Report No. 782-AL FILE COPYAppraisal of an Industrial Credit Project toBanque Algerienne de DeveloppementAlgeriajune 10, 1975

Industrial Credit and Development Finance Companies DivisionProject DepartmentEurope, Middie East and North Africa Region

Not for Public Use

Document of the International Bank for Reconstruction and DevelopmentInternational Development Association

Ihis report was prepared tor official use only by the Bank Croup. it may notbe published, quoted or cited without Bank Group authonzation. The Bank Group doe5not accept responsibility for the accuracy or completeness of the report.

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CURRENCY

Algerian Dinar, abbreviated DA

Exchange Rates

1967 - 1970: PA 4.94 - US$1.00End - 1971: DA 4.64 - US$1.00End - 1972: DA 4.56 = US$1.00End - 1973: DA 4.19 = US$1.00End - 1974: DA 4.00 = US$1.00Mid - 1975: DA 3.85 = US$1.00

DA 1.00 - US$0.25DA 1,000 - US$250

DA 1 million - US$250,000DA 1 billion - US$250 million

ABBREVIATIONS

BAD = Banque Algérienne de Développement

BOA = Banque Centrale d'Algérie

BEA = Banque Extérieur d'Algérie

BNA - Banque Nationale d'Algérie

CEDA = Caisse pour l'Equipement et leDéveloppement d&Algérie

INPED Institut National de la Productionet du Développement Industriel

KFW Kreditanstalt fur Wiederaufbau

SEP = Secrétariat d'Etat au Plan

SNMJ = Société Nationale des Matériauxde Construction

SNMétal = Société Nationale de ConstructionMétallique

This report has been prepared by Messrs. Coudol and Batzella. It is based onthe findings of several missions to Algeria from October 1973 to March 1975.Staff members included Messrs. Sekse, Coudol, Mombru and Batzella, from IO &DFC Division, EMENA. Two consultants provided assistance (11 man-week) in thesector review, Messrs. Klinghoffer from UNIDO and Mr. Ollivier from EREP.

TABLE OF CONTENTS

Page No.

SIMIARY ................ *........................ i-iii

I. INTRODUCTION ......... i, ................... .. 1

Il. ECONOMIC ENVIRONMENT . ... 2

A. The Economy and Industrial Sector. 2B. Institutional Aspects of Industrial

Investments ......... 5 ................. 5

III. THE PROJECT -- PART 1: THE CONSTRUCTIONMATERIALS SECTORS.. 8

A. Present Status of the Subsector of Construc-tion Materials .9

B. The Demand for Construction Materials inAlgeria. 10

C. Assessment of Supply Potential andProspects .10

D. Summary Conclusions on the Outlook for theConstruction Materials Sector .14

E. Economic Justification for Bank Lending to-the Sector .15

F. Subproject Eligibility for Bank Financing,and Size of the Proposed Loan .16

G. Sectoral Problems Under the Proposed Loan 18

IV. THE PROJECT -- PART 2: INSTITUTIONAL ASPECTSAND TECHNICAL ASSISTANCE .18

A. Summary Description of BAD .19B. Role of BAD and the Proposed Loan .22C. BAD's New Appraisal and Supervision Unit 26

V. THE PROPOSED LOAN .. .29

Recommendations.. .. 29

TABLE OF CONTENTS (Continued)

ANNEXES

Annex No. Title

I Algeria: Selected Development IndicatorsIl The Banking System of Algeria - A SummaryIII Institut National de La Productivite et du Developpement

Industriel (INPED)IV The Industrial Investment Decision Process Step by Step -

A SimmaryV Charte de la Gestion Socialiste des Entre prises SocialistesVI Regional Industrial Development Program (RIDP) for Medium and

Small-Size IndustriesVII Description, Activities and Prospects of Banque Algerienne de

Developpement (BAD) (as of end 1974)

Attachment 1: OrganizationAttachment 2: Volume of Operations 1971-1974Attachment 3: Breakdown of Identified Projects by Size of

Proposed FinancingAttachment 4: Breakdown of 1973 Loan Portfolio by Economic

Sectors and by Types of LoansAttachment 5: Situation of Arrears as of December 31, 1973Attachment 6: Income Statements 1971-1973Attachment 7: Balance Sheets at December 31, 1970-1973 and

Provisional Balance Sheet at June 30, 1974Attachment 8: Projected Income Statements 1974-1977Attachment 9: Projected Balance Sheets 1974-1977

VIII Statement of Policy for BAD's UnitIX Interest Rate StructureX Estimated Disbursement Schedule for the Proposed Bank LoanXI Algeria - Constructions Materials (Excluding Cement): Demand

and Future Outlook

SUMMARY

i. This report appraises an industrial line of credit for the develop-ment of small and medium size industry in Algeria, mainly in the constructionmaterials sector. An important aspect of the proposed loan of US$40 millionare the arrangements for technical assistance intended to upgrade the projectappraisal and supervision capabilities of Banque Algerienne de Developpement(BAD), the proposed borrower and administrator of the loan.

ii. Algeria has a centrally planned economy characterized by heavy con-centration on industrial development. Industry is predominantly based on arelatively small number of large State Enterprises. Each industrial StateEnterprise has a virtual monopoly over an economic sub-sector. This highconcentration of economic decision power has permitted the rapid achievementof ambitious targets; it will continue in the pursuit of Algeria's long-termobjective of achieving economic independence primarily through the creationof strong basic industries. The current 1974-77 plan sets a minimum invest-ment target of about $20 billion in 1973 prices, on the basis of physical im-plementation capacity. It also specifies a higher (maximum) target of about$26 billion, with supplementary projects to be undertaken if implementationcapacity can be raised above the estimated minimum level. The share of indus-try in total investment would be 44% in 1974-77, compared to 54% in 1970-73.Annual GDP growth would, according to the plan, range between 11.2% and 12.5%on average during the four-year period, depending on the investment levelactually reached. The plan foresees that, as a result of investment and out-put growth, the employment situation of unskilled labor would be substantiallyimproved. Algeria's investment effort will be mostly financed through itsexports of oil and natural gas. Uncertainties in the forecast of exports ofthese commodities would necessarily affect Algeria's ability to finance itslarge investments program.

iii. Centralization and the absence of the balancing mechanisms of afree market system, or of other market forms of financial discipline, havecreated problems, including important cases of inefficiency in the allocationOf financial resources. The 1971 reform of the country's financial structureappeared as a first step to improve the financial controls over investmentdecisions. BAD, in particular, was put in charge of providing and control-ling all long-term investments of State Enterprises in the non-agricultural,productive sectors of the economy. So far, the reform has not taken firmhold, in part because of the shortage of qualified bankers and project analysts.The authorities are aware of the need to strengthen the banking system ingeneral, and BAD in particular. To this end, they have asked IBRD to couplea loan to BAD with a technical assitance arrangement intended to upgrade BAD'sproject appraisal and supervision capabilities.

iv. In order to establish a manageable starting point for BAD, the useof the proceeds of the proposed Bank loan will be directed to an industrialsubsector whose main characteristics are that it has priority in Algeria'seconomic development effort, and which offers BAD the opportunity to developproject appraisal and supervision expertise over a reasonably large number ofsubprojects that do not present exceedingly complex technical difficulties.

v. The construction materials industry, excluding basic cement andglass production, has been selected for this purpose. The current Four-YearPlan foresees a large investment program in this activity. The priority ofthese investments is high in view of the existing, and rapidly widening, gap

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between supply and demand for construction materials, coupled with the rapidgrowth of Algeria's population. Housing, schools and other social and indus-trial buildings are in acute shortage. The insufficient local production ofconstruction materials has, s0 far, been the main constraint to construction,in spite of Algeria being rich in all basic raw materials needed.

vi. The construction materials industry is presently dominated by twolarge State Enterprises (SNMC and SNMetal). Though they will carry the bulkof the construction materials investment programs, the Plan also promotesan important role in the sector to be played by smaller public sector enter-prises to be set up by local administrations (Wilayate) under the recentlylaunched Regional Industrial Development Program (RIDP). Due to the economicand technical characteristics of the industry, which relies on the localexploitation of available natural resources, projects of this subsector --whether sponsored by State Enterprises or by the Wilayate Enterprises -- willbe decentralized and scattered throughout the country; generally of moderatesize; relatively labor intensive; and technologically uncomplicated. Theypromise to yield a high economic rate of return.

vii. The proposed loan, intended to finance the foreign exchange compo-nent of selected construction material projects, would be an industrial creditoperation with some features of an operation with a DFC, insofar as the se-lection, appraisal and supervision of individual subprojects would be confidedto BAD. A special department, or Unit, has been created for this purpose withinBAD, with a view to eventually expand its project appraisal and supervisionfunction to other types of projects financed by BAD. The organization andfunctioning of this Unit will require the Bank's close supervision, and ithas been agreed that two Bank staff members will be seconded to BAD to assistthe Unit in its work.

ix. For BAD and the Algerian Government, the main objective of the pro-posed Loan is to attract to BAD technical and financial support in line withthe Bank's traditional support to institutions of a DFC character. However,Algeria's centrally planned economic system offers little scope, at the pre-sent time, for the kind of development banking operations the Bank normallyundertakes. Though the volume of funds flowing through BAD for investmentis very large (over US$1 billion of disbursements per annum), BAD has littleautonomy. It is basically a conduit for Treasury funds. It is not a risk-taking institution, since its solvency is assured by the Treasury, and itscreditworthiness consequently rests upon that of the Government. Underexisting laws, financial shortcomings of BAD's borrowers are offset by theGovernment's budget. Moreover, BAD has, so far, little experience in projectappraisal and monitoring. However, the Government wishes BAD to become moreactive and autonomous in these respects. In order to achieve that objective,a balance had to be found between the Plan, which establishes Algeria's in-vestment policies and programs, and BAD which, on the basis of sound appraisalsshould become capable of, and increasingly influential in, preparing the basisfor investment and financing decisions. The ultimate decision-making powersrest with the Government.

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x. This project aims, therefore, at expanding BAD's influence overinvestment decisions in Algeria and at building up gradually its professionalcompetence in project matters. With the declared support of the authorities,and the assistance of the Bank, BAD should be able to attain, within a rea-sonable period of time, the standards of projects appraisal and supervisionthat are typical of a financial institution borrowing from the Bank. Thus,BAD should reach, within the Algerian economic system, the standing it needsto increase its input in decision-making and the economic gains that shouldfollow from this. If these expectations are met, the Bank expects to con-tinue its support to BAD in future years.

xi. A loan of $40 million is recommended to cover commitments, overabout two years, starting mid-1975, to finance medium size industrial devel-opment projects in Algeria. Production units of SNMC and SNMetal would bethe final usera of about 50% of the proposed loan, while the other 50% wouldbe used for RIDP projects. A small portion of the loan (up to $100,000) wouldbe available to strengthen BAD's accounting procedures and train auditors,should this prove to be desirable. The repayment schedule of the loan willbe determined on the basis of the aggregate maturities of BAD's subloans;however, the total term of the loan should not exceed 15 years. There wouldbe no free limit.

I. !NTRODUCTION

1.01 Since 1966, the main thrust of the Algerian economy has been thedevelopment of a strong, self-sufficient, industrial sector. To this end,Algeria nationalized most industries in 1966 and has since invested veryheavily in the sector. The emphasis has been on the creation of basic,capital-intensive industries, and :ndlistries of high p-iority in the fieldsof processing and import substitti on. In many respects, Algeria has succeed-ed, over less than a decade, in creatîng, nearly from scratch, a strong in-dustrial base. However, this rapid industrialization has been accompanied bystructural imbalances and operational problems which are matters of increasingconcern to the Algerian authorities.

1.02 Consequently, the Algerian Government is taking a growing interestin applying, in a more systematic fashion, economic, financial and technicalcriteria and methodology in the appraisal and supervision of investment proj-ects. It wants the Banque Algerienne de Developpement (BAD), Algeria's onlyterm investment bank serving the industrial sector, to take on a major re-sponsibility in these respects.

1.03 Following several missions to Algeria, 1973 through 1975, the Bankagreed to consider a loan, and technical assistance, to BAD to help the insti-tution adjust itself to its new, expanded responsibilities. The Bank recog-nized, however, and so pointed out to the Government, that a loan to BAD wouldnot conform, in many respects, to the pattern of Bank lending to developmentfinance companies. Financially, and in a considerable degree also organiza-tionally, BAD is an integral part of the structure and fabric of the State.Until now, BAD has been more a cashier of the Treasury than a development bank,and its role in deciding on investment proposals has been very limited. Hence,its creditworthiness, in a financial sense, rests basically on the credit ofAlgeria, a fact which nonetheless requires the observance of financial andmanagerial disciplines.

1.04 The proposed industrial credit project would have three major ob-jectives. First, it would create in BAD an institutional ability to helpformulate, evaluate and implement projects as a corollary function to thatperformed by the State Secretariat for Planning. Second, it would helpstrengthen BAD's influence over decisions on industrial investments and theirfinancing,'from whatever source of funds. Third, Bank funds would be investedin specific industrial sub-sectors where their impact would be a substantialone. To meet the third of these objectives, a loan designed to finance onlymedium-size subprojects for the production of construction materials has beenfound appropriate. The development of this sub-sector has high economic andsocial priority. It includes a considerable number and variety of medium-size t/ investment projects of relatively low technological complexity. Overthe next decade, investments in this sub-sector are to be undertaken both bya few, very large State Enterprises as well as by numerous smaller, less ex-perienced, provincial enterprises. Under the proposed loan, BAD would start,

1/ See definition of order of size in para 3.21.

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for the first time, to play a direct role in the design, organization and im-plementation of investments for projects of State Enterprises as well as pro-vincial enterprises. The center of this new responsibility would be a newlycreated special department, or IUnit within BAD, operating under the generalmanagement of BAD.

1.05 Although this first loan to BAD would be confined essentially tothe financing of construction materials industries, the Algerian authoritiesexpect that, over time, the experience acquired by BAD's Unit in appraisingand supervising a number of medium-sized projects will set a pattern for BADin most of its future operations, whatever their nature and sources of fund-ing. Progress should gradually enable BAD to assume a stronger role in theAlgerian investment-decision process. Whether this approach will work, par-ticularly whether BAD's new working tools will carry weight, is the essentialrisk in this operation which has considerable attributes of an experiment inthe Algerlan context.

Il. ECONOMIC ENVIRONMENT

A. The Economy and Industrial Sector

1. Background

2.01 Algeria's econofic development programa have been embodied in threePlans (1967-69, 1970-73 and the current 1974-77 Plan) which, in this centrallyplanned economy, are mandatory policy and strategy statements of the Govern-ment. 1/

2.02 In 1966, Algeria's Revolutionary Council defined the fundamentalobjectives which the country intended to pursue during the period ending1980. These are: (i) to expand and organize the productive base enablingthe economy to reach, by about 1980, a stage of self-sustained growth withfull employment; (ii) to achieve economic independence, which implies thatthe country vould rely first on its own resources for development, althoughinternational economic relations would be expanded and diversified; and (iii)to improve income distribution, particularly among regions. These objectives,and the strategy which has evolved towards their implementation, take intoaccount the country's physical and socio-economic potential, and form a setof coherent choices to which the leadership is deeply committed.

1/ The Bank's Economic Report on recent developments of the economy ofAlgeria is under preparation. Basic data on the economy are presentedin Annex 1.

2. The Second Development Plan (1974-77)

2.03 The current Plan (1974-77) is ambitious, and possibly over-ambitious,but in line with Algeria's objectives of achieving rapid economic independence,primarily through the creation of a strong industrial sector. Five specificgoals are highlighted in the Plan:

(a) the achievement of maximum production for domestic consumptionand for export;

(b) the reduction of bottlenecks resulting in investment slippagesthrough increased emphasis on training of management and skilledlabor;

(c) the increase of employment, especially through regional programs(industry and rural development);

(d) the improvement of standards of living through special urbanprograms and expanded social benefits; and

(e) 'the achievement of a better economic balance between regions.

2.04 These objectives have been translated into targets, including(i) a volume of investment, over the Plan period, of at least DA 85 billionat 1973 prices and possibly DA 110 billion, (ii) and annual growth of GDP(in real terms) of at least 11%, (iii) the creation of 450,000 new jobs out-side of the agricultural sector, and (iv) an average increase in private con-sumption of 11% p.a. The prospects of achieving these targets are heavilydependent on Algeria's balance of payment prospects, and on the developmentof the absorptive capacity of the economy. It is likely that the improvementregistered in Algeria's balance of payments in 1974, as a result of the oilprice increase, will be followed by a deterioration in 1975, which will prob-ably be more pronounced than was expected in the 1974-77 Plan. This develop-ment would be due mainly to a substantial shortfall of anticipated receiptsfrom crude oil and natural gas exports. It is therefore likely that Algeriawill have to opt for significantly slower growth of investment and privateconsumption than foreseen in the 1974-77 plan, beginning in 1976.

2.05 The authorities will have to overcome considerable additional con-straints, some of them inherited from the past. First, in most sectors, in-vestment would need to more than double in real terms as compared to that ofthe 1970-73 Plan. Algeria's ability to implement and absorb such rapid growthis questionable, judged by past results. Second, the considerable differencein growth rates between various sectors could result in serious structuralimbalances, income disparities, and bottlenecks in the implementation of in-vestments. Third, the regional objectives of providing better living condi-tions (employment, income distribution, social services) are unlikely to be

1/ The 1967-69 Plan was called a "Pre-Plan".

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fully achieved unless special programs (e.g. training, administrative reforms)are initiated rapidly. Finally, despite the reforms of the financial sectorin 1971, improvements or changes are still needed in this area, such as theestablishment of a more rational pricing system and the strengthening offinancial institutions to enable them to play a more active role in theexecution and supervision of investments.

3. Industry

2.06 During 1967-71, all means of industrial production were graduallytransferred to the public sector, foreign holdings nationalized and StateEnterprises created. Each State Enterprise was given control over a givensub-sector. At present, the 24 largest State Enterprises own nearly 90% ofall industrial fixed assets, while private enterprises account for less than5% of such assets. MIost State Enterprises are very large and account indiv-idually, in many instances (such as petrochemicals, steel, etc.), for thewhole Industrial sub-sector. During 1966-74, the industrialization strategywas aimed, in decreasing order of priority, at the creation of: (i) heavybasic industries (hydrocarbon, steel, plastic, fertilizers); (ii) processingindustries (metal electrical products, tractors, construction materials, etc.);and (iii) light consumer goods industries.

2.07 In adopting and implementing this policy, the authorities deliberate-ly relegated criteria of returns on investments, efficiency in production andpricing policies to second place. The main objective was, and to a large ex-tent continues to be, the rapid physical build-up of a new production structure.Notwithstanding waste and inefficiencies and, perhaps more importantly, seriousimbalances in the productive capacities of various industries, the structure ofthe economy has over the past ten years changed radically as a result of thispolicy.

2.08 Industrial productioni over the period of the 1970-1973 Plan reached88, of the planned targets, which, given the constraints of the economy, wasquite aui achievement. Hydrocarbonic and food products reached, or exceeded,the targets of the Plan. However, other manufacturing industries were laggingbadly, especially two industries of crucial importance to Algeria's develop-ment: construction materials (4.4% annual growth, instead of 14% foreseen inthe Plan) and mretal and electrical products (6.6% vs. 25.5%). As regardsinvestments, the lagging performance in these and other fields resulted, inturn, in considerable delays and cost overruns. At the end of the Plan, morethan half of the ir.vestments supposed to be completed were still under con-struction.

2.09 Both production and investment difficulties are the result of slowand complex administrative procedures, technical difficulties, inadequateinfrastructure (ports, railways and telecommunications), and lack of manage-ment and skilled labor. The last aspect, in particular, remains a majorconstraint, in spite of the considerable progress made in education andtraining. In some instances, price controls have compounded these diffi-culties through their effect on the financial position of enterprises.

2.10 Under the 1974-77 Plan, 48% of planned investment will be for theindustrial sector. Some key aspects are:

a. Continued rapid growth of basic and heavy industries, usingAlgeria's natural resources. The bulk (63%) of projectedinvestments in the industrial sector over the period will beallocated to the hydrocarbon industry (DA 10.5 billion, or41% of total industrial investments), chemical industry(DA 4 billion) and mining (DA 1.1 billion).

b. An acceleration of growth of transformation industries suchas metal, mechanical and electrical industry, buildingmaterials, chemicals and wood processing (35% on industrialinvestments), and increased production of consumer products.

c. The launching of a Regional Industrial Development Program(RIDP) for smaller, decentralized projects. For that purpose,about DA 1 billion is planned to finance investment in some500-odd projects. A portion of the proposed Bank loan wouldfinance a small part of that program (Chapter III).

The Plan aims at a considerable growth of value added (18% for processingindustries, 14% for mining and energy), corresponding to a doubling of indus-trial output in four years. At the same time, 83,000 new jobs are to becreated. While such growth targets may not be reached fully, the considerableefforts planned in training, education, and housing, the new stress placed onconsumer products, and the efforts to simplify the administrative apparatus,should give the Plan's execution more of a chance of coming close to itstargets than the previous one had.

