Document of The World Bank Public Disclosure Authorized

Report No: 29563

IMPLEMENTATION COMPLETION REPORT (CPL-37430 SCL-3743A SCPD-3743S)

Public Disclosure Authorized ON A

LOAN

IN THE AMOUNT OF US$110 MILLION

TO THE

DEMOCRATIC AND POPULAR REPUBLIC OF

FOR

Public Disclosure Authorized WATER SUPPLY AND SEWERAGE REHABILITATION PROJECT

June 30, 2004

Public Disclosure Authorized Finance, Private Sector and Infrastructure Group Middle East and North Africa Region CURRENCY EQUIVALENTS (Exchange Rate Effective as of 06/30/2004) Currency Unit = Algerian Dinar DA 1 = US$ 0.014 US$ 1 = DA 71

(as of April 1994) DA 1 = US $ 0.028 US$ 1 = DA 36

FISCAL YEAR January 1 December 31

ABBREVIATIONS AND ACRONYMS

AdE : Algérienne des Eaux (Algerian Water Authority) AGEP : Agence Nationale de Gestion de l'Eau Potable (National Agency of Potable Water Management) ANB : Agence Nationale des Barrages (National Agency of Dams) ANRH : Agence Nationale des Ressources Hydrauliques (National Agency of Hydraulic Resources) CAS : Country Assistance Strategy DHW : Direction de l'Hydraulique de la Wilaya (Hydraulic Resources Directorate of Wilaya) EPEAL : Etablissement Public Economique - (Economic Public Enterprise of ) EPEOR : Etablissement Public Economique - (Economic Public Enterprise of Oran) GIS : Geographical Information System GoA : Government of Algeria LRMC : Long-Run Marginal Cost ONA : Office National de l'Assainissement (National Agency of Sanitation) PMU : Project Management Unit PSR : Project Supervision Report SAR : Staff Appraisal Report UFW : Unaccounted For Water WWTP : Waste Water Treatment Plant

Vice President: Christiaan Poortman Country Director Theodore Ahlers Sector Manager Emmanuel Forestier/Francoise Clottes Task Team Leader/Task Manager: Alexander E. Bakalian

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA WATER SUPPLY AND SEWERAGE REHABILITATION PROJECT

IMPLEMENTATION COMPLETION REPORT

CONTENTS

Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 10 6. Sustainability 12 7. Bank and Borrower Performance 12 8. Lessons Learned 14 9. Partner Comments 16 10. Additional Information 17 Annex 1. Key Performance Indicators/Log Frame Matrix 18 Annex 2. Project Costs and Financing 22 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 27 Annex 6. Ratings of Bank and Borrower Performance 29 Annex 7. List of Supporting Documents 30 Annex 8. Borrower's Completion Report 31 Map IBRD 33355

Project ID: P004974 Project Name: DZ-WATER SUPPLY AND SEWERAGE Team Leader: Alexander E. Bakalian TL Unit: MNSIF ICR Type: Core ICR Report Date: June 30, 2004

1. Project Data Name: DZ-WATER SUPPLY AND SEWERAGE L/C/TF Number: CPL-37430; SCL-3743A; SCPD-3743S Country/Department: ALGERIA Region: Middle East and North Africa Region Sector/subsector: Water supply (70%); Sewerage (27%); Central government administration (3%) Theme: Other urban development (P); Infrastructure services for private sector development (P); Regulation and competition policy (P); Pollution management and environmental health (S)

KEY DATES Original Revised/Actual PCD: 12/16/1992 Effective: 09/30/1994 01/10/1995 Appraisal: 06/09/1993 MTR: 07/01/1997 06/26/1998 Approval: 06/02/1994 Closing: 12/31/2001 12/31/2003

Borrower/Implementing Agency: GOV. OF ALGERIA/ Agence Nationale de l'Eau Potable et Industrielle (AGEP) and Ministry of Water Resources Other Partners:

STAFF Current At Appraisal Vice President: Christiaan J. Poortman Caio Koch-Weser Country Director: Theodore O. Ahlers Daniel Ritchie Sector Manager: Francoise Clottes A. Amir Al-Khafaji Team Leader at ICR: Alexander E. Bakalian Fritz Rodriguez ICR Primary Author: Ahmed El- and Alexander E. Bakalian

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: HU Sustainability: HUN Institutional Development Impact: N Bank Performance: U Borrower Performance: U

QAG (if available) ICR Quality at Entry: HU Project at Risk at Any Time: Yes 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective:

The project development objectives were to assist the Government of Algeria in:

(a) Rehabilitating its urban water supply and sewerage systems; (b) Improving the distribution of water in urban areas; and (c) Rationalizing the institutional arrangements in the water sector with a view to achieving full cost recovery through the establishment of efficient, self-financing water authorities.

The loan was approved by the Board on June 2, 1994, for an amount of US$110 million, and became effective on January 10, 1995. The closing date of the Loan was initially set for December 31, 2001.

This project was prepared at a time when Algeria’s water sector had many deficiencies in the way water supply and sanitation services were provided in the country. The project aimed at improving the performance of the water sector utilities by contracting out to the private sector a number of their activities, such as leak detection and repair, metering, network optimization and mapping. Most importantly, it advocated the creation of self-financing public water utilities that would operate under concession agreements with the Government. The design of the project followed the recommendations of a then-recently completed sector strategy report for the development and management of water resources in Algeria.

Assessment of Original Objectives and Context.

The development objectives were too ambitious and mostly unrealistic as their definition did not take into consideration the underlying political and institutional problems prevailing in the sector at that time. The risks that were indicated in the staff appraisal report (related to "concession agreements" between the utilities and Government and tariff adjustments) were quite generic and seem to have been addressed in the policy note that was sent by the Government in March 1994 (Annex 19 of the Staff Appraisal Report). Although some concerns about risk assessment had been expressed within Bank management, the project was given approval for financing and implementation (Box 1).

Box 1 - Some early concerns. At the Board discussions in June 1994, some members of the Board of Directors expressed concern about the following issues related to the project: (a) lack of CAS directions in terms of assistance to the water sector strategy; (b) Algeria’s portfolio showed large undisbursed amounts owing to projects inactivity and implementation performance (notably the previous Loan 2821-AL for the 2nd National Water Supply and Sewerage Project; and (c) the security risk associated with a volatile political situation.

3.2 Revised Objective:

The original objectives of the project were changed twice: (a) in 1998, to extend the private sector involvement to the commercial activities of the utilities such as billing and collection; and (b) in 2001, to limit the objective of cost recovery to operating expenditures and debt service (excluding depreciation). Moreover, on both occasions, the restructuring led to a substantial reduction in the scope of activities (see below).

- 2 - 3.3 Original Components:

The project included the following components:

1) Water Supply Systems: a) water supply system rehabilitation in 10 , inclusive of leak detection and repairs, meter installation and gauging and b) water distribution network re-looping and balancing in the same ten cities (, Ain Temouchent, Bejaia, , Mascara, Oran, , Sidi Bel Abbes, , ); 2) Sewerage: rehabilitation of about 24 sewage treatment plants located in different cities as well as rehabilitation of sewer networks and pumping stations; 3) Consulting services to the Agence Nationale de Gestion de l'Eau Potable (AGEP) and the Agence Nationale des Barrages (ANB) to carry out the feasibility and detailed studies, and environmental impact assessments of projected water and sewerage works; 4) Institutional Development to AGEP, ANB, Agence Nationale des Ressources Hydrauliques (ANRH) and the water utilities; and 5) Supply of operational equipment to AGEP, ANB, ANRH, and the water utilities.

