.4 8 - )s (>0 (1 Z '- /// ilocument ot The World Bank FOR JFt ICIAI L'SE ONLVh Report No. 1 2357-AL STAFF APPRAISAL REPORT DEMOCRPTIC AN) POPULAR REPUBLIC OF ALGERIA WATER SUPPLY AND SEWERAGE REHABILITATION PROJECT MAY 5, 1994 Infrastructure Operations Division Maghreb and Iran Department Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients orly in the performance of their official duties. Its contents may not otherwise be disclosed without A arld Bank authorization. EXCHANGE RATE Currency Unit: Algerian Dinar (DA) - 100 Centiies Eguivalency of 1 US5 in DA since 1985 1985 5.03 1986 4.70 1987 8 4.85 1988 5.92 1989 7.46 1-990 8. (10 1991 17.35 199? 22.49 1993 22.00 1994 (APRIL 12) 36.00 ABBREVIATIONS bbl/d : barrels per day mm : millimecer ha : hectare MM3 : million of cubic meters Km kilometer MMT : million of metric tons lcpd : liters per capita per day m3/ : cubic meters per second GLOSSARY OF ACRONYMS AGEP : Agence Nationale de 1'Eatt Potable et Industrielle et de 1'Assainissement AGID : Agence Nationale de Rdalisation et de Gestion des Infrastructures Hydrauliques pour Irrigation et le Drainage ANB : Agence Nationale des Barrages ANID : Agence Nationale d'Irrigation et de Drainage ANRH : Agence Nationale des Ressources Hydrauliques DGAIH : Direction des Grands Amenagements et Infrastructures Hydrauliques DHW : Direction de l'Hydraulique de la Wilaya DRFUE : Direction de la Reglementation, de la Protection et de l'Usage de 1'Eau EPA : Entreprise Publique Administrative EPDEMIA : Etablissement Public de Gestion e; de Distribution des Eaux Kdnageres et Industrielles et de l'Assainissement EPE : Entreprise de Production d'Eau EPEA : Entreprise de Production, de Gestion et de Distribution d'Eau d'Annaba EPEOR : Entreprise de Production, de Gestion et de Distribution d'Eau d'Oran EPIC : Entreprise Publique, Industrielle et Commerciale GOA : Government of Algeria MA : Ministere de l'Agriculture ME : Ministere de 1'Equipement SEDAL : Socift6 des Eaux de l'Agglomeration d'Alger WILAYA(TE) : Province(s) FOR OFFCIAL USE ONLY DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA VATER SUPPLY AND SEWERAGE REHABILITATION PROJECT Table of Contents LOAN AND PROJECT SUMARY . . . . . . . . . . . . . .. . . . . . . . I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . II. THE URBAN WATER SUPPLY AND SEWERAGE SECTOR. . . . . . . . . . . . 3 General Features . . . . . . . . . . . . . . . . . . . . . . 3 Population Distribution . . . . . 3 . . . . . . . . . . . , 3 Water Resources. . . . . . . . . . . . . . . . . 4 Service Levels. . . . . . . . . . . . . . . . . . . . . . 4 Institutional Arrangements . . . . . . . . . . . . . . . . 5 Investments in the Sector . . . . . . . . . . . . . . . . . . 6 Industrial Water Demand . . . . . . . . . . . . . . . . . . . 6 Finances . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Staffing and Management.8 The Bank Experience in the Sector . . . . . . . . . . . . . 8 Environmental Aspects . . . . . . . . . . . . . . . . 9 III. THE PROPOSED PROJECT. . . . . . . . . . . . . . . . . . . . . . . 9 Project Genesis and Concept . . . . . . . . . . . . . . . . . 9 Objectives of the Project . . . . . . . . . . . . . . . . . . 10 Project Description . . . . . . . . . . . . . . . . . . . . . 11 Institutional Reforms . . . . . . . . . . . . . . . . . . . . 12 Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . 13 Project Execution . . . . . . . . . . . . . . . . . . . . . 14 Project Financing . . . . . . . . . . . . . . . . . . . . . . 15 Cost Recovery . . . . . . . . . . . . . . . . . . . . . . . . 15 Procurement . . . . . . . . . . . . . . . . . . . . . . . . . 15 Disbursement . . . . . . . . . . . . . . . . . . . . . . . . 17 IV. PROJECT IMPLEMENTATION AND OPERATION . . . . . . . . . . . . . . . . 18 Executing Agency . . . . . . . . . . . . . . . . . . . . . . 18 Operation and Maintenance . . . . . . . . . . . . . . . . . . 19 Technical Assistance . . . . . . . . . . . . . . . . . . . . 19 Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Project Accounts and Audit . . . . . . . . . . . . . . . . . 20 V. WATER SUPPLY MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 20 Background . . . . . . . . . . . . . . . . . . . . . . . . . 20 Sector Structure . . . . . . . . . . . . . . . . . . . . . . 21 Concessionary Arrangements . . . . . . . . . . . . . . . . . 22 Organization and Management . . . . . . . . . . . . . . . . . 23 Staffing . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Commercial Operations .................... 23 Accotnting System . . . . . . . . . . . . . . . . . . . . . . 24 Other Management Procedures . . . . . . . . . . . . . . . . . 24 This report was prepared and written by Mr. Fritz Rodriguez (MNIIN); Mr. Charles Sterling (MNIIN); and Mr. Alain F. Thys (Consultant). This documt has a rstricted distrbution and may be used by cpient oy in *te pefrmm of their officil dutes Its contents may not otherwie be hdislosed wihout World D *n autoizaton Table of Contents (continued) VI. FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . 24 Overview . . . . . . . . . . . . . . . . . . . . . . I . . . 24 Past and Present Financial Performsnce . . . . . . . . . . . 25 Revenues and Costs . . . . . . . . . . . . . . . . . . . . . 25 Financing Plan . . . . . . . . . . . . . . . . . . . . . . 27 Future Financial Performance . . . . . . . . . . . . . . . . 27 Monitoring System . . . . . . . . . . . . . . . . . . . . . . 28 VII. ECONOMIC JUSTIFICATION . . . . . . . . . . . . . . . . . . . . . . 28 Project Benefits . . . . . . . . . . . . . . . . . . . . . . 28 Least-Cost Alternative . . . . . . . . . . . . . . . . . . . 29 Economic Return . . . . . . . . . . . . . . . . . . . . . . . 29 Economic Efficiency . . . . . . . . . . . . . . . . . . . . . 29 Environmental Impact . . . . . . . . . . . . . . . . . . . . 30 Institution Building . . . . . . . . . . . . . . . . . . . . 30 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 VIII. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . . . . 31 LIST OF ANNEXES 1. Land and Water Resources 2. Cost of Water Supply Services in 1992 3. Projected Cost of Water Supply Services in 1994 4. Contract Model for Optimizing Water Sttpply Operations 5. Selection Criteria for Sewage Plant Rehabilitation 6. List of Studies and Operational. Equipment to be Procured 7. Program for Upgrading Meteorological Recording Operations 8. Terms of Reference for Management Studies of Surface Water and Groundwater in Soummam Valley 9. Detailed Cost Estima.es 10. Price E&calation Calculation 11. Project Implementation Schedule 12. List of Contracts to be Placed for the Project 13. Estimated Schedule of Disbursements 14. AGEP's Organizational Chart - 1993 15. Terms of Reference for Technical Assistance to AGEP 16. Water S-pply Operations in the Project Area 17. Concesssionary Arrangements for Managing Urban Water Supply Services 18. Contract de Gestion pour l'Exploitation des Services Publics d'Alimentation en Eau Potable 19. Lettre Traitant des Politiques de D6veloppement du Secteur de l'Eau 20. EPEA's Organtzational Chart - 1992 21. EPEOR's Organizational Chart - 1992 22. Proposed Organizational Chart for Regional Water Utilities 23. Terms of Reference for Setting out Commercial Operations of Water Utilities 24. EPEA - Income, Balance Sheet, and Cash Flow Statements 25. EPEOR - Income, Balance Sheet, and Cash Flow Statements 26. Assumptions for Financial Projections 27. Monitoring Indicators 28. Assumptions for Economic Evaluation of the Project 29. Selected Documents and Data Available in the Project File Man- No. IBRD 25235 DEMOMRATIC AM POPUIAR REPUBLIC OF ALGERI WATE SUPPLY AND SW AG U ITATIOX PQJECT LOAN AND RJT S Y Borrowei: : Democratic and Popular Republic of Algeria Not applicable. hmwunit : US$110 million equivalent Zeama : Repayable in 17 years including 5 years of grace, at the standard variable interest rate. Poverty Cateorv: Not applicable. Proiect Descrltion : The project seeks to restructure the urben water supply sector by contracting out a number of its operations, such as leak detection and repair, optimization of meter reading and billing, and network recalibration and mapping, with private entrepreneurs. It advocates the creation of self-financing water utilities that would operate under concession agreements with the Government. To promote water conservation, the report recommends chrArging the true economic cost of the services to consumers. Until now, a national tariff structure has been applied for water services, with no provision for capital consumption and expansion. The project proposes changing this policy by levying regional tariffs that would cover both operating and maintenance costs, and the concession fees. The Government would use these fees to finance asset renewal and expansion. As large volumes of water produced are now unaccounted for, the project includes a network rehabilitation program aiming at reducing water losses. Most wastewater treatment plants in Algeria are currently inoperative. As a result, water pollution is spreading around the large urban agglomerations, damaging the natural environment. To mitigate these damages, the project proposes the rehabilitation of a number of existing wastewater treatment plants. Under the project, institutional development assistance would be provided to three specialized agencies of the Ministry of Equipment: AGEP, ANB, and ANRH. This assistance would aim at improving project evaluation procedures in these agencies. Project benefits would encompass the recovery of 32 Mm3 of annual water production that is now lost, and substantial improvement of water quality in the country. Project execution faces some risks relating to the Government not living up to its obligations under the concession agreements. Other - ii 1 risks r late to the extent and cost of the rehabilitation works, which cannot be determined accurately, and to possible slow pace of their execution. These risks are inherent to the nature of that type of works. To minimize the first risks, Bank review and approval of the concession agreements is proposed, to be followed by a mid-term review in the summer of 1997. To diminish the second ones, a number of seminars are - scheduled to take place at project inception, to discuss strategies for quick project implementation. Fstimated Cost C al Foreign Total -US$ Million- Water System Rehabilitation 24.5 46.0 70.5 Sewage Plant Rehabilitation -.5 7.8 ..L Subtotal 30.0 53.8 83.8 Physical Contingencies 3.0 5.4 8.4 Project Impiementation 1.8 3.2 5.0 Project Preparation 1.5 10.0 11.5 Operational Equipment 0.8 8.7 9.5 Institutional Development 9.O 112 Total Base Cost (Mid-1993 prices) 39.3 90.1 129.4 Price Escalation 2L2. 19.9 40.6 TOTAL PROJECT COST1 60. 11.0. Financimg Plan Concession Fees 54.1 -- 54.1 Government 5.9 . 5.9 IBRD - 110.0 Total Sources 60.0 110.0 170.0 Zstmated Disbsementg BkE* 1995 199£ 1222211222 2 21 Annual 7.3 15.4 19.2 18.9 17.6 15.6 11.3 4.7 Cumulative 7.3 22.7 41.9 60.8 78.4 94.0 105.3 110.0 Economic Rate of Return About 17 percent on the aggregate investments, excluding those for reaabilitating existing wastewater treatment plants, accounting for about 12 percent of the total project cost. Staff AnRraisal LenoOt : 12357-AL IBRD 25235 I/ Inoclud,, 55816.S mllion .quvalemt in taes mad dutlsa. DEMOCRATIC AnE POPULAR REPUBLIC OF ALGERI WATER SUPPLY AND SEWERAGE REHABILITATION PR.OJECT STAFF APPRAISAL REPQRT I. INTRODUCTION 1.01 This report appraises a work program for the rehabilitation of urban water supply and sewerage services in Algeria during the period 1994-2000. There are currently many flaws in the way these services are provided in this country. The supply is interLittent, with insufficient pressure. Almost 45 percent of the volumes of water producedl are unaccounted for, thus not available to meet consumers' demand. With respect to sewerage, most of the wastewater generftted in the urban areas is d.'scharged untreated in the river system and the Mediterranean Sea. A number of wastewater treatment plants have been built in the last twenty years, but most of them are currently inoperative. Other operational aspects in the sector are also in great need of reform. The existing water distributors are public enterprises legally defined as commercial and industrial entities (EPIC), and as such, under Algerian legislation, have possible access to Government subsidies for both capital investments and operations. In some cases, tariffs are insufficient to meet operational requirements, and inefficiency permeates the sector. 1.02 This poor performance, however, should not be attributed to Govern- ment's neglect of the sector. Between 1974 and 1989 the Government made a total investment of US$4.2 billion in the sector, increasing per capita investments from US$48.0 in 1974 to US$102.0 in 1989. A number of institutional reforms were also undertaken during the same period. From a centralized management at the beginning, regional organizations were subsequently set up to manage water supply and sewerage in the country. These reforms, however, were not accompanied by necessary financial measures. Until recently,water has not been considered an economic good, and the Government has not attempted to charge its real cost to consumers. This approach, however, is now being revised as the Government has taken a number of actions aiming at introditeing more efficiency in the sector management. These include a recent doubling of tariffs, a program for full metering of water consumption,and enforcement of regulations governing the management of water utilities in the country. 