Report No. 415-AL FILE COPYAlgeria: Appraisal of aPower Project (SONELGAZ)(Societe Nationale de l'Electricite et du Gaz)

May 20, 1974

Europe, Middle East and North Africa Projects DepartmentPower and Energy Development Division

Not for Public Use

Document of the International Bank for Reconstruction and DevelopmentInternational Development Association

This report was prepared for official use only by the Bank Croup. It may flot be published,quoted or cited without Eank Ctoup authorization. The Bank Croup does not accept re5ponsibilityfor the accuracy or completeness of the report.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURFENCY EQUIVALENTS

Currency Unit = Dinar (DA)DA e 100 DA 1.00US$0.2702 - DA 1.00US$270,200 ' DA 1 millionUS$1.00 - DA 4 .09

SYSTES OF 1eIGHTS AND MEASURES

Metric System

1 hectare (ha) (10,000 m2 ) = 2.471 acres (ac)1 square kilometer (km2 ) = 0.3861 square mile (sq mi)1 cubic mter (m3 ) = 35.315 cubic foot (cu ft)1 kilogram = 2.206 pound (lb)1 metric ton (t) (1000 kg) = 1.10 short ton (sh ton)

o.985 long ton (lg ton)1 barrel (bbl) (0.159 m3 ) - 42 US gallons1 kilowatt (1000 Watt) = 1 kW1 Mégawatt (1000 kW) = 1 MW1 kilowatthour 6 = 1 kih1 Gigawatthour (10 kWh) = 1 GWh1 kilovolt (1000 Volt) = 1 kVI kg force/cm2 (technical atm.) - l4.223 psi (lb/sq inch)BTU = British Thermal Unit1 kcal (kilocalory) = 3.968 BTU (1 BTU-0.293x103 kth)therm = 1000 kcal1 Hz (Hertz) cycle/second

ACRONXNS AND ABBREVIATIONS

SONELGAZ Societé Nationale de l'Electricité et du Gaz

SONATRACH Societe Nationale pour la Recherche, laProduction, le Transport, la Transformation,et la Commercialisation des Hydrocarbures

BNA Banque Nationale Algerienne

BAD Banque Algerienne de Developpement

CNEP Caisse Nationale d'Epargne et de Prevoyance(Trust and Saving Go.)

EdF Electricitë de France

FISCAL YEARJanuary 1 to December 31

ALGERIA

APPRAISAL OF A POWER PROJECT

SOCIETE NATIONALE DE L'ELECTRICITE ET DU GAZ (SONELGAZ)

TABLE OF CONTENTS

Page No.

SUM"ARY AMID CONCLUSIONS , .................... i - ii

1. INTRODUCTION ...... .... . ........... ,

2. THE ENERGY AND POWER SECTOR ...... ........... *es.. 1

General . ........ # ...... * *.............. *.... **. 1Energy Resources ............. .. .. ............ 2Organïzation ........... a............................. ....... 2Future Developments .....o .............. ... ....... 4International Interconnection .... ............. 5

3. THE BORROWER .................... .... o...... ..... 5

Legal Background ................ * 5Management and Organization ...................... 6

Management .................... ..... ............... . 6Organization ...................... ..... . . . 6Staffing ........................... 6Training ....... 0 ........ 0....6Organization Study .......................... 7PlaTiing ...........O.*..****. .... a......... ...** 7Operations ............... .......................O..... ., 7

Tariffs ................ ............................. 7Electricity .................................... 7Gas ............o..................et.......... 8

4. THE PROJECT ............................... .. 9

Project Description . .................. ..... 9Cost Estimates .. ................. ... .............. . 9Status of Engineering and Construction ....... .... 10Procurement and Disbursement ..................... ilEnvironment ..... ........... ............................ 11

This report was prepared by Messrs. W.F. Kuipper (Engineer) and Y.P. Buphomène(Financial Analyst). Ms. J. Chernock edited the report.

TABLE OF CONTENTS (Cont'd) Page No.

5. JUSTIFICATION ....... *******........................*........*....* 12

Objectives ................................................. 12Forecast of Power Requirements .................. . 12Generating Plant ................................... 13Dispatch System ... . ...... ... ..... a 14Substations ....................................... 14Rate of Return of Project .................... .... 15

6z. FINANCIAL ASPECTS ... ...................... ..... . 15

SONELGAZ's Financial Responsibility and Viability 15Accounts ................................ .*. .. . 16Audit ............................................ 16Insurance .. . ... . ... ...... ....... 17Taxes, Duties, and Social Security ............... . 17Contribution to Government's Development Program . 17Balance Sheet ...... e ............................. 18

Fixed Assets ....... ......................... 18Inventories ...... ............................ 18Receivables ......................... *.*......... a....o... 18Equity ............... ............ o* ................o*. 19Long-Term Debt . ......... ........-... ..... . 19

Past and Forecast Operating Results ...... ....... 20Electricity Department Operating Results ......... 21

Gas Department Operating Results ....... ...... 22Other Activities Operating Results ........... *... 22Financing Plan .... .. ..... .a. . . .. ....... ..... . .... . 22

SONELGAZ Overall Financing Plan ............. 24Electricity Financing Plan ................... 24Gas Financing Plan . ............... .......... 5

7. AGREEMENTS REACHED ...... ..................... ..... 25

ANNEXES

1. Energy Sector Organization2. Power Sector Data3. Construction Program Expenditures4. Legal Background Information5. Company Statistics and Indicators 1968-19726. Outline of Reorganization Study, Proposed Terms of

Reference for Tariff Studies7. Description of Project8. Project Estimated Construction Cost9. Schedule of Estimated Disbursements10. Historic and Forecast Sales, Generation, Maximum Demand

and Plant Capacities

TABLE OF CONTENTS (Cont'd)

11, Capacity Schedule, 1972-197812. Fuel Requirements and Cost for Electricity, 1972-197813. Justification of Project14. Balance Sheet - Actual 1970-1972, Forecast 1973-197815. Income Statements - Actual 1970-1972, Forecapt 1973-197816. 1972 Revenue Account Per Activities17. Sources and Application of Funds 1972 and 1973-197818. Major Assumptions Used as Basis for Financial Forecasts19. Long-Term Debt as of December 31, 1972

MAP

IBRD-10892

ALGERIA

SOCIETE NATIONALE DE L'ELECTRICITE ET DU GAZ

POWER PROJECT

SUMMARY AND CONCLUSIONS

i. This report appraises a Power Project for the Societé Nationale del'Electricité et du Gaz (SONELGAZ), a Government-owned company responsiblefor generating, transmitting and dis tributing eleetricity and gas throughoutAlgeria.

ii. The Project comprises 120 MW of gas turbine capacity at Algiers,three 220-kV substations, six 60-kV substations and one 90-kV substation invarious locations, dispatch facilities, and various management and technicalstudies. The total cost of the Project is estimated at US$64.3 million, in-cluding a foreign exchange component of US$38.5 million equivalent. The pro-posed Bank loan would finance this foreign exchange component, which excludesinterest during construction. The Project forms a small part (9.4%) ofSONELGAZ's forecast 1973-78 construction program costing US$681 million(US$483 million for electricity, US$152 million for gas and US$46 million forbuildings and general equipment). Procurement would be on the basis of Inter-national competitive bidding in accordance with the Bank's guidelines and 15%local preference would be allowed for Algerian manufacturers in bid evalu-ation.

iii. In addition to items included in the Project, SONELGAZ's 1973-1978power development program comprises completion of a 274-MW steam station atSkikda; the installation of gas turbine stations at Hassi R'Mel and Arzew(8() MW each), construction of a second 220-kV line between Algiers and Oran,conversion of existing lines and substations to 220 kV, and large expansionsin distribution.

iv. Because of the length of its interconnected network, SONELGAZ isexperiencing problems in maintaining stability, voltage, security and spin-ning reserve, aggravated by an inadequate control system comprising onlylimited communication facilities. The dispatch facilities included in theProject would assist SONELGAZ in remedying these difficulties.

v. Management and operations are satisfactory. Training is excellent.SONELGAZ's organization has not been changed materially since 1947 and in somerespects is inadequate. A consultant has already been appointed to carry outa reorganization study which would be financed by the proposed loan. Retro-active financing totalling about US$300,000 is proposed for this contractarid the engineering contract for the dispatch system, covering costs incurredsince appraisal.

- ii -

vi. With respect to SONELGAZ's electricity activity, the present rate ofreturn of 5.1% on net fixed electricity assets would rise to 7% by 1978 on thebasis of present tariffs. Internal cash generation would cover 20% of thecost of the 1973-1978 construction program for electricity. The Governmentand consumers' contributions would finance 41% of the program, and long-termborrowing, including the proposed loan, would finance 39% of it.

vii. Although SONELGAZ's tariffs are adequate to provide a reasonablerate of return for its elextricity activity, once the ambitious nationalpower expansion program has been completed, the entity had forecast that itsoverall financial position would gradually deteriorate due to the size of theexpansion program (including that for gas) and the operating deficit of itsgas and other activities, unless appropriate measures were taken to improvethe trend. In order to reach this qbjective the Goverament and SONELGAZagreed on a combination of electricity targets and objectives for rate ofreturn, the ratio of surplus to investment program, the ratio of net revenueto debt service requirements, to set prices and charges for operations otherthan sale of electricity and gas not below cost, and to make the period offuture Government loans to SONELGAZ consistent with the economic life of therelevant assets. SONELGAZ will furnish the Bank annually with information,approved by the Government, indicating how it plans to meet the targets, andhow it expects to meet operating deficits and financing gaps (if any) in itsgas and other activities. A tariff study will be made for electricity and amarket/tariff study for gas.

viii. In views of the agreements reached as set forth in Section 7, theProject would be suitable for a Bank loan to SONELGAZ of US$38.5 millionequivalent, repayable over 20 years including a grace period of 3-1/2 years.

