Algeria - Third Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17258 IMPLEMENTATION COMPLETION REPORT ALGERIA THIRD POWER PROJECT (Loan 2981-ALG) December 23, 1997 Infrastructure Development Group Middle East and North Africa Region 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.  CURRENCY EQUIVALENTS Currency Unit: Algerian Dinar (DA) End of Period Dinars/US Dollar 1988 6.73 1989 8.03 1990 12.19 1991 21.39 1992 21.84 1993 23.34 1994 35.06 1995 47.66 1996 54.68 1997 (June) 56.95 FISCAL YEAR: January I to December 31 WEIGHTS AND MEASURES kVA = kiloVolt Ampere kW = kiloWatt kWh = kiloWatthour GWh (GigaWatthour) = 1,000,000 kWh kV (kiloVolt) = 1,000 Volt MW (MegaWatt) = 1,000 kW ABBREVIATIONS AND ACRONYMS EPE Entreprise Publique Economique EPIC Entreprise Publique a caract&re Industriel et Commerciale ICR Implementation Completion Report LRMC Long-Run Marginal Cost MEM Ministry of Energy and Mines SONELGAZ Societe Nationale d'Electricit6 et de Gaz SAL Structural Adjustment Loan Vice President: Kemal Dervis Country Director: Christian Delvoie Sector Director: Jean-Claude Villiard Authors: Rene Mendonca and Ahmed El-Hamri  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Pae Preface Evaluation Summary PART I: IMPLEMENTATION ASSESSMENT A. Statement and Evaluation of Objectives 1 B. Achievement of Objectives 2 C. Major Factors Affecting the Project 8 D. Bank Performance 9 E. Borrower Performance 9 F. Assessment of Program Outcome and Sustainability 9 G. Future Operation 10 H. Key Lessons Learned 10 PART II: STATISTICAL TABLES 1. Summary of Assessment 12 2. Related Bank Loans 13 3. Project Timetable 14 4. 4 Loan Disbursements: Cumulated Estimated and Actual 15 5. 5 Key Indicators for Project Operation 16 6. Studies Included in the Project 18 7. Project Costs 19 8. Project Financing 20 9. Economic Costs and Benefits 21 10. Status of Legal Covenants 22 11. Bank Resources: Staff Input 24 12. Bank Resources: Staff Missions 25 APPENDICES A. ICR Mission Aide-Memoire B. Borrower's Contribution and Comments to the ICR Map IBRD No 19926R 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.  I  IMPLEMENTATION COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) PREFACE This is the Implementation Completion Report (ICR) for the Third Power Project, funded by Loan No. 2981 in the amount of US$160 million (revised amount US$159.43 million). The loan was approved by the Board on June 29, 1988, was signed on November 13, 1989, and became effective on March 29, 1990. The original closing date of December 31, 1995 was extended twice, and the loan closed on June 30, 1997. The last disbursement of US$0.57 million was made on September 3, 1997, and the undisbursed balance of US$23.20 million was canceled. Cofinancing of US$ 86.5 million was provided by the Eximbank of Japan and the undisbursed amount of US$11.8 million was canceled. This ICR was prepared by Messrs. Ren6. Mendonca, Sr. Power Engineer and Ahmed El- Hamri, Economist of the Infrastructure Development Group, Middle East and North Africa Region (MNSID). The report was edited by Ms. Deborah Davis and reviewed by Jean-Claude Villiard, Director, MNSID; Zoubeida Lahdibi-Belk, Sector Leader; and Amir Al-Khafaji, Lead Operations Specialist, MNSID. Preparation of the ICR began during a mission carried out by Messrs. Rene Mendonca and Ahmed El Hamri in July 1997 (see Appendix A: ICR mission Aide-Memoire). It is based on material in the project files and on the completion report provided by the Borrower. The Eximbank of Japan was invited to comment on the draft ICR but no comments were received to date. The Borrower submitted its own evaluation of project's implementation as well as comments on the draft ICR (see appendix B).   IMPLEMENTATION COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) EVALUATION SUMMARY Introduction i. The Third Power Project (Loan 2981) was approved by the Board on June 29, 1988. The loan, to assist in the financial strengthening and institutional restructuring of the public power utility, SONELGAZ, was part of the Bank's strategy to support Algeria's far-reaching program of public enterprise reform, to improve the efficiency and viability of these corporations. The project was designed to increase SONELGAZ' capacity to implement the major investments needed to meet increasing demand by optimizing energy production and improving the quality of supply. The longer-term goal was to use the reform of SONELGAZ as a model for the reform of the country's other public enterprises. Project Objectives and Description ii. The main objectives of the project were to: (a) restructure and strengthen the financial position of SONELGAZ, (b) gradually increase SONELGAZ' autonomy, (c) help implement major investments that would help optimize the productivity of the overall power system, and (d) improve the quality of the power supply. (e) improve SONELGAZ's' management, planning and engineering capabilities. iii. Project components included: (a) about 475 km of 220 kV transmission lines to interconnect the new Jijel power station to the bulk supply system: (b) the con-struction/extension of seven 220 kV transformer substations; (c) supply of specialized equipment and vehicles to improve SONELGAZ' efficiency; (d) studies on power system loss reduction, manpower development, financial management, and options for power generation, including the combined-cycle technology; (e) a training program. iv. Evaluation of objectives. The objectives of the project were relevant and has been properly identified to deal with SONELGAZ reform efforts. However, these objectives were undermined by the risks inherent to the environment in which SONELGAZ operated. SONELGAZ's delays in implementing financial restructuring were linked to delays in increasing tariffs. Other factors, such as the devaluation of the local currency and SONELGAZ's debt burden, weighed against the complete effectiveness of the project. However, considering the achievement of the physical components, the partial completion of the studies, the institutional strengthening undertaken by SONELGAZ, the project can be rated satisfactory (see para. 5 and 6).  ii Achievement of Objectives v. Physical objectives. Overall the project has achieved its physical objectives satisfactorily, albeit with some delays due mainly to the security situation. Some of the physical components in the transmission lines and substations works underwent some modifications. All transmission lines are well on their way to being completed by the end of this year. All substations necessary to strengthen the transmission network have been completed and are in operation, except the Ramdane-Djamel substation. These; physical components will improve the reliability of the transmission network as well as the quality of service to the consumers and help optimize productivity in Algeria's power system. The supply of specialized equipment and vehicles to improve SONELGAZ's operational efficiency have been completed and are in service. The installation of computer hardware and software has improved the planning and operation of the gas and electricity distribution networks (see paras. 7-9) vi. Studies. Most of the studies have been completed. These studies have allowed SONELGAZ to streamline and increase the efficiency of its operational activities. Moreover, the Loss Reduction Study to recommend measures to reduce system losses and the Combined-Cycle Study to define optimal generation option, including combined-cycle alternative, were completed. The Central Cash Management Study and the Management Information System Studies are being completed using SONELGAZ's own funds. These studies should result in a comprehensive and efficient reorganization of the accounting and financial management function of SONELGAZ (see para. 10) vii. Financial objectives. Financial objectives were partially met. SONELGAZ's financial performance should improve in the medium to long run but only after full completion of its restructuring plan, which was not fully achieved under the project. SONELGAZ's revenue generation is still problematic at best. Important problems still exist with respect to collection of receivables from public sector enterprises and administrative institutions. Furthermore, efficiency is still not optimal. SONELGAZ costly operations have undermined its ability to generate adequate surplus (see para. 11-14). viii. The level of the tariffs prevailing during the period 1988-1996 were not appropriate to recover cost based on economic principles nor were they sufficient to meet.the self-financing ratio in every year. These increases were not sufficient to improve SONELGAZ's. financial situation, since they were being eroded by inflation and currency devaluations (see para. 12). ix. Institutional objectives. Achievement of institutional objectives is considered satisfactory in view of SONELGAZ's efforts to provide technical and financial training to reinforce its human resources base. Moreover, the autonomy of SONELGAZ was strengthened through the enactment of its revised statutes approved in 1995. Training conducted under the project will provide long-term benefits through improved personnel efficiency. Completion of the Central Cash Management and Management information System Studies should result in improving the managerial and financial capability of SONELGAZ (see paras. 