B. Institutional Aspects of Industrial Investm_ents

1. Role of the Financial Sector

2.11 Until 1971, public sector enterprises financed their investmentsdirectly from the Treasury as well as from their own resources or borrowingsabroad. In 1971, Algeria's financial system was restructured. The need fora radical financial reform arose because the previous system of ad hoc allo-cation of resources to finance the country's investment needs had createdgrowing problems of inconsistencies, misallocation and waste. Little con-sideration was given to the financial aspects of projects. Without a marketpricing mechanism, or other traditional forms of financial discipline, in-vestments in the industrial sector were rarely subject to economic tests.Main yardsticks against which enterprises were judged were physical investmentand output targets. Inadequate planning and lags in execution at the sectorlevel resulted in the creation of over- or under-capacities.

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2,12 The main purpose of the 1971 reform was to introduce stricter fi-nancial discipline in the economic system. Accordingly, investment decisionsare now formally centralized at the Secretariat d'Etat au Plan (SEP), thecentral planning agency. The current financial management of enterprises issubject to the supervision of the banking system and of the Ministry of Finance,which act as the controllers, financial analysts and coordinators of theeconomy. 1/ Direct grants and advances from the Treasury have been eliminatedas sources of investment financing in the productive sectors. All funds forinvestment financing now come from the banking system in the form of long ormedium-term loans, while cash generation of State Enterprises has to be turnedover to the Treasury, or placed in Government bonds.

2.13 In the spirit of the 1971 reform, the system calls for supervisionover most of the financial aspects of the economy to be the responsibility of,on the one hand, BAD, which provides long-term investment financing (except inthe agricultural sector) and, on the other hand, the primary (commercial) banks,which check the actual financial performance of enterprises against their quar-terly or annual operating budgets, also subject to the banks' prior approval.As regards long-term investments, BAD is given a unique central roie, sincetheir financing, including all foreign borrowings, requires the approval ofBAD. BAD also participates to a limited extent in the process leading to thepreparation of the Plan, and is consulted before the SEP and the relevantMinistries make investment decisions.

2.14 In practice, the 1971 reform has had only a limited impact, because(i) BAD has been only marginally involved in the investment decision processand (ii) the primary banks' supervision over the financial situation of StateEnterprises is rather superficial. Inadequacy of personnel in BAD and theprimary banks has been a major constraint. So far, BAD itself, with a staffof only 75 professionals, mostly with a background in finance, has been unableto make any meaningful contribution to the appraisal of investment projects.

2. Organization of Enterprises

State Enterprises

2.15 Organization. Alongside formal steps towards a reorganization ofthe financial sector in Algeria, 1971 saw the publication of the Charter ofSocialist Enterprises which determines the principles of organization andmanagement of all public sector enterprises in Algeria. The main thrust ofthis Charter, whose principal characteristics are detailed in Annex V, is to

1/ There are three Government-owned primary (i.e. commercial) banks: BanqueNationale d'Algerie, BNA, (specializing in agricultural credit), BanqueExterieure d'Algerie, BEA, (specializing in foreign trade) and CreditPopulaire d'Algerie, CPA, (characterized by a particularly large networkof decentralized agencies, which cater to the more isolated communitiesin the country). Each State Enterprises is assigned to one of the threeprimary banks which handles both its current banking needs and the dis-bursement of funds allocated to approved investments.

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give the workers a say in the management of State Enterprises, by creating:(i) a Workers' Assembly for each enterprise, elected by the workers; and(ii) a Management Council presided over by the company's General Manager andcomprising a number of his immediate assistants and one or two workers' re-presentatives nominated by the Assembly. Though the Assembly and the Coun-cil have access to basic information on the company's policies, operationsand finances, and can make specific recommendation in these respects (includ-ing management's performance), neither the Assembly nor the Council have sofar been sharing the decision power which remains with the General Managerswho are appointed by Government decrees. Control over management's perform-ance rests with the relevant Ministry and the Conseil National Economique etSocial. Though the impact and implementation of the Charter on State Enter-prises has been slow, there are indications that the Government is takingsteps to accelerate its practical application to enterprises.

2.16 Financial Structure of Enterprises. A major characteristic of thefinances of Enterprises is their reliance on outside credit to finance theirinvestments and current operations. Thus, despite the existence in the bal-ance sheets of enterprises of equity funds, the notion of equity is a his-torical carry-over from the time before State Enterprises were created, ratherthan means of achieving a balanced capital structure. Enterprises are fullydependent on credit under the concept that State Enterprises are an instrumentof the State's economic policy and, as such, are financed by the State (throughbanks) and provide finance to the State through the investment of cash sur-pluses in Treasury bonds.

Regional Enterprises

2.17 Administratively, Algeria is divided into 31 provinces or Wilayate(singular: Wilaya). Each has its own local government which is headed bythe Governor, or Wali, who is nominated by the Central Government. The Wilayais divided into communes. Both Wilayate and communes have local assemblieselected by their constituents. Local executive administrations are appointedby the Wali or the Mayor. In addition, local governments, at the Wilayatelevels, include representatives of all key agencies in the Central Government.SEP, for instance, is locally represented by a "Service de l'animation et dela planification economique."

2.18 The 1974-77 Plan provides for the creation of a large number ofindustrial enterprises owned by the Wilayate, or the communes (Chapter III).These enterprises are subject to the Charter of Socialist Enterprises. Manage-ment is appointed by the Wali. Until recently, the investment procedure anddecision process for provincial projects were the same as for State Enter-prises. Following a decree in January 1975, a new procedure has institutedthe decentralization of the financial decisions related to investments ofprovincial enterprises. Accordingly, although BAD remains fully responsiblefor the financing of long-term investment, it will have to branch out in manyof the 31 Wilayate. At present, BAD is represented only in three Wilayateand, therefore, substantial efforts will be required to train and assign staff

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for the other Wilayate. 1/ BAD has started to deal with this problem. Inthe meanwhile, the Credit Populaire d'Algerie (CPA), which has branches inall provinces, would represent BAD on the Provincial Committee responsiblefor taking investment decisions. On the other hand, the political decisionto invest ("individualisation") has not yet been regionalized and remains withSEP. Consequently, for some time, all SEP decisions will continue to be takenin Algiers.

III. THE PROJECT -- PART 1: THE CONSTRUCTION MATERIALS SECTOR

3.01 As mentioned in Chapter I, the proposed Bank assistance to BAD re-quired the creation of a mechanism by which BAD, with the Bank's help, couldaddress itself more effectively to small or medium size projects in relativelyneglected subsectors of high priority, so that BAD would be able to (i) makesuitable use of Bank funds; and (ii) optimize appraisal and supervision ex-perience from such use. The proposed industrial credit project consequentlyhas the following objectives:

(a) allocation of resources to an important but lagging subsectorof industry, with emphasis on employment creation by evaluationof alternative technologies and their respective capital/laborsubstitution impacts; and

(b) creation of an institutional capacity to help formulate,evaluate and implerment such projects as a corollary functionto that performed for large-scale projects under the Plan.

The plausible tools to achieve these objectives appeared to be (i) a line ofcredit for which the use had been predetermined in a subsectoral sense andby scale of individual operations and (ii) an institutional base on which tobuild a meaningful appraisal and decision-making capacity.

3.02 The construction materials industry, excluding from it projectswhich are too large or too complex to be dealt with by BAD under the proposedloan (e.g. cement, glass), seemed to be best suited for the purpose indicatedabove. Indeed, construction materials production units are generally of asmall or medium size, relatively labor intensive, and technologically simple;they present no .particularly complex marketing nor managerial problems.

1/ It is unlikely that all 31 Wilayate will have sufficient investmentprojects to require full time representation from BAD. At present,only 5 or 6 Wilayate would have the investment activity sufficient torequire a permanent representation from BAD. In other Wilayate, re-presentation could be provided on an ad hoc basis.

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A. Present Status of the Subsector of Construction Materials

3.03 Annex Xi glves details on the current situation and prospects. Theconstruction materials industry in Algeria 1/ is presently dominated by SocieteNationale des Materiaux de Construction (SNMC). SNMC, with a turnover of DA341 million and value added of DA 165 million in 1973 produces, in 65 plantsscattered throughout the country, about 63% of the total output of construc-tion materials. The other State Enterprise substantially involved with con-struction materials is Societe Nationale de Construction Metallique (SNMetal),which specializes in metallic products ranging from metal frames to railwaycars. Five of SNMetal's 13 plants produce materials related to the construc-tion industry, such as metallic frames and carpentry, domestic boilers andsmall hardware.

3.04 The development of the sector's production capacity is far behindschedule. Only 55% of the planned increase in production capacity has, allin all, been attained in the course of the first Plan (1970-1973), althoughthe amount invested in new projects during the period amounted to 90% of theforecast.

3.05 While the Regional Industrial Development Program (RIPD) (paras.2.10 and 2.17-2.18), is expected to have a key role to perform in the nearfuture, at present, local production of construction materials by Wilayateenterprises is limited to the output of quarries and of a few small brickand tile plants owned by the Wilayate public works enterprises, which produceexclusively for the local public works programs. Exceptions are the WilayateEnterprises of Batna, Tlemcen and Tizi Ouzou, where the local administrationshave already pursued aggressive industrial development programs.

3.06 The main cause of SNMC's - and to a lesser extent of SNMetal's -shortfall in implementing planned investments has been a lack of moderationin setting realistic Plan targets, coupled with the State Enterprises' in-ability to challenge the Plan on the basis of substantiated feasibilitystudies. Inadequate project preparation due to lack of experienced staffand of funds to finance studies, as well as inadequate supervision by for-eign consultants, have caused severe underestimation of investment costs,difficulties with SEP and BAD in obtaining agreement on adequate financialplans, and poor planning of implementation *chedules resulting in lack ofcoordination with domestic and foreign suppliera. In addition, SNMC had ad-ministrative difficulties with internal traasportation problems and, finally,adequate financing often took long to obtain, causing delays. SNMC claims

1/ In this project, the term "construction materials subsector" does notinclude glass or cement industries which consist mainly of large unitsof production.

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that all the above problems have seriously affected not only its current ope-rations 1/, but also its investment record.

3i.07 The Algerian authorities and SNMC/SNMetal have indicated theirawareness that these problem areas are serious constraints to economic devel-opment. The authorities hope that, with the 8trengthening of BAD, discussedin Chapter IV, BAD and SNMC/SNMetal would cooperate to mitigate some of thesedifficulties, and that the new approach to project preparation, with the Bank'stechnical assistance, will penmeate SNMC/SNMetal and BAD as a whole, and helpavoid the repetition of past mistakes. Two areas where BAD can indeed playa role are the preparation of feasibility studies, and the improvement offinancial planning. These matters are dealt with in paras. 4.17 et seq.

B. The Demand for Construction Materials in Algeria

3.08 So far, as shown in Annex XI, domestic production of constructionmaterials has been inadequate to meet demand. Large quantities of materialswere imported in the course of the First Plan. The level of demand is expect-ed to increase substantially in the immediate future. Annex XI, para. 2,indicates the magnitude of the gap. Translated into surfaces to be built,minimum targets to overcome Algeria's most urgent construction problems areabout 25 million square meters to be constructed during the 1974-77 Plan andanother 38 million sq.m. in the following three years. Such large construc-tion programs stem, on the one hand, from the country's very acute shortage ofhousing, schools, hospitals and other social buildings. Algeria's high rateof demographic growth (3.5% net p.a.) is a major parameter in this respect.On the other hand, the large industrial investments foreseen by the currentPlan will also require a huge construction program (surfaces to be built by1980 are estimated at over 12 million sq.m.).

C. Assessment of Supply Potential and Prospects

3.09 State Enterprises. The aim of Algeria's planners is to reach, by1980, a substantial equilibrium between domestic supply and demand for eachproduct (Annex XI, paras. 8-10). Compared to investments in the course ofthe 1970-73 Plan, which amounted to about DA 1 billion for constructionmaterials projects, new investments in the 1974-77 Plan are expected toamount to at least 7 times as much. In terms of value added, SNMC alone isexpected to more than quadruple by 1977, compared with 1973, and the entirebranch is expected to triple in the same period. No one can say at this stageto what extent targets will be met. Past experience suggests that there will

1/ At end-1973 SNMC had a negative working capital of DA 103 million, andbank overdrafts of DA 140 million. The poor financial performance ofSNMC durlng the first four-year Plan period la largely due to Government-imposed prices on SNMC's sales of both domestically produced and importedmaterials.

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be bottlenecks resulting in slippages of 2-3 years. 1/ But there is evidencethat a huge effort is underway to equip the country with the facilities toproduce the construction materials needed for the housing and public buildingsprograms, as well as for the industrial development programs underway. Themain focus right now is on cement plants 2/ (over one half of SNMC's investmentprograms) but major efforts are also taking place in other fields.

3.10 According to the original Plan, scheduled investments of SNMC areexpected to amount to DA 4.3 million in non-cement projects to be launchedin the course of the 1974-77 Plan, of which DA 3.5 billion should be investedbefore 1977 and the balance in the period 1978-80. Over the same period,SNMetal plans to invest DA 1.0 billion in construction material plants.These estimates are likely to be exceeded by as much as 50-75% due to priceescalation. SNMC's current investments program also includes the completionof projects started in the course of the 1970-73 Plan. The major projectsscheduled in SNMC and SNMetal investment program are listed in the table below.

1/ Project implementation schedules in the current four-year Plan are infact more realistic than in the previous, 1970-73 Plan. Underestimationof investment costs remains, however, a serious problem. The Plan isnow in the process of being revised in view of cost escalations andtaking into account the increase in oil prices.

2/ The Bank is currently appraising SNMC in the context of the constructionof a new cement plan at Saida with a capacity of 500,000 t.p.y. and anestimated project cost of about $158 million.

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SNMC and SNMetal Investment Programs for Production Units(other than Cement Plants)

EstimatedNumber of Units Cost of Projects

Second First Plan (DA millions)Plan Projects to Unit's Yearly Total To be invested

Type_of Project Projects be Completed Production Capacity Cost before 1977

A. SNMCPlaster produc-tion 4 - 180,000 tons 237 200

Quickline pro-duction 4 - 90,000 tons 295 295

Bricks and tilesfactories 31 5 45-90,000 tons 1,534 1,250

Ceramic tilesfactories , - 900,000 m2 293 288

Sanitary ceramicfactories 2 2 9,000 tons 167 167

Asbestos-cementprod. 3 - 45,000 tons 300 300

Agglomeratesunits 22 3 90-180,000 tons 1,093 560

Concrete pipesunits 3 1 50-68,000 meters 80 76

Aggregates 32 8 300,000 - 1 million 333 325quarries tons

Total 108 19 4,332 3,461

B. SNMetalMetallicCarpentry 4 - 10-15,000 tons 600 450

Boilers 3 - 2,500-7,000 tons 225 175Small hardware 2 - 3,500-6,000 tons 80 60

Total 9 905 685

In addition, SNMC and SNMetal plan to jointly invest in an overhaul of theconstruction materials distribution network, the rationalization of which iscurrently under study.

3.11 The Regional Industrial Development Program (RIDP). As alreadynoted, this program has been conceived as an instrument to encourage the in-dustrialization of the least advanced provinces, the creation of industrialjobs away from the three major industrial centers of the country, and the morerational ut.lization of available human and natural resources for the satis-faction of local needs. The original RIDP, as presented in the Plan, encom-passed 504 projects to be launched, under the sponsorship of the Ministry of

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the Interior, by local enterprises in the period 1974-1977. Foreseen invest-ments totalled about DA 1 billion (Annex VI). The implementation of the RIDPhas been delayed, among other reasons, because of Algeria's administrativereorganization in mid-1974, when tae number of Wilayate was increased from15 to 31. Sixteen of the Walis have only recently been appointed, and arestill in the process of organizing their administrations. The Ministry ofthe Interior has conducted, in early 1975, a survev of the status of localadministrations, and has concluded that only those wh4 ch were already estab-lished before the recent administ,ative reform are in a position to undertakeright now significant industrial initiatives. In the other Wilayate, projectswould have to be delayed at least by a year, if not more. The program itselfis being reviewed on the basis of studies conducted by the Ministry. Althoughthe total investment cost for RIDP is likely to remain close to DA 1 billion,as originally planned, the number of projects in the program has been drastic-ally reduced to about one half of the original 504, with average sizes ofindividual projects often enlarged in order to meet better economic and or-ganizational criteria. The sectoral orientation of the program--which alreadyat the beginning attributed a predominant weight to the construction materialsubsector--has been further moved towards projects to supply the raw materialsfor local public works enterprises and for housing construction programs.

3.12 In practice, the preparation of the RIDP projects has been confidedto two institutions: INPED, an agency of the Ministry of Industry (para. 4.30and Annex III), which has set up a special department for the needs of localenterprises under the RIDP, and SEZID, an agency of the Ministry of theInterior 1/ offering industrial consultancy services to local administrations.Following Algeria's administrative reorganization and the creation of 16 newwilayas, SEZID or INPED have assumed for a number of RIDP projects the roleof main contractors. At a later stage, local administrations are expectedto appoint their own project managers. Few turn-key operations are foreseenin the RIDP. The projects which are already at an advanced stage of prepara-tion include:

- 30 sand and gravel quarries, for 15 of which, in the westernpart of the country, the work is practically completed, whilefor the other 15, in the East, implementation is about to beginon the basis of already completed geological surveys. The es-timated cost of these projects is roughly DA 150 million (DA*4-7 million per unit). Once ready to operate, the quarrieswill be turned over to the communes where they are located.

- 10 bricks and tiles factories, with a capacity of 30,000tons/year each, and costing an estimated DA 10 million each.

1/ SEZID (Societe pour l'Equipement des Zones Industrielles Decentralisees)is a mixed ownership corporation, 2% of its shares still belong to itsoriginal sponsor, France's Caisse Centrale pour la Cooperation Economiqtue(CCCE) which still has close links with SEZID. The Company is in theprocess of being transformed into a State Enterprise.

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- 10 concrete pipes and supports factories, 7 of which will havea capacity of 50,000 tons/year and will cost approximately DA10 million each; the other three plants will be smaller unitscosting DA 10 million altogether. These factories will beexpanded later to include facilities for the production ofconcrete tiles.

- Other projects of RIDP which are at a less advanced stage ofpreparation, but which are expected to be launched within thePlan period, include: 15 general wood carpentry units; 2-3small plaster production units: 10-15 units for the productionof prefabricated housing elements; a number of units for theproduction of furniture for schools; several plants producingplumbing elements and insulation products, etc.

3.13 All these projects are characterized by their limited size (not ex-ceeding DA 20 million in investment costs) and their relative labor intensity(the average cost per job created will amount to the equivalent of US$15,000compared to an average of over US$125,000 for industrial investments of StateEnterprises), and by their ability to serve local consumption needs using lo-cally available supplies of raw materials.

D. Summary Conclusions on the Outlook for the Construction Materials Sector

3.14 The extremely large increase in non-cement construction materialsproduction capacity foreseen in Algeria's 1974-77 Plan (Annex XI, para 10)is fully justified on the demand side. Geological surveys have establishedthat Algeria is rich in the necessary raw materials (clay, lime, gypsum, etc.)to enable the projected output from local resources. On that basis alone, thePlan can be supported. There are, however, constraints. Demand for construc-tion materials does not derive immediately from demand for construction; itmust be filtered through the country's capacity to build. While, for theconstruction of rural dwellings, the local availability of constructionmaterials is virtually the sole constraint, conversely, for high rise build-ings and sophisticated industrial construction, specialized and experiencedcontracting firms are needed. A substantial part of new buildings are con-tracted to foreign builders, including the numerous industrial projects whichare to be delivered by foreign suppliers under turn-key arrangements. Second-ly, most large State Enterprises have their own civil construction units, whichare being strengthened in view of the Plan's ambitious investment programs.Thirdly, the central and local administrations have relatively important con-struction enterprises of their own: more than 300 were already in existenceat the beginning of the Plan period. Already in 1973, the construction in-dustry employed more manpower (over 130,000) than any other branch of the in-dustrial sector. Reportedly, however, this is insufficient and adds to theuncertainties as to whether Algeria will be able to build the 26 millionsquare meters of new surface foreseen for the period 1974-77, and the 38 mil-lion square meters foreseen for 1978-80 (Annex XI, para. 7), even if the in-vestment programs for the construction materials industry were carried outon schedule. At any rate, it is reasonable to assume that slippages willoccur on both sides of the supply/demand schedule.

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E. Economic Justification for Bank Lending to the Sector

3.15 The construction material subsector stands as one of the key prior-ity sectors in Algeria. Despite serious uncertainties as regards the possi-bility of achieving the Plan's targets, there will for man,y years be an unful-filled priority demand. Dwellings, schools and industrial buildings are es-sential to Algeria's economic and political future. Efforts to improve thesituation should be supported, provided that sound economic criteria areapplied to the use of resources for the expansion of the construction materialsindustry and that more attention is given to the availability of qualifiedmanagement.

3.16 A major characteristic of the construction materials industry isthat many of the most basic products cannot be imported either because thereis not an international market for them, or because it is not economical totransport them over any but short distances. This is true of clay bricks andtiles, asbestos-cement products, agglomerates, cement pipes and, of course,sand and gravel aggregates, for which there is no import alternative. Asidefrom a certain degree of interchangeability between locally produced bricksand normally more expensive imported cement, for the other materials mentionedabove, the only alternative to the local availability of adequate supply isthe potential construction activities foregone, with the attending loss ofnational income. It is important to note that over three quarters of theentire investment program of SNMC, excluding cement (para. 3.10), and all theRIDP projects at an advanced stage of preparation (para. 3.12) fall under thecategory of projects to produce non-importable items.

