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The World Bank

FOR OFFICIAL USE ONLY

Report No.: 18072

IMPLEMENTATION COMPLETION REPORT

DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA

STRUCTURAL ADJUSTMENT LOAN(Loan 4005-AL)

May 24, 1998

Country Operations DivisionMahgreb DepartmentMiddle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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Currency EquivalentsUnit of Currency = Algeria Dinar (DA)

1993 1994 1995 1996 1997DA per US$, period average 23.3 35.1 47.6 54.7 57.0DA per US$, end of period 24.1 42.9 52.2 56.2 57.9

Fiscal YearJanuary 1 - December 31

Weights and MeasuresMetric System

AbbreviationsAFS Allocation Forfaitaire de Solidarite (Lump Sum Solidarity Allowance)APSI Agence pour la Promotion et le Soutien des Investissements (National Investment Agency)AIG Activites d'Int&ret General (Public Works-based Jobs Program)BA Banque d'Algerie (Central Bank)BAD Banque Algerienne de Developpement (Algerian Development Bank)CNEP Caisse d'Epargne et de Prevoyance (Household Savings Institution)CNT Conseil National de la Transition (Interim Legislature)EFSAL Entreprise and Financial Sector Adjustment LoanEPE Entreprise Publique Economique (Autonomous Public Enterprise)EPIC Etablissement Public a caractere Industriel et Commercial (Autonomous Public Utility)EPL Entreprise Publique Locale (Local Public Enterprise)EPS Entreprise Publique Socialiste (Non-autonomous Public Enterprise)ERL Economic Rehabilitation LoanERSL Economic Reform Support LoanEU European UnionFA Fonds dA'ssainissement (Restructuring Fund)IAIG Indemnite pour Activite d'Interet General (Public Works Allowance)ICB International Competitive BiddingICSR Indemnite aux Categories Sociales sans Revenus (Direct Transfer Payment to Households

without Income)LSMS Living Standards Measurement SurveyMRIP Ministere de la Restructuration Industrielle et de la Participation (Ministry of Industrial

Restructuring and Participation)OAIC Office Algerien Interprofessionnel des Cereales (National Cereals Board)PE Public EnterprisePEC-1988 Programme en Cours 1988 (Program of Public Enterprise Investments as of 1998)PER Public Expenditure ReviewPSA Private Sector AssessmentSGG Secretaire Gen&ral du Gouvernement (Secretary General of the Government)SME Small and Mediumn-scale Enterprises

Vice President Kemal DervisDirector Christian DelvoieStaff Member Habib Fetini

FOR OFFICIAL USE ONLY


DEMOCRATIC AND POP1ULAR REPUBLIC OF ALGERIA

STRUCTURAL ADJUSTMENT LOAN(LOAN 4005-AL)

Table of Contents

Page No.PREFACE

EVALUATION SUMMARY

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. Background ......................... 1B. Program Objectives ......................... 2C. Achievement of Objectives ......................... 3D. Major Factors Affecting the Project ......................... 5E. Project Sustainability ......................... 6F. Bank Performance ......................... 7G. Bo rrowe r Performance ......................... 8H. Assessment of Outcome ......................... 91. Key Lessons Learned ........................ 10

PART II: STATISTICAL INFORMATIODN

Table 1: Summary of Assessments ............................................ 13Table 2: Related Bank Loans/Credits ............................................ 15Table 3: Project Timetable ............................................ 16Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual ................................ 17Table 5: Indicators of Project Implementation ............................................ 18Table 6: Key Indicators for Project Operation ............................................ 25Table 7: Studies Included in Project ............................................ 26Table 8A: Project Costs .27Table 8B: Project Financing .28Table 9: Economic Costs and Benefits .29Table 10: Status of Legal Covenants .30Table 11: Compliance with Operational Manual Statements .31Table 12: Bank Resources: Staff Inputs .32Table 13: Bank Resources: Missions .33

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Itscontents may not otherwise be disclosed without World Bank authorization.




PREFACE

This is the Implementation Completion Report (ICR) for the Structural Adjustment Loan inAlgeria (Loan 4005-AL) in the amount of US$300 million. The loan was approved on May 3, 1996 andbecame effective on June 26, 1996.

The loan closed on April 30, 1998, the original closing date. The first tranche, released uponeffectiveness, was fully disbursed by June 26, 1996. The second tranche was released on July 15, 1997,compared with the original date of June 30, 1997.

This ICR was prepared by Habib Fetini, Sr. Country Economist of the Maghreb Department andProject Manager. It was reviewed by Daniela Gressani, Economic Policy Sector Leader (MNSED),Christian Delvoie, Director (MNCMG), and Marisa Fernandez-Palacios, Portfolio Manager (MNCMG).The draft ICR was communicated to the Government for comments.

Preparation of this ICR was based on the Bank's mission in May 1998. It was also based onmaterial in the project file and from the last social and financial sector missions that took place in Marchand April 1998.

IMPLEMENTAT]ION COMPLETION REPORT

DEMOCRATIC AND PODPULAR REPUBLIC OF ALGERIA

STRUCTURPiL ADJUSTMENT LOAN(LOAN 4005-AL)

EVALIJATION SUMMARY

i. Background. By the mid-1970s, Algeria's socialist economic model was no longer capable ofgenerating growth or productive employmen,t. After international petroleum prices fell in 1986, Algeriaentered into a downward spiral of over-borrowing and economic decline. Starting in 1987, theauthorities began to transform the centrally planned economy into a market economy and the Bankassisted this process with two adjustment operations. Political discontent in 1992-1993 brought policyreforms to a halt and reversed much of the; progress that had been achieved. By early 1994, Algeriacould no longer service its external debts, inflation accelerated and, as imports were compressed,domestic production fell on account of shortages of raw materials and spare parts. In the face ofdeepening domestic despair, political support for market-oriented reform was rekindled. An IMFstandby and a Bank economic rehabilitation operation were quickly mounted and aggressivelyimplemented. The international community rallied to support the program with debt relief under theParis Club and generous financial support by official creditors. The authorities responded by defining afar-reaching, medium-term stabilization and adjustment effort, for which financial support from the IMF,World Bank, and international creditors was sought. The IMF entered into a three-year Enhanced FundFacilit (EFF)operation in May 1995 and the SAL was approved in April 1996.

ii. Program Objectives and Design. The Structural Adjustment Loan (SAL) was designed toadvance reforms initiated under the previous Economic Rehabilitation Support Loan (Loan 3834-AL),and complement the three-year IMF Extended Fund Facility. The program's objectives were to: (a)stimulate private sector-led growth; (b) protect the poor during the transition to a market-based economy;and (c) enhance the country's ability to mobilize external resources. In close collaboration with the IMF,the project was designed to support macroeconomic stabilization by rationalizing public expendituresand reducing state enterprise recourse to the budget.

iii. The program design was consistent with these objectives. Structural measures, aimed atstimulating private sector development and supporting macro stabilization, included the privatization ofmany small communal and local public enterprises, limiting state enterprises recourse to the budgetwhile preparing large public enterprises for privatization, increasing private sector involvement in publicprojects, and enhancing the competitiveness and soundness of the financial sector. This design was,however, at odds with what was known about best practices in fostering transition by the mid 1990s andwas problematic for at least three reasons. F irst, instead of shifting from the rehabilitation of state ownedenterprises and banks (ERL program) to large-scale privatization, emphasis under the SAL continued tobe put on a very gradual process of privatization, recapitalizing distressed state banks without addressingthe fundamental issue of their umbilical link with the State Owned Enterprises (SOE) sector, andestablishing holding companies to manage llarge numbers of the biggest public enterprises. Second, lack

of clarity on reform sequencing, combined with delays in implementation, contributed to poor supplyresponse. In fact, sequencing trade and exchange rate liberalization (Under ERL and EFF) prior toprivatization and removal of major bottelnecks to a domestic supply response was ineffective instimulating resource shifts into newly competitive sectors and contributed to de-industrialization.Finally, while the SAL addressed safety net and social public expenditures, less than appropriateattention was paid to an accompaning active employment creation program to support the reform processin a situation characterized by unusual high unemployment at the start of reforms, combined with aviolent political and social discontent.

iv. Program Results and Implementation Experience. The program's outcome was marginallysatisfactory, judged by the objectives defined during its preparation. In fact, while the program hassubstantially achieved its main targets in terms of external and internal balances and inflation, theseachievements remain fragile. Macroeconomic measures were fully implemented and in areas such asbudget reform, the Government exceeded commitments made under the IMF's EFF program. Theexchange rate was managed flexibly, tight fiscal and monetary policies adhered to, trade restrictionsreduced, a prudent external borrowing policy observed, and significant debt relief was provided throughrescheduling. But while these policies contributed to Algeria's stabilization, exogenous and nonsustainable favorable factors (successive exceptional rainfalls, rising oil prices, favorable cross-currencyexchange rates, etc...) accounted to a large extent for the recovery and the improvement in the internaland external balances. Growth in the non-hydrocarbon sector has not been restored and has in thecontrary continued to deteriorate, in particular in the manufacturing sector. That a broad-based privatesector supply response to reform has yet to emerge is one of the main reason for Algeria's increasingopen unemployment rate.

