Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency Environment Category Report No. PID8866 Algeria-Privatization Assistance Middle East and North Africa Region Privatization DZPE70123 GOVERNMENT OF ALGERIA Date PID Prepared April 4, 2000 Projected Appraisal Date April 21,2000 Projected Board Date Address MINISTRY OF PARTICIPATION & COORDINATION OF REFORMS (MPCR) 11 rue Ibn Baddis El Mouaiz, El Biar, Algiers, Algeria Contact Person: His Excellency Hamid Temmar, Minister of Participation and Coordination of Reforms Tel: (213-2) Fax: (213-2) C 1. Country and Sector Background Privatization remains a key challenge for private sector development in Algeria. Algeria had sought to introduce privatization as early as 1994, and has had considerable success in spinning off small units to workers. However, the main emphasis of past efforts has been on public enterprise reform. As a result, after a decade of restructuring public enterprises, at an estimated cumulative cost of some DA840 billion (US$21 billion equivalent) and some 450,000 jobs, Algeria's privatization program has not yet resulted in a single sale of corporatized public enterprises to outside private interests. The current Government is aware of the shortcomings of the past approach, and in its Government Program has expressed its commitment to accelerate privatization in a transparent manner under a new institutional set up geared towards improving transparency and efficiency of the privatization process.current Status of PrivatizationA first step towards paving the way for privatization was made in the Loi de Finance Complementaire in May Its articles 24/25 authorized so-called "partial" privatization of public enterprises. The terms and conditions for partial privatization specified that (i) up to 49 percent of the equity of an enterprise could be acquired by private persons either through the Stock Exchange or negotiated agreements; (ii) assets and activities including entire production units of a public enterprise could be sold or divested to private interests; and (iii) the management of an enterprise could be transferred to a private entity. These modalities also allowed the creation of private-public joint ventures.subsequent legislation for privatization issued in August 1995, Ordonnance 95-22, allowed for case-by-case "total" privatization of up to 100 percent of equity and assets of public enterprises in specified economic sectors (building and construction, hotels and tourism, commerce and distribution, textiles and agribusiness, various processing

2 industries, roads, port and airport services, and "local" small-medium sized enterprises). It also provided for the establishment of a Conseil National de Privatisation, in charge of executing total privatization, and following cumbersome administrative procedures (only some of which were removed through Ordonnance in March 1997) under close control of the Government. This legislation was complemented in September 1995 by the Ordonnance relative a la gestion de capitaux marchands d'etat, which created initially eleven (today twelve) sectoral and five regional public holding companies, entrusting them with the management and administration of all the public enterprises in their respective portfolios. These holdings in turn were placed under the control of the Conseil National des Participations de l'etat (CNPE), composed of eleven key Ministers and presided by the Prime Minister and assisted by a small technical secretariat. Under this legislation, public enterprises and public holding, as joint stock companies, have the right to dispose of their assets as per the commercial code, including divesting them following a simple procedure under the stipulations for partial privatization. Public enterprises can thus sell their assets (including complete operating units) to private buyers or contribute them to new joint ventures with private partners; and public holding can sell full sub-units or large equity stakes of public enterprises in their portfolio. In principle, these transactions need the consent of the CNPE, which however has given large leeway to public holdings. Until recently, the cash proceeds of such sales have stayed with the holdings, while on the contrary proceeds of total privatization total were deemed to go to the budget. The holdings have certainly played a positive role in introducing some accountability in enterprises where managers had previously acted without any oversight by the State, and in preparing the ground for the eventual privatization of enterprises of their portfolio. They have caused these enterprises to introduce accounting systems and submit more reliable financial statements, regularize ownership titles on their property, implement financial restructuring (with massive debt write-offs by the State) and reduce staffing. They also have not shied away from downsizing large conglomerates and liquidating distressed enterprises. Their massive liquidation effort resulted in the closing of 935 out of a total of 1324 local public enterprises, and of 76 out of a total of 411 national public enterprises. The costs of financial restructuring under the holding regime amounted to Dinar 327 billion (in addition to prior restructuring costs of Dinar 513 billion). In the context of this restructuring, some 320,000 employees were laid off between alone. At the same time, the holdings facilitated the creation of some 1050 new private enterprises through spin-off or sale of assets to employees and managers, resulting in an estimated 25,000 jobs. Under the partial privatization regime, the holdings also arranged for three public offerings at the Algers Stock Exchange, involving 20 percent of shares each for a pharmaceutical enterprise, a food-processing firm and a hotel, as well as for eight joint ventures, six of which originated with the holding for chemistry and pharmacy. However, holdings have had no incentives to support any effort at total privatization (implying transfer of revenues to the Treasury), or at transfer of strategic control (implying loss of management positions) of existing enterprises in their portfolio. Partial privatization also has followed simpler procedures by allowing gre-a-gre and not requiring any competitive bidding procedures -- at expense of transparency. Notwithstanding this incentive structure, the Conseil de Privatisation was asked to prepare the total privatization of 89 production units through -2 -

