Algeria - Transport Strategy Note

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 12669-AL DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA TRANSPORT STRATEGY NOTE January 6, 1994 Infrastructure Operations Division Maghreb and Iran Department Middle East and North Africa Regional Office This document has a restricted distribution and may their official duties. Its contents may not otherwise FILE COPY CONFIDENTIAL Report No: 12669 AL Type: SEC THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA CURRENCY EQUIVALENTS Currency Unit: Dinar (AD) Official exchange rate: Dinar (AD) per US$ Period Period Average 1988 5.92 1989 7.46 1990 8.60 1991 17.35 1992 22.49 1993 22.00 GLOSSARY OF ABBREVIATIONS AND ACRONYMS ANA : Agence Nationale des Autoroutes BAD : Banque Alg6rienne de D&veloppement CALTRAM : Algerian Libyan Shipping Company CNAN : National Shipping Line CNP : National Council of Planning CPL : Central Public Laboratory CTTP : Organisme National de Contr8le Technique des Travaux Publics CW : Chemins de Wilaya DEER : Directorate of Exploitation and Road Maintenance DPAE Directorate of Planning and Economic Affairs DPF Directorate of Planning and Formation DR Directorate of Roads EGSA : Etablissement de Gestion des Services A&ronautiques ENCATM : Entreprise Nationale de Consignation et d'Activit6s Annexes aux Transports Maritimes ENTMV : National Passenger Shipping Line EPIC : Etablissement Public Industriel et Commercial EPTV : Entreprise Publique de Transport de Voyageurs ERENAV National Shipyard Enterprise FIR : Flight Information Region GDP : Gross Domestic Product HDM : Highway Design Model HYPROC : National Shipping Line (Petroleum and gas) ICB : International Competitive Bidding LNG : Liquified Natural Gas MOT : Ministry of Transport NTS : National Transport Study ONEX : Office National des Explosifs PCD : Plans Communaux de D6veloppement PE : Public Enterprise PW : Public Works RN : National Roads SNAT : Schema national d'Am6nagement du Territoire SNTA Société Nationale du Tabac et d'Alutnettes SNTF National Railway Service SNTR National Trucking Service SNVI Société Nationale de Véhicules Industriels SONATMAG Société Nationale de Transit et de Magasinage SPA Société par Action THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA TABLE OF CONTENTS Page EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. INFRASTRUCTURE INVESTMENT PROGRAMS AND PLANNING SYSTEMS . . . . . . . . A. Recent Trends . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport investments over 1987-1991 . . . . . . . . . . . . 2 Transport spending issues . . . . . . . . . . . . . . . . . . 2 B. Investment Priorities for the next five years . . . . . . . . 3 Road investments . . . . . . . . . . . . . . . . . . . . . . 3 Railway investments . . . . . . . . . . . . . . . . . . . . . 5 Port investments . . . . . . . . . . . . . . . . . . . . . . 6 Airport investments . . . . . . . . . . . . . . . . . . . . . 8 Transport Program Summary . . . . . . . . . . . . . . . . . . 8 C. Transport Investment Planning . . . . . . . . . . . . . . . . 9 The institutional framework . . . . . . . . . . . . . . . . . 9 Generic issues of transport investment planning . . . . . . . 9 Recommendations for streamlining of transport planning . . . 12 II. TRANSPORT COST RECOVERY . . . . . . . . . . . . . . . . . . . . . . . 15 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 A. Road Infrastructure Cost Recovery . . . . . . . . . . . . . . 15 Road User Charges . . . . . . . . . . . . . . . . . . . . 15 Road cost recovery issues . . . . . . . . . . . . . . . . . 16 Conclusions and recommendations . . . . . . . . . . . . . . 19 B. Railway cost recovery . . . . . . . . . . . . . . . . . . . . 19 Railway current financial status . . . . . . . . . . . . . . 19 Rail cost recovery issues . . . . . . . . . . . . . . . . . 20 Recommendations . . . . . . . . . . . . . . . . . . . . . . 21 C. Port cost recovery . . . . . . . . . . . . . . . . . . . . . 22 Recommendations . . . . . . . . . . . . . . . . . . . . . . 23 D. Airports . . . . . . . . . . . . . . . . . . . . . . . . . . 23 E. Cost recovery in autonomous transport parastatals . . . . . . 24 Land transport . . . . . . . . . . . . . . . . . . . . . . . 24 Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Air transport . . . . . . . . . . . . . . . . . . . . . . . 27 III. THE INCENTIVES FRAMEWORK FOR TRANSPORT SUPPLY . . . . . . . . . . . . 28 A. Status of Transport Deregulation . . . . . . . . . . . . . . 28 B. Parastatals Dominance On The Transport Market . . . . . . . 29 Highways . . . . . . . . . . . . . . . . . . . . . . . . . 29 Railways . . . . . . . . . . . . . . . . . . . . . . . . . 30 Shipping . . . . . . . . . . . . . . . . . . . . . . . . . 31 Trucking . . . . . . . . . . . . . . . . . . . . . . . . . 32 C. Residual Public Monopolies . . . . . . . . . . . . . . . . . 33 Distribution of strategic transport input . . . . . . . . . 33 Public laboratories . . . . . . . . . . . . . . . . . . . . 34 Quarries . . . . . r . . . . * . . . . . . . . . . . . . . 34 Port Enterprises . . . . . . . . . . . . . . . . . . . . . 35 Air Transport . . . . . . . . . . . . . . . . . . . . . . . 35 D. Foreign exchange rationing . . . . . . . . . . . . . . . . . 36 General aspects . . . . . . . . . . . . . . . . . . . . . . 36 Highways . . . . . . . . . . . . . . . . . . . . . . . . . 36 Other transports . . . . . . . . . . . . . . . . . . . . . 36 E. Shortage of equipment and spare parts . . . . . . . . . . . 37 F. Other obstacles to private sector development in transport . . . . . . . . . . . . . . . . . . . . . . . . . 38 The banking sector is public sector oriented . . . . . . . 38 Heavier taxation of private operators . . . . . . . . . . . 39 G. Serious road safety issues must be addressed . . . . . . . . 39 Annex Background Information on the Transport Sector . . . . . . . . . . . i A. Macroeconomic framework . . . . . . . . . . .. . . . . . . 1 B. Infrastructure . . . . . . . . . . . . . . . . . . . . . . 3 C. Transport Services and Modal Split . . . . . . . . . . . 7 D. Review of Transport Investments over 1987-1992 . . . . . . 12 Map No. This sector work was carried out by Michel Loir, Task Manager. The paper is based on the National Transport Study completed in 1993, and information collected during a Bank mission that same year. Contributions were made by 0. Salama (expert consultant on transport planning), Basile Keita (expert consultant in trucking) and M. Toure (expert consultant in air transportation). Henri Beenhakker and Jaf far Bentchikou (MN1IN), and Michel Ray (EMTIN) presented comments on early drafts. Jorge Rebelo (LAllN), and Abdelghani Inal (AF5IN), are the peer reviewers. A. Amir Al-Khafaji is Chief of the task managing division, MNlIN. Daniel Ritchie is the Country Department Director. Support from the French Trust Fund was received for the work of Ovadia Salama and Basile Keita. THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA TRANSPORT STRATEGY NOTE EXECUTIVE SUMMARY Background' 1. Algeria is a vast country of 2.4 million square kilometers which includes three layers of contrasted zones from north to south: (a) a coastal strip along the Mediterranean sea that extends over some 4% of the national territory; 70% of a fast growing population of 27 million live in this area where the agriculture and industrial production is concentrated; (b) the "High Plateaux" range, located some 150 kilometers away from the coast, comprises 7% of lands and 22% of the population; it has a low urbanization rate, few industrial activities, and a meager agriculture undermined by soil erosion and adverse climatic conditions; (c) the South, consisting of oases scattered in sand and stone deserts extending over 89% of lands but with only 8% of the population, is richly endowed in mining resources. Local geography makes transport a key condition to local economic development and competitiveness of Algeria's exports. 2. The transport system has not evolved much until the mid-seventies. Facilities that existed before independence became underutilized when traffic slumped in 1962, and could absorb traffic growth for many years when it resumed. The focus of transport investment programs was first placed on developing a national shipping industry (1975-79), then on roads. An increasing attention was paid to ports and rail transport in the late eighties, early nineties, especially for the latter which doubled its share of sector's investments. The transport infrastructure is well developed with a 95,500 kilometer-long highway network, 5,100 kilometers of railway tracks, 11 ports, and 30 airports of which 11 are international. Nevertheless, transport infrastructure appears overly conventional and, with the exception of LNG traffic, did not make room to new transport technologies. Containerization and intermodalism made very limited head-ways in Algeria to date. Infrastructure maintenance was neglected for many years and the condition of roads and ports has deteriorated. The Government increased awareness of these issues and ensuing actions are too recent to bear fruit yet. 3. Transport services used to be provided by a small number of public monopolies until recently. Parastatals involved in for-hire or own account trucking control close to 60% of the national carrying capacity. About 70% of interurban and urban bus transport is in the public sector. Air Algerie is the national airline and enjoys a monopoly on the domestic network. The national shipping lines are all Government property, and so are shipping agencies and ship repair facilities. The port enterprises (PEs) established in ten ports as autonomous stock companies, with Government the sole shareholder, have a monopoly on supply of services within port boundaries. The railway company is an EPIC' which, directly or through wholly-owned subsidiaries, controls the entire railway market. The current Government policy, initiated in 1988, aims at liberalizing the transport market. Deregulation has gone the farthest for freight transport, particularly trucking, but the private sector still faces too many constraints to take advantage of the new policy framework. 1/ The detailed background is given in Annex 2/ An *Etablissement Public Industriel ct Commercial" is a public agency enjoying autonomy within limits. The Algerian law seems to consider that an EPIC is an extension of Government which precluded signing of a Contract-Plan between Government and SNTP, a Government being unable to contract with itself. ii Transport Sector Issues 4. Progress in resolving issues identified in the Bank 1987 Transport Strategy Paper did not materialize in any significant way, and the focus is again on improving transport investment planning, correcting cost recovery imbalances, and creating a level playing field for public and private transport operators in order to elicit a strong supply response and improve quantity and cost effectiveness of transport services. A new issue, cutting across sectors boundaries, is the ongoing economic crisis; transport activities, as others, greatly suffer from foreign exchange scarcity and shortages of spare parts and equipment. The current diagnosis by sub-sector unfolds as follows. 5. Highways. Traffic in Algeria is mostly by roads the role of which, therefore, is essential to economic growth. Issues to be addressed by the Government are: (a) the infrastructure network is developing too much in geographical coverage at the expense of improving standard of services on existing roads. Northern national and wilaya roads carrying some 80% of traffic are in bad condition for some, and congested for others. The construction of the East-West motorway answers real needs, but optimization of its design and staging is not achieved as insufficient attention is being paid to cheaper alternatives. The municipal network is the one that develops the fastest, with the weakest justifications. Transport planning lacks qualified staff, consistency around clear and prioritized objectives, and is further weakened by the decentralization of road administration; (b) road maintenance was grossly underfunded until 1993; recent budget increases are still short of needs, leaving more than 80% of the network in quasi neglect; the enforcement nationwide of technical standards, from preparation of tenders and procurement procedures to work supervision, remains weak despite recent efforts; (c) road user charges fail to achieve a satisfactory infrastructure cost recovery; diesel fuel is subsidized, and proceeds from taxation of gasoline lost a third of their value over 1990-1992; heavy trucks contribute little to cost recovery; (d) construction and maintenance costs are inflated by inefficiencies and lack of competition on a market largely captive to public sector contractors; materials management and distribution by public de-facto monopolies cause problems; (e) the public consulting industry and laboratories are insulated from competition and, for the latter, perform poorly which translates into road works of low durability; (f) freight transport has been deregulated, but the weight of former public monopolies and the inadequate incentive framework prevent private sector growth in trucking; (g) bus transport remains regulated, plagued by financial difficulties, and unable to cater to a rapidly growing demand; (h) road safety is a major issue; institutional blockages prevent effective action. 6. Railways. Rail transport is entrusted to SNTF which, by early 1993, was technically bankrupt. Main railways issues are: (a) the thrust of investments programs was on building new lines not economically justified; investment planning systems are very weak; (b) track rehabilitation and renewal did not proceed at the expected pace, and the maintenance backlog which existed in 1987 has been enlarged; (c) rail infrastructure costs are not recovered, creating distortions of competition between road and rail transport that tax privileges aggravate; (d) SNTF financial condition is impaired by lack of clear objectives as commercial ones are entwined with those pursued by Government, limited pricing freedom, a bloated labor force, excessive reliance on works, services, and equipment delivery by wholly-owned subsidiaries, and cost accounting deficiencies. SNTF is generally missing a dynamic management team and active marketing. Its productivity is low. 7. Shipping. The national shipping industry was developed by the Government in the late seventies, allowing Algeria to expand its market share on liner trades to around 70% and take high stakes on other traffic. This policy, relying entirely on parastatals, has proven costly: (a) CNAN, the iii largest shipowner, is heavily indebted; it operates a fleet of conventional and roll on-roll off ships on a growingly competitive market; sheltered by its monopoly and bilateral maritime agreements, CNAN failed to adapt to changing markets and maritime technologies; excessive staffing, weak management, and limited access to foreign exchange are major handicaps; (b) other public enterprises face problems of similar nature; tariff controls by the Government hampered profitability; other Government interferences weighed on profitability of the industry, like recommendations to use the local public ship-yards which provide bad and costly services; (c) the protection of the national shipping industry, which is on the decline, has been a burden on the economy for years; there was a strong Government push in favour of using national flag ships instead of foreign ships which often ignored timing constraints of shippers and meant higher freight rates, especially in late years. 8. Ports. The issues are: (a) port infrastructure is mostly designed to cater for conventional traffic, and the container berths under construction, come very late. The port of Djendjen was built at high costs, but lack of equipment kept it idle for a few years; (b) there is no recovery of port infrastructure costs; (c) PEs' management lacks commercial dynamism, and port prices generate insufficient cash; restrictive labor practices hinders productivity and a more intensive utilization of expensive berth space; 9. Airports. Based on more cursory analysis, conclusions reached are that: (a) capacity constraints exist in such areas as air control and radio guidance systems, and of terminal building (particularly in Algiers); (b) airport planning gives insufficient attention to investment economic justifications; (c) the multiple institutions involved in airports and insufficient coordination between them lead to duplication of expenses and bad coordination of investments; (d) infrastructure costs are not fully recovered. 10. Air transport. Air Alg6rie is financially weak and productivity of its operation is lower than average in the region. Its monopoly on domestic routes is a heavy burden as Government compensations are not paid in relation to public service constraints such as opening and maintaining services, and the policy of low fares in favour of population in the south. Transport Strategy Recommended 11. The transport strategy should fit in the ongoing transition to a market economy. Unless the sector's performance improves, Algeria's economic recovery which will boost transport demand is at risk to stall as transport supply tends to recede in a system that does not generate enough funds to renew an aging capital stock; the monolithic organization under public ownership is not designed to accommodate the growing diversification of needs on a market where the number of players is due to increase tremendously as a result of progressive retrenchment of the public sector. The recommendations are summarized hereafter and further detailed in the attached policy matrix. 12. Strategic planning. The Government has an essential role to play for modernization of the transport sector and provision of additional capacity. (a) The priority given to transport must be upgraded in general. Infrastructure maintenance is where the enlarged funding should first apply. Capacity investments ought to go in priority to port development for container and grain traffic, upgrading of the east-west road corridor through optimization of staged construction of the motorway combined with selective improvements of the existing roads. The road and rail construction drive to support development of "hauts plateaux" and southern areas and integrate remote rural areas should slow down for a few years in order to strike a better balance between investments with more iv immediate returns that Algeria needs most at present, and those which have deferred and diluted impacts many of which being outside the economic sphere. (b) The Government planning systems must be overhauled for achieving greater consistency around prioritized objectives. The technical ministries should strengthen their planning departments, improve data collection, develop cost accounting and restructure budgeting to facilitate monitoring of plan implementation. Transport planning tools should be improved, from national demand modelling and network-based work programming for highways, to specific investment analysis. Coordination problems should be addressed through reallocation of responsibilities (namely concentrating road maintenance management under a single directorate, creating regional port authorities, and transferring the port investment budget, except for expenses on breakwater, to them) and creation of "apex" structures to handle matters interministerial in nature, like intermodal transport and road safety. 13. Cost recovery. The objective is to generate enough cash to sustain efficient transport operations and allow for timely renewal and expansion of the capital stock. (a) Infrastructure cost recovery must be streamlined to bring user charges in adequation to long term marginal costs. For roads, proposed actions include raising taxation of diesel fuel and introducing an axle-load tax to ensure that trucks pay a fair share of road costs. For port and airports, the transfer of investment budget responsibilities should be accompanied by creation of new levies. Port pricing freedom should be granted within upper and lower limits set by Government. For railroads, infrastructure costs should be recouped by way of tariff with a view to restore fair competition with road transport. (b) Improved cost recovery by the parastatals implies increased managerial freedom, in particular for pricing, and insulation of commercial functions from public service constraints which should be well defined, minimized, and compensated within Contract-Plans. SNTF should be established as an autonomous public enterprise. There should be no financial restructuring of ailing transport parastatals other than under market-based conditions prevailing in the industry. Privatization before restructuring could be attempted in some cases, and privatization after breakup may better fit others. Foreign capital inflow is much needed, and transport offers good opportunities that Algeria could seize by opening the capital of transport parastatals. (c) An essential way to restore profitable transport operations is to cut costs. Many parastatals employ too many staff and underutilize their equipment. Stronger leadership and greater accountability of managers, introduction of modem financial information systems, tightening up loose organizations (in shipping and road transport especially) are among main remedies recommended. 14. The incentives framework. Deregulation alone cannot produce a dynamic transport market. Constraints to be removed are exogenous and endogenous to the sector. (a) The ongoing economic crisis imposes drastic restrictions on access to foreign exchange and bank credits. As a result of this, transport activities are increasingly strangled by spare parts and equipment shortages on the Algerian market. Authorizations to import are given by an Ad Hoc Interministerial Committee and difficult to obtain. Private transporters are generally bound to buy foreign currencies on the parallel exchange market at costly rates. This market remains "illegal" and transactions are subjected to discretionary controls by the fiscal administration. Legalization of the parallel market, an action promised by the Authorities, would make a significant contribution to the solution of this problem which deeply distorts competition between private and public transport operators. (b) Endogenous constraints are those which prevent development of the private sector. The market is dominated by large parastatals and there are pockets of lingering monopolies. It is recommended that some of them be privatized, namely the former wilaya enterprises and regional ones in the contracting industry, the quarries, and the ancillary port and railway services. Exposing others to competition is the proposed solution for trucking and the shipping industry, through such formulas as breaking up existing firms along market V segment or regional lines, and auctioning off part of the equipment to private investors. Wherever feasible, foreigners should be encouraged to take equity stakes in local firm as a way to facilitate technological transfer, disseminate efficient management techniques, and overcome local capital scarcity. Management contract formulas with an option to buy could be used initially, pending resolution of political problems which, at present, deter long term investments in Algeria. 15. Environmental considerations. The 1993 Bank report on environmental issues in Algeria does not list transport among sectors at risk. Road construction, of motorways especially, does imply extensive earth moving calling for careful design. In some cases, new roads sterilize lands previously dedicated to agriculture and call for expropriation. Government awareness is being raised through the ongoing preparation of the VIth Highway Project which includes a motorway component in a difficult environment. Execution of a contract financed under the Vth Highway will start in early 1994 which, among other things, provides for expert services designed to develop environmental expertise at the National Motorway Agency. The VIth Project will also be used as a vehicle to develop environmental capacities at the Ministry of Equipment. What may be the most serious transport related environmental problem is the pollution of main towns caused by vehicle exhaust systems. The high gradient of Algiers streets combined with saturation of their capacity and inefficient public transport by diesel burning buses contributes significantly to air pollution. The recommended tax increase on diesel oil, the most polluting fuel, and removal of obstacles to efficient transport through implementation of the strategy herein defined, would go a long way toward alleviation of this problem which, nonetheless, requires that a specific treatment be sought under the proposed Urban Transport Enterprise Project. Finally, marine oil pollution is of national and international concern. With support from the Bank, the Government is taking the right steps to plan remedial and preventive action. Proposed Bank Inolvement 16. Given the large macroeconomic imbalances and social disturbances prevailing in Algeria which considerably weaken the sector performance, it is recommended that, pending significant progress on these fronts, Bank transport lending be focused on investments considered essential to remedy critical capacity shortages. These investments should include a strong technical assistance program designed, first, to cast additional light on policy issues to help Government define reforms, second, to strengthen local capacity for transport investment planning. For the moment, under the base case lending scenario, transport lending includes two projects, Highway VI (FY95L) and an Urban Transport Enterprise Project (FY97S), in addition to projects under supervision, Highway V and Port III. That gives an adequate coverage of essential needs. Three major studies are recommended for financing under either of the two projects: (a) a study on the future of the national shipping industry will help clarify complex issues, from definition of a realistic business plan for national shipowners to a better assessment of balance of payments and employment impacts at stake in any attempt to restructure this industry'; (b) a study of airport master plan would tackle issues of infrastructure planning and maintenance, infrastructure financing, and define investment priorities for the next 7 years; (c) a study on promotion of small contractors which would also include definition of a retrenchment strategy for own account road works. In the short term, it is recommended to conduct I/IBRD Report No. 12195-AL: "Review of Issues in Environmental Management" (in two volumes). October 6, 1993. 4/A study for development of a maritime shipping model was to be carried out under Highway V, but was not implemented. A strong interest in such study, lacking at the time, has been expressed by the current shipping administration, vi a review of import needs of transport operators, and to update the study on road user charges. It would seem preferable to lighten Highway VI of its motorway component which implies looking for innovative financing solutions that are not feasible in the current macroeconomic context. Bank lending could expand considerably if structural adjustment were to accelerate. An agreement with the Fund is a likely component of a more rapid adjustment program. Attachment ALGERIA Transport Policy Matrix Issues & problem area Present status Actions recommended 1. Strateic planning: L.a Resource allocation: - low priority to transport - Transport investments fell to 5% of total - Transport investments must be given a gross investment in 1991, from 9% in 1987. The higher priority to remove capacity bottleneckz shortfall partly comes from lower contributions and integrate new technologies. The financial by financially ailing transport parastatals. feasibility of the recommended program hinges on increased private financing/ usercharges. - maintenance is under-funded - For roads, some 50% of budget resources - No less than 55% of budget resources are allocated to maintenance compared to 20% allocated to roads should go for maintenance. 