Currency equivalents

C. Overall Public Expenditure Patterns

11. 
    Recent public investment in the transport sector has been sizable, but its behavior was procyclical in recent years. Between 2001 and 2004, public investment in the transport sector in Algeria averaged 1.4 percent of GDP (Figure 5.2a), i.e. 2.1 percent of NHGDP. This compares rather well with the 15 EU countries, which averaged 1.2 percent of GDP in the past decade (Carruthers 2004). The trend of public investment in the transport sector follows a cyclical pattern. Starting from a high of 1.4 percent of GDP in 1994 (i.e. 1.8 percent of NHGDP), public investment in the transport sector averaged less than 1 percent of GDP over 1994-2000 (below 1.4 percent of NHGDP).⁶³ This latter period of low investment is explained by tight public budgets. Then, since 2001, once fiscal policy recovers an expansionary stance with the PSRE, a marked recovery of public investment in the transport sector follows. Despite this pattern, efforts toward supporting the transport sector have been significant over the years. From 1992 to 2004, the share of budgetary investment allocated to transport infrastructure has remained consistently above 12 percent, except for 1998, 2000, and 2004, as show in Figure 5.2b.
    
12. 
    As a result, investments in the transport sector expanded with the PSRE, and are projected to increase more under the PCSC. The PSRE allocated 21.5 percent of a total US$7 billion envelope to large investments in the transport sector over 2001–04 (in addition to previous investment programs underway). This explains the average of 1.4 percent of GDP (or 2.1 percent of NHGDP) during those years. About 42 percent of PCSC vast resources have been allocated to transport and public works, approximately US$27 billion. This level marks a sharp increase with respect to past investments in the sector (Figure 5.3b). In absolute terms, this represents more than 4 percent of the projected average annual GDP for the 2005-09 period (or above 7 percent of
    

Figure 5.2 Evolution of Public Investment Expenditures in the Transport Sector, 1992–2004

(5.2a — As a Percent of GDP) (5.2b — As a Percent of Budgetary Investment)

Source : World Bank (1992–95); IMF (1996–97); Ministry of Finance (1998–2004)

NHGDP). As a benchmark, Fay and Yepes (2003) estimate annual investment needs in roads and railways in the Middle East and North Africa Region at 1.2 percent of GDP over the period 2005–10. Under the PCSC, transport projects aim to rehabilitate and restore adequate maintenance on the national road network, complete the construction of the East-West Motorway, rehabilitate and modernize the railways, complete the metro project, and build tramway lines in major cities.

Figure 5.3 Public Investments in the Transport Sector by Mode

(5.3a — Actual Expenditures over 1998–2004) (5.3b — Program Authorizations for 2001–07)



Source: Ministry of Finance

Note: 2005, 2006, and 2007 are estimates provided by the Ministry of Finance, to be executed over 2005–09. They do not include the airports sector, for which details were not available. Railways include the metro and tramways.

13. 
    Nonetheless, the gap in the stock of transport infrastructure has not recovered from the budget constraints during the second half of the 1990s. At that time, tight budgets translated into lower road maintenance budgets (Figure 5.4).⁶⁴ These decreased by 33 percent in real terms between 1993 and 1999, which led to significant degradation of the road network. In 1999, the annual budget needs for adequate road maintenance exceeded the sum of all investments in the transport sector, including roads, railways, ports, and airports (World Bank 1999b).⁶⁵ Thus, budget constraints on maintenance were also an issue in the ports and airports sectors, where budgets decreased by 22 percent between 1993 and 1996 in real terms. Similarly, the lack of maintenance of railways infrastructure over the second half of the 1990s led to a significant aging of its assets. Notwithstanding macroeconomic constraints, the downsizing of maintenance budgets also reflected a cost-ineffective policy choice within the sector—faster depreciation of existing assets in exchange of more expensive investments in the future.
    

14. 
    Priority given to new investment at the expense of timely maintenance has led to a costly need for rehabilitation. In 2003, 46 percent of national roads, 65 percent of wilaya roads, and 70 percent of communal roads were in poor or fair condition, as reported by the Ministry of Public Works. Lack of regular maintenance now translates to a massive and more expensive need for investment in rehabilitation. The cost is illustrated by the case of the South African National Road Agency (SANRAL). Compared to the costs of a road that has been regularly maintained in its 2004 annual report. SANRAL (2004) shows repair costs that are six times higher when maintenance is deferred for three years and 18 times higher after five years of neglect!
    
15. 
    Outdated master plans for the rail subsector and insufficient attention to economic evaluation have also resulted in uneconomic investments. Railway master plans were elaborated in the late 1970s. These included massive investments, based on the ambitious industrial policy of those years. Though these massive plans were eventually abandoned, a few poorly justified projects were still approved.⁶⁶ Neither the economic evaluation of projects nor its implementation are properly carried out or sufficiently weighted in the decision-making process. A final example, the Hauts Plateaux rail lines—still indicated as medium-term projects on maps—show very low (if not negative) ex-ante economic rates of return, and little foreseeable traffic.
    