15-16). x. Project costs and financing. The project's estimated cost at appraisal was US$391.2 million, including contingencies, duties and taxes and excluding interest during construction. On completion in October 31, 1997, the total cost of the project, as revised, is now estimated to be  iii US$314 million, which is about 20 percent lower than appraisal estimate. Of this, the foreign cost is now US$136.2 million (out of US$160 million of the Bank loan) and US$74.7 million (out of US$86.5 million of the Eximbank loan). Savings generated were primarily due to: (a) appreciation of foreign currencies vis-a-vis the local currency; and (b) lower bid prices than appraised estimates (see para. 17). xi. Project economic performance. The recalculated EIRR is now estimated at 9 percent, which is higher than the appraisal estimate of 6.3 percent. These estimates were based on key financial data for the period of 1989-97. This might reflects a relative tariff increase, in addition to incremental revenues resulting from increased genera,tion and improved transmission efficiency (i.e., reduced technical losses). The EIRR was recalculated using the methodology described in the SAR (see para. 18 and Part II, table 9). Major Factors Affecting the Project xii. The project was negatively affected by the security situation, which undermined implementation, supervision and technical assistance. Project effectiveness was delayed by 18 months at the beginning and further delayed by SONELGAZ's unfamiliarity with the Bank's procurement guidelines. Inflation and local currency devaluation eroded tariff adjustments and the debt service of SONELGAZ. These factors have negatively impacted SONELGAZ' efforts toward financial restructuring (see para. 19). Bank Performance xiii. Overall, the performance of the Bank cmn be rated as satisfactory. During project preparation of the project, the Bank responded in a timely manner to the Govermment's request for urgent help. During supervision, the project was supervised on a regular basis, about every 6 months, in spite of the difficult security situation in Algeria. Bank missions gave SONELGAZ substantial assistance in planning its financial performance and obtaining tariff adjustments. Visits to construction sites were not possible during the last two years of project implementation (see para. 20). Borrower Performance xiv. Overall, the performance of SONELGAZ can be rated satisfactory. The implementation of the physical works by SONELGAZ's technical personnel was efficient. The implementation of policy issues, and the performance of the Ministry of Energy and SONELGAZ were in general satisfactory except for delays in implementing tariff adjustments, the Contrat-Plan (not yet approved by the Government), and SONELGAZ's revised statutes (approved in September 1995) (see para. 21). Project Sustainability xv. The project is likely to be sustainable in the long term given the benefits of its components. The full benefit of the project will be achieved where most of the transmission and substations works have been completed and put into service. These works will improve the reliability of the power system and the quality of service to the consumers. The capacity of the transmission system will be maintained and most likely extended. Regarding SONELGAZ's financial position, sustainability of the improvements would be much easier in a low-inflation  iv environment and small devaluations. Moreover, SONELGAZ, financial performance will be improved in view of its measures contained in its financial restructuring plan and will start generating net resources for each year, starting in 1998, which should be consistent with standard covenanted ratios (see para. 22-23). Summary of Findings, Future Operation and Key Lessons Learned xvi. Project outcome. Overall project assessment is satisfactory and the project is expected to achieve a reliable, efficient, and well-integrated transmission network in the long term. The project's recalculated EIRR is satisfactory and reflects increased output, decreased system losses and tariff increases (see para. 24). xvii. Future project operation. Bank's strategy for the sector for further assistance to Algeria will be targeted towards facilitating restructuring of the sector and developing an enabling environment for entry of the private sector in power generation. To this end, as part of its Economic Development Program in the Energy Sector, the Government has declared its intention to introduce private operators in electricity generation in order to alleviate the large investment requirement needed in the generation expansion program (see para. 25). xviii. This project should be continuously monitored in order to ascertain that SONELGAZ financial performance is in line with covenanted targets. SONELGAZ has agreed to monitor the project its financial and operational performance as through performance indicators as outlined in para. 27 and Part II, Table 5. xix. Key lessons learned. The main lessons learned are: (a) stronger financial restructuring measures might have been appropriate during preparation, before Board approval; therefore, further financial reengineering of the enterprise is still needed so that it will be able to generate sufficient internal cash to finance its own expansion plan, and to bring its operational and financial performance in line with that of comparable international utilities; (b) cash generation as defined under the project showed extreme volatility over the years. A rate-of-return covenant might have been more appropriate and understandable by all stakeholders, in spite of local inflation; (c) the Bank might consider providing procurement training before project effectiveness; (d) the Bank should ensure that follow-up project operation is monitored properly and that performance indicators are established at the beginning to facilitate evaluation of project sustainability; (e) project objectives should be linked to overall macroeconomic restructuring objectives so that sectoral reforms do not represent barriers to industrial enterprises that have embarked upon a strategy of change; and (f) the Bank's strategy for the sector should focus on facilitating restructuring of the sector and developing an enabling environment for entry of the private sector. (see para. 28).  IMPLEMENTATION COMPLETION REPORT ALGERIA ALGERIA POWER PROJECT (Loan 2981-ALG) PART I - PROJECT IMPLEMENTATION ASSESSMENT A. Statement and Evaluation of Objectives Introduction/Background 1. There had been two previous power loans since independence. Preparation for a third loan was suspended in 1982 when the Government failed to take action to address SONELGAZ's deteriorating financial situation, and there was a lull in contacts until 1985 when preparation of this project began. The project has focused in particular on the successful implementation of SONELGAZ's Government-approved financial restructuring program, optimization of electricity use at power stations and in the transmission network, optimization of investment programs, and strengthening of SONELGAZ' management and accounting systems. 2. The Bank loan of US$160 million (revised amount US$159.43 million) was cofmanced - as a joint financing arrangement - by the Japanese Eximbank with a loan of US$86.5 million equivalent, with the Bank administering the Japanese loan together with its own financing. The foreign cost of most components was financed 65 percent by the Bank and 35 percent with Eximbank of Japan funds. Project Objectives and Components 3. At appraisal. The Third Power Project at appraisal had four main objectives: (a) to restore and strengthen SONELGAZ's financial position through a gradual shift to greater financial and managerial autonomy; (b) continue implementation of some major investments that would help to optimize productivity in Algeria's power system; and (c) assist SONELGAZ in its efforts to improve its management, planning and engineering capabilities and thereby improve the quality of supply. The proposed project was also expected to (d) provide a vehicle for dialogue with SONELGAZ and the Government on rationalizing the company's overall procurement procedures.  2 4. The project was designed as part of SONELGAZ's least-cost development program for the period 1988-1995. It involved: (a) construction of about 475 km of 220 kV transmission lines to interconnect the power station under construction at Jijel to SONELGAZ's bulk supply system; (b) construction and/or extension of six 220/60kV substations and one 220/90/30 kV transformer substation, with total installed capacity of about 2180 MVA; (c) the supply of specialized equipment and vehicles; (d) training and supply of devices such as computer software and hardware to strengthen SONELGAZ's capabilities in network engineering, planning and financial management; and (e) consulting services to assist SONELGAZ in carrying out various studies for power system loss reduction, manpower development and financial management systems, and a study to determine the opportunity for introducing the combined-cycle alternative in SONELGAZ's future power generation system. Evaluation of Objectives 5. Objectives were clearly stated and agreed to by all stakeholders. Compared to later Bank projects in power sectors of various countries, the objectives of this project may appear to have a limited scope; however, this project restarted a difficult dialogue after several years of interruption. The stated objectives appear to be what were acceptable for both parties at the time. Regarding SONELGAZ' financial performance, the objective/covenant of 15 percent self- financing appears rather modest, but again, at the time SONELGAZ was in a desperate financial situation, and even this low target stipulated a demanding change of direction with the tariff restructuring necessary to reach that objective coming at a high political and economic cost. Given the high inflation, there was no financial rate-of-return target for SONELGAZ' operations. Since the early 1980s, the Government has been implementing economic reforms, including central planning reforms, development of a more autonomous financial system, private sector promotion and improved mobilization and allocation of resources via pricing reforms. It is within this context that this project should be evaluated. 