5 years ago. This is still too low: more than The global maintenance budget must increase 70000 kns of roads in Algeria are not by 35% in real terms from its 1993 level.PCD maintained. Funding gaps are the largest for the road budgets should be cut(-50%); part of funds local networks. The proportion of roads in good freed should go to municipal road maintenance. condition decreased to 41% from 49% in 1987. - The track renewal/rehabilitation program - For railways, two-third of expenses over should be intensified from 100 kms per year 1987-1991 went for construction. The track over 1987-1992 to 200 kns over 1993-1998. maintenance backlog increased by 250 kms in - The ore line should be switched to diesel the last 5 years. traction. - SNTF should gear for intermodalism - uneconomical investments abound - For roads, main problems are with rapid - The next 5-year investment program should extension of the paved road network, municipal curtail spending on upgrading of road accesses roads especially. The decision to speed up to the south and road paving under PCDs. construction of the motorway raises risks of - Design and staging of the motorway needs premature investements. to be optimized, and cheaper alternatives must be sytematically considered.. - For railways the construction of - Construction of the Rocade des Hauts uneconomical lines (Jjel-Ramdane Djamel and Plateaux should be halted with the exception of the "Rocade des Hauts Plateaux") absorbed Tebessa-Ain Mlila, and track doubling should most investment resources in recent years. be limited to the ongoing 250 kms program. - Lack of equipment at Djendjen sterilizes the - Djendjen should be equipped as a center port large resources invested in port infrastructure. for grain. Container facilities must be added. vii 1.b Planning systems: - disintegration of planning - Deepening of the economic crisis together - For roads and airports, preparation of a with decentralization,and deconcentration of master plan will facilitate prioritization of sub- budgets tend to give more weight to short term projects; objectives and to loosen cohesion of planning - all road investments (RNs and CWs) should efforts nationwide. first be integrated in a national road plan by - Many parastatals have generally become the public works administration, then sent to more autonomous and loosened their ties with CNP for approval. overseeing ministries. For those considered - For ports, regional port authorities should be of"strategic" importance, the Goverment still set up to handle planning and construction. interferes with decisions in a more disorganized - Parastatals should focus on commercial way and set conflicting objectives which favour objectives; Contract Plans must be signed to poor performance. hedge against undueGovernment interferences. - coordination of plans is poor - Planning responsibilities are sometimes split - Concentration of responsibilities should be which calls for good coordination. This achieved wherever technically feasible. For condition largely missing in Algeria.. roads, DEER chould manage the full road Coordination flaws weaken road, airport, and maintenance budget, currently split between port planning. DEER and DR. A seemingly better alternative - Overreliance is placed on low profile, would be to set up a Road Fund. ephemeral Ad-Hoc Committees to achieve inter- - An organization study is needed for airports. ministerial coordination. - Permanent apex structures should be set to handle matters involving several ministries; Road safety and intermodal transport qualkfy. - planning tools are flawed - Planning methodologies are especially weak in - Sectoral planning should integrate spatial catching the dynamics of the economic aspects. A Transport Observatory should be set environment of a project. Demand forecasting by up to develop a data base, monitor sector's the administration and the parastatds is weak. performance, streamline demand forecasting. The transport model developed under Highway V The transport model should be revamped presents methodological flaws. through acquisition of a new software package. - Network-based planning is currently limited to - 1lDM III should be expanded to allow for 5,000 kms of national roads. complete network based planning. - trained planners are too few - The central administration and the parastatals - Planning units of technical ministries to be rarely have qualified staff to handle planning. strengthened under forthcoming projects; - Municipal road management is where the - Subsidization of maintenance of their roads expertise gap is the largest. Projects are by the central budget could be introduced to launched on the basis of token analyses encourage municipalities to contract out road management to local PW administration. - The local consulting industry is short of - Foreign consulting firms to be encouraged to state-of-the-art planning expertise; the practice do business in Algeria. The public consulting of joint ventures with foreign consultant has firms to be exposed to competition, with ICB the been disappointing at times. rule for complex studies. 2. Transport cost recovery 2.a Road infrastructure - Road user charges do not cover costs. - Diesel oil prices should be raised to cover - Private transporters are discriminated the revenue shortfall of road user charges. All - road user charges must be raised against by road taxation. discrimination against private road users should - Diesel is subsidized and heavy trucks pay too be eliminated. The weight of taxation should be little of road deterioration they cause. shifted to operations away from ownership. An axle-load tax should be raised on trucks. viii 2.b Railway infrastructure - construction of railway tracks and stations, - infrastructure costs are borne by workshops,yards, catenaries,signalling - The 1988 railway Railway convention should taxpayers equipment and telecommunications is paid by be amended to provide for coverage by users of Government. Periodic maintenance thereof is the long term marginal cost of railway also on the national investment budget. Annual infrastructure, defined as the costs that vary subsidies compensate routine maintenance costs with traffic and/or are avoidable. With higher under the 1988 convention with theGovernment productivity, taris need be raised by 20%. 2.c Railway services - The railway finance is plagued by poor - Productivity increases must be sought by - SNTF is technically bankrupt productivity; labor costs were 112% of operating better monitoring of trains, more intensive use - the competition between road and revenue in 1992; of the rolling stock, closing of lightly used rail is distorted in favour of the - Loss-making services are maintained. The stations, and downsizing of the labor force. A latter (taxation, fuel prices) frontier between commercial and-social goals is Contract-Plan should list the public service - Financial responsibilities of the blurred and Government compensations are not constraints, including social fares, and define Government and SNTF are not forthcoming;; the policy of cheap rail passenger compensation systems. For this, SNTF must adhered to; transport is a major cause offinancial woes. become an autonomous public enterprise. - SNTF does not have pricing - Taxation and pricing of railways input - Conditions of fair competition between freedom; discriminate against road transport transport mode to be restored. - Purchases are mostly made at - Private sector involvement in rail transport is - Railways peripheral services (subsidiaries) subsidiaries without competition nil; SNTF subsidiaries are inefficient. to be opened to private capital. 2.d Port infrastructure - infrastructure costs are not - Construction and heavy maintenance are paid - Infrastructure cost recovery to be recovered under the Government budget. introduced, with exemptions for breakwaters. 2.e Port services - Port services breakeven, but generate too - Accounting and recording of port assets to - low profitability hampers few funds for good maintenance and investments; be streamlined. investments; - costing is incomplete (assets are not - Pricing systems to be modernized; PEs - port management systems are not properly recorded) and pricing systems are ill- should be free to set rates within limits; effective; designed. - Cost containment measures to adopted, - costs are inflated by inefficiencies - port productivity is low. starting with labor. ix 2.f Other transport providers - Land transport: for freight and for - Intercity bus transport must be deregulated -Transport parastatals are heavily passengers, parastatals carry heavy debts and and self sustaining. Urban bus transport must indebted; their operations are costly and inefficient, be organized for more autonomy within - Cash generation does not allow to Maintenance of their fleet is poor. Cash Contract-Plans. renew equipment; generation is too low to allow for renewal of the - SNTR to be broken up to the extent needed - Port productivity is low; vehicle fleet. The financial performance of bus to pay back its debt; financial turnaround to be - Pricing of services is not based on transport is further weakened by regulations, market-based; transport to south to be at cost; good cost accountin and distorted including price fixing by Government. - CNAN and Hyproc should evolve as stock by Government controls of bus - Shipping: Parastatals are loss making and companies; financial restructuring should be fares and freight tariff for transport indebted. Productivity of operations is low. The market-based; the national fleet should be to the south. fleet is aging, not adapted to modem transport. downscaled and modernized(containerships) X 1.3. The incentives framework 3.a The parastatals dominate the market - private contractors get less than 5% - Force account for road works represent 45% - A study must be launched to determine ways of road budgets of the current maintenance budget. The private to reduce own account works to 25% of budget. sector is mostly active on resurfacing contracts. - The former Wilaya and regional contractors Other works are executed by autonomous public must be privatized; contracting firms; - An action plan will be prepared to facilitate - competition between public - Foreign contractors are absent from the graduation of private firms to complex works. contractors is limited market; limited local competition translates into - Procurement to be streamlined to enhance higher road costs and mediocre quality work. competition; - SNTF and its subsidiaries saturate - SNTF spun off branches which became -SNTF subsidiaries to be opened to private the railway market subsidiaries. That produced larger overheads, capital. Management contracts could be tried to overcapacity, and inefficiencies. encourage technological and capital tranfers. - shipping parastatals are protected - Until recently, the policy was to maximize the - National shipowners to be freed from share of the national merchant fleet at any cost. Government interferences; The choice of shippers was biased and local -Foreign investors to be allowed to participate shipowners were induced to resort to public actively to freightforwarding,cargo handling, local suppliers, shipyards in particular. The shipping; sector overall performs poorly, leaving no place - A study on the future of national shipping to private firms and foreign investors; would be useful; - private truckers do not compete with - SATR has a nationwide organization, a large - SNTR to receive no support from SNTR on equal terms fleet of heavy trucks and a network of public Government. The objective is to break it down, customers. They control the market and are and privatize the parts wherever feasible marginally exposed to competition. Private (e.g.LBO). SNTR should remain involved in truckers are confined to short distance, low freight grouping and forwarding, but its capital scale transport. should be opened to private capital. 3.b Residual public monopolies - bitumen and quarry supplies are - Naftal and Naftec control production and - Conditions must be met for entry of private controlled by parastatals distribution of bitumen. Disruption, poor quality competitors on the bitumen market. The quarry of supplies are frequent and costly. The cross- should be privatized. Support to achieving these subsidization applying to strategic products is an objectives could be given through a line of obstacle to market transparency and to private credit under Highway VI; sector involvement.It generates economic wastes. - public laboratories "own" the market - Public laboratories have no competition, - Sole source contracting to become the local or foreign. exception and ICB the rule for complex studies; - Their costs are inflated by inefficiencies and - laboratories to be restructured at market overstaffing. conditions;their statute would be changed to - Quality of controls performed is low. An allow for foreign participation. - port services are all provided by PEs "audit" of PW laboratories is to be carried out - A central laboratory could be developed as a with Bank financing. center of excellence in the public sector; - Port enterprises (PEs) provide all services - Cargo handling and other peripheral port within port boundaries. Restrictive labour services (towage and pilotage) to be given - Air Algerie has a monopoly on practices are an obstacle to higher port under concession agreements to private firms. domestic air transport productivity and modernization of port systems. Management contracts with foreign firm would - Air Alg6rie has no transport rights on the help these to acquire expertise. intra-european market and on air transport - Abrogation of Air Algirie's monopoly on within other Maghreban countries, which limits domestic routes and eliminating price subsidies productivity of its operations. Obtaining such to pave the way to agreements with European rights may call for reciprocity in Algeria. countries and closer regional cooperation. xi 4. b Foreign exchange rationing - road contractors have limited access - Only those contractors which work under - Legalization of the parallel exchange to foreign exchange, especially private contracts financed by foreign sources have a market, as planned by the Authorities, would ones; right to foreign exchange allocations; very few increase the foreign exchange channelled are private contractors; through it and, together with a needed - non-essential imports are controlled - Transporters are allowed to keep 10% of devaluation of the official exchange rate, would and transport goods fall in that their foreign earnings in convertible currency work toward exchange rate unification and category; the sector performance is accounts; changes of relative prices dwarfed the enhance chances of fair competition between th, highly penalized by shortages of spare purchasing power of these 10%; the access to public and private transport operators. parts and equipment. foreign currrencies has been reduced in late - A study to reassess import needs of years, and parastatals have an edge; most transporters must be conducted; action should private truckers have to buy foreign supplies and then be taken to allow them to maintain and equipment at parallel exchange rates. make unrestricted use of convertible accounts; transporters which only operate on the national market should not be excluded. THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA TRANSPORT STRATEGY NOTE I. INFRASTRUCTURE INVESTMENT PROGRAMS AND PLANNING SYSTEMS A. Recent Trends General 1.01 For 25 years, central planning has been the rule in Algeria and socialist growth models were the explicit reference. In a system where administered prices are not indicative of relative scarcities in the economy, investment policies were largely inspired by political considerations, and biased in favor of heavy industrialization and balanced spatial distribution of economic activities. All too often, transport investments were subordinated to implementation of industrial schemes, and little attention was given to their economic justifications since they were to be part of a broader investment package and main benefits were to come from new industrial production. Overreliance was placed on external and indirect effects and the quantitative economic studies remained sketchy, sometimes complacent, and generally inadequate. Decisions on complex projects were mistimed and mismatched, and insufficient attention was being paid to local implementation capabilities, lessened by deficient management of construction parastatals, restrictions on supply of materials and imported equipment, and the limited opportunities given to private contractor to develop their activity. Coordination of ministries involved in large scale projects was very ineffective. 1.02 The transport sector has been operating through severe economic recession in recent years. GDP growth averaged only about 0.5% p.a. over 1985-92 and the Algerian economy is currently in a state of crisis which originates in falling petroleum revenues since 1986, pervasive macroeconomic distortions, and inefficient use of capital. The ratio of gross investment to GDP remains high at about 29% over 1987-92, down though from 36% over 1982-86. Stabilization efforts began in earnest in 1989 but were hampered by adverse international economic conditions, growing social discontent, and political unrest. The pace of adjustment slackened in September 1992 when the Government launched an austerity program which tends to strengthen its grip on the economy in an attempt to meet Algeria's external obligations without formal debt rescheduling and to alleviate most pressing social problems. The medium term objective to transform Algeria into a market economy has not changed, but the focus is on an orderly transition sometimes described as "politique des petits pas". The task is a daunting one. Inflation has soared to 32% in 1992 in the wake of successive devaluations which brought the parity of the Algerian Dinar with the US Dollar from 4.8 to 21.8 between 1987 and 1992. Despite these changes, the national currency remains substantially overvalued. Input shortages, especially from foreign sources, are a growing constraint to economic operators. Many public enterprises are financially distressed and unable to renew or expand their equipment. The Treasury has often to intervene and finance costly restructuring plans, and its deficit is expected to exceed 15% of GDP in 1993 from less than 7% a year before. Transport Investments Over 1987-1991 1.03 Total transport investments financed over the period are estimated at DA 46 billion plus some DA 8 billion for development of the municipal road network. They represented 7.5% of the total gross investment in Algeria, down from 8.2% during the period 1982-1986, attesting to the relatively low and still declining priority given to the sector. Roads and railroads continued to absorb about 2 80% of investment resources allocated to transport, but the importance given to railroads increased quite significantly from 23% to 30% of total transport investments between the two periods. Construction of the motorway from Algiers to Blida, of the Jijel-Ramdane Djamel railroad, and of the first sections of the "rocade des hauts-plateaux" were among main projects implemented between 1987 and 1991. Port investments absorbed 12% of the total, consisting of rehabilitation of breakwaters and quays in major ports, development of roll-on-roll-off terminals in some, and construction of a new deep sea port at Djendjen. The central Government contributes heavily to spending. Its gross expenditures represented close to 40% of the GDP in 1992, compared to 25% in Morocco and about 20% for a sample of comparator countries. Two-thirds of spending, however, is under the current budget, and a large proportion of the capital budget goes to financial restructuring of parastatals (more than 40% in the last two years). The transport sector absorbed 16% of total Government investments during the period 1987-1982. Transport investments by other economic agents (the parastatals and the private sector) dwindled as the economic crisis deepened. Transport Spending Issues 1.04 Too much has been spent on construction and not enough on maintenance. (a) For national roads (RNs) and "chemins de Wilaya"(CWs), a late but definite shift of priorities in favor of the latter took place in 1993. Funding of new construction and upgrading of existing roads was then reduced to some 40% of the central road budget from at least two third in prior years. (b) The municipal road network is where construction went on at too fast a pace. Credits allocated to that effect under "Plans Communaux de D6veloppement" (PCDs) rose from about DA 1.5 billion early in the period to more than DA 3 billion in 1993. These investments are promoted to improve access to remote areas but they are often launched without solid preparatory studies and socio-political objectives take clear precedence over economic ones. (c) As much as 80% of railways investments were for construction of uneconomical new lines, track doubling of dubious value, spur lines to cement factories, and modernization of infrastructure and equipment. 1.05 Maintenance funding is way short of needs. (a) The condition of the road network is mediocre and deteriorating. The proportion of paved RNs in good to fair condition fell from 76% in 1987 to 68% in 1992. The condition of the municipal network is the worst, with 60% of paved roads in bad condition. Municipal budgets are greatly imbalanced and the proportion going to road maintenance is below 5%. Most funds are applied to street maintenance whereas rural roads receive very little. Unpaved roads are in near neglect. The situation of bridges and structures is also preoccupying: at least 10% of a total of 2,700 nationwide need rehabilitation. (b) About DA 6 billion had been programmed for railway track maintenance between 1987 and 1992 in order to catch up with an important backlog but barely more than 100 km of track rehabilitation and renewal have been implemented annually, against a forecast of 150-200 km. 1.06 In many cases, limited allocation of resources to transport investments have not allowed them to keep pace with technological developments. This is most visible in ports, few of which can accommodate the large bulk carriers and container ships that predominate the world shipping scene. Most airports in service date back to colonial times and terminal buildings have become increasingly ill-adapted to meet the standard of services that international travellers expect to find. Urban transport infrastructure, rail especially, did not adjust to fast growing commuting requirements; a town like Algiers suffers from chronic traffic congestion during daytime. Intercity roads may be considered broadly adequate although they often lack the horizontal marking and vertical signalling that make roads safer. Direct crossing of small cities and villages is imposed most of the time, generating delays 3 and safety hazards. Overall, the Algerian transport infrastructure is aging and needs to be modernized. 1.07 Limited project implementation capabilities is another feature that transport shares with other sectors. As most telling examples, the new terminal building at the Houari Boumediene airport in Algiers has been under construction for many years and its commissioning to traffic is not expected before 1995; in 10 years only 1 kilometer of the planned 12.5 km-long Algiers subway has been built. Classic managerial problems are now compounded by recurrent input shortages. B. Investment Priorities For The Next Five Years Road Investments 1.08 The Government main stated priorities are to rehabilitate and strengthen the basic economic network, to relieve congestion on the east-west trunk road, and to improve access to the south. The 1993-1997 investment plan for RNs and CWs provides for the following: - complete ongoing projects; - intensify network-based road recurrent maintenance; - rehabilitate no less than 3,000 km of RN and CW; - strengthen 3,000 km of paved roads; - construction of 150 km of motorway (Blida-Khmis Miliana, Lakhdaria-Bouira, and Constantine-El Arrouch); - modernize 300 km of access roads to southern areas; - modernize and upgrade 200 km of coastal roads; - rehabilitate 1,000 km of roads in the Hauts Plateaux and in the south; - rehabilitate/rebuild about 400 bridges. 1.09 These investments are budgeted to a total of about DA 43.5 billion (1992 prices), of which 47% would be spent on rehabilitation and maintenance (for annual outlays of DA 4 billion on average). DA 15 billion (or 35%) would be for construction of the east-west motorway. Overall the program seems coherent and well proportioned, although too much may be allocated to improve roads in coastal areas, in the Hauts Plateaux, and in the south (about 14%). Adequate funding of light periodic and routine maintenance by the current budget should also be ensured. A rapid analysis of road maintenance needs shows that they are not fully met in the proposed program. Maintaining the 48,500 kn of RNs and CWs is not affordable, and it is desirable that the Government should focus on the priority network (22,500 km). Estimating the average intervals of road strenghtening and resealing works at 15 and 9 years respectively (the absolute minimum), such a network would warrant spending no less than DA 9 billion annually (DA 7.5 billion in 1992 prices), of which DA 6 billion would be for strengthening, DA 1.7 billion for resealing, and DA 1.3 billion for other maintenance works for roads and bridgess. Two conclusions emerge: (a) planned capital outlays for maintenance should be raised to DA 25.5 billion (addition of DA 5 billion, or +24%); (b) the total 1993 road maintenance budget, excluding the municipal network, was equivalent to slightly less than 7 billion; fully funded maintenance would have called for a higher allocation of DA 9 billion (+28.5%). It I/Average 1993 costs for strengthening and reseahng are taken at DA 4 million/km and DA 750,000/km respectively. 4 would also seem that the disintegration of the road maintenance budget (two directorates are in charge, and funding comes from the current and the capital budget) hinders development of a comprehensive maintenance strategy. Spending more on road maintenance, as advocated here, makes it desirable to simultaneously streamline programming and budgeting for it. 1.10 The above program does not include road construction under Plans Communaux de D6veloppement (PCD's). As much as DA 14 billion had been budgeted for PCDs in 1993 of which around 30% was earmarked for municipal roads. Building new municipal roads when it is clear that the country cannot afford maintaining more than a third of its existing paved road network may seem unwarranted. In fact, these programs are less about creating new roads than rebuilding those falling apart for lack of maintenance. It is therefore realistic to assume continuation of these local road programs which, however, should be cut by at least DA 2 billion per year (- 50%) in order to free the budget resources needed for periodic and routine maintenance of the municipal network6 and still reduce the Government capital budget. The related 5-year program is valued at about DA 10 billion. 1.11 Recommendations. (a) More resources ought to be channelled to RNs and CWs maintenance, half of which would be obtained through cutting allocations to coastal and southern roads. That would give maintenance a 55% share in the amended road investment program. (b) The east-west motorway is the second highest priority for construction, as it will bring relief to the northe rn network. Its cost is estimated at DA 38 billion (1990 prices) and traffic above 13,000 vehicles per day on the motorway itself would be needed to achieve a satisfactory return on these large investments. (c) Staged motorway construction with no more than 500 km of motorway in service by year 2,000 (against 210 km at present, or construction of about 50 km per year) should be strongly encouraged; economic benefits are to come from road improvements avoided on the existing roads and higher vehicle speed. The NTS had estimated that 1,700 km of roads would need modernization and widening without the motorway, and that 260 km of new roads would have to be built to connect the motorway to the existing network. Its conclusion, however, that full completion of the motorway before year 2,000 would be economically justified is misleading. A detailed economic feasibility study of the motorway will be carried out during preparation of the VIth Highway Project. Cheaper alternatives to decongestion of the Oran-Algiers-Annaba road must also be tested. (d) Optimization of the motorway design will be especially challenging given the local topography and value engineering which has been integrated in the terms of reference of Bank financed technical studies for Bou Medfaa-Khmis Miliana and Hamiz-Lakhdaria may bring significant savings. (e) Financing of the motorway will imply mobilizing substantial resources and renew the risk that financial requirements for maintenance will be crowded out again. Establishment of a separate budget for motorways and a systematic resort to international donor financing combined with tolling could minimize that risk, all principles that now seem accepted by Government. (g) Curbing the municipal network growth would be another way to free resources for more road maintenance. Municipalities are heavily dependent on central budget allocations and subsidies, giving Government much leverage in restructuring local spending. Diverting annually about DA 650 million of these resources to maintenance of existing roads would be more productive. (f) The road organization should be modified to ensure more effective use of budget resources; beside restoring central management of RNs and integrating road budgets under a single directorate, formalization of respective road maintenance responsibilities for 6/given the 21,049 km and 26,144 km of paved and unpaved roads belonging to the municipal network, and assuming average yearly maintenance expenditures of US$ 2000 and US$ 500 per km respectively, the "normal" budget for maintenance should be close to DA 1.25 billion per year. It as further assumed that municipalities, like the Government, cannot afford maintaining more than 50% of their roads That cuts budget requirements to DA 650 million. 