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Algeria risk: Infrastructure risk(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC56C56Infrastructure riskD63D66Note: 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. Until recent years, construction and repairs were hampered by the threat of Islamist attacks, particularly in the west, but the government has recently started a vast programme of road-upgrading. 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 (Low 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, but a new project to build a motorway linking Tunisia and Morocco across the north of Algeria is underway. 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. An ambitious project to extend and upgrade the east-west motorway, linking Algeria to Morocco and Tunisia, was launched in May 2006. Nevertheless, infrastructural stagnation and further decay are possible in other sectors 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 also started or re-started routes. As investor interest in Algeria grows, so new connections to Algeria are likely to be established. BACKGROUND (Updated: April 18th, 2006) Natural Resources and the Environment Algeria is the second-largest country in Africa (after Sudan), 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. 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, Communications and the Internet 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 2005 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 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. An estimated ten people a day die on Algeria's roads, many of which are in poor condition, and accidents are thought 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. 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. The government has included this project in its plan for some US$55bn worth of infrastructure investment over the next five years. The largest new infrastructure project coming up in Algeria is the East-West Highway, covering 1,260 km in total and running the length of Algerias Mediterranean coastline, of which only a small part has been completed. The cost of the project has been estimated at some US$7bn. According to Amar Ghoul, the public works minister, a significant part of the construction will have to involve specialised international companies because of the technical complexity of the work. The invitation to bid for the three main contracts for the construction of the highway running the length of Algerias Mediterranean coastline has elicited a strong response from international contractors, with bidders from the US, China, France, Germany, Italy, Portugal and Japan. 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, and inaugurated a weekly flight to the oil and gas centre at Hassi RMel in June 2005. 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 by end-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. In September 2005 more than 200 firms applied for licences to open retail space in the new terminal. The transport minister, Mohammed Meghlaoui, announced at the end of 2005 that the government has decided to open negotiations with Frances Aeroports de Paris (AdP) for a contract to manage the second terminal at the capitals Houari Boumediene airport. The project was launched in 1987, but was interrupted by the violence that started in 1992. After a number of abortive efforts to revive the scheme, including an attempt to involve international private investors, the government allocated funds at the end of 2002 to the state-owned Entreprise de Gestion de Services Aeroportuaires to complete the work, at an estimated cost of AD23bn. AdP has been involved as a technical consultant on the construction project, which is nearing completion. The original terminal was built in 1945 with a planned capacity of only 450,000 passengers/year. It now has to handle some 4m. The new terminal will have a capacity of 6m passengers/year, and will be dedicated to international flights, leaving the old terminal to deal with domestic traffic. 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 ordered 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. Khalifa Airways in trouble Air Algerie has resumed its position as the dominant provider of aviation services following the demise of Khalifa Airways, by far the largest of the eight private airlines established since the sector was liberalised in 1999. 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. Air Algerie has reacted to this development by launching a major programme of investment to upgrade its fleet. Internet Internet use has grown rapidly in recent years, reaching 45 users per 1,000 people in 2004, according to the government, compared with only 16 per 1,000 people two years earlier. This puts Algeria on roughly the same level as Egypt as regards Internet penetration, although it still lags behind Tunisia, where there are some 70 users per 1,000 population. There are currently about 30 private Internet service providers operating alongside the state-owned provider, DjaWeb. The government has stated that it intends to invest heavily in information technology (IT) infrastructure over the next five years, with the target of having one personal computer (PC) per family by 2010, and to expand the optical fibre network, which now stretches over 35,000 km. The investment plan includes the construction and equipment of a dedicated cyber-village at Sidi Abdullah. 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 El Khabar, 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 newspaper has since ceased publication. 