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

Document of The World Bank Report No: 21778-AL PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$18.0 MILLION TO THE PEOPLE'S DEMOCRATIC REPUBLIC OF ALGERIA FOR AN ENERGY AND MINING TECHNICAL ASSISTANCE LOAN (EMTAL) February 2, 2001 Infrastructure Development Group Middle East and North Africa Region  CURRENCY EQUIVALENTS (Exchange Rate Effective July 2000) Currency Unit = Algerian Dinar (DZD) DZD 1.0 = US$.014 US$1.0 = DZD 72.26 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ANCM Agence Nationale de Contr6le des Mines MOF Ministiy of Finance ANPM Agence Nationale du Patrimoine Minier MW Megawatts ASM1DAL Entreprise Nationale des Engrais et NAFTAL Societe Nationale de Commercialisation des Produits Phytosanitaires Produits Petroliers BAD Banque Algerienne de Developpement NAFTEC Societ6 Nationale de Raffinage du Petrole CAS Country Assistance Strategy NGO Non-Governmental Organization CPFA Country Profile of Financial NPA National Popular Assembly Accountability DGM Direction generale des Mines ORGM Office de la Recherche Geologique et Miniere E&P Exploration and Production PIP Project Implementation Plan FARAH Financial Accounting, Reporting and PMR Project Management Report Auditing Handbook FERPHOS Entreprise Nationale du Fer et des PMU Project Management Unit Phosphates FMS Financial Management System PPF Project Preparation Facility GDP Gross Domestic Product PPIAF Public-Private Infrastructure Advisory Facility IBRD International Bank for Reconstruction and SA Special Account Development ICR Implementation Completion Report SGA Algerian Geological Survey IDF Institutional Development Fund SOE Statement of Expenditure LFC International Finance Corporation SOEs State-owned Enterprises IGF Inspection Generale des Finances SONATRACH Enterprise Nationale de Recherche, d'Exploration et de Commercialisation des Hydrocarbures LACI Loan Administration Change Initiative SONELGAZ Societe Nationale de l'Electricite et du Gaz LPG Liquified Petroleum Gases TA Technical Assistance MEM Ministry of Energy and Mines Vice President: Jean-Louis Sarbib Country Manager/Director: Christian Delvoie Acting Sector Director: Sonia Hammam Sector Manager/Task Team Leader: Zoubeida Ladhibi-Belk  ALGERIA ENERGY AND MINING TECHNICAL ASSISTANCE LOAN (EMTAL) CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 2 3. Sector issues to be addressed by the project and strategic choices 6 C. Project Description Summary 1. Project components 6 2. Key policy and institutional reforms supported by the project 8 3. Benefits and target population 8 4. Institutional and implementation arrangements 9 D. Project Rationale 1. Project alternatives considered and reasons for rejection 11 2. Major related projects financed by the Bank and other development agencies 12 3. Lessons learned and reflected in proposed project design 13 4. Indications of borrower commitment and ownership 13 5. Value added of Bank support in this project 13 E. Summary Project Analysis 1. Economic 14 2. Financial 14 3. Technical 14 4. Institutional 15 5. Environmental 16 6. Social 17 7. Safeguard Policies 18 F. Sustainability and Risks 1. Sustainability 18 2. Critical risks 19 3. Possible controversial aspects 20  G. Main Loan Conditions 1. Effectiveness Condition 20 2. Other 20 H. Readiness for Implementation 21 I. Compliance with Bank Policies 21 Annexes Annex 1: Project Design Summary 22 Annex 2: Detailed Project Description 28 Annex 3: Estimated Project Costs 42 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 43 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 44 Annex 6: Procurement and Disbursement Arrangements 45 Annex 7: Project Processing Schedule 54 Annex 8: Documents in the Project File 55 Annex 9: Statement of Loans and Credits 56 Annex 10: Country at a Glance 57 MAP(S) IBRD 29992  ALGERIA Energy and Mining Technical Assistance Loan (EMTAL) Project Appraisal Document Middle East and North Africa Region MNSID Date: February 2, 2001 Team Leader: Zoubeida Ladhibi-Belk Country Director: Christian Delvoie Acting Sector Dir.: Sonia Hammam Project ID: P067567 Sector(s): GP - Oil & Gas Transportation, NN - Mining & Other Extractive, PP - Electric Power & Other Energy Adjustment Lending Instrument: Technical Assistance Loan (TAL) Theme(s): Energy; Mining Poverty Targeted Intervention: N Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ Other: For Loans/Credits/Others: Amount (US$m): 18.0 Proposed Terms: Fixed-Spread Loan (FSL) Grace period (years): Years to maturity: 16.5 Commitment fee: 0.85% of Service charge: % undisbursed balances for first four years; 0.75% thereafter Front end fee on Bank loan: 1.00% Financing Plan: Source Local Foreign Total BORROWER 4.00 0.00 4.00 IBRD 1.80 16.20 18.00 Total: 5.80 16.20 22.00 Borrower: GOVERNMENT OF ALGERIA Responsible agency: MINISTRY OF ENERGY AND MINES Address: 80, Avenue Ahmed Ghermoul, Algiers, Algeria Contact Person: Ms. Nour-El-Houda Boughalem, Project Management Unit Manager Tel: 213-21-67-02-78 Fax: 213-21-67-03-37 Email: Nboughalem@Yahoo.Fr Estimated disbursements ( Bank FY/USSM): FY 2001 2002 2003 2004 2005 Annual 1.50 4.00 6.50 4.50 1.50 Cumulative 1.50 5.50 12.00 16.50 18.00 Project implementation period: 4.5 years: July 01, 2000 - December 31, 2004 Expected effectiveness date: 05/30/2001 Expected closing date: 06/30/2005 X:S PAD Fon R.v Mwdh, 2000  A. Project Development Objective 1. Project development objective: (see Annex 1) In December 1999, the Government of Algeria announced its new policy and strategic objectives for the energy and mining sectors. The main thrust of this policy is to: (i) improve efficiency in the energy and mining sectors while securing adequate energy supplies to the economy; (ii) allow market forces to play their respective roles; (iii) increase revenues by further developing untapped resources; (iv) address environmental concerns; (v) promote efficient use of public resources and protect public interest; and (vi) alleviate the financial burden of energy and mining enterprises on public finances. The proposed project will assist the Ministry of Energy and Mines (MEM) to implement the Government's market-oriented reform program in the energy and mining sectors, and would particularly assist in the: (i) separation of the role of the state, as policy maker, regulator and owner of mining resources, from its role as owner of public enterprises, enabling these latter to become fully commercially-oriented entities; (ii) development and implementation of a legal and institutional environment conducive to develop market mechanism, increase competition, and private sector participation; (iii) improvement of service quality and energy access, energy efficiency and environmental standards; and (iv) state-owned enterprises (SOEs)' efforts to adapt to sector reforms and the new business environment. Also, the proposed project will assist MEM in launching its first and innovative power generation plant(s) for 2000MW with private sector participation. 2. Key performance indicators: (see Annex 1) Progress towards achieving the project development objective will be monitored with the following key performance indicators for each of the sectors (mining, electricity and hydrocarbons): * increase in private sector participation a improvement in the efficiency of the restructured SOEs * increase in Government's revenues from the sector * reduction of pricing subsidies. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 15316-AL Date of latest CAS discussion: 02/05/96 The project will contribute to the Government of Algeria's objective of achieving sustainable economic growth through increased competition and private sector participation. The legal, regulatory and institutional reforms supported by the project will create an enabling environment conducive to more competition and private sector participation. It is expected that the next CAS, scheduled for FY2002, will take up these objectives. 