5 municipal roads could be sought through conventions between PWs and small or medium size municipalities. Only for large ones would building up of technical services make sense. Railway Investments 1.12 The diagnosis established by consultants on railroads emphasized the important capacity reserve of rail infrastructure and the low productivity of rolling stocks. SNTF prepared an investment program covering 1992-1995. It provided for DA 32 billion of infrastructure investments, and DA 8 billion on rolling stock. This program should be revised downward and restructured along the following recommendations. 1.13 Recommendations. Resorption of the track maintenance backlog should be given the highest priority. Other investments should be focused on increasing railways competitiveness for services which have potential comparative advantages over road transport. In that regard, freight transport, with special reference to the ore line, is where the brightest prospects exist. The ore line should be switched to diesel traction. The advantages of electrification generally come from lower investments in locomotives, their lower operating costs and higher availability rates, improved performance on curves and high gradients, and smaller inventories. But electrification implies large investments in catenaries, telecommunications, and signalling, and the international experience is that traffic below 10 million gross tons per year are not high enough to earn a satisfactory return on the investment; the 6-7 million gross tons circulating on the ore line are short of these requirements. The low pricing of diesel in Algeria is another hindrance, albeit artificial, to normal returns on electrification investments. The strategy should favor heavier trains with diesel electric locomotives. Thoughts should be given to closing the uneconomical narrow gauge lines. Productivity is very low and the NTS calculated that transport on these lines was three times more expensive than on standard gauge ones. Commissioning of studies to review the economic and social impacts of these closures is advisable and, pending their conclusion which should be available within at most 3 years, no further resources should be directed to maintenance of the lines. The necessary improvement of railway services should integrate intermodal aspects: the expected development of containerization on maritime routes may jeopardize the future of general cargo rail transport unless SNTF reorganizes its services and acquires more flatbed cars. Construction of a container rail dispatching center with container handling cranes would seem most advisable in the Constantine area, given its rail connections to 3 major ports. Such investment (about DA 700 million) would be the first large scale experiment of intermodal transport from which Algeria could learn before stepping it up nationwide. Passenger transport, which developed the fastest in recent years, is where strategic adjustments are needed: the priority should be to expand suburban services to relieve traffic congestion in main towns, and to concentrate on basic intercity services. Passengers are looking for low fares, and services should be packaged to be cheap and profitable for the railways The Trans-Maghreb project should be shelved. Within the next 5 years at least, efforts should focus less on increasing train speed than on improving reliability of services and enhancing operational safety. Upgrading of telecommunications and traffic control systems will work toward that goal, and contribute to more intensive use of the costly railway infrastructure. Track doubling should be limited to completion of ongoing works. Foreseeable traffic on the difficult Relizane-Oued Sly, Setif-El Gourzi, Khemis-El Affroun, and Thenia-Bouira sections do not warrant expensive track doubling investments before year 2,000. Purchase of rolling stock should be kept minimal. Construction of the Rocade des Hauts Plateaux should be stopped with the sole exception of the Tebessa-Ain Mlila line as it offers an alternative route to transport of iron ore and phosphate and, therefore, increased safety. The analysis of future rail transport demand given in the NTS confirms that none of the sections constituting the Rocade would accommodate more than a one way train 6 service per day by year 2000. Freight would be marginal, except for Tebessa-Ain Mlila in the unlikely case of a steel mill development at Bellara. A balanced railway investment program over 1993-1997 would have the following features (in 1992 prices): - track renewal/rehabilitation: DA 10 billion (1000 km) 43.5% - track doubling: DA 3.5 " (250 km) 15.2% - track construction: DA 2.0 " 8.8% - signalling, telecommunications: DA 1.5 " 6.5% - freight station equipment: DA 1.5 " 6.5% - workshop modernization: DA 1.0 " 4.3% - locomotives, rolling stocks: DA 2.5 " 10.9% - others: DA 1.0 " 4.3% Total: DA 23.0 100% Port Investments 1.14 The NTS defined a port investment program totalling DA 6.8 billion*in 1990 prices over 1993-1997 (DA 11 billion in 1992 prices) and shown in Table 11. More than 50% of funds allocated to ports would go to infrastructure rehabilitation and dredging. The Algerian ports have ample reserve capacity and other port investments should focus on rehabilitation and modernization of cargo handling techniques. Development of container port facilities, to the extent that customs procedures are adapted to allow for fast clearance, appears best suited to overcome existing physical constraints, especially the shortage of port storage areas and limited scope for reclaiming new ones. Extension of silo capacity is another high priority. The investment program for the 11 major ports up to year 1998 is shown in table 1. 7 Table 1. Outline of a Balanced Port Investment Program over 1993-1998 Ports/nature of investment superstncture total infrastructure equipment Algiers -container port 580 124 704 -grain terminal,silo 150 115 265 -rehabilitation 549 339 888 sub total 1279 578 1857 Oran - container port 70 78 148 - grain terminal,silo 100 67 167 - rehabilitation 350 173 523 sub total 520 318 838 Annaba - container port 70 69 139 -grain terminal,silo 54 54 -rehabilitation 65 53 118 sub total 135 176 311 Diendien -oil jetty 150 176 326 -grain terminal 500 823 1323 - other 38 38 sub total 650 1037 1687 akik1a(rehab.) 580 163 743 Bejaia (rehab.) 219 102 321 Mostaganem - rehab 50 50 - other 30 36 66 sub total 80 36 116 Ghazaouet(rehab) 60 26 86 Tenes - grain terminal 75 75 - other 130 15 145 sub total 205 15 220 igel(rehab.) 65 65 ,rzw(rehab.) 535 99 634 Total: 4328 2550 6878 of which -grain terminals 825 (19%) 1059 (42%) 1884 (27%) -container ports 720(17%) 271 (11%) 991 (14%) -other 160(4%) 89(3%) 249(4%) -rehabilitation 2623 (60%) 1131 (44%) 3754 (55%) 1.15 The port development strategy gives priority to Algiers, Oran, and Djendjen where two-third of proposed investments are concentrated: (a) Port of Algiers: The construction of a container terminal under the Bank Port III Project is the largest investment foreseen over the period and should be able to accommodate traffic at least until year 2000 but construction of a new terminal outside the present limits may have to be initiated in 1998 1. Rehabilitation of breakwaters is the second largest item. The NTS estimated that grain traffic in year 2000 would also require increasing the silo capacity from 30,000 tons at present to about 100,000 tons; (b) Port of Oran: Rehabilitation of the breakwater and of a jetty constitutes the highest priority. A container terminal is being built under the Bank project and construction of a new one should start after 19978. Grain storage capacity will have to be increased before year 2000; (c) Port of Djendjen: Newly built away from urban centers and designed 2/its cost, not included in the table, was estimated as DA 730 million 8/its cost, not included in table 11, was estimated as DA 420 million 8 in accordance with modern port technologies, the port of Djendjen offers great opportunities to remedy capacity constraints experienced at Annaba and allow Algeria to secure economies of scale on maritime transport of bulk import and export. But these opportunities cannot be seized as long as the port remains without equipment9. The NTS recommended using Djendjen for transshipment of grain traffic. At present, Algeria imports some 5.5 mt of grain by 20,000 dwt ships and 75% of the traffic originates from north America. The consultants estimated that US$ 7-8 per ton could be saved by transporting grain in 80,000 dwt ships. They also concluded that local grain distribution could be optimized by transshipping close to 50% of shipments received at Djendjen on coastal ships which would carry out feeder services to Bejaia, Algiers, Skikda, and Annaba. Developing Djendjen as a main grain port is estimated to cost some DA 1.3 billion in stage 1. This is likely to be a high return investment and technical and economic feasibility studies should be undertaken rapidly to allow for an early implementation. Djendjen could also be developed as a container center port for east Algeria. Airport Investments 1.16 The 1993-1997 program, reestimated to a total of DA 22.5 billion in 1992 prices, covers construction of the new terminal building in Algiers (about DA 9 billion), strengthening and lengthening of runways (about DA 8 billion), various investments by the EGSAs mainly to expand and equip southern airports (about DA 3 billion), and investments for modernization of guidance systems and other air control equipment (about DA 2.5 billion). The program seems broadly adequate, but it should be possible to stretch it out to limit investments in the period to DA 20 billion. Transport Program Summary 1.17 The transport infrastructure investment program envisaged for the next five years comes to a total of DA 110 billion (1992 prices) with the following breakdown: - highways, including PCDs: DA 56 billion, or 50.9%; - railways: " 23 " " 20.9%; - airports: " 20 " " 18.2%; - ports: " 11 " " 10.0%. It compares with the DA 47 billion (in current prices and equivalent to DA 85 billion in 1992 prices) spent over 1987-1991o. In relation to past and projected gross investment, the two totals represent 6.5% and 7.5% respectively", indicating a definite shift of priority in favour of transport. The additional resources needed to finance above investments cannot come from the Government budget which will remain very tight under existing and foreseable macroeconomic constraints. Assuming no real growth of this budget allocation to transport may even be considered optimistic, and DA 25 billion will have to come from other sources. Of this total, some DA 10 billion could be raised by mobilizing private capital in combined with tolling for construction of the motorway, and higher road user charges could generate DA 7.5 billion (see para 2.10). The balance of DA 7.5 billion would come from improved railway cost recovery through higher tariffs and cost savings (see para 2.21). 2/it seems, though, that some berths are now equipped for handling of steel products 10/for consistency, the 1987-91 investments (see table 9 in annex) are reduced by DA 7 billion corresponding to investments by parastatals other than SNTF. L1/after fatling by 1.7% in 1993, GDP would grow by 1.5% over 1994-95, 3.2% in 1996, and 4% in 1997. The investment/GDP ratio is assumed around 28%. 9 Other investments are not expected to expand their share (15% over 1987-1991), the increase of investments by rehabilitated parastatals being neutralized by transfer of others to private ownership. C. Transport Investment PlaRing The Institutional Framework 1.18 Main planning responsibilities are distributed as follows: (a) the Ministry of Equipment (ME) is in charge of infrastructure maintenance and development, railroads excluded; specialized directorates for ports, roads, airports initiate projects on the basis of perceived needs and central guidelines relayed to them by the DPAE ("Direction de la Planification et des Affaires Economiques"). Project proposals are screened and packaged by DPAE into an overall investment program for the ministry; about 30 parastatals involved in project implementation (laboratories, contractors, consultants firms) are overseen by the ministry of equipment; (b) the Ministry of Transport (MOT) elaborates the national transport policy which is approved by the Government; it oversees 28 parastatals which are the main operators in their respective sub-sectors; preparation of the investment plan involves the specialized directories for civil aviation, shipping, ports, land transport, and urban traffic; the coordinating role is played by DPF ("direction de la Planification et de la Formation"); (c) the CNP ("Conseil National de la Planification") provides the planning guidelines to the technical ministries and decentralized institutions, reviews and authorizes their investment programs; it has a decisive role in resource allocation across sectors; specialized directorates within CNP prepare decisions; (d) the Ministry of Finance controls the current budget, thereby in a position to influence transport expenditures planning through financing of routine and light periodic maintenance and subsidization of transport parastatals; (e) the Ministry of Interior oversees Wilayas and municipalities and, given their generally strained finances, is in a position to influence their budgets by setting conditions for the much needed Government budget assistance; and (f) Wilayas make decision on their own budgets and oversee the municipalities and the public trucking and bus companies established by them. 1.19 Decree 91-61 of February 23, 1991 created the "Conseil National des Transports Terrestres" whose mission is to advise the minister of transport on technical, economic, financial, and social aspects of transport investments and operations. It comprises representatives of 8 ministries, a CNP representative, directors of SNTF, SNTR, and EPTV Centre. Generic Issues of Transport Investment Planning 1.20 Strategic planning is disintegrated, reference blueprints are outdated (a) To evaluate the many and sometimes conflicting projects submitted by decentralized entities, the technical ministries and CNP at the top should be able to check consistency of the proposed sectoral and spatial allocation of investment resources against a blueprint for future development of sectors and regions involved. CNP uses the SNAT ("Schema National d'Am6nagement du Territoire") as a reference document which, however, has not been fully developed or adjusted to changing local and international conditions, and appears to have lost importance in late years'"; (b) The five year plan system was put on hold in 1990. CNP does maintain a set of medium term projections against which the annual investment program is evaluated and optimized, but short term considerations have gained weight in investment planning with 2/the approach to creating development poles in the "high plateaux' is increasingly perceived as too dogmatic and not affordable for Algeria at present. 10 the highest priorities now given to employment creation and investments that would pay off quickly. Optimization of transport investments require a medium to long term perspective which is waning; (c) For technical ministries, planning difficulties have been compounded by the decentralization of decision making to regions, and autonomous parastatals unmatched by simultaneous development of adequate management tools. The ME needs a road master plan to integrate projects initiated by Wilayas in a coherent investment program, and the MOT has yet to formalize a national strategy and strike a good balance between the respective roles of Government and transport parastatals. Inside the ME, the disintegration of the road maintenance budget under two managing directorates is not conducive to optimal programming of works; (d) Corporate planning by parastatals is often subject to the pervasive influence of their "public service mission" which generally weakens consistency of their programs. Frequent changes at the top management level have been an additional hindrance to consistent planning. 1.21 Programming rigidities weaken project efficiency. Projects which have been cleared for inclusion in the investment program are not subject to economic revaluation when conditions essential to their economic viability happen to change, which creates risks that investments which turned to be uneconomical might still be implemented at the expense of better alternatives. Other problems arise in connection with cumbersome procedures to revise budget authorizations. High inflation is a new reality and either contracts did not include price escalation formula or CNP, as noticed in the recent past, would not include price contingencies in the authorized budget. The needed budget revisions take a long time which contributes to further cost increases and overall weakening of project economic viability. 1.22 Coordination mechanisms are highly ineffective. Coordination is key in complex economies and even more with decentralization and deconcentration of powers. (a) The port of Djendjen and the Jijel-Ramdane Djamel railway line epitomize the kind of problems encountered by multisectoral projects; designed to serve the future steel mills in El Milia, they were both built at high costs against the World Bank advice but the steel mills are nowhere to be seen; (b) The artificial split of responsibilities between MOT, officially in charge of planning, and ME remains a source of difficulties. A coordination committee has been set up by the two ministries but operates too rarely. Programs prepared on both sides lack insights on all possible trade offs between infrastructure and equipment, and their implementation is poorly synchronized; (c) Coordination of central and local Governments is another problem area. Centrally defined policies and procedural guidelines are loosely applied in the field. Road investments under the Wilaya plans are prepared locally, then discussed with CNP which, in principle, consult with ME for technical advice. This procedure, however, remains largely formal since it comes too late in the process and the time allocated for technical review of these plans is generally too short. There is no concertation with ME regarding road investments programmed under PCDs. (d) Loose overseeing of parastatals by ministries favors inertia and development of disparate actions. The greater autonomy given to parastatals in 1988 compounded the problem of a human resource gap at ministries. Furthermore, the split of financial responsibilities between the central budget and their own budgets may bias parastatals choices in favor projects that the former will pay when more cost effective solutions could be implemented. In ports, for instance, trade offs exist between more infrastructure, payable by Government, and more equipment and improved management, payable by port enterprises (PEs)". (e) Coordination within 3/ for instance, a shortage of storage space could be eliminated, not only by building new areas, but also through a variety of means like deterrent pricing combined with tightened controls to induce faster turnround of cargo in ports, or purchase of high-capacity stacking equipment 11 parastatals is often a organizational problem: the delegation of functions to local branches has sometimes gone too far as is the case for SNTR; others, like SNTF, have an organization where line responsibilities are along technical divisions making it difficult to pursue business objectives effectively. (f) More generally, coordination mechanisms are weak, overly relying on ad-hoc committees to resolve complex problems without providing them with enough leadership, expertise, and relevant data. The limited progress of intermodal transport, where main productivity gains were achieved by industrial countries in the last twenty years, is a direct outcome of poor coordination between administrations. . 1.23 Analytical tools are deficient (a) Costing of investment input has grown even more tentative in the current inflationary context and recurrent costs are often overlooked. (b) Indivisibilities and externalities characterize many projects and the proper identification of inter-sectoral and inter-spatial linkages require analytical tools which are rarely used. (c) The analysis of the transport demand is especially weak: demand forecasting is carried out routinely through annual preparation of transport plans, more or less limited to compiling the anticipated transport needs declared by the main client parastatals. Those plans are generally static and have even to be approved through a political process for somel4. Physical targets are what counts most in these transport plans; lesser attention is paid to how valuable they are to the economy and how costly it is to meet them. Too many investments are appraised on the basis of flawed methodologies and token analysis. (d) Computerized transport sector modelling has been developed under the NTS, an innovative and wide ranging effort which implied comprehensive surveys and detailed analysis of sub-sectors operations. The model has the potential to guide decisions on relative priorities to assign to transport modes, one of the weakest aspect of current planning. Difficulties, however, were experienced in calibration of its parameters and underlying flaws must be fixed. (e) For road maintenance, the selection of priorities mostly relied on heterogeneous judgments on road conditions by PW staff. The HDM III model is now being developed under the Fifth Highway Project to cover the basic economic network (5,000 kin), but there is still skepticism at DEER ("Direction de l'Exploitation et de I'Entretien Routiers") on benefits that could be derived from using it. 1.24 The transport data base and the information flow are of poor quality (a) One of the issues is that parastatals tend to release less information to overseeing ministries now that they have been granted autonomy. Publication of the Transport Yearly Statistics by the MOT was discontinued in 1990. Statistics are still communicated to the ministry but they are incomplete, irregular, neither reliable nor informative of the real condition of the parastatals. Without good data, the central planning functions cannot be handled. Problems are often rooted in the parastatals: many have not yet developed modem management information systems. The MOT is tackling the issue and will fund computerization of data processing at 10 Wilaya's transport directorates in 1994. (b) The central road data base remains mediocre despite recent improvements. Inconsistencies are found in data on the composition and evolution of the road network. No system is in place to update the costs of various categories of road works, a growing need in the new inflationary context. Another anomaly is the lack of detailed information on budget execution, especially for investments. Chapters 521 and 522 managed by DR ("Direction des Routes") cover new construction, modernization, road strengthening and rehabilitation for RN and CW respectively. It is possible to obtain information on total spending under each chapter, but there is no way to break it down by nature of operations. Unorthodox budget practices tend to blur realities of road financing. For instance, PCDs cover road construction, but 4/For instance, the Wilaya land transport plan is prepared by the Wali who submit it to the Popular Assembly for approval 12 part of the funds goes in fact to maintenance. Chapter 951 in the Wilaya budget is normally to finance major repairs, but its uses are often for construction. No effective supervision is possible without a good information flow from provinces. (c) Regarding ports, general traffic data are available but reliable and good port performance indicators are by and large missing. Financial data lack accuracy and comprehensiveness; costing of port services is tentative. Shipping data are especially poor: the NTS found few reliable data on production, operational performance, and finance which hampered the analysis of the sub-sector. (d) Despite substantial investments consented over the last 5 years to computerize its management, SNTF has not been able to organize an exhaustive collection of rail management information from its many decentralized units. The inventory of fixed assets is neither accurate nor up to date. A much needed cost accounting system was to be introduced by January 1990 with financing from the Second Railway Projects, but the consultants were not yet recruited when the project was closed in February 1993. The lack of precise traffic and cost data hampers planning and marketing. (e) The data on the Algerian road vehicle fleet is imperfect and preclude full understanding of land transport issues and sound policy design. SNTR maintains a central computerized data base, but its reliability is questioned. The EPTVs have no management information systems, and no costing data. 1.25 Shortage of local planning expertise: Good transport planners are scarce in the central administration where they rarely find conditions to be effective. A few received extensive academic training abroad, but they lack experience and find themselves isolated and deprived of means to carry out their tasks. Demotivation is common. In parastatals, management skills are concentrated on production and related technical matters. Financial and economic functions remains underrated and attract lesser talents. This is well illustrated by the railway company. Feasibility studies of railway investments are conducted by SNTF directly or through its consulting subsidiary, except for major investments financed by international donors. Because SNTF did not have the in-house expertise to carry out a good economic appraisal of railway investments, the Second Railway Project launched in 1988 provided for technical assistance to establishment of a planning cell, but this was never implemented as SNTF and the Bank failed to agree on objectives. The National Transport Study confirmed the diagnosis that economic and financial feasibility studies were generally oversimplistic on such aspects as traffic forecasting and intermodal competition. All too often, SNTF offered dubious justifications to development of new lines which the Bank considered uneconomical. Insufficient planning skills were a big part of the problem which is also linked to the financial organization: since SNTF does not pay for track investments, it has no incentives to optimize them. Recommendations for Streamlining of Transport Planning 1.26 Development of national transport plans. (a) In order to help identify priorities more effectively, a road and an airport master plan study should be carried out. (b) To facilitate intermodal comparisons and ensure optimization of transport investment planning, it is further recommended to develop a national transport observatory. Its main function would be to rebuild and maintain a good transport data base, operate and develop the transport demand model in order to help Government make decisions on transport investment policy. The observatory would be an autonomous public administration which, like the motorway agency (ANA), would be able to pay more attractive salaries to managerial positions than the central administration, a key condition to hire and retain qualified staff. The Observatory would be under the ministry of transport, but its board would include representatives of CNP and ministries interfering most with transport. Technical assistance would have to be provided during the early development stage; the proposed Urban Transport Enterprise Project could be the appropriate vehicle to finance it. 13 1.27 Opening up the local consulting industry market to competition. For roads, CTTP, an autonomous public consulting firm developed under Bank projects, is often selected to carry out studies of road projects, and the same is true of SAETI, another local firm. Both needed foreign expert support on highly technical and innovative matters and received it under Bank projects. For transport, several public firms did studies for the ministry (Betur, Bedat). Past actions to develop the local consulting industry have met with success in many cases. Time has now come for stirring up competition and finding effective ways to facilitate transfer of technology from industrial countries. Local consulting firm in the public sector should cut their ties with Government and the practice of sole source selection should become exceptional. Future Bank projects should discontinue direct or indirect support to the local public consulting industry which could find alternative ways to increase funding and technical cross-fertilization. Private consulting firms have a large development potential which can only be realized and it is essential that they be given equal access to public contracts, hence the plea for transparent competition. Letting foreign firms take equity participation in local ones is desirable. A systematic resort to international competitive bidding for complex studies could create the incentive to proposed changes. 