Report No. 874-AL COPYAppraisal of theSNMC Expansion ProjectAlgeriaNovember 25, 1975

Industrial Projects Department

Not for Public Use

Document of the Worid Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without Wor[d Bank authorization.

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ALGERIA

SNMC EXPANSION PROJECT

CURRENCY EQUIVALENTS

Except where otherwise notedall figures are quoted inAlgerian Dinars (DA)

US$ 1 DA 3.92DA 1 US$ 0.26

WEIGHTS AND MEASURES

All weights and measures arein metric units

1 metric ton (ton) = 1,000 kilograms (kg)1 metric ton (ton) = 2,205 pounds1 kilometer (km) = 0.62 miles1 meter (m) = 39.3 inches1 hectare (ha) = 2.47 acres1 cubic meter (m3) 35.31 cubic feet1 kilo calorie (kcal) = 3.9685 BTU

ABBREVIATIONS AND ACRONYMS

BAD Banque Algerienne de DeveloppementBEA Banque D'Exterieur AlgerienneSNC Societe Nationale de ComptabiliteSNMC Societe Nationale des Materiaux de ConstructionSONELGAZ Societe Nationale d"Electricite et de GazSNCFA Societe Nationale de Chemins de Fer AlgeriensSNTR Societe Nationale de Transport Routiertpy metric ton per year

Fiscal Year

January 1 - December 31

ALGERIA

APPRAISAL OF THE SNMC EXPANSION PROJECT

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS .......................... i - iv

I. INTRODUCTION ........ .............................. 1

II. THE INDUSTRIAL SYSTEM AND TUE COMPANY .... ........ 1

A. Industrial Policy and the Public Enterprise

System in Algeria ......................... 1

B. SNMC: Company Background and ExistingFacilities .... ............................... 2

C. SNMC: M4anagement and Organization .... ....... 3

D. SNMC: Past Performance and Financial Results. 3

E. SNMC: Accounts and Audits ..... .............. 5

F. SNMC: Future Investment Program .... ......... 6

G. SNMC: Future Financial Viability .... ........ 7

III. THE PROJECT ...................................... 9

A. Project Objective ............................ 9

B. Project Description .......................... 9

C. Allocation of Bank Loan and DisbursementSchedule .................................. il

IV. THE MARKET FOR CEMENT ............................ il

A. Supply and Demand Balance ..... ............... il

B. SNMC Distribution Network ..... ............... 15

C. Pricing of Cement ............................ 17

V. THE SAIDA CEMENT PLANT ............................ 18

A. Technical Aspects ............................ 18

B. Capital Cost and Financing Plan for the

Saida Plant . ............................... 22

C. Financial Analysis . ........................... 25

D. Major Risks .................................. 26

E. Economic Justification ....................... 27

VI. SNC TECHNICAL ASSISTANCE ......................... 28

A. SNC - Background ............................. 28

B. Program Objective and Description .... ........ 29

VII. AGREEMENTS ..................... .................. 30

This report was prepared by Miss Haug and Messrs. Hilton and Cognet, of theIndustrial Projects Department, and Mr. Basman, Consultant.

TABLE OF CONTENTS (Cont'd)

MAPS

1. Location of Existing and Planned SNMC Facilities (IBRD 11667).2. Location of Saida Plant and Quarries (IBRD 11669).

ANNEXES

1 Technical Terms and Process Description

2-1 The Algerian Economy and the Industrial Sector2-2 The Public Enterprise System in Algeria2-3 SNMC - Existing Facilities2-4 SNMC - Organizational and Managerial Structure2-5 SNMC - Organization Chart2-6 SNMC - Historical Income Statement (1970-74)2-7 SNMC - Historical Balance Sheet (1970-74)2-8 SNMC - Plants Under Construction and New Investment Projects2-9 SNMC - Financial Projections

3-1 The Project - Bank Financed Items3-2 The Project - Implementation Schedule3-3 The Project - Estimated Disbursement Schedule

4-1 The Market for Cement in Algeria4-2 Distribution and Pricing of Cement in Algeria

5-1 Saida Cement Plant - Raw Material Availability and Analysis5-2 - Detailed Description5-3 - Infrastructure and Utilities5-4 - Ecology5-5 - Manpower Requirements, Training and Technical

Assistance5-6 - Plant Implementation5-7 Saida Cement Plant - Capital Cost Estimates5-8 " - Projected Working Capital Requirements5_9 si - Bank-Financed Items5-10 - Disbursement Schedule5-11 - Operating Cost Projection

and Production Build-up5-12 Saida Cement Plant - Financial Projections5-13 - Break-even Point Analysis5-14 - Financial Rate of Return and Sensitivity

Analysis5-15 - Economic Rate of Return and Sensitivity

Analysis5-16 - Foreign Exchange Effect5-17 - Regional Development Impact

6 SNC - Technical Assistance Program

ALGERIA

APPRAISAL OF THE SNMC EXPANSION PROJECT

SUMMARY AND CONCLUSIONS

i. This report appraises a proposed Bank loan of US$46,0 million tohelp finance: (a) part of the ongoing expansion of the Societe Nationale desMateriaux de Construction (SNMC), the Algerian state enterprise for construc-tion materials, through erection of a new 500,000 ton per year cement plantnear Saida away trom the coast in the rural south; (b) the expansion of theCompany's distribution network; and (c) a technical assistance program to theSociete Nationale de Comptabilite (SNC), the state accounting and auditingcompany. If approved, the loan would be the Bank's first direct industrialoperation since lending was resumed in FY1973.

ii. The prime purpose of the proposed Bank loan lies not so much inïts tinancial contribution of somewhat more than 20% of estimated projectcosts as in its effort at institution building in Algeria's building materialsector. The project attempts to help SNMC cope with present and future or-ganizational and financial problens created by an ambitious investment pro-gram which, between 1974 and 1980, is expected to require fixed asset expendi-tures in excess of US$2.0 billion and which aims at making Algeria indepen-dent in cement and some other building materials by the end of this decade._76thls end, cerent production is expected to increase from about 1.5 xi31iontons in 1975 to about 8.0 mdllion tons by 1980.

iii. SNMC was established in 1968 as a state enterprise to promote thedevelopment of the Algerian construction materials industry and to manufac-ture, import and distribute a wide range of building materials. The basisfor SNMC's operations were 51, formerly privately-owned, production unitsand their distribution network which were nationalized between 1968 and1972. Since then the Company has expanded substantially and now includesabout 70 enterprises accounting for more than 65% of production in theconstruction materials sector (with a monopoly in cement), the renainderbeing produced by other state enterprises or by small factories owned byregional authorities or private operators.

iv. Industrial state enterprises, such as SNMC, operate under the closesupervision and guidance of the Government which, through the Ministry ofIndustry and Energy, defines individual companies' corporate strategy, appointssenior personnel, formulates investment programs in line with overall economicobjectives, determines the location and capacities of production units, setsprices for industrial products and controls the financing of such enterprisesboth through the allocation of funds from Government-owned banks and by thecollection of surplus funds for reinvestment in the economy. The firm centralcontrol and the absence of a free market price mechanism for primary productsand staples has undoubtedly led to some misallocation of resources and certainimbalances in industrial development in Algeria.

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v. While SNMC is a very active company and vas able to double the valueof its sales between 1970 and 1974, losses have rapidly increased and reached25% of net sales in 1974. This was largely due to prices not having beenadjusted adequately or frequently enough to reflect increasing operating costsand higher import prices for the products SNMC is selling in Algeria, the lackof an effective budgeting and cost control system, and the fact that all cashshortfalls were financed by additional short-term debt thereby aggravatingthe Company's financial strains even further. In addition, there vere anumber of non-recurring costs associated with the takeover of the previouslyprivate companies and a greatly increased wage bill as all workers were puton a permanent salaried basis. At present, therefore, SNMC is nôt a finan-cially viable enterprise.

vi. Discussions have been held with the Algerian Government to putSNMC on a sounder financial basis, independent of continuous subsidies,so that it is able to meet at least its cost and debt service obligations.It has been agreed that, to achieve such an objective, (i) SNMC will plan andimplement a financial planning, cost control and budgeting system, (ii) pricesof all of SNMC's products will be reviewed annually and new prices will beproposed at such levels as to cover at least average unit costs plus a margin tocover debt incurred for that product group, and (iii) if necessary funds willbe made available to SNMC in such a way that the Company can cover its debtservice obligations at least 1.1 times and be able to pay whatever currentliabilities fall due.

vii. Historicaliy, Algerian cement demand has not been met becauseoa lack of domestic production and insufficient cement imports. Morerecently, domestic production rose by 60% between 1969 and 1975 and atthe same time, imports increased almost ten-fold and, since 1973, havesurpassed actual domestic production. Based on the Government's ambitiouseconomic development programs, demand for cement is expected to continueits rapid growth in rural and urban areas where a concerted effort is beingmade to improve the housing situation, expand irrigation and increase theindustrial base. It is estimated that by 1981 cement demand will be between8.0 and 9.5 million tons per year, representing an annual growth rate ofbetween 13 and 16% as compared to 20% in the recent past. Saida is one ofat least seven new plants that are to come on stream between now and the endof the decade to help meet this demand.

viii. An increase in cement production and demand of the magnitude envi-saged requires a concurrent expansion of SNMC's marketing and distributioncapability and the Company is currently establishing a number of distribu-tion centers to handle bulk cement as well as formulating longer-term plansfor distributing a full range of building materials, including those producedby other state companies. This, however, is not yet enough and in order toservice these centers and to transport cement and other construction materialsmore effectively in the rural regions, substantial transport equipment--bothrail silo wagons and trucks--are required. SNMC will also undertake studiesdesigned to determine the location and method of operation of its futuregreatly expanded distribution network and to analyze its long-term transportneeds.

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ix. SNMC's present financial position is not untypical of Algerian

state enterprises and underlines the importance of the technical assistance

program to SNC. The proposed program aims to develop SNC's capabilities in

external auditing, implementing basic accounting systems and modern manage-

ment accounting techniques. The program would require collaboration betweenSNC and a qualified international accounting and auditing firm over five

years and is expected to include both practical training of Algerian staff

abroad and joint operations in Algeria. Given the impracticality of makingindividual loans to state enterprises for improvement of each accounting

department, SNC represents the best available vehicle for effecting a general

improvement in accounting standards.

x. Of the Bank loan (US$46.0 million) to be made to SNMC, US$30.8 mil-

lion will cover approximately 25% of the estimated foreign exchange cost of

the Saida plant; US$10.1 million will provide the foreign cost of the Most

urgent requirements of trucks and silo wagons plus the foreign exchange

expenditures of the related distribution studies; and US$5.1 million will

be onlent to SNC to cover the foreign exchange component of the technical

assistance program. Residual financing for the Saida plant will be provided

by a supplier's credit (US$57.1 million)Ynand by loans from Algerian financial

institutions, probably Banque Algerienne de Developpement (BAD), BanqueExterieure d'Algerie (BEA), and Treasury advances, together amounting to

approximately US$98 million. The Government will also provide the remaining

financing tor the distribution network and the technical assistance component

to SNC as well as any overrun financing that might become necessary to

complete all project elements.

xi. Procurement of equipment, erection and civil works for the Saida

plant is being carried out in accordance with the Bank's international com-

petitive bidding procedures. A turnkey contract, excluding the civil works,

has been signed with Kawasaki Reavy Industries of Japan. The portion of the

Bank loan allocated directly to the Saida plant will finance: 30% of the

outstanding foreign exchange cost of the turnkey contract (representing 15%

of the total cost); 25% of the civil construction cost, representing its

estimated direct and indirect foreign exchange component; the foreign exchange

cost of a railway spur connecting the plant with the existing network as well

as consultant services and technical assistance connected with the implementation

and initial operation of the cement plant. It is proposed that US$300,000 of

the Bank loan be used for retroactive financing of consultant services.

xii. The price the Saida plant will receive for its cement is expected

to be based on average industry costs plus a margin sufficient to cover

SNMC's debt service obligations in the cement sector. The Saida plant will,

however, not be able to maintain a positive cash flow until its third year of

operations. The main reasons for the fact that the Saida plant will be a

higher than average cost producer are the plant's high capital cost, due to

its relatively small size, expensive design features such as a high degree

of automation, ample built-in security margins, above average performance

guarantees, the decision to proceed with a turnkey contract and, in partic-

ular, the special environment in which SNMC has been contracting for cement

plants. Nevertheless, the êconomic rate of return of the Saida plant is

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still about 10%. Once the plant is operating at full capacity, the netforeign exchange savings vill be significant and are expected to recoverthe plant's total foreign exchange costs in 6 years.

xiii. A number of the beneficial effects of the project are diffiultto quantify. The benefit of the Saida plant lies also in the broader de-velopmental impact that it will have on a region which so far has lagged behindthe coastal strip in the north. In addition to the institution-building imi-pact of the project on SNMC and SNC, the strengthening of the accounting andauditing functions in public sector firms can be expected to result in betterfinancial management and economic planning in Algeria. Most importantly, theproject is expected to permit continuation of a constructive dialogue withSNMC and the Goverument on hov to improve the efficiency of industrial develop-ment in Algeria.

xiv. The technical and comuercial risks that the project faces are notmajor. Difficulties may, however, arl:se if SNMC and SNC cannot recruit andretain sufficient qualified staff to implement their expansion progrem.But it muet be recognized that the financial viability of SNMC, and theSaida plant as part of it, depends on the continued functioning ofAlgeria's public enterprise and finance system, and therefore on the readyavailability to SNMC of funds from the Government particularly during theperiod of its rapid expansion.

xv. Based on the assurances and agreements summarized at the end ofthis report, the project is suitable for a Bank loan of US$46,0 millionequivalent to SNMC, for 15 years including 4 years of grace, at an annualinterest rate of 8.5% plus a guarantee fee of 1.5% per annum payable bySNMC to the Government on that portion of the loan which is not onlent toSNC.

I. INTRODUCTION

1.01 This report appraises a proposed Bank loan of US$46.0 million tohelp finance: (i) part of the ongoing expansion of the Societe Nationale desMateriaux de Construction (SNMC), the Algerian state enterprise for construc-tion materials, through erection of a new 500,000 metric tons per year (tpy)cement plant near Saida, about 200 km south of Oran (Map IBRD 11667); (ii)the expansion of the Company's distribution network; and (iii) a technicalassistance program to the Societe Nationale de Comptabilite (SNC), the stateaccounting and auditing company.

1.02 The Saida plant is part of the Algerian Four-Year Plan (t974-77)which stipulates an increase in the country's cement production capacityfrom about 1.6 million tpy in 1975 to 7.5 million by 1978 and forms anintegral component of the Special Development Program (1972-75) for thePlateau Region; this program aims at fostering industry and agriculture ofAlgeria's less developed regions away from the coastal strip.

1.03 The various project components were appraised in May and July of1975. The Bank mission consisted of Miss Haug (Chief) and Messrs. Cognetand Hilton of the Industrial Project8 Department and Mr. Basman (Consult-ant). Technical terms used in the report are described in Annex 1.

II. THE INDUSTRIAL SYSTEM AND THE COMPANY

A. Industrial Policy and the Public Enterprise System in Algeria

2.01 SNMC's organizational structure, investment plans, decision-makingprocess and financial situation must be seen in the context of the Algerianeconomic and public enterprise system and the country's industrial policywhich are described in Annexes 2-1 and 2-2.

2.02 Algeria's economy is characterized by heavy concentration on in-dustrial development and by the absence of the balancing mechanism of anautonomous pricing system or of other free market forms of financial discipline.Production of goods and services is dominated by state enterprises with theprivate sector accounting for only a minor share. Since 1971, all stateenterprises have had to rely entirely on long or medium-term bank loans fortheir investments since financing through equity or retained earnings is nolonger permissible. They are considered instruments of Government policyand, as such, are not only financed by the state through Government-ownedbanks but, in turn, are expected to contribute to Government finances throughtax contributions and investment of internally generated funds with theTreasury in the form of Government bonds.

2.03 Industrial state enterprises, such as SNMC, operate under thesupervision and guidance of the Ministry of Industry and Energy whichdefines their strategy, appoints senior personnel, determines - in collabora-tion with the Ministry of Finance - the allocation of profits and proposes

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investment program-s to the Plan Secretariat for final approval. Althoughstate enterprîses participate in formulating their investment programs, thePlaa Secretariat influences not only production targets in line with overalleconuric objectives, but also the location and capacities of important newproduction units. In the past, enterprises seldom questioned the economicfeasibility of investments inscribed in the Four-Year Plans and emphasisvas instead put on physical Plan fulfillment.

B. SNNC: Company Background and Existing Facilities

2.04 SNMC was established in December 1968 as a State enterprise to pro-mote the development of the domestic construction materials industry and tomanufacture, import and distribute a wide range of building materials. Thebasis for SNMC's operations were 51 formerly privately-owned production unitsand their distribution network which were nationalized between 1968 and 1972.Compensation for take-over of the private assets vas resolved to mutual satis-faction and, by the end of 1974, SNMC dominated the markets for cement (100%),ready mixed concrete (100%), bricks (80%), tiles (75%), and plaster (55%).The Company accounts for more than 65% of production in the Algerian construc-tion materials sector, the remainder being produced by other state monopolies(responsible for metal products, glass, wood, etc.) and by small factoriesowned by regional authorities or private operators.

2.05 The Company produces, imports and markets, in addition to the basicconstruction materials just mentioned, manufactured products of either con-crete (pipes, props, support structures, etc.) or asbestos cement, as wellas ceramicse, sanitary ware, aggregates, sand/cement mixtures and miscella-neous building materials. Recently, SNMC introduced two new product lines,SIPOREX, a sand/cement based brick developed in Sweden for housing con-struction, and some plastic building materials.

2.06 Since its creation, SNMC has invested more than US$400 million innew production facilities, including 8 quarries, 8 brick and tile plants, 5plants for manufacturing concrete products, 3 sanitary ware factories and2 cement plants. The Company currently operates 70 production units, a fleetof trucks, a construction company and a nationwide distribution system with22 agencies and 89 depots. As illustrated in Map 11667, the existing facil-ities, which, are given in some detail in Annex 2-3, are concentrated alongthe coastal strip with few plants or agencies serving the rural high plateauxand nomadic south.

2.07 SNHC's manpower increased from about 6,000 people in 1970 to nearly15,000 people by mid-1975, of whom 92% are employed in production (Annex 2-4).During the past five years, SNMC has been able to maintain productivity levelsin thq formerly private companies and has been operating its plants consis-tently close to capacity.

2.08 The build-up of new capacity in the building materials sector is,however, far behind schedule. During the first Four-Year Plan (1970-73)only 55% of the planned increase was actually attained although investmentscame to 90Z of planned expenditures. The main causes of SNMC's failure to

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implement investments according to targets were: (i) unrealistically tightconstruction schedules, imposed by the Plan and unchallenged by the Companybecause of inadequate project preparation and implementation capacity due tolack of experienced staff, the absence of proper feasibility studies, un-satisfactory experiences with consultants and continued time pressures; and(il) administrative difficulties within Algeria for approving contracts,clearing customs and arranging transport and the need for time-consumingspecial procedures for the financing of overruns which, due to severe ini-tial underestimation of costs, often occurred.

C. SNMC: Management and Organization

2.09 The Company, with headquarters in Algiers, is managed by a DirectorGeneral, Mr. Ait Si Mohamed, who is an engineer by training and who joinedSNMC in 1973. He is assisted by five directors, respectively responsiblefor Finance, Economic Planning, Technical Planning, Operations and Admin-istration. Annex 2-5 illustrates SNMC's organizational structure. TheCompany has been reorganized several times over the past five years. SNMC'spresent organizational structure is basically acceptable and inefficienciesstem more from (i) lack of coordination between the Technical, Financial andEconomic Planning Departments; (ii) inadequate numbers of qualified staff;and (iii) insufficient guidance and supervision of middle management, thanfrom flaws in the organizational set-up.

2.10 SNMC's management efforts are dominated by the need to meet timeachedules and fulfill production and investment targets. Therefore, at theSMMC level, economic planning and financial control of investments havebecome secondary. Lately, examples of resource misallocation have increasedincluding, in particular, overcapacities in certain sectors and regions.

2.11 To help realize, on schedule, its ambitious investment program witha limited number of qualified staff, SNMC has opted for the turnkey approachfor all its major projects and is making a continuous effort to train andrecruit personnel at all levels in Algeria and abroad. To operate its newplants at capacity, an additional safety margin is provided by a tendencyto overdesign new production units in order to safeguard against productionshortfalls in the future.

D. SNMC: Past Performance and Financial Results

2.12 The Algerian state-controlled economic system is characterizedby: (i) the fixing of domestic prices by a Governmental price commission;(ii) the centralization of financial decisions through the requirement thatinvestments be approved by the relevant Ministries and the Banque Algeriennede Developpement (BAD) which is the source of all local and some foreign ex-change credits for investments in the country; and (iii) as mentioned inpara 2.02, the financing of all investments and working capital by debt andthe immediate back-flow of any surplus funds to the Treasury.

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2.13 SNMC's consolidated income statments for the period 1970-74 arecontained in Annex 2-6 and selected indicators are given below:

SNMC - Selected Income Statement Indicators(DA million)

1970 1971 1972 1973 1974

Net sales 326.9 348.1 394.9 496.0 690.0Gross Profit 97.0 115.2 97.5 41.5 27.3Net Income (Loss) Before Taxes 8.4 13.8 (3.4) (64.0) (173.8)Net Income (Loss) After Taxes 0.7 1.0 (15.7) (76.3) (184.0)Net Income (Loss) as % of

- Net sales 0.2 0.3 (4.0) (15.3) (25.1)- Net Fixed Assets 1.0 0.9 (10.4) (22.1) (30.0)

Cash Generation (Cash Loss) 9.3 11.5 (1.0) (46.3) (114.3)

Despite an increase in physical output of about 35% between 1970 and 1974and a virtual doubling of sales over the same period, losses have rapidlyincreased, reaching 25% of net sales in 1974. The major reasons for theselosses are: (i) prices have not been adjusted adequately or frequentlyenough to reflect increasing operating costs as well as higher importprices for the products SNMC is reselling in Algeria; (ii) the lack ofan effective budgeting and cost control system which could set efficiencytargets in the absence of a free market price mechanism; and (iii) taxes ofDA 12.0 million which were levied in each of 1972 and 1973 despite negativepre-tax income. These losses resulted in a cumulative cash shortfall by 1974of DA 162 million (US$42 million) which was financed by short-term loans,thus further aggravating SNMC's financial problems.

2.14 About 87% of SNMC's net los originates from three sectors -cement, bricks and tiles, and concrete - which together account for about 70%of the Company's net sales. Losses in the cement sector are the result ofsales prices which - although they cover domestic cement production cost anda reasonable return on investment - are far below current cement import prices,whereas losses in the brick and tiles, agglomerates, plaster, quicklime andconcrete sectors are due to maintaining sales prices below SNMC's domesticproduction costs.

2.15 Balance sheets for the past five years (1970-74) are given inAnnexe 2-7 and summarized below:

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SNMC - Summary of Balance Sheets(DA million)

1970 1971 1972 1973 1974

Current Assets 164.9 163.1 217.9 267.8 457.7Net Fixed Assets 70.3 103.9 117.0 338.9 544.8Construction in Progress 32.4 122.0 444.6 781.8 1490.4Current Liabilities 133.2 175.8 242.7 204.3 498.3Long & Medium Term Debt 37.8 183.2 419.0 1145.4 2143.5Equity 161.7 159.2 121.1 44.5 (128.8)Debt Service Coverage n.a. n.a. 0.7 0.0 0.0Current Ratio 1.2 0.9 0.9 1.3 0.9

n.a. - not available.

This table again reflects the rapid expansion of SNMC. In five years, netfixed assets have increased eightfold and construction in progress by afactor of 46. On the other hand, equity (derived from the balance sheetpositions of the former private companies) has become negative due to highlosses which, as mentioned above, vere covered, not by Government grants,but by additional short-term debt.

2.16 To improve the Company's liquidity position, the Governwent agreed,iû 1973, to a rescheduling of local debt, including: (i) an extension fromfive to seven years for the repayment of medium-term loans from the BanqueExterieur d'Algerie (BEA) and from 12 to 15 years for long-term BAD loans;(ii) an extension of the grace perioda for BAD and BEA loans to threeyears; and (iii) a DA 110 million medium-term loan for working capital.The liquidity problem which prompted this debt rescheduling has not hada serious impact on SNMC's day-to-day operations since the Company has hadunlimited access to short- and medium-term credits through BEA, its primarybank. Thus the Goverament subsidizes construction material prices throughthe banking system.

E. SNMC: Accounts and Audits

2.17 At the time of nationalization, many of the private plants whichwere attached to SNMC did not keep adequate accounts so that one of the firsttasks of SNMC was to establish a complete and uniform accounting system. Costcenters, on a product-by-product and plant-by-plant basis, have been defined,but SNMC has still to implement budgeting and cost control as well as improveits financial planning. To supplement the financial covenants (para 2.22),the organizational preconditions must be created which will enable SNMC tomeasure and maintain financial discipline. Therefore SNMC has agreed tofurnish to the Bank for comment and to implement thereafter: (i) a plan forstrengthening of its general accounting and financial planning systems, to besubmitted by the end of 1976; (ii) a plan for improvement of its cost account-ing capability, to be submitted by the end of 1977; and (iii) a plan for strength-ening budgeting and cost control for each cost center, to be submitted not laterthan the end of 1978.

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2.18 SNMC's accounts are reviewed by the Commissaires aux Comptes, theofficial State auditors. Staff constraints do not allow them to conductaudits according to the Bank's standards. As part of the project, a trainingprogram for the Societe Nationale de Comptabilite (SNC), the state auditing andaccounting firm, will be executed under which SNC staff will inter alia betrained to perform audits consistent with Bank requirements (paras 6.05-6.09).Agreement was reached that SNMC's accounts will be audited by an independentauditing firm acceptable to the Bank. The Government and SNMC have agreedto appoint SNC to this task. Should SNC prove unable to meet the requirementsof an independent audit, the Bank will so inform SNMC and the Goverament andwill review with them ways and means of ensuring a satisfactory audit.

F. SNMC: Future Investment Program

2.19 It is evident that the construction materials industry must play animportant role in Algeria's development effort since all public and privateconstruction depends on ready availability of cement, bricks, tiles and con-crete. Algeria's experience during the 1970-73 Plan period, when nearly 60%of domestic cement consumption had to be imported, and the high investmentin housing, agriculture, and infrastructure included in the current Plan(1974-77) also led to an ambitious investment program for SNMC. Details ofthis program are given in Annex 2-8 and sumrarized below.

SNMC - Ongoing and Future Investment Program (1974-80)

Projects Under Construction Planned ProjectsAnnual Annual

Capacity Cost Estimate Capacity Cost EstimateSector (000) (US$ billion) (000) (US$ billion)

Cement 7000 tons 1.33 4000 tons 0.92Plaster 240 tons 0.04 600 tons 0.08Lime 155 tons 0.11 200 tons 0.06Bricks and Tiles 800 tons 0.15 1800 tons 0.34Ceramic Tiles 2000 m2 0.13 4000 m2 0.06Sanitary Ceramics 20 tons 0.08 -Asbestos Cement 150 tons 0.10 -Agglomerate 700 tons 0.07 1900 tons 0.27Concrete Pipes - 185 km 0.03Quarries 1000 tons 0.09 1200 tons 0.26Distr. System n.a. 0.05 n.a. -

Total n.a. 2.05 n.a. 2.02

n.a. - not applicable.

Within the construction materials sector, cement accounts for nearly 65% ofinvestments under construction or planned. Details of the cement plant ex-pansion are discussed in paras-4.02-4.04, 4.06 and 4.07 and Annex 4-1.

2.20 As mentioned previously (para. 2.03), in practice, the responsibilityfor financing SNMC's investment program does not lie with the Company but withthe Ministry of Finance and funds are provided through bilateral development orsuppliers' credits and by BAD and BEA loans. Availability of such financingdepends not so much on SNMC's present and future financial position as onAlgeria's ability to generate sufficient funds internally and to attractforeign credits for meeting the economy's overall investment needs. In thepast, this system has not encouraged SNMC to adequately control capitalcosts or to make optimal technical and economic investment choices. The Bankrecently made a loan of US$40 million equivalent to the Banque Algerienne deDeveloppement (BAD) for smaller projects (other than cement production) inthe construction and building materials sector. 1/ The BAD project is expectedto improve investment decisions and financial control in the public sectorand provides for the establishment of a Project Evaluation Unit at BAD. BADwill also be invited to participate in the Bank's supervision of the proposedSNMC expansion project.

G. SNMC: Future Financial Viability

2.21 Although SNMC is at present not a financially viable independententerprise, it can be argued that, in a centrally-planned economy, the sub-sidization of the building material sector through transfer payments fromanother sector or unlimited credit from the Treasury is a legitimate meansof implementing a country's priorities. In theory, such a system may leadto optimal resource allocation if minimum cost and efficiency objectives arefollowed and there is rigorous control of transfers among sectors on themacro-economic level. Both conditions have not yet been fulfilled with regardto SNMC. In 1975, for example, the company budget indicates a net loss ofDA 397 million (US$101 million) of which DA 310 million (US$79 million) isattributable to imports. As a percentage of sales, the loss is expected tobe about 42%. Making allowance for depreciation, the cash loss is expectedto be around DA 303 million (US$77 million). It is, therefore, desirable toreestablish SNMC as a self-contained enterprise independent of subsidies inthe long run, i.e. at least to enable it to meet its cost and debt serviceobligations.

2.22 During appraisal and negotiations, ways and means of establishingSNMC on a sounder long-term financial basis were, therefore, discussed withthe Government and the Company. A number of measures were agreed upon withthe Government and SNMC which should meet this objective. In particular:

1/ Report No. 782-AL-Appraisal of an Industrial Project to Banque Algeriennede Developpement, dated June 10, 1975.

(a) SNMC agreed to review prices of all its products annually onthe basis of audited financial statements and to propose pricesequal to the average unit cost of each product plus a margin tocover debt service associated with that product or product group;the Government undertook to take all steps necessary with a viewto setting SNMC's prices at a level consistent with theseprovisions; 1/

(b) SNMC agreed to maintain a debt service coverage of 1.1 times ineach year and to meet its current liabilities as and when theyfall due; the Government specifically undertook to ensure thatSNMC will have adequate funds (other than short-term loans)sufficient to meet these financial covenants; and

(c) the Government agreed that SNMC's accumulated losses through toDecember 31, 1975 should be refinanced on adequate terms andconditions and confirmed that all losses through to the end of1974 had already been covered by long-term loans.

2.23 Based on information provided during negotiations on the Company'sfuture investments, on the prevailing price policy for the non-cement sectorand taking account of the financial agreements listed above, Annex 2-9 showsindicative financial projections for SNMC from 1976 to 1981. Selected figuresare shown below:

SNMC: Selected Financial Indicators

(DA million - current terms)

1976 1977 1978 1979 1980 1981

Cement price (DA/ton) 140 180 205 200 180 180

Net SalesCement 262 540 939 1212 1259 1325Other sectors 523 794 963 1020 1057 1062

Operating CostsCement 107 179 278 405 488 551Other sectors 370 445 562 630 685 724

Net profit 42 91 97 91 118 173Cash generation 238 486 700 808 805 827Long-term debt 3113 5516 7784 7258 6694 6124Debt service coverage (times)(cement sector only) 1.3 1.1 1.2 1.2 1.2 1.1(SNMC) 1.8 1.4 1.3 1.3 1.3 1.3

1/ In calculating average unit costs, excessive costs due to start-upmay be excluded, in which case the Governnent will ensure provision offunds, other than short-term funds, such that SNMC is able to cover suchcosts and to maintain the agreed upon financial ratios.

