Document of The World Bank

Report No: ICR0000200

IMPLEMENTATION COMPLETION AND RESULTS REPORT (Loan No: 7069-AL)

ON A

LOAN

IN THE AMOUNT OF US$ 16.5 MILLION EQUIVALENT

TO THE

PEOPLE'S DEMOCRATIC REPUBLIC OF ALGERIA

FOR A

FINANCIAL SYSTEM INFRASTRUCTURE MODERNIZATION PROJECT

March 19, 2007

Social and Economic Development Department Middle East and North Africa Regional Office

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CURRENCY EQUIVALENTS (Exchange rate effective March 19, 2007)

Currency Unit = DZD Algerian Dinar

DZD 1.00 = US$ 0.010 Euro 1.00 = US$ 1.32 US$ 1.00 = Euro 0.76

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS BA Bank of Algeria BIS Bank of International Settlements CAS Country Assistance Strategy CCP Centrale des Chèques Postaux CPSS Committee for Payment and Settlement Systems CQ Consultants Qualifications DPS Direct Participants System EIU Economic Intelligence Unit EU European Union FARAH Financial, Accounting, Reporting and Auditing Handbook FMPM Financial Management Procedures Manual GPN General Procurement Notice GoA Government of Algeria HVSS High Value Sub-System IBPS Interbank Payments System ICB International Competitive Bidding IS International Shopping LAN Local Area Network LVSS Low Value Sub-System MPT Ministry of Posts and Telecommunications NCB National Competitive Bidding NS National Shopping PCA Project Capacity Assessment PFS Project Financial Statement PIP Project Implementation Plan PMR Project Management Report PMU Project Management Unit RTGS Real Time Gross Settlement System SAPS Settlement Account Processing System SOE Statement of Expenditures SRFP Standard Request for Proposals

SWIFT Society for Worldwide Interbank Financial Telecommunication WAN Wide Area Network

Vice President: Daniela Gressani Country Director: Theodore O. Ahlers

Sector Manager: Zoubida Allaoua Project Team Leader: Didier Debals

ICR Team Leader: Catherine Burtonboy

Algeria FINANCIAL SYSTEM INFRASTRUCTURE MODERNIZATION PROJECT

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ........................................................... 1 2. Key Factors Affecting Implementation and Outcomes........................................................... 8 3. Assessment of Outcomes ...................................................................................................... 12 4. Assessment of Risk to Development Outcome..................................................................... 17 5. Assessment of Bank and Borrower Performance.................................................................. 17 6. Lessons Learned.................................................................................................................... 21 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ....................... 23 Annex 1: Project Costs and Financing...................................................................................... 24 Annex 2: Outputs by Component.............................................................................................. 25 Annex 3. Economic and Financial Analysis ............................................................................. 26 Annex 4: Bank Lending and Implementation Support/Supervision Processes......................... 27 Annex 5. Beneficiary Survey Results ....................................................................................... 28 Annex 6: Stakeholder Workshop Report and Results............................................................... 29 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ................................. 35 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ................................... 41 Annex 9. List of Supporting Documents .................................................................................. 42 Annex 10.A: Project Risk Assessment & their mitigation........................................................ 43 Annex 10.B : Project Indicators ............................................................................................... 46 Annex 10.C: Project Design Summary – Revised Intermediary Performance Indicators ........ 49

MAP

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A. Basic Information

Country: Algeria Project Name:

FINANCIAL SYSTEM INFRASTRUCTURE MODERNIZATION PROJECT

Project ID: P054217 L/C/TF Number(s): IBRD-70690 ICR Date: 03/19/2007 ICR Type: Intensive Learning ICR

Lending Instrument: SIL Borrower:

PEOPLE'S DEMOCRATIC REPUBLIC OF ALGERIA

Original Total Commitment:

USD 16.5M Disbursed Amount: USD 3.5M

Environmental Category: C Implementing Agencies: Banque d Algerie Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual Date(s) Concept Review: 03/12/1999 Effectiveness: 09/03/2002 09/03/2002 Appraisal: 03/15/1999 Restructuring(s): 08/03/2005 Approval: 07/26/2001 Mid-term Review: 12/01/2004 Closing: 06/30/2005 06/30/2006 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Low or Negligible Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance: Satisfactory

Overall Borrower Performance: Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments

(if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

Satisfactory

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Banking 5 5 Payment systems, securities clearance and settlement 50 50 Telecommunications 45 45

Theme Code (Primary/Secondary) Other financial and private sector development Primary Primary Standards and financial reporting Secondary Secondary E. Bank Staff

Positions At ICR At Approval Vice President: Daniela Gressani Jean-Louis Sarbib Country Director: Theodore O. Ahlers Christian Delvoie Sector Manager: Zoubida Allaoua Emmanuel Forestier Project Team Leader: Didier Debals Deane N. Jordan ICR Team Leader: Didier Debals ICR Primary Author: Catherine H. Burtonboy F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project development objective was: · To put in place a more efficient enabling infrastructure for basic financial services, primarily by modernizing the inter-bank payments system for large-value transactions, the cornerstone of payments system development -and by developing norms and standards for future low-value payments systems, including an electronic clearing house.

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· To further improve the enabling infrastructure by modernizing the information and knowledge management systems of the Bank of Algeria. As a necessary complement and support to the payments and information systems, to provide supporting telecommunications infrastructure to improve the communications links between and among offices of the Bank of Algeria and the headquarters of key financial institutions and banks. Revised Project Development Objectives (as approved by original approving authority) Project development objective as laid out in the Loan Agreement remained unchanged after the formal restructuring. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : A well-functioning RTGS system, including associated regulatory systems, and the adoption of norms, standards and regulations for future low value payments systems.

Value quantitative or Qualitative)

Not in place.

Well-functioning RTGS, Improved quality of BA's policy analysis, knowledge management, services

Improved quality of analysis, increased knowledge management reached in part due to the faster and more reliable data accessible.

Date achieved 05/01/2001 06/30/2006 11/01/2006 Comments (incl. % achievement)

Indicator 2 : Well-functioning telecommunications links serving the payments systems, BA information systems and other communication among financial sector participants.

Value quantitative or Qualitative)

Telecoms not in place.

Telecoms infrastructure enables the achievement of of the performance indicators on payments systems and BA informations systems.

Telecom Network in place and functionning

Date achieved 05/01/2001 06/30/2005 06/06/2006

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Comments (incl. % achievement)

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Growth in the utilization of the RTGS system and in the amount of large-value payments processed by the system.

Value (quantitative or Qualitative)

RTGS not in place

Rise to 70 % of the total value of all transactions within the banking system within 6 months of system cut-over, and to 80 % after one year

Large-value payments processed reach 90% of the total value of all transactions and the number of large value checks has been reduced by 70%.

Date achieved 05/01/2001 06/30/2006 06/30/2006 Comments (incl. % achievement)

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP Actual

Disbursements (USD millions)

1 09/28/2001 Satisfactory Satisfactory 0.00 2 12/19/2001 Satisfactory Satisfactory 0.00 3 05/28/2002 Satisfactory Satisfactory 0.00 4 11/27/2002 Satisfactory Satisfactory 0.17 5 04/15/2003 Satisfactory Satisfactory 0.17 6 08/04/2003 Satisfactory Satisfactory 0.17 7 12/18/2003 Satisfactory Satisfactory 0.17 8 06/29/2004 Satisfactory Unsatisfactory 0.22 9 12/20/2004 Satisfactory Unsatisfactory 0.44

10 04/26/2005 Satisfactory Unsatisfactory 0.61 11 06/03/2005 Satisfactory Satisfactory 1.39 12 12/16/2005 Satisfactory Satisfactory 1.91 13 06/23/2006 Satisfactory Satisfactory 2.93

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H. Restructuring (if any)

ISR Ratings at RestructuringRestructuring

Date(s)

Board Approved

PDO Change DO IP

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

08/03/2005 S S 1.39

I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal Country and Sector Background: In the late 1990’s, Algeria’s financial sector was heavily burdened by the legacy of administrative economic management that was geared towards the needs of the public enterprise sector.

