Document of The World Bank Public Disclosure Authorized

ReportNo. 14495-AL

STAFF APPRAISAL REPORT

Public Disclosure Authorized DEMOCRATICAND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROLPROJECT

MAY 13, 1996 Public Disclosure Authorized

Public Disclosure Authorized Private Sector Development, Finance and Infrastructure Operations Division Maghreb and Iran Department Middle East and North Africa Region CURRENCY

Currency Unit: Algerian Dinar (DA) = 100 Centimes (As of January 1996)

US $ 1.00 DA 53.70 DA 1.00 = US $ 0.0186

t/y : tons/year m3 : meter cubes I : liter mg : milligram p.g : microgram

LIST OF ABBREVIATIONS AND ACRONYMS USED

ASMIDAL: Entreprise Nationale des Engrais et Produits Phytosanitaires BAD : Banque Algerienne de Developpement BOD : Biochemical Oxygen Demand CNP : Conseil National de la Planification DGE : Direction Generale de l'Environnement (General Directorate of the Environment) EA : Environmental Assessment ENIP : Entreprise Nationale des Industries Petrochimiques ENSIDER : Entreprise Nationale de Siderurgie EPE : Entreprise Publique Economique ERL : Economic Rehabilitation Loan FDEPE : Fonds de Depollution et de Protection de l'Environnement HCEDD : Haut Conseil de l'Environnement et du Developpement Durable (High Council for the Environment and Sustainable Development) IEW : Inspectorats de l'Environnement de Wilaya (Wilaya Environment Inspectorates) METAP : Mediterranean Environmental Technical Assistance Program MICLE : Ministere de l'lnterieur, des Collectivites Locales, et de l'Environnement MIR : Ministry of Industry and Restructuring MAP : Mono-Ammonium Phosphate MOH Ministry of Health NEAP : National Environment Action Plan NEF : National Environmental Fund NGO Non Governmental Organizations NOx : Nitrogen Oxides NPK : Nitrogen-Phosphate-Potassium PAH : Polyaromatic Hydrocarbons PE : Public Enterprise PHRD : Policy and Human Resources Development Fund PIP : Project Implementation Plan PIU : Project Implementation Unit SGG : Secretariat General of the Government

SO2 : Sulfur Dioxide TSP : Total Suspended Particles VOC : Volatile Organic Hydrocarbons WHO : World Health Organization

FISCAL YEAR

January I - December 31 DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY ...... i-iv

I. BACKGROUND ..... 1... A. Geographic and Economic Context ...... 2 B. Main Problems Affecting the Environment ...... I C. Rationale for Bank Involvement ...... 6

H. THE PROJECT.. 8 A. Project Design Altematives. 8 B. Project Objectives. 8 C. Detailed Project Description. 8 D. Project Costs .10 E. Financing Arrangements .11

I3. PROJECT ORGANIZATION AND IMPLEMENTATION . .12 A. Project Implementation .12 B. Procurement .13 C. Disbursement .15 D. Reports .17 E. Accounts and Audits .17 F. Supervision .17 G. Environmental Impact .18 H. Sustainability .18

IV. PROJECT JUSTIFICATION .. 19 A. General .19 B. Internalization of the Pollution Abatement Cost .19 C. Least-cost Solutions .20 D. Project Benefits ...... 20 E. Economic Evaluation ...... 20 F. Social Impacts ...... 21

V. THE GOVERNMENT'S PARALLEL PROGRAM IN SKIKDA .22

VI. EXPECTED BENEFITS AND RISKS .22

VII. AGREEMENTS REACHED AND RECOMMENDATION .23

| This report is based on the results of an appraisal mission in May 1995 and was prepared by Messrs. Sherif Arif (Task Manager), Charles Sterling, Hans-Roland Lindgren, and Aziz Bouzaher; and edited by Ms. Michele Detwiler. Mme. Eugenia Marinova, Engy Naguib and Josephine Salang provided invaluable assistance in the preparation of the report. Peer reviewers are Messrs. Anders Haildin (EC4NR) and John Dixon (ENVPE). Mr. A. Amir Al-Khafaji (EMIPI) is the Division Chief; Mr. Daniel Ritchie (MNIDR) is the Country Director and Mr. Kemal DerviS (MNAVP) is the MNA Vice President. IndustrialPollution ControlProject

Page No.

TABLES

Table 2.1: Project Cost Summary...... I 1...... Table 2.2: Project Financing Plan ...... 12 Table 3.1: Summaryof Proposed ProcurementArrangements ...... 14 Table 3.2: DisbursementPlan ...... 16 Table 3.3: DisbursementSchedule ...... 17

ANNEXES

Annex 1: Assessmentof the EnvironmentalSituation in Annaba Annex 2: Policy Letter Annex 3: Descriptionof the First Project Component Annex 4: Detailed Project Costs Estimates Annex 5: Key PeformanceIndicators Annex 6: ImplementationPlan Annex 7: Financial Viability and Internalizationof Costs Annex 8: Health Cost-BenefitAnalysis

MAPS

IBRD 27060 IBRD 27061 DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

STAFF APPRAISAL REPORT

Loan and Project Summary

Borrower Democratic and Popular Republic of Algeria

Implementing Agencies Direction Generale de l'Environnement (DGE) Entreprise Nationale de Siderurgie (ENSIDER) Entreprise Nationale des Engrais et Produits Phytosanitaires (ASMIDAL)

Beneficiaries Sector ministries, wilaya environment inspectorates, local government, NGOs, and private and public consulting and industrial firms

Loan Amount US$78 million equivalent

Terms 17 years, including 5 years of grace at the standard variable interest rate

Commitment Fee 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver

On-lending Terms: The Govemment of Algeria (GOA) would on-lend to ENSIDER and ASMIDAL a total amount of US$67.5 million equivalent for up to 10 years including 3 years of grace, at the Bank's standard variable interest rate. ENSIDER and ASMIDAL would bear the foreign exchange risk.

Objective The bro4d objective of the project is to assist the Borrower in reducing pollution which causes health problems or serious ecological 'degradation. Its specific objectives are to: (a) strengthen the institutional and legal framework; and (b) initiate a pilot investment program to mitigate pollution in the industrial sector of Annaba, situated in the northeastern region of Annaba.

Project Description Strengthening the Institutional and Legal Framework Component (11 percent of project baseline cost) would consist of the following sub-components:

(a) Institution Building; Industrial Pollution Control Project

(b) Enhancing the Legal and Regulatory Framework;

(c) Designing and Implementing a Monitoring and Enforcement System; and

(d) Activating the National Environmental Fund.

The Pilot Investments Component (89 percent of project baseline costs would be limited to the:

(a) Iron and Steel Complex of ENSIDER and would include the reduction of air emissions and treatment and reuse of industrial wastewaters; and

(b) Fertilizer Complex of ASMIDAL and would include the reduction of air emissions and industrial discharges, and the closure of the sulfuric and phosphoric acid plants.

Benefits The main benefits of this project are reduced environmental degradation and decreased negative public health impact as a result of reduced hazardous emissions to air and water, and leakages from wastes. The institutional and legal component would strengthen the national and local capabilities in the design, monitoring, and enforcement of appropriate policies and regulations. The pilot investments component would contribute substantially to the reduction of hazardous emissions and waste in the northeastern region of Annaba, and improve industrial efficiency through the use of cleaner technology and waste minimization.

Risks Restoration of peace in the country would expedite project implementation and enhance Bank supervision. Additional risks are: (a) the institutional complexity of the project; the establishment of a project implementation unit and steering committee and agreement on functions and responsibilities among the different agencies would overcome this risk; and (b) the identified enterprises may not undertake all the pollution abatement measures; the signing of the environmental conventions and the strengthening of the enforcement entities would reduce this risk. Industrial Pollution Control Project iii

Estimated Cost

Locall Foreignl Total -. --- (US$ Million) - A. Strengthening the Institutional and Legal Framework 1. Institutional Building 1.79 7.70 9.49 112.Legal Framework 0.11 0.20 0.31 3. Monitoring and Enforcement 0.11 0.61 0.72 4. National Environmental Fund 0.23 0.31 0.54 Sub-total A 2.24 8.82 11.06 B. Pilot Investments 1. ASMIDAL 6.92 46.59 53.51 2. ENSIDER 10.06 28.62 38.68 Sub-total B 16.98 75.21 92.19 Total Baseline Costs 19.22 84.03 103.25 Physical Contingencies 1.69 7.48 9.17 Price Contingencies 1.91 3.77 5.68 TOTAL PROJECT COSTS 22.82 95.28 118.10

Financing Plan

Local I Foreignl Totalr' U------(US$million)------Bank 3.98 74.02 78.00 GOA 1.76 1.76 Enterprises 17.08 21.26 38.34 Total 22.82 95.28 118.10 a/ The project cost is exclusive of taxesmand duties.

Estimated Disbursements

Bank Group Fiscal Year ------(US$ million)------1997 1998 1999 2000 2001 2002 2003 2004 Annual 1.5 6.0 12.8 18.7 12.5 15.6 7.8 3.1 Cumulative 1.5 7.5 20.3 39.0 51.5 67.1 74.9 78.0 iv Industrial Pollution Control Project

Economic Rate of Return Pilot Investments (49 percent for ENSIDER and 29 percent for ASMIDAL)

Poverty Category Not Applicable

Environmental Rating "BP'

Project Identification No. 4960

Maps IBRD 27060 and 27061 DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

L BACKGROUND

A. Geographic and Economic Context

1.1 Algeria has 2.4 million square kilometers of territory, a population of 27.5 million growing at an average rate of 2.6 percent per annum, and a per capita GNP of US$1,650 (1993). It has abundant mineral resources, including oil and gas reserves and mining resources, but arable land representing only 3 percent of its total surface. From independence in 1962 until the mid-1980s, the country followed a socialist model, emphasizing centralized planning, and directed large investments towards health and education, heavy industries (iron and steel, cement, fertilizers, and refineries), collectivization of land, and large infrastructure projects. These investments were accompanied by large-scale subsidies to public services, basic food products, water, energy, and agrochemicals. This development strategy discouraged conservation and increased inefficiency in resource allocation. The combination of environmental neglect and misuse have degraded natural resources and brought about serious deterioration of soil, water, and air quality. Moreover, the Government of Algeria (GOA) officially stated at the 1972 Stockholm Conference on Environment that it would not sacrifice development for environmental protection that it planned to accelerate economic development.

1.2 After the sharp drop in oil prices in 1986, resulting in a 50 percent decline in the country's terms of trade, Algeria's GDP per capita decline by about 3 percent a year, unemployment soared from 17 percent in 1986 to 25 percent in 1994, and external debt reached 68 percent of GDP over the same period. In 1987, the Government initiated adjustment through a broad program of economic reforms, including the beginnings of land privatization, price liberalization, and reform of public enterprises (PEs) through the establishment of holding companies (Fonds de Participation) and transformation of a large number of PEs into autonomous Economic Public Enterprises (EPEs). However, in 1992, because of the political crisis, the Government backtracked on its program of reforns, resulting in a widening of the budget deficit (8.7 percent of GDP by 1993), a fall in private investment (by 40 percent), and severe macroeconomic imbalances. In 1994, a wide-ranging stabilization program was initiated with the support of: (i) two IMF facilities (US$2.8 billion by May 1995), (ii) a World Bank Economic Rehabilitation Loan (US$150 million in January 1995), (iii) two Paris Club rescheduling agreements (more than US$7 billion by July 1995), and (iv) a recent World Bank Structural Adjustment Loan (US$300 million in April 1996). Already, Algeria is considered to have succeeded on the stabilization front,' and is deepening its structural reform program through: the elimination of non-tariff trade and payment restrictions; price liberalization and the drastic reduction of subsidies; the removal of ceilings on bank lending rates; and the imposition of tight budget constraints on non-autonomous PEs. At the heart of the Government strategy to transform the economy are two key programs: (i) the reorganization of the large PE sector (about 400 enterprises) into holding companies with a view to improving financial discipline and preparing it for privatization, and (ii) a large-scale privatization program for small and medium enterprises (about 1,300 enterprises).

I/ See "CountryAssistance Strategy" for Algeria, World Bank Report No. 15316-AL. 2 Industrial Pollution Control Project

B. Main Problems Affecting the Environment2

1.3 Natural Resources Management. The major issues regarding natural resources management are: (a) decreased water availability for urban, industrial, and agricultural use; (b) soil degradation due to erosion, salinization, desertification, or a combination of these; (c) deforestation; and (d) loss of fauna and flora. A summary of the environmental issues in Algeria is provided in the Project Implementation Plan (PIP).

1.4 Pollution. Industry accounts for a major part of the total pollution in the country. The main polluting industries are the petrochemical industries, chemical industries, ore processing, and metallurgy. The largest concentration of industries is found in the coastal belt of the country, which makes up only 1.7 percent of the total area; it is also where the majority of the population resides. Most of the polluting industries are concentrated in and around the major urban centers of Algiers, Oran, Constantine, and Annaba. Since the largest share of industrial growth occurred during the 1960s and 1970s, the capital stock is old and highly polluting. Most enterprises do not have any pollution control technology and the few enterprises that have air emission or water treatment equipment do not keep it properly maintained and lack an adequate supply of spare parts, impeding the performance of these treatment facilities. The major environmental impacts are: (a) water pollution from municipal and industrial wastewater discharges;

(b) air pollution from d'.sts: total suspended particles (TSP), sulfur dioxide (SO2), nitrogen oxide (NOx), volatile organic hydracarbons (VOC), and heavy metal vapors; and (c) industrial wastes.

1.5 Pollution Situation in Northeastern Algeria. An overview of the industrial pollution situation undertaken by the Government, with Bank assistance, and an assessment of hazardous wastes undertaken by the Government with financing from the Mediterranean Environmental Technical Assistance Program (METAP), indicated that pollution from public sector industries on the northeastern coast, and in particular those located in or around the cities of Annaba (population 465,000) and Skikda (population 167,000), is a major problem that needs to be urgently addressed, especially given its impact on human health. This situation has generated public outcry, in the form of street demonstrations, complaints from NGOs, and an urgent request by the media to take concrete actions to prevent and control pollution. This region: (a) includes the largest agglomeration of versatile heavy industries, i.e., iron and steel (Entreprise Nationale de Siderurgie-ENSiDER) and fertilizers (Entreprise Nationale des Engrais et Produits Phytosanitaires - ASMIDAL), both situated in Annaba, and refineries and petrochemicals (Entreprise Nationale des Industries Petrochimiques-ENIP) in Skikda; (b) generates about 10,400 t/y of hazardous wastes with estimated total stockpiles of 207,000 t; and (c) is unique in terms of meteorological conditions, with a combination of wind direction from sea to land, temperature inversions, and peak emissions generating local short-term peak concentrations of air pollutants, which reach hazardous levels for the exposed population. A review of the environmental situation in Annaba is provided in Annex 1.

1.6 Pollution from the industries in the region is likely to have severe short and long-term effects on: (a) the health of the workers, (b) the exposed population in nearby villages, and (c) the environment. Large amounts of air pollutants, toxic discharges to water, and organic wastes such as biochemical oxygen demands (BOD) are released by these industries. Continuing emissions of heavy metals to air from those industrial sources would increase the metal content in groundwater and soils, leading to increased levels in crops, threatening human health and reducing productivity. The water bodies situated downstream of ENSIDER are almost dead from ecological point of view because of releases of oil, solids, cyanides,

2/ See "Reviewof Issues in EnvironmentalManagement in Algeria,"World Bank Report No 12195-AL. Industrial Pollution Control Project 3 polyaromatic hydrocarbons (PAH), and heavy metals. The phosphogypsum discharge from ASMIDAL has reduced the fish population in the coastal zone. Present mercury releases in ENIP may already be causing concentration levels in fish flesh above what is considered safe. Air pollution has also affected the workers' health, as explained in Annex I and summarized in para 1.9 (d).

1.7 A lack of full understanding of the relationship between pollution and health effects, on the one hand, and between pollution and ecological values, on the other, has prevented the estimation of social and economic costs arising from environmental degradation. A cost-benefit analysis has, therefore, been limited to health effects of dust releases only, where the relationship between the health impacts due to TSP has been established (see para. 4.5). Nevertheless, other pollutants in the area have caused or, in the longer term, would cause severe degradation of the region. It is, for instance, well known that many heavy metals are highly toxic for humans and the environment, that polyaromatic hydrocarbons are carcinogenic, and that cyanides are poisonous. The action program for Annaba, selected as the pilot area in the northeastern region, has therefore been designed to mitigate these health and environmental effects, which are considered the most severe in the region. The priorities are founded both on the specific health and audit studies in the area and on common scientific knowledge. They are based on such criteria as the pollutants' toxicity, persistence, and liability to accumulate; magnitude of the respective emissions; established health effect linkages; magnitude of the affected population and disturbed areas; and the enterprises' plans.

1.8 Environmental Quality in Annaba. To determninethe magnitude and severity of the pollution in the city of Annaba, a METAP-financed health risk assessment was carried out with assistance from the wilaya and two local NGOs in an effort to: (a) determine the ambient levels of pollutants in air and water, and (b) assess the impacts of these pollutants on public health and/or the environment. The study showed that the concentration of total suspended particles (TSP) is four times higher (320-360 Rg/m3 ) than the WHO guidelines (80 ltg/m3) in the two villages of El Bouni and Sidi Amar which are directly exposed to the industrial air emissions. Similarly, the TSP concentration in the city center of Annaba is twice the 3 WHO guidelines. The sulfur dioxide (SO2 ) concentration in El Bouni village (320 ptg/m) and Annaba city center (165 Rg/m3) is about six times and three times higher than the WHO guidelines (50 p.g/m3), respectively. Furthernore, water pollutants such as oils, suspended solids, and cyanides (150 pig/l; WHO guidelines 50 jig/l) are discharged into the Maboudja and Seybouse rivers. Phosphogypsum (2000 tons per day) containing traces of radioactive substances, cadmium, and other toxic heavy metals are discharged untreated into Annaba Bay. Sea water is now acidic in the vicinity of the ASMIDAL plant (sea water pH = 4.4 to 10 m from the outlet). In addition to industrial pollution, the Meboudja and Seybouse rivers have a high level of microbiological pollution (over 5.107 coliform/100 ml, norm = 5.104) due to untreated domestic sewage.

