Algeria - Cement Expansion Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5002 PROJECT COMPLETION REPORT ALGERIA - SNMC EXPANSION PROJECT (LOAN 1185-AL)) March 19, 1984 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT ALGERIA - SNMC EXPANSION PROJECT (LOAN 1185-AL) TABLE OF CONTENTS Page No. Preface ............................................................. i Basic Data Sheet .....................i.i Highlights .... .............................. iv I. INTRODUCTION. 1 II. SNMC - THE BORROWER. 1 A. Company Background.. 1 B. Project Objectives for Restructuring . . 2 C. Project Execution and Results .. 3 III. SAIDA CEMENT PLANT ..... 5 A. Background, Objectives and Description . . .5 B. Project Implementation.... 6 C. Capital Costs, Financing and Bank Loan. . . . 8 D. Early Operations and Training .................. . .. . 11 E. Financial and Economic Performance ... 13 VI. SNC TECHNICAL ASSISTANCE .14 A. Background, Objectives and Description .14 B. Project Execution and Results .15 V. BANK ROLE, CONCLUSIONS AND LESSONS .... 17 A. Bank Role ...17 B. Overall Conclusions . . .18 C. Main Lessons for Similar Projects. . . 18 ANNEXES 1. SNMC: Historic Financial Statements 2. Saida Cement Plant: Project Implementation Schedule 3. Saida Cement Plant: Capital Costs 4. Bank Loan Disbursement by Project Category 5. Bank Loan Disbursement Schedule document has a restriced distribution and may be used by recipients only in the performance of their official duties. Its Contents may not otherwise be disclosed without World Bank authorization.  (i? PROJECT COMPLETION REPORT ALGERIA - SNMC EXPANSION PROJECT (LOAN 1185-AL) PREFACE This report covers the SNMC Expansion project supported by Loan 1185-AL. The Loan was made to the Societe Nationale des Materiaux de Construction (SNMC), the state enterprise for building materials in Algeria. Part of the Loan was onlent by SNMC to the Societe Nationale de Comptabilite (SNC), the state accounting and auditing firm. The Loan of US$46 million was approved in December 1975 and became effective 6 months after approval. It formed the Bank's first direct industrial operation in Algeria since lending to the country was resumed in FY 1973. The Loan was closed in December 1981, when US$ 18.1 million or 39% was cancelled. The project under review consisted of 3 main components: (a) erection of a new 500,000 tpy cement plant near Saida away from the coast in the rural south; (b) strengthing of distribution planning and facilities for building materials in Algeria; and (c) a technical assistance program to SNC. The Bank Loan financed civil works (US$7.1 million) and equipment and services (US$20.8 million). The project completion report was prepared by the Industry Department of the Bank based on desk research of project data available in the Bank. No comments were received from the Borrower. This project was not audited by the Operations Evaluation Department.  (ii) PROJECT COMPLETION REPORT ALGERIA - SNMC EXPANSION PROJECT (LOAN 1185-AL) BASIC DATA SHEET Key Project Data Appraisal Actual/ Financing Required (US$ Million) Estimate Current Estimate Cement Plant 1/ 185.8 221.6 Other Project Components 28.6 n.a. T3tal 214.4 n.a. Cost Overrun (X) Cement Plant - 19 Other Project Components - n.a. Total - n.a. Financing (US$ Million) 1/2/ IBRD Loan 30.8 25.7 Suppliers Credit 57.1 57.1 Local Debt (BAD, BEA or Treasury) 97.9 138.8 Total 185.8 221.6 IBRD Loan Amount (US$ Million) Disbursed 46.0 27.9 Cancelled - 18.1 Repaid to May 31, 1983 14.0 11.1 Outstanding June 30, 1983 32.0 16.8 Project Schedule 2/ Date Commencement Civil Works 12/75 03/76 Mechanical Completion 10/77 06/79 Start Up of Cement Production 02/78 01/79 Implementation Period (Monthly) 3/ 23 40 Project Scope Capacity Level Cement Plant (tpd) 1,500 1,500 Rates of Return _/ Financial Rate of Return (Z) 3.7 neg. Economic Rate of Return (%) 10.3 5 1/ Including railway link which was not implemented. 2/ Cement plant only. 3/ Up to mechanical completion.  (iii) Other Project Data Original Item Plan Actual First Mention in Files - 03/72 Government Application - 10/73 Negotiations 10/20/75 10/20/75 Board Approval 12/16/75 12/16/75 Loan Agreement Date 01/07/76 01/07/76 Effectiveness Date 04/30/76 06/07/76 Closing Date 06/30/82 12/31/81 Borrower SNMC SNMC Executing Agencies SNMC/SNC SNMC/SNC Fiscal Year of Borrower Jan.1-Dec.31 Jan.l-Dec.31 Mission Data Item Sent By Mo/Yr No.Days No-Persons Manweeks Report Date Identification IPD 10/73 4 2 1.6 10/19/73 Preparation 1 IPD 12/73 17 4 13.6 01/09/74 2 IPD 02/74 2 1 0.4 03/21/74 3 IPD 03/74 2 1 0.4 03/22/74 4 IPD 02/75 2 1 0.4 04/08/75 Appraisal 1 IPD 04/75 18 4 14.4 05/14/75 2 IPD 07/75 17 2 6.8 07/28/75 Supervision 1 IPD 01/76 3 1 0.6 01/27/76 2 IPD 01/76 9 1 1.8 02/04/76 3 IPD 04/76 7 3 4.2 04/26/76 4 IPD 06/76 6 3 2.4 07/19/76 5 IPD 02/77 2 5 2.0 03/07/77 6 IPD 06/77 3 1 0.6 07/01/77 7 IPD 01/78 8 2 3.2 02/21/78 8 IPD 09/78 9 2 3.6 10/24/78 9 IPD 06/79 8 1 1.6 07/03/79 10 IPD 05/80 4 2 1.6 07/08/80 11 IPD 05/81 5 1 1.0 06/29/81 Total 60.2 Country Exchange Rates Appraisal (1975) US$1 = DA 3.92 Completion Year (1981) US$1 = DA 4.32 Intervening Years Average (1976-81) US$1 = DA 4.05 Plant Construction Years Average (1976-78) US$1 = DA 4.09  (iv) PROJECT COMPLETION REPORT ALGERIA - SNMC EXPANSION PROJECT (LOAN 