v. -The program has also partially achieved its privatization and public sector reform: TheGovernment closed the public enterprise restructuring fund, launched a small and experimentalprivatization program that put small communal enterprises up for sale, and liquidated close to half of thesmall local Public Enterprises (EPLs). The larger public enterprises (EPEs) were put under theadministration of holding companies, and the authorities have announced their intention to privatizethem. But the process of evaluating these larger enterprises has been stretched and the first realprivatization operation is yet to be seen.

vi. Other steps were taken to improve the private sector enabling environment but the private sectoris still, by and large, confined to the trade sector, and is constrained by public sector dominance in themain economic sectors. A competition law was promulgated, but its implementation will remain non-credible under the quasi-monopoly of the public sector; a stock market was launched, and the state bankswere recapitalized and required to observe international capital-asset norms which are good steps inbuilding a competitive and efficient financial system, but progress in the reform of this sector remainsdependent on its effective de-linking from public enterprises (through privatization) and from stateinterference.

vii. Some progress has been achieved in social safety net strengthening and improved targeting. Apoverty assessment, drawing on the results of a living standards measurement survey, helped to enhancesocial safety net targeting and inform an effort to define a poverty reduction strategy. Paymentprocedures and targeting mechanisms for the three main social safety net programs were improved, butthis was done at the expense of coverage, which has shrunk, while needs are fast increasing.

viii. The objective of increasing the mobilization of external resources was also partially achieved.While the SAL and the EFF programs enabled Algeria to successfully reschedule its bilateral and

commercial debt, Algeria's net direct foreign investment outside the oil sector remains disappointing,and negative net transfers from official lenders are being recorded.

ix. The Government exhibited commitment to the design and implementation of the project. Theauthorities organized tripartite meetings with the unions and enterprise managers to build consensus forthe reform process, and mounted a public information campaign and debate to broaden public support.While the Government was generally cooperative with the Bank during the project period, timely accessto essential information was a problem. This stemmed partly from weaknesses in the Government'sstatistical reporting capacity and reluctance to release "sensitive" information, resulting in delays in thecompletion of some economic and sector work. All specific covenants defined in the Loan Agreementwere met. The second tranche of the SAL was released on time and the loan was closed on time.

x. Special studies were conducted on public expenditures, poverty conditions, tariff policy, and theprivate sector. Study results made an important contribution to the Government's attempts to refine andadvance the reform effort. A great number of the recommendations made in the public expenditurereview, for example, were incorporated into the 1996 and 1997 budgets and budget institution reforms.

xi. Bank staff provided a full complement of skills and expertise in the identification and appraisalof the project. Conditions prior to Board appraisal, and prior to release of the second tranche, were welldefined. Despite the fact that travel to Algeria was restricted for nearly half the project implementationperiod, the project was overall well supervised and a continuous policy dialogue was maintained. Aspart of the supervision effort, the Bank orgamized high-level seminars in Algeria on global lessons ofprivatization and infrastructure projects concessions. This aimed at helping to broaden the understandingof alternative privatization approaches and sensitizing Algeria's leaders to the importance of acceleratingprivatization to restore broad-based growth. Support was also provided to simplify the privatization law,which was modified to ease pricing conditions and allow mass privatization and employee buyouts. TheBank staff were also actively involved in dialogue with the unions and in organizing large informationmeetings with private sector entrepreneurs within and outside Algeria to deepen teir understanding of thereform process and improve the quality of its advice to the Government.

xii. Program Sustainability. The sustainability of the project is uncertain in the medium term.Stabilization achievements will not be sustainable without a quick resumption of private sector-ledgrowth and diversification. Private sector initiatives remain constrained by public sector domination inkey sectors of the economy. Algeria's economy remains highly dependent on the hydrocarbon sector andas such is very vulnerable, especially since restructuring in the non-hydrocarbon sectors is still at a veryearly stage. Despite the limited scope of privatization, unemployment has aggravated, straining thesocial consensus in favor of reform and the prospects for furthering the privatization process. In mid-1998, Algeria's grace period under external debt restructuring arrangements comes to an end, increasingthe pressure on a fragile external payments position. Finally, there is still no definite turnaround in thesecurity situation which continues to claim scores of human lives, destroys infrastructure , interruptsproduction and trade, and deters investment and foreign technical assistance. During the past three years,however, a strong pro-reform constituency has emerged, in particular among the bureaucrats who knowmuch better now about macroeconomic management than in the past, with a direct link between its ownsuccess and the progress of reforms, and a good momentum has developed, weighing favorably for thecontinuation of the reform process. The Central Bank has developed a good degree of independence.Preparation for a large program of privatization is at an advanced stage, and a sharp criticism of the pasttwo years laxism in progressing privatizaLtion is being voiced publicly, including from within theadministration itself.

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xiii. Future Operations and Key Lessons Learned. Algeria's external payments indicators havesignificantly improved. The IMF's EFF program has been completed satisfactorily and there is noextension envisioned to this program. No further World Bank adjustment operations are contemplated atthis point. Structural reform will be discussed during preparation of the Country Assistance Strategy(CAS) and should be supported through policy dialogue and sectoral investment programs within theframework of the CAS.

xiv. The key lessons from this project are that: (a) an active and large scale employment creationstrategy is necessary in a situation marked by very high unemployment (around 25 percent in the case ofAlgeria at the start of the reform process) to enable the political and social feasibility of a swiftimplementation of reforms; (b) sequencing of reforms matters. Trade and exchange rate liberalizationshould go hand-in-hand with privatization and support to the private sector for a quick supply response.The lack of such a balanced and mutually supportive approach contributes to de-industrialization,weakens the support for reform, and undermines the implementation of the very trade and exchangeliberalization as they become unsustainable; (c) unbalanced and prolonged emphasis on stabilization atthe expense of structural reforms, and exaggerated valuation of improved short term macro performanceindicators alone diverts attention from the need to accelerate structural reform, as it gives policymakers afalse sense of having finished the agenda and gives the general population a false expectation of an endto its pain.

IMPLEMENTAT'ION COMPLETION REPORT



PART I: PROJECT IMPLEMENTATION ASSESSMENT

1

A. BACKGROUND

1. The macroeconomic imbalances, structural rigidities, and civil discontent that triggered the needfor adjustment assistance arose from longstanding faults in Algeria's socialist economic model. Thesefaults became fully apparent following the decline in petroleum prices in 1986. Failure to adjustpromptly to the oil chock, and the following reversal of economic reform effeorts during the 1992-1993period, led to severe external payment imbalances. These imbalances arose at the background of adecade-long economic decline in which per capita income fell by close to 25 percent and unemploymentrose to over 25 percent. Failure to foster sustained growth and development contributed to civilinstability and political unrest.

2. In 1987, the authorities began to introduce market-oriented reforms. Most public enterprises(PEs) were granted autonomy, price controls were lifted, foreign investment requirements wereliberalized, state import monopolies were scaled back, and a two-tier banking system was established.The Bank supported this effort through policy dialogue and two adjustment operations. Reform was,however, reversed in 1992 and 1993 following an upsurge in civil unrest, falling oil prices, and a rapidlyescalating external debt burden. Trade and payment restrictions were tightened, the fiscal deficit reached9 percent of GDP, and foreign exchange was rationed for priority imports. Imports were compressed,inflation soared, and the dinar appreciated by nearly 50 percent. By the end of 1993, the authorities wereunable to meet external debt obligations, inflation was approaching 30 percent, official reserves fell tobelow two months of import cover, and shortages of imports disrupted the manufacturing sector.

3. The urgency of the macroeconomic situation inspired the authorities to resume the reformprocess. On May 27, 1994, the authorities and the IMF entered into a one-year stand-by arrangement fora total of SDR 731.52 million (US$1 billion). Resumption of the reform process led to the release of theUS$175 million second tranche of the Bank's EFSAL in July 1994. This triggered the release of anadditional US$150 million from the Export-Import Bank of Japan and ECU 150 million from theEuropean Union. Following approval of the standby arrangement, the Government reached agreementwith the Paris Club to reschedule its official. bilateral debt. This, in turn, triggered resumption of talkswith the London Club of commercial creditors to reschedule US$2 billion in 1994 and 1995 debt serviceobligations. To broaden the focus of structural reform efforts, the Bank entered into an EconomicRehabilitation Support Loan (Loan 3834) in March 1995. This project provided critical balance ofpayments assistance, lent support to the macroeconomic measures outlined in the IMF standbyarrangement, and initiated a structural reform effort aimed at improving the incentive framework forprivate sector development, reforming public enterprises, rationalizing public expenditures, reformingthe financial sector, and strengthening the social protection system.

4. During 1994-1995, swift progress was made on both the macroeconomic and structural fronts.The currency was devalued twice for a total of 100 percent, most non-tariff trade and exchangerestrictions were eliminated, a budget surp!lus was maintained, subsidies were reduced on energy andfood products, agricultural input prices were freed, Government wages were capped, credit limits wereimposed on non-autonomous public enterprises (EPEs), a pilot privatization effort was launched, aprivatization law was promulgated, the commercial and investment codes were modernized, the bankingand insurance sectors were opened to private investment, and a social safety net system, based on a self-targeted public works scheme, a means tested program for the elderly and the handicapped, and aunemployment insurance scheme, was adopted. But the supply response to macroeconomic and

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structural reforms was disappointing. In 1994, GDP continued to fall, end-of-period inflation was closeto 40 percent, and the current account deficit reached 4.4 percent of GDP.