3.17 Another reason to support Algeria's investment program in the con-struction materials industry is that the projects in this subsector (espe-cially, but not exclusively, those of RIDP), are generally of smaller size,more labor intensive, and geographically more decentralized than those ofother industrial branches. As many other developing countries, Algeria reliesheavily on "self-construction", i.e. rural workers building their own tradi-tional one-floor dwellings whenever bricks, aggregates, quicklime and plasterare available. The sheer force of rural underemploynent coupled with the acutehousing shortage, will permit the absorption of whatever supply of cheap, basicconstruction materials will become available in the rural areas. The possi-bility of utilizing under-employed manpower is in itself an attractive featureof this type of construction. Generally, the economic characteristics of con-struction materials are such that production plants must be close to thesource of raw materials as well as to their marketing area. Furthermore, thetechnology of construction materials (aside from cement) is relatively simpleand does not imply economies of scale beyond a certain limit. Lastly, forseveral of the production units in the subsector under consideration (typical-ly, wood and metallic carpentry plants), prcduction cannot be fully standard-ized, but must be adapted to the specific requirements of each constructionproject for which they are intended. For all these reasons, most investmentprojects in the subsector will be expected to yield a high economic return.Though the economic merits of each individual subproject can only be assessedon a case by case basis -- and this will be a primary function of the projectsappraisal and supervision Unit to be set up within BAD -- a cursory review oca large sample of sub-projects now under preparation indicate that theireconomic return should, prima facie, be good.

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F. Subproject Eligibility for Bank Financing, and Size of the Proposed Loan

3.18 Under the proposed loan, Bank funds would be made available to BADfor the financing of subprojects in much the same way as in typical DFC-typeoperations. A special characteristic of this loan, however, due to thespecial nature of BAD, as mentioned in Chapter IV, would be the more precisedefinition of the range of subprojects eligible for financing with the pro-ceeds of the Bank's loan. The loan would be directed to the constructionmaterials subsector, i.e. projects of SNMC other than basic glass and cementplants, metal frame and boiler projects of SNMetal and generally all construc-tion material projects in the RIDP (i.e. excluding projects such as tourism,textiles and food processing).

3.19 Since this sector definition includes two major institutional com-ponents, the production units of State Enterprises and the provincial enter-prises under the RIDP, the question arises of how to distribute Bank funds(and the assistance related to such financing) between these two groups ofprojects. On the one hand, the RIDP displays certain characteristics (decen-tralization, labor intensity) which are, economically and socially, highlydesirable. On the other hand, the substantially more capital-intensivesubprojects of State Enterprises are included in this project for three mainreasons. It is important to provide BAD with direct experience in the ap-praisal and supervision of investment projects of State Enterprises. More-over, BAD's project appraisals should serve as examples to induce StateEnterprises to apply better criteria to all their projects whether or notfinanced with Bank funds. Thirdly, if projects of both Wilayate and StateEnterprises are covered in this operation, a more positive interaction be-tween the two groups of projects can be expected, with RIDP benefitting tothe maximum possible extent from the experience, studies and assistance ofSNMC and SNMetal, and from a better market distribution of investments.For these reasons there will be given approximately equal weight in theproposed loan to projects of State Enterprises and projects of the RIDP.Additionally, as regards SNMC, the prospect of further Bank assistance tothat enterprise through a loan, now under discussion, to finance a largecement plant, would, if consummated, lead to a very close association be-tween the Bank and one of Algeria's largest State Enterprise. This combineddirect and indirect relationship would help all parties concerned to test inmore depth the impact Bank practices and methodology could have on such enter-prises. -

3.20 Paragraph 3.12 lists the RIDP projects which have attained an ad-vanced enough stage of preparation to be launched within the period duringwhich the proposed loan will have to be committed (mid-1975 to about end 1977).For all these projects the availability of suitable management is given primeattention by the authorities, including the expansion of training programs toproject managers and skilled workers. Excluding the 15 quarries already com-pleted, there remain about 30 projects, the total investment cost of which isestimated at DA 280 million, or US$70 million. A certain number of slippageswill unavoidably occur but other projects for which studies are underway arealso likely to be ready for financing in a year or so. Assuming that the

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foreign exchange component of these projects' investment costs will continueto represent 40-50%7 of the total 1/, the imported portion of these investmentsshould amount to about US$25-35 million, as a minimum.

3.21 The foreign exchange needs for SNIC or SNMetal projects (other thancement) are estimated at about US$400-600 million over the Plan period withinthe construction materials subsector. Given the manpower and expertise con-straints of BAD's appraisal Unit, no more than, say, 10 projects of largeState Enterprises should be considered for the first Bank loan to BAD. StateEnterprises have easier access to other sources of external financing (e.g.suppliers' credits) to cover at least part of the foreign exchange componentof their investment projects. In determining the size of the proposed loanand the size of individual subprojects to be financed under the loan, thefollowing factors were considered: The aim of the project being to provideBAD's Unit with as wide an experience as possible in project's appraisal, thereshould be at least 5 subprojects sponsored by SNMC and SNMetal, and 10 subproj-ects with the RIDP over the two-year period of the loan. Such a program shouldbe feasible given the expected processing capabilities of BAD's Unit. Givenalso the characteristics of possible projects (para 3.10 for SNMC/SNMetal and3.12 for RIDP), the proposed loan should have the following modalities:

a. Though large in absolute terms, in the context of Algeria'sindustry medium size subprojects would normally be considered as:

(i) for SNMC and SNMetal:

projects with a total investment cost of less thanDA 100 million (about US$25 million).

(ii) for RIDP:

projects with a total investment cost of less thanDA 20 million (about US$5 million).

b. Financing with Bank funds for each subpoject would be limited:

(i) for SNMC and SNMetal: to US$5 million.

cii) for RIDP: to US$2 million.

c. About 50%O of the loan would be for subprojects of StateEnterprises and about 50% for RIDP, subject, if need be, tochanges in this formula as may subsequently be agreed uponwith the Bank.

d. On balance a loan of US$40 million should be sufficient toachieve the main purpose of this project, with an expectedcommitment period of about two years.

1/ This ratio is mainly based on SNMC experience and projections.

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G. Sectoral Problems Under the Proposed Loan

3.22 The two most serious problems which are expected to be encounteredby BAD's appraisal and supervision Unit in appraising projects for the pro-posed Bank loan, will be project management and project preparation, tradi-tionally the two weak spots of Algerian industrial projects. A third problemwhich is discussed in para. 4.24 is price controls:

a. Due to the novelty of the program, and to the lack of expertisein industrial activities of the local administrations expectedto sponsor these projects, the difficulty of securing adequatetop and middle management for new enterprises will be especiallyserious for RIDP projects. BAD has already made arrangements toobtain assistance from INPED for the training of managers andskilled labor of the projects to be appraised by the Unit (para.4.27). Similarly, SEZID, (para. 3.12), intends to set up amanagement training school in the near future. Both INPED andSEZID plans would be barely enough to cope with training needsbut they are steps in the right direction.

b. As for project preparation, the Enterprises will need specificassistance from the authorities to finance feasibility studieswhich they cannot undertake themselves (for want of staff or ofspecific expertise). During negotiations, the Government hasagreed, in principle, to make adequate funds available to StateEnterprises for the preparation of feasibility studies forprojects, at the joint request of BAD's Unit and the enterpriseconcerned. This understanding has been recorded in a Supple-mentary Letter to the Loan and Guarantee Agreements.

IV. THE PROJECT -- PART 2: INSTITUTIONAL ASPECTS AND TECHNICAL ASSISTANCE

4.01 There is considerable scope to increase BAD's role as a responsiblepartner in the investment decision-making process and to enable it to provideits independent opinion and recommendations on specific investment proposals.In so doing, BAD would, for the first time, look at projects in their totalityand assess their merit on that basis. Though BAD would assume its new roleinitially only for a small part of its total financing, the ramifications ofthis important -- and difficult -- change of approach could eventually go farbeyond small projects of the construction materials subsector. In a sense,it is an experiment which, if successful, could gradually result in a strength-ening of BAD's involvement with the whole industrial investment process.

4.02 In appraising BAD for the proposed loan, the Bank concluded thatBAD would not be able to discharge effectively its new responsibilities with-out the support of a substantial technical assistance arrangement. Beforeoutlining this arrangement (paras. 4.25 et seq.) and in order to give a per-spective to its features and scope, a summary description of BAD follows. Amore detailed description is given in Annex VII.

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A. Summary Description of BAD

4.03 By any standard, BAD is a very large financial institution, withtotal assets of about DA 9 billion (US$2.3 billion) and a lending program forthe period 1974-77 well in excess of one billion US dollar equivalent perannum. With a staff of only 75 professionals, and a relatively thin manage-ment structure, BAD cannot look into all the details of such a large invest-ment program. Until recently, top management was overburdened and could notdevote sufficient attention and time to matters of policy, training and or-ganization. Increasingly, however, middle management (mainly eight AssistantDirectors) has been able to take a more active and responsible role and themanagement situation is improving. Nevertheless, BAD's staff has little ex-perience in project appraisal and supervision. There are no engineers and nomarket analysts, and expertise in financial analysis requires strengthening.Since 1973, BAD has been increasingly concerned with training its staff inproject appraisal and financing matters. Several training programs have re-cently been conducted. In addition, BAD is looking for assistance from theBank Group. It has benefitted from EDI courses held in Algiers and inWashington.

4.04 Operations. BAD's operations since the 1971 reform (paragraph 2.11to 2.14) have closely coincided with the investment projects of public enter-prises undertaken under the four-year Plan. In the period 1972-74, 80% byamount of the investment financed by BAD were for 30 large projects costingover DA 100 million each, the remaining 20% being distributed among almost150 smaller projects. BAD's long-term investment loans generally provideabout 40% of the cost of industrial investments. Another 30-35% is made upcf medium-term loans provided by the primary banks while the balance (25-30%)is financed with foreign suppliers credits obtained through -- and generallyguaranteed by -- BAD or the primary banks. Over 50% of BAD's lending isdirected to oil, natural gas and steel mills; these major subsectors are fol-lowed by the electrical and the construction material industries. Besidesmanufacturing industry, BAD also finances other sectors, such as mining,transportation, marketing, electric power and gas supply, agro-industry andfishing.

4.05 Profitability. The Government's and BAD's policy of holding thelatter's interest rate spread to a low level of about 0.75% results in a lowprofitability as gauged against the size of BAD's loan portfolio. BAD's bor-rowing and lending rates are both fixed by the authorities with a view tokeeping financial charges as low as possible. Net profits cannot thereforebe used as a parameter to judge BAD's performance. Any income in excess ofwhat is deemed necessary for short-term liquidity requirements is turned overto the Treasury in the form of contributions to the State's Budget, as iscash surpluses of all other State Enterprises in Algeria.

4.06 Financial Structure. The financial structure of BAD, excluding thefunds it manages on behalf of the Treasury, is essentially made up of itsborrowings from the Treasury (DA 7.2 billion at June 1974), on one side, andof outstanding long-term loans made since 1971 (DA 8.4 billion), on the other.

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Liabilities at June 1974 also include foreign borrowings of DA 802 million,of which DA 570 million represents a loan obtained fromi a consortium ofAmerican banks against the Government's guarantee. BAD's equity amounts toonly DA 213 million. The "Permanent Advance from Government", amounting toDA 1,031 million at June 1974, represents the outstanding balance of BAD'scurrent account with the Treasury, related to the public funds managed byBAD on behalf of the Treasury as remnants of Algeria's pre-1971 financialset-up. 1/ BAD's current ratio !- very comfortable, being well above 2:1.The debt service ratio is roughly .t the 1:1 level, which follows logicallyfrom the fact that the amortization schedules of BAD's loans closely matchthe maturities of BAD's borrowings from the Treasury. 21

4.07 Quality of Portfolio. Total arrears of principal and interest over-due by more than six months on BAD's own portfolio amounted to DA 106 million(1.3%) at June 1974. By amount, the portfolio affected by these arrearsamounted to DA 0.8 billion or a notionally high 9.7% of the total portfoliooutstanding.

4.08 The level of arrears, however, does not provide a fair indicationof BAD's exposure to risk. Profits and losses of State Enterprises in Algeriaare not always a sufficient indication of the efficiency or quality of theenterprise since, in many cases, enterprises are not free to price their out-put. Moreover, profits or losses do not accrue to the enterprise itself, butto the State. When losses occur, rescheduling or restructuring procedures(Annex VII, para. 34) are intended to offset their effect. However, the ad-ministration of these procedures is time consuming. It may take months, orat times more than a year, before a loan in arrears in BAD's portfolio isrescheduled or other measures are taken by Government decisions. Under thissystem, arrears in BAD's portfolio are more a reflection of administrativebottleneck than of BAD's exposure to real risks. BAD, as far as its fiduciarycreditworthiness is concerned, carries practically no risk.

4.09 Controls and Audit. BAD is audited by the Inspectorate of theMinistry of Finance. As long as BAD's risks are borne by the Government, andas long as losses or liquidity problems of borrowers do not affect the qual-ity of BAD's portfolio, the auditing concepts appropriate to BAD are likelyto be different from the ones required for risk-taking financial institutions.However, BAD, the Government, and other creditors need to know that: (i) BAD'saccounts are properly and accurately kept and are organized to provide theeconomy with an efficient information system on investment financing; (ii) fundschanneled through BAD are used in accordance with investment decisions, withcareful control of disbursements and of the progress of project implementation;

1/ The Government plans to convert, in 1975, the outstanding Treasuryadvances into regular long-term loans, along with corresponding addi-tional obligations of BAD to the Treasury.

2/ The terms of BAD's loans determine in general the terms of the Treasuryloans to BAD, so that, in general, maturities of loans and debts coin-cide.

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(iii) debt repayment by enterprises is carefully monitored and that remedies,in line with Algerian policies, are provided promptly. The last aspect entailsthat BAD and its auditors should have a good knowledge of the financial sit-uation of the borrowers. So far, BAD's accounts have not been subjected toin-depth audits along these lines because the inspectors of the Ministry ofFinance are overburdened.

4.10 Recognizing that the proposed loan to BAD is based predominantly onthe creditworthiness of Algeria, there remain nonetheless strong reasons toimprove financial controls (or audits as defined in the preceding paragraph)over BAD as an institution. An accurate and well organized information systemin BAD would benefit the country's financial system as a whole, and the policymakers in supervising the investment process. Also, a scrutiny of BAD's fi-nances and operations is important to BAD itself in view of its new appraisaland supervision objectives, which will require BAD to be more concerned withthe real financial situation of its clients. Therefore, BAD and the Govern-ment have agreed during negotiations to have the inspectors of the Ministryof Finiance audit (in the sense used above) BAD's financial accounts once ayear, and assess the following four points:

- quality and accuracy of accounting methods;- proper use of funds;- status of arrears and remedies to be applied;- financial situation of borrowers.

Given the size of BAD's portfolio, as regards the last two points, the auditorswill focus, in their report for the Bank, on the financial situation of enter-prises financed with Bank funds. Though this review will cover only a verysmall portion of the entire portfolio, it is considered by the Algerians andthe Bank as a major step to familiarize, for the first time, BAD and itsauditor with the objectives of an audit conducted in accordance with generallyaccepted accounting princinles. The Government and BAD are also aware thatthe Bank will monitor closely the audit of BAD, and expects the Bank to adviseBAD and the Ministry of Finance on auditing matters. There is agreement, thatthe Government will, upon the Bank's request, endeavor to take such correctiveaction as niay be necessary. For this purpose, an amount of US$100,000 fromthe proceeds of the loan would be made available to BAD, with the Bank's ap-proval, for the financing of foreign technical assistance in this respect.The Bank also intends to provide technical assistance on auditing mattersto BAD and to the Government when needed.

4.11 Interest Rates. The Government controls the interest rate structureand credit terms in Algeria. A detailed breakdown of the interest rate re-gulations currently applied is given in Annex X. Until now, the Government'sposition has been that the level of interest rates should not affect resourcemobilization and allocation. BAD's long-term industrial dinar loans are madeat 5.75% p.a., for up to 20 years. Rates for foreign exchange loans grantedfrom foreign credit lines are usually related to the actual cost to Algeria,plus a small margin to cover BAD's administrative expenses. The Government is

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not prepared at present to modify its policy, as long as the Plan remains themain instrument of resource allocation and as long as available resources aresufficient to finance the Plan. Thus, the Bank loan under consideration wouldnot have a significant influence on the Government's overall interest ratepolicies. However, on the principle that no subsidv should apply to the useof Bank funds, an agreement has been reached by which Bank funds will be lentby BAD to sub-borrowers (State Enterprises or Wilayate) at a minimum of 10%p.a. As is standard practice in Algeria for foreign lines of credit, thesub-borrower would bear the foreign exchange risk on the use of the Bank funds.This rate will enable BAD to cover its administrative expenses under the loan.At this level of interest, sub-borrowers would have access to external re-sources at a cost which approaches the rates now prevailing in internationalcapital markets.

B. Role of BAD and the Proposed Loan

4.12 At the request of the Government, the Bank has agreed to grant theloan directly to BAD, which will serve as an intermediary for the extensionof credit to enterprises in a specific industrial sub-sector of high economicpriority. While the loan would not support a typical DFC operation, it hassimilarities, such as:

a. The creation within BAD of a Unit capable of sound andproper appraisal and supervision of projects would setthe stage for the gradual strengthening and restructurationof the institution.

b. The agreements reached in this respect should assure theeconomically sound use of Bank funds, under close supervisionby Bank staff.

4.13 BAD is a Government agency and, as such, to a large extent the ad-ministrator of Algeria's capital budget in areas outside agriculture. It isfrequently used as the Government agent for overseas borrowing. The proposalto lend to BAD is not intended to bestow a seal of good housekeeping on theinstitution as an autonomous bank or a DFC; rather it arises from the Bank'sdesire to have as close a relationship with the executing agency as possible.Lending directly to BAD would certainly strengthen our ties with the institu-tion which, in turn, may help to bring about a number of changes in the insti-tution as well as reinforce the work and status of its appraisal and supervi-sion unit.

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4.14 The intentions of the Government to turn BAD into an effective ap-praisal and supervision center will not be fulfilled rapidly. The recruitingand training aspects associated with the appraisal of an investment programsuch as BAD's pose formidable problens. In addition, BAD will have to proveto the decision makers, and to the State Enterprises, that its taking up therole of a development bank is beneficial to the whole economy and that it isnot counterproductive to the Plan's objectives.

4.15 In a first stage, rather than attempting a complete reorganizationof BAD, a more limited approach has been adopted. It consists of the trainingof a selected team of BAD's staff and the adoption of specific policies for asmall portion of BAD's activities (i.e. small and medium-sized projects mostlyin the construction materials industry as described in Chapter III), whichwould meet Bank standards as well as the Government's objectives. For thispurpose, a special department, or Unit, with a clearly defined scope withinBAD's financing activities has been forned. At the beginning, the Unit willlimit its role to the appraisal and supervision of projects financed by theproposed Bank loan. As soon as possible, BAD's Unit should aim at expandingits role and action to other industrial subsectors.

4.16 In addition to BAD's internal constraints in moving in the directionof a development bank in the full sense of that term, the established planningand decision process in'Algeria, as well as the organization of the economy andIn particular of the State or Wilayate Enterprises, are important factors.Three major issues in this respect are discussed below:

a. Investment Decision Process

4.17 As outlined in Annex IV, the decision to invest ("individualization")has often been taken by SEP on the basis of feasibility studies of uneven qual-ity, usually prepared by the State Enterprises and reviewed by their parentMinistry (generally, the Ministrv of Industry and Energy). Once the "indivi-dualization" decision had been taken by SEP, BAD and the banking sector wereunder the obligation to provide financing without evaluating the project'scharacteristics.

4.18 The inherent weakness in this system had its roots mainly in thelack of available expertise in the banks of which the Government was very muchconscious. In fact, the regulations approved since 1971, and reaffirmed in1974 decrees, clearly called for an active participation of the banks, espe-cially BAD, in assessing projects before the SEP's decision. One of the primeobjectives of the Government in its request for Bank assistance to BAL is pre-cisely to enable BAD, now, to fulfill gradually its obligation to appraise theprojects it finances. For that purpose, and as first step, the Government hasassured BAD, and the Bank, that, at least fcr projects to be appraised by BAD'sUnit, BAD's appraisal of and recommendations on a project will be made beforea project is presented to SEP for "individualization". This understanding,reached during negotiations would permit BAD to assume full responsibilityfor the appraisal of these projects.

