Algeria - Water Supply and Sewerage Rehabilitation Project

DocImxt of The World Bark FOR omaAL USE ONLY Repot No. P-6165-AL MEMa. '%DUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPO$ED LOAN IN THE AMOUNT EQUIVALENT TO US$110 MILLION TO THE DEM0CRATIC AND POPULAR REPUBLIC OF ALGERIA FOR A WATER SUPPLY AND SEWERAGE REHABILITATION PROJECT MAY 5, 1994 This document has a restricted distribution and may be used by recipients only in the perforanace of thdir official duties. Its contents may not otherwise be disclosed without World Bank- authorization.  EXCHANGE RATE Currency Unit: Algerian Dinar (DA) 100 Centimes Eguivalency of 1 USS in DA since 1985 1985 5.03 1986 4.70 1987 4.85 1988 5.92 1989 7.46 1990 8.60 1991 17.35 1992 22.49 1993 22.00 1994 (APRIL 12) 36.00 ABBREVIATIONS bbl/d : barrels per day mm : millimeter ha : hectare Mm3 : million of cubic meters Km : kilometer MMT million of metric tons lcpd : liters per capita per day m3/s : cubic meters per second GLOSSARY OF ACRONYMS AGEP : Agence Nationale de l'Eau Potable et Industrielle et de 1'Assainissement AGID : Agence Nationale de Realisation et de Gestion des Infrastructures Hydrauliques pour Irrigation et le Drainage ANB : Agence Nationale des Barrages ANID : Agence Nationale d'Irrigation et de Drainage ANRH : Agence Nationale des Ressources Hydrauliques DGAIH : Direction des Grands Amenagements et Infrastructures Hydrauliques DHW : Direction de l'Hydraulique de la Wilaya DRPUE : Direction de la Reglementation, de la Protection et de l'Usage de l'Eau EPA : Entreprise Publique Administrative EPDEMIA : Etablissement Public de Gestion et de Distribution des Eaux Menag6res et Industrielles et de l'Assainissement EPE : Entrnprise de Production d'Eau EPEA : Entreprise de Production, de Gestion et de Distribution d'Eau d'Annaba EPEOR : Entreprise de Production, de Gestion et de Distribution d'Eau d'Oran EPIC : Entreprise Publique, Industrielle et Commerciale GOA : Government of Algeria MA : Minist6re de l'Agriculture ME : Minist&re de l'Equipement SEDAL : Societ6 des Eaux de l'Agglomeration d'Alger WILAYA(TE) : Province(s)  FOR OFFICLAL USE ONLY DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA WATER SUPPLY AND SEVERAGE REHABILITATION PROJECT Loan and Prolect Summary Borrower Democratic and Popular Republic of Algeria Beneficiar: Not applicable Amount US$110 million equivalent Terms Repayable in 17 years including 5 years of grace, at the standard variable interest rate novertY Category : Not applicable Financing Plan: Local Foreign Total ------ US$ Million--- Requirements : 60.0 110.0 170.0 Financed by IBRD -- 110.0 110.0 Government : 5.9 -- 5.9 Concession Fees : 54. 54. TOTAL SOURCES 60.0 11. I70 LO0 Rate of Return: About 17 percent on the aggregate investments, excluding those for rehabilitating existing wastewater treatment plants, accounting for about 12 percent of the total project cost. Staff AvDraisal Regort No. 12357-AL URa : IBRD 25235 Ili document has a resticted ditibution and may be used by recipients only in the performance of their offii dutis. Its contents may not otherwise be dislosed without World Bank authorizatn.i  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA FOR A WATER SUPPLY AND SEWERAGE REHABILITATION PROJECT I submit for your approval the following memorandum and recommendation on a proposed loan to the Democratic and Popular Republic of Algeria for the equivalent of US$110 million to help finance a Water Supply and Sewerage Rehabilitation Project. The loan would be at the Bank's standard variable interest rate, with a maturity of 17 years, including 5 years of grace. 1. BackgrQuU4. Algeria, a middle-income country with a current population of 26 million, is endowed with moderate water resources. The current available per capita water resources in the northern part of the country, where 90 percent of the population lives, are about 760 m3/year, compared with 1,200 m3/year in neighboring Morocco. By and large, water consulmption in Algeria is for irrigation, urban supply, and industrial process. In 1990 the irrigation sector consumed almost two-thirds of the mobilized re.s.ources, while the rest was used for urban supply and by industries. Presently, irrigated farming is practiced in only 4 percent of the arable land in Algeria. The Government, however, has an ambitious program for expanding irrigation in newly opened land. At the same time, as the population and the economy continue to grow, more water will be needed to meet urban demand. Together with the proposed irrigation expansion. it is estimated that total net water consumption in the year 2010 will reach 5 billion m3, about 75 percent of the total mobilizable fresh water resources in the country. 2. The urban water supply sector in Algeria is fairly well developed in terms of coverage of the population. An estimated 81 percent of the total population has direct access to the pub'lic water supply network through private service lines. The rest of the population is served by standposts and private wells. These services, however, are not provided efficiently. Almost 50 percent of the water production is unaccounted for. It is estimated that, if this percentage can be reduced to a more acceptable level of around 20 percent, required additional water production for urban use by the year 2010 could be reduced by 60 percent, with a proportionate reduction in capital investments in the sector. 