1.9 On the basis of the studies performed (details in Annex 1), the following conclusions could be made:

(a) There is strong evidence of the impact of pollution on the health of the population in Annaba. Acute perceived respiratory morbidity rates were 42.3 percent (national level: 35.7 percent), with cardiovascular morbidity equal to 5.2 percent (national level: 2.2 percent). The villages of El Bouni (population 107,000), Sidi Amar and Darraji Errdjem (population 84,000), which house the poor workers' families, are directly exposed to the emissions from ENSIDER and ASMIDAL and display the highest incidence of cough/dyspnea and asthma compared to non-exposed villages. 4 IndustrialPollution ControlProject

(b) Upper respiratory disorders are the first cause of infant morbidity, accounting for over 50 percent of total reported symptoms. This frequency is much higher than that found in the general population. Children exposed to industrial pollution in El Bouni presented a significantly higher incidence of cough (39.7 percent versus 26.4 percent) and lower respiratory performance (decline of 1.7 percent in timed vital capacity) compared with unexposed children living in the Safsaf neighborhood of Annaba.

(c) The prevalence of asthma (which includes 9000 asthmatics) is significantly higher than the national level (1.7 percent and 0.8 percent, respectively). Asthma is particularly severe in terms of both frequency and intensity of attacks. In 1993, 55 percent of asthmatics experienced more than one attack per month, and 42 percent of patients were hospitalized during the year. Similarly, for 93 percent of patients, asthma attacks accounted for at least one sick leave during the year.

(d) Workers' health in ASMIDAL and ENSIDER is seriously compromised. In ASMIDAL, skin and ophthalmological diseases have increased to 10 percent and 7 percent, respectively among workers. In ENSIDER, allergy and irritation of the upper respiratory tract constitute 30 percent of the perceived morbidity.

(e) Priority actions for Annaba would be to reduce the air emissions from dust, SO 2, VOC, and NOx, and eliminate water discharges of cyanide and phosphogypsum. The iron and steel complex of ENSIDER and the fertilizer complex of ASMIDAL were found to be the major sources of such pollution.

1.10 Institutional and Legal Aspects. An institutional and legal assessment performed during project preparation (see project files), and partly financed by the Swedish Trust Fund, showed that the institutional framework recommended several institutional changes that were implemented. The Ministry of Interior, Local Government, and Environment (MICLE) is now in charge of environmental management and is headed by a State Secretary of ministerial rank. In MICLE, the Directorate General of the Environment (DGE) and the Agence Nationale de la Protection de l'Environnement (ANPE) were, respectively, the operational and technical arm of this ministry, working independently of each other. In March 1995, ANPE was dissolved and replaced by DGE; the latter took all ANPE staff and physical resources and became the national environmental agency, with a technical staff of 110 and three regional laboratories. An additional 25 technical positions were authorized for 1996.

1.11 The previous institutional setup was constrained by: (a) lack of environmental policies and priorities; (b) redundancies, fragmentation of functions between DGE and the sector ministries; (c) unclear delineation of responsibilities of DGE, the sector ministries, and local environmental inspectorates, and weak monitoring and enforcement at the national and local level; and (d) limited technical and management capabilities to be able to address the major environmental issues of the country. Such constraints would be mitigated by this Project through the provision of technical assistance and training to the newly organized DGE.

1.12 Algeria has enacted a Framework Environmental Law (# 83-3) which provides general principles for environmental management and protection, but enactment of many of its articles has been delayed due to excessive procedural steps and basic design flaws: i.e., the law requires the issuance of specific decrees Industrial Pollution Control Project 5 and up to 85 regulations (25 of which have already been issued) for its application. Among those issued were the EA decree and the decree on air emissions and water discharges standards. While there are good aspects of the law, some parts of it are redundant or contradictory, and many of the law's articles -ave not been applied consistently or do not apply to major sectors of the economy. A review of this law and its related decrees would be undertaken in this project to ensure consistency and coherence with other sector laws, and the new decrees which would be prepared under this project [para. 2.4(b)].

1.13 In 1992, through the annual Budget Law (Loi des Finances), Algeria also established a National Environmental Fund (NEF) to receive earmarked funds of a non-budgetary nature. The key features of this Fund are: (a) it is subject to public budgetary rules and management; (b) its revenue base is made up of para-fiscal taxes, penalties, grants, and state budgetary contributions; and (c) it cannot engage in lending and/or borrowing operations either domestically or abroad. The major source of revenues for this fund has been a pollution tax on industrial installations set up in 1992, which could generate up to DA 125 million (US$2.3 million) a year, but so far only a total of DA 13 million (US$242,000) has been collected because of poor survey and collection methods at the wilaya level. Fund revenues could be used for: (a) monitoring the state of the environment and pollution sources; (b) environmental studies and research; (c) public awareness and education; and (d) grants to environmental NGOs. Since its inception, the NEF has not operated because of a lack of management structure and program of activities. Since the NEF is an important source of revenues for DGE activities, the GOA has requested technical assistance from the Project to make the NEF operational.

1.14 Government Policy and Actions. The Government has a three-pronged strategy for addressing the problem of industrial pollution, consisting of: (a) strengthening the institutional and legal framework, (b) controlling pollution, and (c) putting in place economic incentives. The actions were outlined in a policy letter prepared by the Government (Annex 2), with an attached time schedule for implementing the priority actions. A signed letter was submitted by the Government during negotiations.

1.15 This strategy is manifest in the following actions: (a) establishment of a High Council for the Environment and Sustainable Development (HCEDD), as a national policy-making body, and DGE as the national environmental agency (para. 1.10); (b) strengthening of the environmental functions of the sector ministries; and (c) creation of 48 "inspectorats de l'environnement de wilaya" (IEWs) to replace the 13 regional inspectorates. During pre-appraisal, the Bank was informed that HCEDD had been established by a Presidential Decree # 94-465 in December 1994. The DGE organization chart, had also been approved and was fully consistent with the recommendations of the institutional study, as well as the IEW draft decree.

1.16 The Government has also agreed to include the preparation of a National Environment Action Plan (NEAP) as an integral part of the project. The NEAP would be financed from a METAP grant of US$600,000 and its preparation and implementation would be initiated in tandem with the reinforcement of the institutional and legal framework to be carried out under this project. A NEAP technical brief is provided in the PIP. The legal framework would be also complemented by the priority modification of two decrees: (a) the EA decree (#90-78), which would subject all categories of projects to environmental screening, analysis, or assessments; and (b) the decree on classified establishments (#88-149), which would subject all enterprises to a permit system based on an integrated pollution control approach, and set forth various monitoring and enforcement schemes [see para. 2.4(c)]. Another decree on the handling, transportation, and disposal of hazardous waste is in the final stage of being enacted. The Government has also prepared the management structure and the regulations for making the NEF operational, as first 6 IndustrialPollution Control Project step toward expanding its mandate to become the financial intermediary for all pollution control investments (see para 1.17).

1.17 The Government has also proposed, in its policy letter, the following actions to prevent and control pollution: (a) identifying and setting priorities for actions against severe environmental degradation through audits and least-cost mitigation plans; (b) closing down, to the extent possible, industrial units which are highly polluting, financially non-viable, and unamenable to financial restructuring. An example is ASMIDAL's closure of the two plants producing sulfuric and phosphoric acid. In case closure of other polluting plants is politically unacceptable, the Government would set a maximum term for their continued operation and would finance only environmental investments whose economic payback periods are compatible with their operational periods; (c) adopting integrated pollution control and the "polluter pays" principles; (d) determining, through studies, the necessary incentives for promoting clean technologies; and (e) eventually transforming the NEF into a "Fonds de Depollution et de Protection de l'Environnement" (FDEPE) as an instrument for providing loans and credits for pollution mitigation.

1.18 To effectively implement the present institutional framework, the GOA intends to adopt a three- tiered organization structure which would involve the DGE, the relevant sector ministries, and the 48 IEWs and have the following functions:

(a) The DGE would be the central authority, playing a catalytic role and performing the functions of: (i) submitting for review to the HCEDD as its secretariat, the NEAP, environmental national policies and strategies, and proposed legislation; (ii) ensuring operational and technical coordination; (iii) preparing environmental guidelines and procedures, and reviewing EAs; (iv) negotiating and issuing environmental permits; and (v) providing technical and information services to users.

(b) The sector ministries would strengthen their environmental functions. For example, the Ministry of Industry and Restructuring (MIR) would: (i) assist in the EA preparation in its sectors, (ii) program and review of environmental audits, and (iii) coordinate environmental activities with DGE. The Ministry of Health would undertake health risk assessments and monitoring activities such as toxicity analyses and participation in air and water quality measurements.

(c) The IEW would establish an office in each wilaya to: (i) enforce the laws and decrees and monitor, on behalf of DGE, the status of pollution and natural resource degradation at the local level; (ii) follow up on the implementation of the environmental permits; and (iii) coordinate the environmental activities of the wilaya.

C. Rationale for Bank Involvement

1.19 The Bank's Country Assistance Strategy (CAS), which was discussed at the Board meeting of February 27, 1996, identified three development priorities: (a) stimulating private sector-led growth; (b) protecting the poor; and (c) enhancing the country's ability to mobilize external resources. The CAS also recognized the need to control pollution which has degraded the environment in several geographic areas, and the fact that such pollution control would eventually require Bank and other donors' financial support. This project is consistent with the CAS since it will protect the environment from further deterioration and improve the quality of life of the poor who live in the vicinity of the polluted areas Industrial Pollution Control Project 7

[para. 1.9(a)]. Furthermore, as a prerequisite for private sector growth, the private sector needs to have predictable environmental regulations and liabilities as a basis for the privatization program currently underway. Thus, there is also an urgent need to establish clear and transparent environmental rules and regulations as positive steps towards improving the business climate in Algeria. This project is also consistent with the Bank's three-pronged environmental strategy for the MNA region -- strengthening institutions and participation, arresting emerging pollution, and improving the management of scarce natural resources -- and would reinforce sustainable development by balancing economic, environmental, and social concerns.

1.20 Bank assistance provides a unique opportunity to implement the GOA's environmental objectives and help shape a regulatory and institutional framework, formulate an environmental policy, develop appropriate economic and financial instruments, and arrest critical sources of pollution in Algeria. The project would not resolve all the related institutional issues in Algeria or all the pollution problems of its northeastern region, but rather ensure Government ownership by strengthening the institutional and legal framework and focusing on those pollutants that have severely negative health impacts and therefore justify immediate intervention. The project is an essential step for the Government, which is now committed to addressing pollution problems in a systematic and urgent way. The concerned enterprises are also fully aware of the severe problems and are committed to controlling hazardous emissions and waste generation.

1.21 No industrial pollution cleanup strategies would be effective without addressing the PEs and EPEs in Algeria, particularly in the northeastern region. The GOA has agreed in the Economic Rehabilitation Loan and the Structure Adjustment Loan of April 25, 1996 that ASMIDAL and ENSIDER, which are among the 23 non-autonomous PEs, would be restructured and become autonomous. ENSIDER and ASMIDAL were restructured and became autonomous in March 1995 and April 1996, respectively. ASMIDAL's restructuring was accompanied by the closure of its sulfuric and phosphoric acid plants, which were the major sources of pollution. Such closure was approved by the Council of Ministers on April 18, 1995.

1.22 The GOA has also determined that all PEs and EPEs should bear the costs of cleanup whether they are (or would) become financially viable. These enterprises should have sufficient control over decisions that either pay for themselves (win-win investments through improved resource efficiency) or are necessary to meet the Algerian environmental standards for air emissions and water discharges by internalizing pollution costs through product price adjustments and/or through their profits (Section IV B). The Bank's intervention, including financing of ASMIDAL, is fully consistent with the MNA environmental strategy regarding industrial cleanup in the public sector enterprises. Furthermore, the industrial restructuring in Algeria, as supported by the SAL, would have a significant impact on all the 23 PEs they embark on a restructuring and/or privatization program. The net effect of the restructuring of industry may lead to an improvement of environmental quality. Once in place, this project would strengthen the process of restructuring/privatization.

1.23 Bank involvement would also complement other ongoing and proposed projects in Algeria such as the Water Supply and Sewerage Rehabilitation Project, the Algiers Pollution Control Project, and the Structural Adjustment Loan (SAL), all of which rely on an enhanced capability of environmental management, including the nationwide capacity to carry out environmental impact assessments, enforce environmental regulations, and establish guidelines for environmental liabilities. This is the first self- standing country lending operation in the Maghreb region for industrial pollution control; it would not 8 Industrial Pollution Control Project only contribute to integrated pollution control in Algeria, but would provide an impetus to shift the region's conceptual framework toward designing sustainable investment projects, as required in the MNA environmental strategy, especially for the integrated management of water resources and for arresting the emerging industrial pollution.

II. THE PROJECT

A. Project Design Alternatives

2.1 Three alternatives were used for project design: (a) a technical assistance project for strengthening the institutional and legal framework in industrial pollution; (b) a comprehensive investment project to control industrial pollution on a national scale; and (c) an institution-building project supplemented by a limited number of investment-related activities for addressing the most urgent and critical industrial pollution problems. The first two options were considered premature since Algeria does not have the human anai financial resources for monitoring and controlling industrial pollution on a national scale. The third option was found to be the most feasible, since it would ensure Government ownership by strengthening the institutional and legal framework and focusing on those environmental investments, which by their severity and exposure, have a large environmental externality to justify an immediate intervention.

B. Project Objectives

2.2 The project's broad objective is to assist the Government in reducing exposure to hazardous pollution which causes health problems or serious ecological degradation. Its specific objectives are to: (a) strengthen the institutional and legal framework; and (b) initiate an investment program in the industrial sector of Annaba for mitigating the adverse environmental and health effects of pollution.

C. Detailed Project Description

2.3 The project would consist of two main components: (a) the strengthening of the institutional and legal framework component; and (b) the pilot investments component.

2.4 Strengthening the Institutional and Legal Framework (Baseline Cost = US$11.06 million). This component would provide technical assistance, studies, training, office and monitoring and pollution control equipment, and vehicles to support the following four sub-components which are further explained in Annex 3.

(a) Institution Building. The purpose of this sub-component is to strengthen the technical and administrative capacity of: (i) the HCEDD as the cross-sectoral forum for environmental policies and its sub-commissions, both of which would oversee and review, inter alia, the NEAP; (ii) DGE as the national environmental agency responsible for national policies, NEAP preparation, proposing legislation, and ensuring operational and technical cooperation; (iii) the sector ministries of Industry and Restructuring (MIR) and Health (MOH) and the National Planning Council (Conseil National de la Planification- CNP) for assisting in EA and audit preparation in the sectors; preparing health risk assessment (MOH), and environmental planning (CNP); and (iv) the IEWs in Annaba, Skikda, Constantine, Algiers, and Oran to undertake monitoring and enforcement Industrial Pollution Control Project 9

activities. This sub-component would also finance on the promotion and introduction of clean technology. Detailed terms of references (TORs) were developed for and agreed by the ministries and the DGE in order to ensure the coordinated implementation of this sub-component.

(b) Enhancement of the Legal and Regulatory Framework. The purpose of this sub- component is to provide the GOA with the administrative, management, and technical tools to: (i) review, update, and modify the most important legal texts and regulations derived from the framework environmental law and eliminate overlaps and contradictions; (ii) apply the modified Environmental Assessment (EA) decree as an effective policy instrument and develop the appropriate procedures and sector guidelines; (iii) issue and adopt the modified decrees for the classified establishments, including the issuance of environmental permits and training and technical assistance for handling the transport of hazardous waste; and (iv) undertaking a study on environmental liabilities. The policy letter attached in Annex 2 provides assurance of GOA's commitment to enact the modified decrees.

(c) Design and Implementation of a System for Monitoring and Enforcement. The purpose of this sub-component is to design and implement the environment permit system on a pilot basis in Annaba and Skikda. On the basis of the modified decree on classified establishments (para. 1.16), an environmental permit would be issued after negotiation between the DGE/IEW and each establishment. This permit would determninea ceiling on the pollution amount that each establishment would be allowed to discharge in a given medium by determining local environmental guidelines, as well as a program (when necessary) for reducing the total pollution load over a specific time, consistent with the technology used and the financial status of each establishment. With this sub-component, DGE and the corresponding IEW should be able to monitor the pollution contracts and test a series of enforcement measures and financial incentives to mitigate pollution in an integrated manner.

(d) Activating the National Environmental Fund. The purpose of this sub-component would be to make the NEF operational and then expand its role into an effective instrument of environmental financing as a FDEPE (para. 1.17). This sub-component would finance two studies on activating the NEF and establishing the FDEPE and on the development of economic incentives. It is expected that the FDEPE would be the financial intermediary and would provide loans and credits from GOA contributions, future Bank loan proceeds, international donors, and environmental taxes and fees whenever they are legally established. The Government has agreed that FDEPE would be established on January 1. 1999.

2.5 The Pilot Investments Component (Baseline Cost = US$92.19 million). This componentwould cover environmental investments in the fertilizer complex in ASMIDAL and in the iron and steel complex of ENSIDER. These investments were specifically selected to: (a) demonstrate that they can minimize a major environmental impact (both enterprises contribute to emissions, health, and environmental damage); (b) be economically viable; (c) optimize improvements of environmental benefit per unit of investment; and (d) be carried out by a financially viable enterprise. On the basis of these selection criteria, each sub-component was designed to include technical assistance and training for plant 10 Industrial Pollution Control Project housekeeping and operation and health and safety measures, as well as the necessary pollution abatement investments. Detailed environmental audits, provided in the project files, were financed by the Japanese PHRD fund, and formed the basis of these environmental activities in ASMIDAL and ENSIDER, as described below. Annex 1 provides a summary description of the activities, which the Bank loan would fund at an estimated US$67.5 million.

