Algeria - Country Assistance Strategy

Documentof The World BankGroup Report No. 25828-AL MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY FOR ALGERIA June 30,2003  The last Country Assistance Strategyfor Algeria (report 15316)) was discussed on Feb. 27, 1996 CURRENCY AND EQUIVALENTS US$1 = 78.2494 DZD FISCALYEAR January 1-December31 ABBREVIATIONSAND ACRONYMS AAEU Association Agreement with the European Union IMF Intemational Monetary Fund ADBA Agricultural Development Bank of Algeria IPCP IndustrialPollution Control Project ADE Algtrienne des Eaux LDB Live database AGEP Agence Nationale de 1'Eau Potable MNA Middle East and North Africa ALM Asset Liability Management METAP Mediterranean Environmental T A Program AND1 Agence Nationale de Developpement de MPPI Ministere de la Participation et de la Promotion I'Investissement de I'Investissement AP Algerie Poste NEAP National Environmental Action Plan ARPT Agence de Regulation des Postes et NEPAP New Economic Partnership for African Telecommunication Development AT Algerie Telecommunications NGOs Non-GovemmentalOrganizations ENAD Entreprise Nationale de Detergents NHA National Health Accounts CAS Country Assistance Strategy OED Operations Evaluation Department CDI Centre des Imports ONA Office National de I'Assainissement CFAA Country Financial Accountability Assessment PNDA Plan National de Developpement Agricole CNI Conseil National de I'hvestissement PPF Project Preparation Facility CNPE Conseil National des Participations de 1'Etat PROGDES Programme de Gestion des Dtchets Solides CPA Credit Populaire D'Algerie QAG Quality Assurance Group CPI Consumer Price Index RAMP Reserves Advisory and Management Program CPAR Country Procurement Assessment Review REER Real EffectiveExchange Rate DGE Direction des Grandes Entreprises ROSC Review of Standards and Codes DLC Distance Leaming Center RTGS Real-Time Gross Settlement DPR Development Policy Review SMEs Small & Medium Enterprises EMTAL Energy and MiningTechnical Assistance Loan SONATRACH Entreprise Nationale de Recherche, ERP Economic Recovery Program d'Exploration et de Commercialisation des FDI Foreign Direct Investment Hydrocarbures FIAS Foreign Investment Advisory Services SONELGAZ Societe Nationale de I'Electricite et du Gaz FLN Front de LiberationNationale VAT Value Added Tax FSAP Financial Sector Assessment Program UFO Unaccounted for Water GDLN Global Development LeamingNetwork UNDP United Nation Development Program GDP Gross Domestic Product WBI World Bank Institute ICT Information, Communications, and Technology WHO World Health Organization IFC Intemational Finance Corporation WTO World Trade Organization The World Bank Vice President : Jean-Louis Sarbib, M N A V P Country Director : Theodore Ahlers, M N C O l Task Manager : Zoubida Allaoua, MNSIF TheInternational Finance Corporation Vice President : Assaad Jabre, CIOVP Country Director : Sami Haddad, CMERC Task Manager : Hadj A. Allaoua, CMEHQ  TABLE CONTENTSOF EXECUTIVE SUMMARY ................................................................................................................................. i I INTRODUCTION . ............................................................................................................................... 1 I1 . COUNTRYCONTEXTAND CHALLENGES ........................................................................................ 1 . 1 B. A Recent Political Developments ....................................................................................................... Recent Economic Developments ..................................................................................................... 2 C. KeyPoverty Trends and Gender Equity.......................................................................................... 5 D. KeyDevelopment Challenges.......................................................................................................... 6 I11 . MEDIUM-TERMPROSPECTSANDEXTERNALDEVELOPMENTS ................................................. 13 IV. THEGOVERNMENT'S GROWTH EMPLOYMENTAND GENERATION STRATEGY ....................... 14 A. Strengthening the Basis for Sustainable and Rapid Growth.......................................................... 14 B. Improving the Effectiveness o f Public Service Delivery ............................................................... 17 C. Improving Living Standards and Strengthening Social Protection ................................................ 18 V. PROGRESSSINCETHE FY96 COUNTRYASSISTANCESTRATEGY .............................................. 19 A. World Bank Retrospective ............................................................................................................. 19 B. 20 IFC Retrospective........................................................................................................................... IBRDPortfolio Management ......................................................................................................... D. C. 23 MIGA Portfolio andProgram............................................................................... 23 VI. THEALGERIA-BANK GROUP'S PARTNERSHIP OVERFY04-06............................................... 23 A. 23 B. Overview o f Bank Group Strategy................................................................................................. Inputsto Strategy Formulation....................................................................................................... 25 D. C. Strategic Engagement Principles.................................................................................................... 26 ProgramPriorities .......................................................................................................................... 29 VI1. RISKMANAGEMENT ..................................................................................................................... 39  BOXES Box 1 Millennium Development Goals ........................................................................................... .7 Who Are the Poor?................................................................................................................. 5 Box 2 Box 3 Bank's Assessment through ICR Evaluations..................................................................... .22 Box 4 Consultations for the CAS.................................................................................................... 26 Box 5 FSAP's Focus ...................................................................................................................... 31 Box 6 Cost Sharing for Analytical and MonitoringWork.............................................................. 38 FIGURES Figure 1 Growth inValued Added, inper cent per year ...................................................................... 3 Figure 2 Primary Non-Hydrocarbon Budget deficit and Fiscalrevenues inper cent o f N o n Hydrocarbon GDP................................................................................................................ 3 Figure 3 Volatility and Growth............................................................................................................. 8 Figure 4 Contributions to Per Capita GDP Growth (inpercent; per year) ........................................... 8 Figure 5 Value Added o f Public Enterprises by Sector (inper cent o f total value added) ..................8 Figure 6 Credit to the Economy (inpercent o f GDP) ........................................................................... 9 TABLES Table 1 Main Macroeconomic Performance Indicators 1990-2002.................................................... 3 Table 2 Medium-Term Prospects-Key Economic Indicators......................................................... 13 Table 3 Algeria Portfolio FY96-03 .................................................................................................. .21 Table 4 Components o f Analytical Work, Advisory Services, and Lending FY04-FY06 ................30 ANNEXES Annex I Private Sector Development Annex 11 CAS Consultations Annex 111 Partnerships Annex B1 Algeria at a glance Annex B2 Selected Indicators o f Bank Portfolio Performance and Management Annex B 3 Bank Group Program Summary (IBRD, IFC, MIGA) Annex B4 Summary o f Non-lending Services Annex B5 Algeria Social Indicators Annex B 6 Key Economic Indicators Annex B 7 Key Exposure Indicators Annex B 8 Status of Bank Group Operations and Statement o f IFC's Held and Disbursed Portfolio  EXECUTIVE SUMMARY The Algeria Bank Group Partnership Over FY04-06 - 1. The last CAS for Algeria-discussed at the Board on February 27, 1996-was designed as a transitional one year assistance strategy to support the massive stabilization program o f the Government elected on November 16, 1995. Algeria was then at a crucialjuncture inits history after emerging from a period of severe acts o f terrorism which led to the loss of thousands o f human lives and the destruction o f infrastructure. There was great uncertainty then about the prospects for peace, social and political stability, and therefore growth. The Bank focused its assistance during that transition on helping the Govemment stay the difficult course o f macroeconomic stabilization while implementing measures to ease the adverse social impact o f the economic and social crisis arising from the impact o f the sharp oil price fall and the acts o f terrorism. ii. Algeria achieved aremarkableturnaround since 1996. GDPgrewby3 percentayear, on average, from 1999 to 2002, with similar performance from the non-hydrocarbon, nonagricultural sector. Macroeconomic imbalances had been turned into sizable surpluses by 2001 and inflation fell from over 20 percent in 1994 to 1.4 percent in 2002. Reserves-US$23.1 billion at end 2002-reached their highest levels since independence in 1962 and surpass now the country's stock o f foreign debt. Despite a difficult socio-political environment, Algeria has succeeded in making a fundamental opening o f the political process, with the end o f the one-party system and the adoption o f policies encouraging democratic principles such as freedom o f the press and association, which led to the emergence o f a vibrant civil society. ... 111. Algeria i s in its early stage o f transition from a centrally planned economy to a market-driven economy. The government has articulated a comprehensive national development agenda focused on reforms to sustain growth, generate employment, and reduce poverty and vulnerability. These reforms cover a broad spectrum of political, institutional, economic, and social issues, are complex, and need to be sustained over the long-term to produce the results required for support from the various stakeholders. The Government recognizes that the social tensions which are the result o f the high unemployment and inadequate public services (in housing and water in particular) will not be reduced without sustained, broad based economic growth. Bank Group Strategy iv. The main goal o f the Bank Group's Partnership i s to support these fundamental reforms through a program of analytical and advisory services, institutional capacity building, and demand driven lending, IFC financing, and/or risk mitigation through structured loans, hedging products, and guarantees. Based on the consultations with civil society and discussions with the Government, Algeria has three key development challenges: (i) how to use its oil and gas reserves for the long-run benefit o f the Algerian population; (ii) how to create growth and employment in the non-oil economy to both benefit from the surge in the size o f the labor force over the next decade and avoid the social tensions that would be caused by increased unemployment; and (iii) how to provide better public services so that all Algerians are able to participate in and benefit from a twenty first century market economy. Bank Group priorities for strategic support mirror these challenges and are: (i) support to fiscal sustainability and hydrocarbon revenue management to buildthe basis for a sustained growth; (ii) support to removing the constraints to private sector-led growth, particularly those affecting the business environment, SMEs, the financial sector, and infrastructure development; and (iii)support the Govemment's efforts to articulate and implement a strategy for better service delivery, particularly for water supply, housing, environmental services (municipal waste management), and human development to meet the critical needs o f its population. IFC will complement the Bank's support through financial sector development, SME support, promoting private investments ininfrastructure and supporting the Government's privatization efforts.  ii Algeria Country Assistance Strategy World BankGroup Portfolioand AssistanceProgram v. The quality o f the Algeria portfolio improved over the past few years following a series o f aggressive measures to improve performance through the closing o f an ineffective stock o f projects contracted during the 1980s. Following a CPPR held inFebruary 2003, a strategy for improving quality at entry and portfolio perfonnance has been put in place in partnership with the different Government agencies. The establishment o f a liaison office, in January 2002, has proved crucial and successful in improving relations with the Government, moving the policy dialogue forward, and improving portfolio implementation. vi. Criteriafor support. The Bank Group's support will be guided by the following three strategic engagement principles: (i) selectivity; (ii) programmatic approach focused on transfer o f knowledge, a capacity building, and improvement o f market perceptions towards Algeria; and (iii) partnerships, outreach and knowledge sharing. The Bank Group's strategic priorities for analytical and advisory services will be subdivided into two categories: (i)Base case engagement; and (ii)High case engagement. Scaling up Bank Group support from the base to the highcase engagement will depend on Government's responsiveness to reforms and implementation track record. The Bank Group will review these priorities in a CAS Progress Report planned for FY05, after the new Government i s in place following the April 2004 presidential elections. The following criteria will guide country programming choices and determine entry into new areas o f engagement or exit from current engagements. These are: (i) Banksupporttothecountry'skeydevelopmentpriorities;(ii) linking engaging in areas where there i s explicit request and an agreement with the Government; and (iii) providing support according to Bank Group's comparative advantage in technical skills, resources, convening power, or ability to mobilize intemational expertise. vii. Lending Scenarios and Triggers. Given Algeria's improved financial position and the medium- term prospects for oil prices, there i s no need for an expanded lending program beyond that which would be needed to deliver the technical assistance. Accordingly, there i s only one base case lending scenario and Bank lending i s not expected to exceed US$lOO million a year, including the risk mitigating instruments. If circumstances change, including sharp and sudden falls in oil prices, or if the Government requests additional financial support beyond what i s planned in the base case scenario, the Bank would consider such a request inthe context o f the planned CAS Progress Report. viii. IFC and MIGA. IFC's activities inAlgeria expanded significantly following the improvements inthe political, security, and macroeconomic environments as well as the Government's early efforts at liberalizing the economy at the turn o f the millennium. As o f April 30, 2003, IFC's net committed portfolio in Algeria was US$58.6 million. IFC's portfolio has performed well. IFC's competitive position and comparative advantage in Algeria remains strong due to the perceived country risk and the low level o f private sector development. MIGA has facilitated an estimated total amount o f foreign direct investment inAlgeria o f US$248.4 million. ix. Risk Management. While Algeria's strong external position positively impacts credit risk when taking a short to medium term view, the country's weak commitment to structural reforms, the existing political and social problems, and the economy's hydrocarbon dependency remain important long term risk factors.  ALGERIA-WORLDBANKGROUP PARTNERSHIPFORCOOPERATIONAND DEVELOPMENT I. INTRODUCTION 1. This document` provides a framework for a partnership between Algeria and the World Bank Group for FY04-06. The relationship between Algeria and the World Bank Group has been strengthened over the past few years. A liaison office was established in Algiers in January 2002, and a significant program o f analytical work and advisory services was requested by the Algerian Government. The Government would like the Bank Group to continue to fill their knowledge gap in the areas o f fiscal sustainability in the face o f volatile oil prices; policies to remove bottlenecks to growth and encourage private sector-led and labor-intensive growth; financial sector development; and policies to improve public service delivery (education, health, water and housing) and efficiency and financial sustainability o f the social protection system (including, active labor market policies, the formal pension system, and safety nets). The Government has been deeply engaged with the Bank on the education, health, agriculture and rural development reforms agenda. The Government sees these reforms as crucial to the growth, employment, and poverty reduction strategy. 2. Accordingly, the Bank's role over FY04-06 will focus on helping Algeria reduce risks for investors and improve market perceptions, facilitating knowledge sharing, and providing policy advice. Financial support from the Bank will be flexible and largely focused on technical assistance to help Algeria's institutions modernize and play a more effective role in the new market environment, and support inrisk mitigation. IFC i s expected to scale up its transactions and advisory services, particularly inprivatization and SMEs. This is inline with the MNA regional strategy and the recommendations of the task force on strengtheningthe WorldBank Group's Support for Middle-Income Countries. 11. COUNTRYCONTEXTAND CHALLENGES A. Recent Political Developments 3, Despite a difficult socio-political environment, Algeria has succeeded in making a fundamental opening o f the political process, with the end o f the one-party system and the adoption of policies encouraging democratic principles such as freedom o f the press and association, which led to the emergence o f a vibrant civil society. Upon his election inApril 1999, President Bouteflika embarked on a domestic reform agenda and international initiatives, including assuming a leadership role inthe New Economic Partnership for African Development (NEPAD), serving as a mediator in regional conflicts, and being the first Algerian President to attend the Francophony Summit in2002. 4. On the domestic front, the President openly debated the corruption issue in the country and formed commissions to propose economic and social policy reforms; with a particular focus on the remaining agenda o f reforms: (i)the judicial system; (ii) role o f the public administration under the the new market environment; and (iii) the education system, with a view to aligning the latter with the needs o f the new market and knowledge economy, Violence related to the extremist fundamentalist movements, which emerged in the early 1990s, has receded and the security situation has dramatically improved. However, there are still sporadic attacks by radical Islamists; and pockets o f violence mainly inthe rural areas, and against the military, havepersisted. This strategywas preparedwith full participationof the govemment of Algeria and civil society. Itreflectsthe changingnature of the Bank Group's engagementwith the Algerian Government and major stakeholders there. It outlines a framework through which World Bank Group's support to Algeria could be strengthened through a demand-driven support to reforms which the Governmentis readyto implementwith advice fromthe Bank Group.  2 Algeria Country Assistance Strategy 5, The social unrest, which started in the Kabylie region in 2001, and which led to the boycott o f the legislative and municipal elections in2002 inthis region, has been the focus o f the political debate in Algeria. It has also been at the top of the Government's agenda. While there are some signs o f improvement, the social unrest in the region has not disappeared, and the situation there remains tense. At the national level, problems remain because the root causes o f the social discontent-lack o f accountability, high unemployment and the severe water and housing crises-remain. As is the case in many countries facing major elections, the Government may have to face pressures to slow down reform implementation, to increase public spendingto create jobs, and strengthen social protection inthe run-up to the Presidentialelections, which are scheduled to take place inApril 2004. 6. There was a low turnout at the legislative elections which were held in M a y 2002 (with only 46 percent o f eligible voters casting their votes nationwide against 65 percent in the 1997 legislative elections). The Front de LibCration Nationale (FLN), the former single ruling party, won a majority in both the legislative and local elections which were also held in2002. B. Recent Economic Developments 7. Algeria entered the new millennium with more hope. Starting from a position o f extreme vulnerability in the early 1990s-low oil prices, unsustainable foreign debt servicing, severe acts o f terrorism which led to the loss o f human lives and infrastructure, social and political tensions, and external isolation-it has achieved a remarkable turnaround. 8. Algeria established a strong record o f implementation under the stabilization and structural adjustment programs started in 1994 with the support of the IMF and the World Bank. Successful stabilization inthe face o f volatile oil prices, and some progress in structural reforms, have laid the basis for a growth recovery. GDP grew by 3 per cent a year, on average, from 1999 to 2002; with similar growth performance from the non-hydrocarbon, nonagricultural sector, led by a strong 5 percent real growth in value added from private manufacturing industries. GDP growth reached 4.1 percent in2002. Higher oil prices and tighter demand management turned fiscal and current account deficits into sizable surpluses by 2001 and inflation fell from over 20 percent in 1994 to 1.4percent in 2002, due to a marked drop o f domestically produced food prices which make up to 50 percent o f household consumption expenditure. The drop in food prices resulted from increased supply o f non-cereal agricultural output, combined with tax reductions on small food traders (which account for most o f the food market), and lower import tariffs. As a result o f price, trade and exchange rate liberalization, the dark days o f severe rationing o f goods and services are long gone. 9. Public expenditure adjustment has played a central role in economic developments in Algeria in line with oil price movements. Historically, Algerian Governments have tended to relax demand management policies during oil booms and tighten them during busts. High unemployment, mounting social tensions, and increasing pressure to use the large reserves accumulated since end-1999 to relieve economic and social conditions, pushed the Government to relax its fiscal stance. The government launched in April 2001 an Economic Recovery Program (ERP) for 2001-04 using the windfall oil revenues to boost aggregate demand and generate jobs through public investment in infrastructure and support to agricultural production and to small-and-medium enterprises. The ERP is a capital expenditure program which aims at spending a total of DA525 billion (about 13 percent o f the 2000 GDP) over 2001-04, in addition to the regularly budgeted capital outlays. The increase in public spending turned the 9.9 percent o f GDP fiscal surplus in 2000 into a 1.3 percent o f GDP deficit in 2002, reflecting higher spending but also a decline inhydrocarbon revenues in2001 and 2002 (see Figures 1&2 and Table 1).  Algeria County AssistanceStrategy 3 ~~ Figure I: Growth in Value Added, in per cent per year Figure 2: In Percent of Non Hydrocarbon I Agricu'turu 50 , Primry Non Hydrocarbon Budget Deficit I Services I t 40 Hydrocarbon Fiscal Revenue industry ' V 7 15 0 1 , , I , , I , , I , , I , , , , m . , , , 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Table 1: M a i n Macroeconomic Performance Indicators 1990-95 1996 1997 1998 1999 2000 2001 2002 RealGDP growthrate (%) 0.3 4.1 1.1 5.1 3.2 2.4 2.1 4.1 Realgrowthofnon-hydroGDP (%) 0.1 3.1 -1.3 5.7 1.7 1.2 4.5 4.3 Consumer priceindex (%change) 27.3 18.7 5.7 4.9 2.7 0.3 4.2 1.4 Central Gov. Finances (percentage of GDP) Total revenue 29.7 32.2 33.5 27.8 30.0 39.2 35.0 35.6 Hydrocarbonrevenue 17.6 20.3 21.4 15.3 18.6 30.2 24.0 20.7 Non-hydrocarbonrevenue 12.1 11.9 12.1 12.5 11.4 9.1 11.0 14.9 Totalexpenditures 31.4 29.2 31.2 31.7 30.5 29.3 31.6 36.9 Wages & salaries 9.2 8.3 8.5 9.3 8.8 7.0 7.5 7.4 Interestpayments 2.3 3.5 4.0 4.0 4.0 4.0 3.5 3.1 Investment 7.5 6.8 7.3 7.6 5.9 8.0 8.5 10.2 Other expenditures 12.3 10.7 11.4 10.8 11.9 10.3 12.2 16.2 OveraNJiscal balance -1.7 2.9 2.4 -3.9 -0.5 9.9 3.4 -1.3 External Sector (billions of US$,unless otherwise specified) Merchandise exports 11.1 13.2 13.8 10.1 12.3 21.7 19.1 18.8 o/w hydrocarbons 10.6 12.7 13.2 9.7 11.9 21.1 18.5 18.1 Merchandise imports 8.8 9.1 8.1 8.6 9.0 9.3 9.8 11.7 Interestpayments 2.1 2.2 2.1 2.0 1.9 1.9 1.5 1.2 Currentaccount balance (% of GDP) 0.3 2.2 7.2 -1.9 0.0 16.7 12.4 8.6 Overall balance (??of GDP) -4.0 -4.5 2.4 -3.7 -5.1 14.2 11.3 7.2 Reserves, excluding gold 1.6 4.2 8.0 6.8 4.5 12.0 18.1 23.1 inmonthsof importsof G&S 1.8 4.5 9.4 7.6 4.7 12.3 17.8 20.0 Foreign debt 28.9 33.6 30.9 30.7 28.0 25.3 22.5 22.6 inpercent of GDP 70.2 73.7 65.3 66.6 61.2 47.3 41.5 40.7 Debt service (% of exp. of G&S) 64.8 30.1 29.7 47.2 39.8 19.8 21.9 20.1 Memorandum Oil price for Algeria (US$ibbl) 19.4 21.7 19.5 12.9 17.9 28.5 24.9 25.3 Exchangerate DA/US$ 25.9 54.7 57.7 58.7 66.6 75.3 77.2 79.7 Exchangerate DA/ 32.3 69.4 65.4 65.8 71.0 69.5 69.2 75.4 Source: Bandand I M F staff, Algerian authorities. 10. The oil boom has generated an unprecedented accumulation o f net foreign assets which led to a rapid monetary growth from 12.5 percent in 1999-2000 to over 20 percent in 2001-2002, per year, on average. Inturn, a strong excess liquidity emerged inthe (public) banking system, due to higher deposits  4 Algeria Country Assistance Strategy by the oil company, the substitution o f public banks' non-performing loans mostly to public enterprises (equivalent to 12.5 percent o f the 2001 GDP) with Treasury bonds, and a recapitalization o f three public banks. Despite tightened monetary stance, excess liquidity remains sizeable (M2/GDP was 68 percent in 2002 compared to 50 percent in 2000), highlightingthe thinness o f the financial system. Credit to the economy, representing around a quarter o f GDP, has grown by around 8.5 percent in 2001-2002, mostly due to increased credit to the private sector, although the latter still absorbs only about a third o f the total credit to the economy (see Figure 6). The low share of credit to the private sector i s consistent with private sector's complaints about lack o f access to credit and public banks' complaints about the lack o f bankable projects from the private sector. As a result, private investment financing continues to rely on non-bank sources o f financing. 11, On the external front, the balance o f payments averaged a surplus of 11percent o f GDP in2000- 2002. The surplus in the current account o f the balance o f payments was reduced from 12.4 percent in 2001 to 8.6 percent in 2002 due to lower exports and increased imports, while the capital account deficit has also narrowed over the same period, following higher FDI-mainly in the hydrocarbon sector, investments inthe telecommunications sector, proceeds from the privatization o f a large steel company- and lower debt amortization (see Table 1). 12. External debt decreased markedly since 1997 reaching US$22.6 billion (40.7 percent o f GDP) at end 2002, down from a peak o f US$33.6 billion at end 1996. Debt service declined from 29.7 percent in 1997 to 20.1 percent of exports. Reserves--US$23. lbillion at end 2002-reached their highest level since independence and have surpassed current foreign debt levels, turning Algeria into a net creditor to the rest o f the world. The average real effective exchange rate (REER) has remained broadly stable over the past two years andthe parallelmarketpremiumhas shrunkto 20 percentin2002. 13. Vulnerabilities. Despite these remarkable achievements, Algeria remains vulnerable to oil price shocks. The oil sector inevitably continues to affect economic developments in Algeria, as it directly contributes to around 30 percent o f GDP, provides between 65-70 percent o f total fiscal revenues, and generates around 97 percent o f total export revenues. The pressure to use the windfall oil revenues to boost aggregate demand and generate jobs through the ERP i s not without risks. A mid-term evaluation o f the ERP shows that the program will likely have a positive although moderate impact on the real rate o f growth and is expected to create some 850,000 jobs. These jobs, however, will be temporary. The ERP is also expected to have an impact on the balance o f payments, as the current account surplus i s expected to fall by one percent o f GDP over the life o f the program, because o f its strong import content. In terms o f the effects on public finances, much of the initial cost o f the program may be offset if the exchange rate depreciates and thereby increases dinar-denominated oil export revenues, and if higher non-oil revenues result fkom higher output. However, Government's gains will be offset by losses elsewhere inthe economy due to higher import costs and potential inflation and exchange rate pressures. 14. External vulnerabilities are also considerable. Algerian exports are among the least diversified in middle-income countries. Non-oil exports account for around 3 percent o f total exports. Seventy five percent o f non-oil exports are destined to only 5 countries, mostly in southern Europe, and most enterprises producing exportable goods are State-owned, enjoying considerable protection. The lack o f diversification has increased revenue volatility. At the same time, dependence on food imports has increased and the economy remains highlydependent on imported inputs and capital goods. 15. Finally, the resumption o f growth inthe non-hydrocarbon sector i s fragile since it i s still fuelled by public investment and therefore vulnerable to oil price swings. Private investmentis weak due to the incomplete structural reform agenda which has not yet yielded a conducive business environment, Access to basic services such as information and telecommunication, transportation, housing, and water fall short o f the growing demand, and the quality o f education and health services has deteriorated. Unemployment affects mainly the young (80 percent of the unemployed are under 30), first time job seekers (76 percent o f total), the less educated, urban dwellers, and females. The tight stabilization  Algeria Country Assistance Strategy 5 programs over the 1990s, the incomplete reforms and lack o f private sector supply response have naturally not ledto the growth rates which would have allowed an improved welfare o f the population. 16. Algeria, therefore, still faces formidable challenges to consolidate and strengthen macrostability and complete the transition to a sustainable market-based economy by improving the investment climate, and increasing productivity growth. The strengths and vulnerabilities discussed above have recently brought to the fore the need to explore policy options to shelter the economy from the influence o f oil price volatility and encourage private sector development. This calls for the management of the oil windfall within an asset and liabilities management framework, ensure fiscal sustainability, strengthen the output stabilization role of fiscal policy, improve the investment climate to diversify the economy away fiom oil products and increase productivity growth. This reform agenda i s essential to provide the basis for an annual real growth o f GDP over 5 percent a year, which will be required to reduce unemployment and poverty significantly. The Algerian economy i s also threatened by endemic natural hazards-floods and earthquakes and environmental degradation (soil erosion and desertification). C. Key Poverty Trends and Gender Equity 17. The social impact of the 1986 oil crisis has been high. The fall ineconomic growth from over 6 percent a year from 1970 to 1985 to a mere 1.6 percent per year since 1986-well below annual population growth of 2.2 percent duringthe same period-has ledto increased vulnerability and poverty. According to the 1995 household survey data, 14 percent o f the population was below the poverty line; up from 8 percent in 1988. Although more recent poverty estimates are not available, poverty incidence i s likely to have increased over the last decade, due to low growth and high unemployment, and a stagnation of private per capita consumption between 1995 and 2000. An update o f poverty trends, usingthe recently available 2000 household budget survey, is on-going. 18. Algeria's poor are concentrated in rural Box 1: Who Are the Poor? areas. Seventy percent o f the poor live in rural areas and more than half o f the rural population i s The poor in urban and rural areas have some common poor (see Box 1). The rise inpoverty incidence i s characteristics. Both tend to have larger than average household sizes, a large proportion of children and a high strongly linked to unemployment. The dependency ratio. Most own their dwellings, with 80 combination of a high labor force growth percent living in traditional houses. The poor are more (3.4percent during the 1990s resulting in an likely to live inmorecrowdedhousingconditions. estimated annual average o f 250,000 new entrants Inrural areas, people living inhouseholdswhere the headis in the job market), labor shedding in public working in agriculture, either as farmer or as agricultural enterprises, and the slow growth o f employment in worker, have higher than average rates of poverty. Only about 25 percent of the rural poor have landholdings. The the private sector, have all contributed to keep land-owningpoor have small holdings which are primarily unemployment high. non-irrigated. Diversification of income sources is more common inurbanareas for boththe poor and non-poor. 19. Lack o f income i s only one dimension o f Poverty is strongly associated with low education and poverty. Lack o f opportunity, empowerment, and schooling. Enrollment rates are lower for the poor, access to social services, all contribute to particularly in secondary education, in rural areas and deepening income poverty. The rural poor, among women. The incidence of poverty among particularly women, continue to face access households headed by individuals with no schooling is muchhigher than for those whose heads are more educated. problems, with widening disparities in access to Educational achievements tend to be lower for rural social services. This i s particularly true for access households, for the poor, and for women. According to the to health services and to secondary education. 