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2.24 It can be seen that, until about 1978, other sectors will remainmore important for the Company than cement, in terms of revenue, but thatcement will increase rapidly as new plants come on stream. In 1976 cementis expected to account for approximately 33% of sales and for about 55% by1981.

III. THE PROJECT

A. Project Objective

3.01 The emphasis of the project lies on its institution building effecton the building materials sector. The project attempts to help SNMC cope viththe present and future organizational and financial problems created by anambitious investment program. SNMC has to develop from a financially weakenterprise which is struggling to meet its production targets under the Plan,to one which can meet production and distribution targets as well as maintainfinancial discipline and strict cost control. The proposed loan attempts tocontribute to this development by dealing with 3 critical aspects: (i)cement production, (ii) distribution means and planning, and (iii) accounting,financial planning and auditing.

B. Prolect Description

3.02 The project has three inter-related components:

(a) The Saida Plant: the largest single element in the projectis the construction of a new 500,000 tpy dry-process cementplant at Saida in the underdeveloped high plateau region.Including interest during construction and incremental workingcapital the plant is expected to cost DA 728 million (US$186million). It is part of a plan to increase domestic cementproduction by about 300% between 1975 and 1978.

(b) The Distribution System: SNMC is presently preoccupied withimplementing new projects and has not yet focused adequatelyon its distribution requirements resulting from the immenseexpansion of capacity. The distribution component of theproject includes, therefore, (i) a program of studies definingSNMC's future distribution facilities, and transport require-ments; and (ii) acquisition of an estimated 260 silo wagonsand 190 20-ton trucks with related repair facilities plus anyadditional transport or maintenance equipment as indicatedon the basis of the above studies. Total cost of this programis expected to be about DA 82 million (US$21 million).

(c) SNC: The Government intends to develop SNC, the state enter-prise for accounting and auditing (i) to perform regularindependent external audits and (ii) to provide consultingservices in accounting, cost control and budgeting to state

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enterprises, including SNMC. The project includes a 5-yeartechnical assistance and training program for SNC to developits inhouse accounting, cost control and auditing capabilities.The program is estimated to cost DA 29 million (US$7.4 million).Aside from the immediate objective of ensuring for SNMC anindependent audit satisfactory to the Bank and the possibilityof providing expert assistance when establishing the requiredfinancial planning, cost control and budgeting system (para 2.17),the strengthening of SNC will help improve accounting standardsmore generally throughout Algeria.

3.03 A list of Bank-financed items under the project is contained inAnnex 3-1 and a summary capital cost table for the project as a whole isshown below. Each component is discussed separately in Chapters IV, V andVI and more detailed information is available in Annexes 4-2, 5-7, 5-9 and6-1. A project implementation schedule is contained in Annex 3-2.

Summary of Capital Cost Estimates

Local Foreign Total Local Foreign Total %-- DA million ----- ---- US$ million ----

1. Saida PlantFixed Assets 199.2 413.1 612.3 50.8 105.4 156.2 72.8Working CapitalRequirement 15.3 16.4 31.6 3.9 4.2 8.1 3.9

Interest DuringConstruction 41.9 42.3 84.3 10.7 10.8 21.5 10.0Sub-total 256.4 471.8 728.2 65.4 120.4 185.8 86.7

2. DistributionVehicles - 67.0 67.0 - 17.1 17.1 7.9Studies 2.4 3.9 6.3 0.6 1.0 1.6 0.8Repair Facilities 7.8 1.0 8.8 2.0 0.5 2.5 1.2Sub-total 10.2 71.9 82.1 2.6 18.6 21.2 9.9

3. SNC5-year Program 9.0 20.0 29.0 2.3 5.1 7.4 3.4

FinancingRequirement 275.6 563.7 839.3 70.3 144.1 214.4 100.0

3.04 The total estimated financing requirement of US$214.4 million forthe project is to be covered by a supplier's credit of US$57.1 million, theBank loan of US$46 million and local financing as shown in the table below:

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Financing Plan(US$ Million)

Saida SNC (5-yearPlant Distribution Program) Total %

IBRD Loan 30.8 10.1 5.1 46.0 21.5Supplier's Credit 57.1 57.1 26.6Local Debt

(BAD, BEA orTreasury Advances) 97.9 11.1 2.3 111.3 51.9

185.8 21.2 7.4 214.4 100.0

To ensure project completion under any eventuality, the Goverament has agreedto provide a cost overrun guarantee, i.e. to make available any additionallocal or foreign funds as may be needed to complete the project on terms con-sistent with maintenance of the financial covenants referred to in paras. 2.22and 5.25.

C. Allocation of Bank Loan and Disbursement Schedule

i.0O5 The Bank loan will be used to finance part or all of the estimatedforeign exchange costs of equipment, construction and consultant fees asdetailed in Annexes 3-1, 4-2, 5-9 and 6. The disbursement schedule for allproject components combined is contained in Annex 3-3. Any loan funds re-maining uncommitted for items on the Bank list would be used to finance otherproject components, if found justified, or othervise be cancelled.

IV. THE MARKET FOR CEMENT

4.01 A detailed description of the market for cement in Algeria, includ-ing a discussion of export prospects, transportation requirements and pricingpolicy, is presented in Annexes 4-1 and 4-2.

A. Supply and Demand Balance

4.02 Historic Demand/Supply: While cement has been produced in Algeriaat least since the early years of the century, SNMC did not begin manufactureuntil 1969 when it took over three cement plants (Pointe-Pescade, Meftah Iand Zahana I) of a combined annual capacity of 1.05 million tons. Since then,SNMC has concentrated on the satisfaction of domestic demand by installingnew production capacity and by importation. The results of this expansionare just beginning to be felt, as shown in the following table:

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Algeria: Cement Supply (1969-75)('000 tons)

(est.)1969 1970 1971 1972 1973 1974 1975

Domestic Production

Meftah I 52 61 56 51 59 - -Pointe-Pescade 451 453 468 457 449 412 450Zahana I 421 409 441 419 409 303 400Hadjar-Soud I - - - - 90 225 350Meftah II - - - - - - 250Hadjar-Soud II - - - 5°

Total DomesticProduction 924 923 965 927 1007 940 1500

Imports 250 544 578 830 1220 2006 2200

Total Supply 1174 1467 1543 1757 2227 2946 3700

4.03 The major achievements in SNMC's program so far include: (i) start-up of a new 500,000 tpy plant, Hadjar-Soud I, (1973); (ii) the closure of thesmall Meftah I plant (1974); (iii) start-up of a new 1 million tpy plant,Meftah II, (1974); and (iv) construction of an extension to the Hadjar-Soudplant, Hadjar-Soud II, with an incremental annual capacity of 500,000 tons,which is due to come on stream in late 1975.

4.04 Despite the relatively high level of imports, accounting for about60% of consumption, and an average annual consumption increase of about 20%during 1969-1974, actual cement demand continues to exceed supply as illus-trated by black market prices 50-100% above official levels. The scarcityof cement in Algeria is not only due to inadequate imports and domesticproduction, but also due to inefficiencies in the distribution system, inparticular port handling of imports.

4.05 Projected Demand: Algeria's second Four-Year Plan (1974-77)stipulates an average annual cement demand of almost 7 million tons by 1977.However, past experience indicates that it is unlikely that the Plan will becarried out on schedule and this figure must be seen as an optimistic upperlimit for cement demand. In the period after 1977, when the Saida plant willcome on stream, demand projections can only be based on notional data since noreliable post-1977 planning document exists and secondary effects of economicgrowth are limited in centrally planned economies. The following tableindicates a range within which future cement demand might fall based on variousprojection methods. It should be noted that SNMC's estimates, which are basedon full implementation of the 1974-77 Plan, are consistently higher than thoseof the Bank (Annex 4-1).

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Algeria: Projected Cement Demand 1977-81(million tons)

1977 1978 1979 1980 1981

SNMC Estimate

- Correlation with GDP 6.85 7.62 8.48 9.42 10.60

IBRD Estimates

- Correlation with GDPmost likely estimate 4.65 5.38 6.12 7.05 8.05

- Correlation with GDP/Capitamost likely estimate 5.02 5.96 7.04 8.26 9.42

Both the "most likely" estimates assume an 8.6% p.a. real growth of theAlgerian economy through 1981. Starting from the estimated 1975 consumptionof about 3.8 million tons, the "most likely" projections would representaverage annual growth rates of cement demand of between 16.5% and 13%as compared to the consumption growth of 20% annually between 1969 and 1974.

4.06 Projected Supply: In view of the rapid growth in import volume,the steep rise in import prices (para 4.20) and the constraints which insuffi-cient cement availability have imposed upon Algeria's investment programs, theGovernment has increased its emphasis on expansion of domestic cement pro-duction. The 4 Year Plan (1974-77) includes as a goal self-sufficiency inceement supply by 1980 and plans are for SNMC, as the sole producer of cementin Algeria, to construct 12 new plants beyond those already in operation ordue to come on stream during 1975. Excluding four plants with a totalnominal capacity of about 3 million tons per year, which are still in theearly planning stage, SNMC's production capacity is estimated to develop asfollows:

SNMC: Projected Cement Production 1975-81(000 tons)

(est.)1975 1976 1977 1978 1979 1980 1981

Existing Plants 1,450 2,000 2,200 2,210 2,150 2,150 2,050Plants under Construction 50 225 1,063 2,863 4,562 5,607 5,940Plant at Advanced Plan-ning Stage - - - - 100 250 360

Total Production 1,500 2,225 3,263 5,073 6,812 8,007 8,350

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4.07 The above build-up in cement production is based on capacity utiliza-tion rates of 40% during the first year of production, 60% in year 2, 85% inyear 3, and 90% thereafter. Individual capacities, present status andexpected start-up dates for each new plant and assumed production rates forall plants are given in Annex 4-1. With the exception of CIMA, a joint ven-ture between SNMC and Morocco, all these plants are being contracted on a"turnkey" basis, which is expected to help SNMC assure timely implementationof the expansion program. Substantial foreign exchange financing is beingsecured on concessional terms through bilateral credits for all plants.

4.08 Projected Demand/Supply Balance: Based on the above demand andsupply projections, the following table shows the likely demand/supplybalance through 1981:

Algeria: Projected Cement Demand/Supply Balance (1975-81)(million tons)

1977 1978 1979 1980 1981

Domestic Production 3.3 5.1 6.8 8.0 8.4Domestic Demand

- High 5.1 6.0 7.1 8.2 9.4- Medium 4u6 5t 6.2 7.0 8.1

Domestic Surplus (Deficit)- High (1.8) (0.9) (0.3) (0.2) (1.0)- Medium (1.3) (0-5) 0.6 1.0 0.3

4.09 As noted in para 4.06, an additional four cement plants are cur-rently under consideration, with a total capacity of 3 million tpy, whichcould come on stream during 1981-83. There are serious doubts whether suchadditional capacity could be justified at that time since: (i) slippageof investment plans inscribed in the 4-Year Plan (1974-77) must be expectedalong with perhaps some similar delay in meeting cement production targets,s0 that both cement supply and demand may move at lower levels than antici-pated with the consequence that available cement production capacity of thenine plants now being implemented could still meet demand increases in theearly 1980s; (ii) the growth of cement consumption may tend to level offafter 10 years of very rapid growth; (iii) Algeria's prospects for export-ing at cost large quantities of cement in the early eighties are marginal,because of likely oversupply in the Mediterranean area; and (iv) SNMC'smanagerial capacity may be overtaxed if it had to deal with a major addi-tional export program.

4.10 Allocating regional cement supply and distribution according toplant location, during the early 1980s a regional oversupply situation mayoccur in the west where the Saida plant is to be located. This oversupplymay range from between 0.5 and 1.0 million tons annually and will have to beshipped to the central region (over a distance of 250 km or more), where

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excess demand is expected to prevail. Such shipments will put an additionalstrain on the existing transportation and distribution system, and might havebeen avoided by more careful planning of plant locations. However, theregional supply/demand imbalance only indirectly affects the market for theSaida plant since from a transportation point of view it is optimally locatedto meet the projected cement demand on the high plateau around Saida and inthe southern desert where it does not compete with any other cement plant.

4.11 In view of SNMC's additional expansion plans and because of theexpected regional cement supply/demand imbalance in the early 1980s, SNMChas agreed to provide the Bank, during 1978, with a detailed cement marketstudy whose proposed content shall have been discussed with the Bank. ShouldSNMC decide to invest in further cement capacity prior to completion of thisstudy, the Company agreed to carry out all necessary preparatory studies,the scope and content of which will be the subject of an exchange of informa-tion and views with the Bank, and to furnish them to the Bank upon theircompletion for a further exchange of views.

B. SNMC Distribution Network

4.12 A description of SNMC's present and planned distribution systemis contained in Annex 4-2 and summrarized below.

4.13 Distribution Channels: SNHC's current distribution system hasevolved in an ad hoc manner out of the facilities which the Company inheritedin 1968. It consists of 89 depots and 22 agencies operated by SNMC. Whilethe agencies handle the entire range of the Company's products, their cementstorage space totals only about 22,000 tons and individual agencies varygreatly in size, turnover and level of efficiency.

4.14 On account of the limitations of the existing network, the 4-YearPlan (1974-77) stipulated a shift to a regional cement distribution systembased on bulk-handling from the plants and storage in bulk-silos at 37 newdistribution centers. These centers, to be operated by SNMC, were to sellcement, either bagged or in bulk, to SNMC agencies and depots or final con-sumers and were to result in greater accessibility of bulk cement to largeconsumers and lower transportation and overall distribution costs. Ten ofthese centers were to be completed in 1975 at a total cost of DA 132 million(US$33 million) and each of them will have approximately 30,000 mr of openstorage, 5,000 m2 of covered storage and two cement silos of 1,500 ton capa-city each. However, three problems have arisen which have caused the conceptof the centers to be re-evaluated: (i) owing to the high initial investmentcost, it is unlikely that SNMC's average per ton distribution costs - whichrose from DA 20/ton (US$5.1/ton) to DA 37/ton (US$9.4/ton) between 1973 and1974 - will decline when the centers come into operation since their operatingcosts alone, in 1974 terms, are now estimated at about DA 10/ton; (ii) theoriginal concept of the centers limited them to cement sales while a largepart of total demand in the rural areas is for a wide range of buildingmaterials; and (iii) the number of customers able to receive bulk cement issmall and their needs can be adequately handled by the plants and the 10distribution centers soon starting operation.

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4.15 In addition, the location of some of the centers appears question-able since three of those under construction are located within 15 km of anew cement plant with similar bagging'and storage facilities. It has, there-fore, been decided that: (i) only a few centers (in addition to those underconstruction) will be built; and (ii) the existing agencies and depots aswell as the new centers will be absorbed into a national network of distri-bution centers for construction materials which are to sell building materialsmanufactured by SNMC as well as by other state enterprises. The planningand timing of this new network are discussed in para 4.19.

4.16 Transport: Cement shipments fall under the monopolies of eitherSociete Nationale de Transport Routier (SNTR) or Societe Nationale des Cheminsde Fer d'Algerie (SNFCA) but neither has the capacity to handle all SNMC'soutput. SNMC is therefore allowed to own its own trucks and silo wagons,the latter being operated, through a leasing arrangement under which SNMCpays a preferential tariff, by SNCFA. The present transport capacity isinadequate and 50% of cement sales are picked up by consumers at theplant or dockside. Of the remainder, approximately 35% (on a ton km basis)is at present transported by SNCFA (rail); 10% by SNTR (road); and only 5%by SNMC (road). Road transport is about twice as expensive as rail haulage(DA 0.21 vs. 0.10/ton km) and the weight of this disadvantage will furtherincrease as demand in the hinterland grows and average truck journeys becomelonger.

4.17 In the framework of the 4-year Plan, SNMC has prepared a preliminarytransport plan which determines the transport means required to distributeits projected cement output of about 5.9 million tons in 1978. The study,which together with assumptions detailed in Annex 4-2, projects transportrequirements as follows:

Algeria: Cement Transport Requirements (1978)

Nos. of VehiclesTon Km Total Incremental

Silo Wagons (50-ton) 241 million 440 260Trucks (20-ton) 750,000 230 190

The extension of SNMC's truck and railway wagon fleet is justified as theleast-cost solution to the cement distribution problem. SNCFA, the Algerianstate railway company which operates the SNMC-owned wagons, is expectedto grant SNMC a rebate on its tariffs which would permit SNMC to recoverits investment within eight years. In addition, financial analysis of thetruck fleet expansion project indicates that SNMC could operate its truckfleet at a total cost per ton kilometer that is 15% below the present tariffof the Algerian freight transport company, SNTR (Annex 4-2).

4.18 SNCFA at present operates 60 silo railway wagons for SNMC and hasordered another 120, leaving a shortage of 260 as compared to the 440 wagonsrequired. To help alleviate the cement transport problem in Algeria, it isproposed that the Bank finance under the loan an initial phase of thisexpansion:

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Transport Equipment Financed under the IBRD Loan

Estimated CIF Cost /1(US$ million)

150/50-ton silo wagons (US$40,000 per unit) 6.090/20-ton trucks (US$35,000 per unit) 3.1

Total 9.1

/1 In 1977 prices including contingencies.

The Bank-financed trucks and wagons will be procured in 1976/77 followingICB according to the Bank's guidelines. For the purpose of bid comparisona margin of preference equal to 15% of the cif cost or the actual customsduty, whichever is less, will be given to local manufacturers. The Bankloan will finance 100% of foreign expenditures for, or 65% (representing theestimated foreign exchange component) of the total cost of, about 150 silorailway wagons and about 90 trucks out of minimum requirement of 260 wagonsand 190 trucks. Financing for the remainder of the trucks and wagons, forthe required maintenance equipment and facilities as well as for suchadditional transport and maintenance equipment as shall be determined on thebasis of SNMC's detailed distribution study (para. 4.19), will be providedthrough the Governnent.

4.19 Distribution Planning: In the past, SNMC did not need to pursuean aggressive marketing strategy for building materials, since demand wasconsiderably greater than supply. Consequently, distribution planning andoptimal transport allocation have not been developed as a function. To enableSNMC to handle, by the end of this decade, the distribution of more than tripleits present output, SNMC's distribution function has to be defined and strength-ened within the next two years. In a first stage a series of studies needsto be undertaken, in particular: (i) a study determining location and operatingcharacteristics of SNMC's distribution facilities; (ii) a detailed study ofSNMC's requirements for transportation equipment and maintenance facilitiesduring 1976-1981; and (iii) a study on the development of an integrated nation-al production-transport-distribution system for cement. The Bank will makeavailable under the loan US$1.0 million to cover the foreign exchange costof consulting services for these studies. SNMC will present to the Bank adetailed program of the studies to be carried out and their timing - preparedin consultation with the Bank - by the end of March 1976.

C. Pricing of Cement

4.20 Cement prices in Algeria remained constant between 1966 and 1973when they were increased to DA 130/ton bulk and DA 140/ton bagged (US$33and 36/ton respectively) delivered at SNMC factory gate, agency or depot.Price differentials according to geographical location, mode of transportetc. do not exist. The 1973 cement price was established on the basis of

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SNMC's average unit cost of producing, importing, transporting and dis-tributing cement in 1972, plus a fixed margin. However, while cement pricesin Algeria have been kept constant since then, costs have risen sharply:(i) the average dockside price of imported cement increased from DA 120/tonin 1973 to DA 200/ton in 1975, and (ii) at present, the average productioncost of Algeria's new plants which have not yet reached full capacity isestimated at up to three times that in older plants. Therefore, in orderto cover its present cost of cement production and distribution, SNMC wouldrequire a delivered price of about DA 230/ton versus the 1975 price of DA 130/ton for bulk cement and DA 140/ton for bagged cement. This cost structurewill improve as new plants reach full production at which time costs shouldbe about DA160/ton - below comparable import prices.

4.21 In July 1975, SNMC requested a price increase for all its products.Subsequently a new pricing policy for all building materials but cement wasdecided upon, which determines SNMC's sales prices at cost plus a 10% profitmargin. Cement pricing is still under review and a decision is expectedbefore end 1975. However, it is understood that cement prices will also beadjusted periodically to reflect production costs plus a margin sufficientto cover debt service obligations (para. 2.22).

4.22 Average cost-plus pricing as used in Algeria is widely applied incapital-intensive industries, such as cement. New plants have high unitcosts as they are gradually brought up to capacity operation and pre-oper-ating expenses are written off. Thereafter, costs decrease by some 20-30%and experience an even larger reduction when, after about 10 years of oper-ations, depreciation and financial charges become negligible. Average costpricing systems in countries with a relatively even mix of old and newplants or, as is the case of industrialized countries, a marginal capac-ity increase relative to existing capacity, tend therefore to result in afair amount of intra-industry or intra-company subsidization at graduallyincreasing prices, whereas in countries, such as Algeria, with primarilynew plants such pricing systemns imply high initial and then decreasingcemènt prices over time. This situation is, of course, aggravated bythe fact that, in Algeria, all investrents are financed by debt.

V. THE SAIDA CEMENT PLANT

A. Technical Aspects

5.01 Scope and ObJectives: The plant is part of a lime and cement complex,to be constructed and operated by SNMC near Saida. The cement plant, witha rated capacity of 500,000 tpy will use dry process technology and produceOrdinary Portland cement and possibly some special cement types. The cementplant is being constructed under a turnkey contract, except for civil works,with the Japanese firm, Kawasaki Heavy Industries (KHI), having been selectedas contractor following international competitive bidding.

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5.02 Raw Material Availability and Analysis: Geological investigationswere undertaken by a Bulgarian company during 1972/73, confirming the avail-ability of sufficient reserves of limestone, clay and sandstone to operatethe cement - lime complex at full capacity for more than 50 years. Abundantlimestone reserves exist about 1.5 km from the plant site but the clay depositis located more than 35 km distant. The clay samples show low silica andhigh alumina components which necessitate sandstone and iron ore additionsas corrective components for dry process production. Sufficient sandstoneis available at a deposit 30 km from the site and other additives (e.g. gypsum)are quarried by SNMC, purchased locally (iron ore), or imported (pozzolana).Details on raw material deposits and sources of supply are given in Annex 5-1.

5.03 Plant Description: A detailed technical description of the plant,as proposed by KHI, is contained in Annex 5-2. Dry process technologywas chosen because of the acceptable humidity of the raw materials, thesubstantial fuel savings associated with this process and the objective ofstandardizing cement-making technology in Algeria. The plant will be fullyautomated in line with SNMC's desire to incorporate the latest technology; itincludes a complete line of mechanical and electrical cement machinery witha kiln of a rated capacity of 1,500 tons per day of clinker and all othernecessary auxiliary installations as well as extensive workshops, a laboratoryand administrative and social buildings.

5.04 The design of the plant provides for a doubling of capacity with aminimum of new equipment and no infrastructure additions and includes amplesecurity margins in all but the kiln and cement grinding departments. Asdetailed in Annex 5-2, the raw material quarrying and handling equipment,the limestone crusher and the dispatching facilities are substantially over-designed, with their capacities exceeding by 3-10 times the required normfor handling 1,800 ton per day of clinker during a 30 working hour week.During negotiations, SNMC was asked to review with KHI the possibility ofeliminating these overcapacities. The possible investment saving could beup to US$5.0 million. This issue is further discussed in para 5.13.

5.05 Infrastructure and Utilities: Infrastructure and utilities aredescribed in Annex 5-3. The plant requires the construction of roads connectingthe quarries and the plant site and of a 25 km railway link to the SNCFA mainrail network. SNMC is responsible for undertaking and financing, as part of theproject, all necessary infrastructure work except for the provision of housing.

5.06 Power for the cement - lime complex will be supplied by SONELGAZ 1/through its distribution center north of Saida and a pressure reducing stationat the site. SONELGAZ will be responsible for the construction of the con-necting lines whereas the related investment costs will be covered by SNMCand are provided for in the plant's capital cost. Assurances were obtainedthat SNMC will take all necessary steps to ensure timely availability of gasand electricity for the project.

1/ Societe Nationale d'Electricite et de Gaz

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5.07 Ecology: The plant is designed to meet anti-pollution standardsrequired by Western European c untries (Annex 5-4): (i) to prevent a dustdischarge of mare than 50 mg/m , electrical precipitators and filters will beinstalled which amount to nearly 7% of equipment cost; (ii) the sulphate-alkalimixture of the raw meal and the stack height is to be such as to maintainan annual mean of below 100 micrograms/m ; (iii) noise pollution will be keptto a minimum because of the fully automatic operation of the plant; and (iv)sewerage discharge will be treated by the normal bio-chemical process.SNMC agreed to construct and operate the Saida plant according to soundecological and environmental considerations and to establish and maintaina monitoring system for dust, gas and noise pollution at the plant.

5.08 Manpower and Training: Details of labor force projections andtraining are contained in Annex 5-5. Cement factories have high capital/laborratios; thus the plant will provide direct employment for only about 220persons, including 50 unskilled workers. Training of all personnel will beprovided by KHI as part of the turnkey contract and take place at KHI'sworkshops, similar dry-process plants in Europe and at Saida. In addition,by 1976, SNMC intends to create its own Permanent Technical Training Center,with UNDP/UNIDO assistance, which will supplement the supplier's training.The training plans are satisfactory provided the Company will be able torecruit the required personnel. Assurances were obtained from SNMC that itwill make adequate and tinmly arrangements for recruiting and training ofpersonnel for the Saida plant.

5.09 Procurement: As mentioned above, the Saida plant will be builtunder a turnkey contact. While this approach entails normally higher capitalcosts, it offers in the Algerian context certain clear advantages. First,the number of SNMC's qualified technical staff is very small and clearlyinsufficient to plan and supervise the ambitious ongoing investment program.Second, this concept allows a single contractor to be held responsible forcompletion dates, performance guarantees and costs.

5.10 Procurement procedures for the Saida cement plant were initiated inNovember 1973. Following pre-qualification and ICB according to theBank's guidelines and including two-stage bidding, KHI was chosen aslowest evaluated bidder and a contract signed in April 1975. The turnkeycontract includes detailed engineering, supervision of civil works, supplyand erection of equipment, commissioning and training. It excludes theexecution of the actual construction work for the plant. In May 1975, sitepreparation was completed by a local firm and SNMC has started ICB proceduresfor the plant's civil construction contract. SNMC will also bid internationallythe materials and supplies for the construction of the railroad, followingBank procedures. Details on procurement are given in Annexes 5-6 and 5-7.

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5.11 Plant Implementation and Technical Assistance: SNMC has engagedSOCADEI (France), a Lafarge subsidiary, to provide consulting services.The selection of this company followed Bank procedures. SOCADEI wasinstrumental in preparing procurement documents and evaluating offers andwill be supervising construction and commissioning, and vill elaborate thequarry exploitation plan. The plant implementation schedule is given inAnnex 5-6. The plant is forecast to start operating in mid-1978 andperformance tests are expected to be concluded by end 1978.

5.12 Both SOCADEI's and KHI's responsibilities end with the completionof the performance tests about six months after start-up. SNMC has signedagreements with Lafarge, Asland and COMSIP International for the provisionof technical assistance if SNMC so requires. The companies may not be able,however, to meet SNMC's needs during 1977-80, when five new cement plants willcome on stream. Although SNMC's training program is commendable, SNMC'sexperience with new cement plants during the next two years may prove thatconsiderable technical assistance will be required. Therefore, SNMC hasagreed to make, by December 1977, adequate arrangements for technical services,satisfactory to the Bank, for operation of the Saida cement plant.

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B. Capital Cost and Financing Plan for the Saida Plant

5.13 Capital Cost: Capital cost estimates are detailed in Annex 5-7 andsummarized below:

Saida Plant - Summary of Capital Cost Estimates

DA Million US$ MillionLocal Foreign Total Local Foreign Total %

Building § Civil Works 85.3 54.2 139.5 21.8 13.8 35.6 21.8Equipment Supply, Erec-tion & Supervision 28.8 246.1 274.9 7.4 62.8 70.2 42.9

Infrastructure 30.1 21.8 51.9 7.6 5.6 13.2 8.1Freight & Insurance 2.6 35.0 37.6 0.7 8.9 9.6 5.9Preoperating &

Engineering 10.2 17.8 28.0 2.5 4.5 7.0 4.4Training & Tech. Assist. 0.4 5.1 5.5 0.1 1.3 1.4 0.8Duties & Taxes 20.0 - 20.0 5.1 - 5.1 3.2

Base Cost 177.4 380.0 557.4 45.2 96.9 142.1 87.1

Physical Contingencies 13.4 23.5 36.9 3.4 6.0 9.4 5.1Price Contingencies 8.5 9.7 18.2 2.2 2.5 4.7 2.8

Fixed Assets 199.3 413.2 612.5 50.8 105.4 156.2 95.0Working Capital 15.3 16.4 31.6 3.9 4.2 8.1 5.0

Total Plant Cost 214.6 429.6 644.1 54.7 109.6 164.3 100.0

Interest duringConstruction 41.9 42.3 84.3 10.7 10.8 21.5

Total FinancingRequired 256.5 471.9 728.4 65.4 120.4 185.8

By international standards, the capital cost of the Saida plant is high, withfixed assets (not including infrastructure and investment for the lime plant)amounting to US$285 per annual ton of cement produced compared to US$180 incomparable plants now being built. The high unit cost would be reduced toabout US$225 per ton if plant capacity were doubled. However, the marketprospects in Saida'a natural hinterland do not justify such an expansionwithin the next 8-10 years. The reasons for the high capital costs include(i) built-in overcapacity and excessive safety margins; (ii) capital-intensive design features such as a high degree of automation, (iii) guaranteerequirements and penalties exceeding the international norm, and (iv) apremium paid for plant implementation under the turnkey contract. However,in addition to the above reasons, which may account for a cost increase ofabout US$20 million, there is another major factor in Saida's high capital

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cost: During the past 2 years, SNMC has signed other turnkey contracts for5 cement plants with leading cement contractors. These suppliers are wellaware of: (i) the prevailing working conditions in Algeria; and (ii) SN4C'semphasis on time achedules, technical quality and output guarantees ratherthan on the level of capital costs. SNMC$a approach and. the Algerian systemhave, therefore, created a procurement climate which induces high priced offers.Under such circumstances the normal cost-reducing effect of internationalcompetitive bidding has not materialized.