2. Main sector issues and Government strategy: Main Sector Issues: The fundamental issues in the energy and mining sectors in Algeria are: * Volatility of oil and gas prices having considerable impact on the macro-economic situation - 2 -  of Algeria. Algerian economy is heavily dependent on the income from the export of crude oil, oil products and natural gas, which accounted for about 30% of GDP in 1998. Therefore the volatility of oil prices is having a considerable impact on the macro economic situation of Algeria. Because of the importance of hydrocarbons revenues, the collapse in intemational prices in 1998, which led to about 40% fall in total export revenues, largely explains the contraction of GDP growth from an average annual increase of 4.5 percent in 1995-1998, to an average decline of 0.4 percent between 1998-1999. Hydrocarbons are expected to remain the predominant source of export earnings for years to come, generating some U$15-20 billion per year during the period 2000-2005, depending on the crude oil price. Similarly to virtually all producer countries, Algeria experienced a fiscal crisis (limited access to foreign credit) and balance of payments crisis. It has tried to increase diversification of its source of revenues by investing more in export of petroleum products and natural gas. * Sector operated by quasi-monopolistic state-owned enterprises (SOEs) that play both state and commercial roles with limited managerial autonomy. In the hydrocarbons sector, SONATRACH focuses on oil and gas research, exploration, production, transport, marketing and export; NAFTEC is the refining enterprise, and NAFTAL is responsible for distributing hydrocarbons products within the country. In the electricity sector, SONELGAZ is a fully integrated SOE responsible for generation, transmission and distribution of electricity and distribution of natural gas by pipeline. As for the mining sector, exploration services are monopolized by the state-owned agency, Office de la Recherche Geologique et Miniere (ORGM), and industrialized operations are dominated by the enterprises of the state-controlled Holding Sid Mines. It has been recognized by all concemed parties, that this institutional arrangement gives limited incentives to stimulate managerial dynamism, control costs, and improve efficiency. * Pricing systems with levels below economic costs that provide implicit subsidies for certain consumers, and lead to wasteful consumption and limited cost efficiency. There is currently a distortion between domestic prices and intemational prices with an impact on Government revenues and equity distribution. In the hydrocarbons sector, a preliminary estimate of these subsidies amounts to about US$ 500 million per year. In the electricity sector, while high voltage and medium tariffs are already above and near their economic cost respectively, low voltage tariffs, which relate to about 42% of total consumption, are still below economic costs. * Sectors are putting a burden on public finances either for investment finances or consumption subsidies. As a result of the institutional arrangements, the pricing policy described above, and high debt service requirements, the SOEs are financially constrained and unable to maintain let alone expand their productive capacity. In the electricity sector for example, Govemrnment contributions amounted to about US$ 1.0 billion in 1998. * Substantial capital requirements to meet demand and to optimize the use of Algerian natural resources and increase Government's revenues. As indicated in the Govemrnment's program, hydrocarbons exploration, production, refining and distribution need to be enhanced; SONATRACH's investment requirements for the next 5 years are estimated at about US$ 20 billion. In the electricity sector, needs to meet future demand as well as to rehabilitate the existing power system and reduce system bottlenecks, are estimated at about US$ 12.0 billion for the next 10 years. Finally the mining sector is characterized by substantial untapped resources, due to lack of financial resources for exploration and development. - 3 -  * Little private sector participation in the sectors. Despite the adoption of the 1991 petroleum legislation which opened the hydrocarbons sector to investments by foreign oil companies, exploration activities are low compared to the potential and remain concentrated in prolific areas; and refining and distribution of petroleum products remain almost exclusively the responsibility of SOEs. In the electricity sector, responsibility for generation, transmission and distribution of electricity remains with Sonelgaz and attempts towards introducing private sector participation are just at the initial stages. As for the mining sector, the existing legal and institutional framework maintains considerable barriers to private investment, resulting in difficult access to mineral resources because of discretionary and unclear conditions to obtain and maintain mining titles, unavailability of adequate data, perceived unstable investment conditions, and a sector domination by mining SOEs. * Large scope for improving energy efficiency. Algeria has taken several steps to improve end-use energy efficiency and conservation. The Agence pour la Promotion de la Rationalisation de l'Utilisation de l'Energie (APRUE), a national agency, under the authority of the Ministry of Energy and Mines, has been established to promote energy efficiency and conservation. In 1999, Algeria has enacted a law on energy efficiency and conservation which sets up a national fund for energy efficiency and makes energy audits compulsory. In spite of these measures, the potential for improving end-use energy efficiency remains large, and its realization would require, as demonstrated in other countries, the development of incentive measures, competitive pressures, market-based energy and financial services. v Limited awareness to environmental issues. In the upstream sector there are pending issues such as significant gas flaring which impact on the global environment, and also local issues such as oily waters from the production facilities discharged in the environment. The downstream sector is still struggling with non-compliance with the decree 93-160 on industrial effluents discharges in the environment which impact on coastal zones, wadis and harbor environments. The downstream sector is also characterized by air pollution problems coming from refining facilities, storage facilities and by fuel quality problems essentially due to lead content of gasoline. Despite the adoption of environmental Law in 1983 (Law 83-03), environmental rules and regulations are still to be improved. Government Strategv: As stated earlier, the energy and mining sectors are critical to the overall Algerian economy, accounting for about 95% of total exports and 60% of budgetary revenues. During the years of high oil prices, the state had the resources to provide employment, infrastructure and services through an inefficient centrally controlled system. Social indicators improved markedly and poverty declined thanks to high investment in education, health, basic infrastructure, and generous subsidies. The decline in oil prices in the 1980s put an end to this, highlighting the inefficiencies of the economic structure. Unemployment grew rapidly to 25 percent, and acute housing shortages developed. The housing crisis was further compounded by a high population growth rate (2.9 percent) and continued rural migration to cities. The Government recognizes that the rehabilitation and growth of the overall economy hinges to a large extent on addressing the issues listed above through profound reforms and strengthening of the energy and mining sectors. Efforts to introduce reforms in the sectors have been initiated as early as 1991 in the hydrocarbons sector and 1995 in the power sector, when Sonelgaz and the Government commissioned a Power Sector Restructuring Study, used as a basis for the proposed reform program in the power sector. However, much remains to be done and the Government's program as outlined in December 1999 has - 4 -  established long-range policies for the energy and mining sectors to: (i) modernize and strengthen the legal, regulatory and institutional frameworks; (ii) maximize the role of competition and market forces; (iii) establish economic principles and commercial incentives; (iv) promote private sector participation in all activities by creating a level playing field for the private investors and the SOEs; and (v) reorganize the corporate structure of the SOEs. Government's strategy for the sectors is in Project files and was confirmed formally to the Bank by letter dated August 7, 2000. Specific to the hydrocarbons sector, the Government strategy is to: (a) establish an enabling legal and institutional framework conducive to private investments through a new hydrocarbons law being prepared; (b) set-up new autonomous regulatory and contracting agencies, that will take over the government functions currently exercised by SONATRACH; (c) gradually deregulate prices and open the downstream markets to private participation and competition; (d) introduce a model contract and tender procedure for award of exploration/development rights, ensuring both streamlining and transparency in the procedure and intemational competitiveness; (e) encourage private investments downstream and improve the quality of fuels; (f) update and enforce environmental impact assessment procedures, and develop environmental protection standards; and (g) optimize the valorization of gas resources both for export and domestic market, through a strategy of diversification and market penetration. During negotiations, agreements have been reached that the process of submission of a draft hydrocarbon law, acceptable to the Bank, to the Competent Authorities,i.e Council Of Government, Council of Ministers as well as the National Popular Assembly (NPA), will be completed no later than December 31, 2001. In the electricity sector, the key policy objective is to meet rapidly rising demand while maintaining quality of service at reasonable cost. The institutional framework is being defined in an electricity law the preparation of which is well advanced. The draft law provides for an enabling legal and institutional framework conducive to private investments in generation and distribution with the following principles: (a) generation will be deregulated and subject to market forces; (b) transmission will remain publicly owned and provide open access to suppliers and purchasers; (c) distribution as a natural monopoly will be fully regulated; (d) prices will be liberalized