ALGERIA

SOCIETE NATIONAL DE L'ELECTRICITE ET DU GAZ

APPRAISAL OF A POWER PROJECT

1. INTRODUCTION

1.(1 The Government of Algeria, on behalf of the Societeé Nationale del'Électricite et du Gaz (SONELGAZ), has requested the Bank to help financea Project estimated to cost US$64.3 million. For this Project, which formsa small part (9.4%) of SONELGAZ's 1973-78 construction program, a loan ofUS$38.5 million is proposed to finance the foreign exchange cost. TheProject would comprise two gas turbine stations in Algiers with a capacity of120 MW, various substations, dispatch facilities, and several studies, includ-ing a general organization and management study.

1.02 The Project is based on a study prepared by SONELGAZ for the Algierspower stations and on a feasibility study prepared by Electricite de Francefor the dispatch facilities. A consultant (PA International of U.K.) hasalready been appointed for the organization and management study.

1.03 A previous Bank loan (131-FR) of US$10 million was made in 1955,prior to independence, to Electricite et Gaz d'Algerie (EGA), SONELGAZ'spredecessor, under guarantee of the French Government, to finance part ofEGA's expansion 1955-1958 program in generation, transmission and distribu-tion.

1.04 The Project was prepared following two Bank reconnaissance missionsin 1972 and 1973. This appraisal report was prepared by Messrs. W.F. KÜpper(Engineer) and Y.P. Buphomène (Financial Analyst) and is based on informationprovided to them by SONELGAZ during an appraisal mission in October/November1973.

2. THE ENERGY AND POWER SECTOR

General

2.01 The Democratic and Popular Republic of Algeria, on th2 southwestcoast of the Mediterranean, has an area of about 2.3 million km (885,000square miles). Most of its estimated 15 million inhabitants live in thefertile coastal area, which'covers about 20% of the country. This area isseparated by the Atlas mountain ranges from the predominantly desert areain the south. Of the 44 million ha fertile area, about 34 million ha (15%of the countrv's land area) is used for grazing, 8 million ha (3%) is activelycultlvated and 2 million ha (1%) is covered by forests.

-2-

Energy Resources

2.02 Algerials major natual 3resources are oil and gas. Its proven oilreserves are at least 1.9 x 10 m (12 billion barrels) and the 1973 output,including gas condensate, was 51 million tons or about 1 million barrels perday. The main oil fields are in the central desert area of Hassi Messaoud/Haoud el Hamra. The natural gas field of Hassi R'Mel is one of the world'slarg~st, with proven recoverable reserves (under present techniques) of 3,000x 10( m . Additionally, some 1,000 x 109 m of proven reserves are distributedamong 8 other fields. Liquified natural gas (LNG) is now being exported fromArzew and Skikda and similar large-scale projects are under way includingpipelines across Tunisia and under the Mediterranean, to Italy. The maincenters for processing oil are refineries at Arzew, Algiers, and Skikda.Tule ports of Arzew, Bejaia and Skikda export oil. A project for the con-struction of the new LNG port of Bethioua, near Arzew was appraised for Bankfinancing concurrently with the present power Project, as was a railway re-habilitation project.

2.03 The country's hydro resources are limited and most of the hydropotential is already being exploited for power (284 MW installed capacity,supplying an average of 400 GWh annually), but effective capacity is re-stricted (184 MW) due to irrigation requirements.

2.04 Coal reserves are small, and mainly concentrated around Becharwliere, before independence, about 300,000 tons were mined annually. Themines are being modernized and production is to be increased to 600,000 tonsannually to be used mainly in coke-making for the steel works at El Hadjarnear Annaba in the east. Little coal is currently used for other purposes.

Organization

2.05 An outline of the organization of the energy sector, establishedin 1969 under the Ministry for Industry and Energy, is shown in Annex 1.

2.0( SONELGAZ has the exclusive right to transmit and distribute powerthroughout the country. Its right to generate power is not exclusive. Fac-tories, requiring up to 1,000 kVA, may be auto-producers, and any factoryrequiring process heat may generate its oxmn electricity for maximum economy.However, any excess production of electricity by the auto-producers must besold to SONELGAZ. The company is also the sole distributor of gas in thecountrv, either produced in its own plant (which will be discontinued in1974) or purchased in bulk from the Societe Nationale pour la Recherche,la Production, le Transport, la Transformation et la Commercialization deslHydrocarbures (SONATRACI). In the last few years gas distribution has beenprogressively converted to natural gas (and bottled gas) throughout thecountry.

2.07 SONATRACH has the exclusive right of exploration, development,processing, and trading of oil and gas, with the restriction that gas fornational requirements be sold in bulk to SONELGAZ for distribution.

- 3 -

2.08 The Societeé Nationale de Recherches et d'Exploitation Minière(SONAREM) has the exclusive right of exploration, development, processing,and trading of mining products.

2.09 In order to ensure optimum use of existing power facilities and toreap the benefits of scale, it has been the Government's policy to substituteindividual or isolated power supplies with supplies from SONELGAZ. The variousrefineries and liquefaction plants already have been connected to SONELGAZ'snetwork, and SONELGAZ is expected to meet most of the future power require-ments in the rapidly expanding petroleum and gas sector. Similarly, in HassiR'Mel, generation for the gas field bases, their surroundings, and the gasfield itself (to the extent possible), would le concentrated in a singleplant, to be constructed and operated by SONEIGAZ.

2.10 Growth in the power sector was practically stagnant during 1963-1966, but since then the sector has grown steadily. Power sector data for1973-1978 are shown in Annex 2. The total 1972 capacity of 1,024 MW installedin the country generated 2,323 GWh. Of this capacity 794 MW (78%) was ownedbv SONELGAZ, which generated 2,015 GWh (87%), and 230 MW (22%) captive plant,generating 308 GWh (13%). Dividing losses proportionally, general consumers(domestic, Government, irrigation, commercial) accounted for 1,162 GWh (50%)of the total 1972 production; the petroleum and gas sector for 294 GWh (12%);and other industry for 867 GWh (38%).

2.11 Of the 230 MW installed in captive plant, 140 MW pertains to largerindustries (petroleum, steel) and about 90 MW to smaller industries. Genera-tion of the latter has declined steadily and now constitutes less than 1% ofthe total country generation. Since 1965, generation of the larger industrieshas been relatively level at 10-13% of total generation.

2.12 Overall length of SONELGAZ's 220-kV system (which, however, will beoperated at 150 kV until 1977/78 when full conversion to 220 kV should be com-pleted) is about 1,700 km. Total length of the transmission system, including60-kV and 90-kV lines, is 4,000 km. The middle voltage lines (5.5-30 kV) havea length of about 16,000 km, and low tension distribution lines and cables(127/220 V and 230/380 V) about 9,000 km.

2.13 At the end of 1973, total installed capacity in SONELGAZ's inter-connected system, amounted to 861 MW, and location and capacities of the majorthermal plants were as follows:

Oran: Steam 189 MW, gas turbine 44 MWAlgiers: Steam 120 MW, gas turbine 40 MWAnnaba: Steam 184 MWSkikda: A new steam station comprising 2 x 137 MW is under

construction for completion in 1974/75.

About 200 MW in major hydro plants is concentrated in the area midway betweenthe Tunisian border and Algiers; 84 MW in smaller hydro plant is spreadalong the Atlas Tellie Mountains (lower Atlas), near the coast. In isolatedsystems, gas turbine capacity was about 130 MW, mainly catering to oil andgas fields, and diesel capacity was about 23 MW.

-4-

Future Developments

2.14 SONELGAZ's 1973-1978 construction program, which reflects theNational Development Program but which has not yet been approved by theGovernment, has been assumed to be slightly reduced in practice (see 2.21).It would amount to some DA 2,787 million (US$681 million equivalent). Thisprogram (see Annex 3) includes a power component amounting to DA 1,976 million(71' of the total); a gas component of DA 621 luillion (22%); and a generalcomponent of DA 196 million (7%).

2.15 The program includes the completion in 1974/75 of the 274-MW steamstation at Skikda. With this station SONELGAZ would complete its major ex-pansion program in generation for the interconnected system, initiated underthe last 4-year plan. Thermal plant capacity installed in this system wouldincrease from 312 MW in 1971 to 835 MW by 1975. The additional capacity wasscheduled mainly with a view to expected developments in industry, partic-ularly the oil and gas industry (Oran and Skikda/Annaba areas). Construc-tion of industrial plants was delayed, however, and for the next 2-3 yearsconsiderable (but rapidly diminishing) excess capacity will be available.SONELGAZ is currently constructing a second 220-kV llne from Algiers to Oranand is procuring equipment for conversion to 220 kV (mainly substation equip-ment) to be completed in the next 3-4 years. To remove the capacity regionalimbalances in the system and to meet forecast demand at least cost, SONELGAZis planning to install 3 x 40 MW in gas turbine plant in Algiers by 1977/78,to be financed by the proposed loan, and a further 2 units in the Oran areaby 1979. No steam-electric plant is scheduled for completion prior to 1980.A continuing program of substation construction to be financed partly fromthe proposed loan, and line conversion to higher voltages, in addition toexpansion in distribution, would enable the increasing demand to be met, par-ticularly in industry. The Government would provide the funds required forthe execution of an exceptionally large village electrification plan, risingfrom DA 61 million (about US$15 million) in 1973 to DA 120 million (US$29million) by 1978.

2.16 The present control system in Algiers (mainly telephone connectionsand some tele-indications) is completely inadequate for SONELGAZ's rapidlygrowing generation and transmission system. A dispatch system, to be fi-nanced from the proposed loan, is scheduled for completion by 1977.

2.17 Developments in the gas field of Hassi R'Mel (about 400 km southof Algiers) would require the completion, by 1977/78, of a gas turbine stationwith an installed capacity of about 80 MW. SONELGAZ, which was at first con-sidering Bank financing for this station, has postponed construction of thisstation and therefore has withdrawn this request.

2. 19 The Government is planning to construct, by 1980, an aluminum plantnear Bejata and a steel plant near Djidjelli (both north of SONELGAZ's mainhydro plants, on the coast), requiring a total of 240-300 MW. Plans for agenerating plant and substations catering for this particular load will bemade by SONELGAZ as soon as more details are available. The impact of theseplans on overall system planning cannot be assessed at this stage due to thelack of detailed information.