5.14 The above capital cost estimates can be considered accurate: Theturnkey, consulting and site preparation contracts are firm so that costs ofequipment, erection, engineering and supervision representing 75% of the base

cost estimate, are not subject to price escalation. The estimate for buildingsand civil works reflects a May 1975 quote of a European contractor andSNMC's current experience with other cement plants. Infrastructure costs

are based on quotes from SONELGAZ, SNCFA and local contractors. Importduties and taxes of about 7% have been added to equipment and erectionand 22% to consulting services. An estimated DA 2.7 million for trainingand DA 2.8 million for technical assistance have also been included. Pre-

operating start-up expenses and engineering fees include SOCADEI's and KHI'sfees, the cost of the SNMC project team, and material and supplies duringcommissioning of the plant. To cover possible omissions and changes inproject design, physical contingencies of 5% and 10% have been added respec-tively to the base cost of items for which contracte have or have not beensigned. The allowance for price escalation amounts to 14% of that 25% ofthe base cost plus physical contingencies that remains subject to priceescalation. The annual escalation rates used during the constructionperiod are 15% for foreign equipment and construction, 10% for foreign

services, 5% for local equipment and supplies and 7% for local services.

5.15 As mentioned previously, the Saida cement plant is part of a cement-

lime production complex. The above capital cost includes DA 17.9 million(US$4.6 million) for land, infrastructure, civil works and equipment whichcan be allocated to the lime plant.

5.16 Working Capital Requirements: Working capital requirements through1979, i.e. the first full year of operations of the plant are estimated at

DA 31.8 million (US$8.1 million). The detailed build-up is given in Annex 5-8.

The amount is high due to the fact that the majority of SNMC's customers arestate enterprises or Government agencies which pay only three months afterdelivery.

5.17 Financing Plan: In accordance with financing practices in Algeria(para 2.02) the total financing required for the Saida plant of DA 728.4 million(US$185.8 million) will be covered by loans as follows:

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Saida Plant - Financing Plan

Source DA million US$ million %

Supplier's credit 224.0 57.1 30.7IBRD 120.7 30.8 16.6BAD, BEA or TreasuryAdvances 383.7 97.9 52.7

Total 728.4 185.8 100.0

5.18 In May 1975, SNMC signed a supplier's credit agreement, as part ofthe KHI turnkey contract, totalling DA 224 million, of which DA 194.5 million(87%) is for 13 years including 3 years of grace, bearing an annual interestof 8.0%, and DA 29.5 million, covering KHI's services, is for 8 years, includ-ing 3 years of grace at 8.5% interest. In line with similar Japanese creditsto Algeria, the credit covers 70% of the turnkey contract's foreign exchangecost, equivalent to 48% of the Saida plant's total foreign exchange cost.The Saida plant component of the proposed Bank loan to SNMC is US$30.8 mil-lion equivalent. The Bank loan will cover about 25% of the plant's totalforeign exchange requirements. Both the supplier's credit and the IBRD loanwill be guaranteed by the Government of Algeria; the foreign exchange riskrests with SNMC.

5.19 Financing of incremental working capital requirements (estimated atUS$8.1 million) will be provided by Treasury advances on terms at least asfavourable as those of the IBRD loan. The remaining financing gap (estimatedat US$89.8 million) will be covered by long-term loans from BAD or otherappropriate domestic lending institutions. The latter generally carryinterest at 5.5% per annum and repayment periods in line with a project'sfinancial prospects. The financial projections are based on a repaymentperiod of 16 years, including four years of grace, calculated from the yearin which the disbursement is made. The Government indicated that the BADloan would be on terms at least as favourable at those of the IBRD loan.

5.20 Allocation of Bank Loan and Disbursement: The Bank loan will financepart of the foreign exchange cost of goods and services for the Saida plant,in accordance with a list of items shown in Annex 5-9, consisting of (i) 30%of the outstanding foreign exchange cost of the KHI turnkey contract for supplyand erection of the Saida plant, representing about 15% of the contract's totalforeign exchange cost; (ii) 25% of the cost of the plant's civil constructioncontracti representing the estimated direct and indirect foreign exchangecomponent; (iii) the cif cost of materials and supplies for the constructionof the railway link; (iv) the foreign exchange cost of the SOCADEI engineeringcontract; and (v) the technical assistance contract after commissioning. Sincethe services of SOCADEI were important during project preparation and werecontracted upon the Bank's request, it is recommended that the Bank financethe SOCADEI contract retroactively from May 1, 1975 up to a maximum ofUS$300,000.

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5.22 The disbursement schedule for Bank financed items connected withthe cement plant is given in Annex 5-10. It is based on detailed estimatesof order placement and payment conditions in line with the expected deliveryand construction schedule.

C. Financial Analysis

5.22 Operating Costs: Production cost and revenue estimates are basedon the proposed product mix of 60:40 bulk and bagged Ordinary Portland cementand a production start-up in mid-1978 gradually leading to full capacity ope-ration by 1982. Projections in 1975 constant terms are given in Annex 5-11and those in current terms in Annex 5-12. To reflect inflationary cost changes,it has been assumed that local labor rates will increase by 7% p.a., otherlocal coste by 5% p.a. and foreign inputs by 15% p.a. in 1975-77, 10% in 1978,8% in 1979 and 7% thereafter. In 1982, at full production of 500,000 tpy, theSaida plant is projected to reach a direct operating cost of 55 DA/ton inconstant terms and 86 DA/ton in current terms.

5.23 These operating costs will be about 5-10% higher than those ofother new cement plants in Algeria which - having double the capacity ofSaida - realize economies of scale. However, Saida's operating costsare 10-20% lower than those of comparable plants in Europe and North Africadue to the low cost of fuel (gas) in Algeria. Fuel costs account for only 18%of operating costs, as compared to 35% in European plants. However, sinceceement plants are very capital intensive, financial and depreciation chargesare high and in the case of Algeria, account for up to 65% of total productioncosts. As a result, the competitiveness of Algerian cement plants is moresensitive to changes in capital costs than fuel charges. For the cost struc-ture of the Saida plant, an increase of fuel prices of 70% is equivalent to a10% increase in capital cost.

5.24 Revenues: In line with Algeria's pricing policy for building mate-rials, as discussed in paras 4.21 and 4.22, it has been assumed that in futurecement prices will reflect the cement industry's average unit cost (excludingexcessive costs attributable to start-up problema of new plants), plus a marginsufficient to ensure meeting of debt service obligations. Details on pricebuild-up and revenue calculations are given in Annex 5-12. By the early 1980sthis policy is expected to result in a domestic price structure comparableto prices prevailing in most Western European countries, where, on the average,at present plants have substantially lower depreciation and financial charges.

5.25 Financial Viability: Financial statements for the Saida cement planthave been projected in current terms. Although the plant will not be operatedas an autonomous unit, for accounting and management purposes its financialresults should be separated from SNMIC's overall financial performance. Thefollowing financial agreements have been reached: (i) that SNMC will maintainand furnish to the Bank separate accounts for the Saida plant and will alsoprovide the Bank with annual financial forecasts for the plant; (ii) that SNMCwill maintain a debt service coverage of 1.1 times for the Saida plant andthat the Government will, if necessary, take measures - other than provision

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of short-term debt - to enable this coverage to be achieved; and (iii) thatSNMC will maintain a ratio of current assets to short-term liabilities forthe Saida plant of not less than 2.5:1 and that the Government will providefunds - other than short-term debt - to enable this ratio to be achieved.

5.26 Detailed income, cash flow and balance sheet forecasts through1988 are given in Annex 5-12 and selected items are summarized below:

Saida Plant: Selected Income Statement and Balance Sheet Items(DA u'llion - current terms)

1978 1979 1980 1982 1984

Production ('000 tons) 117 352 478 500 500Net Sales 24.0 70.4 86.0 85.0 98.0Operating Costs 9.8 25.7 33.5 42.0 45.9Net Profit (Loss) (26.2) (57.2) (45.7) (36.2) (10.3)

Cash Generation 0.4 (5.4) 6.0 15.5 35.7

Net fixed assets 684.5 632.7 581.0 477.5 383.5Long-term debt 706.1 670.7 618.0 502.5 389.5

Debt Service Coverage (times) 1.1 1.1 1.1 1.1 1.1

Current ratio 1.7 1.8 1.7 1.9 2.0

5.27 Break-even Point Analysis: The profit break-even point of the Saidaplant in 1982, the first year of full production, would be about 180Z ofcapacity. The plant is not expected to break even before 1987, the 6th yearof full production. The cash break-even point will not be reached before 1988.Details of this analysis are contained in Annex 5-13.

5.28 Financial Rate of Return: Particularly in a centrally-planned econony,where state enterprises operate as agents of the Government, the financial rateof return on a project is of only limited value since it takes no account ofthe discrepancies between domestic prices and world market prices. In the caseof the relatively 8mall and costly Saida plant, the financial rate of returnis only 3.7% since prices reflect the average cement industry cost. Dbtailsof calculations and senaitivity analyses are given in Annex 5-14.

D. Major Risks

5.29 Due to the overdesign of the plant, the technical risks are relativelysmall. However, technical problens could become critical in the unlikelyevent that SNMC cannot attract and keep qualified technicians to operate theplant at its rather remote location. Furthermore, it is likely that theautomatic control systems will not be fully operative for some time, but tech-nically, a fully automated plant can achieve an equivalent output when con-trolled manually or semi-automatically.

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5.30 The major potential risk to the project lies in the question as towhether the proposed pricing policy and financial measures, agreedupon during negotiations, will operate effectively and whether they can serveas a vehicle for the introduction of improved management and greater product-ivity-in the industrial sector, despite the fact that the financial viabilityof both S1MC and the Saida plant will remain during the period of SNMC' a rapidexpansion effectively dependent on the Governmentis continued financialsupport.

E. Economic Justification

5.31 Economic Rate of Return: The economic rate of return represents themost important criterion for rational investment planning. Despite the highcost of the Saida plant, the economic rate of return is estimated at somewhatabove 10%. The calculations are based on an opportunity cost of importingcement of about US$58/ton, delivered at Saida, through 1981 and about US$5Ottônthereafter. Further details on prices, shadow pricing of labor and fuel andsensitivity analyses are given in Annex 5-15. A summary of sensitivity testsis shown below:

Saida Plant: Economic Rate of Return - Sensitivity Tests

Case Description Rate of Return

1. Base Case 10.3%2. Revenue Increase - 25% 13.9%3. Revenue Decrease - 25% 6.1%4. Capital Cost Increase - 15% 8.7%5. Operating Cost Increase - 15% 9.7%

5.32 Linkages and Employment: While the plant creates only about 220additional direct operating jobs, an average of 850 Algerians are likely tobe employed during the construction and erection of the plant. The indirectemployment effect downstream is difficult to quantify, but the supply ofcement will have considerable impact in the construction and service industriesas well as in the transport sector. In addition, ready availability of cementwill facilitate "autoconstruction" in the rural areas thus absorbing a certaindegree of underemployment. While it is true that import of cement might havea similar effect in terms of regional development, the presence of port-hand-ling constraints makes such importation unlikely and, in any case, importedcement would tend to be consumed in the major urban areas. The existence ofan assured cement supply in the plateau region will therefore encourage ruralcement utilization which was previously constrained by the presence of majorcement consuming centers in the north.

5.33 Foreign Exchange Effect: Domestic production of cement in Algeriacompared to importation has two major advantages: (i) direct foreign exchangesavings; and (ii) the fact that self-sufficiency facilitates the actual phy-sical availability of cement by eliminating the inefficiencies of port

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handling and fluctuations in world market prices. The net foreign exchangesavings of the plant, at 1975 prices, are estimated at between US$30 andUS$35 million per year, once full production is reached, offsetting the plant'sforeign exchange cost after 6 years of capacity production. Further detailson the foreign exchange effect are shown in Annex 5-16.

5.34 Regional Development Effect: The regional developmental impact ofthe project is linked to the Government's policy of reducing regional economicdisparities by promoting industrial and agricultural growth in the plateauregions and in the rural south. At present, the modern, wage-earning sectoris almost entirely limited to the coast in the North. Results of this havebeen wide income differentials, rural-urban drift and large-scale emigrationto France. SNMC's Saida plant will be the Company's first cement productionunit located away from the coast and its immediate hinterland. Compared toimports or transhipments, the Saida plant offers transport savings of DA10/ton. The easier availability of cement in the region south of Saida shouldalso facilitate implementation of the Governnent's industrial, rural develop-ment and housing programs in that area. Details on these programs are givenin Annex 5-17.

VI. SNC TECHNICAL ASSISTANCE

A. SNC - Background

6.01 SNC was established by the Governnent in 1967 as part of a policy toreform and organize accounting in Algeria which, hitherto, had been carriedout in an ad hoc manner with little attempt at regulation or consistency.Although its primary function is to act as external auditor to state enter-prises, the rudimentary development of financial and management accountingin most companies has meant that much of SNC's work has been directed towardsmeeting the preconditions for a successful audit; i.e. setting up basicaccounting systern, providing practical guidance to accounting staff andoffering management consulting services. Since it operates with a substantialnumber of companies and, since, through its audit function, it has the powerto enforce changes on a continuing basis, SNC represents the most promisingvehicle for improving public sector financial responsibility.

6.02 SNC is under the tutellage of the Ministry of Finance, but enjoysfull autonomy in the acceptance and discharge of professional obligations, theadoption and enforcement of standards, and in its own budget. During the lastthree years SNC has realized a modest surplus. In the Ministry of Finance,the Directeur de l'Inspection, who is also in charge of the Commissaires auxComptes (the official State Auditors), is specifically responsible for guidanceof SNC. As a result, a natural coordination exists between the Commissairesaux Comptes and SNC; the role of the former being much more limited in theenterprises where SNC carries out an audit.

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6.03 SNC employs some 80 people, with a professional force of about 50,90% of them working in the accounting and auditing sector. The typical SNCassignment differs from traditional auditing, due to inadequacy of recordsand lack of competent personnel in the 8tate enterprises. In Algeria, an auditis only considered as a starting point to diagnose a company's financial con-dition; it typically leads to correction and completion of accounting records,preparation of financial statements and installation of new and more effectiveaccounting systems. SNC's methods are careful and rigorous though somewhatcumbersome. As accounting practices of enterprises improve, SNC will gra-dually limit its intervention to conventional audits. For the meantime, how-ever, its chief impact is to create basic accounting systems upon which suc-cessful audits are based.

6.04 A review of the needs of industrial enterprises indicates that inthe future, SNC should increase its role as external auditor in the publicsector and should provide further assistance in (i) installation of moderncost accounting and budgeting methods; (ii) development of internal auditdepartments; (iii) automatic data processing; and (iv) application of thenew "Plan Comptable National."

B. Program Objective and Description

6.05 The general objective of the proposed technical assistance programis to develop SNC's capabilities in the fields of external auditing, modernmanagement accounting techniques and in implementing basic accounting systems.The services SNC will provide are badly needed in Algeria and will assistenterprises in producing proper financial statements on the basis of whichmanagement as well as ministries can take appropriate decisions in the areasof investment supervision, financing, pricing and cost control. As for specificactivities related to SNMC, the proposed program would aim at making SNC fullycapable of undertaking SNMC's annual audit and, it is anticipated, for assist-ing SNMC in (i) improving its cost accounting system; (ii) establishing abudgeting and cost control system; (iii) defining the framework and methodsfor successful financial planning; and (iv) applying the new accounting systemdefined by law.

6.06 The program, as presently conceived, vill be based on a 5-yearcollaboration between SNC and a qualified foreign auditing and accountingfirm to be appointed in accordance with Bank guidelines. It would includecourse instruction, practical training of SNC personnel abroad, and jointauditing/accounting operations in Algeria. Details of a suggested programare given in Annex 6.

6.07 The cost of the program is estimated at US$7.4 million, includingfees for the foreign auditing firm, salaries and travel expenses of SNC staffduring training, and adequate provisions for price escalation but excludinginterest during execution. It is suggested that the Bank finance, under theSNMC loan, US$5.1 million equivalent or 100% of the foreign exchange cost ofthe SNC project component. It is also recommended that no guarantee fee becharged for this portion of the loan. The Government has given assurances

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that residual financing for the program will be available as and when neces.sary.As a condition of effectiveness, it has been agreed that SNMC will conclude anon-lending agreement with SNC wkhch will ensure tiat SNMC is provided withfunds to service tie relevant portion cl: the loan.

6.08 The adequate implementation of the training program will requirean increase of SNC's staff from 80 to 220 people within 5 years. Such anincrease appears possible since some 20 students are expected to graduateannually in accounting by the end of 1975 with an increase of up to 100 perannum within the next five years. Most of them will seek the "expert compt-able" degree, which requires a two-year practical training in SNC and possiblyan additional five-year "service civil". Nevertheless, SNC may experiencestaffing difficulties because of rigorous selection criteria and the relativelylow remuneration it offers at present. Assurances were, therefore, obtainedthat SNC would make adequate arrangements to (i) recruit qualified personnelin sufficient numbers for the program; and (ii) appoint a qualified full-timeprogram director not later than mid-1976.

6.09 There are certain risks attached to this program: first, itssuccess depends on SNMC's ability to recruit and retain qualified Algerianstaff; second, general working conditions in Algeria are not easy. Thus, itis possible that the relationship between SNC and the foreign consulting firmmight deteriorate after one or two years, leading to insufficient cooperationto create the necessary technology transfer.

VII. AGREEMENTS

7.01 The Loan and Guarantee Agreements will record the following majoragreements and assurances:

A. From the Company:

(a) that SNMC shall furnish to the Bank, according to amutually agreed schedule, plans for strengthening ofthe Company's general accounting, financial planning,cost accounting, budgeting and cost control capabilitiesand will implement and maintain the system thereafter(para. 2.17);

(b) that SNMC undertakes to review its prices annuallyon the basis of audited financial accounts and to proposeprice levels equal to the average cost of each productor product group plus a margin to cover debt incurredfor such product or product group (para. 2.22);

(c) that SNMC will take all action within its power tomaintain sufficient current assets to meet currentliabilities as they fall due (para. 2.22);

(d) that SNMC will take all action within its powerto maintain a debt service coverage of 1.1 times(para. 2.22);

-31-

(e) that SNMC will furnish to the Bank a detailed cementmarket study during 1978 whose proposed content willhave been discussed with the Bank (para. 4.11);

(f) that SNMC will furnish to the Bank for discussion, andwill discuss with the Bank the proposed scope and contentof, any preparatory studies for cement expansion envisagedprior to submission of the detailed market study under (e)(para. 4.11);

(g) that SNMC will furnish to the Bank by March 31, 1976a program and schedule for the distribution studieswhich will have been established in consultation withthe Bank (para. 4.19);

(h) that SNMC will construct and operate the Saida plantwith due regard to ecological and environmentalconsiderations and will establish and maintain apollution monitoring system for the plant (para. 5.07);

(i) that SNMC will employ consultants, satisfactory to theBank, to assist with engineering, supervision andcommissioning of the Saida plant and with carrying outthe studies to define the Company's distribution systemand to determine procedures for its implementation(para. 5.11 and 4.19);

(j) that SNMC will make arrangements satisfactory to theBank, by the end of 1977, to obtain such technicalservices as required for efficient operation of theSaida plant (para. 5.12); and

(k) that SNMC will take all action within its power to maintainfor the Saida plant a debt service coverage of 1.1 timesand a ratio of current assets to short-term liabilities of2.5:1 (para. 5.17);

(1) that the on-lending arrangement with SNC will providefor, by June 30, 1976, appointment of a full-timequalified director for the program and for the recruit-ment of qualified personnel in adequate numbers for theprogram (para. 6.08).

B. From the Government:

(a) that the Government will take all steps necessary witha view to setting SNMC's prices at levels consistentwith 7.01 A (b) above (para. 2.22);

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(b) that the Governmnent vil take st~eps - other than tbé pro-visionof short,-term deltt - to enabl-e SMI'C to maintain the f'inanciaJ.ratos referred to in 7.01 A~ (d) and (k) ab>ove andl to meetits current IliabiLities a-s they faU due (para. 2.22);

(c) that the Government wili undertake ail steps necessaryto make available to SNMC ail funds required to completethe project if there is cause to believe that the fundsavailable to SNMC will be inadequate (para. 3.04); and

(d) that the Government viii take ail steps necessary tomake available funds, facilities, services and otherresources necessary to enable SNC to carry out itsprogram (para. 6.07).

7.02 As a condition of effectiveness, the following convenant was alsoagreed upon:

that SNMC and SNC shall have entered into an agreement forthe on-lending of that portion of the loan allocated to the SNCtechnical assistance program and shall have ensured that SNMCvill be provided with funds as required to cover debt serviceobligations on that portion of the loan (para. 6.07).

7.03 Based on the foregoing assurances and agreements received, theproject represents a suitable basis for a loan to SNMC of US$46 millionequivalent for 15 years including a 4 years grace period.

Industrial Projects DepartmentNovember 1975.

IBRD 11667

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I `;- PROJECTED ROADS

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ANNEX 1Page 1

ALGERIA

SNMC CMENT EXPANSION PROJECT

TECHNICAL TERMS AND PROCESS DESCRIPTION

A. Technical Terms

The following is a list of the nost common technical terms used inthe cement industry:

CEMENT A hydraulic binding material in the for. of an amorphouspowder consisting of tri- and bicalcium silicates, tricalciumaluminates and tetracalclum alumino-ferrites. Cement is pro-duced by heating a mix of rav materials (limestone, clay andsand) which transforme into cement clinker through incompletefusion at a temperature of about 1450'C. Clinker is groundtogether vith suall quantities of gypsum, which acts as aretarder, controlling the setting time of the resulting cement.

The most cormon cement types are:Ordinary Portland Cement used in ordinary concretestructures.Rapid lardening Cernent used in structures requiring earlystrength which is achieved by quick setting of the cement.Sulphate Resisting Cement used in structures exposed to seawater or sulfurous materials.low Heat Cement used in structures of massive concrete blocks(e.g., dams) to avoid overheating during setting.Superfine Cement used for special structures requiring highstrengths and for prestressed concrete.Portland Blast Furnace Cerent prepared, in part, from blastfurnace slag and used in ordinary cement structures.Oil Well Cement used in the construction of oil vells (forlining).Mixed Cement used for masonry work (mortar) and small concretestructures.

CLINKER Clinkerization is the process of burning to produce incompletefusion in the material heated. Less than one-third of thematerial heated becomes fluid. The output of this process isa rocky material called clinker. Clinker is ground with sm8alladditions of gypsum to produce cement.

ANNEX 1Page 2

COMBUSTION AIR Used with fuel to fire the kiln.Primary Air is the small amount of air injected into thekiln together vith fuel under high pressure.Secondary Air, which constitutes the major part of combus-tion air, is provided by fans and is heated up to about800°C in the cooler prior to flowing into the kiln.

COOLER Vessel in which hot clinker leaving the kiln is cooled.The cooler is designed as heat exchanger heating thesecondary combustion air. Three major types of coolersare in use:Air Quenching Grate Cooler: a moving grate, slightlyinclined on which the clinker falls from the kiln to becooled by fans under the gate.Planetary Cooler: this consists of 8 to 14 cylindricaltubes (incorporated into the shell of the kiln) into whichthe clinker to be cooled falls.Rotary Cooler: (Internal Cooler) cylinder of same con-struction as the rotary kiln and located under the firinghood. It rotates on tires.

CRUSHING Ra materials are normally quarried in the form of largelumps and blocks and must be subjected to a reduction insize before being further processed into a slurry or rawmeal which in turn is fed to the kiln. The reduction ofraw materials from a maximum admissible size to an aggre-gate of a specified size is achieved in a crusher. Majorknown types are:Roll crusher: which mills the materials particularlysuited for moist material liable to cause clogging.Jsw crusher: which knocks into pieces the materialparticularly suited for large size lumps.Impact crusher: such as hammer crusher and hammer millideally suited for raw materials of cement manufacture ifthese are not too moist or too abrasive. This type allowsdrying during the crushing process.Impeller crusher: which hits the materials against thebars of a gull and overcomes impact resistance ofmaterial.Gyratory crusher: which rotates the materials arounda cone in a continuous reduced spaee suitable for hardmaterials which are not too moist, and therefore, liableto clogging.

DUST COLLECTION Dust pollution has been a serious environmental problemposed by cement plants as dust is generated at nearlyevery stage of the production process. Furthermore, largequantities of emitted dust also represent lost production.Appropriated filters have been developed:Bag filter: A series of chambers with bags of nylon orother material installed, which dedust the airstream loadedwith dust particles. A system of valves permits reversal

ANNEX 1Page 3

of the aîr stream in a particular chamber to clean the bagand collect the accumulated dust. Only suitable if tem-peratures of the airstream and particles do not exceed1000 to 1500C.Cyclone: It consiats of an upper cylindrical portion anda lower funnel shaped portion. The airstream enters thecyclonic chamber tangentially at the upper portion. Throughcentrifugal force, dust particles strike the vall of thechamber and slide down to the discharge opening of thefunnel. The cleaned airstream leaves the cyclone througha central outlet pipe. Cyclone's efficiency can be en-hanced by arranging several units in line (multicyclonebatteries).Gravel filter: A filter consisting of a series of chambersfilled with gravel. The dust-laden airstream flows throughthe filter pockets thereby unloading the dust particles.Cleaning of the filter is by reversal of airstream andsimultaneous stirring of the gravel bed. This filter issuitable for temperatures above 500'C and, therefore, oftenused for waste gases of clinker cooler and kiln.Electrostatic filter: Electrostatic dust precipitationmakes use of the forces generated in electrically chargedbodies while the dust laden gas passes between two elec-trodes connected to high tension (30,000 to 80,000 V).The positive electrode collects the dust particles whichhave received a negative charge, thereby neutralizing them.Dust must be removed from time to time from the electrode.Optimum operation is achieved at temperatures of 90' to180'C and 15-30% moisture. Therefore, a spraying towerfor cooling the gas and moistening the particles is oftenemployed with the electrostatic filter.

GRINDING Raw Grinding: Reduction of raw material size to specifiedfineness by means of a mill.Wet Process: The hard materials (limestone) are subjectedto preliminary crushing and soft materials (clay) arestirred with vater to form a slurry. Then both materials,mixed in the correct proportions, are ground to fine slurry.Dry Process: Crushed raw materials are dried and groundinto fine raw meal powder.Cement Grinding: The preparation of cement powder fromclinker and gypsum by means of a mill. The fineness ofgrinding (Blaine value) has a significant influence on theproperties of the resulting cement.Grindability of a material depends on its properties, suchas structure, cleavability, brittleness and hardness.

ANNX 1Page 4

HOMOGENIZATION The thorough and complete blending of various raw materialsto prepare a homogenous mixture. This can be achieved instorage silos in which the pre-homogenized mix is stirredand mised by a blover (dry process). Wet process plantsuse slurry tanks with installed rotating arms to achievehomogenization. The tanks serve simultaneously as storagefacilities.

KILN A vessel in which the raw meal is burnt to be chemicallytransformed into clinker (clinkering) at temperatures ofaround 1450°C. A Shaft kiln typically with a throughputof between 50 and 250 metric tons per day, formerlyoperated on a discontinuous basis using the dry process.New developments, using pelletization techniques, operatecontinuously. A Rotary kiln, a large cylindrical steeltube inclined from the horizontal by 1 to 3 degrees, slowlyrevolves, supported by tires and rollers. It is suitablefor wet as vell as dry processes and is typically used inmodern large-scale plants with throughputs of 1,500 to4,000 tpd.

MILL Raw Mill: Grinds raw materials. The types employed inmodern cement plants require prior crushing of raw mate-rials. The most common type is the tube mill, a horizontalcylindrical steel shell, equipped with lining and grindingmedia (e.g., cast steel balls - Ball mill) and which rotatesat between 14 and 20 r.p.m. The free fall (tumbling) of thegrinding media provides for the impact by which the materialis ground. Suitable both for wet and dry processes.Compound Tube Mills: (or combination mills, compartmentmills) have two or more compartments, separated by slotteddiaphragms and filled with different types of grinding media,to achieve successively finer grinding.Closed Circuit Mill with centrifugal separator and bucketelevators. The material ground in this tube mill is con-veyed in a steady flow by a bucket elevator to a separator,vithin which oversize particles are rejected by centrifugalaction and returned to the millfeed.Air-swept Mill: Tube mill or ring mill, the output of whichis continuously assorted by an air separator. Oversizeparticles are returned to the millfeed.Ring Mill: Grinding elements (balls or rollers) roll underpressure on a circular path (the grinding ring). Variationsof this type are spring pressure or spring-loaded mills,centrifugal ring ball mills, centrifugal suspended rollermills, edge mills.Cement Mill: (or Clinker Mill), a tube mill which refinesthe mix of clinker and gypsum to cement powder. Compoundmille vith centrifugal separator are commonly in use.

ANNEX 1Page 5

Wash Mill: A concrete tank wvth installed rotating arms to

break up and stir a soft raw material (clay). The resultingslurry is screened to remove stones or other impuritiesprior to grinding. It is used in dry as vell as vet pro-cess plants.

PREHEATING SYSTEM is a heat exchange system designed to recover the caloriccontent of the kiln exhaust gases with which to heat upthe raw meal.Grate Preheater: The preheating system of the semi-dryprocess, consisting of a traveling grate which moves rawmaterial pellets through a drying and a preheating chamber.Suspension Preheater: The preheating system of the dryprocess consisting of one to four stages of simple or twincyclones on top of each other. The lower cyclones are usedas heat exchangers, the top cyclones as dust collectors.

PREHOMOGENICATION, Storage facility which is also used for prehomogenizationPLANT or blending of raw material.

RAW MEAL A homogeneous powder consisting of the ground raw mix. Itis used to feed the kiln to produce clinker (using the dryprocess).

RAW SLURRY Kiln-feed for the wet process kiln.

B. Process Description

1. The cement production process is based on three basic raw materials--

limestone, clay and sand. These raw materials with a maximum specified block

size (blasting) are reduced to aggregates of pre-specified maximum dimensionsin the crushing department and stored; pre-homogenization is achieved through

intermediate storage. After proportioning according to weight and volume, the

raw materials are ground to a fine raw meal powder in the raw mill. The raw

meal is homogenized and then transported, via conveyors, to the kiln depart-

ment. Within the kiln, heat induces a clinkering process, in which an incomplete

fusion of the raw meal takes place. This clinker is then ground together with

a small percentage of gypsum to produce cement, which is shipped either in

bulk or in bags.

2. Three types of processes have been developed; the wet, dry and

semi-dry processes.

The Wet Process

3. The raw materials, being wet in the natural state, are mixed withwater to create a slurry, whose titration (quantity ratio) can be controlledeasily. By means of pumps and ducts the slurry is introduced into the kiln,

ANNEX 1Page 6

where the clinkering takes place. Energy consumption of the process is high(between 1350 to 2200 kcal/kg of clinker), since more than a liter of watermust be vaporized within the kiln per kg of clinker.

4. The main advantage of the process is its simplicity, easy operat-ional control and maintenance. However, for raw materials with a naturalhumidity of below 10 to 15%, the dry or semi-dry process usually operates moreeconomically because of lower energy consumption, even though investment costsfor the wet process are normally lower than for the comparable dry processequipment. The recent increases in fuel prices have increased the upper limitof humidity for the dry process applicability to about 15%.

The Dry Process

5. This process leaves the raw material in its natural state of humidityup to the raw mill stage; vithin the ravmill the material is ground and simul-taneously dried to a specified limit. The dry raw meal powder is homogenizedmechanically or by means of blowers, then introduced at the top stage of a pre-heating system. Working as a heat exchanger, the system preheats the materialby recovering the caloric value of the kiln exhaust gases whose flow is counterto that of the material (Counter flow system). Thus, part of the calcinationtakes place in the preheater, vith the final clinkerization taking place in thekiln. Within the cooler, the secondary air recovers heat from the clinker,thereby cooling it down.