1185-AL) HIGHLIGHTS The main objective of the SNMC expansion project was its institution building effect on the building materials industry in Algeria. The project would assist SNMC in addressing organizational and financial problems created by an ambitious investment program which aimed at making Algeria self-sufficient in cement and other building materials during the 1970s. It would help SNMC meet its production and distribution targets as well as maintain financial discipline and cost control. Concerning the overall SNMC company, the project was geared to improving the company in three critical areas: (a) financial structure: to set SNMC on a sound financial basis and to establish SNMC as a financially self-contained enterprise; (b) accounting, financial planning and auditing; and (c) distribution planning and facilities. The project has not met its institutional objectives regarding SNMC. SNMC's financial situation did not improve during project implementation and SNMC still incurred heavy losses by the early 1980s and was in a poor financial position. The Algerian Government undertook steps on several occasions to improve SNMC's financial situation including price increases and financial restructing measures that, however, did not lead to substantial improvements. As a result, the compay did not meet the agreed financial covenants. The main reasons for the company's poor financial performance are inherent to the environment under which state enterprises operated in Algeria during the 1970s and early 1980s, including insufficient price levels, a lack of incentives and financial discipline, financing of investments primarily with debt, and lack of financial planning and control systems. Concerning SNMC's financial and accounting organization, the project's impact has been below expectation due to the weak underlying financial and management systems of SNMC and the limited progress of the program implemented by SNC, the state acvounting firm, to address these weaknesses. Furthermore, the distribution component of the project's institutional package for SNMC, which included both studies for distribution planning and distribution hardware, was not implemented. Finally, the dialogue between the Bank and the SNMC on further cement capacity expansion as foreseen under the project was very limited. The construction of a new 500,000 tpy dry-process cement plant near Saida formed the largest single project component. The plant was implemented under a turn-key contract with a Japanese equipment supplier, with ciVil works construction carried out by a local firm. Construction of the plant took almost 40 months from the start of civil works until mechanical completion as against 23 months foreseen at appraisal, and cement production started in January 1979, 11 months behind schedule, but ahead of the full completion of the plant. The  (v) main change in project scope was that the rail way link of the plant with the main rail network was not implemented. The longer than expected implementation period was almost solely caused by delays in civil works due to the poor performance of the local civil works contractor. The final cost overrun of fixed plant costs (excluding the railway link) is estimated at 12%, mostly due to overruns in civil works and training and technical assistance. Financing of the project was secured by the Bank loan, a Japanese supplier's credit and local financing. Local funds financed the cost overrun and were partly provided in the form of short-term bank overdrafts. Technical performance of the cement plant has been quite satisfactory, but cement production has been below appraisal estimates, due to (a) insufficient regional cement demand in the west of the country; (b) lack of qualified staff to operate the plant; and (c) lack of an adequate transportation link to evacuate the plant's production. The staffing constraint in the plant is partly alleviated by a technical assistance contract with the Japanese turn-key contractor. Financial perfcrmance of the plant is estimated to be substantially below expectations as a result of the combined effects of insufficient capacity utilization, inadequate cement prices and the increased capital cost. It is therefore estimated that the financial rate of return which was already very low at appraisal (3.7%) has become negative. In much the same way, the economic rate of return is now estimated at about 5%, down from the appraisal estimate of 10.3%. The third major component of the project, the SNC technical assistance program was geared to improving the general standard of accounting, budgeting and cost control in Algerian state enterprises, including SNMC, by developing SNC's capabilities in external auditing, modern management accounting techniques and implementing basic accounting systems. The program has not met these objectives. Its implementation suffered from a number of problems, including: lack of sufficient SNC staff caused by unattractive working conditions, management problems, and insufficient SNC clientele. These conditions seem to be related to the uncertainty of SNC's position in Algeria, which was never clearly established as the main institution to lead the Algerian accounting and auditing profession. Furthermore, in retrospect, the program was focussed too much on strengthening