3.4 Revised Components:

Immediately after approval, the project implementation run into serious difficulties linked to the inadequate commitment of the Borrower to implementing the sector reforms agreed earlier, management weaknesses within the Project Management Unit (PMU), procurement delays, the noncompliance with financial and legal covenants, all in the context of a deteriorating security situation in the country.

The project underwent two major restructurings: a) in 1998: after three years of a lack of tangible movement on implementation (Box 2), the Government and the Bank agreed to restructure the project and reduce its scope (during the mid-term review mission of June 1998). This lack of progress was due to delays in the procurement processes, the weakness of AGEP to organize the procurement without external assistance and the Government's lack of follow-up on agreed institutional reforms. By early 1998, an offer was received for the Oran (approved by the Bank but not submitted to the National Tender Board) and Annaba sub-projects while those for Jijel and Bejaia failed to attract any bidders. The focus of the restructuring was to reduce the project scope in water supply rehabilitation to 4 cities, namely Algiers, Constantine, Oran and Annaba, while reducing the wastewater component to the rehabilitation of 22 treatment plants. The restructuring also aimed at strengthening the institutional arrangements in the sector by promoting autonomous self-financing utilities, and by extending the rehabilitation contracts with the private operators to include the commercial activities (including billing and collection). The restructuring was confirmed in late 1998 and the Government signed the amendment to the Loan Agreement in January 1999. This amendment was not presented to the Bank's Board of Directors.

- 3 - Box 2 - Major delays in implementation in the early years – 1995-1998. The initial project financing scheme was based on a contribution of an amount of US$ 54.1 million from payment of concession fees by the participating utilities which would have been given financial autonomy. However, this mechanism was never fully implemented. Due to a Loan effectiveness condition, only the regional utilities of Oran and Annaba (of a total of 9) paid the fees in 1994-1996. Their yearly contribution was to equal 3% (an unrealistic amount) of their annual water sales. However, the 7 other regional utilities could not pay the concession fees to the treasury (Fonds National de l’Eau) because they did not generate adequate income and could not achieve cost recovery. The contracts for the remaining 26 wilaya-based utilities were signed in 1997. These agreements turned out to be mere formalities to comply with the Loan Agreement with little possibility for these utilities to actually make the payments given their weak financial situation. Up to July 1998, the implementation of the physical components had been insignificant. Disbursements had been minimal, and no commitments had been made for civil works. The implementing agency, AGEP, lacked the expertise required to carry out competitive bidding procedures of the required quality. Experienced consultants were needed to assist AGEP but were not recruited.

Continued deteriorating project implementation during the 1999-2000 period. Progress in implementation, however, did not improve. The action plan agreed upon in July 1998 had been substantially delayed. This was partially due to the continuing difficult political and security situation of 1999 (Note: the presidential elections were held in April 1999 and contributed to a slow-down of activities). Actually, only one rehabilitation contract had been signed for Oran (after lengthy procedures for approval by the National Tender Board), while the bids for Algiers and Constantine, received by end of October 1999 had not been awarded yet. The tender for the fourth , Annaba, had still to be re-launched pending the formal rejection by GoA of the only bid previously received. As the possibility of a new restructuring of the project was considered by the Bank, there was no action on the part of the Borrower. Repeated attempts to rectify the implementation progress were carried out by the Bank Management and follow-up missions in early 2000. Thus, the Bank decided to advise the Borrower of its intention to suspend disbursement of funds from the Loan unless corrective measures were taken by mid-June 2000.

Suspension of Loan Disbursements. The Bank decided to suspend disbursements of the Loan on June 27, 2000. The Bank’s conditions for lifting the Loan suspension consisted of the following: (i) the Borrower had granted special budgetary support to the water authorities, equivalent to a 20% tariff increase, and committed itself to review each year the amounts of budgetary support to be granted; (ii) the Borrower had finalized the contract for rehabilitation of the water supply system in a pilot area of Algiers, and requested a partial cancellation related to the Constantine and Annaba sub-projects; (iii) the Borrower had initiated a sector reform, which included the main organizations involved in water supply and sanitation services, and for Algiers and Oran, several institutional measures had been taken by the Borrower, including: (a) yearly independent financial audits ; (b) operational assistance by private sector operators in the customer services (billing and collection); (c) an increased participation of the regional water utilities (in Algiers and Oran) in supervision of the rehabilitation activities underway in those cities (AGEP being the implementing entity, maître d'ouvrage); and (d) performance contracts to be entered with the water utilities based on specific performance indicators, including financial management; and (e) the Borrower had submitted appropriate action plans to lift the qualifications of the 1998 audit reports, and recruited independent auditors to carry out in a timely manner the 1999 audits.

Partial Cancellation of the Loan Amount. In December 2000, the borrower requested the cancellation of the components related to the rehabilitation of the water supply systems of Constantine and Annaba. These cities were taken out of the project after very difficult negotiations related to the procurement process, over which the Bank expressed serious disagreements. The cancellation amount was US$28.1 million. The project was then reduced to 2 cities (Oran and part of Algiers) for water supply system rehabilitation. By January 2001 the Bank was satisfied that the Borrower had complied with many remedial measures

- 4 - requested by the Bank's suspension letter, and in February 2001, the suspension was lifted. The Borrower had, in particular, indicated to the Bank, its decision to reorganize the water supply and sewerage sector by creating two national institutions, one for water (AdE, Algérienne des Eaux) and one for wastewater (ONA, Office National de l'Assainissement) and by completing a major water tariff study. b) in 2001: After lifting the suspension, the Bank team carried an assessment of the implementation progress of the project (March and May 2001 missions) and the prospects for achieving the project development objectives. The project team estimated that the basic thrust of the development objectives of the project were still appropriate in the prevailing context of the country, and that the financing of basic infrastructure rehabilitation by the Government was still needed and should continue before a reliable strategy of institutional reforms and private sector participation could be initiated. It was deemed important that the Bank continue to provide assistance to the sector, and that above all, it accompanied the newly launched reform toward reorganization and sustainability, even though it was not clear whether the institutional changes that were occurring would lead to that outcome. The second restructuring of the project was signed in October 2001, after its approval by the Bank's Board of Directors. The amendment also included a 2-year extension of the closing date.

After these restructurings the revised components were:

1) Water Supply Systems: a) Network rehabilitation in Oran and part of Algiers (about 15%) inclusive of leak detection and repairs, meter installation and gauging and b) water distribution network re-looping and balancing in the same two cities; 2) Sewerage Rehabilitation: feasibility studies for the rehabilitation of about 22 sewage treatment plants; 3) Consulting services to AGEP and ANB to carry out the feasibility and detailed studies, and environmental impact assessments of projected water and sewerage works; 4) Institutional Development to AGEP, ANB, ANRH and the water utilities; 5) Supply of operational equipment to AGEP, ANB, ANRH, and the water utilities.

After these two major restructurings, when implementation progress was still slow in 2002 and it became clear that the loan would not be disbursed in its entirety, a second partial loan cancellation was made in 2003 (following a January 2003 Country Portfolio Performance Review) in the amount of US$19 million which reduced the final loan amount to US$62.9 million.