5. The authorities recognized that a deeper commitment to macroeconomic stabilization andstructural reform would be needed to reverse a decade of economic decline. In early 1995, theGovernment requested the support of the IMF and World Bank for a medium-term reform program. OnMay 22, 1995, the IMF Board approved a three-year (April 1995 to May 1998) SDR1.17 billion extendedarrangement under the Extended Fund Facility (EFF). The EFF operation aimed at restoring a high andsustained rate of economic growth, lowering the inflation rate, strengthening the social safety net, andrestoring a viable balance of payments. The Bank collaborated closely with the IMF in the design of themacroeconomic and structural reform measures supported by the EFF program.

B. PROGRAM OBJECTIVES

6. The Structural Adjustment Loan (SAL) was designed to advance reforms initiated under theprevious Economic Rehabilitation Support Loan (Loan 3834-AL), and complement the three-year IMFExtended Fund Facility. The program's objectives were to: (a) stimulate private sector-led growth; (b)protect the poor during the transition to a market-based economy; and (c) enhance the country's ability tomobilize external resources. In close collaboration with the IMF, the project was designed to supportmacroeconomic stabilization by rationalizing public expenditures and reducing state enterprise recourseto the budget.

7. The program design was consistent with these objectives. Structural measures, aimed atstimulating private sector development and supporting macro stabilization, included the privatization ofmany small communal and local public enterprises, limiting state enterprises recourse to the budgetwhile preparing large public enterprises for privatization, increasing private sector involvement in publicprojects, and enhancing the competitiveness and soundness of the financial sector. This design was,however, at odds with what was known about best practices in fostering transition by the mid 1990s2 andwas problematic for at least three reasons. First, instead of shifting from the rehabilitation of state ownedenterprises and banks (ERL program) to large sclae privatization, emphasis under the SAL continued tobe on a very gradual process of privatization, the recapitalizing of distressed state banks withoutaddressing the fundamental issue of their umbilical link with the SOE sector, and the establishment ofholding companies to manage large numbers of the biggest public enterprises. Second, lack of clarity onreform sequencing combined with delays in implementation, contributed to poor supply response. In fact,sequencing trade and exchange rate liberalization prior to privatization and removal of major bottlenecksto a domestic supply response was ineffective in stimulating resource shifts into newly competitivesectors, contributed to de-industrialization, and could very well precipitate the reversal of these veryreforms in the case of worsening external balances. Finally, less than appropriate attention was given toemployment creation in a situation characterized by unusual high unemployment before even the start ofreforms, combined with violent political and social discontent.

2 See John Nellis, "Reform of Public Enterprises" and Vinod Thomas,", Trade Policy Reform", in V. Thomas, A.Chhibber, M. Dailami, and J. De Melo, eds., Restructuring Economies in Distress, Oxford University Press, 1991.

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C. ACHIEVEMENT OF OBJECTIVES

8. Overall, judged by the objectives defined during its preparation, the program's outcome wasmarginally satisfactory. The program has substantially achieved its main macroeconomic objectives interms of restoring external and internal balances and reducing inflation (para. 10). These achievementsremain fragile, however: Exogenous and non-sustainable favorable factors (successive rainfalls, higheroil prices, favorable cross currency exchang,e rates, etc.) contributed largely to this performance; growthin the non-hydrocarbon sector has not been restored but has, on the contrary, continued to deteriorate, inparticular in the manufacturing sector; and with it, unemployment continues to be aggravated. Theprogram has also achieved only partially its private sector support, public enterprise reform, and socialsafety net objectives. Indeed, privatization of large enterprises has not yet started; much remains to beaccomplished in building a competitive and efficient financial system, with progress in the reform of thissector remaining dependent on the pace of reform in the public sector as a means of de-linking thefinancial sector from the public enterprises and freeing it from state interference; and progress in socialsafety net strengthening and employment creation remains insufficient to cover the increased needs inthis area. The objective of substantially increasing the mobilization of external resources was also onlypartially achieved: while the SAL and the l,FF programs enabled Algeria to successfully reschedule itsbilateral and commercial debt, Algeria net direct foreign investment outside the hydrocarbon sectorremains disappointing, and negative net transfers from official lenders is being recorded.

9. External Resource Mobilization. The program partially achieved its objective of mobilizingfinancial resources to meet Algeria's pressing balance of payments requirements. On the basis of theIMF EFF arrangement and the Bank SAL, Algeria was able to reschedule its public debt, first with theParis Club creditors in 1994 and 1995 and then with the London Club of commercial banks in 1996.Debt rescheduling provided US$10 billion in relief for 1994 and 1995, an additional US$3.5 billion in1996, and US$2.2 billion in 1997. In addition to debt relief, the rebound in hydrocarbon export earnings,from US$9.7 billion in 1995 to US$12.6 billion in 1996 and US$13.4 billion in 1997, significantlyimproved Algeria's external payments position. But net direct foreign investment was disappointing,averaging just US$270 million per annum (US$10 per capita). Overall, Algeria recorded negative nettransfers from official lenders of US$1.8 billion in 1996 and US$1.7 billion in 1997.

10. Macroeconomic Framework. Macroeconomic measures were fully implemented, consistentwith the program defined under the IMF's EFF. The exchange rate was managed flexibly, tight fiscaland monetary policies adhered to, trade restrictions reduced, and a prudent external borrowing policyobserved. Real GDP resumed positive growth and grew by 3.9 percent in 1995, 3.8 percent in 1996, butzero percent in 1997. Due in large part to relief provided by debt rescheduling, and owing to highhydrocarbons prices and a decline in impoirts, a current account surplus of 2.7 percent of GDP in 1996and 6.7 percent of GDP in 1997 enabled thte authorities to accumulate US$9 billion in official reserves,equivalent to 8 months of import cover, by the end of 1997. Prudent fiscal policy, the centerpiece ofwhich was a tripartite agreement to reduce the public wage bill, and favorable oil prices resulted in abudget surplus of 3 percent of GDP in 1996 and 2.3 percent in 1997. Limitation of credit by the statebanks held money supply growth to less than 20 percent per annum in 1996 and 1997. To provide scopefor private borrowing, credit to the Government declined in absolute terms. An easing of aggregatedemand pressure brought inflation down from an average of 30 percent in 1995 to 6 percent in 1997.While prudent fiscal and monetary policies contributed to Algeria's stabilization, excellent cropconditions in 1995 and 1996 and a rebound in hydrocarbon exports in 1996 explain most of the economicgrowth in the past three years.

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11. Budgetary Policy. In line with recommendations made in a public expenditure reviewconducted in collaboration with the bank, health and education expenditures were protected from budgetcuts, priorities were set for capital investments, a zero net recruitment policy for civil servants wasadopted, and the public sector wage bill was reduced to 8.9 percent of GDP from more than 11 percent.Institutional measures, including a review of social sector staffing needs, were launched to rationalize theoperations of the civil service. The Restructuring Fund, which had been used to recapitalize publicenterprises, was closed, breaking the link between the budget and the public enterprises sector. CentralGovernment operations registered a robust fiscal surplus for the past two years 2 and 3 percent of GDP),but as the process of privatization has not yet started, and the need for strengthening the socialsafety net to contain the high growth of unemployment and potential layoffs remains pressing forpoliticians, there is a risk, in particular if there is a large oil price shock, of a reversal in the fiscalstance.

12. Public Enterprise Reform. A tighter budget constraint was imposed on the SOE by closing thepublic enterprise Restructuring Fund, and banks' overdrafts to the large PEs were restricted to less thanone month of enterprise turnover. Eleven holding companies were established to manage the 340 largestpublic enterprises (EPEs). Five additional holding companies were created to manage the preparation forprivatization of 200 of the 1,400 small local enterprises (EPLs). The holding companies were authorizedto restructure, divest, and retain the proceeds associated with the sale or liquidation of the PEs. TheBank, presented with the fait accompli of the establishment of holding companies, advised establishingsunset colosing rules with a strict timetable for their dismantling, fixing a comprehensive schedule ofprivatization, and employing a range of privatization approaches that would ensure swift divestiture andefficient restructuring of the PEs.

13. Privatization. A privatization law was passed and later modified to ease pricing conditions andallow mass privatization and employee buyouts. Two batches of small enterprise privatization werelaunched under the SAL. Privatization concerned bringing to the point of sale very small communalactivities and enterprises (which are not SOE, per se, as are EPEs or EPLs), bringing to the point of saleunits of SOEs (partial privatization), and liquidation of EPLs. In the first batch, 274 communal and localenterprises were either sold or liquidated. In the second batch, 267 enterprises were either brought to thepoint of sale or liquidated. Liquidation of bunkrupt EPLs dominated the process. In terms of number thetarget of the SAL, which does not discriminate between liquidation and sale, has been exceeded. In fact,696 out the 1,500 small EPLs have now been effectively liquidated. For the largest public enterprises(EPEs), 76 enterprises, mostly from the construction and manufacturing sectors, accounting for 160,000employees, have been also liquidated. The authorities have announced a program for the privatization of250 of these largest public enterprises. It was reported that the process of evaluating of the largeenterprises is at an advanced stage and that 89 of these EPEs are scheduled to be presented for salebefore the end of June 1998. Despite the large number of public enterprises closed down, theprivatization law has yet to be tested, since none of these enterprises has yet been privatized under thePrivatization Law. Liquidation was the main method used to divest small and medium local publicenterprises, and privatization by sale of the small communal enterprises was made under other restrictivelegislation.