1.28 Strengthening of planning units at technical ministries. The MOT and ME must have minimum in-house expertise in road investment analysis and programming even though consultants would be called to execute detailed studies. They should have staff capable of preparing good terms of reference, checking progress of studies and methodologies applied, and taking a proactive stance to ensure adequacy of the end-product. This staff should be proficient in the use of computers. Both MOT and ME would then need to recruit a core of qualified planners (two for each ministry) who could be receive on-the-job training under technical assistance components of future Bank transport projects. Actions would focus on four aspects: (a) assure that these units are adequately staffed; (b) develop computerized management information systems to ensure availability of analytical data on financial and economic aspects of road works and other transport activities; (c) standardize adequate methodologies for investment appraisal and monitor their application by decentralized units; (d) train staff in Wilayas and other decentralized public works units to handle basic planning tasks. 1.29 Regroup disintegrated planning functions. (a) Network-based road maintenance planning must be further developed. Maintenance is a continuum from routine clearance of vegetation to road strengthening and concentrating related management responsibilities under DEER, irrespective of the supporting budget, would seem appropriate (a seemingly better alternative would be to set up a Road Fund - see para 61). The application of the HDM III model should be expanded to cover the whole priority network. (b) Regrouping of airport management responsibilities could enhance performance; it is recommended that an airport reorganization study be conducted to prepare reforms; (c) Decentralized or deconcentrated planning is another area where improvements should be sought. Local directors of public works (PWs) should be given authority to consolidate programming of national roads and of wilaya roads in a single document which the ministry of equipment would submit directly to CNP for final approval. They should aim at signing conventions with municipalities for maintenance of municipal roads. Incentives to large development of such conventions could be created, such as central budget support to road maintenance covered by them; (d) port investment budgets should be transferred to PEs, except for breakwaters, as the differentiation of funding sources (PEs and the ME) may induce the PEs to minimize their financial burden by calling for more infrastructure than really needed. (e) Another concern is that ports are expensive to build. The autonomous ports are too many and the weight of local interests may be higher than desirable, and conducive to improper allocation or unnecessary duplication of port investments. Regional port authorities should therefore be created to streamline port development. 14 1.30 Set clear objectives and reorganize transport parastatals. Resolution of conflicts between commercial objectives and "public service" which generate misallocation of investment resources and weakens the financial status of transport parastatals should be sought through Contract-Plans. SNTF is a prime candidate and will need to be established as a SPA to that effect. The same applies to shipping where Government interferences in strategic choices have been experienced, weakening consistency of corporate planning and undermining the sector's finance. Examples of such interferences include decisions on optimal ship design, on the proportion of chartering versus owning ships, and on maintaining or opening a line. In all cases, the corporate structure should be changed to facilitate effective planning and a new culture should be introduced to enhance competitiveness and accountability of managers to performance. Privatization before restructuring remains the best solution wherever risks of private monopolies do not exist. 1.31 Associate users to infrastructure planning and financing. The Algerian ship owners enjoy extensive planning freedom but exert it poorly. They complain that the slow pace of port modernization has forced them to opt for conventional ships which are costly and inefficient. This does point to serious shortcoming of national planning systems: the insufficient involvement of users. A National Council of Users had been created to that effect but fell into oblivion. Ship owners should also be abilitated to lease part of port infrastructure where they could develop modern terminals fully attuned to their operational needs 15 II. TRANSPORT COST RECOVERY Background 2.01 Transport pricing has a national setting of market distortions, subsidization of essential products, and inoperative cost containment measures. A program of gradual price liberalization was launched in 1989 and significant progress has been achieved to date, but price controls still apply to some strategic goods from staple food to energy. Consumer price subsidies have been reduced and presented 5% of GDP in 1992 which remains sizeable. Cross-subsidization to even out delivery prices across the national territory has pervasive effects and hampers development of competitive distribution channels. Overall, the economy is suffering from distortion of relative prices leading to misallocation of resources. Price distortions constitute a major obstacle to development of competitive channels. A system of administered prices is rarely on target and favors parasitical arbitrages and illicit gains. 2.02 Main adverse consequences of incomplete cost recovery are: - financial losses when compensations are not forthcoming; - loosened financial discipline, aggravating deficit; - creation of excess demand, triggering uneconomical capacity expansion; and - distortion of intermodal competition. 2.03 Paradoxically, by generating inefficiencies and hampering investments, incomplete cost recovery leads ultimately to higher than competitive transport prices and this is verified in Algeria. The 1987 Bank report on Transport Strategy in Algeria already pointed to wrong pricing as one of the major issues. Transport prices have always been an important tool of Government economic and social policy and were set by joint decision of the ministries of transport and commerce after consultation with the National Price Committee, except for local transport services which were enacted by the ministries of interior and commerce based on local Governments' proposals. Decree 91-401 of October 27 1991 which granted pricing freedom for road freight transport marks a drastic turn toward liberalization, still limited though as passenger transport tariffs remain under (not so effective) Government's control and pricing of transport infrastructure is still much influenced by equity considerations. A. Road Infrastructure Cost Recovery Road User Charges 2.04 Transport vehicles are heavily taxed in Algeria. Average taxes raised on imported vehicles vary from about 56% for a semi-trailer to more than 200% for private cars. A distinction should be made, however, between road user taxation and total taxation of vehicles and vehicle operations. The NTS estimated the latter to DA 17.7 billion and the former to DA 7.4 billion under 1989 conditions. The road user charges are distinct from general taxation and defined as those specifically raised to cover road infrastructure costs. They comprise: customs duties payable for transport related equipment over and above the average taxation rate of 25% for non-agricultural imports; .16 - the "taxe sp6ciale" of 15% on private vehicles imported and financed outside the official channel; - the driving license fees and vehicle registration tax; - the difference between the world market prices for fuel and its retail price in Algeria; - taxes payable upon transfer of vehicle property. 2.05 Recoverable road infrastructure costs may include construction, maintenance, administration and management, plus marginal congestion costs when road capacity is saturated (the logic there is to curtail and prioritize demand and to raise revenue to the extent needed to finance additional capacity). For uncongested roads, the most common case of interurban roads in Algeria, maximum net benefits for society come from charging the marginal cost of roads represented by the portion of annual expenses for road maintenance that varies with traffic and the specific construction costs which can be traced to a clearly identified category of road users' . The NTS did not account for routine maintenance as corresponding wear and tear is time and weather related; it assumed that 65% of surface treatments (periodic maintenance and strengthening) were variable costs and that 20% of construction costs could be traced to specific uses. The 1989 user charges and corresponding marginal costs for urban and inter-city roads are shown in table 2. Table 2: Road User Charges and Road Use Costs on all Road Networks (in current DA million). Road user charges Cost of using roads - special tax 415 (5.6%) - periodic maintenance 176 - custom duties 1128 (15.3%) - construction (variable) 847 - fuel taxes 5679 (77.1%) - administration 123 - other taxes 146 (2%) - congestion 3259 Total 7368 (100%) total 4405 (Source: Etude Nationale des Transports, Etude Sp6ciale Charges des Usagers de la Route. 5-17, table 5.10) 2.06 Revenues in excess of costs were found close to DA 3 billion, giving a revenue cost ratio of 1.7 which is high. Narrowing down the comparison to the inter-city network led to the conclude that the cost recovery ratio was near 5 (the congestion costs in terms of lower speed, higher vehicle operating costs, and time losses, are mostly generated in cities). It could easily be inferred from these figures that road user charges are too high in Algeria and that taxes should be reduced to avoid economic efficiency losses (which may not be practical as Government grapples with severe budget constraints and needs more revenue), or at least restructured to redistribute more equitably the tax burden costs among users. Deep changes, however, took place since the NTS was done and the analysis needs thorough updating. The following completes the diagnosis established by the NTS with a rough assessment of the impact of some of those changes on inter-city road cost recovery. Road Cost Recovery Issues 2.07 Diesel fuel is subsidized: The table above shows that nearly 80% of road infrastructure cost recovery comes from fuel taxes. A major producer, Algeria has cheap supplies of crude oil. For many years the Government elected to pass on part of the windfall gain to local producers and 15/the other concepts referred to in the NTS are not relevant and not considered herelI/ ,17 consumers. Sonatrach sold its products to local distributors at prices well below world market prices and Government taxation was moderate. In 1990, tighter fiscal and monetary policies were initiated, including progressive elimination of implicit and explicit subsidies. Local fuel prices rose swiftly: the pump price for gasoline and diesel oil rose from about DA 3.5 and 0.9 to DA 6 and 3 per liter respectively. Converting these prices in US Dollar (at official exchange rates) shows, however, that the local price correction was more apparent than real as verified in table 3. Table 3 Comparison of Algerian and world fuel 6 prices in March 1990 and December 1992 (US cents per liter) Gasoline premium gasoline regular diesel oil 1.Algerian prices: - 1990 45.74 37.59 11.28 - 1992 28.26 25.22 13.04 2.World prices: - 1990 18.95 17.14 15.04 - 1992 20.00* 18.00* 17.00* Difference (1-2) - 1990 26.79 20.45 - 3.76 - 1992 8.26 7.22 -3.96 * estimates Three main conclusions can be drawn: (a) premium and regular gasoline prices in Algeria are above world prices, but the implicit taxation has lost two third of its value between 1990 and 1992 because new pump prices did not fully account for depreciation of the Algerian Dinar; (b) using parallel market exchange rates, arguably more in line with real relative prices, would bring the pump price for regular and premium gasoline down to US cent 15 and 17 respectively7, at subsidized level; (c) diesel oil is clearly subsidized. 2.08 The logic of subsidizing diesel oil is weak, albeit widespread in the world. Road freight transportation is essential for distribution of food products and other commodities catering to elementary needs of the population and many consider it socially desirable to subsidize these prices. But the diesel oil subsidy benefits the poor and the rich indiscriminately which makes it an inefficient tool of poverty alleviation. Externalities should also be taken into account: diesel oil is more polluting than gasoline. These factors have been acknowledged by the USA where the federal tax on diesel oil is about 40% higher than on gasoline and the pump price of diesel oil roughly 25% higher than for regular gasoline. 2.09 A shortfall of tax revenues has developed in late years: The contribution of the fuel tax, other things being equal, has fallen to one third of its former level, suggesting that the road user charges generate revenues of about DA 3 billion at present in 1989 prices, or approximately to DA 7 billion in current prices half of which roughly correspond to use of the interurban networks. The NTS 16/The world prices are defined as the spot price in Rotterdam minus maritime transport costs plus about 20% for local distribution (this to ensure comparability with Algerian data) 17/for the sake of argument, the real exchange rate is assumed as DA 35 to US$ 1. 18 estimates of interurban road marginal costs should also be updated and corrected to account for optimal maintenance needs, unfulfilled at present. Fully funded road maintenance would imply annual outlays of DA 9.5 billion of which DA 3.5 billion for recurrent maintenance". Road recoverable costs thus comprise: - resealing and surface treatment costs of DA 1.7 billion (see para 25), reduced by 35% for time related wear and tear, estimated at DA 1.1 billion; - 20% of other recurrent maintenance costs, or DA 400 million; - 65% of road strengthening and rehabilitation, or DA 3.9 billion; - 20% of construction costs of DA 5 billion, or DA 1 billion; and - the administration cost, roughly updated at DA 150 million. 2.10 That gives total recoverable road costs for the interurban networks of DA 6.5 billion in financial terms, and DA 5 billion in economic terms. Revenues from interurban road user charges of some DA 3.5 billion leave a DA 1.5 billion gap, and would have to be raised by 40% to close it.. 2.11 Heavy vehicles do not pay a fair share of road costs. Since road cost recovery is largely based on fuel and since diesel oil is subsidized, light vehicles using gasoline are the ones contributing most. Trucks in contrast contribute very little, especially the semi-trailer that cause as much damage to roads as 30-40 000 private carsJ9. The NTS produced estimates of cost recovery ratios among various categories of road users (see table 4) which underscores two basic features: private cars bear the brunt of road taxation, and diesel powered trucks pay practically nothing of costs traceable to them. Table 4: Revenue cost ratio for various categories of users vehicle type private For hire: For hire: Own acct: Own aect: Total private public private public Light vehicle: - gasoline 4.4 4.9 3.2 6.2 5.7 5.0 - diesel 1.5 1.4 0.2 1.0 0.4 0.7 Heavy vehicle - gasoline 4.3 4.6 n.a. 4.6 1.6 3.9 - diesel 3.5 05 0... 0.4 0... 0.1 total 4.2 1.4 0.1 0.6 0.7* 1.3 (* gas powered light vehicles not shown in the table are included; without them the ratio should be around 0.3) 2.12 Current user charges discriminate against private transporters: Customs duties charged on light trucks are 4 times as high as on semitrailers (40% against 10% of c.i.f values). Since private truckers mostly operate small trucks, they end up being taxed more heavily. Foreign exchange accessibility is another source of indirect discrimination. Whereas parastatals receive foreign exchange allocations to purchase trucks belonging to planned imports, the private sector can only import to the extent that financing is secured on the parallel market. Upon import of vehicles, a special tax was raised by customs (15% of c.i.f. value). The obligation they have to find foreign currencies at 18/DA 9 billion for RNs and CWs (see para 25) and DA 650 million for municipal roads (see note 5), 80% of which are not budgeted to date. 19/pavement damage is proportional to the number of equivalent standard axles per vehicle, defined as the ratio of the load on each axle to a standard 8.2-ton axle, raised to the fourth power. 19 parallel market rates constitute an implicit taxation of private transporters and a hidden form of discrimination in favor of parastatals. Conclusions and Recommendations 2.13 The strategy should be to make road users pay a fair share of the variable maintenance costs, and combine a comprehensive road user charges reform designed to achieve this objective with restructuring of the road maintenance budget to secure needed resources and spend them more effectively. Four recommendations follow: - trucks must pay more, especially semi-trailers: diesel implicit taxes have to be raised to a level equivalent to taxes on gasoline. There should be no discrimination other than based on technical features of trucks. Encouraging imports of large trucks with low- axle loads is desirable as long as it does not discriminate against private truckers. An axle-load tax, best related to pavement damage, would be a good complement to the proposed increase of diesel oil prices to achieve normal cost recovery. - the changing dinar value of world prices must be reflected in pump prices: this is key to avoiding further erosion of implicit fuel taxation; - raising road user fees should go with reducing general taxation: adding fees to the already heavy tax burden borne by road users' may trigger tax evasion and worsen recession in the transport industry. Full streamlining of road taxation, therefore, may call for a comprehensive reform of general taxation whereby Government would find alternative sources of tax revenue to make up for decreased taxes on transport; - a road fund would streamline budgeting of road maintenance: on the revenue side, it would guarantee of steady flow of funds and favour a more active targeting of untapped road user surpluses toward expanding the charging bases; on the expenditure side, a road fund could integrate the two maintenance budgets, make programming more effective, and facilitate smooth implementation of approved work programs. B. Railway Cost Recovery Railway Current Financial Status 2.14 By end of 1992, SNTF's bank overdraft had soared to above DA 2 billion, equivalent to one year of revenue, and its negative net worth was about twice as high. Proper evaluation of the long term debt at current exchange rates would have worsened the picture. The railway company is bankrupt, unable to service past loans and to obtain additional loans from local banks. As had been the case in 1988 at the onset of the Second Railway Project, SNTf's future relied entirely on implementation of a financial restructuring plan. In 1988, such a plan had cost Government some DA 1.5 billion in debt write-offs and grants plus DA 650 million in credit facilities. The new restructuring plan has not yet been finalized, but its overall cost is likely to exceed DA 6 billion in write-offs and soft credits. Cost recovery of railroad services has been, and remains a critical issue to date. This situation is partly the result of inadequate pricing policies. The Second Railway Project had assumed that the rail tariff would have to increase by 60% in real terms over 1987-1991 to ensure financial sustainability of SNTF's operations. The tariff was raised by 20% in 1988 more or less in line with 20/taxes supported by private cars range between 150 and 425%. The tax paid upon purchasing an imported truck is about 70% of the c.i.f.value. 20 commitments then taken by Government but tariff were subsequently frozen until February 1991 when they rose by 35% on average for freight and 20% for passenger traffic; new increases took place in February 1992 (respectively 25% and 30%) but these adjustments did little to revert the tendency to lower real railroad prices as inflation over 1991 and 1992 matched the tariff increases. The Bank's insistence on raising SNTF's tariff in 1993 was rebutted by Government and the relative rail price slide has resumed. Rail Cost Recovery Issues 2.15 Rail users do not pay for track costs. The 1988 Convention which clarifies the financial responsibilities of the Government and SNTF stipulates that the former covers the full cost of track maintenance and renewal. Investments in new railway infrastructure, plus telecommunication equipment, signalling and safety systems, and construction of stations are also financed by Government subsidies. The NTS calculated 1989 costs of track renewal as equivalent to annual depreciation of DA 370 million, revalued to some DA 700 million in 1992 prices. Regular track maintenance was then estimated to cost around DA 1 billionO1. The NTS also recalculated depreciation related to rolling stocks to DA 457 million equivalent to DA 822 million in 1992 prices. The 1992 pro-forma income statement could then be estimated as follows: In Current DA million - working expenses: - operating revenues: 2512 track costs 1000 other costs 3157 minus assets production 979 total working expenses 3178 - depreciation: track related 700 other depreciation 823 total operating costs: 4701 - normalized interests: 680 total expenses 5381 - deficit: 2869 2.16 These calculations establish that rail users on average pay less than 50% of real costs of railway operations. Cost recovery looks better for freight than for passengers as calculated by the NTS for 1989: Cost Coverage Ratio Iron ore 0.67 Phosphate 0.55 Other freight 0.58 Passengers 0.36 21/SNTF receives an operating subsidy, a lump sum covering track maintenance and compensations for "public services"( DA 650 million in 1992). 21 2.17 These results must probably be revised downward for 1993, since tariff revisions between 1990 and 1993 have not been fully compensated for inflation. With passenger fares increasing by 57% only since 1988 compared to 110% for freight, it is likely that the relatively favorable evolution of the passenger traffic has been more than compensated for the monetary erosion of the tariff and the previous conclusion should by and large remain valid if not strengthened. 2.18 Borrowing for purchase of rolling stocks are at lower than market terms. SNTF obtains softer terms to borrow locally; maturities extend over 15 years or more, and interest rates are 6-8% when the cost of borrowing locally is 20% or above. 2.19 SNTF gets cheaper supplies than its road competitors: The NTS reports that SNTF paid its diesel fuel DA 0.75 per liter in 1989 at a time diesel prices charged to road transport was around DA 0.9 per liter. The same study estimates customs duties on railroad equipment to 3-11% of the c.i.f value, compared to 10-40% for trucks. 2.20 Rail productivity is low. The above would imply raising tariffs by about 100% to break even which is out of reach for obvious social reasons. The adjustment might in fact be of a lesser magnitude because a lot of operational inefficiencies are embedded in current cost estimates. After spinning off Infrafer in 1988, SNTF was to maintain a staff of no more than 17,000, but let it soar to 18,500 by 1991 which gives a low average of 319,000 traffic units per staff employed during that year. Labor costs exceeded operating revenues by 12% in 1992. The detailed analysis of SNTF carried out under the NTS concluded that current staffing levels were 15% above normal. The rolling stock is underutilized. There are 267 locomotives which, based on total of train kilometers travelled in 1989 gives an average of some 72,000 km per locomotive in the fleet. The availability rates of locomotives and railway cars is below 85%. Maintenance of the rolling stock suffers both from low labor productivity and irregular purchases of spare parts which has much to see with the restricted availability of foreign exchange. The turnaround of freight cars is twice as long as normal in most cases: 3.5 days for the iron ore traffic, 5 days for the phosphate traffic, and 12 days for other freight traffic. The creation of many subsidiaries has inflated overhead costs by staff recruitment and managerial inefficiencies, which bear on the global railway finance. The number of railway freight and passenger stations (200) is too high: less than 30% handle freight of more than 50,000 tons per year and only 5 handle more than 1 mt per year; two third of passenger stations had less than 100 travellers per day in 1989. Altogether, the operating costs of stations represent 15% of total and sizeable economies could be achieved in closing those lightly used. The NTS made simulations of productivity improvements (25%) and their impact of costs; track improvements, better programming of trains, higher train speed, reduced marshalling operations and development of unit trains were the main variables considered. The calculations concluded that the average costs per passenger and per ton could respectively be decreased by 35% and 10% which, at unchanged traffic structures, would translate into overall cost savings of 22%. Reduction of the labor force could bring additional savings of some 10%. Altogether, it seems possible to increase the productivity of railway operations by at least 30%. Recommendations 2.21 The financial restructuring plan should define a recovery path leading to full financial sustainability of the railways by 1997 at latest. The principles of cost recovery should be: 22 coverage by users of the variable portion of track costs: Making SNTF financially responsible for part of the infrastructure will put the railroad on an equal footing with roads, and create incentives for greater selectivity in programming track investments. Assuming variable to total track costs are in a proportion of 1 to 3, the 1989 recoverable costs before productivity gains would have been DA 4.2 billion (instead of 5.4 billion given in para.. ), calling for a 67% tariff increase. Achieving productivity gains would cut costs and a tariff increase of less than 20% would be enough for satisfactory cost recovery. Current conditions may require slightly more, but not to an extent that would impair SNTF's competitive capacity. correct price distortions between modes: Price and tax discrimination between road and rail transport should be eliminated. The above cost recovery target would also ensure equality between road and rail by applying identical cost recovery principles, namely payment by users of variable track costs (construction and maintenance); isolate commercial functions from public service constraints: The intermingling of the two functions is detrimental to overall efficiency. Public service constraints should be the exception and fully compensated by Government. Equity considerations behind the Government policy of cheap passenger fares rail transport should be given a lesser weight. Road transport is a perfect substitute to rail transport in short to medium distance transport and subsidized railway tariffs distort the optimal allocation of traffic among modes without necessarily improving the living conditions of the poor since the subsidy goes indiscriminately to all users, including the wealthy travelling in first class. Direct financial assistance to the poor would achieve social objectives without distorting production. General forms of subsidies should be limited to cases where rail transport creates clear external economies; traffic congestion in Algiers may be one of them; increase productivity and cut costs: Besides downsizing the labor force and better utilization of the rolling stock, SNTF should take steps toward eventual abandonment of uneconomical narrow-gauge lines, starting with studies on financial and social impacts; divest services and increase private sector involvement: Transferring the ownership of single-user rolling stock to industrial customers, and loosening the ties of subsidiaries to SNTF by opening up their capital to private investors could bring positive results. C. Port Cost Recovery 2.22 Port users do not pay for construction and maintenance of port infrastructure which normally represent between 15 and 20% of all user costs in typical multi-purpose ports. They do pay ship dues which, in fact, are Government "taxes parafiscales". The proceeds from ship dues are transferred to port budgets by the Ministry of Finance and actually compensate the costs of facilities and services other than port infrastructure. These dues represented less than 5 % of total revenues generated in ports in 1988 except for petroleum ports (9.5% in Bejaia and 27% in Skikda). 