6. Although the financial objectives were relevant, they were beyond SONELGAZ's capabilities. The gradual approach adopted by the Algerian Government focused on macro rather than microeconomic reforms. Algerian industry was unproductive (apart from the oil and gas industry) and needed a complete overhaul, which depended on fundamental institutional and economic reforms being carried out (which was not the case at the time of project effectiveness). Access to foreign exchange was constrained and limited, inflation rates were high and public enterprises (such as SONELGAZ) were structurally inefficient. Industrial structure was not conducive to growth and institutional behavior (sluggish actions by the Government on the tariff issue in the case of SONELGAZ) led to poor financial results.  3 B. Achievement of Objectives Physical Objectives 7. The main physical objectives of the project were achieved as shown in the following table: Tablel: Comparison of Planned and Achieved Physical Objectives A: Transmission Lines Names-Description Planned Percent Achieved Ramdane Djamel - El-Hadjar 220 kV- single circuit. 80 km 100% in service Jijel - Bellara, 220 kV 25 km by Dec. 97 Skikda- Bellara, 220 kV - single circuit, twin bundle (2x411 mm2 ACSR) 70 km 100% in service by Dec. 97 Zahana - Terga - Ghazaouet, 220 kV - single circuit 150 km 100% in service by Dec. 97 Ouled Fayed - Beni Mered, 220 kV - single circuit 32 km 100% in service by Dec. 97 El-Mansouriah-El Kseur, 220 kV - single circuit, twin bundle (2x411 mm2 ACSR) 70 Ian 100% in service by Dec. 97 El-Mansouriah-Jijel, 220 kV - single circuit, twin bundle (2x411 mm2 ACSR 60 km 100% in service by Mar. 98 Miscellaneous and connection of the substations included in the project. 220 kV - single circuit 25 km 100% in service B: Substations Names-Description Planned Number of bays Percent Achieved Transformer Lines East Region: Randane-Jamel: 220/60kV, 3x120 MVA 3 9x120kV 2 100% in service by Mar. 98 Ain Beida: 220/60 kV, 2x120 MVA 6x220 kV 100% - in service Tebessa: 220/90 kV, and 90/30 kV, lx120 + 2x40 3 10x90 kV 100% - in service MVA +l4x30kV Central Region: Beni-Mered: 220kV, 3x120 MVA 3 4x220 kV 100% - in service 4x60 kV Kherba: 220kv, 60/30kV, 2x120 + 2x30 MVA 4 7x220 kV 100% - in service +7x60 kV Ghelghoum Laid: 220/60 kV, 3x120 MVA 3 6x120 kV Canceled +6x60 kV Ouled Fayet: 220/60 kV, 3x120 MVA 1 6x220kV 100% in service Oued Athmania, 220/60 kV, 3x120 MVA (NEW) 1 220/60kV 100% - in service 8. Overall the project has achieved its physical objectives satisfactorily, albeit with some delays due mainly to security reasons. It is noteworthy to mention that both the Bank and Eximbank of Japan financed components that underwent some modifications. Khemis-Oued Sly (220 kV, single circuit, 110 km) and Jijel-Ain M'Lila (220 kV, single circuit, 120 km) lines were deleted and Ramdane Djamel-EI-Hadjar, Zahana-Terga-Ghazaouet and Ouled-Fayed-Beni Mered lines (total: 262 km) as indicated above were added to the project, which reflected an increase of 32 km of line. With regards to substation work, Ghelghoum Laid substation was deleted and replaced by the Oued Athmania substation. These modifications were due mainly to prevailing security reasons, and alternate works were needed to meet the growing demand; These modifications were agreed with the Bank. All transmission lines are well on their way to being completed by the end of this year, except for the El-Mansouriah-Jijel line, which is proceeding very slowly due to the existing security situation in that location and is expected to be completed  4 by March 1998. All substations necessary to strengthen the transmission network in order to improve the evacuation of energy have been completed and are in operation, except with the Ramdan-Djamel substation expected to be commissioned in the first quarter of 1998. This delay was due because of ground stability problem in the substation, which has been resolved. The project's rehabilitation/expansion work of the transmission network including substations will improve the reliability of the transmission network as well as the quality of service to the consumers and help optimize productivity in Algeria's power system. 9. The supply of specialized equipment and vehicles to improve SONELGAZ's operational efficiency have been completed and are in operation. This has contributed in improving efficiency of SONELGAZ's operation activities as well as the quality of service to the consumers. Supply of computer hardware and software to strengthen SONELGAZ's capabilities in network engineering and planning management was completed, and resulted in improving the planning and operation of the gas and electricity distribution networks. Studies 10. Most of the technical studies that SONELGAZ undertook have been (or are being) completed (see Part II, Table 6). These studies have allowed SONELGAZ to streamline and increase the efficiency of its operational activities. The Loss reduction Study was completed and is assisting SONELGAZ in implementing an action plan to reduce power system losses, which will increase system efficiency. The Combined-Cycle Study was completed and will assist SONELGAZ in revising its investment program and defining optimal generation option, including the combined-cycle alternative. As a result of this study, SONELGAZ has incorporated combined-cycle power plants in its generation expansion plan and the first one is planned to be built in Alger-West. The Central Cash Management Study as well as the Management Information System (MIS) Study to improve the financial and accounting systems of SONELGAZ are ongoing, albeit with delays. They are being completed using SONELGAZ's own funds. These studies should result in a comprehensive and efficient reorganization of the accounting and financial management function of SONELGAZ (a major objective of the project). SONELGAZ has also benefited from many audits that have helped put in place a viable financial management system. However, SONELGAZ needs to complete the Manpower Development Study, which has been delayed due to security reasons, in order to be able to upgrade its managerial capabilities. Financial Objectives 11. The financial objectives were partially achieved. This project was designed to restore and strengthen SONELGAZ' financial position and improve its operational efficiency with a gradual shift to greater financial and managerial autonomy. The Bank and the Borrower had agreed on a comprehensive set of actions that were to be carried out in a timely manner. These actions specifically included: (a) a gradual increase in the self-financing capability to reach 15 percent by 1993; (b) payments of all arrears due to SONELGAZ by public sector enterprises and institutions; (c) systematic audits of SONELGAZ' accounts; (d) completion and implementation of the recommendations of a management and accounting systems study. These actions were conditional on the Borrower's implementation of a phased and gradual tariff increase, which was necessary for the project to reach its financial objectives.  5 Tariffs 12. SONELGAZ had to set up a tariff adjustment policy concurrent with the project's financial objectives. However, its status as an EPIC (enterprise publique a caractere industriel et commercial) did not allow it to act independently from the public institutions that oversaw and controlled its operations and management. Within the context of Algeria, tariffs reflect socioeconomic policies and decisions, and covenanted tariff increases could not be implemented outside this framework. In effect, project effectiveness was delayed by 18 months because of Government delays on the 10 percent tariff increase, which seriously affected project implementation and SONELGAZ's fnancial performance'. A lifeline tariff (5O0kWh/year) was introduced by SONELGAZ at the suggestion of the Bank in order to protect the low-income consumers. The first tariff increase of about 10 percent was implemented in March 1991 and did not much improve SONELGAZ's financial situation. The macroeconomic context was not conducive to successive increases and the Government was not ready for larger increases because of the sociopolitical climate that prevailed in Algeria starting in the second half of 1991. Other increases were enacted in 1992 and 19932 but were not sufficient to improve SONELGAZ's financial situation, since they were being eroded by inflation and currency devaluation3. The Bank did, however, request further financial restructuring and tariff measures from the GOA to improve SONELGAZ's internal cash generation ratios for the period 1994-964. Overall tariffs are progressing toward their economic levels. High voltage tariffs are already at their economic level (107 percent in 1997), while medium voltage and low voltage tariffs will reach their economic levels by 1998 and 2000 respectively. Table 2: SONELGAZ: Evolution of Retail Electricity Tariffs, 1989-1997 (in cDA/kWh) Electricity 1989 1990 1991 1992 1993 1994 1995 1996* 1997* High Voltage 16.77 17.60 25.60 55.48 69.57 77.61 90.66 105.28 124.57 Medium Voltage 26.26 26.79 33.83 56.91 67.30 79.54 112.61 151.83 183.30 Low Voltage 41.09 43.28 48.38 61.37 75.60 70.13 99.23 130.17 162.32 High Voltage -Tariff/Economic Cost N/A N/A N/A N/A N/A 92.2 % 93.1 % 95.2% 107.7% MedVoltage-Tariff/Economic Cost N/A N/A N/A N/A N/A 58.7% 71.1 % 83.7% 95.3% LowVoltage- Tariff/Economic Cost N/A N/A N/A N/A N/A 27.1% 32.5% 37.1% 43.2% lAvg Economic Cost,USc/Kwb ....J.... ....../. . .... 