1995 householdsurvey, poverty incidenceis highest among Reaching the MDG target (under goal 3) of the illiterate, especiallyfor the rural poor and women. The illiteracy rate is highest for rural women (46 percent) substantially increasing the share o f women wage followed by urban women (29 percent), rural men (22 employment inthe non-agricultural sector will be a percent) and finally urban men (13 percent). For both challenge (see Box 2). Insecurity and civil unrest genders and sectors, these rates are highest for the poorest further contribute to poverty, restricting liberty o f decileanddeclinewith higher living standards. movement and rendering more difficult the Source: Algeria PovertyAssessment#18564-AL.  6 Algeria Country Assistance Strategy provision o f public and social services. Social support structures and networks are weakened during conflicts, and families and communities are severely affected socially, economically, and psychologically. 20. Algeria's constitution (art 29) guarantees gender equality. Algerian women have the right to vote, to be elected, to work, and to be educated. Labor laws guarantee gender equality for work and pay. The laws also protect working women's rights and there are no legal or institutional gender discriminatory policies except from those contained inthe Family Code. The latter has been contestedby various rights organizations because o f its open discrimination against women. The Government has expressed its willingness to act to abrogate all discriminatory provisions o f the Family Code. Algeria has also signed the Convention on the Elimination o f Discrimination against Women in 1996, albeit with reservations. A new Ministryin Charge o f the Family and Women's Affairs was created in June 2002. There are five women cabinet ministers in the current Government and the largest national trade union, UGTA,has recently established a women's committee. 21. There are no significant gender disparities in access to education, particularly in urban areas. According to the most recent census (1998), the rate o f schooling for girls inurban areas i s 87.4 percent compared with 88.7 percent for boys. Inthe remote rural areas, this rate drops to 60.5 percent for girls and 74.3 percent for boys (see Box 1). Secondary school enrollment i s lower for the poor and for girls, particularly inrural areas. Girls' retention in school depends primarily on parental choice particularly in rural areas. Parental decisions are mostly based on the cost of schooling since parents who face financial difficulties tend to prefer to withdraw their daughters rather than sons fiom school. Insecurity and inadequate supportive infrastructure (transport, lodging and food on the premises) also contribute to girls dropping out of school. D. Key DevelopmentChallenges A complex transition awayfrom state dominance and high dependencyon oil 22. Algeria's key development challenges are: (i)building a political, social, and economic environment that would bring growth, employment, social cohesion, and poverty reduction; (ii) reducing the economy's high dependence on oil exports and its high vulnerability to oil price volatility; (iii) buildinga conducive investment climate to encourage private investment (foreign and domestic); and (iv) improving the effectiveness o f public service delivery (respect for the rule o f law, education, health, social protection, water supply and sanitation, and housing) to reduce the cost of doing business, improve growth prospects and living standards, and achieve the MillenniumDevelopment Goals. 23. Thefirst and major developmentchallenge i s to restore social and political stability and reduce resistance to change. International experience shows that resistance to change, either due to ideological positions or to fear o f losing one's privileges, remains, as in a number o f other countries facing similar transition issues, a major development challenge. And as it has been demonstrated in a number of countries facing the same problems as Algeria, the lack o f consensus on a minimumplatformfor reform leads to half hearted policy implementation, desire for the state to remain in control, and frequent changes of government. This in turn, reduces the effectiveness of the government to carry out the necessary reforms, prolongs the transition, increases its costs and delays the expected benefits from reforms and with them public support for reforms. For any country, including Algeria, income growth, improved governance, better public service delivery, and empowerment are crucial to buildinga political, social, and economic environment to sustain growth, employment, social cohesion, and poverty reduction. This can only be achieved by a broad-based dialogue on the strategic development objectives, transparency in decision making processes, and continued deepening o f the democratic process. Such a dialogue will help improve communications and build consensus between the Government and the other important stakeholders (such as civil society, political parties, legislative branches, trade unions, and the army) for a sustainable growth and poverty reduction strategy.  Algeria Country Assistance Strategy 7 1990 2000 Percentageshare of income or consumptionheldby poorest 20% 6.5 7.0 Prevalence of child malnutrition (% o fchildren under 5) 9.2 6.0 Population below minimumlevel of dietary energy consumption (%) 3.6 5.7 1990 2000 Net primary enrollment ratio (% of relevant age group) 92.9 Percentageo f cohort reaching grade 5 (%) 94.3 Youth literacy rate ("hages 15-24) 77.6 90.0 1990 2000 Ratio of girls to boys inprimary and secondary education (%) 79.6 93.51 Ratio of young literate females to males (% ages 15-24) 79.2 90.0 Share of women employed in the nonagricultural sector (%) 12.3 Proportion of seats heldby women innational parliament (%) 3.2 (1985-96) 6.2 (2002) I I Target 5: Reduceby two-thirds, between 1990 and 2015, the under-five mortality rate. I 1990 I 2000 Under 5 mortality rate (per 1,000) 69.0 50.0 Infant mortality ratio (per 1,000 live births) 46.0 33.3 Immunization, measles (% of children under 12 months) 83.0 80 1990 2000 Matemal mortality ratio (modeled estimate, per 100,000 live births) 160* 150* Birthsattendedby skilled healthstaff of total) 77.0 92 1990 2000 Forest area (% o ftotal land area) 0.8 0.9 Nationally protected areas ph o f total land area) 2.5 GDP per unit of energy use (PPP $ per kg oil equivalent) 4.8 5.4 CO2 emissions (metric tons per capita) 3.2 3.6 Access to an improved water source (% ofpopulation) 94.01 Access to imrovedsanitation (% ofpopulation) ... 73.0 Algeria has progressed significantly over the past few years with regards to its environmental managementcapacity. Specific institutions have beenestablished or strengthenedat the national and local level. The next step is to improve enforcement and voluntary compliance procedures. * Water is however severely rationed. Source: WorldDevelopmentIndicators database,April 2002 (except Women inParliament Data - Source: Afirican Development Bank gender statistics and Intemational Parliamentary Union (IPU))  8 Algeria Country Assistance Strategy 24. In addition, besides the poor governance, Algeria's efforts to attract foreign private investment are hindered by terrorism and the fears o f political instability. Algeria suffers from severe "headline risk". For a long time the news coming from the country have been dominated by negative stories. Despite the remarkable improvement last year, the acts o f terrorism and sporadic hllings are still scary news for many investors, and the market will take time to give credit to the country for increased stability. Algeria needs therefore to pursue its efforts to improve the investment climate and achieve concrete and measurable results to help dispel these negative perceptions. 25. The second challenge i s to manage 1.: hydrocarbon revenues with a long-term Figure 3: Volatility and Growth perspective, including to reduce Algeria's vulnerability to oil price volatility. With the hydrocarbon sector at the heart o f the Algerian economy, economic performance since independence has in large part been shaped by oil Algeria price movements. Algeria shares the growth pattern o f other oil-producing countries but its exposure to oil price volatility has been very high * * because o f i t s near total dependence on hydrocarbon exports revenues (see Figure 3). Oil -4 ' J price volatility and a large share o f govemment in 0 10 20 30 40 50 the economy have had a mutually reinforcing Standard deviation of annualterms of trade changes Source: World Bank ReDort. adverse impact on productivity and growth (see Figure 4). The pervasive state controls and price and policy distortions, including the limited openness to non-hydrocarbon trade and foreign direct investment, led to growing inefficiencies which negated the returns to the impressive rates o f public investment duringthe 1970s and 80s (see Figures 4 & 5). Figure 4: Contributionsto Per Capita GDP Growth Figure 5: Value Added of Public Enterprises (in percent; per year) by Sector (in per cent of total value added) 1 1 100 Hydrocarbons "14 so 60 Constructionand public 40 20 ~ E ~ ~ $ E P ~ S P H E 1 ~ I 1 I P 0 ~ E E ~ ~ ~ ~ ~ ~ ~ Source: World Bank Report 1963 4930 1891 l S S 2 1993 1834 3985 1886 1987 i908 1999 2000 26. Future growth prospects will continue to be shaped by developments in the hydrocarbon sector. The impact of changes in hydrocarbon revenues on the rest o f the economy will be determined in great part by the efficiency with which these revenues are intermediated by the government. Strengthening fiscal policy, in the context o f an integrated fiscal framework, which would include the Revenue Stabilization Fund, to insulate the fiscal stance from volatile hydrocarbon fiscal revenues, so as to better manage macroeconomic volatility and secure fiscal sustainability, will be key to sustained acceleration o f growth. Such a framework would include: (i)establishing an asset liability management (ALM) framework using risk management tools to reduce the impact o f the price volatility o f hydrocarbons on public finances; (ii) reducing the exposure o f the budget to the volatile hydrocarbon fiscal revenues which leads to a pro-cyclical fiscal stance that has exacerbated volatility in the past; (iii) smoothing out the impact o f hydrocarbon revenue volatility on bank liquidity, which has complicated the management  Algeria Country Assistance Strategy 9 o f monetary policy; and (iv) securing sustainability of public debt in the long term as the primary non- hydrocarbon budget deficit i s large (about 25 percent o f non-hydrocarbon GDP) and hydrocarbon fiscal revenues are eventually exhaustible. 27. Futuregrowth prospects also dependonreducingthe economic andhealth costs o fenvironmental degradation. The direct negative impacts o f environmental degradation on health, natural capital, productivity and efficiency o f resource use have been conservatively estimated at 5-7 percent o f GDP. About 2 percent o f GDP i s lost due to the direct impact on health and the quality o f life; another 2 percent o f GDP loss i s due to the degradation o f the country's natural capital. 28. The third development challenge is to improve the business environment. The Algerian state remains heavily involved inthe provision o f goods and services, well beyond what would be justified by the objectives o f regulation or redistribution, and in excess o f its capacity to deliver. Although Algeria i s less o f an administratively managed economy today than it was a few years ago, the legacy o f a centrally planned economy i s still present. Public sector management remains too centralized. The public enterprise sector remains large (see Figure 6) and the financial sector i s dominated by public Figure 6: Credit to the Economy banks which do not seem to have the full (in percent of GDP) 30 autonomy to manage as commercial entities. The Algerian civil service i s underpaid and not 25 equipped to play its role in supporting the 20 transition to a market-based economy. Not 15 only does this affect efficiency and innovation, 10 but it also creates opportunities for stalling reforms, mismanagement, and corruption. 5 0 29. The results o f a 2002 country-wide 1994 1995 1996 1997 1998 1999 2000 2001 investment climate survey o f 570 firms, an Creditto public enterprises Credit to the privatesector analysis o f constraints to foreign direct Source: World Bank Report. investment in Algeria (Foreign Investment Advisory Services (FIAS) Report), and extensive consultations with private entrepreneurs in the country show that persistingbarriers, many related to administrative and business practices that often contradict the spirit o f the reforms introduced, raise the cost of doing business in Algeria and undermine the competitiveness o f the private sector. Foreign investors' confidence has been negatively affected by Algeria's perceived high political risk due to the continuing violence in the country, delays in privatization, and what i s perceived as a resurgence o f discriminatory and protective measures. 30. The main constraints (see Annex I) private sector development are: to 0 A large public sector incontrol o f economic activity; 0 Shortages o f industrial real estate; 0 Difficulties inraising capital ; 0 Serious administrativebarriers and limited access to information; 0 Shortcomings inlabor regulations and few skilled workers; 0 Inadequate infrastructure; and 0 Ineffective legal andjudicial system.  I O Algeria County Assistance Strategy 31. With a tradition o f high savings, good educational attainment, abundant hydrocarbonresources, and an advantageous geographic location, Algeria has great potential for rapid and sustainable growth in the non-oil sector. For this to happen, however, Algeria needs a friendlier business environment to support the development o f the emerging private sector-the crucial pillar o f a sustainable growth and employment generation strategy (see Annex 1for policy recommendations). This would include: Effectively reducing state intervention to encourage private sector-led growth by privatizinghestructuringpublic sector enterprises; removing bottlenecks to registrationo f private firms; withdrawing the State from the provision o f business services; eliminating red tape; developing a sound market-based financial system to increase the efficiency o f resource allocation, including by privatizing public banks and strengthening prudential regulations and supervision; ensuring access to infrastructure, inparticular to land. Increasing the state's capacity to regulate the market and encourage the private sector to adopt good corporate governance through the establishment o f the basic legal framework o f a market economy, including well-defined property rights (inparticular for land ownership), enforceable contracts and decisions, and the security of an efficient, honest, and effective judiciary, and tax and customs authorities. The weak legal and judicial system and the lingering security concerns combine to increase the risk aversion towards investing inAlgeria. 32. The Association Agreement with the EU offers a tremendous opportunity for Algeria's integration in global trade markets, but also raises important challenges. New enterprises should be encouraged to take advantage o f export opportunities in the emerging Euro-Mediterranean free-trade zone. At the same time, import-competing industrieswill be exposed to increased competitive pressures once the Temporary Additional Tariff ("Droit Additionel Provisoire"; DAP) i s removed. Companies in these industries-especially public enterprises-will need to undergo considerable restructuring and improve their efficiency in order to withstand competition. Algeria has made progress towards achieving competitive unit labor costs in a number o f labor-intensive industries that are important for job creation. Consolidating such competitive positions would need a business environment, to promote investment in these industries and foster productivity growth. Improving the efficiency of infrastructure and trade- related services, streamlining customs procedures, and upgrading product standards to international norms would improve Algeria's attractiveness for export-oriented investment, allowing Algeria to reap the benefits from a free-trade zone for industrial products with the EU. 33. Thefourth challenge i s to improve access to and the quality ofpublic services. Access to basic services, including a well functioning judicial system, are crucial to create the jobs and growth required for poverty reduction and to ensure that the most vulnerable and least endowed, including women, participate in such growth. 34. Human Development and Social Protection. Algeria tried, from independence in 1962, to improve the living standards o f the population through significant investment in human development, public employment generation, and extensive social protection schemes. With growth rates over 6 percent per year and booming oil revenues from the mid 1970s to the early 1980s, Algeria invested heavily in human development, with average expenditures on education and health approximating 10 percent o f GDP. Access to basic social services expanded rapidly, and social indicators improved dramatically. But the decline in oil prices led to a fiscal contraction which affected the social sectors. The reduction in expenditures has not been accompanied by higher allocative and technical efficiency. Reforms to improve efficiency are crucially needed to preserve and increase the gains in social indicators achieved so far, and for Algeria to reach the Millennium Development Goals.  Algeria Country Assistance Strategy I1 35. The weaknesses o fthe education systemhave become evident inthe face o f mountingbudgetary constraints and growing demand. First, there are important inefficiencies in the allocation o f resources. Most o f the budget goes to pay salaries with little left to spend on inputs and infrastructure. As a consequence quality has deteriorated and the internal efficiency o f the system has suffered (only 12 out 100 students entering primary education ever obtain a high school diploma). Second, regional and gender inequalities in terms o f access and outcomes persist and public subsidies are poorly targeted. The problem i s particularly severe in the case o f higher education where the government covers 90 percent o f expenditures. The subsidies have generated an over supply o f graduates, often without the necessary skills, who are finding it difficult to find jobs. The vocational training system i s expensive and not in line with current market demands. It i s focused on training as a mechanism to assist those students who drop out o f basic or secondary education (60 percent o f students). Inthe absence o f competition among training centers, quality suffers and programs become irrelevant to the needs o f the new market economy. 36. Algeria i s close to meeting many o f the MDGs in the education sector. Literacy amongst 15-24 year olds i s over 90 percent, for example, and there i s almost universal primary education enrollment (Box 2). The institutional weaknesses and inefficient resource allocation described above, however, will limit the capacity o f the education system to address the education needs o f that last group o f Algerians who do not yet have access to adequate basic education services. Furthermore, there i s a risk that gaps may widen as the education system continues to have difficulty providing education services to rural areas, particularly to girls. 37. Algeria has made considerable efforts to ensure access to health services to its population. As a result, health indicators have improved dramatically. However, reforms are needed to improve the effectiveness, efficiency and quality o f delivery in the health sector. The rapid demographic transition will increase further financing needs. The country faces the double challenge o f addressing the increasing prevalence o f chronic (and expensive to treat) diseases, while still being confronted with prevalent infectious diseases. At the same time, the prevalence o f stunting in children under the age o f five i s still high (18 percent). Preventive services to diagnose and prevent diseases that affect mainly women are also inadequate. The current weaknesses in the health system can jeopardize progress in achievement o f the MDGs (infant and maternal mortality, malnutrition). 38. Algeria has developed a comprehensive but complex structure o f social protection programs. The social protection system, largely managed by the Government, costs around 9 percent o f GDP and reaches about 30 percent o f the population. It combines three types o f mechanisms: (i) active and passive labor market programs; (ii)health, old-age, and unemployment insurance; and (iii)social assistance programs (including family allowances and targeted cash transfers to vulnerable groups). The systemhas had mixed results. Ingeneral, active labor market policies such as training and wage subsidies have tried to substitute for structural reforms that reduce labor market rigidities and promote growth. Support to agricultural producer prices (cereals) have also been used as a social protection instrument, distorting agricultural markets as well, as i s the case in many countries which used this instrument. Results fell short o f expectations. In terms of social assistance programs, the main problems are linked to inappropriate targeting mechanism and monitoring systems. 39. Insurance systems (health, old-age and unemployment insurance) are unsustainable, and benefit a minority o f workers in the formal economy. At about 36 percent o f the gross wage bill, social insurance contributions rates (for pension, health and unemployment insurances) are relatively high, increasingthe non wage costs o f labor, and limiting the potential for job creation for the low-skilled workers. The financial sustainability o f the insurance system i s further threatened by a shrinking contributive base as a result o f unemployment, increase in minimum pensions, and the escalation o f health care costs due to inefficient health care management. Despite Algeria's favorable demographics, with its current structure,  12 Algeria County Assistance Strategy the pension system i s projected to accumulate unfundedpension liabilities o f about 6 percent of GDP by 2008. This threatens fiscal sustainability. 40. Access to urban services. The rapid population growth and urbanization have exacerbated further the acute shortages in services. There i s an acute shortage o f serviced land for housing inurban areas. Large informal settlements (slums) surround the major cities, which resulted in over-utilization o f the urban environment and enhanced physical vulnerability o f cities to natural hazards. The main strategic reforms which would help achieve the country's objectives in the sector consist of: (i) restructuring the subsidy schemes to reach the target population and improve equity, (ii) improving land management to eliminate supply constraints and liberalize land development; (iii)developing a community-based affordable housing policy to better address existing demand and prevent further development o f slums through improved housing access to the poor, including female headed households; (iv) improving access to housing finance, especially important for the housing-constrained middle-class; and (v) improving labor qualification and competency in the construction sector through application o f appropriate building codes and development o f vocational training which will result in higher productivity, cost reduction, quality enhancement and employment generation. 41. Urban water and sanitation services are also in crisis. Despite a highrate o f connectionto the piped network (about 90 percent o f the urban population) the quality o f service in urban water supply i s very poor. The Algerian Govemment i s aware that this i s due to a combination o f factors: inattention to institutional, financial and managerial issues leading to poor utility performance, delays in completing dams and transfers, and persistent drought. Water tariffs are low and have not been increased since 1998. Water i s delivered to households at an average price o f 15-20 DA/m3, but this average tariff does not cover full O&M costs; people not served by the piped public water supply system often pay up to 600DNm3. As a result, water i s severely rationed across Algeria (4-6 hours/day for 3 daydweek). The level of unaccounted-for water (both physical and commercial losses) i s estimated at about 50 percent. 42. The connection rate to the sewerage network coverage i s also high in Algeria (about 80 percent) but as the Algerian Government acknowledges the service quality is also poor with many pipes clogged or severely undersized as a result o f the population increase. Moreover, most o f the 49 wastewater treatment plants in the country are inoperative due to poor maintenance. The wastewater which i s collected i s discharged mostly without adequate treatment in valleys and the sea, posing very serious public health hazards. 43. Addressing the housing and water shortages will be critical to growth, to poverty reduction, and to reaching the MillenniumDevelopment Goals. The middle class and the poor are the most affected by these shortages. The latter live in precarious and overcrowded housing. They also do not have the housing infrastructure or the financial capacity to invest-as do the better off-in water storage facilities which can be seen on the rooftops o f many houses and apartment buildings. Children and women, in particular, spend a significant amount o f their time fetching water. The potable water situation i s even worse in rural areas. Lack of clean water poses health risks, and scarcity and storage issues reflect arduously on rural women, who need to fetch water from long distances. Resolving these two crises i s a win-win proposition that will generate a virtuous circle o f growth and employment. The development o f the housing market, for example, will help generate employment of unslulled labor (mainly the poor), develop vocational training for skilled labor, fuel growth, and improve living standards while winning support for the necessary structural reforms to support the transition to a market driven economy, the only source o f sustained growth and employment generation.  Algeria Country Assistance Strategy 13 111. MEDIUM-TERMPROSPECTSAND EXTERNAL DEVELOPMENTS 44. Medium-term prospects are positive and the country faces moderate risks. The oil price i s expected to remain around US$23/barell, above the US$19/barrel budgeted by the Government. With an approaching Presidential election and amidst increasing social and political tensions, structural reforms are expected to move slowly. As a result, GDP growth i s expected to remain modest at 3 percent over the period covered by this CAS, pulled by the oil sector and construction, which will continue to benefit from the ERP as over 70 percent o f the program's resources will be spent on public works and municipal infkastructure development projects. 45. Given the expansionary fiscal stance, a slight fiscal deficit o f around one percent o f GDP i s expected to persist over the CAS period. The external position, on the other hand, will remain fairly strong. While a current account surplus o f over 9 percent o f GDP i s expected in 2003 owing to highoil prices and increasedthisoil export volumes, Table 2: Medium-Term Prospects-Key Economic Indicators surplus will decrease to Projected around 5 percent o f GDP 2003 2004 2005 by 2005, echoingless domestic productat market prices Gross 3.4 3.3 3.1 scope for oil export Consumer price index 4.0 4.5 4.2 Fiscal Deficit ( % o f GDP)) -0.7 -1.3 -1.3 as Current account surplus (+) or deficit (-), % of GDP 9.6 5.8 5.1 as increased (see Exports (GNFS) (% of GDP) 40 36 35 2)- The capita1 Imports (GNFS) (% of GDP) 27 28 29 account Will remain in TDS/XGS (Debt service indicators (%)) 17.1 16.2 14.9 deficit as the authorities continue to honor debt repayments that will substantially reduce total foreign debt by around US$2 billion a year. Under this scenario, reserves at Central Bank will be kept at around US$26 billion on average, covering around 17 months o f imports o f goods and factor services on average, thus exceeding from end-2002 onwards the projected level o f Algeria's external debt. Inflation on the other hand i s expected to increase to around 4 percent a year on average over the CAS period, due to the continued implementation o f the ERP and the increase of money growth. Curtailing inflation will entail continuous efforts to absorb excess liquidity and tighten public expenditure. The authorities are expected to strengthen the use of the indirect instruments for monetary management to absorb liquidity and maintain price stability. 46. The most significant risk is a sudden and sustained drop o f oil prices. Should oil prices drop to US$lS/b and remain there for the period covered under this CAS, and should the current economic policy stance remain unchanged, particularly public expenditure, internal and external imbalances would resume. The overall fiscal deficit would worsen from a 1.3 percent of GDP deficit in 2002 to around 9 percent o f GDP deficit in 2003 and remain at that level for the rest o f the CAS period assuming no change in expenditure levels. The current account o f the balance o f payments will remain in surplus. Financing the external imbalance would involve a rapid run down o f reserves by over US$3 billion per year on average. From a balance of payments view point, Algeria's current reserve position should buy the country sufficient time inthe event of a drastic and lasting reversal o f oil prices, allowing it to tighten its policy stance. Algeria's exposure to such downside risks underscores the need for a medium-term savings strategy of hydrocarbon revenues and a prudent management o f the "Fonds de Regulation des Recettes", to prevent the "pro-cyclical" changes inpublic expenditures seen inthe past. It also highlights the urgency o f developing an active domestic securities market, to facilitate the financing o f temporary- butpotentially sizeable-budget imbalances inthe future.  14 Algeria CountryAssistance Strategy 47. Even without a drastic fall in oil prices, the continuation o f past economic performance would not allow a rapid resumption o f growth to improve living standards. The limited growth and export diversification prospects, the high unemployment rate, and high labor force growth (averaging 3.4 percent in the 1990s-higher than GDP growth), and an ensuing increase in the incidence o f poverty, would constitute a constant source o f pressure to relax the fiscal policy stance further, as i s already happening at this moment. Social tensions will persist and so will political instability. These are important risks factors that would undermine Algeria's growth and development prospects if reforms continue to stall. Iv. THEGOVERNMENT'S GROWTH AND EMPLOYMENT GENERATIONSTRATEGY 48. To address the challenges o f growth, employment creation, and poverty reduction, a comprehensive national development agenda has been developed around the following main objectives: (i)strengthening the basis for sustainable market-driven economic growth through restoring macroeconomic stability and improving the investment climate; (ii) improving the effectiveness o f public service delivery; and (iii)improving the living standards o f the population and reducing its vulnerability. Significant progress has been made already in implementing this reform program particularly on macro economic stabilization, deregulation, and social protection but as discussed below the implementation o f structuralreforms could have been accelerated, particularly since 2001. A. Strengthening the Basis for Sustainable and Rapid Growth 49. The government recognizes that the high unemployment and increased incidence o f poverty and vulnerability o f the Algerian population will not be reduced without sustained, broad based economic growth. The government acknowledges that its needs to continue to better manage its oil revenues to create a stable macroeconomic fkamework which when combined with a conducive investment climate, will encourage private investment and growth o fthe more labor intensive non-oil sector. 50. Strengthening Macroeconomic Stability. The government intends to continue its prudent macroeconomic management to maintain macroeconomic stability. To better manage the oil windfalls o f the past few years, the Government established a Revenue Stabilization Fund (Fonds de Regulation des Recettes) in mid-2000. The Government prepares now its annual budget on the basis o f a reference oil price. All revenues which accrue to the Government in excess o f budgeted revenues are deposited inthe stabilization fund. Revenues generated from the fund's operation also remain in the fund. The fund's reserves are then used to (i)help balance the budget in case o f a revenue shortfall, with the aim of stabilizing public expenditure; and (ii) reduce public debt. Domestic resource mobilization has been strengthened through increased efficiency o f collection o f non-oil revenues. The tax system has been simplified, the tax base widened, and tax administration strengthened (but more remains to be done on the tax and customs fronts). However, exemptions remain important-most to protect domestic industry or promote private investment. 5I. The authorities are aware that the recent relaxation of their fiscal stance-in the context o f the implementation o f the Economic Recovery Program (ERP)--could endanger their hard won achievements on the macroeconomic front. The Government i s comforted by the high level o f reserves accumulated so far, which would enable them to carry out the ERP for some time irrespective o f oil market developments. The authorities are, nonetheless, aware that while the looser fiscal stance does not endanger the balance o f payments nor the treasury position as long as oil prices remain high, it carries the risk o f igniting inflation, appreciating the real exchange rate, and depleting the oil stabilization fund, thereby increasingadjustment costs inthe event o f an oil price fall.  