and comparatively humid. Along the coast annual rainfall in some areas averages more than 1,000 mm. Further inland the climate becomes semi-arid and rainfall is more erratic, averaging 200-400 mm per year. This region is bordered by the Sahara desert, which extends for about 1,500 km to the country's southern border. The climate in the Sahara is characterised by low levels of rainfall, averaging less than 130mm per year, and extremes of temperature, reaching over 55C. Algeria's total proven recoverable oil reserves are officially estimated at about 11bn barrels. According to Mr Khelil, production capacity is around 1.25m b/d. Proven reserves of natural gas, which are mainly wet, stand at 175trn cu ft, although actual reserves are probably larger. Algeria has gold deposits in the Hoggar region in the south-east and diamonds near the border with Mali. It also mines and exports high-grade ore, iron pyrites, phosphates, lead, zinc, mercury, barite and antimony. However, non-energy mining infrastructure has been neglected, and capacity utilisation is estimated at only 55%. The country has an estimated 39.6m ha of agricultural land, of which 31.7mha are pasture and bush. Crops are grown mainly on Algeria's fertile but narrow coastal plain, which still dominates agriculture despite government measures to develop steppe and desert farming in the high plateaux and Saharan regions. Transport and Communications Railways In 2001 the government presented to parliament's economic committee draft legislation to open the rail network to private business, operating on a franchise basis. Under the terms of the draft bill the state will lease out franchises for running rolling stock, commercial management, and maintaining and running signalling and safety systems to the private sector. However, by September 2004 there had been no further progress in this plan. The state railway company, the Societe nationale de transport ferroviaire (SNTF), controls 4,200 km of track. SNTF has accumulated debts of around AD12bn (US$160m), and it has suffered from its association with the state, an identification that has made it the target of Islamist rebel groups and, more recently, Kabyle activists. Indeed, restructuring to focus on core business activities is required before any major private-sector opening can be expected. SNTF's passenger service is extremely depleted and the company transports mainly cargo. Like the rest of the transport network, the railway system has been neglected since independence. Most of the network is narrow-gauge track except for an electrified stretch of 300 km between the iron-ore mines of Ounza and the port of Annaba. Rolling stock is in desperate need of replacement and the track and signalling infrastructure also require upgrading. In January 2001 the SNTF received 15 new locomotives ordered from General Motors in a deal worth US$32m. Road traffic The poor quality of the country's roads leads to the deaths of an estimated ten people a day and accidents are estimated to cost the state AD10bn a year. However, with an estimated AD227bn required to renovate the national road system, improvement will be slow. Some outside assistance is being offered: in July 2002 the European Investment Bank (EIB) volunteered a 50m loan to improve Algiers' ring road interchange system. Despite these incremental improvements, the government has said in the past that it plans to privatise all road transport and to seek private investment in highways. However, security from Islamist attack would be a major issue for any prospective private developer and this is likely to prove a major deterrent. Algeria has 88,853 km of national roads, of which one-third are trunk routes. Around 29,394 km are dirt roads and tracks accessible to motor vehicles. Poor road (and rail) links between the ports and the mineral-rich south of the country have inhibited the development of the mining sector. The EIB is also providing 50m in further funding for the Algeria section of the trans-Maghreb motorway. The EIB has already provided 246m in funding for the motorway, although construction has been dogged by delays. The EIB believes that the motorway could be a vital component for fostering economic integration between the Maghreb countries. Shipping and ports Algeria has nine major ports, including those at Algiers, Oran, Bejaia, Annaba, Skikda and Arzew. Algiers port, the most important, is scheduled for expansion. A new 17.5-ha container terminal will speed up operations by increasing handling capacity. Completion of the project, which is scheduled for 2005, will allow the port's current handling capacity of 200,000 TEUs/year to be increased by an extra 250,000 TEUs/y. There are also plans for a second container terminal to be built between 2007 and 2010. The US Trade Development Agency has approved a grant to finance studies on the new terminal project. The Bejaia