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4.19 This system will apply equally to projects of State Enterprises,and of the RIDP, but for the latter, it is likely to have even a vider impactthan for State Enterprises, since the loan will cover-a larger number of RIDPprojects than projects of SNMC and SNMetal. Moreover, the decision processfor the RIDP is still new and under review. For RIDP projects, there will be

a de facto delegation of project planning and projects decision to the Wilayate,whose Technical Committees consider, and recommend on, these projects. Assist-

ance from the Ministry of Interior will nevertheless remain an important feature

of the RIDP; the Ministry issues instructions, administrative decisions, guide-

lines and advice to the Walis. Finally, since BAD chairs the TechnicalCommittees, it should be in a position to ensure that projects have been pro-perly studied before they are passed on for final approval to SEP. Through

the planned establishment of branch offices in the Wilayate, and through coop-eration with the Credit Populaire d'Algerie, which has agi extensive networkof branch offices (para 2.18), BAD will keep in close touch with local invest-ment planners, and will endeavor to ensure that feasibility studies and project

appraisals (the latter by the BAD Unit) are carried out before the TechnicalCommittee recommends on particular investments. Only thereafter will SEP be

called upon for the final decision.

4.20 Obviously, in Algeria's centrally planned economy, the Goverment isfree to make its investment decisions irrespective of BAD's opinion. As aconsequence, SEP might, at times, oblige BAD to finance subprojects that havebeen previously rejected by BAD's appraisal IUnit. Such subprojects, in anyevent, would not be eligible for Bank financing. During negotiations, an

agreement was reached with the Governnent that BAD's position on projectsappraised by the Unit, would be given careful consideration by SEP. BAD's

position on such projects would be decided on by a Technical Committee of BAD.

b. Importance of BAD's Decision

4.21 Under the proposed loan, and more generally under the objectiveswhich have led the authorities to request Bank assistance for this project,BAD should be able to exercise, through its project appraisal and loan super-vision, a direct influence over its sub-borrowers. It should ensure that thesub-projects it finances are well conceived and economically justified, and

it would have to satisfy itself that conditions leading to these results areagreed upon with sub-borrowers. There is clearly a question as to whether BADwill be able to stand up professionally to and exert any degree of real in-fluence over the powerful and very large State Enterprises. The Unit's taskwill not be easy, because (i) BAD has to establish its professional credibilityas a sound appraisal center, and (ii) though the projects to be financed underthe loan will not be very large, as compared to other investment of SNMC orSNMetal, they will require a special effort from these enterprises. Thisissue is complicated by the fact that what would be required by BAD on certain

projects would not apply to other projects. At the beginning, BAD's requestmight even be considered as inconsistent with the general practices and poli-cies applying to the bulk of investments. However, on the basis of statementsmade in Algeria by the State Enterprises themselves, as well as by theirparent Ministry (Industry and Mining), the Ministry of Finance, and SEP, theBank has reached the conclusion that BAD, with the avowed support from the

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Government and from the Bank, should be able to hold its own and exert con-siderable influence over investment decisions also for subprojects, appraisedby BAD's Unit, of large and powerful State Enterprises, such as SNMC and SNMetal.

4.22 The intention of the Government to permit BAD's Unit to exercise itsappraisal and supervision of projects in an independent manner have been con-firmed during negotiations. In addition, in order to assist the Unit in itsinitial stages, BAD will inform investors, their parent ministries (Industry,Interior) and the Walis of the new responsibilities given to BAD and its Unit;BAD will explain its new role and seek the cooperation needed from all parties.

c. Appraisal Criteria

4.23 In Algeria, the law compels public sector enterprises to financethe totality of their investments through credit. As a result, the notionof equity in State or Wilayate Enterprises is not considered important. Theadopted economic and financial thinking in Algeria is that public sector en-terprises are fully integrated with the State and that their creditworthiness,debt liabilities and risk-taking are integral parts of the State's financialstructure. In such a system, financial discipline consists mainly of variousadministrative controls whose efficiency varies. Although the Algerian au-thorities have means of controlling the financial situation of enterprises(the Plan, the approval of enterprises' budgets, the control by the banksover the enterprises, etc.), the current system does not provide the safe-guards which are characteristic of risk-taking enterprises. The only cri-terion presently supported by the Government, and consequently by BAD, is therequirement that enterprises be able to repay their debt on time. Because ofthe general weakness of project appraisals, including the uncertainty affectingdebt service projections, and due to the existence of tight price controls,many public sector enterprises have been facing considerable financial diffi-culties. Ultimately, the Government bails out such enterprises, but the li-ability of the Government in this respect is becoming very large (over DA 5billion in subsidized, long-term loans were granted by the Government in 1974to improve the financial structure of State Enterprises, about half of whichin industry and mining).

4.24 It is not easy against this background to make specific recommenda-tions as to the criteria BAD's Unit should use in assessing the financialsituation of the enterprises it finances. New methods would have to be testedagainst actual experience over some time. In the meanwhile, to establishsome form of financial discipline within the constraints of the existingsystem, BAD's Unit will attempt to assess the financial viability of sub-projects on the basis of the financial return on total capital invested, cal-culated after the exclusioni of possible government subsidies. The effects ofprice controls on the project's profitability will be analyzed by the Unit;when severe distortions derive from price controls, BAD should review withthe Government the sale price of products and make recommendations aiming atprotecting the project's financial viability. Furthermore, the Unit will en-sure that all projects meet sound liquidity and debt-service criteria. Final-ly, in the Algerian system, a key consideration in the appraisal of a project

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would be its economic return, as well as its qualitative economic and socialbenefits. BAD's Unit will attempt to adapt the Bank's guidelines for calcu-lation of economic rates of return on DFC subprojects to country circums-tances. The Bank and EDI will actively assist BAD's Unit in developing amethodology in this respect. The Policy Statement of the Unit (Annex VIII)includes the following benchmarks to be used, at least initially, by the Unitas project selection criteria: projects should =normally yield a minimum fi-nancial rate of return of 9% p.a., and a minimum economic rate of return of8% p.a.

d. Procurement

4.25 A commission formed by BAD, the primary bank, the relevant Ministry,the Plan, a representative of the President's council and, in special cases,the State Enterprise itself, is responsible for obtaining bids, reviewingthem and selecting the best offer. Procurement is regarded as an importantaspect of the investment process in Algeria. In the future, BAD's responsibil-ity to appraise all aspects of the projects it finances would include BAD'spassing judgment also on the effectiveness of procurement procedures.

C. BAD'S New Appraisal and Supervision Unit

4.26 The project appraisal and supervision Unit created within BAD willbe similar in many respects to the projects departments of conventional de-velopment banks. The Unit, though small at the beginning, will be staffedwith economists, engineers and financial analysts of sufficient experience ortraining. In addition, and following a request from the Governiment, twoexperienced staff members of IBRD will be seconded to BAD and assigned to thisUnit to help in appraising projects, to advise on methods and policies and totrain staff. These two persons neither could nor should appraise alone theprojects financed under the proposed loan. However, with proper guidance fromthem, a number of BAD's professionals can attain, over a year or so, the pro-fessional standards required. Six of them have already participated in proj-ect appraisal courses sponsored by EDI in November-December 1974. Furthertraining is underway or planned so that, by mid-1975, a Unit of about twelvequalified or semi-qualified professionals could be in place. Further expan-sion, training and recruiting for the Unit is envisaged (paras. 4.28-4.34).All in all, the Unit, so staffed, should be able, with the advice and part-icipation of the Bank staff seconded, to produce appraisals of adequatequality for Bank financing shortly after the loan becomes effective. Monitor-ing of these appraisals would remain with the Bank, in a way similar to sub-projects financed under Bank loans to development finance companies. Therewould be no free limit. In the process of supervising its loan to BAD, theBank would pay special attention to the organization, training and efficiencyof the Unit, the support it receives from BAD's management and its success indealing with the Government's decision makers as well as with BAD's potentialborrowers.

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4.27 Selection of Subprojects. One of the first tasks of the Unit willbe to organize a work program for appraising projects in an efficient andorderly manner. Project selection will require not only BAD's attention butshould be undertaken in close coordination with the Ministries of Industryand Interior, the Wilayate, INPED and CPA (para. 2.12). As a part of itsreporting obligation s to the Bank, BAD should prepare, by September 1, 1975,a work and lending program of sub-projects to be examined by the Unit, underthe limits defined in para. 3.21) and covering the operations of the Unituntil June 30, 1976. The Unit's work program will be regularly updated atthe beginning and in the middle of each fiscal year and will be communicatedto the Bank. BAD agreed during negotiations to undertake this planning ex-ercise.

4.28 Establishment and Staffing of the Unit. During negotiations, BADconfirmed that it has already created.at present a unit of 10 staff. TheDirector of the Unit, as well as the other staff, have been recruited amongBAD's most experienced and capable staff. The staff include six professionalshaving been exposed to EDI training. In addition, BAD has agreed to recruitat least one experienced engineer to become a member of the Unit. The Bank andBAD are currently searching for qualified candidates. BAD will expand thesize of the Unit as operations dictate.

4.29 Bank Staff Secondment. Two Bank staff members with considerableexpertise in project appraisals and finance will be seconded to BAD to help inthe Unit's operations and in training the staff of the Unit to undertake soundappraisal and supervision of projects. Their secondment to BAD would be con-tracted for a two-year period. During that period, these staff would be fullyresponsible to BAD. Administratively they would be considered by BAD asTechnical Advisors, but BAD has agreed, during negotiations, that they willbe given clear responsibility for establishing guidelines and work programswithin the Unit, according to their experience and in line with the policiesof the Unit (para 4.33). The financing of the salaries and associated costfor staff secondment (including the engineer if expatriate) will be proposedto UNDP. There are already informal indication that UNDP financing can besecured. In such a case the Bank will be the Executing Agent.

4.30 Association with INPED. In its appraisal of investment subprojectsfinanced under the proposed loan, BAD will have to analyze and pass judgmenton all aspects of these projects, including the managerial, technical andmarket aspects. The lack of experts in Algeria in these fields is a seriousconstraint and severely limits BAD's possibilities to hire experts in thesedisciplines. The authorities have assigned to INPED (Annex III) part of thetask of studying the technical and market aspects of projects in the Wilayateindustrial program and other sectors, as well as to provide technical assist-ance for training the middle and top management for enterprises. INPED, whichreceives massive foreign technical assistance and has sufficient experts toaccomplish a useful role, has agreed to assist BAD in the technical/market/training appraisal of subprojects to be financed by the Unit. At least, overa reasonable period, such an arrangement would allow BAD to divide its work,and to proceed with the training of its own staff without embarking upon an

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over-ambitious hiring plan. In appraising this project, considerable atten-tion has been given to INPED's qualifications as a supporting agency to BAD.Our assessment is threefold. First, INPED seems to have the means, and isacquiring the experience, to provide good quality technical advice on projects;most of INPED's engineers come from reputable foreign companies. Secondly,INPED management seems determined to run INPED in an efficient manner and iswilling to cooperate with BAD. Thirdly, the alternative of having BAD hiringall the technicians it would need or passing a technical assistance contractwith foreign firms does not seem a practical solution.

4.31 An agreement has already been signed between INPED and BAD, estab-lishing a cooperation program according to which INPED would provide BAD(without charge) with the assistance needed to (i) define the technical as-pects of subprojects, (ii) evaluate the market, and (iii) train managementand other experts especially for Wilayate enterprises, as needed, in lightof BAD's appraisal of subprojects under the proposed loan. BAD, not INPED,will be in control of the Unit's appraisals. The Unit should be able, onthe strength of its own staff, to monitor the technical work assigned ini-tially to INPED. This is one of the main reasons for the requirement thatthe Unit include at least one experienced engineer.

4.32 Association with the Credit Populaire d'Algerie (CPA). CPA is theappointed primary bank for Wilayate enterprises; it has an extensive networkof branches across the country. CPA is currently studying the impact the RIDPwould have on its organization and finances. It is too early to have a clearpicture in this respect but, obviously, CPA will play an important role in theday-to-day operations of Wilaya enterprises and, lndirectly, on the Bank proj-ect. For example, CPA would have to arrange for frequent supervision of theenterprises it finances with medium-term or working capital loans. Also, BADand CPA will closely cooperate in the implementation of investment projectssince CPA will maintain and monitor the accounts of the Wilaya enterprises.CPA will also be associated with BAD in the supervision of the constructionof projects as well as, later on, the operation of these enterprises. CPAhas already indicated that it will provide BAD with the assistance needed toachieve the purpose of the proposed Bank loan. Though it is not recommendedhere to formalize the relationships between CPA and BAD in the context of thisproject, it would be useful, to the extent possible, to continue the dialoguebetween the Bank and CPA, through BAD, so that CPA would be well informed ofthe Bank project and able to provide maximum cooperation to BAD in the day-to-day performance of this project.

4.33 Policy Statement of the Unit. The Unit's operations and performancewill be functions of (i) the quality of the staff assigned to it, (ii) theadvisory role of Bank staff seconded to it and their acceptance by BAD and bythe Unit, and (iii) the support received by the Unit from BAD's top management.A Policy Statement establishing the Unit as a structured group with clearguidelines regarding staffing, advisorv support, training, organization,operational objectives, basic approach to project appraisal and supervisionincluding methodology, is an essential part of the proposed loan. It isattached in Annex VIII. During negotiations, BAD agreed that this Statementbe incorporated in the Loan Agreement (Schedule III thereof).

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4.34 Further Training. Further outside assistance would be required toenable the Unit, and BAD as a whole, to make progress in its project appraisalexpertise. There are two areas where the Bank Group can continue to assistBAD. First, further training through EDI and specific training within theBank would continue both in the field and in Washington. Second, the Bankshould be prepared to accommodate requests to associate BAD staff to Bankappraisal missions in Algeria for projects, for which the local currency fi-nancing is provided by BAD (i.e. all projects in the productive sectors ex-cluding agriculture). In this process, a number of BAD staff could be ex-posed to the appraisal methods of the Bank in large projects. This wouldhelp BAD in its work under the proposed loan; it would also pave the way forBAD's undertaking sound appraisals of large projects in the longer run.

V. THE PROPOSED LOAN

Recommendations

5.01 A Bank loan to BAD of US$40 million equivalent is recommended tofinance part of the import component of construction materials subprojectsfinanced by BAD. These subprojects would have been fully appraised by BAD'sUnit according to the Statement of Operations and Policies of the Unit (AnnexVIII) and would be submitted to the Bank after approval by BAD's Board and SEP.In line with the Bank's and BAD's experience with the type of projects includedin this loan, subloans should be repaid over a maximum period of 15 years fromthe date of the loan; grace periods of 1-4 years are normally to be expected.The terms of the proposed loan, will be determined on the basis of the aggre-gate maturities of BAD's subloans; however, the total term will not exceed15 years. There would be no free limit. The Bank will provide technicalassistance to BAD through the secondment of two qualified Bank staff over atwo year period. As explained in para. 4.10, a portion -- up to US$100,000 --of the proposed loan would be available to BAD, with the Bank's approval, tofinance part of the foreign technical assistance to improve BAD's audit.

ALGERIA

SELE'TED DEVELOPPE:T INDIq' TORS

Actual Est. Prolected Growth rates1973- 1975- 1980-

1973 1974 1975 1976 1977 1980 1985 1977 1980 1985

A. NATIONAL ACCOUNTS(DA billions; 1973 prices)

1. Gross domestie produet 31.2 33.3 35.4 39.9 43,0 53.5 75.9 8.3 8.6 7.2

2. Gains from TT - 7.4 6.0 6.7 6.1 8.5 11.7

3. Gross domestic income 31.2 40.7 41.4 46.5 49.2 62.0 87.6 12.1 8.4 7.2

4. Imports 11.1 14.5 16.8 18.1 18.9 21.8 29.5 14.2 5.4 6.2

5. Exports - volume 8.6 7.8 7.5 8.8 9.7 13.6 18.0 3.1 12.6 5.8

6. Exports - TT adj. -8.6 -15.2 -13.4 -15.4 -15.8 -17.4 -29.7 16.4 5. 4 11.3

7. Resource gap - TT adj. 2.6 - 0.7 3.4 2.6 3.1 - 0.3 - 0.2

8. Consumption 21.7 25.4 27.2 32.1 34.2 40.2 58.6 12.0 8.1 7.8

9. Investment, inci. stocks 12.0 14.7 17.5 17.0 18.1 21.5 28.8 10.8 4.2 6.0

B. BALANCE OF PAYMENTS($ millions; current prices)

1. Exports, incl. NFS 2,057 4,918 4,813 6,017 6,662 11,517 21,696 34.2 19.1 13.5

(Hydrocarbon exports) (1,489) (4,348) (4,164) (5,282) (5,829) (10,255) (18,871) (40 8) (19.8q) (13-0)

2. Imports, incl. NFS -2,669 -4,700 -6,015 -7,045 -7,974 -11,370 -21,524 31.8 13.6 13.6

3. Resource balance - 612 218 -1,201 -1,027 -1,312 147 172

4. Net factor service income 105 142 130 47 -38 - 154 - 1l6

(Interest receipts) ( 19) ( 84) (110) (101) (113) (149) (256)

(Workers' remittances) (214) (241) (266) (290) (313) (387) (543)

(Interest payments) (-79) (-130) (-195) (-280) (-395) (-730) (--74)

(Other, net) (-49) (-53) (-50) (-6 ) (-70) (-6() (-91)

5. Net current transfers 84 95 95 95 95 95 9-

6. Balance on current account - 423 4S6 -976 _ &. -1,255 -18 101

7. Private direct investment 48 5S 64 74 84 104 (9

8. Official capital grants -37 -76 0 0 0 0 0

9. Public M+LT loans, net 912 162 751 1,059 1,395 223 365

(Disbursements) (1,066) (470) (l,032) (1,508) (2,051) (1,696) (2,6'14)

(Amortization) (- 154) (- 632) i/(- 281) (- 449) (- 656) (-1,473) (-2,249)

10. Capital transactions, n.e.i. 73 277 13 10 9 13 23

11. Change in reserves (- increase) - 573 - 550 147 - 258 - 232 - 322 - 579

12. Net reserves- amount at year's end 1,100 1,650 1,504 1,761 1,993 2,842 5,381

- equivalent in months' imports 4.9 4.2 3.0 3.0 3.0 3.0 3.0

C. EXTERNAL DEBT1. Loan commitments ($ million) 2,112 156 902 1,380 2, 23 1,769 2,712

(Commercial banks) (1,301) 344/ (415) (90) (1,606) (79) (1.415;)

2. Debt service: %; of exports 11.3 8.5 - 9.8 12.1 15.8 19.1 14.4

3. Debt outs. and disb. ($ million) 3,164 2,851 3,584 4,643 6,037 7,986 9,427

1J Including advance repayments of commercial bank loans totalling $344 million.

/ Excluding advance repayments from debt service.- nil or less than half of unit shown

not applicable H

Details may not add up to totals due to rounding.

EMENA IC&DFCMarch 1975

ANNEX IlPage 1

BANQUE ALGERIENNE DE DEVELOPPEMENT

The Banking System of Algeria - A Summary

1. The Credit Council, established in 1971, is the highest nionetaryauthority; it examines and advises on all matters related to monetary andcredit policy, particularly in the volume and cost of credit. The TechnicalCommittee of Banking Institutions was set Up at the same time as the CreditCouncil to study the problems of the banking system and propose measures forimprovements.

2. The Central Bank was established in December 1962 and commencedoperations in 1963 by assuming the functions formerly undertaken by theFrench nationalized bank, Bank of Algeria. It has the usual instruments ofmonetary policy such as open market operations, discount rate changes, redis-count ceilings, and liquidity ratios but relies primarily on rediscount ceilings.It is administered by a Governor, a Director General and a Board of Directors.Both the Governor and the Director General are appointed by Presidential Decreeand are permanent members of the Board cf Directors. The Board has broadpowers over credit and monetary policies and decisions are taken by simplemajority. The Central Bank receives deposits from the Government and makespayments on its behalf in its role as a banker and financial agent for theGovernment. As banker to the primary banks and other specialized creditinstitutions (BAD), the Central Bank accepts deposits and provides creditmostly in the form of short-term rediscounts of commercial paper and treasurybills. Medium-term credit may be rediscounted to the primary banks and toother specialized financial institutions (BAD, CNEP) to help finance invest-ments provided in the Plan and for housing construction. These medium termcredits are granted for an initial period of three months and renewable up tofive years, but after three years they have to be financed in full by theprimary banks. In principle, the commercial banks are required to hold theequivalent of 60%o of their short-term assets in short-term liabilities.

3. The three state-owned primary banks conduct all banking activitiesand, together with the Postal System, handle all external financial transac-tions. They are allowed to carry out foreign exchange operations but they arerequired to transfer daily their foreign exchange balance to the Central Bank.Individuals and private enterprises may have as many accounts in as mïanyprimary banks as they choose. Public enterprises are assigned to one primarybank in which they are permitted two accounts; one for current operations andone for capital investment. Primary banks are permitted to borrow abroad ona long-term basis in order to fund some of the foreign exchange needs of thepublic sector enterprises assigned to theri, and thev can also issue guaranteeson foreign borrowings of those public enterprises which have sufficient standingto top the international capital market on the strength of their own name(i.e., SONATRACH). All foreign borrowings are channelled through BAD. Ingeneral, the primary banks cannot make long-terr loans; exceptions are long-term loans out of resources obtained from foreign long-term borrowings, orloans made to agriculture by BNA.

ANNEX IlPage 2

4. A summary of the main features of each of the three primary banksfollows:

(i) The Banque Nationale d'Algerie (BNA) established in July1966, had 3,300 employees, and assets of DA 7.3 billionat end 1972. It had 155 branches throughout the countryby the end of 1974. It is the only bank which has accessto Treasury loans for medium and long-term investment creditto agriculture. It also finances agricultural crops andtheir marketing from its own resources; it is in fact in-volved in the appraisal of agricultural projects startingfrom the local level and all the way up to final Governmentapproval. Besides having a monopoly in agriculture, it has30 State Enterprises assigned to it, some of them inagriculture-related fields such as food processing, textilesand wood industries. It has also AIR Algerie, mining com-panies and metal transformation industries. Twenty percentof BNA's operations are still done with private investors.