3.5 Quality at Entry:

The quality at entry is rated highly unsatisfactory. This assessment is based on (i) the low quality of project design which did not reflect lessons from previous projects and a poor assessment of risks (Box 3); (ii) the overly ambitious project scope which did not fully take into account the institutional constraints and risks emanating from the Borrower's weak implementing capacity (procurement systems and management capacity of AGEP to manage some potential 80 contracts - as projected in the SAR); (iii) the lack of project ownership by the Borrower and the lack of participation of the regional water utilities (the main beneficiaries of the loan) in project design; (iv) given the poor performance of the implementing agency in previous projects, the implementation arrangements put in place were not adequate; (v) the failure to have considered a pilot project to implement the reforms that were being introduced.

- 5 - Box 3 - Previous Bank Experience in the Sector. The Bank has been involved in the water sector in Algeria since the late 1970s. It has financed six loans (including this one):

1978: Loan 1545-AL; US $ 82 million, Algiers Sewerage Project ; construction of sewer interceptors and sewage treatment plant in Algiers; 1980: S-17-AL, US$ 5 million Water Resources Study and Master Plan for Algiers; 1984: Loan 2461-AL, US $ 290 million, Water Supply in Algiers; 1985: Loan 2591-AL US $ 262 million, Water Supply and Sewerage in Constantine and Oran; 1987: Loan 2821-AL US $ 250 million, Second National Water Supply Rehabilitation Project; 1994: Loan 3743-AL US $ 110 million, Urban Water Supply and Sewerage Rehabilitation Project

Implementation experience showed that projects failed because of an environment characterized by weak institutional capacity. For example, in the case of the Algiers Water Supply project (2461-AL), despite the increase in production and expansion of services, heavy water losses had persisted (unaccounted for water at 50% in 1991 and 1992). Also, little progress had been made towards carrying out these activities during the years following project completion and project sustainability had since been compromised. This failure can be attributed mainly to a bias towards capital investments over operation and maintenance activities. Similarly for Loan 2821-AL, while the aim was to create the capacity for sound investment programming and improve operational efficiency of the regional water utilities, the goals turned out to be unreachable as the project failed to consider the adverse socioeconomic climate in Algeria, the institutional and managerial inadequacies, and the degree of resistance to reform. Moreover, no key development outcomes were set for the project’s institutional objectives.

4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective:

The achievement of the objectives is highly unsatisfactory. At Loan closing on December 31, 2003, project implementation had not progressed in any significant manner. The two major sub-projects (rehabilitation of water networks in Oran and in part of Algiers) remain substantially incomplete. The Government indicated that both sub-projects will continue to be executed using Government funding (the Algiers sub-project is scheduled to be completed by August 2004 and the one in Oran - with a sizable contract adjustment - around late-2006). However, even with the completion of the works, the ambitious target of 20% unaccounted-for-water (under both contracts) will most likely not be achieved. On the institutional side, the sector weaknesses remain as no improvement has been made in turning the utilities into self-financing entities, tariffs have stayed well below the cost recovery levels and unaccounted for water is yet to be improved. The situation in the other eight cities in the original design has not improved either. On the wastewater component, no tangible outcomes have been achieved since the loan stipulated that the rehabilitation of the sewage treatment plants would be carried out only when adequate institutional arrangements would be made to operate the system and operational costs would be covered by the operator. None of the improvements materialized.

Despite the unfinished works, some lessons have been learned and the Ministry of Water Resources has indicated its desire to use the project design in other cities where network rehabilitation and utility management need immediate attention. Although it is clear that much more needs to be done in Oran and Algiers, the project has somewhat contributed to the upgrading of the capability of the local units in the two cities, including the skills of the local private contractors, to repair and manage the water networks. Some skills transfer has happened in mapping of physical infrastructure, in improved commercial systems, hydraulic modeling of networks and good construction practices.

- 6 - 4.2 Outputs by components:

Water Supply Rehabilitation. This component is rated unsatisfactory as much of the work remained incomplete at the project closing date. a) Algiers Water Supply Rehabilitation

The inclusion of Algiers as a project activity in 1998 was considered an emergency operation. The wilaya of Algiers has a network totaling 3819 Km in length with a UFW reaching 45 to 50%. The Bank decided to include Algiers notwithstanding the total absence of preparatory designs. The awarding of the rehabilitation contract was plagued by delays because of lengthy procurement procedures and the inexperience of the PMU in launching a contract involving a private international operator. The contract for the rehabilitation of the water supply system for Algiers was awarded to SEM-BRL (the water company of the city of - France). The bidding process was launched during the second semester of 1998 and implementation of the contract started in April 2001. The contract was amended due to a major modification to increase the amount of pipe length to be rehabilitated (from 54 km to 144 km) in order to attempt to meet the performance target of 20% UFW, specified in the contract. The duration of contract implementation was 40 months (exceeding the Loan closing date of 12/31/2003).

Specifically, the Algiers contract consisted of 7 components: A: activities included network cartography, data collection on the existing system and inclusion into a geographical information system (GIS); B: leak detection and repair on Algiers’ western zone side and repair/upgrading of 7.5 Km of the pumping system (discharge pipes) Hamiz-Bordj El-Kiffan ; C: technical and functional assessment of the existing water supply system as well as development of a normative and mathematical model for the water supply network; D: development of a master plan for the rehabilitation and upgrading of the water supply system; E: development and implementation of: (a) managerial/operational guidelines for the water supply system and; (b) a system to lower unaccounted for water; F: development and implementation of a management information system for billing and collection for Algiers’ western zone; G: rehabilitation of the Beni-Amrane pumping station’s cooling system.

At Loan closing, the rate of completion for individual components was as follows: component A (network mapping) has been completed at a 100%; component B’s rate of completion was at 45%; component C was at 58%, activities for component D have reached a completion rate of 23%; component E was at 68%; component F was at 84%; and component G at about 90%. Moreover, in view of what has been completed so far, the UFW objective of 20% (in the project zone) is unlikely to be achieved by the end the rehabilitation contract (September 2004) because leak detection and repair works are still on-going and behind schedule. Important activities that would have an impact on UFW reduction and the provision of reliable water services have yet to be completed; these include (i) system testing and verification which is at 18% of target and (ii) water meter and connection replacement is progressing very slowly and is at 26% (2,902 out of 11,200 planned have been installed). b) Oran Water Supply Rehabilitation

The Oran rehabilitation operation sought to: (i) install a computerized water supply network information system and update network mapping; (ii) reduce unaccounted for water through leak detection and repair, and remove illegal connections; (iii) reduce the unaccounted for water to 20%; (iv) implement preventive

- 7 - system maintenance and control; and (v) improve operational conditions of the network. In order to reach these objectives project’s activities focused on 5 components:

A. Network mapping and data collection on the existing urban water supply system; B. Leak detection and repair operation; C. Diagnosis of the existing water supply system and development of a mathematical model for the network; D. Master plan development for the rehabilitation and the upgrading/recalibration of the network; E. Development and implementation of operational norms and standards for the management of the water supply system including the reduction of unaccounted for water.