at the generation level and regulated at the transmission and distribution levels; (e) retail competition will be introduced for large consumers; (f) an independent regulatory authority will be established; and (g) Sonelgaz will be reorganized to adjust to the new legal framework and market forces. During negotiations, agreements have been reached that the process of submission of a draft electricity law, acceptable to the Bank, to the Competent Authorities,i.e Council Of Government, Council of Ministers as well as the National Popular Assembly (NPA), will be completed no later than June 30, 2001. In the case of mining, the legal regulatory and institutional framework has been reviewed and defined in a new draft mining law approved by the Council of Government and the Council of Ministers, and submitted to the NPA for approval. The new mining law establishes: (a) an enabling legal framework to significantly increase private investment in Algeria's mining sector; (b) sector institutions to effectively enforce laws and regulations, administer mining titles, and monitor sector performance and development; (c) provisions for environmental and safety protection during the whole mining operation cycle; and (d) the provision of basic geological data and other services for promotion of private investments. - 5 -  3. Sector issues to be addressed by the project and strategic choices: The project will help addressing the sector issues as identified in Section 2. Through the establishment of adequate legal and institutional framework conducive to private sector participation, the strengthening of existing and/or creation of new institutions in the sectors, the reliance on market forces to establish prices, and the reorganization of SONELGAZ and other enterprises in the mining subsector to adjust to the new strategy, the project will set the stage to: * demonopolize the sector activities with the exception of the natural monopolies, and increase competition; * help control costs and improve efficiency of the sectors * increase private sector participation; * develop operations in an environmentally sustainable manner; * increase Government revenues; and * reduce the burden of the sectors on public finances. A prerequisite for all these reforms is the commitment (i) to reach consensus on principles of reforms with all stakeholders, including labor unions, SOEs; and (ii) to develop a comprehensive strategy and road map per sub-sector, identifying options and action plans in order to meet the objectives of the reform. The analysis of the various options led the Government to make several strategic choices which have been the basis for designing the proposed project: (i) Private versus public ownership: The Government has opted to introduce gradually private participation in the development and operations of the sectors, which is consistent with its strategy to primarily direct public resources to social sectors, and increase Government's revenues. Accordingly, and as a first step, SOEs in the electricity and mining subsectors will be restructured to become more commercially-oriented entities. (ii) Creation of autonomous regulatory agencies for each subsector (i.e hydrocarbons, electricity and mining): The Government has committed to divest MEM's existing regulatory functions and to empower and staff an independent regulatory authority for each subsector. (iii) One versus three regulatory agencies: Given the status of preparation of the various laws, and in order to expedite the process while taking into account the specifics of each sector, the decision was taken to go with three separate regulatory authorities, one each for hydrocarbons, electricity and the mining subsector. The possibility of combining two or three agencies will remain open for the future. (iv) Multi-buyer model in the electricity sector and retail competition: The Government is planning to implement models which would progressively provide wholesale competition and also allow the development of retail competition. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project would comprise the following components (Annex 2 also provides a brief background and strategy for reforms for each subsector): -6 -  (a) Hydrocarbons: (i) review, design and implementation of a legal, regulatory and institutional framework, upstream and downstream, consistent with the proposed strategy and reforms including the development of suitable environmental policies and regulations for the hydrocarbon sector on the basis of sectoral environmental assessments for said sector; (ii) set-up and assistance in initial operation of a contract management and promotion agency with a state of the art data center; (iii) set-up and assistance in initial operation of an autonomous regulatory entity; and (iv) training of relevant staff. (b) Electricity: (i) review, design and implementation of a legal, regulatory and institutional framework, for electricity and natural gas distribution by pipelines, consistent with the proposed strategy and reforms including the development of suitable environmental policies and regulations for the electricity sector on the basis of sectoral environmental assessments for said sector; (ii) design, establishment, and operation of an autonomous regulatory entity and, at a later stage, a system operator and a market operator; (iii) implementation of the restructuring and reform program of the sector in general and the reorganization of SONELGAZ in particular; (iv) assistance in the launching of an innovative and challenging first power generation program with private sector participation ("2000 MW Project"), to be used for local market and export; and (v) training of relevant staff of the various sector institutions mainly in reforms and regulations. (c) Mining: (i) review, design and implement the legal, regulatory and institutional framework and respective regulations consistent with the proposed strategy and reforms including the development of suitable environmental policies and regulations for the mining sector on the basis of sectoral environmental assessments for said sector; (ii) establishment and assistance for initial operation of an autonomous national agency for geological survey and mining control and an autonomous national cadastral agency; (iii) implementation of a mining promotion program; (iv) assistance to the Holding SIDMINES {comprising the Entreprise Nationale du Fer et des Phosphates (FERPHOS), the Entreprise Nationale des Engrais et Produits Phytosanitaires (ASMIDAL), and the Entreprise Nationale du Marbre (ENAMARBRE)}, the Office de la Recherche Geologique et Miniere (ORGM), and the Entreprise Nationale de l'Or (ENOR), in their effort to adapt to the sector reform, and with strategic private partnership; and (v) training. (d) PMU: institutional strengthening of MEM and set-up of a Project Management Unit (PMU) within MEM. Estimated cost: Table below gives the summary of the estimated costs by components (including contingencies): -7-  Indicative Bank- % of Component Sector Costs % of financing Bank- S(U$M) Total (US$M) financing (a) Hydrocarbons Hydrocarbons 7.55 34.3 7.55 41.9 --Legal and Institutional Framework and Institutional Set-up (b) Electricity Electricity 5.75 26.1 5.75 31.9 --Legal, Institutional Frarnework and Institutional Set Up --Restructuring of Sonelgaz --2000 MW Project (c) Mining Mining 4.22 19.2 4.22 23.4 --Policy, legal and regulatory framework --Institutional Set-up --Support to mining companies and SOEs (d) PMU 0.30 1.4 0.30 1.7 (e) administration fees, custom duties 4.00 18.2 0.00 0.0 and taxes Total Project Costs 21.82 99.2 17.82 99.0 Front-end fee 0.18 0.8 0.18 1.0 Total Financing Required 22.00 100.0 18.00 100.0 All the Institutional components listed above include training activities as described in Annex 3 2. Key policy and institutional reforms supported by the project: The project will support the Government of Algeria in its effort to reform sector policies and institutions. It includes: * for each subsector, establishment of new legal and institutional framework, set-up of autonomous regulatory agencies and other new institutions as defined in the agreed strategy and detailed in C. 1 above, opening the subsectors to private sector participation and competition; * assistance to the SOEs in the electricity and mining subsectors to adapt to the new mandate and legal and regulatory framework instilling competitive behavior; * launching of the first power generation program with private sector participation; 3. Benefits and target population: The project will benefit the Algerian economy and hence the population, through the following benefits: (i) induced by the project: with a contribution of 30% of GDP, about 95% of export revenues, and 60% of total government revenues, the energy sector is key in the development of the Algerian economy. It is therefore essential that efficiency of development and operations of the sector in an environmentally and socially sustainable manner, be enhanced and maintained. This will enable the - 8-  Government to further support economic growth, and the social infrastructure to meet the needs of the poor. (ii) as a direct result of the project: (a) establishment of a modem, consistent and homogeneous energy and mining legal and regulatory framework, and state of the art institutions that will provide the governance to protect public interest, and assure efficient use of public resources; (b) better understanding of how Government, private sector, and communities can work together in dealing with foreign investors; (c) transparent administration of the state's revenues from the hydrocarbons sector; (d) restructuring of the SOEs into efficient and commercially oriented enterprises; (e) establishment of new agencies to assure faster and non-discretionary award and administration of contracts, improved understanding of issues involved in managing such rights, and improved enforcement capacity of environmental, health and safety regulations; (f) improved knowledge of existing environmental and socio-economic conditions, as a basis for improved management and participation of local communities; (g) protection of the environrnent from potential damage caused by activities and a better grasp of how to improve fuel quality and, in general, how to define environmental protection norms and standards in the energy and mining sectors. 