(ii) The Banque Exterieure d'Algerie, (BEA) established in 1967through the nationalization and amalgamation of five foreignbanks operating in Algeria initially handled all foreignoperations of the Algerian banking community. It had 1,400employees and assets of DA 3.8 billion at end 1972, 24branches in the main cities of the country. Today it handlesabout 60% of the banking business generated by State Enter-prises since it is the primary bank for SONATRACH and SNS,the two largest State Enterprises in the country. It alsohas other State Enterprises in the chemical, construtionmaterials, shipping, paper and electricity sectors, amongothers.

(iii) The "Credit Populaire d'Algerie" (CPA) was also establishedin 1967 and it has about 50 branches throughout the country.It had about 1,300 employees and assets of about DA 1.8 bil-lion at end 1972. It handles more business with privateinvestors than the other two primary banks but no exactfigures were available. It was originally supposed tobe the bank for small and medium-size enterprises but it hasgradually diversified its business with large enterprises inthe public sector, particularly construction, transport andtourism. In November, 1972, CPA was appointed the primarybank of Wilayate and Commune enterprises.

5. Other financial institutions in Algeria include the National SavingsFund (CNEP), which was formed in 1966 and mobilizes small savings of bothindividuals and local communities and provides them with housing and mortgageloans; the Postal Checking System, which accepts deposits; and two state ownedinsurance companies which have the monopoly of all insurance operations in thecountry, as a result of their assuming since 1966, the activities of a numberof insurance agencies, most of them branches of foreign companies.

EMENAIC/DFC DivisionAugust 1974

ANNEX IIIPage 1

INSTITUT NATIONAL DE LA PRODUCTIVITEET DU DEVELOPPEMENT INDUSTRIEL

(INPED)

1. INPED was created in August 1967 as a public sector agency under theMinistry of Industry. Headquarters are in Boumerdes, about 50 miles east ofAlgiers.

Objectives and Purposes

2. To assist in the industrialization of Algeria, INPED's main func-tions and roles are defined as follows:

(a) Train management of industrial enterprises in businessadministration

(b) Provide technical assistance to State Enterprises inorganization and management problems;

(c) Provide general consulting services to State Enterprises;

(d) Prepare feasibility studies and/or appraise the technicaland marketing aspects of projects for State Enterprises;

(e) Provide assistance to communes and wilayate in regionaldevelopment programs, including project identification,appraisal of projects and training of managers and skilledlabor.

3. With the growing demand placed on INPED for technical assistance andappraisal services by the Ministry of Industry, the State Enterprises andwilayate, INPED is now organized in four departments, as follows:

(a) Organization of Enterprises and management problems, (DOG)which provides consulting services for organization of StateEnterprises. Over 50 consulting contracts have been signedto date. INPED has a team of Algerian and foreign expertsfor this activity.

(b) Management training. This department organizes courses andseminars in business administration and various specializedtopics. INPED courses are in large part organized and rununder Canadian Technical assistance. At present about 600students are trained every year.

ANNEX IIIPage 2

(c) Technical and market appraisal of new industrial projects ofState Enterprises. For this task, INPED has contracted withseveral large engineering and consulting firms in Europe fromwhere it can draw expertise on a case by case basis. For thisactivity, INPED is opening two branches in 1975, in Oran andin Constantine.

(d) Regional Development Department. This department which isrelatively new is expected to acquire considerable importancein the near future. Its role would be essentially to estab-lish a link between the objective of the Plan and its actualimplementation. This department would be involved with thesectoral identification of projects, market studies, feasibilitystudies, technical and market appraisals of specific subprojectsas well as training of staff. INPED has negotiated substantialtechnical assistance contracts in Europe to provide this Depart-ment with the expertise in engineering and marketing needed forthis program.

STATEMENT OF AGREEMENTBETWEEN

BANQUE ALGERIENNE DE DEVELOPPEMENT (BAD)AiD

NATIONAL INSTITUTE OF PRODUCTIVITY AND INDUSTRIAL DEVELOPMENT (INPED)

Prefatory Statement

The cooperation between Algeria and IBRD is bound to materializewith IBRD extending to our country a line of credit intended to financemedium sized projects related to the Wilayate.

Within this framework, BAD, which is responsible for the promotionof investments in Algeria, plans to set up, with the cooperation of INPED,the means necessary for the appraisal and implementation of these projects.

.For this purpose, a project appraisal Unit has been created withinBAD, with IBRD's technical assistance. The Unit is in charge of studying andappraising projects selected for financing under the loan extended by IBRD.

Before a planned investment is implemented, it is important toundertake a feasibility study covering all aspects of the project.

To this end, INPED is called upon to cooperate with BAD, and speci-fically with its projects appraisal Unit, by contributing its expertise inthose areas in which the Unit is deficient, namely, in technical, economic,and engineering studies.

ANNEX IIIPage 3

Since INPED is the organization which the Ministry of Industry hasput in charge of promoting medium scale enterprises, its contribution isuseful in view of its role and of the means available to it.

The present agreement has the purpose of defining the modalities onthe basis of which the two institutions will cooperate, their common goalbeing the development of the country.

Article 1

BAD and INPED vill join efforts to select, study, and formallyappraise, projects likely to be financed under the IBRD line of credit, inorder to meet all conditions necessary to implement the planned investments.

Article 2

The cooperation between INPED and BAD will pertain to the followingaspects:

- project selectionfeasibility studies

- technico-economical studies- engineering studies- organization and management studies.

Article 3

Projects likely to benefit from IBRD financing may be chosen amongthose which the Wilayate have requested INPED to study.

Article 4

INPED will provide, under its authority, the necessary staff innumber and in quality, to perform the tasks which will be confided to it.

Article 5

BAD's appraisal Unit shall prepare, with the collaboration of INPED,all the necessary studies relating to the selected projects.

Article 6

The two institutions shall work in close cooperation, beginning fromthe project selection phase, until the project's implementation. During thisprocess the two institutions shall consult with each other, and shall exchangeall information on each project.

ANNEX 111Page 4

Article 7

For each project, BAD shall commit to INPED specific tasks throughformal requests made in accordance with this Agreement.

Article 8

The two parties reserve the possibility of concluding new agreementsin order to better specify the terms of their cooperation, and to adapt themto each particular case.

Article 9

This Agreement applies especially to BAD's and INPED's interventionin the following industria.l branches:

- construction materials- metal frames- wood and metal general carpentry- prefabricated construction- general mechanics- small hardware for the construction industry- food processing and chemical industries.

Article 1U

After having been studied and appraised, the projects shall undergothe procedure foreseen by the State Secretariat for Planning and by the Minis-try of Finances concerning the financing of local economic units.

Article Il

This Statement of Agreement is prepared in two copies, eacri of whichshall be regarded as equally authentic.

Article 12

The present Agreement shall become effective on the day w..en it issigned, and shall remain in effect indefinitely. However, each o0 t;he partiesshall be entitled to terminate it by advising the other party by rtzisteredmail at least two months in advance.

Algiers, February 17, 197Y

Signed:

for INPED for BADThe Director The President Director General

EMENAIC & DFC DivisionsMarch 1975

BAN4UE ALERIENNE DE DEVELOPPEYENT

The Indu strial Inveatient Decision Process Stop by Stop - A Sumary

Institutlons alhose Type InatitutUonvieie are sought of Responaible Inatitutionaand/or which Outcome / for Idvised

participate in Decision Outcomse o ofStage Mnin Purpose the discussions Decision Decision

Plan 4eetings Discuesion of SEM, PBs, Ministries, Det-ermination of SEP PBa, Minzatriea,the 4-year BAD, CB, SNs tentative amriunts BAD,, CB, SNeinvestment o! investsentsprogram by envisaged forSector/sub- the h-year Plan;sector/ enter- definition of apriee framework of

activities

Tentative Define the need SEP, PBs, Min- Identification of Min Induatr7 SEP, BADstucy for for a specific Industry, BAD, a project on a upon the re-Identifica- project within the SNs tentative basis queat of thetion of an framework provided SNindustrial 1/ by the Planproject

yeasibility Study of technical 2SP, Minlndustry, Produce a feasi- SNs, under PBa, BAD, SUstudy together market, and ec nomic SNs, BAD bility report Min Induatry'a Min Financewith a request aspectso. à project substantiating lqua-lity"to "individual- with preliminary the request to control 2/-ze" the project financirg plan "individualize"

pa coject

!rydv&iLk' i -- 7 4ecidc or the SEP, Milind2stry Decisi.r. to -o SEP upon PMU ? PBa, N±nSxba-try,tiir: Decision mrin aspects ahead with a Industry's BAD, MinFinance(DI) together Justifyir.g a spe- project within the recomwndationmw.t' "technicaL ci2ic project context defined bycard" 'F.T.) the Plan

lnnual Trarc9he To consclidate the SEP, MinFinance, Definition of the BAD'a Board PBa, MinInduetry,o- Ihnvestmer.ts tert-ttive financial BAD total investment (Minpinanoe/ CB, SNa

pl'ns _ each one of needs for a year SEP issuethe projects whose D.I. on the basis of formally)h as already been taken the tentative fin-

ancing plans of theerterprises andthe investment amountsreraînainfln unallocated

from previous years

F1n3ncing To produce the BAD, PBs, SNs Provide a project BAD's Board PBs, MinIndustry,P?mn :or a financing plan whose D.I. has (MinFinance SEP, CB, SNsproject on. a hest suited to already been taken authorizesfinal basis the project's with authorization foreally)

neecs according to for a given financingthe availability plan. 3/of t.he Country'sfinancial resoa.rces

Convertion To agree on the BAD, PBs, SNs Cosmitment of the SN RAD, PBa, SNs MinIndutry,or sign3ture of commitments defining to carry out the MinFinancethe loan/s the specific terms project and of the CBapproved by the of the financirg financial system tofinancing plan authorized provide it with theas authorized approvea financing LVor a final basis

Pootnotesa See page 2

ImmR IC&LWVt 197i&

ANNU IVPage 2 of 2

Footnotes to Page 1

1/ Industry in a wide sense; productive activities. The process is the same for other type

of projects but the role of each institution varies slightly (i.e., MinIndustry, would be

substituted by MinAgriculture in the case of an agriculture project).

2/ The quality control consists basically in the checking of the study' e main features as

against the "Manuel d'evaluation des Projets" which is kept and updated regularly by the

SEP on the basis of the experience gained by the overalll system in project appraisal.

3/ Financing Plan is prepared on a pluriannual basis but there is only a comnitment to provide

financing in a one given year; the plan being gradually reviewed in light of: 1) overruns

of any type and, ii) resource availabilities.

h/ Up ti May 197h, the convention was only on an annual basis, after that date convention is ona project basis, that is to say, it gives a commitment on a pluriannual basis.

ANNEX V

BAiQUE ALGERIENNE DE DEVELOPPEMENT

Charte de le Gestion des Entreprises Socialistes

1. Based on "Ordonnance" No. 71-74 of November 16, 1974, the 'Charte'applies to all Socialist Enterprises, which are defined as financially auto-nomous institutions whose assets are fully owned by the state. A SocialistEnterprise may comprise one or more Units.

2. The worker's General Assembly is elected by the workers for a threeyear period. It consists of 7 - 25 members and meets twice a year or whenexceptional circumstances call for it. The Assemblv has the right to beinformed of all activities of the enterprise and produces an annual reportgiving an opinion on the management of the enterprises. It also gives itsview on the investment program, budget, financial statements and Auditor'sreport. It is associated with management in elaborating personnel, trainingand workers promotion policies of the enterprise, and it is to be consultedby management on every important reform which affects the situation of theworkers as well as on each structural change of the enterprise. It decidesalso on the allocation of the enterprise's profits within the existing legalframework. The Assembly operates on the basis of the work done by specificcommissions on economic/financial, social/cultural, personnel/training, dis-cipline and hygiene/security affairs. The Assembly's decisions are alwaystaken by the majority. The Assembly can be dissolved, if important opera-tional deficiencies occur, under the initiative of the Unions, the Party orthe relevant Ministry.

3. The Management Council is presided by the General Manager and in-cludes an undetermined number of his immediate associates and one or twoworkers' representatives elected by the Assembly. The composition of theManagement Council has to be officially announced by the relevant Ministry.It meets at least once a week and every time the General Manager so wishes.The council is kept informed by Management on the general activities of theenterprise and, specifically, on what Management proposes regarding invest-ment programs, sales, production, expansion, resources, salaries and organi-zation of. the enterprise.

4. The General Manager is responsible for the operations of the enter-prise and "hierarchically' exercises his authority over the personnel. TheGeneral Manager is nominated by Presidential Decree under the proposal of therelevant Ministry and is dismissed following the same legal procedure. TheGeneral Manager proposes his management team to the relevant Ministry for itsofficial nomination.

ANNEX VIPage 1

REGIONAL INDUSTRIAL DEVELOPMENT PROGRAM (RIDP) FORMEDIUM AND SMALL-SIZE INDUSTRIES

A. Background

1. Since Independence, regional disparities in Algeria have been ofconcern to the Government. Before Independence, Algeria's commerce and in-dustry were concentrated in four large cities, and agriculture was limitedto low, rich lands. Distortions were aggravated during the war by destruc-tions in a number of specific zones.

2. During the first Four-Year Plan (1970-73), growing emphasis was putby the Government and the Plan on decentralization of investments. This policywas carried to some extent by State Enterprises which established units ofproduction in new urban centers. The growing allocation of equipment creditsto agriculture, handicraft, as well as the launching of special programis toreconstruct the poorest areas of the country, have also been an incentive forregional development.

3. At the end of the last Plan (1973), 300 small-scale enterprises hadbeen created and were run by local governments. These included 45 enterprisesunder the administration of the Wilayate, mostly handicraft centers, but alsoin construction and public works, transportation and urban development. Theannual turnover of these enterprises reached nearly DA 300 million in 1973.

B. Regional Industries in the Second Plan (1974-77)

4. While exceptional investment procedures continued to apply after1973 for the financing and management of special development programs approvedfor the 200 poorest communes of the country, as well as for the modernizationof 33 urban centers, the Plan (1974-77) promoted a new program of investmentto create small- and medium-size local industries to benefit about equallyall Wilayate in the country.

5. This program is only one part of a general decentralization program.The promoeion of regional industries which would be, in large part, directedto the production of building materials, also foresees the establishment ofdeveloped structures for agriculture, a strengthening of the local governmentsand local administration and rapid growth and modernization of local publicworks enterprises. These objectives would take place under the framework ofdevelopment plans designed and run by wilaya or communes themselves.

6. In the industrial sector, the program has two objectives: On onehand it aims at exploiting local resources, including raw material, agricultureproducts, labor, and at meeting local demand for priority products. On theother hand, this program should allow a gradual balance in industry with largeState Enterprises and discharge the latter from supplying local demand whichcan be accommodated cheaply by the regions thenselves.

ANNEX VIPage 2

7. The regional industrial program is quite substantial. Investmentcredits foreseen by the Plan should reach at least DA 910 million, includingDA 164 million for projects under construction and DA 746 million for new proj-ects. This represents about 2% of net total industrial investment foreseenin the Plan. This program covers about 800 projects including 300 handicraftunits (see above) already in operation which are being reorganized as coopera-tives.

C. Characteristics of the Program

8. The instructions of the Plan regarding small- and medium-size regionalindustries are as follows: "The Plan gives absolute priority to the broadeningof the production capacity at the regional level. In this context, sponsorswill promote rapidly investments related to housing and building construction,such as building materials plants. Investors will also aim at creating pro-duction units such as metal industries, carpentry, wood processing, etc. Inaddition, an essential objective of the development of regional industriesbeing a better balance of employment, sponsors will pay particular attentionin designing the investment to employment factors. The choice of technologyand methodology should aim at maximum labor intensity."

9. The details of the Plan follow very precisely the objectives statedabove. The regional industrial Plan include investment projects in threeareas: (i) construction materials; (ii) general mechanical and metal process-ing, (iii) various medium size industries taking account of local resources,such as food processing textile, handicraft etc.

10. The table below shows the list of RIDP projects as originally fore-seen in the Plan. This table should only be considered as a first approximationof the scope of the program. After further studies conducted by the Ministryof Interior, the conclusion has been reached that the overall size of RIDP willremain close to what was originally planned in terms of total investment cost;conversely, the number of projects to be implemented during the Plan periodwill be drastically reduced, to about one-half. The size and investment costof individual projects, especially in the construction materials subsector, willbe vastly increased compared to original estimates. This follows, on the onehand, from the more accurate cost estimates, taking into account internationalprice increases for the equipment, and, on the other hand, from size optimiza-tion as well as organizational and distribution considerations. Though somewhatoutdated, however, the list of original projects shown in the table is stilluseful because it indicates the direction in which RIDP will develop.

Page 3

REGIONAL INDUSTRIAL DEVELOPMENT PROGRAM

Construction mate- No. of Capacity Investments 50% in foreign currency

rials Projects per unit (DA million) (DA million)

- Bricks 32 15,000 t 144.0 72.0

- Roof tiles 15 10,000 t3 45.0 22.5

- Cement granite tiles 56 100,000 m 112.0 56.0

- Composite materialtiles 47 150,000 m3 94.0 47.0

- Concrete products 35 15,000 t 52.5 26.2

- Plaster 11 15,000 t 33.0 16.5

- Gypsum quarries 3 10,000 t 6.0 3.0

- Quicklime 10 8,000 25.0 12.5

209 511.5 /a 255.7

Metal working industries

- metallic carpentry il - 33.0 16.5

- mechanical industry 20 - 30.0 15.0

- Subcontracting forheavy industry 6 - 30.0 15.0

- Other metal working 30 - 79.0 39.5

67 172.0 86.0

Wood and Paper

- carpentry 39 - 56.0 28.0

- other 10 - 14.0 7.0

49 70.0 35.0

Food processing 13 - 26.0 13.0

Textiles 10 - 24.0 12.0

Chemical products 8 22.0 11.0

Traditional handicraft 12 36.0 18.0

Maintenance work shops 30 30.0 15.0

Tourism projects 106 112.0 56.0

TOTAL 504 1003.5 /b 501.7

/a Average investment cost of construction materials projects: DA 2.5

million or $0.6 million./b Average investment cost per project: DA 2.0 million or $0.5 million.

ANNEX VIPage 4

D. Sample survey of the lWi-laya program

11. The appraisal mission visited several Wilayate and Wilaya projectswhich are already in operation. Some of the findings related to two repre-sentative cases follow:

SOCOHYD

12. This is a pharmaceutical product factory (medicinal cotton-woolgauze) located in Issers, Wilaya of Tizi-Ouzon (east of Algiers). The projectof DA 6 million was financed by grants from the Government channelled throughBAD.

13. SOCOHYD is an industrial complex already in operation and which,when completed, will consist of four sections:

(j) manufacture of absorbent cotton-wool for medical use and non-absorbent cotton-wool for other purposes (investment 6 million DA)

(ii) gauze dressings manufacture with imported gauze (this section isnow being started, investment 4.5 million DA)

(iii) gauze weaving for dressings (realization not yet started;investment 20 million DA)

(iv) spinning the yarn for the gauze manufacture (in planning stage,investment 20 million DA).

14. SOCOIIYD is a legal entity acting under the sponsorship of the Minis-try of the Interior, the technical guidance being assured by the Ministry ofIndustry and Energy and the Health Ministry. It is managed by:

(i) the Assembly of the Workers (General Assembly)

(ii) the legally constituted Supervising Board, of which themembers are:

'the Governor of the Wilaya (Wali), president,1 director of the Wilaya,1 director of the Ministry of the Interior,1 director of the Ministry of Industry and Energy,1 director of the Health Ministry,3 members of the Wilaya Assembly,the General Manager as reporter.

This Council has no direct managerial power.

(iii) the General Manager

pANWEX VI

(iv) the Managing Board constituted by the General Manager, theSection Chiefs (production, maintenance, commercial, personnel),the Secretary General of the Trade Union Section and a memberof the Workers' Assembly.

Overall, the organization of SOCOIYD is very similar to that of a joint-stockcompany (Societe anonyme); as such it gives the impression of being quitecomplicated for a relatively small enterprise. In reality, the day-to-daymanagement is in the hands of the General Manager who, assisted by the seniorstaff, is responsible for the orderly functioning of the plant.

15. Only general bookkeeping is done by the erterprise. As to thebookkeeping of the production costs, the enterprise relies upon the NationalInstitute for Prices, the necessary basic information being supplied bySOCOHYD. The General Manager appears to be competent and quite able to managea plant of this size. The composition of the staff of 80 is adequate.

16. As to profitability SOCOHYD, is starting to show a small profit.But the accounting of the production costs and the pricing policy which isunder the control of the Institute of Prices create a problem. The Instituteis unable to keep a sufficiently close contact with all the enterprises itcontrols. In addition, the Price Institute watches rather carefully thatenterprises make as little profit as possible. Thus, the situation of thisenterprise remain marginal. Making higher profit should, however, be possi-ble. This is a matter of policy linked to the establishment of a pricingmechanism which would adequately reflect efficiency of enterprises not onlyfor the distribution of the Wilaya divident, but eventually for the creationof a reserve fund.