2.19 Although the power program would considerably strengthen transmis-sion, and reinstitute an appropriate balance between regional generation ca-pacities, it is closely geared to the 1974-1977 National Development Plan.Because SONELGAZ is considered the basic entity for industrial development,it is obliged to frame and execute its own program substantially irrespectiveof changes or delays in other parts of the national plan. This already hascaused overinvestments (see 2.15) in power under the 1970-1973 national plan.

2.20 Agreement has been reached with Government and SONELGAZ on variousfinancial measures which will improve SONELGAZ's financial position (see 6.02).The application of these measures will necessitate, inter alia, a review ofthe program and institution of measures needed to restore a balanced invest-ment pattern.,

2.21 In view of (a) the fact that the 1973 construction expendituresremained about 16% below the estimate, (b) the gas program appears over ambi-tious and not based on a realistic view of the market development, and (c) theagreements reached--which are expected to result in an investment pattern moreclosely related to actual developments in power requirements--it was consideredappropriate to assume a somewhat reduced 1973-1978 program. For power, thisreduction (down to DA 1,975 million from DA 2,076) mainly reflects the delay--which already became apparent in 1973--in some non-Project items (mainly trans-mission) by about one year. For gas (down to DA 621 million from DA 848 million)a reduction of 25% was assumed, which appears realistic consistent with thehistorical trend. The general component was reduced by 10% (down to DA 196million from DA 218 million) in line with the reduced overall investment.

International Interconnection

2.22 Algeria supplies, by means of a 90-kV line from its 150 kV substa-tion El Aouinet, some power to the town of Tadjerouine in Tunisia. Similarlyit receives in the Annaba area some power from the Fernana hydro station inTunisia. In 1q69, the Governments of Algeria and Morocco reached an agree-ment in principle on interconnection of their power systems. A study, fi-nanced by the African Development Bank, was completed in 1972. In 1973,SONELGAZ and Office Nationale de d'Electricité (ONE) of Morocco reachedagreement on 220-kV interconnection between Oran and Oujda in Morocco formutual support and reserve. The link is scheduled for completion by 1976/77.

3. THE BORROWER

Legal Background

3.01 SONELGAZ is the successor to l'Electricité et Gaz d'Algerie (EGA),which was created in 1947 when all electricity and gas companies in Algeriawere nationalized by the French Covernment. In 1969, the Algerian Governmentdissolved EGA and created SONELGAZ, vesting all former rights and obligationsof EGA in thie new company. See Annex 4 for details on legal background.

- 6-

Management and Organization

3.02 Management. The company's management is satisfactory. Its ChiefExecutive is the General Manager, who is appointed by Government decree uponthe recommendations of the Minister of Industry and Energy. The present Gen-eral Manager was appointed in 1970. The ordinance of July 1969, which createdSONELGAZ, stipulated that the company was to be controlled by a Board (Comited'Orientation et de Controle) of 12 members comprising a President, the Gen-eral Manager, representatives of various miùistries, the party, and employees.This committee, however, was never instituted because of changed views withrespect to management of socialistic organizations; it is expected thatworkers participation in management will be required by law in 1975. Thecommittee's prerogatives are now vested in a Management Committee (Comitede Direction) comprising the General Mlanager and the 5 directors and 9 chiefsof the various divisions, departments, and advisory services.

3.03 Organization. SONELGAZ has 4 major divisions, each headed by aDirector: Electrical Planning and Construction, Planning for Gas Productionand Transport, Generation and Transmission, and Distribution. Contributoryservices are provided by 8 departments: Financial, Economic, Legal, Person-nel, Training, Procure,ment and Stores, Organization, and Information. Allexecutive officers are Algerian.

3.04 Staffing. At the end of J972, SONELGAZ employed 6,277 regularstaff, which has increased since 1968 by a modest average of 2.5% annually(see Annex 5). The number of staff is reasonable. Combined energy sales ofelectricity and gas (both expressed in energy equivalent) per employee rosefrom 0.55 x 106 therm in 1968 to 0.75 x 106 therm in 1972. Assuming that allgas consumers are also electricity consumers (204,860 gas consumers and807,420 electricity consumers in 1972), the ratio rose from 118:1 in 1968 to129:1 in 1972, which îs reasonable.

3.05 The replacement of foreign employees (which numbered 464 in 1963)by Algerian personnel has been more rapid than SONELGAZ considered desirabledue to the difficulty of retaining and recruiting such staff in view of thecurrency restrictions which do not allow staff to repatriate surplus earningd.This explains the fluctuations in foreign staff, which ntmbered 119 in 1970,rose to 181 in 1971 and dropped again to 141 in 1972.

3.06 Training. SONELGAZ has excellent training programs and facilitiesin Blida and Ben Aknoun, where up to 250 students can be trained for periodsof several months up to 2 years in basic technical courses, or follow re-fresher courses. It is difficult, however, to attract new trainees becauseof the insufficiency of their basic training and the fact that interest intechnical work is low. As a consequence, the training capacities of thecenters are not fully utilized and the dropout rate is high (up to 50% foryoung trainees). Algeria has many training centers for administration, andfull use is made of these centers to train clerical staff, and for higherstaff to study special subjects. Career development possibilities are good,provided the employee shows initiative. In 1972, about 40 employees wereenrolled (up to 4 years) at universities and other training centers in Algeriaancd 33 were attending courses at institutes and universities in France, Belgium

and Russia.

- 7 -

3.07 Organization Study In early 1973, SONELGAZ informed the Bank ofits wish to engage consultants to study and make recommendations for its re-organization and to modernize its administrative procedures in view of itsrapid growth. Subsequently, in accordance with the Bank guidelines for em-ployment of consultants, SONELGAZ engaged the services of P.A. Internationalof the U.K., on conditions and terms of reference acceptable to the Bank (seeAnnex 6). The foreign exchange cost of the study, which is expected to becompleted in about 3 years, amounts to abou: US$750,000, which would be fi-nanced from the proposed loan. SONELGAZ has agreed to review with the Bank,prior to implementation, the actions it proposes to take as a result of thesestudies. Retroactive financing of about US$50,O00 is proposed for financingthis contract.

3.08 Planning. SONELGAZ's long-term planning, which is executed by itsown engineers, is in broad outlines only. Until recently, investment decisionswere based on financial and technical rather than economic considerations. Thecompany has now initiated the use of discounted cash flow methods for comparisonof alternative major components within its programn, particularly developmentin generation. This approach, however, does not yet take into account that forevaluation of alternatives the relevant cost is the cost to the economy (e.g.,fuel costs like natural gas are taken at the low price paid by SONELGAZ toSONATRACH, not the pre-liquefaction price reflecting the international marketprice, or future replacement cost (see 5.09).

3.09 Operations. SONELGAZ's facilities are well run and operation isgenerally satisfactory. Annex 5 provides some statistics and company indi-cators for 1968-1972.

'ratiffs

3.10 Electricity. SONELGAZ's electricity tariffs, which have not beenchanged since their implementation in 1965, are stipulated in a "Cahier deCharges" for high tension and one for low tension supply. Their structurewas designed by Electricité de France (EdF) for l'Electricité et Gaz d'Algerie,and represents the French "tarif vert" concept, i.e. marginal costing. Intheory, tariffs should be adjusted on the basis of economic indicators forhigh and low tension networks. Since the issue of the cahiers de charges,however, no adjustment has been allowed by the Government because such ad-justment would not be in accordance with present policy.

3.11 All tariffs have an annual demand charge per kW (high tension) orkVA (low tension), metered or subscribed, and kWh charges depending on thetime of day, the season and location (except for domestic purposes for whichthe fixed charge and kWh charge are equal throughout the country). Specialtariffs cater for complementary or standby supply to auto-producers and areactive charge can be applied for industry. Although the structure isbasically the same, the diversity of industrial tariffs is large due tothe division in zones. Typical for Algiers are the following high tensiontariffs:

- 8 -

Demand charge: DA 45/kW year

Energy charge in DA,/kWh:

------------ Winter-------- --------- … Summer----Normal Hours Off Hours Normal Hours Off Hours

Peak Hlotirs 6-12h; 14-22h 22-6h; 12-14h 6-12h; 14-22h 22-6h; 12-14hkV Nov., Dec., Jan. October 1 - March 31 April ï - September 30

60 12.53 7.49 2.35 3.61 1.7330 14.39 8.30 2.68 4.80 2.001( 16.35 9.83 2.94 5.63 2.25

Typical domestic tariffs are:

0.5 kVA 1 or 2 kVAFixed charge DA/year 6 35Energy charge DAe/kWh 35 28

Average revenue for 1972 was: high tension (i.e. most industrial connections)9.5 DAé/kWh (USJ2.3/kWh); low tension (domestic and small industry) 32.6 DA,/kWh (US,8.0/kWh); average: DAJ17.1/kWh (USe4.2/kWh).

3.12 A tariff study was made in 1965 by a French firm, indicating thh*tthe general tariff structure was still appropriate. Some minor changes wererecommended in the low tension tariffs but a 20% increase in high tensiontariffs was recommended to reflect the relevant cost of supply. No actionwas taken because the Government declined to authorize any tariff increase.

3.13 In order to assess the impact on costs of its development program,SONELGAZ has agreed to engage qualified consultants prior to March 31, 1975,on terms of reference and conditions acceptable to the Bank, to,carry out anelectricity tariff study, and review with the Bank, prior to implementation,the actions it proposes to take as a result of this study. Suggested termsof reference for this study which is to be financed from the proposed loan,are given in Annex 6.

3.14 Gas. SONELGAZ's gas tariffs were revised in November 1968, whenthe Government decreed a reduction of about 50% in view of the conversionto indigenous natural gas, and for social reasons. There are 3 tariffs:

- Domestic: ranging from DAi1.8-DAe5.2/therm (1 therm1,000 kcal or about 4,000 BTU);

- Small industry: fixed charge DA 162/year, and energy chargeof DAé1.3/therm; and

- Large industry: individual contracts because the tariff forbulk supply is still being studied.