container terminal to the east of Algiers is also being upgraded following an agreement signed in August 2004 between Entreprise Portuaire de Bejaia and Singapore's Portek International. This will entail setting up a joint operating company for two berths, with Portek investing in new equipment and providing management services. The terminal handled 34,000 TEUs in 2003, and this is expected to rise by 40% in 2004. Air services Before the onset of sustained political violence Algerian airports were among the busiest in North Africa, handling some 6m passengers and 27,851 tonnes of goods in 1992. There are four major airports, located in Algiers, Oran, Annaba and Constantine, and more than 60 smaller airports, many of which are being modernised to take international traffic and more domestic flights. Until recently, security concerns have ensured that only one major European airline, Italy's Alitalia, serves Algeria. However, an important mark of progress was made in mid-2003 when Air France resumed flights to the country nine years after they were interrupted following the hijacking of one of the company's planes on the tarmac in Algiers in December 1994. Militants from the Groupe islamique armee (GIA) were accused of the attack, in which the hijackers killed three passengers before flying to Marseilles where the plane was stormed by the French security forces. In a further mark of confidence, British Airways resumed flights to Algiers in January 2004. China State Construction & Engineering has been making good progress in finishing the construction of a terminal in Houari Boumedienne airport in Algiers. The firm, which was awarded the contract in January 2003, said that it had completed the construction of the main terminal building by June of that year. The government had originally planned to have a private contractor complete and then run the airport, but this idea was scrapped following a difficult round of negotiations with two foreign firms. The Chinese contractor's work is scheduled for completion in mid-2005. A second contract, to carry out feasibility studies for the construction of a VIP lounge, car parking for up to 2,700 vehicles, above-ground water-storage facilities and a road network, has been awarded to France's Aeroports de Paris. The two contracts form part of plans to expand the capacity of the airport to 8.5m people ayear. Other major plans for the sector include the partial privatisation of the national carrier, Air Algerie, as part of a liberalisation of the aviation market. In early 2001 the Algerian authorities appointed an international consultancy firm, Booz Allen & Hamilton, to advise on the best way to open up 49% of Air Algerie's capital to private investors. However, owing to political resistance we do not foresee this happening for a number of years. The company has nevertheless been upgrading its ageing fleet, announcing plans to purchase up to 40 new aircraft. In 2003 it placed an order for five Airbus 330-200s. It has also announced plans to buy three Boeing 737-800s, for which the Export-Import Bank of the US has offered finance. As part of a plan to boost its short-haul services, it has purchased six ATR 72-500s. Air Algerie had been facing serious competition from Khalifa Airways, one of eight private airlines in the country. After rapid expansion since its foundation in 1999, Khalifa Airways was even discussing a possible takeover of Air Algerie in conjunction with Germany's Lufthansa. However, serious financial difficulties afflicting the parent Khalifa Group, which emerged in early 2003, led to the airline's abrupt collapse, leaving Air Algerie in a position to reassert its dominance over the market. Internet In 2002 Algeria had only 16 Internet users per 1,000 people, compared with 52 in Tunisia and 23 in Egypt. The state-owned Internet provider, DjaWeb, selected a US company, Lucent Technologies, to assist in its network creation in 2002, and this project has laid the basis for the rapid expansion of the sector, although up-to-date data were not available as this report went to print. Mass media Despite much press opposition, a new law was adopted in 2001 which imposes heavy prison terms and fines on journalists found guilty of insulting the president or any public institution. Journalists and political parties see the law as a major setback for advances in press freedom since 1989, when the state loosened its control over the media. In the past decade the state-owned daily newspapers, the French-language El Moudjahid and the Arabic Ech-Chaab, have been overtaken in popularity by privately-owned papers such as Le Matin, El Watan and Liberte. Although privately-owned, and often vociferous in their criticism of government (or certain members of it), many of the new publications cannot be considered to be totally independent because they reflect the interests of powerful factions