Achievements and Prospects in the Wilaya of Tlemcen

17. The wilaya of Tlemcen has created and developed several enterprisesin the framework of regional development as follows:

- Public works equipment and material- Public works (SOTRAWIT)- *Water supply and sewage (SOGERWIT)- Center for Silk (CETS)- Four agriculture or agro-industry units.

18. The silk center is an interesting project which aims at developingproduction, processing and spinning of silk. Already 1000 hectaresof mulberrytrees have been planted and the mill is under construction. In a first phasethis project will employ 700 people. This project would serve as a test forthe creation of similar project wherever mulberry trees can be cultivated.It appears to be a very promising example of integrated agro-industry.

ANNEX VIPage 6

Two of the other industrial enterprises are described below:

(a) Public works' equipment and material

19. This enterprise was created in 1971. The objective was to buildup a stock of equipment, vehicles and parts for public works in the Wilaya.Such equipment could be rented to users. From this initial objective, essen-tially based on leasing, the enterprise has started to undertake itself publicworks, such as roads, heavy works, navvying, embankinent, etc... By the endof 1974, the enterprise employed 450 people, including 10 engineers, dividedin four departments:

- public works- purchase and leasing of equipment- repairs and workshop- quarries

20. At its inception the enterprise received a government grant ofDA 10 million which was used for the purchase of equipment. During the firsttwo years, financial controls have been very loose. Accounting and financewere organized in 1973 leading to a situation which appears quite sound (sales:DA 14 million in 1974.

(b) Public works (SOTRAWIT)

21. Also created in 1971, its first contract was the construction of aschool which opened in September 1971. This enterprise has developed veryrapidly but cannot meet all demand. In 1974 it employed 1,150 persons. Theenterprise is organized in two main departments:

Engineering - which organizes and controls civil and public worksprojects. It includes 3 engineers, 2 architects,2 quantity surveyers, 2 draftsmen, etc.

Production - organizes various activities needed for the workprogram of the enterprise such as wood, mechanicalwork, paint, plumbing, construction materials, etc.

22. The financing of SOTRAWIT included a government grant of DA 0.5 mil-lion, and a Treasury loan of DA 2.0 million. The Public Work's Equipment andMaterial Enterprise provided considerable assistance in leasing equipment andproviding Treasury facilities. The turnover of the company has grown rapidlyfrom DA 7 million in 1972, to DA 14 million in 1973 and 1974. Starting 1973SOTRAWIT had to have recourse to bank credit.

23. SOTRAWIT has good top management. It is however handicapped by thelack of middle management. They are planning to create a new unit for pre-fabricated lodging with financing from BAD.

ANNEX VIPage 7

Prospects and planning for the Wilaya of Tlemcen

24. The small- and medium-size industrial program for the Wilaya ofTlemcen includes 51 projects, 21 from previous programs and 30 entirely newprojects. 22 out of the 30 new projects are purely industrial in their con-cept and include 13 projects in construction materials, 4 in metal processing,3 in wood processing, 1 textile project. Construction materials, wood andmetal represent respectively 50, 17 and 9% of total investment cost of theprogram, which totals DA 64 mîllion. In discussion with responsible officialsin the Wilaya, two remarks were made regarding the Plan. First, there isconsiderably enthusiasm for Government support, both in finance and technicalassistance. But at the same time the local government believes that theprogram itself is not always correctly tailored to the specific needs of theWilaya. In the Wilaya of Tlemcen, such doubts are raised as regard theproduction of bricks for example which is already produced in this area bySNMC. The local authorities would like to put more priority on the creationof processing industries related to construction and industrial equipmnent,such as metal processing, electrical equipment, prefabrication of housing andbuildings etc. The dialogue between the Wilaya and the Central Government isonly starting and it will be as a result of this dialogue that details of thePlan itself are likely to evolve to meet better the regional needs of theWilaya.

EMENAIC & DFCJanuary 21, 1974

ANNEX VIIPage 1

Description, Activities and Prospects ofBanque Algerienne de Developpement (BAD)

(as of end 1974)

A. Establishment, Ownership, Legal Status and Functions

1. Banque Algerienne de D.eçloppement (BAD), a State Enterprise fullyowned by the Algerian Government, was created in 1963 under the name ofCaisse Algerienne de Development (CAD). 1/ Its purpose was and continues tobe to participate in the financing of productive investments, to implementthe investment programs of the Algerian Government and to assure adequateterm financing for all approved investments undertaken in Algeria.

2. Before 1971, BAD was merely for administrative purposes, a channelbetween the Treasury and the State Enterprises. The 1971 reform gave BAD anessential role in the allocation of resources to investment. 2/

3. BAD's main functions at present are as follows:

a. To prepare the financial plan for investment projects approvedby the Plan. These financial plans are based on technical andmarket appraisals prepared by the State Enterprises and theirparent ministry. In drawing these plans, BAD takes into con-sideration the nature of the investment and the expected cashgeneration of the project. BAD is responsible to prepare fi-nancial plans into annual tranches for each type of financing:long- and medium-term loans, as well as external credits to fi-nance imports.

b. To provide the long-term financing requirements of the produc-tive investments according to the plan as defined in (a) above(medium-term financing is assured by the primary banks).

c. To make available foreign credits needed to finance the foreignexchange component of projects either by mobilizing foreignlines of credit on its own account, or guaranteeing foreignexchange borrowings or suppliers' or buyers' credit obtainedby the primary banks or by State Enterprises, and managingbilateral governmental credits.

d. To supervise the implementation of the investments (especiallyas regards disbursements) and to agree to restructure the debtservicing of the enterprises if their financial equilibrium isendangered.

1/ Law 63-165, May 7, 1963.

2/ The law creating BAD was amended by "Ordonnance" 71-43 of June 30, 1971and by "Ordonnance" 72-76 of June 7, 1972.

ANNEX VIIPage 2

e. To grant the benefits of the Investment Code to private enter-prises.

f. To manage budgetary operations and Government grants for theTreasury. BAD acts in this case as the controller and dis-bursing agent for the Treasury. Beginning 1974, BAD is gra-dually phasing out of these functions.

B. The Board

4. BAD's Board consists of its President-General Manager, its DeputyGeneral Manager (both nominated by Presidential Decree), the Director of theTreasury, a representative of the Central Bank, one of the Plan, one of eachof the three primary banks, and a representative of the parent Ministry ofthe enterprise whose financing is to be discussed at a given meeting. TheMinister of Finance can send his own personal representative to any meetingof BAD's Board.

5. The Board's functions are determined by the Ministry of Finance.It meets, under the Chairmanship of BAD's President, as often as needed, butat least once every two months. Extraordinary meetings can be called by BAD'sPresident or by the Ministry of Finance. Decisions are taken by simple major-ity. The Board's role is that of an administrator, not of a policy maker;the latter role rests with the Ministry of Finance. The Board has three mainfunctions: (i) it is responsible for the preparation of annual tranches ofinvestment approved by the Plan; (ii) it plays a decisive role in consolidat-ing the financial situation of State Enterprises in difficulties through re-scheduling of loans; and (iii) it decides on the financing of investmentprojects already authorized by the Plan. BAD's Board does not approve orreject projects per se but only their financing. The authorities have re-cently agreed that the Investment and Financing Decisions are to be takensimultaneously in the near future. Under this system, BAD's Board will begiven the opportunity to comment on a project's merits before the InvestmentDecision is taken and this should give BAD and its Board more responsibilityin the investment decision process.

6. Within the framework of Algeria's regional decentralization and or-ganization of the regional investment programs (RIDP, Agrarian Revolutionand other special programs), the Government is promoting some decentraliza-tion, or at least branching, of the banks in the regions. For industry,mining, tourism and other sectors covered by BAD, both BAD and CPA would beassociated in financing Wilaya and Commune Enterprises. In the same wayas for the Board, but at the Wilayate level, BAD will chair RegionalTechnical Committees composed also of representatives of the Wali, theCommune, the Treasury, CPA and the Central Bank. This committee will havethe power of BAD's Board over the financing of RIDP projects. BAD, however,will remain fully responsible for its financial assistance to projects.

ANNEX VIIPage 3

C. Management Staff and Organization

Management

7. Mr. Mustapha Ali Kara has been BAD's President-General Manager sinceMay 1973. Until then, he had been for several years Algeria's ExecutiveDirector at the African Development Bank. BAD's President is responsible forBAD's operations and for implementing the Board's decisions. Mr. Nader Nouioua,BAD's Deputy General Manager, has been with BAD since 1970 and was previouslywith the Central Bank. The Deputy General Manager is responsible for the in-ternal organization and the day to day management of the operations of thebank. Both the President-General Manager and his Deputy General Managerare nominated by Presidential Decree on the Minister of Finance's proposal.

Staff

8. BAD's staff was 225 at the end of 1974, of which 75 can be consid-ered professionals. l/ Twenty-five professionals hold college degrees, mostlyin law and business. Six professionals attended a course in project appraisalsponsored by EDI in November-December 1974. Twenty-one more are at variouslevels of graduation. Salaries are at the same level as in commercial banks,but about 15% below the industrial sector. 2/ Turnover has been kept below10%. Department Heads or a Section Heads have been in BAD on the average 5 to6 years. Most of the professional staff have had more than five years ex-perience in banks and administration prior to their coming to BAD. Neverthe-less, BAD's professionals have little experience in project appraisal workor supervision. There is no engineer, no market analyst, and expertise infinance itself, which should be the strong point of BAD, appears to requireconsiderable strengthening. The rather large number of clerical or semi-clerical staff (113) is explained by the rale BAD had been performing ascontroller of disbursements made for investments.

9. Shortage of qualified staff is an acute problem in Algeria. Aspecial program to train 26 undergraduates was started by BAD in mid-1973.All 26 have joined BAD after a year of formal education in finance and ac-counting. A similar program involving 25 trainees is now underway. Forits day to day operations, BAD relies heavily on its middle management(Department and Section Heads). Most Department Heads seem well aware of andin control of the business of their departments. Their qualifications andexperience, as well as their professional capabilities, seem well gearedtowards the type of work BAD has been performing so far.

1/ Management team not included. At the end of 1971, there were 169 staffemployed in BAD of which 42 professionals, about the same proportion(20%-25%) throughout the period.

2/ A National Commission has been created under the Ministry of the Interiorto try to equalize salaries between industry, the civil service and thebanking system.

ANNEX VIIPage 4

10. With the prospect of considerable growth of business over the per-iod of the new Plan (1974-78), together with the increasing pressure put onBAD to become more involved with appraisal and supervision of the projectsit finances, BAD will continue over the next two or three years to sufferfrom a very tight staff situation. BAD and the Ministry of Finance, arekeen on finding a solution to this problem. They have asked the Bank tohelp but technical assistance alone will not be sufficient to strengthenBAD to a level commensurate with its expected role.

11. BAD's organization is described in Attachment 1. As shown in theorganization chart and its description, the span of management is too largeat present; among various alternatives there seems to be a good case to pro-vide BAD with a Director of Credit and a Director of Finance and Administra-tion to cover respectively the credit departments on one hand and the otherdepartments on the other hand.

D. Policies and Procedures

12. Policies. BAD's statutes are very broad. They allow long-termloans, guarantees and participation in loans granted by other institutions,equity investments, discounting, underwriting, rights offering, promotion ofenterprises and of financial syndicates and preparation of studies to thateffect, creation of subsidiaries, holding shares, giving concessions, form-ation of holding companies, holding foreign exchange, etc. BAD has no PolicyStatement to regulate its operational policies. When basic policy decisionsregarding BAD are to be made, the policy changes are defined in Presidentialdecrees under the proposal of the Minister of Finance. BAD's operations arenot limited by specific financial criteria.

13. Procedures. BAD's role in project appraisal is limited:

(i) Appraisals of projects are generally prepared by the StateEnterprises and their parent ministry, with the assistance ofsuppliers, or of consulting firms. Technical aspects seem tobe the main focus. BAD plays virtually no role. 1/

(ii) BAD's financial appraisal of a project is limited to thedetermination of the terms of the financing requested bythe State Enterprise after it has been approved by SEP("individualization"). The objective is to establish afinancing plan ensuring that the enterprise would be ableto repay its loan. Deeper financial analysis of the valid-ity of the projects is scanty. In fact, inadequate atten-tion is devoted to the assessment of contingencies, working

1/ The State Enterprises do not really expect BAD to contribute at thisstage. Many do not even send BAD a copy of their feasibility studies.

ANNEX VIIPage 5

capital needs, etc. Increased sophistication in the finan-cial analysis and a better evaluation of the total cost ofthe project are the two areas where improvements in thequality of financial appraisals seem to be inost needed.

14. Follow-Up. BAD is responsible for the follow-up of the investmentprojects it finances. BAD's supervision activity is supported by the primarybanks. BAD is specifically respcnsible to the Ministry of Finance and SEPto ensure that the enterprises' drawings on investment accounts matchthe financing plans as approved by BAD's Board and reflected in the Plan'sannual tranche.

15. To that effect, the primary banks submit to BAD quarterly reportson disbursements by enterprise, project and type of investment. When, as aresult of overruns, the enterprises increase their demands for funds, BADcannot authorize supplementary disbursements, and a new Investment Decisionis called for. BAD does not supervise the physical implementation of projectsnor the operations of enterprises from a managerial, technical or market pointof view. BAD compiles statistics on how the project is being implementedbased on quarterly disbursements data.

16. Disbursements. BAD's disbursements are made through the primarybanks. For each disbursement State Enterprises must provide adequate documen-tation to the primary bank, including BAD's specific approval of the expendi-tures to be financed. BAD's President, Deputy General Manager and the CreditDepartment Heads authorize these disbursements by granting their "visa"; thistakes an inordinate amount of time of BAD's management, and creates adminis-trative bottlenecks. BAD's and the primary banks' control is basically ofan administrative/accounting nature; in this respect it is satisfactory.

E. Operations

17. Up to and including 1970, BAD's major activity consisted of transfer-ring Treasury funds to State Enterprises at no risk to itself. These opera-tions did not appear in BAD's financial statements. BAD's assets consistedmainly of. relatively sizable current assets, and a small portfolio of termloans and equity investments which the institution financed mostly out of itsown funds. As of end-1970, BAD's balance sheet showed no outstanding long-termborrowing, aside from a substantial amount (DA 227 million) of Government ad-vances.

18. BAD's pre-1971 equity investments portfolio was made up of 10 parti-cipations in mixed-ownership companies, or cooperative partnerships, in whichBAD was a minority shareholder (7% to 40%). The book value of these shares

ANNEX VIIPage 6

amounted to DA 25 million, but the amount actually paid up by BAD was aboutDA 17 million. The field of activity of these companies ranged from hotelconstruction to the production of shoes. Following the evolution of theAlgerian economic system, which tended to leave relatively little scope forthe private sector, it became apparent that most of these companies wouldeither be liquidated or turned over to public enterprises. As a consequence,beginning in 1970, BAD made large provisions against most of its equity port-folio, considering that out of BAD's ten participations, seven had lost vir-tually all their value. The three remaining active companies include a shoemanufacturing business, a small textile complex, and a household appliancesimianufacturer. By the end of 1973, the net value of equity investments hadbeen reduced to about 1 million dinars in BAD's balance sheet. BAD does notintent to invest any more funds in private sector stocks and expects to li-quidate its existing portfolio in the near future.

19. BAD's lan portfolio evolved in the opposite direction from the equityinvestments portfolio after the 1971 reform of the financial system. AtDecember 31, 1970, outstanding long and medium-term loans made by BAD to theproductive sector amounted to DA 138 million; they grew to DA 1.6 billion in1971 and to DA 8.4 billion as of June 30, 1974. Direct lending to enterprisesrepresented a side line activity for BAD before 1971. The 1971 reform of thefinancial system established the principle that all investments of productiveenterprises would be financed through term loans, and that long-term loans tothe productive sector would be the monopoly of BAD. As a result, BAD's lendingactivity after 1970 became directly tied to the entire program of productiveinvestments of the Algerian economy. A summary of the investments authorized,and BAD's commitment and disbursement in 1971-74 is shown in Attachment 2.

20. Aside from its main function of lending long-term funds to produc-tive enterprises, BAD continues tu operate, on an interim basis, as a cashierfor the Government, directly disbursing Treasury funds to designated reci-pients. Such disbursements are not recorded as BAD's own operations, andappear in separate accounts, distinct from BAD's own financial statements.Tihe bulk of the funds managed by BAD on behalf of the Treasury are disbursedin the form of advances of grants, though a significant portion of them tookthe form of "budgetary loans" in the past. It is foreseen that a part of theadvances and of the budgetary loans now administered by BAD on behalf of theTreasury will be turned into normal lending operations of BAD's (i.e. loansto State Enterprises covered by Government loans to BAD), while the outrightGovernment grants will eventually be handled by the Treasury directly, sothat by 1975-76 the dualistic nature of BAD's functions will be supersededby a definitive allocation of distinct functions between BAD and the Treasury.

Characteristics of BAD's Lending

21. Algeria's economic development strategy has relied heavily on theimplementation of very large investments, mainly in heavy industry, oil,mining and infrastructure, having generally a nationwide scope. Thus BAD's

ANNEX VIIPage 7

lending in recent years was concentrated mostly in large projects of the StateEnterprises. About 80% of the total investment cost of all projects approvedfor BAD's financing in 1972 through 1974 was absorbed by 24 large projectscosting more than DA 100 million (US$25 million) each. The remaining amountof the total authorized investments was subdivided among 150 smaller projectsin the three year period (Attachment 3).

22. Long-term loans to the private sector have been discontinued since1971. Even before, BAD's financing of the private sector has only been marginaland limited to a small percentage of BAD's loan portfolio. BAD still has fiveloans to mixed-ownership or private companies in its portfolio, which dateback to the late 60's; their outstanding amount (about DA 2.5 million out ofa total portfolio of over DA 7 billion) accounts for less than 1/2 of 1 oftotal loan portfolio.

23. Within the public sector, BAD's lending is limited to the productiveenterprises, excluding agriculture per se, and housing construction. The de-finition of "productive", however, is not precise. BAD's borrowers include,besides the manufacturing industry, mining, transportation enterprises, market-ing concerns, electric power and natural gas production and distribution, agro-industries, fishing, etc. A breakdown of BAD's outstanding portfolio by econ-omic sectors as of end-1973 is given in Attachment 4, which shows that thesectoral distribution of BAD's lending closely reflects the general economicdevelopment strategy decided by the Algerian Government, and set forth in thefirst 4-year Plan (1970-73).

24. The effect on BAD's lending operations is that over 50% of BAD'stotal outstanding loan portfolio was made up of loans to the oil and naturalgas industry (32%) and steel mills (28.5%), which are followed by the mecha-nical and electro-mechanical industry (8.4%) and the construction materialsindustry (7.1%).

25. With regards to import substitution, and export oriented indus-tries, it is somewhat surprising that textiles and leather (traditional han-dicraft), and tourism, appear to have had a relatively low priority. This isonly partly explained by the fact that private investors have been especiallyactive--and successful--in these branches.

26. The geographic distribution of BAD-financed projects is also deter-mined by the Plan. A recent development of Algeria's strategy is the attemptto decentralize industry out of the capital city areas in order to provideemployment in Algeria's less advanced regions. Some success has been achievedin this respect, with the creation of two industrial poles in the eastern andwestern regions of Algeria. While Algiers still absorbs about 40% of the totalnumber of workers employed in industry, some of the newer industrial plants(steel works, petrochemical plants, mechanical industry) have been set up inthe Constantine-Annaba-Skikda area, in eastern Algeria, while in the West,petrochemical and mechanical plants have been established in the Oran-Arzew-SidiBel Abbas industrial triangle.

ANNEX VIIPage 8

27. Self-financing of investments is discouraged, if not prohibitedin Algeria; therefore, the only sources of funds for the implementationof industrial or tourism projects of the public sector (which accounts for90% of industrial fixed capital) are: (i) BAD's long-term investment loans;(ii) medium-term loans extended by the primary banks; and (iii) externatfinancing of the foreign exchange portion of the projects' cost. As aresult, BAD's long-term investment loans accounted for about 40% of thetotal investments in the industrial and tourism sectors in the period 1971-73;the primary banks' medium-term. loans accounted for 30%-35%, while the balancewas financed with foreign exchange credit obtained abroad.

28. External financing, even when not obtained directly by BAD for therecipient, must be channelled through BAD, and in most cases, is guaranteedby BAD. BAD exercises, therefore, some control not only on the local currencylong-term financing to productive enterprises, but also over most of the ex-ternal financing, and over a portion of local medium-term credit. In anyevent, all financing plans for industrial investments are elaborated as pack-ages, by BAD's staff, and must be approved by BAD's Board.