-9-

Average revenue for 1972 was: high pressure (i.e. most industrial connec-tions) DAi0.9/therm (USe0.22/therm or US$0.56/106 BTU); low pressure (domes-tic and small industry) DAt2.5/therm (USe0.S'1/therm or US$1.53/106 BTU); aver-age DAe1.3/therm (USe0.32/therm or US$0.78/ 06 BTU). The number of consumerswas 204,860. In order to relate SONELGAZ's gas development program as closelyas possible to actual requirements (see 2.21) in view of the current and fore-cast deficiency aspects of SONELGAZ's gas operations (see 6.22), the companyhas agreed to combine a study of its gas tariffs and the market withthe tariff study for electricity (see 3.13 and Annex 6).

4. THE PROJECT

Project Description

4.01 The Project, which is described in detail in Annex 7, consists of:

(a) gas turbine plants with a capacity of 120 MW to be installedat Algiers, comprising a power station with two 40-MW unitsat Boufarik substation, southwest of the city, and a powerstation with one 40-MW unit at Bab-ez-Zonar substation, eastof the city;

(b) main dispatch center (including a district dispatch centerfor routine operation of facilities in the central part ofthe country) at SON?LGAZ's new head-office at Algiers;district dispatch centers at Oran and Annaba; transmittingfacilities along transmission and telephone lines; sendingand receiving facilities at power stations, and at 220-kVsubstations and other selected substations;

(c) construction of three 220-kV substations (El Asnam, MarsatEl Hadjadj and El Hadjar extension), six 60-kV substations(Hassi Ameur, Ain Skhouna, Ben Aknoun, Bordj Bou Arreridj,Constantine South, Laghouat, and one 90-kV substation(Souk Ahras); and

(d) consulting services for improvement of SONELGAZ's organiza-tion including administration and accounting, a tariff studyfor electricity and a market/tariff study for gas.

Cost Estimates

4.02) The estimated cost of the Project (Annex 8), excluding interestduring construction, is US$64.3 million, of which US$38.5 million would bein foreign exchange. Cost estimates are summarized as follows:

. -10 -

-----DA million…----- -- US$ million---- Foreign to

Local Foreign Total Local Foreign Total Total Cost

Gas turbine stations,Algiers 29.2 48.0 77.2 7.1 11.7 18.8 62

Dispatch System 9.0 21.1 30.1 2.2 5.2 7.4 70

Substations 29.6 33.1 62.7 7.3 8.1 15.4 53

Total Direct Cost 67.8 102.2 170.0 16.6 25.0 41.6 60

Engineering 6.2 7.3 13.5 1.5 1.8 3.3 55

Consultant servicesfor studies 1.5 3.7 5.2 0.4 0.9 1.3 69

Total Engineering,Consultants 7.7 11.0 18.7 1.9 2.7 4.6 43

Contingencies(i) Physical 10.1 7.3 17.4 2.4 1.8 4.2 43

(ii) Price 20.1 37.0 57.1 4.9 9.0 13.9 64

Total C2ontingencies 30.2 44.3 74.5 7.3 10.8 18.1 59

Total Project Cost 105.7 157.5 263.2 25.8 38.5 64.3 60

4.03 The cost estimates have been based on SONELGAZ's estimates for thegas turbine stations and substations, and consultant's estimates for the dis-

patch system. These estimates are based on end-1973 price levels of similar

substation equipment and gas turbines. They include import duties, whichaverage 10-12% on the imported component. Physical contingencies of 15%

on local cost and 5% (gas turbines) and 7% (dispatch and substations) on

foreign exchange cost have been added. To allow for future price risesboth for local and foreign cost, compounded increases were assumed, allow-

ing for 14% in 1974, 11% in 1975, and 7.5% thereafter. On the basis ofthese estimates, the gas turbine stations would cost about US$230/kW with

a foreign exchange component of US$145/kW. This is considered realisticin view of the local cost incurred in the construction of power stationbuildings and the fact that the foreign cost does not include the cost ofsubstation modifications which are to be carried out under SONELGAZ's gen-

eral program.

Status of Engineering and Construction

4.04 Dispatch System. SONELGAZ has engaged EdF to study the dispatch system

anld prepare bid documents under a contract acceptable to the Bank. The contract

specifies that during all work stages EdF will provide the necessary staff to

adlvise and assist SONELGAZ in the execution of the scheme, and train personnel.

Ihis is in accordance with SONELGAZ's general policy of assuming formal respon-

sibi.lity for execution of a project. This is acceptable in view of the com-petence of SONELGAZ's staff. Retroactive financing, amounting to aboutUS$250,(000, is proposed for this engineering contract.

- 11 -

4.015 Gas Turbine Stations. SONELGAZ (with limited assistance from con-quitants) has procured and installed a number of package gas turbines similarto the proposed Bank-financed gas turbine plant to be installed in Algiers.It intends to engage the services of consulting engineers under arrangementssimilar to those made for the dispatch system for carrying out the works.

4.06 Substations. SONELGAZ prepares all designs for its substation pro-gram. It engages consultants (currently SocieteGenerale pour l'Industrie ofSwitzerland and Electrobel of Belgium) to review the final design and super-vise the required testing. Due to the lack of sufficient competent staff,SONELGAZ hires specific staff from its consultants for expert assistancein the execution and supervision of complicated projects. This policy oflimited consultant services would also apply to the substations to be fi-nanced under the proposed loan, and is acceptable.

Procurement and Disbursement

4.07 The proceeds of the proposed Bank loan would finance the c.i.f. costof imported materials and equipment and the foreign exchange cost of relatedinstallation services and consulting services. All contracts to be financedfrom the proposed loan (except for consulting services) would be awarded onthe basis of international competitive bidding, consistent with Bank GroupGuidelines for Procurement. Although Algerian industry manufactures littleof the required equipment, a preference of 15% or applicable duties, which-ever is the lesser, would be granted to Algerian manufacturers who do par-Licipate. Retroactive financing totalling about US$300,000 (see 3.07 and4.04) for consulting services is proposed. The expected disbursements fromthe proposed loan are shown in Annex 9.

4.08 Should the Project foreign exchange cost be less than estimated,any undisbursed amount would be allocated to consultant services for thenext stage of development or, if not required for this purpose, would becancelled. Procurement is expected to be completed by the end of 1975,and the Project by June 30, 1978. The closing date should be December 31,1979, to allow for some slippage and final guarantee payments.

Environment

4.09) The environmental impact of the gas turbine plants is negligiblebecause they will be located outside population centers and operate on na-tural gas which ensures a minimum of noxious and visible fumes. The sub-stations will be located in sparsely populated areas where amenity consid-erations are minimal.

- 12 -

5. JUSTIFICATION

Objectives

5.01 The main objective of the Project is to assist SONELGAZ in remedy-ing difficulties encountered in its interconnected system, which stretchesfor about 1,000 km along the coast. Problems are being experienced in main-taining stability, voltage, security of supply and spinning reserve, whichare further aggravated by the inadequacy of the present control system com-prising limited communication facilities only. The proposed dispatch facil-ities included in the Project would help remedy these problems. By install-ing additional gas turbine plant in the Algiers area, the present regionalcapacity imbalance in the system would be reduced. An important objectiveof the proposed loan is also to assist SONELGAZ in improving its organiza-tion and administration.

Forecast of Power Requirements

5.02 SONELGAZ's growth trend (least square method) ln sales since 1966,wlhen sales started improving after a stagnant period of several years, hasbeen about 11%. An average annual growth of 14% is expected for 1973-1978.For 1973 and 1974, sales are expected to increase by 17% and 15% respectively,reducing to 12% by 1978. The forecast does not take into account the possibleeffects of the recent substantial increases in international prices for oilanci natural gas, because the effect on power demand may not become markedlynoticeable before 1976/77. For scheduling of additional capacity, however,a higher growth rate has been assumed (see Annex 13) to reflect the possi-bility of requirements exceeding the present forecast.

5.03 It is extremely difficult to forecast SONELGAZ's growth because:

(a) the period of real growth covers only 6 years (1966-1972); and

(b) the company has not yet been able to fully develop a method toassess delays in new industrial plant completion and actual powerdemand of such plant; this problem is further aggravated becausenational companies do not provide full details on their futuredevelopment plans.

5.04 SONELGAZ has taken three approaches in forecasting power require-nients (see Annex 13). First, an exponential curve was fitted by least squaresto past growth in generation, and extrapolated. Secondly, the 17 sectors ofthe economy, as divided for statistical purposes, and domestic consumners,were studied to assess background growth, to which were added new industrialplant requirements in accordance with the national plan. Thirdly, a mathe-matical model was prepared reflecting GNP and number of inhabitants for 16developing countries, which was then applied to Algeria. The results varywidely; during appraisal these forecasts were discussed with SONELGAZ in viewof the uncertainties in industrial plant development, and a combination ofinethods 1 and 3 was adopted for the average growth rate.

- 13 -

5.05 The increase in relative importance of sales to industry, partic-ularly to the oil and gas industry, is shown in Annex 10; the increase insales is summarized as follows:

Average Growth1966 1972 1978 1966-72 1972-78

GWh % GWh % GWh % ----- %----

Donestie 350 36.3 604 33.5 1,040 26.4 9.5 9.5Government Services 88 9.1 130 7.2 220 5.6 6.7 9.2Railways 20 2.1 19 1.0 60 1.5 - 21.1Irrigation 94 9.8 145 8.0 315 8.0 7.4 13.8011 and Gas Industry il 1.1 89 4.9 675 17.1 41.7 40.2Other Industry 328 34.0 674 37.5 1,410 35.8 12.8 13.1Commercial 73 7.6 143 7.9 220 5.6 11.9 7.4

964 100 1804 100 3,940 100 11.0 13.9

5.06 Existing plant, and plant to be installed during 1973-1978, as wellas fuel requirements and cost for each type of plant and type of fuel, areshown in Annexes 11 and 12. Conversion from residual oil to natural gas forfuel and a relatively small amount of flare gas from refineries will be sub-stantially completed in 1974, except for some outlying systems not yet con-nected to a natural gas pipeline. SONELGAZ currently pays only DA 0.007/m3(or about USé4.4/106 BTU) for natural gas, and total fuel cost (includingflare gas and soate residual and diesel oil) per kWh generated would be re-duced from DAi 0.490/kWh (IJS mil 1.20/kWh) in 1973 to DAJ 0.241/kWh (US mil0.59/kWh) by 1978; gas turbines would then generate 890 GWh or 22% of thermalgeneration (totalling 4,000 GWh, which itself is about 90% of total genera-tion, including hydro, amounting to 4,420 GWh).