5.743 5.164 4.269 4.085 3.816 2.Avg Sale Price- USc/Kwh 3.763 3.363 2.201 2.678 3.079 2.343 2.452 2.768 2.475 12 in percent 53.61 45.37 57.44 67.76 64.86 * Preliminary figures for 1996 and 1997. This mediocre financial performance (in 1989) was due mainly to a one year delay in tariff increase. SONELGAZ also incurred substantial foreign exchange losses on debt service. Furthermore, there was a lack of significant improvement in accounts receivable and in the agreed-upon cost reduction program. 2 Tariff increases of 55 percent for 1992 were decided in April, of which 2 steps of 15-18 percent (depending on voltage levels) and were implemented as planned in April and June. Similar adjustments followed in September 1992. 3 Average tariffs were still below targets and were offset by inflation rates (which were higher than estimated). 4 New tariffs were promulgated in September 1994 to take effect during the second half of 1994 and with automatic adjustments for 1995.  6 13. Overall financial performance. SONELGAZTs revenue generation is still problematic at best. Important problems still exist with respect to collection of receivables from public sector enterprises and administrative institutions. Billing collection, for the period 1989-97, was not consistent with the 2-month covenanted target of the project agreement (see table 4). Furthermore, efficiency is still not optimal. In effect, excessive expenditures, representing an average of 90 percent of total sales (for 1989-97) have undermined SONELGAZ's ability to generate adequate surplus. In spite of costly debt conversion and restructuring, debt management needs to be improved. The debt service ratio has not reached the agreed-upon objective (1.3 times). In spite of financial adjustment measures, internal cash generation remains below the covenanted 15 percent. However, this ratio did improve from negative 5 percent in 1986) to 7.7 percent in 1996. This financial performance is due to SONELGAZ's inability to mobilize adequate revenues (its cash flow is negative) to reach the agreed-upon targets. 14. As of 1995 SONELGAZ's financial situation was improving (see table 3) but not to the extent of achieving project objectives. All corrective measures have to be perceived within a constraining internal (managerial) and external (regulatory and economic) environment that 5 SONELGAZ had to contend with. In spite of debt buy-back operations , at about DA 11.4 billion in 1992, DA 8 billion in 1995 and DA 8,5 billion in 1996, and the conversion of BAD (Banque Algerienne de Developpement) debt6, its ratio of equity over net assets remained very low (0.23 in 1995). Furthermore, SONELGAZ embarked upon a strategy of settling accounts with its public sector consumers. Given that tariffs were lagging behind revenue requirements, it was difficult for SONELGAZ to secure enough internal cash to finance its own operations. Its activities were highly leveraged and debt levels were excessive (representing 75 percent of liabilities in 1995). External debt represented 45 percent of total debt and 33 percent of total capital. Total debt service represented 72.6 percent of income from total sales, however debt service ratio did improve considerably (from -0.19 in 1989 to 1.21 in 1996). Receivables have also improved from 3.9 months of billing in 1989 to 2.6 in 1996. Cash flow management is also improving as measures to collect arrears due to SONELGAZ are producing positive results. Financial performance indicators for 1996 show that SONELGAZ is pursuing a cautious strategy which will ultimately pay off in the period 1998-2001. However, investment financing remains a problem for the period after 2001, when considerable capital outlays will be needed, in particular for the renovation and expansion of generation capacity. SONELGAZ had to readjust its capital and financial structure because of debt absorption requirements. 6 In 1996, delivering on its commitments to financial restructuring, SONELGAZ converted DA 38.9 billion in debt owed to the Algerian Development Bank (BAD).  7 Table 3: SONELGAZ, Key Financial & Operational Indicators; 1989-97 Categories 1989 1990 1991 1992 1993 1994 1995 1996* 1997* I.Total Electricity Generation in GWh 14589 15442 16756 17677 18959 19488 19361 20212 21507 2.Users (Households and Public Inst) in million 2.9 3.16 3.36 3.48 3.63 3.77 3.90 4.01 4.32 2.Number of Employees 22396 23516 24905 24936 24805 25635 25591 25548 26099 4.Total Electricity Sales (in GWh) 12271 12994 13123 14478 14831 15108 15699 16211 17205 5.Increases in Percent 5.89 0.99 10.33 2.44 1.87 3.91 3.26 6.13 6.Electricity (DA million) 3351 4015 5695 8872 11285 13882 19034 25443 27506 7.Natural gas (DA million) 517 564 870 1689 2352 2464 3584 4497 5803 8.Total income (6+7+ Other) 4197 5024 7033 11361 14657 17484 24516 28322 36751 9.Total expenditures (DA million) 3988 4930 6632 10393 14635 16590 18860 24664 32094 10.Net income (DA million) (1295) (1803) (2890) (3651) (4408) (3021) (9024) (4124) (3297) I I.Net intemal cash generation (DA million) 5632 (70) (576) (3457) (2078) (1345) (7634) (4389) 572 12.Annual investment-incl rural.(DA million) 3667 3780 6528 7511 9750 11517 12770 14570 22974 Ratios Operating ratio 0.95 0.98 0.64 0.91 1.00 0.95 0.77 0.87 0.87 Net internal cash generation ratio % N/A 5.2 -76.8 -109 -19.0 N/A 9.2 7.7 5.2 Debt service coverage ratio -0.19 0.92 0.83 0.31 0.63 1.02 0.5 1.21 1.02 LT debtlLT debt +equity 0.62 0.60 0.57 0.66 0.42 0.42 0.18 0.19 0.22 Public Sector Receivables 1989 1990 1991 1992 1993 1994 1995 1996* 1997* Electricity and Gas Consumption Current billings receivable (DA million) 1352 1514 2292 3864 4117 5984 5278 10500 N/A Arrears in months 3.9 3.6 3.9 4.1 3.4 4.1 2.8 2.6 2.4 * Preliminary figures for 1996 and 1997. Institutional Objectives 15. Achievement of institutional objectives is considered satisfactory in view of SONELGAZ's efforts to provide technical and financial training to reinforce its human resources base. Furthermore, SONELGAZ's revised status in 1995 has increased its autonomy particularly in terms of decision making vis-a-vis the Ministry of Energy regarding its investment expansion program, its internal structural reorganization and appointment of its high level management. Annual programs of trainees, mostly engineers, were sent to foreign school to be trained mainly in the operation of power plants and telecommunications. This training program was approved by the Bank and lasted for a period of 5 years, and resulted in improving SONELGAZ's operational activities. 16. Over several years, the annual audits of SONELGAZ's accounts and systems by an association of a foreign and an Algerian audit firm were successful in improving and strengthening SONELGAZ's systems. Unfortunately, these missions have come to a halt because of the security situation. Completion of the Central Cash Management and the Management and Information System Studies should result in improving the managerial and financial capability of SONELGAZ.  8 Project Costs and Financing 17. Based on 1987 prices, the project's estimated cost at appraisal was US$391.2 million, including contingencies, duties and taxes and excluding interest during construction. Of this, the foreign cost was estimated at US$245.3 million, with financing from the Bank (US$160 million) and the Eximbank of Japan (US$86.5 million), excluding the Govenmnent's contribution. On completion in October 31, 1997, the total cost of the project, as revised, is now estimated to be US$314 million, which is about 20 percent lower than appraisal estimate. Of this, the foreign cost is now US$136.2 million (out of US$160 million of the Bank loan) and US$74.7 million (out of US$86.5 million of Eximbank of Japan loan). However, it should be noted that appraisal and current estimates are not comparable as some physical components have been changed as explained above (para. 8). Furthermore, appraisal estimates did not include SONELGAZ administration and local engineering expenses. Savings generated were primarily due to: (a) appreciation of foreign currencies vis-a-vis the local currency; and (b) lower bid prices than appraised estimates. Original and final project costs are shown in Part II, Table 7 and 8. Project Economic Performance 18. The project was part of SONELGAZ's least-cost expansion program, and during appraisal the economic rate of return (EIRR) on SONELGAZ's investment program for generation, transmission and distribution for the period 1988-1995 was estimated at 6.3 percent With actual data for the period 1989-1996, the EIRR is now estimated at 9 percent, which is somewhat higher than the appraisal estimate. These estimations are based on preliminary (unaudited) accounting and financial figures. (see Part I, Table 9). EIRR recalculations, for project such as this one, are somewhat subjective. The relatively higher EIRR takes into account Sonelgaz's overall performance during the period 1989-97 and should only be interpreted within that context.. C. Major Factors Affecting the Project 19. The following factors affected the project: (a) The security situation in Algeria had an impact on physical implementation of certain high-voltage lines, and on the implementation of several studies and technical assistance (i.e., the annual audits were substantially reduced in scope, as were the technical