1.03 The Bank has been active in the sector since 1978, and so far has made five loans for urban water supply and sewerage works. Except for the last one, these loans financed projects in the taree largest cities in the country, Algiers, Oran, and Constantine. The fifth loan financed works in medium-size cities. Through these loans, an attempt was made to strengthen the sector institution. Though not always successful, it has nevertheless led to major improvement of water supply services in the large urban areas. It has advocated the application of more realistic user charges, the establishment of self- accounting entities to manage the services. A large tariff increase that took effect in early 1993, was in response to the Bank's advocacy for more efficiency in the sector. From a municipal department in 1978, the water service in Algiers has evolved to a semi-autonomous entity. Similar evolution has taken place in other cities involved in the Bank-financed projects. - 2 - 1.04 The previous projects, together with the structural reforms that they tried to achieve, were confined to specific areas. The proposed project is taking a bolder approach to institutional reforms in the sector. It advocates taking a first step in the path to privatization of the management of water services in Algeria. It calls for the establishment of self-accounting entities, for more efficiency in providing the services,and for developing national expertise in water resources management. The proposed project follows recommendations of a recently completed sector report on a strategy for the development and management of water resources in Algeria. For now, a large proportion of water produced is lost through leaks in the network. Because of low tariffs, consumers have not attempted to conserve water. Large volumes of water are wasted inside the dwellings through faulty plumbing systems.. If these wastes can be reduced, it is proiected that the available fresh water resources could meet water demand up to the year 2030. 1.05 With this objective in view, the project includes a rehabilitation program aiming at reducing water losses in the network. It advocates the adoption and applicatior of a more progressive tariff structure that would promote water conservatior. To enhance environmental conditions, the project contemplates the rehabilitation of wastewater treatment plants that are neces3ary to protect the w^ter resource base. Institutional development assistance would also be provided to operators in the sector, including training of their staff. Implementation of these components, however, is contingent upon the issuance by the Government of directives f5r- the establishment of self-financing water utilities, with a clear mandate and incentives for increasing performance and efficiency. 1.06 The estimated total cost of the project is US$170.0 million, with a foreign exchange component of US$110.0 million. A Bank loan is proposed to finance this component. The balance will be financed by cash generation in the sector, and Government funds. Detailed project design is under way and is expected to be finished by the time the Bank loan is ap1 roved, to allow immediate start of procurement. The project would be executed during the period 1994-2001. A mid-term review of progress in project execution and in compliance with loan covenants is scheduled to take place during the summer of 1997. 1.07 Project preparation was partially financed under Bank Loan 2821-AL, and carried out by the Kinistry of Equipment with the assistance of consultants. The Bank actively participated in project formulation and discussed it with lenders involved in the water sector in Algeria. A Bank mission composed of Messrs. Fritz Rodriguez and Charles Sterling (Bank staff) and Mr. Alain F. Thys (Consultant), appraised the project in June 1993. II. THE URBAN WATER SUPPLY AND SEWERAGE SECTOR General Features 2.01 With an area of about 2.4 million km2, Algeria is the largest country in North Africa. Most of this area, however, extends into the Sahara Desert, is unfit for agriculture, but rich in mineral resources. North of the Saharan Atlas is a semi-arid region encompassing a coastal strip along the Mediterranean, the interior plains, some highlands near the coast, and the high plateaux. More than 90 percent of the population livos in this region. The mean annual rainfall in this northern part of the country varies between 300 mm and 1,000 mm, exceeding 600 mm only in the central and eastern coastal plains where rich arable land is found. It is less than 100 mm south of the Atlas in the Sahara. 2.02 There are 17 major river basins in Algerie. Some of them are shared by other countries: the Medjerda with Tunisia; the Tafna, Guir, Dra and Daoura with Morocco. Based on rainfall and surface water regime, climate, and soil characteristics, 11 hydrographic regions have been identified in the country: Oranie, Chelf, Algeroise, Soummam, Constantinoise, Annaba, Medjerdah-Mellegue, Hodna-Zahres Sersou, Aures Nementchas, Chott Chergu' South Atlas, and Southern Algeria. This regional distribution is used in comparing water demand with the available supply in different parts of the country. 2.03 Administratively, Algeria ia divided into 48 provinces (wilayate), 567 counties (dairate), and 1540 communes. At the provincial level, the executive is headed by a Governor (Wali), and his cabinet includes representatives of each of the Central Government's ministries. PoMIlation Distribution 2.04 The 1987 census recorded a population of 23 million in Algeria, half living in urban areas. A previous census was carried out in 1977. Between these two censuses, the population kept growing at an average annual rate of 3.1 percent. The urbanization rate alst increased during that period from 39 percent in 1977 to 50 percent in 1987. The expectation is that the share of urban population will continue to increase, reaching 58 percent of the total population by the year 2000. The stationary population in Algeria is projected to be around 76 million. More than 90 percent of the population lives in the northern part of the country, accounting for only 12 percent of the land. As a result, the population density is relatively high in this part. It ranges from 50 persons per jn2 in the steppe to 220 perions per km2 in the coastal plains. In fact, almost 40 percent of the total population resides along the coast between Oran and Annaba in a strip accounting for less than 2 percent of the total area. Only 7 percent of the total population lives in the southern part of the country. 1/ In this report the teiz urban water refers to potable water used in households, pubLUc entities, and iustries in both urban end rural areas. -4- 2.05 Over 70 percent of the total population lives in fixed settlements that need to be provided with public water supply and sewerage services. The rest of the population is dispersed, necessitating at the most the provision of water points for its supply. About 44 percent of Algerians are under 15 years of age, 65 percent under 25 years of age. Although one-fifth of the urban population is concentrated ir. the capital city, Algiers, there exist in addition a number of -relatively large and medium-size cities distributed across the- northern part of the courntry, where puhlic services such as water supply and sewerage can be provided at a reasonable cost. This distribution saggests that a decentralized sector organization for urban water supply can be implemented in Algeria, provided the necessary staff can be feund to manage the resulting independent systems. at_er Resources 2.06 A detailed description of land and water resources in Algeria is given in Annex }. Total water resources are estimated at 19.1 billion m3 per year, comprising 12.4 billion m3 of surface water and 6.7 of groundwater. Surface waters are particularly abundant in the coastal plains (11.1 billion m3), but decrease rapidly in the steppe (0.7 billion m3) and in the Saharan Atlas (0.6 billion m3). Because of irregular flows and heterogeneoue distribution, the surface water resources cannot readily be exploited for irrigation and urban water supply. Most of the rivers are dry in the summer, and their quality deteriorates in the winter, as the rising flows carry high solid contents. Their regulation througih costly reservoirs is often required to obtain economically exploitable yields. It is estimated that, with full damming, about 5.7 billion m3 per year or 46 percent of the surface waters in northern Algeria could be mobilized for irrigation and urban water supply. Presently, an average of 2.2 billion m3 is exploited from a total of 45 impounding dams. Large investments remain to be made for full mobilization of the surface water resources. 2.07 As a result of high infiltration from storm runoff and surface water resources, and of the existence of large fossil water deposits, groundwater is available over much of the country. The average annual yield of groundwater is estimated at 6.7 billion m3, but more than two-thirds of these resources (4.9 billion m3) are located in the Sahara Desert. In Northern Algeria, more than 80 percent of groundwater is already under exploitation, particularly in the coastal plains. The balance of 0.3 billion m3 is essentially in the steppe in Zahrez, Chott Hodna, and Chott Chergui. Overall, the average yield of water resources, excluding groundwater in the Sahara, with full development of storage, is estimated at 7.4 billion m3/year. This should be sufficient to cover the water needs for urban, industrial and agricultural use until the early part of the next century. Beyond that, it will be necessary to reclaim wastewaters and to tap non-renewable groundwater in the northern part of the Sahara, and later on to demineralize brackish water to meet the demand. Service Levels 2.08 Government investments over the last decade or so have allowed to increase service levels in 1989 to about 81 percent of the total population with direct connections to the water network, from an estimated 50 percent in 1976. - 5 - Despite this achievement attained during a period of high urban population growth, much remains to be done in terms of improving the quality of the services. The average consumption in households, estimated at 100 lcd, is considered adequate. In some places where it is lower, it could be much improved if losses were reduced to more acceptable levels. About 87 percent of the urban population have direct access to public water supply through private service lines; it is about 75 percent in agglomerated rural areas. The rest of the population is served- by standposts and private wells. The water quality is considered safe, although cholera and other water-relateo diseases have been endemic in Algeria. 2.09 The service levels are somewhat lower in the sewerage subsector. About 70 percent of households in urban areas are connected to public sewer systems. In many instances, these systems are combined networks carrying botlh wastewater and stormwater runoff. Large volumes of wastewater are discharged untreated into the Mediterranean and the rivers. It is estimated that in 1992 only 17 percent of domestic and -ndustrial wastewaters received some form of treatment prior to their disposal. This threatened water quality and created environmental hazards in the country. By the end of 1990, the Government had provided grants for the construction of 77 wastewater treatment plants; but most of them are now inoperative. Access to sewerage services in rural areas is provided to about 20 percent of the population. Institutional Arra&Uements 2.10 The Ministry of Equipment (ME) is responsible for the development, management, and conservation of water resources in the country. Thtis Ministry plans and builds urban water supply, sewerage, and irrigation conveyance systems. These functions are decentralized in a number of departments (Directions). The Direction des Grands Amenagements et Infrastructures Hydrauliques (DGAIH), carries out the planning and design of water resources development schemes. Another department, La Direction de la Reglementation, de la Protection et de 1'Usage de l'Eau (DRPUE), regulates sector operations including the sharing of water resources among different uses, and the setting of tariffs. Two semi- autonomous agencies provide specific services in the sector: the Agence Nationale des Barrages (ANB) for the construction of dams, and the Agence Nationale des Ressources Hydraullques (ANRH) for the collection and interpretation of hydrologic data, and the monitoring of water quality. 2.11 The main regulatory agency of the urban water supply and sewerage sector is the Agence Nationale de 1'Eau Potable et Industrielle et de 1 'Assainissement (AGEP). When established in 1986, this agency was assigned the task of formulating detailed policies for the urban water supply and sewerage sector, and of monitoring the operations in the sector. Other specific assignments were the provision of technical assistance to the sector operators, and staff training. Unfortunately, AGEP has not fulfilled these assignments. Instead, it has spent its resources planning and supervising the construction of water projects. To a large extent, this has curtailed AGEP staff from their true mandate of improving sector operations. Their assistance in this area has been minimal. As part of a fourth Bank-financed water supply project (Loan 2821-AL), it was agreed to undertake management studies to determine what actions should - 6 - be taken to improve efficiency in the sector. These studies were completed recently. 2.12 Water supply services to consumers are now provided by nine regional enterprises and 26 wilaya agencies. They are responsible for both production and distribution of urban water, and for sewerage services. The reasons for having two kinds of organizations are not fully transparent. Except that in the case of a regional enterprise, it appears that its water production facilities are usually located in more than one wilaya, making it a natural regional organization. Economies of scale and cross-subsidization appear not to have been determinant factors in setting up the current organization. The enterprises are semi-autonomous entities, with industrial statute (EPIC) giving them possible access to government funds for operations and capital investments. Their operations are not guided by commercial objectives, or return on investments. The proposed project advocates radical changes in the status of the entirprises to transform them into truly commercial entities. It further proposes the use of economic criteria and competition to optimize the geographical division of services in the country. Investments in the Sector 2.13 Since 1974 the Government has made increasingly large investments in the sector. During the First Five-Year Plan (1980-1984), investments in the order of DA 6.0 billion (US$1.2 billion) or about DA 300 (US$60.0) per capita were made in the sector. This amount increased to DA 10.4 billion (US$2.2 billion) during the Second Five-Year Plan (1985-1989). Table 2.1 illustrates the increasing importance given to the sector over successive plan periods. Given the continuing need to make up for backlogs in water infrastructure provision, the Government is not considering curtailing investments in the sector in the coming years. Table 2.1: Sector Investment Plant (in current DA) Total Per Capita Investment Plan DA US$ DA US$ .... billion.. 