Algeria Country Assistance Strategy 15 52. Improving the Business Environment. In addition to macroeconomic stability, reforms in this area focused on enhancing competition, reducing transactions costs, and increasingtransparency through de-regulation, price, trade and payments liberalization; tariffs reduction and rationalization; modernization o f monetary policy instruments; establishment o f the institutional foundation for the development o f the financial sector; including banking supervision, tax reform, and public enterprise reform. 53. In anticipation o f privatization and following the deregulation o f prices, competition legislation was introduced in 1995, essentially devoted to a regime o f transparent commercial transactions, and the creation o f a competition council. The investment and tax codes were revised and an investment promotion agency was created to facilitate private investment and grant tax exemptions. A comprehensive tariff reform was implemented in two stages from August 2001. The 2001-2002 tariff reform intended to streamline the tariff and reduce rate dispersion ahead o f the finalization o f the AAEU in 2002 and Algeria's accession to the World Trade Organization. These changes will further the need for additional reform to bringAlgeria's economic laws, regulations and administration in line with WTO requirements. A new tariff with only three rates (5%, 15%, and 30%), in addition to the zero rate, became effective on January 2002. However, a temporary additional tariff (Droit Additionel Provisoire) was introduced in July 2001-at 60 percent which i s expected to be phased-out infive annual reductions by January 2006-to protect local enterprises duringthe transition. 54. Algeria signed, on April 22, 2002, an association agreement with the European Union (AAEU). The AAEU, which will come into effect after ratification o f the agreement by Algeria and each o f the members o f the European Union, implies free trade in industrial products between Algeria and the countries o f the EU after 12 years from the implementation date. Negotiations toward accession to the World Trade Organization (WTO) are ongoing. 55. Onpublic enterprise reform, the Government focused initially on cleaning up their portfolio o f debts to public banks. A new privatization framework was established with the creation o f the Ministry o f Participation and Promotion o f Investment. For the last six years, privatization has been a priority on the agenda o f successive governments, with little implementation success, however, due to strong opposition from trade unions and vested interests. Four major transactions did take place over 2000- 2001; the assets o f the public sector steel-making complex, SIDER, the jewel o f the heavy industrialization era, were sold to a majority foreign-owned company; a public detergent company (ENAD) was partially privatized in 2000 with 60 percent Government ownership sold to the Group Henkel; 52 percent of Government ownership inthe capital o f another public enterprise (ENOR), a gold mining company, were also sold in 2002, and a new cellular telephone license was sold in 2001 to a private investor for US$737 million. 56. Reforms in the financial sector focused on establishing the institutional foundation for the development o f the financial sector. The strategy emphasizes increased foreidprivate participation in public banks and the modernization o f the payments systems to promote efficient financial intermediation to support growth. Substantial progress has been made over the last few years in addressing the problems o f the financial sector. These incIuded: (i) recapitalization o f banks through cash infusions and treasury securities and official authorization o f banks; (ii) moving toward the use o f indirect and market-based instruments for the conduct o f monetary policy; (iii) strengthening prudential regulations to limit risk concentration and to provide rules for loan classification and provisioning; (iv) strengthening o f bank supervision; and (v) ensuring the use o f market-based mechanisms for the mobilization of domestic financing o f the budget. A total of 15 private banks operate now in Algeria, over half o f which are foreign; the Government has decided to open the capital o f one o f the six state- owned banks (CPA) to private participation, through an international biddingprocess. The Government has also requested a FSAP to help guide its financial sector reform strategy inthe future.  16 Algeria Country Assistance Strategy 57. The Government has signaled a change inpolicy to allow private participation inthe provision o f infrastructure services through concessions. New laws and regulatory institutions have been approved to open up the sector to private participation in roads, telecommunications, mining, power, water and sanitation. New laws were passed in2000 conducive to public private participation schemes intransport. The private sector i s active in the transport market which has relieved many urban bottlenecks and created many jobs. Air transportation was opened to the private sector with the entry o f smaller private companies. The recent attempt to invite foreign investment for the Algiers airport through a concession was not successful, however, due to the absence o frisk mitigation incentives. 58. In December 1999, the Government announced a new policy in the energy and mining sectors aimed,at: (i)improving efficiency while securing adequate supplies to the economy; (ii)introducing competition; (iii)increasing Government revenues by developing untapped resources; (iv) addressing environmental concerns; (v) promoting efficient use o f public resources and protecting public interest and (vi) alleviating the financial burden o f the energy and miningenterprises on public finances. A new mining law was approved, in August 2001, opening up the sector to private investment, allowing free transfer o f capital and profits, and creating a new oversight institutional structure. The latter clarifies the mandate o f the Government as policy maker and regulator o f mining activities, which are opened to private investment. In February 2002, a new electricity law was promulgated creating the enabling environment for restructuring and unbundlingthe national utility (SONELGAZ), allowing private sector investment, introducing competition, and creating a commission for regulating electricity and gas distribution. A separate company for system operations i s being created and SONELGAZ has been converted into a joint stock company. Several subsidiaries for generation, transmission, and gas and electricity distribution are in the process o f being created. In principle, the capital of SONELGAZ subsidiaries i s open to private investment (provided Government retains the majority), but no concrete plans exist to attract private capital. Attempts have been made to attract private investors to a number o f Independent Power and Water Projects in partnership with the Algerian Energy Company (owned by SONATRACHand SONELGAZ), butnone o fthe projects reached financial closure. 59. A new hydrocarbon law has been drafted, which clarifies the role o f the state as the policy maker and regulator, defines the competitive environment in which energy companies-including the state owned SONATRACH-will operate, and opens up both upstreamand down stream activities to domestic and foreign private investment. However, because o f opposition from trade unions, the private sector, and several political parties, it remains a draft law under discussion. 60. While comprehensive reforms have been initiated, actual results on the ground in terms o f improved efficiency, pricing adjustments, reduced reliance on Government resources and increased private sector participation, have been limited. Substantial capital i s required to meet the rapid increase indomestic energy demand, optimize the use ofindigenousresources for export and increase government revenues. Energy prices remain distorted and the level o f implicit subsidies i s high (about US$500 million per annum in the hydrocarbon sector only). The planned integration with Europe's energy markets will have implications on energy pricing policies. 61. A new legal and regulatory framework for a multi-operator system in the telecommunications system has been established. The Government adopted and published a telecommunications strategy in May 2000, and subsequently enacted a new postal and telecommunications law in August 2000. Postal and telecommunication services have been unbundled and transferred from the central administration to two distinct companies, operating under commercial law. The Government's strategy in this area i s to gradually liberalize all market segments o f the telecommunications and postal services. The capital o f AlgCrie TClCcom would be opened to private participation in2004, according to the Government.  Algeria Country Assistance Strategy 17 62. The Government's Information and Communications Technology (ICT) development strategy i s being implemented gradually. The Algerian government opted for a thorough reform o f its posts and telecommunications sector, in order to face the challenges o f the 2lStcentury and to guide the country towards the information society. This reform i s taking place inthe context o f increased globalization and pending Algerian membership in the WTO. The implementation o f the association agreement with the European Union i s an additional incentive to reform. The ICT industry is also expected to contribute to increasingwomen's employment opportunities. B. Improving the Effectiveness of Public Service Delivery 63. Improving Administrative Efficiency and Accountability. Two consultative committees created by Presidential orders have finalized their comprehensive reports on respectivelyjudicial reform in 2000 and on the restructuring of the role of the State and its organizational structure in 2001. The main reform areas cover: public service rehabilitation, decentralization and strengthening of local administrations, the judicial system; public financial management, greater transparency through increased information on government activities to facilitate public oversight; and deregulation to reduce incentives for rent-seeking behavior. These initiatives are also driven by the need to adjust the legal and regulatory framework to: (i) comply with the requirements o f the fkee trade agreement with the European Union; (ii)harmonize trade and investment related regulations with the requirements o f the WTO accession; and (iii) a more efficient and reliable judicial system to support the new business build environment. These reports are not yet public and have not been therefore the subject o f a national debate before Parliament. 64. In the area of public financial management, the Government is modernizing its budgetary processes and public expenditure management. A Bank Country Procurement Assessment Review (CPAR) was carried out inJanuary 2002. A new Public Procurement Law was enacted on July 24,2002, which forms the basis for all future public procurement. The new law i s comprehensive and i s an improvement over the existing 1991 law. 65. Improving the effectiveness of social service delivery to support job creation and develop human capital. While the Government remains committed to financing basic social services (which i s justified both on equity and efficiency grounds), it i s now open to involving the private sector in the delivery of these services. I n education, the Government i s aware o f the problems affecting the efficiency o f public expenditures in education and the low returns to education. In May 2000, it appointed a National Commission to explore reform alternatives that would strengthen and expand the education system while ensuring that it i s financially sustainable. The key reforms that are being considered across education levels include the following: (i) reviewing current human resources policies for basic education (remuneration, evaluation, promotion, deployment and training o f teachers to improve quality and internal efficiency); (ii)reviewing current financing mechanisms inhigher education to reduce the share o f public subsidies; particularly those related to student subsistence expenditures ("Oeuvres Universitaires"); and (iii)developing continuous vocational training programs based on the findings of an evaluation of current programs. 66. The Government's health sector reform i s ambitious, technically intensive, and will require strengthening institutional capacity, in particular updating management and information systems. The reform includes: (i) developing a health sector master plan, to include the growing private sector; (ii) revising existing treatment norms for health facilities and personnel; (iii) developing and implementing a contracting system between the Ministry o f Health (MOHP) and Caisse Nationale des Assurances Sociales; (iv) revising the reimbursement schedule for private health care; (v) reinforcing access to a package o f essential health care services - including preventive health care, and contraception; (vi)  18 Algeria Country Assistance Strategy conducting an analysis o f the pharmaceutical sector, including an analysis o f spending on pharmaceuticals; and (vii) carrying out a National Health Accounts (NHA) study. C. Improving Living Standards and Strengthening Social Protection 67. The Government's strategy for improving living standards and strengthening social protection has two components. The first relates to a combination o f interventions designed to improve the population's well being (housing, urban water and sanitation, solid waste management, rehabilitation o f urban sites) and encourage growth inthe rural areas where most o f the poor live. The second includes a comprehensive social protection system (covering active and passive labor market programs; health, old- age and unemployment insurance; and assistance programs to address both poverty and economic and social vulnerability). 68. Housing. The main priority o f the country inthe housing sector i s to provide affordable housing to all segments o f the population, inparticular to low income earners, and reduce the fiscal burden o f the housing subsidy on public resources, while maximizing employment generation, through: (i) shifting from a supply-driven, public sector dominated to a demand-driven, market oriented housing strategy, and (ii)refocusing the public sector role on formulating and implementing sector policies that encourage private sector involvement in the housing sector, including land development, housing construction and real estate development; (iii) developing the housing finance market to enable demand, particularly from the middle class; and (iv) subsidizing housing to low income groups while shifting the provision o f such housing to private operators. 69. Water and Sanitation. Given the worsening water crisis inAlgeria, the water resources strategy focuses on expanding water storage, by buildingnew dams and desalination plants. There is, however, a welcome emphasis on rehabilitation and improved management o f the existing infrastructure. While sizable additional investments will be needed in the sector to overcome mounting service deficits (especially in wastewater collection and treatment and also in water services), the private sector will be increasingly called upon to share in the efforts to redress the situation. To reduce the critical supply- demand gap, the government has taken short-term measures such as development o f desalinization plants. A number o f BOT and concessions projects are contemplated in the short and medium terms. A water management strategy that analyzes access, distribution, and pricing i s therefore crucially needed. 70. Solid Waste Management. The Government i s in the process o f piloting a framework for its municipal waste management strategy through its PROGDES program. The strategy aims to strengthen institutional capacity for hazardous and municipal waste management. It has targeted 21municipalities throughout the country to pilot this initiative. The Government recognizes that success in this area will require an integrated approach encompassing the institutional, regulatory, financial and technical aspects both at the local and national level. The participation o f the private sector i s legally grounded inthe new Waste Management Law. 71. Rural Development and Employment Creation. The Government has made significant progress inimproving the incentives regime for agricultural growth. Agricultural trade and pricingregimes have been substantially liberalized; only wheat producers receive subsidies. After the first round o f reforms in the 9Os, the Government initiated a focused Agricultural and Rural Development Plan (PNDAR) in2000. The PNDAR, which i s an integral part o f the Economic Recovery Program (ERP), receives 12 percent o f the budget authorizations, excluding the water and rural power sectors. 72. The rural strategy aims to promote an environment conducive to agricultural growth through sustainable use o f natural resources, more efficient irrigation and decentralized, participatory approaches that involve beneficiaries in the development process. With a radical shift from the traditional producer price subsidies, the agricultural and rural development strategy under PNDAR focuses on reducing  Algeria Country Assistance Strategy 19 vulnerability and reversing the rural urban migratory flows. The strategy aims at improving agricultural productivity and growth through investment support, targeting the rural poor, the vulnerable and unemployed, particularly the young. Improving the efficiency o f water use in irrigation i s also a critical focus under the strategy, and i s reflected in the incentives for drip irrigation equipment for the economic use o f water resources. 73. The Government's strategy for natural resource management is part of its growth and poverty reduction strategy. The strategy aims at reducing vulnerability in the rural areas and reducing environmental health risks through a better management o f the natural resource base. Rural areas face serious environmental problems. The critical ones are soil erosion, desertification and desert encroachment, arising mainly from the over-exploitation o f the resource base through opportunistic cultivation and grazing o f marginal areas (steppes, nappes alfatigres, forests). The strategy i s being implemented through the National Environmental Action Plan (NEAP) endorsed in 2002. The latter is the Government's main instrument through which the implementation o f the country's environmental policy i s monitored. The strategic priorities are to improve: (i) population's health status and quality o f life through reduction inthe prevalence o f water borne diseases, increased access to water and sanitation, and improvement in solid and hazardous waste management; (ii) productivity and sustainability o f the country's natural capital through sustainable land and watershed management, using participatory and community driven approaches, with strong linkages to agriculture, rural employment, rangeland and water resource management; institutional reform and system improvement in irrigation; forest conservation including additional forest coverage; and improved protection o f costal and "oasis" resources; (iii) resource use efficiency, through economic pricing, user-based management approaches, and re-use and recycling, rehabilitation and sustainable management o f water distribution (including irrigation); and trade facilitation (including improving the efficiency o f ports through dredging); and (iv) the global environment through on-site biodiversity conservation (natural parks and protected areas); contribution to the reduction in green house gases through increased reforestation, and better management o f oil and gas fields; and elimination o f ozone depleting substances. v. PROGRESS SINCE THE FY96 COUNTRY ASSISTANCESTRATEGY A. WorldBankRetrospective 74. Implementation of the previous CAS. The last CAS for Algeria dates from FY96. It was designed as a transitional one year assistance strategy to support the massive stabilization program o f the elected Government on November 16, 1995. Algeria was then at a crucial juncture in its history. The Bank focused its assistance during that transition on helping the Govemment stay the difficult course o f macroeconomic stabilization while helping to ease the adverse social impact o f the economic and social crisis arising from the oil price fall and the severe acts of terrorism. The Bank's planned support was built around three key elements: (i) supporting structural reforms for the transition to the market; (ii) protectingthe poor duringthe transition through targeted safety net programs; and (iii) providing external financing and enhancing the country's ability to mobilize external resources (with the help o f the IMF, through debt rescheduling, and joint efforts with IFC and MIGA to mobilize FDI). The portfolio was also rationalized with the cancellatiodrestructuring of the stock o f projects contracted during the 1980s (see Table 3). The strategy foresaw the implementation o f substantial structural and sectoral adjustment programs, with smaller amounts for social safety net financing. 75, However, the ambitious reform program scheduled for adjustment support never materialized in the face o f a succession of policy reversals and lack o f agreement on their content. Inaddition, between 1997 and 2000 successful macroeconomic stabilization measures together with a recovery in oil prices obviated the need for IBRD financing. As a result, the lending program was scaled back to the approval  20 Algeria Country Assistance Strategy o f about two projects per year, focusing on the social sectors (Low-Income Housing and support for a Social Fund) and rural development (Rural Employment Project). 76. The Bank Group's task has been made difficult during this transition because o f terrorism and the lack o f social consensus on the direction and depth o f structural reforms. Algeria's Governments have been historically more willing to reform during the bust than oil boom years. Deep seated suspicions from some members o f the Government, the bureaucracy, and civil society regarding the Bank's role and mission also played a role in reducing Bank effectiveness on the ground. In 1999, President Bouteflika's first Government sought Bank's support to open the infrastructure sector to private investment. A seminar on concessions was held and a series o f institutional development projects were prepared aimed at supporting reform in strategic sectors. The institutional loans included a Telecommunications TA loan (US$9 million), a Privatization LIL (US$5 million), a Budget System Modernization TA loan (US$23.7 million); an Energy and MiningTA loan (US$18 million), a Financial System Modernization loan (US$16.5 million), a Transport TA loan (US$8.7 million) and a Mortgage Finance TA loan (US$5.5 million). In addition to these technical assistance projects two emergency loans were approved: the Ain Temouchent Earthquake Emergency Reconstruction loan (US$83.5 million) in 2000 as well as an Urban Natural Hazard Vulnerability Reduction loan (US$88.5 million) in 2002. Overall the Bank's assistance reflected flexibility and responsiveness to Government's requests for support. The assistance over the past few years was in line with the FY96 key priorities. However, Bank effectiveness has been hampered by a lack o f Government consensus on the reform agenda. 77. The Bank has supported Algeria's reform program with analytical and advisory services to underpin the policy dialogue and guide interventions. These include: (i) a public expenditure review for the social sectors in 2001; (ii) a poverty assessment in 1998; (iii) private sector assessment in 1999, a followed by an investment climate survey in 2003; (iv) a Foreign Investment and Advisory Services report in2002; (v) a Medium-term Macroeconomic Strategy for Growth and Social Stability in2002; (vi) a Country Procurement Assessment Review (CPAR) in 2002; and a program o f modemization o f public expenditure management in 2002; (vii) an SMExchange program, financed by the private sector, to facilitate the development o f SMEs; (viii) assistance for the preparation o f the National Environment Action Plan for Sustainable Development, and the preparation o f an Operational Strategy for Municipal Waste Management; and (ix) the Bank i s also deeply engaged with various Government counterpart teams in the formulation o f a water resource management strategy (to be completed inFY04), a housing market development strategy (FY04) and an I C T strategy (to be completedthis fiscal year). 78. A more open and reform-oriented attitude o f the Algerian government since 1999 as well as the increasingly client-oriented approach o f the Bank hold the promise for better effectiveness in the future. An agreement was reached in mid-2001 to work under an "Interim Program' (2002-mid 2003) and to prepare a new assistance strategy, restart policy dialogue through analytical work, and establish a liaison office in Algiers. The office, headed by a senior Bank staff, has proved crucial and successful in improving relations, moving the policy dialogue forward, and improving portfolio implementation. B. IBRDPortfolio Management 79. Portfolio Performance. The quality o f the Algeria portfolio has improved over the past few years following a series o f aggressive measures to improve performance through a cleaning up o f an ineffective stock o f projects contracted duringthe 1980s. InFY96, with more than 52 percent o f projects and 71 percent o f commitments "at risk", Algeria had a high "portfolio at risk" resulting, among other things, from major deficiencies in the design and implementation o f several projects in the portfolio. Since then, there has been a clear improvement in performance regarding both the size and the quality o f the portfolio as well as the Bank's approach and strategy for portfolio management (see Table 3). In FY02, the percentage o f projects and commitments at risk were reduced significantly to 15.4 percent and 24.9 percent respectively. However, at the beginning o f FY03, the portfolio deteriorated again. The  Algeria Country Assistance Strategy 21 Algerian authorities and the Bank took immediate actions to improve portfolio performance. As a result, two projects have been upgraded to non risky status and it was jointly decided to close as scheduled two projects currently in problem status. These are the L o w Income Housing and Water Supply and Sewerage projects, which will close respectively on June 30,2003 and December 30,2003. Table3: WorldBankAlgeria Portfolio FY96-FY03 FY96 FY98 FYOO FY02 FY03" Number of active Projects 19 10 11 13 13 Net Commitments(US$m) 1,83 1.6 750 772.8 698.8 565.8 Projects at Risk (%) 52.6 50.0 18.2 15.4 15.4 Commitmentsat Risk (%) 71.6 55.9 31.1 24.9 32.2 Disbursement Ratio (x) 27 13 13.1 18.2 10.6 *As of May 1,2003. 80. Since FY99, the country and the Bank have been proactive in ensuring that project management issues are addressed promptly. This i s reflected by a 100 percent proactivity ratio inthe last five years. Nonetheless, delays in effectiveness and slow implementation are affecting project start up and fulfillment o f development objectives. Reflecting project implementation problems, the disbursement performance o f investment loans has been weak since FY97 and well below the Region and Bank's averages. While the FY02 disbursement ratio improved to 18.2 percent; it i s still below the FY02 Bank's average o f 20.6 percent. The annualized ratio for FY03, based on the performance o f the first ten months, i s at 10.6 percent. 81. The Bank's Quality Assurance Group (QAG) has assessed the quality o f the Bank's supervision efforts and reviewed nine projects inAlgeria since FY97. Overall, QAGrated 69 percent o f supervisions as satisfactory. The three assessments, carried out in FY99 and FYOO resulted in a 100 percent satisfactory rating while the assessment carried out in FY03 (the Rural Employment Project) received a highly satisfactory rating. 82. Since FY97, the Bank's Operations Evaluation Department (OED) reviewed 16 projects in Algeria. Sustainability was likely in only 27 percent o f them while only 56 percent o f projects had satisfactory outcome (between highly satisfactory and moderately satisfactory). The performance o f the Bank was rated satisfactory for quality o f supervision in 67 percent o f projects and satisfactory for quality at entry in 69 percent o f projects. The performance o f the borrower was rated satisfactory for preparationin 81 percent o f projects, 57 percent for compliance but only 38 percent for implementation. 83, Satisfactory outcomes, sustainability, and institutional development impact are highly correlated with implementation arrangements (see Box 3). The institutional capacity o f the implementing entities, their autonomy, the coordination with line ministries when the implementation of sub-components i s decentralized to the provinces, the continuity o fproject staff, and the speed with which disbursements are made all contribute to performance outcomes. 84. Portfolio Management Strategy. Many o f the problems affecting project implementation are related to unfamiliarity with the Bank's guidelines on procurement and financial management. Over the past year, a number o f project-specific seminars were organized to disseminate best practices on procurement and financial management. A Country Procurement Assessment Review has also been completed and a Country Financial Accountability Assessment i s scheduled for FY05. The findings and implementation o f these two core diagnostic reviewsare expected to help improve portfolio performance.  22 Algeria Country Assistance Strategy 85. The Bank carried out a Country Portfolio Box 3: Bank's Assessment Through ICR Evaluations Performance Review (CPPR) in Algiers in February 2003, to address the systemic factors Key LessonsLearned affecting the quality o f the Bank program in Govemment's ownership needs to be confirmed prior to Algeria. Implementing the action plan that loan effectiveness and be sought throughout the project, resulted from the CPPR exercise i s expected to from identification to completion. lead to a reduction in commitments at risk from Project design and scope needto be adjusted to the Algerian 55 percent to under 33 percent by June 2003. environment and constraints better accounted for during project preparation. It i s important to design projectsjointly The main factors that affected the effectiveness with the relevant Government institutions and in line with o f the implementation o f the program, their implementingcapacity. highlighted by the CPPR, are: (i)lack o f project preparedness for implementation; (ii) insufficient Project implementation units should, from the start, have an capacity and familiarity with Bank procedures; adequate skills mix and be familiar with Bank guidelines to support project implementation, and the Bank should (iii)insufficient communication and coordination provide and invest in fiduciary training prior to project both between the Bank and the Government and effectiveness. within the Government; (iv) frequent project staff changes; and (v) focus on inputsand outputs Closer attention should be paid by the country and the Bank to the monitoring system to be put in place for each project rather than on desired outcomes and impact. to evaluate its performance indicators and its impact. Setting up an effective M&E system i s crucial to efficient 86. To address these factors, the project implementation and sustainability and should take recommendations o f the CPPR include: (i) place at the very beginning of the project. adoption o f a project readiness filter which To promote participation at the local level and ensure includes a list o f criteria to be fulfilled at early community support for the proposed project activities, stages o f project implementation to ensure projects should include activities with a high demonstration project preparedness for implementation such as effect that can be implemented in the early stages o f the designation o f key implementing agencies' staff, project. training, procurement and implementation plans; Source: OED evaluation reports. (ii)capacity building efforts during project preparation and continuous training efforts during mplementation; (iii) quarterly meetings between the oversight entity in the Ministry of Finance (DGRFE) and all other entities involved to discuss implementation progress and eventual constraints; (vi) strengthening o f the DGRFE's and implementing entities' capacity in monitoring and evaluation; and (v) ensuring continuity o f project staff by enhancing commitment and motivation. The CPPR recommendations are well aligned with those of the OED reviews (see Box 3). 