in Algeria's ruling military and intelligence circles. In mid-2003 a number of these papers were suspended supposedly for "financial irregularities", although this probably reflected infighting between the military decideurs. In the wake of the re-election of Abdelaziz Bouteflika as president in April 2004, a court sentenced Mohammed Benchicou, the editor of Le Matin, to two years in prison for violating foreign-currency regulations. The national broadcasting system includes three radio channels and one terrestrial television channel; all tend to toe the line of the establishment. The system is being expanded to reach the most remote corners of the country. Telecommunications Infrastructure The telecommunications sector has made great strides since the passage of a law in 2000 that paved the way for privatisation of the industry. The first step was the establishment of a new joint-stock company, Algerie Telecom, to take over the operation of fixed-line services and of the global system for mobiles (GSM) network from the Ministry of Posts and Telecommunications. This was accompanied by the creation of an independent regulatory agency, Autorite de regulation de la poste et des telecommunications. The agency has since issued two mobile-phone licences, while Algerie Telecom has invested heavily in upgrading its own services, in particular mobile phones. The lack of investment in the sector in the past means that Algeria is still comparatively poorly served, although the industry is expanding rapidly. According to the most recent survey from the International Telecommunication Union (ITU), there were only 74 telephone subscribers (fixed and mobile) per 1,000 people in Algeria in 2002. This compared with 180 subscribers per 1,000 people in Egypt and 240 in Morocco. Subscribers to cellular lines were low in 2002 at only 400,000, compared with 4.5m in Egypt and 6.2m in Morocco, according to the ITU figures. However, the start-up of the new mobile-phone operators has changed the picture dramatically. Egypt's Orascom Telecom, which paid US$737m in 1991 for the first private licence, announced in August 2004 that the number of subscribers to its Djezzy service had reached 2m at the end of June. ATM Mobilis, the mobile arm of Algerie Telecom, started to roll out its new equipment in 2003, and now has some 250,000 subscribers. Kuwait's Wataniya Telecom, which paid US$421m for the second private licence, launched its service in the third quarter of 2004. The government put the fixed-line section of Algerie Telecom up for sale in early 2004, but received no offers. The poor response was attributed to the high asking price and the low financial returns from fixed-line services. Sweden's Ericsson has long held a dominant position in the Algerian telecoms equipment market, partly by virtue of its 35% stake in Sitel, a firm based in the western city of Tlemcen and which manufactures telephone switches. However, rival companies have managed to secure major orders from the new mobile-phone operators, and China's Huawei in 2004 signed a strategic partnership agreement with Algerie Telecom. One of the fruits of this agreement has been an order to set up a code-division multiple access (CDMA) network, allowing for the expansion of the fixed-line service using wireless networks. Energy At 743 kwh a head, electricity consumption in Algeria is low compared with Egypt's 910 kwh a head (both 2003 figures). Algeria's existing 6,000 mw of generating capacity comes from gas-fired power plants at Algiers, Annaba and Oran. The country also has a series of small hydroelectric power stations in Kabylia. However, demand is growing at around 4% a year and the country will have to add substantially to its generating capacity over the next decade. A number of new power plants have been linked to the production of desalinated water. Following the passage of an electricity and gas law in 2001, aimed at liberalising the sector, most major new projects have involved private investors. The model for the new build-own-operate (BOO) plants involves the private developer forming a joint venture with the Algerian Energy Company (AEC)--owned equally by the state energy company, Sonatrach, and the state power utility, Sonelgaz. AEC will also guarantee to purchase the power produced by the plant. The offtaker for desalinated water is Algerienne des Eaux. The first such project is being carried out in the western oil and gas terminal of Arzew, with Black and Veatch of the US acting as the main lead investor, with an 80% equity interest. The plant will generate 314 mw of electricity and produce 88,000 cu metres/day of water. The main contracts were placed in 2002. The second major BOO project was awarded in 2003 to Canada's SNC Lavalin for an 800-mw combined cycle power station in the eastern port city of Skikda. A partnership of Ionics of the US and Japan's Mitsui and Company