Generating Plant

5.07 With the completion of the 2 x 137 MW steam-electric plant at Skikdain 1974/75, increasing amounts of power will have to be transferred to Algiers(400 km) and to Oran (800 km), and new plant will be required in these areasto meet requirements and to improve the balance of capacities and reserves.Because it appears likely that the installation of gas turbine plant will bethe least cost development following Skikda, the only two reasonable alter-natives to be studied are the following: Alternative 1, the next step ingeneration would be the installation of gas turbines followed by steam plant,and Alternative 2, steam plant only would be installed.

5.08 At the estimated opportunity cost of capital of about 9%, constantprices as of the time of appraisal, and financial cost of fuel, Alternative1 would have a present value of DA 28 million below the present value ofAlternative 2, mainly due to the lower capital cost of gas turbines and theiruse primarily for peaking. The decision is not significantly sensitive tovariations in construction cost because in order to equalize the present valueof both alternatives at a discount rate of 9%, gas turbine plant cost shouldhave to be at least 14% higher, and steam plant cost 14% lower, than estimated,whieh appears highlv unlikely.

- 14 -

5.09 The effect on Project justification of varying assumptions for theeconomic cost of fuel was tested. In view of the large gas reserves (some4,000 x 109 m3) - the date at which foreign exchange cost vould be incurreddue to the use of gas for power, is not the date (or dates) on which the gaswould actually be used, but the date on which - as a result of this usage -the gas would not be available for export. Conservatively assuming a run-outdate of 25 years for the field and, in view of the uncertainties, an economicwell head price ranging from US$1.20-1.70/106 BTU, and a shadow exchange rateraniging from DA 4 - DA 6/US$, the above present value difference of DA 28 mil-lion (in favor of Alternative 1) would reduce by a minimum of about DA 6.6million and a maximum of DA 9.4 million; thus the conclusion is not sensitiveto teic economic. cost of fuel for the values assumed, which cover the likelyransge of possibilities.

Dispatch System

5.10 Because SONELGAZ's system, in which increasing amounts of powerhave to be transferred over distances up to 800 km, would become progres-sively more unmanageable, the present telephonic dispatch should be replacedby an automated system. Advanced installation of gas turbine plant in theweakest (western) part of the system could conceivably allow postponingconstruction of the dispatch system by several years, and for this purposetwo alternatives have been studied (see Annex 13). Alternative 1 assumesthat the dispatch systemi would be completed by 1976 and that gas turbineplant (80 MW) for Oran would be installed by 1979 as currently envisaged.Alternative 2 assumes the dispatch system to be delayed by 3 years, whichwould require advancing installation of 60 MW in gas turbine plant by asimilar period.

5.11 At the estimated opportunity cost of capital in Algeria of 9%, thepresent value of Alternative 1 would be about DA 3.5 million below the pres-ent value of Alternative 2, indicating that the dispatch system should becompleted as soon as possible. This conclusion is rather insensitive toconstruction cost; the cost of the dispatch system should have been under-estimated by 18% and the cost of gas turbine plant overestimated by 18%, inorder to cause both alternatives to break even at 9%. The conclusion is notsensitive to an increase in the price of fuel (i.e. using economic cost offuel ratlher than financial cost). Such increase would benefit Alternative 1,because the extra fuel required in relation to increased revenues (due todecrease in system outages) for this alternative is less than the net sav-ings in fuel attributable to this alternative.

Substations

5.12 The substations near Oran/Arew (El Asnam, Marsat El Hadjadj, HassiAr,eur), Algiers (Ben Aknoun) and in the east (Constantine South, El Hadjar:xd Souk Ahras) all are required (see Annex 13) to meet rapidly increasingdemanld, mainly for industry and urban developments, which cannot be met bytiue present subtransmission lines and substations and alternative extensionstliereto. Three substations at Ain Skhouna, Bordj Bou Arreridj and Laghouatare the only reasonable technical solutions for meeting increased demand re-sulting from increased requirements of existing and new domestic consumers

- 15 -

ani fron the execution of small infrastructure projects in the interior; highcost die-sel plant in Ain Skhouna and Laghout would be eliminated, and Bordjioi Arredi.dj would be connected to a 60-kV line to be constructed for a cementf SIc torv.

Rate of Return of Project

5.13 The rate of return of a project is the discount rate which equalizesthe present values of the cost and benefit streams attributable over time tothe project. Because the proposed Project comprises a dispatch system, gasturbine plant mainly used for peaking and reserve, and substations, for whichbenefits are extremely difficult to quantify, it was deemed appropriate toassess the rate of return on SONELGAZ's overall 1973-1978 expansion programfor electricity, of which the Project constitutes a small but representativepart (9.4%). Revenues from additional output have been used as an approxima-tion of the benefits. These revenues understate the benefits consumers re-ceive from the development program because it is considered that a tariffincrease of reasonable magnitude (say 10-20%) would not reduce demand sig-nificantly.

5.14 At present tariffs the rate of return of the development programand, consequently, of the Project, is about 15% (Annex 13). This rate ofreturn is coxisidered reasonable because, after a long period of slow expan-sion, the current program includes a backlog of construction to restore anadequate balance of capacities and service quality, and the requirements forexecution of a national plan, the additional benefits of which, if achieved,cannot be quantified with any degree of certainty. The rate of return wouldincrease to about 21% in the event of a favorable combination of a 10% reduc-tion in the investment program and in operational cost, and a 10% increasein revenue. Because conservative estimates have been used in forecastingSONELGAZ's revenues from the sale of electricity, the probability of resultsin line with these more favorable assumptions appears high. If the abovethree factors would combine unfavorably (10% increase in construction andoperating cost and a 10% reduction in revenue), the rate of return woulddecrease to somewhat less than 8%. This combination appears unlikely.The rate of return is expected to range from 15-17%.

6. FINANCIAL ASPECTS

SONELGAZ's Financial Responsibility and Viability

6.01 Although SO)NELGAZ is an autonomous commercial entity, in practice ithas little financial independence. Management is hampered by numerous Gov-ernrvent controls (e.g. according to SONELGAZ's 1971 Annual Report about 20 ap-provals are required for awardlng a contract). The Ministry of Industry andEnergy controls SONELGAZ's activities and approves all decisions on organiza-tion and personnel. SONELGAZ's operation and construction budgets must beapproved by the Ministries of Planning and Finance, which arrange external

financing for projects once they are included in the National Development

- 16 -

Plan. Tariffs are subject to Government approval. InternaL resources gen-erated in excess of the amount required for meeting the renewal program,should under the law be invested in Treasury Bonds, but the Company iscurrently exempted from this (see 6.10).

6.02 At the end of 1972 the overall financial situation of SONELGAZ wassound, although during the preceding 3-year period the revenue growth ratehad been decreasing while the operating expenses had been increasing at agrowing rate. The situation for the electricity activity is expected toremain satisfactory. lHowever, SONELGAZ's financial situation as a wholewould be weakened by the burden of an ambitious construction program andbecause earnings from electricity are subsidizing the unprofitable gas andmiscellaneous activities. Consequently, the company would not remain viableunless (i) non-essential components of the investment program are curtailêdincluding a substantial revision of the gas program (see 2.21), and (ii) theGoverntent and the company implement appropriate financïal measures to alle-viate the debt service requirements and, if needed, provide comnplementaryfinancial assistance in the form of grants. The Goverrment and SONELGAZagreed to take appropriate measures (see 6.27).

Accounts

6.03 The accounting methods still reflect those implemented in Franceby the National Accounting Council. Although this system is largely satis-factory, it still requiîrs some adjustment, now underway, to meet SONELGAZ'sspecific requiretaents and to speed up the accounting procedures. At ptesent,a rather old punch card system is being uged in Algiers and Oran for account-ing, inventories, billing of domestic consumers and payroll; however, a newGk 115 Honeywell computer is being installed îti Algiers and several new ap-plications for data prbcetsing are being developed.

6,04 SONELGAZ's âccouints are consolidated; however, a pattial breakdovnof the balance sheet is available for electticity, gas and other activitieà,and in 1972, for the first time, detailed aepatàte revenue accounts for eathbf these activities were attached to the consolidated accounts with a break-ddwn for generation, transmission and distribution. In September of each yeAâ,SNELGAZ prepares an opetation and construction budget for the current yearand the following yeat, thich is sent to the Government for approval. InJune, SONELGAZ prepares an annual repott on the previous yeat's accounts,containing information (even criticism) which one usually expects to findbtly in an external auditot's report. This antual report i8 very detailedand satisfactory.

Audit

6.05 According to the law creating SONELGAZ a Commissaire aux Comptesexercises financial controls on behalf of the Government and prepares anaudit of the Company's accounts. This Commissaire aux Comptes is appointedby the Minister of Finance from the staff of the Government's FinancialControl Departnent. He is entirely independent of SONELGAZ and reports

- 17 -

to the Government. His audit, in association with the Annual Financial Reportissued by the Company, would be satisfactory for the Bank. However, theCommissaire aux Comptes has not yet issued his 1971 and 1972 reports. Duringnegotiations the Bank confirmed that the audit of the Commissaire aux Comptesis acceptable, and the Government and the Bank will consult with each otheron the conditions under which such audit is performed. The Government hasindicated that it will cause the Commissaire aux Comptes to perform his auditin such time that this audit will be received in the Bank not later thanSeptenmber of each year.

Insurance

6.06 SONET,CAZ insures its major assets against the usual hazards (fire,transport, third party, electrical or mechanical damage to machinery, etc.)throuigh the Caisse Algerienne d'Assurances et du Reassurances (CAAR) and theSociete Algerienne d'Assurances (SAA). Both are nationalized companies whichreinsure through the world insurance market. In 1972, the insurance premiumamiounted to DA 6 million against a total net fixed asset value of DA 2,875million (0.2%). Since 1967, however, it no longer covers electrical ormechanical damage to transmission lines and substations, which are themost frequent. Negotiations are in progress with CAAR to insure these assets.