(a) ASMIDAL-Annaba. The purpose of this sub-component is to reduce SO 2, NOx, and dust emissions (phosphate, ammonium nitrate) into the atmosphere and to totally eliminate phosphogypsum discharges. The major investments are: (i) closure, demolition, and decontamination of the sulfuric and phosphoric acid plants and importing during the first year, phosphoric acid and/or mono-ammonium phosphate (MAP) to compensate for the production losses resulting from decline in activity in these two plants; (ii) rehabilitation of Annaba's port facility to import and store raw materials for ASMIDAL; (iii) rehabilitation of the gas treatment system in the nitric acid plant nitrate unit; (iv) installation of a scrubber or granulator in the ammonium nitrate plant; (e) rehabilitation of the granulation units for the production of nitrogen-phosphate- potassium (NPK), and tri-super phosphate fertilizers; (v) technical assistance and training for plant operation and for improving workers' health and safety; and (vi) purchase of spare parts. The estimated investment costs are US$59.8 million, of which the Bank loan would finance US$35.0 million. Prior to Board Presentation, the Government submitted a restructuring plan including closure of the sulfuric and phosphoric acid plants. The demolition dates for these two plants are December 31. 1997 and June 30. 1998. respectively. The demolition dates would be a dated covenant.

(b) ENSIDER-Annaba. The purpose of this sub-component is to reduce emission of dusts, ammonia, and VOCs in the atmosphere and reduce industrial discharges into the Seybouse River. The major investments are: (i) the installation or rehabilitation of dust removal systems for the electric arc furnace, sintering plants, and blast furnaces and installation of a door cleaning system in the coke ovens; (ii) construction of two waste water treatment plants, for the blast furnace and for the general wastewater; (iii) installation of a boiler for ammonia distillation; (iv) renovation of the biological waste water treatment plant; (v) establishment of an environmental laboratory for pollution monitoring; (vi) purchase of spare parts; and (vii) institutional strengthening. The estimated investment cost is US$46.76 million, of which the Bank loan would finance US$32.5 million.

D. Project Costs

2.6 The estimated cost of the project is DA 6.3 billion, or US$118.1 million. The foreign exchange component of DA 5.1 billion, or US$95.3 million, represents 81 percent of total costs. These estimates are based on early 1996 prices and exclude taxes and duties, which are estimated to be 15-20 percent. Detailed cost estimates by component and sub-component are provided in Annex 4, which includes the assumptions on which physical and price contingencies have been based.

2.7 Table 2.1 below shows a breakdown of project costs by components and sub-components. Industrial Pollution Control Project 11

Table 2.1: Project Cost Summary3

(DA in Millions) (US$ in Millions) % % Local Foreign Total Local Foreign Total Foreign Total Base Exchange Costs A. Institutional and Legal Framework Strengthening

1. Institutional strengthening 96.12 413.49 509.61 1.79 7.70 9.49 81 9 2. Legal strengthening 5.91 10.74 16.65 0.11 0.20 0.31 65 0 3. Monitoring and Enforcement 5.91 32.76 38.67 0.11 0.61 0.72 85 1 4. National Environment Fund 12.35 16.65 29.00 0.23 0.31 0.54 57 1

Sub-total A 120.29 473.64 593.93 2.24 8.82 11.06 80 11

B. Pilot Investments

1. ASMIDAL 371.60 2,501.88 2,873.48 6.92 46.59 53.51 87 52 2. ENSIDER 540.22 1,536.89 2,077.11 10.06 28.62 38.68 74 37

Sub-total B 911.82 4,038.77 4,950.59 16.98 75.21 92.19 82 89

Total BASELINE COSTS 1,032.11 4,512.41 5,544.52 19.22 84.03 103.25 81 100 Physical Contingencies 90.75 401.68 492.43 1.69 7.48 9.17 82 9 Price Contingencies 102.57 202.45 305.02 1.91 3.77 5.68 66 6 Total PROJEC1 COSTS 1,225.43 5.116.54 6,341.97 22.82 95.28 118.10 81 114

E. Financing Arrangements

2.8 The Borrower of the IBRD loan of US$78.0 million would be the Government of Algeria. An amount of US$10.5 million would be allocated to the institutional and legal framework component. The pilot investments component, for which US$67.5 million would be allocated, would be financed through subsidiary loan agreements denominated in US dollars. Acting as an agent of the Algerian Treasury, the Banque Algerienne de Developpement (BAD) would make funds available to ASMIDAL and ENSIDER at the Bank standard variable interest rate. Reimbursements would have a maximum ten-year repayment period, including three years of grace. ASMIDAL and ENSIDER would assume the foreign exchange risk.

2.9 The IBRD loan would finance 100 percent of the total foreign exchange cost and 85 percent of the local costs of the institutional and legal framework component, and approximately 92 percent of the total foreign exchange cost of the pilot investments. GOA would finance part of the local costs of the first component estimated at US$1.76 million. ASMIDAL and ENSIDER would cover most of their own local costs, estimated at US$17.08 million and the balance of foreign costs, estimated at US$21.26 million, through intemal cash generation. Retroactive financing, not exceeding 10 percent of the Bank's loan, can be provided for expenditures incurred within three months of the signing date. Table 2.2 below provides a detailed breakdown of the financing scheme.

3/ The Projectcost is exclusiveof taxes and duties. 12 Industrial Pollution Control Project

Table 2.2: Project Financing Plan

(US$ million)

IBRD GOA Enterprises TOTAL

A. Institutional and Legal Framework Component 1. InstitutionalBuilding 8.74 1.76 - 10.50 2. Legal Framework 0.35 - - 0.35 3. Monitoringand Enforcement 0.81 - - 0.81 4. National EnvironmentFund 0.60 - - 0.60

Sub-total A 10.50 1.76 - 12.26

B. Pilot Investments 1. ASMIDAL 35.00 - 24.08 59.08 2. ENSIDER 32.50 - 14.26 46.76

Sub-total B 67.50 - 38.34 105.84

Total 78.00 1.76 38.34 118.10

* The project cost is exclusiveof taxes and duties.

III. PROJECT ORGANIZATION AND IMPLEMENTATION

A. Project Implementation

3.1 The proposed project would be implemented over a period of approximately eight years and is expected to be completed by December 31, 2004, and closed by June 1, 2005. DGE in MICLE would be the implementing agency for this project. Since its preparation, the project has been coordinated by an inter-ministerial committee for coordination and follow-up (Comite National de Coordination et de Suivi), which is chaired by DGE and includes representatives of the ministries of Health, Finance, and Industry and Petroleum, and of the National Planning Council. This Committee would provide overall policy guidance, review work programs, and resolve any inter-ministerial implementation issues on relating to this project. During pre-appraisal, the Government submitted to the Bank a signed inter-ministerial decree establishing this committee.

3.2 A Project Implementation Unit (PIU) has been established within DGE, and consists of a full-time project manager and competent technical and administrative staff. The PIU would be responsible for Industrial Pollution Control Project 13 interface between the Bank and DGE. During pre-appraisal, the Govemment submitted the names of the technical staff of the PIU, which were acceptable to the Bank. The PIU would assist DGE in the day-to- day management of the institutional and legal component, review and approve the conventions (stipulating emissions levels, monitoring indicators, and reporting requirements) to be signed between the enterprises and coordinate the work of the different investments sub-components.

3.3 The pilot investments component of this project would be managed by the individual enterprises in close cooperation with DGE and IEW. On the basis of the audits performed, least-cost mitigating plans were prepared with the appropriate package of investments, training, and technical assistance. Each enterprise would be required to prepare two documents: a subsidiary loan agreement to be negotiated and signed with the Treasury, and a convention to be signed with DGE and to include the pollution levels authorized, and monitoring and reporting requirements that ASMIDAL and ENSIDER should fulfill. Each enterprise would be responsible for its own procurement. DGE and its PIU would maintain regular contacts with each enterprise and ensure adherence to its implementation and procurement plans. GOA has agreed to submit, as a condition of effectiveness. the signed subsidiary loan agreements for ASMIDAL and ENSIDER.

B. Procurement

3.4 All procurement of works and goods financed under the proposed Bank loan would be carried out in accordance with the Bank's Guidelines. The Bank would provide Standard Bidding Documents (SBDs), which were agreed during negotiations. The PIU, on behalf of the beneficiaries of the institutional and legal framework component, would be responsible for the procurement of vehicles and laboratory and computer equipment, with a total estimated value of US$3.5 million under International Competitive Bidding (ICB), US$0.5 million under National Competitive Bidding (NCB), and US$0.3 million under National Shopping (NS). Each enterprise would carry out its own procurement, comprising mainly highly specialized industrial production equipment with a total estimated value of US$49.0 million under ICB. Project equipment represents 75.6 percent of works, goods and services to be financed from the Bank loan. Purchase of raw materials and spare parts for ASMIDAL will be carried out under International Shopping (IS) for an amount not to exceed US$3.8 million and US$3.4 million, respectively. National Competitive Bidding (NCB) would be used to procure civil works for demolishing the sulfuric and phosphoric acid plants, with a total estimated value of US$2.38 million. For ENSIDER, individual contracts below US$0.3 million for specialized/proprietary equipment would be eligible for procurement under direct contracting (DC) for up to an aggregate amount of US$2.8 million, and national shopping (NS) for up to an aggregate amount US$0.4 million. Proposed procurement arrangements by component are depicted in Table 3.1.

3.5 Consultants for various assignments would be recruited in accordance with the Bank's Consultant Guidelines. Their terms of reference would be subject to prior review by the Bank. Technical assistance and training for the four institutional and legal framework sub-components would be consolidated into two packages of US$5.6 million and US$0.6 million. One package would cover the institution building, enhancement of the legal framework, and the design of a system for monitoring and enforcement; the other would cover the activation of the NEF. During appraisal, the Bank reviewed and approved TORs for these two packages, described in the PIP. The consulting firm selected for the first package could also act as a procurement service agent for assisting the DGE in preparing the equipment specifications, bidding documents, supplier lists, and follow-up on the shipment and installation of equipment. 14 Industrial Pollution Control Project

Table 3.1: Summary of Proposed ProcurementArrangements (USS million) ProcurementMethodl ICB"' NCB" OTHERdy NBF" TOTAL

Project Components A. Institutional& Legal Framework

- Vehicles& Equipment 3.50 0.50 0.30 4.30 (3.50) (0.50) (0.30) (4.30)

- ConsultantServices 6.20 6.20 and Training (6.20) (6.20)

- RecurrentCosts 1.76 1.76

Sub-total 3.50 0.50 6.5 1.76 12.26 (3.50) (0.50) (6.5) (10.50) B. Pilot Investments

ASMIDAL

- Civil Works 2.38 1.19 3.57 (1.90) (1.90)

- Equipment 21.20 0.40 7.20 20.45 49.25 (21.20) (0.40) (7.20) (28.80)

- ConsultantServices 4.30 4.30 (4.30) (4.30)

- Social Cost 1.96 1.96

Sub-total 21.20 2.78 11.50 23.60 59.08 (21.20) (2.30) (11.50) (35.00) ENSIDER

- Civil Works 2.19 2.19

- Equipment 27.80 3.20 12.07 43.07 (27.80) (3.20) (31.00)

- ConsultantServices 1.50 1.50 (1.50) (1.50)

Sub-total 27.80 4.70 14.26 46.76 (27.80) (4.70) (32.50)

TOTAL 52.50 3.28 22.70 39.62 118.10 (52.50) (2.80) (22.70) (78.00) al Figures in parenthesisare the respectiveamounts financed by the Bank. Amountsinclude contingencies. b/ ICB = IntemationalCompetitive Bidding. c/ NCB = National CompetitiveBidding. dl This category includesconsultant services and training(US$12.0 million), InternationalShopping (USS7.2 million), National Shopping (USS0.7million), and Direct Contracting(USS0.8 million). e/ NBF denotesnon-Bank financing.

3.6 All contracts for civil works above a threshold of US$0.3 million and for goods above a threshold of US$0.3 million, as well as appointments of consulting firrns above US$0.1 million and individual consultants above US$0.05 million, would be subject to prior Bank review. This would result in prior review of more than 95 percent of Bank-financedgoods and services. All other contracts would be subject IndustrialPollution Control Project 15 to a posteriori review by the Bank. To initiate and accelerate the procurement of technical assistance, training, and equipment, DGE would be allowed to engage the services of individual consultants for a total amount not to exceed US$0.3 million. Similarly, they could purchase office and laboratory equipment, field vehicles, and materials and supplies using NS procedures for a total amount not to exceed US$0.3 million and NCB for a total amount not to exceed US$0.5 million.

C. Disbursement

3.7 The Bank loan would be disbursed, as shown in Table 3.2, against: (a) 100 percent of foreign expenditures of imported equipment and materials; (b) 100 percent of local expenditures (ex-factory costs); 80 percent of shelf items procured locally; (d) 100 percent of total expenditures for the consulting services and staff training for the institutional and legal framework component, ASMIDAL's and ENSIDER's management improvement program, and institutional strengthening of ENSIDER; and (d) 80 percent of plant demolition works for ASMIDAL allocated in the IBRD loan. 16 Induzstrial Pollution Control Project

Table 3.2: DisbursementPlan Category Amount Percentageof (US$ Million) Expendituresto be Financed 1. Consultant Services and Training 100

(a) Strengtheningthe 6.2 Institutionaland Legal Framework

(b) Technical Assistance 4.3 and Training for ASMIDAL

(c) Technical Assistance 1.5 and Training for ENSIDER

11. Goods IOOF/IOOLE/80La/

(a) Vehicles and Equipment 4.3 for Institutional and Legal Framework Component

(b) Equipment for 25.0 ASMIDAL

(c) Import of Raw 3.8 Materials for ASMIDAL

(d) Equipment for 3 1.0 ENSIDER

111. Civil Works 1.9 80 Demolition of Sulfuric and Phosphoric Acid Plants

TOTAL 78.0

a/ F = Foreign expenditures;LE = Local expenditures (ex-factory); L = Local expenditures fbr other items procured locally.

3.8 To facilitate prompt payments to suppliers and consultants, the Bank would advance funds to establish and replenish one Special Account (SA) at the Central Bank of Algeria. The SA would be denominated in US Dollars for an amount of US$4.0 million and used to cover the Bank's share of eligible expenditures in both local and foreign currencies over a period of four months. The Special Account would be replenished monthly upon receipt of replenishment applications submitted with appropriate supporting documentation, or when approximately one-third of the maximum amount allowed has been spent, whichever comes first. Monthly bank statements of the Special Account would accompany replenishment requests. Withdrawals against contracts for goods and works valued below US$300,000 equivalent, for contracts with consulting firms valued below US$100,000 and for individual consultant contracts valued below US$50,000 would be presented to the Bank for payment on the basis of statements of expenditure (SOEs). The disbursement schedule is summarized in Table 3.3 below. Industrial Pollution Control Project 17

Table 3.3: Disbursement Schedule

Bank Group Fiscal Year ------(USS million)------1997 1998 1999 2000 2001 2002 2003 2004 Annual 1.5 6.0 12.8 18.7 12.5 15.6 7.8 3.1 Cumulative 1.5 7.5 20.3 39.0 51.5 67.1 74.9 78.0

D. Reports

3.9 The PIU would submit a quarterly progress report to the Bank and an implementation completion report within six months following the loan closing date. The quarterly progress report would cover: (a) status of procurement of civil works, equipment, and services, including revised timing of procurement actions such as bidding and contract awards; (b) investment expenditures to date and estimates of costs for remaining works, goods, and services; (c) progress towards compliance with output and environmental indicators (Annex 5); and (d) implementation of technical assistance programs and procurement carried out by DGE, ASMIDAL, and ENSIDER in accordance with the implementation schedule in Annex 6.

E. Accounts and Audits

3.10 The GOA and each of its executing agencies would provide Bank staff with access to all financial reports necessary to assess implementation progress, monitor compliance with loan conditions, ensure proper use of Bank loan proceeds, and assess the continuing financial viability of participating public enterprises. The Financial Comptroller's Office (Inspection Generale des Finances) within the Ministry of Finance would carry out an annual audit of the project account, including the Special Account and the statements of expenditure, pertaining to the institutional and legal framework strengthening component. In addition, each enterprise would engage independent auditors (Commissaires aux Comptes) acceptable to the GOA and the Bank to carry out annual audits of its income statement, balance sheet, and statement of sources and uses of funds. All audits are to be carried out in accordance with international standards, and terms of reference for private firms would be subject to the Bank's prior review. Certified copies of all audited accounts would be submitted to the Bank not later than nine months following the close of the Borrower's fiscal year, i.e., June 30 of each year.

F. Supervision

3.11 During the first year of implementation, the Bank plans to send three supervision missions; subsequently, two missions a year would suffice to supervise all activities. Following Board approval of the loan, the Bank and DGE would jointly organize a workshop to orient key staff of the PIU, ASMIDAL, and ENSIDER and all other agencies in the application of Bank Guidelines and procedures for procurement and disbursement, the Operational Plan (OP). It is anticipated that the supervision effort would require about 40 staff-weeks during the first year and 30 staff-weeks per year thereafter. The missions would be staffed by an environmental economist, financial analyst, and one or more technical specialists in environment-related fields, depending on the nature and scope of the immediate implementation issues. The missions would focus on reviewing progress on the procurement, installation, and operation of major investments in plant equipment; status of the DGE and the enterprises' compliance with monitoring indicators (Annex 5) and the implementation schedule (Annex 6); the enterprises' 18 Industrial Pollution Control Project financial position; their maintenance programs; and the availability of spare parts. Local consultants may carry out supervision missions as needed, especially to oversee technical assistance and training sub- components. Not later than July 1, 2001, the GOA and the Bank would carry out ajoint mid-term review of project implementation. This review would, inter alia, identify and enforce remedial measures, if any, needed to carry out project objectives and would focus on the progress made towards compliance with the performance indicators. G. Environmental Impact

3.12 The project falls within category "B" according to the classification in OD 4.01 A health risk assessment, air and water quality measurements, and detailed environmental audits for ASMIDAL and ENSIDER were also prepared to form the basis for mitigation plans included in the project's respective investment sub-components.

