Never too late for a realistic industrial policy

For a sustainable development in Algeria . . .

I note with satisfaction in this month of February 2017 that the respective Departments of Energy and Transport will be taking actions as recommended alas ten years earlier, by an audit carried out under my direction and assisted by the then leaders and managers of State Oil Company ‘SONATRACH’, independent experts and world-renowned Ernst Young consultants (1). As it is never too late for a realistic industrial policy, it is an encouraging message to all to see and appreciate.

Having been interviewed by the economic commission of the Algerian National Congress to which I presented the main conclusions, I drew the attention of the Government of the day on the urgency of a new fuel policy, and focus on the LPG, the “Bupro” for all heavy vehicles, (positive effect on the environment), the majority of cars and trucks running on diesel or gasoline including those of administration and public enterprises. History, with strong imports between 2009 / 2015 Bill gave us reason.

Here is yet again my view on the said subject.

According to the Office of National Statistics (ONS), the National Automobile Parc (NAP) of Algeria totalled 5,683,156 vehicles as at end of 2015, an increase of 4.75% or 250,000 units  if compared to year 2014.)

By category of vehicles, the NAP in 2014 is made of individual cars with 3,483,047 units (64.2% of the total), of pickups with 1,083,990 (near 20%), of trucks with 396,377 (5.4%), of farming tractors with 146,041 (2.7%), of trailers with 134,019 (2.47%), of coaches and buses with 82,376 (1.52%), motorcycles with 20,380 (0.38%) and special vehicles with 4,756 (0.1%).

The distribution of the NAP for year 2014, according to ages of vehicles showed that the number of under 5 years had reached 1,253,731 units (23.11%), from 5 to 9 years to 933,006 vehicles (17.2%), 346,788 (6.4%) of 10 to 14 years, 15-19 years with 214,287 units (3.95%), 20 and more with 2,677,746 (49,35%). This increase in the NAP was explained by the increase in registrations of new vehicles in 2015 compared to 2014 of more than 900,000 units, or 7.72%.

For 2015, the distribution by age showed that the number of under 5 years had reached 1,368,549 units, (24.08%), from 5 to 9 years 892,196 units (15.70%), 10 – 14 years of 508,815 units (8.95%), from 15 – 19 years 187,067 (3.29%) and more than 20 years 2,726,529 (47.98%).

By spatial distribution, Algiers was top with 1,496,561 units (26.33%), Blida with 311,024 (5.47%), Oran 293,156 (5.16%), Constantine with 204,843 (3.60%) and Tizi-Ouzou with 199,507 (3.51%).

As for the imported quantities, these fell 73.74% with 53,356 vehicles imported between early January and late July 2016, against 203,174 units during the same period in 2015, or 149,818 vehicles less, according to the National Center for Statistics (CNIS) of the Customs. As a reminder, vehicles import licences awarded, were in May 2016, granted to 40 dealers of 80 applicants. Initially set to 152,000 units for year 2016, the vehicles import quota was finally reduced to 83,000 units. According to the Ministry of Trade, import to 2016 Bill does not exceed a billion Dollars up from $3.14 billion in 2015 (265,523 units) and $5.7 billion in 2014 (417,913 units).

But important note regarding all parts and accessories of all motor vehicles; these are expected to increase during the coming years if the rate of integration does not exceed 40 / 50% and if all scheduled units were assembled, it would mean a return to the old import bill, since these accessories costs decreased between 2015/2016 by only 4% without these units being still operational.

For the type of fuel used, in 2014, gasoline represented 65% and the Diesel 34%, the use of LPG being marginal, less than 2% and for 2015, gasoline represented 65,67% and Diesel 34.33% so no significant change. From January to end of May 2016, certainly because of the rising prices, Normal gasoline sales declined by 2% between the same period of 2015 to 2016, that of the Super fell 11%, an increase of 2% for Diesel, consumption rose by 2% and the LPG quantities marketed during the period from January to May 2016 experienced an increase of 14%, all according to the National Society of Marketing and Distribution of petroleum products (NAFTAL); information covered by the APS.

Thus according to NAFTAL, the aggregate of sales of fuels in the first five months of the year 2016 (figures in brackets are those of the same period of 2015).  These are:

So is a new model of energy consumption as I had recommended previously, see note (1) that Algeria had to change its model of energy consumption, to review its policy of subsidies which need to be targeted (as per lesson learned from a mission to Malaysia experience), to focus on the GPL and the GNW for all big carriers; the BUPRO to be reserved for all impoverished areas in the Highlands and the South because it does not require the separation of propane and butane, and thus save huge investments of refining complexes.

Because of the extrapolation of internal demand on growth, before a declining supply, the report predicted massive import of diesel and unleaded gasoline by 2010 / 2014. The report stressed the importance of an active policy of storage for a balanced and supportive space to avoid supply disruptions. Unfortunately, the recommendations have not been implemented. According to the report of the World Bank to 2014, fuel subsidies in 2014 have exceeded $20 billion, one third of the State’s annual budget, while the wealthy 10% of the population consumes more fuel than the remaining 90%.