Taxes, Duties, and Sbcial Security

6.07 SONELGAZ is liable for income tax (20% of net income after inter-est on debt), sales tax (averaging 7.9% of which 7% is charged to consumers),salarv tax (6% on all salaries) and custom duties (varying from 0 to 100%and resulting in 7 to 8% of the total construction cost). SONELGAZ is alsoliable for a construction tax of 10% of the bills paid to contractors, butpresently has an exemption until 1975 which probably will be extended.

6.(8 SONELGAZ's social security plan includes free medical treatment,retirement provisions, dependents' benefits, holiday camps for staff children,etc. In 1972, the cost amounted to DA 26 million or about 20% of gross wagesand salaries.

Contribution to Government's Development Program

6.0U' Like all other national companies, SONELGAZ is required to con-tribute about 50% of its net consolidated surplus (before allocation to reserves),forecast one year in advance, to the cost of the Government's developmentprogram. No reimbursement takes place if the actual surplus is less thanexpected, or if a loss is incurred. The contribution amounted to DA 11 mil-lion iri 1971, DA 8 million in 1972, DA 10 million in 1973, and will reachrDA 15 million in 1974.

6.1) SONELGAZ is also required to invest in Treasury Bonds, the amountcharged for depreciation. However, an annually renewable exemption from thisobligation has been granted up to the hmount required for the renewal androutine development programs.

- 18 -

Balance Sheet

,.11 Fixed Assets - SONELGAZ's actual 1970-1972 and forecast 1973-1978consolidated balance sheets are in Annex 14. Major assumptions are statedin Annex 18. At the end of 1972, gross fixed assets in operation (DA 2,949viillion) and work in progress (DA 1,023 million) aggregated DA 3,972 million,of which 77% was for electricity, 10% for gas and 13% for Head Office andgeneral. From 1972 through 1978, gross fixed assets in operation would in-crease at an average annual rate of 11% for electricity and 23% for gas. The1972 fixed assets anc 1973-1978 forecast fixed assets do not include any cap-italized interest during construction, which is treated as an expense. In1972, accumulated depreciation amounted to 39% of gross fixed assets in opera-tionI. In 1961, the existing assets were revalued by DA 347 million. About40% of the capital expenditures at the end of 1973 was made after 1967 and 27%after 1970. Under these conditions the present assets valuation is reasonableand is expected to remain so due to the effects of the large continuing develop-ment vrogram. At the end of 1972, the amount of work in progress was high -about 35% of the 1972 gross value of assets in operation - because the volumeof work has sharply increased since 1968 and transfer from work in progress toassets in operation is generally slow. However, this is expected to improve.bv the end of 1978 work in progress would reduce to about 18% of the grossvalue of the assets in operation.

6.1'') Inventories - The average turnover of materials in stock is too low,chliefly because of the slow and intricate administrative procedure for purchaseand import of materials, which causes SONELGAZ to overstock in order to avoidpossible interruption in operation and construction. SONELGAZ expects thatthe Government will ease the procedure, permitting the company to graduallyreduce the turnover to about 8 months by 1978.

6.13 Receivables - At the end of 1972, receivables amounted to DA 285million and represented about 76% of the total revenue for the year. Thebills in arrears for electricity and gas supplies amounted to DA 137 millionagainst a revenue of DA 353 million, or an average of 142 days of billing.The following table summarizes the situation by consumer categories:

Outstanding Revenue EquivalentReceivables from Sales Days Average12/31/1972 1972 Sales

… _______-----…DA million-----------------

Ceneral Consumers 24.2 192.0 45 daysNational Companies 40.7 77.8 190 days(,overnment and Municipalities 72.3 82.8 320 days

137.2 352.6 142 days

- 19 -

For general consumers the situation is satisfactory. The proportion of billscollected in the year of issuance was 93.9% in 1972. On the other hand, thesituation was bad and worsening from year to year with respect to Governmentand Municipalities as well as National Companies. For the former, the propor-tion of hills collected in the year of issue was only 53% in 1972 and 72%for the latter. The company has informed the Government of this situationrepeate.dly, through its annual report. The Government has informed the Bankthat it expects to settle arrears within a reasonable time, in principle be-fore December 31, 1976, and is expected to cause its offices and the NationalCompanies to pay promptly for future services.

6.14 At the end of 1972, accounts receivable for debtors other than con-sumers amounted to DA 86.4 million. Of this amount, about DA 35 million wasfor taxes incorrectly assessed on the Company, according to SONELGAZ. DA 17million pertains to cash advances to two subsidiaries, TRAVELEC and SERIG,responsible for civil works in electricity and gas. The latter amount willbe transferred to "loan" and "portfolio" in the 1973 and 1974 accounts.

6.15 Equity - There are no stocks or shares. The Government is legallyentitled teo receive a dividend but has agreed to replace this by the contribu-tion to Government's development program (see 6.09). As of December 31, 1972,the ecuitv amounted to DA 1,832 million, including: (i) DA 1,145 million main-ly for assets transferred from former French companies and taken over by theGovernment after independence; (ii) DA 368 million in Government contributionsfor rural development, and (iii) DA 272 million in consumers' contributions.Accumulated profits were negligible. From 1973 through 1978 Government con-tributions for rural electrification would grow by DA 553 million and consumers'contributions by DA 335 million. It has also been assumed that during theperiod the Government would transform DA 27 million of existing loans intoequity related to the electricity activity, and would grant DA 70 million insubsidies for the gas activity (see 6.24).

6.16 Long-Term Debt - As of December 31, 1972, outstanding long-termdebt was DA 1,221 million, a breakdown of which is shown in Annex 19. Amajor feature of this debt is the very low average interest rate (2.9% in1972). Tlis is the result of numerous adjustments of accounts between theGovernment and the company within the framework of the general settlementof problems between France and Algeria. With the exception of the firstIBRD power loan (DA 11 million outstanding) and suppliers' credits, the exist-ing debt at the end of 1972 consisted of loans from Algerian banks or long-terni credits from the Treasury. All banks in Algeria have been nationalized.Besides the Banque Algerienne de Developpement (BAD), there are three otherbanks, of which the Banque Nationale Algerienne (BNA) is allowed to makeloans to SONELGAZ. One savings institution, the Caisse Nationale d'EpargneeL de Prévoyance (CNEP), is also allowed to make loans. On the basis of theassuni%pt ons made in tLuis report, long-term debt would increase by DA 1471million during 1973-1978 (see 6.24). The debt/equity ratio would remain atabout 40/60.

- 20 -

Past and Forecast Operating Results

6.17 A major feature of the consolidated income statement for 1970-72(actual) and 1973-1978 (forecast) (see Annex 15) is the steadily growing in-terest on long-term debt which, despite the low rate, would have risen fromnearly 6% of the expenses (including depreciation), in 1970 to 18% in 1978.SONELGAZ, which had an average net annual surplus of about DA 18 million foreach of the 3 years 1970-1972, would accumulate an average net annual surplusof about DA 31 million for each of the following 6 years. Annex 16 gives abreakdowm of SONELGAZ's 1972 revenue account for electricity, gas and otheractivities. The following table summarizes a similar breakdown for 1973-1978:

Other TotalElectricity Gas Activities SONELGAZ----------- DA million-----

Revenue2,825 455 - 3,280

Other activities 256 2562,825 455 256 3,536

ExpensesPersonnel 812 143 43 998Fuel for production 52 2 54Purchase of gas for distribution 28 28Materials for operation 47 13 42 102Purchase of goods for sale 37 37Other operating expenses 240 73 120 433Income tax 20 - - 20Other taxes 260 42 25 327

Subtotal: Operating expensesbefore depreciation 1,431 301 267 1.999

Depreciation 706 146 9 861

Total operating expenses 2,137 447 276 2,860

Net operating income 688 8 (20) 676Interest on debt 356 131 487Net surplus 332 (123) (20) 189Contribution to Government 105 - - 105

Avallable surplus 227 (123) (20) 84

- 21 -

Electricity sales are 80.0% of conso:.idated revenue and gas sales 12.9%; theremaining 7.1% comprises revenue from works for consumers, revenue from salesof appliances, sales of by-products or scrap, rental fee for staff housing,etc. Operating expenses for electricity, gas and other activities accountfor 71.6%, 15.0% and 13.4%, respectively, of total expenses before depreciation.During 1973-1978 the average growth rate of revenue from sales would be 12.8%as against 13% between 1969 and 1972. Operating expenses before depreciationare assumed to increase at an average rate of 9.5% during the period as against11% between 1969 and 1972 because of the conversion to natural gas as the prin-cipal fuel for the power stations, the closing down by the end of 1974 oftiie manufactured gas plants, and the increase in efficiency expected inthe power production.

6.18 Depreciation, for which the straight line method is used, is satis-factory. Depreciation rates are based on the expected life of assets: 30years for most of the equipment in thermal power stations, 50 years for civilworks and buildings, 30 and 40 years for overhead lines and substations, 75years for dams and reservoirs, and 10 and 5 years for office equipment andvehicles.

Electricity Department Operating Results

6.19 The forecast income statement and operating results of the Elec-tricity Department from 1972 (actual) through 1978, assumes an average an-nual growth rate in sales of about 14% (see 5.35), as against 9% in 1972,with no changes in SONELGAZ's tariffs. During the period the annual revenuegenerated by the assets in operation (gross value) would be a steady 14.0Net operating income ranges from DA 67 million in 1972 (22% of sales) to DA166 million (27% of sales) in 1978. Annual surplus would average DA 55 mil-lion for the period. A comparison with EdF, which uses similar administra-tive and operational methods, shows that in 1972 administration and over-head costs for thermal generation (about DA 30 per kW) were satisfactory. Thecost of operation and maintenance, excluding fuel, was 30% above the Frenchcost. This is partially due to the smaller size of the plants and the dif-ference in workers' skills. However, SONELGAZ could improve its productivi-ty, which is one of the purposes of the reorganization study (see 3.07) andthe objective of various technical improvements now under way. The operat-ing ratio (before depreciation) was 57% in 1972. Forecast revenue accountsassume that by 1978 the operating ratio will decrease to about 50%.