• The financial system remained broadly under developed. • The banking system was still oligopolistic and nearly entirely state-owned. It

mainly consisted of six public sector banks acting as passive distributors of administered credits to state enterprises in a centrally managed economy. In spite of a substantial government buyback of non-performing loans to state enterprises since 1993 and a subsequent recapitalization of the public sector banks since 1996, which was partly supported by a World Bank adjustment operation, the financial condition of state-owned banks required strengthening. Overall, the state banks were undercapitalized, and, according to government estimates, non-performing loans reach DZD 200 billion, or 6% of GDP.

• In addition to state-owned commercial banks, there were nine small, private foreign and domestic merchant banks.

• The postal system was the largest provider of basic retail bank services, with a network about equal in size to that of the commercial banks' entire national network.

• Cash remained the predominant payment instrument and accounted for about half of the money supply. The size of the banking system which remained low relative to the level of economic activity had declined since 1993. By the end of 1997 it had fallen from 76% to 64%. This was to a large extent attributed to the inefficiency of banking institutions.

• A defining event was the passage of the Law on Money and Credit in 1990, which granted central bank autonomy, introduced transparent rules in treasury and central bank relations, and stipulated non-discriminatory commercial bank financing of public and private enterprises. Financial sector reform gained further momentum in 1994 in the context of an IMF-supported reform program.

The performance of bank payments services required substantial improvement in order to strengthen the attractiveness of bank deposits and bank financial intermediation. In the development program approved by the National Assembly in August 1997, the Government acknowledged the limited progress achieved in the reform of the financial sector and adopted a new strategy and program to:

(i) promote increased private participation in the banking sector through the introduction of new private banks and private minority participation in the capital of existing state-owned banks;

(ii) pursue a more liberal and pragmatic policy on foreign entry in all segments of the financial sector;

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(iii) promote the development of the securities market and other non-bank financial instruments; and

(iv) pursue the organizational restructuring of the state-owned banks. In line with government policy, bilateral financial and technical assistance as well as Japanese PHRD funds were secured to help strengthen the foundation of the securities market, namely the institutional development of the Securities Commission (COSOB) including the basic elements of a securities market regulatory framework, the introduction of a secondary market for government securities, and the initial development phases of the stock exchange. Rationale for Bank assistance: The project was consistent with the Bank’s Country Assistance Strategy (CAS) for Algeria, No. R96-15 [Rev.], dated February 27, 1996. It supported the CAS objectives by improving the financial system infrastructure that was critically important for a well-functioning financial system within a private sector-led economy. The project was also an integral part of the strategy and plan of the government and the Bank of Algeria to help further integrate Algeria into the global financial architecture. The Government had requested the Bank to assist in the development of the project in order to benefit from the Bank's international expertise on highly technical issues related to the Project. BA and the commercial banks had little exposure to the policy, legal and functional design issues associated with modem electronic payment systems. In addition, this project was an opportunity for the Bank to “jump start” a very difficult but crucial dialogue with the GoA on the Financial Sector and its much needed reforms. Borrower Commitment: The Government of Algeria has been fully committed to supporting the sector's role in economic and private sector growth. The Governor of BA has championed the project from its inception and all stakeholders involved showed their commitment by participating not only in the discussions but in the steps taken to overcome challenges presented by the implementation of the project. In addition, the Project has benefited from essential collaboration with the Ministry of Post and Telecoms (MPT) in the preparation of the telecom and data transmission component, which provided critical logistical support for international telecommunications consultants in their assessment of the facilities.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) Project Development Objectives: The project development objective was to put in place a more efficient enabling infrastructure for basic financial services, primarily by modernizing the inter-bank payments system for large-value transactions - the cornerstone of payments system development – developing norms and standards for future low-value payments systems, including an electronic clearing house. To further improve the enabling infrastructure, the Project modernized the information and

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knowledge management systems of the Bank of Algeria (viz., the Central Bank of Algeria). As a necessary complement and support to the payments and information systems, the Project also provided supporting telecommunications infrastructure to improve the communications links between and among the offices of the Bank of Algeria and the headquarters of key financial institutions and banks. The telecommunications network helped to facilitate efficient interconnections and end-to-end processing for both inter-bank and intra-bank payment systems and networks. Key performance indicators: The key performance indicator for the achievement of the project development objective was the growth in utilization of the Real Time Gross Settlement System (RTGS) and in the amount of large-value payments processed by the system. As evidence of strong performance, the large-value payments processed by the RTGS system, on a daily basis, was expected to rise within 6 months of system cut-over to 70% of the total value of all transactions within the banking system, and, within one year after system cut-over, to 80%. A second indicator was a demonstrable reduction in the use of large-value checks following system cut-over. Other important qualitative indicators expected to be achieved by the modernization of BA's information and knowledge management systems, were: a) improved quality of the central bank's policy analyses and of its services to the financial sector and the banking system; b) improved efficiency in the conduct of monetary policy; and c) the promotion and dissemination of knowledge on payments system activity. The main indicators for the achievement of the project deliverables and outputs were as follows:

(i) Modernization of the Payments System: a) Large-value transactions are settled in real time with intra-day finality (e.g., when funds are available, 95% of transactions are settled in less than 15 seconds and 100% in less than one minute; and, less than 5% of transactions need to be queued for settlement at any time); b) The incidence of settlement delays exceeding one day are virtually eliminated within one year of system cut-over; c) RTGS system availability is at least 90% within one year of system cut-over, and 98% within two years of system cut-over; and d) Norms and standards for low-value payment systems are completed and published by BA by December 31, 2002.

(ii) Development of Bank of Algeria's Information Systems: Improved quality and timeliness of the central bank's financial and economic statistics and publications.

(iii) Supporting Telecommunications Infrastructure: Well-functioning telecommunications links serving the large-value RTGS payment system, BA information systems and other communications among financial sector participants, which enable the achievement of the performance indicators given above for the payment systems and BA information systems.

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Summary table PDO Outcome Indicators Output Indicators 1. Modernization of the Payments System

1a. Growth in utilization of the RTGS and the amount of large value payments processed in the system. 1b. Increase in the number of large-value transactions settled with intra-day finality

1a. Large value payments reach 90% of the total value of all transaction within the banking system. 1b. A 70% reduction in the use of large value checks

2. Norms, Standards and regulations for future low value payments systems

2. Improved transparency and harmonization in the processing of the low value transactions.

2. Norms and Standards completed and published

3. Improvement of BA’s information system

3. Improved quality and timeliness of BA’s financial and economic statistics and publications

3a. Achieved improvement in the quality of BA’s policy analysis, knowledge management, services to the financial sector, and monetary policy. 3b. Improved quality of the data

4. Performing Telecom Infrastructure

4. Telecommunications infrastructure in place allow for a speedy, efficient and transparent processing of the payments

4. Inter-bank private network of BA operational, links installed by Algeria Telecom.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

Project development objective as laid out in the Loan Agreement remained unchanged after the formal restructuring in August 2005. The Key indicators were not modified. However, new intermediate indicators were identified and included in the action plan for the restructuring presented to the Board for non-objection (see 1.6 and Annex 10C).

1.4 Main Beneficiaries Primary Target Group:

• The Bank of Algeria and commercial banks. The improved payments systems, both large-value and low-value, will improve the quality of payment services to further reduce float, speed up the circulation of funds, and increase efficiency of funds transmission, while providing convenience and service to users. They will also provide appropriate tools to both the central bank and participating commercial banks to facilitate enhanced cash management and avoid credit and liquidity risk.