The bidding and awarding process for the Oran operation took about 3 years to complete and was a major constraint in project implementation. Similarly to the Algiers case, work description and quantities required for the Oran operation were not well defined from the outset because of the lack of feasibility studies and master workplan. This has led to a significant amendment in the scope of work, mainly an increase in the total length of pipes to be changed from 24 km to 60 km. Therefore, the contract has been the subject of 2 consecutive amendments. The first amendment had increased the initial amount from 1,285,022,249 DA to 1,397,345,193 DA. The second amendment to the contract (approved by the Bank in August 2002) which has yet to be approved and implemented would bring the total contract amount to 1,939,526,470 DA representing an increase of 51% over the initial amount. The delays in approving the amendments has negatively impacted the Oran operation which has been halted since November 2002 pending payments of arrears to the contractor.

At Loan closing, the rate of completion of the physical aspects of the operation was estimated at 50%. The rate of completion of the 5 individual components is as follows: component A (network mapping) has been completed at a 85%; component B’s rate of completion was at 70% (not considering the second amendment); component C was at 50%, activities for component D and E have not yet begun. As in Algiers, the objective of 20% UFW is unlikely to be achieved by the end of the rehabilitation contract (the amended contract will have a 30-month extension and will be financed by the Government, closing by late 2006).

Sewage Treatment Plant Rehabilitation. This component is rated highly unsatisfactory.

Initially, the project had included the rehabilitation of: (i) sewage collection networks (US$8 million), (ii) sewage treatment plants (US$2.5 million) and (iii) pumping stations (US$2.8 million). The physical rehabilitation of the treatment plants was dropped from the project because no institutional arrangements for the management of the stations and the network were put in place. The Loan agreement stipulated that the financing of the sewerage component was conditional on compliance with Loan covenants (Article III, Section 3.05-b which stipulated that the Borrower shall (i) designate a sewerage authority to be responsible for the operation and maintenance of the sewage treatment plant to be rehabilitated under the sub-project; and (ii) secure the funds necessary to finance the operation and maintenance costs of the sewage treatment plant). In reality, these conditions could only be fulfilled if the municipalities were to provide to the utilities adequate funds to cover the operating costs of the treatment plants. This meant that management contracts (with objectives and corresponding fees) had to be established between the municipalities and the utilities, and that municipal budgets would allocate funds (money that they did not have) to cover the gap between the actual operating costs of the treatment plants and the amounts collected through the sewerage tax (representing 20% of the water bill). The sewerage tax equivalent to 20% of the water bill would be collected by the utilities (as decreed by the water resources law) and transferred to the municipalities.

- 8 - Attempts at making the system work were undertaken (in Algiers and Constantine) but ultimately failed because the resources generated via the sewerage tax were insufficient. Moreover, from a technical and investment perspective, the rehabilitation of the treatment plants was also considered inadequate as it did not include rehabilitation of upstream sewage networks (actually there are conflicting information in parts of the SAR and the legal agreement with regards to the inclusion of sewerage rehabilitation in the project). It is within this context that the legal covenants governing the institutional and financial operations of the sewerage component were not complied with and consequently the Bank cancelled their financing from the loan. Thereafter, the implementation of the sewerage component was limited to the feasibility studies for the rehabilitation of the wastewater treatment plants (WWTP). The first phase (11 WWTPs) of the feasibility studies was completed in May 1999. The contract amounting to US$216,705 and DA 5.5 million, was implemented by the RSW-ENHYD consulting group, while the consulting firm of the second batch was selected in 2002 but the contract was never concluded as the study was not programmed in the Ministry's budget.

Technical Assistance Component of Agence Nationale des Barrages (ANB). This component is rated satisfactory despite the delays in completing the programmed activities which are mainly attributable to causes beyond the control of the agency. This component consisted of a number of feasibility studies of transfers and dams. At Loan closing, two studies have been fully completed. The completed studies are: 3 (i) the Boulatane dam for a capacity of 20 million m to be mainly used for the irrigation of a perimeter in 3 the Tarf wilaya; and (ii) the Djidiouia dam (in the wilaya of Relizane) for a capacity of 22 million m to irrigate the lower Chéliff valley. The other feasibility studies which are still ongoing or about to be 3 completed by the end of 2004 are: (i) the study for the Tabellout dam for a capacity of 190 million m to contribute to the transfer scheme -Hodna; (ii) the Boussiaba dam in the wilaya of Mila for a total 3 capacity of 80 million m ; this study has been delayed because of security concerns to carry out geological surveys; (iii) the study for “Porte de Fer” dam, intended for urban water supply in the wilaya of Bordj Bou Arriredj, has also been delayed because of delays in the geological surveys and other technical assessments; and (iv) the study for Taourira dam, in the wilaya of and intended for irrigation, has also been delayed because of difficulties in carrying out the geological surveys.

Technical Assistance Component to Agence Nationale des Ressources Hydrauliques (ANRH). This component is rated satisfactory. ANRH is the national agency responsible for monitoring water resources in the country. The technical assistance to ANRH was in the form of (limited) consulting services and in the provision of hydrological and operational equipment. The objective of this assistance was to modernize ANRH’s monitoring and analytical capacity through: (i) the installation of a water quality monitoring system to help ANRH establish databases for the hydrological basins in Algeria; (ii) the acquisition of equipment and chemicals for laboratory uses; (iii) the acquisition of hydro-geological equipment to improve ANRH’s capacity to carry out measurements of piezometric levels as well as to enhance its analytical capability on baseline hydrology; and (iv) the rehabilitation and modernization of the national hydro-climatologic system in order to improve its reliability. Upgrading was extended to 12 hydrometric stations in western Algeria; this will improve the data collection on and hydrology. The total cost of this assistance was about US$3 million of which about US$67,000 was for consulting services and the rest for equipment purchases.

4.3 Net Present Value/Economic rate of return: The SAR’s economic evaluation of the project shows an economic rate of return (ERR) of 17 %, excluding the sewerage rehabilitation program. This evaluation had many pitfalls as it did not assess risks that did occur and impacted project outcomes. Furthermore, the economic evaluation did not include an estimate of the long-run marginal cost (LRMC) of the water supply service. An estimate of an LRMC would have been

- 9 - a catalyst for implementing an appropriate water tariff policy.

The expected outcome of the project did not materialize as the project was continuously plagued by delays, restructuring, suspension and partial loan cancellations. Furthermore, as the project did not achieve its intended development objective, the ERR could only be negative. The water utilities involved in the project are still in dire financial difficulties as they still have large debts to settle with the national treasury, the national power utility, and other public firms. They have not been able to generate sufficient revenues to pay their staff. let alone cover their operating expenses. As operating costs soared, tariffs have not been 3 adjusted accordingly. Average water tariffs for Algiers and Oran are 16 DA/m , whereas tariff levels for 3 3 cost recovery should be respectively 49.1 DA/m and 48.8 DA/m (according to a recent tariff study carried out in 2002 by an international consulting firm). Water sales are way below what the project had predicted, and unaccounted for water is still very high. Therefore, an ex-post economic evaluation would be a less than useful exercise.

4.4 Financial rate of return:

For the same reasons indicated above, the calculation of a financial rate of return was deemed unnecessary.

4.5 Institutional development impact:

The project's institutional development impact is rated as negligible. Despite some efforts from the Borrower to comply with the Loan covenants (e.g. budgetary support to utilities, regional tariff systems) the institutional development impact is not tangible. The tariffs were set at much lower levels than needed, not contributing to any improvement of the utilities' finances. Moreover, the most recent institutional reorganization (implemented in January 2003), with the creation of the AdE and ONA, is still not showing any concrete results. This is particularly serious with the ONA which is struggling to become a viable entity, with the sewerage tariffs (at 20% of the water tariffs) not even coming close to covering its most basic expenses. It is worth mentioning that the Bank was not involved in this exercise and did not explicitly support this restructuring effort which led to a re-centralization of service provision. A recent Bank-led strategy report (2003) has proposed the merging of the AdE and ONA and the decentralization of service provision to the wilaya level.