6. The intricate thermic equilibrium stage in the raw mill - preheater- kiln - cooler section allows a total thermic consumption for the dry processplants of 750 to 950 kcal/kg of clinker. Nevertheless, the savings in fuelare, in part, outweighed by disadvantages such as a more complicated processflow, which is sometimes difficult to control and to maintain. Continuousand automated sampling for control is necessary. Investment costs are usuallyhigher than for the vet process, despite the use of a short kiln (about halfthe length of the vet process kiln).

7. The industry has developed several variations of the dry process,using long or short kilns cyclonic preheaters of one to four stages with simpleor twin/type cyclones vithin the stages. The decision as to the type of dryprocess to be selected is a function of: (i) the supplier (some of the varia-tions are patented); (ii) the chemical components of the raw materials andfuel (particularly their level of harmful alkalies and chlorides); (iii) fueleconomy; and (iv) initial investment costs and operating costs, particularlycontrol and maintenance.

The Semi-Dry Process

8. In this process the raw material is pelletized in a balling drum bymeans of between 12 to 20% of vater. The wet pellets with a diameter of about1.5 cm discharge drom the drum directly into a hopper on the feed end of a tra-velling grate preheater. The grate conveys the pellets through a drying zoneof about 300'C, then through a preheating zone of about 875°C. Kiln exhaustgases flow partly via a bypase through the drying zone, partly directly through

ANNEX 1Page 7

the preheating zone. After passing through the preheating chamber, the hotpellets are stripped from the travelling grate and cascade into the short kilnwhere they are heated further to clinkerize at about 1450°C. The pelletizedclinker is then cooled over a grate cooler.

9. The thermic consumption of this process is about 850 kcal/kg ofclinker, thus comparable to the dry process. Hovever, the process is moreexpensive both in initial investment and operating costs, as it contains manymoving parts. Its suitability is confined to raw materials which lend them-selves to pelletization. Its advantage lies in the stability of the process,the accuracy with which it can be adjusted and controlled, and the removalof harmful alkalies and chlorides from the raw material in process, which isachieved by collecting the dust from the bypass in a cyclone dust collector.The resulting cement has, therefore, a lower alkali content than can beobtained vith dry process equipment.

Industrlal Projects DepartmentNoVember, 1975.

ANNEX 2-1Page 1

SNMC CEMENT EXPANSION PROJECT

THE ALGERIAN ECONOMY AND THE INDUSTRIAL SECTOR

A. The Four-Year Development Plans

1. Algeria's economic development programs have been embodied in threePlans (1967-69, 1970-73 and the current 1974-77 Plan) which, in this centrallyplanned economy, are mandatory policy and strategy statements of the Govern-ment.

2. In 1966, Algeria's Revolutionary Council defined the fundamentalobjectives which the country intended to pursue during the period ending 1980.These are: (i) to expand and organize the productive base enabling the economyto reach, by about 1980, a stage of self-sustained growth with full employ-ment; (ii) to achieve economic independence, which implies that the countrywould rely first on its own resources for development, although internationaleconomic relations would be expanded and diversified; and (iii) to improveincome distribution, particularly among regions. These objectives, and thestrategy which has evolved towards their implementation, take into accountthe country's physical and socio-economic potential, and form a set of coherentchoices to which the leadership is deeply committed.

The Second 4-Year Development Plan (1974-77) _/

3. The current Plan (1974-77) is ambitious, but in line with Algeria'sobjectives of achieving rapid economic independence, primarily through thecreation of a strong industrial sector. Five specific goals are highlightedin the Plan:

(a) the achievement of maximum production for domestic consumptionand for export;

(b) the reduction of bottlenecks resulting in investment slippagesthrough increased emphasis on training of management andskilled labor;

(c) the increase of employment, especially through regionalprograms (industry and rural development);

(d) the improvement of standards of living through specialurban programs and expanded social benefits; and

(e) the achievement of a better economic balance between regions.

1/ The 1967-69 Plan was called a "Pre-Plan".

ANNEX 2-1Page 2

4. These objectives have been translated into targets, including (i) avolume of investment, over the Plan period, of at least DA 85 billion at 1973prices and possibly DA 110 billion, (ii) and an annual growth rate of GDP (inreal terms) of at least 11%, (iii) the creation of 45,000 new jobs outsideof the agricultural sector, and (iv) an average increase in private consump-tion of 11% p.a. The prospects of achieving these targets are heavilydependent on Algeria's balance of payment prospects, and on the developmentof the absorptive capacity of the economy. It is likely that the improvementregistered in Algeria's balance of paynents in 1974, as a result of the oilprice increase, will be followed by a deterioration in 1975, which villprobably be more pronounced than was expected in the 1974-77 Plan. Thisdevelopment would be due mainly to a substantial short-fall of anticipatedreceipts from crude oil and natural gas exports. It is therefore likelythat Algeria will have to opt for a significantly slover growth of investmentand private consumption than was foreseen in the 1974-77 Plan, beginning in1976.

5. The authorities will have to overcome considerable additionalconstraints, some of them inherited from the past. First, in most sectors,hnvestment will have to more than double in real terma as compared with thatof the 1970-73 Plan. Algeria's ability to implement and absorb such rapidgrowth is questionable, judged by past results. Second, the considerabledifference in growth rates between various sectors could result in seriouastructural imbalances, income disparities, and bottlenecks in the implementa-tion of investments. Third, the regional objectives of providing betterliving conditions (employment, income distribution, social services) areunlikely to be fully achieved unless special programs (e.g. training,administrative reforms) are initiated rapidly. Finally, despite the reformsof the financial sector in 1971, improvements or changes are still neededin this area, such as the establishment of a more rational pricing systemand the strengthening of financial institutions to enable them to play amore active role in the execution and supervision of investments.

B. lndustry

6. During 1967-71, all means of industrial production were graduallytransferred to the public sector, foreign holdings nationalized and StateEnterprises created. Each State Enterprise was given control over a givensub-sector. At present, the 24 largest State Enterprises own nearly 90%of all industrial fixed assets, while private enterprises act for lessthan 5% of such assets. Most State Enterprises are very large and accountindividually, in many instances (such as petrochemicals, steel, etc.) forthe whole industrial sub-sector. During 1966-74, the industrializationstrategy was aimed, in decreasing order of priority, at the creation of:(i) heavy basic industries (hydrocarbon, steel, plastic, fertilizers); (ii)processing industries (metal electrical products, tractors, constructionmaterials, etc.); and (iii) light consumer goods industries.

ANNEX 2-1Page 3

7. Given the absence on an industrial base in 1965, the main objective

was and to a large extent continues to be rapid physical build-up of a newproduction structure. In adopting and implementing this policy, the authoritiesdeliberately relegated criteria of returns on investments, efficiency inproduction and pricing policies to second place. Notwithstanding waste and

inefficiencies and, perhaps more importantly, serious imbalances in the produc-tive capacities of various industries, the structure of the economy has overthe past ten years changed radically as a result of this policy.

8. Industrial production over the period of the 1970-73 Plan reached88% of the planned targets, which, given the constraints of the economy,was quite an achievement. Hydrocarbon and food products reached, or exceeded,

the targets of the Plan. However, other manufacturing industries were lag-ging badly, especially two industries of crucial importance to Algeria'sdevelopment: construction materials (4.4% annual growth, instead of 14%foreseen in the Plan) and metal and electrical products (6.6% vs. 25.5%).As regards investments, the lagging performance in these and other fieldsresulted, in turn, in considerable delays and cost overruns. At the end of

the Plan, more than half of the investments supposed to be completed werestill under construction since their implementation periods had been seriously

underestimated.

9. Both production and investment difficulties are the result ofpartially inherited slow and complex administrative procedures, technical

difficulties, inadequate infrastructure (ports, railways and telecommunica-tions), and lack of management and skilled labor. The last aspect, inparticular, remains a major constraint, in spite of the considerable progressmade in education and training. In some instances, price controls have com-

pounded these difficulties through their effect on the financial position of

enterprises.

10. Under the 1974-77 Plan, 48% of planned investment will be for the

industrial sector. Some key aspects are:

(a) Continued rapid growth of basic and heavy industries, usingAlgeria's natural resources. The bulk (63%) of projectedinvestments in the industrial sector over the period will beallocated to the hydrocarbon industry (DA 10.5 billion,or 41% of total industrial investments), chemicalindustry (DA 4 billion) and mining (DA 1.1 billion).

(b) An acceleration of growth of transformation industries suchas metal, mechanical and electrical industry, buildingmaterials, chemicals and wood processing (35% on industrialinvestments), and increased production of consumer products.

(c) The launching of a Regional Industrial Development Program(RIDP) for smaller, decentralized projects. For that purpose,about DA 1 billion is planned to finance investment in some500-odd projects.

ANNEX 2-1Page 4

The Plan aims at a considerable growth of value added (18% for processingindustries, 14% for mining and energy), corresponding to a doubling ofindustrial output in four years. At the same time, 83,000 new jobs are tobe created. While such growth targets may not be reached fully, t:he consider-able efforts planned in training, edu,:ation, and housing, the new stressplaced on consumer products, and the efforts to simplify the administrativeapparatus, should give the Plan's exe:ution more of a chance of coming closeto its targets than the previous one :.had.

Industrial Projects DepartmentNovember 1975

ANNEX 2-1Page 5

AIfiERIA - SNMC EXPANSION PROJECT

THE INDUSTRIAL INVSTMUET DECISION PROCESS IN AL&ERIA - A SUMARY

Institutions whoseviews are sought Type Institutionand/or which of Responsible Institutionsparticipate in Outcome/ for Outcome/ Advised of

StEge Main Purpose the discussions Decision Decision Decision

Plan Meetings Discussion of SEP, PBE, Ministries, Determination of SEP PBs, Ministriesthe 4-year BAD, CB, SNs tentative amounts BAD, CB, SNsinvestment of investmentsprogrrm by envisaged forSector/sub- the h-year Plan;sector/enter- definition of aprise framework of

activities

Tentative Define the need SEP, PBs, Min- Identification of Min. Industry SEP, BALstudy for for s specific Industry, BAD, a project on a uporn the re-Identific.- project within the SNs tentative basis quest of thetion of an framework provided SNindustrial 1/ by the Planrroject

Feasibility Study of technical SEP, MinIndustry, Produce a feasi- SNs, under PBs, BAD, SEPstudy together market, and economic SNs, BAD bility report Min Industry's Min Financewith a request aspects of a project substantiating "quality"to "indivildual- with prelimiruary the request to control 2/ize" the Froject financing plan "individualize"

a project

Individualizp- To decide on the SEP, MinIndustry Dacision to go SEP upon Min PBs, Minlndustry,ticn Decision main aspects ahead with a Industry's BAD, MinFinance(DU) together justifying a spe- preject within the recommandationswith "technicpl cific project context defined bvcard" (F.T.) the Plan

Annual Trpnche To consolidate the SEP, MinFinance, Definition of the BAD's Board PBs, Minlndustry,cf' Investmerts tentative financial BAL total investment (MIinFinence/ CB, SNs

plans of erch one needs for a yerr SEP issueof the projects whose on the basis of the formally)

d.I. has elrepdy been the tentativetrken ancing plans of the

enterpr;ses and theinvestment nemuuntsremaicnirig urnallocatedf rom previous years

Financing To produ'ce the BAD, PBs, SNs Providae project BAD's Board PBs, MillIndustry,Plan for a financing plan whose D.I. has (MinFinance SEP, CB, SNsproject on a best suited to already been taken authorizesfinal basis the project's with authoriznticn formally)

needs accordi.nE to for a given financingthe availability plan. 3/of the Country'sfinancial resources

Convention To agree on the BAD, PBs, SNs Comms'itment of the SN BAD, PBs, SNs Minirdustry,or signature of corsitments defin- to carry out the MinFirance,the loan/s ing the specific project and of the CBapproved by the ternis of the finan- financial system tofinancing plan cing authorized provide it with thees authorized Ppproved financing h/on a final basis

1/ Industry in a wide sense; productive activities. The process is the same for other typesof projects but the role of each institution varies slightly (i.e., MinIndustry, would besubstituted by MinAgriculture in the case of an agriculture project).

2/ The quality control consiats basically in the cheekirng of the study's main feateres asagainst the "Manuel d'evaluation des Projets" which is kept and updated regularly by theSEP on the basis of the experience gained by the overall systen in project appraisal.

3/ Financing Plan is prepared on a sultiannual basis but there is only a comaiitment to providefJnancing in a one given year; the plan being grpdually reviewed in light of: i) overrunsof any type and, ii) resource availabilities.

b! Ur to May 197h, the convention was only on an annîîal basis, after thrt date convention is ona basis, that is to say, it gives a comssitment on a multiannual basis.

Industriel Projects DepnrtmentNovember 1'975

ANNEX 2-2Page 1

ALGERIA

SNMC CEMENT EXPANSION PROJECT

THE PUBLIC ENTERPRISE SYSTEM IN ALGERIA

A. Introduction

1. Following independence, achieved in 1962, Algeria opted for aone-party system and a reconstruction of society along socialist lines.An extensive development effort was initiated to consolidate economicindependence, with priority given to industrialization and to the inte-grated development of the economy under firm control of the State. Animportant aspect of this strategy vas the creation of a large number ofpublic enterprises, combining production and distribution functions andoften enjoying a monopoly over foreign trade. As modern industrial,financial and trade activities vere gradually taken over or controlledby the central authorities, particularly after 1965 when President HouariBoumedienne and the Revolutionary Council came into pover, the publicsector came to dominate the economy. The share of public investment intotal fixed capital formation increased from 55 percent in 1966 to over95 percent in 1972, as investments vere initiated by the Central Govern-ment, public enterprises and, recently, by regional public authorities.The monopolistic position of many public enterprises in foreign trade novcovers about 80 percent of the total value of imports. On the domesticmarket, however, a certain degree of competition exists from privateenterprises, though these mainly consist of small firms with activitiesrelated to textiles, shoes and leather. Public enterprises, includingmixed enterprises with majority participation by the public sector, novnumber about 100, with 37 enterprises of an industrial character accountingfor over 60 percent of industrial employment. Each branch of industry isled by a public enterprise responsible for the bulk of manufacturing andacting as an autonomous business entity with the aim of producing a surplusfor contribution to the Algerian economy. However, product prices areagreed on with the Ministry of Commerce. Salaries are largely controlledand investment plans are approved by the Central Govermment.

B. Control

2. Public enterprises operate under the guidance and supervision ofa Ministry of Control (ministere de tutelle). In the case of public enter-prises of an industrial nature, this role is usually assumed by the Ministryof Industry and Energy. The control authority defines the general policyguidelines for the enterprise and sees to their implementation in the pub-lic interest. It approves organizational changes in the enterprise, makesappointments to senior positions, determines annual and multi-annual invest-ment programa before their transmittal to the Plan Secretariat and deter-mines the allocation of profits, in cooperation with the Ministry ofFinance.

ANNEX 2-2Page 2

3. Financial control of public enterprises is exercised by theMinistry of Finance, the Development Bank (BAD) 1/ and the primary banks.The Ministry appoints an accountant (commissaires aux comptes) to eachenterprise to check monthly and annual statements. Provisional state-ments of accounts are submitted to the Ministry before the end of eachyear. These are used to review past performance and to determine thelevel of annual contributions to the State budget, subscriptions to theTreasury bonds 2/ and working capital requirements for the following year.Each public enterprise is assigned to one primary bank (one of three state-owned deposit banks) by the Government. The primary bank follows closelythe current and investment operations of the enterprise, and must approvethe company's quarterly and annual operating budgets, which it also helpsto establish. Long-term financing for investments approved by the PlanningSecretariat is provided by BAD or foreign banking institutions. Foreignloans are also subject to control by BAD and the prlmary banks.

C. Management and Organization

4. Each public enterprise is headed by a Director General, appointedby the Government on the nomination of the control ministry. The DirectorGeneral is responsible for the general management of the enterprise. Intheory, he is assisted by a management council and a committee for guidanceand control as defined in the "Charte et Code de la Gestion Socialiste desEnterprises." The Management Council (Conseil de Direction), chaired bythe Director General and composed of a number of his closest associatesand one or two worker representatives, is kept regularly informed of the day-to-day operations of the enterprise and decides on a number of matters con-cerning the economic and financial aspects of the enterprise and itsorganization, as well as the status and renumeration of personnel.

D. Worker Participation

5. The "Charte et Code de la gestion socialiste des entreprises" vaspassed in 1971-72 and the principles of worker participation are nov prac-tised in selected public enterprises. The participation of workers in themanagement of the enterprise is provided for by a workers' assembly ofseven to 20 members elected from among all workers. The workers' assembly,which meets for two ordinary sessions per year, but can be convened forextraordinary meetings, has theoretically extensive povers. It offersadvice and recommendations on development and investment plans and on theprovisional accounts which have to be submitted to the assembly. It is

1/ Banque Algerienne de Developpement.

2/ Public enterprises do not have financial resources of their own, buttransfer their reserves and amortization funds annually to the Treasuryin the form of subscriptions of long- and medium-term interest-bearingbonds (see para. 8).

ANNEX 2-2Page 3

consulted on important reforms concerning the structure of the enterpriseand the status of vorkers. The workers' assembly is associated with thedevelopment of personnel policy and vocational training programe. It par-ticipates in decisions on the allocation of the financial results andprofits distributed to workers. In theory, it has general control overthe management of the enterprise and the execution of programs. To thisend it issues an annual report in which it reviews the company s development.

6. Permanent commissions prepare matters to be taken up by theworkers' assembly and represent vorker interests in between sessions ofthe assembly. Commissions can be set up for economic, financial, socialand cultural affairs, personnel and vocational training, discipline, andsecurity matters. Commission members are designated by the workers'assembly, except for the commission for disciplinary matters and thecommission for hygiene and security which are composed of an equal numberof representatives of the workers' assembly and management.

E. Financial Structure

7. The financing of public enterprises vas reorganized during 1971.Up till then, the funds for a public enterprise's investment vere mobilizedeither by the enterprise itself or by the Treasury, and such transactionswere not necessarily coordinated. The major component8 of the reform were:

(a) centralization of financial decisions throughinvestment approval by the Planning Secretariat,the "ministere de tutelle" and BMD;

(b) strengthening of the banking system's controlfunction;

(c) financing of all investments by credit vithoutequity provision;

(d) channelling of the public enterprises' internalcash generation into "development bonds" andcontributions to the Government budget and con-tributions to workers.

The purpose of the reform vas to (i) bring the total amount ofpublic investment in line with the economy's financing capacity and (ii)to ensure that adequate financial resources are allocated to priorityinvestments.

8. Development Bonds. Public enterprises no longer have financialresources of their own to finance new investments. The counterpart oftheir depreciation allowances has to be deposited with the Treasury inthe form of 5-10 year development bonds bearing interest of 5 percent.These bonds can be used for the repayment of long-term debts. In prac-tice, only well-established public enterprises have invested in bonds,whereas others have to use internal cash generation to cover debt service.

ANNEX 2-2Page 4

9. Contribution to the Government Budget. The public enterprises'special contributions to the Government budget are analogous to the divi-dends that a company pays to its shareholders. The contribution is leviedby the Gavernment on after-tax profits, and is determined annually by theTreasury on the basis of a company's sales, profit and investment level.In case of loss, structural difficulty or force majeure, an enterpriseis exempt from payment or pays a reduced amount.

10. Contribution to Workers. The system acknowledges the principle,that workers should participate in an enterprise's net profit after taxes.The form and amount of such contributions are still within the Government.

11. The Role of the Banking System. Each public enterprise is per-mitted to deal with only three banks: (i) BAD, which grants long-termcredit for investments and, in turn, draws on Treasury Funds; (ii) aprimary bank, which grants short- and medium-term credit directly fromits own funds and handles all banking transactions for the company, includingthe disbursement of BAD's long-term loans; and (iii) the Central Bank, forforeign currency transactions which have been approved by the primary bank.Foreign credits can be contracted by the primary bank, BAD, or the Goverumenton behalf of public enterprises (or by the enterprise itself), but they arechanneled only through the concerned primary bank.

12. The reform has decentralized control of public enterprises to someextent, since the Treasury no longer finances investments directly, but mayintervene only if the enterprise shows losses or chronic liquidity problems.Such an intervention may take the form of a "restructuration", an "lassainisse-ment" or an increase of working capital. An "assainissement" restructuresthe enterprise's financial obligations in line with its investment, productionand sales programs in order to enable it to operate on a financially viablebasis. A "restructuration", comprising debt rescheduling and interest rateadjustments, is possible if the debt service coverage of a public enterprisebecomes insufficient. Several "restructurations" have been approved re-cently, since many public enterprises show chronic liquidity problems.There are several reasons for this situation: (1) price levels have notbeen adjusted regularly to reflect higher costs and import prices, (ii)long-term investment has been financed by credits which are not in line wvthdepreciation charges and (iii) investment costs for new projects have beenunderestimated and cost overruns had to be financed temporarily by short-termcredits until official authorization was received.

13. A note of caution: the public enterprise system is still in adynamic and experimenting phase. It is continuously adapted to newexperiences and ideas, so that it is difficult to give a picture ofits functioning which is not outdated.

Industrial Projects DepartmentNovember 1975

ANNEX 2-3

ALGERA

Sli54C - EXPAilSION PROJECT

SNIM4 - EXISTING FACILITIESI/

Number Location Products Capacity On-Stream Date

1. Point Pescade Cement: Portland 210/325 460,000 tons/year 19142. Zahana Cemênt:. 85% OPA 325 1948

15% prise mer 450,000 tons/year3. Hadjar Soud I Cement: CPA 325/400 500,000 tons/year 1973

(CPAL, prise mer)4. Ghardaia Plaster 20,000 tons/year5. Camp des Chenes Plaster 18,000 tons/year6. fleuros Plaster 20,000 tons/year7. Djemila Plaster 8,000 tons/year

8. Chettaba Limentone 15,000 tons/year

tons/year

9. El Mokrania - El Harrach Bricks, Tiles briclcs: 16,000; tiles: 38,00010. Kouba Bricks, Tiles bricks: 10,000; tiles: 10,00011. Bouzegza - Boudouaou Bricks bricks: 18,00012. C. Amirouche - Boudouaou Bricks bricks: 19,00013. La Gare - Boudouaou Bricks bricks: 29,00014. El-Khemis Bricks, Tiles bricks: 24,000; tiles: 15,00015. An-Nadjan-Reghaia Briclcs bricks: 7,00016. An-Kasr-.Rouiba Bricks, Tiles bricks; 4,000; tiles: 2,00017. Ould Hocine - Hadjout Bricks bricks: 7,00018. Hammouche - Ms*ftah Bricks bricks: 7,00019. E. Abelkader - Mouiba Bricks bricks: 8,00020. Baraki Bricks, Tiles bricks: 4,000; tiles: 3,00021. Kolla Mohamed - El Attat Bricks, Tiles bricks: 3,000; tiles: 1,00022. Mitidja - Boufarik Bricks bricks: 7,00023. Psrradji Omar - Rauiba Bricks, Tiles bricks: 6,000; tiles: 3,00024. Mers-El-Kebir Bricks, Tiles bricks: 45,000; tiles: 20,00025. Roseville Bricks, Tiles bricks: 10,000; tiles: 14,00026. Amsi Mokhtar - Souahlia Bricks bricks: 29,00027. Chenine Bachir Mostaganem Bricks bricks: 7,00028. Sersou - Tiaret Bricks bricks: 11,00029. Bechar Bricks bricks: 7,00030. Batna Bricks, Tiles bricks: 6,000, tiles: 12,000 197131. D. Mourad Bricks, Tiles bricks: 14,000; tiles: 7,00032. Hamrouch - Skikda Bricks bricks: 11,000 197333. 4 Chemins - Bedjaia Bricks, Tiles bricks: 6,000; tiles: 12,000 197334. Mezzaias - Bedjaia Bricks, Tiles bricks: 14,000; tiles: 3,00035. Baraki Bricks, Tiles 1974

36. Ibn-Ziad Ceramic -Tiles 600,000 m2

/year 1972- Sanitary War' 1975

- El Nilia

37. Annaba Concrete: Ready-mised 17,000 tons/year38. Bedjaie 1,500 tons/year39. CMCO 25,000 tons/yearho. Oued S,ua 20,000 tons/year41. El-Asnam 4,000 tons,'year42. Setif 1,500 tons/year

43. El-Harrach Concrets, Pipes 19,000 meter/year44. Khemisel - Khechna 22,000 meter/year 197545. El -Hadjar 15,000 meter/ysar 197146. Hasa Bouziane 21,000 meter/year 197147. Chaabet E1l-1soam 24,000 meter/ye ar48. Oued Phiou 16,000 meter/year

49. El-Harrach Concrete prups 4,000 pieces/year50. Khemis El-Ehec.ina 4,000 pieces/year51. Hanna Bouziane 8,000 pieces/year 197152. Chaabet El-Ieham 6,000 pieces/year

53. Kouba Asbesbos Cemenn 26,000 tons4'year

54. 7Z.~P Saa 5,00) tons/year

55. Prefabrication 3,000 pieces/year 197456. Setif Plastic Pipes 2,400 tons/year

57-63. Biscellaneous Units Quarries and Aggregates 1 million m3

/year

64. Siporex-Pieftah Siporex 1974/75

65. Berrovachia Agglomerates 197566. Tizijghenit Aggloaerates 1975

67. Bordj Ifenaiel Bricks, Tiles 197468. Hadjout Bricks, Tiles 197469. Meftah Bricks, Tiles 197570. Boufarik Bricks, Tiles 1975

1/ May 1975.

Tndustri I ro'iects DensrtnentNTovember 1?75

ANNEX 2-4Page 1

ALGERIA

SNMC CEMENT EXPANSION PROJECT

SNMC - ORGANIZATIONAL AND MANAGERIAL STRUCTURE

A. Background

1. SNMC - Societe Nationale de Materiaux de Construction was estab-lished in December 1967 as a public enterprise (i) to promote the develop-ment of the domestic construction materiab industry and (ii) to manufactureand import building materials. The basis for SNMC's operation are 51 formerprivately owned production units, and their distribution networks, which werenationalized between 1968-1972 as follows:

May 20, 1968: Plaster factory at Ghardaia; brick and tile plantat Mers-El-Kebir, Roseville and El-Harrach, asbestoscement unit at Kouba, factories for concrete pipesat Chabat El-Leham, El-Hakjar and El Harrach, andOued-Rhiou.

June 12, 1968: Cement factories in Zahana and Point-Pescade.

July 23, 1968: Distribution agencies in the east; brick and tilefactories at Didouche Mourad and 4-Chemins-Bedjaia;ceramic tile factory at Annaba and Bedjaia.

October 22, 1968: Ceramic tile factory at Ibn-Ziad.

May 3, 1969: Concrete production unit at Oued Fodda, brickfactories at Ammi-Mlokhtar de Ghazaouet andMers-el-Kebir, plaster factory at Fleurus.

July 25, 1969: Brick factories in Bechar and Mostaganem.

August 12, 1969: Brick and tile factory in Tiaret, asbestos cementunit in Zahana, concrete plant CMCO in Oran and aquarry in Mers-el-Kebir.

October 21, 1969: Prefabrication unit in Hamiz and 4 quarries inAnnaba.

September 1, 1970: Plaster unit in Champ des Chenes, brick and tilefactories in Boudouaou (Gare, Bouzegza, ColonelAmirouche), Mezzaias, Skikda, El-Khemis Douba andBaba-Ali.

October 30, 1970: Concrete production unit in El-Asnam.

ANNEX 2-4Page 2

May 23, 1972: Concrete production unit in Oued Smar, brick andtîle factories in Emir Abdelkader, Baraki, Meftah,Hadjar, Boufarîk, Rouiba, Reghaïa, El Arraf andDertradj, and Omar.

SNMC obtained the import monopoly for building materîals in 1969 and has beenresponsible for imports of sanitary equipment since 1971. At present, SNMCoperates some 70 plant units (Annex 2-3) and employs nearly 15,000 people(Annex 2-4, p. 4).

B. Organizational Structure

2. SNMC operates under the direct supervision of the Ministry of Indus-try and Energy. As "ministere de tutelle," it nominates the management counciland determines the strategy and orientation of SNMC by approving annualand multi-annual investment plans, techno-economic studies for each invest-ment project and the Company's annual budget. The role of the other ministriesvis-a-vis SNMC is more specific. The Planning Secretariat influences the scopeand content of the Company's annual and multi-annual investment programs, andgives the final approval for each investment project ("individualisation desprojects"). The Ministry of Commerce authorizes annually SNMC's importquotas of building materials and the Company's own import needs for foreignequipment and spare parts. The Ministry of Commerce also controls the pricecommission, which fixes SNMC's prices. The Ministry of Finance (i) appointsthe Company's "Commissaires aux Comptes,", (il) authorizes all loans carryinga Government guaranty, and (iii) in coordination with the Ministry of Indus-try and Energy, approves SNMC's annual budget and the distribution of theCompany's profit.

3. SNMC has been reorganîzed several times since its creation. In1972, the Company hired DMP-Cresap, McCorm!ek and Paget, a British consultingfirm to review the organizational structure. The report, however, did notpropose essential changes, but merely emphasized the strengthening of thefinancial control units on the production and distribution level. A chartof SNMC's organizational set-up as of May 1975 is given inr-Annex2-5.

4. Although SNMC's latest reorganization created one Department ineoutrol ef operations SNMC's organîzat1on remains characterized by thestrIct sepàratton of production and distribution functions. The productionunits receive monthly production targets as well as shipping orders, i.e.,a production manager has no authority to market output but his sole respon-sibility is to send specific quantities to predetermined distribution centersand warehouses.

5. Implementation of new projects is the responsibility of the Engi-neering Department. After project completion, it is transferred to theProduction Department. For the final phase of project preparation and actualproject execution, however, a special SNMC project team is appointed which

ANNEX 2-4Page 3

handles all technical, financial and administrative questions which mightarise. The Economic Planning Department in coordination with the technicalproject team prepares the techno-economic study which is the basis forproject approval by the Ministry of Industry and Energy and the PlanningSecretariat ("individualisation de projet"). Serious coordination problemsdid arise in the past between the Technical, Economic Planning and FinanceDepartments during the planning and follow-up of investments. They arecompounded by the general lack of staff and the geographical separationbetween the Technical Department and the other Departments in Algiers. Toovercome at least some of the coumunication problems, a special financedivision was created vithin the Technical Department whose main responsibi-lity should be investment cost budgeting and control.

