Algeria - Energy and Mining Technical Assistance Loan Project (EMTAL)

Report No. PID9381 Project Name Algeria-Energy and Mining TA Loan (EMTAL) Region Middle East and North Africa Region Sector Oil & Gas Transportation; Mining & Other Extractive; Electric Power & Other Energy Adjustment Project ID DZPE67567 Borrower(s) GOVERNMENT OF ALGERIA Implementing Agency Address MINISTRY OF ENERGY AND MINES 80, Avenue Ahmed Ghermoul, Alger, Algerie Contact Person: Mlle Nour-El-Houda Nabila Boughalem, Chef de la Cellule de Gestion du Projet Tel: 213-2-67-02-78 Fax: 213-2-67-03-37 Environment Category C Date PID Prepared June 13, 2000 Projected Appraisal Date July 15, 2000 Projected Board Date December 12, 2000 1. Country and Sector Background Main Sector Issues: The fundamental issues in the energy and mining sectors in Algeria are:Volatility of the oil market having considerable impact on macroeconomic situation: the Algerian economy is heavily dependent on the income from the export of crude oil, other oil products and natural gas.Sectors operated by quasi-monopolistic state-owned enterprises (SOEs) with limited managerial autonomy. Sonatrach focuses on oil and gas exploration, production, transport and export; Sonelgaz is a fully integrated SOE responsible for generation, transmission and distribution of electricity and distribution of natural gas; Naftec is the refining enterprise; Naftal is responsible of distributing hydrocarbon products within the country. As per the mining sector, exploration services are monopolized by ORGM, a state agency, and industrialized operations are dominated by five enterprises incorporated in the state-controlled Holding Mines. It has been recognized that this institutional arrangement has its limitation as far as controlling costs, improving efficiency and generating enough financial resources for future development.Pricing systems with levels below economic costs that provide subsidies for certain consumers, lead to wasteful consumption and limited cost efficiency.Sectors are putting a burden on public finances either for investment finances or consumption subsidies. As a result of the factors described above and a high debt service requirement, the SOEs are financially constrained and unable to maintain, let alone expand, their productive capacity to meet demand.Substantial capital requirements to meet demand and to optimize the use of Algerian natural resources to increase Government' s revenues. As indicated in the Government's program, hydrocarbons activities have slowed and need to be enhanced to make optimal use of Algerian potential. Investment requirements in this  sector for the next five years are estimated at about US$ 20.0 billion. In the electricity sector needs to meet future demand including the rehabilitation of the existing system are estimated at about US$ 12.0 billion for the next decade. Finally the mining sector is characterized by important untapped resources, and the investments required to develop these resources are also important.Little private sector participation in the sectors (expected to increase in the next five years), despite the adoption of the 1991 petroleum legislation which opened the hydrocarbon sector to investments by foreign oil companies on a Production Sharing Agreement basis, exploration activities with the participation of International Oil Companies are concentrated in prolific areas, whereas high risk areas and smaller prospects are handled by Sonatrach only.Government Strategy:The energy and mining sectors are critical to the overall Algerian economy, accounting for about 95t of total exports and 60t of budgetary revenues. The Government recognizes that the rehabilitation and growth of the overall economy hinges on addressing the issues listed above through profound reforms. Efforts to introduce reforms in the sectors have been initiated as early as 1991 for the hydrocarbons sector and 1996 for the power sector. However, much remains to be done and the Government's program announced in January 2000 has established long-range policies for the energy and mining sectors to (i) maximize the role of competition and market forces; (ii) harness economic principles and commercial incentives; (iii) promote private sector participation; and ( iv) reform the corporate structure of the SOEs to adjust to the new rules of the sectors. 2. Objectives The proposed project will assist the MEM and its agencies in their efforts to implement the Government's market-oriented reform program. The main objectives of the project are : (i) redefinition of the role of the state, clearly separating its policy and regulatory roles from its role as owner of public enterprises, enabling the latter to play fully their commercial roles; (ii) development of legal and institutional environment conducive to address market failures, increase competitiveness and private sector participation; (iii) restructuring of the SOEs to adapt to sector reforms and the new business environment. Also, the proposed project will assist in designing a comprehensive strategy to optimize the valorization of the gas resources and the market position of the Algerian gas, both internally and externally. 3. Rationale for Bank's Involvement The Bank has a long track record in developing similar energy sector reforms in Latin America, Eastern Europe and Asia. The Bank is well positioned to provide assistance in this transformation by bringing its knowledge of other countries' experience. The introduction of market competition in the energy and mining sectors will require the definition of a market model and a market structure by adequate legal instruments which imply the formation and development of new institutions and a serious redefinition of the roles of the SOEs. It is essential to create the proper conditions for an adequate monitoring and control of the sector performance by independent institutions, particularly with respect to social, health, safety and environmental aspects.Algeria can benefit from the Bank's experience in sector reforms, including particularly sector policy formulation, modernization of its legal and institutional frameworks and restructuring of SOEs. Given its experience and - 2 -  established presence in the country, Bank involvement would facilitate the achievement of the project objectives in a timely manner. 