3. Service levels are somewhat lower in the sewerage subsector. Public sewer systems exist in most urban areas, but are presently in great need of repair and better operation. Large volumes of wastewater are discharged untreated into the Mediterranean and the rivers. It is estimated that in 1992 less than 20 percent of domestic and industrial wastewater receivAd any treatment prior to disposal. A number of wastewater treatment plants have been built across the country, but most of them are inoperative. As a result, serious environmental degradation has taken place in Algeria's large urban areas. 4. Water supply and sewerage services in Algeria are provided by 35 publicly owned utilities. Some of them are regional organizations, while others are confined to a single province. As parastatals, they have had access to Government subsidies for both capital investments and operations. Until recently, the Government, eager to maintain low water tariffs, had relied on its general revenues to cover these subsidies. This policy, however, is changing as the Government consented in early 1993 to double the tariffs, and to further increase them by 33 percent as of January 1st, 1994. As a result, the utilities, financial situation is forecast to greatly improve in 1994. Still, this  improvement needs to be ironed out in a policy framework that would ensure economic and financial sustainability in the sector. New policies should also aim at introducing greater efficiency in providing water services in the country, so as to promote conservation of the limited resources. The proposed project attempts to put in place these progressive policies. 5. Project Obiectives. The proposed proje_t would seek to ensure that water supply and sewer systems in Algeria are operated and maintained more efficiently. To this end, the oroject proposes transforming the existing parastatals into self-financing water utilities that would manage these systems undee concession agreements with the Governmer.t. The concession fees would be used to finance new investments in the sector, chus easing the sector's burden on the Government's general revenues. The project further recommends contracting out some of the utilities' operations, such as leak detection and repair, and streamlining of meter reading and billing procedures, with private entrepreneurs. At present, a national tariff structure, covering only operating costs, is applied in the country. It is proposed to change this policy with the introduction of regional tariffs that would meet operating and maintenance costs, and asset renewal and expansion in the country. Funds for the latter would be covered by the concession fees. 6. A rehabilitation ptogram would be implemented to reduce the current water losses in the project area by half. Until now, no institution has been in place to manage wastewaters in the country, and no funds have been allocated on a regular basis for operation and maintenance of wastewater systems. This project takes a first step toward rational management of wasLewaters in Algeria, conditioning new investments in sewerage on the availability of well-structured organizations and funds for their operation and maintenance. The expectation is that by the er.d of project implementation, water pollution would be reduced, with consequential enhancement of urban environment and water quality. 7. Eroject Description and Implementation. The project would include: (a) water network rehabilitation (U$$103.3 million): (b) wastewater treatment plant rehabilitation (US$19.7 million); (c) studies and environmental impact assessments (US$15.5 million); (d) supply of operational equipment (US$12.8 million); (e) institutional development assistance (US$15.1 million); and (f) project implementation (US$3.6 million). Detailed estimated project costs and financing plan are provided in Schedule A, while procurement and disbursement methods are given in Schedule B. The project would be implemented by the Ministry of Equipment through its regional offices in the wilayate (Direction de 1 'Hydraulique de la Wilaya - DEW) and the national urban water agency, AGEP, with the assistance of consultants for construction supervision and the studies. Except for the wastewater treatment rehabilitation program, preparations for the other components are about to be completed. A number of wastewater treatment plants to be rehabilitated under the project have been identified during project appraisal. The rest should be selected and appraised at the latest during the first year of project implementation, on the basis of criteria that were agreed upon at negotiations. 8. A Bank loan of US$110 million is proposed to finance the foreign exchange component of tie project. The balance would be financed by concession fees and Government funds. 9. ProJect Sustainability. The proposed policy reforms are expected to provide the institutional environment required for sustainable development of the urban water supply sector in Algeria. Through the establishment of self-  -3- financing utilities, the necessary structure would be put in place for diligent, efficient operation and maintenance of the water systems. Through the concession agreements, funds would be generated to finance new investments in the sector. Under these agreements, the tariffs necessary for the utilities to meet their financial oblivations including the concession fees, would be defined and indexed to inflatJon and cost increases. At the same time, incentives would be proviued to the utilities' management for reducing and controlling costa, by allowing them to share revenue surplus ensuing from operations, amlong their staff. 