SNC's audit capabilities rather than on consultancy work to strengthen basic financial and accounting systems in Algerian state enterprises. Disbursement of the US$46 million Bank Loan amounted to US$27.9 million, with remaining US$18.1 million cancelled by December 31, 1981. Apart from the amount for the cement plant railway link (USA$6.8 million), US$8.9 million designated for the development of SNMC's distribution systems, and US$2.4 million for the SNC technical assistance program were cancelled. In conclusion, the main objective of the project, namely institution building in the Algerian building matertal industry, has not been achieved. In retrospect, SNMC was not the right vehicle for achieving organizational and financing strengthening in the Algerian state enterprise system. It now seems  (vi) that this objective should have been dealt with on a broader level, possibly through an analysis of the public enterprise system to improve efficiency and incentives, followed at a later stage by the implementation of specific measures at the enterprise level. One of the main lessons for similar projects is therefore that it should be clear at the outset whether the project entity in question provides the right vehicle for ac1teving the project objectives, particularly when it concerns public enterprises that operate under close Government supervision. Therefore, the environment in which the enterprise functions should be carefully analyzed to determine whether improvements can be achieved through measures at the enterprise level or if intervention at a broader level is required. Furthermore, the project left too many studies, which were to be carried out in preparation of further measures under the project, rather ill-defined at project appraisal. Most of these studies were not undertaken or were much delayed. Therefore, to avoid delays in project implementation, such studies should be identified early on in project preparation and be carried out along with overall project preparation and appraisal. Finally, poor working conditions (salaries, housing, etc.) proved to be a serious problem for implementing both the cement plant and the SNC technical assistance program. In future projects, it should therefore be ensured that working conditions for project staff are adequate.  - 1 - PROJECT COMPLETION REPORT ALGERIA - SNMC EXPANSION REPORT (LOAN 1185-AL) I. INTRODUCTION 1.01 This report covers the SNMC Expansion Project supported by Loan 1185-AL. The Loan was made to the Societe Nationale des Hateriaux de Construc- tion (SNMC), the state enterprise for building materials in Algeria. The Bank loan of US$46 million to SNK would help finance: (a) part of the ongoing expansion of SNMC through erection of a new 500,000 tons per year (tpy) cement plant near Saida away from the coast in the rural south; (b) the expansion of the company's distribution network; and (c) a technical assistance program to the Societe Nationale de Comptabilite (SNC), the state accounting and auditing company. 1.02 The Loan formed the Bank's first direct industrial operation to Algeria since lending to the country was resumed in FY 1973. The loan which financed civil works, equipment, and consulting services, was appraised in April and July 1975, approved in December 1975 and became effective in June 1976. Eleven supervision missions visited the project during 1976-81. The loan was closed in December 1981, when US$18.1 or 39Z of the loan was cancelled. 1.03 The report is based on desk research of project data available in the Bank. Since the preparation of the report has not been accompanied by a project completion mission to Algeria, some of the information and data normally includ- ed in a project completion report were not available or have been included in lesser detail. Furthermore, information on which the report is based is not fully up-to-date as the last supervision mission visited Algeria in mid-1981 and progress reports have not been received since then. 1.04 The report treats the three major components of the project separately. Chapter II deals with the institution building aspects of SNMC as a whole, Chapter III reviews the implementation of the Saida cement plant, and Chapter IV addresses the SNC technical assistance program. Finally, the Bank's role in the project, main conclusions, and major lessons to be learned for similar projects are summarized in Chapter V. II. SNMC - THE BORROWER A. Company Background 2.01 SNMC was established in 1968 as a state enterprise to promote the development of the Algerian building materials industry and to manufacture, import and distribute a wide range of building materials. At the time of appraisal, the company included some 70 enterprises with employment of about 15,000, and accounted for more than 65Z of production in the building materials industry (with a monopoly in cement). Industrial state enterprises, such as SNMC, operate under the close supervision and guidance of the Government, which defines corporate strategy, appoints senior personnel, formulates investment programs, sets prices for products and controls the financing of such enterprises through the provision of funds from Government-owned banks and by the collection of surplus funds for reinvestment in the economy.l/ SNGC's management efforts were dominated by the need to meet time schedules and fulfill production and investment targets. / For a broader treatment of the Algerian state enterprise system, see Report No. 2981-AL: Algeria-Enterprise Financing and the Banking System, September 1980.  - 2 - 2.02 At the time of appraisal, SNMC was not a financially viable enterprise. While sales increased rapidly, the company incurred heavy losses which reached 27% of sales in 1974. This was largely due to low prices which had not been adjusted frequently to reflect increasing operating costs and higher prices of comparable imports, and the financing of cash short-falls by short-term debt. Furthermore, the company's financial organization lacked im- portant management tools such as proper budgeting, cost control and financial planning systems. Also, SNMC's accounts were not audited in accordance with Bank's standards. The company's liquidity problem did not have a serious impact on its operations as it had unlimited access to further credits through the banking system. However, such a system does not promote financial independence and discipline or the optimal allocation of resources. B. Project Objectives for Restructuring 2.03 The main objective of the SNMC expansion project was its institution building effect on the building materials industry in Algeria. The project would assist SNMC in addressing organizational and financial problems created by an ambitious investment program which aimed at making Algeria self-sufficient in cement and other building materials during the 1970s. It would help SNMC meet its production and distribution targets as well as maintain financial discipline and cost control. Concerning the overall SNMC company, the project was geared to improving the company in three critical areas: (i) financial structure: to set SNMC on a sound financial basis and to establish SNMC as a financially self-contained enterprise independent of subsidies in the long run; (ii) accounting, financial planning and auditing; and (iii) distribution planning and facilities. 2.04 To establish SNMC on a sound long-term financial basis, the Government and the company agreed to implement the following measures: (i) an anuual re- view and setting of prices of all SNMC's products so that these would cover unit costs and debt service associated with the products; (ii) SNMC would meet certain financial covenants, including a debt service coverage of 1.1, and the maintenance of sufficient current assets to meet current liabilities as they fell due; and (iii) the Government would refinance SNMC's losses through December 1975. To supplement the above measures and to improve SNMC's financial systems, the project included a provision for strengthening SNMC's accounting, financial planning and auditing. SNGC therefore agreed to furnish to the Bank for comment and to implement thereafter: (i) a plan for strengthening of its general accounting and financial planning systems (to be submitted by end 1976); (ii) a plan for improvement of its cost accounting capability (to be submitted by end 1977); and (iii) a plan for strengthening budgeting and cost control by a cost centre (to be submitted before the end of 1978). Furthermore, SNMC agreed to have its accounts examined by an independent audit firm. SNC, the state auditing and accounting firm, would carry out such audits. As part of the project, SNC staff was trained to perform audits consistent with Bank requirements (para 4.02). 2.05 The third major institutional measure concerned the improvement in SNMC's distribution planning and facilities, which had become vital due to the rapid expansion of SNMC's production by the mid-1970s. To assist SNMC in this respect the Bank loan provided US$1 million for the financing of consulting services to carry out several studies, including (i) a study to determine the  -3- location and operating characteristics of SNMC's distribution facilities; (ii) a detailed survey of SNMC's requirements for transportation equipment and maintenance facilities; and (iii) a study on the development of an integrated national production-transport-distribution system for cement. SNMC would present to the Bank a detailed program of the studies by March 1976. In addition to these studies, the Bank Loan would finance transport equipment to help alleviate the cement transport problem in Algeria. US$8.1 million of the Loan was earmarked for the purchase by SNMC of some 150 railway silo-wagons and 90 trucks. Financing for the remainder of the trucks and wagons, and for related maintenance equipment and facilities would be provided through the Government. 2.06 In addition to the above measures, the project provided for a dialogue between SNHC and the Bank on further expansion plans in cement with a view to alleviating expected cement supply/demand imbalances in the country. In this regard, SNMC agreed to prepare by 1978 a detailed cement market study for discussion with the Bank. Furthermore, SNMC would consult with the Bank on preparatory studies for any new cement projects. C. Project Execution and Results 2.07 As described above, financial rehabilitation of SNHC was one of the main objectives of the project. Judging from the actual financial result6 this objective was not achieved. Annex 1 contains the financial statements of SNMC during the implementation of the project, of which some selected indicators are given below. SNMC: Selected Financial Indicators, 1974-80 1974 1975 1976 1977 1978 1979 1980 Sales Revenue (DA Million) 690 910 1,351 1,591 1,828 2,199 2,510 Total Assets (DA Million) 2,514 4,807 6,625 8,742 10,397 10,638 11,186 Operating Profit as % sales (22) (30) (10) ( 4) - ( 8) ( 5) Net Profit as Z Sales (27) (50) (28) (27) (22) (38) (32) Current ratio 0.91 0.87 0.88 0.99 0.62 0.67 0.63 Debt Service Coverage neg. neg. neg. neg. 0.16 0.23 0.31 As shown, SNMC's financial situation has not improved during 1974-80, and SNMC still incurred huge losses by 1980 (DA 800 million or 32% of sales) and was in a poor financial situation. 