Other Beneficiaries:

• Potential investors and foreign banks. The project was intended to strengthen the attractiveness of the Algerian financial system to potential investors and foreign

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banks by enabling payments services in a manner that demonstrably balances efficiency, cost and risk.

• Private sector. The project envisioned increased private sector development and

trade, by enabling the development of efficient, reliable, secure means of payments for goods and services.

• Different market sectors. The project was expected to help satisfy the needs of the

different market sectors, consumer and retail sectors, industrial and commercial sectors, financial markets sector, government sector and the foreign trade sector -for secure, reliable, convenient, cost effective and easy-to-use bank payment services.

• Users of bank services. The ultimate beneficiaries of payments system

modernization would be the actual and prospective users of bank services, including households, with the benefit also of increasing the level of deposits and financial resources available to the commercial banks.

1.5 Original Components (as approved) The project consisted of four components as follows: Component 1. Payments Systems Modernization (US$ 4.80 million) The payments systems component included the following sub-components: (i) Real Time Gross Settlements (RTGS) applications system development, including associated support for installation and testing, operational and recurrent costs for the first year's operations, and staff training; (ii) Computer network equipment and operating software, including computer servers and workstations; (iii) Technical assistance and training, including specialized consultant services in: (a) RTGS systems and regulation; (b) low value payment systems and electronic clearing; (c) payment systems management including regulations and security (approximately 15 staff months of consultant services in total); (iv) Initial subscription to the Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) service, if applicable; and (v) Studies to identify appropriate participant fees, interface standards and processing rules for the clearing and settlement of both large value and retail banking activity payments.

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BA would also carry out a study, under terms of reference acceptable to the Bank, to determine an appropriate user fee structure for recovering a reasonable proportion of the investment and operating costs of the overall payments system and of the telecommunications infrastructure, described below. Towards this objective, the study would define the system's expected operating costs, expected usage volumes by major clients, and proposed user fee structures. Component 2: Bank of Algeria Information Systems (US$ 4.50 million) The information systems component for the Bank of Algeria included the following sub-components: (i) Technical supporting infrastructure for the RTGS system, including local networks and workstations, servers and software; (ii) Computer hardware and software (which were not included under the telecommunications infrastructure component described below) for BA's internal information systems (e.g., workstations and access terminals) at its offices in Algiers; and (iii) Technical assistance and training for the RTGS system and BA's information systems (about nine staff months of consultant services). Component 3: Supporting Telecommunications Infrastructure (US$ 8.10 million) This component included the following activities: (i) A high capacity, secure, telecommunications optical ring network in Algiers, linking BA's offices in Algiers, with the headquarters offices of commercial banks in Algiers, and with BA's 47 regional offices around the country; (ii) Telecommunications hardware and software (which were not included under the information systems component) for BA's internal and external telecommunications and information systems networks (e.g., WAN and LAN networks and interfaces, routers, encoding devices and connections) in order to process inter-bank payment transactions, BA's internal information data, and external inter-bank data; and (iii) Technical assistance and training for telecommunications engineering, security audits, technical specifications, and operations (approximately one staff year of consultant services). Component 4: Project Management Support (US$ 0.60 million) This component included technical assistance and training, and a small amount of equipment, to strengthen the capabilities of the Project Management Unit (Comité Technique) to implement the project.

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1.6 Revised Components

There were no changes in the project's design and implementation arrangements, but at the restructuring of the project approved by the Board in August 2005, the Bank of Algeria Information Systems component (Component 2) was dropped from the project as BA decided to fund this component from its own resources. The project restructuring was decided after the mid-term review. The mid-term review of the project resulted in a downgrading of the implementation process to "unsatisfactory" due to more than 2 years delay. The team worked on a restructuring proposal with the Central Bank of Algeria in order to win back some of the delays and ensure that the major components could be completed and the DO substantially achieved within an abbreviated time frame. It was decided that the restructuring plan should be formalized as soon as a detailed action plan including selected indicators as milestones (i.e. Strategic Development plan for information system and the bid evaluation for telecom component) could be agreed upon with BA. The partial loan cancellation and the project extension were conditional to BA meeting the milestones listed above. Partial Loan cancellation: An amount of $11.3 million (68.5% of the original loan amount of $16.5 million), was cancelled from the loan. This was due to an substantial cost savings derived from: (a) the choice of a much cheaper and more performing technology for the telecom component {Coarse Wavelength Division Multiplexing (CWDM) instead of Synchronous Digital Hierarchy (SDH)} and (b) the decision of the BA to undertake the modernization of the information system using its own funds. The revised loan amount thus became US$5.2 million.

Project component costs (including counterpart funding)

At appraisal After restructuring and loan cancellation

Component 1 $4.8 M $ 2.8 M Component 2 $4.5 M $ 3.5 M Component 3 $8.1 M $2.0 M Component 4 $0.6 M $0.2 M Total: $18.0 M $8.5 M

Extension of the Closing Date: The closing date of the project was extended by one year, from June 30, 2005 to June 30, 2006 due to procurement delays. The extension allowed the Algerian authorities to complete the implementation of the project's activities and fulfill the development objectives.

1.7 Other significant changes

Other than those listed above, there were no significant changes to the project.

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2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

Soundness of the Background Analysis: The project design and preparation took into account lessons learned from previous Bank-assisted projects in Algeria and other countries. Likewise, the design considered the risk factors and appropriate measures were adopted to mitigate them. Nevertheless, the preparation was extremely laborious because from 1998 to 2002 Algeria was going through a difficult post-conflict situation. Because of the prevailing tense atmosphere and fragile security situation, Bank staffs were not able to spend much time in the country during the preparation stage of the project. In addition, the following factors contributed to delay the project preparation:

• Country's slow transition from a controlled economy to a market economy, and the lack of reform in the financial sector;

• Lack of specialized and/or well trained staff on the Algerian side • Differences of opinion between the BA and the MOF; and • Changes in the specifications of project requirements by the BA.

Quality at entry: The project was rated satisfactory at QE review. This project was and remains relevant and essential to the development of Algeria's banking system. The project was quite complex as it involved rapidly changing technologies that did not exist in Algeria at the time and evolved faster than the project could be implemented. Assessment of Risks: As documented in Annex 10, the risks component as well as their mitigation was an important element of the project design. At the design stage, the risks identified centered mainly on the lack of specialized capacity, potential lack of commitment and cooperation between the different stakeholders and potential deterioration of the economic, political and social environment. With hindsight, the ICR team feels that the project risks were accurately identified. The delays experienced in the project were not linked to a lack of evaluation of the potential risks, but rather to the completely unpredictable explosion in the development of the type of technologies used in the project and to the normal challenges of implementing a project in a country that is coming out of a long conflict. Adequacy of Government’s commitment and participatory processes: A participatory approach was adopted from the outset. The BA, the Ministry of Finance (MOF), the main financial institutions of Algeria, and the MPT were actively involved in all aspects of project design. This continuous involvement and dialogue contributed without a doubt to the final positive outcome of the project. It allowed the project team to maintain an ongoing link between the stakeholders who often had diverging views. This proved essential in seeing the project finally "take off" and succeed. The project management structure reflects the continuing involvement of all affected parties