87. The Bank will strengthen the use o f quality at entry and readiness filters as its main instruments to better assess project preparedness and address the recurrent issue of effectiveness delays and very slow start o f the implementation phase. Insupervision, the Bank will intensify its supervision efforts in order to improve project implementation, institutional capacity building and the development impact o f Bank lending. Inthis context, the Bank will continue to focus on strengthening institutional capacity for social and environmental risk mitigation. The main instrument to that effect will be the environmental impact assessment decree that has been revised under the Industrial Pollution Control Project. The Bank will also use country environmentalperfonnance assessments and training to strengthen Algeria's Safeguards procedures and bringthem in line with those of the Bank. 88. Collaboration inmanaging the portfolio will intensify between the Bank and the country through regular participatory Country Portfolio Performance Reviews. Reviews will take a results-focused approach in order to tackle the systemic issues and promptly address project specific issues. The Bank will also ensure that technical and advisory support i s provided in the course o f project supervision. Benchmarks and standards will be agreed upon to assess the effectiveness o f procedures and processes (both in the Bank and in Algeria) relating to the Bank-financed program. Although intensive and close  Algeria Country Assistance Strategy 23 portfolio management i s expected to continue to be carried out from Washington, it i s expected that the Bank liaison office in Algeria, which was opened in January 2002, will be progressively strengthened to play an increasingly important role in portfolio management, program implementation, and close and continued dialogue with project implementation units. Going forward, the office will enhance its information sharing activities, including more dissemination o f reports and more interaction with civil society. C. I F C Retrospective 89. Algeria became a member o f IFC in 1990, which was relatively late in comparison to other middle income countries. Duringthe early 1990s, the country's security and political situation, as well as the Government's lack o f commitment to liberalize the economy were not conducive to attracting IFC investments via local or foreign partners. IFC's first investment in Algeria was in FY93-a US$10 million loan to Helios, a petrochemical company. By end of FY99, IFC's total held portfolio inAlgeria amounted to only US$7.7 million, comprising a US$4.7 million outstanding loan to Helios and two equity investments in the financial sector-Arab Banking Corporation o f Algeria (US$2 million), and SociCtC GCnCrale d'AlgCrie (US$l million). IFC's activities inAlgeria expanded significantly following the improvements in the political, security, and macroeconomic environments as well as the Government's early efforts at liberalizing the economy at the turn o f the millennium. As o f April 30, 2002, IFC's net committedportfolio inAlgeria i s US$58.6 million. Investments include a US$20 million guarantee o f a trade enhancement facility, and a US$35 million loan to the first private sector cement company inAlgeria (Algeria Cement Company). Although IFC has not approached the market potential, as indicated by the size o f the economy, these are IFC's largest investments in Algeria so far and demonstrate that a higher scale o f business i s possible. IFC's portfolio has performed well. IFC's competitive position and comparative advantage in Algeria remains strong due to the perceived country risk and low levels o f private sector development. During the last CAS period, several pieces o f analytical work and technical assistance were provided to the Algerian Government and business community inthe areas of SME support, investment climate, micro-finance, housing finance, and leasing. D. M I G A Portfolio and Program 90. MIGA has facilitated an estimated total amount o f foreign direct investment in Algeria of US$248.4 million. At the beginningo f FY03, MIGA had no outstanding guarantee portfolio in Algeria. Projects that have benefited from MIGA's guarantees in the past include one in the oil and gas sector, and one inthe banking sector. There i s further interest from investors inMIGA coverage for investments inthe oil and gas, manufacturing and telecommunications sectors. Algeria can also benefit from access to MIGA's online investor information services, which provide a vehicle for disseminating information on the investment climate and business opportunities inthe country. VI. THEALGERIA BANKGROUPPARTNERSHIPOVERFY04-06 - A. Overview of Bank Group Strategy 91. The government o f Algeria is engaged in a program o f far reaching reforms for a transition o f the country to growth and prosperity. These reforms cover a broad spectrum o f political, institutional, economic, and social issues, are complex and need to be sustained over the long-term to produce the results required for support from the various stakeholders. The main goal of the Bank Group's Partnership i s to support these fundamental reforms through a program o f analytical and advisory services, institutional capacity building, and demand driven lending, and/or risk mitigation through structured loans, hedgingproducts, and guarantees. The IFC will assist Algeria with investments and a strong focus on demand-driven TA and advisory services (see Annex Ifor the Bank Group's PSD  24 Algeria Country Assistance Strategy strategy). Based on the consultations with civil society and discussions with the Government, Algeria has three key development challenges: (i) how to use its oil and gas reserves for the long-run benefit o f the Algerian population; (ii) how to create growthljobs in the non-oil economy to both benefit from the surge in the size o f the labor force over the next decade and avoid the social tensions that would be caused by increased unemployment; and (iii) how to provide better public services so that all Algerians are able to participate inand benefit from a twenty-first century market economy. Bank Group priorities for strategic support mirror these challenges: (i) support to fiscal sustainability and hydrocarbonrevenue management within an overall asset liability management framework; (ii)support to removing the constraints to private sector-led growth, particularly those affecting the business environment, SMEs, the financial sector, and infrastructure development; and (iii) support the Government's efforts to articulate and implement a strategy for better service delivery, particularly for water supply, housing, environmental services (municipal waste management), and social protectionto meet the critical needs o f its population. \ / MILLENNIUMDEVELOPMENTGOALS / \ Algeria's GrowthandEmploymentGenerationStrategy / w 6 ( u Fiscal Sustainability Improving Improving Public BusinessEnvironment Service Delivery ALM Framework incl. Human Development Managementof Oil Price 1Political Stability 1 Volatility 1IncentiveiRegulatoryReform 1Housingand Water Social Protection Improving Government 1Privatization 1 RuralDevelopment Effectiveness 1Private Participation 1 ** Public Exp. Mgmt. ** FinancialServices 1Natural Resource Mgmt. ProcurementReforms Energy, Transport, ICT I World BankGroup StrategicPrinciples Selectivity ProgrammaticApproach Partnershipsand Outreach Corporate Priorities Global Public Goods  Algeria Country Assistance Strategy 25 B. Inputsto Strategy Formulation 92. The Bank Group strategy i s shaped by: (i) lessons learnt from the implementation of the past the Bank Group assistance in Algeria, including IFC's experience as an investor and advisor; and (ii) the concerns o f Algerian women and men expressed during the consultations held by the Bank Group all through 2001-2002 (see Annex 11). The Bank Group's assistance strategy i s also underpinned by the MDGs as a frame o freference inalignment with corporate priorities and global public goods. 93. Lessons from the on-going Bank Group Country Assistance Strategy. Experience with implementation o f the 1996 CAS and the Interim Programhas yielded many lessons. 0 The acts o f terrorism and security concerns, particularly in the early 1990s, limited travel and closer interactions with the client. The Bank's lack o f presence in the field limited its effectiveness. Learning from this experience, the Bank established a liaison office in Algiers in 2002 to be closer to the client and better support the Government's development strategy. 0 Bank support for reforms needs to pay more attention to the time involved in implementing reforms, to properly account for capture by vested interests and their capacity to delay reforms, and to the country's implementation capacity. In time, the possible establishment o f a full country office may help to deepen policy dialogue with the Algerians and improve Bank Group's effectiveness through a program o f technical assistance and advisory services. 0 Algeria, for the most part, does not need IBRD lending but it does need global knowledge and technical expertise to guide its transition to a market-based economy. The Bank needs therefore to mobilize cutting edge expertise to contribute to development outcomes and remain a relevant partner inAlgeria. 0 There i s a direct relationship between the Bank's effectiveness and its knowledge base. The Bank was most effective when it had credible expertise to offer which the client saw as added value. 0 The effectiveness o f past Bank support was also inversely related to oil price movements. There was more receptivity to reforms duringthe bust than boom years. The Bank i s therefore focusing its dialogue and support to encourage the Government to isolate economic management and structural reform implementation from movements inoil prices. 0 The Bank needs to improve its dialogue with the Government on Bank guidelines and fiduciary responsibilities in order to reduce delays and other transaction costs by helping the clients develop effective safeguards and fiduciary systems for public expenditure, procurement, and financial management. These are the areas where the client sees the cost o f dealing with the Bank as high. 0 The IFC also needs to work more closely with local private sector groups to build their capacity and provide term financing. 94. Consultations and their impact on strategy formulation. A series o f consultations were organized to seek the views o f the major stakeholders on Algeria's medium-term development challenges and opportunities; on priorities for this CAS; and Bank Group support (see Box 4). These consultations gave participants the opportunity to learn more about the Bank Group's mission in Algeria and make suggestions for the future. Participants were critical o f what they called the Bank's "orthodoxy and lack o f compassion". They stressed the need to continue this dialogue on Algeria's development challenges  26 Algeria Country AssistanceStrategy and the Bank Group's partnership with the Algerian Govemment and civil society on a more regular basis (see Annex II). 95. The overriding message from these consultations was participants' requests for more voice both within the administration and between policy makers and civil society. Representatives of the private sector underscored the need to have a more predictable investment climate, more Box 4: Consultationsfor the CAS consultation between policy makers and the The consultations on the Algeria CAS were organized with private sector on key reforms affecting the Govemment support. The Govemment indicated from the start business environment. Businesses highlighted that it wanted to be involved to benefit from the public debate on the development issues with which it i s struggling. A first the importance o f "getting the government to round o f consultations took place in January 2002. These give a clear signal about its role" by reducing covered consultations with central and regional local the burden o f regulations and administrative authorities; the private sector, associations and NGOs, the barriers that breed corrupt practices and media and academia. Consultations on rural development increase the cost of doing business in Algeria issues were held in April 2002, with a wide cross-section of participants from the local and central administration, farmers, for both private and public enterprises, and professional organizations, banks, other ministries involved in privatizing public enterprises and banks. rural areas, research organizations, and academia. Gender related issues were also consistently Consultations were also held in June 2002 on participatory raised. The consultations also showed that the approaches to development and mainstreaming of environmental and social aspects to better inform the issues o f quality and availability o f water, formulation o f the assistance strategy. In particular, housing, and information and communication consultations were held with local stakeholders and bilateral technologies are highon everyone's agenda. and multilateral institutions on the National Environmental Action Plan. Staff also met with the UGTA Secretary General C. Strategic Engagement Principles to seek his views on the formulation o f the strategy. A second round o f consultations, which included 96. The Bank Group's support will be representatives o f major stakeholders in the guided by the following three strategic telecommunications, housing, and water sectors, was held in engagement principles: (i)selectivity; (ii)a December 2002 (telecom and housing) and January 2003 programmatic approach focused on transfer o f (water). IFC and the Bank held a series o f consultations with representatives o f the private sector and o f the relevant public knowledge, capacity building, and institutions in charge o f promoting a conducive investment improvement o f market perceptions towards climate for private investment. These consultations took place Algeria; and (iii)partnerships, outreach and during the course o f preparation of the Investment Climate knowledge sharing. Assessment. The Foreign Investment Advisory Services reflected in their report the concems and views of foreign investors interested in investing in Algeria as well as those of Towards Greater Selectivity domestic private investors. Consultations were also held with Algeria's development partners. 97. Underlying both the selection o f the Bank Group's strategic priorities and their More consultations took place during the course o f 2003 on implementation is the principle o f "strong the structural and financial constraints to growth in general. The Bank has prepared in consultation with the govemment client pull" for reform and selectivity. There i s the necessary analytical work to foster a constructive debate a need to focus, not just on what i s important, regarding the management of oil price volatility and creating but also on areas with strong client the necessary incentive framework for a private sector-led commitment to carry out the necessaryreforms. growth and employment generation strategy. The Govemment has asked that consultations on its social and urban Given the political sensitivities, there i s a need development issues be held after the completion o f the to show flexibility, to seize windows o f Govemment's own work in this area to be able to have a opportunity when they emerge, and move at the meaningful debate on the options and opportunities for social speed at which the client i s prepared to move. and urban sector issues. Ultimately the sustainability of the reforms depe 1s on client commitment and the broad public suppc for reform. While success requires a client driven strategy, the Bank Group's role i s to help make sure ~~ the client-driven strategy i s a sound one and that the Bank Group resources are deployed in areas where it has the comparative advantage to help. Accordingly, selectivity will be achieved through engagement ina limitednumberof areas andthrough a selective use ofBankinstruments.  Algeria County Assistance Strategy 27 98. The Bank Group's strategic program will be centered on analytical, advisory, and financing services but the depth o f the engagement will depend on Government's responsiveness to reforms and implementation track record. 99. Areas for Base Case Engagement. While cooperating with other donors, the Bank Group will take the lead in supporting the Government's conceptualization o f the reform agenda and ways to address it. Hence, the Bank will respond to windows o f opportunity as they arise. These will include at first areas where there i s current Government demand for support-managing oil price volatility and fiscal sustainability, supportingreforms to build a friendly business environment, including support to financial sector development and ICT, and social protection. Under this scenario, the Bank Group will focus on core diagnostic services, policy advice, knowledge sharing, limited IBRD lending or guarantees focused on capacity building, demonstration effects, and reducing market risk aversion. This support will be complemented by IFC's advisory services and financing and leveraging the resources o f WBI to play an advocacy role to encourage reforms. 100. Areasfor High CaseEngagement The Bank Group will scale up its engagement inareas where the Government has expressed demand for support, has shown the strongest commitment to reform, and has demonstrated such commitment through measurable actions. Under this scenario, the Bank will deepen and widen its areas o f engagement. In this case, the diagnostic and analytical services will develop into programmatic approaches to respond to Government's demands once there i s a clear indication that the Government i s ready to move rapidly the implementation o f reforms that are critical to the growth and poverty reduction agenda. These could include support to the restructuring o f the public enterprise sector, including banking reforms, capital market development, public sector management, water management, and education and health sector reforms. ProgrammaticApproach 101. Algeria i s at an early stage in its transition to a market-based economy. Accordingly, the Government's reform program i s comprehensive and covers the political, law and order, institutional, regulatory, economic, and social areas. These reforms are inherently long-term in nature and can therefore be more effectively supported by a programmatic approach o f analytical and lending services (withmulti-year programs at the national level first followed by those at the sub-national levels when the Algerian government i s ready to implement its decentralization strategy). The Bank Group's ability to leverage progress on the growth and poverty reduction agenda lies in its support for the policy and institutional reforms to encourage broad-based growth, ledby the private sector, institution building, and social development. The Bank proposes therefore a menu o f instruments aimed at delivering knowledge to informpublic policy choices and buildingcapacity with flexible lending. These are: 0 Monitoring and diagnostic work focusing on Algeria's key development challenges, leveraged with WBI's resources, to underpinthe policy dialogue and encourage reforms. 0 Advisory servicesfrom the World Bank's Treasury to help the Algerian Government build its own capacity in selected areas o f public financial management such as asset management, public debt management, riskmanagement and middle-and back-office organizationand operations. 0 New IBRD Financial Products. Financial products to be used to support Algeria's development strategy could include: (i)traditional IBRDlending as needed; (ii) intermediation or guarantee o f long-dated derivatives transactions to enable the Government to better manage foreign exchange, currency, or commodity risks in its liability portfolio; (iii)partial risk guarantees to support Govemment's objective o f catalyzing private finance for infrastructure, including the provision o f political risk guarantees in support o f eligible new direct foreign investment, to increase investors' comfort in investing in Algeria; and (iv) IFC financing and technical assistance or  28 Algeria Country Assistance Strategy advisory services. These instruments can support private transactions in areas such as water supply, infrastructure concessions, and port improvements; the Bank Group (IFC and MIGA, World Bank Treasury, and Project Finance and Guarantee Department) will work with the Government to help structure an optimal portfolio o f IBRD financing from a cost and risk perspective, taking into account the government's existing liability portfolio and the available alternative sources o f finance. Partnerships and Outreach 102. The Bank has built stronger partnerships with the IMF and other development partners in support o f the government's stabilization and structural reform program (see Annex In). Given the limited resources and the need to enhance effectiveness o f client support, the Bank will continue to be selective and to specialize in areas where it has a comparative advantage. There i s already a clear arrangement between the Bank and the IMF for support to Algeria's reform program. The Bank-Fund collaboration on the FSAP will provide a strong foundation for a broad-based partnership for the diagnostic o f financial sector issues as well as monitoring o f progress. The Bank will take the lead inthe dialogue on social, structural, and other sectoral issues and fiduciary assessments while leaving core macroeconomic and related structural issues to the IMF (such as support to monetary policy management, strengthening o f central bank's oversight capacity, tax and tariff reforms). UNDP has entered into partnership with the Bank and the Government on the investment climate assessment. UNDP i s leading the support to the implementation o f the judicial and gender equity reforms and to the monitoring o f progress in meeting the MDGs Given the importance o f the Association Agreement and EU assistance, the Bank will seek to reinforce its partnership with the EUin order to take advantage o f the comparative advantage o f each institution. The Bank will also play a more active role in establishing partnerships with bilateral and other development partners involved in supporting Algeria's growth and poverty reduction strategy. 103. Partnerships are also central to IFC's work, since it i s always a minority investor. IFC will continue to work closely with domestic and intemational investors inkey industries such as infrastructure and the financial sector to facilitate new investment. IFC will also work closely with domestic financial institutions to help mobilize long-term domestic financing, e.g. through partial guarantees o f bank loans or bonds. MIGA can provide non-commercial guarantees for new foreign direct investment into Algeria, including for privatizations. IFC activities will aim to crowd in private investment. Overall, the approach i s to invest in, andor guarantee investments in, projects that have a strong catalytic impact in mobilizing additional private investment, pioneeringnew opportunities for private investment, or support new mechanisms for raising finance. 104. Outreach and Knowledge Sharing. The Bank Group's outreach activities need to be strengthened significantly over the CAS period. Accordingly, the Bank has increased its interactions with the different levels o f governments, the Algerian media, civil society, and business community to establish partnerships for Algeria's development. The Bank Group's outreach and knowledge-sharing capabilities will expand further once Algeria develops its Distance Learning Center (DLC) as part o f the Global Development Learning Network (GDLN). The latter, a global "Network o f Networks" on development issues i s composed of public, private, and non-governmental learninghowledge organizations. It i s a fully interactive, distance-learning network with a mandate to serve as a leading depository o f development-related knowledge. Joining the GDLNwill greatly increase the Bank Group's outreach and knowledge-sharing activities inAlgeria by bringing learning and capacity buildingactivities to larger numbers o f government officials, private sector representatives, members o f civil society, and other stakeholders. The Bank will also increase its outreach duringthe CAS period to help build support for reforms through a more comprehensive dissemination o f the findings o f the analytical work, and of the experiences of countries who are undergoing the same structural changes to integrate their economies  Algeria CountyAssistanceStrategy 29 with world markets. This will be done through seminars, study tours or road shows (along the lines of the SMExchange initiative), and closer collaboration with local universities. Members o f civil society are involved in some Bank initiatives such as the Consultative Council on Gender, the Mediterranean Development Forum, and the Initiatives on the Laws o f Association in the Arab World. Inaddition, and inresponse to the feedback receivedduringthe CAS consultations (see Annex 11), a special effort willbe made to extend the Bank Group's outreach through more periodic dialogue with stakeholders, The Bank will continue also its highlyeffective participatory consultative process with local research institutes, and women's organizations, on strategic directions for reforms such as those organized on the ICT, water and housing sectors. D. ProgramPriorities 105. Given the selectivity principle and the scenarios outlined above, the Bank Group's priorities for FY04-06 are summarized in Table 4 and include (i) diagnostic and monitoring work to underpin the dialogue and advisory services; and (ii) support for reform implementation through advisory services, technical assistance, risk mitigation instruments, flexible new lending or guarantees, and the supervision o f the ongoing portfolio. IFC will complement the Bank's support through financial sector development, SME support, promoting private investments ininfrastructure, supporting the Govemment's privatization efforts, and helping to improve the investment climate and reduce perceptions o f country risk for foreign investors. Along with several prioritized direct investments, drawing on lessons from IFC's experience inother transitionalcountries, the Corporation's activitiesinAlgeria will havea strong focus ondemand- driven TA and advisory services. Particular emphasis will be given to the areas o f SME support through the recently established North Africa Enterprise Development (NAED) facility (Annex I,Box 2), privatization support through the Private Sector Advisory Facility, advisory services to the Govemment on other specific transactions, and the undertaking o f analytical work in sectors such as micro-finance, housing, and leasing (see Annex I). The specific activities of each member o f the Bank Group in the outer years o f the CAS will be derived from the work program described in this CAS and will be agreed upon with the Algerian Govemment. Implementation support will be demand-driven and focused on activities whose demonstration effect and impact will further Algeria's drive for sustained growth and employment creation. Diagnostic and Monitoring Work 106. The Bank's monitoring and diagnostic role will be implemented through a series o f Economic reports, all done in collaboration with Government counterparts and other development partners as required. The purpose o f this work i s twofold. First, to stay abreast o f economic and social developments, fulfill the Bank's due diligence responsibilities, and engage with the Government and other stakeholders analytically on the national reform agenda, including the broad range o f the growth and employment generation issues. The second objective i s to use the Bank Group's analytical services, including WBI, to build capacity, fill the knowledge gaps in key areas o f reforms, and help the Government to both articulate its reform strategies and strengthen its implementation capacity. This diagnostic work will also provide the Government and the Bank Group with a basis for identifying areas inwhich financial support could be required or for scaling up support inline with the recommendations o f the Bank's Middle-Income Countries Task Force and the MNA regional strategy. (see Table 4). 107. The Bank's monitoring and diagnostic role i s already being implemented through dissemination and follow-up o f the study just completed in collaboration with the Algerian Government on Algeria's medium-term macroeconomic strategy for sustaining faster growth with economic and social stability. The study i s part o f a series o f analytical work to underpinthe policy dialogue and the partnership with Algeria. Companion studies include: A private sector development strategy note; and a diagnostic note on the climatefor foreign direct investment in Algeria (FIAS). The findings o f these reports led to the elaboration o f a two-pillar strategy-securing fiscal sustainability and promoting a favorable investment  30 Algeria Country Assistance Strategy climate for medium-term growth. Over the next three years, the Bank will focus its policy dialogue and advisory services on the implementation o f the findings o f these studies. Table 4: Componentsof Analytical Work, Advisory Services, andLendingFY04-FY06 FY04 FY05 FY06 Economic & Social Monitoring Economic & SocialMonitoring DPR Economic & Social ................................................................................................................................................................................................................................................................] Monitoring Public ExpenditureReview FSAPfollow-up activities ................................................................................................................................................................................................................................................................h FSAP PovertyAssessment CFMROSC Public Sector Reform ............................................................................................................................................................................................................................................................. ................................................................................ GenderAssessment Follow-upActivities on povertyand -up Activities on .......................................................................................................................... kT?!!?!........................................................................................................... ..~o~e.~..and..gen.der ...................................... ................................................................................................................................................................................................................................................................\ ............................................................................................................................... HDfollow-up activities .................................................................................................................. ............................................................................................................................. .Rufa!,.De./.,.?eatea.. ........................................................ Health..Sector..Financlnp..Sllategy ........................................................................................................................ ................................................................................................................................................................................................................................................................d Water ResourceMgmt. Strategy ................................................................................ ........... LegalBusinessEnvironment CAS Progress Report Supportto FiscalSustainability To be determined To be determined Supportto improve the business climate Support to public servicedelivery Solid Waste/Municipal Waste Mgmt Water sector ReformLoan ....................................................................................................................... LY??2?... mi!!) ......................................................................................................................................................................................... ($120 mil) ICT Dev. Support (US$22.5 mill) UrbanHousing($100 mil) To be decidedon the basis of Govemment's demands and reform implementationtrack record over the base case scenario 108. In this context, the Bank will focus its analytical work on (i) completing the core diagnostic activities (PER, CFAA, Poverty Assessment, DPR); (ii) supporting, in partnership with the IMF, the macro-economic stabilization program; and improvement o f public expenditure management; (iii) supporting the development o f the financial sector (see Box 5) and assisting the Govemment in designing and puttinginplace an effective Anti-Money Laundering regime.  Algeria County AssistanceStrategy 31 Box 5: FSAP's Focus The FSAP is carried out jointly with the Algerian authorities. It will include: (i)identifying risks and vulnerabilities in the financial system and their linkages with the macro-economy; (ii) assessingthe performance o f the financial system in support of economic growth; and (iii)assessing key financial sector standards, and implications for financial system stability and development. Inparticular: The FSAP will focus on the financial conditions and prospects o f the banking sector, analyzing the results o f past efforts at re- capitalizing and restructuring the public sector banks, discussing the need for additional financial and operational restructuring o f these institutions and examining the operations and financial condition o f the new private banks and their links with local business groups. The main objective o f the FSAP will be to improve the operational efficiency o f banks in credit and financial riskmanagement and credit monitoringand loan recovery as well as on strengthening corporate governance and ensuring arm's lengthrelations with govemment and dominant business groups. Various options will be put forward for future restructuring and consolidation o f the banking sector, covering the merits and demerits o f "twinning" arrangements, privatizing public sector banks, and separating private banks from dominant shareholders and business groups. The second focus o f the FSAP will be on the functioning o f the govemment bond market and public debt management more generally. This component will address such questions as the issuance techniques used by the Algerian authorities, the structure o f the bond market in terms o f size o f issues, benchmarking and liquidity, the extent o f competition among primary dealers and the role o f institutional and other investors in the market. The FSAP will include proposals for enhancing the efficiency o f the primarymarket and improvingthe liquidity o f the secondary market. Related to capital market developments, the FSAP will report on recent developments in housing finance, focusing on the adequacy o f the primary market for originating and processing housing loans, initiatives to develop a secondary mortgage market and the current state o fthe legal andjudicial framework supporting housing finance operations. This report will include policy recommendations for strengthening the efficiency and performance o f housing finance institutions and markets. A review o f the insurance companies and other institutional investors will also be undertaken. The focus will be on the structure and performance of insurance companies, their regulation and supervision, and their future prospects, but will also address the role o f social security institutions in the govemment bond and other financial markets. Proposals will be made for strengthening regulation and supervision and enhancing the contribution o f institutional investors to the financial sector and economic development o f the country. Recent developments in payment systems, focusing on the adequacy o f available payment facilities and on legal and regulatory issues will also be reviewed. The aim i s to recommend policy reforms for strengthening the efficiency and adequacy o f payment systems. The FSAP will also focus on the macroeconomic and financial sector implications o f the accumulation and fluctuations of hydrocarbon revenues and will address issues in the design o f a savings strategy and the potential use o f intemational hedging facilities. An analysis o fthe performance o fthe enterprise sector, distinguishing betweenpublic enterprises, large corporations and SMEs will also be undertaken. The FSAP will report on the financial condition of the enterprise sector and its vulnerability to future changes in the exchange rate and the level o f interest rates and will discuss access issues o f SMEs to financial services. Proposals will be made for policy improvements in this area, including the promotion o f efficient credit information networks and various twes o f registers. 