H. Sustainability

3.13 Three major factors are expected to contribute to the sustainability of the project: (a) a credible enforcement threat; (b) an examination of the incentive structures to enhance both pollution prevention and mitigation; and (c) the internalization of the investments costs by the polluting enterprises. The credibility of the enforcement threat is enhanced through the project's institutional and legal framework component and Government ownership and commitment to strengthen and enforce the law and to help establish self-monitoring and enforcement at the local and plant levels. At the national level, in addition to having elevated the State Secretariat of the Environment to a cabinet-level position, the HCEDD, the national policy making body, would also ensure that environmental concems are addressed and integrated into the country's socioeconomic development agenda. The preparation of the NEAP would be an effective mechanism to set long- and short-term priorities recognizing the resource constraints. The reorganization of the DGE, the establishment of environmental management units at the sector ministries, and the IEWs would ensure that the EA reviews, monitoring, and enforcement are institutionalized at the national and local levels. In terms of the second factor, the GOA's policy letter (para. 1.14) includes the establishment of economic and financial incentives as essential instruments for pollution prevention. The implementation of the provisions of the NEF would ensure that all polluting enterprises are assessed pollution taxes in accordance with the Budget Law of 1992 (para. 1.13). Strengthening the enforcement of this law would enhance the revenue base and would generate adequate resources for the implementation of the environmental priority programs. In addition, the transformation of the NEF into an efficient financial intermediary for environmental financing (FDEPE) would include the adoption of economic instruments and lending for environmental prevention and mitigation consistent with the "polluter pays" principle.

3.14 The project's financial sustainability, in large measure, would be predicated on the ASMIDAL's and ENSIDER's capacity to generate sufficient resources to self-finance part of their investments in plant and equipment and to repay the investment loans throughout the life of the project and beyond. ENSIDER and ASMIDAL have undergone financial restructuring culminating in full managerial and financial autonomy (para 1.21). In the early 1990s, both ENSIDER and ASMIDAL incurred sizeable deficits. These were the result of the need to borrow through the overdraft facility of the local banking system to meet an increasing foreign debt service in the face of a rapidly devaluating dinar.

3.15 ENSIDER's management has requested complementary measures to further enhance its financial position. The salient features of the plan are DA 13 billion dinar (US$242 million) in recapitalization and Industrial Pollution Control Project 19 debt rescheduling. With respect to ASMIDAL, the central feature of company's proposed financial restructuring plan is the forgiveness of DA20 billion (US$372 million) in local debt. The financial projections in Annex 7 are consistent with ASMIDAL's proposal.

3.16 The likelihood of the project's financial sustainability is linked to both the country's economic stability and the enterprises' ability to compete in a market economy. Such economic stability is predicated on the progress to be achieved under the wide ranging stabilization program (para. 1.2). The restructuring of ASMIDAL and ENSIDER, as pre-conditions, coupled with a package of enviromnental improvement in terms of good housekeeping, improved management, training, and targeted investmnents were designed to ensure improvement in environmental quality. The net effect, however, would lead to healthier price competition and quality products, since this project is expected to help facilitate the transition to a market economy. Annex 7 describes the actual and envisaged financial perfonnance of ENSIDER and ASMIDAL.

IV. PROJECT JUSTIFICATION

A. General

4.1 The purpose of this project is to assist the GOA in reducing industrial pollution, which is causing serious health problems and ecological degradation in the northeastern part of the country, and to enhance the Government's capacity to sustainable manage environmental problems. A broad range of benefits are expected, including reduction in air pollution, protection of surface and groundwater resources, protection of coastal waters and marine resources, protection of ecological values, and improvements in economic efficiency (including better management, more efficient use of resources, and better product quality). In addition, because of the location of the industries within urban areas and on the coast, other benefits from the project include improvements in amenity and other non-use values, and an overall healthier living environment for the people of the region. However, because of lack of data and methodological complexities, only a small number of these benefits are quantifiable, namely human health improvements from reduced dust emissions and some productivity improvements. On this basis alone, the project is economically viable, as demonstrated below, and explained in Annex 8.

B. Internalization of the Pollution Abatement Cost

4.2 Assessment of the project's financial viability has been predicated on the capacity of each PE to internalize its pollution abatement costs, i.e., its capacity to (a) incur and service the resultant additional debt, and (b) generate sufficient resources internally to finance part of and maintain environmental investments under the project. ASMIDAL's financial projections have been based on conservative price and production estimates that show an improvement in the debt service coverage ratio from 0.4 in 1994 to 1.6 in 1997, when the company would have an operating revenue of DA 2.3 billion (US$42.8 million) adequate to cover a debt service expected to reach DA 2.1 billion (US$39.1 million). ENSIDER's financial projections have been based on the company's financial restructuring plan. These projections show an increase in the debt service coverage ratio from 0.3 in 1994 to 1.5 in 1997. Similarly, the company's expected operating revenue in 1997 of DA 7.6 billion (US$141 million) would cover the annual debt service, expected to reach DA 5.7 billion (US$106 million). Financial projections for the two enterprises are shown in Annex 7. 20 Industrial Pollution Control Project

C. Least-Cost Solutions

4.3 Investments to strengthen the institutional and legal framework, including technical assistance, are not amenable to conventional economic analysis because of the difficulty of evaluating benefits. However, these investments have been qualitatively evaluated and represent a key element in the sustainability of overall project benefits. Economic analysis has been carried out on the pilot investments component of the project, representing 89 percent of project expenditures. For investments undertaken by ASMIDAL and ENSIDER, a least-cost (in the case of process-type solutions) or cost-effective (in the case of end-of- pipe solutions) approach has been used consistently to evaluate technical alternatives of pollution mitigation. In each case, a detailed environmental audit was used to determine the pollution sources and emission levels, as well as the technical alternatives.

D. Project Benefits

4.4 The institutional and legal framework strengthening component is expected to increase capacity for policy formulation, monitoring, and enforcement. This added capacity would doubtless increase public expenditures to some degree, but it would yield major benefits in terms of contributing substantially to lowering the current social cost of environment and natural resource degradation, keep future costs in check, and reduce the inefficiencies of the country's fragmented system of environmental protection. The second component would produce several major benefits: (a) for the local populations of Annaba, relief from pollution, with positive impacts on the quality of their lives, particularly for children; (b) from a public expenditure point of view, a lower health cost bill, with additional savings on education, workers' compensation, productivity losses, and special interventions (pollution accidents); and (c) for ASMIDAL and ENSIDER, although not the primary focus of the project, improvements in energy efficiency, production efficiency, and product quality, resulting in lower worker exposure and better management and safety. Following mitigation actions proposed in para. 2.5, concentration of pollutants in ambient air would decrease. This decrease would be most prominent at the point sources; however, concentrations would drop in the whole region. Modeling based on the proposed mitigation measures gives the following average reduction for the Annaba region (rounded figures):

Particulates 45 percent SO, (sulfur dioxide) 65 percent NH, (ammonia) 10 percent VOC (volatile organic compounds) 25 percent NOx (nitrogen oxides) 5 percent

E. Economic Evaluation

4.5 The overall Project justification is based on its pollution reduction benefit rather than on purely economic benefits. Although the environmental benefits are not all quantifiable, particularly those related to human health impacts, a partial cost-benefit analysis was undertaken comparing total investment costs to savings due to reduction in air pollution. Using a dose-response model, which provides a relationship between health impacts and changes in concentration levels of total suspended particles (TSP) of a major pollutant, it was estimated that if TSP were maintained at its current level (of 2-4 times WHO norms) in the Annaba region, it would result in 246 deaths, 2.9 million days of reduced activity due to sickness, 27,300 asthma attacks, and 9.2 million respiratory symptoms per year. Morbidity alone represents a total annual cost to society of DA 1.4 billion (US$26.0 million); this cost can be broken down into: (a) direct Industrial Pollution Control Project 21 annual cost linked to treatment of pathologies attributable to pollution, estimated at DA 514 million (US$10.0 million); and (b) annual indirect costs due to loss of productivity from reduced activity, estimated at DA 868 million (US$16.0 million). The morbidity cost alone represents the low estimate of the total social cost. On this basis, an eight-year investment program in the Annaba region, costing on average US$8.5 million per year (for a total of US$67.5 million), would result in lowering TSP levels to WHO standard levels and consequently provide benefits of at least US$26.0 million, corresponding to a saving of over US$13.0 million per year for the next ten years.

4.6 The economic evaluation of the pilot investments component of the project includes savings in health costs and productivity losses as the primary benefit, as well as improvements in production capacity and quality as a by-product. Clearly, because all the benefits are not quantifiable, economic rates of return (ERR) cannot be usefully determined for each enterprise. In the case of ENSIDER, although all the investments are end-of-pipe, dust reduction will allow a more efficient use of the electric arc furnace, resulting in productivity enhancement: thus, the economic justification of the investment is mostly based on improvements in environmental quality. Since ENSIDER contributes about 90 percent of TSP, this corresponds to an ERR of 49 percent using ENSIDER's investment cost and a yearly benefit strearn of 90 percent of total social cost. In the case of ASMIDAL, project environmental benefits cannot all be estimated; however, avoided TSP pollution and process efficiency are used to compute an ERR of 29 percent.

F. Social Impacts

4.7 The project would have positive social impacts through reduction of exposure of the local populations to industrial pollution. In the case of Annaba, the villages of El-Bouni and Sidi-Ammar, which are exposed to significant industrial pollution sources, are among the lowest income groups in the wilaya. Because these populations have less disposable income and live in lower quality conditions, the project can only contribute to improving their welfare.

4.8 The potentially negative social impact of the project, affecting 210 workers, relates to the gradual closure and demolition of ASMIDAL's phosphoric and sulfuric acid plants [para. 2.5(a)]. This may result in a gradual reassignment of workers, though it would not be entirely due to the closure of these two units per se, but to the financial restructuring of the enterprise and its reorganization in accordance with the financial audit performed under the Bank's Enterprise and Finance Structural Adjustment Loan. In the restructuring plan that ASMIDAL has prepared, a 50 percent reduction in the work force is anticipated by 1999, at both complex locations in Annaba and Arzew. Until the total reorganization is in place, the project has included the following mitigating actions: (a) during the first year, the current work force would be involved in the decontamination and demolition of the two acid units; and (b) after the second year, part of the work force would be reassigned to the two NPK units whose production capacity would increase after they are rehabilitated. In addition, the proposed Bank loan allocation for ASMIDAL includes US$4.3 million for training and technical assistance for management and workers and would involve workers' retraining as necessary. The project has also included, as part of the GOA contribution, a two-year compensation benefits package in accordance with Algerian labor laws in the event workers are transferred to another ASMIDAL facility in Arzew, are dismissed, or leave because of early retirement. The Bank has received written confirmation from the Government that the closure of the phosphoric and sulfuric acid plants was made public through the press and TV. ASMIDAL's management has confirmed in writing to the Bank that the workers' syndicate in Annaba was officially informed of the Council of 22 Industrial Pollution Control Project

Ministers decision to close the plants (para. 1.21) and that a social plan, as part of the enterprise restructuring, has been prepared for the total reorganization of the ASMIDAL complexes.

V. THE GOVERNMENT'S PARALLEL PROGRAM IN SKIKDA

5.1 In parallel with the preparation of this project, the Government has prepared, with the Bank's assistance, a parallel pollution program for the wilaya of Skikda. The progran would eliminate mercury emissions in the industrial areas of Skikda and would resolve the issues of hazardous solid wastes stored in the different wilayates of the northeastern region. Two sub-projects were proposed:

5.2. ENIP-Skikda. The purpose of this sub-project is to eliminate mercury pollution. This includes the safe disposal of mercury-contaminated sludges currently stored on site. The major investments entail: (a) changing over to a membrane process for chlorine production; (b) mercury decontamination in the existing plant; (c) constructing a landfill on the plant premises for the stockpiled mercury-contaminated sludge, in accordance with international standards; and (d) technical assistance and training for plant operators.

5.3 Storage and Disposal Facility for Hazardous Waste: Skikda. The purpose of this sub-project would be to construct a hazardous waste disposal site that conforms to internationally accepted standards for performance and environmental impacts. This landfill would serve the northeastern region. It would have a capacity of 6000 t/y in addition to the 7000 t of existing stockpiles. It would have a life of 20 years. The major actions include: (a) site characterization and geotechnical studies; (b) construction; and (c) management of the landfill. The landfill site belongs to the Government.

5.4 The estimated cost of these two sub-projects, derived from the feasibility studies, is US$68.3 million, of which the Government has solicited concessional loans for US$42.5 million to cover the foreign exchange costs. The European Investment Bank has agreed in principle to allocate $40.0 million for ENIP's investment. The Government is also seeking additional financing for the hazardous waste disposal and storage facility.

VI. EXPECTED BENEFITS AND RISKS

6.1 The major benefits of this project are the reduction in environmental degradation and its consequent impacts on human health. The institutional component, a prerequisite for any effective pollution control program, would strengthen the national and local capabilities in the design, monitoring, and enforcement of appropriate policies and regulations. The pilot investments component would contribute substantially to the reduction of hazardous emissions and waste in the northeastern region and would achieve both pollution reduction and improvement in operational efficiency through the use of cleaner technology and waste minimization. As a whole, the project is expected to contribute to social cohesion in Annaba, since the public and local NGOs have been calling for a solution for many years.

6.2 The major risks to project implementation fall under the following categories:

(a) Managerial. The project is institutionally complex, since it involves multiple agencies and two PEs. Although this risk is inevitable in an environmental operation involving both institutional and pilot investments components to reduce large environmental externalities, this risk has been mitigated by: (i) setting up a PIU and an inter-ministerial Industrial Pollution Control Project 23

committee to oversee project implementation; (ii) limiting project execution and scope to four ministries for the institutional component and to two enterprises for the pilot investments component; and (iii) establishing terms of reference for the concerned ministries and project agreements with the enterprises.

(b) Technical. The key risk is that ASMIDAL and ENSIDER may not be able to undertake all the environmental activities contemplated in their respective sub-components. This risk has been reduced by: (i) involving the senior management of the enterprises in preparation of the mitigation plans; and (ii) strengthening the enforcement entities, in particular, DGE and the IEW in Annaba, so that they would be able to enforce compliance with the signed environmental conventions.

(c) Political Situation in Algeria. The current situation in Algeria could delay implementation of the project. This risk would be partly mitigated as follows: (i) the technical assistance element would rely primarily on local consultants, with the provision of international consultants limited to very specialized skills, which would only be needed after the second year of the project; (ii) the training element was also designed to allow for overseas training in case local training could not be undertaken; (iii) civil works would be undertaken by local firns; and (iv) project supervision could be carried out by the same consultants from the Maghreb countries who assisted in project preparation.

VII. AGREEMENTS REACHED AND RECOMMENDATION

7.1 The following agreements were reached with the Government during negotiations:

- The Government, in collaboration with the Bank, would carry out a mid-term review by July 1, 2001 to assess project progress on the basis of agreed indicators (para 3.11).

7.2 Conditions for Board Presentation would be the submission of a restructuring plan for ASMIDAL including the closure of the sulfuric and phosphoric acid plants (para. 1.21).

7.3 Conditions for Effectiveness would be the submission of signed subsidiary loan agreements between the Treasury and each of the two PEs (para. 3.3): ASMIDAL and ENSIDER.

7.4 The proposed dated covenant for the demolition of ASMIDAL's sulfuric acid plant is December 31, 1997 [para. 2.5(a)].

7.5 The proposed dated covenant for the demolition of ASMIDAL's phosphoric acid plant is June 30, 1998 [para. 2.5(a)].

7.6 The proposed dated covenant for the establishment of the FDEPE is January 1, 1999 [para. 2.4(d)].

7.7 Financial covenants would require that ASMIDAL and ENSIDER maintain a debt service coverage ratio of at least 1.5. 24 Industrial Pollution Control Project

7.8 Recommendation. Subjectto the above conditions,the proposed project is suitable for a Bank loan of US$78.0 million equivalentfor a term of 17 years, including5 years of grace and at the standard variable interest rate. Annex 1 Page 1 of 11

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

ENVIRONMENTAL SITUATION IN ANNABA

I. BACKGROUND

A. The Pollution Situation in Algeria

I. The World Bank's review of the environmental management issues in Algeria indicates that industrial pollution constitutes a major part of the total pollution in the country. The main polluting industries are the petrochemical and chemical industries, mining and ore processing, and the metallurgy and manufacturing industries. The largest concentration of industrial activity is found in the northern coastal belt, a densely populated part of the country, which makes up only 1.7 percent of the total area of Algeria. Most of the polluting industries are concentrated in and around the major urban centers of Algiers, Oran, Annaba, Skikda, and Constantine. Since the largest share of industrial growth occurred during the 1960s and 1970s, the capital stock is old and highly polluting. Most of the enterprises do not have any pollution control equipment. The equipment installed has not been properly maintained and iacks spare parts. Poor housekeeping also impedes the performance of these treatment facilities. The environmental impact is as follows:

(a) Water pollution is the major cause of water quality degradation. A total of 6 billion m3 of industrial and municipal wastewater is currently being discharged untreated into the rivers and the sea, combined with leakage from hazardous waste sites, causes serious problems. The problem is compounded by the fact that the rivers' natural flow is very low in summer. Furthermore, nearly all of Algeria's groundwater aquifers (Mascara, Blidah, Saida, Chetiff, and Mitijda) are either already contaminated or threatened with contamination. The Mascara aquifer is no longer used for domestic water supply, resulting in a loss of 60 million m3 a year, equivalent to the annual water supply for a population of 800,000.

(b) Air pollution is caused by dust, sulfur dioxide (SO2), nitrogen oxide (NO), volatile organic hydrocarbons (VOC), and heavy metals from heavy industry and the power sector. In addition, serious air pollution is the result of lead emissions from the use of leaded gasoline. The transport sector also emits hydrocarbons, nitrogen oxides, and carbon monoxide.