Moreover, Algeria remains one of the few African countries that still uses leaded gasoline and by the way does partly import it.  According to a report by the UN program for the environment (UNEP) published in April 2014 where the sulphur content in Algerian gas was found to be between 500 and 2000 ppm must conform to international standards by generalizing unleaded gasoline. Algeria should therefore put an end to the production of leaded gasoline and produce the two well-known types of the 90 and 95 unleaded gasoline.

For this and because it is appropriate to avoid any supply disruption that poses a threat to national security, I recall that the Minister of Energy at the time announced on April 16, 2015 before MPs that storage capacity are reduced by 7 to 10 days and that an amount of $200 million would be unlocked to make that to 30 days by 2020. This is strategic management which should take into account the specificity of each region, to deal with the consequences of a shortage that can paralyze strategic sectors.

Thus, strategic inventories, distinguishing three main complementary systems, private stocks, State stocks prevailing in the USA, Japan, Germany, France and agency (public or private) stocks, are the result of Government policies established to meet a serious break in supply, related to an international oil crisis, a strike of navigation, a political boycott, a natural disaster, or even to a lack of foresight on behalf of the management of exports of some countries.

For example, for France, it is required that oil stocks for 90 days of average daily net imports or 61 days of daily domestic consumption are available. In the majority of countries, the safety stock exceeds two months.

But the most important is to have a strategic vision. Following the official statement of the Council of Ministers of 2014; reserves of natural gas were 2700 billion m³ for traditional gas and 12 billion barrels for oil, that both with the strong domestic consumption would lead towards exhaustion by 2030. Furthermore, that the Algerian economy feeds on the hydrocarbons revenues has to be taken into account.

The evolution of prices would basically determine the purchasing power of the Algerians for inflation which is back led to the deterioration of their purchasing power. The total income must be corrected to take account of the distribution of income and consumption model, for an overall aggregate would have little meaning. Several questions need to be answered for any coherent economic policy.

-First, what will happen with the inevitable exhaustion of oil in economic terms and not in profitability of physical discoveries, on the purchasing power of the average citizen? In this case compared to the real purchasing power (housing, food, clothing including health, etc.) and with the dumbing down of the middle strata, would any purchasing power suffice to say buy a car?

-Secondly, the absence of any specialised industrial units, referring to the knowledge-based economy in order to promote integrated subcontracts, what will be the currency balance of the projected units? Especially when the majority of inputs (costlier with the slippage of the Dinar) will almost be imported and must include labour, transport, training adapted to new technologies costs.

-Thirdly, by international standards, the threshold of capacity are between 300,000 and 500,000 units per year for individual cars, about 100,000 for trucks / buses and scalable with large concentrations since 2009. Accounting costs are fixed and variable; what is the break-even point for a competitive costing if compared to international standards and the new mutations of this sector?  Would producing between 1000 and 10.000 cars projects be competitive?

At what before-tax costs would Algeria produce this car and which trend will be applied when the tariff relief going to zero according to the agreement with the European Union and in this case what is the internal added value created with respect to the international price vector (balance currency taking into account depreciation and imported inputs both in hard currencies)? The hardware representing less than 20 / 30% of the total cost which like a computer, the cost is not the carcass (mechanical vision of the past), it is the software that represent 70 / 80%. And not being able to ban importation, these mini projects will they competitive in terms of cost/quality as part of the logic of international values?

-Fourthly, do we actually build a factory to make cars for a local market while the objective of the strategic management of any enterprise, would it not be either regional or global in order to ensure the financial profitability in the face of international competition and this sector is it not internationalized with sub-segments nesting at the global level?

-Fifth, the automotive industry becoming capital orientated, (digital programming eliminating all intermediate jobs) what is the number of direct and indirect jobs to be created, referring to the necessary qualification, taking into account new technologies applied to the automobile?

-Sixthly, what will be the cost and strategy of distribution networks so as to adapt to these technological changes?

-Seventh, will these cars use gasoline, Diesel, LPG, Bupro, will they be hybrid or solar. Whilst attending to the emergence of cars using new technologies, including ‘smart’ cars at horizon 2020 putting old conventional cars off the international market; in this case what will be the future of going for all these units of low capacity and using old technological methods, impossible to export in the face of fierce international competition?

In conclusion, I will never repeat enough that the engine of any development process lies in research and development, that capital money is only a means and that without a knowledge economy no project has a future.

In this twenty-first century, before a turbulent and unstable world where technological innovations are in perpetual evolution, Algeria should rethink its model of development in general and its model of energy consumption in particular; energy being at the heart of its national security, the move towards a new energy MIX would be a must.

Algeria to take only the example of transport, being similar to the majority of other economic sectors and households as a whole, will it go for solar and encourage renewable energies however delayed, and for fuels such as gasoline, Diesel, LPG, on the GNW (for all heavy vehicles), or for hybrid or solar with the technological revolution that looms upon us?

Which mode of transportation as based on the stratification of the household incomes and including all road accidents?  What will be the price of these fuels and which strategy of distribution networks to adapt to these technological changes?

In fact all these objectives cannot be achieved without a strategic vision, adding that all technical models would be inefficient, were it not carried by “reformist” responsible for its social and political forces.

 

(1) – Reference to a study “For a new policy of fuel” – Department of Energy Algiers (8 volumes) 2006/2007 – Audit performed under the direction of Dr A. Mebtoul, Professor and International Expert