4. Institutional and implementation arrangements: Implementation period: July 2000 - December 2004 Implementing Agency: Implementation of the proposed project will be the responsibility of MEM through the Project Management Unit (PMU). PMU will be assisted by consultants and the various concerned enterprises in the sectors. The Manager of the PMU has already been appointed. Measures to appoint the rest of the key PMU staff, namely the financial/accounting and the procurement specialists have been initiated. In addition, PMU will be initially assisted by a sector specialist from the various concerned enterprises until the required appointment is made. Project oversight and policy guidance: Project Administration: The Manager heading the PMU reports directly to the Minister, and will be responsible for coordinating the services of the consultants financed by the project and for ensuring proper procurement, financial and administrative management of the project. A Project Implementation Plan (PIP) has been prepared by the PMU. The PIP defines the various roles and responsibilities, individual work programs, and performance indicators, and includes a timetable to be closely monitored for successful and timely project execution. The PIP includes detailed arrangements for project and financial management, procurement and accounting procedures. The PIP is in the Project Files. Project Management Reporting: The PMU will prepare quarterly Project Management Reports (PMRs), consisting of analysis of the project implementation progress (narrative and indicators), procurement activities, and project financial statements including summaries of all sources and uses of project funds, expenditures detailed by category and contract, and Special Account statements. Copies of such quarterly PMRs will be submitted to the Bank 45 days after the end of each quarter. Financial Management Systems of MEM: The Financial Management System (FMS) currently in place in the MEM is part of the overall FMS of the Government, and is based on principles and procedures defined by the legal framework applicable to the pubic sector and more specifically to governmental institutions, including the Law on Government Accounting of 1990. -9-  MEM prepares an annual budget for its current and capital expenditures. The annual budget is submitted for approval to the Ministry of Finance (MOF), which closely controls budget preparation and execution. Payments against the budget are authorized by MOF's representatives in the MEM. The Government's accounting system registers commitments and actual expenditures against the budget. The accounting system uses the cash method. The Ministry's accounts are subject to annual audits by the Government's audit department, Inspection Generale des Finances (IGF). Project Financial Management: Financial management arrangements for the project are detailed in Annex 6 and summarized below. The expenditures of the proposed project and their financing will be administered by the PMU. An action plan for developing the necessary systems and procedures at the PMU has been agreed, and is detailed in the PIP. Accounting and financial procedures have been also defined in the PIP. An assessment by the Bank of the financial management system to be developed by the PMU will aim at ensuring that the system is operating satisfactorily and generating PMRs acceptable to the Bank. The assessment of the financial management system will take place no later than June 30, 2002. Special Account: To facilitate disbursements from the proposed loan, a Special Account (SA) for an amount of US$ 1.5 million equivalent will be established at the Central Bank (Banque d'Algerie). Initially the funds in the SA will be limited to US$ 1.0 million equivalent until project expenditures will have reached US$ 5.0 million equivalent. Loan Disbursements and Payments Processing: Disbursements from the Bank loan will use traditional procedures, i.e. other than those based on PMRs. Payments from the SA and requests to the Bank for replenishment of the SA will be initiated by the PMU and processed through the Government-owned Algerian Development Bank (Banque Algerienne de Developpement: BAD). This is based on procedures applicable to foreign-financed projects implemented by the Government and its non-commercial entities, i.e. Law 90-21 of August 15, 1990 on Government accounting, and the Economics Ministry Resolution of August 14, 1993 defining the implementation modalities of Government projects supported by external financing through the Algerian Development Bank, together with regulations and instructions of 1987, 1994, and 1997. Project Accounting: Accounting for all project expenditures and their financing will be done by the PMU, in addition to the accounts kept by BAD for the proposed loan. As already mentioned, the staff of the PMU will include a qualified accountant. The PMU will acquire the necessary computers (PCs), other office equipment, and a project accounting software, all to be funded from the proposed loan. Project Audits: The project accounts and financial statements, the Special Account and all disbursements based on Statements of Expenditure (SOEs) will be audited each year by independent auditors acceptable to the Bank. The auditors will apply international audit standards and follow the Bank's guidelines in the Financial Accounting, Reporting and Auditing Handbook (FARAH), as well as specific terms of reference for the audits of this project to be prepared during the project launch mission. During negotiations, agreements were reached that audit reports will be sent to the Bank annually six months after the fiscal year closing date (December 31), i.e., by June 30 of the following year, and that the audit of the PPF will be included in thefirst year audit of the project. Monitoring and Evaluation: The PMU will be responsible for monitoring progress against agreed performance indicators specified in Annex 1. As stated earlier, the PMU will submit quarterly PMRs summarizing project implementation and the utilization of project funds. They will cover implementation - 10-  status; deviations, if any, from the implementation plan; problems and constraints and corrective actions being taken; and updated disbursement and commitment tables. During negotiations, agreements were reached that not later than December 31, 2002, the PMU will prepare a detailed mid-termn report to serve as the basis for a Project Mid-Term Review to be carried out on February 28, 2003. The PMU will also prepare and submit to the Bank an Implementation Completion Report (ICR) within six months of the Closing Date of the Loan. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The proposed project approach is consistent with the Bank's strategy for the energy and mining sectors, which calls for shifting the government's role from ownership and operations to policy making and regulation, promoting efficiency and quality of services, and increased private sector participation. Rationale The Government of Algeria is committed to this strategy and the choice to open the sector for private investments has clearly been made. To pursue its policy objectives, the Government of Algeria is moving on a fairly fast track The preparation of modem mining, hydrocarbons and electricity laws, which include new institutional and regulatory frameworks for all these sectors, is well advanced, and the draft mining law has been already submitted to the NPA. Dealing in an integrated way with the preparation and implementation of the energy and mining reform programs will create substantial synergies. Alternatives The Government of Algeria has decided to request a technical assistance loan instead of an investment loan to benefit from the Bank's global knowledge and experience in these sectors. Provide separate technical assistance loans for each subsector. This approach was rejected because of timing, inconsistency with Government's approach and fear to lose the benefits of synergies. Process the operation as a Learning and Innovation Loan: This option was disregarded because sector reforms similar to the ones proposed are well proven Bank products and the amount required exceeds the LIL limits. - 1 1-  2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings I_________________________________ ___________________________ (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Improve power sector financial Power III (Loan 2981 -AL), S S performance through financial completed in June 1997. restructuring and institutional restructuring of the public power utility Sonelgaz, while supporting the expansion of its transmission system. Help attract foreign investments, First Petroleum project( Loan S S improve efficiency of petroleum 3395-AL); completed in June services companies and drilling 1997. operations, optimize production of Sonatrach's oil fields and address environmental problems. Improve telecommunications First telecommunication S S infrastructure, strengthen MPT's Project( Loan 2370-AL); organization and financial management completed in June 1992 capabilities, and restructure tariffs. Acceleration of the Govermment's Privatization support S S privatization program project-LIL (Loan 70290-AL); approved on June 26, 2000 Creation of an enabling environment to Telecommunications and postal S S improve access to efficient and sector reform project ( Loan affordable communications services by 70270-AL); approved on June opening the telecommunications and 27,2000. postal services to competition and private participation. Other development agencies Canadian Intemational Development Private Sector Development Agency Fund ( ongoing) European Union Privatization TA Project (ongoing) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) - 12-  3. Lessons learned and reflected in the project design: The Bank has gained a broad experience in providing Technical Assistance to Governments willing to carry out similar sector reforms. Lessons learned in other energy sector restructuring and privatization programs and in the completed operations in the power and petroleum sectors in Algeria are reflected in the project design. These lessons include: * political commitment, ownership and consensus building among all stakeholders including labor unions are a prerequisite to ensure effective implementation of far reaching reforms, and their sustainability; * far reaching reforms can only be achieved gradually; * bringing international expertise on reforms early in the process increases the chances for success; * a clear legal and regulatory framework has to be defined as early as possible in the reform process; * establishment of self financed and autonomous regulatory entities early in the process; * relevant borrower's staff need to be trained in major aspects of the reform program and project implementation mainly regulation, procurement; * the project management unit has to be functional as early as possible during the preparation of the project. 4. Indications of borrower commitment and ownership: The Borrower commitment to the project is high. The Government has long been aware of the necessary changes to be brought to the energy and mining sectors in order to enhance their efficiency and make them reliable support to the growth of the economy, and took the initiative in requesting the Bank's assistance in this respect. This commitment is demonstrated by: - Government's policy for the energy and mining, encompassing the major principles for reforms, has been indicated in the Government's Program, already approved by the National Popular Assembly (NPA), and confirmed to the Bank by letter dated August 7, 2000; - Preparation of the various draft laws setting the main rules and regulations of the reform program is well underway. The draft mining law has been approved by the Council of Ministers and submitted to the NPA. Drafting of the Electricity Law is well advanced; the draft was presented to various stakeholders in an open seminar on July 18-19, 2000; its finalization for submissiori to the Competent Authorities is expected in mid-2001. Drafting of the hydrocarbons law is also ongoing, and its submission to the Competent Authorities is expected in 2001; * availability of funding out of a Project Preparation Facility (PPF) was finalized in August 2000; * efforts are being made to inform and build consensus among the various stakeholders through numerous seminars/workshops, media campaigns, meetings with labor unions, etc.; * measures have been taken to initiate the procurement process for hiring consultants to assist in the tender process for the first power plant to be implemented with private sector participation, and for the hiring of consultants to advise in the design and set up of regulatory agencies and other new institutions; and * the setting up of the PMU has been initiated with the recruitment of the Head of the Unit, and measures are underway to select the procurement and financial specialists. 5. Value added of Bank support in this project: The Bank has a long track record in the development of similar energy and mining sector reforms in Latin America, Eastem Europe and Asia. Algeria will be able to benefit from the Bank's experience in sector - 13-  reform, including particularly formulation of strategic choices, modernization of its legal and institutional frameworks and restructuring of State owned enterprises. The Bank is well positioned to provide assistance in this transformation process by bringing its knowledge about other countries' experience and helping Algeria address properly the issues of its energy and mining sectors, while taking good stock of the lessons learned. The Government of Algeria recognizes the Bank's extensive experience and has sought Bank's assistance as it embarks in its reform program. In addition, the Bank's group could offer, through various instruments (lending from IBRD and IFC, guarantees, advisory services) the support that the Government of Algeria may request to further develop private sector involvement in the energy and mining sectors. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit NPV=US$ million; ERR = % (see Annex 4) O Cost effectiveness * Other (specify) Given the size and nature ( technical assistance) of the project, an economic analysis is not required. The project focuses on policy, legal and institutional reforms which, if implemented successfully, will enable the energy and mining sectors to contribute more effectively to economic growth and poverty reduction. The economic benefits of the reform program supported by the project are likely to include: discovery of additional reserves and increased production, improved efficiency of operations, increase in exports and fiscal revenues, and increase in private capital flows, allowing for more resources to be allocated to social sectors development. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Given the size and nature ( technical assistance ) of the proposed project, a financial analysis is not required. The past and current financial performance of SOEs to be restructured under the proposed project will be examined and financial projections established, in the context of the assistance to the restructuring of these SOEs. Fiscal Impact: The required changes in the taxation system for new hydrocarbons exploration and production contracts will be designed and implemented as part of the proposed project with the objectives to be competitive internationally, provide adequate incentives to attract exploration activities in non traditional areas and maintain a fare share for the State. Moreover, the project is expected to result in increased fiscal revenues in absolute value from the increased activity in the sector. As to the downstream reforms, the project will analyze the impact of lifting subsidies and gradual pricing liberalization on fiscal revenues, new investments and macro economic aggregates. 3. Technical: The introduction and use of state-of-the-art technology and systems to support sector management has been, as a rule, very successful under technical assistance projects in other countries, particularly within - 14-  the fields of surveying and management, environmental impact assessments review and monitoring, data processing and information management, software for support to decision-making, etc. Similar technologies and systems will be introduced through the proposed loan and no particular difficulties are foreseen. 4. Institutional: The implementing agency, MEM, and its PMU will face an ambitious schedule for carrying out a set of closely inter-related project activities, which are relatively novel and complex. Their ability to implement the project has been assessed and will be enhanced through local and foreign technical assistance and training programs included in the proposed project, to assist PMU to reinforce its financial, procurement, and sectoral coordination capabilities. Local and foreign technical assistance and training are also envisaged for: (i) the various regulatory agencies and other new institutions in the sectors, to develop their economic, financial, technical and legal skills; and (ii) the SOEs to be restructured, to help them implement their restructuring program and operate within the new mandate. 