2.2 Implementation By 2004, the project implementation was approximately two years behind schedule and,

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accordingly, it was downgraded and rated unsatisfactory on implementation progress from June 2004 to June 2005. The following were the factors which caused delay in the project implementation: (i) Initial delays in the signing of the Protocol between the Bank of Algeria and Algeria Ministry of Posts and Telecommunications: The project was approved by the Bank's Executive Directors on July 26, 2001. Loan signing was delayed at the request of the Algerian authorities who needed more time to complete their normal internal processing steps, but it was signed on January 4, 2002. After two extensions (the first one to July 3, 2002 and the second one to September 3, 2002), the project finally became effective on September 3, 2002. These extensions were granted mainly to give the BA additional time to enter into a "Protocol" with the Ministry of Posts and Telecommunications (MPT) in order to legally define their respective obligations and responsibilities under the telecommunications infrastructure component of the project. Unfortunately, once the "Protocol" was signed, it became void because important changes had occurred in the Ministry of Posts and Telecommunications; Algeria Telecom was created as an independent subsidiary of MPT. This new entity was the new counterpart for BA, replacing the MPT. The protocol as such was no longer valid and a revised version needed to be signed between BA and Algeria Telecom. At the time, Algeria Telecom was a new private enterprise in the midst of a major restructuring and did not have this project at the top of its agenda. Additional delay stemmed from the need to sign a revised convention, between BA and Algerie Telecom (AT), to reflect a) the new structure and b) the technological improvements that did not exist in Algeria at the time and that Algeria Telecom was not certain to be able to deliver. (ii) Improvements in technology in the telecom sector. Improvements in technology in the telecom sector took place during the period spanning between loan approval and project effectiveness. At the Bank's suggestion, BA and AT revisited the original technology and adopted more efficient and less expensive technology, leading to major cost savings (about $4.3 million). (iii) Frequent change of Project Director: During implementation the Project Director changed three times, leading to disruption in implementation as each new director needed time to familiarize himself with the project. This issue was resolved in November 2004 with the arrival of the new final project Director whose dedication and sense of accountability gave the project the needed momentum to move forward successfully. (iv) Procurement Delays: In addition to the delays listed above, procurement delays also took place due to the following:

• New technology in the IT market: the technical assumptions factored initially in the project for the information system component were replaced by more efficient and cheaper technology solutions; this caused a change in the technical specifications of the bidding document which delayed its issuance;

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• Issuance of customized bidding documents for RTGS and Telecom contracts: The Telecom bidding document was prepared based on the Bank Standard Bidding Document however these documents did not correspond exactly to the situation at hand and required customizing to fulfill the project needs. This required Bank clearances before finalizing the customized bidding document which took more time than anyone could have anticipated;

• Insufficient specialized procurement capacity in BA and Algeria Telecom: Algeria Telecom which was newly established as a private entity had (i) an institutional reorganization and (ii) limited experience with the newly proposed technology;

• Lack of available specialized French speaking procurement staff on both sides: Preparing complex customized bidding document and reviewing the offers received required an expertise that was lacking in AT at that time. The Bank did not have enough francophone procurement experts with experience in Telecom and RTGS to provide AT promptly with the required support.

Slow Disbursements: The delays due to the two extensions for loan signing and substantial delays in procurement activities led to a very low disbursement rate. The accumulated disbursement lag (26 months) was considerable and resulted in downgrading implementation progress to "unsatisfactory". It is however important to note following the restructuring of the project and the $11.3 million loan cancellation, that the disbursement targets set at project design were no longer relevant. The disbursement rates after restructuring and based on the new loan amount were actually satisfactory. Project Restructuring: Based on the recommendations of the MTR, the Bank’s mid-term review conducted in December 2004 worked out a restructuring proposal with the BA in order to help compensate for some of the delays and ensure that the major components could be completed and the development objective substantially achieved within an abbreviated time frame. The project restructuring (1 year extension, partial loan cancellation and dropping of 1 component), was subject to BA and AT reaching an agreement and signing the "Protocole". This took place before the initial closing date (06/30/05) and the restructuring of the project was approved by the Board in August 2005. It entailed: (i) Dropping the information systems component of the project to reflect the decision of the BA to finance it out of its own funds. This change was not expected to affect the achievement of the project development objectives, but would allow the authorities to meet them within a simplified structure and at a lower cost. (ii) A cancellation of US$11.3 million of the loan. This amount represented the cost of the information systems component and cost savings derived from improvements in technology and other factors. This partial cancellation took place on June 16, 2005 following the authorities' request. The revised loan amount was therefore US$5.2 million. (iii) A modification of the project intermediate performance indicators for project outputs to better reflect the actual progress in project implementation as well as the

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improvements in technology. The BA had agreed to maintain intermediate performance indicators for its Information Systems, reflecting both its commitment to achieve the project's development objectives and its willingness to maintain close dialogue with the Bank during its implementation.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization M&E design. The project was to be carried out by the BA in accordance with a detailed Project Implementation Plan (PIP) that included target dates of actions to be taken and monitorable performance indicators. The BA was expected to furnish the Bank with detailed quarterly reports summarizing progress in implementation and procurement and in the achievement of the performance indicators. The Bank planned to carry out at least seven supervision missions during project implementation, including a Mid-Term Review, carried out in December 31, 2003. M&E implementation. Significant efforts were undertaken during supervision to: (a) make sure that data collection mechanisms were put in place; and (b) gather the relevant information as the project began to yield results. Stakeholders were kept focused on the Key Performance Indicator: "Growth in the utilization of the RTGS system and the amount of large-value payments processed in the system". M&E utilization. The M&E indicators were instrumental to decision-making, in particular when the project was restructured. The initial RTGS-related indicators were retained at MTR, as they reflected both the centrality of this component to the project and the focus on ensuring that improvements to financial flows would be measured. In the same vein, the indicators related to the Telecoms component were essential in managing other implementation risks of the project.

2.4 Safeguard and Fiduciary Compliance

From its onset, this project did not present any potential safeguard or fiduciary compliance issue. The implementation process took place without any significant deviations or request for waivers from the Bank safeguards and fiduciary policies and procedures.

2.5 Post-completion Operation/Next Phase (a) Post-completion Operation and Sustainability: The new automated payment system is in place and sustainable. It has already become a vital component of the Algerian financial sector infrastructure and is being used extensively by the BA, commercial banks, and customers of the commercial banks.

• The BA has ensured arrangements for the project's future operation regarding effective operation and maintenance with the RTGS and infrastructure providers.

• All required backups for the RTGS and the telecom infrastructure are in place.

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• Monitoring of the system is functioning with appropriate training provided to the staff.

• BA has already transformed the PMU into the Directorate of Payment Systems and the following three sub-directorates have been created under this Directorate: (i) Operations; (ii) Technical Support; and (iii) Supervision of the Payment System. All nine members of PMU have been absorbed under this directorate.

• BA will finance all requirements in terms of training and recruitment of additional staff in order to ensure that the system performs on a continual and regular basis.

(b) List of performance indicators. The following set of monitoring and evaluation indicators have been developed and they will be used as part of the BA's regular payment systems operations:

• Percentage of inter-bank transactions captured under RTGS compared to overall transactions

• Percentage of uptime of the RTGS (the number of hours in a day the system is functioning)

• Monitoring of the system • Supervision of liquidity management of participant banks in real time • Ability to take charge of external systems (such as clearing house, securities

settlement, etc.) (c) Follow-up by the Bank. This project was an investment project with a fairly narrow focus and as such does not call for a follow-up. However the team is discussing the possibilities of other related TA with the GoA. (f) Priority and optimum timing of any future impact evaluation. A joint Bank/IMF mission on Financial Sector Assessment Program (FSAP) will be conducted in Algeria during the first semester of 2007. The payment system will be part of the overall FSAP in order to assess the progress made in this area. This mission will coincide with the first anniversary of the RTGS implementation and will be the perfect opportunity to evaluate the impact and pay-offs of the project.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation Relevance of Objectives

A modernization of the payments system based on modern information systems and reliable telecommunications facilities is central to the upgrading of the financial sector. Given the reforms undertaken by the GoA, the project was timely and appropriate. The