14. Agricultural Sector Reform. Restitution measures for land "donated" to the state were passed,and a law outlining the procedures for transforming state agricultural land into private property wasapproved by the Council of Government. The law is scheduled to be debated by the Parliament beforethe end of 1998. These highly sensitive measures, if implemented, have the potential to bolsteragricultural investment incentives and spur technological progress.

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15. Incentive Framework. The implementing regulations for a Competition Law were published.Progress was made in regularizing urban property titles and enabling legislation was passed for leasingand factoring services. Regulatory improvemnents had, however, little immediate effect on private sectorinvestment activity because of the restraints to competition posed by the large Government presence inthe productive sectors and the deteriorating security situation.

16. Housing Reform. Under a new housing strategy, public sector involvement was phased out andconstruction by the private sector was emphasized. Housing subsidies were made explicit in the 1998budget and a plan for privatizing Government construction companies and auctioning off undevelopedurban building sites was prepared. The housing finance agency (CNEP) was transfortned into a mortgagebank. Public housing rents were increasedi to reduce poorly targeted dwelling subsidies, but theseincreases remain very modest (based on the existing very low rental rates, it will take more than twocenturies to mortgage a Government-rented house in Algeria).

17. Financial Sector Reform. The stal:e banks were audited, management contracts for the bankswere developed, all banks met a first stepF 4 percent capital adequacy requirement, and three wererecapitalized to meet the 8 percent international capital adequacy norm. Growth in overdraft accountswas checked by the establishment of a one-month turnover limit for overdrafts to PEs. The Governmentopened up participation in two state banks but this attracted little investor interest. Taking advantage ofmore liberal banking laws, two new private banks with foreign participation were founded. Despite thisprogress, Algeria's financial market continies to be dominated by five low-performance state banks.Capital market activity was given a boost by new regulations governing the accounting of financialsecurity transactions, the start of a Treasury Bill auction, and the founding of a Securities MarketManagement Corporation. Efforts to reform the payments system stalled. Further progress in financialsector reform will be closely linked with the pace of the privatization process and reform of the publicsector in general as they provide a means of de-linking the financial sector from the public enterprisessector and freeing it from state interference.

18. Social Safety Net Reform. Poverty relief transfers were combined into an lump-sum SolidarityAllowance (AFS) program directed to elderly and handicapped, which was improved by better targetingand by establishing shorter payment periods. The self-targeting public employment program PAIG (aself-targeted income transfer and transitory employment program) was based on the rule of "a full day'swork for a half day's pay", even though many violations to this rule were reported and the increase inwages and the decrease in allocation, contributed to a decline in the participation in the PAIG programwhich fell from 580,000 persons in 1995 to about 100,000 in 1997. The Unemployment Insurance Fund(CNAC) has accumulated large reserves, estimated to be sufficient to finance close to 200,000 layoffseach year. The results from a living standards measurement survey (LSMS) and a poverty assessmentshould enable the Government to refine its strategy for reducing poverty.

D. MAJOR FACTORS AFFECTING THE PROJECT

19. Factors Beyond Government Control. Restoring macroeconomic balance was assisted byunforeseen improvements in Algeria's external economic environment. Good weather in 1996 aiid 1997led to strong growth in agricultural output and helped to ease inflationary pressures. Crude oil exportprices overshot forecasts by 20 percent and reached US$22 per barrel in 1996, and stayed firmn at US$20per barrel in 1997. In value terms, hydrocarbon exports in 1997 were 56 percent greater than in 1994,boosting GDP by close to 3 percent in both 1996 and 1997. The strengthening of the US dollar (thehydrocarbon export currency) vis-A-vis the yen (major debt payment currency) and the Euro currencies

6

(imports payment currency), helped improve the trade balance, reduce debt service costs, and easepressure on the budget. Major new investments in the hydrocarbon sector came on stream in 1997 and1998, benefiting from the strong global prices in 1997 and helping to compensate for the decline in 1998global petroleum prices. Another important unforeseen contribution to the improvement of the externalpayments position came from a sizable decline in import levels related to the overall depression of thenon-oil economy, in particular to the decline in inputs and capital goods imports by public enterprisesfollowing tightening of the budget constraint and their limited access to credit. The decline in importswas also related to the decline in imports of consumption linked to the decline in disposable income.

20. A deteriorating domestic security environment and political uncertainty also hampered thereform process and dampened the supply response to improvements in the domestic incentiveenvironment. The national elections of 1997 ushered in a coalition Government which had to reconcilegreat differences in economic perspectives, administrative experience and reform approaches. Sabotage,assassinations, and other acts of extremism marred the political scene in 1996 and 1997. The volatiledomestic security situation affected domestic trade, obstructed foreign direct investment, and hamperedthe provision of international technical assistance.

21. Factors Generally Subject to Government Control. The authorities adopted a "go slow"reform policy, especially with regard to public enterprise privatization, private participation in statebanks, and the phasing out of Government activity in the housing market. Reform timidity was dictatedby the prevailing civil strife and an unemployment rate that reached 28 percent of the labor force in1997. After the presidential elections of 1996, the pace of reforms slowed, in part because of theexclusive emphasis of the Government on the political reform process, including the parliamentary andmunicipal elections, and also because of improvements in hydrocarbon exports eased the immediatepressure on the budget and the external payments position. At the beginning of the process, Governmentofficials launched an intensive media campaign to explain the main reform measures to the population.The unions were enlisted to support the reform process.

E. PROJECT SUSTAINABILITY

22. Whether reform progress will accelerate at a sufficient pace and stabilization be maintained isuncertain. First, improvements in the external payments situation and the budget balance, and the easingof inflation, have somewhat reduced the sense of urgency regarding the economic situation andcontributed to a relaxed stance in carrying out privatization and sectoral reforms. After a decade of muchpain and little gain for the general population, a certain amount of adjustment fatigue has set in, and themuted support by the unions is ending. Second, the depth and breadth of the structural adjustment effortis not yet sufficient to ensure a sustained private sector-led growth and development process. Theeconomy is still highly dependent on hydrocarbons, which account for 95 percent of exports, 60 percentof Government revenues, and one fourth of GDP. As a result, Algeria's new-found economic stabilitymay be hard to maintain in a more adverse economic environment. Third, in mid 1998 the grace periodprovided under debt rescheduling expires, and the debt overhang will strain the budget and may impedestrong future investment. Fourth, no lasting progress has been made in restoring employment growth.The manufacturing sector, dominated by public sector, continues to contract (by 8.7 percent in 1996 and9.2 percent in 1997) in the face of foreign competition, and open unemployment is approaching 30percent of the labor force. Private activity is clearly insufficient to keep pace with the 170,000 workersentering the labor force each year, much less the overhang of an estimated 2.4 million unemployed. Ifprivatization proceeds, the PE labor force will be subject to downsizing. As unemployment rises, thiswill place heavy strains on the Government budget, at the same time that debt service obligations

7

increase, threatening the achievements in macroeconomic stabilization. Fifth, faced with the fiscal andpolitical imperative of avoiding costly job losses, there is a risk that the authorities may adopt, on a largescale, "accommodating" privatization policies, such as employee buyouts, that would lock in existinginefficiency and impede trully enterprise restructuring. Finally, there are no definite signs of aturnaround in the security situation which continues to claim scores of human lives, destroyinfrastructure, interrupt production and trade, and deter investment and foreign technical assistance.

23. On the other hand, there is also relatively strong constituency for reform, and a momentum hasdeveloped during the last three years of reforms, both of which weigh in favor of the sustainability ofreforms. Strong support for a stable macroeconomic stance among the officials in charge of economicpolicy setting and management has indeed developed throughout the EFF and SAL processes andconstitutes a non-negligible resistance factor against the possibility of macroeconomic policy reversals.The Central Bank has also established a significant degree of independence. Steps taken to improvepriority setting in public expenditure have served as a valuable learning experience, and Governmentefforts to enhance budget transparency and advance civil service reform provide reason to believe thatfurther progress will be made along these lines. There seems to be less risk than before that theGovernment will provide recourse to the budget for the PEs, bringing to a close nearly a decade ofbailouts. Preparation for a large program of privatization is at an advanced stage, and although theprocess has been slow indeed, it seems to be moving forward now. The state banks have beenrecapitalized, excessive recourse to overdrafts and public enterprise lending has been halted, and thebanks are starting to observe internationally accepted capital adequacy requirements. In housing, theGovernment has liquidated most of the construction companies and is moving to privatize the rest. Acommercial mortgage bank has been set up. Institutional arrangements for a more diverse capital marketare being put into place and the Government continues to improve targeting and enhance management ofthe social safety net programs.

F. BANK PERFORMANCE

24. Preparation. The Bank was heavily involved during preparation of the program. The skill mixof mission members was appropriate and included macroeconomic, private sector, financial sector, socialsafety net, unemployment insurance, and legal specialists. The project built on the results of the ongoingERL project and a number of special studies funded by the ERL, including a public expenditure review, aprivate sector assessment, two studies on private participation in banking, a review of the social safetynet, and the preliminary results from a Living Standards Measurement Survey (LSMS). Reformsidentified in the 1994 Country Economic Memorandum were reflected in the program which wasdesigned to be the cornerstone of the Bank's country assistance strategy to Algeria in 1996 and 1997. Inaddition to the project team, inputs were provided to the operation from a wide range of Bank andGovernment specialists. While preparing the project, Bank staff maintained active consultation with theIMF, the EU, and key bilateral donors to ensure combined and coordinated financial support for theGovernment's reform effort. Insufficient attention was devoted to designing a strategy to deal with themassive open unemployment problem and the rigidities in the labor market particularly since the tepidpace of structural reform was dictated largely by the authorities' fears of aggravating unemployment.