assistance to improve SONELGAZ's accounting and financial systems and the Central Cash Management Study); (b)Project effectiveness was delayed by 18 months, resulting in delay of project implementation; (c)Delays were experienced at the start of the project by SONELGAZ due to unfamiliarity with the Bank's procurement guidelines; (d) Tariffs were eroded by inflation and therefore needed to be much higher in order to achieve increases in real terms. Local successive currency devaluations have undermined the ability of SONELGAZ to carryout its financial restructuring. Most of all, debt service and exchange losses related to the sizable foreign currency debt have affected SONELGAZ in a way not anticipated during project preparation. D. Bank Performance 20. Overall, the performance of the Bank can be rated as satisfactory. During project preparation of the project, the Bank responded in a timely manner to the government's request for urgent assistance. During supervision, the project was supervised on a regular basis, about  9 every 6 months, in spite of the difficult security situation in Algeria. Bank missions gave SONELGAZ substantial assistance in planning its financial performance and obtaining tariff adjustments. Visits to construction sites were not possible during the last two years of project implementation because of security situation. The overall procurement process was satisfactory, except for US$600,000 canceled for misprocurement, because of disagreement on a contract award. E. Borrower Performance 21. Overall, the performance of SONELGAZ can be rated satisfactory. The implementation of the physical works by SONELGAZ's technical personnel was efficient, as was the performance of the financial department. Furthermore, concerning the implementation of policy issues, the performance of the Ministry of Energy and SONELGAZ is in general satisfactory, except for delays in tariff adjustments, the Contrat-plan (not yet approved by the Government), and SONELGAZ's revised statutes (approved in September 1995). However, it should be noted that some procurement problems were experienced at the start of the project due to SONELGAZ's unfamiliarity with Bank procurement guidelines. F. Assessment of Project Outcome and Sustainability Project Sustainability 22. The project is likely to be sustainable in the long run given the benefits of its components. In fact, some benefit of the project has been achieved in the case of the transmission and substations works that have been completed and put into service during the last 2 years. Performance of the physical components should not be a problem. A higher rate of evacuation of energy was achieved where transmission lines and transformers are in operation. The capacity of the transmission system will be maintained and most likely extended. 23. Regarding SONELGAZ's financial position, sustainability of the improvements would be much easier in a low-inflation environment and with only a few small devaluations, because fewer tariff adjustments would be needed. Furthermore, SONELGAZ's financial position will be improved because of the current implementation of its financial restructuring program. SONELGAZ will start generating net resources for each year, starting 1998, that should be consistent with the covenanted cash generation ratio and adequate to service its debt. Project Outcome 24. Overall project outcome can be considered satisfactory. Implementation has been satisfactory and it is more than likely that the project will, in the long run, achieve a well integrated transmission network, resulting in reduced technical losses, increased system reliability and operational efficiency. Training conducted under the project will also provide long-term benefits through improved personnel efficiency. The recalculated EIRR of 9 percent reflects a higher tariff increase than anticipated, as well as incremental revenues resulting from increased generation and improved transmission efficiency (i.e., reduced technical losses).  10 G. Future Project Operation 25. Bank's strategy for the sector for further assistance to Algeria will be targeted towards facilitating restructuring of the sector and developing an enabling environment for entry of the private sector in power generation. Several measures to be taken by the government and SONELGAZ in the areas of sector reforms, commercialization/corporatization of SONELGAZ (including further financial restructuring, spin-off and divestiture of its external activities, increased managerial and operational efficiency) and sector monitoring and evaluation may reflect a satisfactory plan for proposed Power IV Project. On sector reforn and under the Ministry of Energy and SONELGAZ supervision, a Study on the restructuring of the power sector is being prepared by an International Consultant. The recommendations of this study will lay-down the policy framework for the proposed Power IV Project. The preliminary recommendations of the study is expected to be completed by December 1997. 26. As part of the Government's Economic Development Program in the Energy Sector, the Government has declared its intention to introduce private operators in electricity generation in order to alleviate the large investment requirement needed in the generation expansion program, and to that effect, intends to revise its electricity law. 27. The Bank should continue monitoring SONELGAZ's financial performance until its in line with international standards. SONELGAZ's main indicators of success for its future operation remain the same as its current ones: minimization of losses, achieving high level of reliability, and more efficient management of its accounts receivable. SONELGAZ has agreed to monitor the project, its financial and operational performance through performance indicators as outlined in Part II, Table 5. Future operation will rely on SONELGAZ ability to carry out and complete the Government sector reform and strategy program. H. Key Lessons Learned 28. Major project delays were probably unavoidable given the prevailing security situation. The main lessons learned are: (a) Cash generation as defined under the project showed extreme volatility over the years. A rate-of-return covenant might have been more objective and understandable by all stakeholders, in spite of local inflation. (b) Stronger financial restructuring measures might have been appropriate during preparation, before Board approval. It is necessary to have a financial management structure conducive to efficient resource allocation and financial planning before project implementation. SONELGAZ had no hedging capability to deal with excessive foreign exchange losses. (c) Training to the Borrower on Bank procurement guidelines should have been provided in order to improve the procurement process. (d) If adequate, tariff levels commensurate with inflation, and structure or sector policy reforms are necessary. They should be implemented before loan effectiveness, given the difficulties of achieving such adjustments subsequently.  11 (e) In order to ensure monitoring of project sustainability, the Bank should offer assistance to the Borrower to implement a system of key performance indicators (for implementation and development objectives) to follow-up on project operation. (f) Complete ownership of the project by the implementing agencies should be assured from the outset in order to achieve better project performance. SONELGAZ's statutes (EPIC) does not permit actions to be taken independently from Government stakeholders. (g) A strategy of pursuing sector reforms, including corporatization of SONELGAZ, the establishment of independent regulation and the pursuit pf private sector investors, perhaps initially for electricity generation to alleviate large investment requirement, would likely have had far more success.  12 IMPLEMENTATION COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) PART II - STATISTICAL ANNEXES Table 1: Summary Assessments A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic v Sector policies __ Financial objectives . I Institutional development / Physical objectives _ Poverty reduction Gender concerns Other social objectives Environmental objectives . Public sector management I _ Private sector development / Otier (indicate) . Likely Unlikely Uncertain B. Project Sustainability It C. Bank Performance Highly Satisfactory Satisfactory Deficient Identification / Preparation I Appraisal / Supervision _ . Highly Satisfactory Satisfactory Deficient D. Borrower Performance Preparation _ Implementation / Compliance with covenants I Operation: Trans/Distr Tech. losses I Highly Satisfactory Satisfactory Unsatisfactory E. Assessment of Outcome _  13 IMPLEMENTATION COMPLEIION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) Table 2: Other Bank Loans/Credits Loan/Credit Objectives Date of Status Approval Preceding Operations First Power Project As part of the 1973-78 power expansion program, 1974 Project completed (Loan 997-AL, US$38.5m) help finance construction of gas turbine plants, 1981; fully disbursed substations, and dispatch system. by March 31, 1980. Improve the organization and management of the electric power sector, especially its financial aspects. Second Power Project As part of 1976-80 power expansion program, help 1976 Project completed (Loan 1293-AL, US$57.5m) finance the erection of 3,400 km of transmission 1981; disbursement lines. completed March 28, 1981; undisbursed Improve SONELGAZ' organization and balance (US$1.5m) development, canceled Oct. 5, 1981. Subsequent Operations Fourth Power Project Assist the Government in issuing policies for the In preparation. power sector and prepare the legal and regulatory framework. Assist SONELGAZ in (a) increasing generating capacity; and (b) improving sector efficiency by reducing system losses, establishing financial viability and corporate autonomy, and mobilizing resources through the introduction of IPPs.  14 IMPLEMENTATION COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) Table 3: Schedule Stage of Project Cycle Planned Date Actual Date/Estimate Identification March 1986 March 1986 Preparation June 1986 June 1986 Appraisal March 1987 Oct. 1987 Negotiation Sept. 1987 May 1988 Board presentation Dec. 1987 June 29, 1988 Signing Dec. 1987 Nov. 13, 1989* Effectiveness Nov. 1988 March 29, 1990 Loan closing Dec. 31, 1995 June 30, 1997 *Delay in signing due to Borrower's decision to postpone signature until Government (a) decided on 10 percent tariff increase, and (b) fnalized agreements with the cofmancing agency, the Exim Bank of Japan.  