Algeria - Financial System Infrastructure Modernization Project : Algeria - Financial System Infrastructure Modernization Project : proposed restructuring

33072 People's DemocraticRepublicofAlgeria FinancialSystemInfrastructureModernizationProject ProposedRestructuring (Loan No. 7069 -AL) Background 22475 -The 1. above project was approved by the Executive Directors on June 26, 2001 (Report AL) and became effective on September 3, 2002. The project was designed to support Algeria's efforts to put in place a more efficient enabling infrastructure for basic financial services, primarily by modernizing the inter-bank payments systems for large-value transactions and by developing norms and standards for future low value payments systems, including an electronic clearing house. To further improve the enabling infrastructure, the project also aimed at modernizing the information systems o f the Bank o f Algeria and at providing supporting telecommunications infrastructure to serve both inter-bank and intra-bank payments systems and networks. 2. The project components were: (i) modernization o f the payments systems for the the Bank o f Algeria; (ii) development o f Information Systems for the Bank o f Algeria; (iii) the the set-up o f a supporting Telecommunications Infrastructure; and (iv) support to Project Management. 3. The original cost of theproject was estimated at US$18.20 million, to be financed by the Government o f Algeria (US$1.70 million) and the Bank (US$16.50 million). The closing date o f the loanwas June 30,2005. To date, project implementation is behind schedule for four mainreasons: Initial delays in loan signing and effectiveness. They mainly stemmed from the need to adapt the legal convention initially signed between the Bank o f Algeria and the Ministry o f Post and Telecommunications (which was then the telecom operator), to reflect reforms inthe Telecoms sector which led to the creation o f an autonomous entity, Alge'rie Te'le'com. In addition, the revised convention, now between the Bank o f Algeria and Alge'rie Te'le'com,had to reflect the technological improvements described below, calling for a new set o f services to be provided by the Telecom operator; Improvements in technology in the telecom sector took place during the time frame between loan approval and effectiveness. These improvements triggered a review o f the Telecoms technological options, eventually allowing for the adoption o f cheaper and significantly more efficient technology; Pioneering o f new World Bank procurement documentation for high technology systems (Real Time Gross Settlement System - RTGS). The complexity o f the bidding process combined with the introduction o f new World Bank procurement guidelines imposed a longer than expectedpreparation o f the biddingdocuments; Weaker than expected collaboration between the Banko f Algeria andAlge'rie Te'le'com.  2 ImplementationProgress 5. Significant progress has been achieved over the last months, which should significantly improve the pace o fproject implementation. a) Component 1- Modernization o f the payments systems for the Bank o f Algeria. The RTGS contract has been signed and the implementation is proceeding swiftly. b) Component 2 - Information systems o f the Bank of Algeria. The Bank o f Algeria has decided to fund the Information Systems component from its own resources. The Strategic Plan prepared by the Bank o f Algeria confirms its commitment to achieve the objectives initially set inthe project. The Bank of Algeria intends to launch the first phase o f this project during the second half o f 2005. The implementation o f the RTGS and o f the Telecoms infrastructure would not be substantially affected if the roll-over by Bank o f Algeria o f its new Information systems were not to proceed as expected. In that respect, no risk o f a mismatch between the actual payments realized and the ability o f the Bank o f Algeria to track the associated information has been identified, as the existing information network in the Bank o f Algeria is sufficient to support the related flows o f information, at worse with some delays. c) Component3 - Setting-up o f a supporting Telecommunications Infrastructure. The Bank o f Algeria has contracted with Swift to ensure that the Telecoms requirements are met and that linkages with the banking sector are set up to ensure fbll-functioning when the RTGS becomes operational in October 2005. The Bank o f Algeria has also selected the provider for the Telecoms component and the operational phase i s expected to begin shortly. A long-delayed Convention between Alge'rie Te'le'com and the Bank o f Algeria was signedon M a y 4, 2005, laying out Alge'rie Te'le'com's contractual commitments inthe implementation o f this commitment. ProposedRestructuring 6. The objective o f this restructuring is to refocus the scope o f the project given the decision o f Bank o f Algeria to fund the information systems component with its own resources. This refocus is linked to a reduction o f the loan amount to reflect this change and cost savings that occurred due to technological improvements under the other components (the RTGS and the telecommunications components). 7. Given the progress achieved to date, although the major components are still in their implementation phase and not yet operational, the likelihood o f achieving the project's development objectives under the payments systems and telecommunications components i s very high.The implementation o fthis project is now expectedto be completed by June 30,2006, and the recent steps taken provide now for a satisfactory rating o f implementation progress. Further, these objectives will be achieved at a lower cost than estimated at appraisal, without reducing the initial ambition o f the project. 8. The Algerian authorities have also requested an extension o f the project closing date to allow them to fulfill the project's development objectives. Moreover, the statements and policies o f the Government and Bank o f Algeria in support o f global payments systems reform (a  3 separate technical assistance activity) provide comfort of their commitment to see the project objectives achieved, but also to engage inadditional payments systems reform which would help strengthen the financial infrastructure and would support the sector's role in economic and private sector growth. 