25. Appraisal. The Bank reviewed the project sufficiently but overestimated the Governmentinstitutional capacity. That the prior conditions specified for Board submission were met in full is proofthat the measures were realistic and that Government was committed to a medium-term program ofmacroeconomic and structural reform. However, the Bank overestimated the Government's institutional

8

and technical capacity to implement the reform program, especially under the difficult securitycircumstances prevailing in Algeria. Preparation for privatization even for the small communalenterprises proved cumbersome. The first Privatization Law was rigid and inappropriate to privatize thelarger enterprises, and recourse was made to alternative legislation that allowed only partial privatization,while the Privatization Law was amended. We didn't properly estimate the technical difficulties whichwere later encountered in auditing and recapitalizing the state banks, in attracting private participationinto the state banks, in improving the payments system, and in launching a secondary market fordomestic Treasury instruments. Slippage in the implementation of reforms in these areas occurredbecause it required the active involvement of international technical experts, who were deterred fromgoing to Algeria because of the difficult security situation. We didn't forsee this coming. The Bank wasalso too accomodating at the time of negotiations which were exceptionally difficult and took more thanthree weeks.

26. Supervision. Extraordinary measures were employed to supervise the project because Bankstaff travel to Algeria was restricted for nearly half of the implementation period. The Bank tried to useinnovative methods to circumvent these constraints. A combination of missions to third countries,regular phone contacts, and frequent but limited duration missions were used to supervise the project.Bank supervision was moderately effective in quickly resolving the small number of implementationproblems that arose, providing advice and feedback on special studies and technical assistance activities,and mounting a number of special studies (e.g., Public Expenditure Review, Poverty Assessment, TariffReview, and Private Sector Assessment). Supervision efforts also helped to sensitize the authorities tobest global practices in privatization, through Bank seminars held in Algiers in October 1996 and June1997.

G. BORROWER PERFORMANCE

27. Preparation. The Borrower was closely involved in all aspects of project preparation.Government coordination committees established to implement reforms launched under the ERL projectplayed a key role in preparing the project. The authorities cooperated fully to articulate a reform effortaimed at furthering Algeria's transition to a market economy, based primarily on needed reformsidentified in joint studies such as the Public Expenditure Review, Financial and Capital Market Study,and a Private Sector Assessment. The Government organized a tripartite meeting with the unions and theenterprise managers in order to create widespread ownership and understanding of project reforms. Anaggressive public relations campaign was mounted by senior Government officials to explain the reformsto the population and elicit feedback.

28. Implementation. The Borrower's performance during implementation was satisfactory, giventhe immense difficulties posed by the adverse security situation. However, the Borrower's ability tomanage the policy reform process was hampered by: (a) a lack of timely and accurate data on privatesector activity and living standards, areas in which much progress has been realized lately; (b)fragmentation of fiscal responsibilities and very inefficient coordination among budgets; (c) restrictionson international travel, which frustrated attempts to involve international experts in auditing the statebanks, improving bank clearing systems, and launching the stock market; and (d) the priority given to thepolitical reform process and the organization of the Presidential, Legislative and Local elections at theexpense of the economic reform agenda, and the heavy toll these elections took on the attention andenergy of the bureaucrats in charge of implementing the economic reforms.

9

29. The Government responded to requests for information from the Bank, but the informationprovided was often incomplete and delayed. Restrictions on access to poverty conditions andemployment information delayed preparation of special studies. Longstanding weaknesses in Algeria'sstatistical reporting system were part of the problem, but a reluctance to release "sensitive" statisticalinformation to the Bank was encountered.

30. Covenant Compliance. The Government met all specific covenants defined in the LoanAgreement. The second tranche of the SAL was released on time and the loan was closed on time.Although often delayed and incomplete, regular economic reports were generally furnished to the Bankin accordance with the indicators defined in the President's Report.

H. ASSESSMENT OF OUTCOME

31. The program had a marginally satisfactory outcome because it achieved its major objectives and,despite problems encountered, is expected 1to achieve, at least partially, its development results. Tightfiscal and monetary policy have been maintained, inflation has been brought to the single digits, thebalance of payments has improved, and growvth has resumed from after a long negative trend, although itremains largely insufficient and essentially driven by oil and exceptionally favorable rainfall conditions.Between 1994 and 1998, about US$16 billion in debt relief was obtained.

32. Public expenditures have been partly refocused to enhance spending efficiency while protectingcritical social outlays. Recourse to the budget by public enterprises has been minimized; a more flexiblePrivatization Law was developed; half of the small, local public enterprises (EPLs) have been liquidatedand their assets sold; past progress in liberalizing trade and exchange arrangements has been maintainedin spite of the stress posed by the deteriorating domestic supply in manufacturing and other sectors; theprivate sector started to play a larger role in the housing market; banking soundness has relativelyimproved; and social safety net programs are operating more efficiently and are better focused on thepoor, even though they are not keeping pace with the increase in unemployment and the deterioration ofthe social situation.

33. A large share of the credit for macroeconomic recovery, however, is due to the higher worldmarket and exogenous transitory factors. A broad-based, private sector supply response tomacroeconomic stability and structural reform has yet to emerge. In part, this can be explained by theenormous constraints on investment posed by the volatile security situation. But it also reflects thebottlenecks posed when key sectors of the economy --manufacturing, banking, utilities, construction,transport-- remain dominated by a public sector that is itself hampered by resource constraints, over-employment, and a legacy of inefficient management.

34. Private Sector Development. Efforts to restore broad-based growth and employmentgeneration hinge on the transformation of a public sector-dominated economy to a market economy. Theenabling environment for the private sector was improved under the project by reducing inflation,liquidating a large number of small public enterprises, and limiting Government bailout of SOEs andcrowding-out of private activities. But private sector activity is still largely confined to small-scale andinformal trade and rent-seeking activities. The public sector continues its quasi-monopoly in themanufacturing, finance, housing, transport, mining, and utilities sectors. The private sector simply cannotcompete with Government in these sectors, and the inefficiency resulting from the large public presencein the productive sectors renders large segments of the non-hydrocarbon economy globallyuncompetitive. A much deeper privatization effort in banking, manufacturing, housing, and agriculture

10

is needed to enlarge the scope for private sector initiative and to eliminate the bottlenecks posed bypublic domination of critical economic services.

35. Poverty Reduction. The reduction in inflation has helped to protect wages and savings of low-income households. The new AFS improved payment system and better beneficiary targeting under theAFS and PAIG programs has helped maintain a real income floor for the poorest groups. Good harvestshave helped protect the poor in low-income rural areas. On the other hand, unemployment rose fromnearly 25 to 29 percent of the labor force and real wages fell throughout the adjustment period. Risingunemployment can be attributed partly to project-supported privatization efforts, and falling real wagescan be attributed to the knock-on effects of fiscal restraint. Housing rental subsidies were reduced, butsince non-payment rates are so high in Government housing, this has had little tangible effect on thepoor.

I. KEY LESSONS LEARNED

36. Political fear of a worsening the unemployment situation, starting from an already very highlevel (25 percent) under severe civil unrest, was among the main factors behind the slow pace of reformin Algeria. The speed and depth of reform are, on the other hand, key to shortening the transitory phaseand bringing a convincing turnaround in the growth, welfare, and positive expectations of the population.To contain the political and social costs of a swift reform of the production system and its privatization, amajor public works effort that temporarily gives work to a critical number of unemployed workers, andan active support for the laid-off workers to be through the strengthening of unemployment insurance,were (and still are) necessary. This would have required major additional resources from the Bank andother donors, and would have provided a positive incentive to the unions and to the public to support amore wide-ranging and speedy transition effort.

37. The sequencing of reforms matters a great deal in the success of the transition. Sequencing tradeand foreign exchange liberalization prior to privatization, and in the absence of private sectordevelopment, has contributed to de-industrialization and could threaten the sustainability of the verytrade and exchange reform itself, especially if the external payments situation worsens. Indeed, tradewas reformed and the exchange rate was liberalized, while the production system continues to bedominated by non-competitive public enterprises. Domestic production, constrained by the problemsand inefficiencies of the public enterprise system and by a particularly active informal trade system (thefamous Trabendos) simply could not compete with imported manufactured and consumer goods. In theabsence of a supply response from the private sector, which remains constrained by the dominance of thepublic sector, the process of de-industrialization has accelerated. To check import growth, the authoritiesmay likely be obliged to resort to indirect administrative trade restraints, i.e., quality controls, and otherindirect quantitative restrictions practices that defeat the very purpose of trade liberalization reform andrun against the effective integration of Algeria into competitive global markets.

38. An unbalanced and prolonged focus on stabilization at the expense of structural reforms, andexaggerated valuation of the improvement of macroeconomic performance indicators, diverted theauthorities attention from the need to mount a rapid and aggressive structural reform effort. The IMFEFF operation preceded the SAL, was a much larger operation, and focused Government's attention forthree years mostly on the imperative of short-run stabilization. This has somewhat diverted theauthorities' attention from the more fundamental problem of restoring medium-run growth and creatingproductive employment through significant withdrawal of the state from the production area, and deepsectoral reforms. A debilitating economic vicious circle has emerged by which stabilization

11

achievements have started to be fed by poor growth performance and the collapse of the manufacturingsector (import decline over the last three years has contributed a good deal to balance of paymentsperformance, and inflation control is being driven more by the decline in demand than by better supplyperformance).