23 2.23 Tariffs charged to port users combine with shipping dues to balance costs borne by port enterprises on their budgets. Table 5 provides information on net cash flows generated by ports and their relation to turnovers in 1988 and 1989. Table 5: Port financial performance in 1988 and 1989 (in current DA million) port enterprises 1988 1989 turnover cash flow ratio turnover* cash flow ratio Skikda * + 37.0 * + 11.0 Bejaia * + 11.0 * + 4.0 Mostaganem * - 7.9 Tenes * + 1.0 * + 0.3 Annaba * + 10.4 * + 6.2 Jijel * + 0.1 * - 0.2 Oran * + 3.4 * - 36.0 Algiers * + 51.0 * + 12.8 Ghazaouet * - 1.4 * - 8.0 (*) information will be requested from MOT 2.24 The above table suggests that, with a few exceptions, the ports are profitable. The accounts however may not truly reflect the costs, as fixed assets for instance are recorded at historical values. The proportion of salaries and wages appeared to be high: they were close to 80% of turnover in Oran. Recommendations 2.25 Based on the sketchy information available at this stage of report preparation, provisional conclusions that emerge are: - port users should pay at least for maintenance of port infrastructure and possibly for construction of port facilities other than breakwaters; the latter would be desirable to speed up modernization of ports which has been slow to take place under the current financing system as proposed port investments were crowded out by competing demands on scarce Government budget funds; charging for the use of port infrastructure will ensure that coastal shipping competes with land transport on equal terms; - pricing systems will need a complete overhaul to establish a closer link between tariff items and cost centers, integrate the modernization of shipping services, and contribute to more efficient use of existing facilities; pricing freedom should be granted within minima and maxima set by the Government; - revaluation of port assets should take place at regular intervals unless the current inflation abates; - cost containment measures should be sought systematically. D. Airports 2.26 Airport infrastructure costs are partially recouped by the EGSAs and ENNA. Major investments and maintenance works are on the Government budget and transferred to operating entities free of charge. The financial condition of these entities was satisfactory in 1989, the most recent year 24 for which information exists. There are two main avenues that could lead to improved cost recovery. On the one hand, responsibilities for financing airport infrastructure should be reapportioned to increase the share of costs covered by user fees, and reduce the excessive burden imposed on public budgets (central Government and wilaya budgets) by airports. On the other hand, cross-subsidization of secondary airports by major ones that the current airport organization implies is a drag on normal development of the latter, and should be eliminated as a condition of greater dynamism of the sub- sector. E. Cost Recovery in Autonomous Transport Parastatals Land Transport 2.27 For freigh, liberalization of transport prices in a depressed market produced lower prices and SNTR was reported having difficulties to break-even. A falling demand for freight transport translated into lower load factors'. The overall productivity decreased by 25% between 1989 and 1992. The financial performance over 1987-1990 had been mixed, producing an average profit of DA 28.5 million annually over the period, or 2% of turnover. It deteriorated thereafter and, in 1992, SNTR incurred a whopping deficit of DA 450 million. The company remained heavily indebted by mid-1993 (DA 1.4 billion of debts, equivalent to its annual turnover), and was expected to undertake financial restructuring with substantial Government support. The trucking tariff set by the Government used to be too low to cover SNTR's costs. Calculations carried out under the NTS showed that, against official tariff in 1990 equivalent to DA 0.6-1.0 per t/km for light trucks and semitrailers (these tariffs had been unchanged for 4 years), actual trucking costs were in a DA 1.5-1.8 range for the former and DA 0.8-1.4 range for the latter, depending on distances travelled. The past tariff policy has been an obstacle to normal renewal of the truck fleet making periodic financial restructuring inevitable". These official tariffs though would have covered the costs of an efficient trucking company. The average distance travelled each year by SNTR trucks went down from 80,000 km in 1990 to 57,000 km in 1993, which is very compared to other countries (for instance, 110,000 km for french trucks at the time). Maintenance is especially weak. Spare parts are costly and rare on the market. They often have to be retrieved from broken down trucks which is wasting capital. The proportion of truck downtime of 7 days or more rose from 14% in January 1990 to 38% by end of 1993. SNTR is also burdened by high labor and administration costs. Last but not least, the Government used until recently to impose provision of below cost transport to the south without compensating SNTR. Under these conditions, the cost recovery strategy for freight should only focus on cost cutting and productivity increases. Government support to parastatals should stop. The practice, of subsidizing transport to the south must be fully discarded (despite its new pricing freedom, SNTR keeps charging rates that are 2-3% higher than average) and replaced by targeted subsidies which would meet the same objective without creating distortions on the freight transport market24. 2.28 Bus transport remains tightly regulated by central and local Governments including tariff controls. Three fourth of all intercity operations are carried out by the EPTVs which had a combined 22/the ratio of ton-kilometers to capacity offered, accountng for empty hauls and less than full loads dropped from 32 to 28% from 1989 to 1992. 23/the truck fleet is aging, more than 12-year old on average, according to a Bank financed survey carried out in November 1993. 24/ One possible way would be to provide additional central budget support to southern wilayas and municipalities which could be used to develop collective services, subsidize producer and consumer credit for merit goods (housing for instance). Targeted subsidies are always more effective than diluted ones. 25 turnover of some DA 1.4 billion in 1990. Despite high vehicle occupancy rates (more than 70%), the EPTVs do not generate enough cash to sustain their operations and carry heavy debts (about DA 2 billion in 1990). They are grossly overstaffed (close to 14,000 staff), and maintenance is inefficient'. Buses are more than 10 years old on average and many should be replaced which the insufficient cash generation does not allow. Officially, operations of the EPTVs are not subsidized but, because tariffs are too low, loans had to be contracted for renewal of the bus fleet forcing Government at some point to step in and take over the burden of unserviced debts which amounts to an indirect form of subsidization already present in the soft borrowing conditions that were granted until recently. Tariff did not change between April 1988 and August 1990, although inflation was running at 13% annually. Consultants estimates of bus costs under the NTS show that tariffs in 1990 covered no more than 69%, 44%, and 27% of long, medium, and short distance respectively. Urban bus transport is in a worse situation as equity considerations are even more at stake for mass transit. The bus enterprise in Algiers, Etusa, has been charging the same flat rate since 1981 (DA 1 per line, equivalent to US cent 4 in 1993). It also relies indirectly on Government for acquisition of new buses. The strategy for bus transport should be to fully liberalize interurban services and breakup the ENTVs, through concession to private operators or selling off their buses to small private companies, and to establish the publicly owned urban bus companies as autonomous enterprises operating under contract-plans which would specify conditions of eligibility to subsidies in a restrictive way. ShipRing 2.29 Government maritime policy has long been to resort massively to national shipping lines for transport of Algerian imports and exports in order to save foreign exchange and elude risks of monopolistic pricing by foreign shipowner or conferences. Government support to rapid development of the national fleet has essentially consisted of "soft" loans in dinars to the operating company upon transfer of new ships, and easy access to working capital loans in years of financial losses. Indirect support came from the national commercial policy on the revenue side: by selling c & f and buying fob, the Government could influence the way shippers, especially local ones, selected their maritime transporter and maximize utilization of national shipping lines. Until 1987, the general cargo market was made captive to local lines by the practice of bilateral conventions signed between Algeria and its trade partners. The possibility offered to pay services in local currency was another strong incentive. Profitability of national shipping lines was not of main concern. For instance, Sonatrach would negotiate c.i.f LNG contracts with its foreign customers, overlooking transport aspects, and then ask Hyproc to assure transport below costs. This policy was quite successful in terms of market share gains, but undermined the financial status of local shipowner and their ability to modernize their fleet in a market which has grown much more competitive in recent years. 2.30 Pricing of shipping services depend on the market segment: (a) freight rates for transport of strategic products (main bulk exports, and imports of foodstuff and construction materials) are dictated by the world market; the Algerian fleet has lessened its involvement on this market, pulling out of petroleum transport after Sonatrach's decision to sell fob; Hyproc divested its tanker fleet; (b) on liner trade markets, dominated by the Algerian fleet, freight rates are fixed by the Government. They were frozen between 1975 and 1991 and contributed to aggravation of the financial situation of the maritime industry. Since October 1991, maritime transport prices are market based. Shippers are 25/30% of the fleet was out of service in 1990, and maybe more at present 26 now free to make their own transport arrangements. To survive, local ship owner must be more competitive. 2.31 Based on information contained in the NTS, it would appear that major cost recovery issues have three dimensions: National shipping companies lose money. CNAN is the largest company and the most financially imbalanced. It carries large debts which have yet to be sorted out; some may still relate to activities transferred to other local shipowner. The Government is expected to make a decision on a financial restructuring plan and transformation of CNAN into an SPA ("Soci6t6 par Action"), the statute now common to most former parastatals. The NTS made a detailed review of the 1989 financial statements, and figured that capital costs had been grossly underestimated. The calculations are summarized in table 6, results showing a DA 579 million real deficit. Table 6: Estimates of CNAN's financial performance in 1989 (in DA million) type of operation cost estimates operating revenues deficit calculated - owned ships 1819.0 1344.8 484.2 - chartered ships: 1402.8 1307.8 95.0 total: 3221.8 2642.6 579.2 2.32 Operations with its own ships is where CNAN incurs most of its deficit. Among the 5 branches, the one operating the lines across the Mediterranean sea, mainly with Ro-Ro ships was the least profitable and accounted for 41% of the calculated deficit. The deficit of the other 4 branches were within DA 75-100 million. Hyproc officially lost DA 189 million in 1989, nearly 20% of total revenues. The LNG carriers were the main source of deficit. Again, extended ship downtime was the main factor. ENTMV posted a small loss of DA 11 million in 1989, or about 3% of its revenues. But the car ferries were old (about 22 years), and related capital costs charged to income were small. Renewing the fleet would have generated additional capital charges of nearly DA 200 million, meaning that the current level of tariff does not allow to cover much more than half of the costs of running a modem fleet. 2.33 Operations are not cost efficient. The paradox is that national shipping lines have become more costly to operate than foreign lines, whereas the Government developed it with the goal of securing cheaper transport. For liner trades, international market rates in 1991 were reported to low to cover CNAN's costs, and the same was verified for dry bulk cargo. Before it was restructured in 1987, CNAN managed to contain progression of liner freight rates to 3% annually for 15 years, while letting its own costs grow at 5% at the same time. Whereas competitors were able to cut their costs through innovation allowed by more flexible management, CNAN evolved little and cumulated managerial and technological inefficiencies. The main problem of cost recovery for shipping is not that tariffs are too low but that costs are too high. Ship crews are too large by international standards; administration is oversized and overheads represent a fourth of total costs. The fleet should be modernized: ships are aging (about 16 years on average) and less competitive (older ships consume more fuel and require larger crews). The conventional fleet operated by CNAN covers less than two 27 third of its costs. There are too few round trips a year because vessels are not adapted to traffic and spend too much time in repairs'; 2.34 Trade patterns are constraining. Traffic is imbalanced and the Algerian market share of liner trade is overexpanded; multilateral operations of foreign lines open opportunities of higher utilization of ships capacity, whereas the Algerian fleet basically operates on the Algerian trade and bears the full consequences of overcapacity on one leg of the voyage; foreign shipowner should have a greater role in maritime transport of Algerian trades. 2.35 Recommendations. National shipowner should compete on equal terms with foreign shipowner and achieve financial viability. Financial management must be strengthened, especially costing of services. Subsidization by Government, either directly or through financial restructuring should be avoided. No turnaround of the ailing local maritime industry will be achieved unless it is scaled down and its operations refocused on more profitable segments. CNAN and HYPROC should be transformed as stock companies and eventually opened to private participation. Air Transport 2.36 Air Algeria is not profitable. The deficit has been growing from DA 99 million to some DA 235 million in 1989, the last year for which statistics are available. Productivity is low and high labor and maintenance are costs (about 40% of total operating costs) play a significant part in the company's financial performance, further weakened by inadequate pricing. Main losses are incurred on domestic routes where fares are regulated by Government and flawed on two counts: (a) rates are calculated as a function of distances travelled within three geographical categories (north, high-plateaux, south) whereas 50-75% of costs are fixed; (b) the Government has a policy of cheap transport in favor of southern populations through cross-subsidization of services. The situation on international routes is better, although deteriorating lately. Fares are negotiated within upper and lower limits set by IATA and the Government strategy was to minimize increases for travels to Algeria to minimize balance of payments outflows and to allow nationals to pay for international tickets in dinars at favorable rates. This strategy did not work and Air Algeria bears the burden of collecting 25-30% of its revenues in foreign currencies which makes up for 40-50% of its costs. The rapid devaluation of the Algerian dinar broadens the gap. The NTS calculated that the Fokker 27 only earned between 27 and 56% of their costs on services to and from southern regions. The cost recovery ratio is less unfavorable for other planes, as shown in table 7. Table 7: Cost recovery ratios for domestic air transport by plane category sector Fokker 27 Boeing 737 Boeing 727 Airbus 310-200 North 0.56 0.96 1.06 1.00 Hauts Plateaux 0.42 0.73 0.81 0.76 South 0.27 0.47 0.53 0.50 26/ships operated by CNAN on the mediterranean lines are idle for 4 months per year according to the NTS. The grain carriers makes and average of 4 round trips annually when 10 would considered normal .28 III. THE INCENTIVES FRAMEWORK FOR TRANSPORT SUPPLY A. Status of Transport Deregulation 3.01 The Government policy recently took a sharp turn from past policies. Transport services used to be provided by a small number of public monopolies in post independence Algeria under tight control by overseeing ministries. The dwarfed private sector was "tolerated" and mostly confined to local distribution functions. Sweeping policy changes have taken place after 1987 and the Government's claim that the transport market has been fully deregulated, at least for freight, is supported by recent legislation: (a) the practice of administrative allocation of maritime freight between transporters was abandoned after 1986; (b) Decree 87-42 of February 1987 extended to private transporters the conditions to operate for-hire freight services applicable to Wilaya parastatals, and abrogated licensing of truck operations for own account transport with trucks above 10-tons capacity; (c) Law 88-01 of January 1988 created a new policy framework which granted more autonomy to parastatals under revised statutes; they were to be transformed into stock companies (SPA or "Soci6t6s par Actions") jointly owned initially by public Participation Funds; the state monopolies were abolished; (d) Executive order dated June 1, 1991 authorized public transport by own account transporters on the empty legs of their hauls; (e) Decree 91-401 of October 1991 introduced pricing freedom for freight transport; (f) Decree ?... of ...?. 1992 stated the right of foreign shipping agents and forwarding companies to do business in Algeria; (g) Executive order dated ?? 1993 removed all remaining restrictions on access to the trucking market; (h) Legislative Decree dated ?? introducing a new investment code. It tax includes incentives to foreign investments in existing enterprises and in new business ventures and facilitate the approval process of projects by creating Agency reporting directly to the Prime Minister to act as a "one -stop-shop" for assisting potential investors with delegated authority from various administrations involved. 3.02 This complex and intensive legislative effort is still in progress. Structures built through 25 years of socialist regime do not easily change. The institutional framework was designed to fit a centrally planned economy, and creating a competitive market will take time as internal contradictions between new laws and former detailed regulations may not be immediately perceived. A common pitfall of bold reforms comes from lags between their initiation by political leaders and implementation by the public administration. The dominant culture of the Algerian administration is still of uneasiness about private sector development which cannot but slow down the pace of reforms'. An example of contradictions and legal complexities accompanying liberalization of the transport market is offered by Participation Funds designed to provide parastatals with strategic governance as boards normally do for private enterprises. These "boards", however, comprised civil servants unfamiliar with market issues and lacking the basic incentive that comes with personal investment. They remained bureaucratic and failed to dynanize the commercial management of parastatals. They are to be replaced by corporate holdings which could eventually be opened to private participation, but privatization of public assets is not yet permitted and the Government is now working on amending the I/ many see the private sector as the refuge of unscrupulous individuals in search of fast profits and minding little about public interest and private entrepreneurs are "suspect " in the eyes of public administrators; there may be some truth behind those feelings but one wonders if the so-called illicit practices are not in reaction to extreme difficulties met by private entrepreneurs to survive in an economy dominated by the public sector; the unshakable tolerance of mediocre services by parastatals reveals a cultural bias. .29 law. The bankruptcy law constitutes another case: public enterprises are no more protected from bankruptcy, and their autonomy would normally exclude them from the benefit of Government aided financial restructuring, which is key to establishing a level playing field for private and public competitors; the Law however is so worded that the Government may step in to rescue any public enterprise when provision of "essential" public service appears jeopardized which drains the law of much of its innovative substance. The new investment code excludes "reserved activities" from the scope of foreign investments in Algeria which leaves much discretion to Government to keep protecting the public sector. Contradictions even exist within the Government policy: the administrative allocation of foreign exchange and heavy taxation of vehicle ownership constitute typical examples of barriers to entry and undermine parallel efforts to increase private sector participation in transport; technicalities linked to foreign exchange constraints have also delayed application of the decree legalizing foreign shipping agencies. B. Parastatals Dominance on the Transport Market Highways 3.03 Promotion of the private contracting industry is desirable to enhance competition and lower highway construction and maintenance costs. Private market outlets are constrained, first, when too much works are done by force-account. The situation in that regard has greatly improved in Algeria. Whereas force-account covered most road maintenance works before 1984, they are currently limited to routine and a small part of light periodic maintenance (surface treatment within the wilaya of Skikda). Out of DA 1.3 billion budgeted in 1993 for those works in relation to paved roads, only 41% was to be executed by force-account. For bridges and structures, more than 70% of the 1993 budget allocation is contracted out. There is scope however for further overall reduction of force-account capacity toward better utilization of resources 'while developing it in the south where few contractors are interested to work. The market dominance of parastatals constitutes the main obstacle. Contracts for road construction and major maintenance works are regularly awarded to a relatively small number of public contracting firms (9 for roads and 7 for bridges and structures which are overseen by ME, plus public enterprises of Wilayas and former municipal enterprises which have become autonomous) with limited excess capacity, technical expertise, and dynamism. These conditions are conducive to oligopolistic behavior and high costs. Direct contracting remains a common form of procurement for works financed under local budgets. When competitive bidding is used, imprecision and incompleteness of bidding documents plus, at times, an erroneous definition of technical specifications constitute as many obstacles to efficient functioning of the selection process and do not ensure that most advantageous bids will be retained Private contractors are confined to light periodic maintenance and get less than 10% of total road budgets. A small contract for road strengthening (12 ki) was awarded to EGTR Kadri in mid-1993, the first time a private firm would gain access to works of that nature. The ministry of equipment seems in favor of greater private sector participation and took initial steps toward that goal. The issuance in 1993 of guidelines on road strengthening and rehabilitation will disseminate knowledge and favor standardization of practices across the nation. Private contractors adhering to basic principles set forth in a "Plan qualit" will be offered increasing chances to win contracts. The increasing use of competitive bidding for light periodic works goes in the same direction. Maintaining the quality of contractors' performance however will require lifting 28/private contractors will be expected to ensure higher labor productivity and produce better quality work; productivity increases will allow to do more with the same budget which will buffer negative umpacts on employment 30 current constraints of bitumen and other supplies needed at the work site and improving payment procedures. 3.04 Recommendations. The strategy should focus on enhancing competition in the local contracting industry. Procurement of civil works must be streamlined, including preparation of standard documents and training of PW staff. The tender commission should limit its role to checking regularity in the application of procedures, and the practice of negotiating with the lowest evaluated bidder should be discontinued. Partial privatization of the contracting industry should be decided, encompassing all former Wilaya enterprises (the EPTPs) as well as regional ones (the EPTRs). The largest enterprises would remain temporarily in the public domain. Promotion of small private contractors is another important aspect of the proposed strategy which implies setting aside budget funds to provide them with sufficient and stable work opportunities. The VIth Project could include agreement at negotiations on: (i) an Action Plan to facilitate graduation of private contractors to more complex works; full implementation of the plan should be achieved within 3 years; (ii) gradual reduction to no more than 25% of recurrent maintenance budgets spent on force account with a focus on southern areas of the country; a first step would be to study a retrenchment strategy for own account including definition of arrangements under which the public works equipment could be made available by DTPs to small contractors on a hire or leasing basis, and on ways to reduce or redeploy the labor force of about 7,000 workers currently on the public payroll; the VIth Highway Project could provide financing and seek implementation of recommendations within two years. The feasibility of a lengthmen system for routine maintenance deserves special attention. Using labor intensive methods, they might reconcile cost effectiveness and employment protection. Railways 3.05 The Government policy sought to diversify sources of railway services but the railway "playing field" still excludes private participation. Infrafer was established in 1987 as an autonomous public enterprise to carry out track renewal. More recently, SNTF spun off specialized functions, creating wholly-owned subsidiaries which comprise: the engineering companies (for rolling stock, railway infrastructure, and telecommunications and signalling), the computer services, Infrarail which carries out routine and periodic track maintenance plus rehabilitation of buildings, Restaurail for catering, Express rail for railroading of small parcels, and a real estate promotion business looking into possible conversion of SNTF lands to non rail uses. The main local supplier of railway cars is Ferrovial, another parastatal. Some components of the rolling stock are manufactured in Algeria by other public enterprises (ENPC, ENCC, etc...). Management of the SNTF's subsidiaries is generally weak, and they don't have enough trained staff. Except for Infrarail, the subsidiaries operate at a fraction of their capacity and can saturate the market. Competition only exists between foreign firms for supplies of rolling stock not produced locally and for track renewal financed by international donors. Even then, the Government tends to protect the local industry and its insistence on awarding the track renewal contract for Annaba-Ramdane Djamel to Infrafer rather than to the lowest evaluated bidder is a recent example of tampering with competitive market mechanisms. 