1974-77 4.0 0 8 240 48 1980-84 6.0 1.2 300 60 1985-89 10.4 2.2 476 102 Source: MlJintry of EqUymnt. Industrial Water Demand 2.14 There are a limited number of industries that use large volumes of water in Algeria. Beside', except for the industrial complex in Arzew, the industries are dispersed over the territory, thus imposing no disproportionate load on the water system In particular areas. Also, some of the industries with heavy water use have their own water supply. This is the case of the industrial - 7 - complex in Arzew, a phosphate rock processing plane in Djebel Onk, the steel complexes, and the petrochemical industries. The fact is that, at present, industry is not a major water consumer in Algeria, as shown in Table 2.2 below. As is the case for most countries at Algeria's stage of development, the major consumer is the household sector. Table 2.2: Volume and Structure of Sales in 1987 Usage Volume (Mm3) Percent Domestic 520 67 Industrial* 119 16 Commercial 60 8 Public .70 9 TOTAL zu Q * Excluding the volumes of water produced by industries for their om u8o. 2.15 The industrial sector accounted for about 16 percent of total water used in 1987. To this amount should be added the volumes consumed by industries equipped with their own water supplies, estimated to amount to 40 Mm3. This gives a total industrial water use of 159 Nm3 in 1987, i.e., about 20 percent of the total use in that year. Given the current and expected macroeconomic situation in Algeria, it is not foreseen that the structure of water uses would markedly change in the coming years. Finances 2.16 Annex 2 provides the cost of urban water in different provinces of the country in 1992, while Annex 3 depicts the projected cost in 1994. The bulk of past investments in the sector were financed by government grants, and not surprisingly, the asset base of the regional water enterprises is very low. Very often, the Government-funded fixed assets have not been registered in the enterprises' books, and no depreciation allowance has been made for these assets. This practice distorts the financial situation in the sector, giving a blurry picture of the financial position of the enterprises. In general, the level of receivables is high, on average 10 months of sales. This is compounded by the presence of illegal or unregistered connections that provide no revenues to the enterprises. Most of the water enterprises posted operating losses at the end of 1991, though by allowing their accounts payable to increase, cash collection was sufficient to cover expenses in that year. 2.17 The current tariff structure for urban water supply was established by Decree No. 85-267 issued in October 1985. It is an increasing block rate structure encompassing four blocks in domestic consumption. The base price per =3 in the first block is currently DA 2.20, generating an average revenue of DA 6.30 (US$0.18) per,-. With some exceptions (Medea, Tiatat, Illizi, Tamaurasset, Tebessa), this amount is projected to be sufficient to meet operating costs of the 35 enterprises in 1994 as illustrated in Annex 3. In some cases, it will also be sufficient to cover capital investments. A more detailed discussion of the tariff structure is carried out in paras. 6.05-6.07. Staffina and Management 2.18 With an average ratio of 14 employees per 1,000 connections, the enterprises are considered overstaffed. At the same time, there is a shortage of qualified staff in the sector. Labor productivity is low. The work seems to be reduced to the minimum necessary to continue providing services, and no effort is made to Improve them. A case in point is the high volume of losses in the water network. No systematic approach to repairing the leaks has been taken, and the staff seems to be comfortable with the situation. Long delays are observed betweer, the time a customer requests a service line and the time the work is done. In some cases, receivables amount to more than a year of sales, but no action is taken, since cash collection can meet salaries and other operating expenses. There is a definite lack of dedication and involvement by the staff. 2.19 The salaries and employment conditions in the enterprises are lover than in the industry and energy sectors. Most of them, therefore, are experiencing difficulties in recruiting staff of high caliber in areas such as finance and accounting. These difficulties are accentuated in enterprises located in places relatively far away from large urban centers. This situation could be remedied through the implementation of a comprehensive staff training program. An additional remedial action would be regionalizaticn of the services. It would be a lesser burden for staff if they are stationed in large cities where the main offices of regional water companies are located. From there, they could provide operational assistance to small utilities in the region, and at the same time, enjoy the amenities of a large city. The Bank xperiLen_c in the Sector 2.20 The Bank became involved in the sector in 1978 when Loan 1545-AL of US$82.0 million was made for the Algiers Sewerage Project, to finance the construction of sewer interceptors and a sewerage treatment plant in Greater Algiers, and management and engineering studies in the cities of Algiers, Constantine, and Oran. One of the objectives of this project was to strengthen the sector organization in Greater Algiers through the creation of a regional water supply and sewerage authority (SEDAL). In spite of some delays in implementing agreed policies, the SEDAL experience was good and instrumental in the Government decision, in 1986, to set up similar authorities in the rest of the country. 2.21 To help improve water supply and sewerage services in the Algiers area, in 1980 the Bank made a US$5.0-million loan (S-17-AL) to finance a water resources study, the Water Master Plan for the Algiers/Sebaou Area. Upon the recommendations of this study, a water supply project, -overing the first construction stage of the Master Plan, was defined for Greater Algiers. In June 1984, the Bank zAade a US$290-million loan (2461-AL) to finance part of this construction. This loan also addressed the institutional development of the sector by partly financing the setting up of AGEP, the implementation of a sector survey, and organizational, managerial and financial studies for the Algiers water company. Implementation of the Algiers project was completed at the end of 1992. -9- 2.22 In 1985, the Bank made a US$262-million loan (2591-AL) to finance water supply and sewerage works in Oran and Constantine, and technical assistance for 13 regional water companies in the areas of organization, management, finance and staff training. A fifth loan of US$250 million (Loan 2821-AL) was made in 1987 to finance part of the investments in the sector during the period 1986- 1991. Implementation of these two projects is progressing reasonably well, with the first one expected to be completed by the end of 1994, and the second one in 1995. The latter was restructured in 1993 -to introduce more urgently needed works. 2.23 Since the beginning of its involvement in the sector, the Bank's lending strategy has been geared essentially toward the development of a strong institutional framework for the sector, that would result in sound investment programming, improved operational efficiency of the water utilities, and ultimately in improved and expanded services. To this end, the Bank has been actively assisting the Government in putting in place financially strong and viable organizations, and in expanding water supply and sewerage services in the large and intermediate cities, as outlined in the Second Five-Year Plan. Important institutional reforms have already been achieved under the four previous Bank-financed projects, but much remains to be done to establish a more cohesive approach to the use and management of the water resources. Environmental Asnects 2.24 Domestic and industrial wastewaters in Algeria are discharged virtually untreated into the Mediterranean and the river system. Only 17 percent of the wastes actually receive some form of treatment. Industrial pollution is particularly heavy near the large coastal cities of Algiers, Annaba, and Oran. Apart from the unpleasant sight of polluted waters in the Algiers Bay and El Harrach River near Algiers, there is serious risk of polluting the groundwater aquifer along the coast, a source of potable water for the large coastal urban communities. Because of water pollution in the Bay and the river system, recreational activities such as bathing, swimming, and sailing, have ceased in this area. 2.25 The first phase of a wastewater collection and treatment master plan for Greater Algiers is now operaLional. Wastewaters generated in the most industrialized part of this conurbation are now treated for their eventual reuse in agriculture. There are plans for completing the implementation of the master plan, and for implementing similar programs in the regions of Annaba and Oran. III. THE PROPOSED PROECT Proiect Genesis and Concept 3 01 In 1987 the Bank made a loan of US$250 million (2821-AL) to the Government of Algeria to finance a number of water supply and sewerage works in the country. The loan also covered studies in areas with deficient water supply to determine how services could be improved in these areas. At the beginning, - 10 - project implementation experienced some difficulties. The sector organization was changed with the creation of thirty-five water utilities replacing thirteen regional authorities with which the loan had been negotiated. Since reimbursement agreements were to be entered between the Government and the implementing agencies, additional negotiations took place between the Government and the Bank following loan signing. The project itself included some controversial works such as the construction of two dams along the Tunisian border. Recently, the project had been restructured, eliminating these works and introducing more needed subprojects. 3.02 Meanwhile, the studies included in the loan have been carried out successfully. They have defined a number of urgently needed works for which detailed design is currently under way. These studies have also showed that large volumes of water produced were unaccounted for, and that the systems were in great need of rehabilitation. This finding has led the way in conceiving the proposed project. On the institutional side, both the Government and the Bank have recognized the need to restructure the sector by introducing more efficiency in the provision of water supply and sewerage services in the country. An institutional study along with a sector survey were included in Loan 2821-AL. They were conducted by an Algerian/French consortium (CNAT/SAUR-Afrique), and completed recently. The study recommendations have been taken into account in forovulating the proposed project. Oblectives of the Prolect 3.03 The proposed project would seek to rationalize institutional arrangements in the urban water sector with a view to achieving full cost recovery by autonomous, self-financing utilities. As these institutional reforms are taking shape, the project will proceed with the rehabilitation of existing urban water supply and sewer systems. As highlighted in para. 1.01, large volumes of water production, around 45 percent, are now unaccounted for, due to leaks in the systems, metering defects, and illegal connections. Leakages are considered the cause for three quarters of water unaccounted for. The project would attempt to optimize water distribution in a number of cities with current water production considered relatively sufficient to fill water demand in these cities. They are the cities of Annaba, Ain Temouchent, Bejaia, Jijel, Mascara, Oran, Relizane, Sidi Bel Abes, Setif, and Tlemcen with a total population of 2.0 million. The rehabilitation program would cover leak detection and repair, the setting up of a reliable metering system, both bulk and individual, the establishment of efficient billing and collection procedures, and an updated census of water customers. 3.04 The difficult situation of sewerage operations in Algeria has already been highlighted in this report (paras. 1.01 and 2.09). The communes now operate the sewer systems, but have neither the technical capability nor the financial resources to perform this task. Beginning in 1993, the Government began collecting a 10-percent surcharge on water bills to cover sewerage expenses. This surcharge, however, was considered insufficient to ensure normal operation and maintenance of the sewerage installations. It was increased to 20 percent effective January 1st, 1994. But further increases are needed to meet operational requirements. The proposed project addresses this issue. It - 11 - Includes the rehabilltation of a number of sewage treatment plants. However, to ensure adequate operation and maintenance of the rehabilitated plants, during negotiations, agreement was reached with the Government that Bank loan proceeds for a sewerage rehabilitation subproject in a city would be disbursed only after the Bank has been satisfied that a sewerage organization has been tstablished in this city, and funds to cover sewerage operations have been identified. 3.05 As the water supply rehabilitation program is being implemented, it will be necessary to strengthen regulations in the sector. The Government has recently made a start in this direction. It has proposed that communes, as the owners of water distribution and sewage networks, give them in concession to water utilities. It has recently issued regulations governing the functioning and operations of water utilities. The Government has also regulated the relations between customers and water utilities. A large meter installation program is currently under implementation with the goal of full metering of all individual connections in urban areas by the end of 1994. 