5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency:

The main factor that was outside the control of the Government or implementing agency was the poor security situation prevailing in Algeria in the 1990s which was not conducive to appropriate project implementation and supervision neither by the Bank nor by the Borrower (a travel ban was in place until late 1997; and during 1998-2000 travel to Algeria was restricted and infrequent - four updates of the project supervision report -PSR - are found in that period and no site visits). The security conditions clearly undermined the environment in which the project was being executed. Moreover, foreign firms have been somewhat reluctant to send expatriates to Algeria (as their staff had experienced a high degree of insecurity), especially in the areas outside Algiers and the larger cities. For example, it is clear that the implementation of the feasibility studies for dams that was under the ANB (through foreign consulting

- 10 - firms) was delayed because of the security situation and the difficulty of carrying out critical field work.

5.2 Factors generally subject to government control:

These factors are the following: a) Lack of clear oversight from the Borrower on the implementation agency and frequent institutional changes that took place during the project life. The weak institutional environment for project implementation was manifested through: (i) unclear sector direction and vision (and unwillingness by he Borrower to implement the policies enunciated in its policy note of March 1994 - Annex 19 of SAR); (ii) unclear financial management rules that produced financing gaps in the project (such as lack of tariff adjustments to provide financial resources for the utilities to pay their "concession" fees) and (iii) overlapping of responsibilities in terms of investment financing and rehabilitation program funding (DHW, AGEP, EPE-Algiers and EPE- Oran). For example, in 2001, when it became clear that AGEP would be abolished and replaced officially by two new agencies, Algérienne des Eaux (AdE) and the Office National de l'Assainissement (ONA), the execution of the contracts in Oran and Algiers was assumed to be transferred to the ADE; however, following a decree on deconcentration in September 2002, the responsibility for new investments, i.e. "maîtrise d'ouvrage", was given to the DHWs (of Oran and Algiers, respectively). The transfer of the project implementation files to the DHWs took place in February 2003. In Algiers, it was completed and works had resumed in March 2003 and the arrears due to the contractors had largely been paid. However, in Oran, work has been at a standstill since November 2002. After many months of negotiations between the DHW-Oran and the contractor on the contract amendments (especially the proposed second amendment), the DHW-Oran decided to re-transfer the project responsibility to AdE. In November 2003, the second amendment of the contract (which was first approved by the Bank in August 2002) was re-submitted by AdE to the "Commission Nationale des Marchés" and was re-approved. The additional costs that the contractor had incurred since the shutdown of its activities are still in litigation which has undermined resumption of the works and project completion. The amended contract should have a 30-month extension and is to be financed by the Government (with a closing date in late 2006). b) As indicated above, lengthy procurement procedures in Algeria contributed to the delays incurred during project implementation. In addition to Bank’s no objections, implementing agencies had to go through national procurement commissions, depending on the size and type of the contract. The issue of procurement could have been mitigated if the "Commission Nationale des Marchés" was asked to show a proactive attitude in the context of the project. c) Water tariff adjustments were needed to be approved by the Government to ensure the viability of the utilities. The Government was reluctant to discuss tariff adjustments with the Bank and used the tense political situation as the reason for not being able to introduce adequate cost recovery tariffs. d) Unclear strategy for the sewerage sub-sector that resulted in the lack of institutional arrangements for the sewerage component of the project as well as non-compliance with the corresponding Loan covenants.

5.3 Factors generally subject to implementing agency control:

The implementing agencies should have availed themselves of the necessary technical assistance to procure and manage the services that were provided by the loan. In the case of AGEP in particular, the Bank insisted on many occasions that external project management expertise be retained and help AGEP in its day-to-day operations; however, AGEP did not avail itself of this help.

- 11 - 5.4 Costs and financing:

The total project cost, including physical and price contingencies, was estimated at appraisal at some US$170 million. Bank financing was set at US$110 million. After two cancellations, the loan amount was reduced to US$62.9 million. Disbursements from the project proceeds reached US$38.4 million (about 35% of the original amount). The undisbursed loan amount was US$24.6 million. Details of these figures appear in Annex 2.

6. Sustainability 6.1 Rationale for sustainability rating:

The project sustainability is rated as highly unlikely. In the case of Oran, the works that were initiated under this project will continue for at least another 30 months (assuming that amendment 2 of the contract is signed). Furthermore, it is not likely that the contract will reach the original target of 20% unaccounted for water. In the meantime, the AdE-Oran has taken over the day-to-day operation and is trying to focus on improved customer service. The long-term sustainability of the investments surely rely on the revenues that the system will generate over time that will be sufficient to cover all the costs. In the case of Algiers, the project has worked in an area that represent just about 15% of the customer base. It is not clear to what extent the DHW-Algiers will continue investing in the rehabilitation of the rest of Algiers.

The Government's massive effort to re-build water supply networks to meet the demands can only be sustainable if proper operation and maintenance is ensured. Project sustainability is not assured and could be seriously threatened if no adequate operation and maintenance arrangements are put in place within an enabling institutional structure and the appropriate tariffs that will support it.

The sustainability of project outputs implemented by DHWs (Algiers & Oran) may be undermined given the deteriorating financial situation of AdE. Furthermore it remains to be seen to what extent the split in the responsibility on investment in rehabilitation (DHW) and operation and maintenance (AdE and ONA) can further complicate the long-term sustainability of the networks.

6.2 Transition arrangement to regular operations:

Measures for sustainable operations: After project completion, operations will be transferred to the AdE by DHW-Algiers to carry out daily management of the water supply network in the project area. AdE-Algiers is already participating in the overall coordination of the works (with the DHW of Algiers) and should be able to take over the new assets and maintain them (with adequate tariffs). In Oran, AdE is already in charge of the project (DHW-Oran has refused to take over the contract after the dissolution of AGEP) and is involved in the supervision of the works (however the works are still in a hiatus since November 2002).

7. Bank and Borrower Performance Bank 7.1 Lending:

The Bank's performance during project preparation is rated highly unsatisfactory. At the time of preparation and appraisal, the project did not fully take into consideration lessons from previous operations

- 12 - (it is ironic that the implementation completion report of the previous loan - prepared in 1997 - lists as lessons learned the same ones that are being identified for the present one); previous attempts at institutional reform had not materialized, even when similar efforts were spent under most earlier loans. The risk of the Government's lack of commitment to the stated policies should have led the team to spend more efforts in ensuring the fulfillment of some conditionalities prior to loan negotiations. Furthermore, it would have made sense to require the preparation of some bidding documents prior to Board approval. Given the novelty of these service contracts to the Algerian utilities, the scope of the project should have been more limited. More importantly, the project outcomes were not clearly defined except for output indicators. The Bank did not explicitly require, as a condition for lending, any reform of sector organizations or the granting of more autonomy to the utilities to enable them to provide better customer service. Tariff levels were very low and it would have been logical to carry out some adjustment prior to loan effectiveness. Therefore, proposed reforms were not fully followed up or not implemented at all. The assessment of the capacity of the implementing agency was not adequate and more upfront work should have been carried out to ensure that the proposed external assistance (to AGEP) was put in place early on.