12




PART II: STATISTICAL INFORMATION

Table 1: Summary of AssessmentsTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Indicators of Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

13

Table 1:: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible Not Applicable

Macro Policies DXX E Cl E

Sector Policies E DXX El E

Financial Objectives l CIXX El E

Institutional Development El DXX E E

Physical Objectives El El E DXX

Poverty Reduction El E DXX E

Gender Issues E El DXX

Other Social Objectives E DXX E E

Environmental Objectives D[XX

Public Sector Management E DXX El El

Private Sector Management E DXX El E

Other (Restoring Momentum) E DXX E E

B. Project Sustainability Likely Unlikely Uncertain

El El OXX

C. Bank Performance Highly Satisfactory Satisfactorv Deficient

Identification El DXX El

Preparation Assistance El DXX E1

Appraisal El DXX E

Supervision El E XX E

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D. Borrower Performance Highly Satisfactory Satisfactarv Deficint

Preparation C CXX C

Implementation C CXX 13

Covenant Compliance C C XX Cl

E. Assessment of Outcome Highly HighlySatisfactory Satisfactor Unsatisfactory Unsatisfactor

C CXX C C

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Table 2: Related Bank Loans/Credits

Loan/Credit Title Purpose Year of Approval Status

Proceeding operations To restore growth by August 31, 1989 Closed on December 31,1. 3117-AL Economic introducing a more 1991; cancellation of US$Reform Support Loan of market-oriented economic 1.2 million.US$300 million system.

2. 3352-AL Enterprise To restore macro-balances June 21, 1991 Closed on June 30, 1995;and Financial Sector through tight fiscal and US$350 million was fullyAdjustment Loan of monetary policy mwhile disbursed.US$350 million introducing competitive

structural policies andstrengthening the socialsafety net.

3. 3834-AL Economic To accelerate the transition January 26, 1995 Closed on December 31,Rehabilitation Support to a market economy and 1996; US$150 million wasLoan of US$150 million mobilize the external fully disbursed.

financing necessary torestore sustained growth.

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Table 3: Project Timetable

Steps in Project Cycle Date Planned Date Actual/

Latest Estimate

Identification (Executive Project Summary) 4/28/1995 4/28/1995

Preparation 12/13/1995 12/13/1995

Appraisal 1/29/1996 1/29/1996

Negotiations 3/05/1996 3/05/1996

Board Presentation 4/25/1996 4/25/1996

Signing 5/3/1996 5/3/1996

Effectiveness 6/26/1996 6/26/1996

First Tranche 6/26/1996 6/26/1996

Second Tranche 6/30/1997 7/15/1997

Loan Closing 4/30/1998 4/30/1998

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Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual

(US$ millions)

FY 1996 FY 1997 FY 1998

Appraisal Estimate 300 300 300

Actual 150 150 300

Actual as % of Estimate 50 50 100

Date of Final Disbursement 6/26/1996 6/26/1996 7/15/1997

Note: IBRD fiscal year ends on June 30.

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Table 5: Indicators of Project Implementation

Component Measures taken before Measures to be taken before Measures to be taken Implementation StatusMay 1, 1995 presentation of the SAL to the before the release of the

Board Second TrancheMacroeconomic Framework Maintenance of a macroeconomic Maintenance of a macro- EFF criteria have been met and all purchases under

framework in accordance with the EFF. economic framework in the arrangement have taken place on schedule.accordance with the EFF. Real GDP grew by 3.9% in 1995, 3.8% in 1996,

and 0% in 1997. A current account surplus in 1996and 1997 enabled official reserves to rebound to 8months of import cover. A budget surplus of 3% ofGDP in 1996 and 2.3% of GDP in 1997 easeddemand pressures and brought end-year inflation to15% in 1996, 6% in 1997, and a projected 4% for1998. From 1994-1998, the money supply grew byless than 20 percent per annum and net credit toGovemment declined every year.

Foreign Exchange & Dinar convertibility achieved forTrade Regime most trade-related transactions;

elimination of remainingprofessional criteria requirementsfor importers.

Budgetary Policy Reduction of budget deficit from Submission to the Bank of a Government The 1996 and 1997 budgets were jointly reviewed8.9 percent of GDP in 1993 to 4.4 investment program and plan for recurrent with the Bank and the main PER recommendationspercent in 1994. Govemment expenditures for 1996 in the incorporated. In 1996, this included a 130 percent

health, education, transport, and housing increase in basic health expenditures, an increase insectors, in accordance with the Public pharmaceutical expenditures, reallocation ofExpenditure Review (PER). investment outlays from rail transport to housing,[Note: major measures already taken and a freeze on net Govemment employment.include: zero net recruitment of teachers; Health and education spending were protected froman increase of 150 percent in the budget spending cuts in 1996 and 1997, and a betterfor teacher training and retraining; 75 balance struck between cufrent and capitalpercent increase in pharmaceutical spending in the social sectors. Careful scrutiny ofexpenditures; 130 percent increase in 80 ongoing public investments in 1996 and 1997preventative medicine expenditures; led to a focusing of the PSIP on 50 priority publiclaunching of pilot operations for investments. Foreign participation is being soughtsubcontracting with private sector for food for infrastructure projects, such as the Algiersand cleaning services in the health sector; metro, airport, east-west freeway, industrial zones,halting construction of Algiers metro; and energy generation and distribution projects.reallocation of part of plannedinfrastructure investments to housing. In terms of new commitments, the Restructuring

Fund was closed on December 29, 1996. In termsStabilization of recruitment for the civil of disbursements, the Restructuring Fund wasservice, in accordance with the EFF. closed in March 1997 as programmed. DA 10

19


Board Second Tranchebillion from the Fund will be used to recapitalizethe Development Bank (BADR) in 1998.

Presentation to the Bank of the In 1996 and 1997 Govemment operated a zero netprogram of personnel recruitment policy for civil servants. That, plusexpenditures for the civil service prudent wage controls, caused total personnelproposed for 1997 budget, expenditure to fall to 8.9 percent of GDP in 1997.comprising the measures agreed These policies exceeded EFF conditionality andjointly and satisfying to both were consistent with PER recommendations toparties in the context of the PER. reduce the public sector wage bill.

Budgetary policy Agreement on the timetable for Progress toward closure of the Presentation to the Bank of a Greater efficiency of the civil service (the largest(continued) the closure of the Restructuring Restructuring Fund in accordance with program to improve the public employer), is to be achieved through a

Fund Appendix B, Annex 1, ERL agreed timetable. Note: three measures in efficiency of the civil service and review of social sector strategy together with theLetter of Development Policy) the matrix - the above measure, the implement of a first set of founding of a Ministry of Civil Service and

passage of the remaining large public measures agreed jointly. Administrative Reform. Both initiatives are in lineenterprises to autonomy (see Public Progress toward the closure of with PER recommendations. AdministrativeEnterprise Keform), and constraints on Restructuring Fund in accordance reform in 1997 led to the abolition or streamliningbanks to maintain prudential ratios (see with agreed timetable. of 51 Government entities.Financial Sector) impose hard budgetconstraints on public enterprises.

Private Sector Support &Reform of Public Enterprises

Privatization Drafting of privatization law, in Promulgation of privatization law. Joint review of the privatization A Privatization Law was passed in April 1996 andconsultation with the Bank (ERL) process based on these amended in April 1997 to provide more flexible

Promulgation the implementing texts, as implementing texts and their pricing, ease labor dismissal terms, and broaden theagreed in consultation with the Bank; improvement, if necessary. scope to include large enterprises. None of thecreation of the institutions foreseen in the privatizations of 1996 and 1997 was under thelaw for management of the privatization Completion of initial program of framework of the new law. A Bank seminar onprocess. privatization (including privatization lessons was held, and inspired the

concessions). authorities to adopt best practices, includingImplementation of an initial privatization employee participation and mass privatization.program, including bringing 103 Establishment of a secondcommunal-level public enterprises to the privatization program. Of the 274 communal and local public enterprisespoint of sale, offering 35 communal (EPLs), 117 were liquidated or privatized by theactivities for private sector operation by Bring to the point of sale (sale of end of 1996. Lack of demand for some firms,concession, bringing to the point of sale the whole enterprise, sale of units unresolved legal questions regarding some(selling the units, opening to capital or of enterprises, opening to enterprises, and administrative delays hinderedoperation by the private sector through capital), operation by the private implementation. The sale of the Hilton Hotel inmanagement contracts) 50 units of sector through concession or Algiers and profit-sharing management contractsnational public enterprises (EPEs), management contracting for two cement plants were high-profileprivatization of the management of two arrangements, or dissolution of privatization efforts.Government-owned hotels, and dissolution parts, accepted by both parties, ofof 84 local public enterprises (EPLs). this second program. For the second privatization effort, the target of 276

enterprises to be brought to the point of sale or

20


Board Second Trancheliquidated has been surpassed. By April 1997, atotal of 367 EPLs were dissolved. The unsoldEPLs have been transferred to five regional holdingcompanies to prepare for eventual privatization.The 1998 privatization program includes 250 of thelargest public enterprises (EPEs) and accounts forabout one-third of SOE output.