3.06 Recommendations. The railway sector should be opened to private investors and the subsidiaries should become fully independent from SNTF. It may not be feasible to pursue their outright privatization as private capital may not be forthcoming and some of these activities would be monopolistic anyway. Management contracts involving foreign firms might be a way to inject both technical expertise and commercial clouts in railway services. Joint ventures with foreign investors could be sought for development of new types of rolling stock. 31 Shipping 3.07 The local private sector is conspicuously absent from the shipping scene. The freight market is tightly controlled by shipping parastatals which only have foreign competitors. The large capital required to enter the market together with insufficient development of specialized banking services deter private investment in shipping. The same applies to shipyards and the policy has long been to maximize uses of Erenav, notwithstanding its bad performance. The national shipping industry must be maintained only to the extent that it provides competitive services to shippers. Employment is less than 6,000 at present, and downsizing it to a level consistent with new ship technologies and profitable operations should not be a major social problem. Typically, less than a fourth of maritime transport costs relate to wage bills. The gains obtainable from reduction of labor costs in conjunction with restructuring of the fleet are highly leveraged making it relatively easy to compensate laid-off staff. 3.08 Saving foreign exchange has been one of the reasons why Algeria wanted to build a national maritime industry. Despite many signs that it did not work that way, some are still favorably impressed by the argument. Opening the shipping market to foreign competitors is in progress, and no exception should be allowed. Any form of discrimination in favor of nationals must be eliminated. For instance, the berthing priority given to national flag ships is detrimental not only to foreign flag ships having to wait longer but also to port efficiency. The breakdown of state monopolies will gradually lead to a more atomistic transport demand. Introducing modern techniques of transport demand management and commercial savvy in the maritime industry will be easier if foreign firms are allowed to do business in Algeria not only in shipping ancillary services but also in freight forwarding and port based cargo handling. 3.09 Recommendations. National shippers have been authorized to make independent arrangement for transport and this policy should be continued'. The parastatals should develop revised business plans and reorganize their operations on a smaller scale. There should be no Government interference in the process and any financial restructuring that may follow should exclude infusion of capital under privileged conditions and subsidized terms. The argument that national shipping needs budget support to be able to compete with subsidized foreign shipping is easily refuted by pointing out that subsidization of foreign shipowners generally comes in compensation of public service constraints imposed on them, like buying more expensive ships in the country to support their ailing shipbuilding industry. In Algeria, the Government only needs to free the local shipping industry from all kind of constraints which it bears at present without compensations". Staff reductions should be sought and indemnities payable to laid-off workers may, as an exception, be covered by the Government budget. In order to clarify a complex set of issues that range from balance of payment support to foreign trade security and help sharpen policy changes, it is further recommended that a study on the future of national shipping be commissioned under the Vth Highway Project; the study would attempt a comprehensive measurement of the foreign exchange balance of maritime operations by the national industry; it would also estimate all indirect costs and inefficiency surcharges associated not only to national shipping lines, but also to local support services including shipyards. Best ways to facilitate 29/for instance, Sonatrach contracted oil maritime shipments on the international market leading Hyproc to divest its oil tanker fleet. The NTS reported that joint venture with foreign partners were under discussion for LNG transport. 30/ It implies in particular easier access to foreign exchange, improved port performance in Algeria, freedom to maintain and repair ships abroad if better conditions are found there, and increased freedom to hire and fire personnel. 32 inflows of foreign capital to renew the obsolete part of the fleet and technological transfers will be reviewed. Trucking 3.10 It would seem that competitive market conditions are largely met, at least for freight transport. There are no barriers to entry: shippers freely choose their transporters, and transport prices are market based. The reality is somewhat different though and conditions at present are still far from being conducive to a strong supply response from the private sector.The natural dominance of former state monopolies on their respective markets due to their sheer size remains a formidable obstacle to emergence of competitive markets. Large portions of the market are captive for reasons ranging from a habit of long established business relationships between parastatals to technical specifications that private transporters cannot meet because they do not have the right equipment. SNTR is the only transporter to have an organized commercial network which gives it an overwhelming advantage for gaining large contracts and has a "de facto" monopoly on freight forwarding. Its overall capacity and availability of specialized trucks makes it alone capable of handling transport needs of large parastatals and put it in a position to cream off the market. Some of its large customers are indeed complaining about monopolistic pricing by SNTR. The private sector did increase its freight market share in recent years but its operations are concentrated on short distance transport and are mostly of owner- operator's type. Own account transport also favors market disintegration and distorts optimal allocation of traffic among modes as verified for grain traffic by the NTS; simulations proved that more than 1 million tons were trucked when railroading would have been more economical. Finally, the subsidization of transport to the south which normally implies payment of compensations to the transporter calls for a very limited number of trucking companies for the system to remain manageable. In that sense, it constitutes an obstacle to development of a truly competitive trucking market. As long as the Algerian economy remains dominated by large parastatals in production and distribution, the market will remain largely captive to public transporters. But the ongoing adjustment of the national economy will eventually lead to a greater atomization of the transport demand, which will require development of transport intermediaries; these prospects should be integrated in the transport strategy. 3.11 Recommendations. The strategy should therefore be to favor development of medium size private trucking companies. The new Government policy to induce establishment of parastatal own- account fleets as subsidiaries entitled to carry out public transport goes in the right direction and should be pursued. The viable parastatals should divest part of their fleet to the extent needed to pay off their accumulated debt. Just like for shipping, the Government should abstain from providing financial support to trucking parastatals, directly or through financial restructuring other than market based. Those which are technically bankrupt should be liquidated. Their trucks could be auctioned off to the private sector which will find there opportunities to acquire large trucks and become more competitive. Tax incentives to their regrouping within cooperatives or consortia should be created. The example of Great Britain where a public road haulage corporation, National Freight, was privatized in the early eighties by selling it to the employees might provide useful insights on alternative ways to increase private sector involvement in transport. . SNTR should evolve as a 33 transport broker" in competition with others; developing this profession is a national priority. Subsidization of transport to the south must stop to enhance competition and facilitate growth of private transporters. Competition, by itself, will reduce transport costs and help the south. C. Residual Public Monopolies Distribution of Strategic Transport Input 3.12 Distribution of fuel and bitumen is entrusted to Naftal. Bitumen supplies to road work sites were frequently disrupted over the last 5 years, generating additional road costs of at least 10%. Naftal lacks commercial dynamism and failed to promote innovative and more cost-efficient formulas than those routinely adopted by PWs and contractors. The quality of bitumen produced locally by Naftec proved sometimes poor and a cause of faster deterioration of surface treatments. The Government is aware of these problems and has set up a working group which benefits from expert assistance financed under the Vth Highway Project. An Action Plan is to be prepared. Cross subsidization by Government of strategic products constitutes another hindrance to more competition in transport. In the case of Naftal, the obligation to deliver fuel in remote regions at the same selling price as in coastal areas would imply transporting for free or even at its cost without the benefit of a price structure providing for a complex system of compensations, some coming from tax and others from overcharging the nearest customers. Such a system has to be administered and, to be viable and controllable, requires vertical integration from storage to transport which may be why Naftal and other distributors of strategic products have developed a transport capacity of their own32. The provisional diagnosis is as follows: (i) administered prices do not create incentives to be cost efficient and find trade-offs between production and distribution since the system provides for compensation of each cost item anyway; the distribution of 40/50 bitumen from Skikda to near Arzew and of 80/100 bitumen from Arzew to near Skikda is an example of wastes generated by the system; (ii) the administered price system implies concentration of storage and distribution responsibilities; (iii) with concentration of distribution, transport requirements are large and so is the transport capacity needed which, in Algeria, can only be secured by doing own-account transport or contracting transport to SNTR; (iv) the lack of transparency opacity, a source of hidden profits, characterizes administered price systems; operating an own-account truck fleet aggravates it because cost accounting is rarely a source of reliable data. Tightening controls will be ineffective and, for these reasons, dismantling of administered price system and of distribution monopolies would seem a way to improve prospects of a larger private sector involvement in trucking and bring about competitive transport pricing. 3.13 Recommendations. The working group will produce an Action Plan the implementation of which should be part of the up-front conditionality of the VIth Highway Project. Naftal's monopoly is not the only problem. Introducing some element of competition by allowing direct imports of bitumen and creating some common user storage capacity at ports could bring relief to execution of road programs and create incentives to better performance by Naftal. 31/SNTR could play an important role in development of intermodal transport in Algeria; small shipments are the most frequent which hampers containerization; SNTR could develop a grouping function for less than container loads in addition to the traditional freight forwarding one. These functions should by no means be limited to SNTR. ONT in Morocco shows the loss in economic efficiency that goes with a state monopoly. 32/Nafal has been increasingly using SNTR in recent years more because 50% of its own truck fleet is out of order than to seek transport savings. Indirectly, this example shows that the need to have special trucks was not a compelling argument to develop an own account fleet. 34 Public Laboratories 3.14 There are 7 public laboratories in Algeria for controls and tests under road contracts. Autonomous and specialized by geographic area, they enjoy a de facto monopoly. Notwithstanding a shortage of qualified technicians, current staffing of 2,500 is well above needs given the current activity level and contribute to growing financial strains. The overall performance of local laboratories has raised concern throughout execution of Bank highway projects. A faulty organization and lack of competition contribute to (a) high costs (laboratories invoices are often very high in proportion of civil works contracts); (b) ineffective control; (c) slow execution of tests delaying works. There is no leadership in management and the sense of public service is waning. Poor quality of local laboratory services has been verified in many instances. Tests are not fully reliable, either from staff neglect or inadequate calibration of laboratory equipment. This is a most serious issue as loose controls generally lead to low quality of works, shorter durability, and lower than expected economic returns on road maintenance investments. The VIth Highway Project will have to tackle the issue. 3.15 Recommendations. The suggestion is to provide financing under the Vth Highway Project for a comprehensive study of public laboratories and recommendations should be part of the up-front conditionality of the VIth Highway Project. At this early stage, it would seem that the most urgent need is to develop competition by discontinuing the practice of sole-source contracting and freeing laboratory prices. After restructuring and appropriate staff retraining, the laboratories should get involved in quality control for execution of local infrastructure projects, such as construction and maintenance of municipal roads. Other solutions to problems could consist in encouraging some foreign laboratories to participate in large new road programs through packaging of contracts or indirectly through twinning arrangements with local laboratories. Improved management is probably key to achieving financial sustainability for most laboratories. The detailed legislation to give full meaning to the statute of stock companies given to laboratories is still missing, and should be passed to pave the way to private (local and foreign) participation in their capital which will bring much needed financial resources and technical expertise. A Central Public Laboratory (CPL) would be maintained. Concentrating the most expensive equipment, it would be intended to spearhead research and become a "center of excellence" where other commercial laboratories would be able to find technical support and training for their staff. CTTP currently exerts certain of the functions herein assigned to CPL, and would have therefore to shed them and re-focus its activities. Quarries 3.16 Concessions to operate quarries are given to public contractors to supplement the national public enterprise specialized in such activity. Materials used for road construction and maintenance are not supplied to work sites in the desired quality and quantity. Problems are aggravated today by local insecurity which imposes drastic restrictions in releasing of explosives by ONEX, a public agency for production and distribution of explosives. But issues are also deeply rooted in the existing organization. The public contractors are not well equipped and, by holding a monopoly on production of materials, they are in a position to discriminate against private contractors by giving a low priority to their orders which would thwart all other efforts to help them grow. Important benefits are at stake in streamlining quarry operations. The size and nature of crushed materials included in bituminous overlays is critical of their durability. In too many cases, faulty materials have led to premature deterioration of surface treatments which had to be repeated. Cost duplications should be avoided, and a strong private contracting industry will increase competition and lower prices. For these 35 reasons, it is recommended to separate quarry operations from the parastatals currently in charge and to proceed with their outright privatization. Port Enterprises 3.17 They constitute the best illustration of a closed market. Port enterprises have a monopoly on cargo handling, pilotage, towage, and ship mooring; that they handle it poorly is no surprise. The dock labor force is on the regular port payroll, except for some specialized traffic where gangs are provided by the industrial importers and exporters. Port productivity is mediocre largely because of low work intensity and lack of incentives to productivity. Working hours standardly allow for operations from 7 a.m. to 7 p.m. in two shifts. Work over the week-end and at night is exceptional. Tolerance of restrictive port labor practices and protection of port employment may be one reason why the Government policy did not make place in the planned investment programs for development of containerization in Algerian ports until recently. Now that this technological change is in progress, a drastic adjustment of the port operation policy is an essential condition to reap expected benefits from investments. 3.18 Recommendations. Cargo handling should be transferred to separate entities. The port enterprises should be able to control operations, and the solution of concession to a private operator, which has had many successful applications throughout the world, is designed to allow for such control and still boost productivity. The concession holder should be totally free to hire and fire staff. It is important to add that no solution is optimal for all ports. The concession is more likely to produce good results in the four largest ports. Concession should not be limited to cargo handling: all port services fit well the mold. Management contracts could be added for facilitating technological transfer which is mostly relevant to container operations. Air Transport 3.19 Domestic air transport remains a monopoly, a situation which by itself is not uncommon. The configuration of the national and international networks, however, operated single-handedly by Air Algeria constitutes a handicap which will increase as competing foreign airlines, particularly in Europe, tend to integrate their businesses through agreements and mergers. The national airline is at risk to be marginalized by lack of competitiveness unless it diversifies and increases frequency and quality of its services, which it cannot do by relying on its own forces. Two main avenues should be explored: (a) seeking renegotiation of bilateral agreements with european countries that would allow Algeria to increase its fifth freedom rights; (b) develop cooperation with other Maghrebin airlines, from development of common maintenance facilities and commercial representation abroad to operations of joint services. In order to make these changes possible, it is recommended to abrogate the domestic monopoly of Air Algeria and free domestic tariffs from Government controls. D. Foreign Exchange is Rationed General aspects 3.20 Transport operations require equipment and spare parts which are not usually manufactured in Algeria. Contractors and transporters, private and public, must resort to imports and they need foreign exchange. Severe limitations placed by Government on access to foreign exchange is a major obstacle to efficient transport and a source of discrimination between public and private firms. Before 1990, 36 no enterprise in the transport was allowed to open a convertible account. The Government, through Banque d'Alg6rie, had full control on foreign exchange allocation which gave overwhelming privileges to the parastatals. Regulations were softened in October 1990, allowing enterprises in general to keep 10% of their foreign exchange earnings in convertible accounts. Conditions for utilization of these accounts have become more and more restrictive with deepening of the economic crisis and the transport sector is increasingly strangled by foreign exchange scarcity. Highways 3.21 Main constraints at present in highways come from exclusion of works financed under the current budget from foreign exchange distribution. Under the investment budget, only those contracts which are financed by foreign banks open the possibility to maintain a convertible account. As public contractors are the main ones having access to such contracts to date, there is a clear element of discrimination against the private sector which has limited chances to ever grow. Payment procedures have been another source of difficulties. Contractors awarded contracts under the Vth Highway Project were entitled to payment in convertible money in proportion to the disbursement rate applicable to their contracts. But the procedure which involved the ministry of public works, the Treasury, BAD, and Banque d'Alg6rie proved cumbersome and unduly long. The local cost was paid by the Treasury, whereas the foreign cost was eventually converted in foreign currency months if not years after submission of invoices by contractors and at rates which, given the extreme volatility of the Algerian dinar, drastically reduced the foreign exchange allocation. The alternative system of "d6budg6tisation" gives BAD full control over payments both for foreign and local costs. 3.22 Recommendations. Pending awaited liberalization of the exchange regime, local contractors should be authorized to keep 10% of their earnings in a convertible account, irrespective of the supporting budget and untied to foreign financing of contracts. Future Bank projects should be "d6budg6tis6". An alternative would be to transfer all road maintenance works other than routine maintenance to the investment budget". Other Transports 3.23 Other transport related activities remain very constrained by foreign exchange scarcity. The current policy rations allocation of foreign exchange restricting it to imports considered essential by the bureaucracy as per "Instruction 625". Beneficiaries are mostly public firms. Imports valued at $ 100,000 or more have to be approved by an Ad Hoc Interministerial Committee. The private importers are allowed to import "non essential" goods as long as they manage to pay for them through informal channels. The Government policy authorizes "imports without payment" which basically relies on informal supply of foreign currencies by migrant workers. Ten to twenty percent of imports are believed to come through that channel. The parallel exchange rate is more than double that of the official market, which cannot but penalize the private sector. The parallel exchange market is "illegal" and transactions are encumbered by discretionary controls. Broadly speaking, the parastatals obtain foreign currencies at the official and subsidized rate and the private sector at much higher rates and cannot compete on equal terms. This distortion is partly alleviated by the parastatals being strictly rationed and not getting foreign exchange in the amount and when needed. In any case, that gives a very unhealthy market place. For one thing, private sector's operations are bound to stay small scaled 33/Foreign exchange constraints for routine maintenance are not as serious. These works have a much higher labor content. 37 and unable to countervail the influence of public enterprises in the foreseeable future. Another aspect is that changing relations between foreign and local prices tend to reduce the purchasing power of the convertible account deposits held by transport operators. For instance, the price of needed imports often exceed the allowance of private truckers, then obliged to seek special authorization by the Ad Hoc Interministerial Committee that may not be given. The very large costs of foreign exchange rationing are rarely perceived as their effects are diluted and deferred. 3.24 Recommendations. Legalization of the parallel exchange rate, as planned by the Authorities, would increase the foreign exchange channelled through it and, together with a needed devaluation, would work toward exchange rate unification and enhance chances of fair competition between private and public transport operators. To sensitize the Authorities to the dimension of problems faced in the sector, it is recommended to conduct a study to reassess the import requirements of main transport activities in the light of changing relations between local and foreign prices and of a reduced local capacity of import substitution. The needs of transporters only active on the national market should be part of the assessment, and they should also be given rights to maintain accounts in convertible currencies. E. Shortage of Transport Equipment and Spare Parts 3.25 Replacement and modernization of the transport fleet has been very limited. The problem of aging fleets is now compounded by spare part shortages. Parallel markets thrive, but their supplies are limited, very costly (up to 100% above official prices) and not accessible to structured enterprises which need invoices for their accounting. There are trucks laid off simply because tires cannot be replaced! Local manufacturing of transport equipment is limited to SNVI, another parastatal, which used to deliver 25,000 vehicles per year from buses to trucks, reduced its output to less than 5,000 due to difficulties to import components plus management deficiencies". Truck imports have considerably decreased since 1988 as shown by table 8. This is especially true of imports by private transporters bound to buy second hand trucks locally. Table 8. Evolution of Imports of Freight Vehicles between 1988 and 1992 import status 1988 1989 1990 1991 1992 -"without payments 1800 1554 449 149 51 - commercial 421 3837 7020 6626 980 total 2221 5391 7469 6775 1031 Local truck and bus manufacturing and distribution cannot assure regular renewal of the national truck fleet of 110,000 vehicles of 2-tons capacity or more plus the 30,000 buses. The possibility to pay for SNVI vehicles in Algerian dinar is of considerable appeal which produces long waiting lists. It now takes at least two years for a private operator to get delivery by SNVI of vehicles ordered. It is likely that public customers get preferred treatment which further discriminates against the private sector. Foreign sources of transport equipment have to compensate for local shortages. Because of weak finance and inaccessibility of foreign exchange, private transporters tend to purchase second hand vehicles either locally or through parallel market transactions. Import of used vehicles was forbidden until 1989 when the Government realized that there was no other way to prevent extinction 34/SNVI imports 90% of components and parts needed by its production. -38 of the transport fleet. The current authorization to import is limited to trucks of less than 5 years and to buses of less than 8 years. The parastatals are in no better position for other reasons3s: SNTR purchased 114 trucks over 1989-91, which was less than those scrapped. This issue is of great strategic importance: the market overcapacity is a temporary phenomenon. Transport capacity will decrease as the fleet gets older; in contrast, the economic recovery expected to materialize within two years will boost transport demand, especially for freight. Unless something is done to facilitate renewal of the vehicle fleet, great tensions will likely appear between transport demand and supply resulting in physical bottlenecks and price hikes, which might eventually slow down the recovery. 3.26 Managerial freedom, essential to innovation, implies the possibility to choose the right equipment. This condition is not always met in Algeria. Financial and other constraints greatly limit the choices left to private truckers. The NTS showed them operating small trucks (between 3 and 5 tons, compared to 16-tons for SNTR and 12 tons for own-account transport of parastatals). Under normal conditions, economies of scale in trucking are quite substantial: the cost per capacity ton is reduced by more than half by switching from 5-ton to a 20-ton truck. Private truckers cannot be truly competitive with small trucks. The parastatals themselves face a number of constraints. The NTS reports that OAIC wanted to purchase semitrailers but was eventually forced to buy 900 trucks of only 10-tons capacity which doubled grain transport costs. For railways, the locomotives purchased in the former East Germany have been performing poorly. 