3 international competitive bidding. A first batch of 35 units was offered for sale in fall 1989, followed by a second batch of 26 units in February However, due to the political transition, the previous Government eventually aborted the process, even though 36 tenders (half of them from international investors) met the technical qualifications and exceeded the stipulated minimum price. As a result, Algeria's privatization program has not yet resulted in a single sale of majority interests or transfer of control to outside private interests. Problems and IssuesThe new Algerian Government established in December 1999 is well aware of the shortcomings of the existing privatization arrangements and of the limitations of the privatization program inherited from the previous Government. These include: (i) lack of a privatization strategy, with clear time-bound objectives underpinned by a detailed implementation plan and supported by a broad-based information campaign; (ii) an overall lack of financial and human resources devoted to the privatization process and its supporting institutions, particularly in the Conseil de Privatisation; (iii) unclear legal and institutional arrangements, with confusion between two parallel tracks (partial versus total privatization) and overlapping roles and responsibilities of the Conseil de Privatisation and the holdings; and (iv) a bias towards partial privatization, often without addressing issues of enterprise governance (in the case of public offerings) or management expertise (in the case of sale to employees), and with only limited transparency. An important obstacle in the recent past, lack of investor interest, may be gradually disappearing as: (i) perceptions of investors from abroad (strategic partners as well as expatriate Algerians), of the country's security situation and its investment climate, is improving; and (ii) as there is a potential to offer more attractive enterprises (with better financials, reporting, and profitability) for privatization than in the past. Government strategyalgeria's new leadership, both President and Government, have expressed early on their commitment to accelerate privatization and address its most pressing constraints, and have emphasized the urgent need for Algeria to attract foreign investment. A new ministry, the Ministry of Participation and Coordination of Reforms (MPCR) has been created, and is likely to receive a broad mandate comprising: the exercise of ownership rights over state-owned equity in enterprises; privatization; investment promotion; and coordination of economic reforms. This Ministry will among other tasks, articulate the privatization strategy, elaborate and control the privatization program, supervise a new privatization agency, and take on the responsibilities of the former technical secretariat of the CNPE, with expanded control over the holdings. The Conseil de Privatisation will be transformed into a full-fledged Privatization Agency (PA) with adequate resources, primarily staffing and funds to hire badly needed external advisers.a strong emphasis will be placed on privatization transactions with strategic partners and foreign investors, with extensive use of investments banks, auditing firms, consultants and legal advisers. Growing numbers of foreign firms are expressing interest in investing in Algerian public enterprises in a number of sectors and public holdings are currently pursuing discussions with diverse foreign partners. The authorities thus realize how urgent it is to acquire high level professional expertise and build the capacity to handle complex privatization transactions with foreign investors in a transparent manner. The existing public holdings will be dissolved and about 40 new industrial/financial sub-holdings or "groups" will be created to take over the public enterprises currently under the holdings. The role of these new groups with respect to the upcoming -3 -