4. Description The proposed project would comprise the following components which will be implemented through provision of advisory services, computer software and hardware when needed, and training:(a) Hydrocarbons: (i) review, design and implementation of a legal and institutional framework consistent with the proposed strategy of reforms; (ii) set up and assistance in initial operation of a license contract management and promotion agency; (iii) set up and assistance in the initial operation of the regulatory entity; (iv) assistance to Sonatrach in its efforts to adapt to sector reforms and new business environment; and (v) assistance in setting up a data bank.(b) Electricity: (i) review, design and implementation of a legal and institutional framework consistent with the proposed strategy of reforms; (ii) establishment and initial operation of the regulatory entity with development of various regulations; (iii) establishment of a new entity responsible for contracts management; (iv) implementation of the restructuring of Sonelgaz with the various institutions as will be defined by the new Electricity Law under preparation; (v) assistance in processing the first IPP; and (vi) training of relevant staff of the various institutions mainly in reforms and sector regulations.(c) Mining: (i) completion of the regulatory framework and respective regulations; (ii) establishment and successful operation of the an autonomous regulatory entity; (iii) execution of a mining promotion program with setting up of a data bank; and (iv) institutional strengthening of the various enterprises in the sector.(d) Gas strategy: design of a comprehensive strategy for private sector participation in the gas sector to optimize the valorization of the gas resources and the market position of Algerian gas internally and for export. (e) Overall: (i) institutional strengthening of MEM; and (ii) set up of a Project Implementation Unit within MEM.Estimated Cost: Preliminary total cost is estimated at about US$15.0 million. This estimated cost and its allocation by component will be reviewed during appraisal. 5. Financing Total ( US$m) GOVERNMENT 5.0 IBRD 10.0 IDA Total Project Cost 15.0 6. Implementation Implementation period: July 2000 - December 2004IImplementing Agency: Implementation of the proposed project will be the responsibility of MEM through the Project Implementation Unit (PIU). PIU is being established within MEM and will be assisted by consultants and the various enterprises in the sectors. The key PIU staff, namely the Project Manager, financial/accounting and procurement specialists, are being appointed to ensure adequate project preparation and implementation. Project oversight and policy guidance:Project Administration: The project Manager heading the PIU will be responsible for supervising the consultants financed by the project and for ensuring proper procurement and financial management, with the assistance of the related specialists as stated above. Financial Management, Accounting and Financial Reporting, Audit, and -3 -  Disbursements: will be reviewed and agreed upon during appraisal. Monitoring and Evaluation: The PIU would be responsible for monitoring progress against performance indicators to be agreed upon during appraisal. The PIU will submit semi-annual project management reports (PMRs) and financial management reports (FMRs), summarizing project implementation and the utilization of the project funds. These reports would cover implementation status, deviations, if any, from the agreed implementation plan; problems and constraints and corrective actions and updated disbursement and commitment tables. The PIU will prepare a mid-term report to serve as basis for a Project Mid-Term Review and would also prepare and submit an Implementation Completion Report within six months of the Loan closing date. 7. Sustainability By developing a competitive framework for market-oriented reforms in the energy and mining sectors, and adapting the SOEs to the new business environment, the proposed project will help improve service efficiency and energy access, accelerate investments, address market failures. Incentives to sustain project objectives include transparency and competitiveness of the overall contractual arrangements. Improved service coverage and quality at more competitive prices will be sustained as private investments grow in both infrastructure and services. Empowering the new regulatory entities and ensuring financial independence will enable regulatory functions to be sustained without dependence on budgetary support. 8. Lessons learned from past operations in the country/sector Experience in other countries indicates that improving the enabling environment increases the ability of a country to improve efficiency, attract and retain appropriate private investments. The results of reforms can be measured in terms of increasing outputs, government revenues, cost savings, consumers satisfaction, productivity gains, job creation and more efficient public institutions.Experience in other countries with capacity building suggests that emphasis on beneficiary' s participation, intensive supervision, organization and coordination in the field are critical for timely and effective implementation. Ownership and political commitment are key to ensuring strong local leadership, availability of counterpart funds, and clear delineation of ministerial responsibilities. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues : There is no direct impact of the Technical Assistance activities to the environment. However, the project will bring improvement in the Government environmental regulatory capacity in all sub-sectors by improving quality standards of products and operations. 11. Contact Point: Task Manager Zoubeida Ladhibi-Belk The World Bank 1818 H Street, NW Washington D.C. 20433 -4-  Telephone: (202) 458-0020 Fax: (202) 477-1691 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending August 4, 2000. - 5 -