Agricultural Sector Reform State lands under socialist state Presentation to the Bank of the Government's agricultural policy was presentedfarms distributed to individual and Government's agricultural sector policy, and reviewed with the Bank.collective farms with usufruct notably concerning agricultural land andrights but without property rights. the privatization of public enterprises in Law 95-20 on land restitution was promulgated.

the sector.Draft legislation defining the procedures on

Promulgation of legislation authorizing the privatization of state agriculture land, acceptable torestitution of agriculture land donated to the Bank was adopted by the Council ofthe State (Law No 95-25). Government and submitted, in late 1997, to the

Parliament. The law transforms usufruct rights ofnationalized land into private property rights.

Public Enterprise Reform Transition to autonomy of 5 large Rule definitively on the future (immediate Adoption by the Council of About half the 1,300 EPLs have been liquidatedpreviously non-autonomous passage to autonomy, redeployment, or Government of a draft law and the balance transferred to five regional holdingpublic enterprises. dissolution) of the remaining large non- defining the modes of companies for restructuring and eventual

autonomous public enterprises in privatization and state-owned privatization. Even holding companies wereconformity with the framework set out in agricultural land. established for 300 of the largest public enterprises,the ERL. and strategies have been prepared for their

restructuring and eventual privatization. The legalCreation of institutions necessary for framework for holding companies was establishedimplementation of the law creating in 1996.holding companies to manage publicenterprises, notably: The holding companies were authorized to sell all* Promulgation of the bylaws of the or part of their assets, and to retain the proceeds

holding companies. from the asset sales. Quarterly adjustments to* Establishment of the technical transport and utility tariffs improved the financial

support unit for the CNPE. performance of the largest state enterprises in 1997In conformity with the objectives set out and 1998.in the Letter of Development Policy.

Design, in consultation with the Bank, a Regular monitoring of the inter- Data on bank overdrafts to large borrowers,system to monitor the inter-enterprise enterprise debts of public including most of the large public enterprises,debts of public enterprises. enterprises. amounted to 26.3 days of turnover, and within the

limit of a one-month ceiling on overdrafts to stateenterprises agreed to with the Bank. Procedures formonitoring inter-enterprise debts and overdraftmeasures were agreed to with the Bank.

21


Board Second TrancheIncentive Framework Promulgation of a competition Drafting of the implementing regulations, The implementing regulations of the competition

law. in consultation with the Bank, and law were published after consultation with thepublication of all these texts. Bank.

The transfer of unsold EPL and ERL assets toholding companies has clarified the legal status ofthese enterprises, easing legal barriers toprivatization.

Promulgation of the new Carry out a general program to clarify and Review progress of program to A program to clarify to regularize property titlesinvestment code. regularize property titles. clarify and regularize property was mounted in both 1996 and 1997.

titles for industrial andInstallation of the Agency for the Enactment of legal texts permitting lease commercial enterprises and adopt Leasing and factoring legislation were promulgatedPromotion and Support of financing of capital equipment. if needed, measures jointly in 1996.Investment. agreed to improve this program.

Promulgation of a decree permittingOvening of one-stop information factorinz.window for potential investors,

Housing Reform Freeing of construction prices for Adoption by the Government and Evaluate of the private sector The new public housing strategy and financingsocial housing. presentation to the Bank of a new national share in the 1995 public housing strategy for 1996 and 1997 was provided to the

housing strategy. program and an increase in Bank and shows a steady increase in the private10 percent increase in subsidized private sector share of the 1996 sector share of new housing construction from 54%rents. Implementation of measures designed to program in 1995 to 77% in 1996.

increase participation of the private sectorAdoption of a plan to restructure in the execution of the 1995 public Execution of the 1996 public The Ministry of Housing has agreed to steps toCNEP, the national housing housing program. housing program following the improve targeting of social housing during thefinance institution. financing plan and timetable second half of 1997. Housing rents were increased

Adoption by the Government and agreed with the Bank. by 15% in November 1996 and 20% in Marchpresentation to the Bank of a financial 1997. In April 1997, the Central Bank agreed toplan and a timetable for the 1996 public Presentation to the Bank of a transform the housing finance agency (CNEP) intohousing program. financial plan and a timetable for a mortgage bank, and draft bylaws for a housing

the 1997 public housing program loan refinancing agency were developed.

Government agreed that housing subsidies will bemade explicit in the 1998 budget, that large publicconstruction companies will be liquidated, and thatall urban property will be sold by auction, startingin 1998, with the proceeds used to fund a slum-upgrading program.

Financial Sector Replacement of interest rate Elimination of the ceiling on bank margins Maintenance by the public banks Audits of the five state banks proceeded slowly andceilings on bank loans by a of acceptable capital adequacy had to be undertaken without the physical presencemaximum 5 percent margin. Determination of bank capital ratios. of auditors in Algeria; 1993 audits were completed.

requirements to meet minimum capitalthresholds, on the basis of end-1993audits, in consultation with the Bank.

22


Board Second TrancheRecapitalization of the five public banks By end-1997, all banks had been recapitalized toand payment of the capital contributions as meet an agreed interim capital-asset ratio of 4foreseen in the 1995 Government budget. percent. Three banks had been recapitalized to

meet a capital adequacy norm of 8 percent of riskweighted assets. The Development Bank (BAD) isto be split up into a series of specialized institutionsin 1998.

Adoption of a model management Signature and implementation of Adoption, in consultation with Management contracts for the five public bankscontract between the Ministry of management contracts for the five public the Bank and launching ofjointly have been concluded and proposals for privatizingFinance and managers of publicly banks. agreed program for the opening the Rural Development Bank (BADR) have beenowned banks, holding the of the capital and/or the private reviewed with the Bank.managers responsible for Completion of study and presentation to management of at least one of therespecting capital adequacy the Bank of a draft proposal for private five existing private banks The Govemment has opened the capital of therequirements. share ownership and/or private Local Development Bank (BDL) to private

management of at least one of the five Adoption and introduction, in participation in 1997, but this approach attractedexisting public banks. consultation with the Bank, of little interest. A different approach was suggested

accounting regulations and by external consultants, but these recommendationsevaluation norms for transactions were not acted upon. Two new private banks, within financial securities. foreign partners, were established in 1997.

The Central Bank has established improvedaccounting regulations and evaluation norms forfinancial security transactions.

Redesign of the structure of newissues of Govemment securities,in conformity with the principlesagreed in the context of theCapital Market Study.

Adoption and introduction of Adoption and introduction of instructionsaccounting and calculation concerning open foreign exchangestandards for commercial bank positions of commercial banks and othertransactions in foreign exchange. financial institutions.

Adoption of the regulations and Adoption, in consultation with Bank, of Establishment of an operational The issuance and negotiation of new Treasuryprocedures for the auctioning of instructions conceming the issuance and system for the auction of securities was established in consultation with thenew Treasury bills and bonds. the negotiation of the new Treasury Treasury bills and bonds; Bank. An operational system for the auctioning of

securities. establishment of the requirements Treasury bills and bonds started in mid-1997. Afor Treasury security dealers; to secondary market in Treasury bills has yet tosupport the development of a emerge.secondary market, establishmentof payment mechanisms fortransactions in Treasurysecurities.

23


Board Second TrancheSubmission of a summary report on the Introduction of the plan to Plans were made to improve the bank clearingaction program to upgrade the bank check improve the performance of the system, but little actual progress was made in thisclearing and fund transfer system, bank check clearing and fund area.including the relevant data. transfer system, attainment of

pre-established objectives. The establishment of a limit of one-month on theEstablishment of quantitative targets for overdrafts to the largest public enterprises helpedthe reduction in commercial bank Attainment of the pre-established reverse the trend towards overdraft escalation in theoverdrafts granted to the economy. objective for the reduction of banking system.

overdrafts granted to theeconomy.

Adoption of amendments to the Stock Execution of the planned work Amendments were made to the stock market law inMarket Law (1) authorizing an over-theprogram. accordance with Bank recommendations.counter secondary market in Treasurysecurities, (2) authorizing stock exchange A Securities Market Management corporation wasmembers to trade in other security created in March 1997 and a Commission on Stockmarkets, (3) relieving stock exchange Market Organization and Supervision wasmembers of the responsibility to account launched. Intemational consultants were hired infor the origin of their clients funds. 1997 to help Govemment establish a well-

functioning securities commission. RegulationsPutting into place of the COSOB for IPOs, investment funds, and stock broker(Exchange Comm) and establishment of licensing have been included in the work programits work program, notably staff training, of the Commission.allocation of staff functions, and draftingof regulations for public offerings, A new payments system for the AFS, through a tie-operations of investment funds, and in with the postal system, establishes shorterlicensing of stock brokers. monthly payment periods. Other income transfer

efforts have been combined in the AFS and betterImplementation of new social safety net Implementation of measures beneficiary targeting brought down the numbermeasures. designed to strengthen the three receiving AFS support from 600,000 in 1996 to

programs. 520,000 in the first quarter of 1997.