(c) Waste from industrial sources is estimated at 4.9 million tons per year (tly); 185,000 t/y of the generated (solid, liquid, sludge) and 350,000 t of the stockpiled wastes are considered hazardous. Annex I Page 2 of 11

B. The Institutional Framework

2. Responsibility for environmental protection falls under the Ministry of Interior, Local Government, and Environment (MICLE). In March 1995, the Government of Algeria established the Directorate General of the Environment (DGE) as the national environmental agency. DGE is now staffed with 110 technical staff and will be supplemented by another 25 technical positions. It has three regional laboratories. At the wilaya level, an environmental inspector was nominated, but has very limited technical resources. The Government of Algeria (GOA) has also enacted a decree for establishing 48 Environmental Inspectorates of the Wilaya (IEW), in order to monitor and enforce environmental laws and decrees. The project is providing, in its first component, US$12.26 million for technical assistance, training computer equipment and vehicles to reinforce the institutional and legal framework.

C. The Legal Framework

3. Algeria has enacted a Framework Environmental Law (#83-3) which provides general principles for environmental management and protection. The major features and flaws of this law are: (a) the establishment of discharge standards which were issued by decrees, but are not based on sound economic foundation; (b) adoption of the environmental assessment (EA) for which general guidelines were issued as a decree (#90-78), but which exempts major infrastructure projects (such as dams, power stations) are exempted; (c) guidelines for issuing permits and licenses which are not in use because of redundancies and contradictions within the classified establishments decree (# 88-149); (d) the establishment of civil liabilities and compensation for damage, determined by the courts, but which are only applicable in certain situations; and (e) civil and criminal penalties ranging from fees to jail sentences which are not applied.

4. The legal framework would be modified under this project to include changes in the following two decrees: (a) the EA decree (#90-78), subjecting all categories of projects to either environmental screening, analysis, or assessments; and (b) the decree on classified establishments (#88-149), subjecting all enterprises to a permit requirement that is based on of the integrated pollution control approach and sets forth the various monitoring and enforcement schemes. Another decree on the handling, transportation, and disposal of hazardous waste is in the final process of being enacted.

5. The following list is a summary of the laws and decrees are considered to be relevant to industrial pollution and hazardous wastes:

Law No. 83-03 on environmental protection Decree No. 88-228 on the disposal of PCBs Decree No. 88-149 on classified establishments Decree No. 88-227 on environment inspectors Decree No. 90-78 on conducting environmental assessments Decree No. 90-97 on transport of hazardous materials Decree No. 93-68 on environmental taxes Decree No. 93-160 on industrial wastewater Decree No. 93-165 on air emission Decree No. 93-184 on noise regulations Project for a decree on the management of hazardous wastes Annex 1 Page 3 of 11

II. THE NORTHEASTERN REGION OF ALGERIA

6. The northeastern region includes the wilayas of Annaba and Skikda, located along the Mediterranean coast in eastern Algeria not far from the Tunisian border (see IBRD Map). These wilayas were selected because they hold: (a) the largest agglomeration of versatile heavy industries, such as iron and steel, and fertilizers in Annaba, refineries and petrochemicals in Skikda; and (b) the largest amount of stocked hazardous waste and one of the largest generators of wastes (10,400 t/y). Annaba is also unique in terms of meteorological conditions; wind direction from sea to land and temperature inversions combine with peak emissions levels and generate local short-term peak concentrations of air pollutants that reach hazardous levels for the exposed population.

7. The following studies were undertaken on the major industrial sites located near the wilaya's main town of Annaba: (a) pollution load calculations; (b) air and water quality measurements; (c) a health risk assessment; and (d) detailed environmental audits. Details are given below.

III. THE WILAYA OF ANNABA

A. Geographical Characteristics

8. The first series of studies was carried out in the Arnaba urban area including the Annaba, El Bouni, Sidi Amar, and El Hadjar communes, which are 15 km apart and together constitute a vast urban concentration of 465,000 inhabitants (see IBRD map). About 40 percent of the population is under 15 years of age. This urban concentration is surrounded by two large industrial complexes: to the north, the ASMIDAL fertilizer complex; and to the south, ENSIDER's iron and steel complex at El Hadjar. This zone is essentially urban and divided by two main water courses: the Seybouse wadi is the second largest river in Algeria, whose mouth lies at the southern border of the Annaba commune; and the Meboudja wadi, whose flow was only temporary and is a tributary of the Seybouse wadi.

B. Pollution Loads in the Wilaya of Annaba

9. Air pollutants. An estimation of the total air and water pollutant loads for Annaba are found in Table 1 below. It shows that ASMIDAL and ENSIDER are the most significant sources of air pollution in Annaba. Annex 1 Page 4 of 11

Table 1: Contribution to Air Pollution in Annaba

llutants . Pollutant; ENSIDER ASMIDAi Contributionfrom: 0 .~~ ~~~~ Loids. yt/y Contributon:o . Contribution. .. .: .... Other:Sources Particulates 42,600 84% 10% Various Sources: 6%

Lead 252 94% -- Traffic: 6% Sulphur 13,200 32% 68% Traffic: < 1% Dioxide Nitrogen 2,700 40% 24% Power Plant: 16% oxides Traffic: 18% Air Traffic: 1%

VOC 13,700 89% -- Wood Production: 1% Traffic: 10% Ammonia 7,500 41% 32% Agriculture:27%

10. Water Pollutants. The major water pollutants in Annaba are: oil, polyaromatic hydrocarbons (PAHs), pesticides, chloride, nitrates, amnmonia,iron, chromium, and cyanides, as shown in Table 2.

Table 2: Contributions to Water Pollution in Annaba

Polluant A Polluntt ENSIDER ASMIDAL Contributionfrom ...0- .. l; t ... 0i: loadsflty Contribution: Contnrbution Other Sources Oil 7,819 36% Various Other Sources: 64% PAHs 87 73% Power Plant: 27%

Pesticides 2 -- Agriculture: 100% Chlorides 4,700 78% DomesticSewage: 22%

Cyanides 434 100% -- Nitrate and 26,333 10% 12% Agriculture,Various Ammonia Other Sources: 78% Iron 1,983 100% Chromium oxides 6 72% 27%

11. Table 2 also shows that from the industrial sources, ENSIDER and ASMIDAL are the largest important contributors to water pollution. ENSIDER discharges into the Oued Meboudja, which discharges into the sea. The Oued is a relatively small stream, and may be fully dry during the summer. It would Annex 1 Page 5 of 11 appear that ENSIDER is a major contributorto pollutionof the Oued. The dischargesof phosphogypsum from ASMIDAL into the bay of Annaba will have an important impact on the bay's ecosystem because of the high volume of nutrients and heavy metals in the phosphogypsum.

C. Ambient Air Quality in Annaba

12. Methodology. Five sites were selected to measure the levels of air pollution taking into account the meteorological data. Two sites were selected for their exposure to industrial pollution; EL Bouni exposed to the emissions of the iron and steel complex (ENSIDER) and the fertilizer complex (ASMIDAL); and Darraji Errdjem, part of Sidi Amar, exposed to the emissions from ENSIDER. Two other sites were selected in the most heavily populated neighborhoods; central Annaba, a densely populated area with a high level of vehicle traffic; and Annaba Kouba, a calm area at some distance from the center from the city, with little exposure to industrial complexes in terms of the principal wind directions. The substances measured were SO2, NOx, VOC, dust, and fluorine. Measurements were taken during three months (September - December 1994) for fifteen consecutive days at each site. Additional measurements over a longer period were not possible due to the security situation that prevailed in Annaba during 1994.

13. Results. Data in Table 3 below show high levels of dust and to a lesser degree S02. The influence of the industries is clear for these two pollutants: ENSIDER and ASMIDAL for dust emissions and ASMIDAL for SO2 emissions. These two pollutants are the most disquieting for public health, especially considering that they are known to act concomitantly in the respiratory tract. VOC and NOx values are also high, but the measurement method used (instantaneous values) does not allow for rigorous comparison of results with existing standards. Fluorine levels are also higher than the guideline value.

Table 3: Results of Atmospheric Pollution Measurements in the Annaba Area

Total S2 N2 VOC N13 F Suspended Particles ug/m3 sg/m3 IAg/m3 Ag/m3 jug/m3 ,ug/m3 El Bouni 315 321 3,320 4,944 3 Darragi Errdjem 365 77 11,758 67 22 Sidi Amar Center 130 n.d. n.d. n n.d. n.d. Annaba Center 754 15 1,9 9,228 2 Annaba Kouba 137 14 83 1,60 21

WHO values 80 50 200 2,000 100 10

D. Water Quality

14. Methodology. Water samples were taken from: (a) both ground and surface water used for drinking and irrigation; and (b) surface fresh water: main wadis and tributaries, downstream from the main urban and industrial sources as well as coastal salt water; and wastewater from urban areas. The parameters measured were: total suspended solids (TSS), biochemical oxygen demand (BOD5 ), nitrates, coliform, fecal matter, and cyanide. Annex I Page 6 of 11

15. Results. Groundwater, particularly that used for drinking water, does not present certain traces of contamination by pollutants. Surface water is characterized by a high level of microbiological pollution (over 107 coliform/100 ml at the mouth of the Seybouse river) due to discharge of urban wastewater and untreated industrial water. Wastewater from ENSIDER complexes causes a distinct increase of cyanide levels in the Meboudja wadi (150 jig/l, 3 times the WHO guidelines). Although not measured here, discharge of used oils is considerable (over 2 million liters per year). Wadi water cannot be used by the population as drinking water because of industrial pollution, and the discharges contribute to pollution of the Mediterranean coast. Discharge of phosphogypsum (2000 tons/day) from the ASMIDAL phosphoric acid plant is the primary cause of degradation of the marine environment. This degradation is due to considerable deposits of solid matter, acidification of water (PH = 4.4 at 10 meters from the complex's outlet) and the presence of heavy metals (cadmium).

E. Health Effects

16. Methodology. The public health study consists of an analysis of existing epidemiological data for the general population and workers (retrospective studies), supplemented when necessary by transversal studies (prospective studies). The primary epidemiological results originated from analysis of raw data from a morbidity study undertaken on the Annaba wilaya in 1993 on 1000 households, following a protocol similar to that of the national survey organized by the National Institute of Public Health (INSP, 1992), allowing for significant comparisons between specific data from the Annaba wilaya and national averages. A study was performed during the month of November 1994 on schoolchildren, on two groups (exposed/unexposed) of 224 and 212 children with a mean age of 10 years, living respectively in an area considerably exposed to atmospheric industrial pollution (El Bouni), and in an area with little exposure (the Safsaf quarter in Annaba, on the Seraidi road, near the Kouba quarter). The children were selected randomly by groups after elimination of individuals who suffered from a diagnosed and treated respiratory disorder during 15 days preceding the study.

17. Results. On the basis of the data analysis, the following conclusions could be made:

(a) Acute perceived respiratory morbidity rates were 42.3 percent (national level: 35.7 percent), with cardiovascular morbidity equal to 5.18 percent (national level: 2.18 percent). Statistics also showed that upper respiratory disorders are the first cause of infant morbidity, accounting for over 50 percent of total reported symptoms. This frequency is much higher than that found in the population in general (23 percent) .

(b) The El Bouni village (population 107,000) which is directly exposed to the emissions of ASMIDAL and ENSIDER and the Sidi-Amar village (population 13,000), which is exposed to ENSIDER emissions, display the highest incidence of coughldyspnea and asthma when compared to other non-exposed villages. Populations in these two villages is among the lowest income groups in the wilaya.

(c) The level of asthma prevalence (which includes 9,000 asthmatics) is significantly higher than the national level (1.67 percent and 0.8 percent, respectively). Asthma is particularly severe in terms of both frequency and intensity of asthma attacks. In 1993, 55 percent of asthmatics experienced more than one attack per month, and 42 percent of patients were Annex 1 Page 7 of 11

hospitalized during the year. Similarly, for 93 percent of patients, asthma attacks accounted for at least one sick leave during the year.

(d) Children who are living in the El Bouni village and exposed to industrial pollution, presented a significantly higher incidence of cough (39.7 percent versus 26.4 percent, p<0.05) and lower respiratory performance (decline of 1.7 percent in timed vital capacity, p< 0.05) compared with unexposed children living in the Safsaf neighborhood of Annaba. A French study found that children exposed to 100 Ag/m3 of dust show a decrease of 1.5 percent in forced expiratory volume in one second compared with the population of children in theory exposed to 0 ig/m3 of dust.

F. Environmental Audits

18. Based on the results from the environmental quality and health studies, the priority for interventions in Annaba will be to reduce the air emissions from dust, SO2, VOC, and NOx because of their health impact. The iron and steel complex of ENSIDER and the fertilizer complex of ASMIDAL, major sources of such pollution, were selected for detailed environmental audits.

Entreprise Nationale de Siderurgie - ENSIDER - Annaba

19. General. The ENSIDER iron and steel complex is situated 15 km south of the city of Annaba. The nominal production capacity is approximately 2 million tons of steel per year, but current production is of the order of 0.8 million tons of steel per year. The production line at ENSIDER is standard, consisting of a coke oven, two sintering plants, two blast furnaces, basic oxygen furnaces, and an electric arc furnace. The production line also includes hot rolling mills, cold rolling mills, and galvanization. The main raw materials are imported coal, iron ore from Ouenza in Algeria, and scrap steel, the majority of the latter being produced internally in the work. The main products are sheet steel, coils, pipes, wire, and reinforcements for concrete.

20. Workers' Health and Safety. The total number of workers is 16,000. ENSIDER's medical records and analysis showed that allergy and irritation in the upper respiratory tract constitutes 30 percent of the perceived morbidity. This is followed by skin infections of which solvents and oils are the source. It was also found that 1,500 workers constituting 64 percent of the work force in the sintering plant, are exposed to dust concentration (particle size less than 5 pig) exceeding the threshold limit value permissible in the work place (2mg/m3). Thirty workers exposed to dust for the last five years were diagnosed with pulmonary fibrosis. Among the workers of the coke plant, the phenol concentration in urine (indicator of benzene exposure) is 15 mg/I ( norm 10 mg/I) and the peroxene concentration (indicator of VOC exposure) is 3.9 pig per g of creatinine ( norm is 2pLg/g). The frequency of worker accidents is 67 percent, double of what is permissible in a similar plant in France.

21. Pollution Loads. The major pollutants are:

particulates in the atmosphere from the sintering plant, the blast furnaces, the coke ovens and the new electric arc furnace, which is due to come on-line at the beginning of 1995. Emissions of particulates amount to 35,700 t/y at the current production rate. Dust containing lead amounts to 230 t/year. Annex 1 Page 8 of 11

* organic matter (12,200 t/y), ammonia (3,100 t/y), and phenol (660 t/y) to the atmosphere, emitted mainly from the coke ovens;

* sulfur oxides in the atmosphere (4,100 t/y), emitted mainly from the coke oven and the sintering plants; and

* wastewater, containing oils and greases (2,650 m3/y), suspended solids (6,000 t/y), heavy metals, and cyanides.

22. Mitigation Measures. The following recommendations have been made, based on the findings of the audit and least-cost option considerations:

* the fitting of a dust removal system (fabric filter) to eliminate particulates from the electric arc furnace;

* renovation or replacement of the dust removal systems for the sintering plants;

* replacement or renovation of the dust removal systems for the blast furnaces;

a for the coke oven, fitting of a door cleaning system and systems for dust removal during charging of the coal and coke pushing;

* installation of a boiler required for the distillation of ammonia from wastewater (ammonia liqueur) and renovation of the biological treatment works for ammonia, phenol, and cyanide removal;

* construction of a wastewater treatment works for blast furnace 1; and

* construction of a treatment works for the general industrial wastewater that is currently being discharged to the local Oued. The treatment works will also allow recycling of the process water and therefore reduce water consumption. Water shortage is currently a major problem.

23. Implementation of the above recommendations will result in reductions in pollutant loads of: 26,200 t/y of dust; 10,800 t/y of VOCs; 500 t/y of SO2; 2,500 t/y of ammonia; and 650 t/y of phenol to the atmosphere in addition to a reduction of 2,550 m3/y of oils and grease and 4,400 tly of suspended solids discharged to the Oued Meboudja.

24. Investments. The total cost of implementing these recommendations, including technical assistance and training, as well as the purchase of spare parts, amounts to US$46.76 million, of which US$32.5 million is the Bank's contribution.

Entreprise Nationale des Engrais et Produits Phytosanitaires - ASMIDAL - Annaba

25. General. The ASMIDAL fertilizer complex produces both phosphate and nitrate fertilizers and is situated to the east of Annaba. The phosphate fertilizer chain produces sulfuric acid, phosphoric acid, Annex 1 Page 9 of 11

and NPK, TSP, STPP fertilizers. The nominal capacity is 330,000 t/y of NPK or 264,000 t/y of TSP. Actual production in 1993 was 171,600 tones of NPK and 39,000 tones of TSP. The nitrate fertilizer chain produces ammonia, nitric acid and ammonium nitrate, with a nominal capacity of 330,000 t/y of anmonium nitrate. The actual production of ammonium nitrate in 1993 was 121,675 tons. In general, the units that comprise the nitrogen fertilizer chain are in a better state of maintenance than the phosphate fertilizer units. The latter are in a state of advanced degradation due to inappropriate operational practices (e.g., very frequent shutdowns) and a general lack of maintenance.

26. Workers' Health and Safety. The total number of workers is 2,000. The medical record in ASMIDAL showed that in the last ten years skin and ophthalmological diseases increased from 8 percent to 10 percent and from 4 percent to 7 percent, respectively. A medical analysis performed in 1992 showed that 24 workers had fluorosis and 16 workers had a fluorine concentration in the urine of 0.8 ig/l ( norms 0.5 jig/l). The frequency and gravity of accidents due mainly to acid production have increased by 120 percent in the last three years and the number of days lost is on the order 10 percent.

27. Pollution Loads. The major pollutants are:

* SOx to air, originating from the sulfuric acid plant, with a load of 9,000 t/y;

* particulates to the atmosphere originating from the ammonium nitrate plant, 4,300 t/y at the current production rate;

* ammonia to air from the ammonia plant, 2,300 t/y at the current production rate;

* nitrogen oxides to air from the ammonia plant and the nitric acid plant, 1,200 t/y;

- fluoride to air, originating mainly from the phosphoric acid plant, 90 t/y;

* phosphogypsum with an acidic PH originating from the phosphoric acid unit, and discharged directly to the sea at a rate of 288,000 t/y; and

* ammonia (6,400 t/y), nitrates (13,300 t/y), and phosphates (17,500 tly) originating from the NPK plant and discharged directly to the sea.