3.06 Some major issues, however, still remain to be tackled. They include tariff levels, asset renewal, increasing productivity and efficiency in the sector, and intersectoral coordination. The proposed project addresses these issues. Frolect Descrintion 3.07 The proposed project would include: (i) water supply system rehabilitation in ten cities, inclusive of leak detection and repairs, meter installation, and gauging; (ii) water distribution network relooping and balancing in the same ten cities; (iii) rehabilitation of about 24 sewage treatment plants located in different places in the country; (iv) consulting services to AGEP and ANB to carry out feasibility and detailed studies, and environmental impact assessments of projected water and sewerage works; (v) institutional development assistance to AGEP, ANB, ANRH, and the water utilities; and (vi) supply of operational equipment to AGEP, ANB, ANRH, and the water utilities. 3.08 For the rehabilitation program of water supply systems, it is proposed to contract out with private specialized companies following competitive tendering. The contracts would be based on target costs for water loss reduction. The contractors would get a bonus if actual costs are less than the target costs, and a penalty if they are more. The contracts would be executed in three phases. The first one would cover a quick study to determine whether a large proportion of water unaccounted for in a subproject is resulting from - 12 - leaks in the system. Depending uponI this finding, a decision would be made on whether or not the subproject should be undertaken. 3.09 In the second phase, the metering system would be rehabilitated, water leaks detected and repaired, and an evaluation of the water network operations carried out. In the third phase, the network would be recalibrated with a system and procedures set out to control loss in the network. In each city involved in the program, a unit would be detached from the water utility to work with the specialized company. It is expected that by the time the program is completed, the unit staff would be trained enough to take over leak detection and repairs in the city. The rehabilitation program in a city is expected to last about four years. A more detailed outline of the contract is provided in Annex 4. 3.10 Given the high level of water pollution in the country, as a result of the breakdown of most sewage treatment plants, it is proposed rehabilitating 24 of them. Selection criteria of these plants that were agreed upon during negotiations, are given in Annex 5. In rehabilitating the selected plants, particular attention would be paid to the disposal of liquid and solid wastes. Whenever reuse of the plants' effluent in agriculture is not contemplated, it should be disinfected prior to disposal. Dry beds are used to process the plants' sludge. Special equipment would be provided for safe transportation of dried sludge to farms where it would be used in agriculture. 3.11 As additi.onal components, the project includes consulting services to carry out detailed studies and environmental impact assessments of future water works, and the supply of operational equipment. A list of these studies and of operational equipment is shown in Annex 6. Special assistance would be given to ANRH in the form of consulting services and provision of hydrologic and operational equipment. ANRH is the national agency responsible for monitoring water resources in the country. An overview of this agency is outlined in Annex 7. Terms of reference for a particular study of water resources development management in Soummam Valley are outlined in Annex 8. For tendering purposes and to speed up their procurement, similar items of equipment will be packaged together. Institutional Reforms 3.12 A proposal has been made to the Government for restructuring the utilities to make them operate and maintain water systems under concessionary arrangements with the Government as owner of the water systems. most of these systems have been financed by Government grants and are not included in the asset base of the utilities. For now, no system is in place to generate funds for renewal and expansion of water works. Whenever this is required, the Government until now has provided the necessary funds. A systematic change of this practice is proposed, whereby the concession fees would be allocated for asset renewal and expansion. 3.13 It is proposed that at the beginning, these institutional reforms be carried out in only two utilities: one in the east (EPEA), and the other in the west (EPEOR). These two utilities are now the best run in the country. The - 13 - proposed reforms would be experimented during the next two and a half years. After evaluation, they would be standardized in the sector. At negotiations, the Government agreed to complete the execution of concession agreements with all utilities in the sector by January lst, 1997. Meanwhile, institutional development assistance would be provided to the utilities to make them better prepared for entering into the concession agreements with the Government. A discussion of these agreements is carried out in paras. 5.07-5.09. 3.14 A national tariff structure is now applied for vater services countrywide. This system, however, has created inefficiency in the provision of the services. In places where the cost is higher than the tariff, consumers have not made an efficient use of the supply. Meanwhile, in places where the cost could be lower, operative inefficiency has predominated through high expenses and waste. As shown in Annex 3, operating costs vary markedly from one region to another. To make consumption more responsive to prices of the services, it is proposed to apply regional tariffs. A detailed discussion of the tariff structure is carried out in paras. 5.04-5.06 and 6.05-6.07. As for the concession agreements, the Government has agreed to apply regional tariffs by January 1, 1997 at the latest. Cost Estimtes 3.15 The estimated total cost of the project is DA 5,801.3 JDillion (US$170.0 million), with a foreign exchange component of DA 4,481.3 million (US$110 million), i.e., 64.7 percent of the total cost. A summary of the cost estimates is given irt Table 4.1. Detailed estimates and price escalation calculation of project investments are provided in Annexes 9 and 10. 3.16 The cost estimates are based on an evaluation of the works that would be required to reduce unaccounted for water and rehabilitate the sewage treatment plants. It takes hold on previous experience in similar circumstances. The estimates include taxes and duties. A 10 percent allowance has been added for physical contingencies. Construction supervision is projected to account for about 6 percent of the base cost. During project execution, local expenditures are projected to increase by 20 percent in 1994, 18 percent in 1995, 16 percent in 1996, 14 percent in 1997, 12 percent in 1998, and 10 percent in 1999 and 2000. Foreign expenditures, meanwhile, are expected to increase by 3.4 percent in 1994, 2.9 percent in 1995, 3.0 percent in 1996, 2.7 percent in 1997, 2.7 in 1998, 2.5 in 1999, and 2.5 percent in 2000. Price escalation is forecast to amount to about 31 percent of the base cost. To convert DA amounts in US$, exchange rates of DA 36.0 for US$ 1.0 in 1994, DA 37.5 in 1995, DA 41.0 in 1996, DA 43.0 in 1997, DA 47.0 in 1998, DA 50.0 in 1999 and in 2000, are used. 3.17 The project provides for an estimated 1,100 person-months of consulting services for project preparation and implementation, and for institutional development assistance to AGEP, ANB, ANRH, and the utilities. - 14 - Table 3.1: Cost Estimates LOCAL FOREIGN TOTAL LOCAL FOREIGN TOTAL PERCENT ITEM OF TOTAL DA Million US$ Million Water systems rehabiliation 539.0 1,012.0 1,551.0 24.5 48.0 70.5 54.5 Sewerage rehabititation 121.0 171.6 292.6 5.5 7.8 13.3 10.3 Subtotal 660.0 1,183.6 1,843.6 30.0 53.8 83.8 64.8 Physical contingencies 66 9 118.4 184.4 3.0 5.4 8.4 6.5 Project implementation 39.6 71.0 110.6 1.8 3.2 5.0 3.8 Project preparation 33.0 220.0 253.0 1.5 10.0 11.5 8.9 Supply of operational equipment 17.6 191.4 2090 0.8 8.7 9.5 7.3 Institutional development 48.4 198.0 246.4 2.2 9.0 11.2 8.7 Total cost (Mid 1993 pnoes) 864.6 1,982.4 2,847.0 39.3 90.1 129.4 100.0 Price escalation 455.4 2,498.9 2,954.3 20.7 19.9 40.6 31.4 TOTAL PROJECT COST 1,320.0 4,481.3 6,813 60.0 110.0 170.0 131A (current prices) Prolect Executlon 3.18 A bar chart illustrating construction phases of the project components is shown in Annex 11. Project construction is expected to begin by mid-1994 and to be completed by the year 2000. Bids for the water supply rehabilitation program are scheduled to be called by mid-1994, so as to allow for a quick start-up of project- execution. The execution of the sewerage component is expected to begin in early 1995. 3.19 The Directions de 1'Hydraulique de Wilayate (DHW) would be responsible for the execution of the rehabilitation works. This responsibility would be carried out in concert with the water utilities coneerned, with the assistance of consultants acceptable to the Bank. For the purpose of Bank review of contracts and loan disbursement, the works of the DHWs would be coordinated by AGEP. Studies and environmental impact assessments included in the project would be undertaken by concerned agencies, also with the assistance of consultants acceptable to the Bank. All consultants under the project would be retained not later than March 31, 1996, in accordance the Bank Group Guidelines for the Use of Consultants, under terms and conditions satisfactory to the Bank. - 15 - Project Financing 3.20 A Bank loan of US$110 million is proposed to finance the foreign exchange cost of the project. The loan would be made to the Government, to be repaid over 17 years, including 5 years of grace, at the standard variable interest rate. Through the concession fees, the Government is expected to raise a minimum of DA 1,549.0 million (US$54.1 million equivalent). The balance of local cost would be financed by the Government who would keep ownership of the works. An outline of the financing plan for the project is given in para. 6.08. Cost Recoverv 3.21 Investments that the Government would make to rehabilitate the water supply systems would be recovered through the payment of concession fees by the utilities. As the systems are reshaped and produce more water for sale, the fees would increase to achieve full cost recovery of the investments. In addition, the Government would use part of the Bank loan to finance institutional development assistance, and the supply of operational equipment to water utilities in the country. This cost needs also to be recovered. To this effect, whenever such financing is provided to utilities, the concession agreements with these utilities would specify how repayment of expenses for technical assistance and operational equipment should be made to Government. Repayment terms and conditions might vary, depending upon the financial situation of a utility. These terms and conditions would be reviewed at the time the Bank approves the agreements. Procurement 3.22 Proposed procurement arrangements for the project are depicted in Table 3.2. A list of contracts to be placed for the project is given in Annex 12. The project elements have been distributed into contract packages that should ensure efficiency and economy in project implementation, and at the same time provide the opportunity for domestic contractors to participate in bidding. Supplies of pipes, valves, and fittings for the water supply rehabilitation component would be grouped into one contract. For efficiency and cost containment, single contracts covering both equipment supply and civil works would be laid for the rehabilitation of sewage treatment plants. These contracts would be for small amounts (less than US$800,000 each), dispersed, and of little interest to foreign bidders. Therefore, they would be procured by LCB acceptable to the Bank. 3.23 Except for those items, all other Bank-financed works and goods contracts would be procured through International Competitive Bidding (ICB), in accordance with the Bank Guidelines for Procurement- under IBRD Loans. To speed up the procurement process, agreement was reached during negotiations on standard sets of tender documents that would be used to procure civil works and equipment. In particular, a special contract type has been prepared for the water supply rehabilitation program. Since it will not be possible to determine in advance bills of quantities for these rehabilitation works, a target price contract would be used to implement this program. Contractors would be reimbursed against actual costs of works performed plus a fixed fee. To provide incentives for increasing performance, contractors would get a bonus if actual costs are less than the target costs, or a penalty if they are higher. An outline of this contract type is given in Annex 4. - 16 - ta2le 3.2: Sutmary of P-, uderocue,iienAtangruie (US$ Million Equivalent) PROJECT ELEMENT TOTAL IeB LCB OTHER Ui.B.F. COST 1. Works 1.1 Leak repairs - 70 7.0 12 Rehabilitation: Water systems 41.5 - - - 41.5 (24.9) - (24.9) Wastewater systems - 19.7 - - 19.7 (11.8) (11.8) 2. Goods 2.1 Equipment and machlnery: vehides, trucks daa procssIng 12.8 - - - 12.8 (10.0) (10.0) 2.2 Matelals. Pipes, fitings, valves 46.5 - - - 46.5 (x325.5) (32.5) 3 Srnice cofr 3.1 Unaounted for water reducwon 8.? _ _ _ 83 (5-8) (58 4. Consultances 4.1 Projet inpmentation - - 3.6 - 3.6 (2.5) (2.5) 42 Pro preparation - 15.50 _ 15.5 (12.0) (12.0) 4.3 Institutionsl deveopment - - 15.10 - 15.1 (10.5) (10.5) 109.1 19.7 34.2 7. 