109. Another important part o f the diagnostic and monitoring work will be the build-up o f the knowledge base on human development policies and programs and social insurance systems. Inaddition to the policy dialogue, the priorities would include, as per Government's request, a review o f the current portfolio o f social protection programs to better match social protection instruments (risk reduction, risk mitigation, and risk coping) with social risks, and delivery mechanisms (public, private, informal). In this context, the diagnostic work will focus on: (i) evaluating the impact o f active labor market policies (vocational training, wage subsidies, public works, and micro-finance programs) in order to decide which programs should be adjusted and expanded and which programs should be gradually phased out; (ii) reviewing current social assistance programs to identify gaps incoverage and overlaps; and (iii) defining a policy reform agenda for the current insurance system (pension, disability and death, health and unemployment) to reduce payroll taxes that impair job creation.  32 Algeria Country Assistance Strategy Advisory Services, Technical Assistance, Partial Risk Guarantees and other Financial and Risk management Products, andflexible IBRD Lending 110. The Bank Group's implementation support will be limited and selective under the base case engagement scenario. In line with Govemment's requests, the implementation support will be focused on the reforms to: (i)support fiscal sustainability, including assistance for public asset and liability management and government effectiveness; (ii) improve the business environment, including the use o f technical assistance, financial and risk management products to help reduce the vulnerability o f public finances and to foster private participation in the financial, transport, water, housing, and ICT sectors; and (iii)support to social protection programs. IFC will complement the Bank's support through financial sector development, SME support, promoting private investments in infrastructure and supporting the Government's privatization efforts. Strengthening the Basisfor Fiscal Sustainability and Government Effectiveness 111. Fiscal Sustainability The Bank will continue to encourage the Government to further strengthen the fiscal framework, with the aim o f better managing volatility and securing medium and long-term fiscal sustainability, through a three-pronged approach: 0 De-link public expenditures from short-run movements in oil prices and design and implement a strategy to reduce the risks resulting from the volatility in hydrocarbon fiscal revenues through: (i)anchoringthefiscalframeworkonanindicatorthatisunaffectedbytheshort-runchangesin hydrocarbon revenues, such as the non-hydrocarbon primary fiscal deficit, measured as a ratio to non-hydrocarbon GDP; (ii) implementing a multi-year expenditure planning, based on a rolling medium-term expenditure framework; and (iii) using a balanced mix o f structured loans and hedging products within an adequate asset liability management framework. 0 Secure the sustainability o f the non-hydrocarbon fiscal deficit inthe mediumand long term. The main options which are being discussed with the Government could include: (i) implementing a savings strategy, in anticipation o f the long-run depletion o f hydrocarbon fiscal revenues and the concomitant future calls on the budget; (ii) implementing a rules-based fiscal policy over the medium term, with the aim o f keeping the non-hydrocarbonprimary deficit below a sustainable threshold, while saving excess hydrocarbon fiscal revenues for the future. A prudent estimate o f the `permanent hydrocarbon income stream could provide an implementation benchmark for " such a threshold; and (iii) managing hydrocarbon revenue savings in the context o f an active asset and liability management strategy, with the aim o f reducing the risk to public finances. Following a diagnostic assessment, a priority action plan would be established to structure a sustainable asset and liability portfolio that could include retiring expensive foreign debt and managingthe hydrocarbonproducts. 0 Strengthen the transparency o f fiscal accounts and the role o f the budget as an instrument for improved medium-term macroeconomic management. The Bank could provide assistance for the modernization o f the preparation and formulation o f the Budget, in particular by: (i) helping establish an integrated Budget framework, including a unified, multi-annual, rolling budget; (ii) encouraging reforms that promote transparency through a comprehensive coverage o f all fiscal and expenditure accounts within the budget; and (iii)assisting the authorities in the consolidation, evaluation, and monitoring o f the contingent liabilities o f the public sector. 112. Inaddition to the support to fiscal sustainability, over the next 2-3 years, and ifrequestedbythe Government, the Treasury services o f the World Bank, would provide advisory services to help the Government o f Algeria build its own capacity in selected areas o f public financial management such as asset management, public debt management, capital markets financing, investors' relations, and middle-  Algeria Country Assistance Strategy 33 and back-office organization and operations. More specifically, based on a needs assessment, and complementing and coordinating with other support currently being provided by other sources (e.g., the IMF, Banque de France, Banque de Belgique), Treasury advisory services could offer support in the following areas: 0 Asset Management. This would include: (i) technical assistance to help strengthen all aspects o f investment and governance practices along with the management o f operational and market risk in official reserves, pension funds and/or "heritage" reserves such as petroleum funds; (ii) capacity building in all aspects o f management o f official reserves, via the World Bank Treasury's ongoing Reserves Advisory and Management Program (RAMP); and (iii) knowledge transfer on structuring financial assets that would help in managing the inherent risks in government finances. Public Debt Management. This would include: (i)capital markets access and funding transactions execution; (ii)delivery o f a comprehensive public debt management assessment pursuant to the Guidelines for Public Debt Managementrecently developed with the IMF, to help identify priority needs for improvement in this area; (iii) technical assistance in public debt management to help build capacity and meet objectives with respect to cost and risk; (iv) technical assistance in asset-liability management, with a particular focus on the design and implementation o f strategies to measure and mitigate foreign exchange, interest rate and commodity risk in government finances; and (v) technical assistance inthe design and execution o f a government funding program in the international markets, including assistance with rating agency processes and relationships, design o f a sustainable funding strategy, and management o f banking and investor relations, and back- and middle-office. 113. Governance Reforms. The Government i s still working on its public sector reform and governance improvement strategy and has not sought Bank support yet except in the areas o f public procurement and modernizing o f budgetary procedures. Bank support will therefore be focused over the next three years on: (i)the implementation o f the recommendations o f the Country Procurement Assessment Review (CPAR), carried out in January 2002, with full Government support; and (ii) technical assistance in the areas o f public expenditure management and information management through the supervision o f the ongoing Project for the Modernization o f Budgetary Processes. A Country Financial Accountability Assessment (CFAA) i s planned for FY05. The Government and the Bank have recently started the accounting and auditing review module within the Reports on the Observance o f Standards and Codes, or ROSC, in order to improve and enhance the quality o f financial reporting within public interest entities (banks, insurance companies, listed companies, large entities). The diagnostic review currently under way and the policy recommendations will lay the foundation for a reform agenda and a concrete action plan inthe future. Improving the BusinessEnvironment and Encouraging Private Sector Participation 114. The Bank Group will use the findings o f the private sector development strategy note; and the diagnostic note on the climatefor foreign direct investment in Algeria (FIAS) to underpin its dialogue and advisory services for the promotion o f a favorable business environment for medium-term growth (see Annex 1 for the recommendations). Pending an agreement with the Government on the specific areas o f focus for Bank support, the Bank Group will pursue the dialogue in support o f private sector development in Algeria through: (i) encouraging further privatizinghestructuring o f public enterprises; (ii)furthering banking reform, including privatization o f banks, and financial market development; and (iii)encouraging private sector participation in infrastructure services, including telecommunications. Attracting foreign private investors to Algeria i s not going to be easy given market perceptions about Algeria's political risk and the global risk aversion to emerging markets. Privatization approaches will  34 Algeria Country Assistance Strategy have to be structured very pragmatically taking into account this market situation and local sensitivities to privatization o f public sector assets. The Bank Group can play a very important role in this area through the set o f risk mitigating instruments it could offer in helping to present Algerian risk to the market, through for example joint road-shows with the Government, advice on ratings, partial risk guarantees, and improving the outreach with trade unions on the benefits o f privatization and private sector involvement in general. 115. IFC has provided technical support to the Algerian Government and the private sector. For instance, the recently established North Africa Enterprise Development Facility in Algiers i s geared to help SMEs develop business skills, receive management training, and increase their access to financing. IFC i s also negotiating a global advisory agreement on privatization with the Ministry o f Participation and Investment Promotion. The Bank Group will therefore continue, through policy dialogue and advisory services, to support the reform agenda to strengthen Algeria's integration into global markets and improve competitiveness. The Association Agreement between the EU and Algeria offers a unique opportunity inthis respect. 116. The Bank Group will continue to support financial sector development, a major component o f the Government's reform agenda and a Government priority area for Bank Group support. Specifically, over the next three years, Bank Group support will focus on the implementation o f the recommendations o f the FSAP report based on specific requests from the Government. In addition to the priority areas emerging from the FSAP, the Bank will continue to support the Government through two ongoing technical assistance projects for financial sector development-The Financial System Infrastructure Modernization Project and the Mortgage Finance Technical Assistance Project. 117. IFC has already helped to develop many o f the new private institutions in the financial sector with equity investments in two commercial banks, an investment bank, and a leasing company. IFC i s expected to support the reform o f public banks with loans and equity participation in the privatization and attraction o f a solid technical partner for one o f the public banks. As part o f the reforms to develop the capital markets, the Bank i s supporting the development of the housing finance system through a three-year US$5.5 million loan, the Mortgage Finance Technical Assistance Project, which was approved inJune 2002. The project supports the development of the enabling environment for a well-functioning mortgage loan market through (i) reform o f the legal and administrative fkamework to enforce property rights, mortgage lien efficiency, and property titling and registration systems; (ii)strategic technical assistance tailored to the needs o f targeted banks and other related financial institutions; and (iii) training of bank staff to acquire the professional slulls needed in the mortgage line o f business. The mortgage market, for which a trust-funded IFC study i s under way, micro-finance and the insurance sector could also provide opportunities for IFCto introduce new products. 118. Facilitating private sector participation in infrastructure. The Bank' s support for infrastructure will be focused on the urban transport sector, water and sanitation services, housing, energy, and ICT. The Bank will continue to support the modernization o f the transport sector through the ongoing Transport Technical Assistance Project (US$8.72 million) which was approved inAugust 2001. The project supports the formulation o f transport policies, master plans for ports and road transport, a comprehensive package to reengineer the railway company, and advisory services and possibly guarantees to support the promotion o f concession schemes mostly related to the port o f Djendjen, the Algiers subway and airports. Infrastructure presents another area where IFC's expertise i s needed and the potential i s significant. 119. Developing transport concessions is crucial for Algeria's growth prospects. Algeria needs direct foreign investment and its associated technology transfer and demonstration effects, to develop its key infrastructure services. The Bank Group can play a major role in reducing foreign investors perceived risk for investment in infkastructure schemes, once the authorities take the right steps on the  Algeria Country Assistance Strategy 35 policy reform front. This would include using Bank Group's financing, advisory and risk mitigation instruments to reduce risks for investors and improve market perceptions. The priorities for such support could include: (i) the Algiers subway; (ii)a container port near Algiers; (iii) construction o f the 1216-km East-West motonvay; and (iv) privatization o f the road contracting industry, city bus services, air transport, port services, and non-core railway services. 120. The recent failure to attract a private investorfor the Algiers Airport concession scheme is a clear reminder that success in this area has prerequisites. The concession framework should be consistent with international norms. The ebbing of private infrastructure projects inthe world since 1997 calls for a more commercial approach to transport concessions as well as public-private partnerships for investment financing. The Bank Group could bringvaluable support to the conclusion o f transactions by helping the Government finance its share o f the partnerships and by extending its partial risk guarantees. The Bank work on Output Based Aid could also guide development o f a project to address road maintenance issues inrural areas where 70 percent o f the poor work and live. 121. Fostering a transition to a private sector-led development in infrastructure could lead to Bank support to the construction of the East- West motorway. The Government envisaged resorting to private concessions initially. However, issues ranging from tolling limitations in the near future and the wariness o f investors about a sector that has under-performed over the last ten years, together with the current security conditions in Algeria, will necessitate starting construction with traditional external financing. Once the some 300 km planned are in operation and tolls are gradually raised, private financing o f the East-West motonvay may become feasible. The Bank could support and hasten construction o f this first segment, hence paving the way for private schemes that will use the cash flow generated by motonvay sections in operation under the traditional approach, to develop the other sections, without resorting to public funds. Finally, a technical assistance project to promote management reforms within the ministry o f public works together with a strong training program that the new leadership seems intent to introduce better governance inthis critical sector. 122. The Bank will continue its support to the Government's ICT reform strategy through: (i) on- the going Telecommunications and Postal Sector Reform Project (approved inFYOO, US$9 million) which provides technical assistance for implementing the first-generation ICT reforms (establishing a new postal and telecommunications regulatory framework; liberalization entry - 2"d G S M license awarded in 2001, and third license forthcoming; creation and institutional support to AlgCrie Poste (AP), AlgCrie TClCcom and the regulatory authority (ARPT); partial privatization o f AlgCrie TClCcom); and (ii)the proposed ICT Development Support Project (FY05) which aims at supporting the second-generation reforms agreed with the Government (strengthening o f the regulatory framework to develop an information society; transforming Algtrie Poste (AP) into an e-commerce enabler, supporting selected e- government flagship applications, and institutional development support to Algiers Technology Park (incubation services, incentive mechanism for R&D, ICT training, capacity building for SMEs to use ICT insupply chain management)). IFC could potentially support Algtrie TClCcom prepare for privatization through financing and advice or help other private operators enter the market. Improving Public Service Delivery 123. Developing human capital and strengthening social protection. The Bank is expected to support the Government's education, health, and social protection agenda. The Bank has prepared in partnership with the Government a review o f public expenditures in the social sectors (FY02) and i s ready to engage with the Government on enhancing the efficiency and quality of public service delivery in the education, health, and social protection sectors and on broader sector reform issues once the Government i s ready to seek Bank support. Accordingly, over the next three years, the Bank will continue its dialogue on the social sectors (Health, Education and Social Protection) through sector work and continuous dialogue.  36 Algeria Country Assistance Strategy 124. I n water and sanitation, the Bank will continue to encourage the Government to clarify its priorities for the sector and prepare a sustainable development strategy which the Bank Group could support through a menu o f instruments. These could include: technical assistance; investment lending; or a guarantee facility to help the Government attract the private sector to help finance and manage specific segments o f the sector. The facility would. help identify and advise on the viability o f BOT and concession projects. There i s already an interest from foreign investors for investment in water. The Bank and/or IFC services could help private interest into investments. There i s now a window o f opportunity to actively pursue the dialogue with the Government on the immediate agenda o f reforms which include: (i) stabilizing water supply networks by rehabilitating the networks to reduce losses; (ii) corporatizing the utilities with an appropriate level o f financial and managerial autonomy, and increasing tariff levels to cover operation and maintenance (O&M) costs; and (iii) introducing the private sector in O&M in the form o f lease or performance based management contracts. Water i s a sector where IFC could get involved in the financing o f BOTSor public-private partnerships for the existing systems in large cities or properly structured water desalination plants. 125. I n housing, while support to the policy reform on housing finance continues through the on- going Housing Finance TA Project, a broader reform agenda has been identified and discussed with the authorities in the context of the CAS preparation. The Bank will support this agenda through: (i) advisory services to assist in designing and implementing action plans to move forward the strategic reforms o f the sector; (ii) technical assistance, and if needed, financial support, to pilot alternative approaches to address priority policy reforms for land management and public-private partnership inland development; (iii)support to develop the local debt/mortgage market, and (iv) IFC technical assistance and/or investmentto help develop the mortgage finance institutions. 126. Strengthening natural resource management. A Bank assessment o f the National Environment Assessment Plan (NEAP) was discussed at the Board o f Executive Directors in June 2002 (Report # 22890-AL). The assessment proposed a strategy to support the implementation o f the NEAP which will be guided by the key operatingprinciples o f the MNA Regional Strategy and will include the following: Sharing knowledge with support from the Mediterranean Environmental Technical Assistance Program (METAP) to build local institutional capacity for understanding the externalities between energy, trade policies, poverty, and the environment; and (ii)mainstreaming environmental concerns into high impact strategic lending in water and waste-water; municipal services through the Solid Waste Management Project planned for FY05; and the Second Rural Employment Project for North-Central Algeria (FY 03). 0 Improving public Sector efficiency and governance and encouraging public sector investment in projects with significant environmental benefits (water and waste water, irrigation). Support will be provided through the Solid Waste ManagementProject inwhich the capacity of municipalities will be strengthened bothtechnically and inthe area o f financial management and cost recovery. The ongoing Industrial Pollution Control Project (PCP) will also help strengthen the management capacity o f environmental institutions and agencies. 0 Encouraging an environmentally sustainable private sector development strategy through the planned Technical Assistance under METAP and PCP. 0 Supporting the formulation and implementation of a water management strategy focused on quality, sustainability of resource use, economic efficiency and equity. The region's water advisory program; the ongoing dialogue with the Government on its water management strategy, and the plannedrural development strategy (FY04) will be the main instruments.  Algeria Country Assistance Strategy 37 0 Strengthening Government's capacity for harmonizing environmental and social safeguards policies with the Bank's policies by developing a structured learningprogram aimed at building in-country capacity for upstream integration o f environmental considerations inthe planning and decision making processes 127. Given that the Bank's support toAlgeria, over the next threeyears, isprincipally a knowledge- sharing partnership with a strong capacity building element, the role of WBI is very important. Algeria's policy makers need knowledge about how other countries have successfully navigated their development challenges and opened-up to the world. Information on how to tailor international good practice to Algeria's circumstances i s crucially needed. Inthis context, WBI will work closely with the Government to design and implement a knowledge and capacity building strategy for Algeria. For example, there i s already a request for support to the newly created water management company (Algkrienne des Eaux, or ADE). The Bank Group will engage the Algerian Government on the medium and long term fundamental issues related to water resource management, including decentralization issues, and the role o f the private sector. There i s also a strong demand to develop a multi-year learning program to support banking restructuring and Central Bank's capacity inpartnership with the "lnstitut de Financement du Dkvelopment du Maghreb arabe " in Tunisia. 128. WBI will also use its existing program and course offerings to strengthen Government implementationcapacity and enhance sustainability o f knowledge sharing through partnerships with local researchknowledge centers. WBI, in partnership with the MNA region, could also support a GDLN Center in Algeria, should Algeria choose to join this network. This will expand Algeria's access to knowledge not only through courses and other learning events via WBI's increased use o f web-based information services, but also by accessing the vast global network o f Distance Learning Centers and other partner learninghowledge institutions which have turned the GDLN into the world's leading "Network o f Networks" on development-related learning. The specifics o f the WBI program in the context o f the implementation o f this CAS will be agreed on with the Algerian Government. 129. Criteriafor support. The Bank Group's program will be highly selective over the next three years based on Government requests and priorities. The Bank Group will review these priorities with the new Government following the April 2004 presidential elections. The following criteria will guide country programming choices and determine entry into new areas o f engagement or exit from current engagements. 0 A link to policy reform. Linking Bank support to the country's key development priorities i s critical. Particular importance will be given to ensuring a strong link to policies supporting the establishment o f an enabling environment for private sector development, employment generation, and poverty reduction. 0 Explicit Government ownership. The Bank will engage only in areas where there i s explicit request and concrete upfiont signals, and an agreement with the Government. 0 Bank Group's comparative advantage. The Bank will provide support only if it has a particular comparative advantage in technical skills, resources, convening power, or ability to mobilize international expertise. 130. Scaling up Bank Engagement. Moving to a high case scenario o f analytical and advisory services will depend on progress in implementing the reforms under the base case scenario. Under such scenario, the Bank will be ready to scale up its engagement and agree with the Government on an expanded and deeper program of programmatic diagnostic and advisory services which will be carried  38 Algeria Country Assistance Strategy out through a Country Development Box 6: Cost Sharingfor Analytical and MonitoringWork Partnership, with the possibility o f co- sharing the costs o f some o f the expanded The Bank Group's diagnostic and monitoring work does not rely on services between the Government, the Bank, direct financial contributions from the Government with the and other donors (see Box 6). exception o f the FIAS report (where Government's financial contribution was paid for through a trust fund). However indirect cost sharing by the Govemment (and some cases other partners 131. Scaling down Bank Engagement. such as UNDP) i s an integral part o f the diagnostic and monitoring Lower demand for Bank services over the work. The analytical work is driven by Government's demand. CAS period will lead to a scaling down o f There are no stand-alone or ad hoc analytical and advisory services engagement to a program of analytical and outside o f those agreed to with the Govemment. The Govemment identifies the relevant institutions and puts in place counterparts diagnostic work focusing on the core teams to work jointly with the Bank Group team. This approach diagnostic requirements and limited has been adopted for the following work: implementation support focused on selected areas where there i s Government demand and The Investment Climate Assessment where teams from reform implementation would be judged different ministries and agencies in charge o f the promotion of private sector development took part in the work and satisfactory. validation exercise for the survey results on the investment climate. LJNDP financed part o f the cost o f the survey. 132. Lending Scenario. The planned The evaluation o f the Government's Economic Recovery partnership between the Bank Group and the Program. Government o f Algeria in this strategy o f The Public Expenditure Review o f the Social Sectors. The Government and the Bank are expected to put together cooperation presents the base case for Bank teams to update the 1998 Poverty assessment. Group engagement. The base case balances Government's demands for Bank Group The Government's indirect financial contribution i s measured by services with what the Bank Group i s able to the direct costs related to counterpart teams time helping Bank provide in terms o f its own resources and teams with background work on the issues, providing an understanding o f the political and social context for the particular comparative advantage (Table 4). Given issues being examined, preparing workshops and seminars, Algeria's improved financial position and the monitoring progress in implementation actions plans (in most cases medium-term prospects for oil prices, there i s these programs require extensive discussions and actions by various no need for an expanded lending program parts o f the administration). beyond that which would be needed to In March 2003, the Bank signed its first contract of reimbursable deliver the technical assistance. technical assistance (equivalent to US$lOO,OOO) with Accordingly, there i s only one base case SONATRACH. Bank services under this partnership consist of lending scenario and Bank lending i s not helping SONATRACH align its procurement practices with Bank's standard procurement standards. expected to exceed US$lOO million a year on average, including the risk mitigating instruments. The criteria for support which also determine entry and exit strategies for the Bank were discussed above. If circumstances change, including sharp and sudden falls in oil prices, or if the Government requests additional financial support beyond what i s planned in the base case scenario, the Bank would consider such a request a prepare a CAS Progress Report for Board discussion. Evaluation and Country Program Monitoring 133. The effectiveness of Bank Group support to the Government strategy can bejudged ultimately by Algeria's progress towards achieving sustainable growth and achieving the Millennium Development Goals (MDGs). Given the swings in past Bank Group involvement in Algeria, the lack o f a national consensus on a reform program, and the uncertainty related to the upcoming Presidential election, the prospect for demonstrating results in the short-term i s limited. The CAS aims to keep the Bank Group involved and lay the basis for accelerated reform inthe future. 134. Given the political economy considerations and the demand-driven nature of this CAS, it is proposed to have a simple evaluation and monitoringframework. The two broad areas which the Bank Group will be supporting are fiscal sustainability and improving the business environment. The quality  Algeria Country Assistance Strategy 39 o f the policy dialogue in these two areas o f support will be measured by the Quality Assurance Group (QAG). The impact o f this policy dialogue will be measuredthrough an assessment o fthe policies which will be put in place and the steps taken to implement the reform agenda for example for the proposed asset-liability management framework. There will be no specific indicators as the focus i s on engagement. However, there will be a number o f instruments which would help monitor results. These are: (i)client surveys conducted during the implementation o f this CAS to seek client feedback on Bank's effectiveness; and (ii)performance o f the portfolio (through the CPPR exercise) which would show Government and Bank track record in implementation. If the 2004 elections lead to greater consensus on the need for accelerated reforms and greater clarity regarding a Government program, the FY05 CAS Progress Report would provide an occasion to elaborate a stronger results-based framework for the reminder of the CAS period. wr. RISK MANAGEMENT 135. Algeria's economy faces many development challenges and risks emanating from a variety o f internal and external sources. While Algeria's strong external position positively impacts credit risk when taking a short to medium term view, the country's weak commitment to structural reforms, the existing political and social problems, and the economy's hydrocarbon dependency remain important long term risk factors. There are, therefore, two mainrisks associated with this CAS. 136. Thefirst and most important risk is that the Government mightfurther lessen its commitment to reforms due topolitical opposition or complacency arisingfrom thefavorable prospects for future oilprices: 0 With Presidential elections scheduled to take place by April 2004, there i s unavoidable uncertainty about the sustained implementation o f the limited reform agenda outlined in this CAS. There i s a clear riskthat the Government might slow down the implementation o f the more politically sensitive reforms. The Government has had to delay the discussion o f its own reports on public sector and education reforms, the laws on hydrocarbons and land ownership because of political opposition. Trade unions have also staged a general strike against the Government's privatizationprogram. 0 Strong political pressure to relax the Government's fiscal policy stance and current social tensions. The Government has been pressured by trade unions and other stakeholders to spend the current oil windfall on increased welfare programs and public investment in infrastructure and housing. Reserves are offering the various vested interests an opportunity to reverse the 1990s liberalization trend and move toward a public sector led growth strategy again. The Government has so far been able to balance macroeconomic stability with the pressures to stimulate the economy through a fiscal expansion. But the risk remains that as elections near, there will be more temptation to spend and endanger the fiscal stance which painfully restored macroeconomic balances inthe mid-1990s. 0 High oil prices and levels of international reserves may lessen the drive to improve the investment climate to attract foreign investment now that international reserves are rising and seem likely to continue to rise over the CAS period. High international reserves and an election year might also lessen the pressures to deepen the reforms o f the public enterprises and banking sectors. The Bank Group is managing this risk by focusing on analytical and advisory services to help the Government build a strong rationale for reforms through dissemination and consultations about the benefits o f reforms based on results both within Algeria and elsewhere, and by supportingthe  40 Algeria Country Assistance Strategy Govemment's social protection strategy. To the extent that IFC's expanded engagement in the country depends on improvements in the investment climate, privatization, and increased private investment, renewed instability in the country or reversal o f reforms would therefore negatively affect IFC's program. IFC intends to manage this risk by helping the Government structure socially acceptable solutions for the privatizationsinwhich IFC will be involved. 