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weak operational performance of the Algerian banking system (core provider of payment services) represented a major impediment to savings mobilization and the efficient settlement of basic business transactions. It was the main rationale for the project’s objective to modernize the Central Bank monetary policy and the cash management throughout the banking system. This is why the project was closely linked to the establishment of an electronic Clearing House (i.e. in defining the norms of the payment instruments). The achievement of the project objectives would be a major improvement in monitoring the banking liquidity, a major issue in Algeria. In addition, a modern payments infrastructure would lay the foundations to develop a nascent financial market, essential to attract new private foreign banks to Algeria. As mentioned in Section 1.1, the project was consistent with the Bank's CAS for Algeria. Relevance of the design

The design of the project at entry was appropriate: the RTGS, BA information systems and Telecom infrastructure, were all the components necessary to build a modern payment infrastructure in Algeria. For instance, to complement the project's support of the payments system development, the project included support to modernize BA's information systems and computer networks. With hindsight, the design of the project could have included specific TA to the public banks in order to upgrade their information system. Relevance of the implementation

Optimally, the implementation sequence should have taken place with a “building blocks” approach: infrastructure first, then RTGS, and finally electronic clearing house. This would have ensured the testing of the infrastructure (from a security stand point) before the implementation of the software (RTGS and electronic clearing house). The actual implementation faced unexpected delays in implementing the Telecom infrastructure. This forced all components to be implemented at the same time. This created a challenge for the WB Team, the PIU and all the other stakeholders to meet the deadlines. Nevertheless, RTGS was launched in February 2006 with only a 4 months delay due to the extension of the pilot phase at the request of the Central Bank.

3.2 Achievement of Project Development Objectives Satisfactory. The PDOs were met, the targets were more than reached, within an implementation time frame much shorter than initially planned and this at a much lower cost than forecasted.

1. RTGS

Within nine months of its inauguration, RTGS has already captured 90% of inter bank transactions, which is much higher than the originally envisioned 70%. It is estimated that between February and October 2006, an average 800 payment operations were performed per day under RTGS, representing an average daily amount of 670 billion

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Dinars. RTGS enabled settlement of transactions made on other financial markets such as the stock market and money market.

• The RTGS was launched in February 2006 and is now fully operational with

no significant operational failure so far. • Swifter funds transfers between banks in order to manage their settlement

positions with other banks or with the BA, have significantly improved the management of the liquidity and reserves while reducing systemic risks.

• Real time information on the status of accounts allowing optimization of the Treasury and more efficient management of fund flows is enabling commercial banks to invest surplus idle cash in monetary and financial markets.

• The rapid processing of large commercial payments between businesses, which is of critical importance to the promotion of trade and economic development has been achieved with a reduction in delays from about 5-15 days to one day and has created a positive impression about commercial banks from the clients’ perspective.

• In addition, the following are benefits highlighted by BA during the workshop: The implementation of RTGS has boosted the efficiency of the monetary policy and the monitoring of the banking liquidity in:

Securing management of BA’s cash management account and the

optimization of its Treasury. Giving transparency of all financial and fiduciary transactions of

commercial banks with BA in real time. Allowing full-proof traceability of all transactions and automated

reception of account statements enabling efficient reconciliation of accounts.

2. Bank of Algeria information systems

All the systems necessary to a proper functioning of RTGS are in place allowing an effective process of all the functionalities of RTGS:

The terms of references needed to implement the “Information system improvement Strategy” were completed on time and the vendor was selected as planned.

Improvement of debt management. Improvement of the reconciliation process and reduced/eliminated discrepancies. Adoption of the International Accounting Standards (IAS).

3. Telecom Infrastructure

The Telecommunications Development Component of the project provides the technological backbone of high speed telecommunications links necessary for the modernization of the payments systems. In addition, it is providing the

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telecommunications capacity necessary to host RTGS. The private network of bank of Algeria is now in place and banks are ready to switch from SWIFT network to BA’s private network. BA is now able to communicate with its regional offices and with commercial banks quickly and safely. The remaining key challenge going forward is the adequacy of the security policy for the private network.

The government has introduced new systems to modernize the payments system for low value transactions, including the establishment of an electronic clearing house. The government carried out this task in partnership with individual Algerian commercial banks and the Central Bank. The development of this independent but very much related component with close links to the project and RTGS has started accommodating the net settlement of batches of low value transactions and the cash settlement of securities transactions on the stock exchange. To this effect, with the technical assistance of the project, BA has developed norms, standards and regulations applicable to all low-value payments systems that are in accordance with international standards and ensure that low-value systems can interface with and be integrated into the RTGS system. The clearing house for small payments system has started functioning for checks in May 2006, credit transfers in September 2006, and debit cards in October 2006. The remaining payment instruments will be progressively introduced by the end of 2006. By the end of 2006, the overall payment system is expected to be fully operational. Banks will be the major beneficiaries of this payment system modernization as their information systems will be upgraded and modernized.

3.3 Efficiency There is not actual rate of return that can be calculated for this type of project, but from a cost effectiveness perspective, this project is a major achievement due to the choice of a technology more efficient and cheaper than expected at the onset of the project. In addition, a portion of the costs of the project are expected to be recovered through user fees. The BA has already finalized the formula for a cost recovery mechanism and a fee structure consistent with international best practice, to be charged from the participating institutions. The BA is waiting for the approval of its Governor to initiate the user fee.

3.4 Justification of Overall Outcome Rating Rating: Satisfactory Based on the explanations given in sections 3.1, 3.2 and 3.3, the overall outcome is rated satisfactory

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development

Poverty and Social Development: As such, the project does not have a direct impact on poverty reduction, social development or gender. However the increased access to

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finance and financial services that are being offered by the commercial banks to the public should have a lasting positive impact on poverty reduction and social development. Gender Aspects: NA (b) Institutional Change/Strengthening The entire scope of the project was the strengthening of the banking system and the institutional capacity of the BA. The BA has put in place:

• A new department for payment system (for both RTGS and mass payments) including monitoring and supervision.

• A division of this department is in charge of the oversight of the payment system. • A Steering Committee for Arbitration for resolving issues and problems of the

commercial banks with the BA will be set up.

In addition, the capacity of the staff of the BA and commercial banks has been enhanced by various types of training imparted to them related to the payments system. (c) Other Unintended Outcomes and Impacts (positive or negative)

The project did not have unexpected positive or negative outcomes/impact.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops The Beneficiary and Stakeholder workshop took place on Wednesday, October 11, 2004. It was chaired by Representatives from the World Bank and attended by representatives from Bank of Algeria, Algeria Telecom, RT2I, External Bank of Algeria, CPA, BNP Paribas and CPI as well as the Project Director were present. The discussions were centered around 2 themes: (i) An evaluation of the outcomes and sustainability and (ii) the lessons learned from the project. Their comments are summarized below: Outcomes All stakeholders are satisfied with the outcomes of the project, the network is in place and has been tested successfully and the infrastructure is in place in the different Banks. The back-up, security (firewalls, antivirus) and oversight of the RTGS are in place and have been tested and the management of funds and speed of transactions have improved significantly.