170.0 TOTAL (73.2) (11.8) (25.) (110.0) NOTE, FIgue In pae s are t respective amounts financed by the Bank loan. N.B.F.: Not Bank fnaeh a Finaed by the Algian Governmt; procured under LCB or by force account b. Needed for the Water Systems Rehabilitton Program. C. Prored In hcoordanie wth Worbd Bank's Gudelnes: Use of Consulknts by World Bank Borrows and by the Wodd Bank as Executng Agency, August 1981. - 17 - 3.24 With minor exceptions, local procurement regulations in Algeria have been found acceptable to the Bank. In this context, works contracts above a thresbold of US$2 million would be subject to the Bank's prior review procedures. The review process will cover about 89 percent of the total value of Bank- financed works contracts. Goods contracts above a threshold of US$300,000 would also be subject to prior review, covering about 91 percent of the total value of Bank-financed goods. In evaluating bids for the supply of equipment and materials, a 15 percent margin of preference or the actual customs duties, whichever is lower, would be allowed for goods manufactured in Algeria. Consulting services would be procured in accordance with the Bank's Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency. Disbursement 3.25 The Bank loan would be disbursed against: (i) 100 percent of foreign expenditures for imported equipment and materials; (ii) 80 percent of local expenditures for goods procured locally; (iii) 60 percent of total expenditures for civil works; (iv) 80 percent of total expenditures of consulting services for project preparation; and (v) 70 percent of total expenditures of consulting services for project implementation and institutional development assistance. Overall, the Bank loan would finance about 65 percent of the planned investments. 3.26 Estimated quarterly disbursements of the loan and Government funds have been derived from the Project Implementation Schedule (Annex 11), and are shown in Annex 13. The estimates match disbursement profiles of past water projects in Algeria with due consideration of the status of project preparation. Disbursement is projected to be somewhat slow during the first two years of project execution, but to pick up rapidly thereafter. 3.27 In order to make prompt payments to contractors and consultants, the Bank has agreed to advance regularly funds for the establishment of a Revolving Fund in Algeria to cover these payments. The Fund would be maintained at the Central Bank of Algeria for a maximum amount of US$7.0 million, which would cover the Bank's sl re of eligible expenditures on the project over a period of four months. r Fund would be maintained in US dollars and replenished by reimbursement applications from the Government in US dollars. Applications with appropriate supporting documentation, covering the use of the Fund, should be submitted when approximately half of the maximum allowed avount in the Fund has been spent. 3.28 The closing date of the loan would be December 31st, 2001, i.e. one year after the end of the provisional acceptance and uaintenance period of the works, which is the time needed to monitor their performance and to return retention money on civil works contracts. - 18 - IV. PROJECT -VJLEMENTATION AND OPERATION ExecyAting Aiencv 4.01 The project would be implemented by the Ministry of Equipment through the nat.onal water supply agency Agence Nationale de 1'Eau Potable et Industrielle et de 1 'Assainissement (AGEP), and its local representatives for the water sector in the wilayate (DHW). The water supply and sewerage rehabilitation works would be implemented by the DHWs, in cooperation with the utilities. Execution of the studies included in the project would be supervised by AGEP and the Agence Nationale des Barrages (ANB). To facilitate Bank supervision, and probably to speed up project implementation, all procurement activities under the project would be centralized in AGEP. 4.02 Annex 14 shoaws AGEP's current organization. 1.is agency was created in June 1985, but became operational only in 1987, with the mandate to provide technical assistance to water supply enterprises. Its responsibilities encompass technical support to water utilities, preparation of standards and norms, design of tariff structures, recording of assets, and implementation of regional projects. To execute these tasks, AGEP has established four departments: operations, works, studies and programming, and administration. There is agreement between the Bank and the Ministry of Equipment that AGE? so far has only fulfilled the last part of its mandate, i.e. project construction supervision. AGEP has been the implementing agency of three ongoing Bank- financed projects (Loan 2821-, 2591-, and 2461-AL) and has acquired experience in this area. 4.03 At the time of AGEP's creation, there was a void in technical capability for construction supervision, and quite naturally AGEP took over this task. But an important element of its mandate, the assistance to the water utilites, remains to be fulfilled, and an effort should be made to reach this objective. A number of weaknesses have been hindering AGEP's operations. One of them is an acute shortage of competent staff. As a ministry agency (EPA), its salary scale is not competitive with those of the private sector. Consequently, AGEP has been urable to recruit qualified staff. The staff includes only engineers, and no economists or financial analysts. It follows that its project analysis capability is rather weak, focussed essentially on engineering aspects. AGEP has also been suffering from excessive oversight by staff from the Ministry of Equipment. 4.04 Complete restructuring of AGEP is envisaged under the proposed project. Its present responsibility for construction supervision will be assigned to a new agency to be set up as an EPA. Meanwhile, the status of AGEP would be changed into EPIC to make it the main regulatory agency for the urban water supply sector. The restructured AGEP also will be the supervisory and enforcement agency of the Government in relation to the concession agreements with the water utilities. Under its new status, AGEP would be provided with administrative and financial autonomy. As a result, it will be able to establish a more competitive salary scale that would allow it to attract more qualified - 19 - professionals. Part of the concession funds would be used to cover AGEP's expenses. The proposed reforms would be carried out gradually, but should be completed by January 1, 1997. The decree transforming AGEP's status into EPIC, should be issued by July 1, 1996. During the transformation period, institutional development assistance would be provided to AGEP. A brief outline of this assistance is given in paras. 4.06 and 4.07. Detailed terms of reference for it are depicted in Annex 15. Operatimn and NaIntenance 4.05 The rehabilitated works would be operated and maintained by the utilities. Their staff would be involved in their execution, so as to familiarize themselve. with operating peculiarities of these installations. Norms to follow for operating and maintaining Government-owned facilities would be covenanted in the concession agreements. The staff are also expected to participate in a large staff training program, currently under implementation. Technical Assistance 4.06 As outlined in the project description, technical assistance would be provided to the new AGEP, ANB, and the Agence Nationale des Ressources Rydraul.lques (ANRH). The assistance to AGEP would include two parts. The first one would involve the participation of experts in project analysis and appraisal. It would cover the financial and economic tests that should be carried out for projects, to determine their viability. Most of AGEP's studies are now executed by consultants on the basis of terms of reference prepared by AGEP. The experts would assist AGEP's staff in drafting these terms of reference and in evaluating the consultants' reports. 4.07 The second part would address the technical assistance that the restructured AGEP would be mandated to provide to water utilities in the country. Experts would assist AGEP's staff in preparing operational procedures that C.e utilities should follow in managing their systems. These procedures would in particular cover commercial and financial activities. Together with the experts, AGEP's staff should organize regular visits of the utilities to review their operations and to collect operational data. The private sector in Algeria is capable of providing this assistance to AGEP, and should be encouraged to do so. Whenever it is necessary, foreign experts would be called upon and engaged by the local private firm in charge of the assistance to AGEP. 4.08 As for AGEP, the assistance to ANB would focus on drafting terms of reference for studies, and on reviewing studies and reports prepared by consultants. Special training would also be given to ANB's staff on assessing environmental impact of water resources development projects. The technical assistance to ANRH would consist of an evaluation of ANRH's existing equipment and current procedures to determine how they should be modernized and made more effective. - 20 - ReDortin= 4.09 In order to monitor progress in project implementation, it was agreed during negotiations that the Ministry of Equipment through AGEP woula submit, to the Bank, quarterly reports on project activities by AGEP, ANB, ANRH, and the concerned DHWs. These reports would in particular cover: (i) progress in procurement of equipment, materials, and civil works, including revised timing of procurement actions such as bidding and contract awards; (ii) progress in rehabilitation of water networks and sewage treatment plants; (iii) expenditures on the project and updated cost estimates of remaining works; and (iv) execution and evaluation of the technical assistance programs. 4.10 Assurances were also obtained that, within six months following the closing date of the loar., the Ministry of Equipment through AGEP would prepare and submit to the Bank - completion report on the execution and initial operation of the project, its costs and benefits derived or to be derived from it, the performance and fulfillment by the Government, the Ministry of Equipment and its agencies, and the Bank, of their respective obligations under the Loan Agreement, and the accomplishment of the objectives of the Bank loan. Prolect Accounts and Audit 4.11 t.GEP maintains separate accounts and records of its projects. A financial controller from the Ministry of Economy regularly controls these accounts. Nevertheless, they should be audited by independent auditors acceptable to the Bank. To this end, during negotiations agreement was reached on appointing the Inspection Gin6rale des Finances (IGF) as such auditors, to execute an annual audit of the project accounts, including the Revolving Fund account. Certified copies of the accounts as well as the auditors's reports sho-ld be submitted to the Bank not later than six months after the end of a fiscal year. V. WATER SUPPLY NANAGERNT Background 5.01 Water supply operations in Algeria are managed by regional and wilaya utilities. There are now, in total, thirty-five of them. The regional ones usually cover adjacent wilayate with common water production systems, such as in Setif, Oran, and Algiers. Other than this commonality, there seems to be no other rationale for the adopted geographical division. An impediment to a rational approach for the partition of regional companies is the current - 21 - application of national uniform tariffs, a situation that is expected to change under the proposed project (para. 6.06). 5.02 When regional tariffs are applied, it would become possible to use market forces to determine the size and limits of regional utilities. This approach is described thereinafter, Meanwhile, it is proposed to leave the sector organization unchanged. As previously mentioned (para. 3.13), the new institutional arrangements would be experimented with two regional utilities: the Entreprfse de Productlon de Gestion et de Distribution d 'Eau d'Annaba (EPEA), and the Ehtreprise de Production, de Gestion et de Distribution d 'Eau d 'Oran (EPEOR). A detailed description of their jurisdiction together with An evaluation of past operations of these utilities are given in Annex 16. Tney would operate the systems under concession agreements with the Government. A brief outline of these agreements is given in paras. 5.07 to 5.09. Meanwhile, more details are provided in Annex 17. A full French version of the concession agreements is given in Annex 18, 5.03 A timetable for standardizing the use of these agreements in the sector and for applying regional tariffs is depicted in a sector development policy letter dated March 19th, 1994 (Annex 19), that the Government has transmitted to the Bank. This letter also covers other policies, such as pricing of sewerage services, environmental management of land and water resources, and water usage regulations, that the Government is expected to implement in the water resour'-es sector during the period 1994-2000. Sector Structure 5.04 A national tariff structure is now applied for urban water services in Algeria. However, the cost of providing these services differs from one region to another. As a result, some utilities derive a rent, while others post a deficit. If this situation exists in a group of adjacent wilayate, it would be possible to agglomerate them into a regional. utility with its revenues and expen3ss in equilibrium, without changing the current average tariff. It would be more than a zero-sum-game operation, as Government subsidies now given to the non-profitable utilities would no longer be necessary. It is thus possible to come out from this regrouping with the ideal geographic division of the sector, resulting from a search for economies of scale, population distribution and densities, production costs, and operating efficiency of the utilities. 5.05 There are many ways to arrive at the ideal structure, and some constraints should be placed to limit the number of solutions. One of them is geographical boundaries. Obviously, a wilaya in the West should not be allowed to associate with a wilaya in the East. They must maintain contiguity within the same region. Another constraint should be the number of regional utilities. There are now nine of them in the northern part of Algeria. This number should be allowed to grow to no more than eleven, similar to the number of hydrographic regions in the country. In fact, the strategy outlined here is to put in place a system under which the existing regional utilities would take over the wilaya enterprises. In the process, some wilaya enterprises might instead decide to join together to form new regional utilities, or to stay independent. However, as national tariffs would no longer be applied, wilaya utilities will have to set - 22 - their own tariffs, which might be much higher than regional ones. This should, in principle, discourage wilayate from setting up thteir own utilities. But they can opt for this alternative, if consumers are willing to pay the higher prices, including concession fees to the Government. 