Implementation Completion Report Algeria-Power I1l (Loan 2981-AL) Table 4: Loan Disbursements-Cumulative Actual (in US S millions) Fiscal Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 Appraisal Estimate-aniual 3.20 24.00 35.20 35.20 28.80 19.20 14.40 0.00 0.00 Appraisal Estimnate-ciiumitilative 3.20 27.20 62.40 97.60 126.40 145.60 160.00 160.00 160.00 Actual annual 1.47 16.76 19.75 11.91 28.27 38.36 10.76 7.33 1.62 Actual cumulative 1.47 18.23 37.98 49.90 78.16 116.52 127.28 134.61 136.23 Actual as % of Estimate 0.46 0.67 0.61 0.51 0.62 0.80 0.80 0.84 0.85 Actual % disbursed 0.01 0.11 0.24 0.31 0:49 0.73 0.80 0.84 0.85 Date of Finial Disbursement 31-Oct-97 IBRD Loan was UIS $ 159.4 million: US $ 600,000.00 was canceled because of inisprocuremnent. Graph: Loan 2981-Disbursements | Appraisal Estimate-cumulative -* Actual cumulative 160.00 140.00 ....... ... ..... 120.00 0 100.00 - 0.00 _ 1989 1990 1991 1992 199" 1994 1995 1996 1997 Fiscal Year  16 Table 5: Key Indicators for Project Operation l__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _Y ear Indicators for SONELGAZ Unit 1997- 1998- 1999 -2000-2001 and beyond 1. Markd Electricity coverage percent Customers at year's end (breakdown by category) thousand Annual electricity production, total: GWh -- Hydroelectric GWh -- Oil-fired plant: GWh -- Gas turbine: GWh Annual sales GWh Annual load factor percent Average tariff of electricity sold DA/kWh Average tariff of electricity purchased DA/kWh ___ Fuel-oil price DA/ton Gas price 2. Efficiency Employees number Employees per thousand customers number Waiting time for a new customer to be connected days Average duration of outages hours/cust Frequency of outages times/year Sales per employee MWh Energy losses percent X Fuel consumption, fuel oil, gr./kWh Fuel consumption, coal, kCal/kWh Production cost, total DA/kWh -- Fuel cost DA/kWh --Energy purchased DA/kWh -- Salaries DA/kWh -- Operation and maintenance DA/kWh -- Depreciation charge DA/kWh Availability of thermal plants percent 3. Financial Rate of return on assets in operation percent Cash operating margin percent Self financing percent Debt service coverage ratio number Debt/Equity ratio number Accounts receivable days of billing Arrears, total days of -- Govemment billing  17 IMPLEMENTATION COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) Table 6: Studies Included in the Project Study Purpose Status Impact Increase system efficiency Loss Reduction Study (50 Assist SONELGAZ in Done. man-months, US$0.70m) reducing power system losses Improve SONELGAZ' Management Information Assist SONELGAZ in Due Dec. 31, 1997. managerial Capabilities. System Study (130 man- improving its organization months, US$2.0m) and accounting system; study implemented by SONELGAZ with assistance of consultant Development of a Combined-Cycle Study Assist SONELGAZ in Done. technological framework (20 man-months, revising its investment for production capacity US$0.15m) program and defining alternatives. optimal power generation option, including the combined-cycle alternative; study implemented by SONELGAZ with assistance of consultant Manpower Development Assist SONELGAZ in Not completed due to Study (30 man-months, defining training needs security reasons. US$0.50m) Sources: SAR and project monitoring reports.  18 Table 7: Project Costs (in US $ millions) Appraisal estimate Actual Vanance in % Local I Foreign I Total Local Foreign Total A: 220-kv Transmission lines 49.63 95.07 144.70 11.80 66.79 78.59 0.54 B: Substations 60.89 141.73 202.62 41.15 149.97 191.13 0.94 C: Others:Equipment-Information systems-T.A and Training 23.63 20.25 43.88 15.49 27.10 42.59 0.97 Total 134.15 || 257.05 391.20 68.44 245.28 1 313.73 0.80 Above table exclude IDC estimates Table 8: Project Financing (in US $ millions) Appraisal estimate Actual Sources of Financing Local Foreign Total Local Foreign -Total Sonelgaz cash Generation 26.83 0.00 26.83 13.70 0.00 13.70 Government 107.32 10.55 117.87 54.75 0.00 54.75 |BRD Loan 0.00 160.00 160.00 0.00 136.20 136.20 Other Sources/Japan Eximbank 0.00 86.50 86.50 0.00 74.70 74.70 Total I 134.15 257.05 391.20 68.44 210.90 279.35_| * Above table exclude IDC estimates  1 9 Table 9: Economic Analysi (in DA millions at 1997 prices) Years Investment Inc. Fuel Inc. Total Inc Net Cost 0 & M Inc. Costs Revenue Benefits 1989 2,267 -2267 1990 2,340 107 684 3,131 664 -2,467 1991 4,182 255 1445 5,882 1680 -4,202 1992 4,893 551 3467 8,911 3177 -5,734 1993 6,107 897 654 7,658 2413 -5,245 1994 6,779 395 863 8,037 2597 -5,440 1995 7,670 1083 2005 10,758 5152 -5,606 1996 8,770 803 786 10,359 6409 -3,950 1997 803 786 1,589 6409 4,820 1998 803 786 1589 6409 4,820 1999 803 786 1589 6409 4,820 2000 803 786 1589 6409 4,820 2001 803 786 1589 6409 4,820 2002 803 786 1589 6409 4,820 2003 803 786 1589 6409 4,820 2004 803 786 1589 6409 4,820 2005 803 786 1589 6409 4,820 2006 803 786 1589 6409 4,820 2007 803 786 1589 6409 4,820 2008 803 786 1589 6409 4,820 2009 803 786 1589 6409 4,820 2010 2144 803 786 1589 6409 2,676 2011 803 786 1589 6409 4,820 2012 803 786 1589 6409 4,820 2013 803 786 1589 6409 4,820 2014 803 786 1589 6409 4,820 2015 803 786 1589 6409 4,820 2016 803 786 1589 6409 4,820 2017 803 786 1589 6409 4,820 2018 803 786 1589 6409 4,820 2019 803 786 1589 6409 4,820 2020 -1548 803 786 1589 6409 6,638 ERR= 9  20 IMPLEMENTATION COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) Table 10: Status of Legal Covenants Loan Ref. Covenant type Present Fulfillment Description Comments Status Date* 2981- 3.01 Sectoral/cross- C 8/4/94 Guarantor to ensure that all its entities Done. AL sectoral resource pay SONELGAZ all amounts due by allocation 12/31/87. 3.01 Sectoral/cross- NC Guarantor to ensure that all its agencies Average delay is three to (B) sectoral resources pay SZ within 30 days of receipt of bills. four months. allocation 3.01 Sectoral/cross- NC Guarantor to ensure that on December Average delay is three to (C) sectoral resource 31 of each year, amounts due to SZ shall four months. allocation not exceed an amount equal to the average of two months'billings. 2.02 Flow and C 1/21/91 SZ to open and maintain in dollars a Done. utilization of Special Account at the central bank. project funds _ 3.03 Implementation C 1/21/91 SZ to employ consultants to carry out Most studies were carried (A) studies on loss reduction, manpower out; MIS study is being management, management information implemented and should systems, and the use of combined cycle. result in improving the managerial and financial capability of SONELGAZ. 3.04 Implementation C 4/30/90 SZ to furnish to the Bank a detailed staff Training being implemented training program with an after review by the Bank. implementation schedule, and to take all actions necessary to implement it. 5.01 Accounts/audit C 8/4/94 SZ to have its financial statements, Audits by SNC are up to project cost SSAs and SOEs audited by date. Opinions on financial independent auditors, and to furnish statements qualified. audit reports to the Bank. Improvement and accounting training programs underway. Corrective actions are to be taken by SONEGAZ as requested by the Bank. 5.02 Financial CP SZ to generate internal funds to cover See sideletter covenants, (A) performance/ debt service and to contribute to its below. generate revenue capital expenditures. from beneficiaries 5.02 Accounts/audits C 7/19/91 SZ to prepare financial forecasts to 1994-2000 financial (B) review compliance with cash generation projections prepared during targets. November 96 supervision.  