2.08. The Government on its part has taken steps on several occasions to * alleviate SNMC's financial situation. Government-controlled prices of cement and other building materials were raised on several occasions,2/ but remained inadequate to meet costs and were below import prices of comparable products in many cases.3/ Furthermore, the Government approved quite important financial restructuring measures to restore SNMC's financial health. In 1976, the Government introduced the framework for such restructuring which was geared to establishing a sound financial basis for the state enterprises and which 2/ Cement prices were raised in 1976 and 1979 by 40%. 3/ In 1979, the Bank proposed a new system of cement pricing whereby prices would be based on operating costs of plants operating at 80% of capacity with a provision for price increases following increases in the elements of operating costs. Such a pricing system would therefore cover operating costs and remunerate efficient plants.  - 4 - included three types of measures: (i) financial rehabilitation, including price increases, rescheduling of existing loans, and loans for past losses; (ii) financing of permanent working capital by medium and long-term loans; and (iii) financing of start-up losses of new plants by medium and long-term loans. For SNMC, the Government approved such restructuring measures in 1976-for a total of DA 4.1 billion (conversion of short term overdrafts into long-term loans, and rescheduling if other debt) and in 1979 for a total of DA 6.0 billion (including conversion of short-term and long-term debt into equity and rescheduling of debt to cover past losses, infrastructure and training costs and interest during construction on new projects). However, as is evident from SNMC's financial results, these restructuring measures did not lead to an improved financial situation of SNMC. Both the Government and the company therefore did not meet the agreed financial covenants on pricing, debt service coverage and current ratio (para 2.04). 2.09 The main reasons for the company's poor financial performance are inherent to the environment under which state enterprises operated in Algeria during the 1970s and early 1980s. Apart from the insufficient price levels dis- cussed above, such reasons included: (i) insufficient incentives for efficiency improvements due to lack of competition and the heavy organization structures of the enterprises, resulting in underutilization of installed production capaci- ties; (ii) financing of investments primarily with debt, (iii) lack of financial discipline due to an easy access to short term bank credits; and (iv) lack of financial planning and control systems. 2.10 Concerning SNMC's financial and accounting organization (para 2.04), the project's impact has been below expectations. Following the start of the SNC technical assistance program in September 1977 (para 4.06), a SNC team under supervision of its consultants, started to analyze SNMC's financial and account- ing systems in order to carry out an audit of SNMC's accounts and to improve SNMC's systems. Based on this analysis it was determined that SNMC's underlying financial and management systems were too weak to be used as a basis for cost accounting, budgeting and control systems. Therefore, in July 1978, SNC and SNMC agreed on a program to improve these underlying systems and designed a pilot project in SNMC's brick operations. This pilot project was executed between the end of 1978 and the suspension of the contract between SNC and its consultants in May 1981 (para 4.06). Even after this period not all the basic systems were operational under the pilot project, and other sectors (e.g. cement) had not been covered. Furthermore, the more sophisticated planning and control systems foreseen under the project had not been implemented. Also, because of the unreliable accounting system of SNMC, SNC did not carry out full audits of SNMC's books as foreseen under the project, and SNMC stopped its audit contract with SNC in 1980. 