UTILITY PRICES RISING AS THE GOA BEGINS TO

UNCLAS SECTION 01 OF 02 ALGIERS 001289

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV EIND ETRD BEXP AG
SUBJECT: UTILITY PRICES RISING AS THE GOA BEGINS TO
PRIVATIZE WATER MANAGEMENT AND DISTRIBUTION


SUMMARY AND COMMENT
--------------


1. Parliament passed June 16 a revised Water Code allowing
public water and sanitation services to take on private
partners and to adjust the sliding water tariff schedule,
which will likely lead to more price increases. (Minimum
per cubic meter water prices for typical consumers already
increased 61% in January.) The new Code will permit state-
owned company Algerienne des Eaux (ADE) to award a water
distribution management contract for Algiers to the French
Suez Group. Once adopted by the Conseil de la Nation
(Senate),the new Water Code will also permit the state to
enforce environmental regulations and impose penalties for
violations. These revisions come at a time of acute water
shortages in western Algeria, particularly Oran.


2. Sonelgaz increased electricity and gas prices June 1 by
5%, maintaining a general trend of price increases for many
products in Algeria, including gasoline, whose prices have
also increased within the past year.


3. Comment: The press criticizes these Sonelgaz rate hikes
for taking another bite out of consumer spending power.
Press commentaries regularly call attention to the
disconnect between rising utility prices and Algeria's fast-
rising oil revenues. It remains to be seen if the GOA will
adjust its utility pricing in the face of consumer concerns,
although the larger economic benefits of instituting a
rational pricing system would argue against GOA changes at
this point.

END SUMMARY AND COMMENT.

MANAGEMENT PRIVATIZATION FOR ALGIERS AND
A NEW TARIFF SYSTEM FOR HIGHER PRICES
--------------


4. Parliament passed the revised Water Code June 16 to let
water pricing reflect actual costs of production,
exploitation, maintenance and infrastructure development.
The sliding scale for water pricing will adjust the
consumption brackets on which charges are based, and is
likely to lead to price increases for average consumers.
(Note: Water rates already increased 61% in January for the
lowest consumption bracket from 3.6 dinar (5 cents) to 5.8
dinar (8 cents) per cubic meter. The GOA continues to
subsidize the difference between these costs and the actual
cost of water, 25.5 dinar (35 cents). End Note.) The
effects of severe water shortages have affected both
drinking water and irrigation supplies, leading the GOA to
adopt large and ambitious water infrastructure investment
plans, the costs of which the GOA plans to pass on to water
customers. The new Code represents the first change in
drinking water pricing since 1995 and in irrigation water
pricing since 1998.


5. The Code grants Algerienne des Eaux (ADE) the right to
create private-sector partnerships for water distribution
and sanitation services. Water will technically remain in
state ownership, a point that Water Resources Minister
Sellal has reiterated publicly in the face of minor
opposition. The GOA began negotiating in 2003 with the
French Suez Group to manage the first stage of water
distribution improvement in Algiers. The goal of the two-
year management contract is to reduce water loss from 40% to
between 5% and 10%. A jointly-owned company, the Algiers
Water and Sanitation Company (SEAL),would be created with
state utility Algerienne des Eaux (ADE),the National
Sanitation Office (ONA),and the Suez Group. Sellal has said
that the contract with Suez would not privatize Algeria's
water sector and that the State would continue to subsidize
water prices. Management privatization contracts would be
granted in a second phase for Annaba, Constantine, and Oran,
with tenders to be released in October 2005.

ELECRITICITY AND GAS
PRICES ALSO ON THE RISE
--------------


6. Electricity and gas prices rose 5% June 1 for households,
consistent with a request earlier this year from Sonelgaz to
the Regulatory Commission for Electricity and Gas. Both
rates increased 9.5% for small businesses, and 10.5% and
9.5%, respectively, for heavy industries. Gas rates were
lowered for the petrochemical industry to stimulate growth
in that sector. The GOA announced in a communique that
these rate adjustments were designed to be in conformity
with the 2002 Law on Gas and Electricity, and were not a
result of the new Hydrocarbons Law, as opponents had
claimed.

MP'S CRITICIZE EARLY VERSION
OF NEW WATER CODE DURING DEBATE
--------------


7. The new Water Code's Article Two had initially changed
the right of the public to "access" water to the right of
the public to "use" water. Most political parties deemed
this shift "dangerous" for social stability, considering the
right to access water as fundamental. The new language,
which was rejected, may have reinforced the GOA's ability to
shut down illegal connections to the public water system.
Such violations have been traditionally tolerated by
authorities, but will be become harder to overlook as water
meters in private homes become more universal.

8. Outspoken Workers' Party (PT) deputy Louisa Hanoune
declared that the new code violated Articles 17 and 26 of
the Constitution, guaranteeing that public property belongs
to the national collectivity. She said the law's
consequences would be disastrous, as it would restrict
access to water and would "unquestionably" lead to "diseases
and epidemics" that have already been eradicated. A former
deputy of the majority-aligned party RND declared that the
new text had put into question the fundamental human right
to use water.


9. Reacting to the privatization of Algiers' water
management, the Worker's Party (PT),moderate Islamist party
MSP, and FLN deputies opposed those portions of the new
text, declaring themselves "outraged" to see economic and
commercial interests taking control of a public service.

"WATER POLICE" TO ENFORCE
ENVIRONMENTAL REGULATIONS
--------------


10. The new code would also give more power to the
government to regulate water quality and protect areas with
vulnerable watersheds and ecosystems. A new "water police"
unit within the Ministry of Water Resources will be created
to enforce both water and environmental regulations and set
penalties and sanctions for violating them.

MORE OPPORTUNITIES FOR U.S.
FIRMS IN THE WATER SECTOR
--------------


11. The four-year water infrastructure budget is USD 7
billion, excluding funding for seawater desalination. New
strategies to address Algeria's 750 million cubic meters of
wastewater, most of which are dumped in the Mediterranean,
are a priority. Tenders will be released in October 2005
for water management contracts in Annaba, Constantine, and
Oran, with 5 more tenders to be released in 2006 for
Tlemcen, Skikda, Tizi-Ouzou, La Calle, and Temouchent.
Western cities, particularly Oran, have experienced drinking
water deficits for the last 20 years, exacerbated by low
rainfall and poor technology in water demineralization and
purification. Nationally, ten new dam projects were
recently launched and 15 projects are in the study phase.
Flood protection technologies and aquifer replenishment are
other key areas where the Ministry of Water Resources is
actively seeking foreign participation.

ERDMAN