7.2 Supervision:

The Bank's overall performance in supervision is rated unsatisfactory. In the first three years of the project (1995-1998), the Bank showed limited proactivity in addressing the mounting delays and implementation problems which was partly due to an intermittent travel ban to Algeria, for security reasons. It is only at the mid-term review of the project in July 1998 that the major deficiencies were revealed and warranted an amendment of loan agreements, mainly to reduce the scope of work.

On the procurement aspects, more diligent application of Bank procedures could have sped up implementation, especially around the mid-term period. The turnover in Bank teams supervising the project caused some procurement delays that occurred during transition periods. Moreover, it is also important to mention the hiatus that occurred when the first Bank task manager left the project in 1997 following accusations of irregularities in the procurement of services, and the poor state of documentation that was left behind. All of these disturbances led to mounting delays at the early stage and diverted the management's attention from key implementation problems.

In hindsight, the Bank could have been more proactive regarding the lack of progress on water tariff increases and the deteriorating financial situation of the utilities that ensued. Raising the dialogue on this issue to ministerial level should have been done earlier in project implementation. At the same time, it should also be noted that the political environment was not fully conducive to a dialogue on this subject around the late 1990s. However, as a minimum, and although already too late, the Bank could have established the approval of the long overdue water tariff increases as a precondition for granting the extension requested by the Government. Retrospectively, granting an extension without using its leverage on the tariff issue should probably have been avoided.

Overall, it appears that the Bank was trying to be as accommodating as possible to salvage whatever was left from the project and its relationship with the Borrower. The Bank management and the project team tried many of the tools at its disposal to draw the attention of the Borrower (including suspension of disbursement) to the need to adopt the agreed reforms but the political conditions were not suitable. Moreover, the design of the project - from the beginning - was clearly inadequate for the country's conditions.

7.3 Overall Bank performance:

- 13 - The Bank's overall performance is rated unsatisfactory.

Borrower 7.4 Preparation:

The Borrower's performance in project preparation is rated highly unsatisfactory. Despite the stated policy objectives (Annex 19 of SAR) it appears that the Borrower was not ready to implement the project as designed. The commitment made under the project objectives was not translated into action during implementation. In hindsight, it is questionable to what extent the project design reflected the clear convictions of the Borrower in pursuing sector improvement using the methodology and tools of the project design. It is also clear that the project had too many implementing agencies (AGEP, ANB, ANRH, DHWs) and weak coordinating capacity at the AGEP. The Borrower should have better prepared the design of the contracts to be entered with the private operators and probably understood better what was expected from each party (utility, private operator, DHW, etc.). It was indeed a novel contract and included a difficult target (20% unaccounted for water) which should have been better assessed in light of the lack of data on the conditions of the existing networks.

7.5 Government implementation performance:

The Government's implementation performance is assessed as unsatisfactory because of: (i) its inability to achieve project objectives (even the much reduced scope) despite the Bank's willingness to accommodate the implementation delays; (ii) its noncompliance with the financial covenants of the Loan Agreement; (iii) its inefficient procurement procedures which led to major delays from bidding to contract signing (more than three years). Moreover, the Borrower did not intervene forcefully to try to redress the problems that were being faced by the implementing agencies. A project with such a slow disbursing profile should have prompted the Borrower to take the required actions to refocus the project on its initial objectives.

7.6 Implementing Agency: The implementing agencies' (AGEP, DHW and AdE) performance is rated unsatisfactory. In the first place, a complex project (some ten cities for water system rehabilitation and 22 wastewater treatment systems for rehabilitation) necessitated external management capacity which was not actively sought by the implementing agency leading to the unsatisfactory results of the project. The presence of many implementing agencies and the multiplication of components clearly did not match the capacity of the implementing (and coordination) agency, AGEP.

7.7 Overall Borrower performance: The overall performance of the Borrower is rated unsatisfactory.

8. Lessons Learned Several lessons can be drawn from this project. Some of the key lessons are:

Keep the project design simple and set realistic targets based on previous country experience. The initial components were neither realistically defined nor appropriately designed as they were too broad to meet the project objectives. The project design did not take into account the specificity of the complex sector problems in Algeria. Starting from ill-defined development objectives, the project did not link the institutional capacity strengthening to previous results on the ground and lessons learned from past Bank

- 14 - projects. Implementing agencies had not demonstrated in previous Bank operations that they were capable of successfully executing complex and extensive components. Furthermore the activities included in the institutional components proved to be insufficient to fully achieve the strengthening objectives, specifically regarding the improvement of the financial capacity of the sector providers.

Implementation responsibility must be clearly defined and given to the agency that will be ultimately be responsible for the operation of the water supply networks. The fact that the AGEP was initially responsible for project implementation, even though the main beneficiaries were the EPEAL, EPEOR (and later the DHWs and AdE) created delays and difficulties in the procurement and supervision of the works. The split responsibility of investment (AGEP and later DHWs – maître d’ouvrage) and operation and maintenance (EPEAL, EPEOR and later AdE) has continued to create unclear lines of accountability.

In water supply rehabilitation projects, where the knowledge of the physical conditions of the network is limited, the works contract should be preceded (or run in parallel) to a consultancy that will help locate the problems and assign them to the contractors. Under such conditions of uncertainty, the contractors should probably be retained on the basis of preset amount of work and not be held responsible for an outcome (20% unaccounted for water) that they cannot control, especially in the case of this project where in both Algiers and Oran the water supply was intermittent and the contractors had difficulties to measure flows, pressures and leaks under those conditions. Moreover, the main risk that was not possible to mitigate was the political reluctance of the Government to accept the necessary (sizable) contract amendments that ensued from the initial uncertainties.

The service contracts - as designed for this project - should have been split into two components: the works contract and the technical assistance contract for all other services (studies, leak detection, GIS and commercial cadastre and system improvement). The firms that were selected are primarily management and operation firms (such as SEM and SAUR) and were not necessarily good at implementing the works (and importing goods); in both cases, they have sub-contracted all the works to local firms. Otherwise, they should be given a performance-based management contract and allow them to be responsible for the entire operation and maintenance activities.

The Bank management should have been more reactive and take corrective measures much earlier. When it was becoming clear around the mid-term review (1998) that the Borrower and the implementing agency were reluctant to implement the agreed reforms, loan conditions and project design, the Bank management should have been more proactive and not allow the already accumulated implementation delays to increase. It should have been unacceptable to sign the contracts after 5 years from effectiveness (and their amendments) when it was known that the contracts will go beyond the closing date.

To implement new reforms in the sector, it would be more appropriate to design pilot project of much smaller scale to test the commitment of the Government and the feasibility of the reform. In this case, it would have been much more relevant to test the objectives in one or two locations before committing to 10 utilities. Moreover, it was difficult to project the feasibility of rehabilitating wastewater treatment plants when the operational costs are not clearly covered. The sector performance did not lend itself for optimistic projections and yet the project was designed on that basis.

Large complex projects (with many contracts) require competent project management capacity to be on board from the beginning. It is very likely that the implementation of this project could have been more positive, had AGEP availed itself with capable technical advisers to help prepare bidding documents

- 15 - and oversee the implementation of the contracts. Anecdotal evidence shows that PMUs that are assisted by professional project managers have implemented their projects in timely manner and without creating large (parallel) bureaucracies within government structures.