16. 
    Transport policy is shifting strongly toward investment in rail. The current investment mix is far from optimal. For the years 1998 to 2004, the distribution of public expenditures in transport was 55 percent for roads, 10 percent for ports, 14 percent for airports, and 20 percent for railways (Figure 5.3a).⁶⁷ The 2005–09 PCSC significantly increased the emphasis on rail, raising it to 36 percent of the capital budget for both the Ministry of Transport and the Ministry of Public Works. This does not include 9 percent of the capital budget to be spent on the Algiers metro and tramways. This means that investment in rail would increase to around 2 percent of Algeria’s GDP within the next few years (about 3.5 percent of NHGDP). This is extraordinarily high! Not only does it represent about half of all investments in the transport sector, but it is about 20 times beyond the regional benchmark. Fay and Yepes (2003) estimate the annual need for rail investment in the Middle East and North Africa to be about 0.1 percent of GDP for 2005–10. They estimate the need for investment in roads to be about 1.1 percent of GDP. Clearly, the current and projected investments in the rail sector deserve to be examined on economic grounds so as to optimize the allocation of public resources.
    
17. 
    The future of rail in the Algerian economy urgently needs to be reconsidered. In the gradual transition toward a market economy, Algeria’s railways are in competition with other modes of transport, mainly roads. In most market economies today, rail is not normally competitive with roads. Rail has become more or a specialized modality operating in those relatively small niches where it can provide adequate services with a cost advantage. Rail has lost considerable market share since the beginning of the 1990s—from 4 percent of passenger service and 16 percent of freight traffic in 1990, it dropped to around 0.5 percent of passenger service and less than 10 percent of freight traffic in 2004 (World Bank 2004b). In the present era, railways do not usually produce growth impact; nor are they development incubators (as they were in the American West of the 19^th century when “rail was king” both technically and economically). Under PCSC authorizations for 2005–09, the government would therefore be distorting competition by massively investing in—and then subsidizing—a transport modality that is not just less profitable, but not forward-looking in an economic sense.
    
18. 
    Public expenditures in the transport sector are capital intensive. Recurrent expenditure did not exceed 24 percent of total budget (current plus capital) at the Ministry of Transport and 5 percent of total budget at the Ministry of Public Works (Figure 5.5a and Figure 5.5b), thereby reflecting the capital intensity of expenditures in the sector. The low levels of recurrent expenditure are also explained by the fact that railways, ports, and airports are operated as off-budget expenses, and financed by SOEs budgets. This excludes government subsidies to some of those SOEs. In addition, road maintenance and project studies are carried out under investment budgets.
    

Figure 5.5 Capital and Recurrent Budgets for 2000–04

(5.5a — Ministry of Transport) (5.5b — Ministry of Public Works)



Source: Ministry of Finance, IMF.

Note: The recurrent budget of the MOT includes subsidies to SNTF, but financial restructuring is not accounted for.

19. 
    The large increases in capital outlays under PCSC exceed absorption capacity. In 1998–2004, the execution rates of capital budgets were high in the transport sector, averaging 93 percent. The breakdown by subsector shows that railways experienced significantly lower execution rates overall. The average annual execution rate for rail was 83 percent, compared with 100 percent, 90 percent, and 92 percent respectively for roads, ports, and airports (Figure 5.6). This reflects satisfactory execution capacities in both ministries and subordinated SOEs. However, capital budgets allocated to both ministries under the PCSC for 2005–09 are, respectively, 2100 percent and 800 percent higher than those allocated for 2000-04 (Table 5.4). Meanwhile, recurrent budgets at the Ministry of Transport (including subsidies to SNTF) and the Ministry of Public Works have barely increased, by 17 percent and 19 percent respectively between 2004 and 2006. This lower increase in recurrent budgets suggests that implementation capacity will be insufficient. Both ministries have taken action and recruited external technical assistance for the completion of the East-West Motorway and the management of the railway program.
    

Table 5.4 Evolution of Capital and Recurrent Budgets, 2000–04 and 2005–09 (million DA)



Source: Ministry of Transport, IMF

Note: Ministry of Transport current budget for 2006 indicated in the table includes subsidies to SNTF.Updated data to: 11-30-2006. There are some discrepancies between these data and those on Volume II tables.

20. 
    Hence, future maintenance and operating budgets will need to be increased. As a rule of thumb, annual maintenance needs are 2 percent of the replacement cost of the capital stock for rail and road (Fay and Yepes 2003). This is considered a minimum annual average expenditure on maintenance. If it falls below, the network’s functionality will be threatened. Applying this estimate to the additional transport capital stock generated by new constructions⁶⁸ and rolling stock purchase in roads, railways, and urban transport infrastructure under the PCSC would result in additional annual maintenance needs of around DA 25 billion (~US$350 million) until 2009. This sum is equivalent to about 0.3 percent of 2005 GDP, and represents more than twice the DA 10 billion average annual expenditure allocated by the Ministry of Public Works on road maintenance over 2000–04. These estimates are mildly mitigated by the fact that maintenance costs of the additional transport infrastructure stock will be mainly financed by SOEs—by Algérienne de Gestion des Autoroutes (AGA) for the East–West Motorway (through user fees to be determined), by SNTF for railways, and by Entreprise du Métro d’Alger for the metro and tramways. As these are particular cases and SOEs have no record in bearing maintenance costs to date,⁶⁹ it is highly likely that new investments in the sector will end up creating significant pressure on future recurrent budgets.