29. Foreign currency requirements for the implementation of industrialprojects are generally met through the use of suppliers' credit; only for asmall proportion of imports the Central Bank and the Ministry of Finance au-thorize payment in convertible dinars (subject to BAD's control and endorse-ment). Sources of foreign exchange funds that BAD can channel to the publicenterprises, aside from BAD's own borrowing abroad (which has been very limitedup to now) are the following: (a) suppliers' credit extended directly to theenterprises, which either BAD or the primary banks must guarantee and forwhich BAD's approval is in any event required; (b) bilateral intergovern-mental agreements which are only usable for imports from the country sign-ing the agreement and are often linked to specific projects: BAD partici-pates in the negotiations of these agreements, and administers the use (andthe repayment) of the funds available under them; and (c) foreign banks' openlines of credit (accords-cadres) which consist of pre-negotiated conditionsfor the extension of credit in foreign currencies to the enterprises, withthe guarantee of BAD and under BAD's control. It appears from the above thatBAD exercises a direct control over the use of available external resourcesby nationai enterprises.

F. Financial Situation

Resource Position

30. BAD's equity as of June 30, 1974 was made up of capital, amountingto DA 100 million, endowed by the Treasury and fully paid up in 1966; asmall additional endowment fund of DA 5 m41llion; reserves and accumulatedprofits of approximately DA 77 million. The "Permanent Advances from theGovernment" amounting to DA 1,031 million, which represent mainly the netbalance of BAD's account with the Treasury arising from BAD's management ofpublic funds on the Treasury's behalf, may be considered as quasi-equity.

ANAEX VIIPage 9

31. BAD's only othier source of local currency rc ources are the Treasuryloans made each fiscal year to ma-ch the amount of tlhe yearly "tranche" of thePlan allocated to productive invcstments, and to be dis! ursed by BAD. Thesetreasury loans began in 1971, when the present system of investment financingwas started. The rate of interest of the Treasury loans is fixed at 5% p.a.,and their maturity is generally linked to the average eco"omic life of theprojects they are intended to finance, i.e., between 7 -- 20 years includinggrace periods of between 2 and 6 .ears. Treasury loans ,ade to BAD outstand-ing at June 10, 1974 amounted t. . 7.2 billion; no repai-ment has been madeyet since all loans are still wilain their respective grïce periods. Accruedinterest payable on these loans, amiounting to DA 132 million, represents thelargest single item in BAD's current liabilities.

32. By mid-1974, BAD had received four foreign loans aggregating DA 802million outstanding. They included one loan of DA 570 million from a group ofAmerican banks (headed by First National City Bank), which BAD contractedjointly with BEA (which borrowed a like amount) on behalf of the Treasury.The proceeds of the loan, as well as all attending repayment obligations,were immediately passed on to the Treasury. BAD's foreign liabilities alsoinclude DA 18 million representing outstanding drawings from two lines ofcredit obtained by BAD from the African Development Bank, and from LloydsBank of London, respectively, on behalf of two state-owned enterprises(ONALAIT and SONAMA). The total amount of the two lines of credit is equiv-alent to DA 109 million. The proceeds of drawings on these lines of creditare passed on by BAD to the final recipients, together with all contractualconditions, including foreign exchange risk. BAD's role in mobilizing for-eign resources has been, up to end-1973, simply that of a passive intermediary.In 1974, BAD contracted three more foreign lines of credit; one of these lines,from SUMITOMO Bank of Tokyo, of which DA 214 million was outstanding at June30, 1974, also falls in the category of operations for which BAD simply actsas an intermediary. The other two lines of credit contracted in 1974 were ob-tained from KfW. The loans were guaranteed by the Government as all otherforeign resources of BAD. The proceeds of the first KfW line, amounting toDM 138 million (interest rate 2-3% p.a.) have already been earmarked for proj-ects agreed upon by BAD and KfW; the interest charged by BAD is the usual5-3/4% rate. The foreign exchange risk is with the final recipients.

Quality of Portfolio

33. At mid-1974, BAD's loan portfolio arising from the institution'sown operations (i.e. excluding disbursements made on behalf of the Treasury)amounted to DA 8.4 billion of which 95%, or DA 8.0 million, vas made up oflong-term investment loans extended to public enterprises in the periodJune 1974. The rest of BAD's loan portfolio (DA 429 million, or 5% of total)includes (i) a small amount (DA 0.6 million) outstanding on old CEDA 1/ in-dustrial loans transferred to BAD; (ii) direct long-term loans (DA 60 million)

1/ CEDA (Caisse pour l'equipement et le developpement d'Algerie) was aFrench DFC operating in Algeria during the French administration ofthe country. After Algeria's independence, CEDA's assets and liabil-ities have been passed on to CAD (as BAD was previously known).

ANNEX VIIPage 10

and medium-term loans (DA 58 million) made by BAD to productive enterpricesout of BAD's own resources before 1971; and (iii) long-term "restructuration"credits, amounting to DA 310 million, extended by BAD in 1973 to productiveenterprises, in accordance with the legislation regulating financial assist-ance to public enterprises experiencing liquidity difficulties.

34. The procedures set forth in the finance laws of 1970, 1972 and 1974for the "restructuration" (debt rescheduling) and "assainissement" (reorgani-zation) of public enterprises, and for the extension of low-interest, long-term loans to finance their working capital requirements, are intended to solveany financial problems that public enterprises are likely to incur, by inject-ing fresh liquidity, under various forms, in the budgets of ailing firms.Such injections of liquidity are directly or indirectly financed by the Treasury.The bankruptcy of a public enterprise is virtually unthinkable in the Algeriansystem, although the possibility cannot be excluded from a purely legal pointof view.

35. A summary of the arrears situation of BAD as of December 31, 1973is shown in Attachment 5. The arrears of overdue principal and interest pay-ments that do appear in BAD's financial statements represent mostly the re-sult of delays in the carrying out of refinancing procedures. Total arrearsof more than six months amount to DA 115 million at end 1973, and DA 106 mil-lion at June 30, 1974, (1.4% of total assets), of which DA 48 million (0.7%of loan portfolio) represent overdue principal repayments and DA 58 millionare past-due interest payments. Provisions against doubtful loans and past-due interest cover the entire amount of DA 106 million, but do not cover theportion of the portfolio affected by these arrears which has not yet matured.Outstanding loans affected by arrears of more than 6 months amounted to DA0.9 billion (12.4% of total loan portfolio) at end-1973.

36. Aside from loans, BAD has also a small portfolio of ten equity par-ticipations, mostly in cooperative enterprises and mixed-ownership companies(para. 4.02). The gross value of BAD's equity investments, at cost, is DA16.9 million; specific provisions amount to DA 15.7 million, which leavesa net book value of equity investments in BAD's balance sheet, of DA 1.1million (0.01% of total assets). The risk seems therefore to be adequatelycovered.

Financial Performance and Position

37. BAD's Balance sheet and Income Statement are presented in Attach-ments 6 and 7. BAD's performance is a function of the Government's policies.Interest rates are fixed by the Government in such a way as to reduce to aminimum financial charges for investments. The Government does not expectBAD to be highly profitable. Break-even point is considered a sound objec-tive. On the other hand, BAD's financial position cannot be judged on thebasis of its capital structure. It is the Government's decision and objectivethat operations of the State Enterprises, including banks, should rely basi-cally on a continuous flow of long-term Treasury loans. BAD's domestic cur-rency borrowings come exclusively from the Treasury and external borrowingsare all guaranteed by the Government. Some degree of financial discipline is

ANNEX VIIPage 11

considered important however. In this respect, the major criteria for BADis debt service coverage which is virtually guaranteed not to exceed 1:1, by

the very close coincidence of the amortization schedules of its borrowings,with those of its loans.

G. Prospects

38. Basically, BAD's forecast of operations is the translation of thePlan into effective financial decisions and physical implementation. Theuncertainty of BAD's projections is also a reflection of the Plan. BAD is

expected to disburse between DA 3 to 5 billion every year in long-term finan-cing. A forecast of BAD's balance sheet and income statement for 1975 is givenin Attachments 8 and 9. These projections are based on a recent review of

the implementation of investment proj-ects under way. Projections for sub-sequent years are more subject to uncertainties, particularly as regardsthe type of resources BAD would secure to finance its program. Obviously,as in the past, BAD's resource mobilization effort would not be separatefrom the Government's strategy and the management of Algeria's budget.Nevertheless, at present, wide variations of estimates in Algeria's rev-enues from oil may have considerable implications, one way or the other,on Algeria's borrowings abroad and, consequently, on BAD's foreign resources.Tentative projections based on the Plan, discussions with BAL and othersources over the period of the current Plan (74-77) appear in Attachments

8 and 9.

BANQUE ALGERIENNE DE DEVELOPPEMENT

| r r Al N al | r

O___ __ _ ___ES __ __rOeSENllLMaA

O r r~~~~~~~~~~~~~~~rrrr, rCrr,r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Orrrrrr rrrrhr.r 5%'AL rrrr CNAE rrrr ES THEr GNEA Brr NErr,,rr

| rrCC'ON BSCr 55s2 SESSIO5b 1N | |SES SSSO Nrr | | bSrCC rErîE TAT SNOSCCS | 5C|CS SOC'S rOISON; eT N ;; 1F ;;

1 < 1 | ~~~~~~ErESNOCTRIC TVOOiSSESCCSO<ECCCNES SESSEESSCOTS, ES | ETO

| F Es zIh l l M rharlT l l l l H rarlh | f A Hs A s l l l l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r

ANNEX VIIAttachment 1Page 2

Organization

Since the end of 1973, the General Manager has three assistants

performing a coordinating role with BAD's Departments. Specific tasks areassigned to them on a case by case basis. BAD has 12 Departments, two of

which are the Regional Offices of Oran and Constantine. Most Departments are

organized in Sections (32 in total). The functions are summarily describedas follows:

i. The three Credit Departments are basically in charge of thepreparation of the appraisal reports to be presented to BAD'sBoard for the approval of the financing of specific projects.They also are mainly responsible for all the other technicalfunctions for which BAD's Board is in charge in the contextof the Algerian system (i.e; annual tranches, supervision ofthe financial situation of State Enterprises, etc.). The threeDepartments specialize in different productive sectors of theeconomy. "Hydrocarbons" includes chemical, energy, textiles,leather and food products. "Iron and Steel" covers also metal-lurgy, mechanical, electricity, construction materials, and otherindustries, and "Primary/Tertiary" takes care of public works,mining, tourism, transport, distribution/commercialization andagriculture light equipment. Three Departments heads and fourteensector heads carry out within the three Credit Departments thebulk of BAD's operational work. Credit Department heads areauthorized to approve payments to be made by the primary banksto the enterprises requesting disbursements out of the invest-ment accounts allocated to them in the Annual tranches. Althoughthis function favors decentralization and increased responsibil-ity it seems to take an inordinate amount of the Credit Depart-ments Head's time.

ii. The Follow-up and Control Department is in charge of controllingthe implementation of the projects financed as well as theirfollow-up from a statistical point of view. The control workconsists basically in checking that disbursements are made ac-cording to the authorization as they appear in the Annual Tranche.No supervision of operations from a managerial, technical ormarket point of view is carried out. In addition, the Departmentsupervises the few equity investments BAD undertook in the past,both in private and public companies and the Department Head re-presents BAD on the Board of these companies. A final responsibil-ity of the Department are the legal aspects, mostly related to thepossible implications of bad loans under litigations.

ANNEX VIIAttachment 1Page 3

iii. The Studies Department was, until recently, part of the Inter-national Financial Relations Department (see iv below) and istherefore, still at an early stage. It will carry out economic/statistical studies for projects as well as centralize thestatistical information of interest to the other Departments.The Department is also responsible for keeping the documentation,archives and publications. It is not clear what BAD managementexpects this department to develop into, but it carries littleweight in today's BAD.

iv. The International Financial Relations Department is responsiblefor mobilizing resources abroad, and for managing the externalfunds obtained by the Algerian Government and some of the StateEnterprises.

v. The Finance Department keeps the books and manages the localcurrency resources obtained by BAD from the Government in theform of long-term loans from the Treasury, as well as the dis-counts and guarantees.

vi. The Administration Department is responsible for the administra-tion and personnel matters. Regarding the latter, the Departmentdesigns the recruitment and training programs. Recruitment formanagement positions is handled by the Director General and hisDeputy; the administration Department carries out the selectionprocess and interviews candidates.

vii. The Public Equipment Department handles the Treasury allocationsof funds to public enterprises (managed funds) for the accountof the Treasury. The Department is not operational and ispresently being restructured.

viii. BAD's representative at the investment commissions, both at theNational and Regional level has the rank of Department Head buthas no professional staff with him. The two Regional officesrank also as Departments. No specific autonomy of functionshave yet been determined for BAD's Regional offices.

ANMEX VIIAttachment 2

1/BÂ:*iQL'- ALGERIENN;E DE DEVELOPPEMENTVOLUME OF OPERATIONS 1971 - 1974

(millions of Algerian Dinars)

1971 1972 1973 197ù

`'pproved projects (individu'alizations) 1/ n.a, 2/ 8,228 4,881 n.a.

Comriitments for the year (conventions) 3/ 1,520 2, 0&j 3,o85 5,53h

Disbursernents (utiliv,tionc) - / 1,539 1,,9°23 2,971 L,569

1/ The Prnount of proposed financing identified in the "dezisions d'individua-lization " includes not only the long-term funds to be provided by VPAE, buta.so proposed medium-term loans to be made available by the primary banks,and external foreign exchange finan-.ing.

2/ For 21?71, the first yenr in which the reformed system went into effect,newly-identified projects are not distinguished frori proje2ts identified inpreviouc yem'rs :nd not yet -ompleted.

3/ B3ADTs rommitments conteined in the annual "conventions" with borrowingenterprises refer only to one fiscal year, not. to the entire duration cfproie'ts' implementption period.

L/ 'Risbursements' represent amount actually withdrawn by enterprises fromtheir investmnent -wcojnts with the primary banks.

EMENA IC&DFCMarch 1975

BANQUE ALGERIENNE DE DEVELOPPEMENT

Breakdown of Identified Projects by Size of Proposed Financing

1972 1973Number of Proposed Financing Number of Proposed Financing

Size of Investment Projects (DA millions) Projects (DA millions)

More than DA 100 million 9 7,506 9 3,895

DA 50 - 100 million 8 503 4 202

DA 20 - 50 million 18 576 15 532

Less than DA 20 million 30 242 26 251

65 8,827 5h h,880

1/ The amount of proposed financing identified in the "decisions d'individualization " includes not only thethe long-term local currency funds to be provided by BAD, but also proposed medium-term loans to bemade available by the primary banks, and external foreign exchange financing.

EMENA IC&DFCAugust 1974

,. F-

leSUE .U0lZrIBNE DE D2SELOPPEIIEHT

8r.a«m of 1973 lWo Portfolio Dy 5coeuic S0eor e4dRy T7.gs of Ins

(Data in Millin. of Algoan Diar.)

booTs 0..;tandling. t De.msber 31. 1973

Lgng.lem £50tct bos taSor D.bt ?o¶4 i@tg etX'estment Louis Reot.uibiri66 O.tst9 dt4 4 ,

MoNoMC 2E3yA91 .93 ocT~ idlas-Tu. (1(3 b

Hydroc4rbou 2,2te 2,266 32.0

Other H)Uztg 112 112 1.6

Poo.r and Oui Ojisatyb iU 367 367 5.2

tgr2oldustry ar4 2lcliîg Wô 48 0.7

lw.0anUetuo.c 16durtry 3,38) 38 9 310 37. ?r.?

- 9tiol (i,8o5) (222) (2,027) (28,5). Cho'8.cs> (105) (7) (112) ( t 61- mer8ani,ol aod Eletric (565) (2h) (5) (593) ( 41.)- ' Sttff (101) (5) (106) ( 1.fl- £onitruction I8ateroalo (503) (1) (1) (504) t 7.1>- Teatileo (1) (1) (2) (ha) (175) 1 2.5- bêt.6, (6) (6) 9,¶- Wo,4 and P5oer (175) (1) (40) (213) 3,1

T.oitjox liator 395 5 41

- Towi.io (l9S) 153 (19s5) 2i.13- frading Eiiu, (9) (9,- Traispert by Road (1)

R-1w.y. (115) (11%)F.ea (5S}(11 (96) ,l

Other S.ctorso 123 7 S _ _13d ` .0

TOTAL LOANS 0,095 50 23 310 7,ûd3 tOO.O

I/ ToClude- a s osO SoW (DA 0.6 xillio) of indratris:L lo Is RArD -s rred to 2AC r0tF.e oneie,t CE3)A portfs3io.

j `Ibs ï-t I os). E fw IfrE8tAtCteIr4 loges =eh s au st6ra otate, s8dpy.rds, t. J,icostiosu, w6t.r:upply.

EJINA rht3C&August 197L

; ANQUE AWE}RIENNE DE DEVELOPPMe-T

Sjtuatiori of Airrenrs Pas of De'^ember 31, 1973(Values in li unds of Algerian lanars)

Long-Termn Pre-1971 Direct LoarnsInvesttment loar. ,

(1971 - 1973) Lor-g-To-rr. lMlediiinr-Termn A1l Loars

Overdue principal repayments L,-65 12 5'dL 33,273 50,12

Interest payrient- overdue by more than 6 moriths 5L,599 8611 5.0Lo 6!,503

Total arrenrs for wbiqih provisioris ;re mnade 58g,96, 17, ).3 38j313 111>715

Provirions 5P,9 e1! 17,e1 38 38,313 ]J-liii715

errour.t of ffe;er Joan- o'-tst'indrt, net of prcvî-o,ri 6'97, 0f1 1,,595 L2,!Ro 7 8 li,159

Interest overcbixe b-" less than 6 months 5(0, C;Oc 195 177 -0,371

Amourft of' loanrs ouitstndi,ig affe;ted by arrenrs cfless tharn 6 month 2P 255,6f6 - 3,53 2,259,301

Total interest nrrears 1h oJQ1 5,059 5,?37 1l ,e77

Totc2. arrenrs (princ,ipa1 and interest) lOF,9(6 17(,l33 38 1 90 16,089

Loan portfo:Lio affectecd by arrears 2,952,752 blv595 )l,0i3 -- 0:?,Sc

EMENA IC&DFCAugust 197h

ANNEX VIIAttachment 6

BANQUE ALQERIEINE DE DEVELOPPEMENT

INCOME STATEMETS 1971 - 1973(Thousands of Algerian Dinars)

IN(IM OE 1971 1972 1973

Interest and CommissIons 38,560 212,572 272,261Charges on discount and guarantee operation!s 3,1436 6,225 7,808Other charges on banking services 4,171 2,051 4,670Profits carried forward _475 22,652 1,357

Total Income ****@*@-.*,*-D**- 46,642 2143,500 326,096

EXPENSES

Personnel and training 2,509 3,096 4,L87Indirect taxes 111 119 179Interest and oCommissions paid 357 13lî,863 206,834Provisions 5,551 72,219 7h4,149Depreciation 234 2L48 277Losses carried forward Contribution to Government's Budget 6,000 6,000 8,500Other operating expenses 31di 383 562

Total expenses ...*....... 15,106 216,928 294,988

NET PROFITS 31,536 .26,572 31,108

EMENA IC&DFCAugust 1974

ANNIE VIIAKttachueint 7

BANQUE ALGEBIENNE DE DEVEI,PPE34ENT

Balance Sheets at Denumber 31, 1970-1973and provisional balance sheet at June 30,1974

(la Tousnds of Algerian Dlinars) -Jane 30

ASS ErS 1970 1971 1972 1973 1974

Current Assets

casn, Treasury, Central Bank and postal Giro-Accounts ( 110,561 62,î93 72,263 78,721Banks < 252,033 93,103 101,561 126,465Bills discounted ( 25,440 21,236 1,545 1,440Current interest receivable 8,430 7,473 Ild,713 158.3? 124,315Past-due interest receivable _É46;72 6503 58239

Total Gurrent Assets 260,513 236,577 351,330 423,104 262,715

Long-term Loans n.a. 1,643,340 3,725,039 7,132,967 8,391,391minus: provisions for possible losses n.a. 5 923 29 754 jO,212 47 956Net long-term loans 137,913 1,637,7 3,695,335 7,032,755 t,343;h35

Advances to Treasury and others -- 51,113 100,060 612,600 802,783

Managed Accounts and Sundry Ituis 9,979 3,544 7,d23 7,054 7,054

Fixed Assets

Equity portfolio n.a. n.a. n.a. lo,366 16,866Provisions for possible losses n.a. n.a. r..a. 15 ;4O 15 740Net equity portfolio 1,d17 927 1 1 TsT2

Buildings and materials, net ( 2,172 2,296 2,249 2,429Other fixed assets, net ( 2,314 63 41 41 41

TOTAL ASSE1S U lii 9 =,) 3,12,929 9,M19,583

LIABILITfI

Current Liabiliti es

Interest and other charges, payable n.a. 32 1l3,02 13,132 70,169Other accounts payable n.a. 325 326 1,306 978Provision against past-due interest receivable n.a. -- 4ri,97

2 64,5C3 58 239Total current liabilities T, 7 1 9J9 199,991

Long-teren Borrowing

TronTreasury -- l,433,00C, .,141,65 7,220,397from foreign and international institutions -- -- 5232 531,00 63Total long-term loans -- 1,453,00o 2,933,5d2 s,729,66C 8,022,560

Managai locounts and Sundry Items l0, 3c2 10,342 10,013 9, 6 9,646

Provision for Personnel Pension Fund i,"2 760 762 762

Permanent Advances from Government 276,574 311,670 32',W22 975,560 1,030,702

Equity

Legal, statutory and voluntary reserves (,734 15,15 `3,167 23,167Profits carried forward ( 5,o96 13,379 35,455 56,055 85,163Additional endowment fund 4,930 4,980 6,930 4,930 4,980Paid-in capital 100,000 10100,000Net profits of tne year 14 013 32 536 26,572 Il 1,)3 13 217Total equity 1261, û94 I:5 9 162,202 213 ,31

TOTAL LIABILITIES Zr2,537 739 4,5,6 3,123,929 9,419,583

EHNNA IC&FCJanuary 1975

ANNEX VIIAttachment 8

BANQUE AIGERIENNE DE DEVELOPPE!-TENT

ProJected Income Statements 1974 - 1977(Millions oft lgerian Dinars)

INCOME 1974 1975 1976 1977

Interest and Commissions 414 475 505 591Charges on discount, guarantee and

other banking services 12 15 20 22Other and extraordinary income 18 20 h 18

Total Income . . . . . . . U4 510 529 631

EgXPESE

Personnel and training 5 6 6 7Interest and Commissions paid 270 340 h20 500Indirect taxes depreciation and

other administrative expenses 2 3 3 hProvisions 120 120 55 60Contribution to Government's budget 9 10 12 15

Total Expenses . . . . . . 406 479 496 586

NET PROFITS 38 31 33 45

EMEA IC&DFCJanary 1975

ANNEX VIIAttachment 9

BANQUE ALGERIENNE DE DEVELOPPEMENT

ProJected Balance heets 1974-1977(In Millionq of Algerian DînarsJ

ASSETS 1974 -975 1976 1977

Current Assets

Liquid Assets 150 150 160 170Accounts receivable 170 195 210 230Past due interest receivable 125 175 200 220

Total Current Assets 445 520 570 620

Long-term Loans 9,660 12,721 15,800 19,200

minus: provisions 110 180 210 250Net long-term loans 7W 531 15,590 B1,950

Advances to Treasury and others 802 802 700 600

Sundry items 7 5 5 5

Fixed assets, net 3 3 3 3

TOTAL ASSETS 10,07 13,871 16,868

LIABILITIES

Current Liabilities 170 260 280 300

Accaunts payable 170 260 280 3°°Provisions against past due

interest receivable 125 175 -200 220Total current liabilities 215 52 0

Long-term Borrowing

from Treasury 8,406 11,495 14,027 16,173from IBRD - 3 36 95from other foreign sources 815 846 1 300 1 800Total long-term loans 9,221 12,344 15,363 1 ;068

Managed Accounts, Sundry items andPersonnel Pensions Fund 10 10 10 10

Permanent Advances from Government 1,030 800 700 600

Equity

Capital and endowment fund 105 105 105 105Reserves and accrued income 10 146 177 210Net profits of the year 38 31 33 45Total E;quity 25 1 2S3

TOTAL LIABILITIES MMT07 1T77 3Ô,j 19,558

EMENA IC&DFCJanuary 1975

ANNEX VIIIPage 1

Statement of Policy for BADIs Unit

(The statement is an annex (Schedule 3) în the Loan Agreement).