2.11 The distribution component of the project's institutional package for SNMC (para 2.05) was not implemented and the US$9.1 million of the Bank loan allocated for studies and equipment was cancelled. On several occasions, the Bank discussed possible terms of reference for distribution studies with SNMC but these were not finalized. SNMC's distribution problem became very pressing in the late 1970s when an oversupply capacity of cement developed in the west of the country while the east remained a deficit area (para 3.20). Following this development, SNMC started the implementation of a distribution program including  the purchase of trucks and the construction of depots. The Bank offered to finance part of this program, but since SNMC did not follow Bank procurement procedures, the Bank loan could not be used. 2.12 Finally, the dialogue between the Bank and SNNC on further cement capacity expansion as foreseen under the project (para 2.06) was very limited. In the context of supervision missions, SNGC's expansion plans were discussed in general, but the Bank was not consulted on the development of 2 cement plants (Bouira and El Asnam), and the cement market study to be prepared by SNNC in 1978 was not received by the Bank. 2.13 In the context of the project and sector work in Algeria, the Bank discussed on many occasions possible reforms in the state enterprise system to improve financial performance, efficiency and resource allocation. The fact that the rather far reaching financial restructuring measures undertaken by the Government on various occasions (para 2.08) did not improve SNMC's financial position indicates that more drastic measures were required to reform the system. In this respect, the Bank discussed with the Algerians the possibility of splitting SNMC in smaller operating companies with a greater degree of autonomy in their day-to-day operations. A committee for reorganization of state enterprises in Algeria was also studying such reorganization. It was learned that the Government decided in 1982 to restructure SNMC as a pilot project under such reorganization by establishing regional enterprises specialized in particular building materials. This decision foresaw the establishment of 4 regional enterprises for ceramic products, 3 enterprises for bricks and tiles, 4 enterprises for "hydraulic binders" (e.g. cement and lime), and an enterprise for research and development that would be responsible for project implementation also. Furthermore, the production of other building materials would be reorganized and decentralized. These restructuring measures, which are in line with the project's overall objectives, would be finalized by the end of 1983. III. SAIDA CEMENT PLANT A. Background, Objectives and Description 3.01 The largest single project component was the construction of a new 500,000 tpy dry-process cement plant near Saida to produce ordinary portland cement and some special cement types. The plant formed part of the plans for expansion of Algerian cement production capacity from about 1.6 million tons in 1975 to 7.5 million tons in 1978 under the Algerian Four-Year Plan (1974-77). * It also was an important component of the Special Development Program (1972-75) for the Plateau Region, which aimed at fostering industry in Algeria's less developed regions away from the coastal strip. 3.02 The plant was implemented under a turn-key contract and includes fully integrated cement producing equipment including a kiln with a capacity of 1,500 tons per day (tpd) of clinker as well as other auxiliary installations, workshops, laboratory and administration and social buildings. Dry process technology was chosen because of its low fuel consumption. The plant is fully automated, includes ample security margins in all but the kiln and cement grinding departments, and its capacity can be doubled with a minimum of new equipment and infrastructure. The project scope included the construction of  - 6 - roads connecting the quarries (para 3.03) and the plant site and a 25 km railway link to the main rail network. Finally, the plant was designed to meet anti-pollutiou standards in line with requirements in West European countries. 3.03 Geological investigations had confirmed the availability of sufficient reserves of limestone, clay and sandstone to operate the plant for more than 50 years. Limestone reserves and the clay deposit are about 1.5 km and 35 km respectively from the plant site. Other additives are quarried by SNMC, purchased locally or imported. B. Project Implementation 3.04 The project was implemented under a turn-key contract with a Japanese equipment supplier and with a minimum involvement of SNMC technical staff. The turnkey contract included detailed engineering, supervision of civil works, supply and erection of equipment, commissioning and training. Although the turnkey contract did not include construction of civil works, detailed design and site supervision for civil works were included. During the planning and preliminary design stage, SNMC was assisted by a French consulting firm which was responsible for comprehensive project design, preparation of specifications and bidding documents, assistance in bid evaluation and contract negotiations. During project implementation, the French firm provided assistance under a technical assistance contract with SNNC, including checking of equipment design, control of civil works drawings, supervision assistance of construction and start-up assistance. Civil works were carried out by an Algerian construction firm (SNHC's construction subsidiary) which was linked to a Belgian civil contractor through a technical assistance contract. 