21 Sideletter Covenants IA(A) Financial NC SZ to generate internal funds of at least Tariff increases for 96 and performance 3% in 1990, 7% in 1991, 13% in 1992, 97 approved by GOA and and 15% thereafter, of 3-year capital effective March 96. The expenditures, after debt service. SFR was 9.2% for 95 and 7.7% for 96 and 5.2% for 97 as compared to the 15% covenanted. IA(B) Financial NC Debt service coverage: net revenues to The debt service coverage performance cover debt service and contribute to ratio (0.5 compared with capital expenditures as stupulated in 1.3 covenanted) and the A(A). self-financing ratio (9.27% compared with 15% covenanted) were in default in 1995. IB(A) Financial NC SZ to reduce inventories to 12 months Inventories have been performance consumption by end 1990, to 10 months reduced through online by end 1991, 8 months by end 1992, and stock information system, 6 months by end 1993. but still exceed target by 11 months. I Financial NC SZ to reduce its receivables to 4 months At the end of 1995, performance of billings in 1990, 3 months in 1991, receivables are at 2.8 and 2 months by end 1992. months. Efforts toward further reduction continue. Financial CP 4/3/90 SZ to select types of financing whose Terms have been gradually performance repayment periods approach the lengthened. depreciation periods of the works financed. Accounts/audit CP 12/19/95 SZ to adjust the depreciation of fixed Underway; auditors assets to realistic useful lives. presently working on new guidelines and accounting system for fixed assets. Financial CD 4/3/90 SZ to implement tariff increase of June 1989 increase implemented, performance 30, 1989 as well as future tariff increases. as well as later increases approved by GOA (1996 and 1997 to date). Financial C 4/3/90 SZ to review on a continuous basis the Need is reviewed performance ned to adjust tariffs to meet financial periodically, in relation to objectives. economic cost and financial viability. Serious attention to projected exchange rate fluctuations and inflation is needed. Financial C 8/4/94 SZ to reschedule in 1989 its internal debt Debt restructuring performance incurred between 1980 and 1985. completed Financial C 8/4/94 SZ to cause, by 12/31/89, its former Done. performance subsidiaries to pay all their debts due as of 12/31/86.  22 *Date of Form 590 in which compliance first noted. Covenant Class: 1. Account/audit 2. Financial performance 3. Management aspects of the project 4. Special conditions relating to the implementation of strategics, critcria, and procedures 5. General and institutional conditions Status: C = Complied with CD = Compliance after delay CP = Complied with partially NC = Not complied with  23 IMPLEMENTATION COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) Table 11: Bank Resources -Staff Stage of Project Cycle Planned Actual Planned Actual (staff weeks) (staff weeks) (US$000) (US$000) Preparation n.a. 117 n.a. $259 Appraisal n.a. 42 n.a. $110 Negotiation through Board Approval n.a. 21 n.a. $55 Supervision n.a. 158 n.a. $498 Completion/Closing 8 6 $28 $14 TOTAL 8 344 $28 $934  24 IMPLEMENTATION COMPLETION REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA THIRD POWER PROJECT (LOAN 2981-AL) Table 12: Bank Resources -- Missions Performance Rating Stage of Month/ No. of Staff- Specialized Staff Implementation Development Type of Problem Project Cycle Year Persons Weeks in Skills status objectives Field Represented Through March 3 6 Power Engineer n.a. n.a. Appraise and design Appraisal 1986 Financial Analyst project. Economist June 1986 3 8 Power Engineer n.a. n.a. Prepare project; Financial Analyst discusses needed studies; Economist discuss financial restructuring of SONELGAZ. Appraisal Oct 1987 3 9 Power Engineer n.a. n.a. Revise scope of project through Financial Analyst based on review of Board Economist proposed components; Approval discuss fnancing plan, environmental impacts, financial restructuring of SONELGAZ. Feb-March 3 5 Financial Analyst n.a. n.a. Discuss Bank's 1988 Loan Officer disbursement procedures; Senior Country conduct disbursement Officer workshop. Supervision June 1989 1 1 Power Engineer 2 2 Urge SONELGAZ to speed up loan signing and effectiveness (delay due to Borrower's decision to postpone signature until Govt (a) decides on 10% increase, and (b) finalizes cofmancing agreements with Japan Exim Bank). Jan-Feb Power Engineer Monitor progress of 1990 3 4.5 Financial Analyst 2 2 procurement and urge Economist Borrower to comply with financial covenants.  25 Nov 1990 1 1 Power Engineer 2 2 Monitor implementation progress, issuance of bidding documents for transmission line construction and requests for proposals for studies. May-June 2 4 Financial Analyst 2 2 Monitor implementation 1991 Power Engineer progress and lack of improvement of SONELGAZ' financial status; discuss possible Fourth Power Project on distribution of electricity and natural gas. Nov-Dec 2 4.5 Financial Anslyst 2 2 Monitor implementation 1991 Power Engineer progress and identify Fourth Power Project; discuss making fourth project conditional on improvement of SONELGAZ' financial performance. May 1993 2 2 Financial Analyst 2 2 Monitor implementation Power Engineer progress; do detailed financial assessment of SONELGAZ.; discuss extending closing dates of Bank and Exim loans to Dec 31, 1996 (done). Dec 1995 2 1 Financial Analyst I I Monitor implementation Power Engineer progress; discuss SONELGAZ' renewed request for Fourth Power Project. Completion/ June 1997 2 3 Power Engineer I I Prepare Implementation Closing* Financial Analyst Completion Report; discuss Fourth Power Project. *Delay in completion due to security situation in Algeria. Performance Ratings: I- Satisfactory. 2--Moderate problems. 3--Major problems. U--Unsatisfactory.  26 APPENDIX A: AIDE MEMOIRE OF THE ICR MISSION  27 ALGERIE Troisieme Projet d'Electricite (pret No.2981-Alg) - Mission d'Achevement Quatrieme Projet d'Electricite - Mission de Pr6paration Assistance Technique - Projet Solaire PV (FEM) et don IDF DU 13 AU 26 JUIN 1997 AIDE-MEMOIRE 1. Une mission de la Banque Mondiale composee de Messrs. Rene Mendon,a et Ahmed El-Hamri a eu des reunions avec les representants de la Sonelgaz du 13 au 26 juin 1997 a la residence El-Mithak - Alger pour superviser et preparer le rapport d'achevement du troisieme projet d'electricite dans le cadre de la cl6ture du pret et suivre la preparation du quatrieme projet d'electricite et du projet solaire photovoltaique (Fond de 1'environnement Mondiale - FEM). En outre les possibilites d'utiliser des dons IDF ont ete enumrn&es. En ce qui concerne le cofinancement (financement conjoint: 65%/35%) assure par l'Eximbank du Japon, celui-ci sera cl6tur6 selon les accords en Octobre 1997. 2. La mission tient a remercier vivement les representants de la Sonelgaz pour leur chaleureux accueil et leur collaboration efficace. Le present aide-memoire resume les principaux sujets discutes et les accords conclus lors de cette mission que la Banque confirmera par lettre officielle, une fois la mission rentree a Washington. La liste de personnes rencontrees est presentee en Annexe 1. A. Achevement du Troisieme Projet d'Electricite: Introduction 3. La mission a confirme aux representants de la Sonelgaz que, dans le cadre des directives et accords des prets de la Banque Mondiale, les "agences" beneficiant des emprunts, ont la responsabilite de preparer, apres une cl6ture du pret, un rapport d'achevement du projet conjointement avec la Banque. Le rapport de l'emprunteur constitue la dernire etape du suivi du troisieme projet d'electricite. I1 devrait etre pr6pare par 1'entreprise et soumis a la Banque dans un delai de six mois apres la cl6ture du pret, c'est a dire, le 31 d6cembre 1997. La mission a recommande a Sonelgaz de saisir l'opportunite pour faire une evaluation retrospective du projet qui vient de s'achever et presenter son point de vue dans le but de determiner l'impact du projet sur la performance des activites de Sonelgaz et de preciser dans quelle mesure le projet a atteint ses objectifs ainsi que de s'exprimer librement sur la qualite de l'action de la Banque. La Banque de son cote, preparera un rapport d'achevement du projet dans lequel seront inclus ces commentaires. II sera tenu compte dans ce rapport des commentaires de 1'emprunteur qui  28 seront annexes dans le rapport final d'achevement. Le rapport sera transmis aux membres du Conseil d'Administration de la Banque. 4. La Sonelgaz s'est engagee A preparer un rapport preliminaire d'ach&vement et de le transmettre A la Banque avant la fin juillet 1997. Le rapport d'achevement definitif sera transmis par Sonelgaz A la Banque avant la fin Septembre 1997. Ce rapport devrait contenir une partie analytique d'environ 10 pages ainsi que des annexes detaillees se rapportant aux objectifs realis6s. La mission a suggere a la Sonelgaz que ce rapport contienne en outre l'analyse retrospective du projet, le point sur les realisations physiques, des problemes rencontres dans la passation des marches ainsi que sur les decaissements du pret par rapport aux objectifs envisages initialement (tel que presentes en Annexe 2). A cet effet, la Banque a remis A Sonelgaz un prototype de rapport d'achevement fait par d'autres emprunteurs. Point de situation du Projet 5. Obiectifs du projet. Les objectifs du projet tels qu'ils ont ete defini par le rapport d'evaluation initiale sont les suivants: a). assainir et renforcer la situation financiere de la Sonelgaz A travers un plan de redressement b). permettre A l'entreprise de continuer l'execution des investissements cles de l'entreprise dont l'impact serait de renforcer et d'ameliorer le systeme energetique du pays, et d'optimiser la productivite des investissements courants dans le secteur dlectricite. c). ameliorer et renforcer la qualite du service de l'offre d'energie et sa fiabilite. Ces objectifs representent, pour la Sonelgaz, un aspect important de son plan de developpement. A l'effet de concretiser ces objectifs, les composantes retenues sont decrites dans ce qui suit: 6. Description du projet. a). Construction de 487 km de lignes de transport de 220 kV b). Construction et/ou extension de sept (07) poste de transformation (220/60 kV; 2180 MVA) c). Acquisition d'equipement et de vehicules specialises pour ameliorer l'efficacite operationnelle de la Sonelgaz. d). Formation et acquisition de materiel informatique et de logiciels e). Etablissement de services-conseil ingenierie, pour des etudes sur la reduction des pertes, sur le developpement des ressources humaines, sur la mise en place des systemes informatique et financier, et sur l'analyse optimale technico-economique des diff6rents types de production de l'energie electrique. 