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 remotest corners of the country. Naguib Sawiris, the head of Egypts Orascom Telecom--which has a powerful position in Algerias telecoms market--has expressed interest in investing in a private television station in 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 three mobile phone licences and one fixed-line licence, while Algerie Telecom has invested heavily in upgrading its own services, especially 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 just over 200 telephone subscribers (fixed and mobile) per 1,000 people in Algeria in 2004. This compared with 230 subscribers per 1,000 people in Egypt and more than 300 in Morocco. Mobile phone penetration has risen more than tenfold since the licensing of private operators in 2001, and reached about 150 per 1,000 population in 2004, a level that is broadly in line with Egypt, Tunisia and Morocco. The market continued to grow rapidly in 2005, and the number of mobile subscribers now exceeds 9m. Egypt's Orascom Telecom paid US$737m in 2001 for the first private licence, and in June 2005 marked the achievement of 5m subscribers to its Djezzy service. ATM Mobilis, the mobile arm of Algerie Telecom, started to roll- out its new equipment in 2003, and now boasts over 3m subscribers. Kuwait's Wataniya Telecom, which paid US$421m for the second private licence, launched its Nedjma service in the third quarter of 2004 and celebrated reaching 1m subscribers in August 2005. All three operators are embarking on expansion plans. Orascom Telecom announced in March 2005, in a 50:50 partnership with state-owned Telecom Egypt, that it had won a 15-year licence to build and operate a fixed-line network in Algeria. The licence will allow the Egyptian consortium to develop high-speed data and other specialised services as well as meeting the large unfulfilled demand for basic residential telephony. Orascom, which was apparently the only bidder for two fixed-line licences on offer, said that the consortium will pay US$65m for the licence and expects to invest some US$1bn during the licence period in building an advanced next-generation telecommunications network. It added that the licence includes a two-year exclusivity period to operate both national and international fixed-line network services. Meanwhile the government has appointed Banco Santander to advise on the privatisation of Algerie Telecom. 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 about 800 kwh per head, electricity consumption in Algeria is low compared with Egypt's 1,020 kwh per head (both 2004 figures). Algeria's existing 6,000 mw of generating capacity largely 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, as well as upgrading the transmission and distribution system. Kabylia. A number of new power plants have been linked to the production of desalinated water. The government passed an electricity and gas law in 2001, aimed at liberalising the sector. However, private investment has so far been restricted to the desalination sector. 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 at the oil and gas terminal of Arzew in the north-west. Black and Veatch of the US initially acted as the lead investor, with an initial equity interest of 80%. However, the US firms share has since been reduced to 5%, as AEC has injected fresh capital and increased its own stake to 95%. The plant will generate 314 mw of electricity and produce 88,000 cu metres/day of water. The main contracts were placed in 2002, and it was inaugurated by the president, Abdelaziz Bouteflika, in September 2005. 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 GE-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 project got underway at the start of 2005 after the developer concluded a US$200m financing package with the US Overseas Private Investment Corporation. The engineering, procurement and construction contract was subsequently awarded to a joint venture of Egypts Orascom Construction Industries and Belgiums Besix. AEC is evaluating bids for two more desalination plants in Algiers, as well as for similar plants at Tlemcen and Mostagenem. Negotiations are also under way with a Spanish consortium about a 100,000-cu metres/day plant at Skikda. Assuming all these projects go ahead, Algeria will have more than 500,000 cu metres/d of desalination capacity installed by 2009. However, the execution of these projects may be held back by AECs ruling in mid-2005 that they must be financed exclusively by local banks. In June 2005 parliament passed a law allowing for foreign companies to be awarded management contracts for urban water-supply systems, as part of a policy to tackle chronic waste in Algerias main water systems. The manage-ment contracts will focus on the distribution network--which accounts for most of the losses from the system--as well as on training and on the introduction of new technology. The first such scheme is likely to go ahead in Algiers, where the government has proposed setting up a joint venture between Algerienne des eaux. Office nationale dassainissement and Frances Suez group. It will be named Societe des eaux dAlger (SEAL). Similar structures are envisaged for the other cities, including Oran, Constantine and Annaba. The water resources minister, Abdelmalek Sellal, said that the foreign partner will receive a management fee for an initial period of five years, after which the question of developing the relationship into a full concession may be broached. 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 tender process has since dragged on without a contract being awarded, and as of September 2005 commercial offers had still not been submitted. In September 2004 Siemens was selected for the contract to build a 500-mw gas-turbine power station at Berrouaghia, 75 km south of Algiers, following a public opening of commercial offers. The German company submitted a price of 234m (US$284m). The other two bidders were Alstom and SNC-Lavalin. The client is Berrouaghia Electricity Company, owned by the state power company, Sonelgaz (51%), and the state energy company, Sonatrach (49%). 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 was supposed to clear 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.In June 2002 the government announced that Sonelgaz's subsidiaries would be opened up to private investors, including foreigners. However, none had taken the opportunity by September 2005 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 more than two years since the passage of the law suggests that there is considerable political resistance to deregulation of the sector. Copyright 2006 Economist Intelligence Unit |