3.05 Project management by SNMC was carried out by an Algerian mining engineer who was responsible for overall project supervision until start-up. Limited control was exercised by SNMC's engineering/development and production departments due to the heavy workload of SNMC's technical staff in contracting and starting up new plants and in ongoing operations of existing plants. Limited cost control by SNMC probably contributed to civil works cost overruns (para 3.13). Cost control in other areas was less critical because the turnkey contract was fixed price. SNMC's main responsibilities during project implementation included construction of off-site infrastructure (roads and railway link), provision for power and gas supply, and contracting and execution of civil works (excluding engineering and supervision which remained with the turn-key contractor) and housing. 3.06 Construction of the plant took about 40 months from the start of civil works until mechanical completion, as against 23 months foreseen at appraisal. Further delays were experienced in finishing the workshops, administrative and social buildings, and housing. Cement production started in January 1979, 11 months behind schedule, but ahead of the full completion of the plant. As the main deviation from the original project scope, the railway link to the main rail network was not implemented (para 3.11). The actual implementation schedule compared with appraisal estimate is given in Annex 2 and is summarized below. (  - 7 - Saida Plant: Analysis of Implementation Delays a/ Completion of Activity Delay Activity Appraisal u/ Actual Cf (Months) Site Preparation October, 1976 June, 1977 8 Civil Works June, 1977 March, 1979 21 Equipment Erection: - Clinker Kiln October, 1977 August, 1978 10 - Cement Grinding October, 1977 December, 1978 14 - Cement Silos October, 1977 June, 1979 20 Start-Up Cement Production February, 1978 January, 1979 11 a/ Excluding workshop, expedition, building, administrative and social buildings, housing and railway connection. b/ Based on initial schedule of French consulting firm. c/ Partly estimated. 3.07 The longer than expected project implementation was almost solely caused by delays in civil works which amounted to 21 months (excluding some support facilities and housing for which delays were longer). This was caused in part by delays in finalizing contracts between SNMC and the local civil works contractor, and between the local contractor and the Belgian firm for technical assistance, but mainly by the lack of qualified Algerian personnel to manage the works, inadequate site organization, and poor maintenance of construction equipment, which problem was aggravated by the wide variety of equipment used by the local contractor. These problems were compounded by the remoteness of the site and the need to train a labor force with a mostly agricultural background. The staff shortcomings were partly compensated by close site supervision of the turn-key contractor. Furthermore, the turn-key contractor minimized delays in erection by preassembling equipment. In order to avoid fu-ther delays in start-up of the plant, SNMC decided in 1977 to phase the completion of the plant, to allow an early start-up of clinker production facilities (November 1978), to be followed at later stages by cement grinding facilities (January 1979) and cement silos (June 1979). Such phased completion is quite a normal occurrence for cement projects. Although cement production started in January 1979, final tests were not yet finished by mid-1981 and the definitive handing-over of the plant was expected by September 1981, almost 3 years after the firing of the kiln. 3.08 Procurement procedures for the Saida plant were initiated in November, 1973, when turnkey offers were invited. The turnkey approach, although normally more costly than a package-by-package procurement approach, was believed to be more appropriate in the Algerian context because it placed the responsibility for achievement of completion dates, performance guarantees and costs on a  single contractor, and thus minimized the need for scarce qualified SNMC technical staff. Following pre-qualification and international competitive bidding (ICB) including two-stage bidding (technical and financial separate), in accordance with the Bank's guidelines, a Japanese firm was chosen as the lowest among two bids and a contract signed by April 1975 (i.e. before Bank appraisal of the project). Under the contract, the Japanese firm would provide major equipment items, but about 35% of the contract value would be supplied by non-Japanese subcontractors. 3.09 Initially, SNMC invited bids for the turn-key contract on the basis of performance specifications with a minimum of preparatory work, instead of detailed tender documents. As it did not receive offers from suppliers on this basis, the company hired French consultants to prepare plant design and procurement documents. This firm also assisted SNMC in evaluating offers and negotiating the turn-key contract. Therefore, SNMC lost time in proceeding initially with bidding documents based on insufficient project preparation. 