Industrial Projects DepartmentNovember 1975

ALGERIA

SNMC EXPANSION PROJECT

SNMC - MANPOWER (1973)

Production SectorBricks, Concrete,

SNMC Head- Commercial Tiles, Asbestos,

Employment Category Number % quarters Sector Total Cement- Ceramics Cement Construction Transportation

I. StaffEngineers 92 0.7 59 - 33 29 - - 4 -

Professionals (1 degree) 62 0.5 61 - 1 - - - 1 -

Other Staff 146 1.0 28 32 86 21 36 13 13 3

Sub-Total 300 2.2 148 32 120 50 36 13 18 3

II. Technicians and ForemenTechnicians 393 2.9 33 - 360 143 68 94 53 2

Others 318 2.4 190 16 112 13 36 44 17 2

Sub-Total 711 5.3 223 16 472 156 104 138 70 4

III. WorkersSkilled Labor 1,034 7.7 28 98 908 343 343 169 6 47

Specialized Labor 3,008 22.5 95 117 2,796 642 1,325 783 11 35

Unskilled Labor 4,279 31.9 114 361 3,804 956 1,714 1,077 2 55

Others 1,364 10.3 205 240 919 232 279 234 137 37

Sub-Total 9,685 72.4 442 816 8,427 2,173 3,661 2,263 156 174

IV. Permanent Employees (I) + (II) + (III) 10,696 80.0 813 864 9,019 2.379 3,801 2,414 244 181

V. Temporarv Employees 2.683 20.0 14 409 2,260 163 604 601 882 10

VI. Total Employment 13,379 100.0 827 1 273 11,279 2.542 4.405 3,015 1,127 191

1/ Including plaster and limestone.

Industrial Projects DepArtment

November 1975

ALGERIA ANNEX 2-5SNMC EXPANSION PROJECT

ORGANIZATION CHART

General Manager|

Department Oerations annFnneA ~rIoO R. TAZ BLAIF t sou ls t C I I.L

l Poduct on aretn

t> E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~fi O 3- O

M Zt l

Industrial Projeets DepnrtmentNovember 1975 World Bank-9974

AtNIEX 2-6

ALGERIA - SNMC EXPANSION PROJECT

CONSOLIDATED HISTORICAL INCQFME STATEIOENTS (1970-1974)

(DA Million)

1970 1971 1972 1973 1974

I. Net Sales

Products 298.7 321.0 368.4 458.7 623.1Services 28,2 27.1 26.5 37.3 66.7

Total 326.9 348.1 394.9 496.o 690.0

II. Cost of Goods Sold

Materials, Supplies, andUtilities 158.5 144.1 171.1 283.3 528.8

Labor 72.0 94.8 139.6 189.0 226.4Inventory Changes 0.7 6.0 (13.3) (17.8) (92.o)

III. Gross Profit 97.0 115.2 97.5 41.5 27.3

IV. Operating Expenses

Transport 13.2 17.3 15.3 20.5 50.4Overhead 2.9 3.3 5h .2 .Depreciation and Provisions 20.2 16.5 15.8 32.7 59 5Duties and Taxes 48.0 50.6 47.8 51.0 64.7

V. Operating Profit 12.7 27.5 13.2 (66.9) (152.4)

Financial Charges 1.7 1.5 10.9 9.9 33.0Other Income (2.3) (3.1) (5.0) (4.1) (2.3)Exceptional Profit/Loss 0.3 0.9 (1.1) 5.3 4.7Profit/Loss on Previous Years &.6 14.4 9.6 (14.0) (114.0)

VI. Net Income Before Taxes andContributions 8.4 13.8 (3.4) (64.0) (173.8)

Contributions and Taxes 7.7 12.8 12.3 12.3 10.3

VII. Net Income 0.7 I.O (15.7) (76.3) (184.0)

1/ Includes contribution to state budget, based on SNMC's budgeted profit; stilllevied when SNMC shows losses due to inaccurate budgeting of SNeC's financialresults.

Industrip.l Projects DepartmentNovember 1975

ANNEX 2-7

ALGERIA

SNMC - HISTORICAL BALANCE SHEET

SNMC: CONSOLIDATED HISTORICAL BALANCE SHEETS (1970-1974)

(DA Million)

Fiscal Year Ending December 311970 1971 1972 1973 1974

AssetsI. Current Assets

Cash 1.3 1.4 13.7 - -

Banks 9.7 63.14 - 23.6 44.0Receivables 104.6 142.2 133.2 155.4 232.5Inventory 49.3 56.o 71.0 88.8 181.3

Sub-Total 164.9 263.1 217.9 267.8 457.7

II. Fixed AssetsGross Fixed Asset 237.5 281.3 312.6 563.2 827.1Less: Accumulated Depreciation 167.2 177.4 195.6 224.3 282.3

Net Fixed Assets 70.3 103.9 117.0 338.9 544.8Construction in Progress 32.4 122.0 444.6 781.8 1 490 4

Sub-Total 102.7 225.9 51.6 1,1 20.7 2,035

III. Other Assets 1.1 1.9 3.3 5.8 21.1

IV. Inter-Group Accounts (Net) 64.0 127.4 -

TOTAL ASSETS 332.7 618.7 782.8 1,394.3 2.514.0

LiabilitiesI. Current Liabilities

Payables 132.2 275.8 200.0 151.8 443.1Short-Term Debt 1.0 - 42.7 52.6 55.2

Sub-Total 133.2 2757. 2142.7 204.4 498.31/

II. Medium-Term Debt 37.8 n.a. 236.9 445.2 752.0

III. Long-Term DebtBAD - 3.4 170.4 509.2 1,197.6Others 179.7 9.0 191.0 193.9

Sub-Total - 1 83. 2 179.4 700.2 1,391.5

IV. CapitalEquity 182.5 158.2 136.8 120.9 55.2Retained Earnings (Losses) 20.8 1.0 (15.7) (76.5) (184.0)

Sub-Total 161.7 159.2 121.1 128.8

TOTAL LIABILIlIf9 332.7 618.7 782.8 1,394.3 2,514.0

RatiosCurrent Ratio 1.2 0.9 0.9 1.3 0.9

n.a. = not available

1/ Medium-term loans include loans with repayient periods of 1-5 years.

Industrinl Projects DepartmentNovember 1975

ANNEX 2-8Page 1

ALGERIA - SNMC CEMENT EXPANSION PROJECT

SnMC - PLANBED EXPANSION PROGRAM

NEW INTESTr1EhT PROJECTS (1975-1980)

EstimatedCapital Estinated

Capacity Employ- CostY/ Start-upSector (000 tpy) ment (DA million) Date

A. Cement1T.Meftah 1,000 400 613 19752. Hadjar Soud II 500 210 218 19753. Zahana 1,000 400 566 19774. El Asnam 1,000 400 695 19775. Saida 500 300 725 19786. Setif 1,000 500 731 19777. Beni Saf 1,000 400 919 19788. Constantinois 1,000 400 904 1978

Sub-Total 7,000 3,010 5.371

B. Plaster1. Fleurus 240 140 150 1977

C. Lime1. Hadjar Soud 55 80 270 19772. Saida 100 80 150 1977

Sub-Total 155 160 420

D. Bricks and Tiles1. Besbes 100 140 75 19762. Batna 100 140 70 19763. El Achour 100 140 75 19764. Boudouaou 100 140 75 19765. Medea 100 140 75 19766. El Khemis 100 140 70 19767. Mers El Kebir 100 140 70 19768. Remchi 100 140 72 1976

Sub-Total 800 1,120 582

E. Ceramic Tiles (million m2

)1. BE Achour 1.0 170 70 19772. Remchi 1.0 170 70 1978

Sub-Total 2.0 340 140

F. Sanitary Equipment (000 tpy)1. Cran 10 336 150 19772. Tenes 10 336 150 1977

Sub-Total 20 672 300

G. Asbestos Cement1. BordJ Bou Arreridj 50 550 130 19772. Zahana 50 550 130 19773. Meftah 50 550 130 1977

Sub-Total 150 1,650 390

H. Agglomerate1. Annaba 200 140 70 19772. Bouziane 200 140 70 19773. Bouiba 200 140 70 19774. Oran 100 140 55 1977

Sub-Total 700 560 265

I. Quarries

10 Quarries 1.0 500 350 1976

J. Distribution Centers

Distribution Centers 120 n.a. 200 1975

TOTAL (A-J) 8.152 8.168

1/ IBRD estimate, adjusted from SNMC 1973 data.

Industrial ProJects DepartmentNovember 1975

ANNEX 2-8Page 2

ALGERIA - SNMC EXPAzSION PROJECT

SNMC - PLANNED EXPANSION PROGRAM

NEW INVESTMENT PROJECTS (1975-1980)

Estimated 2 /Capacity Capital Cost- Start-up(000 tpy) (1975 million DA) Date

A. Cement1. Cima l/ 500 400 19782. Cimat2/ 500 100 19803. Aures 500 600 1979h. Titteri 500 600 19805. Algerois 1,000 900 1980-816. Alger-Setif 1,000 900 1980-81

Sub-Total 4,000 3,800

B. Plaster1. El Khemis 200 110 19782. Batna 200 110 19793. M'Zita/DJemila 200 110 1980

Sub-Total 600 330

C. Lime1. El Attaf 100 110 19782. Biskra 100 110 1978

Sub-Total 200 220

D. Bricks and Tiles1. Didouche Mourad 100 60 19772. Mila 100 60 19773. El Milia 100 60 1977h. Saida 100 60 19775. Bechar 100 60 19776. Setif 100 60 19777. Mostaganem 100 60 19788. Sook Ahras 50 40 19789. Tiaret 50 hO 1978

10. Biskra 100 60 197812-25. Plants 900 780 1978-79

Sub-Total 1,800 1,310

E. Ceramic Tiles (000 m2

)

1. Bechar 1,000 60 19782. Ghazacuet/Mers El Kebir 1,000 60 19783. Plant Center 1,000 60 1978h. Plant East 1,000 60 1979

Sub-Total 4,000 240

F. Agglomerate

1-18. Plant Units 1,900 1,080 1977-80

G. Concrete Pipes (lon)

1. Oran 55 30 19782. El-Hadjar 75 hO 19783. Setif 55 30 1978

Sub-Total 185 100

H. Quarries (000 tpy)

33 Quarries 12,000 990 1978-80

I. Distribution Centers n.a. n.a. n.a.

TOTAL (A-I) 8&100

1/ Joint venture with Morocco and Tunisia respectively, fi'eures showninclude Algerian production and cost share only.

2/ IBRD estimate, based on adjusted 1973 SNMC figures.

Industrial Projects DepartmentNovember 1975

ANNEX 2-9Page 1

ALGERIA

SNMC EXPANSION PROJECT

SNMC - FINANCIAL PROJECTIONS

ASSUMPTIONS

1. The financial projections for SNMC, presented in this annex,are based on data provided by SNMC's Financial Department, both beforeand during negotiations, amended in line with Bank experience, exceptwhere noted below. To reflect the Company's expected cash flow position,all figures are in current prices.

2. Since it was not possible to obtain a full copy of the 1975SNMC Budget, financial projections have been limited to the incomestatement and to the Company's sources and applications of funds.l/ Inaddition, it should be noted that the projections exclude the impactof importation under SNMC's monopoly.

3. Net Sales: The cement price used in the projections is theprice required to cover full costs in the cement sector plus a sufficient marginto cover debt service 1.1 times for the sector. Prices for other productsare in line with present SNMC policy which is in line with agreementsreceived from the Government and SNMC. After 1980, however, it is assumedthat cement prices will not fall with declining depreciation and financialcharges but will hold at 180 DA/ton for 1981.

4. Operating Costs: Operating costs for the cement sector arebased on anticipated unit costs for the Saida plant (Annex 5-11), applied toSNMC's total production. These estimates are about 10% more conservativethan those put forward by SNMC.

5. Investments: Figures for cement investment other than theSaida plant are those provided by SNMC modified in line with Bank estimatesof physical and price contingencies as shown below:

SNMC Base IBRD Reason for TotalPlant Cost Adjustment Change Cost

(DA million) (DA million) (DA million)

Hadjar Soud I 225 - - 225Hadjar Soud II 218 - - 218Meftah 613 - - 613Zahana II 566 12 Physical 578

ContingencyEl Asnam 695 36 731Setif 731 36 767Beni Saf 918 - - 918Constantinois 904 _ - 904

1/ However, estimates of the Company's total long-term debt - based on the1974 balance sheet and known investments in 1975 - have been included inthe Main Report (para 2.23).

ANNEX 2-9Page 2

In addition, DA 78 million has been allocated for maintaining Zahana I inoperation after 1980 and DA 39 million for necessary pollution control atPointe-Pescade. Replacement expenses are in line with those used in projectionsfor the Saida plant (Annex 5-12).

6. Change in Working Capital: Working Capital for SNMC is based onone month's sales for cash, three monthsl sales for accounts receivables, onemonth's costs for payable and inventory as a percentage of total cost of goodssold as prevailed in 1974.

ANNMEX 2-9

ALGERIA: SNMC EXPANSION PROJECT rage 3

SNMC - PROJECTED FINANCIAL STATEMENTS

INCOME STATEMENT

(DA Million - Current Terms)

1976 1977 1978 1979 1980 1981CEMENT SECTOR

Cement Production (000 tons) 1870 3005 4555 6060 6995 7360Cement Price (DA/ton) 140 180 205 200 180 180

Cement Revenue 262 540 939 1212 1259 1325

Cost of Sales 102 174 273 400 483 545Depreciation 92 207 377 483 469 459Financial Charges 60 127 267 308 272 230Distribution Costs 5 5 5 5 5 6

Total Cost 259 513 922 1196 1229 1240Total Cost/ton 138 171 202 197 174 169

Pre-tax Profit 3 27 17 16 30 85

OTHER SECTORS

Revenue 523 794 963 1020 1057 1062

Cost of Sales 362 437 554 622 677 715Depreciation 104 188 226 224 218 195Financial Charges 46 97 95 81 66 55Distribution Costs 8 8 8 8 8 9

Total Cost 484 730 883 935 969 974

Pre-tax Profit 39 64 80 85 88 88

TOTAL SNMC PRE-TAX PROFIT 42 91 97 91 118 173

Industrial Projects DepartmentNovember 1975

ALGERIA: SNMC EXPANSION PROJECT ANNEX 2-9Page 4

SAIDA - PROJECTED FINANCIAL STATEMENTS

SOURCES AND APPLICATIONS OF FUNDS

(DA Million - Current Terms)

1976 1977 1978 1979 1980 1981

SOURCES

Cash from OperationsCement Sector Profit 3 27 17 16 30 85

Other Sector Profits 39 64 80 85 88 88

Depreciation 196 395 603 707 687 654

Sub-total 238 486 700 808 805 827

LoansCement Sector 74 2152 2551 - 43 -

Other Sectors 978 530 148 - - -

Sub-total 1052 2682 2699 - 43 -

Total Sources 1290 3168 3399 808 848 827

APPLICATIONS

InvestmentsInitial 1036 2682 2691 - - -

Replacement 16 - 8 - 43 -

Sub-total 1052 2682 2699 - 43 -

Loan Repayment 88 279 431 526 564 570

Change in working Capital - 137 210 175 89 62

Total Uses 1140 3098 3340 701 696 632

Annual Surplus 150 70 59 107 152 195

Cumulative Surplus 150 220 279 386 538 733

Debt Service Coverage (times)Cement Sector 1.3 1.1 1.2 1.2 1.2 1.1

SNMC 1.8 1.4 1.3 1,3 î.a 1.3

Industrial Projects DepartmentNovember 1975

ANNEX 3-1

ALGERIA

SNMC EXPANSION PROJECT

THE PROJECT - BANK FINANCED ITEMS

Foreign Exchange CostDA US$

Million Million

1. Saida Cement Plant -

(Plant equipment and erection, civilconstruction, cif equipment cost for.railway construction and consultingservices) 120.74 30.8

2. Distribution 2/

Consulting Services 3.92 1.0150 Silo Wagons 23.52 6.090 Trucks 12.15 3.1

Sub-Total 39.59 10.1

3. SNC - Technical Assistance 20.00 5.1

PROJECT - TOTAL 180.33 46.0

1/ For details, see Annex 5-9.

2/ For details, see Annex 4-2.

3/ Based on the foreign exchange cost of full proposed 5 year program.For details, see Annex 6.

ALGERIA\

SNM4C EXPANION PROJECT

PROJECT IMPLEMENTATION SCHEDULE

1975 19761977 1978

SAIDA PLANT

1. Consulting Services t

2. Detailed Design -3 Equipment, Supply !__

& Erection

4. Civil WorksTests and

5. Cpmmissioning

6. Training

7. Technical Assistancei/

DISTRIBUTION

Supply of Transport '* Equipment

2. Studies ;_ __-_l_I

1/SNC - PROGRAM

1. Consultant Selection

2. Technical Assistance

1/ Programs Continue to Mid-1981.

Industrial Projects DepartmentNovember 1975

ANNEX 3-3

ALGERIA

SNMC EXPANSION PROJECT

THE PROJECT - ESTIMATED DISBURSEMENT SCHEDULE

Cumulative UndisbursedDisbursement Disbursement _Amount

- ------------------ (US$o00)…

1976

I Quarter 4,o89 4,089 41,911II Quarter 4,o89 8,178 37,822III Quarter 4,089 12,267 33,733IV Quarter 4,089 16,356 29,644

1977

I Quarter 5,700 22,056 23,944Il Quarter 5,700 27,756 18,244III Quarter 5,700 33,456 12,544IV Quarter 5,700 39,156 6,844

1978

I Quarter 750 39,906 6,094II Quarter 750 40,656 5,344III Quarter 750 41,406 4,594IV Quarter 750 42,156 3,844

1979

I Quarter 350 42,506 3,494II Quarter 350 42,856 3,144III Quarter 350 43,306 2,794IV Quarter 350 43,556 2,444

1980

I Quarter 350 43,906 2,094II Quarter 350 44,256 1,744III Quarter 350 44,606 1,394IV Quarter 350 44,956 1,0o44

1981

I Quarter 350 45,306 694II Quarter 350 45,656 344III Quarter 344 46,000

Industrial Projects DepartmentNovember 1975

ANNEX 4-1

ALGERIA

SNMC CEMENT EXPANSION PROJECT

THE MARKET FOR CEMENT IN ALGERIA

A. THE SUPPLY OF OEMENT IN ALGERIA

I. Historic Domestic ProductionII. Historic Import Requirements

III. Projected Domestic Production

B. THE DEMAND OF CEMENT IN ALGERIA

I. Historic Domestic DemandII. Sectoral Demand Projections (1974-77)

III. Projected Domestic Demand (1975-1980)

C. PROJECTED SUPPLY/DEMAND BALANCE

D. THE REGIONAL MAIEXET FOR CEMENT

I. Historic ConsumptionII. Historic SupplyIII. Projected Regional Supply

IV. Projected Regional DemandV. Regional Demand/Supply Balance

ANNEX 4-1Page 1

A. THE SUPPLY OF CEMENT IN ALGERIA

I. Historic Domestic Production

1. SNMC was formed in December 1968 as the monopoly producer and im-porter of cement in Algeria and, shortly after its foundation, it took overthe country's three major cement producing plants which had previously beenowned and operated by private French interests. These were:

(a) Pointe-Pescade: Located 8 km from Algiers, with an effectiveannual capacity of 450,000 tons. The plant first enteredproduction in 1914, although its present equipment wasinstalled in the 1950s.

(b) Meftah I: A very small plant, also located in the Algiersregion, had an annual capacity of only 50,000 tons withoutput restricted entirely to CM 250. 1/ It has sincebeen closed.

(c) Zahana 1: Started production in 1948. Its originalequipment is reaching the end of its useful life, althoughit was converted to natural gas in 1964. Eighty-fivepercent of its output is CPA 325 and the remainder isASTM water-resistant (Prise-Mer) cement primarily forbarrage works. It is located in the western region, 2/50 km inland from Oran.

_/ The abbreviations used in this annex to refer to cements are: CM 250 -

Ciment de Maconnerie 250, used for masonry and stonework: CPA 325 -Ciment Portland Artificiel 325, ordinary Portland cement for general,non-specific application; ASTM IV, vater-resistant cement for irrigationand barrage works.

2/ The use of the terms Eastern, Western and Central Regions should not betaken to indicate any more than a merely heuristic distinction, althoughthey do approximately coincide with the colonial administrative divisionsof, respectively, Constantinois, Oranie and Algerois. For purposes ofanalysing the market for cement, and SNMC's distribution network, sucha distinction is from time to time helpful since the road and rail networkbboth are predominantly located in thè Northern litoral with North-Southspurs roughly coinciding with the three regions. Each region may beunderstood to include the following Wilayas:

West: Bechar, Mostaganem, Oran, Saida, Bel-Abbes, Tiaret,Tlemcen.

Center: Algiers, Blida, El Asnam, Medea, Tizi-Ouzou.East: Annaba, Constantine, Batna, Bedjaia, Biskra, Jijel,

Setif, Skikda, Touggourt.

ANNEX 4-1Page 2

2. The total nominal capacity of these units, all of which utilizedthe wet process was 1.05 million tons per annum, but, as illustrated below,this total had not been achieved since 1961 largely owing to the politicaldislocation which accompanied independence. At Zahana in particular, theutilization rate had fallen to about 80% by the time of SNMC's takeover.

Algerian Cement Production: 1961-1969

1961/1 1962 1963 1964 1965 1966 1967 1968 1969

1,072 563 602 730 739 657 731 868 924

/1 For 1961, figures are based on CEMBUREAU statistics: thereafter SNMCdata are used.

3. Since 1968, SNMC has embarked on a vigorous policy of expansionand modernization, under the first and second national 4 Year Plans. In1973 Hadjar-Soud I opened with a nominal annual capacity of 500,000 tons.This plant, which is located in the Eastern Region, near Annaba, is thefirst dry process plant which SNMC has introduced. It has the potentialto produce a wide range of special and water-resistant cements as well asCPA 325. A new plant at the same location, Hadjar-Soud II, is currentlyunder construction and is expected to start production towards the end of1975, with the same annual capacity of 500,000 tons. In 1974, as indicated,Meftah was also shut down as a new plant in Meftah with a nominal annualcapacity of one million tons, came on stream. By the end of 1975, therefore,the nominal capacity of those SNMC plants actually in production will haverisen to 3.0 million tpy.

4. The following table shows the annual production of SNMC's cementunits since the formation of the company through the end of 1975:

SNMC: Cement Production 1969-1975(000 tons)

Nominal EstimateCapacity 1969 1970 1971 1972 1973 1974 1975

Meftah I 50 52 61 56 51 59 - -Pointe-Pescade 500 451 453 468 457 449 412 450Zahana I 500 421 409 441 419 409 303 400Hadjar-Soud I 500 - - - - 90 225 350Meftah II 1,000 - - - - - - 250Hadjar-Soud II 500 - - - - - - 50

Total 924 923 965 927 1,007 940 1,j50

Source: SNMC Direction Commerciale

ANNEX 4-1Page 3

II. Historic Import Requirements

5. From independence to the setting up of SNMC's monopoly, Algeriahad been a net exporter of cement, having exported a total of approximately337,000 tons between 1964 and 1968, primarily to France. However, with therapid growth'in the demand of cement in Algeria, emphasis shifted towardssatisfaction of the domestic market as a priority and imports have increasedsteadily as shown below, until, since 1973, they have exceeded total domesticproduction. All importation of building materials is carried out throughSNMC's monopoly and, despite its sharply higher cost, imported cement entersthe national distribution system at the same price as that of domestic cement.

SNMC: Cement Importation (1969-1975)(000 tons)

Estimate1969 1970 1971 1972 1973 1974 1975

250 544 578 830 1,220 2,006 2,200

6. Historically, the largest suppliers of imported cement have beenSpain, USSR, and Turkey. More recently, France, Greece and Romania have becomeimportant.

SNMC: Importation of Special and Ordinary Cement by Country of Origin(000 tons)

1970 1971 1972 1973 1974Origin Ord. Spec. Ord. Spec. Ord. Spec. Ord. Spec. Ord. Spec.

Lebanon 178 9 122 18 48 il - -

USSR 120 - 4 - 197 - 326 - 219 -

Turkey 84 - 258 - 131 - 6 - - -

Spain 30 0 74 2 164 7 438 64 982 69Others 90 34 76 23 249 17 339 45 699 37

TOTAL 502 43 534 43 789 35 1,109 109 1,900 106

Source: SNMC Direction Commerciale

7. Authorization for cement importation is given to SNMC by theMinistry of Commerce, which fixes SNMC imports by value on an annual basis.In 1972, DA 80 million was allocated to SNMC for imports and in 1973 thiswas increased to DA 150 million. Since contracts are generally signed wellin advance, this system of budgeted importation by value has worked fairlywell. However, at the beginning of 1974, faced with rapidly rising worldmarket prices, efforts were made by certain exporting countries to renegotiatecontracts, and conversely, in 1975 SNMC renegotiated contract prices in thelight of the European recession and drop in cement demand.

ANNEX 4-1Page 4

8. On the basis of contracts already signed or currently being negotiated,SNMC's intends to import in 1975 more than 2.2 million tons of cement by quantityand origin, are shown as below, with an estimate of the likely price per ton:

SNMC: 1975 Cement Import Forecasts (Bagged)

Supplier Quantity (Tons) Price (DA/ton) Price (US$/ton)

SpaLn 900,000 161 0+ /2 40.8France 365,000 173 C+F 43.8USSR 200,000 /1 160 C+F 40.0Greece 600,000 164 C+F 41.5

/1 Estimated/2 C+F = Cost plus Freight.

Source: SNMC Direction Commerciale

9. A major constraint on cement importation has been the limitedhandling capacities at Algerian ports which, at present, have no silofacilities. 1974 cement throughput, by port of importation, is illustratedin the table below:

SNMC: 1974 Cement Importation by Port(000 tons)

Port Quantity

Algiers 315Annaba 341Bedjaia 382Oran 278Ghazaouet 133Jijel 124Skikda 115Tenes 109Mostaganem 100Dellys 85Collo 23

TOTAL 2,006

Source: SNIC Direction Commerciale

10. A further disincentive has been the wide difference in handling costsat each port, illustrated in the histogram below. These divergencies are, atleast partially, a function of the gross overcrowding and inefficient organiza-tion at the major ports. Algerian port charges for cement are 3-5 times higherthan the handling charges of comparable Medeterranean ports. However, in addi-tion, the differentials represent an effort by the Government to divert traffic

ANNEX 1.-1

AVERAGE PORT HANDLING CHARGES FOR CEMENT (1973)(DA/TON)

35.2734.67 3428

31.72

31.20

,, -~~~' ~ ~ 29.90

t' " k M ~~~~~2685

4,,

27.5

24.94

Annaba Skikda Oran Dellys Alger Ghazaouet Tè es Bejaia Mostaganem Jijel

Weighted Average: DA 32.87/ton

é:V National PortsF Loading (;2 Authority

Cleaning and NavigationRebagging Elajgto

| Supplementary Labor Cos sCustoms Duties

Storage

Worid Bank-9839

ANNEX 4-1Page 6

away from grossly overcrowded ports at the major coastal cities to samallerports by preferential tariffs at the latter.

III. Projected Domestic Production

11. In view of the rapid growth in import volume - as well as the risein import prices - the Government has allocated a high priority to expansionof domestic production capacity. This was begun in the First 4-Year Plan(1970-73) and the Special Regional Programs (1971-75) and is continued in theSecond 4-Year Plan (1974-77) which has as a goal self-sufficiency in cementproduction by 1980. To reach this target, the Plan and the "Perspectives1980" include provisions for twelve cement plants in addition to thosecurrently existing or scheduled to come on stream during 1975. With theexception of the CIMA project, a joint Moroccon-Algerian venture, all thesewill be constructed through "turnkey" contracts. The Company's total likelyfuture production, from existing facilities and projects in the advancedplanning stage is likely to evolve as shown in the table below.

ANNEX 4-1Page 7

SNMC: Projected Cement Production 1975-1982/

(000 tons)

NominalA. Existing Plants Capacity State of Preparation 1975 1976 1977 1978 1979 1980 1981 1982

Meftah 1000 Operative 250 700 900 900 925 950 950 950

Hadjar-Soud 500 Operative 350 45o 450 460 475 475 475 475Zahana I 500 Operative 400 4oo 4oo 400 350 350 350 350

Pointe-Pescade 500 Operative 450 45o 450 450 400 4oo 300 300

Sub-Total 2000 1450 2000 2200 2210 2150 2150 2050 2050

B. Plants UnderConstruction

Hadjar-Soud II 500 Start up 10/75 50 225 330 440 450 450 450 450Zahana II 1000 Start up early '77 - - Loo 600 850 900 900 900

El Asnam 1000 Start up late '77 - - 200 500 725 875 900 900

Setif 1000 Start up late '77 - - 133 470 685 865 900 900

Constantinois 1000 Contract signed 1/75L- - - - 320 560 800 890 900Beni Saf 1000 Contract signed 1/75L - - - 270 530 770 880 900Saida 500 Contract signed 4/75 - - - 117 352 478 493 500

CIMA lion/2 Start uP late '78 - _ _ 146 410 469 527 586

Sub-Total 7100 50 225 1063 2863 4562 5607 5940 6036

C. Advanced Planning

CIMAT 1 oOo/3 Engineering ConsultantBeing Selected - - - - 100 250 360 44o

TOTAL: 10100 1500 2225 3263 5073 6812 8007 8350 8526

1/ Projected cement production is estisnted on the following basis as regardsstart up of new plpnts:

a) CIMA: production figures given are those used in the CIMlAAppraisal Report

b) Saida: See Annex 6-1 for full justification of figures usedc) Other Plants: 40% in the first full year of production, 60%

in Year 2, 85% in Year 3 and 90% thereafter.2/ CIMA will export hslf of its production to SNMC, keeping 50Q4 in Morocco.3/ CIMAT will export half of its production to SNIIC, keeping 50% in Tunisia.E/ The contractual dates for start up of Beni Saf and Constantinos are 42 and

44 months, respectively, after contrRct signing.

Industriel Projects DepartmentNovember 1975

ANNEX 4-1PaRe 8

12. The following paragraph gives more details on the operatingcharacteristics and state of preparation of the above listed facilities.

Meftah: unlike most of SNMC's future plants, Meftah which will havea nominal capacity of 1 million tpy was not constructed on a "turnkey"basis. Project implementation, under the supervision of the Canadianconsultants SNC, has been delayed by nearly 18 months. Start up 'is ex-pected in mid-1975.

Hadjar-Soud I: after prolonged start-up difficulties, this plant - whichwas due to come on stream in early 1974 with a nominal capacity of 500,000tpy - should begin to operate near capacity by 1976. It was constructedunder the supervision of the Swiss engipeering firm, P.E.G.

Zahana I: studies are currently being undertaken as to the feasibility ofconverting this plant to dry process technology. It is tentatively estimatedthis would cost around US$20 million. If no such investment is made the plantmight close by 1979.

Pointe-Pescade: an old wet-process plant with serious pollution problems,this plant would require investments of about US$10 million to upgrade equip-ment to allow production beyond 1979.

Hadjar-Soud Il: this 500,000 tpy project is an expansion of Hadjar-SoudI through the addition of a second kiln. Start up is expected in October1975.

Zahana II: a single-kiln, 1 million tpy "turnkey" project for which acontract was signed with Fives-Cail Babcock (FCB) in December 1973.Financing is being provided by German bilateral development aid and byFrench suppliers' credits on very concessionary terms.

Setif: a single-kiln, 1 million tpy "turnkey" project for which acontract was signed with KHD (Germany) in August 1974. Financing willbe through German bilateral aid.

El Asnam: a single-kiln, 1 million ton "turnkey" project for which acontract was signed with Kawazaki Heavy Industries in October 1974.Financing will be provided by Japanese suppliers' credits.