Mitigation Measures

28. Phosphate Chain. Following the techno-economic and environmental study, five options have been evaluated. Based on the least-cost option, of which a sensitivity analysis was performed, the following recommendations were retained:

* total shutdown of the sulfuric acid and phosphoric acid plants within a period of 18 to 24 months from April 1995. This shutdown occured in November 1995;

* during this transition period, the production rate of phosphate fertilizers from sulfuric acid and phosphoric acid produced at the ASMIDAL site will be progressively reduced from Annex 1 Page 10 of 11

45 percent of the current production rate to 0 percent. This will, therefore, result in the total elimination of SOx pollution to the air and phosphogypsum discharges to the sea;

* the NPK I line will be rehabilitated. The NPK 2 line will be rehabilitated after the 24 month transition period. The rehabilitation of these 2 plants will result in a reduction in ammonia discharge of 6,300 t/y, a reduction in nitrate discharges of 13,200 t/y and a reduction in phosphate discharges of 17 300 t/y; and

* during the first 6 months of the transition period a harbor facility will be rehabilitated in order to allow for the import of phosphoric acid. Subsequent to the completion of this facility, phosphoric acid for the production of phosphate fertilizers will be imported directly or MAP will be imported instead, depending on market economics.

29. Nitrate chain. The following options have been retained:

* rehabilitation of the ammonia plant, one nitric acid plant and one ammonium nitrate plant which will have a positive effect on the level of environmental releases, and the rehabilitation of the tail gas treatment system in order to reduce NOx emissions by 280 tly; and

* installation of a scrubber or granulator for removing dust from the amnmoniumnitrate unit gases, with a resulting reduction in dust emissions of 4,200 t/y.

30. Investments costs. The investments required for implementing the recommendations for the phosphate and nitrate fertilizer chains is US$59.08 million, of which US$35.0 million will be the Bank's contribution. The investments include technical assistance in the operation of pollution control equipment and training in pollution control, and safety measures in the amount of US$4.3 million. Annex 1 Page 11 of 11

ANNABA URBAN AREA i400 .tords .M&diterraryean :300 :- Seraidi PARTICLEPOLLUTION 2

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m-r arrioo ErredJem- \t -400 Annex 2 Page 1 of 6

Unofficial Translation

April 24, 1996

Mr. James D. Wolfensohn President The World Bank Washington,DC 20433

Subject: EnvironmentalPolicy on IndustrialPollution

Mr. President:

First, allow me to expressmy satisfactionregarding the excellentrelationship our Governmenthas establishedwith the World Bank to address environmentaland sustainabledevelopment issues.

As you know, Algeria is facing disquietingenvironmental issues, which have begun to threaten public health,the country's sustainabledevelopment and the potentialfor future generationsto have access to the resources necessaryfor their socioeconomicneeds. The present legal and institutionalframework has begun to prepare the country for resolving these issues. In the meantime,these efforts need to be reinforced.

TOWARD SUSTAINABLEDEVELOPMENT

In order to begin the process of sustainabledevelopment, the Algerian Government passed a frameworklaw of February3, 1983related to environmentalprotection, which stipulatesthat the national environmentalprotection policy is aimed at:

- natural resource conservation,restoration, and development; - preventionand control of all forms of pollutionand hazards; and - improvementof the quality of life.

Environmental protection is hencefortha basic requirement of national policy for social and economic development.

The context created by economic reforms offers an excellent opportunity for integrating environmentalprotection concerns with the economic objectives which we plan to achieve and which should be also compatiblewith environmentalprotection.

Economic reforms adoptedby Algeria are environmentallybeneficial insofar as they allow every company to seek costs minimizationand a greater efficiency in the use of technologies and scarce resources. Annex 2 Page 2 of 6

Moreover, applying the "polluter-pays" principle to which the Algerian Government fully adheres, provides additional incentives for better environmental protection.

The national strategy for environmental protection rests mostly on the following elements:

- legal and institutional strengthening; - pollution control; and - measures for economic incentives.

These elements were conceived to:

- complement the economic policy; - promote better use of resources; - promote the use of clean and efficient technologies mainly in the use of raw materials; and - promote investments in the area of clean technologies.

Their implementation is already well advanced and will be consolidated under the World Bank loan.

Within the institutional framework, Algeria created a High Council for the Environment and Sustainable Development (Haut Conseil de l'Environnement et du Developpement Durable (HCEDD)) chaired by the Head of the Govemment, which consists of concerned ministers and persons chosen by the Head of State.

HCEDD constitutes a forum for thought, debate, and arbitration for all issues related to the design and implementation of the national policy for environmental protection.

Moreover, the Algerian Government has set up its environmental structure in the form of a General Directorate, consisting of five (5) sub-directorates, endowed with all managerial and financial autonomy. Algeria has adopted a government structure for environment, which is the State Secretariat in charge of the environment, which will ensure national environment policy, coordination and formulation.

The Algerian Government has also established, at the level of each wilaya, an environmental inspectorate whose main function is to ensure that environment laws and regulations are implemented.

All these environmental institutions must be set up and made operational within the shortest possible time.

In the area of pollution prevention and control, we have been focusing on the industrial pollution and toxic wastes issue, one of the most disquieting in Algeria. This issue needs to be treated as urgent treatment and Government action in this area will be required in two forms: reducing the pollution of existing industrial units and promoting a clean industry.

In order to reduce the pollution of existing industries, we plan to start acting as early as January 1996 in the industrial zones located within the wilayas of Annaba and Skikda. This action will progressively reach other parts of the country, based on a timetable to be established according to the project currently being discussed with the World Bank. Annex 2 Page 3 of 6

Our action will consistof:

Establishing priorities based on environmental audits and mitigation plans. These priorities will be based on a cost-benefit analysis in order to maximize environmental benefits.

Closing, as much as possible, partially or entirely, any industrial unit that is excessively polluting, financially non-viable and cannot be restructured. In case immediate closure has negative social consequences, the Algerian Government will fix a maximum operating period for the industrial unit during which depollution measures may be taken only if the depollution investments have a payback period compatible with the maximum operating period fixed by the Government.

To prevent pollution by promoting clean industry, the Government will undertake the following actions:

Amend before January 1, 1997, Decree #90-78 related to environmental impact assessment in order to adapt it to the national economy and the needs for environmental protection.

Amend, before June 1, 1996, Decree #88-149 related to classified establishments in order that the authorization process be based on the notion of "environmental permit" and integrated pollution control.

Determine, by means of an appropriate study, before March 31, 1998, incentives to encourage imports and promote the use of clean technologies.

In the area of economic incentives, the "polluter-pays" principle will be applied. As early as January 1, 1999, the Depollution Fund as well as other regulating and economic incentives measures will be implemented.

This project constitutes the first investment operation in the environment sector undertaken in Algeria and financed by the World Bank.

This pilot project's main objectives is to reduce industrial pollution and ensure a national environmental management of toxic wastes and public health protection in the Skikda and Annaba regions.

It will have two components:

Strengthening of the legal and institutional framework; and

Implementation of an investment program to depollute two industrial complexes at Annaba (ENSIDER and ASMIDAL), an industrial complex at Skikda (ENIP). The latter could benefit from a loan from the European Investment Bank.

The first component will consist of strengthening the procedures, providing technical assistance, training, and purchasing equipment to reinforce our environmental institutions. Annex 2 Page 4 of 6

The institutions which will benefit from the strengthening program are the following:

- DGE (Directorate General of the Environment) - HCEDD - environment inspectorates (about 10) - units involved within the ministries of Health, Industry, Energy, the CNP (Conseil National de la Planification)

It is also planned for the:

- Improvement of the regulatory framework through the amendment of decrees related to environmental impact assessment and the one related to classified establishments, and enactment of the decree related to toxic wastes management.

- Establishment of HCEDD, which will be endowed with adequate operational means, and the preparation of a national environment action plan (NEAP), which will be submitted to the HCEDD before June 1, 1998.

- EEstablishmentof the procedures to set up an environmental permit and integrated pollution control system (applied to the Annaba and Skikda regions as pilot operations), and the establishment of an administrative and organizational system for the transport of toxic wastes.

- Implementation of a study whose objective is to determine the government's and the economic sector's liabilities (public and private) in financing depollution programs.

- Establishment of financing institutions and proper mechanisms for the environmental sector through, particularly, review of the National Environment Fund (FNE Fonds National de l'Environnement) statute and make it operational by June 1, 1997.

- Implementation of a study whose objective is to determine new economic incentives aimed at better protecting the environment and based on the "polluter- pays" principle and the market economy.

As for the second component, it was found that three industrial plants in Annaba and Skikda are responsible for most of the pollution in the northern area of the country.

The ENSIDER and ASMIDAL complexes emit nitrous and sulfur oxides, fluorhydric acid, dust particles,and cyanide-containing waste substances into water sources at concentration levels above WHO accepted norms.

We have agreed with the firms involved (ENSIDER and ASMIDAL) about a depolluting program to be implemented in this framework. We have ensured that all investments made to ASMIDAL, ENSIDER and ENIP are compatible with the economic restructuring program as supported by the World Bank Economic Rehabilitation Loan (ERL). Annex 2 Page 5 of 6

World Bank assistancewill strengthenour efforts in launchingour sustainabledevelopment policy. We have taken appropriatesteps so that the project be launchedas planned. We have already set up an interministerialcommittee, which is activelyinvolved in the project design and which will be responsible for its implementation. We have also establishedthe implementationunit for this project which consists of a task managerand technicalexperts. Moreover,on the basis of the attached project timetable,we are willing, with your assistance,to implementall the key elementsof this project.

We hope the present project will be followedby other operations in order to deal with Algeria's industrialpollution and toxic wastes issues.

Please accept, Mr. President,the expressionof our high esteem.

Sincerely,

Signed

The State Secretaryto the Minister of Interior, Local Governmentand Environment,In Charge of the Environment

AhmedNoui Annex 2 Page 6 of 6

ACTION SCHEDULE

Elements Implementation Date Task Manager Work program for the first year 01/01/97 DGE Establishment of HCEDD and its 01/01/97 SEE committees

Environment Action plan 01/06/98 DGE preparation

Establishment of environmental 01/02/97 DGE inspectorates at Annaba, Skikda, Algiers and Oran

Completion of the executive 01/01/97 SEE decree amendment on the environmental impact assessment

Enactment of a decree on toxic 01/01/97 SEE wastes

Enactment of the executive decree 01/01/97 SEE amendment on "classified establishments"

Operation of the National 01/06/96 DGE/Finance Ministry Environmental Fund as stipulated in the 1992 Appropriation Law

Establishment of a Fund for the 01/01/99 DGE/Finance Ministry depollution and protection of the environment (FDEPE). FDEPE is a financial mechanism of the depollution projects based on NEF and replenished by DGE's revenues, economic incentives and Government budgetary support

Signature of the conventions with 01/01/97 DGE/ENSIDER ENSIDER

Signature of the conventions with 01/01/97 DGE/ASMIDAL ASMIDAL

Signature of conventions with 10/01/95 DGE/ENIP ENIP Annex 3 Page 1 of 4

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

PROJECT DESCRIPTION

COMPONENT I: Strengthening the Institutional and Legal Framework

1. This first component will enhance the following environmental functions: policy formulation, coordination, monitoring, and enforcement. These functions will be strengthened through:

(a) Institution building by reinforcing the technical and administrative capacity of the DGE, the sectoral ministries and the IEWs, and articulating the environmental policies of the HCEDD and preparing the NEAP;

(b) Enhancing and updating the legal and regulatory framework;

(c) Designing and implementing monitoring and enforcement system; and

(d) Activating the NEF and expanding it into the FDEPE.

2. This component will: (a) provide 425 person-months (pm) of international and local consultants; (b) organize and implement 25 technical and specialized workshops which will be attended by about 500 professionals from the sector ministries, local government, NGOs, and private and public sector consulting and industrial firms; (c) provide training abroad to 45-60 professionals in the different environmental fields of specialization; (d) finance a total of three policy studies (environmental liabilities, environmental financing mechanisms, FDEPE structures, and clean technology); and (e) purchase a total amount of US$6.3 million of field vehicles, laboratory equipment and materials, computer equipment for air and water pollution monitoring and supplies, books and documentation. A summary of the four sub- components are provided below.

A. Institution Building

3. The purpose of this sub-component is to strengthen the technical and administrative capacity of:

(a) The HCEDD as the cross-sectoral forum for environmental policies and its sub- commissions, both of which will oversee and review, inter alia, the NEAP;

(b) The DGE as the national environmental agency responsible for national policies, NEAP preparation, EIA reviews, proposing legislation and ensuring operational and technical cooperation;

(c) The sector ministries of Industry and Petroleum (MIP), Health (MOH) and the National Planning Council (Conseil National de la Planification-CNP) for assisting in EA reviews Annex 3 Page 2 of 4

and in industrial audits (MIP), health risk assessment (MOH) and environmental planning (CNP); and

(d) The IEWs in Annaba, Skikda, Constantine, Algiers and Oran to undertake monitoring and enforcement activities. Detailed terms of references (TORs) were developed for the ministries and the DGE in order to ensure the coordinated implementation of this sub- component.

4. This sub-component (US$10.5 million) would include:

(a) Technical services to: (i) HCEDD for developing procedures and operations, including identification of a set of policy and economic studies on selected environmental problems that will be identified by the sector ministries and industrial associations, as well as for the development of council members' capabilities to analyze policy options for environmental problems outlined in the NEAP; and (ii) the DGE, sector ministries (MIR, MOH, CNP) and five IEWs to develop operational procedures and guidelines; organize their own environmental program to set up appropriate mechanisms for information sharing and cooperation, and to establish the necessary institutional and legal framework that will foster the implementation of activities in the NEAP;

(b) Training technical staff of the DGE, the sector ministries, NGOs and private and public sector firms in environmental planning, environment management techniques, monitoring and enforcement, pollution modelling, environmental economics, environmental assessment and audit reviews, and health risk assessment, including short visits to international environmental protection agencies and relevant environmental institutions abroad; and

(c) Purchase of air and water quality monitoring laboratories for Annaba and Skikda, Constantine, Algiers and Oran and office equipment, books and journals, field vehicles, and computer hardware and software for the DGE, MIR, MOH and the five IEWs of Annaba, Skikda, Constantine, Algiers and Oran.

B. Enhancement of the Legal and Regulatory Framework

5. The purpose of this sub-component is to provide the Government with the administrative, management and technical tools to:

(a) Review, update and modify the most important legal texts and regulations derived from the Framework Environmental law and eliminate overlaps and contradictions;

(b) Apply the modified Environment Impact Assessment (EIA) decree as an effective policy instrument and develop the appropriate procedures and sector guidelines; and

(c) Issue and adopt the modified decrees for the classified establishments including the issuance of environmental permits and for handling and transport of hazardous waste. Annex 3 Page 3 of 4

6. Under this proposed arrangement, financing in the amount of (US$0.35 million) will be provided for:

(a) Consulting services to assist DGE, the Ministries of Industry and Petroleum and Justice to review and update existing text regulations, and undertake an assessment of the environmental guidelines under the Intemational Standards Organization (ISO);

(b) Training and workshop to support the participatory process of reviewing and fine tuning regulations and legal measures. The training programs will be for sector ministries, including the Ministry of Justice and the Secretariat General of the Government (SGG) in environmental law, environmental impact assessment, environmental audits, processing and ways to promote better understanding and awareness of environmental legal issues; and

(c) Purchase of equipment and the establishment of a legal documentation center.

C. Design and Implementation of a Monitoring and Enforcement System

7. The purpose of this sub-component is to design and implement the environment permit system on a pilot basis in Annaba and Skikda. On the basis of the modified decree on classified establishments, an environmental permit will be issued after negotiation between the DGE/IEW and each establishment. This permit will determine a ceiling on the pollution amount that each establishment would be allowed to discharge in a given medium as well as a program (when necessary) for reducing the total pollution load over a specific time consistent with the technology used and the financial status of each establishment. With this sub-component, DGE and its IEW should be able to monitor the pollution contracts and test a series of enforcement measures and financial incentives to mitigate pollution in an integrated manner.

8. This sub-component (US$0.81 million) will include:

(a) Consultant services to design the permit system and to prepare operational procedures and guidelines for drafting and reviewing pollution proposals and contracts and expanding, if successful, the application of such a system nationwide; and

(b) Financing: (i) a program for environmental audits, pollution load and health risks assessments to identify and rank areas of severe environmental degradation; and (ii) two studies on the promotion of clean technologies and the environmental liabilities for the private and public sector.

D. Activating the National Environmental Fund

9. The purpose of this sub-component will be to make the NEF operational and then expand its role into an effective instrument of environmental financing as a FDEPE. The proposed project will finance only technical assistance for activating the NEF and establishing the FDEPE after a comprehensive organizational study is undertaken. It is expected that the FDEPE will be the financial intermediary and will provide loans and credits from GOA contributions, future Bank loan proceeds, international donors Annex 3 Page 4 of 4 and from environmentaltaxes and fees wheneverthey are legallyestablished. The Governmenthas agretd that the establishmentof FDEPE will be covenantedat 1/1/99.

10. This sub-component(US$0.60 million) will include:

(a) Consultant services to establish the administrativestructure of the NEF and prepare its operational and financial guidelinesand its activities;

(b) Financing two studies on: (i) the identifying the best policy, economic and financial instruments;and (ii) the most appropriate institutional and financial arrangement for establishingthe FDEPE on a commercialbasis; and

(c) Training for establishing the FDEPE on the basis of the recommendationsof the commissionedstudies. Annex 4 Page I of 3

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

DETAILED PROJECT COSTS

1. The estimated cost of the project is DA 6.3 billion, or US$118.1 million. The foreign exchange component of DA 5.1 billion, or US$95.3 million, represents 81 percent of total costs. These estimates are based on early 1996 prices and exclude taxes and duties, which are estimated to be 15-20 percent. A 10 percent contingency has been applied to all expenditures for civil works and equipment. Price contingencies have been based on the following inflation rate assumptions:

(a) local costs are expected to rise 15 percent during 1996, 10.3 percent in 1996, 7.6 percent in 1997, 7.6 percent in 1998 and 5.5 percent thereafter; and

(b) foreign costs are expected to rise 2.4 percent per annum over the duration of the project.