SCHEDULE 3

Policies and Operations for the Project

A. Composition of the Unit

1. The Unit shall consist of at least ten members appointed by theBorrower, including a director responsible for the Unit, and, not later thanDecember 31, 1975, or such other date as shall be mutually agreed, an expe-rienced engineer. The staffing of the Unit will vary in order to meet itsworkload.

B. Functions of the Unit

2. The Unit will be primarily engaged in the selection, appraisal,preparation and supervision of projects to be financed under the Loan. TheUnit's scope of activity may be expanded to the appraisal and supervision ofother projects.

3. For subprojects to be financed under the Loan, the Unit

(a) shall review each Investment Project and related applicationor request for a sub.-loan on the basis of a detailed appraisalof the Investment Project prepared by the Unit, including:

(i) the technical feasibility of the Investment Project;

(ii) the marketability of the proposed production;

(iii) the financial and economic justification of the InvestmentProject, on the basis of realistic assumptions; and

(iv) the creditworthiness of the Investment Enterprise andits management of the Investment Project.

(b) shall, after its review, make recommendations to the Borrower oneach Investment Project and related sub-loan as to its conformityto the Statement of Operations and Policies for the Project setforth in Part D hereof and make any recommendation to achievesuch conformity;

ANNEX VIIIPage 2

(c) shall establish and maintain appropriate records and accountsas provided for in Section 3.03 of the Loan Agreement, forwardto the Bank periodic statements and reports thereon, in suchdetail as the Bank shall request, and all such other informa-tion as the Bank or the Borrower shall from time to timereasonably request;

(d) shall propose to the Borrower's management appropriate timeschedules and procedures for supervision and evaluation ofeach Investment Project, shall assist the Borrower's otherdepartments in carrying out such supervision and evaluation,and shall review and comment on supervision and evaluationreports so prepared by such departments; and

(e) shall maintain on behalf of the Borrower close relation withthe Bank and assist the Bank representatives in any inspectionof Investment Projects and in exchanges of views with theBorrower on matters relating to the Loan and the Project.

C. Review of Investment Projects

4. The Borrower shall review each Investment Project on the basis ofthe appraisal report prepared by the Unit and shall state its acceptance orrejection of such Investment Project.

D. Operations and Policies for the Project

5. Investment Projects and subloans for Investment Projects, unless theBank shall otherwise agree, shall conform to the following criteria:

(a) Investment projects, shall be either:

(i) construction material projects sponsored by SNMC orSNMetal, or

(ii) industrial projects sponsored by the Wilayate, Dairateor Assemblees Populaires Communales in Algeria, in theframework of the development of regional small- andmedium-size enterprises, in the following sub-sectors:construction materials, wood processing, metal process-ing, and other sub-sectors as the Bank and the Borrowermay agree from time to time.

(b) The aggregate use of the Loan for each of the two categoriesmentioned above shall be not more thar $20,000,000 each.However if such amount cannot be fully utilized under cat-egory (i), the parties may affect a higher amount to category(ii).

ANNEX VIIIPage 3

(c) Investment projects shall be limited to small- and medium-sizedsubprojects defined as follows:

(i) for SNMC and SNMetal:

projects with a total investment cost of less thanDA 100 million;

(ii) for RIDP:

projects with a total investment cost of less thanDA 20 million.

Proceeds of the Loan shall be used for each Investment Projectgenerally up to a maximum of:

(i) for SNifC and SNMetal: US$5 million,(ii) for RIDP: US$2 million.

(d) Investment Projects should provide satisfactory financial andeconomic rates of return, on the basis of detailed and realisticestimates of costs, revenues and benefits, in addition to meetingnormal criteria of technical feasibility of the project, market-ability of its production and creditworthiness and managerialcompetence of the Investment Enterprise. Unless a special jus-tification is provided: (i) projects with an internal finan-cial rate of return of less than 9% will be excluded; for thepurpose of calculating the said financial rate of return,Government subsidies, if any, shall not be included; and (ii)if the economic rate of return is calculated to be less than8%, the Investment Project shall normally be rejected.

(e) In its appraisal of the financial aspect of a subproject, theUnit shall ensure that the projected results of the operationsare sufficient to maintain an adequate net working capitalthroughout the subproject's economic life and to cover theservice of the debt incurred to finance the subproject. Ifthe projected cash flow of a subproject is not sufficient toensure the maintenance of an adequate working capital and the'service of the debt due to Government-imposed low sale prices,the appraisal report of the Unit should proposed solutions toensure financial equilibrium.

(f) Sub-loans for Investment Projects shall be made for a termconsistent with the requirements of the Loan Agreement andrelated to the debt servicing capacity of the InvestmentEnterprise bu:t in no case to exceed the useful life of theassets financed. Sub-loans shall be repayable in the samecurrencies as the corresponding principal amount of the Loanused for the purpose and shall carry interest, payable inthe same currencies as the principal, at an annual rate ofnot less than 10% of the principal amount outstanding.

ANNEX VIIIPage 4

(g) Each Investment Project shall be subject to close supervisionby the Borrower in accordance with the procedures proposedby the Unit until the date on which the loan agreement forthe sub-loan shall terminate. Such supervision would be or-ganized by the Unit or under the Unit's responsibility.

EMENAIC & DFCMarch 1974

ANNEX IX

ALGERIA - BANQUE ALGERIENNE de DEVELOPPMENT

Interest Rate Structure

Commercial Banks Interest Rate (in %)

Demand Deposits 1.125Time Depositsbetween 2 and 12 months 2.6-3.6between 12 and 2h months 3.8more than 24 months 4 5

Deposit Certificates6 months duration 3.212 months duration 3.824 months duration h.5

CNEPSavings Deposits 3.5

Governuent Equipment Bonds /11 year maturity h.02 years maturity 4.53 years maturity 5.0h years maturity 5.55 years maturity 6.010 years maturity (reimbursable aXter 8th year) 8.0

Central Bank Discount Rate 2.75

Commercial Banks LoansShort-term

Overdrafts 4.5-5.0Discounts (rediscountable commercial paper, export

financing credits relating to Government contracts,etc.) 4h0-h475

Discounts (non-rediscountable commercial paper,direct credits, prefinancing of Govermnentcontracts) 6.0

Medium-termIndustrial and Commercial 5.5Agriculture 3.5

Long Term to Agriculture (BNA) 2-3

Development Banks (BAD)Long-term Industrial Loans 5.5

/1 Issued by the Treasury and reimbursable.

EMENA IC&DFCFebruary 1975

ANNElX 3

BA~JQU3 A1; RIENNE DE DEVELOPPEM¢``TT

Estimated Disbursement Schedule for the Proposed Bank Loan(in Thousands of US$)

1976 First Quarter 500Second Quarter 1,000Third Quarter 1,500Fourth Quarter 1,500

1977 First Quarter 2,000Second Quarter 3,000Third Quarter 5,000Fourth Quarter 7,000

1978 First Quarter 7,000Second Quarter 5,000Third Quarter 2,000Fourth Quarter 1,000

1979 First Quarter 1,000Second Quarter 1,000Third Quarter 1,000Fourth Quarter 500

h0,000

Assumptions

1. BAD is expected to commit $12 million in the second part ofFY75 and the whole FY76, $22 million in FY77, and $6 millionin the first half of FY78.

2. Commitments and disbursements (in accordance with the provisionalamortization schedule in Schedule 1 of the Loan Agreement) areestimated as follows: 20% for loans of 5 years without graceperiod, 50%, 8 years including 2 years of grace, 20%, 10 yearsincluding 3 years of grace, and 10%, 12 years including h years ofgrace.

EHOENA IC&DFCJune 1975

ANNEX XIPage 1

ALGERIA

CONSTRUCTION MATERIALS (EXCLUDING CEMENT)

DEMAND AND FUTURE OUTLOOK

Background

1. At end-1973, the construction materials industry's capacity was in-adequate to meet the country's demand. A large portion of the needed con-struction materials had to be imported during the 1970-1973 Plan period (e.g.;20% of the total consumption of quicklime; almost one half of all ceramictiles, 46% of cement and 100% of sanitary ceramics). In addition, many con-struction materials (e.g. clay bricks and tiles, asbestos-cement products,agglomerates, concrete pipes, sand and gravel) are not internationally tradedgoods: they simply cannot be imported. As a result, the supply deficit hasbecome a major bottleneck for the construction and public works industryitself, or has led to the replacement of certain materials with expensiveimported substitutes (typically, clay bricks, and also quicklime, which couldbe cheaply produced locally, may be substituted for with cement, in certaincases).

2. The following table shows the production capacity of Algeria ingeneral, and of SNMC in particular, for each of the basic products in thesubsector in 1973, excluding cement which is outside the scope of this study.The table also shows the gap, in percentage terms, between domestic supply ofeach product, and the estimated potential demand in 1973.

Deficit ofDomestic Supply

Production in 1973 over DemandProducts Unit SNMC Total Algeria %

Clay bricks and tiles 1000 tons 453 618 -51%Plaster " 62 84 -72%Quicklime fi 16 40 -25%Sand and-gravel aggregates " 1,327 8,000 -11%Agglomerates 34 500 -43%Cement pipes and supports 1000 meters 78 99 -32%Asbestos-cement products 1000 tons 34 34 -45%Cerarnic tiles 1000 square 600 600 -76%

meters

The gap between supply and demand of construction materials is bound to furtherwiden in the course of the 1974-77 Plan, in spite of ambitious plans to expandproduction capacity in this sector. The rate of expansion will be by far ex-ceeded by the expected growth in demand for new construction.

ANNEX XIPage 2

Hiousing

3. There remained a considerable housing shortage at the end of thefirst 1970-73 Plan, partly due to the delays encountered in implementing theconstruction programis of the Plan itself. Existing dwellings at end 1966(latest census) were estimated at about 2 million, which could be consideredsatisfactory, given that Algeria's total population was 12 million (averagedensity: 6 persons per dwelling). Between 1966 and 1973, only 60,000 newdwellings were completed, while the country's population grew by 2.9 millionin the same period. Thus, at the same persons-per-dwelling ratio (6) a short-age of over 420,000 dwellings had developed by 1974. In addition, the lack ofconstruction materials led to a general deterioration of existing dwellingswhich have not been properly maintained. It is expected that Algeria's pop-ulation will be 16.9 million by 1977, 18.7 million by 1980, 20 million by 1982and over 22 million by 1985. In order to make up for the backlog of housingconstruction, and to maintain an averàge density of 6 persons per dwelling,which is a declared objective of Algeria housing policy, the country wouldhave to build over one million new dwellings by the end of the decade, andover 1.6 million dwellings by 1985. Such a construction program is a for-midable task and has binding constraints, both in the available supply ofconstruction materials, and in the capacity of the local construction indus-try. Considering these constraints, the Algerian planners have set the fol-lowing timetable to meet the growing demand for dwellings: 1/

- The construction of 100,000 new urban dwellings (typically4-room apartments in 4-5 floor, 8-10 apartment buildings) willbe undertaken in the course of the current Plan; taking intoaccount the construction already started, 90,000 new urbandwellings should be delivered by end-1977.

- The rate of construction of new urban dwellings should increaseafter 1977, to reach 100,000 new dwellings per year by 1980,and 200,000 per year by 1985.

- In the rural environment, the construction of 300 new villageswill be undertaken in the course of the current Plan, withinthe framework of the "Agrarian Revolution" (the program fore-sees the construction of 1000 new villages, by 1980).

- All in all, 100,000 rural dwellings will be started in thecourse of the Plan, and 90,000 rural dwellings should bedelivered by end 1977. (In the rural environment, the Plancounts on the initiative of the villagers to build their ownhousing by themselves, under "self-construction" programs).

1/ The average surface of an urban dwelling is assumed to be 85 sq.mt.,while the surface of a rural dwelling is assumed to be about 50 sq.mt.

ANNEX XIPage 3

In the short run, it seems that the above program represents thebare minimum that Algeria should aim for. It is difficult, however, to passa judgment on whether these targets are realistically attainable - too manyuncertainties remain as regards the Plan itself. One area in particularwhere information is scanty,is the geographic distribution of demandfor housing. While it is known that the present population is about evenlydistributed between the country's urban areas and rural areas, with housingshortage being especially serious in the urban areas, the data on the degreeof shortages in the various cities and among the 31 wilayate have not beenupdated since 1966. As a result there is no clear picture of the geographicdistribution of demand. This is a serious problem since the location of pro-duction plants in relation to demand is a determining factor in the evaluationof the economic merit of construction materials projects. This problem is onethat the proposed Bank loan would cause BAD to raise when individual construc-tion material subprojects would come for appraisal by its Unit. With adequateproject preparation substantial progress could be made at a relatively smallcost to optimize investment implementation in function of geographic demand.

Schools

4. School construction represents the largest requirement of new socialbuildings, in line with the Government's massive effort to reduce and eventuallyeradicate illiteracy 1/ and to increase the availability of skilled workers andtrained technicians. The current Plan foresees the building of 8,000 class-rooms for elementary schools, in order to accommodate an increase of 90,000primary school children per year over the plan period; in the subsequent threeyears (1978-80) another 7,600 primary classrooms should be built according tothe Plan's estimates. For secondary education, 380 new high schools and voca-tional schools are to be built within the Plan period, accommodating between600 and 1000 students each, and including dormitory facilities for 25-30% ofthe students. A similar construction program should be completed in 1978-80.Finally, new buildings are needed in universities and technical colleges(30,000 additional students per annum over the next 6 years). Translatedinto surfaces to be built, the total education program is summarized in thetable below (thousands of square meters):

Surface to be built during:1974-1977 1978-1980 Total

Primary education 1282 1221 2503Secondary education 1382 1443 2826Superior education 360 361 721Other, and athletic equipment 25 30 55

Total construction for education 3050 3055 6105

1/ At end-1972, Algeria's population in the primary school age group (aged6-13) was 3.3 million, of which only 2/3 were attending school.

ANNEX XIPage 4

Public Health

5. For the period 1974-77, the Plan foresees the construction of 30 newcommunity hospitals (of which 11 were already under construction at end 1973)with a capacity of between 120 and 240 beds each; two university hospitals with1000 beds each; 150 clinics, and 300 rural emergency wards. A further devel-opment of public health facilitie- of similar size is expected to take placein the period 1978-80. In terms of surface to be built, the program foreseesthe construction of 738,000 m2 by 1977 and of another 755,000 m2 by 1980.

Industry

6. The cost of new industrial buildings is expected to amount to aboutDA 1l billion during the Plan period, and to about DA 8 billion in the sub-sequent 3 years. With an average cost of industrial construction in Algeriaof roughly DA 1500 per square meter, 7.3 million square meters of industrialconstruction are expected to be added by 1977, and a further 5.3 millionsquare meters in the period 1978-80.

7. In summary, the housing, education, health and industry programsplanned in Algeria until 1980, call for the construction of 64 million sq.meters of new surfaces, as follows (in million sq. mt.):

Surface to be built1974-1977 1978-1980 TOTAL

Housing 13.5 28.0 41.5

Education 3.0 3.1 6.1

Health 0.7 0.8 1.5

Industry 7.3 5.3 12.6

Other 1.2 1.0 2.2

Total conptruction 25.7 38.2 63.9

8. Using past experience and standard criteria normally used in theconstruction industry the Ministry of Industry and the S.E.P. have arrivedat the following estimates of the theoretical demand of key constructionmaterials (excluding cement)expected to be generated by such a constructionprogram:

ANNEX XIPage 5

Unit of Yearly production capacity neededMeasure by 1977 by 1980

Plaster 1000 tons 430 700Quicklime 1000 tons 112 178Clay bricks and tîles 1000 tons 1,680 2,720Ceramic tiles 1000 sq.mt. 4,500 6,000Sanitary ceramic 1000 tons 26 32Agglomerates 1000 tons 1,600 2,800Asbestos-cement products 1000 tons 92 120Concrete pipes 1000 meters 225 283Aggregates 1000 tons 17,200 28,000

For metallic frames produced by SNMetal, the Plan estimates a potentialdemand, based on the need to complete the programs described above, of690,000 tons, during 1974-77. Only 43% is likely to be satisfied bydomestic production, while the balance would have to be imported.

Outlook

9. The response of the Algerian planning authorities to the projectedincrease in demand for construction materials is a large investment programaffecting SNMC, SNMetal and also the decentralized Wilayate Enterprises tobe set up under the RIDP. The investment program is discussed in the maintext of this report (paras. 3.10 to 3.13).

10. The table below shows the overall supply of each product in theconstruction materials subsector that should be available at the completionof the current 4-year Plan (end 1977), and at the time when all projectslaunched in the course of the Plan are expected to have started operations(end 1980). The table also shows what portion of total foreseen supply willbe provided by SNMC, and, in the last column, the estimated percentage deficit(or surplus) of demand over supply of each product, based on a comparison be-tween future production capacity and estimated future demand.

ANNEX XIPage î

Percentage Percentagedeficit or deficit or

Estimated surplus of Estimated surplus ofproduction capacity domestic produc- domstic

in 1977 supply over tion supply overUnit of TOTAL of which demand in capacity demand inMeasure SNMC 1977 in 1980 1980

Plaster 1000 tons 344 322 -20% 804 +15%Quicklime 1000 tons 199 178 +78% 399 +124%Bricks andtiles 1000 tons 1,892 1,681 +13% 2,902 + 7%

Ceramic tiles 1000 sq. 2,605 2,605 -41% 6,050 + 1%mt.

Sanitaryceramic 1000 tons 19 19 -24% 27 -16%

Agglomerates 1000 tons 1,245 1,060 -22% 2,880 + 2%Asbestos-cement 1000 tons 102 102 +11% 157 +31%Concrete pipes 1000 mt. 134 134 -41% 264 - 7%Sand and gravel 1000

tons 20,400 7,800 +19% 28,000 + 9%Metallic car-pentry &Boilers 1000 tons 150 - -35% 280 - 7%

The large overcapacity for quicklime as shown in the table is only apparent,since a large part of quicklime production will be absorbed by other branchesof the economy, such as agriculture and steel mills. The slight overcapacityshown in the table for other products (bricks and tiles, asbestos-cement,and aggregates) is due to the fact that plants are planned according tostandardized optimal-size models, which may create some overcapacity incertain locations. One should keep in mind, however, that these over-capacities would occur only if all investment programs were completed onschedule, which is doubtful.