4.1 Executing agencies: The Ministry of Energy and Mines (MEM) and its various agencies in the sectors. The project would support the setting up of new sector agencies which will result in an important cultural change for public employees. At the start and during the planned transition period, staff experience and implementation capacity of the new agencies will be limited within this new environment. Therefore, there is a major need for technical transfer at all levels, including management and operation. The project includes a substantial provision for training as well as hiring international consultants and national staff who will be in charge of the implementation of specific project sub-components. The Project will also contribute to strengthen management capacity in the various existing and new agencies through targeted specific training programs, as well as through on-the-job training with the support of consultants to be contracted under the loan. 4.2 Project management: In order to ensure adequate project implementation, MEM decided the setting up of a PMU and appointed the Manager of PMU early in the process. In order to adhere to World Bank guidelines, these efforts will be complemented by the appointment of experienced procurement and financial specialists, and later by sectoral specialists. 4.3 Procurement issues: The project will finance technical assistance services for studies and other consultant assignments (57% of the project cost). Procurement of goods will be limited (19% of the project cost, with one package accounting for 14%). Procedures for selection of consultants and procurement of goods will be in accordance with applicable Bank's policy and guidelines. The project elements, their estimated costs and procurement methods are summarized in Annex 6, Table A. All other procurement information, including: (a) publication of General Procurement Notice (GNP); (b) Bank procurement thresholds and prior review process with the implementation agency's procurement capacity assessment and required training; and (c) procurement plan providing packaging and estimated schedule of the major procurement actions, are summarized in Annex 6, and detailed in the PIP. No Bank's Country Procurement Assessment Report (CPAR) has been made yet. Existing country's legal and institutional frameworks for public enterprise procurement were reviewed during the procurement - 15 -  capacity assessment of the project agency and found to be generally in line with the Bank's Procurement Guidelines. However, the capacity assessment identified certain practices and procedures not acceptable to the Bank for which assurances were obtained from MEM' s officials, for not using them under the project. Theses practices and procedures and the procurement capacity assessment of the project agency are reflected in Annex 6. The overall procurement risk assessment rating for the project is considered as average. 4.4 Financial management issues: During project preparation, an evaluation of the PMU's financial management capacity and its ability to meet Bank's requirement was carried out. The action plan resulting from this assessment is incorporated in the PIP. The PMU will procure a computerized financial management and accounting system to be used for management of the Bank's project. During negotiations, agreements have been reached that adequate computerization, accounting and financial management system in the PMU will be a condition of effectiveness. 5. Environmental: Environmental Category: C (Not Required) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The project is a Technical Assistance Project supporting reforms in the energy and mining sectors, to improve efficiency, and lay the ground for more competition and private sector participation. The Project includes legal, institutional and capacity building components. As a result, there are no environmental issues in the proposed Project. The Project is expected to have a positive impact on the environment, by building capacity for environmental management at the national level and within the energy and mining sectors especially in the new regulatory agencies. It will include in particular development of sectoral environmental assessments and respective guidelines for energy and mining projects and will thereby support the Government's environmental strategy. For the sub-component related to the assistance for launching a 2000 MW power generation program with private sector participation, the call for proposals will include terms of reference for the development of the related Environmental Assessment. 5.2 What are the main features of the EMP and are they adequate? Not applicable. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: N/A Not applicable 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Not applicable. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? During project implementation consultation will take place with NGOs, landowners, and industry representatives regarding the energy and mining sector environmental aspects. - 16 -  6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The Government has already initiated the launch of media campaigns on the overall benefits of the reform program, and to promote social acceptance of this program. Social concerns were discussed, since the reform and restructuring program could have an impact on employment. The reform program will have a net positive effect through: (i) improvement of services; (ii) creation of new institutions and hence new jobs; (iii) new private investments induced by the establishment of the new legal and regulatory framework which will boost the creation of new job opportunities in new areas that will be opened for oil and mining exploration and exploitation; and (iv) the reallocation of more public resources to social programs. However, possible negative impact on employment could be induced by the reforms and the restructuring program. The Government confirmed that it will include in its action program a more detailed evaluation of the social impact of these reforms to adopt appropriate safeguard measures. Furthermore, and under the newly approved Privatization Assistance Loan, the Ministry of Participation and Coordination of Economic Reforms is setting up a Division in charge of addressing the labor issues in coordination with other ministries and agencies concerned . Specifically, the mandate of this Division is to help design and implement plans mitigating the social impact of the reforms and future privatization. These plans will complement an already comprehensive social safety net in Algeria which has been enacted with the beginning of the macroeconomic program in 1994, including broad legislation pertaining to retrenchment benefits, early retirement schemes and social security compensation. 6.2 Participatory Approach: How are key stakeholders participating in the project? Workshops involving major stakeholders, including representatives of labor unions and civil society have already been organized, and will continue to be organized, to discuss the new legal and institutional framework, and the main concepts underlining the development of the energy and mining sector, including social issues. The Bank is assisting in this aspect through a PPIAF grant and the proposed loan will enhance this activity. Discussions between Government, unions and employers, and between unions and employers' association and the industries are taking place and are intended to improve the social climate and create an environment favorable to the reform program. In addition the information campaign launched to explain the process to the general public will also help build a broad consensus. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? 0 In addition to the various workshops and seminars already held since April 2000, the proposed project includes activities to: (a) develop a consultation/communication policy and strategy regarding energy and mining in Algeria; and (b) increase the awareness within sector institutions, companies, local governnents, labor unions, NGOs and civil society, including local communities. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Not applicable - 17 -  6.5 How will the project monitor performance in terms of social development outcomes? Not applicable 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Polioy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes * No Natural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) 0 Yes * No Pest Management (OP 4.09) 0 Yes * No Cultural Property (OPN 11.03) 0 Yes * No Indigenous Peoples (OD 4.20) 0 Yes * No Involuntary Resettlement (OD 4.30) 0 Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Not applicable. F. Sustainability and Risks 1. Sustainability: By developing a competitive framework for market-oriented reforms in the energy and mining sectors, the project will help accelerate investments, address market failures and enhance service efficiency and energy access, while improving environmental standards. Incentives to sustain project objectives include transparency and competitiveness of the overall contractual arrangements. Improved service coverage and quality at more competitive prices will be sustained as competition develops and private investment grows in both infrastructure and services. Empowering the new regulatory authorities and ensuring financial independence will enable regulatory functions to be sustained without dependence on budgetary support. - 18 -  2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Government commitment to implement M (a) Govermnent's