How to finance projects in an OPEC country when the price of oil barrel is divided by two?
Beginning of July 2017 a workshop with Algerian Project Management Association Board took place in in Algiers in order to review the implementation progress of the roadmap that APMA presented to become an IPMA member. The young North African member association joined IPMA in 2016, a year where the Algerian economy (Algeria is member of the Organization of the Petroleum Exporting Countries) suffered a lot from shrinking revenues as the price per oil barrel fell from 80 to 48 dollars. Since 2 years the consequences on Algeria’s economy and commissioned infrastructure and industrial projects are dramatic. In this context, what options does the country that 3 years ago had foreign exchange reserves of +200 bn. US dollars have to finance its economy?
Excluded in 2015, put on the agenda in 2016 contracting external debts as recommended by the International Monetary Fund is now being excluded again from the government program in 2017.
The first option the country has to finance ongoing and future projects is to work on the revenue side of its balance of payments:
- search external resources, as financing projects in the sector of energy with 1bn euro from the African Development Bank (2017-2027). This initiative just started
- increase taxes: a bill just passed through Parliament and will impact households, public and private enterprises
- attract private and public foreign direct investors: this is complex as the legal framework is unstable and competences in finance are missing. However, this is a promising solution and should be seen as an opportunity by many public and private stakeholders
- follow the example of China. It offers its state companies operating in Algeria such as China State Construction Corporation and China Harbour Engineering large long term loans (3,4 Bn euro) to finance mega infrastructure projects in Algeria
- invest in renewable energies (solar energy) to better satisfy national a growing national demand and have more fossil energy reserves to export in the future. Did you know that Algeria imports petrol for its national consumption mainly in transports (cars, busses and trains) as it has not sufficient refining capacities to process its own oil and gas production?
- anticipate important trends: While in 2019 the car and truck manufacturer Volvo announced that they will not produce anymore classical combustion engines and will convert them to electrical and hybrid engines , it is sure that other car manufacturers will follow. At the same time Algeria invests huge amounts of money in the development of an own car industry to manufacture combustion engines (ex. Dacia, Renault and Peugeot plants just implemented near the Algerian town of Oran)
Contracting external debts can be risky in a context of political instability and slow economic reforms towards economic liberalization. The rating of granted loans today could become worse in the future and push the country into even higher financial instability.
The second option the country has finance projects is to reduce expenses in the balance of payments:
– reduce with strong discipline the invoice of imports made in hard currency will help to preserve foreign exchange reserves that now are below the symbolic amount of 100 bn dollars. Future capacity to import food are at stake
– reduce subsidies inherited from the socialist period of the Algeria economy in many sectors of the economy
– revisit the investment program in large infrastructure projects, especially in the sectors of energy housing, transport and increase taxes where possible means that a devaluation of the Algerian currency dinar against the dollar is likely to take place shortly
-invest in agriculture to reduce food imports and increase food self-sufficiency
In a nutshell, to finance projects in oil and gas exporting countries either you reduce the expenses drastically and diversify your source of revenues or you have to contract international debts.
No matter what way the Algerian government will chose, it will have to invest (40 to 50 bn dollars according to an Algerian professor) into people (human intelligence as some Algerians say), innovation, creation of start-ups and certainly project management competences. This is the objective of APMA and IPMA regularly encourages its Alerian member to enhance its visibility in the country. In this context, a national conference on project management will be organized before December 2017, following the ones organized in 2013, 2014 and 2015. Representatives of administrations, private and public businesses, and universities will be invited. IPMA already offered its participation. Work is in progress and more details are coming up.