The Government should show their commitment to reforms by initiating them prior to project implementation. Bank experience in many projects has shown that reforms in the water sector take time and are tied to political cycles. It is increasingly clear that achievement of sector reform should not be conditions of project implementation. Bank investment loans are not good vehicle for ensuring sector reforms. For example, tariff adjustment or institutional restructuring should be carried out outside an investment loan framework. In other words, it is better that sector reform precede major investments and that governments demonstrate its seriousness in results. The Bank should have established the approval of the long overdue water tariff adjustments as a precondition for consideration of the project closing date extension.

9. Partner Comments (a) Borrower/implementing agency:

- 16 - (b) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

- 17 - Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Water services improved in Oran and a pilot 25%. 45% area of Algiers.

Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Two contracts entered for water supply Two contracts completed. Contracts still on-going; the one in Oran has rehabilitation. still another 30 months to go and is at a halt pending negotiations of an amendment and the one in Algiers is due to be completed in August 2004. Twenty-two studies for WWTP rehabilitation. Twenty-two studies completed. Eleven completed; process for the second batch is frozen. Sector reform prepared and implemented: (i) Reform implemented: decrees approved; Reform partially implemented; impact not yet decrees for new organization to be drafted, organizational studies completed. measurable (ii) decrees to be approved, (iii) carry out organization studies for sector agencies.

1 End of project

- 18 - Table A: Performance indicators for the Algiers Water Supply System Rehabilitation

Component Description Rate of Completion as of 12/31/03 A Network cartography and GIS Mapping at 100 % Data collection at 100 % Field validation : 3 804 km out of 3 819 km ( 99 % ) Mapping & Manuals at ( 95 % ) GIS design at: 98 % Supply of Equipment and software at (100%) Training : 12 staff have been trained B Leak detection and Repair Network Sectorization Rehabilitation and upgrading of - diagnosis and segmenting : 100 % the Hamiz piping system - sectorization work and installation of control lines including water meters , taps and (60 % ) Number of leaks detected : 1 005 Leak repairs : 49 % Consumer survey (via sampling) 70 % Training for 16 staff Drafting of Manuals and Reports 70 % Supply of equipment, materials and measurement instruments: 100 % Pipe rehabilitation and upgrading : 25 % C Network assessment Diagnostics at 80 % (diagnosis) and development of Mathematical model development: 50 % a mathematical model Information system- software training : PICCOLO program : 50 % Report on network operation : 50 % D Master plan development Socio-economic survey : 70 % Master plan : 0 % Definition and design of a works program : 14 % Schematics, manuals & reports : 30 % E Management guidelines and Managerial guidelines for the management of the water supply system : 60 % methods Feasibility study on a dedicated/specialized control system : 80 % Creation of an AdE leak detection unit : 85 % Leak detection information system : 90 % Operational guidelines and manuals : 60 % Evaluation of the implementation of managerial guidelines : 30 % F Billing and Collection Audit and recommendations : 100 % Cost and Tariff study : 100 % Water meters and consumers inventory : 100 % Connections and meters rehabilitation and upgrading : 26 % Training of 12 staff : 100 % Supply of computer equipment : 100 % Installation of the Water meters repair unit: 60 % G Supply and assembly of Works have been completed- final delivery not yet confirmed as equipment remains Hydrocyclones at Beni-Amrane to be calibrated and validated (testing remains to be undertaken) pumping station

- 19 - Table B: Performance indicators for the Oran Water Supply System Rehabilitation

Component Description Rate of Completion as 31 December 2003 A Network cartography and GIS Mapping at 100 % Data collection at 100 % Field validation : (100 % ) Mapping & Manuals at ( 95 % ) GIS design at: 100% Supply of equipment and software at (100%) Training : 5 staff have been trained B Leak detection and Repair Network Sectorization - diagnosis and segmenting : 100 % - sectorization work and installation of control lines including water meters , taps and ( 80% ) Leak repairs: activity still on-going and hampered by technical issues due to network thus results are useless Consumer survey (via sampling) 90 % Training for 9 staff Drafting of Manuals and Reports 75 % Supply of equipment, materials and measurement instruments: 100 % Pipe rehabilitation and upgrading: 26.3 Km (65%) C Network assessment Diagnostics at 80 % (diagnosis) and development of Mathematical model development: 50 % as flow and pressure measurement activity a mathematical model has yet to be started Output Report on network operation 0 % Training of 5 staff D Master plan development Socio-economic survey is still on-going Master plan : 0 % Definition and design of a works program : 20 % E Management guidelines and Guidelines for the management of the water supply system : 0 % methods Feasibility study on a dedicated/specialized control system : 0 % Creation of an AdE leak detection unit : 0 % Leak detection information system : 0 % Operational guidelines and manuals : 0 % Evaluation of the implementation of managerial guidelines : 0 %

- 20 -

Project Objectives, Components and Status: Changes during Project Life Objectives Components Context & Status 1995 1.Rehabilitating of urban water supply 1.Water supply system rehabilitation in ten The project ran quickly into implementation and sewerage systems cities; difficulties linked to inadequate commitment of the government to sector reforms, management 2. Improving the distribution of water in 2. Rehabilitation of about 24 sewage weaknesses of all agencies involved in the project, urban areas treatment plants and sewage networks non-compliance with financial and legal covenants, and the deteriorating security conditions. 3. Rationalizing the institutional 3. Consulting services to AGEP and ANB Development and implementation objectives have arrangements in the water sector with a to carry out feasibility and detailed studies, been rated unsatisfactory since early 1997. Up to July view to achieving full cost recovery and environmental impact assessments of 1998, physical components execution had been through the establishment of efficient, projected water and sewerage works; insignificant because of the slow implementation of self-financing water authorities the project. Disbursements had been minimal and 4. Institutional development assistance to behind schedule, and no commitments had been AGEP, ANB, ANRH, and the water made for civil works. The Borrower, notably AGEP, utilities; lacked the expertise required to carry out competitive bidding procedures of the required quality, and it 5. supply of operational equipment to seemed that prequalified foreign firms were reluctant AGEP, ANB, ANRH, and the water to intervene in the project. Institutional arrangements utilities. were not implemented Restructuring 1.Rehabilitating urban water supply and 1. Water supply system rehabilitation in It was agreed to keep only activities that would be in 1998 sewerage systems four cities (Algiers, Oran, Annaba and achieved by the closing date of 12/31/2001. These Constantine) activities would concern a small number of cities in 2. Improving the distribution of water in order to increase the project’s impact on the urban areas 2. Studies for the rehabilitation of 22 population. Development objectives remained largely sewage treatment plants; unchanged. Borrower seemed committed to 3. Rationalizing the institutional strengthen ownership of the project. Drought arrangements in the water sector with a 3. Consulting services to AGEP and ANB situation in Algeria and the shortage of water in the view to achieving full cost recovery to carry out feasibility and detailed studies, large cities was used as a rationale for including through the establishment of efficient, and environmental impact assessments of Algiers and Constantine in the project. As self-financing water authorities projected water and sewerage works; procurement procedures did not result in the selection of viable contractors, Annaba and Constantine were 4. Institutional development assistance to later dropped from the project. Because the Borrower AGEP, ANB and ANRH; could not provide for their technical and financial adequate management, WWTPs rehabilitation was 5. Supply of operational equipment to dropped from the project. However, studies for the AGEP, ANB, and ANRH. rehabilitation of the WWTP were kept as a project component. Restructuring 1. Rehabilitation of urban water 1. Rehabilitation of the water supply The revised DO reflected the reduced scope of the in 2001 systems in the city of Oran and in a system in the city of Oran and of a pilot project which was limited to water systems pilot area of the city of Algiers; zone in the city of Algiers rehabilitation in Oran and a pilot area in Algiers, and to preparatory studies for wastewater plants 2. Preparation of studies for the 2. Studies for the rehabilitation of 22 rehabilitation. The cost recovery objectives included rehabilitation of sewage treatment WWTP coverage of operating costs and debt service with the plants; and exclusion of depreciation. These revised DO were 3. T.A and studies for ANB considered achievable because at the time : (i) the 3. Rationalization of institutional Borrower was committed to sector reform, tariff arrangements and the improvement of 4. T.A and supply of equipment for ANRH restructuring and establishment of a viable financial cost recovery in the water sector by set up for the sector; and (ii) the last periodic Bank strengthening of the water authorities of supervision missions had observed good progress in the cities of Oran and Algiers. project implementation. However, a major factor undermined project implementation progress: the creation of two new centralized national entities, ADE for water and ONA for sewerage. This institutional transition contributed to the slowing down of project implementation and the ongoing rehabilitation contracts. Closing 12/03 1. Partially achieved 1. Partially completed The two major sub-projects (rehabilitation of water networks in Oran and in part of Algiers) remain 2. Partially achieved 2. Partially completed (only 11) incomplete (works have been completed between 50 and 75%). The Algiers sub-project had been 3. Not Achieved 3. Partially competed (2 out of 6 studies) restarted in mid 2003 (and is on-going) while the one in Oran has yet to be re-initiated (all indications are 4. Completed that it would be restarted during the second quarter of 2004 following agreements reached on the payments of all arrears due to the contractor). The Government indicated that both sub-projects would continue to be executed using Government funding (the Algiers sub-project is scheduled to be completed by August 2004 and the one in Oran - with a sizable contract adjustment - in mid-2006). However, even with the completion of the works, the ambitious target of 20% unaccounted-for-water will most likely not be achieved