Sustainability All stakeholders agree that the sustainability of the project relies on a few essential points:

Maintenance and oversight of the system and training on new technology Good coordination between all the stakeholders Further improvement of the banks information system and, Good coordination with all stakeholders

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Lessons learned (the lessons learned will be explained in detail in section 6)

• The initial project was probably too ambitious given the environment at the time of inception

• The telecom infrastructure should have come first, then RTGS and then electronic Clearing House

• The security of the network should have been addressed at the design stage Part of the training should have taken place before implementation, issues regarding the use of new technology could have been better managed during the implementation of the project. For instance, BA staff in charge of RTGS did not have sufficient training during the implementation stage of Telecom infrastructure new technology in order to avoid some of the delays in the use of the RTGS

4. Assessment of Risk to Development Outcome Rating: Low or Negligible The DOs have been met and the RTGS payment system has become an integral part of the BA on a permanent basis and as a result, is highly sustainable. The BA is now able to process all payment transactions in a secured manner. With increased security policy, more experience gained in operating the payment system, and continuous upgrading of the system with the development of new technology, the already low risk to the project outcome will be reduced even further. In addition, as a precautionary measure, the BA has made arrangements to create a back-up of all the transactions on a regular basis.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The QAG panel rated the quality at entry of this operation as satisfactory overall and in all individual categories, except in Bank's inputs and process, technical, financial and economic categories, which were rated as marginally satisfactory. QAG remarked that: “The payments system has been very well designed taking into account best international practice.” The ICR team concurs with QAG in their rating of the overall operation. The project was realistic and essential to the development of the Country's financial sector. It was also consistent with the CAS for Algeria. During preparation and appraisal, the Bank took into account the adequacy of project design and all major relevant aspects, such as technical, financial, economic, institutional, fiduciary, environmental, and social. An assessment of BA's financial management capacity was carried out by a Financial Management Specialist in order to assess BA's

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ability to fulfill Bank requirements. A procurement capacity assessment (PCA) of the project implementing agency, PMU, was also initiated during project preparation and completed during project appraisal. Institutional and implementation arrangements as well as M&E arrangements were clearly defined and laid out. The project also adopted an extensive participatory approach. The BA, the MOF, and other stakeholders were actively involved in all aspects of project preparation. The project was technically sound and addressed the needs of BA, commercial banks, and other stakeholders. Project components were designed to reflect best international principles, standards (for example, Bank of International Settlements (BIS) and European Union standards) and guidelines, as well as local Algerian realities. User needs were identified during preparation activities via detailed data collection and analysis and were reflected in the project design. In addition, major risk factors and lessons learned from other related projects in the financial sector were considered and incorporated into the project design. (b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Satisfactory Because of the difficult country context and the initial delays in effectiveness and in the procurement process, as described above in section 2.2, the assessment of Implementation Performance by the supervision team was a difficult balancing act. The initial hope was that there would be quick catch up on these delays and that it would be worthwhile to briefly withhold the decision to downgrade the IP rating to unsatisfactory with the hope that sufficient progress in implementation would have occurred in the meantime. In addition, as the project was in practice an avenue to maintain dialogue with all Algerian authorities on financial sector issues, one concern was that a downgrading could negatively impact this already tenuous dialogue. The mid-term review of the project that took place in December 2004, resulted in a downgrading of the implementation process to “unsatisfactory” due to more than 2 years delay. The team worked on a restructuring proposal with the Central Bank of Algeria in order to recapture some of the delays and ensure that the major components can be completed and the DO substantially achieved within an abbreviated time frame. It was decided that the restructuring plan should be formalized as soon as the “Protocole” between BA and AT was signed and that a detailed action plan including selected indicators as milestones (i.e. Strategic Development plan for information system and the bid evaluation for telecom component) could be agreed upon with BA With hindsight, the mid-term review proved to be a positive turning point. Because of its scope, it offered both the supervision team and the Algerian implementation team with an opportunity to review in detail the status of the project, and to reach on a consensus basis

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the conclusion that Implementation was indeed unsatisfactory. At the same time, as the Mid-term review adopted a forward-looking stance, it also allowed the two parties to agree on a "critical path" to get the project on-track. The decision of the Bank of Algeria to nominate a new Director for the PMU also contributed to a new start. Overall, this approach helped in fostering the credibility of the "critical path" agreed to. The borrowers were fully aware of the fact that without the fulfillment of the measures then agreed, the Bank would close the project at the initial closing date. This was particularly important for the supervision team to be able to recommend an extension of the project, which was conditional on an upgrade of the Implementation Performance rating based on objective progress. On a regular basis between the mid-term review and the restructuring of the project, the supervision team sought advice; through a quality enhancement review of the mid-term review, and by actively involving the quality unit of the Bank’s MENA region in the preparation of the restructuring. The Closing Date of the project was extended by one year, from June 30, 2005 to June 30, 2006 due to procurement delays. The extension allowed the Algerian authorities to complete the implementation of the project’s activities in full compliance with the fiduciary requirements, submit all reports in accordance with the loan agreement and fulfill the development objectives. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory Based on the performance during the lending and supervision phases as described in section 10.1, the overall bank performance is rated as satisfactory

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory Despite substantial delays in project implementation, the government has remained fully committed to the development objectives. The Algerian authorities have evidenced their commitment to broaden the payments systems dialogue, to include not only the Central Bank systems to process large payments (for which the project provided support), but also commercial bank systems to process the large volumes of small payments. In addition, to strengthening the financial infrastructure, the government was also committed to supporting the sector's role in economic and private sector growth. The telecommunications component was a major issue during the implementation of the project as BA faced many hurdles to reach an agreement with MPT/AT to ensure a reliable, timely and appropriate telecommunications network. The proper implementation of telecommunications network was not easy and experienced some delays. With the personal involvement of the Governor of the Central bank, BA signed a Protocol ("Convention") with the MPT (soon to become Algeria Telecom- AT) that defined the

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responsibilities and obligations of each party in relation to implementation of the supporting telecommunications infrastructure component of the project, and set out the conditions under which MPT/AT operated the telecommunications network. For the development of the telecommunications network, MPT/AT granted the project access to fiber optic lines which was not made available to the public telephone system. In addition, the project benefited from a very productive collaboration with AT in the preparation of the telecom and data transmission component, which provided critical logistical support for international telecommunications consultants in their assessment of the existing facilities. (b) Implementing Agency or Agencies Performance Rating: Satisfactory

Implementing Agency Performance

BANK OF ALGERIA

Institutional Arrangements. The project was managed by BA, who had ultimate executive responsibility for the project. BA established and maintained a good dialogue between the stakeholders in establishing: First, the PMU in charge of the project staffed with a team that was very committed to achieve the development objectives and to resolve timely implementation issues. Second, a Steering Committee (Comité de Pilotage) responsible for overseeing the project, addressing key implementation issues, and recommending appropriate solutions and courses of action to the Governor of the BA. The Steering Committee was chaired by a Vice Governor of BA, and included senior officials of BA and several Chairmen of commercial banks. Third, a Consultative Committee (Conseil Consultatifs Correspondants), comprising senior managers of BA and of commercial banks, advised the PMU on payments system activities and issues. It was chaired by the Project Director and convened at least once every trimester. Fourth, BA maintained close links with the CPI in charge of implementing the electronic clearing house and ensured compatibility of the two systems (RTGS and low payments system). Audit: BA appointed an auditor (Inspection Générale des Finances) acceptable to the Bank to carry out an annual audit under specific terms of reference (TORs) acceptable to the Bank and in accordance with International Standards of Auditing. In accordance with the loan agreement, the auditor submitted to the Bank an annual audit report within the six months period following the end of each government fiscal year. No major issues were raised during these audit missions. Project Implementation and Monitoring. BA carried out the project in accordance with a detailed Project Implementation Plan (PIP) that included target dates of actions to be taken and performance indicators to be monitored. BA also furnished the Bank with detailed quarterly reports summarizing progress in implementation, procurement and in the

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Implementing Agency Performance

achievement of performance indicators. BA coordinated data collection from commercial banks and organized meetings with the senior management of commercial banks to discuss the major issues of payment system design. Counterpart funding. The project did not suffer from any counterpart funding problems, as BA made appropriate budget provisions. The Governor of the Bank of Algeria championed the project and proved to be a formidable asset in the resolution of issues and bottlenecks.