3.10 Procurement of civil works (excluding civil engineering and construction supervision) was based on ICB procedures without prequalification to meet the tight deadline of the turn-key contract. Due to limited advertising as a consequence of Algerian procurement procedures, only 2 bids were received, both from Algerian contractors, of which one was from SNMC's own construction subsidiary. Bid evaluation was carried out by SNMC and its French consultant and the Bank reviewed bidding documents and bid evaluation. SNMC's construction subsidiary was selected as the low bidder. The contractor would execute the works with technical assistance from a well-known Belgian civil works contractor which included secondment of Belgian personnel to the plant construction site. Due to delay in civil works procurement, start-up of civil works was about 3 months delayed from the initial schedule. Finally, the civil works contract was only signed in October 1976, although the works had already started in March 1976. 3.11 Procurement for the railway link of the plant was initiated in March 1976, following the preparation of design and bidding documents by a French consulting firm. Response was inadequate due to limited advertising, and procedures had to be restarted later in 1976. Consequently, SNMC was slow in bid evaluation so that initial bids were no longer valid. More importantly, from 1978, SNMC claimed that it was not responsible for execution of off-site infrastructure such as the rail link, but rather the Government. However, with- in the Government, responsibility was contested between various Ministries, as a result of which work on the rail link was not started. Due to the expected high cost for the rail link, the Bank suggested from 1978 onwards to compare the execution of a rail connection with a road. Such a study was not undertaken, and, as a result, by 1981 the plant was lacking a proper connection to the main road or rail network, which is expected to affect the performance of the plant (para 3.23). C. Capital Costs, Financing and Bank Loan 3.12 The initial capital costs for the Saida plant were already on the high side with fixed assets about 58% higher per annual ton of cement produced than comparable plants. The reason for the high capital costs included: (i) built- in overcapacity and excessive safety margins; (ii) capital intensive design features such as a high degree of automation; (iii) guarantee requirements and  -9- penalties exceeding the international norm; (iv) a premium paid for plant imple- mentation under the turnkey contract rather than by separate package contract- ing; and (v) the general Algerian procurement climate (difficult working conditions and administrative red tape) which induced high priced offers so that the normal cost-reducing effect of ICB was not realized. The Bank discussed these high capital costs in great detail with SNMC, including studies comparing costs of Algerian cement plants with foreign plants and recommending possible cost reductions. Nevertheless, the Bank impact was very limited in this respect and the Bank's comments on plant design, in particular over-capacities and high capital costs, were not implemented by SNMC. 3.13 Due to the lack of reporting of SNMC on the Saida plant project and the unavailability of detailed updated costs of the plant to supervision missions, no final capital costs for the project are available to the Bank. Nevertheless, based on information obtained by various supervision missions, the capital costs of the project have been estimated and are given in Annex 3. For the fixed plant cost, the cost overruns by main items can be summarized as follows: Saida Plant: Analysis of Cost Overruns % Cost Z of Total Item Cost Overrun Overrun Cost Overrun (US$ Millior.) Buildings and Civil Works 9.2 22 55 Equipment (Supply, Erection and Supervision) (4.0) (5) (24) Infrastructure a/ 0.4 11 2 Freight and Insurance 0.1 1 1 Engineering and Preparatory Expenses 2.7 35 16 Training and Technical Assistance 8.5 472 51 Duties and Taxes (0.2) (4) (1) Total Fixed Plant Cost 16.7 12 100 a/ Excluding railway link which was not executed. 3.14 The main reason for the 12% overrun of fixed plant costs are related to civil works and training and technical assistance. The civil works overrun was due to the poor performance of the local civil works contractor as explained above (para 3.07). A proper evaluation of this overrun was never provided to the Bank, despite several requests. The increased costs for training and  - 10 - technical assistance reflect the substantially higher costs than foreseen for start-up and operating assistance which was required because of delays in recruitment and training of SNMC staff and a lack of qualified plant personnel (para 3.21). If the railway link, which was not implemented, would have been included, the overrun of fixed plant costs are estimated to increase to about 28% (Annex 3), which could be reduced if a road connection would be constructed instead. 3.15 Financing of the project was secured by the Bank Loan, a Japanese supplier's credit snd local financing. Based on the estimated capital costs of the cement plant as shown in Annex 3, the financing of the plant was as follows: FinancAing of Saida Cement Plant a/ / Appraisal Final Estimate Z of Z of US$ Ann DA Mln b/ Total US$ Mln DA Mln c/ Total IBRD 4.0 94.1 14 25.7 105.4 14 Supplier's Credit 57.1 224.0 33 57.1 234.1 31 Local Loans 92.2 36/1. 53 98.9 405.5 55 Total 173.3 ,'679.2 100 181.7 745.0 100 a/ Excludidg railway link. b/ Based on US$1 = DA/3/392. c/ Based on US$1 = Dl .1. The supplier's cre it was part of the turn-key contract, and covered 70% of the contract's fore