10. Lessons from erevious Bank Loans. So far, the Bank has made flive loans for a total of US$889 million to the water supply and sewerage sector in Algeria. Two of these are still under implementation. Performance under Bank- financed projects has been mixed, reflecting the institutional constraints in the sector. These projects have contributed to major improvements of water supply services in the country's largest urban areas, but some of the institutional reforms sought with these loans have not materialized. The Bank recently completed a Water Resources Development Strategy Paper on Algeria, spelling out recommendations for institutional reforms in the sector in relation to organizational arrangements and pricing. Also, under the fifth water supply project (Loan 2821-AL), consultants were retained to re-v-iew the management and operation of the water utilities. The Strategy Paper, as well as the consultants' recommendae.ions, have been used to agree with the Government on the structure, orientation, and future policies of the sector. 11. Rat5ionale for Bank Involvemen. The proposed project is in conformity with the country assistance strategy. It tits into the Bank's interim lending strategy for Algeria, that focuses on priority social and infrastructure sectors, such as urban water supply and sewerage. The Algerian Uovernment is facing the difficult task of streamlining management and policies J.n the water sector, with a view to protecting the resource base for future generations. As essential elements of this strategy, it would need to reduce water losses and increase wastewater treatment, as contemplated in the project. It would further have to implement policies and enact regulations that would encourage water conservation. In pursuing these objectives, the Government has indicated its desire to receive Bank assistance. Our involvement would be fully justified, as Bank advice would be quite valuable to the Government in implementing the proposed new institutional approaches. Given the limited water resources in Algeria, the water sector is bound to play an important role in promoting sustainable economic development in this country. 12. There is no international waterway issue under the proposed project. The cities where the water distribution rehabilitation program would be implemented are far away from the borders with neighboring countries. The project contemplates the recovery of water now lost through leaks in the distribution network, but no new withdrawal from water sources. None of the sewage treatment plants that might be rehabilitated unaer the project, discharges treated wastewater into an international waterway. The proposed rehabilitation program of these plants would be most beneficial in improving the quality of water flows in Algeria. 13. A1reed Actions. (a) Institutional Arrangements: There are currently nine regional and twenty-six provincial water utilities in Algeria. Ideally, for economies of scale, it is desirable that the regional utilities take over the provincial ones, so as to provide regional cross-subsidies and lower tariffs in provinces with high costs. Nevertheless, some provinces might decide to stay out of regionalization and to continue operating their own utilities.  -4- But as for the regional utilities, they would have to set out tariffs sufficient to cover their operating expenses and to pay concession fees to the Government. At present, all the utilities rely on a national tariff schedule for their revenues. As outlined in para. 17(c) of this memorandum, beginning January 1st, 1997, regional tariffs will be applied to replace the current national tariffs. 14. It has been agreed with the Government that possible takeover of provincial utilities would be accomplished through managed competition among the regional utilities. To decide on how the merger of a provincial utility should be carried out, regional utilities bordering the province in question, would be asked to submit concessionary bids for the takeover. The most efficiently run regional utility should be expected to win the bid. This process should lead to the least-cost institutional arrangements for providing water supply services in Algeria. 15. While alignment of the provinces into the regional utilities is taking place during the next two and a half years, institutional development assistance would be provided to all the utilities. Meanwhile, concession agreements would be signed immediately with the two besi. run utilities in the country, EPE.OR in the West, and EPEA in the East. In addition to concession fees, the agreements would spell out tariff schedules, network expansion rate, service quality, performance le-als, auditing requirements, and mutual obligations. During the next two and a half years, the execution of these two concess40ons would be monitored to determine any necessary change in the outlined institutional approaches. By January 1st, 1997, concession agreements, as modified during the transitory period and approved by the Bank, would be executed with all utilities in the sector, whether regional or provincial. Project success is dependent upon the structure of these agreements that would dictate sector policies in the country during the next seven years. Given their importance, drafts of the concession agreements were reviewed and approved by the Bank during negotiations. Their execution with EPEA and EPEOR is a condit.on of loan effectiveness. 16. (b) Regulatorv Agency: As concession agreements are institutionalized for sector operations, the Government would need to have in place an independent, strong, financially automous agency to regulate sector management. This agency should supervise the execution of the concessions, keep records of the Government-owned assets in the sector, manage the concession funds, and execute investments to be borne by the Government. In carrying out this task, the agency would need to closely supervise the utilities' operations and quickly take corrective measures when necessary. It has been agreed with the Government to make AGEP this regulatory agency. To this effect, AGEP's present status as a public administration would be changed to a commercial and industrial enterprise (EPIC). A small percentage of the concession fees would be used to finance ACEP's operations. During negotiations, agreement was reached with the Government that the decree setting out AGEP's new role and responsibilities, would be issued by July 1st, 1996. Under the proposed project, institutional development assistance would be provided to AGEP to help it discharge its functions in the sector. 