9. The proposed restructuring therefore aims at reflecting those changes in the project development objectives and inthe loan amount. It will entail: Dropping the information systems component o f the project. Inthe Loan Agreement, the project development objective i s described as "to assist the Borrower in putting inplace an efficient infrastructure for basic financial services". As set out in Schedule 2 o f the Loan Agreement, the project consists o f four parts (Modernization and Development o f Payments Systems, Development o f the Information Systems, Telecommunications Infrastructure, ProjectManagement Support) to achieve this objective. The proposed restructuring would not affect the project development objective as set out inthe LoanAgreement. The informationsystems component would bedropped to reflect the decision o f the Bank o f Algeria to finance it out o f its own funds. This change would not affect the achievement o f the project development objectives (see 5.b o f this Memorandum), but would allow the authorities to meet them within a simplifiedstructure andat alower cost (see below). A cancellation of US$11.3 million of the loan. This amount represents the cost o f the information systems component and cost savings derived from improvements in technology and other factors. This partial cancellation took place on June 16`h, 2005 following the authorities' request. The revisedloan amount i s therefore US$5.2 million. Category IAmount allocated I Amount cancelledI Newallocation 1 A modification of the project intermediate performance indicators for project outputs, to better reflect the actual progress in project implementation as well as the improvements in technology. The Bank of Algeria has agreed to maintain intermediate performance indicators (reflected inthe attached table) for its Information Systems, reflecting both its commitment to achieve this project's development objectives and its willingness to maintain close dialogue with the World Bank during its implementation. The up-dating o f the risk assessment undertaken during project preparation confirms that the main risks then identified and the related risk-ratings remain accurate, and that the risk mitigationmeasures are still relevant (and implementedwhere warranted).  4 11. The proposed restructuring also required the extension o f the closing date from June 30, 2005 to June 30, 2006 and would require amending the LoanAgreement as follows: a) Modify Article 2 o f the Loan Agreement to reflect the reduction o f the loan amount; b) Modify Schedule 4 o f the Loan Agreement to reflect the creation o fAlgkrie Te'le'com(in place o f the MinistBre des Postes et Te'le'communications); c) Modify Schedule 1 o f the Loan Agreement to reflect the changes in the allocation o f the loan amount by categories o f expenditures; and d) Modify Schedule 2 o f the Loan Agreement to reflect the suppression o f the Information systems component.  5 Annex I Project Design Summary Revised Intermediary Performance - - Indicators Hierarchy of Objectives Key Performance Key Performance Indicators (initial) Indicators (revised) Project DevelopmentObjective: Outcome I Impact Indicators: More efficient enablinginfrastructure Growthinthe utilizationo fthe Unchanged for basic financialservices RTGSsystemand inthe amount of large-valuepayments processedby system. The largevaluepayments processedby the RTGSsystemon a daily basis shouldrise to 70 % ofthe total value ofall transactions within the bankingsystem within 6 months of system cut-over, andto 80 % within one year after systemcut-over Demonstrablereductioninthe use of large-valuechecks following system cut-over Improvedquality of BA'spolicy analyses, knowledgemanagement, services to the financial sector, and monetary policy ~~~ ~ ~~~ ~~ ~ Hierarchy of Objectives Key Performance Intermediary Performance Indicators (initial) Indicators (revised) Output from each Output Indicators: Component: I,Payments SystemModernization- 1. a) Large-valuetransactionsare RTGS systeminstalledand A well-functioningRTGS system, settledinrealtime with intra-day tested on Zirout site includingassociatedregulatory finality Regulatory framework systems, and the adoptionofnorms, defined(includingregulations standards and regulationsfor future 1. b) Incidenceo f large-value and account conventions) low value payments systems settlement delays exceeding one day Customizedsoftwareinstalled are virtually eliminatedwithin one Completionof trainingon the year ofsystemcut-over RTGS systemfor Bank of Algeriastaff 1 c) RTGS systemavailabilityo f at I least 90% within one year of system :ut-over, and98% within two years Definitionand publicationof 3 f system cut-over norms and standards for small-paymentssystems (in 1. d) Norms and standards for low- particularfor credit cards) value payments systems are Zompleted andpublishedby December2002  6 Hierarchy of Objectives Key Performance Key Performance Indicators (initial) Indicators (revised) 2. Information Systems 2. Improved quality and timeliness of Component removedbecauseno Modernizationfor the Bank of the central bank's financial and longer financed by project. Algeria -Improved information economic statistics and publications However, the Bank and the systems are operational authorities agreed to maintain a monitoringof itsimplementation usingthe followingindicators P Agreement reachedwith Swift 9 Contractwith the providerfor > the BA networksigned Up-datedconventionbetween Bankof Algeria andAlgbie TLltkom signed 3. Supporting Telecommunications 3. The telecommunications Infrastructure - Well-functioning infrastructure enables the telecommunications links serving the achievement o f the performance payments systems, BA information indicators given above for the systems and other communications payment systems and BA information among financial sector participants systems 4. Project Management Support - A 4. Project implementationproceeds well-functioning P M Uwith adequate smoothly and in accordance with the capacity to implement the project Project ImplementationPlan  7 wb71739 P:MLGERIA\IF\54217\boardFSIMP-MOP-restructuring-July14.doc 19/07/2005 12:16:00