PMU PROJECT PIU The frequent replacement of the Project Director (three times) slowed down the implementation of the project. However, it is worth mentioning that, with the arrival of the current Project Director in mid 2004, the implementation gained momentum. With the strong commitment and support from BA’s top management, and very proactive response from all the stakeholders, the project director was able to put the implementation on track and help the project achieve its objectives. The PIU managed and coordinated the implementation of project activities, including financial management, procurement and disbursement processes satisfactorily to the Bank. The project director and financial management specialist assured the issuance of annual Project Financial Statements (PFSs) and quarterly Project Management Reports (PMRs) acceptable to the Bank. The PIU also made useful recommendations to the Steering Committee with respect to any issues related to project implementation or payments system development. The PIU also ensured close coordination with the MPT and later with the AT regarding the implementation of the telecommunications network, and with commercial banks and other institutions, which were involved in activities related to the overall payments system.

(c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory In light of the Government, BA and PIU performance as discussed in section 10.2, the overall performance of the Borrower is rated satisfactory.

6. Lessons Learned Positive lessons ⇒ The Bank took the calculated risk to finance this project in order to create some momentum in the development of the financial sector in Algeria. Rather than waiting for

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the perfect environment and for all the elements to be in place, the Bank and the GoA went forward. One restructuring and one extension later, this proved to be the right decision. (General applicability) ⇒ The downgrading of the project was the opportunity to turn a negative situation into a positive one. The Bank and the GoA showed flexibility and pro-activity in their efforts to resolve implementation issues. The downgrading of the project to "unsatisfactory" at mid-term review was a good decision to create a momentum and get the project back on track The restructuring of the project allowed for more focus on core issues (RTGS first), improved consistency and reinforced stakeholders ownership. (General applicability) ⇒ The personal involvement of the Governor of the Central bank to mobilize relevant people inside the Central Bank and outside. He was instrumental in putting pressure on Algeria-Telecom and public banks to catch up delays, demonstrating once again the importance of a "Champion" in the success of a project. (General applicability) ⇒ New technology came on the market after the design and approval of the project. The dilemma facing all participants was the following: do we stay the course, spending more money and running the risk of building a system that could soon be obsolete, or do we take two steps backwards and rework the project to include this new technology? The choice of shifting to a more efficient and cheaper technology for the Telecom infrastructure was not easy but at the end was definitely the right one. As a result, The RTGS was launched with success in February 2004, just over a year after project restructuring. (Project specific) Negative lessons ⇒ Lack of specialized staff at the Bank, Algeria-Telecom and the PIU regarding the new technology in Telecom infrastructure caused some delays in the procurement process. (General applicability) ⇒ The information systems of commercial banks were outside the scope of the project. As a result, most of the banks are currently behind in implementing an appropriate interface between RTGS and their own information system. This is preventing them from fully benefiting from the RTGS. (Project specific) ⇒ Security issues regarding the telecom network should have been addressed at the inception of the project as part of development objectives. In fact, a breach of security could have a systemic impact on the financial system (DZ 670 billions per day) and jeopardize the credibility of the entire Banking system. (General applicability) ⇒ Training issues regarding the new technology used could have been better managed during the implementation of the project. For instance, BA staff in charge of RTGS did not have sufficient training during the implementation stage of Telecom infrastructure new technology. (General applicability)

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7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies

There were no real issues raised by the Borrower or the implementing agencies but rather concerns to ensure the sustainability of the project. Following discussions during the ICR mission, the project team and the Borrower/Implementing agencies came to the following conclusions:

For all the stakeholders, the sustainability of the ARTS system depends on constant upgrades of the application as well as a constant modernization of the technological environment, particularly telecommunications. To this effect, a Steering Committee including Bank of Algeria, Algeria Telecoms and one representative from the commercial banks would be best suited to ensure the regular up-grades. The implementing agency also recommends the set up of a "one window system" for the day to day problems encountered.

BA has already streamlined its organization in creating an ad hoc department dealing with payment system issues. The head of this department is the former head of the PIU. This ensures a smooth continuity after the closing date of the project. BA is in charge and accountable for a proper functioning of the overall payment system (RTGS and low payment system). (b) Cofinanciers N/A (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) N/A

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal

Estimate (USD M)

Actual/Latest Estimate (USD M)

Percentage of Appraisal

PAYMENTS SYSTEM MODERN. FOR BANK OF ALGERIA 4.80 2.70

INFORMATION SYSTEMS DEV. FOR BANK OF ALGERIA 4.50 0.00

SUPPORTING TELECOMMUNICATIONS INFRASTRUCTURE

8.10 1.70

PROJECT MANAGEMENT SUPPORT 0.60 0.20 FRONT-END FEE 0.20 0.20 Unallocated 0.00 0.40

Total Baseline Cost 18.20 5.20 Physical Contingencies 0.00 Price Contingencies 0.00

Total Project Costs 18.20 0.00 0.00 0.00 0.00 0.00 0.00

Total Financing Required 18.20 5.20

(b) Financing

Source of Funds Type of Cofinancing

Appraisal Estimate (USD

M)

Actual/Latest Estimate (USD M)

Percentage of Appraisal

Borrower 1.70 3.40 200% International Bank for Reconstruction and Development

16.50 3.50 21%

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Annex 2. Outputs by Component Component 1: Payment systems

(i) Real time gross settlements (RTGS): is fully operational and 100% of the transactions are handled through the RTGS system.

(ii) Computer network and operating software: have been installed, tested and are functioning successfully

(iii) Technical assistance and training: assistance and training have been delivered

(See annex 1 (a) indicator 1)

Component 2: Bank of Algeria Information systems

Technical supporting infrastructure for the RTGS system, including local networks an workstations, servers and software are operational and technical assistance and training have been provided.

Component 3: Supporting Telecom Infrastructure

The Telecom infrastructure of BA is in place and functional, with adequate back ups. BA and the commercial banks are ready to switch from SWIFT to the new private network.

Component 4: Project Management Support

All technical assistance and training have been provided regarding this component, as illustrated by the fact that all systems are operational and have already been integrated in the banking system

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Annex 3. Economic and Financial Analysis (including assumptions in the analysis) N/A

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members Names Title Unit Responsibility/Specialty

Lending Supervision/ICR Radia Benamghar-Lalouani Procurement Analyst MNAPR Procurement Specialist Didier Debals Sr. Financial Sector Spec. MNSED TTL Leila Elmasry Consultant MNSIF

Souhila Harchouche Financial Management Specialist MNAFM FM Specialist

Fatouma Toure Ibrahima Wane

Special Asst. to Vice President SECVP Team Member

Moez Makhlouf Consultant MNAFM FM Specialist

b) Staff Time and Cost Staff Time and Cost (Bank Budget Only)

Stage of Project Cycle No. of staff weeks

USD Thousands (including travel and

consultant costs) Lending

FY98 63.19 FY99 133.59 FY00 17 133.28 FY01 22 134.14 FY02 7 31.37 FY03 0.00 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00

Total: 46 495.57 Supervision/ICR

FY98 0.00 FY99 0.00 FY00 0.00 FY01 0.00 FY02 9 55.04 FY03 15 73.98 FY04 16 110.27 FY05 20 114.59 FY06 18 82.15 FY07 3 28.85

Total: 81 464.88

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Annex 5. Beneficiary Survey Results (if any) In this project, the stakeholders and beneficiaries are the same. Therefore since all the information that would have been found in a survey were provided during the workshop, a separate survey was not conducted

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Annex 6. Stakeholder Workshop Report and Results As described in Section 3.6, the Beneficiary and Stakeholder workshop took place on Wednesday, October 11, 2004. It was chaired by Representatives from the World Bank and attended by representatives from Bank of Algeria, Algeria Telecom, RT2I, External Bank of Algeria, CPA, BNP Paribas and CPI as well as the Project Director was present. The discussions were centered around 2 themes: (i) An evaluation of the outcomes and sustainability and (ii) the lessons learned from the project. Their comments are below:

1. BNP Paribas

The implementation in February 2006 of the Payment System Algerian Real Time Gross Settlement (ARTS) is a key stepping stone in the modernization of the banking and financial sectors in Algeria. This technological progress allowed the Country to catch up on the delays accumulated until now, particularly in the payment systems and techniques.

a. Situation before implementation

a.1 : The transfers : Whatever their amount, they were manually handled with a lot of constraints such as:

The transfers

The order is made by the client at the Branch handling his/her account. The transfer is entered and transmitted to the Central Back Office on day J. Based on the client's request, the Central Back Office creates a new request in three copies with a recapitulative situation by bank to be presented in clearing house. By day J+1 Transfers are exchanged in clearing house but the credit to the beneficiary client often takes place after long delays

a.2 : Management of the account Bank of Algeria and of the Treasury : The cash management account opened with the Bank of Algeria is the account used for all treasury transactions. Prior to implementation of ARTS, the management of this account was characterized by:

- Lack of transparency on the different transactions

- Account statements received on hard copy and often late

- Lack of information on the transactions preventing an optimal management of the treasury

b. Situation after implementation

b.1 : The transfers : The urgent transfers and those for large amounts are handled distinctly

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The transfers

The order is made by the client at the Branch handling his/her account. The transfer is entered in the system, scanned and sent to the Central Back Office via Internet. As soon as they are received, the Central Back Office enters these orders in the transaction processors, overseen by the "Direction des operations". The order is then given to the comptroller who validates the transaction.

b.2 : Management of the account Bank of Algeria and of the Treasury : The implementation of ARTS allowed for a more secure management of the Bank of Algeria cash management account and therefore the optimization of its Treasury

- A clear vision in real time of all transactions made with the Bank of Algeria

- A fail proof traceability of all transactions

- An automated reception of account statements allowing for an efficient reconciliation of this account

- Information in real time on the status of the account allowing for an optimization of the Treasury.

c. Technical Environment

Since the implementation of ARTS, BNP Paribas El Djazaïr only needed the services of the Bank of Algeria-Technical Office, once and this because of problems related to the SWIFT base. While the application has not been problematic per say, we have encountered repeated cuts in the liaison which disturbs the continuity of the service

d. Sustainability of the System

In our opinion, the sustainability of the ARTS system depends on constant upgrades of the application as well as a constant modernization of the technological environment particularly telecommunications. To this effect, a Steering Comity including the Bank of Algeria, Algérie Télécoms and one representative of the banks would be best suited to ensure the regular up-grades.

We also recommend the implementation of a one window system serving as hot line for the day to day problems encountered.

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2 . C r e d i t P o p u l a i r e d ' A l g e r i e

IMPACT OF THE ARTS PROJECT

a . S h o r t t e r m

The implementation of the ARTS system in the Bank of Algeria had for consequence a great improvement on the handling and execution of the large amount and urgent transfers received and ordered.

i.e. The delays in admission and reception of this type of transfers went from 5 to 15 days to one day.

This improvement had a positive effect on the image that the clients, real beneficiaries of this improvement, have of the Bank

In addition, outside of the improved security brought about by the system, it also made for a more efficient management in real time of the funds flows

This is confirmed by the fact that the Treasurer has at all times a clear picture in real time of his payment account which allows him to take advantage of any investment opportunities available on the monetary and financial markets and therefore curtail the tendency to have a dormant treasury.

On the other hand, if the ARTS project had some positive effects, some localized technical have occurred, among them the following:

The absence to date of an interface between the Bank of Algeria's information system and ARTS has created an important amount of work in addition to the ARTS, for example:

⇒ the Swift messages are received on faxed paper copies and the information they contain needs to be transcribed.

⇒ verification of the consistency of these transcriptions and their transmission to the network (an average of 70 fax a day) with all the difficulties linked to the transmission,

⇒ Problems in using the bank statements of the Bank of Algeria transmitted to the banks in swift fax support.

b. medium and long term

The interface of the information system between the Bank of Algeria and the ARTS system is being developed and will soon make it possible for the Treasury to credit directly the beneficiary client's accounts without having to go through the process explained above.

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This procedure will not only save a lot of time i twill also improve the processing of the transactions linked to this system while reducing the risk of human errors that is present when the transactions are handled manually. In order to reduce the number of outages caused by the telecoms the Bank of Algeria will be equipped with a V SAT transmission.

Project RTGS

Results:

a. Short term

⇒ Better performance on the client's transfers (speed, reliability and safety).

⇒ Better transparency of the financial and fiduciary transactions (better transaction, balances and payment account supervision).

b. Me d i u m t e r m

Provided the necessary automation and an adequate training take place:

• A better management of the Treasury • Optimization of the performance and the costs.

c. Lessons learned

- Obstacles during implementation: There were no particular obstacles during that period but rather hurdles inherent to any modernization project. These issues have been resolved as they occurred during the implementation of the project

- Retrospective: Two main points need to be underscored:

(i) The accelerated rhythm of implementation the not give the banks enough time to implement all the necessary automations.

(ii) Organization of the project: the creation of a « steering committee » including the Bank of Algeria and the other banks participating in the project would have made for a better coordination and project supervision.

3. External Bank of Algeria (BeA)

The implementation of the payment system in real time of large amounts and urgent payments (RTGS) is now just over 8 month old. This system was implemented according to international standards and improved significantly the day to day management of cash flows, the commercial payments between companies, the payment of transactions made on the capital market (i.e. the stock market, Bonds market, and inter-bank monetary market) contributing to their development, the

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payment of the dinar counter parts of transactions negotiated on the exchange rate market and finally the payment of the netting results of the large amount payment.

Getting the Project on the way took a year of preparations in order to set up the "structure d'accueil", to train the project team and develop a simulation on the system (duration about 1 month). The users of the system have rapidly mastered the functionalities required to efficiently handle the flows of payments and the treasury transactions.

The average daily number of transactions handled by the system is about 100 and concerns pretty much each of the Bank's activities. In addition, the transfers received by ARTS for our clientele are usually treated the same day or at the latest the next morning, they are routed to the Branches through PC connect SWIFT.

However, the transfer of the exchange value in dinars of the repatriation transactions with a Friday value date are handled in the ARTS system with the value of the second business day after the week-end instead of the first, which goes against the "dispositions de Particle 20 du règlement N° 05-04" dealing with the System in real time for payment of large amounts or urgent payments (ARTS)

While the implementation of the system had the positive effects listed above on the speed and security of payments, it did not stimulate the BeA to further accelerate the implementation of its information system and its’ overall modernization.

For the sustainability of the system, it would help to designate only counterpart who will be in charge of the software and telecommunication hardware maintenance, and will be the vis-à-vis of Algeria Telecom for all work done on the Network. This way the BeA will only need one maintenance contract that will cover all possible problems and outages encountered by the system.

The major obstacle to this project was (and will probably remain for a while) the information system of the BeA. This system does not allow for an interface between the client and accounting data of the ARTS platform and the central system of the Bank. Therefore the transactions can only be entered by hand, with all the risk for human error that this type of operation represents.

4. Algerie Telecom

a. Results:

Realization of the transmission network related to the transmission related to the « payment system » project CPI, RTGS and SI was done on time

• Realization of two loops CWDM (core/backup) and the set up of the hardware SDH, X25 and VSAT

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• Successful testing to ensure that the different links SDH et X25 concerning private and public banks were operational

• Satisfaction of the banks following the activation of the CPI, RTGS and SI network

b. The sustainability of the Network:

• To ensure the sustainability of the network, maintain it in working order in order to provide a better service to the end-users on should:

• Implement a Network supervision system • Create a unit in charge of coordination between the services of Algeria Telecom

and the ba