4 privatization of the enterprises in their portfolio, and thus vis-a-vis the Privatization Agency, will need to be further clarified. However, it is envisioned that execution of most privatization transactions, whether partial or total, will be concentrated in the Privatization Agency. As mentioned above, exercise of ownership rights and overall responsibility for the privatization process will rest with MPCR. Thus, a strong capacity will also need to be built in this Ministry. The immediate objective for the next 18 to 24 months will be to launch and complete about 50 significant privatization operations - targeted mainly at strategic investors who will bring know-how, improved management techniques and corporate governance, and financing. The major concern is not to generate cash proceeds from privatization, but to develop and improve the performance the enterprise sector. To this end, strategic investors can acquire a stake in an public enterprises by either buying existing shares or by subscribing to new shares through a major capital increase, if it is deemed that the enterprise is in need of significant funding. Further, the Government is aware that the legislative framework for privatization will need to be revamped - unifying in particular the partial privatization and total privatization tracks. It is also expected that most sectoral restrictions to privatization will be lifted, and that the scope of privatization will be expanded to most of the economy. Even for the hydrocarbons sector, there is an ongoing debate about the scope of privatization. However, for most infrastructure services, private sector participation will only be engaged in the context of regulatory reforms which will take some time to develop. 2. Objectives Over the last two years, there has been an intensive dialogue with the Algerian authorities on both the technical and political level regarding the formulation of a private sector development (PSD) strategy. In the context of this dialogue, a broad private enterprise survey was conducted and a PSD Strategy Note was prepared in close collaboration with an Algerian counterpart team. Furthermore, initial discussions were held with the current Government to identify potential Bank Group interventions to support implementation of this strategy. The proposed Privatization Assistance Project (PAP) grew out of this dialogue, and would be a first element of a broader effort to support the proposed PSD strategy (see Box 1, Section B below).the project development objective of the proposed project, which would address a key issue identified in the PSD strategy note, is to create the basis for an accelerated implementation of a credible privatization program under a new institutional set-up. To this end, the project provides capacity building support to the Ministry of Participation and Coordination of Reforms (MPCR) under whose authority the privatization process will be streamlined and centralized. Transaction assistance will also be provided to the Conseil de Privatisation, which will be converted into a Privatization Agency reporting to MPCR in charge of executing transactions. The assistance provided under the project should enable the Government to close a set of pilot transactions following a competitive and transparent process, thus providing an important learning experience and demonstration effect for future scaling-up of the privatization program. 3. Rationale for Bank's Involvement -4-

5 4. Description Component 1: Capacity Building of MPCRThis component aims to strengthen the institutional capacity of the MPCR, by providing financial resources and expertise, and to streamline privatization procedures. Specifically, the component allows for hiring of: (i) one visiting high level international policy advisor to the Minister; (ii) legal advisory services from an international reputable legal firm; and (iii) two resident technical advisors to MPCR's department in charge of oversight of enterprise groups. The component also includes funds for hiring short-term specialists and/or organizing a study tour for MPCR staff. Component 2: Transaction Support to Privatization Agency This component aims to strengthen the transaction capacity of the Privatization Agency. Specifically, the component allows for hiring of: (i) one resident senior transaction advisor to the Privatization Agency; (ii) investment banks to assist in the implementation of about five complex transactions; and (iii) advisory services to design specific outreach and information activities. Component 3: Project Implementation Unit This component aims to ensure adequate general and financial management of the Project. Specifically, the component allows for hiring of: (i) a project sub-manager with procurement skills; and (ii) a financial management specialist. 5. Financing Total ( US$m) Government 0.5 IBRD 5 IDA Total Project Cost Implementation Project implementation will be ensured by the project implementation unit described above, supported by a dedicated senior staff of the MPCR. Following the successful example of the Bank's cooperation with the Social Development Agency (ADS), the unit will be housed in the MPCR, but be set up as a legal entity with financial and administrative autonomy under the commercial code. Through the dedicated senior staff, the unit will report directly to the Minister. The capabilities of the PIU will be assessed before effectiveness with respect to financial management and reporting systems, including accounting, financial reporting, auditing, internal and other control procedures. An accounting firm is being engaged to help design a proper accounting system which, when implemented, will ensure that the project accounting meets "International Accounting Standards" as issued by the International Accounting Standards Committee. Draft templates for the Financial Management Reports will be attached to the Project Implementation Plan. 7. Sustainability -5-

6 8. Lessons learned from past operations in the country/sector 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues : Core environmental legislation is in place in Algeria. The public enterprises selected for the pilot transactions supported by this Project will be chosen among the group of enterprise with no or minimal environmental liabilities. At the same time, the environmental capacity of the MPCR and the Privatization Agency will be strengthened under follow-up privatization assistance from the European Union and/or the World Bank. Terms of reference for the investment banks hired under the Project will include the obligation to ensure that environmental aspects are duly taken into account in the preparation and negotiations of the transactions. 11. Contact Point: Task Manager Axel R. Peuker The World Bank 1818 H Street, NW Washington D.C Telephone: (202) Fax: (202) For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending April 21,