The self-targeting mechanism of the PAIG programwas enhanced by enforcing the "full days" work fora "half days" pay policy. PAIF participationdropped from 580,000 in 1995 to about 100,000persons in 1997

Launching of new social safety Based on the results ofjoint studies with Step-by-step implementation, in The unemployment insurance program wasnet measures -job loss insurance, the Bank, adoption of measures necessary consultation with the Bank, of an operational in 1996, 1997 and 1998. The Caissepublic works program (PAIG) and to strengthen the three programs. autonomous social development Nationale dAssurance Chomage (CNAC)cash assistance for those not able agency. cumulated reserves sufficient to finance anto work (AFS). Presentation to the Bank of a draft estimated 200,000 layoffs each year.

executive decree creating and establishing Based on the results of the LSMSthe bylaws of a social development and/or the Poverty Assessment,agency. and, in consultation with the

Bank, development and adoptionof a program to improve the

24

Component Measures taken before Measures to be taken before Measures to be taken Implementation Status

May 1, 1995 presentation of the SAL to the before the release of theBoard Second Tranche

social protection system for thepoorest groups.

Social Safety Net Launch LSMS in collaboration Agreement conceming the Bank's Using the LSMS results and an evaluation of social

with the Bank. analytical use of the LSMS data, based on safety net programs, in 1997 the Govemmentterms and conditions established in developed a strategy for improving socialadvance with ONS, the national statistical protection, including better targeting of housing,office. health care, and education support for the poor.

25

Table 6: Key Indicators for Project Operation

Key Operating Indicators Actual 1996 1997 Estimates

in President ReportMacro-economic Framework1. GDP Growth 3.8 02. Industrial Growth -7.2 -7.43. Imports (billion US$) 9.1 8.84. Exports (billion US$) 13.2 13.95. Consumer price index (average) 18.7 6.16. Re-discount rate (monthly) 20 187. Interest rates anbd dinar amounts from

credit auctioning sessions (monthly)8. Average inter-bank market rates

(Monthly)9. For. exchange reserves (billion US$) 4.23 810. Foreign exchange rates 56.2 57.911. Credit to economy (bill. dinar) 777 89812. Credit to public enterprises l

13. Credit to 23 large, previously non- lautonomous public enterprises

14. Credit to 10 food product import 231 naagencies

Reform of Public Expenditures1. Treasury balance (quarterly) budget balance of DH 100 billion surplus budget balance of DH 83 billion surplus2. Expenditures of the Restructuring Fund 24 18/closed

(billion dinar)3. Capital & current expenditures, overall presented in the Public Expenditure Review presented in the Public Expenditure Review

and by sector (those sectors covered bythe Public Expenditure Review(quarterly)

Private Sector Development & PublicEnterprise Reform1. Projected shares of sectoral private 23% na

value added industry.2. Registered requests for enterprises

creation at APSI:- (number) 556 1227- projected employment 48,755 81,766- value in Mill. DA 81,459 86,330

3. Import-weighted average tariff rate (six 19 19months)

4. Average Wage in Industry (AD) 16,690 20,217

Financial Sector ReformI . Share of bank credit in the financing of 31.5% of GDP 30.6% of GDP

the economy (quarterly)2. Capital ratio to banks (annual) 4 % 4%

Strengthening of social safety net system1. Number of beneficiaries of early 600,000 in the PAIG program at the start of 520,000 in the PAIG program in mid-1997

retirement and unemployment 1996insurance programs (six months)

2. Number of beneficiaries of the social 580,C00 in the AFS program in 1996 100,000 in the AFS program in 1997safety net: AFS and PAIG (six months)

26

Table 7: Studies Included in Project

Study Purpose as defined at Status Impact of StudyAppraisal/Redefined

Poverty Assessment Study To map poverty incidence and Completed Helped Government define itsimprove relief targeting poverty strategy and better defme

a social safety net strategyLabor Force Study To assess labor market Ongoing Study is still in progress, but parts

performance to help design of the study, related to thecompetitiveness enhancing informal sector, are advanced.reforms, to investigate factorscausing rigidities in the labormarket, and to underpin a publicworks program aimed atcombating unemployment.

Tariff Review To rationalize tariff and trade Completed Was the basis for Algeria topolicy to increase global market support negotiations for WTOintegration admission and to start

negotiations with the EU for aFree Trade Agreement

Public Expenditure To identify priorities for fiscal Completed Identified a wide range ofReform reform. measures aimed at enhancing the

efficiency and effectiveness ofpublic spending, which wereincorporated into the 1996 and1997 budgets. Fiscal strategiesfor improving external debtmanagement and the managementof fluctuations in hydrocarbonearnings were adopted byGovernment. Follow-upmeasures for civil servicerestructuring were launched.

Private Sector Assessment To advise on future policy An update is Is ongoing as a part of a series ofreformns required to advance ongoing sectoral country assistanceprivate sector activity and to strategies.assess privatization demand.

27

Table 8A: Project Costs

Appraisal EJstimate (US$M) Actual/Latest Estimate (US$M)

Local Foreign Total Local Foreign TOTALCosts Costs Costs Costs

ItemBalance of Payments Support 300 300 300 300TOTAL 300 300 300 300

28

Table 8B: Project Financing

Appraisal Estimate (US$M) Actual/Latest Estimate (US$M)

Local Foreign Total Local Foreign TOTALCosts Costs Costs Costs

SourceIBRD/IDA 300 300 300 300Government of AlgeriaTOTAL 300 300 300 300

29

Table 9: Economic Costs and Benefits

Not applicable

30

Table 10: Status of Legal Covenants

Agreement Section Covenant Original Revised Status Description of Covenant CommentsType Fulfillment Fulfillment

Date DateL4005 AL Section 3.01 (a) 9 periodic periodic complied with Parties shall exchange views on progress. no commentL4005 AL Section 3.01 (b) 9 periodic periodic complied with Borrower shall furnish progress reports. no commentL4005 AL Section 3.01 (c) 9 April 30, April 30, complied Borrower and Bank shall carry out a no comment

1998 1998 review for the purpose of evaluatingprogress achieved.

L4005 AL Section 3.02 (a) I April 30, April 30, complied The Borrower shall have the Deposit no comment1998 1998 Accounts audited.

L4005 AL Section 3.02 (b) I Oct. 30, not yet due The Borrower shall furnish a copy of the no comment1998 certified audit report to the Bank.

L4005 AL Section 3.02 (c) I periodic periodic complied with Fumish to the Bank reasonable no commentinformation concerning the DepositAccounts.

L4005 AL Section 2.02 (d) 9 June 30, June 30, complied with Continued maintenance of a Concurrence of the IMFmacro-framework 1997 1997 macroeconomic framework satisfactory to under the EFF was

the Bank. obtained.L4005 AL Section 2.02 (d) 9 June 30, June 30, complied with Submission and joint review of the 1997 Bank provided draft and

Budgetary Policy 1997 1997 Budget and Public Investment Program. comments incorporatedinto final budgets.

L4005 AL Section 2.02 (d) 9 June 30, June 30, complied with Progress toward closure of the Fund committients haltedBudgetary Policy 1997 1997 Restructuring Fund. in 1997.

L4005 AL Section 2.02 (d) 9 June 30, June 30, complied with Carrying out part of the Second Largely a liquidationPrivatization 1997 1997 Privatization Program. effort.

L4005 AL Section 2.02 (d) 9 June 30, June 30, complied with Council of Government adoption of draft Legislation was deemedAgriculture 1997 1997 legislation to privatize state-owned land. acceptable to the Bank.

L4005 AL Section 2.02 (d) 9 June 30, June 30, complied with Reduction of outstanding overdrafts to Overdrafts reduced to oneFinancial Sector 1997 1997 State-owned Banks. month for SOEs.

L4005 AL Section 2.02 (d) 9 June 30, June 30, complied with Implementation of measures to strengthen Reduced payment periodsSocial Safety Net 1997 1997 PAID, AFS, and Unemployment improved program

Insurance, and using the LSMS findings to delivery, and betterimprove social assistance targeting. targeted reduced public

works participants. LSMSused to define a nationalpoverty strategy.

Covenant Class: I Accounts/audit; 3 Flow and utilization of project funds; 9 Monitoring, review and reporting.

31

Table 11: Compliance with Operational Manual Statements

No significant lack of compliance with applicable Bank Statements in the Operational Manual(OD or OP/BP) was observed under the project.

Statement Number and Title Description and Comment on lack ofcompliance

Not Applicable

32

Table 12: Bank Resources: Staff Inputs

Stage of Project Cycle Planned Revised Actual

Weeks US$ (Thous) Weeks US$ (Thous) Weeks US$ (Thous)

Preparation to Appraisal 38 159.2 28.1 103.7 29.2 107.9

Appraisal-Board 23 77.2 36.7 115.7 35 129.9

Negotiations through 6 17.3 13.7 33.3 14.7 44.6Board Approval

Supervision 69 248.3 54 239.1 55 205.8

Completion 8 19.5 7 17.1 5.8 17.6

TOTAL 143.9 521.5 140.9 508.9 139.6 505.8

Source: World Bank Management Information System.

33

Table 13: Bank Resources: Missions

Stage of Month/Year No. of Days in Specialized Performance Types ofProject Cycle Persons 'Field Staff Skills Rating Problems

RepresentedPre-appraisal 8/95 4 20 (3! Economists s s

Social

Appraisal 2/96 6 58 (4) EconomistsSocialLegal

Supervision 7/96 5 52 (3) Economists s s

10/96 5 59 Finance S SPrivatization

(2) Macro

6/97 4 12 (3) Economist S SlSocial

Completion 5/98 1 3 Economist S S

Sources: World Bank Management Information System, Form 590s.

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