5.06 Under the proposed system, managed competition would be used to set up the sector structure in Algeria. Regional utilities around a wilaya would be allowed to bid for taking over the water supply system in that wilaya. Normally, two to three regional utilities, at the most, would be in a position to submit concessionary bids. One should expect that the most efficiently run utility should win the bid. To ensure transparency in the process, a study should be carried out by the Government to determine what should be the cost of the services in the wilaya, so that the winning bid can be qualified. Following the bidding, the tariffs of the regional utility that has won the concession, would need to be adjusted to reflect the new cost of the services. The bidding process should be initiated and managed by the Government. The regional utilities might propose possible takeovers, but should not be allowed t3 start takeover discussions with wilaya enterprises without prior Government authorization. Concess ionarv Arrangements 5.07 Two central features have been at the root of slow progress in the sector development in Algeria. The first one relates to the Government's poor cost recovery scheme under which major investments have been financed by subsidies. The second one refers to the application of a national tariff structure, unrelated to the real cost of providing the services. The tariff has been assumed to cover only operating costs, and no allowance has been made for asset renewal and expansion. Under the proposed concessions, both features would disappear, as concession fees would be calculated on the basis of the capital required for asset renewal and expansion. 5.08 Tariffs to be levied in a region would be determined as the sum of efficient operating and maintenance costs in the region, and the concession fees. Both the tariffs and concession fees would be adjusted annually on the basis of an indexation formula covering all major components in the water supply industry, such as labor, electricity, and chemicals. Any operational profit would be retained by the utility management and shared among its staff as performance bonuses. This will provide an incentive for the utilities to compress operating expenses, expand operations and increase revenues, and consequently bonuses. Concurrently, the utilities would be under the obligation to provide an agreed upon level of service, including a rate of service expantsion. In this context, the concession agreements should specify the types of investment and equipment renewal to be made by the utilities, and those by the Government. 5.09 The concessions would have a duration of six years, but would spell out special circumstances for their cancellation. One of them could be unsatisfactory performance by a utility. They would also set out the tariffs that would be applied at inception of the concession period and circumstances and procedures for their indexation and possible revision. Under the new institutional arrangements, the tariffs would be integrated in the concession agreements and no longer be part of a national decision. Drafts of these - 23 - agreements for the two selected utilities, EPEA and EPEOR, were approved during negotiations. Their execution would be a condition of loan effectiveness. Any proposed modification of these concessions should be submitted for the Bank's prior approval. Their termination, without prior consultation with the Bank, should be cause for suspension of loan disbursements. Organixation sad Management 5.10 There would be some variations in the organization of the different regional utilities. But the organizational core essentially would remain the same. Since a utility covers various wilayate. a branch office would be established in each of them. The setup would be completed in a wilaya with the establishment of an administrative unit in each daira. This organization follows the country's administrative subdivision, and might not always be the most efficient one, as the work load might differ among the dairas. But for a start, it should be accepted until a cost accounting system is in place that would determine the resulting costs in the dairas and decide on the opportunity of equipping them with units. The head office would be locrted in the largest urban area. 5.11 Annex 22 shows a proposed organizational structure of the regional utilities. Four departments would be established at the head office: finance, commercial, administration/personnel, and engineering/operations. At a branch level, a similar organization would be set up. Meanwhile at a daira level, only two divisions would be put in place: commercial, and engineering/operations. Executive Boards, made up of representatives of the Government, the industrial sector, and consumers, would evaluate the utilities' policies and operations, and set out directions and priorities. In addition, Administrative Boards,composed of the utilities' managers, would evaluate results and discuss corrective measures. 5.12 Internal audit sections, reporting directly to the General Managers, would be set up in the utilities. Two other sections, dealing respectively with legal questions and public relations, would also be put in place. Staffing 5.13 For now, staff productivity in the regional utilities is considered low. The number of customers per employee vary from 63 in EPEA to 110 in EPEOR. Ratios twice higher have been observed in neighboring countries. Most of the excess staff, however, are in the low grade jobs such as guardians and messengers, and more professionals would need to be recruited. Until now, Government salary structures have been applied in the water industry. This situation is expected to change in the newly restructured utilities, as they would be free to set salary scales that would make them more attractive to qualified profeseionals. Commerelal OperAtlons 5.14 The commercial operations of EPEA and EPEOR are not now run efficiently. Long delays occur from the end of a billing period to the time 24 - bills are dispatched to consumers. Collection is neither efficient. To redress this situation, technical assistance would be provided to these utilities to design and put in ylace an effective commercial system. Terms of reference for this assistance are given in Annex 23. 5.15 EPEA and EPEOR currently bill household customers quarterly, while industries and other large consumers are billed monthly. This practice would continue Lo the future, except that household bills would be issued on a continuous cycle. lIt addition to consumption, the utilities levy fixed charges for connection maintenance and meter rental. At the end of 1993, arrears for water consumption averaged eight months of sales. Acc.ounting System 5.16 The utilities' accounts would be kept on an accrual basis and computerized. The computer equipment has been in service for some time, and the staff have been trained in this area. Payroll, budgets, and stock management would also be computerized. The utilities should quickly begin developing a cost accounting system. The limited assets whose renewal rests with the utilities would be re-evaluated annually on the basis of an index to be introduced in the concession agreements. As indicated in para. 4.02, AGEP will manage the Government-owned assets. Other llanagement Procedu-res 5.17 The utilities' annual accounts would be audited by external auditors acceptable to the Government and the Bank. The selection and appointment of such auditors would be recorded in the concession agreements. These auditors' annual reports should be submitted to the Government and the Bank not later than September 30th of each year. Assurances to this effect were given during negotiations. This requirement would be recorded in the concession agreements. Assurances were also obtained during negotiations that Bank staff would be given access to any other report they might need to evaluate progress in project implementation. 5.18 The utilities would also establish procedures for personnel management and staff training. An information system would be put in place to allow quick and full dissemination of management data in the utilities. VI. FINANCIAL ANALYSIS Overview 6.01 As mentioned earlier in this report, two regional utilities, EPEA and EPEOR, have been selected to experiment with the proposed concessionary arrangements in the water supply sector. After evaluation at the end of 1996, the experiment would be replicated along similar lines at other water supply utilities. The organization, staffing, and management procedures of EPEA and - 25 - EPEOR are discussed in paras. 5.10-5.18. This chapter deals with their financial performance, past and future. 6.02 At present, EPEA and EPOR provide service to about 70X of their jurisdictional areas. As they expand service to small agglomerations, the average unit cost of water produced will increase, although some of the 'ncrease may be compensated by overall efficiency gains. Tariff increases will be necessary in the future because of the expansion just mentioned and the ongoing inflation. A uniform national tariff schedule is currently applied for water services. The recommendation is made for introducing regional tariffs. Past and Present Financial Performance 6.03 The actual income statements, balance sheets, and sources and applications of funds statements of EPEA and EPEOR --e given in Annexes 24 and 25. Highlights of their 1993 financial performance -.;-pear in Table 6.1, Table 6.1: Financial Indicatorg in 1293 REGIONAL OPERATING COLLECTIOM PAYABLE CURRENT DEBT:EQUIVY UflLfIY RATIO PERIOD, MONTHS MONTHS RATIO RATIO EPEA 0.87 6 17 2.6 6:94 EPEOR 0.86 8 33 1.5 77:23 6.04 Although EPEA and EPEOR had fairly acute operating problems in the period 1991-1993, there is evidence that in 1993 the discipline associated with the project was already producing improvements. Both utilities had favorable operating ratios, and their outstanding receivables were lower. However, both utilities had unacceptably high payables. Further, EPEOR had a very unfavorable debt to equity ratio. The year 1993 was particularly difficult for EPEOR on account of a severe drought in the Oran region, which severely curtailed the amount of water available. As a result, the volume of water sold dropped from 91 million m3 in 1992 to 55 million m3 in 1993, and a rationing system was introduced to meet the demand. In the meantime, EPEOR was able to remain solvent by sharply increasing its volume of outside civil works. =yeniia and Costp 6.05 Water utilities in Algeria derive their revenues from water sales, meter rentals and repairs, and civil works. In 1993, EPEA's revenues from water sales accounted for about 84X of total revenues, EPEOR's only about 65X. In time, however, water sales at these utilities are expected to represent over 90X of their total revenues. It should be pointed out that, in the absence of cost accounting systems, costs are not systematically allocated to each of the major activities, all expenses being treated as period costs. An analysis shows that the 1993 average revenues and costs of water sold per m3 by EPEA were DA 3.96 and - 26 - DA 3.55, while the average cost of water produced was DA 2.51. The corresponding 1993 figures for EPEOR were DA 5.24, DA 4.89, and DA 3.13. Table-La: Watgr Tariff Structure EXISTING STRUCTURE ANNUAL WATER USAGE ALLOWANCE, M3 TARIFF DA/K3 WATER RATES IN 1994 Household 0 - 100 1.00 U' 2.20 100 - 220 2.50 U 5.50 221 - 330 4.25 U 9.35 > 330 5.00 U 11.00 Public Uniform 3.50 U 7.70 Commercial n 4.25 U 9.35 Industrial " 5.00 U 11.00 6.06 Under the proposed sector restructuring (para. 3.12), the utilities would be responsible for system operation and maintenance, and mechanical equipment renewal. The Government would be responsible for system expansion and renewal. The tariffs should be sufficient to satisfy both obligations. For the Government, an important source of financing would be the concession fees (para. 5.08). As costs differ from one region to another, regional r.triff structures should be applied. A simpler structure should also be adopted for different classes of consumption. The present national structure is made up of seven classes inclusive of four for households, and one each for public dwellings, commercial activities and industries. Effective January lst, 1994, the national water tariffs have been increased by 33X. The rates that are now in force are given in Table 6.2. 