3.27 Recommendations. Conditions for timely renewal of the transport fleet and regular supply of vehicle spare parts should be created. The VIth Highway Project could bring temporary relief to the burden bearing on the transport profession by financing imports of vehicle and spare parts but assurances should be given that conditions stated in paragraph V above will be met within two years. F. Other Obstacles to Private Sector Development in Transport The Banking Sector is Public Sector Oriented 3.28 Transport is a capital intensive industry which requires good banking services. This does not exist in Algeria and the private sector is the one suffering most. Banks are bureaucratic and accustomed to deal with public enterprises assigned to them (for instance, SNTF and Air Alg6rie are domiciliated at Banque Nationale d'Alg6rie, SNTR at Caisse Populaire d'Alg6rie). The lending policy used to be guided by political considerations until recently. Private entrepreneurs in general and private transporters in particular complain that they have difficulty obtaining credit. High interest rates (20% in 1993) constitute another obstacle to credit financing of transport equipment. Small transporters have no banking facilities at all. 3.29 Recommendations. Specialized credit should be developed based on the specific financial requirements of transporters with a double focus: (a) facilitate investments of private operators; (b) facilitate creation of private firms and/or labor buy outs of parastatals for which there is no realistic prospect of successful turnaround. The contracting industry, trucking, and ancillary railroad services are where the new form of credits should apply first. 35/their financial condition is weak and they have problems borrowing . 39 Heavier Taxation of Private Operators 3.30 Taxation of transport vehicles and spare parts is high, adding up some 70% to the C & F value. Most of the taxation is on ownership. A healthier system would be to tax operations. Not only would it establish a more desirable link between variable costs of using roads and the amount of tax paid, but it would also stabilize transport prices and produce healthier competition. The higher the proportion of start-up costs, the greater the risk of "price wars" competition where transporters are satisfied by prices covering variable costs. Because private truckers have a small market share and their trucks travel fewer kilometers per year than SNTR's, the tax concentration on ownership puts them at a clear disadvantage. 3.31 Tax discrimination between private and public operators is said to exist no more. Small truckers, however, are generally paying lump sum taxes based on an assessment by the fiscal administration of their likely earnings. They complain that these assessments are not realistic6, which is probably true in the depressed trucking market of Algeria. Other indirect forms of tax discrimination exist such as higher import taxes of small trucks which are predominantly used by the private sector. Private truckers importing second hand vehicles also complain about customs assessing the c.i.f. values at arbitrarily high level. 3.32 An example of more direct tax discrimination is offered by SNVI: customs duties it pays on imported spare parts are reduced from 40% to 15%. No private distribution network can develop unless this privilege is cancelled. 3.33 Recommendations. Explicit and hidden forms of tax privileges that parastatals may still enjoy must be repealed. This implies a thorough analysis of options available to private operators regarding investments and operations. When, for reasons of imperfect functioning of the market or other macro- economic constraints that are transitory in nature, the private sector has only limited options left, taxation should be devised so as to avoid adding to its burden. The objective of creating a level playing field between private and public operators must be given priority over other objectives, which may be quite legitimate under more normal circumstances, until after the private sector has reached full competitiveness. G. Serious Road Safety Issues must be Addressed 3.34 Road are unsafe in Algeria. From 1985 to 1989, the number of killed and wounded persons per year averaged 4,000 and 40,000 respectively. When related to the vehicle fleet, the casualties are at 473 per 100,000 vehicles, which is about 20 times the average in industrial countries and 1.5 times the Moroccan ratio. The problem is most acute for the intercity traffic where the fatality rate is twice as high as for urban traffic. Economic costs associated to road accidents are estimated at about US$ 0.5 billion per year. There is a significant involvement of trucks in road accidents. From 1986 to 1990, SNTR trucks incurred a total of 3,766 accidents, 1,855 of which (close to 50%) were caused by the truck driver. SNTR's accidents represent 3% of total accidents registered in Algeria at the time, a high rate knowing that SNTR fleet is only 0.3% of the national vehicle fleet. 6/the fiscal administration assumes a minimum turnover of DA 300,000 per year for a 20-ton truck and a benefit of 40% of that amount. On both counts, the estimate seems on the high side. The trucker would have to "sell* about 300,000 tkms and travel close to 50,000 km. This is unlikely under current conditions. 40 3.35 To date, Algeria is ill-equipped to tackle the road safety issue effectively. Weaknesses are found at four levels: (i) Organization: road safety issues are complex and its many aspects fall under the responsibility of a variety of Government bodies: the ministry of Transport for regulations which are enforced by the Ministry of Interior (Police) and the Ministry of Defense ("Gendarmerie"), the ministry of equipment for road standards and design, the Ministry of Public Health which overseas emergency care systems, the Ministry of Education which sensitizes the youth at school to road hazards. Under such conditions, the definition and implementation of road safety measures critically hinges on good coordination. The current organization is based on Law 87-09 of February 10, 1987 which provides for creation of a Centre National de S6curit6 Routi6re to ensure coordination. No detailed legislation followed however, and the Centre remains a project. In the interim, the "Sous- Direction de Circulation Routi6re" at the Ministry of Transport handles road safety matters with too limited means though to be effective. Decentralization of the Algerian administration creates further coordination difficulties between central and local institutions. (ii) Incentives: road safety principles set forth in the Law are not always enforced: speed limits are difficult to control because patrols are too few and do not have radars; fines are limited deterrents given the loose controls on their payment; the vehicle inspection is not applicable to light vehicles; leniency on maintaining vehicle standards is dictated anyway by the short supply of auto parts induced by foreign exchange restrictions; the nationalized insurance company charge indiscriminately the good and bad drivers. (iii) Information systems: the road safety data base is poor in quality and quantity. Better information on accident characteristics is a prerequisite to efficient action. The cost of accidents remains imperfectly measured and probably underestimated: greater accuracy in measuring the social cost of accidents will give strength to national media campaigns for improved road safety. The Police and Highway patrols are currently responsible for reporting on accidents within and outside town limits respectively. Data collection and processing is manual which drastically limits the scope for detailed analysis of accident causes. A first attempt to introduce a computerized system was made in 1990 under technical assistance from France, but it failed. Lessons learnt from that experience are: (i) the police and highway patrols should be involved at design stage so that they "own" the computerized system and feel compelled to make it work; (ii) the computerized model was flawed in that it provided for three different data bases with limited possibilities to combine criteria; the location of accidents was not precisely defined and coded, which much constrained identification of "black spots". (iv) Drivers training: no special training is organized for truck and bus drivers; the standard programs of driving schools are inadequate, and their delivery is mediocre. 3.36 Recommendations. The Bank VIth Highway Project should focus on two series of actions: (i) help set-up the Centre National de S6curit6 Routi6re, and develop good coordination mechanisms; (ii) design and implement a road safety data base which eventually will facilitate identification of "black spots" and design of works to mitigate the problems. It includes: - developing a micro-computer accident analysis package7; - developing a code to locate accidents based on a review of detailed local maps; - creating three computerized road safety centers, one for data collection and processing by the police, one for data collection and processing by the highway patrols, and one under the Ministry of Transport for consolidation of data, analysis, and technical studies of accident causes and remedial measures; - extended coverage of vehicle inspection rules; 37/such system has been developed by the British TRRL and could be adapted to Algerian needs 41 - training of driving school instructors and of driving tests inspectors; - introduction of point systems in driver licensing; and: - periodic revalidation of driver licenses, including eye-sight testing. Annex Page 1 of 16 DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA TRANSPORT STRATEGY NOTE BACKGROUND INFORMATION ON THE TRANSPORT SECTOR38 A. Macroeconomic framework 1.01 Algeria is a vast country of 2.4 million sq.km with over 1,000 km of coastline on the Mediterranean sea. It includes three contrasted zones: (a) the northern coastal strip extending over some 4% of the national territory where 70% of a fast growing population of 27 million lives; agriculture and industrial production are concentrated in this area, owing to its relatively good endowment in water resources and arable land; (b) a mid-portion starting some 150km from the coast known as the High Plateau region (7% of lands and 22% of the population); it has a low urbanization rate, few industrial activities, and agriculture is severely constrained by land erosion and adverse climatic conditions; (c) the South consisting of oases scattered in sand and stone deserts (89% of lands and 8% of the population), but where important mining resources (crude oil, gas, ores) are concentrated. Local geography makes transport a key condition to local economic development and competitiveness of Algeria's exports. 1.02 The transport sector has been operating through severe economic recession in late years. Falling petroleum product prices after 1986 dried out foreign exchange earnings and combined with structural defects of the economic framework to trigger an economic crisis. After growing at 4.5% in real terms over 1980-1985, GDP steadily declined until 1989 when limited growth resumed, primarily fueled by agriculture and a moderate recovery of oil prices. Overall, real GDP growth averaged 0.5 % p.a. over 1985-1992. Investments fell sharply from about 35% of GDP in 1985 to less than 28% in 1993. The number of unemployed workers more than tripled from 1985 to 199131. The public sector which used to be a major outlet for new job seekers was jolted by the financial collapse of many parastatals; costly restructuring plans often included downsizing of bloated labor forces. The 1993 investment budget set aside DA 83.5 billion for restructuring credits out of a total of DA 200 billion, showing the gravity of the situation. Inflation developed rapidly in the wake of the Algerian Dinar's successive devaluations with great impacts on financial stability of transport. Table 1 gives the evolution of consumer prices and of the parity of the Algerian dinar with the US dollar over 1987- 1992. 38/This annex is essentially based on information contained in the National Transport Study, plus additional and more recent data collected by Bank missions. /The number of unemployed workers was close to 1.2 million in 1990. according to official statistics; the youth was primarily affected. Annex Page 2 of 16 Table 1: Dinar depreciation and local inflation: 1987-92 1987 1988 1989 1990 1991 1992 average exchange rate (DA/US$1): 4.85 5.92 7.61 8.96 18.47 21.84 consumer price index (100:1985) 120.7 127.9 139.8 163.0 200 265 1.03 The ongoing monetary turmoil follows a long period of relative stability and create an unstable economic environment which calls for new management skills that few have. The Government undertook to reform the economic system, trying to move socialist Algeria toward a market economy with limited results to date. The stated objective is to promote the private sector and make it compete with the parastatals on an equal footing. But the incentive framework remains ineffective because of deep rooted distortions, among which the still overvalued exchange rate" associated to burdensome administration of foreign exchange reserves' and external credit and price subsidization bear the most adverse consequences. So far, the Government has committed to honor Algeria's foreign debt servicing without rescheduling which imposes drastic restrictions on use of foreign currencies. The economic crisis is compounded by political unrest and social discontent. The Government has been pressured into altering the course of economic structural reforms, and a new economic program was introduced in September 1992 to address the most acute social problems while imposing austerity measures restricting market freedom. The transport sector cannot perform well under such an adverse macro-economic context which rations needed input (vehicle and spare parts) and provides private operators with too limited opportunities to grow and compete successfully against still protected public ones. The past policies in favor of concentration of production and distribution in the public sector created a spiral of inefficiency. Unreliable services on the market place induced their substitution in- house that is well exemplified by the inordinate development of own account transport. This, in turn, led to low utilization of trucks and economic wastes. The Government has endeavored to straighten these issues in late years, but not much can be achieved without also repealing sniffling regulations on credit and foreign transactions. 1.04 The relative priority given to transport appears low and on the decline. Sector's investments over 1987-1991 were about 6% of total planned investments compared to above 8% over 1982-1986. Aging of the capital stock and outdating of technologies is ingrained in such trend, and quite visible in Algeria. Excessive concentration of scarce investment resources was an aggravating factor. Transport programs were generally skewed in favor of sizeable new construction in support of industrial development and access to remote areas and improving conditions of existing traffic was given relatively less importance. Long term indirect benefits were usually targeted at the expense of more immediate and direct benefits and, to that extent, it could safely be said that the transport sector did not make a significant contribution to growth over 1987-1992 although transport inefficiencies could hardly be singled out as a major cause of poor economic performance. Regional development goals conflicted heavily with efficient transport. Driven by equity considerations and the specter of growing costs of urban congestion and pollution along the coast, the Government developed a dogmatic vision of a more balanced distribution of economic activities, which translated into a 1987 Law designed to 42/the Algerian Dinar is currently exchanged on the black market at 1/4-1/3 of its official value. 41/ The Government has committed to honor Algeria's foreign debt servicing without rescheduling, which entails restrictions on access to foreign currencies. Annex Page 3 of 16 coordinate efforts to prepare and implement a National Land Development Master Plan ("Schema National d'Am6nagement du Territoire"). The Haut Plateau Region was selected as the area where future industrial growth take place. Infrastructure development, seen as a key condition for successful implementation of the plan, was then set in motion at high costs. B. Infrastructure Highways 1.05 The transport infrastructure is well developed with a 95,500 km-long highway network and 2,700 bridges and structures. The classified network comprises 3 categories of roads. The paved road network is about 62,500 km long or two-third of total which is high by regional standards'. Municipal roads represent nearly half of the road network. Expressways (2 or 3 lanes each way) were the latest addition to the network, totalling 210 km at present along the northern east-west corridor and nearby main cities. Detailed engineering is under preparation for another 200 km of expressways. Table 2 gives details on the composition of the Algerian network in 1992. Table 2. Structure of the Algerian highway network in 1992 (in km) classification paved unpaved total Expressways 210 0.3% 210 0.2% National roads (RN) 22345 35.8% 3624 11.0% 25969 27.2% Wilaya roads (CW) 18846 30.2% 3286 9.9% 22132 23.2% Municipal roads (CC) 21049 33.7% 26144 79.1% 47193 49.4 * total 62450 100% 33054 100% 95504 100% 1.06 Most unpaved roads belong to the municipal network and nearly all of those of the national network are found in southern regions, with average daily traffic below 50 vehicles. The economic importance of roads is uneven, as is traffic intensity. A "R6seau principal" has been defined by CTTP11, consisting of about 16,700 km of paved roads inter-connecting major towns and ports, all but 62 km belonging to the RN network with average daily traffic in excess of 2,000 vehicles. Of this total, some 5,000 km constitute the basic economic network which includes roads with average daily traffic above 3,500 across in northern areas where two third of economic activities are concentrated. About half of paved roads are 7-m wide or above (against 10% in Morocco). More recently, the National Transport Study identified a priority network which is a bit larger (22,500 km). Maintenance efforts should be concentrated on it. 1.07 Existing statistics show a rapid expansion of the paved roads network from 48,062 km in 1987 to 62,450 km in 1992 (+30%), much of which comes from classification or reclassification of municipal roads. Construction of new paved roads (RN and CW) was limited to about 1,000 km over 42/In Morocco, only half of roads are paved. LOrganisrne National de Contr6le Technique des Travaux Publics, an autonomous public agency for road design and supervision of works. Annex Page 4 of 16 six years, less than the annual addition to the municipal network estimated between 1,500 and 2,000 km . Yearly investments also included an average of 50 kn of track construction and about 400 km of RN and CW roads upgrading each year through 1992. Altogether, the focus of road programs other than maintenance tends to have shifted away from the national network. Decentralization of road management decisions on the Wilaya and Municipal networks boosted demand for road construction as part of a systematic effort to integrate remote communities in the nation and also in response to pressures from local constituencies. Budget resources for improvement of the RN network were not as forthcoming which had a negative impact on traffic fluidity on the roads most important to the economy. Daily traffic on the trunk road Oran-Algiers-Constantine are above 10,000 vehicles in many spots, and driving speeds as well as safety conditions have receded. 1.08 The condition of the road network is mediocre as indicated in table 2, which also points to definite signs of deterioration since 1987. On average, 61 % of paved roads were in good to fair condition in 1992, compared to 75% in 1985 and 65% in 1980, a sign that maintenance efforts slackened again in late years. Unexpectedly, the Wilayas roads seem to have fared better than national roads: those in bad condition roads stayed at 24% of total against an increase to 32% for national roads. The condition of municipal roads, mostly found in rural areas, is by far the least satisfactory. Unpaved roads are in near neglect and interurban bus services have been discontinued in some instances because of poor road conditions. Table 3. Paved road condition. Evolution between 1987 and 1992 (in % of total) Classification 1987 1992 good fair bad good fair bad - national (RN) 49% 27% 24% 41% 27% 32% - wilaya (CW) 49% 27% 24% 42% 34% 24% - municipal(CC) 20% 20% 60% (sources:Etude Nationale des Transports. Volume H: Transports routiers. Table 3.3 Premier Congrbs National de ]a Route. Tome II. D6cembre 1992) 1.09 Road management has been decentralized except for routine and light periodic maintenance of RNs. The municipal networks are "owned" by municipalities which are responsible to program, fund, and execute their maintenance. The local public works (PW) branches of the Ministry of Equipment are frequently asked by municipalities for technical assistance but such services are not institutionalized and take place outside official line responsibilities. Routine and periodic maintenance of the CW roads is managed and financed by Wilayas which rely on local PWs for design, programming and supervision of works approved by them. Road investments and heavy maintenance (strengthening and rehabilitation) are financed by the central budget, but budget execution responsibilities are largely exerted by "Walis" who represent the Government in Wilayas; they have broad delegation from the Minister of Equipment to commit funds and order payments. The centrally managed portion of the Government road investment budget in 1993 is limited to major construction works and less than a third of total allocation. The Wilaya budget provide for additional funding, albeit limited, of road investments. Budgets in all cases are sourced by taxation. With anticipated 44/ this is an estimate of road construction under Plans Communaux de Dveloppement. More precise data will be requested from CNP. Annex Page 5 of 16 development of expressways exceeding foreseeable Government resources, tolling is now being considered. Ports 1.10 Nearly 100% of all Algerian imports and exports other than chemicals, oil and petroleum products are handled in 9 commercial ports which are by decreasing order of importance: - on the west coast: Oran, Mostaganem, Ghazaouet; - on the central coast: Algiers, Bejaia, and Tenes; and - on the eastern coast: Annaba, Skikda, and Jijel. 1.11 Hydrocarbons exports are concentrated in Arzew/Bethioua near Oran, Bejaia and Skikda. Dry cargo movements are concentrated on Oran, Algiers, Bejaia, and Annaba ( % of traffic in 1992). A new port was built at Djendjen in the vicinity of the small port of Jijel, east of Bejaia. Djendjen infrastructure is completed and includes berths at minus 18m which are not in service though because they are not yet equipped. Annaba serves primarily the local fertilizer and steel industries, and can accommodate 16-m draft vessels. Other major ports have berths limited to 8 to 12-m draft ships. Port infrastructure is generally constrained by lack of storage space; rapid urban growth nearby limit possibilities of landward expansion and in and out traffic is congested. 1.12 Port inbound and outbound traffic in 1989 was 18 and 62 million tons (mt) respectively. Outbound traffic was constituted mostly of hydrocarbons (60 mt of oil and LNG) and fertilizers (1 mt). Grain was the largest single import (about 5 mt). General cargo (excluding dry and liquid bulk) totalled some 10 million tons, two third of which was concentrated in Algiers, Oran, and Annaba. Trade with Europe sustains the essential of the general cargo port activity, but the 20-25% of cargo tonnage to and from other continents is not negligible and creates a specific demand for deeper port access as large ships generate economies of scale on long routes. Port layouts are mostly traditional and not conducive to efficient cargo handling. Poor coordination with truckers makes direct delivery of goods from ship holds to bonded warehouses especially slow. Cumbersome customs and administrative procedures contribute to the slow turnaround of goods in storage: imported containers stay an average of 21 days in Algerian ports instead of a few hours in efficient world ports. Technological changes in shipping moved at a slow pace; no more than 10% of about 5 int of containerizable cargo in 1989 came in containers and, since Roll on-Roll-off accounted for less than 15% of general cargo operations, conventional lift on-lift off techniques applied to 75% of them. Average productivity of general cargo handling stays around 500 tons per ship day at berth, which is low. Port capacity is less of a constraint: the ENT estimated that existing berths could accommodate up to 14 mt under current conditions, or 40% above current traffic. Port modernization is therefore more needed than port expansion. Annex Page 6 of 16 Railroads 1.13 Started in 1860. the current network comprises 3,100 and 1,200 km of standard gauge and narrow gauge tracks respectively'. There are 200 railway stations and 3,000 level crossings. The main lines are: - the principal line ("Rocade Nord"): 1028 lan stretching from Annaba to Oran; about 270 km of the line are double tracks between Ramdane Djamel and El Gourzi, Thenia- El Affroun, Oued Fodda-Oued Sly, and Oued Tlelat-Oran. Track doubling is in progress over a total of 282 km; it has ample reserve capacity and two bottlenecks on the Bouira-Thenia and El Affroun-Khmis Miliana sections; track doubling investments would be costly and, according to the NTS, could be deferred to year 2,010 by operational improvements; - the ore line is 400 km long; the 244 km portion between Annaba and Tebessa and spur lines to iron ore deposits totalling about 300 km are electrified. The track is doubled on 10 km to the south of El Hadjar where the steel-mills are located. The line carries iron ore to El Hadjar and phosphate from Djebel Onk to Annaba. Catenaries have deteriorated beyond repair over about half of the line forcing locomotives to switch power which is time consuming. The Government favors full rehabilitation of the electric line; - the Relizane-Tiaret-Mahdia narrow gauge line (166 1m): the section from Tiaret to Mahdia has been closed, and remaining sections are in bad condition; traffic is limited to 1 freight train per day; - the Mohammedia-Bechar narrow gauge line (660 km): occasionally disrupted by floodings and sand storms, the line is reasonably active but still costly to operate due to steep ramps between Mohammedia and Saida; - the narrow gauge Blida-Djelfa line (278 km): the collapse of a tunnel in 1988 forced the interruption of services; rehabilitation is in progress, and about 30 Ian of the line have to be converted to standard gauge tracks; - the most recent standard gauge line is Ramdane Djamel-Jijel; 157 km long, the line was built to serve the port of Djendjen. At present, traffic is limited to one passenger service per day. 1.14 With the exception of narrow gauge lines, tracks, bridges and tunnels are in satisfactory condition. Maintenance works are of good quality. In contrast, telecommunication systems are largely obsolete and contribute to slow down traffic and restrain track capacity. 