Program; (b) Government's reform program request to the Bank to assist in implementing the reform program; (c) early start of preparation of the primary legislation accompanied by media campaigns, seminar and workshops to build consensus; (d) support of the Bank as part of overall sector reform dialogue with all concerned parties. In addition the mid-term review will ensure that the reform is proceeding in conformity with the project development objectives. Stakeholders and population concerns vis S (a) broad information campaigns; and (b) MEM a vis the reform program constant dialogue with major stakeholders throughout the implementation process and initial operation. Overall investments conditions stability S (a) preparation of secondary legislation and its adoption early in the process (covenant of the mid-term review); (b) early set up of the new agencies, in particular the regulatory agencies; (c) road-shows and promotion activities. Inadequate recurrent budgets for the M (a) rapid executive decrees to facilitate initial newly set up agencies and inefficient operations of Regulatory institutions; (c) management adequate budgetary provisions for the first year of operation of the new agencies; and technical assistance for the new agencies funded under the project. From Components to Outputs Continued project ownership S (a) Continued progress in implementing the sectoral reforms; (b) continued sector reform dialogue with stakeholders, from preparation throughout implementation; (c) timely implementation of sector reforms and project activities, including training of staff and provision of adequate infrastructure. - 19 -  Staff stability M Conditions regarding the provision of necessary staff and resources to effectively implement the reform would be part of the loan agreement and of the PIP. Implementation and procurement delays S Early set up and adequate staffing of the PMU; demonstrated ownership and clear commitment by project and sector agencies staff regarding the PIP; a substantial portion of the procurement documents and TORs ready during the first year of project implementation; procurement and financial training in WB procedures already initiated and to be continued during the first six months of project implementation. Performance M Adequate and timely provision of technical assistance and supervision by the Bank. Social stability S Government confirmed its commitment to adopt appropriate social safeguard measures. Overall Risk Rating Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: The main possible controversial aspect is the risk of social instability due to the reform program. In order to minimize this controversy, the Government stated clearly that it will maintain employment in the sector in the context of the reform program, and that it will adopt appropriate safeguard measures. In addition media campaign and seminars on the overall benefits of the reform program will continue during project implementation. G. Main Loan Conditions 1. Effectiveness Condition * Borrower to put in place adequate computerization, accounting and financial management system in PMU; 2. Other [classify according to covenant types used in the Legal Agreements.] * completion of the process of submission of the draft Law on Electricity and natural gas distriburion by pipelines, satisfactory to the Bank, to the Competent Authorities ( Council of Government, Council of Ministers as well as the NPA) no later than June 30, 2001; * completion of the process of submission of the draft Hydrocarbon Law satisfactory to the Bank, to the Competent Authorities ( Council of Government, Council of Ministers as well as the NPA) no later than December 31, 2001; * PMU's financial management system to be assessed by the Bank no later than June 30, 2002; * submission to the Bank of quarterly Project Management Reports (PMRs); - 20 -  * project accounts audits to be submitted to the Bank not later than six months after the end of each fiscal year; * complete staffing of the PMU as needed and with a core of sectoral staff no later than one year after project effectiveness; * promulgation of required decrees and regulations specific to each subsector (hydrocarbons, electricity, and mining) no later than December 31, 2002; * set up of the three regulatory agencies (one for each subsector, i.e., hydrocarbon, electricity, and mining respectively), agreement on their respective organization chart, and appointment of core local staff to contract out consultant services to assist in this design/concept stage and in the initial operation of the agencies no later than one year after enactrnent of the relevant laws; * set up of other institutions as foreseen by the various laws, in particular a contract management and promotion agency for the hydrocarbon subsector, a power system operator and a power market operator for the electricity subsector, and a Cadastrial Agency for the mining subsector; * mid-term review (MTR) report to be submitted to the Bank not later than June 30, 2002, and MTR of the project to be carried by February 28, 2003. H. Readiness for Implementation D1 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1 1. b) Not applicable. 1 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. El 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. DG 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Zoubeida Ladhibi-Belk Sonia Hammam Christian Delvoie Team Leader Acting Sector Dir. Country Director - 21 -  Annex 1: Project Design Summary ALGERIA: Energy and Mining Technical Assistance Loan (EMTAL) Hierarchy f Objectives Indicators !MonitoringA &Evaluation Crntical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Higher and sustainable rate of economic growth through * Increase in private * CAS discussions * Macroeconomic increased competition and sector participation * Portfolio reviews environment and political private sector participation in * Improvement in the stability the Energy and Mining efficiency of the Sectors. restructured SOEs * Increase in Government revenues from the sectors * Reduction of pricing subsidies Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: Reform of the energy and mining sectors, setting the * Enactment of laws on * Government stage to improve sector Mining, Hydrocarbon and * Government commitment and efficiency, introduce market Electricity self-evaluation of policy acceptance by other forces, develop untapped * Establishment of the and institutional stakeholders of the resources, address agencies foreseen under progress. reform process. environmental concerns and the new legal framework * Supervision mission by * Successful operation of alleviate financial burden on * Restructuring of WB the new agencies. public finances SONELGAZ and support * Participation by the to the public enterprises of private sector Consistent with the the Mining Holding * Creation of a Government Energy and (ENAMARBRE, competitive market Mining Program which FERPHOS), ENOR and structure received support from the ORGM for adapting to the World Bank reforms Impact indicators: * Award of new mining titles and new hydrocarbon exploration and production contracts based on the new contractual instruments * Successful bidding auction for the 2000MW project(s) * Effective reduction of funding of investment in the MEM's sectors by the state budget - 22 -  Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Hydrocarbons - Le2al * Government commitment Framework Output # 1: Draft to implement reform of Hydrocarbon Law the hydrocarbon sector * Fiscal parameters for new * Draft Hydrocarbon Law contracts * Supervision Reports * Consensus at the political * Model agreement * Issues and Option Paper level on principles and * Specialfiscal terms for * Model Contract the new roles in the SONATRACH's existing * Consultant Report hydrocarbon sector and producing areas the liberalization of the * Evaluation of the Impact downstream petroleum of downstream opening sector Output # 2: Separation of * Pricing structure for Roles petroleum products * Contracts between the * Consultant Report politically acceptable. contracting agency and * Progress Report by PMU SONA TRA CH covering * Overall environment SONA TRACH's conducive to attract exploration and private investments production (E&P) * Preparation and establishment of dividend policy between SONA TRA CH and the Government: Output # 3: Secondary * Draft of secondary legislation legislation and required * Technical and new decrees Economic regulation * Environmental assessments and regulations * Gas marketing regulation * Tender procedures for E&P contracts - 23 -  Hydrocarbons - Institutions' Set Up Output # 4: Contract * Consultant Reports for For each of the agencies: management and promotion each of the two agencies Agency -Set up and Initial * Progress Report by Operation PMU * Sufficient funding of the * Legal aspects agency * Design and start up of the agency * Efficient operation of the * Office furnishing and agency equipment * Training * Hiring of qualified Staff * Data center Output # 5: Regulatory Agency - Set up and Initial Operation * Legal aspects * Design and start up of the agency * Office furnishing and equipment * Training Electricity - Leeal. Output # 6 Legal Framework * Draft of the Electricity As for the Hydrocarbon's Institutional Framework Law Component and