137. The second risk relates to the financial risk to the Bank. Given that Algeria i s not expected to need significant financial support from the Bank over the CAS period, the proposed lending program i s modest and would allow for a continued decline o f IBRDexposure in line with the reduction o f Algeria's external debt obligations. IBRD exposure stood at US$1.3 billion at end FY02, down from US$2.1 billion at end-1996. All IBRD exposure guidelines are currently met. However, the share o f preferred creditor debt service intotal public debt service comes close to the 35 percent guideline threshold. While the financial risks to the IBRD are limited over the short-to-medium term, the country risks (potential continued violence, social tensions, pressures to relax the fiscal stance, and lesser commitment to reforms) and the vulnerabilities o f the Algerian economy to oil price movements are important. The Bank Group i s managing these risks through the planned advisory services to: (i) manage Algeria's vulnerability to oil price vulnerability as discussed in the CAS; (ii)improve public debt management; (iii)encourage a faster implementation of the structural reform agenda to improve the business environment to encourage a private-sector led growth to reduce unemployment, the root o f much o f the social tensions; and (iv) reduce Algeria's sovereign risk through advisory services and use o f risk mitigating instruments and IFC's financing and support. James D.Wolfensohn President By: Shengman Zhang Peter Woicke Washington, D.C.  ANNEXI:PRIVATE SECTORDEVELOPMENT I.DEVELOPMENT PROFILEOFTHEPRIVATESECTOR AND 1. Historical perspective - the gradual rise of a private sector. Even when marginalized by government policy, Algeria's private sector has always existed. Since independence in 1962, the government pursued a centrally-planned economic strategy, which translated into massive public investment, particularly in industry, construction, agribusiness, banlung, infrastructure and foreign trade. Private enterprises suffered from discriminatory measures, including limits on their investments, inability to import outside the State's trade monopoly system, and very limited access to credit from banks (those lent almost exclusively to public enterprises). However, beginning in the mid-80s, the government engaged in a gradual change o f economic policy, moving toward a market-based economy. This transition made possible the resurgence o f private enterprises. Graph 1below shows the distribution o f a random sample o f 600 Algerian firms based on the year o f creation. Roughly half o f the firms were created before 1990 and have grown under the socialist era, a peculiar feature o f the Algerian enterprise sector which greatly affects its slow transition to a market economy, and the behavior o f most entrepreneurs. #firms in Graph 1: Enterprises age in Algeria ~ sample 24 20 16 12 8 4 0 19211942 19521959 19631967 19711975 197919831987 19911995 1999 Year of creation ~ Source: World Bank, Investment ClimateAssessment. 2. During the period o f central planning, the private sector managed to survive in the niches left uncovered by public enterprises, particularly in the poorly capitalized, high-profit sectors where demand was not being met. Thus, private enterprises were able to dominate the sectors o f retail commerce, services (restaurants, small hotels, computers), land transportation, tailoringhosiery, finishing work in construction, processing o f plastics, printing, leather work, hardware, etc. These enterprises generally supplied, retailed and did subcontracting work for public enterprises (which concentrated on industry,rail, maritime and air transportation, and processing o f raw materials). 3. The majority o f independent entrepreneurs employed few or no staff. Many other private enterprises adopted a low profile based on family units headed by an owner/founder. These enterprises operated very flexibly to escape the constraints o f the state, adapted themselves to an unfavorable business environment and directed their production almost exclusively to the domestic market. Enterprises often engaged in speculative and sometimes illegal behavior-the latter particularly with regard to importing, filing financial statements, and reporting employment and profits. They made little use o f the banking system. Entrepreneurs o f this period learned to be wary o f the state, o f public administration and o f the judicial system. In industry, the dependence on protection from international competition meant that enterprises had little incentive to innovate and invest in new technologies. The  Page 2 of 21 Annex I private sector emerged from this period in disarray, without its own supply and distribution network and with an insufficiently structured professional organization. 4. However, the dominance o f the public sector and its monopoly on foreign trade did help private enterprises in some respect and led to the emergence to what Algerians call a "secteurprive` rentier". Given the constraints to conduct private business activities, the few entrepreneurs who were able to make investments o f significant size acquired monopolistic positions in niches, that turned into profitable and secure rents. The high margins and protection thus acquired reducedtheir incentives to innovate and seek other markets. 5. A recently conducted survey shows that the `old' private sector that has grown during the centrally planned era or during the burgeoningreforms o f the 1980s, reports different constraints than the more recently created enterprises. Inparticular, they are the ones complaining proportionally more about unfair competition. They also seem to have more access to credit. 6. Characteristics today:private enterpriseslowlyfinding its role. Private enterprises are generally family endeavors. They are small in size (see Graph 2 below on the size distribution o f a random sample of firms). They tend to be under-capitalized and heavily indebted.' Their management methods are obsolete, particularly in the fields o f finance, strategy, marketing and human resources. A management culture has yet to emerge. Dominated by family-based capital and management, enterprises were reluctant to open themselves up to the outside. With the liberalization o f prices and trade, once high- profit markets became more competitive, dryingup economic rents as most were ill-equippedto deal with international competition (for example, intextiles, engineering and agribusiness). Movements to transfer, merge and consolidate enterprises are rare. Acquisitions by foreign firms remain very limited. Graph2: Firm size: number of employees E 28.8% BPrivate ,15to9 ~ 1 0 t o 1 9 / 2 0 t o 4 9 ~ 5 0 t o 9loo+ 9 ~ 63 1 97 114 51 21 Source: World Bank, Investment Climate Assessment 7. Free access to the market is, at present, guaranteed dejure. Inpractice, private agents have not yet invested sufficiently inthe opportunities that have been created. The importing and supply networks remain, on the whole, inefficient and trade i s fragmented. The isolation fi-om international markets over many years and the difficulty inAlgeria o f obtaining information on new technologies have contributed to wideningthe gap between domestic and foreign producers. With the movement to a market economy and rising internationalcompetition, Algerian enterprises realized that they had to modernize their production facilities and adopt a more aggressive marketing approach, including with regard to exports. However, given the difficult access to credit and the absence o f significant foreign investment, private enterprises experienced problems in bringing their equipment up to standard. Consequently, they are generally not very competitive. Their products are often obsolete and the quality mediocre. Particularly those that invested heavily inthe late 1980s, borrowed inforeign currencies and were caught by the depreciation o f the DA inthe mid-1990s.  Annex I Page 3 of 21 8. The movement to a market economy and the liberalization o f trade represented two things simultaneously to many enterprises: a shock but also a scope for extraordinary development opportunities. Many enterprises struggle inthe face o f foreign competition, for which they are ill-prepared. Production capacity i s under-utilized. The absence o f foreign investment does not allow them to modernize (not only interms of equipment but also with regardto management and marketing methods). The transformation and restructuringo f the sector have yet to be achieved, including the creation o f a true fabric o f small and medium-sized enterprises (SMEs), the formalization o f individuals and enterprises in the informal sector, the formation o f modern supply and distribution networks, and-except for a few notable exceptions-the further development o f large private industrial and commercial groups. 9. Composition of theprivate sector. Obtaining accurate data on the enterprise sector inAlgeria i s a challenge. For instance, the CaisseNationale d 'Assurance Sociale (CNAS) recorded 179,893 registered businesses as o f 10131/2001, while the Centre National du Registre du Commerce (CNRC) recorded 667,200 o f them as o f 12/31/2000 (of which 45,277 were enterprises and 621,923 individual businesses).2 However, for consistency purposes, the compositionbelow i s based on CNAS figures. 10. A striking feature of the Algerian enterprise sector seems to be the low density o f businesses (either self employed or enterprises) compared to the population. Altogether, there i s only one registered enterprise for 666 inhabitants and one for 48 when self employed are included. 11. Table 1clearly shows that the construction and industry sub-sectors are predominant. Commerce and trade are still underdeveloped, although it i s likely that many individuals and small firms are operating informally in these sub-sectors. Among enterprises registered at the CNAS, 95 percent have less than 10 employees. These very small firms (less than 5 employees) employ 44 percent o f all labor registered at the CNAS. For the whole enterprise sector, the average number o f employees by firm i s only 4. Based on CNAS data, there are only 518 private enterprises with more than 100 employees. However, regular inspections made in 2001 by the Labor Inspectorate at the Ministry o f Labor over a sample o f 7,779 enterprises showed that 41.45 percent o f employees were not properly registered at the CNAS3. Different figures from other sources evaluate the proportion o f non registered labor between 35 to 45 percent. 12. Geographically, enterprises are concentrated along the coast. Algiers i s by far the most important economic center with 28 percent o f registered enterprises (CNRC data), followed by Oran (7 percent) and 6 Wilayas accounting for between 3.6 and 4.3 percent o f the total (Setif, Tizi Ouzou, Chlef, Constantine, Bejaia and Blida). Only 11percent o f enterprises are located in the South. Another characteristics i s the limited role of women in business (at least in registered businesses). Only 10,5 percent o f businesses (self employed as well as enterprises) belong to women. Regarding the judicial form of registered enterprises, only 3 percent arejoint-stock companies, 53 percent are limitedresponsibility companies and the rest are partnerships or single owner firms. As in many other developing countries, Algerian businesses are small family affairs, mostly closed to outside investors. There i s not a single private enterprise listed on the Algiers Bourse des Valeurs, because Algerian entrepreneurs would not share equity and control with other investors outside their family or a small circle o f trusted friends. The CNRC (the trade registry) registers all enterprises and individuals involved in an economic activity. The CNAS registers enterprises and individuals employing staff liable to pay social security charges. The DGIregisters tax payers. The data discrepancy i s explained by avoidance o f the rather high taxes o n employment as well as a large number o f registered but non active entities. The ONS keeps an important data base on economic activities. Other data bases are kept by the Ministkre de la PME-PMI, the Chambers o f Commerce and Industry; and specialized agencies, such as the Direction des Douanes (customs), PROMEX, CAGEX, etc. This number should be used with care as micro-enterprises and fm from the construction sector, where most unregistered employees work, are more frequently visited by the Inspectorate, so that average may well be overestimating the true percentage o f employees who are not registered.  Page 4 of 21 Annex I Table 1: Subtotalbv maior sectors Agriculture & fisheries Water, Energy, OiVGas& Services to Oil Mines & Quames Construction Industry Transport& Communication Commerce Services Total AveraEe number of employees Source: Office National de Statistiques. 13. The ONS has prepared rather elaborate comparisons o f the performance between public and private enterprises over an 11-year period, from 1990 to 2000. The main conclusions can be summarized as follows: 0 Most o f the value added of the public sector came from hydrocarbons. Without hydrocarbons, private enterprises have been generating more value added than the public ~ e c t o r .While the ~ value added o f public enterprises (without hydrocarbons) stayed flat after 1995, it kept growing steadily in the private sector. Over the same period, they generated-hydrocarbons included-an average added value o f 54 percent, against 46 percent by the private sector. In2000, the private sector created 78% o f value added, outside hydrocarbons. Private enterprises were much more 250- f 200- # 150- 100.- - / Private \-e\ Public 50- 07 I , I , , , I I I I , , Table 2: Share of the Private Sector inValue Added (YO) I 1993 20001 Agriculture 99.0 Hydrocarbon 0.o Hydrocarbon-related construction 0.o Industry (excluding hydrocarbons) 15.7 Construction (nonrelated to hydrocarbons) 60.6 Transportation and telecommunications 56.2 Retail trade 84.8 Services 84.3 Total including hydrocarbon 47.7 42.4 ITotal excluding hvdrocarbon 66.6 Source: Algerian authorities However, public enterprises still generate more value added (on aggregate) in some industrial sectors (mechanical industries, buildingmaterials, chemicals, paper and wood).  Annex I Page 5 of 21 0 Inthe early 1990s, public enterprises were paying more than double the aggregate wages paidby the private sectors. Starting in 1996, the total amount o f wages paid by the private sector progressively caught up with public sector wages. By the end o f year 2000, they were about equal', With the exception o f the year 2000, private enterprises always generated a higher operating income (on aggregate) than public enterprises. Actually, detailed ONS data shows that most operating income o f the public sector was generated by the energy and hydrocarbon sub-sectors. Inseveral sub-sectors+.g. mechanical industries, textiles, ago-industries, leather and shoes and services-public enterprises were regularly loss making. With the exception o f textiles in 1993- 94, the private sector never showed a loss inany sub-sector over the entire 11-year period. Public enterprises were large consumers o f fixed assets. Over the 11-year period they consumed an average o f 78 percent o f fixed assets against only 22 percent by the private sector. 14. Insum, inspite ofall discriminatorymeasures, private enterprises appear to have generatedmore jobs, have been more efficient and more profitable than public enterprises. Eventually, the total amount o f wages they paid exceeded those paid by public enterprises. The trend i s also worth observing: while public enterprises were stagnating and are now beginning to disappear, the private sector kept on growing in spite of the severe problems it faced during that period (security, depreciation of the DA, strong informal competition, unfavorable environment, etc.). 11. KEY CONSTRAINTSTOPSD 15. While some improvements have occurred over the years which have helped increase the private sector's share in the economy, the poor overall investment climate prevailing in Algeria has adversely affected the country's ability to attract sufficient FDI, especially inthe non-oil sector, as well as crowded out private sector investments. In addition to governance problems, an inability to implement structural reforms to alleviate the key constraints to PSD (identified below) have frustrated investors for years. The slow pace o f change i s due to resistance to change from those who stand to lose or for ideologicalreasons. Higher oil prices also contribute to delaying the needed structural reforms. 16. The investment climate survey conducted among 600 firms in nine Wilayas, together with the interviews done by FIAS o f 56 potential European investors, convey a sense o f the main constraints identified by investors-whether private, public, foreign, or local firms. Overall, there appears to have been a recent shift from constraints resulting from an economy o fshortages,towards one o f constraints to growth, which probably reflects regained optimism among investors, but calls for urgent and deep structural reforms to reduce them. The main constraints to PSD identified in the surveys and WBG experience are: 17. Public Sector Control of Economic Activities. Algeria's long legacy o f a centrally-planned economic strategy where the public sector played a strong and active role in the economy i s still visible today where large parts o f the economy are under public dominance or control. The most obvious o f this i s the financial sector, where 95 percent of the market i s captured by public sector banks. Similarly, the hydrocarbon sector, infrastructure, and some industries continue to be fully dominated by the public sector. Inthis context, the governance issues associated with a large public sector apparatus have resulted inseveral barriers to entry for local and foreignprivate firms. A lack o f strong Government commitment to liberalize the economy on par with other middle income countries, including countries like Jordan in the region, continues to hold back the development o f Algeria. The foreign perception o f Algeria i s negatively affected by the perceived hesitations in implementing structural reforms, particularly the privatization program and the heavy bureaucracy which controls tightly many economic decisions such as business registration and exchange controls. Other issues that pose particular concern for foreign However, unit wages are still muchhigher inpublic enterprises (about double).  Page 6 of 21 Annex I investors include the practical impediments that they often face in transferring royalties or dividends abroad, in spite o f a clear guarantee o f transfer in the Algerian legislation; or the negative attitude and restrictions to foreign investment in the service or distributionsector. There is a remnant o f old socialist thinkingwhich does not value service industries highly. There is little recognition o f the value-added provided by modem distribution systems that will create jobs, improve quality control, and more importantly, introduce efficient logistics to a largely disorganized sector, and contribute to improvements inupstreamproductionand investment.. 18. Shortage of Industrial Real Estate. This is an increasingly severe constraint. There i s a large unsatisfied demand for industrial land. Out o f the 600 firms surveyed in 2002, 38 percent have been looking for a plot o f land, for a period o f time o f almost five years on average, to invest and expand. At the same time, around half o f equipped land i s unused, either because it belongs to bankrupt public enterprises or because private owners are holding on to them to speculate. The State-dominated land market6 exhibits large-albeit diminishing-price differentials which fosters speculation and corruption; and non-transparent distribution. There i s a severe titling problem. Lastly, existing industrial parks and activity areas are poorly equipped, serviced and managed. 19. DifJicult Access to Finance. Access to credit i s difficult, time consuming, and unreliable. Inthe random sample o f 600 firms we surveyed, only 11.4 percent o f their working capital financing needs were financed by bank credit over the last three years. Bank financing accounts for only 18% o f total investment financing by Algerian firms which use internal cash generation for 71% o f their needs. Large private firms have easier access than SMEs (46% o f investments financed by banks vs. 16%). Overall, only 29% o f loans are given to the private sector compared to 71% for the public sector. Banks-the largest are still state-owned-are bureaucratic, not business-friendly and poorly equipped. Credit officers are not trained to assess risk or serve smaller private sector clients, and they have little incentive to take responsibilities or manage risk. The "Performance Contracts" signed with the public banks following their recapitalizationaim at separating the management from the ownership o f the public banks, and thus could be a step towards improving bank incentives to actively seek new market niches. However, the transparency o f these "Performance Contracts" i s open to question, as i s their effectiveness in permanently altering the incentives for public bank lending to state-owned enterprises. On the business side, economic information i s scarce and unreliable, only 53% o f private companies have audited accounts, credit history databases inexistent, and many SME managers lack the qualifications to present sound business plans. The judicial system i s slow, unreliable, and still dominated by judges lacking knowledge o f commercial matters; making it difficult for banks to credibly secure collateral. Private and foreign banks and other financial institutions (leasing, venture capital) are still weak and only play a minor role in financing enterprises. The payment system i s extremely slow and encourages cash transactions even for large amounts, thereby discouraging savings mobilization. 50% o f broad money i s held in cash. Lastly, export financing facilities (export credit, guarantees) are very limited and inadequate. Capital markets are undeveloped and there i s little availability of non-bank sources o f financing. Leasing i s nascent, the stock exchange i s moribund and bond markets undeveloped and tightly controlled. 20. Administrative Barriers and Access to Information. The positive change in Government policy toward the private sector did not translate yet into significant change in the attitude o f the public administration (see graphs 4 and 5 below). Entrepreneurs still face unfriendly bureaucratic behavior, red tape, cumbersome and opaque regulations and endless delays to obtain clearances and authorizations. Although evidence i s hard to produce, corruption i s also said to be rife, possibly spurred by the administrative barriers and cumbersome procedures that make service delivery by the public sector slow and unreliable. Barriers are pervasive in all areas of business activity. Most frequently mentioned are the procedures to: clearing imported goods through customs, in particular through Algiers' harbor; obtaining a building permit; registering an enterprise; etc. Tax harassment i s also frequently mentioned. These While dominated by public land, the land market is actually dual and there i s a private market for land.  Annex I Page 7 of 21 difficulties are compoundedby difficulties to access information, such as applicable laws, regulations and procedures to specific cases, statistics, market information, etc. Graph 4: Importing: days to clear custom Graph 5: Average delays in the delivery of public services ~ 401 3s 30 zoo Mn *' , DP150 YE 20 IAvg. daysto clear Y' ILongest delay to clear 100 10 50 n 0 DZA MAR CHN IND 21. Inefficient & Cumbersome Taxation. Overall, direct taxation levels are about average compared to other countries. This is, however, negated by a series o f additional taxes on turnover, imports, etc, which increase the overall tax burden. This i s compounded by a complicated system o f tax incentives that adds to confusion and administrative discretion. In addition, social charges on employment are very high and discourage job creation. The cost of employees born by businesses exceeds 130% o f gross salary and i s higher or on par with much more advanced countries such as France and Sweden. 22. Inadequate Infrastructure. Firmsoften have poor access to services rendered by public utilities, and the quality i s reportedly low. The services considered to pose the most significant problems are connection to, and maintenance, o f fixed-line telecommunications, access to water supply, harbor services and management o f industrial parks. The density o f telephone mainlines i s quite low at 57 per 1000 people in2000 (table 3), and this ratio has failed to significantly increase inthe last 10years. Tunisia and Egypt, with a similar teledensity in the early 199Os, outstripped Algeria by the end o f the decade. The slow growth o f mainlines in Algeria i s partly due to the limited ability o f the public monopoly to satisfy growing demand. Mobile phones have started to make inroads into the Algerian market, and the recent sale o f a G S M license may remedy this situation. Transportation or access to energy are not regarded as a major problem. Table 3: Selected InfrastructureIndicators Algeria Tunisia Morocco Egypt MENA Paved Road (%) 1995-00 68.9 64.8 56.4 78.1 66.3 Telephones per 1,000 57.0 90.0 50.0 86.0 92.0 people, 2000 Telephone mainlines- waiting 5.4 0.9 0.9 1.9 1.2 time inyears, 2000 Personal computers, per 6.5 22.9 12.3 22.1 31.2 1000people, 2000 Source: World Bank, World Development Indicators 2002. 23. Legal and Judicial Issues. The Algerian legal framework is progressively being more attuned to the requirement o f a market economy. However, it i s far from functioning smoothly because o f the shortage o f qualified commercial judges, the lack o f disclosure o f court's decisions and understanding, by the business community, of methods that proved successful in other market economies (e.g. collateral legislation; bankruptcy; alternative dispute resolution). Also, there i s limited trust within the business  Page 8 of 21 Annex I community inthe impartiality o f thejudicial system. It i s still widely seen as slow, inefficient, impartial, corrupt and best avoided. 24. Shortcomings in Labor Regulations and Few Skilled Workers. Labor costs are fairly low but are offset somewhat by low productivity. There i s a lack o f good intermediary staff, such as factory foremen and skilled workers, and, as importantly a general lack o f skills in non technical management areas critical to a market-oriented economy (management, finance, marketing, strategy, etc.). There i s a strong demand for training. However, the Algerian education system does not meet enterprises' needs and post-education training and consulting services remain below standards and under-developed, Enterprises also suffer from excessively high social security charges and from cumbersome and expensive labor regulations. 111. RECENTPOLICYDEVELOPMENTSPRIORITIESFORGOVERNMENT AND A. Recent Policy Developments 25. Amidst a difficult domestic political environment, Algeria has made considerable progress in establishing macroeconomic stability and achieving significant economic liberalization. Some recent initiatives include: (i)liberalization o f the mining, electricity, and telecommunications sectors, and establishment o f regulatory bodies in each o f these sectors; (ii) strengthening o f the legal and judicial framework for private sector development with a new Investment Code, the creation o f an Investment Council along with the Agency for InvestmentDevelopment, and a one-stop investment window (ANDI); (iii)promulgation o f two new decrees clarifying further the privatizationpolicy and process as well as the creation o f the Ministry for Privatization and Investment Promotion; and (iv) substantial progress inprice and trade liberalization, most prominently tariff reductions in keeping with the Association Agreements with the EU(AAEU)signed in2002 andthe ongoing negotiations for WTO membership. While progress on privatization has been slow in general, four major transactions did take place over 2000-2001; the assets o f the public sector steel-making complex, SIDER, the jewel o f the heavy industrialization era, were sold to a majority foreign-owned company; a public detergent company (ENAD) was partially privatized in 2000 with 60 percent Government ownership sold to the Group Henkel; 52 percent o f Government ownership in the capital o f a gold miningpublic enterprise (ENOR) were also sold in 2002, and a new cellular telephone license was sold in2001 to a private investor for US$737 million. B. Priorities for the Government 26. Structural reforms are key. Reducing the constraints to enterprise development cannot be done successfully in a piece-meal manner. The experience o f the transition economies in Eastern Europe bears no ambiguity to the importance to pursue rapid reforms on many fronts, in order to send strong and credible signals to investors. Addressing the constraints described above and launchingthe corresponding reforms simultaneously should form the basis o f the Government strategy to increase investment in Algeria inthe medium-term. 27. To be implemented effectively, this set of reforms will call for strongpolitical will, ownership and dedication from various parts of the Government; significant expert resources; management capacity and senior officials involvement and monitoring. The Government would need to focus on the following strategic priorities to ensure that the Algerian private sector has the opportunity to burgeon to full potential, as well as attract further foreign investment into the country (see the matrices starting on page 15 for details): 28. Establish market discipline on public enterprises and foster the privatization agenda. Structural reforms for enterprise development call for a fundamental redefinition o f the role o f the State in the functioning o f the economy. InAlgeria and elsewhere, it i s now admitted that the State should have a limited role in the production of goods and services. However, Algeria has made much less progress in overcoming the-much more difficult-double challenge o f successful second generation reforms for  Annex I Page 9 of 21 private sector development, which consist in (i) increasing the State capacity to regulate markets; enforce decisions; ensure a level playing field among all participants; provide strong, effective and reliable public services and market institutions (customs, tax authority, judicial system, anti-trust agency, the administration etc.); and (ii) reducing the State intervention in areas where private operators should progressively take over: the land and credit markets; the provision o f services to enterprises; the provision o f infrastructure; and the production o f goods and services that do not exhibit public good attributes. In particular, the latter calls for accelerating a transparent privatizationprocess based on a well defined legal framework, and enforcing market discipline on the "old economy". 29. This is the single most important area that has affected the quality o f governance and weighs heavily on the perception o f the investment climate. Inaddition to public sector reform and acceleration o f privatization, the Government o f Algeria (GOA)mightwant to consider other actions that will increase the visibility o f the country and improve foreign investor perceptions: (i)seek a sovereign rating to establish a benchmark, increase visibility, and, eventually, lower financing costs for the public and private sectors7; (ii)establish a regular forum for dialogue with private investors (domestic and foreign) to discuss areas o f concern to the private sector and increase transparency on the formulation o f policy (see Box 1); (iii) change the weekend days to benefit from greater integration in the world economy giventhe recently signed agreement with the EUandpending WTO adhesion8. 30. Reform the institutional set-up of the industrial land markets to increase supply of land slots at market rates. The supply o f available public landneeds to increase significantly and the current dual land market be unified. The whole institutional set-up o f industrial land development and management needs to be reviewed, including a greater involvement o f private actors to ultimately limit the State's involvement to its regulatory function. It will also be important to foster private participation in development and management o f industrial parks. 3 1. Accelerate the comprehensive reform of the financial sector. The weaknesses in Algeria's financial sector i s severely constraining the private sector's ability to access financing and increase its activities inthe economy. Hence there i s an urgent needto reform the financial sector, especially through privatization o f some o f the prominent state owned banks and insurance companies. It i s also important to foster judicial reform (e.g., collateral legislation, bankruptcy laws etc.), and improve access to reliable market information and credit information systems as well as valuable business services for SMEs. 32. Reduce administrative bottlenecks and improve access to information services. Some reforms are already underway and should be scaled-up (ex. customs, tax authority), but major efforts o f simplification and e-enabling o f administrations are needed. Some o f these, including facilitating enterprise registration, faster business creation, and improved access to information, should materialize via the ongoing roll-out o fANDI. 33. Simplijj the tax system and gradually reduce average rates while eliminating incentives that have not demonstrated their efficacy in increasing investments. The various fiscal and social charges on payroll should also be reduced to encouragejob creation. 34. Improve access to quality infrastructure. Access to quality infrastructure has significantly improved in other countries-often at reduced cost-by opening-up the sectors to private operators. Buildingon the transport and mobile phone experiences, Algeria should move in the same direction for ports, airports, power, and water. Management and maintenance o f infrastructure in industrial zones shouldbe handed over to private operators inthe short-term. Most comparator countries inMENA are rated (Egypt, Iran, Jordan, Lebanon, Morocco, Oman, Saudi Arabia, and Tunisia). The weekend is on Thursday-Friday inAlgeria, Friday-Saturday inEgypt, Saturday-Sunday inMorocco, Tunisia and Pakistan.  