2. The cost of the consulting services is based on an average person-month cost of US$16,000 for foreign consultants and US$6,000 for local consultants. These rates comprise individual fees, local allowances, and in the case of foreign consultants, international travel.

3. The attached tables show a breakdown of project costs by component and sub-component: Annex 4 Page 2 of 3

Institutional and Legal Strengthening Breakdownof Totals (million US$) DetailedCosts For. Local IBRD Govt Total Exch. Excl. Tax Total Total A. Institutional Strengthening 1. DGE Equipment 4.00 4.00 0.00 4.00 0.00 Training 0.66 0.59 0.07 0.66 0.00 TechnicalAssistance 3.19 2.93 0.26 3.19 0.00 Recurrentcosts 1.76 0.00 1.76 0.00 1.76 Subtotal DGE 9.61 7.52 2.09 7.85 1.76 2. HCEDD Equipment 0.02 0.02 0.00 0.02 0.00 Studies 0.07 0.07 0.00 0.07 0.00 Subtotal HCEDD 0.09 0.09 0.00 0.09 0.00 4. MPS Equipment 0.24 0.24 0.00 0.24 0.00 TechnicalAssistance 0.07 0.07 0.00 0.07 0.00 Studies 0.21 0.21 0.00 0.21 0.00 Subtotal MSP 0.52 0.52 0.00 0.52 0.00 S. MIR Equipment 0.04 0.04 0.00 0.04 0.00 TechnicalAssistance 0.24 0.24 0.00 0.24 0.00 Subtotal MIE 0.28 0.28 0.00 0.28 0.00 Subtotal 10.50 8.41 2.09 8.74 1.76 B. Legal Strengthening EnvironmentalImpact Assessment (EIA) 0.12 0.07 0.05 0.12 0.00 HazardousWaste Management 0.11 0.08 0.03 0.11 0.00 PollutionPermits 0.12 0.09 0.03 0.12 0.00 Subtotal 0.35 0.24 0.11 0.35 0.00 C. Monitoring and Enforcement Fundfor EnvironmentalAudits 0.43 0.43 0.00 0.43 0.00 ImplementationPermit System 0.07 0.04 0.03 0.07 0.00 Studies 0.31 0.18 0.13 0.31 0.00 Subtotal 0.81 0.65 0.16 0.81 0.00 D. National Environment Fund TechnicalAssistance 0.25 0.20 0.05 0.25 0.00 Training 0.35 0.13 0.22 0.35 0.00 Subtotal 0.60 0.33 0.27 0.60 0.00 TOTAL 12.26 9.63 2.63 10.50 1.76

^ Projectcosts are exclusivetaxes andduties Annex 4 Page 3 of 3

ASMIDAL Breakdown of Totals (million USS) Detailed Costs Local For. (Excl. IBRD ASMIDAL Total Exch. Taxes) Total Total I. Investment Costs A. Equipment and Inputs Scrubberfor ammoniumnitrate unit 3.79 3.79 0.00 3.70 0.09 Harbourreception facility 4.82 4.82 0.00 4.71 0.11 RehabilitationNPK (lines 1 and 2) 10.62 10.62 0.00 10.37 0.25 Spare parts (phosphateline) 4.29 4.29 0.00 2.81 1.48 Spareparts (nitrogenline) 10.59 10.59 0.00 3.41 7.18 Rehabilitationof nitric acid unit 6.32 6.32 0.00 0.00 6.32 Rehabilitationammonium nitrate unit 3.16 3.16 0.00 0.00 3.16 Importof primary materialinputs 5.66 5.66 0.00 3.80 1.86 Subtotal Equipment and inputs 49.25 49.25 0.00 28.80 20.45 B. Civil Works Scrubberfor ammoniumnitrate unit 0.46 0.00 0.46 0.00 0.46 Harbourreception facility 0.73 0.00 0.73 0.00 0.73 Subtotal Civil Works 1.19 0.00 1.19 0.00 1.19 C. Services Demolitionof sulphuricacid unit 1.05 0.00 1.05 0.84 0.21 Demolitionof phosphoricacid unit 1.33 0.00 1.33 1.06 0.27 Subtotal Services 2.38 0.00 2.38 1.90 0.48 D. ManagementImprovement Maintenanceplan 0.52 0.26 0.26 0.52 0.00 Operationalmanagement training 1.26 1.01 0.25 1.26 0.00 Environmentalmanagement system 0.62 0.31 0.31 0.62 0.00 TechnologyTransfer 1.89 1.51 0.38 1.89 0.00 Subtotal Management Improvement 4.30 3.09 1.21 4.30 0.00 E. Social Costs 1.96 0.00 1.96 0.00 1.96 Total 59.08 52.34 6.74 35.00 24.08

Figures may not totalexactly due to rounding Project costs are exclusivetaxes and duties

ENSIDER Breakdown of Totals (million USS) Detailed Costs Local For. (Excl. IBRD ENSIDER Total Exch. Taxes) Total Total I. Investment Costs A. Equipment Dust removal (sinterplant) 9.06 5.95 3.11 5.95 3.11 Dust removal(electric arc furnace) 12.71 9.04 3.67 9.04 3.67 Coke ovens 7.47 4.91 2.56 4.91 2.56 Blast furnaces 3.20 2.31 0.89 2.31 0.89 Water treatmentfor blast furnace 3.85 2.82 1.03 2.82 1.03 Generalwaste water treatmentplant 3.42 3.42 0.00 3.42 0.00 Spare parts 2.82 2.82 0.00 2.01 0.81 Laboratoryequipment 0.54 0.54 0.00 0.54 0.00 Subtotal Equipment 43.07 31.81 11.26 31.00 9.15 B. Clvil Works Generalwaste water treatmentplant 2.19 0.00 2.19 0.00 1.78 C. Technical Assitance InstitutionalStrengthening and Training 1.50 1.50 0.00 1.50 0.00 Total 46.76 33.31 13.45 32.50 10.93

^ Project costs are exclusivetaxes and duties Annex 5

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

KEY PERFORMANCE INDICATORS AND IMPLEMENTATION PLAN

KEY PERFORMANCE INDICATORS

Baseline Mid - End of Project Project I. DevelopmentIndicators Reducedperceived respiratory morbidity in El Bouni and Sidi 42.3 40 38 Amar (%) Real increaseof environmentalprofessionals in sector ministriesand 115 215 280 public sector agencies Real growth of funding by donors for environmentalpollution n/a 10 12 control (%)

II. Output Indicators Number of participantsfor in-countrytraining 200 500 Number of participantsfor training abroad 25 60 Number of completedstudies 3 4

III. EnvironmentalIndicators" Annaba(ENSIDER & ASMIDAL) Releasesto air (t/y) Dust 40,000 10,000 11,000 s02 16,400 7,000 8,000 NOX 3,200 3,000 3,000 Releasesto water (t/y) Oil 2,500 150 175 SuspendedSolids 6,000 1,600 1,800 Phosphogypsum 288,000 - -

I/ Environmentalindicators were estimatedon the basis of audits. They would be revised upon finalizationof the detailed engineering. DEKOCRATIC AND POPULAR REPUBLIC OF ALGERIA INDUSTRIAL POLLUTION CONTROL PROJECT

IMPLEMENTATION SCHEDULE

191997 1 1 I 1999 2000 122001 2002 ID TaskNam0 Q3 104 101 102 103 104 101 1Q2 103 104 l01 102 103 I04 la 02 103 I04 QI1102 103 104 I01 102 I03 104IQ I huttuidonal en Legr Sttngtheneng (ceonenwnt 11

2 Project hImUp enuelalentM (PIU) ' ! -l

3 Establishment d Prolet kwwnle on Unit

4 Purtxchaseo ctleaeipplies(PIU) 5 Ps.,d,eue of eldvehidls (PUI)

6 "CEDE)*i

7 E.tabliah nt dl HCEDD

8 Developmuentoperational procdures (IHCEDD)

9 Technical Assistwnce component 1 (xcept Fund)

10 ReUest for Proposa'

11 Cal lor bids

12 Contractor mobsetion ; 13 Develop operationel procedures (DGE.MSP.MPE) 14 Purchae euipmeant 15 Equipment specifications 16 Calllor bds, 17 Equipment instiletwo - 18 Purchasevehicles 19 Vhtcleu spaecficaons

20 Call forb ds i 21 Operatoroalisat.on vehicles - 22 Training InAigerta 23 rramngPt-ns

28 General trining modules 33 Techmol tramumgmod,iles

38 Training abroad 43 Estabtlshrent of aIr monitoring laborl-oies_

44 A-ba. Skikda - 45 Algiers - 46 Oran _ 47 Preparation of NEAP 48 Preparationof NEAP

49 Legal and In.ttut1onat FranreworI; 50 Review of legal and regulatory Irfaewor,ik 51 EIAproaedure. and guidelines 52 Modificationof EIAdecree 53 Guidelirnes of sectorELAs - 54 Permitsystem_ 1996 i9971 1998 1999 2000 000 1 2002 l ;4 ID TaskName 3Q4 0 1 02 0Q3 04 0 1 002 0Q3 Q4 04 | 12341 02 0 03 Q40 Q10 Q2 0Q30 Q4| 1 0 55 Decreeon permits 56 workshopfo legalstaff 1997 - 0% 57 Workshopfor legal staff 1998 _ 58 Designof permd system (Aneba. Shukda) 59 Negobabonsw entr.prises(Arnaba, Sklkda) - 60 lmplamentabonof permits 61 Healthand poll, loadassessment and Audits 62 Heaehassessment (Algiers) - 63 Polklt,ontoad assesement (Algiers) _ 64 Audits(Algiers)- 65 VWorkshopon fe prgremr(Alg,ors) 66 Healthassessment (Orarn) - 67 Pollutonload assessment(Ofan) _

68 AWKs (Oran) 69 Vorkshopon thr program(Oran) 70 Studt-e 71 ShortieSon etnsarw-nmental tibitbltes

72 Studi on Wlen tedosolbgy 73 Acivabonof pollution fund 74 Preperatonof TOR _ 75 C4allfor btds _

76 Mobaln of eotrdor _ 77 Preparatonof operatiorat g.idelinra for NEF 78 NEF opwratcrnal 79 Funcbonomgof NEF

so Economicslud ! _ 81 Organioen wmigemmntsforFOEPE 82 FDEPEis operetood 83 Trairng n FDEPE 84 Furwuga oFDFEPE 85 hV.iStwsg an FOEPEoperaltns_ i; 86 Folw up trnaesgFDEPE rpwaitns is 1996 1997 1998 999 2000 1 2001 2002 01 2Q3 0 401 ID TaskName Q304|1QQ2 Q3 Q4 Q0 Q20Q30Q4 Q102 0Q3041 Q020Q3|04|01 02|Q|030Q4 T 108 ENSIDER 109 Oust removal sinter plant)Iwatertreatment 110 Engieermg stud.es 111 Invntationfor bids 112 Contract effactrenass _ 113 Prorurement 114 Transportanrd ustom 115 Sitepreparation 116 Equipmentinstallation 117 Commrisioninrg 118 Filbn repaacenufnts 119 Engmnearsngstudies 120 invitatonfor bids - 121 Contractefaedicrness - 122 Procurement 123 Trmnsportr,d cutom 124 Sdopreparabon - 125 Equipmaramstallaion 126 Commi ioneing 127 Eltarcf ercfurnace 128 Engineringstudies 129 tlo,falao for bids 130 Conltraceflcveness 131 Procurement 132 Trensportandr custom 133 Ste propardicn 134 Equipnmen installation 135 Commar,ioningr 136 Rdat. of coke mven,amnonsa distillation & satewatertrat*. 137 Engnesrngstudies 138 Invitabonfor bids 139 Contractefftveness - 140 Procurenmet

142 Sitesprepwaion cuto 143 ErtiaPetrtinstallation 144 Commksidrwr ._*_,_._ 1996 1 991 1 1998 1 1999 2000 2001 1 2002- ID Task Name Q30Q4 Q1 021031Q40Q1 Q2 030I4201 Q2 0304002030400203 040102030401 145 ASMIDAL 146 PhosphateLine 147 Rehabilitationofhwibo.r Fcility 148 DelailedEng,neer,mg

149 C.nfor beds _II 150 Sne preparabion 151 Installat,onof Equpment 152 Comm.ss,oning 153 Import 154 MAP 155 PhosphoricAc,d - 156 Demolitionsulphuric - phosphoncplants 157 Clos3weof sltunc acld 158 Closureof phosphorc acid 159 Call forbids - 160 Deonrtlamrnation* demoltimor, 161 Rehabilitationof NPKS 162 DeDtaledde,gnt_ 163 Cal forbids 164 Shenehatobfitalion (NPK1) 165 EquipmenlInstdllat,on (NPK1I) 166 Commisranvig (NPK1) 167 SAerehabeltabon (NPK2) - 168 EqulpmatInstuliaton (NPK2) Commmsioming(NPK2) l 170 NitrateLine 171 Nitric acid plant 172 Callfot b,ds - 173 Sdepreparablon 174 Rehabrtxaton 176 COmmisoM,ns.g 176 Arnmonbumnitrat 177 Callfor bids 176 Scnebbrostallatbon,_ 179 Commissbmnrg Annex 7 Page I of 10

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

FINANCIAL VIABILITY AND INTERNALIZATION OF COSTS

1. Financial projections through the year 2000 support the capacity of ASMIDAL and ENSIDER to internalize the cost of environmentally-related investments. These projections have been derived from budgetary estimates for 1996 provided by each enterprise together with assumptions for 1997 onward that take into account, inter alia, sales forecasts based on expected productivity increases and international price references, as well as the two enterprises' restructuring plans.

ASMIDAL

2. ASMIDAL's main product lines are NPK (15-15-15 and several other varieties), ammonia, and nitric acid. In 1995, the company produced 180,000 tons of NPK and 216,000 tons of ammonia. NPK production will increase by 23.5 percent beginning in 1996 and will level off at 250,000 tons in 1997, which will represent 76 percent of installed capacity. Ammonia production in 1995 was 240,000 and will increase by 7.5 percent during 1996. By the end of 1997, production will reach 400,000 tons which will represent 45 percent of installed capacity. In view of the current favorable conditions in the international ammonia market coupled with ASMIDAL's installed capacity of 900,000 tons, ASMIDAL is an excellent position to increase its production for exports as well as for the production of fertilizers to meet local growing demand.

3. In 1996, the price per ton of NPK is US$254 and per ton of ammonia US$147.50. The price for NPK is based on relatively low international prices with 25 percent added to cover the duties that would be paid by fertilizer importers on the newly liberalized market. Since ammonia is already being exported by ASMIDAL and is in high demand on the international market, its price per ton has been based on an equally low reference point (US$120-200).

4. In 1995, ASMIDAL had gross revenues of DA 4.4 billion (US$82.9 million). Respective increases of 35 percent in 1996 and 50 percent in 1997 are envisaged and will be essentially due to ongoing investments in plant and equipment outside the scope of the Bank-assisted project. In 1998, most of the new assets, including those financed by the Bank, will be operational.

ENSIDER

5. ENSIDER's main product lines range from slabs (about 50), heavy plates (seven, including concrete billets), steel pipes (about 20), and molten steel (about 8). The company has about 50 percent of the heavy plates market, at least until 1997. Prices on this market are free and influenced by ENSIDER's competitors. The steel for reinforced concrete market is an excellent example of price liberalization which took place in 1995, for which ENSIDER set its price at about 17,500 dinars (US$326) per ton (excluding tax) compared with about 18,000 dinars per ton (US$335) (excluding tax) charged by the private sector. Annex 7 Page 2 of 10

6. The company has a virtual monopoly on slabs and by far has the greatest market share of steel pipes. Its gross revenues have evolved from DA 7.7 billion (US$14.3 million) in 1983 to DA 11.2 billion (US$20.9 million) in 1990 reaching DA 26.9 billion (IJS$50.0 million) in 1995. It is envisaged that an increase in gross revenues, in real terms, by 30 percent between 1995 and 1997, based on an annual production of 1.5 million tons of steel, will allow an increase in capacity utilization to about 70 percent. Such increase will be the result of the coming on line of new assets being acquired under the company's present investment program will have been put into operation, to wit the blast furnace, the sintering plant, and the coke oven.

7. Notwithstanding the purely environmental nature of the Bank-financed project, which complements the company's investment program, the elimination of dust from the electric arc furnace will add two coulees with a total value of approximately DA 720 million (US$13.4 million) per annum

Other Assumptions

8. Financial projections for the two enterprises are also based on the following assumptions:

(a) Operating Costs. Personnel costs are expected to rise with inflation, taking into account staff reduction due to the closure of the sulfuric and phosphoric acid plants in the case of ASMDAL. Energy, raw materials, and services are proportional to sales less 10 percent, which has been applied to reflect cost containment and efficiency measures;

(b) Depreciation Expense. It is assumed that the plant and equipment on average will be renewed every 20 years; therefore, 5 percent p.a. has been applied to gross fixed assets;

(c) Debt Service. The present market rate for interest is 21 percent , which is expected to decrease along with local inflation. Accordingly, the rate of local inflation plus 2 percent has been applied;

(d) Assets. All new investments are assumed to be part of this project;

(e) Accounts Receivable. A receivables turnover ratio of about 4.0, i.e., three months of revenues, is assumed;

(f) Inventory. An inventory turnover rate of 2.0, i.e., eight months, is introduced incrementally; and

(g) Accounts Payable. Cash flow should be adequate to pay suppliers within four months of receipt of invoices.

