Algeria - Industrial Restructuring Project

 Industrial Restructuring Project Report No: ; Type: Report/Evaluation Memorandum ; Country: Algeria; Region: Middle East And North Africa; Sector: Industrial Restructuring; Major Sector: Industry; ProjectID: P004925 The Algeria Industrial Restructuring Demonstration Project, supported by Loans 3210-14-AL for US$99.5 million was approved in FY90. The loans were closed in FY96 with six months of delay, and US$23.9 million was canceled. The Implementation Completion Report (ICR) was prepared by the Middle East and North Africa Regional Office with Annexes contributed by the Borrower. Designed to support Algeria’s economic reform program, the project was an important aspect of the Government’s strategy to strengthen the supply response of the productive sector. The project anticipated that the successful restructuring of three productive and one consulting/service enterprises in the public sector would provide the experience to be replicated on a larger scale in the industrial sector. The project had three components, each with a specific objective. The first was to help three representative public industrial enterprises to restructure technically, financially and managerially in order to become more efficient and competitive. The second was to help the Entreprise Nationale d’Organisation et d’Informatique (ENORI) to improve its services and strengthen its management consulting activities. The third included technical assistance to develop a program to restructure other industrial enterprises willing to follow the example of the first three. The project ran into problems from the outset. Because of a lack of commitment to reform by the parastatal shareholders of the enterprises to be restructured (Fonds de Participation), the loan became effective only some 14 months after its approval, and further implementation delays occurred as the enterprises struggled with the Bank’s ICB procedures. Throughout the implementation period, the shareholders of the beneficiary enterprises were in conflict with the Bank as they questioned not only their own role and responsibilities vis-a-vis the project, but also the whole investment program. The target enterprises also faced serious difficulties in obtaining local bank guarantees and foreign exchange for their imports. Moreover, the devaluation of the Algerian dinar, liberalization of imports and economic recession in the early 1990s, created a financial crisis for the beneficiary enterprises. In an effort to save the project, the Bank began developing a new strategy in 1992/93, using the services of an international management consulting firm. In February 1993, the Bank suspended all further disbursement pending the result of its reappraisal. The new strategy called for the deletion of certain investments and reorientation of some activities. However, the new strategy proved largely ineffective under the prevailing economic conditions. None of the main project objectives were achieved. In the face of weak demand and import competition, capacity utilization in the target enterprises has remained low and on a declining trend since 1992/93. Two of the enterprises have been loss-making since 1990–the third had a net loss during 1995. All enterprises are in serious financial crises, incapable of achieving any financial restructuring. No noticeable improvements have taken place in the management of the enterprises, and there are no plans to bring about recovery from the current dismal situation. To explain this outcome, the ICR states: “given the economic conditions prevailing in Algeria from 1986 to 1996, and the constraints under which public enterprises operated, the demonstration effect sought was unlikely to materialize unless the macroeconomic reform program resulted in concrete action plans favorable to these enterprises