Institutional Set UP * Electricity Law * Draft of secondary * Secondary legislation legislation (technical, economic, and environmental * Institutional aspects, tender Development Programs procedures for private * Consultant Reports sector participation, * Supervision Reports etc.) * Progress Report by PMU * Environmental standards and regulations revisited Output # 7 Establishing the Electricity and Natural Gas a Training Programs Distribution Regulatory * Progress Report by PMU Commission Output # 8 Developing and implementing training programs - 24 -  Electricity - Restructuring Output # 9 Sonelgaz * Draft legislation of the SOE - Sonelgaz restructured and creation of * Audit Report separate corporatized entities * Consultant Reports * Audit of Sonelgaz' * Opening Balance Sheet accounts * Establishment of the new generation, transport, distribution (electricity and natural gas by pipelines) companies * Transfer of assets, liabilities and other rights and obligations to the new companies * Decentralization and transfer of management information systems and staff to the new companies * Financial restructuring measures Electricity - 2000 MW Output # 10: Agreement * Consultant Report Proiect between Government of * Bidding Document Issued Algeria and private parties for * Environmental assessment the development of the 2000 completed MW Project(s): * Finalized Legal * Preparation, processing documentation and completion of the * Progress Report by PMU transaction through financial closure. - 25 -  Minin2 -Policy. Ieeal and Output # 11 Completion of As for the Hydrocarbon's reLulatory framework the regulatory framework and * Secondary Legislation Component operative procedures * Consultant Report * Progress Report by PMU Output # 12 Workshops and seminars: * in Algeria, for public officers to explain the new legalframework and its application; * in Algeria, for investors, operators and other stakeholders to inform about the new legal framework; * abroad, to promote the benefits of the new legal framework Minin2 - Institutional Set-up * Consultant Report and Information Systems Output # 13: Regulatory * Progress Report by PMU Agency and Information System- Set up and Initial Operation * Legal aspect * Design and Start-Up of the agency * assessment and establishment of sector environmental regulations * Office furnishing and equipment * Training * Data Center Mining Support to state-owned mining Output # 14: SOEs * Audit Report enterprises restructured * Consultant Reports * Audit of the mining sector's SOEs * Consultant Report * Technical and economic * Progress Report by PMU evaluation of ENOR assets * Propose options for partnership with private investors * Restructuring of ORGM - 26 -  Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Financed by the Bank Hydrocarbon (in US$) * Adequate Capacity to (see Annex 2 for details) 7,550,000 Consultant Reports implement the project ( see Annex 2 for the list of * Legal, Institutional and reports) * Timely procurement in Fiscal Framework accordance with Bank * Institutional Set-up Monitoring through Bank task guidelines * Data Bank management procedures for a sector reform project. Electricity 5,750,000 (see Annex 2 for details) *Legal, Institutional Framework and Institutional Set Up *Restructuring of the SOEs * 2000 MW Project(s) Mining: 4,220,000 (see Annex 2 for details) *Legal, institutional and regulatory framework *Institutional Set-up *Support to mining companies and SOEs Project Management Unit 300,000 - 27 -  Annex 2: Detailed Project Description ALGERIA: Energy and Mining Technical Assistance Loan (EMTAL) Detailed Project Description and cost estimate The project will consist of four components: I) hydrocarbons; 2) electricity; 3) mining; and 4) assistance to the setting up of the Project Management Unit (PMU). The hydrocarbons, electricity and mining components will basically comprise three similar sub-components as indicated below. The electricity component will also include assistance to MEM in launching the 2000 MW power generation plant(s) with private sector participation: (a) assitance on legal and regulatory matters, dealing mainly with the preparation of new laws and/or regulations and procedures; (b) assistance on institutional matters, dealing mainly with the establishment and the initial operation of new institutions, including the contracting and regulatory agencies; and (c) assistance to reform the state-owned entities (SOEs) in the electricity and mining subsectors, dealing with the adaptation of SOEs to the new sector policy, and support to private sector development. By Component: Project Component I - US$7.55 million The Hydrocarbons Sector Component I The policy of the Government of Algeria concerning the hydrocarbons sector is based on the following principles: * optimizing the value of the vast natural resources, * preservation and increase of the State revenues 2. Sub-sector background: A - Upstream As of today, the upstream hydrocarbons operations are dominated by the national company, SONATRACH which is: * the main oil and gas producer (approx. 88%); * the owner and operator of the pipeline network; * the responsible entity for the management of the data base, the promotion and negotiation of exploration and production (E&P) contracts (30 contracts) and related administrative tasks; * the entity that collects on behalf of the state royalties and taxes; * the only crude oil and gas supplier to the domestic market; * the entity in charge of all gas exports; * called to play a state policy role in addition to its commercial role; - 28 -  * faced for the next five years, with investments needs in the order of 20 billion US$ for exploration and production activities; * benefiting from government guarantees for financing its investment plans. In general, the system of management and control of the sector is characterized by a weak performance, in spite of the recognized large production and geological potential and the success of the exploration carried out by international partners of SONATRACH since early 1990. In concrete terms, the upstream sector is characterized by: * a limited number of new contracts; * an exploration effort concentrated in a specific geological region; * an insufficient cost management; * an insufficient technical and environmental control of the operations; and * a lengthy negotiation process for awarding contracts to private investors. 3. The key objectives of the reform program for the upstream hydrocarbons sector are to: * separate the commercial functions of the SOEs from the state roles. * assign the functions related to negotiations, management and control of contracts and of implementation of regulations to autonomous government agencies. * allow the public company to focus solely on commercial activities in competition with private companies * accelerate and promote a larger and diversified private participation * reduce the state debt and limit state guarantees to SOEs in future investmnents 4. The reform strategy upstream includes two key aspects: Legal. fiscal, and contractual -- basically to put in place a framework, applicable in particular to new ventures, that will ensure: * the development of exploration and production (E&P) model contracts that provide international competitive terms and a level playing field for the private investors and the SOEs; * transparency and efficiency in procedures from access to data bases through award, signing and management of the contract; * promulgation of regulations; * promotion private sector participation in all exploration and production activities, including pipelines; * receipt by the government of a fair share of the economic rent from exploitation of hydrocarbon * the exploration of frontier zones and the exploitation of marginal fields and gas resources * respect for technical and environmental standards and norms. Institutional -- basically to create and implement two new entities: * A contractual autonomous agency - in charge of the management of the data base, the promotion of E&P activities and the signing and management of contracts * An autonomous regulatory agency - in charge of the application of regulations (inter-alia, technical, safety, environmental and, specific to pipelines, economic regulations) - 29 -  The resources required for carnying out this strategy are not included in the proposed project. B - Downstream 5. The downstream sector is characterized by: (i) a state monopoly in the hands of two companies: Naftec (refining activities) and Naftal (storage and distribution of petroleum products and LPG), (ii) most facilities requiring upgrading and rehabilitation investments, (iii) a system of transfer prices and administered margins throughout the supply chain which is not providing for fmancing the required investments, (iv) insufficient technical and environmental controls and monitoring, and (v) a poor quality of consumer's services and products. 6. The objectives of the reform for the downstream sector are to: - separate the roles of the companies (mainly trading and operation of the storage and transport facilities) from the State, responsible for setting the rules to protect the interest of consumers, - proceed with the deregulation of prices and margins which should be progressively set by market's supply and demand forces,