Constantinois and Beni Saf: contracts for both of these 1 million tpysingle-kiln plants were signed in January 1975 with Creusot-Loire (France).Finâncing will be through French bilateral credits. SNMC presently expectsthat part of production from Beni Svf - which is located on the coast nearOran - will go for export or supply of Eastern Algeria by ship.

Saida: unlike SNMC's other planned facilities, Saida will have a nominalcapacity of only 500,000 tpy. For details, see Annexes 5-1 to 5-17 of thisreport.

ANNEX 4-1Page e

CIMA and CIMAT: In its desire to advance Mahgrebian unity, the Algerian Gov-ernment has encouraged SNMC to participate in two companies with Moroccan andTunisian partners. In each case, SNMC will hold 50% of the new company'sstock and has pledged to take 50% of each unit's production at its full costprice. The new plants vill, however, be constructed on Moroccan and Tunisianterritory, respectively. In the case of CIMA, project execution vill be underthe supervision of APCM (United Kingdom) and the major mechanical equipmentpackages were contracted in July 1975. Unlike the other SNMC projects, CIMAvill have two kilns with a total nominal annual capacity of 1.1 million tons.Financing through the World Bank and the Arab Fund is currently being consi-dered. In the case of CIMAT, geological studies have been completed and adecision has been taken to execute the project on a "turnkey" basis. CimentFrancais has been selected as Engineering Consultant.

Additional Plans for Expansion of Domestic Cement Production

13. In addition to those units whose production is described above,SNMC is also considering four other plants. They are already containedin the Second 4-Year Plan (1974-77) and preparatory work is currentlyunderway. These projects should be reconsidered in the light of the start-upof the other new plants and the indicative market forecasts, shown in ChapterIII of this Annex. The projected supply/demand balance does not appear tojustify further expansion vithin the time frame currently envisaged by SNMC.There is a strong possibility of over-supply of cement in Algeria by thebeginning of the eighties, if SNMC does not evaluate the viability of thesefour projects before proceeding vith their implementation.

SNMC: Future Cement Plant Expansions

Plant Nominal State of Earliest RealisticLocation Capacity Prepration Year for Start-up

Algerois 1 million tpy Geological Studies 1979-81underway.

Aures 500,000 tpy Geological studies 1980-82underway since theend of 1974

Titeri 500,000 tpy Geological studies 1980-82underway since 1974

Alger-Setif 1 million tpy Geological studies 1980-82underway

14. Nevertheless, should SNMC proceed with these new projects irrespectiveof market conditions - or should the market change to justify their implementa-tion - it is possible that, after 1982, total nominal cement production capacityin Aglgeria might be in the region of 12 million tpy.

ANNEX 4-1Page 10

15. SNMC's existing and proposed facilities is the building materialssector are shown on the map at the end of the main text of this Report.

B. THE DEMAND FOR CEMENT IN ALGERIA

I. Historic Domestic Demand

16. Even in an economy where Government is by far the largest consumerof building materials, the existence of black markets for private sectorconsumers of cement, with prices substantially above those officially obtaining,is indicative both of repressed marginal demand for cement and possibledistribution problems. Such a repressed market situation creates difficultiesin quantifying total national demand and, hence, historical consumption figurestend to underestimate actual demand.

Algerian Cement Consumption: -' (1961-1974)(000 tons)

1961/2 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974

1,439 650 620 646 652 559 663 730 1,174 1,467 1,543 1,757 2,227 2,946

/1 Consumption - Domestic Production - Exports + Imports./2 For 1961, CEMBUREAU statisties were used. After 1961, figures are

SNMC data.

17. Since 1969 Algeria has faced an acute shortage of constructionmaterials. In the 1967-69 Plan, although 81% of the industrial investmentprogram in the public sector was in fact achieved, cement production did notmeet the increasing demand so that the resulting gap had to be met by sharplyincreased lmports. A similar pattern was reflected in the 1970-1973 Plan.During the latter period, overall growth in domestic cement production wasabout 20% less than the targetted increase of 100% due to the delayed im-plementation of 2 cement plants. At the same time consumption increased by154%. Even importation at this level, however, was not sufficient to meettargets in other sectors and - while insufficient supply of cement may nothave been one of the major factors contributing to the slippage - there canbe no doubt that some part of the delay in plan achievement must be attributedto non-availability of cement.

II. Projected Domestic Demand (1975-77)

18. Methodology: Based on experience elsewhere of market studies forcement, the three most widely used techniques for forecasting future demandare sectoral analysis, correlation with macro-economic indicators and extra-polation of previous consumption data. As indicated below, however, each ofthese methods has intrinsic weaknesses when applied to the Algerian case andone must, therefore, be wary of draving more than indicative conclusions from

ANNEX 4-1Page 11

the figures presented in this section. Both SNMC's own analysis and that ofthe Bank's mission can demonstrate no more than a range within which futureconsumption is expected to fall.

(a) Sectoral Analysis: The best indicator of future cementconsumption is expected construction activity. Furthermore,vithin any one economy there exist relatively constantrelationships which obtain between cement utilizationand investment in any particular sector. In Algeria, theonly planning document which exists for the period after1977 is the "Perspectives - 1980" which, published in 1973,was largely superceded by the 4 Year Plan (1974-1977). The"Perspectives" forecast a total cement requirement of justover 29 million tons for the period 1974 to 1980. Accordingto the Plan and as shown in para 18, total cement requiredthrough 1977 alone now comes almost to this figure. Whilean attempt is made below to assese cement requirementsbased on Governrent investment after 1977, it should beborne in mind that any such estimates can only be notional.

(b) Correlation: Statistical analysis shows that a fairly closecorrelation exists between cement consumption and macro-economicindicators such as GDP, GNP and gross fixed capital formation.Per capita cement consumption is often used as an indicatorof a country's level of development, which is in turn reflectedin per capita GNP. One may, therefore, establish a regressionequation, based either on cross-sectional international dataor on time-series data within one country, to predict futureconsumption in that country. The chief drawback of this method,in the case of Algeria, is that (i) the present developmentdynamic is of recent origin and relatively few time seriesobservations exist and (ii) any correlation based on pastconsumption must inevitably ignore unquantifiable represseddemand and hence, will be an inaccurate indicator of futuredemand if the relationship between available cement and totaldemand changes over time. In Algeria, as new domesticcapacity is brought on stream, one would assume that thedifference between consumption and unrestricted demand wouldtend to zero, and that, ceteris paribus, a regression equationbased on historic consumption would tend to underestimatefuture demand. It must, however, also be observed that - forreasons which are set forth below - it is probable that thenational income projections contained in the 1974-1977 4 YearPlan will prove unduly optimistic and that to fit them intoa regression equation based on actually-realized GDP datawould tend substantially to inflate projections of demandabove those felt to be realistic. To some extent, thesetwo types of errors would therefore tend to offset oneanother.

ANNEX 4-1Page 12

(c) Extrapolation: For the same reason as above, namely the as-symetrical relationship vhich has historically prevailed be-tween consumption and demand, one cannot simply extrapolatepast consumption trends into the future. Additionally, Algeriais very much a paradigm case of a dualistic economy in which amore developed, urbanized northern litoral dominates a tradi-tional or transitional rural south, both in terms of overallinvestuent and in cement use. In such a case, one must expectsecondary and tertiary effects as more people move out ofpastoral nomadism into the cash economy. Furthermore, theexistence of building materials vill create forvard linkageswhich vill have a multiplier impact downstream, possiblyaccelerating the change towards a relatively modern life-stylevith its concomitant use of permanent construction materials.Simple extrapolation cannot take account of these shifts intaste and interrelated linkages and is, therefore, inapplica-ble in this case.

19. In the light of the methodological constraints indicated above,the analysis which follows endeavors to establish a range vithin vhichfuture demand may be expected to fall. The feasibility of this range isthen checked by reference to the sketchy sectoral data which exists forthe later period and by comparison vith cement consumption of other countriesat the stage of development which Algeria is expected to have attained by1980. The folloving table summarizes the results of some of the moremeaningful projections. More detailed interpretation of this data followsin para. 22.

ANNEX 4-1Page 13

ALGERIA: Projected Domestic Cement Demand (1975-80)(000 tons)

1975 1976 1977 1978 1979 1980

A. Correlation with GDP

Projection I: SNMC estimate 5360 6060 6850 7625 8480 9420Projection II: Modified SNMC

estimate - mostlikely 4160 4690 5110 5560 6040 6580

- low 4160 4690 5060 5440 5850 6290Projection III: IBRD estimate

(GDP) - mostlikely 3070 3950 4650 5380 6120 7050

- low 3070 3950 4360 5170 5850 6580Projection IV: IBRD estimate

(GDP/capita)- Most

likely 3190 4160 5020 5960 7040 8265- low 3190 4160 4920 5740 6680 7740

Projection V: IBRD Estimate(GFCB)

- Mostlikely 3520 3990 4350 4730 5140 5560

- low 3520 3400 3640 3900 4160 4470

B. Sector Analysis

Projection VI: - high - - - 7700 9400 11200- low - - - 5200 6400 6800

SNMC's demand estimates, ranging from 8.5-9.4 million tons of cement in 1980,clearly exceed the Bank's more conservative projections which range from6.3 - 8.3 million tons in 1980. Taking into account the questionable ac-curacy of data, assumptions and the methodological approaches, the "mostlikely" demand for cement in 1980 is in the range of 7.0 - 8.2 million tons.

SNMC Projections (Correlation with GDP)

20. SNMC has developed a linear regression equation between GDP andgr2ss cement consumption which, it is claimed, has a correlation coefficient(r value) of 0.988. Based on seven observations between 1971 and 1973,the best-fit predictor was found to be:

Y = 0.1176 GDP - 933,079

2r = 0.988Y = cement consumption in tonsGDP = GDP in millions of 1973 Dinars

ANNEX 4-1Page 14

Based on this relationship, on full realization of the 4 Year Plan (1974-77)and on a 10% annual real growth rate for GDP thereafter, SNMC has projectedfuture cement demand as shown in the following table. This estimate ishenceforth referred to as Projection I.

SNMC - Projection I

Estimated Domestic Cement Demand (1974-80)(SNMC Correlation with GDP)

Year Annual Cement Consumption

1975 5,360,000 tons1976 6,060,000 tons1977 6,850,000 tons1978 7,625,000 tons1979 8,480,000 tons1980 9,420,000 tons

21. There are, however, a number of lmpelling reasons for doubting thatdermand will actually develop according to this forecast:

(a) GDP or GNP projections for Algeria vary widely. Althoughreal growth in GDP from 1970-1973 was only about 6%, ascompared with a target of 9%, the rise in oil prices hasmade the target rate of growth of 10-11.2% in the 4 YearPlan (1974-77) more likely. However, the Plan is based onan assumed 1973 GNP of DA 43 billion, while statisticsquoted in the Plan itself put actual 1973 GNP at DA 27billion and Bank estimates place it at DA 31 billion. Inorder to reach the 1977 target, the economy's rate ofgrowth would have to be substantially higher than thatindicated in the Plan to overcome the initial shortfall. 1/

(b) A three-year period - even with semestrial observations - isan inadequate base for projections through to 1980, leadingone to suspect the validity of the extremely high correlationcoefficient quoted above. In addition, the linear nature ofthe function - while it follows from such a short observationperiod - is unlikely to hold over the longer term and shouldnot be inferred a priori. Although it may prove a better fitif the actual curve should prove to be sinosoidal.

1/ This shortfall was almost entirely due to the failure of the hydrocarbonsector to perform up to expectations.

ANNEX 4-1Page 15

Modified SNMC - Projections (Correlation with GDP)

22. Accepting the validity of SNMC's linear regression equation,Projection Il - illustrated below - represents the impact that a downwardreassessment of future GDP, in line with estimates provided by the Bank'srecent economic mission, would have on future cement consumption. 1/

Projection II

Estimated Domestic Cement Demand (1975-80)(Modified SNMC Correlation with GDP)

Annual Cement ConsumptionYear Most likely Low

1975 4,162,000 tons 4,162,000 tons1976 4,691,000 tons 4,691,000 tons1977 5,115,000 tons 5,056,000 tons1978 5,557,000 tons 5,438,000 tons1979 6,038,000 tons 5,848,000 tons1980 6,573,000 tons 6,291,000 tons

23. The economic mission's estimates and projections of GDP, inconstant 1973 prices were as shown below:

"Most likely" "Low"Estimates Projections Projections

1973 1974 1975 1976 1977 1980 1977 1980

31.2 33.3 35.4 39.9 43.5 55.9 43.0 53.5

In the "most likely" Projections, it was assumed that real petroleum priceswould remain stable at the levels prevailing in the first quarter of 1975,the economy thus obtaining an annual growth rate of 8.6%. In the "low"Projections, a GDP growth rate of 7.5% p.a. and a decline of real petroleumprices by 5% annually between 1975 and 1980 was assumed. In both cases,cement consumption forecasts are more than 1/3 lower than those produced bySNMC. However, the problems of assumed a priori linearity and an inadequateobservation period remain.

IBRD - Projections (Correlation with GDP)

24. In order to go some way towards meeting these problems, a regressionanalysis was conducted between cement consumption and GDP and between cementconsumption per capita and GDP per capita. Both raw data and their naturallogarithms were used and raised on observations for 1968-1974. The 1968-1974

1/ Current Economic Position and Prospects of Algeria, October 20, 1975(Report 900-AL).

ANNEX 4-1Page 16

period was chosen (i) as the period during which SNMC has gradually consolidatedits position as the monopoly producer of cement and (ii) because it avoids someof the problens associated with repressed domestic demand during 1962-67 whenexports were being made to France.

25. Both untransformed and double logarithmic regressions were runbecause - although it was intuitively unlikely that the resulting relation-ship would be linear - it seemed desirable to ascertain the degree ofimprovement in the fit generated by using logarithms.

26. The input data for the regressions was as shown in the followingtable: GDP data were drawn from the recent economic report.

Algeria: Input Data for IBRD Regression Analyses

Cement Consumption GDP (1973 Prices) Population(000 tons) (kg/Capita) (Billions DA) (DA/Capita) (Millions)

1968 730 58 23.3 1840 12.671969 1174 90 25.5 1954 13.051970 1467 109 27.3 2031 13.441971 1543 111 26.6 1922 13.841972 1757 123 30.7 2153 14.261973 2227 151 31.2 2122 14.701974 2946 194 33.3 2193 15.20

27. The resulting equations and the accompanying correlation coefficientswere as follows, where C = total cement consumption, Cp = cement consumptionper capita, G = GDP and Gp = GDP per capita:

(a) Correlation of cement consumption with GDP

2C = 194GDP - 3789; r = 0.955

(b) Correlation of log cement consumption with log GDP

log C = 3.417 log GDP - 4.045; r = 0.964

(c) Correlation of per capita cement consumption with per capita GDP

CpC = 0.202GDP pC - 474; r - 0.882

(d) Correlation of log per capita cement consumption with log percapita GDP

2Log CpC = 5.288 log GDP pC - 35.54; r = 0.899

(e) Correlation of per capita cement consumption with GDP

2Cp = 11.699GDP - 211; r = 0.954

ANNEX 4-1Page 17

(f) Correlation of log per capita cement consumption with log GDP

Log CpC - 2.903 log GDP - 4.960; r = 0.958

28. For all equations above, r2 values are slightly - though notsignificantly - higher for double logarithmic functions than for thosewith untransformed variables. Hovever, analysis of residuals would indicatethat the linear functions are as good predictors as log functions.

29. Input data for these projections are based on the estimates ofa recent Bank Economic Mission to Algeria and are shown below:

Algeria: Input Data for IBRD Projections

GDP (1973 prices) GDP/Capita Population(Billion DA) (DA/capita) (Millions)

1975 35.4 2250 15.731976 39.9 2451 16.38

"Most "Mostlikely" /1 "Low" /1 likely" "Low"

1977 43.5 43.0 2580 2550 16.861978 47.3 46.2 2712 2649 17.441979 51.4 49.7 2847 2753 18.051980 55.9 53.5 2900 2864 18.68

/1 Most likely - 8.6% real GDP growth p.a., low - 7.5% real GDP growthp.a.

30. Using these estimates and regression equation (a), domesticcement demand is forecast as follows:

Projection III

Estimated Domestic Cement Demand (1975-80)(IBRD - Correlation with GDP)

Annual Cement ConsumptionYear (000 tons)

1975 30741976 3047

"Most likely" "Low"

1977 4645 45481978 5382 51681979 6177 58471980 7049 6584

ANNEX 4-1Page 18

31. Projection IV, shown below, is based on the correlation between percapita cement consumption and GDP are derived in regression equation (e).

Projection IV

Estimated Domestic Cement Demand (1975-8)

(IBRD - Correlation with GDP/capita)

Annual Cement ConsumptionYear (000 tons)

1975 31931976 4158

"Most likely" 'Low"

1977 5016 49171978 5963 57391979 7037 66781980 8265 7741

IBRD - Projections (Correlation with Gross Fixed Capital Formation)

32. A regression equation was also developed based on the observed rela-tionship between gross consumption and fixed capital formation, which werefound to be closely linked. Input data, the resulting function and its cor-relation coefficient, are shown below:

Algeria: Input Data for IBRD Projections

GFCF Cement ConsumptionYear (Million DA) (000 tons)

1969 6,882 11741970 8,887 14671971 9,767 15431972 10,738 17571973 12,325 22271974 14,300 2946

Regression Equation:

C - 0.238 x GFCF - 647 r2 = 0.972C = cement consumptionGFCF = gross fixed capital formation

in 1973 prices

ANNEX 4-1Page 19

33. Based on this linear function, future cement demand would be asshown below in Projection V; projections of future GFCF coming from theBank's recent Economic Report:

Projection V

Estimated Domestic Cement Demand (1975-80)

(IBRD - Correlation with Groass Fixed Capital Formation)

Annual Cement ConsumptionYear 000 tons

1975 3518

"Most likely" "Low"

1976 3994 33991977 4351 36371978 4732 38991979 5136 41611980 5565 4470

34. These projections are substantially lower than thosse based oncorrelation between cement consumption and GDP. One of the major reasonsis the type of investment program during 1969-74 which serve as baseyears for the regression. During these years gross capital formation hasbeen heavily concentrated in capital and equipment intensive industry withlow cement utilization ratios. Since it is the expressed policy of theAlgerian Government to shift investments during 1975-1980 to more "cementintensive" sectors such as housing, education and agriculture, the correlationbetween cement consumption and groass fixed capital formation cannot beconsidered a valid predictor of future cement demand.

Sector Analysis

35. Although, no reliable guide to Government policy beyond 1977presently exists, the 4 Year Plan (1974-77) and the "Perspectives - 1980",together, do provide some indications of the direction that certain sectoralinvestments will follow. The proceeding analysis - sketchy though it mustinevitably be - does therefore provide some sort of check on the feasibility(if not the probability) that actual demand will fall within the limitsindicated by the previous correlations. It is, however, predicated uponimplementation of the 4 Year Plan and, in addition, cannot comprehensivelycover major industrial and agricultural users of cement.

36. The sectors in which future post-1977 demand can be inferred are:

(a) Housing: Two hypotheses have been assumed - Hypothesis I inwhich the housing def-icit anticipated in 1977 - approximately

ANNEX 4-1Page 20

1.05 million units - is absorbed by 1985, and Hypothesis IIin which it is absorbed by 1990. Both hypotheses are basedon (i) the known housing stock in 1973, (ii) the constructionof 200,000 units between 1974 and 1977, (iii) an annual rateof population increase of 3.5% as projected in the 4 Year Plan,(iv) an annual replacement of 6,500 housing units, and (v) ausage of 25 tons of cement for each unit, plus 5 tons fornecessary infrastructure if the unit is in an urban regionand 7 tons if it is rural. Taking account of the likelyeasing of the cement supply constraint after 1978, the demandfor cement in the housing sector will be at least 2.3 milliontons by 1980.

SNMC: Estimated Cement Demand in the Housing Sector (1978-1981)(000 tons)

1978 1979 1980 1981

Hypothesis I (25 tons per unit) 3117 3715 4590 5715Hypothesis II (25 tons per unit) 2500 3000 3202 3432

Hypothesis I (20 tons per unit) /1 2340 2777 3466 4353Hypothesis II (20 tons per unit)/1 1847 2205 2356 2527

j1 SNMC estimates that, if 20 tons of cement are used instead of 25 tons,brick requirements will increase from 8 tons per unit to 11 tons. Perunit cement estimates are in line with other comparable countries,although no hard and fast rule can be applied since much depends ontraditional building techniques. Recent figures indicate that cementuse per housing unit is about 20 tons in France, 31 tons in Italy, 14tons in Spain, 12 tons in Greece and 26 tons in Germany.

(b) Education: to get anywhere near the Plan targets of 100%and 50% enrollment ratioe for primary and secondary studentsrespectively by 1980, construction activity for the educa-tional sector must increase sharply. The related cementrequirements are projected to reach 680,000 tons in 1980.

(c) Other non-industrial sectors: while these sectors are indi-vidually relatively unimportant, in the aggregate their cementconsumption is significant and, in the cases of tourism andhealth facilities, is expected to rise quite sharply after 1977.

ANNEX 4-1Page 21

Estimated Cement Demand in other Non-Industrial Sectors: 1978-1981(000 tons)

1978 1979 1980 1981

Tourism 108 117 129 141Health 84 85 101 109Youth & Sports 10 10 10 10-Administration 94 100 106 112

Total 296 302 436 462

37. Total cement demand in sectors other than industry and agricultureis therefore expected to be approximately as shown below for the period1977-1981. It should, however, once again be stressed that these figuresare only indicative and that they have been inferred from general statementsof policy rather than calculated on the basis of firm commitments.

SNMC: Non-industrial and Non-agricultural Cement Demand: 1978-1981(000 tons)

1978 1979 1980 1981

Hypothesis I (25 tons per unit)/1 3885 4690 5616 6811

Hypothesis II (25 tons per unit)/1 3267 3975 4228 4529

Hypothesis I (20 tons per unit)/1 3108 3752 4492 5449

Hypothesis II (20 tons per unit)/1 2614 3180 3382 3623

/1 The quantity per unit shown refers only to the housing componentof total cement demand.

Source: SNMC

38. In the past, cement consumption by these sectors in Algeria asa percentage of total cement consumption has averaged about 35%. This issubstantially lower than comparable countries in the Mediterranean wherethe non-industrial and non-agricultural sector accounts for at least 50%of cement consumption. Based on such a 50:50 split between sectors andthe more conservative assumption that only 20 tons of cement vill be usedfor each housing unit, total cement demand may range from 6.8-11.2 milliontons in 1980.

ANNEX 4-1Page 22

PROJECTION 5

SNMC: Estimated Domestic Cement Demand (1977-81)(SNMC - Sector Analysis)

(000 tons)

1978 1979 1980 1981

High 7700 9400 11200 13600

Low 5200 6400 6800 7200

International Comparison of Cement Consumption per Capita

39, A comparison of cement consumption per capita and GNP per capitaof selected countries with similar construction practices in the European-Mediterranean and Middle East area indicates Algeria's relatively low percapita cement consumption in relation to GNP per capita.

Cement Consumption and GNP per Capitafor Selected Countries

Cement Consumption per Capita /1 GNP per Capita(kg/capita) (US$/capita)

Country 1971 1972 1971 /2 1972 /3

Egypt 74 87 220 240Morocco 103 102 270 270Iran 96 117 450 490Algeria 111 123 360 430Tunisia 110 123 320 380Iraq 125 128 370 370Jordan 139 149 260 270Turkey 180 196 340 370Syria 197 202 290 320Portugal 275 300 730 780Yugoslavia 293 305 730 810Romania 371 393 740 810Lebanon 342 417 660 700Spain 484 548 1,100 1,210Greece 552 625 1,250 1,460Libya 303 680 1,450 1,830Switzerland 839 943 3,640 3,940

/1 Total Cement Consumption (Cembureau Statistical Review) divided bymid-year population (World Bank Atlas).

/2 Market Prices 1971; World Bank Atlas.

/3 Market Prices 1972: World Bank Atlas.

ANNEX 4-1Page 23

In 1980, Algeria can expect to reach a GNP per capita of about US$740. Basedon international comparison, this implies a per capita cement consumptionof 370-400 kg or a total domestic cement demand ranging from 6.6-7.5 milliontons by 1980. These projections are in line with the cement demand forecastsbased on correlation and sector analysis and summarized in para 20.

C. PROJECTED SUPPLY AND DEMAND BALANCE

40. Based on SNMC's projected cement production (para 1) and themost probable range of domestic cement demand in Algeria as summarized inpara 19, it is likely that Algeria will continue importing cement at leastuntil 1978.

ALGERIA: Projected Cement Demand/Supply Balance (1975-80)(million tons)

1975 1976 1977 1978 1979 1980

Supply 1.50 2.23 3.27 5.07 6.81 8.01Demand - low 3.10 4.00 4.60 5.60 6.20 7.00

- high 3.20 4.20 5.10 6.00 7.10 8.20

Demand/SupplySurplus (Deficit)

- low (1.60) (1.77) (1.33) (0.53) 0.61 1.01- high (1.70) (1.97) (1.83) (0.93) (0.19) (0.19)

The situation for the 1979-80 period remains uncertain. If all of SNMC's7 cement plants currently under construction come on stream as scheduledand cement demand does not reach the targeted level, a temporary oversupplyof up to 1.0 million tons may materialize. On the other hand if SNMC encoun-ters start-up difficulties and/or cement demand develops as projected, acontinuous deficit in domestic cement supply of equally likely.

D. THE REGIONAL YARKET FOR CEMENT IN ALGERIA

I. Historic Consumption 1/

41. As shown below, in the past cement consumption has been concentratedin the central region around Algiers, althouRh in recent years the easternregion, around Annaba and Constantine, has grown rapidly in importance. Inthe west, although the absolute level of consumption had grown by about 350%between 1962 and 1973, the region's share in total consumption has actuallydropped from the levels prevailing in the early 1960s.

1/ For a-n explanation of the terms "eastern", "central" and "western" regions,see p. 1, footnote 1 of this Annex. The division of the country into theseregions is a conceptual tool rather than an existing administrative division.

ANNEX 4-1Page 24

Algeria: Regional Cement Consumption (1962-1973)(000 tons)

1962 1963 1964 1965 1966 1967Quan- Quan- Quan- Quan- Quan- Quan-tity % tity % tity % tity Z tity % tity X

East 216 33 181 30 159 25 181 28 154 27.5 201 30Center 272 42 238 38 295 45 299 46 260 46.5 270 41West 162 25 201 32 192 30 172 26 154 36 191 29Total 651 100 670 10 Ô 0 646 100 652 100 569 100 663 100

1968 1969 1970 1971 1972 1973Quan- Quan- Quan- Quan- Quan- Quan-tity % tity % tity % tity % tity % tity Z

East 283 31.5 400 35 484 35 567 38 687 40 819 38Center 359 42 460 40 569 40 580 38 610 36 745 35West 234 26.5 291 25 347 25 396 24 404 24 568 27Total 877 100 1,115 100 1,400 100 1,543 100 1,701 100 2,132 100

Average Annual Rate of Growth(1962-1973)

East 12.4%Center 8.8%West 10.5%Total 10.7%

II. Historic Supply

42. In the past, regional consumption has been significantly constrainedby regional supply. The major reason for this was the critical shortage oftransport. The recent equalization of cement prices throughout the countrydoes not any longer favor consumption activities near a plant site. However,transport deficiencies do still exist so that cement availability is notevenly spread throughout the country.

43. Of the four plants operating prior to 1975, all were establishedin the north; Meftah I and Pointe-Pescade in the center, Hadjar Soud I inthe east and Zahana in the west. Regional domestic cement supply from 1969to 1975 was, therefore, approximately as shown below.

ANNEX 4-1Page 25

SNMC: Regional Cement Production 1969-1975(000 tons)

Estimate1969 1970 1971 1972 1973 1974 1975

Center 503 514 524 508 508 412 700East - - - - 90 225 475West 421 409 441 419 409 303 400

Total 924 923 965 927 1007 940 1575

44. These northern plants exclusively serviced the hinterlands re-presented by their respective regions. In 1974, for example, Zahana's entireoutput of ordinary cement was consumed in the west,1/ while Hadjar-Soud Iproduction was restricted to the east and that from Meftah and Pointe-Pescadeto the center. Given transportation, distribution and port handling con-straints, it has also been necessary to lmport cement on a regional basis toalleviate regional shortfalls. Again using 1974 as an example, approximately27% of total cement imported was intended for use in the central region, 47%in the east and 26% in the western region.

III. Projected Regional Supply

45. Based on the domestic supply projections (para 11), the futureregional supply of domestically produced cement will be approximately asshown in the table below.

SNMC: Future Domestic Cerent Supply by Region /1(000 tons)

1976 1977 1978 1979 1980 1981 1982

Center 1,150 1,550 1,850 2,050 2,225 2,150 2,150East 675 800 1,690 2,270 2,815 3,030 3,140West 400 913 1,533 2,492 2,967 3,170 3,236

Total 2,225 3,263 5,073 6,812 8,007 8,350 8,526

/1 The following plants are assumed to supply each region:

Center: Pointe-Pescade, El Asnam and Meftah.East: Hadjar-Soud I and II, Constantinois, Setif and CIMAT.West: Zahana I and II, Benisaf, CIMA and Saida.

1/ A small amount of water-resistant, "prise-mer" cement was however, consumedin the other two regions.

ANNEX 4-1Page 26

In fact, El Asnam is located in a position to service both thewestern and central regions and Setif could also expect todistribute a substantial portion of its output in the center. Tothat extent, therefore, the distinctions are somewhat arbitrary.

IV. Projected Regional Demand

46. In late 1973, SNMC provided the Bank with a breakdown of futurecement demand by Wilaya and distribution agency, based on a total cementdemand in 1980 of 6.80 million tons. Although SNMC's estimate of totaldemand and the Wilayate structure have both changed, the company expectsthe relative importance of individual areas to remain much as indicated sincethe basis for the breakdown was primarily anticipated population growth. Asummary of SNMC's 1973 estimate for 1980 is, therefore, presented below. Inline with the country' Investment Program, the main changes forseen between1975 and 1980 are expected to take place in the east and center, the sharecf the former rising from 33% to 36% and that of the latter dropping from 40%to 38%. These changes, however, are not major and the share of the west islikely to remain virtually unchanged.

SNMC: Expected Distribution cf Cernent Consumlption in 1980

West Center East

Mostaganem 7% El Asnam 6% Annaba 9%Tiaret 3% Tizi Ouzu 5% Batna 5%Tlemcen 4% Algiers 17% Setif 9%Oran 9% Medea & Oasis 10% Constantine 12%Saida andBechar 3%

Sub-total 26% Sub-total 38% Sub-total 36%

47. Applying these relative proportions to the most likely estimateof the national demand in 1980 (para 18), regional demand can be anticipatedto be within the limits indicated below.