has also been selected for a project to build and operate a desalination plant in Hamma, in Algiers. It will produce 200,000 cu metres/d of water, using reverse osmosis technology. It will draw its electricity needs from a recently completed 400-mw power station nearby. (The Hamma power station was the target of a bomb attack in June 2004 but was not seriously damaged.) In July 2004 the long-delayed Hadjret Enouss power station project moved ahead, with the submission of technical offers to AEC by three international companies. The client approved the bids of SNC Lavalin and Germany's Siemens Power Generation, but rejected the proposal of France's Alstom as not conforming to specifications. The plant, to be built at Tipasa, west of Algiers, will generate 1,200 mw of electricity. It will be combined cycle, consisting of gas turbines and a steam turbine unit using heat recovered from the gas-turbine cycle. The winner of the tender will be required to take a 25% stake in the operating company, with the remaining equity held by AEC. The initial feasibility study for Hadjret Enouss was carried out by Electricite de France in 1999. Energy liberalisation Demand for power will be driven partly by the government's commitment to expand the housing stock, in order to relieve social tensions. Industrial investment, particularly in the hydrocarbons sector, will also feed demand. The capacity expansion required to meet the demand will be costly--around US$12bn over ten years--and the government is eager to attract substantial foreign investment to the sector. The enabling legislation for this investment is the 2001 electricity and gas law, which ends the monopoly of Sonelgaz over the domestic power and gas markets. The law cleared the way for liberalisation of the sector by 2005, through the following actions. Opening electricity generation to full private competition. A new regulatory body, to be known as the Commission for Regulating Electricity and Gas (CREG), will act as the commissioning authority. CREG will be responsible for enforcing technical, environmental and economic regulations. It will also ensure transparency and fair competition between all participants, and will be responsible for setting transmission prices. The creation of two new subsidiaries of Sonelgaz, one for the transmission of electricity and one for gas. They operate under licences from the Ministry of Energy. The creation of a system operator, which will have the challenging job of ensuring that supply and demand are in balance. This will be a private firm with no interest in power generation. The creation of a new market operator, whose main role will be to match the offers from the generators with bids by the suppliers, traders, retailers, and others. The gradual opening of the retail market to private competition. The law provides for a 30% opening of the market within three years; energy users consuming above a fixed amount will be able to choose their own supplier.Moreover, in June 2002 the government announced that Sonelgaz's subsidiaries will be opened up to private investors, including foreigners. However, none had taken the opportunity by September 2004 and there remains considerable uncertainty about the degree of official commitment to full-scale deregulation of the energy sector. In June 2004 the chief executive of Sonelgaz, Nourredine Boutarfa, declared that the electricity market is not ready to be opened to full-scale competition owing to (de facto) subsidies that exist in the pricing of power in the domestic market. "Conditions for opening the electricity market do not yet exist in our country. We are still two to three times less expensive in terms of prices than Morocco or Tunisia," Mr Boutarfa said, which would be a disincentive to potential foreign distributors looking to make a profit. The fact that the government has done nothing to adjust the subsidy system in the two-and-a-half years since the passage of the law suggests that there is considerable political resistance to deregulation of the sector. Water and wastewater schemes Water provision is a critical social issue, with severe shortages afflicting some parts--typically the working class areas--of Algiers. It is estimated that over 250km of the Algiers supply network requires renovation. EPEAL, the national water enterprise, introduced a new water management programme after levels of water reserves for Algiers, Oran and Constantine plummeted in early 1997. A US$350m scheme to improve water supplies in eastern and western Algeria is to receive US$118m of support from the World Bank. AEC is also proceeding with a number of new desalination projects. They include two plants to be built in east and west Algiers, each with the capacity to produce 100,000 cu metres/day. A similar project is planned at Mostagenem, and two smaller schemes are to be carried out in Jijel and Tlemcen. |