6.07 The new tariffs would allow EPEA and EPEOR to meet their operating expenses, service their debts, and begin to service their concession obligations. These tariffs have been specified in the agreements between the Government and the utilities. They would be indexed to inflation and cost increases, and adjusted annually. The execution of the concession agreements with EPEA and EPEOR is a condition of effectiveness. I/ 'U* is the unit charge levied for water use in the first block of domestic conimiptian. A multiplicator is applied for uses in other blocks. - 27 - Financinj Plan 6.08 The project's financing plan is set out in Table 6.3. Financing sources would be concession fees, Government funds, and the proposed Bank loan. Z l3: FinansgPlan (1994 - 2000) DA USS PERCEW lMillion Proposed Projed 5,801.3 170.0 83.9 Capitalized Interest 1.3322 &i ii Total Requirmento 730.7 10. Concession Fees 1,549.0 54.1 26.7 Govwrnmt Finandng 1.,102 i n Total Nalional Funding 2.2 4 57 Proeseds of Bank Loan 4,481.3 110.0 54.3 TOTAL SOURCES future Financial Perfgmnce 6.09 Forecasts of future financial performance by EPEA and EPEOR are outlined in Annexes 24 and 25. Assumptions made in preparing these forecasts are described in Annex 26. Assuming that greater staff productivity and cost containment would materialize as conceived in the forecasts, these utilities should be able to maintain a healthy financial situation during the projection period. The projections assume that collection periods would be reduced to four months by year 2000 from the present level of around 8 months. Meanwhile, payment periods would decrease from the present 17 and 33 months to about 4 and 10 months, respectively for EPEA and EPEOR. The operating ratio of both utilities would fluctuate around 0.9 during the projection period. Amounts equivalent to 20X of basic personnel costs have been provided for staff performance bonuses. This is expected to provide a strong incentive for staff to fulfill the objectives of the proposed project. The projected tariffs are estimated to be within the margin of consumers' affordability, and should not generate increased levels of receivables. - 28 - Nonitorina System 6.10 Annex 27 gives the technical and financial indicators that the Government should monitor to evaluate the utilities' performance. This Annex also shows values forecast for the indicators in the years 1994 through 2000. These forecasts should be covenanted in the concession agreements. During negotiations, it was agreed that the Government, as part of its progress reports to the Bank, would report on the evolution of the indicators to the Bank on a quarterly basis during the project execution. The Government hps also engaged itself to carry out any action suggested by the Bank, aiming at meeting targeted values of the indicators. VII. ECONO_IC JUSTIFICATION Project Benefits 7.01 Because of its different components, the project would give rise to a number of complementary benefits. First, through its main objective of reducing unaccounted for water, it would increase available production and consequently water sales in the project area. Total water production in the cities where the network rehabilitation program would be executed, is currently estimated at 128 Km3/year. Only 55 percent of this production, i.e. 70.4 Mm3/year, is now recorded as sales to consumers. It is expected that, by the end of the project execution, this percentage would increase to 80 through the recovery of 32 Nm3/year. 7.02 Other elements of this program include network recalibration and mapping. The first one is expected to bring better services to consumers through more adequate water pressure and less interruptions in the distribution. There are many public health benefits inherent in a continuous service, as the risks of pollution entering the water system are curtailed to a minimum. The availability of maps of the systems would help in increasing work productivity in the utilities. At present, there are no detailed maps of the distribution network. Before proceeding with repairs in the network, very often much time must be spent searching for the location of pipes and other buried equipment. Faster repairs should become possible with the availability of maps. 7.03 As a complementary approach to optimizing water production in the country, it is proposed to assist ANRH in monitoring water resources, and to finance a number of studies of water production systems. These studies are aimed at identifying the works to be built, in addition to further rehabilitation, to meet future water demand in the country. 7.04 The last project component deals with sewerage rehabilitation in the country. This component benefits would be translated in improved environment, better public health conditions, and enhanced welfare of the population. - 29 - Least-Cost Alternative 7.05 The proposed project is the least-cost way of improving water supply service in Algeria. While new investments could be made to increase production to meet expanded demand, this would lead to a larger percentage of unaccounted for water and faster depletion of the resources. In a water sector study carried out recently by the Bank, it has been estimated that, if unaccounted for water could be reduced to 20 percent from its present 45 percent, the available fresh water resources could meet the demand by an extended period of 10 years from 2020 to 2030. Whenever water losses are higher than the above percentage, rehabilitation works should be undertaken first, prior to production expansion. Economic Return 7.06 Annex 28 outlines the assumptions made in calculating the return on the proposed investments. The economic rate of return on the project, excluding the sewerage rehabilitation program, would be about 17 percent. Benefits from the water supply rehabilitation program are valued using the water production cost of DA 3.00/m3 in 1994, times the volumes of water recovered of S2 Mm3/year beginning in year 2000. 7.07 A number of benefits relating to the sewerage component have already been mentioned in para. 7.04. They are, however, difficult to quantify in monetary values. The most obvious benefits would result from savings that would incur in treating waters for urban supply downstream of the sewerage works. But most of the benefits would come from environmental improvements which are intangible in nature. 7.08 A sensitivity analysis has been carried out on changes in benefits and costs on the project. An increase of 20 percent in the cost stream would reduce the return to 15 percent. A reduction of 10 percent in the costs would increase the return to 20 percent. A decrease of 20 percent in the projected tariffs would reduce the return to 12 percent. This analysis shows that as long as no radical changes occur during project execution, the project would be worth undertaking from an economic viewpoint. Economic Efficiency 7.09 Annex 28 shows basic assumptions for calculating the long-run marginal costs (LRMC) in the regions of Annaba and Oran. At the expected 1994 price levels, it is estimated to be US$0.31/m3 (DA 11.16/m3) in Annaba and US$0.45/m3 (DA 16.20/m3) in Oran. These estimates corroborate the hydrologic situation in Algeria where much more water resources are avail ble in the east (Annaba) than in the west (Oran). The projected average revenues of DA 6.07/m3 in Annaba and DA 6.82/e3 in Oran in 1994 are below the respective LRMCs in these regions. For economic efficiency, the tariffs of large consumers would need to be raised in real terms over the coming years. 7.10 The current tariff structure calls for progressive rates for increasing consumption blocks. It provides for a first subsidized block of 100 m3 per family per year. As consumption increases, higher rates are levied. In - 30 - Annaba, apart from the first three domestic categories up to 330 M3 per year, consumers in the other categories and industries are charged tariffs close to the marginal cost. Thus, to some extent, economic efficiency ls being achieved in the Annaba region, while at the same time safeguarding social equity. To attain similar results in Oran, the tariffs of domestic customers consuming more than 330 m3 per year, and for other uses would have to increase annually by 7 percent in real terms to equal the LRMC in year 2000. Environmental Impact 7.11 The project will have a major positive impact on the environment. By stopping leakages in the water distribution network, it will improve sanitation in urban areas, through the elimination of water pools, a propitious environment for the development of germ carrier vectors. A rehabilttated water network would provide better assurances against infiltration of wastewater in the network, and possible contamination of the drinking water and spread of vector- borne diseases. The rehabilitation of sewage treatment plants would contribute to a major improvement of water quality in Algeria. Wastewaters, now generated in urban areas, are disposed of without treatment. As a result, the environment around these areas has been seriously affected. The project is expected to redress this situation in a number of them. 7.12 In rehabilitating the sewage treatment plants, necessary precautions would be taken to ensure that the plants' effluent and sludge are disposed of without damaging the environment. When it is not reused in irrigation, the effluent would be disinfected prior to disposal. As indicated in para. 3.10, the plants' sludge would be composted for use in farming. The plants' operations would be monitored to ensure the safe use of their effluent and sludge in agriculture. Appropriate safeguard instructions would be given to farmers. In this context, prior to undertaking the rehabilitation of a plant, the necessary investigation and analysis would be carried out to ensure that there is no industrial discharge that might affect the plant operation. 7.13 Because treatment plants and other project construction might have limited adverse environmental effects, the project has been rated "Category B". Necessary precautions will be taken to keep effects resulting from construction, such as noise, air pollution, and population influx, to a minimum. Institution Building 7.14 A major project objective remains the institutional reforms that are expected to be accomplished in the sector. These expectations include the establishment of financially viable utilities; the application of tariffs, promoters of water conservation; and effective cost recovery. To realize them, the project proposes a first start toward privatization of the sector through the introduction of concessions for the management of the systems. It further recommends contracting out: (i) leak detection and repair works; (ii) optimization of meter reading and billing; and (iii) customer survey and recording. The project covers about 20 percent of sector operations in Algeria. If successful, it will be replicated for the rest, to achieve a major sector reform in the country. - 31 - Riskgs 7.15 There are some risks associated with project execution. The major one relates to the Government not living up to its obligations under the proposed concession agreements with the utilities, particularly with regards to tariff adjustment and other support to the utilities, relating to the payment of water consumption by public entities. If this occurs, the utilities in return might not be able to meet their obligations, with the end result of project failure in terms of institutional reforms. As a first action toward minimizing this risk, the concession agreements with EPEA and EPEOR have been reviewed and approved by the Bank during negotiations. Their ratification is a condition of effectiveness. Further action would be a mid-torm review in the summer of 1997 to evaluate possible deviations from the loan agreement and necessary corrective measures. 7.16 Other risks may surface in the execution of the rehabilitation works. In general, these are slow, tedious, difficult undertakings. As it is not possible to identify them with exactness, the estimates are not utterly reliable. To manage these risks, it is proposed to hold two seminars at project inception, to discuss the leak detection program and procurement. The aim is to set out in advance, actions that would need to be taken to keep project execution and costs under control. VIII. AGREEMENTS REACHED AND RECOMNENDATION 8.01 Agreement having been reached on the issues outlined in Chapters III through VII, and subject to the condition of effectiveness set forth in paras. 5.09 and 7.15, the proposed project is suitable for a Bank loan of US$110 million to the Government of Algeria for a term of 17 years including 5 years of grace. Washington, D.C., U.S.A. May 5th, 1994 - 32 - AN=1 Page 1 of 4 DEORXI MM OPOPULAR REA .LIC OF ALERIA WATER SUPPLY AND SEWERAGE REHABILITATION PROJECT LAN AND_ VATER RESOURCS GeffiffralFere a 1. With an area of about 2.4 m'llion km2, Algeria is the largest country in North Africa. Host of this area, however, extends into the Sahara Desert, is unfit for agriculture, but rich in mineral resources. North of the Saharan Atlas is a semi-arid region encompassing a coastal strip along the Mediterranean, the interior plains, some highlands near the coast, and the high plateaux. More than 90 percent of the population lives in this region. The mean annual rainfall in this northern part of the country varies between 300 mm and 1,000 mm, exceeding 600 mm only in the central and eastern coastal plains where rich arable land is found. It is less than 100 mm south of the Atlas in the Sahara. 2. There are 17 major river basins in Algeria. Some of them are shared by other countries: the Medjerda with Tunisia; the Tafna, Guir, Dra and Daoura with Morocco; and the Niger by Mali and Niger. Based on rainfall and surface water regime, climate, and soil characteristics, 11 hydrographic regions have been identified in the country: Oranie, Cheliff, Algeroise, Soummam, Constantinoise, Annaba, Nedjerdah-Mellegue, Hodna-Zahres Sersou, Aures Nementchas, Chott Chergui South Atlas, and Southern Algeria. This regional distribution is used in comparing water demand with the available s-"ply in different parts of the country. 3. Administratively, Algeria is divided into 48 provinces (wilayate), 567 counties (dairate), and 1,540 communes. At the provincial lcvel, the executive is headed by a Governor (Wali), and his cabinet includes representatives of each of the Central Government's ministries. FoMUlation Distribution 4. The 1987 census recorded a population of 23 million in Algeria, half of it living in urban areas. A previous census was carried out in 1977. Between these two censuses, the population kept growing at an average annual rate of 3.1 percent. The urbanization rate also increased during that period from 39 percent in 1977 to 50 percent in 1987. The expectation is that the share of urban population will continue to increase, reaching 58 percent of the total population by the year 2000. The stationary population in Algeria is projected to be around 76 million. As previously mentioned, more than 90 percent of the population lives in the northern part of the country, accounting for only 12 percent of the land. As a result, the population density - relatively high in this part. It ranges from 50 persons per km2 in the st. ,pe to 220 persons per km2 in the coastal plains. In fact, almost 40 percent of- the total population resides along the coast between Oran and Annaba in a strip accounting for less than 2 percent of the total area. Only 7 percent of the total population lives in the southern part of the country. - 33 - ANN9X X Page 2 of 4 5. Over 70 percent of the total population lives in fixed settlements that need to be provided with public water supply and sewerage services. The rest of the population is dispersed, necessitating at the most the provision of water points for its supply. About 44 percent of 41gerians are under 15 years of age, 65 percent under 25 years of age. Although one-fourth of the urban population is concentrated in the capital city, Algiers, there exist in addition a number of relatively large and medium-size cities distributed across the northern part of the country, where public services such as water supply and sewerage can be provided at a reasonable cost. This distribution suggests that a decentralized sectoral organization for urban water supply can be implemented in Algeria, provided the necessary st&ff can be found to manage the resulting independent systems. Land Resources 6. Out of a total land area of 238 million ha, only 40 million ha are considered suitable for farming. Less than 10 percent of this arable land, however, is actually under cultivation, while another 10 percent is laying fallow. Some 31 million ha are used for pasture and grazing, and about 3.7 million ha in raising cereals such as corn and sorghum. Most of the Algerian territory consists of the Sahara Desert and is not usable for agriculture. Land evaluation is still in progress in Algeria. At the end of 1986, the evaluation was completed for a total area of 5.8 ha. 7. Overall, irrigated farming is practiced on about 320,000 ha, a very small percentage of the cultivable land. Government plans are to expand irrigated land by 20,000 ha yearly. So far, however, little progress has been made in this area. The best arable land, about 168,000 ha, is found in the western part of Algeria; but less than 10 percent of this land is presently under irrigation. The fact is that farming in Algeria heavily relies on rainfall. As a result of good rainfall in the last two years, the amount of fallow land has decreased, but erosion has accelerated with an estimated loss of 15,000 ha of steppe land eve'y year. This soil degradation has led to siltation problems in the reservoir system, with the resulting loss of capacity and deterioration of water quality for urban supply. Land management is 8 pressing issue that the Government should address forthrightly, if surface water quality is to be lmproved, and water structures such as impounding dams, transmission facilities and irrigation grids are to provide continuous benefits. 