ALGERIA: Regional Cement Demand in 1980(000 tons)

Total West Center East

Projection I 9420 2450 3580 3390Projection II 6580 1710 2500 2370Projection III 7050 1830 2680 2540Projection IV 8265 2150 3140 2975

ANNEX 4-1Page 27

48. With a production capacity of 500,000 tpy the Saida Cement Plantviii supply nearly 25Z of the cement demand [n the western region. Georgra-phically, the Saida plant is located in Algeria's hinterland and it will beSNMC's most soufhern plant. The natural market for the plant vill therefore,be the wilaya of Saida and the region south of the high plateau including thewilayas of Bechar and Adrar as vell as the Western Sahara. Estimates offuture cement consumption for this specific market indicate a possible cement

d fmd of 445,000 tous by 1980 in these régions.

SNMC - Demand for Saida Cement(nnn tnnq!

Wilaya 1978 1979 1980

Saida 155 180 190Bechar 65 85 120Adrar 75 85 95Western Sahara 20 30 40

Total 215 380 445

These projections assume that the Government of Algeria continues (i) itsregional programs oriented towards construction of rural housing, irrigationand infrastructure extension and (ii) that major industrial projects currentlybeing,planned for the area 1/ will come on stream in the early 1980s.

V. Regional Demand/Supply Balance

49. The analysis of the previous chapters indicates that totaldomestic cement supply and demand may approximately be balanced by 1980.However, a comparison of regional forecasts suggests that the selection ofplant locations for the new cement plants nov under construction is likelyto lead to a regional supply/demand imbalance by 1980.

ALGERIA: Regional Supply/Demand Balance in 1980(000 tons)

West Center East

Supply 2970 2225 3030Demand

- SNMC Projections 2450 3580 3390

- IBRD Projections- Low 1830 2680 2500- High 2150 3140 2975

ANNEX 4-1Page 28

The production of cement in the Western region vill not, even under the mostoptimistic circumstances, be consumed in this area. Quantities of up to 1.5million tons may have to be shipped or exported from cement plants such asZahana, CIMA, or Beni Saf to the central region. Although rail and shippingconnections do exist, transport of cement implies substantial additional costswhich could have been avoided by more careful planning of the optimal cementplant locations in Algeria.

Industrial Projects DepartmentNovember 1975

AUNEZ 4-2

ALGERIA - SNMC CEMENT EXPANSION PROJECT

DISTRIBUTION AND PRICING OF CEMENT IN ALGERIA

A. INTRODUCTION

B. DISTRIBUTION CHANNELS

I. Existing System and FacilitiesII. Distribution Centers

III. Planned Distribution Channels

C. TRANSPORT

I. Transport Modes and CostsII. Future Transport Requirements

D. CEMENT PRICES AND PRICING SYSTEM

ANNEX 4-2Page 1

A. INTRODUCTION

1. SNMC is not only responsible for the production and importation ofbuilding materials in Algeria, but also distributes cement on the wholesale andretail levels. A special distribution department deals with the planning ofdomestic consumption, and physical allocation and transportation of buildingmaterials is handled by three regional offices in Oran, Algiers and Annaba.Until now, problems related to the distribution of building materials --in particular cement -- have been transport inefficiencies and not marketingproblems. Supply greatly exceeds demand, so that cement users are willingto transport cement themselves from SNMC's facilities. This situation islikely to change before the end of the decade. The planned expansion ofdomestic production facilities is expected to free previously repressed de-mand and to increase domestic consumption from 3 million tons in 1974 toabout 7 million tons in 1980, thus requiring a simultaneous expansion of thedistribution system.

B. DISTRIBUTION CHANNELS

I. Existing System and Facilities

2. The existing system of cement sales and distribution has evolved in anad hoc manner out of the facilities which were operated by private owners atthe time of SNMC's formation. SNMC now operates 22 agencies of which 18 arelocated in the western region. These agencies carry a full range of SNMCproducts, but cement storage space for all agencies combined is only 11,500tons.

SNMC: Distribution Agencies (1975)

West Center East

Oran Algiers SetifTlemcen Blida TebessaEl Asnam Tizi-Ouzu BejaiaSidi Bel-Abbes Medes SkikdaTiaret TouggourtSaida JijelMestaganem AnnabaBechar Constantine

BatnaBiskra

The agencies are supplemented by 89 SNMC depots, 33 of which are inthe western region. Each depot - storage capacities of which vary between10,000 and only 200 tons for all SNMC products combined - is provisioned by

ANNEX 4-2Page 2

one distribution agency to which ail sales are credited. The depot representsthe lowest level of SNMC's distribution network, although there also existsmall independent retailers who sell bagged cement in general stores andcooperatives.

3. These agencies vary widely in aize, operating costs and efficiency,and none as yet has the capacity to handle bulk cement. As shown in the tablebelow, annual sales of all SNMC products per agency varied in 1972 from DA22 million at Algiers to only DA 300,000 at Sidi Bel-Abbes. Similarly, stockon hand at the end of the year, as a percentage of total sales, also variedwidely, from 8% at Annaba, 6% at Setif and only 2% at Batna to 65% at Blidaand 57% at Sidi Bel-Abbes. In general, larger agencies and agencies nearertheir sources of supply have tended to operate more efficiently than smalleragencies located away from the coastal region.

SNNC: General Agencies: Capacity and Sales

Fixed Cement Total Stock Value Sales Total2 Capacity Manpower At End (All SNMC Products)

Agency Storage (m ) in Tons (June 73) 1972 (DAm) 1972 (DAm)

Algiers 6,288 861 1,177 2.814 31.919Blida 2,650 500 158 1.997 2.985Tizi-Ouzou 750 400 272 0.435 2.608Medea 600 200 191 0.578 1.844Annaba 3,000 1,000 375 1.304 16.754Batna 1,675 1,175 147 0.195 7.535Bejaîa 4,460 3,910 231 0.605 6.920Biskra 1,600 600 123 0.695 4.908Constantine 1,700 950 559 2.664 14.916Jejel 2,350 1,150 75 0.577 3.128Setif 1,900 900 218 0.790 13.042Skikda 7,314 5,850 329 0.954 12.826Touggourt 3,115 840 278 0.298 7.557Bechar 1,600 600 35 0.112 0.388El Asnam 1,450 850 119 0.142 2.202Mostaganem 3,750 1,550 144 0.187 2.426Oran 3,000 1,000 229 1.496 8.285Saida 1,200 500 25 n.a n.aBel Abbes 1,200 500 64 0.172 0.307Tiaret 1,300 600 81 0.203 1.116Tlemcen 1,500 6,000 47 0.125 3.345Tebessa n.a n.a n.a n.a n.a

Total 52,302 21,436 2,305 -

Source: SNMC.

n.a. - Not available.

ANNEX 4-2Page 3

4. Sales statistics for the agencies reflect the pattern of officialsales rather than the actual physical consumption of cement, which may takeplace elsewhere particularly if the cement credited to the agency was in factpicked up directly from the factory by the client himself. This is parti-cularly important since about 90% of cement is purchased by Governrentagencies or State enterprises, many of which are big enough consumers tojustify regular pick-up of cement at the plant.

5. The costs of handling and distributing cement increaséd by morethan 20% between 1973 and 1974. The increase was primarily due to porthandling charges for imported cement.

SNMC - Distribution Cost (1973-1974) /1

1973 1974Domestic DomesticProduction Imports Production Importe

'000 tons 1,007 1,220 1,575 2,006Distribution Cost(DA/ton) 16 39 /2 11.5 45

Average (DA/ton) 29 37

/1 Includes operating cost of agencies and depots, port handling charges,but no transport costs.

/2 Includes port handling charges.

II. Distribution Centers

6. In the first 4-Year Plan (1970-73) it was decided to move towardsa regional distribution system based on bulk handling from the cement plant,stockage in specially constructed silos at distribution centers devotedprimarily to cement sales and, finally, sales either in bulk form or baggedat the distribution center, to SNMC depots or final industrial and non-industrialconsumers. Initial plans were for 12 of these centers, construction of whichhas been repeatedly delayed beyond their originally estimated 1972 start-update. However, it was later decided to construct over 30 to serve the entirecountry. Originally, three of the centers were to have two 1,500 ton silos,for an annual cement capacity of 120,000 tons. The remainder were to haveonly one 1,500 ton silo, for an annual capacity of 60,000 tons. However,late in their planning it was decided that each center would have an annualcapacity of 120,000 tons. Ten centers are presently under construction andall of them are located on or near a rail line as shown below. Start-up ofmost of these units is expected by the end of 1975.

ANNEX 4-2Page 4

SNMC: Distribution Centers Under Construction

CapacityOpen Covered Silos Z Completion as at Unit COsV 7'

Location (m2) (m2) (tons) July 1974 DAmi Lha

Djelfa 20,000 5,000 2 x 1,500 20% 13430vTouggourt 20,000 5,000 2 x 1,500 55% 136,12.Batna 20,000 5,000 2 x 1,500 40% 13.425Mesloug 20,000 5,000 2 x 1,500 60% 23.MGEl Kroub 20,000 5,000 2 x 1,500 50% 13,425El Asnam 20,000 5,000 2 x 1,500 - 13.000Tiaret 20,000 5,000 2 x 1,500 15% 13.0E:Ain Fezza 20,000 5,000 2 x 1,500 15% 13.000Bechar 20,000 5,000 2 x 1,500 10% 133.125Saida 20,000 5,000 2 x 1,500 5% 13.00C

/1 Studies for the distribution centers were carried out by several consultanteincluding PEG, BELAID and Algetudes.

7. These distribution centers will include three warehouses, twoconcrete silos each weighing 5,500 tons, open-air stockyards, repair facili-ties, administrative offices, a canteen and an infirmary. Contracte have beensigned for the construction of 10 centers. The present cost estimate of US$32million is more than DA 47 million (US$13 million) higher than the originalestimate, the bulk of the overrun coming on equipment and assembly. Long-ternRAD credits, totalling DA 72 million, at 5.5% over 12 years and medium termloans of DA 47 million at the same rate but payable over 5 years will coverlocal costs of these centers, while the direct foreign exchange requirementsare being provided by suppliers credits at 6%, repayable over 5 years.

8. Planning of the location of the distribution centers has not beencoordinated properly with the location of new cement plants. In 3 cases,Saida, Nezloug, and El Asnam the silos and bagging facilities of thedistribution centers are being constructed wîthin 15 km of a new cement plant.The associated investments of about US$10 million represent a direct misalloca-tion of resources.

9. The major advantages of the distribution centers are (i) an improvedgeographical availability of large quantities of cement in bags as well asbulk for large-scale consumers; and (ii) economies in transport costs by bulkshipping. However, due to their high investment cost, SNMC's average distrilbutîon costs per ton are unlikely to decline after the distribution centerscome into operation. Operating costs of the centers (in 1974 value terms) are

ANNEX 4-2Page 5

estimated at DA 10 per ton during the 1975-80 period and will decline there-after to not less than DA 5 per ton as depreciation charges level off. 1/

III. Planned Distribution Channels

10. The 4 - Year Plan (1974-77) included an additional 34 distributioncenters. Rapidly rising investment costs led SNMC to re-examine the conceptof distribution centers as its basic distribution channel. In the first place,their original conception limited them to cement sales, while a large part ofthe demand - particularly in rural areas - is for a wide range of constructionmaterials. In the second place, the number of customers who demand bulk cementis relatively small and can be served by the existing plants and 10 distribu-tion centers. Above all, the geographical spread of cement supply in 1983,through 11 cement plants and 10 distribution centers, will be sufficientlywide that the transport cost savings by shipment of bulk cement to evenmore distribution centers does not any longer outweigh the considerable invest-ment costs of such installations. Only 3-5 additional distribution centersare, therefore, likely to be constructed during the coming years. Thesecenters will be located near Tlemcen and Marnia, at the Moroccan border, andat Tebessa, near the Tunisian border. They should be completed by 1978/79and will be designed for storage and trans-shipment of 500,000 tpy of bulkcement from CIMA and CIMAT, respectively.

il. SNMC's plans for its future distribution system are therefore based on:

a) the new and existing cemrent plants with their bagging and bulkstorage facilities;

b) 10-15 distribution centers with bagging installation and bulkstorage silo; and

c) a large number of distribution centers for a range of buildingmaterials which would eventually absorb the existing agencies anddepots.

12. The general distribution centers for construction materials willmarket all types of construction materials including bagged cement and otherSNMC products, but also including wood, steel frames, glass, etc. which areproduced by other state monopoly enterprises. SNMC, in cooperation with SNS,is in the process of studying the optimal location, size, design and managementstructure of the new all-round marketing centers. The concept of such general

1/ Estimate based on SNMC data as follows: - wages and salaries: approximatelyDA 2.66 million annually; maintenance: based on 0.5% of the cost of civilengineering and 2.5% of the equipment cost, this would be about DA 580,000per annum; depreciation: based on write-off of 20 years for civilengineering and infrastructure, 10 years for equipment and 5 years forother assets, depreciation charges would be DA 11.9 million in the first5 years, DA 4.3 million in the next five years and DA 2.75 million there-after; Utility charges: DA 364,000.

ANNEX 4-2Page 6

stores should not only contribute to a better geographic dispersion of cementand other construction materials but ought to also cater to the specific needsof private and small scale constructors.

C. TRANSPORT

I. Transport Modes and Costs

13. In theory, all shipment of cement either bagged or in bulk, fallsunder the monopoly of either SNTR 1/ or SNCFA, 2/ the state haulage and railwaycompanies. In practice, neither of the two companies has the capacity tohandle SNMC's transport volume. Accordingly, SNMC is allowed to own its ownfleet of trucks and has purchased 60 silo wagons which are operated for itby SNCFA. However, SNMC's truck fleet is still small, so that the bulk ofcement sales is picked up directly by the customer at the plant or dock side.In 1974, domestic cement consumption reached 2.9 million tons of which 193,000tons or 7% was transported by SNTR, 246,000 tons or 8.5% by SNCFA, an esti-mated 1.0 million tons (34%) by SNMC, and more than 50% by customers them-selves in their own trucks or in trucks owned by SNTR.

14. Railroad Transport: The existing rail system is constructed primarilyon an east-west axis, with narrow-gauge spurs running south from Mohammedia toBechar, from Ighil Izane to Tiaret and to Djelfa and Khenchela.The total system is 3,950 km, of which 1,260 km is narrow track. In the west,although the coastal belt is well served, the 750 km narrow guage southernspur to Bechar is under-utilized and has not had major rehabilitation forover 15 years. In 1969 it carried only 25,275 tons of freight and the statedweight limitation is 12 tons an axle or 3 tons a meter - approximately halfthat of a well-maintained normal-gauge track. SNCFA currently operates about1,700 narrow-gauge wagons, with an aggregate capacity of just under 20,000tons. It also operates 60 50-ton capacity cement silo wagons, owned bySNMC. SNCFA has ordered a further 120 silo wagons, financed by a World Bankrailway loan.

15. Road: Like the railroad, the national road system is primarilyeast-west with three north-south spurs perpendicular to the coast. The totallength of this network is 79,000 km of which 45% is paved. The Saida areaitself is served by RN6, which links Oran with Bechar, and by metallizedroads connecting Saida with the administrative centers of Mecheria, El Bayadh,Aricha, Aflou and Ain Sefra. Under the 1970-73 Plan DA 8.35 million wasallocated for regional road improvement and under the Special Program for theSaida area further substantial investments in road rehabilitation were foreseen.

1/ SNTR - Societe National de Transport Routier.

2/ SNCFA - Societe Nationale-deS Chemins de Fer d'Algerie.

ANNEX 4-2Page 7

16. SNMC operates, from its three regional centers, a fleet of approxi-mately 40 vehicles suitable for transportation of cement, divided by locationas shown in the table below. Annual transport volume of this fleet has notexceeded 1.2 million tons and many of the trucks are reaching the end oftheir useful life. 1/ Twelve of the SNMC owned vehicles are silo trucks,each of about 50 ton capacity.

SNMC: Cement Haulage Fleet (1974)

West Center East

Trucks /1 12 7 21

Forklift trucks 1 4 -

Cranes 1 1 -

Capacity (tons) 94,850 68,750 224,600

/1 Including tractor-trailers and trucks with trailers.

14. Transport costs vary according to transport mode, distances involved,gradients to be encountered and, in the case of SNTR, whether the truck willhave to return empty. The official tariffs charged by SNCFA and SNTR have notchanged in the recent past. In case SNMC-owned wagons are used, SNCFA grantsa rebate to SNMC amounting to 15% on the normal gauge railroad and 6% on thenarrow gauge railroad.

The cost structure of each carrier in 1972, the last year for whichdisaggregated data are available, are illustrated in the table below:

SNMC: Transport Costs - Distribution of Building Materials

Tons Shipped ('000) Tons x Kilometers (Mil) Cost per Ton/km (DA)

Mode West Center East Total West Center East Total West Center East TotalSNTR 271.7 295.2 93.6 660.5 32.2 22.76 10.59 65.63 0.215 0.221 0.213 0.217SNCA 74.6 1.0 385.9 460.5 40.35 0.47 146.18 187.00 0.100 0.100 0.104 0.103SNMC /1 243.1 335.9 301.2 880.2 4.49 5.39 3.01 12.89 0.189 0.210 0.213 0.203

/1 Distribution of building materials only.

1/ Most of the vehicles were purchased between 1971 and 74. Theaverage useful life of a truck in Algeria is 5 - 7 years.

ANNEX 4-2Page 8

Clearly, the railway is the most economical means of transporting cement.The tables below demonstrate, for the case of Saida, that SNTR can only competewith SNCFA tariffs on short distances and on 20 ton trucks with return load.

SNTR RATES BETWEEN SAIDA AND WESTERN URBAN CENTERS: 1973(DA PER TON - KILOMETER)

From: Saida Return Full Return Empty _Truck Size Truck Size

10 ton 15 t 20 t 10 t 15 t 20

To: Mascara .146 .121 .104 .234 .194 .167S.B. Abbes .139 .115 .099 .223 .185 O15DZahana .133 .11 .095 .213 .176 .

Mostaganem .133 .11 .095 .213 .176Mecheria .157 .13 .113 .252 .308 .180Oran .133 .11 .095 .213 .211 .152Tlemcen .233 .11 .095 .213 .176 .iï2El-Bayadh .156 .167 .144 .246 .208 .175Bechar .134 .111 .096 .215 .178 .jît

RAIL FREIGHT RATES: BAGGED CEMENT BETWEEN SAIDA ANDOTHER WESTERN TOWNS

From: Saida Distance (km) DA/ton - km

To: Ghazaouet 433 .086Oran 198 .119Mostaganem 170 .126Bechar 540 .080Ain-Sefra 283 .103Mecheria 181 .123

15. At present, the costs per ton-kilometer for SNMC's transportfleet compare well with SNTR tariffs. Further savings through economies ofscale can be expected after expansion of the fleet and its maintenancefacilities. However, average transport cost per ton of cement will increas2since (i) cement consumption in the hinterland is increasing and (ii) SNTR,SNCFA and SNMC will transport a higher share of the total volume of cementshipped.

II. Future Transport Requirements

16. The projected transport volume of cement in 1978 has been calculataunder the assumption that: (i) SNTR will more than double the tonnage whichit transports to 500,000 tons per year; (ii) SNCFA will be responsible forall bulk shipment from SNMC plants to SNMC's Distribution Centers with silo

ANNEX 4-2Page 9

capacity; and (iii) customers will continue to pick up cement from the factoryas in the past, the volume of such private pick-up increasing from 1.5 milliontons in 1974 to about 2.0 million tons in 1978 as new plants come in operationand more customers benefit from their proximity to the plant.

17. Rail. The following pattern of transport volume and distancesbetween SNMC plants and distribution centers appear to be realistic for 1978.

SNMC - PROJECTED RAIL DISTRIBUTION PATTERN (1978)

TonnageDistribution Plant Shipped Distance Ton-km

Center Source ('000 tons) (km) (million)

Djelfa Meftah 120 300 36Touggaurt Setif 120 500 60Batna Setif 240 130 31El Kroub Hadjar Soud 120 250 30Tianet Zahana 120 150 18Ain Fezza CIMA 120 100 12Bechar Saida 80 500 40Maghnia CIMA 200 70 14

1,120 241

According to the Bank's appraisal of SNCFA's operation, in the context of thefirst railway loan, 1/ about 10% of available rail cars are being repairedat any point in time. Average productivity of a railway wagon in Algeriahas been estimated at 586,000 ton/km per annum. SNMC would, therefore,require 440 50-ton silo wagons in 1978 to cover the demands for 241 millionton-km. Since SNCFA operates or has contracted for 180 wagons, there will bea shortfall of at least 260 silo-wagons by the end of 1978. 2/

18. SNMC - Trucks. As to road transport, SNMC will fill the transportneeds between the plants and cement distribution centers on the one hand, anddepots or the general distribution centers for building materials on theother hand. In addition, SNMC might have to provide bulk silo truck transportto large customers. To determine the number of trucks SNMC will have tooperate in order to transport 2.35 million tons of cement in 1978 betweenSNMC operating and marketing units, the following assumptions have been made:20-ton trucks can be on the road for an average of 250 days per year over adistance of 250 km per day. Assuming further that the average trip requires75 km and 60% of all journeys involve empty return trips, the annual efficiency

1/ Algeria: First Railway Project. Loan No. 996-AL. June 10, 1974.

2/ SNCFA's 1974-77 program does not provide for these 260 additional wagons.

ANNEX 4-2Page 10

of a truck is 750,000 ton-km. This results in a need for 230 20-ton trucksto transport 2.35 million tons of cement. About 30 of these trucks shouldbe silo-trucks in addition to the existing 12 ones. SNMC might also acquirea limited number of 10-ton trucks to service small depots, but the majorityvill be more economical 20-ton trucks. Not taking into account the replace-ment needs for the existing 40 trucks by 1978, SNMC vill require at least190 new 20-ton lorries.

19. Repair Facilities. The present size of SNMC's truck fleet hasmade only limited demands on the Company's capacity to provide maintenanceand repair facilities. SNMC realizes that the need for additional repairfacilities and management would grow vere its truck fleet to increase to230 20-ton trucks. Two possible solutions are still under study, either:(M) trucks vill be directly allocated to individual plants which vill alsoundertake their maintenance; or (ii) 5 new transport centers will be creatednear Algiers, El Asnam, Constantine, Annaba and Oran which vill be responsiblefor the organization of all SNNC's truck fleet. The latter solution offerssome advantages since it may encourage optimal utilization along the coastalstrip and hence economize on investments in new truck repair facilities. Onthe other hand it may discriminate against distribution from plants in thehinterland such as Saida, since trucks would have to be sent from Oran (about150 km) to distribute construction material within a radius of about 75 kmaround Saida. It is therefore likely that a compromise vill be reached throughwhich SNMC will maintain 5 transport centers along the coast and an addi-tional 2-3 facilities in the hinterland possibly around Saida, Touggourtand Batna. The investment costs required for truck repair and maintenancefacilities are difficult to estimate at the moment. They may range fromUS$800,000 to US$3.5 million depending on the number of repair centers andon the quality of their equipment.

20. Economic Justification. The extension of SNMC's truck fleet canbe justified from an economic point of view since it represents a leastcost solution and is likely to improve the quality of cement distribution.A cost/benefit analysis based on the least cost method has been undertakenand is summarized below.

(a) SNMC's future cost structure for the truck transportfacilities vas compared with SNTR's tariffs. As noted aboveSNMC trucks will primarily be used to transport bagged cement(and other construction materials) over an average distanceof 75 km between SNMC plants and depots with 60% returntrips empty. SNTR's tariff for such haulages in a 20-tontruck averages DA 0.135 per ton-kilometer.

(b) Assuming that SNMC expands its truck fleet to 230 20-tontrucks with corresponding maintenance and repair facilities,SNMC's cost structure can be estimated as follows:

ANNEX 4-2Page 11

Investment Cost US$ Million

190 20-ton trucksdelivered cost 7.6Repairs Facilities 2.5

Total 9.4

Operating Cost DA per ton-km

For one 20-ton truckaveraging 750,000 ton-kmper year:

Labor 0.015Materials & supplies 0.065Maintenance 0.021Depreciation /1 0.009Financial charges /2 0.004

Total 0.114

/1 Based on depreciation over 7 years./2 Assuming financing of 90 trucks at IBRD

conditions (15 years repayment plus 4 yearsof grace at 10%) and the remainder at 5.5%over 7 years.

(c) Consequently, SNMC should be in a position to transport2.35 million tons of cement at 15% below the tariffpresently charged by SNTR.

4-

However, lower cost is only one of the factors which favor the expansion ofSNMC's truck fleet. In addition there are definite qualitative advantages:SNTR's investment program for 1974-77 does not include provisions forthe required new trucks so that it is very likely that by 1978 they villnot be able to cope with SNMC's transport demand. Although the directpick-up of cement by the consumer represents an economical solution, itfavors large-scale consumers with their own transport means and reinforcesregional imbalances of cement consumption.

D. CEMENT PRICES AND PRICING SYSTEM

21. Cement prices in Algeria remained unchanged from May, 1966 untilOctober, 1973, during which time they were fixed on an ex-factory level.Prices ranged from DA 96.02/ton for bagged cement to DA 88.07/ton, 1/ ordinaryportland cement which was in line with domestic production costs as shown inthe table below:_/ DA 82.5/ton if TGP (sales tax) were excluded.

ANNEX 4-2Page 12

Unit Cost of Ordinary Portland Cement

Pointe-Pescade ZahanaDA/ton DA/ton

1970 1971 1970 1971

Raw Materials 23.58 21.15 16.28 15.01Personnel 11.16 10.62 13.76 13.87Utilities 11.74 10.22 17.02 16.50Taxes 1.54 1.68 1.54 0.96Financial Charges 0.03 0.04 0.17 0.06Depreciation 2.64 2.29 4.14 2.42General Charges 1.15 0.27 1.40 0.31Transport and Handling - 1.95 - 0.12Head Office Charges - 4.58 - 4.58

Bagging 51.84 52.80 54.30 53.837.6 7.6 7.6 7.6

Total 59.44 60.40 61.90 61.43

22. In 1972, SNMC started to realise losses in the cement sector sinceimport prices had risen markedly above the domestic sales prices.The Price Commission subsequently reviewed the level of cement prices inAlgeria and revised the pricing system as of October, 1973. Accordingly,prices are no longer fixed at the ex-factory level, but at the SNMC level,i.e. SNMC must charge a uniform price per ton to all its customers independentof geographical location, plant, dock side or agency. The system is designedto encourage cement use in the south and rural areas away from the developedcoastal strip. The prevailing prices for 1973-75 are as follows:

SNMC Sales Prices of Cement /1

Type of Cement Bagged Bulk

Ordinary: (CPA 325) DA 140/ton DA 130/ton

Special: Sulphate DA 160/tonWhite DA 210/tonQuick Setting DA 310/ton

/1 Delivered at SNMC agency, depot or bulk-handling facility.

23. The 1973 sales price was based on SNMC's actual cost in that year,which included ex-factory production costs, handling charges, transport

ANNEX 4-2Page 13

and a 10% margin ("marge de distribution"). It is not quite clear--on thebasis of SNMC's cost accounting records in 1973--if overhead expenses andmarketing costs were properly allocated 10 had to be absorbed by the 10%

margin. SNMC's cement cost structures in 1973 and 1974 are illustratedbelow.

SNMC - Unit Cost of Bagged Cement(DA/ton)

1973 1974 /1

Ex-factory cost 107.44 162.15Bags 7.60 8.50Handling 5.48 7.05

Sub-total 120.52 177.70

10% margin 12.05 17.77Transport /2 7.06 18.00

Total 139.63 213.47

Sales Price 140.00 140.00

/1 Estimated.

/2 Assuming a transport charge for 40% of tonnage distributed.

24. The table above indicates a cost increase of 60% between 1973 and1974 which was foreseeable but which was not taken into account by SNMC orthe Algerian price commission. The reasons for this change in the cementcost structure are twofold:

(a) The cif cost of imported cement increased further, fromDA 113 per ton in 1973 to DA 160 per ton in 1974. Includingadditional costs of importing (transit, unloading, storageand financial charges), the average cost of importedcement export reached DA 217.00 per ton in 1974. In thefuture cif prices of cement are likely to remain constantor even to decrease in real terms. However, in Algeriamiscellaneous port charges account for nearly 30% of thecif import price and have contributed heavily to the factthat Algeria's imported cement price levels exceed internationalstandards. CIF price decreases as well as greater efficiencyin port handling are therefore needed to stabilize the costof imported cement.

(b) SNMC started production in 2 new cement plants during 1974-75whose unit production costs far exceed the costs at existing

ANNEX 4-2Page 14

plants. The actual or estimated production and unit costbreakdown is as follows:

1973 1974 1975000 000 000tons DA/ton tons DA/ton tons DA/ton

Old plants /1 917 69 715 75 750 65New plants 71 87 200 225 220 750 235

/1 Pointe-Pescade, Zahana/2 Meftah, Hadjar Soud I

This trend will continue during the next 5 years, as anadditional 7 cement plants come on stream.

25. Until SNMC's new plants reach full capacity, their unit costs willtend to be 2-3 times more expensive than those of older plants. Even afterfull capacity is reached, these will still tend to be a differential of 50-100% for up to 10 years based on higher depreciation and financial charges.This will, therefore, be reflected in a new level of SNM 's cerent coststructure.

Industrial Projects DepartmentNovember 1975

ANNEX 5-1Page 1

ALGERIA

SNMC EXPANSION PROJECT

RAW MATERIAL AVAILABILITY AND ANALYSIS

A. INTRODUCTION

1. SNMC's first investigation into the raw material supply for theSaida cement plant was based on the geological map prepared by the Frenchmining service. After preliminary location of several deposits of limestone andclay within an area of 2,500 m2 to the east of Saida in summer 1973, SNMCrequested the Bulgarian consulting firm BULGAR PROJECTS to carry out a detailedstudy with the aim of locating raw material deposits suitable in both quantityand quality for the production of 500,000 tpy of clinker and 100,000 tpy oflime. Proven reserves were to be sufficient for at least 50 years at thislevel of production.

2. To locate suitable clay and limestone deposit for the production ofcement and limestone BULGAR PROJECTS has undertaken:

(a) a geological survey of the region to the South and South-Eastof Saida to fix the sites of the limestone deposits,

(b) a detailed geological survey with borings, corings,and chemical analyses, to determine the quality ofthe selected deposits; and

(c) detailed boring and coring wvth chemical and physicalanalyses to ascertain the physical and chemical charac-teristics of the selected limestone deposit.

3. After location of limestone, clay and sandstone deposits, BULGARPROJECTS undertook in its laboratories in Sofia:

(a) the petrographical studies of the representative samples;

(b) the pilot production tests of clinker manufactured from variouscombinations of the abovementioned raw materials, withand without correction components; and

(c) the chemical, physical and petrographical studies of theobtained clinkers.

B. OUM EL DJERANE LIMESTONE DEPOSITS

4. The limestone deposit is situated about 5 km south of the villageof Oum el Djerane; 1.5 km from the plant site, and on both sides of the roadbetween Oum El Djerane and Manora. The front of the deposit is 2 km long,and makes a right angle with the road. The altitude of the deposit varies

ANNEX 5-1Page 2

between 1,144 m and 1,188 m. The deposit of limestone is partially covered

with quarternaire clay of 0.20 to 0.60 m thickness, following the topography.