6.20 Based on the revised construction program (see 2.21 and Annex 3),the rate of return of electricity assets (including an adequate proportion ofheadquarters and consumer assets) would range from 5.0% in 1972 to 7.0% in1978. This realistic objective, combined with other proposed financialcovenants (see 6.27), would provide SONELGAZ's electricity sector with areasonable financial position.

6.21 During negotiations, the Government and SONELGAZ agreed that in theyear 1974 and thereafter, they would take all measures to provide, by the endof 1978, a rate of return of not less than 7% on the average net electrical

- 22 -

fixed assets in operation. The calculation of this rate of return would bemade by considering only revenues and expenses related to the electricityactivity, including a reasonable allocation for head office or general over-heads. Electrical fixed assets would exclude assets financed by consumersbut include a reasonable proportion of Headquarter's and other assets commonto both electricity and gas activities.

Cas Department Operating Results

6.22 In 1972 the gas activity was in deficit by about DA 9 million.Sales increased by 8%. The average revenue per therm sold vas DAJ1.3.The forecast assumes an average increase of sales of about 22% for 1973through 1978, much less than initially expected by SONELGAZ. However, thenet operating income for the gas operation would be almost nil during 1973-1978 and, after payment of interest on debt, a deficit of about DA 125 millionwould accumulate. SONELGAZ's gas activity, under present conditions, is notviable. The deficit heretofore has been financed by electricity surplus.Forecast financial statements attached to this report assume that the Govern-ment will grant subsidies in sufficient amount to meet the difference betweenthe internal cash generation and the debt service related to the gas activity.

Other Activities Operating Results

6.23 In 1972, these activities were in deficit by about DA 4 million be-cause charges made to consumers do not adequately cover overhead expenses.The forecast shows deficits accumulating to about DA 20 million in respectcf '973/74. For future years the Government and SONELGAZ agreed to set pricesand charges to consumers at such levels so as to assure revenue from theseactivities and services would at least cover costs including reasonably allo-cated overhead and general charges.

Financing Plan

6.24 SONELGAZ's 1974-1978 construction program and Financing Plan havenot yet been approved by the Governnent. SONELGAZ 's consolidated Sources andApplication of Funds for 1972 (actuai) and the proposed 1973-1978 financingpJin, based on the assumed construction program (see 2.21), are shown inAnnex 17. The following table summarizes the situation with an approximatebreakcdown between electricity (including general construction program) and gas.

- 23 -

---------------DA Millions------Electricity % Gas Total SONELGAZ

I. Net Sources of FundsNet cash generation 1,394 143 1,537Less debt service 884 211 1,095

510 (68) 442Change in working ccapital 22 5 27

532 25.1 (63) 469Less contribution paid to Govt. 105 (4.9) 105

427 20.2 (63) 364

Long-Term BorrowingProposed Bank loan 157 - 157Other external loans assumed 76 - 76Loans from Treasury andAlgerian banks 379 649 1,028

Suppliers' credits 210 _ 210822 38.8 649 1,471

Government contribution torural electrification 553 26.0 - 553

Consuiners' contribution 318 15.0 17 335Total contribution 871 17 888

Government subsidies -_70 70

Total: Net Sources of Funds 2,120 100 673 2,793

Il. Application of FundsThe Project 263 - 263Potential second IBRD Project 164 - 164Other 1,692 656 2,348

Total Application 2,119 656 2,775In1crease in Cash 1 17 18

2,120n 673 2,793

Ratio of Net Revenue toDebt Service 1.6 - 1.4

6.25 As a matter of Government policy, and as is the case for other na-tional companies, SONELGAZ's internal cash generation is intended to be suf-ficient onlv to finance replacement and routine development. Revenues fromelectricity, gas and other activities are not considered separately, and areused for the financing of the activities as a whole. All major works in-cluded in the national development plan are financed by loans made avail-able to the company through Algerian banks, according to the Government'sinstructions or from the Treasury, and exceptionally through internationallending agencies. Rural developmment is financed by Government contribu-tioris.

- 24 -

6.26 SONELGAZ's overall financing plan does not consider separate finan-cing for electricity and gas. For the year 1975 and thereafter, the Governmentand SONELGAZ agreed to prepare separate two-year financing plans to be epprovedby the Government for each of the activities in accordance with the requirementstated in 6.27.

6.27 Electricity Financing Plan. The electricity financing plan con-sidered separately is a suitable basis for a loan. During negotiations:

(a) SONELGAZ and the Government agreed that until the 7% rate ofreturn has been reached (see 6.21), the surplus from theelectricity activity (before charging depreciation, butafter deducting all operating expenses related to thisactivity including a reasonable allocation of generalexpenses, and debt service on loans allocated to electri-city) would not be less than 15% of the average constructionprogram for electricity, including a reasonable proportiont ofgeneral construction for the current and the previous year;

(b) the Government agreed to take appropriate measures to al-leviate the burden of SONELGAZ's debt service in such awav that the ratio of the net revenue of SONELGAZ's elec-tricity activity to the debt service related to this activityfor the previous and current year is not less than 1.5 for1975 and thereafter;

(c) the Government agreed to cause the lending institutions toset the duration of future loans to SONELGAZ commensuratewith the nature of the assets they are to finance; and

(d) SONELGAZ agreed that any funds remaining after the contributionto the Government shall be initially applied to meet require-ments for electricity operations.

b. LS8 Financial statements attached to this report assume that DA 27 millionof loans borrowed in 1971/72 will be transferred to equity and that the periodof future loans will be extended to 20 years including 3-1/2 year periods ofgrace.

6.29 SONELGAZ's proposed financing plan assumes two foreign loans. Thefirst one would be the proposed Bank loan for US$38.5 equivalent for 20 yearsincluding a grace period of 3-1/2 years. The second loan of about US$27million equivalent, for which similar conditions have been assumed, wouldfinance the foreign cost of the Arzew and Hassi R'Mel gas-turbine stationsand the installation of two more 220-kV substations. The Government andSONELGAZ have discussed the matter with the Bank, but have not yet formallydecide whether or not to request further assistance.

- 25 -

6. 3ù Suppliers' credits included in the financing plan are similar tothose existing in 1972/73. The average proportion of suppliers' credits inthe long-terîn borrowing, which was about 25% in 1972 for SONELGAZ as a whole,would remain about the same throughout 1973-1978.

6.31 Gas Financing Plan. Without the electricity activity subsidizinggas, or without Government grants, the gas financing plan is not viable.Because of delays in industrial plant completion, the initial program wasoversized and requires some curtailment. A thorough study of the gas marketis needed to ascertain the exact demand and assess which part of the programshould be reduced or postponed (see 3.14). SONELGAZ agreed to engage consult-ant to carry out sucli a study. Financial statements attached to this reportare based on a construction program in line with the trend of the assumedgas consumption.

7. AGREEMENTS REACHED

7.(il S9ONELGAZ has agreed:

(a) to furnish to the Bank for review, promptly upon completion,the reports for the organization study, the electricity tariffstudy, and the gas market/tariff study, and inform the Bankof the actions it proposes to take as a result of the saidstudies in accordance with the instructions of the Governmentand in application of the Government's national development plan(see 3.07, 3.13 and 3.14);

(b) to take all steps necessary to employ consultants for theelectricity tariff study and gas market/tariff study, notlater than March 31, 1975 (see 3.13);

(c) to employ qualified consultants as and when needed and onspecific assignments, upon terms and conditions satisfactoryto it and the Bank, to assist it in carrying out the workfor the Algiers gas turbine facilities and the dispatchfacilities (see 4.04, 4.05);

(d) to take all steps as shall be necessary to (i) provide by1978 a rate of return of not less than 7% on the average netfixed electricity assets in operation; the rate of returnshall be calculated by taking into account net income andoperating expenses for electricity, including a reasonableproportion of other charges for overhead and general purposes;electricity assets would exclude assets financed by consumers,but would include a reasonable portion of headquarter facilitiesand other assets common to all SONELGAZ's activities (see 6.21);and (il) until the 7% rate of return has been reached, achievea surplus for the electricity activity (before charging depre-ciation but after deducting all operating expenses related tothis activitv, including a reasonable allocation of general

- 26 -

expenses) not less than 15% of the average cost of constructionprogram for electricity (including a reasonable portion ofgeneral construction) for the current and preceding year; andthat, except as the Bank shall otherwise agree, any fundsremaining after the contribution to the Government shall beinitially applied to meet requirement for electricity operationsfor its operations (see 6.27);

(e) to set prices and charges for its operations other than thesale of electricity and gas at levels sufficient to ensurethat revenue from such other activities are not less thantheir costs, including reasonably allocated overhead andgeneral charges (see 6.23); and

(f), that, beginning with 1975, it will provide to the Bank,prior to November 30 of each year, separate financing plans,approved by the Government, covering the current and thefollowing year, showing the proposals for (i) meeting fort-,e electricity activity the targets for rate of return,tIte coverage of the construction program, and ratio of netrevenue to debt service, and (ii) meeting the operatingdeficit, if any, for the gas activity, and the financinggap, if any, for the construction program for gas (see-6.26).

7.i' ' The Covernment has agreed:

(a) that it will take, not later than December 31 of each year,starting with 1975, all steps necessary to ensure that theratio of SONELGAZ's net revenues for electricity operationsfor the current year to the average debt service requirementson loans allocated to electricity operations for the previousand current year is not less than 1.5 (see 6.27); and

(b) to cause the lending institutions to set the duration of futureloans to SONELGAZ coennensurate with the nature of the assetsthey are to finance (see 6.27).

During negotiations the Bank has confirmed that it considers the"(:omn.issaire aux Comptes" appointed by the Government to be independentauditors acceptable to the Bank. The Government and the Bank will consultwith eachi other, àt the request of either of them, on the conditions underwhicl such audit is performed. The Government has indicate that it willc.use the Commissaire aux Comptes to perform his audit in such time thatthis audit will be received in the Bank not later than September of each year(see 6.05).