45/these numbers include about 620 km of service lines in marshalling yards, etc.. Annex Page 7 of 16 Airports 1.15 Civil aviation infrastructure consists of 30 airports including 11 are at international standards. International traffic, however, only materialize in 5 of them: Algiers, Oran, Constantine, Annaba, and, to a much lesser extent, Tlemcen. The sub-sector was reorganized in 1987 with the creation of 4 autonomous "Etablissements de Gestion des Services A6ronautiques (EGSAa) entrusted with management of the major international airports. Each EGSA is also responsible for managing a varying number of domestic airports included in a "geographical sector" (16 for Algiers and 9 for Oran, and 3 and 2 respectively for Constantine and Annaba). Air navigation and communication aids are provided by ENNA (ex-ENESA), a public agency created in 1983 to manage the Algerian air space. MOT is the overseeing ministry. Major investments are financed by the Government or the Wilayas budget. Other investments are financed by the EGSAs and ENNA. Traffic has stagnated in recent years, a consequence of the economic crisis and of political disturbances which inhibit tourism. Airport international traffic fell from 4.5 million passengers in 1985 to 3.2 million in 1987. Growth then resumed at 10% annually until 1989 and subsided again in recent years. Domestic traffic has been stagnating at about 1.8 million passengers. Construction and maintenance of airport infrastructure is financed by the Government budget. Infrastructure is generally in good condition and largely sufficient to handle current traffic, especially in southern areas. Terminal buildings are where capacity constraints are felt (in Algiers, Oran, Constantine, Ghardaia, and Tamanrasset). A major investment to build a first tranche of a 12 million passenger terminal in Algiers is in progress at a slow pace. Other main capacity constraints are with air control: the northern centers are nearing saturation and differences in traffic processing systems make transfers from the Algerian FIR (Flight Information Region) to other FIRs create additional constraints. C. Transport Services and Modal Split 1.16 Road transport is by far the most utilized of all modes. Still, the motorization rate in Algeria is low compared to industrialized countries with ratios of one vehicle per 33 inhabitant and per 3 km2. Transport services are mostly provided by parastatals, although a rapid development of the private sector has been noticed in recent years. Road transportation 1.17 Interurban passenger public transport is provided by 5 autonomous public enterprises ("Entreprises Publiques Economiques de Transports de voyageurs", specialized by geographical area) which employ some 14,000 staff and operate a combined fleet of approximately 2,800 buses. These enterprises are saddled with debt and plagued by maintenance problems. Other public enterprises have been created by the "Wilaya"and cater to short distance transport needs. Laws passed in 1987 and 1988 lifted restrictions of access to market by private operators. The private sector has been growing rapidly: the privately owned fleet in operation included 800 vehicles in 1990, and its current market share is estimated at 30%. Most private transporters operate on a small scale, with one or two buses. Urban bus transport is also dominated by parastatals owned by municipalities. A proposal to transform Etusa, which operates in Algiers, as an autonomous public enterprise ("EPIC") has been put to the Government. Etusa exemplifies the kind of operational constraints faced by public bus transport in big -ities. Lines across Algiers follow narrow streets, some with high gradients, which are not designed Annex Page 8 of 16 to accommodate mass transit and congested at peak hours'. The private sector has been developing its market share within cities since 1988 and provides services along specifications detailed in contracts signed with overseeing authorities. In addition to public transport, own account transport of personnel used to be widespread. In 1987, the own account fleet included some 3,200 vehicles (buses and minibuses). The Government undertook to restrict own account transport by public enterprises and about a third of the above fleet has been switched to public transport. Overall, the supply of urban bus services is short of demand. 1.18 The freight road transport fleet included 98,000 trucks in 1990. Road freight transport is mostly own account. Public transport is split between parastatals and the private sector. Table 4 shows the distribution of the fleet and trucking capacity by ownership and by statute. There is excess supply on the trucking market at present. Average distances travelled annually per truck vary from 25,000 km for privately owned ones to 80,000 km for those operated by SNTR, the market leader. Empty haulages are frequent. Table 4: The freight transport fleet and its ownership Statute & ownership percent of truck fleet percent of capacity -Public transport: SNTR 2.3% 5.8% other PEs 0.6% 1.0% private 25.2% 16.0% -Own account transport public 29.2% 49.1% private 42.6% 28.1% 1.19 SNTR was created in 1967 as a public enterprise and given a monopoly for long and medium distance transport, plus international transport to other Maghreb and African countries. To carry out its mission, SNTR developed a network of transport and freight centers across Algeria. Its monopoly has been rescinded but, by its size and its organization to track freight, SNTR remains the leading trucking enterprise in Algeria. SNTR operated 2,200 trucks in 1989, with a combined capacity of 50,000 tons, and employed slightly less than 7,000 staff. The load coefficient is around 60% showing declines in late years. Other public enterprises have been created by Wilayas starting in 1983, initially to cater to local transportation needs. A Law was passed in 1988 allowing these enterprises to extend their services beyond their Wilaya limit and compete with SNTR nationwide. But they have not been able to overcome financial and managerial shortcomings, and just a few remain in operation. In general, the productivity of transport parastatals is low. Some 15,000 private transporters controls 25% of the total public transport fleet, and 16% of its capacity. Their activity is largely confined to short distance haulages. They operate small trucks (less than 5-tons on average) which may be the result of recently repealed regulations restricting operations of trucks above 5.5 tons to administrative authorizations, together with the absence of specialized credit facilities. 1.20 About 70% of the truck fleet and close to 80% of its carrying capacity falls under own account transport. Faced with insufficient transport supply, many producers and distributors of 46/bus commercial speed in Algiers is around 6 km/h Annex Page 9 of 16 "strategic products" developed a transport branch. Naftal, which mainly distributes petroleum products, operates more than 5,000 trucks. OAIC (grain distribution) and SNTA have their own fleet of 900 and 2,000 trucks respectively. This trucking capacity is under-utilized and costly to run. The unavailability rates of this fleet is abnormally high, ranging from 30 to 50%. The Government has taken measures to discourage renewal of the own account fleet. An Executive Order dated June 1991 allowed own account operators to do public transport in order to limit empty return haulages. Further steps are envisaged such as requesting enterprises doing own account transport to incorporate their transport branches as subsidiaries and creating tax incentives to divestiture of transport assets. Railway transport 1.21 Passenger and freight transport is entrusted to SNTF, a parastatal established in March 1990 as an EPIC which employs 18,500 staff. For passengers, services are offered to suburban traffic (within a perimeter of 50 km of Algiers and, to a much lesser extent, Annaba, Oran, and Constantine), and to intercity and international traffic. The evolution of passenger traffic over 1987-1991 is given in table 5. Table 5: Evolution of rail traffic: 1987-91(in million units) Year number of travellers: Passenger km: suburban intercity suburban intercity 1987 36.2 7.1 1005 968 1988 36.9 8.0 1120 1319 1989 42.8 9.7 1193 1531 1990 41.8 11.9 1234 1757 1991 41.0* 16.8* 849* 2344* (* the definition of suburban limits was reduced from 100 to 50 km in 1991, distorting the comparison with previous years) 1.22 Intercity passenger traffic is concentrated on the coastal line: services between Algiers and Oran, and Algiers and Constantine extend over no more than one fourth of the network length but account for more than 80% of total intercity traffic. International traffic was a mere 100,000 in 1988, but has a large growth potential. The intercity traffic is the most dynamic segment of the passenger transport demand, growing 16% annually. Some transfers from road and air to rail may have taken place due to increasingly attractive fares and improved quality of services versus deterioration of driving conditions on the more dangerous and increasingly congested coastal east-west trunk road. 1.23 Freight transport by rail is mostly of bulk cargo. Its share of total was 75% of total tons transported and 65% of total ton/km4. Fuel distribution is the largest traffic in terms of ton/kIn, closely followed by iron ore and steel products. The concentration of industrial activities near Annaba generate the brunt of the freight railway traffic. SNTF carries most input of these industries and 47/the lower share in ton/km is caused by shuttling of coal trains between Annaba and El Hadjar (15-19 kn) Annex Page 10 of 16 distributes their output across the country. Table 6 shows that iron ore, coal, phosphate, and steel products made for 50% and 53% respectively of total tons transported and tons kilometers in 1991. Table 6: Evolution of the traffic share of industrial traffic year total traffic: of which: industrial* tons tons/km tons tons/kn 1987 12.8 2937 7.8 1741 1988 13.1 2814 7.5 1554 1989 12.6 2697 6.7 1392 1990 12.4 2689 6.4 1436 1991 11.9 2710 5.9 1429 (* industrial products include iron ore, coal, phosphate, steel products, fertilizers). 1.24 About a third of SNTF traffic uses the Annaba-Djebel Onk line. Freight traffic receded over 1987-1991 at an annual rate of -1.5% which reflects the severe economic recession. The bulk traffic goes by unit trains (about 1,600 net tons per train), which are also formed for part of the steel products traffic. The NTS estimated that about 55% of freight traffic was carried by unit trains. It also observed that no more than 16% and 26% of tons carried and ton/kIn related to 96% of movements! Although SNTF has a policy to transport full carloads only, less than car-loads are most frequent: the NTS estimated that general cargo railcars on average were loaded at 20% of capacity. Air transport 1.25 International air transport services are provided by foreign airlines and Air Algeria, the national airline. Traffic rights are sometimes exploited under bilateral pooling agreements which is not the case for traffic to and from France, by far the most important (70% of total). In addition to its international function, Air Algeria has a monopoly on domestic air transport and operates a 13,000 km-long network linking 25 towns. The national fleet comprised 47 planes in 1989 (39 jets - Boeing 727 and 737 and Airbus 310 - and 8 Fokker 27). The technical performance of Air Algeria, a parastatal, is relatively satisfactory but, despite the high occupancy rates achieved on both networks (around 70%), its financial condition suffers from a number of constraints including below cost transport fares on domestic routes, limited foreign exchange, sub-optimal composition of the fleet, and overstaffing (some 8,600 employees were on the payroll in 1989). Planes tend to be used less intensively than in other Maghrebin airlines, especially the Boeings. Commercial and maintenance expenses are high and could be reduced through cooperation with Royal Air Maroc and Air Tunisia. Maritime transport 1.26 International shipping is essential to foreign trade and development of a strong maritime industry has been a constant of Government policies implemented since independence with a triple objective to save foreign exchange, assure cheap transport of imports, and enhance competitiveness of Algerian exports. The national merchant fleet currently comprises 75 ships with a combined capacity of about 1 million dwt. It includes 42 general cargo carriers of about 7,500 dwt capacity and 17 years Annex Page 11 of 16 of age on average. CNAN was the first parastatal created after independence and was entrusted with a wide range of responsibilities including those of shipping agent, shipowner, and cargo handling operator. CALTRAM was jointly created in 1973 by the Governments of Algeria and Libya. CNAN underwent several restructurations since its creation and spun off some of its branches which became new parastatals: HYPROC in 1982 to carry petroleum products, LNG, and chemicals; ENTMV in 1987 to take over the car-ferry operations; ENCATM in 1987 to handle the shipping agent business and other ancillary services; ERENAV in 1987 to operate the shipyards. Towage and cargo handling was transferred to the Port Enterprises in 1971. SONATMAG is another parastatal in charge of freight forwarding. Total employment in shipping is close to 6,000 and to 11,000 in port based activities. The Algerian maritime industry which operates essentially on trade between Algeria and the world has developed a substantial market share behind the shelter of its local monopoly and bilateral arrangements on traffic rights. In 1989, CNAN which remains the most important shipowner carried about 30% of imported grain, 76% of the liner trade and overall, 35% of all general cargo and dry bulk traffic. HYPROC's market share of petroleum and chemical products was close to 60%. ENTMV carried 62% of passenger traffic between France and Algeria, and 100% between Algeria, Spain, and Italy. 1.27 Coastal shipping is limited to a few strategic products: petroleum, chemicals, grain, and bitumen which represented altogether 2.4 mt in 1989. HYPROC was the most active by then with 1.5 mt of gasoline and diesel oil, 0.5 mt of LPG, and 75,000 tons of bitumen. CNAN and CALTRAM combined to carry some 200,000 tons of grain. Poor port productivity, undue customs constraints, and inefficient shipping operations are reported as major obstacles to larger development of coastal shipping in Algeria. Modal split 1.28 Road transport is the dominant mode for domestic passenger and freight transport. Table 7 indicates the modal split for intercity passenger traffic as estimated by consultants in 1990. Table 7: Distribution of passenger transport among modes in 1990(in million) transport mode Passengers per year Passenger/km per year passenger cars 634,024 87.7% 28,991.9 70.6% taxi 44,929 6.2% 2,744.8 6.7% bus 33,128 4.6% 6,599.2 16.2% sub-total 712,081 98.5% 38,335.9 93.4% train 9,122 1.3% 1,558.6 3.8% air transport 1,836 0.2% 1,160,7 2.8% total 723,039 100.0% 41,055.2 100.0% 1.29 The NTS review of traffic by origin and destination within Algeria established that 98% of transport on distances of 100 km or less was by road. For distance over 500 kIn, the road market share fell below 60% whereas air transport increased its own to more than 30%. Rail transport competes best for 300-400 km long trips where its share reaches 20%. Annex Page 12 of 16 1.30 For freight, the international traffic is for the most part transported by sea (not accounting for pipeline transport of hydrocarbons). For domestic traffic, recent surveys estimated the total interzonal traffic to 110 million tons. Coastal shipping takes no more than 2% of total domestic traffic. Rail transport is specialized on bulk traffic which competes with road transport; their respective market share is 45% and 55%. Further details on the modal split are given in table 8 showing that freight transport by rail is understandably more competitive on longer distances and its market share is larger on the basis of ton/lan. Table 8: Distribution of freight traffic between modes in 1990 (in million units) type of cargo road transport railway transport 1. in tons: bulk and heavy loads 12.5 54.8% 10.3 45.2% other cargo 95.3 98.5% 1.4 1.5% sub total 107.8 90.1% 11.7 9.9% 2. in ton/kin: bulk and heavy loads 2065 47.4% 2293 52.6% other cargo 11941 97.5% 306 2.5% sub total 14006 84.3% 2599 15.7% D. Review of Transport Investments over 1987-1992 Composition of the Overall Investment Programn48 1.31 Transport public investments actually implemented over 1987-1991 are estimated at DA 46 billion plus some DA 8 billion for development of the municipal road network. They represented only about 7.5% of total gross investment compared to 8.1 % over the previous 5 years, and some 16% of Government capital expenditures in that period. The relatively low capital accumulation in the sector is partly the result of a reduced contribution by financially distressed transport parastatals. The fact that investment resources have often been concentrated on a few large projects (shipping in the seventies, railways in late years) aggravated the investment deficit experienced in most areas. By all accounts, spending for transport sems low in a country as large as Algeria"9. A comparison over 1990-92 between Algeria and Morocco shows the latter allocating an average of 13 % of public (Government plus parastatals) investments to the sector and the latter around 10%. What these indicators suggest is amply confirmed by direct observation: transport infrastructure is aging and service delivery is poor. Though it is not a bottleneck to economic growth at present, transport could soon become one unless greater efforts are consented to modernize and expand it. Table 9 provides a breakdown of investments by sub-sector: L8/The data is incomplete or dubious when marked with an asterisk. Updated figures will have to be provided by Government. 49/Transport worldwide typically accounts for 20 to 50% of public and private physical capital stock which gives a rough indication on the yearly flow of capital needed to build and maintain this stock. Annex Page 13 of 16 Table 9 : Actual Transport Investment Expenditures over 1987-1991 (in current DA million) Sub-sector 1987 1988 1989 1990 1991 1987-91 - roads 2570 2910 2850 2630 3110 14070 - ports 820 820 800 1051 2000 5491 - airports 330 420 150 225 304 1429 - railways 2200 2700 2750 3580 4970 16200 - others 1980 1450 1500* 1600* 2250* 8780* total: 7900 8300 8050* 9086* 12634* 45970* 1.32 Railways and road investments for the period were practically identical, sharing some 65% of investment resources allocated to the sector (*). With the construction of Djendjen boosting expenditures in late years, the port sub-sector absorbed 12% of sector investment resources. Port and airport investments shown in the table do not include the investments financed by the parastatals, all included in "others". Road Infrastructure Expenditures 1.33 Resource Allocation in the Last 4 Years. For a more comprehensive analysis of road expenditures, routine and periodic maintenance financed under the current budget over 1990-1993 have been included in table 10. Table 10: Evolution of Road Spending in Recent Years (in current DA million) type of works 1990 1991 1992 1993 (budget) Recurrent maintenance -: - national roads 525 583 809 1589 - wilaya roads 332 333 560 799 - municipal roads 462 n.a. n.a. n.a. sub total 1319 916 (*) 1369 (*) 2388 (*) Road investments: - national roads (Ch 521) 2384 2732 4025 5688 - wilaya roads (Ch 522) 246 378 762 747 - wilaya roads (own budget) 155 n.a. n.a. n.a. - municipal roads 1600 (*) 2000 (*) 2500 (*) 3000 sub total 4385 5110 7287 9435 total spending 5704 (*) 6026 (*) 8656(*) 11733 (*) 1.34 The table above shows that road expenditures more than doubled over 1990-1993 from about DA 5 billion in 1990 to DA 11.7 billion in the 1993 budget. Actual expenditures are always less than budgeted and, with unit costs now 85% higher than in 1990, it can safely be concluded that the 1993 budget increase is nominal and not real, except for recurrent maintenance which more than tripled for national roads. Surface treatment of 1,700 km has been budgeted in 1993, compared to 915 km in 1990, 870 km in 1991, and 700 km in 1992. The recurrent budget for Wilaya roads represented 39% of total in 1990 but 33% only in 1993. It shows an increasing concentration of maintenance on LO/ Recurrent maintenance includes routine (about DA 0.5 billion in 1993)and light periodic maintenance. Expenses under chapter 951 are included. Annex Page 14 of 16 national roads which account for no more than 36% of the Algerian paved road network but more than 80% of vehicle/km nationwide. The budget allocation to maintenance of bridges is DA 128 million in 1993, a substantial increase over the DA 45 million budget of 1992 which testifies to a greater and much desired awareness of bridge deterioration issues across the country. 1.35 Road Spending Issues. The analysis of recent road programs lead to the following conclusions. Insufficient priority for maintenance, especially before 1993 The Road Directorate (DR) investment budget mixes up pavement strengthening and new construction and there are no side analytical accounts to break it down. The NTS estimated that 80% of road "investments" from 1986 to 1988 went to new construction and road upgrading. Reports on physical execution of projects from 1988 to 1992 evaluating the annual length of road strengthening and rehabilitation at some 500 km and 200 km respectively suggests corresponding outlays of about DA 6 billion, which leaves DA 10 billion for construction and upgrading under chapters 521 and 522 (new construction includes the motorway to Blida and the road to Illizi in the south). In 1993, the proportion of the DR budget going to maintenance should be about 60% (*), pointing to a radical albeit late shift of priorities in favor of maintenance. Assuming municipalities managed to double their road maintenance budget from its 1990 level, the 1993 road maintenance budget for Algeria (current plus capital ) must be slightly below to DA 7 billion (*), more or less equivalent to the construction and upgrading budget. A 50/50 ratio of maintenance to construction remains too low, given the current condition of the Algerian road networks. The concentration of spending on RNs until now was still too low to avert deterioration of their condition (see para.8, page iv). With the 1993 budget including authorization for spending up to DA 7 billion under the motorway development program, future road maintenance budgets seem to face renewed risks of losing priority unless innovating financing formulas are found to raise private capital for construction of motorways. 1.36 Too Narrow Focus on Most Trafficked Roads. Maintenance of dirt roads is nonexistent. For paved roads, the thin budgets are geographically concentrated on most trafficked roads of the priority national network leaving out two third of paved roads. In 1992, Algeria spent about DA 4 billion on road maintenance nationwide (routine and periodic, road strengthening and rehabilitation), or the equivalent of US$ 3,000 per km of paved roads. During the same year, Morocco spent DH 1.05 billion or nearly US$ 4,500 per km of paved roads. Knowing that Morocco would need to spend twice as much in order to optimize the economic impact of its road program gives a measure of the road maintenance deficit in Algeria which is at its highest for the municipal and Wilayas networks. 1.37 Maintenance Unit Costs are High. Contractors are well aware of difficulties to import equipment, timely receipt of fuel and quarry supplies, and prompt payments. Their bids are hedged against such constraints, which vary among Wilayas, with the result that unit prices are much higher than for similar works abroad. Comparing Algeria to Morocco on the basis of 1992 average costs is revealing. Algeria Morocco - road strengthening/kIn: US$ 100,000 US$ 65,000 - light periodic maint./km: US$ 25,000 US$ 20,000 51/ Some 10% of bridges and structures need rehabilitation, and routine maintenance must be more systematically carried out. Annex Page 15 of 16 These costs derived from programs executed nationwide do not necessarily imply that unit costs are intrinsically higher in Algeria, but that they are inflated by inefficient execution of works. Materials management is particularly weak, and road works are often completed way beyond schedules2. Irregular supplies of bitumen is a recurrent issue and loose controls on the work site contribute to over-consumption. Other factors leading to higher road costs are (a) the organization of the contracting industry: nearly all of road strengthening contracts are awarded to a few number public enterprises (PE) that have limited spare capacity and hardly compete against each other"; (b) the relative inexperience of local PW directors: the works are frequently overdesigned to ensure results and innovative and cheaper solutions, like bitumen emulsion, are rarely used. 1.38 Maintenance of wilaya and municipal roads is increasingly under-funded. Information on road spending by municipalities is scant. Based on data given the ministry of Interior, it appears that municipalities altogether spent DA 385 million and DA 462 million in 1989 and 1990 out of their current budget. Related to the length of their paved network, average spending per km was DA 18,300 and DA 22,000 for the two years. Most of that spending goes to street maintenance in and around main cities, and other municipal roads, especially in rural areas, are largely neglected. Average spending on the Wilayas' network was about DA 18,000 per km in 1990 and close to DA 30,000 per km in 1992, respectively equivalent to US$ 2,000 and US$ 1,400 (or less than half the average maintenance allocation for Algerian roads). These figures indicates that both Wilayas' and municipal networks face similar problems of eroding road maintenance budgets. The DA 11 billion spent from 1987 to 1992 on road construction under PCDs (Plans Communaux de D6veloppement) offer a sharp contrast and a clear case of resource misallocation. Railway Expenditures 1.39 Of the DA 14 billion spent for the railways, about DA 13 billion were for infrastructure with the following (and approximate) breakdown showing that construction of new lines absorbed nearly two third of the investment program, leaving only 20% to maintenance. Current flaws are summarized as follows: 1987-1991 - construction: 8.0 billion 61.5% - track doubling: 0.4 " 3.8% - maintenance: 2.6 20.0% - modernization: 2.0 " 14.7% Total 13.0 " 100.0% 1.40 The analysis of past railway investment programs allows to underscore two major shortcomings: Misallocation of resources in uneconomic investments. About half of the total for the period relate to the 137 km long railway line between Jijel and Ramdane Djamel where substantial cost overruns have been incurred. Construction of the "Rocade des Hauts Plateaux" started with the Ain Touta-Msila (150 km), Bordj Bou Arrejij-Msila (60 km), and Tebessa-Ain Mlila (165 km) 52/execution of the second tranche of road strengthening under the Vth Highway Project took 60% more time than contractually agreed. Strengthening of the RN9 under the same project is an extreme albeit revealing case: it took nearly 5 years to complete it instead of an initial contractual time of I yearl 53/ The initiative by the Road Maintenance and Traffic Directory to call for competitive bidding for light periodic maintenance over the last two years demonstrated that more competition means lower price. Annex Page 16 of 16 sections is still in progress and absorbed about DA 2.5 billion over the period. All these projects are far ahead of demand and a drag on the economy. Other significant investments were on new spur lines to cement factories (Beni Saf-Ain Temoutchent, and Saida spur line); costs of these lines are not charged to their single users nor are they recovered by SNTF through adequate pricing. 1.41 Underfunding of track maintenance. Track maintenance had been neglected for years with only 18 km of track renewal between 1980 and 1985. The Second Railway Project was meant to help SNTF intensify its track maintenance program and raise it to an average of 150-200 km annually. Lines slated for rehabilitation were the trunk line Oran-Annaba plus 220 km of the ore line. The Bank project, closed in February 1993 achieved its objective of about 280 km of track renewal but complete renewal of the Annaba-Ramdane Djamel line did not materialize. About DA 6 billion overall had been budgeted for track maintenance over 1987-1992 but less than 45% was actually spent of which about half a billion dinar was wasted in maintenance of uneconomical narrow gauge lines. From 1987 to 1992, track maintenance has been executed over 700 km for an annual average slightly above 100 km whereas 150 km correspond to the optimum (assuming no backlog, which here is substantial). The railway investment program executed to date is greatly imbalanced and not designed to enhance competitiveness of the railways and sustainability of operations. Port Expenditures 1.42 Port investments over the period include construction of roll on-roll off berths in Oran, Annaba, and Algiers, and rehabilitation of breakwaters and piers started in Bejaia, Skikda, and Arzew/Bethiouia. Construction of Djendjen (DA 2 billion *) and rehabilitation of Arzew/Bethiouia (DA 0.5 billion *) were the largest investments over 1987-1992. The container terminals financed under the Bank project (Port III Project) are at an early implementation stage. Airport expenditures 1.43 Many projects to strengthen and lengthen runways have been carried out since 1987, mostly in the South (Timimoune, Ouargla, Hassi Messaoud, Tamanrasset, Bechar); new projects are about to be launched at In Salah and Adrar. doc. m:\michel\white2.tsn