7. Obiectifs phvsigues. La realisation des objectifs physiques du projet sera achevee en totalite a l'exception des deux lignes de transport (Jijel/Mansouriah/El-Kseur) et de la fourniture des postes int6rieurs. Sur un total de US$245,3 millions (prets Banque/Exim  29 bank), A fin Mai 1997, il resterait en solde sur tous les contrats, US$31,5 millions. Sur ce total, US$14,6 millions sont prevus pour etre decaisses avant le 31 Octobre 1997, US$9,5 millions sont A resilier pour fin de contrat et US$7,4 millions concemant le contrat d'acquisition des equipements pour postes interieurs seront A decaisser en dehors de la couverture financiere de Banque/Exim bank du Japon pour parachever le Projet. 8. Objectifs financiers. L'actualisation des donnees du modele financier de l'entreprise n'etant pas completee, cette evaluation prends en consideration les chiffres comptables r6els pour 1994-95 et preliminaires pour 1996. De ce fait, les tendances financieres du modele ne seront verifiables qu'apres l'audit des comptes de 1996. Donc, cette evaluation tient compte de deux situations. Une evaluation qui est representative des donnees du modele d'analyse financiere (base sur les tendances du modele financier de l'entreprise), et la seconde qui est basee sur les donnees comptables reelles telles qu'elles figurent dans les comptes audites de 1995 et 96. Par rapport A l'objectif d'autofinancement de 15%, Sonelgaz a atteint une capacite de fmancement de 22% compte non tenu de la rdevaluation des immobilisations et de celle de la dette devise. Le ratio de couverture du service de la dette a atteint, A fin 1996, 1.2 sur un objectif de 1.3. Le recouvrement des creances clients s'est sensiblement ameliore, et a atteint 2.6 mois du chiffre d'affaires sur un objectif de 2 mois. Dans ce contexte, la situation financiere de Sonelgaz s'est amnelioree au vu de sa performance etalee sur les annees 1994-96. Au vu du plan de redressement, cette amelioration continuera dans les moyen et long termes. 9. Indicateurs cls de perfonnance du prolet. La Sonelgaz utilise un ensemble d'indicateurs techniques et de gestion qui permettent d'evaluer sa performance. A titre indicatif, les indicateurs cles de performance presentes dans l'Annexe 3 seront etudies, completes eventuellement et utilises par la Sonelgaz pour faire le suivi de performance futur des activites de la Sonelgaz. 10. Renseignements et donnees com=ldmentaires. Les renseignements et les donnees statistiques de la Sonelgaz qui n'ont pas ete delivres A la mission seront envoyes A la Banque Mondiale par courrier au plus tard A la fm juillet 1997 conformement A l'Annexe 2. Neanmoins, quelque documents et donnees ont ete dejA remis a la mission. B. Preparation du Ouatrieme Projet d'Electricite. 11. Un expose sur le 4eme projet a ete fait par la Sonelgaz. I1 a permis d'actualiser les aspects techniques et financiers lies au reseau de transport et des BCC. Les autres volets du projet demeurant inchanges. iA est entendu que les moyens d'exploitation et les aspects formation/etudes seront definis ulterieurement. La consistance physique du projet se presente comme suit: - Reseau HT: 951 kms et 18 postes HT - Reseau Distribution: 9400 kms MT/BT et 4800 postes plus equipements TST. - (02) BCC A Oran et Constantine  30 Le cofit du projet s'etablit A 623 millions de dollars dont 290 millions de dollars en devises et 332 millions de dollars en monnaie locale pour une parit6 de I $US=60 DA. Ce cofit de base inclue une provision pour imprevus physique et financier. 12. Etude Institutionnelle. La Banque a rappele la saisine du Ministere de l'Energie et des Mines dans sa correspondance du 28 mai 1997 et la reponse qu'elle y a apporte. Elle confirme que les resultats et les recommnandations de cette etude permettront entre autre de proposer et de definir une politique strategique A court terme du secteur ainsi que les parametres institutionnels sur lesquels sera adosse le Quatrieme Projet d'Electricite. Selon les informations dont dispose la Banque, la phase une "Recommandations des options institutionnelles du secteur electrique" serait probablement finalisee a fin septembre 1997. En attendant les resultats de l'etude et la strategie qui sera definie, la Banque en liaison avec la Sonelgaz, continuera A finaliser les contours du Quatrieme Projet d'Electricite en vu de l'evaluer si possible avant la fin de l'annee 1997. Elle souhaite A cet effet, recevoir l'etude technico-economique definitive de Sonelgaz avant la fin Septembre 1997. C. Activit6s - Assistance Technique. 13. Projet Solaire PhotovoltaYque - FEM. Le dossier relatif au projet solaire PV a ete revu avec le Directeur Recherche et Developpement de Sonelgaz. Il a ete prevu de remanier le document du projet pour tenir compte des remarques et eclaircissements qui ont eu lieu durant la reuni on. Les documents (PDF Block A et le document de conception du projet) seront transmis par Sonelgaz a la Banque a la mi-juillet 1997. 14. Don sur le dveloppement institutionnelle (IDF grant). Un expose sur la possibilite de disposer du don IDF a et6 fait par la mission. Ce don porte sur le developpement institutionnel et pourrait etre utilise pour l'amelioration des economies d'energie, l'externalisation et/ou l'essaimage, et les aspects de dossiers d'appels d'offres touchant a la production independante privee. Les enveloppes par projet sont au maximum US$500.000 par activite A mobiliser au plus sur deux annees, sur la base de fiche de projet (requ8te) a proposer par le beneficiaire A la Banque. A ce titre, la Sonelgaz transmettra une requete a la Banque relative A l'amelioration de ses capacites de management (formation, organisation, etc..) II est mentionne que ces projets pourraient etre finances par des dons car non rentables. Alger, le 25 Juin 1997. Pour la Banque Mondiale: Rend Mendonca  31 ANNEXE 1 LISTE DES PERSONNES RENCONTREES NOM FONCTION MM. Benghanem A. Directeur General Halimi A. Sous Directeur des finances Abrous C. Chef de division tresorerie centrale Bouferguene A. Chef de division investissements Mitiche R. Chef de projet Kaci M. Ingenieur d'etudes Benkhalfallah Chef de dept. engineering - postes Kichou Chef de dept. engineering - lignes Oubraham H. Chef de projet - etude de tresorerie Derrar N. Directeur recherche et dvt. Guezam S. Chef de projet recherche et dvt. Benmiloud F. Ingenieur recherche et devt. Fatnasse L. Ingenieur recherche et devt. Mne. Belkahfa F. Sous Directeur de la formation  32 ANNEXE 2 Le raMport d'achevement de la Sonelgaz devrait analyser/contenir les sugets suivants: Evaluation retrospective Op6ration future du projet Indicateur de performance technique et gestion Contrat-Plan Sonelgaz/Gouvernement Realisation physiques du projet Passation des marches et decaissement du pret Etudes: reduction des pertes, dvt. ressource humaine, systeme informatique et financiere, optimisation des different type de centrale de production) Crdances et arrieres statistiques 1988-1997 Baremes des tarifs 1988-1997 Formation du personnel Assistance technique - consultants Echeancier d'investissement projet 1988-1997 Taux de rentabilite economique interne du projet actualise Echeancier d'investissement total: 1988-1997 Finances: statistiques 1988-1996 et previsions Inflation et valeur du dollar: statistiques 1988-1997 Prix du fioul et du gaz naturel  33 ANNEXE 3 Indicatewrs clis de performance pour la Soneigaz (uniti). 1. Efficacitk: Employes (nombre) Employes pour mille clients (nombre) Temps d'attente pour un nouveau raccordement (ours) Duree moyenne des pannes (bres/coupures) Frequence des pannes (nbre de fois/an) Ventes par employe (MWh) Pertes d'energie (pourcentage) Consommation combustible, foul (gr/kWh) Consommation combustible, gaz (gr/kWh) Coiit de production, total (DA/kWh) - Couit carburant (DA/kWh) - Energie achetee (DA/kWh) - Salaires (DA/kWh) - Exploitation et entretien (DA/kWh) - Couit d'amortissement (DA/kWh) Disponibilit6 des centrales thermiques (pourcentage) 2. Marchi. Couverture service electrique (pourcentage) Clients en fin d'annee --ventilation par categorie (milliers) Production electrique annuelle, total (GWh) - Hydro6lectrique (GWh) - Centrales alimentees au foul (GWh) - Centrales alimentees au gaz (GWh) Achats annuels d'electricite (GWh) Ventes annuelles (GWh) Facteur annuel de charge (pourcentage) Tarifmoyen de l'electricite vendue (DA/kWh) Tarif moyen de l'electrice achetee (DA/kWh) Prix du fioul aux centrales (DA/tonne) Prix du gaz aux centrales (DA/tonne) 3. Financier. Rentabilite des actifs en exploitation (pourcentage) Marge d'exploitation liquide (pourcentage) Autofinancement des investissements (pourcentage) Ratio de couverture du service de la dette (nombre) Ratio d'endettement (nombre) Comptes crediteurs (jours de facturation) Arrieres, total (ours de facturation)  34 APPENDIX B: BORROWER'S CONTRIBUTION AND COMMENTS TO THE ICR  35 Etabkissement Publ2c carac_*re Industriel et Commercial RAPPORT D'ACHEVEMENT (RAPORT PRrLIMINAI) ALGE REB TROISXEME PROJET D'ELECTRICITE PRET No 2981 - AL Novembre 1997 DIRECTION DES FINANCES ET BUDGET SOUS DIRECON FINANCEs DIVISION ENGENIERIE FINANCIERE  36 TAUX DE CHIANGE (m%x d mois de noveembre de chaque annde) Unil6 moT6tak = Dinar algdricn 1989:1 USD = 8.2 DA 1990:1 USD * 10,9 DA 1991: 1 USD = 22,3 DA 1992: 1 USD = 22,6 DA 1993:1 USD = 24,1 DA 1994: 1 USD 42,4 DA 1995: 1 USD = 51.1 DA 1996: 1 USD = 55.5 DA 1997:1 USD = .56,7 DA X tRCrCE BUDGETAIRE: 1 Janyier au 31 Dt5cembrc. POlDS ET MESURES kVA = kdlo VoIL Amp6e kW = kilo.Wau kWh = kilo Watt heure Gh 1.000.000 kWh kV = 1.000 Volt MW L .00 I-W  37 TABLE DES MATMIRES Prffacc... PARTIE I: EVALLUATION DE L'EXECUT1ON DU PROJET A. Expos6 des Objectits - Principaux objecti