9. ASMIDAL's and ENSIDER's historical and projected financial statements are presented in the following tables: Annex 7 Page 3 of 10

ENSIDER

INCOMESTATEMENT (DA millon)

1993 1994 1995 1996 1997 1998 1999 2000 Actual Forecast OPERATINGREVENUES Sales 19,624 22,595 26,864 32,300 37,736 40,420 46,191 52,600 Services 341 607 531 1,063 1,120 1,180 1,243 1,310 Other Revenues 1,533 393 1,202 1,329 1,469 1,624 1,795 1,984 Subtotal 21,498 23,594 28,597 34,692 40,325 43,223 49,229 55,895

OPERATINGCOSTS Personnel 3,762 3,837 4,749 4,925 4,973 5,017 5,446 5,684 Energy & Materials 10,553 13,730 15,915 20,883 20,693 22,706 24,578 28,608 Services 1,115 1,608 1,604 2,812 1,992 2,352 2,263 2,939 BusinessTaxes 559 821 820 1,025 1,115 1,178 1,234 1,380 Miscellaneous 148 150 243 150 150 150 181 170 Subtotal 16,137 20,146 23,331 29,795 28,923 31,403 33,702 38,781

Depreciation 1,363 3,404 3,829 3,525 3,783 3,986 4,039 4,042

Total OperatingCosts 17,500 23,550 27,160 33,320 32,706 35,389 37,741 42,823

Net Revenue 3,998 44 1,437 1,372 7,619 7,834 11,489 13,071

Less:Interest (1,492) (714) (3,238) (4,054) (3,412) (3,138) (2,946) (2,420)

Non-OperatingRevenues (804) (1,690) (1,226) - - - -

Profit Before Tax 1,702 (2,360) (3,027) (2,682) 4,207 4,696 8,543 10,651

IncomeTax - - - - 1,388 1,550 2,819 3,515

Net Profit 1,702 (2,360) (3,027) (2,682) 2,818 3,146 5,724 7,136 Annex 7 Page 4 of 10

ENSIDER

STATEMENT OF SOURCES AND USES (DA million)

1993 1994 1995 1996 1997 1998 1999 2000 Actual Forecast

SOURCES OF FUNDS Operating Income before Depreciation 4,557 1,758 4,040 4,897 11,402 11,820 15,528 17,114 Borrowings 4,198 8,240 2,676 4,921 2,542 3,023 1,061 67 Recapitalizationl Debt Restructuri - 13,000 - - - - - Total Sources 8,755 22,998 6,716 9,818 13,944 14,844 16,589 17,181

USE OF FUNDS Investments 1,651 3,122 2,973 6,151 3,178 3,779 1,326 84 increase/Decrease in Working Ca 1,459 15,009 (3,649) (4,541) 3,201 3,773 8,163 10,523 Debt Service Interest 1,492 714 3,238 4,054 3,412 3,138 2,946 2,420 Principal 4,153 4,153 4,153 4,153 4,153 4,153 4,153 4,153 Total Uses 8,755 22,998 6,716 9,818 13,944 14,844 16,589 17,181 Annex 7 Page 5 of 10

ENSIDER

BALANCE SHEET (DA million)

1993 1994 1995 1996 1997 1998 1999 2000 Actual Forecast

ASSETS

Fixed Assets 83,542 83,831 86,804 92,955 96,133 99,912 101,238 101,322 Less: Accumulated Depreciation (44,313) (45,676) (49,505) (53,030) (56,813) (60,799) (64,838) (68,880) Net Fixed Assets 39,230 38,155 37,299 39,925 39,320 39,113 36,400 32,442

Current Assets Cash 2,234 0 1,860 146 1,078 1,784 6,268 17,994 Accounts Receivable 6,593 7,047 7,149 8,673 10,081 10,806 12,307 13,974 Other Debtors 434 434 434 434 434 434 434 434 Inventory 13,028 13,028 13,028 13,028 13,028 13,354 15,487 13,071 Subtotal 22,289 20,509 22,471 22,281 24,621 26,377 34,497 45,472

TOTAL ASSETS 61,519 58,664 59,770 62,206 63,941 65,491 70,897 77,914

LIABILITIES & EQUITY

Equity 21,884 33,650 30,623 27,941 32,148 36,844 45,387 56,038

Long- and Medium-Term Debt 18,614 20,781 19,304 20,071 18,460 17,330 14,237 10,151

Current Liabilities Accounts Payable 4,301 2,067 7,777 10,180 9,641 7,851 8,425 9,695 Current Maturities 3,720 2,165 2,066 4,014 3,692 3,466 2,847 2,030 Overdraft 13,000 Subtotal 21,021 4,232 9,843 14,194 13,333 11,317 11,273 11,725

TOTAL LIABILITIES & EQUITY 61,519 58,664 59,770 62,206 63,941 65,491 70,897 77,914 Annex 7 Page 6 of 10

ENSIDER

FINANCIALRATIOS (DA million)

1993 1994 1995 1996 1997 1998 1999 2000 Actual Forecast

Current Ratio 0.4 2.3 2.3 1.6 1.8 2.3 3.1 3.9 Quick Ratio 0.2 0.6 1.0 0.7 0.9 1.2 1.7 2.8 ReceivablesTurnover 6.5 3.5 4.0 4.4 4.3 4.1 4.3 4.3 CollectionRatio (months) 4 3 3 3 3 3 3 3 InventoryTurnover 1.5 1.1 1.2 1.6 1.6 1.7 1.7 2.0 Monthsto Sell 14 11 10 7 8 7 7 6 Profit Margin 9% 0% 0% 0% 7% 8% 12% 14% OperatingRatio 81% 100% 95% 96% 81% 82% 77% 77% WorkingRatio 75% 85% 82% 86% 72% 73% 68% 69% Debt Service CoverageRatio 0.9 0.7 0.7 0.6 1.5 1.6 2.2 2.6 Debt/Debt& Equity 0% 38% 39% 42% 36% 32% 24% 15% Annex 7 Page 7 of 10

ASMIDAL

INCOME STATEMENT (DA million)

1993 1994 1995 1996 1997 1998 1999 2000 Actual Forecast

OPERATING REVENUES Sales 2,460 3,569 3,565 5,214 7,845 9,156 9,522 9,828 Services 16 62 47 28 36 45 46 48 Other Revenues 4 14 815 89 116 142 148 153 Subtotal 2,480 3,645 4,427 5,331 7,997 9,343 9,717 10,029

OPERATING COSTS Personnel 809 783 846 840 817 879 927 978 Energy & Materials 1,878 1,947 1,672 2,844 3,518 3,940 4,157 4,385 Services 238 189 220 85 111 136 144 152 Business Taxes 72 119 89 103 122 131 138 146 Miscellaneous 59 55 52 80 104 128 135 143 Subtotal 3,056 3,093 2,879 3,954 4,672 5,214 5,501 5,804

Depreciation 1,895 1,701 1,630 1,650 1,016 1,096 1,161 1,178

Total Operating Costs 4,951 4,794 4,509 5,604 5,688 6,310 6,663 6,982

Net Revenue (2,471) (1,149) (82) (273) 2,309 3,033 3,054 3,047

Less: Interest (794) (750) (1,435) (1,473) (964) (1,139) (1,124) (1,066)

Non-Operating Revenues (260) (188) (1,698) -

Profit Before Tax (3,525) (2,087) (3,215) (1,745) 1,345 1,894 1,930 1,982

Income Tax - - - - 444 625 637 654

Net Profit (3,525) (2,087) (3,215) (1,745) 901 1,269 1,293 1,328 Annex 7 Page 8 of 10

ASMIDAL

STATEMENT OF SOURCES AND USES (DA million)

1993 1994 1995 1996 1997 1998 1999 2000 Actual Forecast

SOURCES OF FUNDS Operating Income before Depreciation (836) 364 (151) 1,378 2,881 3,504 3,578 3,571 Borrowings 14,000 7,300 4,534 993 2,167 1,274 1,051 326 Recapitalization/Debt Restructurin 20,142 Total Sources 13,164 7,664 24,526 2,371 5,048 4,777 4,630 3,897

USE OF FUNDS Investments 182 86 - 1,046 2,408 1,592 1,314 407 Increase/Decrease in Working Ca 11,171 6,553 12,396 (1,317) 543 682 798 1,059 Debt Service Interest 794 750 1,435 1,473 964 1,139 1,124 1,066 Principal 1,017 275 10,695 1,169 1,134 1,364 1,394 1,365 Total Uses 13,164 7,664 24,526 2,371 5,048 4,777 4,630 3,897 Annex 7 Page 9 of 10

ASMIDAL

BALANCE SHEET (DA million)

1993 1994 1995 1996 1997 1998 1999 2000 Actual Forecast ASSETS

Fixed Assets 20,229 17,065 17,065 18,111 20,519 22,111 23,426 23,833 Less: Accumulated Depreciation (12,994) (11,450) (13,093) (14,744) (15,760) (16,856) (18,017) (19,195) Net Fixed Assets 7,235 5,615 3,972 3,367 4,759 5,256 5,409 4,638

Current Assets Cash 0 0 1,209 3,469 2,531 3,510 3,727 5,074 Accounts Receivable 724 1,746 661 1,333 1,999 2,336 3,239 3,343 Other Debtors - - 811 246 246 246 246 246 Inventory 1,327 1,639 2,271 1,422 2,111 1,970 1,860 1,726 Subtotal 2,051 3,385 4,952 6,471 6,887 8,062 9,073 10,390

TOTAL ASSETS 9,286 8,999 8,923 9,838 11,646 13,318 14,482 15,028

LIABILITIES & EQUITY

Equity 653 (16,697) (3,587) 2,747 3,648 4,917 6,210 7,538

Long- and Medium-Term Debt 900 8,201 5,844 5,668 6,701 6,611 6,268 5,229

Current Liabilities Accounts Payable 5,489 6,800 4,913 1,318 1,168 1,304 1,375 1,451 Current Maturities 275 - 584 105 129 487 628 810 Overdraft 1,969 10,695 1,169 - - - - Subtotal 7,733 17,495 6,666 1,423 1,297 1,790 2,003 2,261

TOTAL LIABILITIES & EQUITY 9,286 8,999 8,923 9,838 11,646 13,318 14,482 15,028 Annex 7 Page 10 of 10

ASMIDAL

FINANCIALRATIOS (DA million)

1993 1994 1995 1996 1997 1998 1999 2000 Actual Forecast

Current Ratio 0.3 0.2 0.7 4.5 5.3 4.5 4.5 4.6 Quick Ratio 0.1 0.1 0.4 3.5 3.7 3.4 3.6 3.8 Receivables Turnover 3.4 2.9 1.7 3.9 3.4 2.9 2.4 2.0 CollectionRatio (months) 3 2 7 4 4 4 3 3 InventoryTurnover 1.2 1.3 0.9 1.5 2.0 1.9 2.2 2.4 Monthsto Sell 10 9 14 8 6 6 6 5 Profit Margin 0% 0% 0% 0% 11% 14% 14% 14% OperatingRatio 200% 132% 102% 105% 71% 68% 69% 70% WorkingRatio 123% 85% 65% 74% 58% 56% 57% 58% Debt Service CoverageRatio 0.0 0.5 0.1 0.5 1.6 1.6 1.7 1.7 Debt/Debt& Equity 58% 0% 0% *67% 65% 57% 50% 41% Annex 8 Page I of 4

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

INDUSTRIAL POLLUTION CONTROL PROJECT

HIEALTH COST-BENEFIT ANALYSIS

A. General Overview

1. Two different evaluations were considered. 'rhe first one compares the costs of asthma treatment in Annaba given different assumptions about prevalence (i.e., number of cases). The other one is based on a dose-response model that measures the impact of change in pollution levels on some public health indicators.' T he tNvomodels give similar results for the direct health costs related to pollution.

B. Comparative Evaluation of Asthma Cost

2. The cost of asthma treatmentwith present level of prevalence (i.e., 1.67 percent) is compared to the cost of lreatment if prevalence equals the national figure (i.e., 0.80 percent). The assumption is that asthma prevalence is high in Annaba, compared with national average level, because of pollution. The total cost of asthma treatment with the present prevalence is DA 488.06 million. The total cost with national prevalence is DA 233.82 million. Therefore, provided the asthma prevalence in Annaba were reduced to the national average level, the annual benefit from reduced cost of treatment would be DA 254.24 million (US$4.73 rnillion) (see Table 1).

Table 1: Comparison of Asthma Treatment Costs (1995 prices)

With Pollution WithoutPollution Benefit Prevalence 1.67 percent 0.80 percent Numberof Cases 8925 4276 4649

COST (Million DA) Treatmentand Surveillance 178.48 81.67 88.81 Emergencies 12.30 5.90 6.40 Hospitalization 305.29 146.25 159.04 [Thtal - - - - 488.06 233.82 254.24

B. Ostro, "Estimatingthe Health Effectsof Air Pollutants,"The World Bank, Policy ResearchDepartment, 1994. Annex 8 Page 2 of 4

C. Utilization of the Dose-Response Model

3. The dose-response model gives the annual number of cases, for some pubiic health indicators, directly linked with levels of pollution exceeding the WHO standards. The study was used to calculate the health cost due to pollution with Total Suspended Particles (TSP) in the wilaya of Annaba (Tables 2 and 3).

Table 2: TSP Concentration

Cities or neighborhoodsof Population MeasuredTSP (,g7m-3 TSP concentratiorTin Annaba urban area excess of WHO standards (80 ttg/m3) El Bouni 107 000 316 236 Darraji Errdjem 13 000 365 285 Sidi Amar (without D. 71 000 130 50 Errjem) and El Hadjar (Sid Amar) Exposed Areas of Annaba 136 000 154 74 (Annaba-center) Unexposed and Calm Areas 136 000 137 57 of Annaba (Annaba-Kouba) l Total 463 000 WHO standard: 80

Table 3: Impact Factors of the Dose-Response Model

Public health indicators Impact factors of 10 yg/n3 change in TSP(dose-response) Mortality 4.9 / 100 000 people Respiratory Hospital Admissions 12 / 100 000 people Emergency Room Visits 235.4 / 100 000 people Restricted Activity Days 57,500 / 100 000 people Asthma Attacks 32,600 / 100 000 asthmatics RespiratorySymptoms (days with) 183,000 ' 100 000 people Chronic Bronchitis 61.2 / 100 000 people

4. The unit costs and total cost were then calculated. The total cost represents the benefit for society if TSP pollution is reduced from the present level to WHO standards. Conversely, this cost is paid by society as long as nothing is done to reduce pollution. If particulate matter is not reduced fromnpresent levels to WHO standards, it is expected that 246 deaths. 2.9 million restricted activity days and 27,300 asthma attacks will occur every year. Morbidity alone amounts to an annual social cost of DA 1.4 billion (US$25.7 million). The cost breaksdown into direct cost (i.e., cost of treatment of diseases due to pollution: DA 514 million, or US$9.6 million) and indirect cost (i.e., cost of lost production for society because of restricted activity days: DA 868.4 million, or US$16.2 million) (see Table 4). Annex 8 Page 3 of 4

Table 4: Morbidity Cost

Annual Intermediatecalculations Annual cost cases (M DA) DIRECT COSTS RespiratoryHospital 603 x DA 27,429/hosp.day x 12 days/stay 198.8 Admission EmergencyRoom 1183 x DA 787/emergency 9.3 Visits AsthmaAttacks 27 378 x DA 9,114/attackx 6 attacks/patient/year 248.8 Respiratory 9 202 613 x DA 6.2 (self treatment)/symptom 56.5 Symptoms Sub-total 513.6 INDIRECTCOST RestrictedActivity 2 891 531 x DA 300 (GNP/person/day) 868.4 Days l TOTAL 1382.0

5. Given an annual population increase rate of 2 percent in Annaba, the total cost for ten years is DA 15.1 billion (US$281.8 million). With a discount rate of 15 percent, the net present value for ten years is DA 8.5 billion (US$159.0 million). Furthermore, the real social cost is probably higher since calculations were limited to TSP only (lowered to WHO standard level) and mortality has not been evaluated (see Table 5).

Table 5: Total Cost After 10 Years

Annual Cost Total Cost DiscountedTotal Cost 1st year after 10 years after 10 years

Million DA Million DA Million DA DIRECT COSTS RespiratoryHospital 198.8 2,176.4 1,228.5 Admissions EmergencyRoom Visits 9.3 102.1 57.6 Asthma Attacks 248.8 2724.6 1,537.9 RespiratorySymptoms 56.6 620.2 351.0 Sub-total 513.6 5623.3 3174.1

INDIRECTCOSTS Restricted Activity Days 868.4 9,509.9 5367.4

TOTAL 1382.0 15,132.3 8,541.5

D. Economic Analysis of the Pilot Investments Component

4. The economic evaluation of the pilot investments component of the project includes savings in Annex 8 Page 4 of 4

health costs and productivity losses as the primary benefit, as well as improvements in production capacity and quality, as a by-product. Clearly, because all the benefits are not quantifiable, economic rates of return (ERR) cannot be usefully determined for each enterprise. In the case of ENSIDER, although all the investments are end-of-pipe, dust reduction alone will allow for more efficient use of the electric arc furnace, resulting in productivity enhancement valued at well over US$6.0 million; thus, the economic justification of the investment is based mostly on improvements in environmental quality. Since ENSIDER contributes about 90 percent of TSP, this corresponds to an ERR of 49 percent using ENSIDER investment cost and a yearly benefit stream of 90 percent of total social cost plus productivity gains. In the case of ASMIDAL, the project's environmental benefits cannot all be estimated, particularly those related to ecological impacts of phosphogypsum pollution. However, avoided TSP pollution and process efficiency (mostly in the form of product losses avoided) are used to compute an ERR of 29 percent. Table 6 summarizes key elements of the cost-benefit analysis.

Table 6: Sub-Projects Benefits and Costs (US$ Million, base year 1996)

Net Present Value of Benefits Source of Difference Sub-Projects2 Costs3 and Costs4 Economic Financial Taxes Health

ASMIDAL 35.0 37.2 17.2 9.5 10.5

ENSIDER 32.5 73.2 -27.6 6.7 94.0

Rate of Return

ASMIDALSub-project 29% 19%

ENSIDER Sub-project 49% -8%

2 See paras. 22, 28 and 29 of Annex I for details of the sub-projects.

3 Excludingtaxes.

4 The applied discountrate is 12 percent.

2 0 2 46 8'

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Report No: 14495 AL Type: SAP