- 21 - Annex 2. Project Costs and Financing

Table A: Total disbursement for Loan 3743-AL

Category Category Description Disb. USD 3743S Disb. USD 3743A Total Disbursed 1-A CW-PARTS A-B 1,224,978.04 5,867,367.96 7,092,346.00 1-B CW-PART C 0 0 0.00 2 EQUIPMENT & MATERIALS 6,919,180.29 13,287,168.66 20,206,348.95 3-A CONSULTANTS SERVICES 2,479,795.77 3,877,605.76 6,357,401.53 3-B CONSULTANTS SERVICES 600,883.96 3,373,595.39 3,974,479.35 CONV-SA SA - Conversion 0 0 0.00 SA-A BANQUE D'ALGERIE -29,819.93 790,082.05 760,262.12 UNALLOCATED UNALLOCATED 0 0 0.00 0.00 Totals (for all 8 Categories) 11,195,018.13 27,195,819.82 38,390,837.95

Table B: Expenditure by Category

Category Initial Amount Revised Loan Amount In US $ In US $ 1. CIVIL WORKS CW for parts A and B 22 400 000 15 500 000 CW for part C 10 600 000 0 2. EQUIPMENT & MATERIALS 38 300 000 24 487 550 3. Technical Assistance and Consultants T.A. & Consulting Services for part D 10 800 000 11 100 000,00 T.A. & Consulting Services for parts A, B, C et E 16 900 000 11 300 000,00 4. Unallocated 11 000 000 512 450 TOTAL 110 000 000 62 900 000 Cancellation of amount from Loan on 12/12/2000 28 100 000 Cancellation of amount from Loan on 04/22/2003 19 000 000 Revised Loan Amount after 04/22/2003 62 900 000

- 22 - Table C: Loan 3743-AL – Cancellations: Loan Amounts by Category

Category Initial Loan Revised Loam Amount Revised Loam Amount Amount in US $ in US $ in US $ After Cancellation of After Cancellation of 12/12/2000 04/22/2003 1. CIVIL WORKS CW for part A et B 22 400 000 10 400 000 15 500 000,00 CW for part C 10 600 000 10 600 000 0 2. EQUIPMENT & MATERIALS 38 300 000 34 200 000 24 487 550 3. Technical Assistance & Consultants T.A & Consulting Services for part D 10 800 000 10 800 000 11 100 000,00 T.A for part A, B, C and E 16 900 000 4 900 000 11 300 000,00 4. Unallocated 11 000 000 11 000 000 512 450

TOTAL 110 000 000 81 900 000 62 900 000

- 23 - Annex 3. Economic Costs and Benefits

Not calculated, given the incomplete status of project implementation.

- 24 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 02/25/1993 3 SANITARY ENGINEER (1); FINANCIAL ANALYST (1); ECONOMIST (1) 04/28/1993 1 SANITARY ENGINEER (1)

Appraisal/Negotiation 06/30-07/22/1993 4 SANITARY ENGINEER (1); FINANCIAL ANALYST (1); ECONOMIST (1); CONSULTANT 02/15-21/1994 5 SANITARY ENGINEER (1); FINANCIAL ANALYST (1); LAWYER (1); DISBURSEMENT OFFICER (1); PROGRAM ASSISTANT (1) Supervision 07/12/1994 2 ENGINEER (1); S S FINANCIAL ANALYST (1) 01/31/1995 1 SANITARY ENGINEER (1) S S 10/30/1995 1 SANITARY ENGINEER (1) S S 12/19/1996 1 SANITARY ENGINEER (1) U U 03/10/1998 3 SANITARY ENGINEER (1); U U FINANCIAL ANALYST (1); ECONOMIST (1) 10/16/2000 3 SR. SANITARY EGR/TTL (1); U U FIN. MGT SPECIALIST (1); SR. ECONOMIST (1) 05/24/2001 1 SR. SANITARY ENG. (TTL) (1) S U 10/22/2001 2 SANITARY ENGINEER/TTL S S (1); ECONOMIST (1) 05/21/2002 1 SANITARY ENGINEER/TTL S S (1) 10/28/2002 2 TASK MANAGER (1); LEAD U U FINANCIAL ANALYST (1) 05/05/2003 2 WATER SUPPLY SPECIALIST U U (1); LEAD FINANCIAL ANALYST (1) 07/17/1996 2 SANITARY ENGINEER (1); U U FINANCIAL ANALYST (1); 07/23/1998 6 ENGINEER (1); FINANCIAL U U ANALYST (2); ECONOMIST (1); SECTOR DIRECTOR (1); SECTOR MANAGER (1)

- 25 - 12/07/1998 2 SANITARY ENGINEER (1); U U FINANCIAL ANALYST (1); ICR 01/21/2004 2 ENGINEER/TTL (1); S S ECONOMIST (1)

- 26 - (b) Staff:

Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation NA 157,000 Appraisal/Negotiation NA 200,000 Supervision NA 751,000 ICR NA 20,000 Total NA 1.128,000

- 27 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA

Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA

- 28 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU

6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU

- 29 - Annex 7. List of Supporting Documents The following documents, available in the project files, were used as the basis of this ICR:

Memorandum and Recommendation of the President to the Executive Directors Staff Appraisal Report Project aide-memoires Project Supervision Reports Audited Financial Statements

- 30 - - 31 -