8. Algeria is endowed with 1.5 million ha of canopied forests. The dst,:estation rate during the first half of the 1980s, however, was 40,000 ha each year. About half million ha of land is classified as protected areas. Vater Resources 9. Total water resources in Algeria are estimated at 19.1 billion m3 per year, comprising 12.4 billion m3 of surface water and 6.7 of groundwater. Surface waters are particularly abundant in the coastal plains (11.1 billion m3), but decrease rapidly in the steppe (0.7 billion m3) and in the Saharan Atlas (0.6 billion n3) . Because of irregular flows and heterogeneous distribution, the surface water resources cannot readily be exploited for irrigation and urban - 34 - Page 3 of 4 water supply. Most of the rivers are dry in the summer, and their quality deteriorates in the winter, because the rising flows have high solid contents. Their regulation through costly reservoirs is often required to obtain economically exploitable yields. It is estimated that, with full damming, about 5.7 billion m3 per year or 46 percent of the surface waters in northern Algeria could be mobillzed for irrigation and urban water supply. Presently, an average of 2.2 billion m3 is exploited from a total of 45 impounding dams. Large investments remain to be made for full mobilization of the surface water resources. 10. As a result of high infiltration from storm runoff and surface water resources, and of the existence of large fossil water deposits, groundwater is available over much of the country. The average annual yield of groundwater is estimated at 6.7 billion m3, but more than two thirds of these resources (4.9 billion m3) are located in the Sahara Desert. Their evaluation was carried out in the course of oil exploration and drilling, and with the help of simulation models. These aquifers lie very deep under the ground surface, and their exploitation would ie costly. When economically feasible, their utilization should be essentially for local consumption. Any water transfer scheme appaars to be an expensive proposition that should not be included in a mid-term balance sheet of available water resources. 11. Of the 1.8 billion m3 of groundwater available in northern Algeria, 1.5 billion m3 are already in exploitation, particularly in the coastal plains. The unexploited balance of 0.3 billion m3 is essentially in tne steppe in Zahrez, Chott Hodna and Chott Chergui. Thus, the average yield of water resources, excluding groundwater in the Sahara, with full development of storage, is estimated at 7.4 billion m3/year. This should be sufficient to cover the water needs for urban, industrial and agricultural use until the early part of the next century. Beyond that, it will be necessary to reclaim wastewaters and to tap non-renewable groundwater in the northern part of the Sahara, and later on to demineralize brackish water to meet the demand. This situation already exists in some urban areas along the coast, such as in Oran, where the present demand exceeds the available supply in the river basin, and water must be transferred from the adjacent Chelif basin. Also, in other regions, it might be more economical to reclaim wastewater instead of tapping additional outside fresh water. 12. Most urban are&s are presently supplied with groundwater, also a main source of water for irrigated farming. While surface water is under-exploited, groundwater resources are already utilized to more than 80 percent of their full capacity. Domestic, public and industrial uses currently account for about 34 percent of water used. These needs, however, will expand rapidly with larger population and possibly higher per capita consumption associated with greater income. It is estimated that, presently, irrigation farming is in use in only 4 percent (320,000 ha) of the arable land. 13. The following table gives the volumes of water consumed in 1987 by different types of users. Serious water shortages, and potential conflicts of use, are likely to develop in the more densely populated watersheds, and along the coastal areas where the majority of the population is concentrated. In the - 35 - Page 4 of 4 long run, reclamation of wastewater and eventually desalination will become necessary to meet the demand. Water Use in 1987 (Million m3) By End-user Volume Percent Households 580 24 Industry 159 7 Public 70 3 Irrigation 1.584 66 TOTAL La. 910.0 ealautorl Framework 14. The institutional perspective of the water resources sector in Algeria is geared toward improving the nation's welfare. The Constitution states that water resources belong to the nation's people and should be used for their welfare and prosperity. Emphasis is also on protecting the environment. These objectives are spelled out in three legislative frameworks: the Water Code or Law No. 83-17 (1983); Law No. 83-03 (1983) relating to environmental protection; and Decree No. 85-266 (1985> regulating the provision of public water and Sanitation services. Under the Water Code, usage priority of the water resources is given first to drinking water, followed by agriculture use and industry. Decree No. 92-100 (1992) regulates the establishment and operation of water utilities in the country. The regulation and operation of large-scale irrigation areas are spelled out in Decrees No. 85-259 and 261 (1985). Meanwhile, the disposal and management of national lands are regulated by Law No. 84.16 of June 30, 1984. It should be noted that, while these regulations are full of good intent, their application is not always carried out to the letter of the law. This is particularly the case for environmental and pricing regulations. DEMOCRATIN JWD POUAREPUOLIC ALGERIA WATER 8UPPLY AND SEWERAE REILTATION COST OF WATER SUPPLY SERVIE IN 1982 POPULATION, 1000 TOTAL 9 SRSVB) NO. SERVICE WATER PERCAPITA OPERATI AVERAGE UNES SALES, 106 MS CON& LCD COSTS. 10 ODA COST (l) (2) (4)(L() ) A11110110 8,415 64 243,400 126. 119 W7.0 4.00 Annaba 841 78 60,000 55* 239 168.0 3.05 ChIet 1.416 20 D 8.20 15.6 161 35.5 2.14 C _saatanlln. 1.914 62 112.800 Sao0 8 18.7 4.41 m1m 1,7 45 79200 20.0 so 10.0 4 Oran 2.9 am 205.700 88.0 125 363.0 4.01 6619 1,4 46 s5.101 24.4 82 5.0 S.9O Xbd OSS 3S 28.700 7.9 42.8 6.42 Im,9 73 126 37.0 82 167.0 4.1 WYAIITS Ad 772 es el7 2.0 82 9.e 2.0 B Sy0 7 6O0 1" t10 75. 02 ea 20 so 18,200 12.9 18 3.7 2.79 SaWs 01 8 MM50 a.9 78 34*0 3* _a 41 431 .2a0 14.4 187 25.9 167 Dub 607 53 71M00 5. 47 11 2.23 0Ousd 44 27 1 0 4.0 1 102 El11h 72 0, f i 1.5 0 9.4 w*@ O_de 20 07 41.100 7 4.1 a Gushow 410 go 2.160 7 25.0 4* mmb S4 07 2.00 OA 88 41 7.75 ua 804 99 1260 6.2 175 38.9 .5 Lagho S 17,00 0.6 1S3 26.4 3.42 W166 311 57 16,800 4.7 107 20.8 4.4 Meotag... 500 56 1G,600 *.1 82 43.1 4A8 Nsa.. 60 60 11,000 30 so 12 7.4 4.88 0 . a am 6 78 24.00 0.3 139 23.3 5 Ouft* 810 el 29.400 19.6 17 02.4 4.20 Palmt. 627 37 21,700 6.2 73 14.0 2.5 asI Sl Ab ale 40 0.800 09. 129 15.4 1.02 Samd. 279 as 24.D0 8.5 131 14.4 1.00 Skda 712 51 26.00 15.9 120 48.6 3.05 Sm*-Ahra 106 70 9.900 4.6 171 27.7 5.10 TaMeWa 44 as 3.,00 0.6 48 3.0 0.00 Tabos Soo0 as 38,700 5.7 61 34.0 6.99 llnduf 20 74 l,60o 0.6 111 32 6.23 ALGMERIA MIS55- UL.4 _ - ~~~~~~~~_ _, NOTE: lalCok ^( gve. w pcea oodu lpopultion need by to te. In tal In 1692 Uty pmAlded ervls to 142...9000 poopl. L.. aboeaMof Otm total population. ibi Column (5) Ib ra to betwm cdumn (4) and coumn (1) tims column (2). Ija Column (7) laobtalwed by dhh cohmn (6) by comn (4). DUdOCAAWMADOFPlA aR fTW SUPPLY AND _W E E RABIhT& PRWWT 6R_ MOSrOFW ATf SUJPPLY S0VCEN 1N OPERATINdaCOSTS WATEt SALEM OffRCDOT CAPITAL ASSETS PROVISION ALLOWANME TOrALCOST CAPITAL tOOlA looms PERMS, DA IOODA FOR ASiEWAL PERM8 DA CARA CONS.A A USODA (1) ( (4) () (6) ) RE MA A*t* 71S.0 186. 581 12.175 243A 1.8 7.11 34 Annaba 810.0 01.0 5.18 2.000 40.o 0.06 6.84 19 C0J 60.8 18.0 2.7* 1.01 14.0 188 4.18 40 C _wWIn 224.i 88.0 5.78 5.087 100.7 2.69 8.7 4 Medea 182. 9 22 G8 S .013 50.8 2.70 0.6 se Oane $81n. O6.0 6.6e 9.160 68.0 1.18 6.2 20 Sawl 184.5 15.4 6.09 8,217 04.8 2.44 7.58 46 iawr 00. 9.6 7.18 1.392 27. 8.27 10.40 40 T-OUZa 2386. 40.0 &01 6,232 104.7 2.62 8.5 44 Abr 0.4 2.2 4.27 264 5.1 2.82 .59 64 SeIn 106.6 20.6 .12 2.130 42.0 2.06 7.17 40 lsOhaw 47.7 19.1 8.*4 747 14.9 1.14 4.70 S1 Bouk 46.6 .0e slo 1.307 20.1 2.72 7.7 64 own. 88.1 16.6 244 8s 17. 1.1 as. 47 Seb 16.7 6.7 2.08 1.320 26.4 4,.0 7.00 Ise ElOsd 14A 5.0 2.08 60 10.1 2.02 4.90 70 Eal B 13. S 1.0 8.81 2 6.3 3.31 11.08 40 Sbrdm 472 0.7 6.4 o6n 19.2 2.21 7.08 41 tu_m 85.4 6.0 6.90 0 18.2 3.20 .10 54 mlm 4.4 0.4 11.00 as 1.4 8.60 14.60 32 _ thancht 82.0 8.7 4.78 412 0.2 122 0.00 26 Lhaa 41.0 0.8 4.47 766 16.4 .e6 0.13 37 USa. 2M 6.1 6.78 a0 10.2 2.00 7.78 as stapn.m 0tO1.0 10.6 6.61 1.379 27.0 2.09 8.44 46 Na_ne 24.6 8.9 0.81 386 0.7 1.72 8.08 27 Out. a DmzoN 47.2 10.1 4.67 79N 10.0 1.69 6.26 34 OMwa 116.7 21.2 6.60 1,222 24.4 1.15 6.66 21 PAlzn* 20.7 8.7 8.09 006 19.7 2.04 6.03 Os SWkSol Abb.e 21.4 10.3 2.12 874 17.6 1.70 3.02 so a" 20.4 0.2 2.2 761 16.0 1.3 8.86 74 Sklda 66.7 17.2 SAM 1,640 30.8 1.78 6.78 46 Sauk-Ahm 86*2 4.9 8.00 as 0.1 t24 0.24 1s Tma_Ot 4.8 0. 8.60 123 2.5 6.00 13.60 se Tab.. 4.2 0.2 7.77 1,307 20.1 4.21 11.00 64 Tindout 4.6 0.7 0.43 64 1.3 1.0 620 20 14* 617S 6.14 6 7, 97 1.144M 6 0 w NOTE lei COdmn (8) bIt. rafio b*twe 0 u (1) and Pbi Cdumn(s) kdlutae anl _a" sosumpto atoace or c a 0- pedod. pcl Col. (6) b the rao b twen eum_e (5)nd (. Id) CIok (7) bI Omam of ockmmnmo anti p. (f Coa m8) is te rdlio ofcolumn(S) mr eonnn (8). - 38 - AEN= 4 Page 1 of 4 DEMOCRATIC AND POPULAR REPUBLIZ OF AMLERIA WATE R =SPL AND SEUMAG REHADILAT1ON MROUNT CONTRACT MODEL FOR OPTIMIZING WATER SUPPLY OPERATIONS Introduction 1. In theory, urban water supply production in some large Algerian cities is sufficient to meet demand. For example, in the city of Annaba, current water production reaches about 240 liters per capita per day. This means that, even if 50 percent of the production tiere unaccounted, the available supply would be 120 liters per capita per day, an allowance largely sufficient for a city of the size of Annaba. The reality, however, is very different. In spite of the relatively large production, water is rationed in the city of Annaba. Some areas receive water 12 hours a day, while others only 3 hours a day. Because of the unreliability of the services, consumers have accustomed to store water when it is supplied, and to discard the remaining stored water at the beginning of the next supply. As a result of such prar-tice, the percapita consumption has increased substantially. But even that increase should not have led to the current rationing in the city. The fact is that, even at peak hour demand, the available supply could fill the demand. 2. Two problems are associated with the inability of water utilities in Algeria to provide continuous water services. The first one is the large volume of water unaccounted for, resulting from leaks, illegal connections, and metering errors. The second one is the lack of capacity and pressure in distribution networks. Primary pipelines do not have the necessary capacity to convey peak hour demand. Because of the type of material used in connections, leakage occurs very often in service lines to consumers. To solve these problems, an action plan should cover the entire spectrum of water supply operations. Water leakage might be a faulty area with major impact on water availability. Faulty metering might be also a major culprit. Illegal connections may be another area responsible for the disparity between production and metered consumption. 3. The following outlines a type of contract to be used for optimizing urban water supply operations in Algeria. Reonired ServLces 4. The type of contract outlined here is intended to be more interventionist than a traditional consultancy approach for providing advice and training. It is a start toward privatization of leak detection and repair, and commercial activities of water utilities. In entering into a contract with a specialized company, a major objective for water utilities should be to increase metered consumption and consequently sales and revenues. To reach this goal the following services should be spelled out in the contract: - 39 - AN 4 Page 2 of 4 (a) diagnostic of the system operations inclusive of metering, leakage level, pipe capacity, and pressure availability; (b) repair of leaks and other defects; (c) replacement of defective equipment (district meters, valves, pressure reducers, overflows etc.); (d) consumer metering, meter reading, billing and revenue collection; (e) modelling of the distribution system; (f