17. (c) Water Tariffs: A national water tariff structure is currently applied in Algeria. However, the Government has agreed, by January 1st, 1997, to adopt a regional-based tariff structure. The Government doubled water tariffs in 1993. They have further been increased by 33 percent since January 1st, 1994. This additional increase was necessary to allow the two selected regional  -5- utilities, EPEOR and EPEA, to meet their obligations under the concession agreements. As part of these agreements, the Government has agreed to index the tariffs to cost increases and inflation. 18. (d) Sewerage Tariffs: Beginning in 1993, the Government had begun levying a surcharge of 10 percent on water charges to cover the operating cost of sewerage. This surcharge was increased to 20 percent as of January 1st, 1994, but iv still considered insufficient. The project sewerage component would cover rehajilitation works that would be selected during project execution. They would account for less than 12 percent of the total costs, and would concern a limited area in the country. Consequently, it is not now recommended to request an overall sewerage tariff increase. Rather, prior to Bank loan disbursement for a sewer&ge subproject, agreement would be reached with the Government on ways to meet its operating and maintenance costs. Also, an appropriate, well-stractured organization should be in place to operate and maintain the facilities built under the subprcjeet. 19. Sector Development Policy Letter. The Strategy Paper mentioned in para. 10 has made a number of recommendatiens concerning the sharing and use of water resources between irrigation and urban supply, the establishment of environmental management offices in the country's hydrographic regions, and wastewater reuse. The Government has transmitted a 'Development Policy Letter", dated -March 19th, 1994, reflecting its agreement to these recommendations. In addition, the letter spelled out the Government's commitment to enter into concession agreements with all utilities by January 1st, 1997. Also, as of that date, regional tariffs would be applied for water cons'.mption. Whenever it is necessary, the tariffs for domestic consumption of more than 220 m3 per family per year, and for public, com-ercial, and industrial consumption would be progressively increased to the levels of the respective long-run marginal costs in the regions by the year 2000. 20. Financial Performance. The proposed concession agreements are expected to enhance financial stability and performance in the sector. These agreements would have a six-year renewable duration. Both the concession fees and the tariffs would be indexed to future cost increases and inflation on an annual basis. The tariffs would be set at the levels necessary to cover operating expenses, pay the concession, and generate a net income equivalent to about 20 percent of the cost of personnel. This income will be retained by the utility and shared among its staff. This scheme is expected to provide strong incentives to the staff for increased productivity and higher performance. 21. Project Benefits. By the time the project is completed in year 2000, the leak detection component is expected to recover some 32 MI3/year. Based on the current production cost of DA 3.0/m3, this component should generate a high rate of return, now estimated to be about 17 percent. The proposed rehabilitation of wastewater treatment plants would provide major health and environmental benefits in terms of water pollution abatement. These benefits include: (i) reduced expenses for health care; (ii) welfare improvement of women and children who are the primary collectors of water; (iii) higher productivity and learning ability of children in school; (iv) improved welfare of the population at large, stemming from a cleaner and better environment; and (v) workers' higher productivity as a result of better health. It is difficult, however, to quantify these benefits in monetary terms. Through the recovery of treated water now unaccounted for, the proposed project would make it possible to stretch out the use of fresh water resources in Algeria, and to postpone resorting to more expensive treatments such as demineralization and desalination.  -6- 22. Environmental AsDects. The proposed program bears a major environmental focus. By stopping water leaks ir the distribution nietwork, it will improve sanitation in urban areas. As a result, waterlogging, would be avoided, lessening the possibility of creating favorible conditions for tho development and spread of vector-borne diseases. Tho rehabilitationi of wastewater treatment facilities wiould contribute to a major improvement of water quality. Nevertheless, because treacment plants and other project construction may have limited adverse environmental effects, the project has been rated Category B. Neiessary precautionis would be takern to keep construction effects such as noise, air pollution, ana populatiotn influx, to a miniwum. 23. Poverty Reductioni. lhe proposed project is not directly targeted at poverty reduction. But it is expected to be most bene