Page 10 of 21 Annex I Box 1: An InvestorAdvisory Councilfor Algeria The Government of Algeria may want to consider the development of a small, high-level business-government "Investor Advisory Council" (IAC) to support its objectives. The purpose of an Investor Advisory Council would be to reinforce implementationof investment climate reforms, by providing an investors' perspective on the establishment of clear priorities and on results-orientedmanagement of reform. An effective Investor Council can help pinpoint priority areas for change, suggest solutions based on practical investor experience, and help create an atmosphere of greater trust by providing a recognizedand transparent platform for dialogue. Ultimately, an effective Investor Council will motivate actions in the policy arena, and eventuallynew investments. Business-governmentconsultativemechanismsdesigned alongthe lines of InvestorAdvisory Councils exist inmany emerging economies, where they have had some noted successes. In Eastem Europe for example, Foreign Investor Advisory Councils established in the last decade have been credited with leading to lasting policy reforms in Russia and Kazakhstan. While the institutional approaches, composition, agenda, outputs and ultimately impact o f every Council differs, lessons have emerged that provide insight into what makes an effective Investor Council, and the common approaches that can be consideredas best practices intheir development. An Effective Investors' Advisory Councilwould.. . Be a direct channel of dialogue between investors and a country's political leaders, at the highest possible level on both sides; Be relatively small, with approximately15 business leaders, drawn fromthe top echelons of intemationalbusinesses working inAlgeria, of intemationalbusinessesnot currentlyinvestedinAlgeria, andof Algerianbusinesses BechairedbyH.E. the PresidentofAlgeria, with approximately5 other governmentministersselectedto participate Convene once or twice a year for one-daymeetings Be a business-led process that involves year-round engagement through a working group structure that maintains follows up on issues betweenmeetings Be concemedwith Algeria's opportunitiesinthe global economy Proactivelyseek to identify obstacles to investment and proposesolutionsthat benefit investors collectively Have a fairly limited remit to ensure tangiblepolicy reforms Buildon existinglocal institutionalstructuresandcapacities InvestorAdvisory Council Added Value - Added Valuemniqueness of Investor Council Proposal The primary added value of the Council is the face-to-face interactionbetween decisionmakers who set policy and those who control investment, and the follow-up implementationthat derives from the working group structure. This enables govemmentsto gather information to designmore realisticand efficient policieswith inputsfrom the private sector, while providing investorswith amore informedperspective on the policy priorities of the country. Such consultation helps to enable stakeholders from business and govemment to take joint responsibility for policy choices and economic results. An Investors'Advisory Council adds value by: Adding the perspective (leadership, managementand investment) of a group of intemationalbusinessleaders to key elements of Algeria's strategyto stimulate growth andprivate investment; Making recommendations for concrete measures that have the potential to increase Algeria's attractiveness as a location for international capital and domestic investment, and helping ensure implementation of those recommendations; Ensuringfollow-up on recommendations,throughaworking group structure; Providing increased intemational visibility for Algeria's progress in creating an environment conducive to global investment. Empoweringand elevatingthe participatorylevel of existing consultativemechanismson which it would draw. NEXT STEP: Shouldthe Government of Algeria be interestedin exploring the development of an InvestorAdvisory Council, the next step shouldbe an assessment led by the World Bank, with the Government of Algeria, in full consultationwith IMF, IFC and MIGA. 35. Improve the legal and judicial system. In the short-term, there is a need to speed-up the implementation o f the judicial reform on commercial matters, inparticular the setting-up o f independent  Annex I Page 11of 21 commercial courts. As important i s the need to urgently scale-up the ongoing training program o f commercialjudges to a much larger number o f beneficiaries. 36. There is a strong need also to: (i) strengthen competition policies and significantly reinforce the anti-trust agency; (ii) increase transparency and competitiveness o f public procurement policies to create a level-playing field between all enterprises, whether public or private; and (iii)create an enabling environment for informal companies to formalize. For the longer-term, Algeria is inneed o f an ambitious and credible anti-comption strategy. 37. Create a labor force that is geared to a market economy. In the long-term, reform o f the education system-in particular at secondary and university level-should be geared towards greater adequacy o f skills to market demand. More urgent would be the reform o f the system o f professional training centers-in particular in management, by greater involvement o f the private sector and self- financing mechanisms' that would insure training responds to market needs. Iv. WORLDBANKGROUPSTRATEGY A. WorldBankStrategy 38. The pieces o f analytical work which underpinned this country assistance strategy" have helpedin outlining a program o f short-and-medium term reform agenda to improve the investment climate and encourage private sector development (See policy matrix attached to this annex). Bank support could include technical assistance and advisory services, policy dialogue, or risk mitigation instruments. Consultations with the Government o f Algeria over the coming year will help specify the areas for support which are expected to focus on the following areas ": Reform of the industrial land market, which could include institutional reform; land market regulation; rehabilitation and titling programs; fostering private participation in the development and management o f industrial zones; Reduction of the administrative barriers for firm registration and investment. This could include support to the development o f the network o f one-stop-shops (ANDI), its processes and organization, its linkages with other institutions and its information network. The development of a national market information system. This would include support to the ongoing Government program o f buildinga sound and reliable information system on companies and sectors. It could involve support inthe design o f the system and the linkages betweenvarious institutions (ONS, CNRC, ANDI, CNAS, Ministries, Chambers o f Commerce and Industry, etc.), as well as the design o f the downstreammechanisms to supply the information to various market stakeholders, which would involve public-private partnerships. Support the ongoing reform of the judicial system that pertain to commercial matters. This could include support to strengthening legislation and legislative policies, in particular on commercial law and economic regulation issues"; strengthening legal institutions; strengthening legal education and the ongoing program o f judges training on commercial matters; the development of Alternative Dispute Resolution; etc. 'or carefilly designed subsidy mechanisms like matching grants for SMEs. loThe PSD strategy note, the Investment Climate Assessment, the FIAS diagnostic. Assistance to support financial sector reforms will be discussed with the Algerian Government after the completion o f the ongoing FSAP. 12E.g., the Bankruptcy, Securities and Competition laws.  Page 12 of 21 Annex I Strengthening of market institutions. In particular the anti-trust agency ("Conseil de la Concurrence") and other market regulation institutions; export support institutions like CAPEX and CAGEX; as well as supporting the ongoing reform o f the Customs authority to facilitate export as well as import operations. Improving access of jirms to quality infrastructure. This could include supporting reforms to further facilitate private participation in infrastructure services, inparticular in harbor operations, and inindustrial ~ 0 n e s . l ~ B. IFC Strategy 39. Along with the World Bank, the IFC will assist the Algerian Government inaddressing several o f the strategic priorities listed above. The IFC will draw on its comparative advantage and lessons of experience working with private sector partners in other transitional countries. For instance, in both Vietnam and Russia, IFC devoted the bulk o f its efforts to TA and advisory services. Lessons from IFC's experience indicate that for successful overall results in such transitional countries, it i s important to have both a strong client demandpolitical will for IFC services and advisory efforts, as well as an improving investment climate. Prioritization of TA services to achieve strategic goals, as well as working in close coordination with the World Bank in soliciting and using donor TA finds, especially in relation to financial sector and investment climate activities, are other lessons IFC will draw upon when designing interventions inAlgeria. Along with several prioritized direct investments, the Corporation's activities in Algeria will have a strong focus on demand-driven TA and advisory services, particularly inthe areas o f SME support through the recently established North Africa Enterprise Development (NAED) facility (Box 2), privatization support through the Private Sector Advisory Services, advisory services to the Government on other specific transactions, and the undertaking o f analytical work in sectors such as microfinance, housing, leasing etc. 40. As the lessons o f experience have shown the importance o f a strong investment climate, IFC will work in parallel to help improve the business environment by encouraging private participation and assisting the Government to improve perceptions in international markets. In this context, IFC will put specific emphasis inthe following areas: Successful privatization i s crucial to the development o f a healthy private sector. The Government has asked for IFC's help inthis area. IFC i s negotiating a global advisory agreement with the Ministry in charge o f privatization and will also help increase investor confidence with pre- and post-privatizationfinancing and advice. Financial sector developmenti s also a priority area. IFChas already helped to set upmany o f the new private institutions inthe financial sector (with equity investments intwo commercial banks, an investment bank, and a leasing company). It can also help the government to tackle the broader area o f reform o f the public banking sector through convertible loans designed to accelerate the privatization o f one o f the public banks and attract a solid technical partner. The mortgage market, for which a trust-funded IFC study i s under way, microfinance, and the insurance sector could also provide opportunities to introduce new products. Encouraging private participation in infrastructure presents another area where the need for IFC's role and expertise is great and the potential business i s large. Promising opportunities are inpower, transport, water, andtelecoms. Inpower, IPPsare scheduled for awardinthe future. In telecoms, IFC could help Algeria Telecom, the incumbent public company to prepare for privatization through financing and advice. Water i s a sector where shortages are fuelling unrest and disruptingthe normal functioning o f the economy. IFC could get involved inthe financing o f l3 Through the ongoing rehabilitationprogram of the Minister o f Industry, or the creation o f new industrial areas or free-trade zones.  Annex I Page 13 of 21 BOTSor public-private partnerships for the existing systems inbig cities or properly structured water desalination plants. IFC will strive to Strengthen the Local Private Sector through relaying concerns and constraints to private sector development and strengthening prominent local groups with financing and advice. Supportfor SMEs i s ajoint priority o f the Govemment and IFC. The newly established NAED i s developing a program o f TA and advisory services and helping opportunities for IFC's investments (see Box 2). Help improve management skills. IFC i s actually pursuinga project that would help finance one of the first private business schools. Box 2: Algeria North Africa EnterpriseDevelopment(NAED) Facility InJune 2002, the BoardofDirectors ofthe World BankGroup approvedtheparticipationandcontributionofthe IFC to the North Africa Enterprise Development(NAED) facility. The Governments of Switzerland, France, Belgium, and Italy are contributors to this new initiative which is managedby IFC, and covers Algeria, Egypt and Morocco. The Facility's core objective is to support the development of the SME sector in these countries. This will be achieved by complementingthe ongoing government and donors SME programs. The Facility is expectedto be in full operation in all three countries by July 2003. In Algeria, NAED is co-located with the World Bank office in Algiers. It operates under the existing Establishment Agreement between the WBG and the Govemment of Algeria (GOA). The NAED office was officially inauguratedin September 2002 through the signing of a Memorandum of Understanding(MOU) between IFC and the GOA. NAED's activitiesin Algeria to-date have focused on surveyingBusiness Associations in the country, conductinga preliminary assessment of a leasing company and investment funds, and launchinga market assessment of microfinance, including a reviewof the regulatoryframework. Futureactivities under the Facility will include: . Improving SME access tofinance: provide advisoryltechnical assistance to private commercial banks and non- bank financial institutions in developing products geared towards SMEs; help develop viable micro-finance activities; and strengthenthe SME finance training programso f local banks. Supporting intermediary organizations in business development services: developcapacity building partnerships with active businessassociations,managementtraining institutes,and consultingfirms; provide training in areas of businessmanagementandadministration;and organize an export seminar geared towards SMEs. Providing direct assistance to small and medium-sizedfirms: through selectedauditinglconsultingfirms, deliver . technical assistance and advisory services in areas such as financial management, MIS, restructuring of organizations etc. Improving the business enabling environment: review the legal and regulatory environment affecting small businesses inAlgeria including exports. Strengthening the supply chain linkages between large$rms and SMEs.  Yk E; 5 .-* z *b aB 0 0 0  -0 5 " 'E0 e e e e  * *   a a a a a a a : a a a * 0 .-  e e . e e . e . e . e e . e  rr  e e ; e e . e e . e e . e  ANNEX11: CAS CONSULTATIONS 1. A series o f consultations were organized on the priorities for thisjoint BanWIFC CAS. A dozen consultationworkshops organized between January 2002 and April 2003 drew together over one thousand participants from a broad range o f backgrounds. Consulting on Algeria's DevelopmentChallenges and Prioritiesfor BankGroup Support 2. The intent o f the Bank consultation was to enable Bank Group staff to hear directly from people about their concerns and their expectations. The followingpriorities were underlined : Reduced poverty and exclusion, both social and economic; Greater economic growth leading to morejobs and wealth; Improved education and capacity building; Better access to affordable and suitable housing, inparticular inurban areas; Better water management to put an end to the shortages; More transparent and responsive form o f government; Greater participation and increased ability to have a voice inpolicy decisions; and Increasedattention to gender issues. 3. Sectoral workshops allowed in depth discussions on macroeconomic issues, private sector development, public sector performance, ICT, housing, water and rural development. Discussions were also held on the role the World Bank has played in the past and could play in the hture to help support economic growth and poverty reduction inAlgeria. Poverty andExclusion 4. The findings o f the consultations point to a concern that the Algerian population i s becoming increasinglyvulnerable. There was a general concern that poverty and social exclusion are on the rise and that the gap between haves and have-nots ("fracture sociale") i s growing. The main factors advanced are: persisting violence in the country, structural adjustment programs (referred to as "instruments o f exclusion"), globalization and the opening o f the Algerian economy, and low economic growth. It was observed that liberalization and devaluation had an extremely high social cost without engendering the positive outcomes that hadbeen promised. 5. "Social exclusion" was referred to much more often than "poverty" in the consultations. The multiple facets o f exclusion inAlgeria have been stressed and, the main groups suffering from exclusion being the poor, the unemployed, women and youth. One o f the main challenges that Algeria has to face i s fighting these various forms of exclusion in order to reduce vulnerability and empower these social groups to play an active and productive role in society. The following factors were listed as necessary conditions to reduce exclusion: Greater economic growth; Growth supported by pro-poor policies and targeted programs for excluded groups; Better understanding o f the dynamics o f poverty and vulnerability, inparticular the characteristics o f the vulnerable groups, their coping mechanisms and the factors that impinge on their ability to cope; Increased access to social services that cut across socio-economic status, gender, age and geographical locationto address related inequities;  Page 2 of 8 Annex I1 e Greater attention to the demand side o f interventions to identify the economic, social and cultural factors that impinge on the ability o f the vulnerable groups to access resources and services; and e Improved mechanisms to reduce poverty in rural areas, including ensuring food and other basic needs at adequate levels, and to enhance the inclusion o f rural societies in terms o f access to resources and services. Greater Economic Growth 11. A great emphasis was put on the needto spur economic growth. There was a strong feeling that insufficient analysis has been conducted to understand the causes o f the slow growth, and that future growth will not be possible without a consensus on the causes o f past failure. Questions were raised on the link between the slow growth and possible shortcomings in the diagnosis, the design o f policies, or their implementation. Links were also made between disappointing performance on factors specific to Algeria, such as the way institutions and governance function. 12. The Algerian economy has been described as a rent-seelung economy inwhich powerful interest groups such as the oil industry,various monopolies, political powers and some social groups protect their interests. The urgency for moving toward a more open, dynamic and competitive economy was stressed as a priority, but the question was, how? H o w to manage the transition to a new form o f economy and ensure consensus around the reform agenda? H o w to share the rent in a fairer and more equitable way? The private sector emphasized that for growth to pick up inAlgeria, the business environment needs to be greatly improved to give both public and private enterprises more liberty o f action. This was echoed by many participants at the April 2003 consultations. The latter discussed the options proposed intwo Bank Group's reports: the medium-term strategy for sustainablefor sustainingfaster growth with economic and social stability, and the private sector development strategy. They insisted on the need to create a conducive business environment for both private and public enterprises. 10. Toenhancegrowth, theprivate and the rural developmentsectors identifed thefollowing main areasfor development: Reforming banking and financial sector, legal and judicial system including land tenure, and transparency ineconomic and administrative decisions ("the rules o f the game"); Promoting private Infomation and Communication Technology industry, namely on services; Specifying which sectoral improvements are expected by the adoption and diffusion o f Information and Communication Technology to build an Information Society; the effort would leadto the definition o f a comprehensive e-Algeria strategy; Favoring sustainable development relying on an environmentally sound use o f natural resources and guided by market-based economic principles; Diversifying agricultural and rural productive activities that would be susceptible to employment creation, and to encourage private sector-led development in agro-industry in an integrated manner with local production o f primary products andraw materials; Assessing social, political and institutional constraints to growth.  Annex 11 Page 3 of 8 Educationand CapacityBuilding 8. Education was identified as a cornerstone for development and poverty reduction. A major concem was that the education system i s not sufficiently open to new ideas and i s not building the skills required for the knowledge economy. The need to rethink education to enable it to better respond to the new needs o f the Algerian economy was emphasized. According to the participants, the reform of the education sector, in particular at the secondary and tertiary levels, should aim towards a better alignment between the qualifications delivered and the demand for skills from employers. 9. An Information and Communication Technology (ICT) Symposium held in December 2002 pointed to the needto reformthe Algerian education system and to introduce ICT inthe training programs as soon as possible. There was agreement that any reform o f the education system must include the diffusion o f ICT as a learning tool and a means o f production, and that systems o f e-learning should be diffused and used by schools and universities. In parallel to this, the need to train the educators to the most modern I C T systems and content i s necessary to diffuse updated information and allow for the development o f a Knowledge Economy. The education system should aim to achieve a learning environment in which students can use ICT, learn through ICT, acquire a broader technological knowledge, and communicate with the international environment. Threemajor actions were identified: 0 Roll out communication networks inall institutes and betweenthem; 0 Train teachers on how to use ICT and how to teach with the help o fmodemtechnologies; 0 Develop language-specific multimedia content available for education purposes. 10. Discussions in most workshops pointed to the need to improve capacity of key stakeholders of the economy: central and local government officials, civil society, professional groups, and private entrepreneurs. The rural development workshop highlighted the need to improve capacity in the central and decentralized public administration inagriculture and inprofessional organizations. Inthe context o f the housing workshop discussions were held on the need to improve the professionalism o f public and private organizations involved inhousing. The private sector consultations pointed to the needto develop the capacity o f government officials to regulate the market and create an enabling business environment. The urgent need to reform professional skills development centers in order to ensure greater participation from the private sector and, therefore greater alignment with real training needs. Housing 11. Housing was identified as an issue o f serious concern in several o f the workshops, and was analyzed in great depth inthe housing workshop which was an opportunity to take stock o f the situation o f the housing market in Algeria and identify ways to improve housing policies and programs. Participants noted that although housing is a stated priority area o f the Government and public spending inthis sector is substantial, many urban dwellers live in sub-standard housing and wait for years to get into a new apartment or house. They expressed concern that the situation seems to be deteriorating. With a rapidly growing urban population, more people not less will be living in run-down housing (habitat - - pre'caire) inthe years to come. 12. The main bottleneckslimiting the supply of affordable and decent housing in urban areas were identified as being control of the State over land tenure and construction, lack of housing credit, limited role of private developers, and inequitable use of subsidies. Whereas it was recognized that the govemment has several subsidy schemes for housing, it was highlighted that most o f the subsidies, such as those for leasing (location-vente), go to middle to upper income families.  Page 4 of 8 Annex 11 13. To improve housing in Algeria, a detailed list o f recommendations was put together for each theme. Suggestions on issues related to the supply of land and the role of the state in its distribution included 0 Make land valuable by offering it at market rate; 0 Privatize state owned land; 0 Encourage the growth o f developers; 0 Give priority to infrastructure inthe context o f public funding; 0 Lighten the rules regardingland usage; 0 Ensurethat the cadastre does not represent a barrierto urbanization; 0 Improve property titling; 0 Review taxation issues and ensure that they do not represent disincentives. Onthe issue o fhousingsupply,it was suggested to: 0 Increaseproduction(mainly inthe public sector inthe beginning); 0 Favor production through promotion and self-helped constructions; 0 Develop housing finance; 0 Suppress cap on subsidies once land subsidies are canceled; 0 Extend (public and private) assistance o f estate rehabilitation; 0 Create the right incentives to increase rental ingeneral and investments inthe rental sector; 0 Undertake studies to better estimate demand. Regarding low income housing and the social dimensionsof housing, it was recommendedto: 0 Take stock o f the size o f slums and non-serviced low-income areas; 0 Identify and elaborate financing schemes; 0 Establish the right institutional framework for support "know-how", experience and improve the efficiency o f public intervention; 0 Plan and finance national actions on low income housing; 0 Put in place mechanisms to coordinate intersectoral issues as well as partnerships with various agencies supporting the development o f the housing sector; Inthe area ofhousingfinance, the mainprioritieswere to: 0 Increase the number o f institutions providing financing as well as the type o f services; 0 Provide the right incentives for savings; 0 Promote already available financing services; 0 Lessen barriers related to mortgage; develop securities and guarantee systems for low income borrowers; 0 Examine the conditions necessary for the development o f financing services adapted to rental; 0 Ensure proper regulation. Onsubsidies, it was recommended to: 0 Evaluate the actual level o f subsidies and revenues; 0 Carry both the land and subsidies reforms indefined areas; 0 Maintain the social rental concept ("locatif social"), but only for low income population 0 Develop financial and regulatory incentives regarding investment and management inthe private housingrental market; 0 Manage access to subsidies to encourage self-helped construction; 0 Provide subsidies for renovation.  Annex 11 Page 5 of 8 Water Management 14. Just as housing is a topic o f great concern for urban dwellers, so is water as most people can go without running water for many days. Water i s also a source o f concern for the rural population who suffer greatly duringperiods o f drought when their crops perish and their incomes shrink. Participants in the water workshop discussed the Government's sector strategy and its proposed actions in the short and medium terms inorder to identify ways o f improving the current situation. 15. Most participants from outside the Ministry o f Water Resources agreed that there i s a need to improve demand management before embarking on new costly investments such as desalination plants and new dams. Better water management implies reductions inwastage, increase intariffs, rehabilitation o f the existing infrastructure, and decentralization o f responsibilities. They also emphasized the need to include economic analysis inthe comparison o f alternative options such as construction o f new dams and water treatment plants to allow people to have an informed opinion about the feasible options. Some participants argued the importance o f finding the reasons for failure o f existing wastewater treatment plants and focusing on their rehabilitation and operation. A More Transparent andResponsive Government 20. Duringthe consultations, the government has been qualified as too "controlling", "rigid", and "bureaucratic". There was collective sentiment that a more responsive and enabling Government would open the way for greater economic growth. Such perceptions came out most strongly in the discussions with stakeholders from the private sector which stressed the need to reduce the role o f the State in areas where the private sector should take the lead such as land tenure and financial markets, and to improve the Government's role as regulator. Although the Government's rhetoric regarding the private sector has changed, entrepreneurs and executives said that the Government's attitude towards private firms has not changed. Firms are still faced with hostile bureaucrats, red tape, lengthy delays to obtain authorizations, and inconsistent application o f the rules and regulations. The processes that were mentioned most often as being hampered by bureaucracy include getting goods through customs, mostly in the Port o f Algiers; obtaining a constructionpermit; and registeringa firm. Many also mentioned corruption as a problem. 21. In that perspective, the role o f the state they argued should be clearly outlined and limited to establishing and enforcing the rules o f the game, promoting competition and facilitating wherever needed private sector investment. In this framework, the role o f regulation i s to ensure the interface between these two sectors and to facilitate the development o f competitive practices. 22. The important role to be played by the State as a starter or catalyst o f the information society transformationhas been stressed duringthe ICT symposium. This role includes the modernization o f the education system, the adoption o f ICT in the public administration to streamline its internal processes and strengthen its capabilities, and the adoption o f incentive measures favoring private sector-led initiatives and investments. Participants highlighted the role that I C T can play in strengthening governance and consolidatingthe democratic process. Greater Participation and Voice 23. The lack of participation and dialogue betweenpolitical and government leaders, on the one hand, and civil society and private sector, on the other was mentioned as a major impediment for reform and democracy in Algeria. Representatives from local governments identified communication, dialogue and participation as a key area for improvement-between central and local governments, and with citizens at large. Academics and economic journalists emphasized that the identification and implementation o f socio-economic reforms could not be construed without active participation o f the private sector and civil society inorder to build a consensus.  Page 6 of 8 Annex 11 24. Members o f the private sector underscored the growing communication gap between the government and the private sector. The lack o f consultations surrounding the reform o f customs taxes in 2001 was given as an example. Private entrepreneurs confessed that in order to survive in a business environment fraught with uncertainties and rigidities, they often had to take illegal actions, to the detriment o f society. 25. Participants in the rural development workshop emphasized the need to resort more frequently to participatory approaches in order to integrate local populations, including women in particular, into the development process in the context o f projects and programs. They also saluted the open and frank dialogue on rural development that i s being carried out widely inAlgeria and i s but one manifestationo f the drastic change on rural development perspectives inAlgeria. 26. Most participants in the consultations were hopeful that civil society groups that wish to play a role in shaping the reform agenda are growing innumber and in influence. Participants saw these groups as important vehicles to promote democracy in the economic arena and to ensure that suggested reforms were discussedwith and thoroughly explained to citizens. Governance 27. The consultations on social development and governance issues with Algerian researchers aiming at understanding the key social and governance challenges in Algeria. The selection o f the participants aimed to ensure an adequate balance between academics, professionals with direct experience in key sectors, field research in rural and urban areas o f the country, gender, age and geographical representation. 28. Duringthe workshop, a set o fbenchmarks were recommended to measure progress inimproving the quality o f governance: (a) strengthening the institutions that coordinate and monitor public sector reform; (b) support the development o f instruments for multi-year planning and control, including budget management and performance monitoring; (c) strengthening the incentives and accountability o f public sector employees; (d) introducing mechanisms for the public to provide feedback on the performance o f the public sector; and (e) increasing the access o f public to public sector information. The main issues on governance andpublic sector reform that emergedfrom the discussions are: Key actors with low access, voice and participation: 0 Low-income citizens, with low asset base (particularly the women heads o f households, the elderly and the young with low education); 0 Municipalities with low-resource base; 0 Small and mediumenterprises. Barriers to Participation such as: 0 Lack o f resources (financial, assets), education, access to information, mechanisms to provide feedback; 0 Weak organizational capabilities; 0 Lack o f legalhegulatory framework that ensures recognition o f property rights; 0 Lack o f predictable, timely and low-costjudicial decision-making; 0 Lack o f competition and easy entry o f alternative service providers (e.g. lack o f access to public contracts); 0 Lack o f incentives to deploy staff to poor, remote areas; 0 Municipalities are inadequately staffed, with inadequate and predictable intergovernmental transfers.  