7.04 During negotiations the Government and SONELGAZ have informed theBank that the Government is considering a settlement of debts owed to and byGovernment agencies and public enterprises and that it expects that a fullsettlement of such debts will have been accomplished by December 31, 1976(s.e e ei)

- 27 -

7.0.5 In view of the agreements and assurances on the matters listedabove, the Project provides a suitab"e basis for a Bank loan of US$38.5million. The proposed loan would be made to SONELGAZ for a term of 20 years,including a grace period of 3-1/2 years. A Guarantee Agreement would beconcluded between the Democratic and Popular Republic of Algeria and the Bank.

ALGERIA

Energy Sector Organization

|Ministry for Industry and Enorgy|

|Directorate: |nryi-- Dir ctorate Mines -Oeolog-8y|

Natura. and Natural 0 O3 ;oal

|Electricity| |Manufactured|- L Byproducts Bypro| dets Byproducta

~~~~~~0 T

International National National a tionalInterconnectiona Requirement Requirements Petroehenucals Reqtirementa Requiremente -

lo95a19,, SttI 77n91819 (nnr 963 1964 16196 1917 1969 199 1917 191 971

Intttlîti (79lt)i,h19il761 ad. 1994 2n12 I7. 1 25. 1 29. 7 14.1 18.2 42.

2 12. 1 40. 1 15. 6 31. 1

D-tîtîi.' 1954 1n53 103.9a 136.20 157. 1 19.9 101.98 199. 2 71. 5 177.0 9 3. 2 168.1

82.., Ijan Itao 1997 1 7. 5 11.7 15.23 13. 2 19. 7 24. 3 9.4 17. 7 7. 5 7.5

Knosoînîa 1~~~ ~ ~~~~~969 31.50 29.7 179. 1 159.4 16~4.9. 131. 7 11411 9.Ostînos tat 91 rIver plants ~~~~~~~~~~j 1631-1152 43 ~~~~ 77.2 771 9. 16. 1.6 75. 7,..67. 61.6 948

9,1779pat deeslno rînlr 16-923 84 59 7.142. 49.0 58.4 59.0 9, 42.6 91.

îaanlnn416 254.0 99T 99-.5 217.6 4662.7 5_649 3T59-.3 579.6 912. 6hZ82.6

Intal4

spcty 28)194 184 284 284 284 284 294 264 284 294

P1*71 taf.-1% 19.7 19 .9 14 .9 16 .1 14i.1 22.7 14.4 23 .2 122.9 19.4

977611/1-2 191l& 47^.9 524.2 591.9 434.9 360.8 3593.0 596.9 437.0 597 597

Otan 71a79n Oîern/1-7 ~~~~~~~~~~~1951 ^277 } 231.5 180.0 202.7 199.4 243.71 219.3 5009.6 39.9 581.9 434.7/64) (187)

ALGERIA

SOCIETE NATIONALE DE L'ELECTRICITE ET DU GAZ

Power Project

Construction Program Expenditures

1973-1978

Included in 1973 1974 1975 1976 1977 1978 Total NotesBank Project Development Item 3 ------------------ DA Million--------------

GenerationCompletion Skikda Thermal Station, 374MW 107.2 63.7 17.6 188.5

x Gas Turbines Algiers, 120 MW 1.3 9.3 28.3 40.5 34.8 113.8Gas Turbine Station Hassi R'Mel 4.9 14.6 40.2 25.4 85.5Gas Turbines Arzew (Oran), 80 MW 0.5 3.8 23.1 26.4 53.8 Total cost DA 84.8 millionOther (spares, improvements, small plant) 28.0 11.0 14.0 30.0 35.0 45.0 163.0

Total 135.2 76.0 46.3 76.7 138.8 131.6 604.6 21.7% of total program

TransmissionAlgiers-Oran, 220 kV 8.5 5.6 4.3 4.0 3.0 1.6 27.0Conversion 150-220 kV 10.2 6.7 12.0 12.4 17.0 18.7 77.0New Lines

220 kV 6.4 7.4 9.0 8.0 12.5 16.2 59.560 kv 8.5 8.3 9.6 13.9 13.0 4.2 57.5

x Dispatch Facilities 0.4 0.6 11.5 22.9 9.1 3.0 47.5x Substations 220 kV, 60 kV 9.4 19.5 20.5 31.3 16.0 96.7

Ongoing and New Program of Substations220 kV 8.5 8.4 8.6 11.8 18.9 27.9 84.160 kV 8.0 13.6 11.5 12.5 12.5 12.5 70.6Total 50.5 60.0 86.0 106.0 117.3 101.1 519.9 18.6% of total program

DistributionExtensions 30.0 27.0 32.5 28.5 33.5 34.0 185.5Renewals 15.5 15.6 21.6 24.8 27.0 21.0 125.5Village Electrification 61.2 70.0 80.0 100.0 110.0 120.0 541.2

Total 106.7 112.6 134.1 153.3 170.5 175.0 852.2 30.6% of total program

GasTransmission/Distribution 61.1 76.5 85.0 94.5 99.5 109.0 525.6Renewals 10.2 t3.5 15.0 15.5 20.5 21.0 95.7

Total 71.3 90.0 100.0 110.0 120.0 130.0 621.3 22.37 of total program

GeneralBuildings (Admin., Operation) 13.0 15.0 16.0 16.0 16.0 18.0 94.0Staff Housing, Office Equipment,

Vehicles, etc. 9.0 13.0 11.0 14.0 14.0 15.0 73.0x Studies (Bank financed) 1.5 1.6 1.5 0.6 5.2

Other Studies 5.5 2.0 3.9 2.5 2.4 1.0 17.3Total 27.5 28.5 32.5 34.0 33.0 34.0 189.5 6.8% of total program

Total Expenditures 391.2 367.1 398.9 480.0 579.6 570.7 2.787.5 Totals were reduced in Annex 17 by a total ofof which Bank Projact: -- DA 1,3.2 mnillion for reduction in inventories.

Local Currency 0.2 5.8 18.9 27.8 31.7 21.3 105.7Foreign Currency 0.2 7.0 23.0 45.4 49.8 32.1 157.5Total 0.4 12.8 41.9 73.2 81.5 53.4 263.2 9.4% of total program

May 6, 1974

ANNEX 4

ALGERIA

SOCIETE NATIONALE DE L'ELECTRICITE ET DU GAZ

Power Project

Legal Background Information

1. Before nationalization, supply of electricity in Algeria wasprovided by more than 20 private companies under their respective conces-sions. Folloving the nationalization in France (by Decree 46-628 ofApril 18, 1946b, as modified by Decree 46-2298 of October 21, 19h6), Decree47-1002 of June 5, 1947 (as modified by Decree (without number) ofSeptember 17, 1947) applied nationalization for Algeria creatirg at thesame time l'Electricité et Gaz d'Algerie (EGA) as the sole public entityto serve the sectors.

2. Subsequent to Algerian independence, EGA was dissolved and Societe

National de l'Electriciteé et du Gaz (SONEI.GAZ) was created by Ordinance 59-59 of July 28, 1969, which transferred all assets, rights and obligations tothe new company. SONELGAZ's statutes are annexed to this ordinance.

3. Regulations for the employment of person'nel (Statut National duPersonnel des Industries Electriques et Gazieres), which date from 1946(French Decree 46-1541 of June 22, 1946, declared applicable to Algeriaon June 5, 1947, and promulgated on July 10, 1947), are still applicable,except that basic rezuneration schedules were revised on June 6, 1963, andthat many special aUowances have been added of general (13th month, emplcy-ment allowance) and particular (productivity, travel distance, location ofemployment, training, settlement, etc.) nature.

4. SCNEIGAZ's regulations for its concession and operations, definingits rights and duties and those of its customers, as well as its tariffs,are laid down in two "Cahier des Charges", one covering the 60-kV supply,and one covering 30 kV and lower tensions, in the form of an agreementbetween the Minister of Industry and Energy and EGA, dating from March 3,1965.

5. In accordance with Decree 63.201 of June 1963 and the Ordinanceof May 27, 1966, SONEIGAZ insures its assets and other risks with the CaisseAlgerienne d'Assurances et de Reassurances and the Societ4 Algerienned'Assurances.

ALGERIA

SOCIETE NATIONALE DE L'ELECTRICITE ET DU GAZ

Power Project

Company Ststistics and Indicators

1968-1972

AverageAnnual Short-Term

1968 1969 1970 1971 1972 Increase Trend Observations-r--la Installed Capacity (MW) n.a. n.a. See Annex 2

Hydro 284 284 284 284 284Steam 288 288 288 288 363Gas Turbine 34 34 56 56 124Diesel 19 20 21 22 23 Estimate

625 696 649 650 794

lb Net Effective Capacity (MW) n.a. n.a. See Annex 10Hydro 180 180 180 180 180Steam 271 271 271 271 342Gas Turbine 30 30 49 49 109Diesel 19 20 21 22 23 Estimate

5°° 501 -21 522 657

2 Gross Fixed Asset ValueElectricity, DA10° 2,062 2,126 2,3oo See Annex 15Per Installed kW, DA10

33,177 3,270 2,915

Per GWh generated, DA103

1,212 1,118 1,139

3 Personnel for Generating PlantHydro Plant, number 147Per Installed MW 0.52

Thermal Plant, number 730 No breakdown steam/gas turbine availablePer Installed MW 1.45

4 Maximum Demand (MW)Interconnected System 241 283 323 340 384 12.4 11.7 See Annex 10

5 Net Generation (GWh) See Annex 10Hlydro 565 359 580 322 483Steam 687 1,055 1,024 1,420 1,358Gas Turbine 14 18 54 166 142Diesel 31 30 33 39 32Purchases 10 12 10 4 4

1,307 1,474 1,701 1,951 27019 11.5 10.7

6 Losses n.a. n.a. Excludes station supplyGWh 167 184 194 246 215 See Annex 10

12.8 12.5 11.4 12.6 10.6 See Annex 10

7 Load Factor (%) ( l

Interconnected System 59 57 57 59 55 n.a. n.a.

8 Reserve Margin See Annex 10Interconnected