Annex 11 Page 7of 8 Institutional Barriers to Performance including: Lack o f incentives driving the performance o f public civil servants (lack o f merit-based civil service recruitment and promotion and lack o f effective sanctions for poor performance or corruption); 0 Inadequate demarcation o fresponsibilities for delivery; Lack o f transparent and performance-oriented budgetingprocess; Lack o f accountability both upwards (fiscal accountability) and downwards (oversight, political accountability). The Role of the World Bank Group 29. Participants in many workshops alluded to difficulties working with the Bank Group in the past: cumbersome processes, dogmatic views, unwillingness to listen, advocate o f structural adjustment policies that have not had a positive impact on growth. 30. However they congratulated the Bank and the Ministry o f Finance o f Algeria for engaging in a consultative process and expressed interest inmaintaining open channels o f communication. Nonetheless they did express some skepticism about the Bank's sincerity in engaging in this process and willingness to take their views into account. They are waiting to see what tangible outcomes will come out o f the discussions as proof o f the Bank's genuineness.  Page 8 of 8 Annex 11 TimelineofAlgeria CAS Consultationsin2002 and 2003 January 2002 - CAS workshops inAlgiers with: central and local government officials (35 people), executives from the private sector, academics and economic journalists, Economic and Social Council - Conseil Economique et Social (CNES). April 2002 - Sectoral CAS meeting on Rural Development and Agriculture in Ghardaia. A wide cross- section o f participants represented the local and central administration, farmers, professional organizations, banks, other ministriesinvolved inrural areas, research organizations, universities, etc. June 2002 - Participatory CAS workshop on Integrating a Social Perspective into the CAS. A total of 9 sociologists and economists from various universities and think tanks in Algeria met in Algiers for two days to provide contributions to the debate about national development priorities. January to October 2002 - Consultations with numerous private sector representatives have been held on a number o f occasions: Full-day event in Algiers in January 2002 attended by over 100 private sector companies to hear their views on private sector issues and to share with them how the Bank group works (activities o f various groups, terms and conditions). 0 Consultations with associations of entrepreneurs (women, youth) and of CEOs during the preparation o f the PSD strategy note. Interviews with entrepreneurs and businessmen and women, academics, bankers, trade associations, consultants, and civil servants from various central and local administrations to assess obstacles to private sector development. Questionnaires filled out by 600 firms as part o fthe InvestmentClimate Assessment. Consultations organized by Foreign Investment Advisory Service (FIAS) mostly with foreign investors and domestic private investors to gather their views on barriers to investment and areas o f opportunity. December 2002 - Workshop on Housing Policies in Algeria in Boumerdks. Over 150 participants spent two days to discuss past and present housingpolicies, and identify strategies for the future. December 2002 - Symposium on Information and Communication Technology in Algiers. The Symposium was attended by 1,300 people, including: political authorities representing different ministries (Finance, Communication and Culture, Defense, Research and Tertiary education, Interior, Vocational training, etc.), representatives o f the academia, the domestic press (newspapers, national radio and TV), professionals associations and NGOs, diplomatic representatives, and national and international consultants. The attendance distribution was: 50% civil servants, 30% enterprise managers, 10% from the education and academia sector, 10% the civil society including the press. January 2003 - Water Seminar in Algiers with Government officials, and representatives from the NGO and academic communities. Discussions focused on analyzing the proposed Government sector strategy for the short and medium terms and identifying ways in which the Bank could assist with strategy formulation and implementation. April 2003 - Consultations on fiscal sustainability, management o f oil price volatility, and private sector development strategy. About 100participants from various backgrounds includingprevious Ministers. October 2002, January, April 2003 - Consultations with development partners  ANNEX111: PARTNERSHIPS Macro economic International Monetary Fund. InJune 2000, inthe context o f the Article IV framework, private consultation discussions, ajoint I M F N o r l d Bank team prepared an and financial sectors assessment o f Algeria's compliance with the Base1Core Principles for Effective Banking Supervision. The assessment prepared inthe context o f the Report on Standard and Codes (ROSCs) summarizes the extent to which Algeria observes internationallyrecognizedstandards and codes inthe area o f banking supervision. ROSCs are usedto help sharpen the institutions' policy discussions with national authorities, and inthe private sector (including by rating agencies) for riskassessment. SMExchange Program. To support the development o fthe private sector, particularly SMEs, the Bank helped establish the SMExchange Progra-a regional initiative inNorthAfrica that aims at linkingthe chambers of commerce from (mostly Southern) Europe to their counterparts inMorocco, Algeria, Tunisia and Egypt. The program, which was born out o fregional economic and sector work, was launched in September 2002 duringthe Marseille knowledge conference. The initiative will involve capacity building, networking, and information exchange. Program on Private Participation in Mediterranean Infrastructure. The joint World BanWEuropean Commission Program on Private Participation in Mediterranean Infrastructure(PPMI), i s based inthe Bank's office inBrussels. The purpose o f the PPMIprogram i s to foster private participation and competition ininfrastructure (telecommunications, energy, water and transport sectors) in the countries o f the Middle East and North Africa, with emphasis on Morocco, Algeria, Tunisia, Egypt, Jordan, West Bank & Gaza, Lebanon and Syria. PPMIpursues its goal through policy advice to governments, the preparation o f development projects and technical assistance for support by the World Bank and the EC, and the preparation and dissemination o f analytical work. TheEuropean Commission-MEDA Program. Algeria i s one o f the 12 Southern Mediterranean Counties participating inthe Barcelonaprocess and as such benefits from European CommissionMEDA funds. The EC program focuses on four main areas: (i) support to economic reforms and strengthening o f market institutions (to help Algeria integrate inthe world economy and increase the country's competitiveness); (ii) infrastructure development (to increaseprivate sector participationandreinforce integrationwith Mediterranean and EUcountries); (iii) resources development, and; (iv) human rule o f law and good governance (to improve security and the prospects for FDIinthe country). EUR 164milliono fMeda funds were committed inthe 1996-1999 period. Programs currently ongoing include a structural adjustment facility, projects for the promotion o f SMEs, an industrialrestructuringand privatization initiative, a financial services sector project (EUR 23 million), and operations inthe area o findustrialwaste clean-up (EUR 10.75 million). EUR90 million have been committed since 2000 for four new programs including for telecom and postal services reform, support for journalists and the Algerian media, the police force, and the reform o f professional training. The total commitment  Page 2 of 4 Annex IIl for the 2002-2004 period i s EUR 150 million. USAID provided advice on administrative barriers issues. The European Union and UNCTAD are also working on investment climate-related studies commissioned by the Algerian Government. UNDPPrograms. The programinAlgeria covers three main strategic directions: governance, economic environment, and poverty reduction. With an annual budget o f US$0.6 million, the portfolio includes standardization and certification projects, private sector development projects and support inthe context o f negotiations with the WTO and the EUas well as inthe areas o f poverty, labor, and micro-credit strategies. The UNDPprogram includes restructuringplans for individual banking and saving institutions (such as the BNA,CPA, BADRand CNEP-Banque), support to the restructuringo fthe MinistryofFinance, anddeveloping trainingprograms. The Canadian CDPQ-Conseil i s providing help inupgrading public debt management at the TrCsor. TheAfrican Development Bank's assistance strategy to Algeria for 2000- 2002 covered structural reforms in finance, private and infrastructure sectors, and support to poverty reduction. Inthis context, the AfDB grants loans in various sectors including agriculture, (credit to the "Banque de 1'Agriculture et duDkveloppementRural" (BADR)),transport (roads, Air AlgCrie), water and energy. The objective o f the credit to BADR (US$lOS million) i s to promote private investment inthe agricultural sector to encourage growth and poverty reduction. Infrastructure Arab Fundfor Economic and Social Development (FADES, Fonds Arabe de Dtveloppement Economique et Social), the Islamic Development Bank (IDB , the Saudi Fundfor Development (SFD),TheKuwaiti Development Fund (KDF), theAbu Dhabi Fundfor Development (ADFD) have current commitments o f more than US$1,490 million for various infrastructure projects. FADES funds represent 61 percent o f this amount, followed by SFD (13 percent), ADFD (11percent), IDB (9 percent), and KDF(4 percent). These funds support projects mainly inthe electricity, water, transport and housing sectors. TheEuropean Investment Bank Program (EIB). The EIBhas granted loans worth EUR 1.588 millioninthe last 10 years (1992-2002). Sectors covered are industry(7 percent), energy (42 percent), transport (27 percent), water (including dams for water resources management), wastewater and solid waste (23 percent). Number and size o fprojects have increased inrecent years (4 projects for an amount o f Euro 143 million inyears 2000, 1project for an amount o f Euro 225 million in2001, and 5 projects for an amount o fEuro 227 million in 2002). The EIB i s due to increase its involvement inAlgeria ihroughthe new Facilityfor theMediterranean (the FEMIP),to support infrastructure and private sectors projects.  Annex 111 Page 3 of 4 Housing Arab Fundfor Economic and Social Development (FADES, Fonds Arabe de Developpement Economique et Social) has granted a US$30 million to the S R H (Societe de refinancement hypothtcaire) to support its refinancing activities. Abu Dhabi Fundfor Development (ADFD) with a US$120 million commitment i s currently supporting two housingprojects (6600 units including 6000 for social housing). French DevelopmentAgency (Agence Franqaise de Dkveloppement -AD). AfD partially financed the low incomehousingprogram with a financing ofE 25 million. The portion financed by the A D would benefit 15 000 to 20 000 households and provide them with water, electricity and other infrastructure. Ruraldevelopment The Food andAgriculture Organization (FAO) currently has a number o f and agriculture ongoing technical assistance projects indirect or indirect support o f the National Plan for Agricultural Development (Plan national de developpement agricole (PNDA)). The projects include the establishment o f a special program on food security, agricultural land, pesticides, aviaries. TheInternational Fund and Agriculture Development (IFAD) i s also present inAlgeria with aproject inOued Safsafandinthe Wilaya ofMsila. Education,Health The World Bank collaborates with the Gender Thematic Donor Group (Group and Gender Thematique Genre - GTG) which meets regularly. It i s comprised o f technical focal points from the UnitedNations Population Fund (UNFPA), World Health Organization, WorldFood Program, United Nations Development Program (UNDP), United Nations Children Fund (UNICEF),the International Labor Organization (ILO). UNDPand F A 0 have been the two international agencies that have helped formulate a Gender Action Plan to integrate women inthe development process. UNDP also plans to have a gender component under its Poverty Alleviation Program. Through UNDP, the UnitedNations Development Fundfor Women (UNIFEM)promotes anumber o factivities inAlgeria, especially researchthat addresses issues o f gender equality inAlgeria. Incollaboration with UNIFEM, the Population Council conducted, for example, a study (1998) o f the roots o f gender-based violence duringthe civil war inthis country. UNIFEMalso supports the Collectif 95 Maghreb Egalite a women's regional NGONetwork - working inMorocco, Algeria, and Tunisia. TheEuropean Commission-M E D A Program also supports initiatives inthe area o f education, health, social safety-net and community development. The main projects under preparation include a EUR 50 million initiative to support social funds, a EUR 60 million for education.  Page 4 of 4 Annex 111 Telecom TheAfrican Development Bank (APB) has approved a loan o fUS$120 million to finance the telecommunications sector upgrading and support project inAlgeria. The project i s inkeepingwith the Government's reform and investment policy for the 2000-2005 period, which aims to liberalize the entire telecommunications sector. The project's objective i s to increase the contribution o f telecommunications and information technologies to the country's gross fixed capital formation (GFCF) from 1.16 percent in 1999 to at least 5 percent by 2005. TheEuropean Commission-M E D A Program supports a telecomproject with EUR 17 million commitment. Water andEnergy TheAfrican Development Bank (APB) has currently three loans under implementation: Dam Sidi Mohammed BenTaiba (US$5 1million), the rehabilitationo f the water supply network in Sidi Bel Abbes; a US$70 million project; and the Dam Koudiat Acerdoune with a US$87.5 million commitment. The Fonds Arabe de DeveloppementEconomique et Social (FADES) has two major loans inthe water sector: a loan o f US$103 millioninOctober 2001 for the construction o f the pumpinginfrastructure o f the Beni Haroun dam complex. The second loan has a commitment of US$99 million for the transfer infrastructure o f the Beni Haroun dam to the Athmenia dam. TheKuwaiti Development Fund (KDF) is financing the constructiono fthe Tichy H a fDam (US$30 million). The KDF i s also providing US$33 million o f co-financing for the transfer infrastructure o f the Beni Haroun dam to the Athmenia dam. TheIslamic Development Bank has provided a loan for the Oued Athmania dam for an amount o f about U S 3 4 million. TheEuropean Investment Bank i s financing the transfer Tasksebt-Alger with a US$225 million loan. TheEuropean Commission-M E D A Program has several projects inthe water, energy and environment sectors including industrial de-pollution, TA in the economics o f energy and ecosystem management.  Algeria Country Assistance Strategy Annex BI Page 1 of 2 Algeria at a glance M. East Lower- POVERTY and SOCIAL &North middle- Algeria Africa income Developmentdiamond' ~ 2002 Population, mid-year (millions) 31.4 301 2,164 Life expectancy GNI per capita (Atlas method, US$) 1,710 2,000 1,240 GNI (Atlas method, US$ billions) 53.8 601 2,677 Average annual growth, 1996-02 II T Population (%) 1.6 2.0 1.o Labor force (%) 3.4 2.9 1.2 Gross ?enrollment primary Most recent estimate (latest year available, 1996-02) Poverty (% ofpopulation below nationalpoverty line) 23 Urban population (% of totalpopulation) 58 58 46 Life expectancy at birth (years) 71 68 69 I I Infant mortality (per 1,000live births) 32 43 33 Child malnutrition (% of children under 5) 6 15 11 1 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 94 89 ao Illiteracy (% ofpopulation age 15+) 31 34 15 Gross primaryenrollment (% of school-age population) 114 97 107 Algeria Male 119 103 107 Lower-middle-income group Female 110 90 107 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 1 Economic ratios' GDP (US$ billions) 45.2 48.0 54.9 55.7 Gross domestic investmenffGDP 37.3 30.8 25.5 30.1 Exports of goods and serviceslGDP 30.9 25.3 37.0 36.3 I Trade Gross domestic savings/GDP 39.2 32.2 40.6 39.8 Gross national savingslGDP 37.1 30.6 38.7 37.6 T Current account balancelGDP -0.4 2.7 12.4 8.6 Interest payments/GDP 3.2 3.8 3.5 3.1 Total debt/GDP 39.0 57.0 41.5 41.6 Total debt servicelexports 30.6 76.2 21.9 20.1 Present value of debt/GDP Present value of debt/exports indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) GDP 1.5 2.6 2.1 4.1 3.8 Algeria GDP per capita -1.3 0.8 0.5 2.3 1.8 Lower-middle-income group Exports of goods and services 3.3 4.1 -2.2 4.9 4.1 STRUCTUREof the ECONOMY 1982 1992 2001 2002 ~ Growth of Investmentand GDP (%) (% of GDP) Agriculture 8.4 12.1 9.8 30 Industry 56.1 49.7 Manufacturing 11.2 12.3 7.5 Services 35.5 38.2 355 36.7 ~-,0+ I Private consumption 44.6 51.8 43.9 43.9 1-20 - General governmentconsumption 16.2 16.0 15.6 16.3 -GDI Imports of goods and services 29.0 23.9 21.9 26.6 +GDP - Gross domestic investment -3.8 1.4 12.7 12.8 -Exports +Imports Imports of goods and services -6.6 0.8 3.9 16.6 Note: 2002 data are preliminaryestimates. Group data are through 2001. The diamonds show four key indicators in the country (in bold) compared with its Income-groupaverage. If data are missing, the diamondwill be incomolete.  Algeria Country Assistance Strategy Annex B1 Page 2 of 2 Algeria PRICES and GOVERNMENTFINANCE 1982 1992 2001 2002 Domestic prices (% change) Consumer prices 6.6 31.6 4.2 1.4 Implicit GDP deflator 1.9 21.9 3.3 0.5 Government finance (% of GDP, includescurrent grants) Current revenue 37.4 30.2 35.0 35.6 Current budget balance 17.6 7.7 12.1 9.0 -GDPdeflator +-PI I Overall surplus/deficit -11.8 -1.2 3.4 -1.3 I TRADE 1982 1992 2001 2002 (US$millions) Export and import levels(US$ mill.) Total exports (fob) 13,509 11,510 19,090 18,800 25,000 Crude oil 2,977 2,089 3,994 4,570 Condensate 2,807 2,928 3,170 3,098 20,000 Manufactures 69 251 439 416 15,000 Total imports (cif) 10,735 9,085 9,940 11,749 10 000 Food 2,023 2,127 2,350 2,720 Fuel and energy .. 147 133 151 5.000 Capital goods 3,631 1,894 3,259 3,698 0 00 Export price index (1995=100) .. 112 140 132 96 97 98 99 01 02 Import price index (1995=100) 86 92 93 0 Exports 0 Imports Terms of trade (1995=100) .. 129 152 142 BALANCEof PAYMENTS 1982 1992 2001 2002 (US$ mi/lions) Exportsof goods and services 14,026 12,130 20,002 19,058 imports of goods and services 13,264 10,070 11,920 13,527 - Resource balance 763 2,060 8,082 5,531 15 -- - Net income -1,312 -2,160 -1,690 -2,076 10 -- - Net current transfers 367 1,390 408 1,345 Current account balance -183 1,290 6,800 4,800 Financing items (net) -982 -1,620 -700 300 ; ; ; ; : I 96 97 99 00 01 02 Changes in net reserves 1,165 330 -6,100 -5,100 Memo: Reserves including gold (US$ millions) 2,638 1,726 17,960 23,100 Conversion rate (DEC, local/US$) 4.6 21.8 77.2 79.7 EXTERNALDEBT and RESOURCEFLOWS 1982 1992 2001 2002 /US$ millions) Composition of 2001 debt (US$ mill.) Total debt outstanding and disbursed 17,642 27,343 22,503 23,100 IBRD 280 1,474 1,328 1,203 G: "' A: 1,328 IDA 0 0 0 0 Total debt service 4,564 9,331 4,376 3,831 IBRD 49 278 296 304 IDA 0 0 0 0 Composition of net resource flows Official grants 22 71 0 0 Official creditors 263 235 -877 Private creditors -599 235 -953 Foreigndirect investment -54 12 1,180 Portfolioequity E 12,151 World Bank program Commitments 0 115 42 119 A . IBRD E. Bilateral Disbursements 29 268 83 70 B IDA D -Other multilateral F Pnvate ~ Principal repayments 24 166 177 200 C IMF .- G -Short-term Net flows 5 101 -94 -130 interest payments 26 112 119 104 Net transfers -21 -11 -213 -233 Development Economics  Algeria Country Assistance Strategy Annex B2 Page I of I Selected Indicators* of Bank Portfolio Performance and Management As of 5/1/2003 Indicator 2000 2001 2002 2003f Portfolio Assessment Number o f Projects Under Implementation a 11 10 13 13 Average ImplementationPeriod (years) b 3.7 3 3.2 3.4 Percent o f Problem Projects byNumber a, c 9.1 20 15.4 15.4 Percent o f Problem Projects by Amount a, c 14.2 23.9 24.9 32.2 Percent o f Projects at Risk by Number a, d 18.2 20 15.4 15.4 Percent o f Projects at Riskby Amount a, d 31.1 23.9 24.9 32.2 Disbursement Ratio (%) e 13.1 9.8 18.2 10.6 Portfolio Management CPPR duringthe year (yedno) Yes no no Yes Supervision Resources (total US$OOO's) 666 988 1101 801 Average Supervision (US$OOO's/project) 55.5 76 85 57 MemorandumItem Since FYSO Last Five FYs Proj Eval by OED by Number 52 7 Proj Eval by OED by Amt (US$ millions) 3744.4 143 % o f OED Projects RatedUor HUbyNumber 50 28.6 % o f OED Projects RatedUor HUbyAmt 50.4 8.5 a. As shown inthe Annual Report on Portfolio Performance (except for current FY). b. Average age ofprojects inthe Bank's country portfolio. c. Percent o f projects rated Uor HUon development objectives (DO) andor implementation progress (IP). d. As definedunder the Portfolio ImprovementProgram. e. Ratio o f disbursements during the year to the undisbursed balance o f the Bank's portfolio at the beginning o f the year: Investment projects only. f. As ofMay 1,2003. * All indicators are for projects active inthe Portfolio, with the exception o fDisbursement Ratio, which includes all active projects as well as projects which exited duringthe fiscal year.  Algeria Country Assistance Strategy Annex B3 Page 1 of2 BankGroup ProgramSummary inAlgeria As of 5/1/2003 ProposedIBRDDDA Base-CaseLendingProgram Fiscal Strategic Rewards Implementation b year Project US$(M) b (H/M/L) Risks (H/M/L) 03 URBANNATURALHAZARD 88.5 H H VULNERABILITY* RURAL EMPLOYMENTII* 95 H H Result 183.5 05 ICTDEVELOPMENTSUPPORT PROJECl 22.5 H M MUNICIPALWASTE MGMT. 25 H H Result 47.5 06 WATER SECTORREFORMLOAN(S) 120 H M URBAN/HOUSING 100 H H Result 220 RESULT 451 a. This table represents the proposedprogramfor the next three fiscal years. b.For eachproject, indicatewhether the strategicrewardsandimplementationrisks are expectedto be high(H), * Actual moderate(M),or low (L)  Algeria Country AssistanceStrategy Annex B3 Page 2 of2 Algeria IFC and MIGA Program, FY 2000-2003 - As of 5/1/2003 2000 2001 2002 2003est IFCCommitments(USSm) 8.2 0.3 21 60 Sector (YO) FINANCESERVICES 0 100 100 0 GENERALMANUFACTURING 100 0 0 100 Total 100 100 100 100 Investment instrument(%) Loans 79 0 0 100 Equity 21 100 3 0 Quasi-Equity 0 0 0 0 Other 0 0 97 0 Total 100 100 100 100 MIGA guarantees (US$m) 5.2 4.7 5.5 0  Algeria Country Assistance Strategy Annex B4 Page 1 of 1 Summary Of Non-Lending Services As of 5/1/2003 Product Completion FY Cost (US8000) Audience a. Objective6. Recentcompletions ICT Strategy FYOl 100 G, B, PD KG, PD, PS NEAP FY02 120 G, D, B, PD KG, PS Social ExpenditureReview FY02 220 G, B, PD KG, PS PSD Strategy FY02 171 G, D, B, PD KG, PS Underway CPAR FY03 130 G, B PS Macroeconomic Strategy FY03 360 G, B, PD KG, PS Social Expendituredialogue FY03 50 G, D, B, PD KG, PS Civil Society FY03 50 G, D, B, PD KG, PD, PS InvestmentClimate FY03 120 G, B, D, PD KG, PS Water ResourceManagementStrategy FY04 195 G, D, B, PD KG, PD, PS Gender Assessment FY04 110 G, D, B, PD KG, PS Planned PovertyAssessment FY04 250 G, D, B, PD KG,PS Public ExpenditureReview - PER FY04 260 G, D, B, PD KG,PS Country FinancialAccountabilityAssessment FY05 85 G, D, B, PD KG,PS CFAA FinancialSector AssessmentProgramReport. FY04-05 300 G,B KG, PS FSAP and follow-up Rural DevelopmentStrategy FY04 65 G, D, B, PD KG, PS HD Dialogue FY04 75 G, D, B, PD KG, PS HousingMarketStrategy FY04 100 G, D, B, PD KG, PS LegalBusiness Environment FY04 75 G, B KG, PS Pensionsand InsuranceReformStudy FY05 150 G, D, B, PD KG, PS CAS Progress Report FY05 50 G, D, B, PD KG, PD, PS Health Sector FinancingStrategy FY05 15 G, D, B, PD KG, PS EducationFinancingStrategy FY05 15 G, D, B, PD KG, PS EnvironmentAssessment FY05 150 G, D, B, PD KG, PS Poverty and Gender follow-up activities FY05-06 150 G, D, B, PD KG, PS HDfollow-up activities FY06 200 G, B, PD KG, PS Public Sector Reform FY06 135 G, B, PD KG, PS DevelopmentPolicyReview - DPR FY06 235 G, B, PD KG, PS ReimbursableTechnicalAssistance (RTA) FY03-04 RTA to Sonatrach a. Govemment,donor, Bank,public dissemination. b. Knowledgegeneration,public debate, problem-solving. Note:1.ProgrammaticESW (PESW):Multi-yearinstrument for knowledgework andpolicy dialogue. 2. The specific of FY06programwill be determinedwith Algerian Govemment duringimplementation of the CAS.  Algeria Country Assistance Strategy Annex B5 Page 1 of 1 Algeria - Social Indicators Latest single year Same regionhcome group M.East Lower- & North middle- 1970-75 1980-85 1994-00 Africa income POPULATION Total population, mid-year(millions) 16.0 21.9 30.4 295.2 2,047.6 Growth rate (% annual average for period) 3.1 3.2 1.7 2.0 1.1 Urbanpopulation(% of population) 40.3 48.0 60.3 58.6 42.0 Total fertility rate (births per woman) 7.3 5.7 3.2 3.4 2.1 POVERTY (% ofpopulation) National headcount index 22.6 Urbanheadcount index 14.7 Rural headcount index 30.3 INCOME GNI per capita (US$) 950 2,460 1,580 2,090 1,130 Consumerpriceindex (1995=100) I 18 135 112 146 Foodpriceindex (1995=100) 17 135 INCOMElCONSUMPTIONDISTRIBUTION Gini index 35.3 Lowest quintile (% o f income or consumption) 7.0 Highest quintile (% of income or consumption) 42.6 SOCIAL INDICATORS Publicexpenditure Health(% of GDP) 2.6 3.4 2.3 Education("?of GDP) 6.6 8.3 6.0 5.2 4.6 Social securityand welfare (% o f GDP) Net primaryschoolenrollmentrate (% of agegroup) Total 17 86 94 83 91 Male 89 94 96 87 91 Female 64 78 92 79 91 Access to an improvedwater source (Yhofpopulation) Total 94 89 80 Urban 98 96 95 Rural 88 80 69 Immunizationrate (% under I2 months) Measles 68 83 86 89 DPT 70 83 88 89 Child malnutrition (% under 5 years) 13 15 11 Life expectancyat birth (years) Total 56 64 71 68 69 Male 55 63 69 66 61 Female 57 65 73 69 12 Mortality Infant (per 1,000 live births) 120 67 33 43 33 Under 5 (per 1,000 live births) 192 139 39 54 41 Adult (15-59) Male (per 1,000 population) 258 226 149 183 192 Female (per 1,000 population) 201 197 127 151 125 Maternal(per 100,000 live births) 150 Births attendedby skilled healthstaff (%) 2s 15 Note: 0 or 0.0 meanszero or less thanhalfthe unit shown. Net enrollment ratiosexceeding 100 indicatediscrepancies betweenthe estimates of school-age populationand reportedenrollment data. Source: 2002 World DevelopmentIndicatorsCD-ROM,World Bank.  Algeria Country Assistance Strateg Annex B6 Page 1 of 2 Algeria Key Economic Indicators - Actual Estimate " Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Nationalaccounts (as % of GDP) Gross domestic product" 100 100 100 100 100 100 100 100 100 100 Agriculture 12 I O 12 11 9 10 11 11 11 11 Industry 51 52 47 50 60 55 62 64 58 56 Services 37 37 41 38 31 36 26 25 30 32 Total Consumption 69 68 73 69 56 59 60 58 63 64 Gross domestic fixed investment 25 25 27 26 22 22 26 29 25 26 Government investment 7 7 8 6 8 8 11 12 11 11 Private investment 18 17 19 20 14 14 15 17 14 15 E X P O ~ ~(GNFS)~ S 30 31 23 28 42 37 36 40 36 35 Imports (GNFS) 24 22 24 24 21 21 25 27 28 29 Gross domestic savings 31 32 27 31 44 41 40 42 37 36 Gross national savings' 28 30 25 28 40 40 36 39 35 35 Memorandum items Gross domestic product 46845 47869 47357 47592 53455 54680 52015 53 100 54880 56364 (US$million at current prices) GNP per capita (US$,Atlas method) 1550 1530 1560 1550 1670 1730 1680 1660 1660 1690 Real annual growth rates ('YO,calculated from 1980prices) Gross domestic product at market prices 4.1 1.1 5.1 3.2 2.4 2.1 2.2 3.4 3.3 3.1 Gross Domestic Income 6.0 0.6 -0.9 5.4 12.9 0.8 -1.7 5.2 0.0 2.3 Real annual per capita growth rates (%, calculated from 1980prices) Gross domestic product at market prices 2.3 -0.6 3.5 1.7 0.9 0.5 0.4 1.5 1.3 0.9 Total consumption -2.2 -2.4 0.8 1.3 0.9 1.1 -2.3 1.5 1.9 2.1 Private consumption -4.1 -3.8 0.5 1.4 0.8 1.4 -3.8 0.5 3.6 4.2 Balance of Payments(US$millions) E X P O ~ ~(GNFS)~ S 13970 14890 10880 13040 22560 20000 18916 21231 19852 19889 MerchandiseFOB 13220 13820 10140 12320 21650 19090 17986 20266 18851 18848 Imports (GNFS)~ 11240 10280 10850 11520 11700 12220 13106 14209 15407 16577 Merchandise FOB 9090 8130 8630 8960 9340 9780 10491 11231 12172 13089 Resource balance 2730 4610 30 1520 10860 7780 5811 7023 4445 3312 Net current transfers 880 1060 1060 790 790 670 674 681 698 715 Current account balance 1050 3450 -910 20 8940 6760 4073 5108 3198 2878 Net private foreign direct investment 270 260 500 460 420 1180 800 950 650 950 Long-term loans (net) -3400 -2510 -1330 -1960 -1960 -2010 -1795 -1910 -1992 Official 908 160 -226 -388 -266 -877 -1000 -1115 -1243 --2147 1463 Private -4308 -2670 -1104 -1572 -1694 -1133 -795 -795 -749 -684 Other capital(net, incl.errors & ommissions) 4460 2980 650 -870 220 260 48 46 45 43 Change inreservesd -2380 -4180 1090 2350 -7620 -6190 -3125 -4194 -1901 -1724 Memorandum items Resourcebalance (% o f GDP) 5.8 9.6 0.1 3.2 20.3 14.2 11.2 13.2 8.1 5.9 Real annual growth rates ( YR80 prices) Merchandise exports (FOB) 8.0 9.8 3.0 6.0 5.7 -1.9 2.6 3.5 3.4 2.1 Primary 4.6 11.1 2.2 7.0 23.7 -4.1 4.4 1.8 5.7 1.8 Manufactures Merchandise imports (CIF) -5.9 -10.6 15.6 0.1 -5.0 1.4 7.7 5.7 5.2 4.6 (Continued) " Scenariosbasedonprovisional2001data. Figures for 2002arestillinprocess.  Algeria Country Assistance Strategy Annex B6 Page 2 of 2 Algeria Key Economic Indicators - (Continued) Actual Estimate " Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Public finance (as % of GDP at marketprices)e Current revenues 32.2 33.5 27.8 30.0 39.2 35.0 34.9 34.6 34.0 33.6 Current expenditures 21.5 23.3 23.9 24.5 21.3 22.8 23.8 23.6 23.9 23.7 Current account surplus (+) or deficit (-) 10.7 10.2 4.0 5.5 17.9 12.2 11.1 10.9 10.1 9.8 Capital expenditure 7.8 7.9 7.9 6.1 8.0 8.8 11.1 11.6 11.4 11.2 Foreign financing 4.1 2.3 -0.3 -2.3 -2.4 -2.6 -1.5 -1.7 -2.0 -2.3 Monetaryindicators M2IGDP 35.7 39.2 46.3 46.3 41.2 49.0 54.3 59.4 61.7 63.7 Growth o f M 2 ('YO) 14.4 18.2 19.1 14.0 12.7 24.9 12.0 17.1 10.0 9.1 Priceindices(YR80 =loo) Merchandise export price index 117.5 111.8 79.6 91.3 151.8 136.5 125.3 136.4 122.7 120.1 Merchandise import price index 125.4 133.8 124.3 127.6 128.6 134.9 134.7 136.4 140.5 144.5 Merchandise terms o f trade index 93.7 83.5 64.1 71.5 118.1 101.2 93.1 100.0 87.3 83.1 Real exchange rate (LCU/W%Qf 103.9 114.2 119.7 110.2 107.7 110.4 114.0 115.5 116.6 117.7 Real interest rates Consumer price index (% change) 18.7 8.4 2.3 2.7 0.3 4.2 1.4 4.0 4.5 4.2 GDP deflator ('YOchange) 23.8 6.5 -4.2 10.4 24.0 2.8 -1.2 3.5 2.5 2.5 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequitedtransfers excluding official capital grants. d. Includes use o f IMFresources. e. Consolidatedgovernment data. f. "LCU" denotes "local currency units." An increase inLCUllrS$ denotes a depreciation. I'Scenarios based on provisional 2001 data. Figures for 2002 are still inprocess.  Algeria Country Assistance Strategy Annex B7 Page 1of 1 Algeria KeyExposureIndicators - Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total debt outstandingand 33645 30892 30678 21997 25273 22503 20376 18081 15773 13398 disbursed(TDO) (US$"" Net disbursements (US$m)' 1597 -428 -1622 -1943 -1574 -1994 -2084 -2297 -2307 -2375 Total debt service(TDS) 4212 4418 5131 5191 4470 4376 4204 3800 3469 3254 (US$m)" Debt anddebt serviceindicators ("/.I TDO~XGS~ 240.8 203.9 272.7 211.1 110.2 107.9 102.0 81.2 73.9 61.3 TDOiGDP 71.8 64.5 64.8 58.8 47.3 41.2 39.2 34.1 28.7 23.8 TDS/XGS 30.1 29.2 45.6 39.1 19.5 21.0 21.1 17.1 16.2 14.9 Concessional/TDO 9.8 10.2 10.8 12.2 12.3 12.0 12.2 12.4 12.9 13.4 IBRDexposureindicators (%) IBRDDSipublicDS 9.3 8.0 6.5 6.3 6.7 6.8 8.2 8.4 8.3 7.3 Preferredcreditor DWpublic 21.5 31.6 23.9 22.7 18.6 22.7 35.0 33.2 31.7 28.7 DS(%)' IBRDDS/XGS 2.8 2.3 3.0 2.5 1.3 1.4 1.7 1.4 1.4 1.1 IBRD TDO (US$mld 1939 1795 1676 1540 1425 1328 1253 1170 1061 939 Of whichpresent value of guarantees(US$m) Share of IBRDportfolio (YO) 0 0 0 0 0 0 0 0 IDA TDO (US$mld 0 0 0 0 0 0 0 0 0 0 IFC HeldPortfolio (USJm)\f 8.7 7.3 8.0 7.7 14.5 12.9 24.3 58.6 ofwhich Loans 8.7 7.3 6.0 4.7 9.9 8.0 0.7 35.0 ofwhich Equity andquasi-equity /c 0.0 0.0 2.0 3.0 4.6 4.9 3.6 3.6 ofwhich GSR (GuaranteesiStandbyiRiskManagement: 0.0 0.0 0.0 0.0 0.0 0.0 20.0 20.0 MIGA MIGA guarantees(US$m) a. Includespublic andpublicly guaranteeddebt, privatenonguaranteed,use of IMF credits andnet short- term capital. b. "XGS" denotesexportsof goods andservices, includingworkers' remittances. c. Preferredcreditors are defined as IBRD, IDA, the regional multilateraldevelopmentbanks, the IMF, andthe Bank for International Settlements. d. Includespresent value of guarantees. e. Includes equity andquasi-equitytypes o f bothloanandequity instruments. f. IFCportfolio estimates for 2003 areas ofJanuary 31,2003. I' Scenariosbasedon provisional2001 data. Figuresfor 2002 are still inprocess.  Algeria Country Assistance Strategy Annex E8 Page I of 2 Algeria Statusof BankGroup Operations - As of 5/1/2003 IBRWIDA Total Disbursed(Active) 191.8 ~I of which has beenrepaid 11.7 Total Disbursed(Closed) 3,985.30 of which has beenrepaid 3,206.90 Total Disbursed(Active + Closed) 4,177.20 of which has beenrepaid 3,218.60 Total Undisbursed(Active) 369.30 Total Undisbursed(Closed) 7.00 Total Undisbursed(Active + Closed) 376.30 DifferenceBetween Active Projects LastPSR Expectedand Actual SupervisionRating OriginalAmountinUS$M Disbursementsa Development Implementation Project ID Project Name Objectives Progress FiscalYear IBRD IDA GRANT Cancel. Undisb. Orig. FrmRev'd PO64921 BudgetSystemModem S S 2001 23.7 22.5 22.5 PO67567 Energyand MiningTA Loan S S 2001 18.0 14.8 6.8 PO54217 FinancialSystemInfiastr. Modem S S 2002 16.5 16.3 4.8 PO42940 LowIncomeHousing U U 1998 150.0 50.0 64.9 114.9 107.9 PO64983 MortgageFinanceTA S S 2002 5.5 5.1 0.4 PO70123 PrivatizationAssistance (LIL) U U 2000 5.0 2.7 2.2 PO43724 RuralEmployment S S 1997 89.0 38.8 38.8 8.5 PO69947 TEERP S S 2000 83.5 43.8 43.8 PO72458 TransportTechnicalAssistance S S 2002 8.7 7.9 4.9 PO70308 TelecommunicationsandPostalSector S S 2000 9.0 5.0 4.2 2.8 PO67605 UrbanNaturalHazardVulnerability S S 2003 88.5 84.6 9.5 -0.6 PO04974 Water Supply andSewerage U U 1994 I10.0 28.1 45.9 74.0 0.2 PO04960 Ind.PollutionCtrl. S S 1996 78.0 41.4 17.0 53.4 -0.105 Overall result 685.3 - 119.5 369.3 380.2 118.7 aIntendeddisbursementsto dateminus actualdisbursementsto dateas projectedat appraisal. b. Following the FY94Annual Review of Porffolio Performance (ARPP), a letter based system was introduced (HS= Highly Satisfactory, S =Satisfactory, U = Unsatisfactory, HU= HighlyUnsatisfactory).  Algeria Country Assistance Strategy Annex B8 Page 2 of 2 Statement of IFC's Held and DisbursedPortfolio As of 5/1/2003 (In US DollarsMillions) Held Disbursed FYApproval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1998 ABCA 0 1.9 0 0 0 1.9 0 0 2002 ACC 35 0 0 0 0 0 0 0 2000 AIP 0 0.3 0 0 0 0.2 0 0 2001 ALC 0 0.7 0 0 0 0.4 0 0 1998 SGA 0 0.7 0 0 0 0.7 0 0 Total Portfolio: 35 3.6 0 0 0 3.2 0 0 ** Total portfolio does not include US$20 million Guarantee inATEF committed inFY02.