These clays have a rusty-brown color and contain limestone fragments of

different sizes. The limestone strata are of the Jurassie period, Bajocien

level, and belong to the Nador Carbonate Formation. The thickness of the

limestone varies between 15 m and 51 m. The strata are virtually horizontal,

the inclination varying between 5G to 10', to the North of North-West. It is

a hard stone with fine calcite grain structure, with a porcelain aspect, a

white to grey color, and some local spots of violet-rose. The top levels of

the strata are altered and fissured to 2 at 5 meters, and have some pro-

nounced carstic formations. The fissures and the cavities are filled wlth

rustry brown clays. The walls of the fissures and the cavities are partially

covered with a deposit of ferrous and magnesium hydroxides.

5. The remaining levels of the strata consist of very homogeneous,

compact and hard limestone. Only the bottom levels of the strata have a few

insertions of marly clay of 0.10 to 0.2 meters thickness.

The limestone strata lie on partly rusty-brown colored marly clay

of the same geological period and level as the limestone. The chemical

constitution of the marly clays is not suitable to the fabrication of cement,

due to a high tenor of magnesium and various mineral oxîdes. The strata of

m-arly clay lie on dolomite strata of unexplored thickness.

6. To calculate the reserves of the Oum El Djerane Limestone deposit,

26 borings of a total length of 1,015 m have been done over an area of

2,618,000 m2. Alone, the reserve studied in detail covers the needs of a

cement plant of 500,000 tpy with a lîme plant of 100,000 tpy for more than

70 years. (See tables 3 and 4)0 The reserves are made up of homogeneous hard

limestone of 1.5 average humidity, with a chemical composition suitable for

the fabrication of cement with dry process technology. The harmful component

(chloride, phosphates) percentage is below admissible limits (see Table 1).

7. Exploitation of the limestone quarry will rely on conventional

methods, by means of drilling and blasting in terraces of 10 m to 20 m

working face heights.

C. SIDI EL MINOUN NORTH CLAY DEPOSITS

8. The clay deposit is situated South of the road R 77, near the

Marabout Sidi-Ahmet Chibani (about 57 km from the Oum el Djerane limestone

deposit on the other side of the town of Saida). The altitude of thedeposits varies between 735 m and 788 m. The deposits are partially covered

with deluvial sandy-clay of dark-brown color. With the insertion of gravelof various sizes, the thickness of the cover varies between 0.50 and 3.0

meters.

9. The clay strata are of the Bajocian division of the Jurassic period

and has an inclination of 30° North. Their thickness varies between 7.00 to

16,000 meters. The upper levels of the strata are alterated and fissured.

ANNEX 5-1Page 3

The color of the clay is greenish-beige and partially rusty brown in the wallsof the fissures due to the ferrous hydroxide. The altered clay is plastic,and is of a very fine grain. The bottom layer of the strata is compact andgrey. When in contact with the atmosphere the color progressively turns towhite and decomposes into laminae. There are insertions of hard stratavarying between 0.1 to 0.5 meters in both levels, consisting of marly claywith coherent sandstones, and a few lenticular insertions of iron-mouldedbrown and white marly clay of 0.3 to 0.07 m thickness. To fix the depositsof the Sidi El-Minoun clay deposits, 29 borings of a total length of 910meters have been carried out in an area of 227,462 m2. The reserves studiedin detail in an area of 136,878 m2 cover by thenselves the needs of thecement plant for a period of more than 50 years. (See table 3 and 4)

10. The constitution of the clay strata is quite homogeneous. Thehumidity of the clays varies between 6 to 15.3%. The average humidity is8.7%. (See table 1 and 2)

11. The clay is composed of low silica modula and high alumina modula(See table 2). There are no components harmful to the fabrication of clinkerin dry process technology. A correction will be needed to raise the silicamodula and reduce the alumina modula in raw meal preparation. Sandstonesand iron ore will be added for these purposes. This sandstone will beextracted from the deposits at Oum el Djerane.

12. The exploitation of the clay deposits will be carried out by con-ventional methods, i.e., by digging and excavating in terraces. Specialprecautions muet be taken to drain the water from the quarry, especiallyduring the rainy seasons.

Note: SNNC has undertaken a new study of clay deposits near AineVBHadjar. Ain el Radjar in located weut of the Saida-Bechar road, only11 kms from Saida. These deposits offer the advantage of being closer tothe site of the limestone deposit at Oum El Djerane and of being connectedby national roads of shorter distances. The deposit is about 36 km by roadfrom the plant site and is also situated relatively close to the projectedroute of the rail spur from the plant site to the operating railroad.

D. OUM EL DJERANE SANDSTONE DEPOSITS

14. The sandstone deposit is situated 3 km north of the village ofOum el Djeran, and about 17 km by road from both the limestone deposits andthe plant site.

15. The altitudes vary between 1074 and 1101 meters. The deposits arecovered with marly clay of a thickness varying between 0.10 to 15 m. Themarly clays have plastic characteristics. The colors are greenish grey and,near to the surface in the alterated zones, brownish yellow. In the stratathere are insertions of rusty brown sandstone of about 10 cm thickness.These sandstones are of the Jurassic period, and are made up of quartz cementedwvth clay. The colors of the sandstone are brownish-red to rusty brown.

ANNEX 5-1Page 4

2They are brittle, and have a high tenor of SiO . (See table 1 and 2). Thesandstone strata thicknesses vary between 15 and 23 m. There are a fewinsertions of sandy-clay levels of about 0.20 m thickness in the strata.The sandstone strata lie under the greenish-grey marly clay formation.The marly clay tenor of SiO2 is very low.

16. To study the sandstone reserves of the Oum el DJerane deposits, 24borings of a total length of 916 meters have been made over an area of151,860 m2 . The reserves studied in detail, of 54,160 m2 alone cover theneeds of the cement plant for more than 80 years. (See table 3 and 4)

17. The sandstone will be used as a correcting component for the clays,with the purpose of correcting their silica and aluminum modulas. The maximumyearly consumption will be 25,000 tons. The constitution of the reservesis homogenous. Exploitation of the sandstone will be by way of drilling,blasting, and loading. Special precautions must be taken for the drainage ofwater. The stripping of the cover will pose some difficulties due to itsconsiderable thickness in some parts of the deposits.

E. IRON ORE

18. The use of iron ore has been foreseen in the project as a correctioncomponent in the chemical composition of the raw meal. The iron will beobtained from the mine of Beni Saf, near Oran, (Mine de Fer De Makta el Halid)(See table 5). This ore is to be transported by dumper trucks, over a dis-tance of 300 kilometers. The maximum yearly consumption of iron ore will be12,500 tons.

F. GYPSUM

19. The gypsum is mixed in the proportion of 1:25 with the clinker forthe fabrication of cement. The annual gypsum needs will be provided by theSNMC plaster plants of Fleurus, situated 170 km east of Oran, and 320 kmfrom Saida. The yearly gypsum consumption of the plant will be about 20,000tons. The transportation will be by dumper trucks or rail. (See table 6)

G. RAW MNAL COMPOSITION

20. With the above-mentioned raw materials, the Saida cement plantwill be able to prepare raw meals suitable for the production of APC 350and APC 400 as well as ASTM IV cements, by way of dry-process technology.

The limestone of Oum el Djerane and the clay of Sidi el Minoun Northwill be the main components to be used for the preparation of the raw meal.

21. The sandstones of the Oum el Djerane deposits and the iron fromBeni Saf will be used as correction components for the purpose of raisingthe silica modula and reducing the aluminum modula. They will also be usedfor the preparation of a special raw meal for the fabrication of low-heatcement.

ANNEX 5-1Page 5

22. The chemical composition of the raw materials does not show aharmful level of chloride sulphates, alkalis or phosphates for dry processtechnology (See table 7). Using a good homogenization procedure, theSaida cement plant will be able to produce an excellent quality of clinker.

The technological tests that have been done at the laboratoriesof BULGAR PROJECTS in Sofia, with 6 different mixtures of raw materials,confirm the feasibility of obtaining an excellent quality of clinker with orwithout correction components (See table 8 and 9).

Industrial Projects DepnrtmentNovember 1975

ALGERIA - SNMC. EXPANSION PROJECT ANNEX 5-1Page 6

Table I

PHYSICAL ANALYSIS OF RAW MATERIAL

Limestone Clay Sandstone

Min Max Average Min Max Average Min Max Average

Volumetric Weight gr/cm3 2.23 2.56 2.42 2.30 2.50 2.37 1.92 2.19 2.00

Specific Weight gr/cm3 2.70 2.72 2.71 2.30 2.83 2.78 2.65 2.67 2.66

Natural huriidity % 0.10 1.41 0.78 6.0 15.3 8.7 2.05 7.11 3.39Porosity factor K 0.053 0.211 0.12 - - - 0.237 0.427 0.374

Compression resistancekg/cm2 308 1083 583 - _ _ 113 358 191

Industrial Projects DepartmentNovember 1975

AIGERIA - SNMC EXPANSION PROJECT

Table 2

CHEMICAL ANALYSIS OF RAW MATERIAL

Ignition Silica AluminaSECT10N SiO2 Fe2 03 A12 03 TiO2 CaO MgO K20 Na2 O S03 Ci P205 Loss Ratio Ratio

LIMESTONE I - A 2.2 0.4 0.6 0.10 53.2 0.6 0.22 0.22 0.2 0.017 0.02 41.8 2.2 1.5II - B 2.6 0.4 0.6 0.07 52.7 0.6 0.22 0.25 0.3 0.016 0.02 41.7 2.6 1.5

III - B 4.3 0.6 1.2 0.09 50.8 0.8 0.34 0.25 0.3 0.017 0.02 40.9 2.3 2.0IV - B 2.1 0.4 0.5 0.10 53.2 0.6 0.22 0.23 0.2 0.017 0.01 41.8 1.9 1.25V-- C 4.0 0.6 0.9 0.01 51.5 0.6 0.29 0.21 0.3 0.015 0.08 41.1 2.6 1.5

VI - C 9.4 0.5 0.7 0.07 52.2 0.6 0.28 0.27 0.3 0.018 0.02 41.6 2.8 1.4

Average 3.3 0.5 0.8 0.09 52.2 0.6 0.27 0.22 0.3 0.016 0.03 41.4 2.5 1.6

CIAY I - A 56.8 7.8 16.5 0.56 4.5 1.9 2.47 0.77 0.9 0.014 0.12 8.1 2.3 2.1II - B 55.9 8.0 16.4 0.79 4.5 2.2 2.46 0.72 0.8 0.013 0.10 8.4 2.3 2.0

III - B 54.6 7.8 16.3 0.58 5.3 1.9 2.32 0.78 0.9 0.024 0.17 9.5 2.2 2.1IV - C 55.4 7.6 16.0 0.59 5.0 1.9 2.32 0.82 0.9 0.027 0.16 9.4 2.3 2.1V - C 55.5 8.0 16.3 0.58 4.8 2.1 2.48 0.74 0.8 0.015 0.12 7.6 2.2 2.0

Average 55.9 7.8 16.6 0.58 4.7 2.0 2.40 0.76 0.9 0.019 0.13 8.7 2.3 2.1

SANDSTONE I - B 84.0 2.2 5.8 0.33 1.99 0.9 1.84 0.50 0.07 0.016 0.07 3.21 10.5 2.6II - C 82.5 2.4 5.9 0.33 1.99 0.9 1.89 0.10 0.06 0.01 0.06 3.21 9.9 2.4

III - C 83.1 2.3 6.0 0.33 1.99 1.0 1.85 0.10 0.09 0.016 0.08 3.21 10.0 2.6

Average 83.3 2.28 5.88 0.33 1.99 0.95 1.86 0.10 0.06 0.01 0.07 3.21 10.27 2.57

Industrial Projects DepartmentNovember 1975

ALGERIA - SNMC EXPANSION PROJECT ANNEX -1A

Page 8Table 3

RAW MATERIAL REQUIREMENT FOR CEMENT FABRICATION

A. LIMESTONE

Specific requirement 1,6x0,75 = 1,2 ton of dry limestone per ton1,2 : 0,9922 = 1,21 ton - (mean humidity0,78%)

Annual requirement for 500,000xl,21 = 605,000 tons of quarry500,000 ton clinker limestoneproduction

B. CLAY

Specific requirement 1,6x0,22 = 0,35 ton of dry clay per ton ofelinker0,35x0,913 = 0,38 ton (mean humidity 8,7%)

Annual requirement for 500,OOOxO,38 = 190,000 tons of quarry clay500,000 ton clinkerproduction

C. SANDSTONE 1,6x0,03 = 0,048 tcn of dry sandstone perton of clinker0,048 : 0,973 = 0,050 ton (mean humidity2,66 %)

Annual requirement for 500,OOOxO,050 = 25,000 ton of quarry500,000 ton clinker sandstoneproduction

RAW MATERIAL REQUIREMENT FOR LIME FABRICATION

LIMESTOME

Specific requirement 1,78 ton of dry limestone per ton of lime1,78 : 0,9922 = 1,8 ton mean humidity 0,78%.

Annual requirement for 100,OOOxl,8 = 180,000 ton of quarry limestone100,000 tons limeproduction

Industrini Projects DepartmentNovember 1975

ALGERIA - SN1C EXPANSION PROJECT

Table 4

RAW MATERIAL RESERVES AND THEIR AVAILABILITY

SECTION SECTION THICKNESS DEPOSIT VOLUMETRIC RESERVES OVERBURDEN RESERVES RESERVES IN YEARS RESERVES IN YEARSAR2EA AVE-RAGE VOL WEIG3T VOLv E CORRECTED FOR 500.000 tpy WITH 100.000 tpym m .OOOmt/ .000-,tons m .000 ton CLINKER LIME

LIMESTONE I-A 136.560 36.44 4.976.2 2.42 12.042.5 12.290 11.777.6 19.4 15.0

il-B 417.000 28.29 11.796.9 2.42 28.548.5 25.870 27.920.5 -- --III-B 222.480 18.77 4.175.9 2.42 10.105.7 24.433 9.833.5 -- --IV-B 102.020 33.34 3.401.3 2.42 8.231.2 14.238 8.050.1 -- --

TOTAL B 741.500 -- 19.374.2 -- 46.885.6 84.626 45.854.1 75.8 58.4

TOTAL A+B 878.060 -- 24.350.4 -- 58.916 96.916 57.631.7 95.2 73.4

V-C 1.094.190 22.56 24.684.9 2.42 59.734.5 104.419 58.423.3 -- --VI-C 646.310 21.99 14.212.3 2.42 34.393.9 409.872 33.637.2 -- --

TOTAL C 1.740.510 -- 38.897.2 -- 84.132.9 219.289 92.060.5 152.2 117.2

TOTAL A+B+C 2.618.560 -- 63.247.7 -- 153.060.5 316.205 149.692.2 247.4 190.6

CLAY I-A 49.584 32.44 1,608.5 2.37 3.812.1 5.454 3.812.1 20.0 --

II-B 40.142 27.83 1.117.2 2.37 2.647.6 24.085 2.647.6 -- --III-B 47.152 29.41 1.386.7 2.37 3.286.6 8.487 3.286.6 -- --

TOTAL B 87.294 -- 2.503.9 -- 5.934.2 32.572 5.934.2 31.2 --

TOTAL A+B 136.878 -- 4.112.4 -- 9.746.3 38.026 9.746.3 51.2 --

IV-C 19.008 21.55 409.6 2.37 970.8 3.801 970.8 --V-C 71.576 25.88 1.853.4 2.37 4.390.1 67.997 4.390.1 -- --

TOTAL C 90.584 -- 2.262.0 -- 5.360.9 71.798 5.360.9 28.2 --

TOTAL A+B+C 227.462 -- 6.374.0 -- 15.107.2 109.824 15.107.2 79.4 --

SANDSTONE I-B 54.160 19.80 1.072.4 2.00 2.144.7 109.944 2.144.7 85.7 --

II-C 47.630 18.61 886.4 2.00 1.772.7 211.477 1.772.7 -- --III-C 50.070 17.49 875.7 2.00 1.751.4 103.644 1.751.4 -- --

TOTAL C 97.700 -- 1.762.1 -- 3.524.2 315.122 3.524.2 141.0

TOTAL B+C 151.860 -- 2.834.5 -- 5.668.9 425.066 5.668.9 226.7 --

1) Cavernousity ratio for limestone K = 0.978

For Clay and Sandstone K 1

Industrinl Projects DepartmentNovember 1975

ALGERIA - SNMC EXPANSION PROJECT ANNEX 5-1Page 10

Table 5

BENI SAF IRON ORE ANALYSIS

Loss in Ignition 9 %

Si °2 6,3 %

A12 03 2,9 %

Fe2 O3 68,35 %

Ca 0 6,3 %

Total 90,9 %

Table 6

GYPSUM ANALYSIS

Ca S0h>2H 20 80-90 %

Industrial Projects DepartmentNovember 1975

ALGERIA - SNMC EXPANSION PROJECT

Table 7

RAW MEAL COMPOSITION

MIXTURE LIMESTONE CLAY 1 CLAY 2 SANDSTONE IRON ORE I.L ) SiO2 A12O3 Fe2 03 CaO M8O X5) LF2) MS3) MA4)

(%) (_) _ _ (7.) (%) Mo (%) ( .) (Z/) •. _ __-

1 76.51 22.95 -- 0.41 -- 35.20 13.42 4.25 1.87 43.25 0.38 1.62 0.95 2.19 2.282 73.60 26.40 -- -- -- 33.60 13.38 4.12 1.74 41.40 0.87 1.89 0.74 2.80 2.363 74.63 -- 22.56 2.00 0.81 34.08 13.47 4.78 2.46 42.78 0.79 1.64 0.90 1.86 1.914 75.57 -- 22.90 -- 1.53 33.70 13.15 4.52 2.99 42.74 0.70 2.20 0.93 1.75 1.515. 76.14 23.86 -- -- -- 34.80 14.00 4.79 2.04 42.27 0.64 1.46 0.86 2.05 2.306 75.84 22.75 -- 1.41 -- 34.17 13.72 4.38 2.51 43.00 0.79 1.43 0.91 1.99 1.75

IRON ORE 5.05 11.80 2.04 72.60 2.20 5.96 0.35 -- 1.58 0.02SANDSTONE 2.81 82.85 6.17 1.86 4.56 0.50 1.25 -- 10.32 3.31

CLAY 2 8.72 55.05 16.56 8.27 5.50 2.95 3.00 -- 2.22 2.00CLAY 1 8.55 56.45 16.32 7.49 4.98 3.19 3.03 -- 2.37 2.17

LIMESTONE 42.90 0.64 0.60 0.38 55.28 0.00 0.38 0.91 0.65 1.57

1) Ignition loss2) Lime factor (KIND FORMULA)3) SILICA MODULA4) ALUMINA MODULA5) OTHER CHEMICAL COMPONENTS

Industrinl Projects DepartrrentNovember 1975

ALGERIA - SNMC EXPANSION PROJECT

Table 8

CHEMICAL AND MINERALOGICAL COMPOSITION OF CLINKER

CHEMICAL ANALYSIS RATIOS MINERALOGI6AL ANALYSIS

CLINKER SiO2 A1,0 Fe 0 CaO CaO MgO Na0 K0 L MS MA s C C3A CA WEIGHT

.3 2 3 2 2 03 LF- MS - 3 C2 3 4AWIH

(°i .(ZL. .(ZL. <%) *•%) -% •L •L .Z (%) (7a (7 (7) Kg/lt.

1 20.69 6.56 2.88 67.56 1.82 0.58 0.68 0.60 0.45 0.93 2.19 2.23 62.90 12.45 12.50 8.75 1.350

2 24.62 6.19 2.62 62.23 0.21 1.30 1.72 1.22 0.10 0.74 2.80 2.36 20.60 55.10 11.95 8.00 1.210

3 20.40 7.26 3.74 64.92 0.17 1.20 0.50 0.75 0.50 0.90 1.85 1.94 54.40 17.60 12.90 11.4 1.300

4 19.80 6.81 4.50 64.52 0.64 1.05 0.86 1.04 0.85 0.92 1.75 1.51 57.30 13.70 10.50 13.7 1.260

5 21.42 7.34 3.12 64.68 0.25 0.98 1.18 1.08 0.20 0.85 2.05 2.30 45.60 27.70 14.20 9.5 1.360

6 20.80 6.65 3.80 65.23 -- 1.20 0.48 0.91 0.41 0.91 1.99 1.75 57.80 16.10 11.20 11.6 1.34e-

LF: Lime factor (KIND Formula)MS: Silica ModulaMA: Alumina Modula

Industrial Pro,jects Department_November 1975

ALGERIA - SNMC EXPANSION PROJECT ANNEX 5-1Page 13

Table 9

PHYSICAL TESTS OF CEMENT

CEMENT NUMBER 1 2 3 4 5 6

WATER % 25.3 29.7 26.3 25.3 28.3 26.0

SETTING TIMEinitial 2h.20' 2h.20' 2h.40' 2h.30' 2h.25' 2h.40'final 4h.10' 3h.30, 4h. O' 3h.30' 3h.30' 3h.35'

LITER WEIGHT Kg/lt.bulk 1.228 1.090 1.065 1.095 1.065 1.090compact 1.553 1.480 1.475 1.505 1.480 --

EXPANSION1000C 'water normal normal normal normal normal normal

1800'water il "i Il " fi

SPECIFIC WEIGHT lt/cm 3 3.066 3.19 3.29 3.22 3.22 3.19

FINENESSBlaine cm2/gr 3343 3986 3637 4061 3994 3780residue 900/cm 2 1.0 1.5 1.0 1.5 1.0 1.5

residue 4900/cm 2 6.0 7.0 7.0 6.0 5.0 6.0

IGNITION LOSS 1.30 1.49 1.14 2.39 0.96 0.88

INSOLUBLE RESIDUE % 0.42 -- -- 0.76 -- 0.33

TENSILE STRENGTH

TRACTION Kg/cm2

1 day 26.0 14.3 25.3 32.7 22.3 24.33 days 54.0 21.3 47.3 56.0 50.3 52.37 days 66.3 43.0 60.0 65.3 65.3 61.0

28 days 73.7 69.3 71.7 78 79.7 75.0

COMPRESSION Kg/cm2

1 day 91 44 92 123 80 933 days 250 91 218 282 215 2637 days 283 191 337 394 373 302

28 days 495 403 542 486 582 545

Industrial Projects DepartmentNovember 1975

ANNEX 5-2Page 1

ALGERIA

SNMC EXPANSION PROJECT

SAIDA CEMENT PLANT: DETAILED DESCRIPTION

A. General ProJect Conception

1. The general guidelines followed by SNMC in the design of previous

cement plants include provisions that:

1) Minimum capacity of each plant must be 500,000 tpy of clinkeror 1,500 tons per day of kiln capacity;

2) Dry-process technology be used;

3) The production process must be driven by fully automaticprocesses with fully automatic controls;

4) The most modern technology should be incorporated inthe plant;

5) All departments in which technical imperatives do not imposea continuous run must be designed for a capacity of 8 hoursper day and a five day week;

6) The equipment capacity should allow a sufficient securitymargin to allow temporary increased production to offsetlosses associated with expected production shutdowns;

7) The anti-pollution, safety and security measures of the plantmust be consistent with internationally accepted standards; and

8) The project must be realized in the shortest possible timeperiod under the full responsibility of a turnkey contractor.

This approach, which has been applied to the new cement plants for which SNMC

has recently signed contracts, has the advantage of assuring the supply ofthe latest cement manufacturing technology according to a predetermined time

schedule and with a minimum involvement of SNMC's scarce technical staff. Itrepresents a choice as to the allocation of economic resources which theAlgerian authorities have consciously taken. Hovever, disadvaatages include

(i) the possibility of sub-optimal process choices, (ii) high capital costrequirements because of excessive security margins, (iii) capacities whichmight not be in line with market requirements, (iv) premiums paid for thelatest technology, (v) the risk of costly start-up problems with fullyautomatic cement plants, and (vi) the possibility that capital-intensiverather than labor-intensive construction methods will be preferred.

ANNEX 5-2Page 2

B. Process Choice

2. The dry process has been chosen as basic technology for the Saidacement plant. Three factors determined this choice: (i) all new cementplants in Algeria will use this technology and SNMC expects that such auniform production technology vill minimize expenses for staff training andspare parts and allow the shift of staff between plants; (ii) the plant villbe located in a semi-arid area where water availability is limited--thechoice of the wet process vould require an additional 20 lb/second whichvould have to be diverted from agricultural purposes; and (iii) a comparisonbetween the investment and operating costs of the Saida plant and those ofcomparable wet process plant shows that the lover fuel costs of a dryprocess plant offset its higher investment cost and higher pover consumption,so that ceteris paribus neither process offers a significant cost advantage.In view of the limited availability of water and the desirability of stand-ardization, the choice of the dry process for the Saida plant is endorsed.

C. Description of the Installation

3. The following technical description is based on the turnkey contractsigned between SNMC and the Japanese supplier Kawasaki Heavy Industries (KHI).A flow sheet and plant lay-out are given at the end of this Annex.

I. The Limestone Quarry:

The limestone quarry, situated 1.5 km from the site of thefactory, vill operate in the conventional vay, with terraces of a height ofabout 20 meters. Drilling rigs vill drill holes for the dynamite charges.After blasting, the oversized blocks will be reduced by secondary blasting.A hydraulic shovel of 4 m3 capacity vill load the rocks into dumper trucksof 23 tons capacity each. The dumper trucks will discharge the stone intobine of a KAWASAKI HAZEMAK crusher of 600 to 700 tons per hours capacity,located 1.5 km from the factory.

In the crusher the stone will be reduced from 1.2 x 1.2 x 1.0meters, dovn to 20 mm, 60 to 70% of this being even finer. The crushedstone vill be transported to the factory by means of a belt conveyor. Abag filter installation is foreseen for the collection of the dust in thecrushing installation. The crusher vill work 6 hours a day, 5 days a veek.Its capacity is calculated to meet the needs of the cement and lime plants.The equipment of the quarry will include 2 drilling rigs of a dianeter of3 inches, 5 rock hand-perforators, 3 stone-breakers, two compressors of acapacity of 25 m3, one compressor of 10.5 m3 per minute, 3 dumper trucksof 22 tons capacity each, one hydraulic shovel, vith a capacity of 4 m3one bulldozer and one grader.

ANNEX 5-2Page 3

Il. The Clay Quarry:

3 The clay quarry vill operate conventionally with a face shovel of1.5 m capacity for digging and excavating the quarry faces of about 10meters height, which vill be set in terraces.

The shovel vill load the dumper trucks of 17 tons, which villtransport the clay to the factory crusher bin. The distance between thequarry,and the factory ls about 30 kms. The overburden vill be removed bymeans of a bull-dozer. Thirteen 17-ton dumper trucks are foreseen for theclay transportation.

The quarry vill be in operation for a duration of less than 6 hoursa day, five days a week.

TII. The Sandstone Quarry:

The sandstone quarry vill operate vith a drilling rig of a diameterof 2 inches. After blasting, the sandstone vill be loaded on dumper trucksof 17 tons via a rubber-tired loader of a capacity of 0.8 m3.

The dumper vill discharge the stone into the factory sandstonecrusher bin. The distance between the quarry and the factory is about 15 km.The equipment foreseen for the quarry vill consist of one drilling rig of2 inches, one hydraulic shovel vith a capacity of 0.8 m3, one rubber-tireloader and one dumper truck of 17 tons. A work-shop truck, a lubricationtruck, one vater truck, and one fuel tanker truck are also foreseen as commonequipment for all quarries.

IV. Clay and Sandstone Crushing

The clay and the sandstone, filled up in the bins of the crusher,vill be fed to the drying HAZEMAK SAPT crusher of 150 tons per hour capacityin appropriate quantities, regulated by the automatic drive system. To drythe rav material, the crusher vill also be supplied with hot air from thehot air generator of 12.106 Kcal/h at 750'C.

In the crusher, the stone will be reduced from max. 800 x 800 x800 mm to max. 20 mm vith only 10% in excess of this. Humidity vill bereduced by 4%. The crushed material vill be sent to the pre-homogenizationdepartment by means of a conveyor belt. In the crusher an electrostaticprecipitator has been foreseen for dust collection. An automatic weighingand sampling device will be installed at the outlet of the crusher andconnnected to the automatic drive system.

V. Pre-Homogenization

In the factory, the crushed limestoue vill be sifted and particlescoarser than 20 mm. vill be sent to the lime factory where they vill be

ANNEX 5-2Page 4

crushed again for raw material fabrication. After this secondary crushing,the stone vill be sifted once more and the particles of a 8ize less than10 mm vill be sent back to the pre-homogenization department. 2 such siftingsvill allow optimal use of the limestone between both plants.

The limestone pre-homogenization department vill be a covered hallvith a lime storage capacity of 2 x 15,000 tons. By means of speciallongitudinal shifting equipment vith a capacity of 700 tons pér hour, thecrushed limestone vill be stored and spread out in the form of layers vithinthe storage area. The limestone thus stored in layers vill be taken byspecial transversal shifting equipment vith.a capacity of 300 tons per hour,and vill be conveyed by rubber conveyors to the crude grinding department.

The clay and the sandstone homogenization department is to be acovered hall vith a capacity of 2 x 4,000 tons of mixed clay and sandstoneand 6000 tons for iron ore, gypsum and pozzolana, equipped vith both longitu-dinal and transversal shifting equipment vith capacities of 260 and 100 tonsper hour respectively. Retaking of the clay and sandstone mixture vill takeplace by means of the transversal shifting equipment.

Iron ore, used as corrector in the raw meal, gypsum and pozzolana,used in the cement, will also be stored in the covered clay and sandstonepre-homogenization section. These materials vill be supplied to the factoryby means of dumper trucks or railway bine which vill be discharged into aspecial hopper, after which they vill separately be conveyed to the storagearea of the pre-homogenization unit.

Iron ore, gypsum and pozzolana vill be transported the longitudinalshifting equipment. The iron ore vill be conveyed to the crude grindingdepartment. The gypsum and the pozzolana vill be conveyed to the cementgrinding department by means of rubber-belt conveyers.

VI. Crude Grinding

The limestone, the mixed clay and sandstone and the iron ore willbe taken from the bins in a proportion determined by the central automaticdrive system and will be carfted to the KAWASAKI RAZEMAK drying crusher whichwill have a 150 tons per hour capacity.

Transfer of the material will occur by means of an automaticsampling and veighing device attached to the central automatic drive system.

In normal conditions the crusher vill be heated with hot gas comingfrom the kiln, so that the calorific power of the gas will be used to drythe raw material. During start-up or when the kiln is stopped for any reason,the crusher vill be heated by means of a hot gas generator of 7.106 Kcl/hourat 750°C' capacity.

The raw material thus crushed and dried vill be conveyed to theKAWASAKI grinding mill, which has a capacity of 150 tons per hour and a

ANNEX 5-2Page 5

diameter of 4.1 meters. The output of the mill vill be sent to a KAWASAKIseparator by means of a mechanical elevator, where the coarse material villbe separated and returned to the mill and the fine material vill be sent tothe homogenization silos by means of pneumatic meal pumps.

The gas from the hot gas generator or from the kiln vill be condi-tioned, by means of vater injection in the conditioning tower, to meet thephysical performance requirements of the electrostatic precipitator. Itsefficiency vill be less than 50 mg/m3.

The fine raw material particles which vill be collected in theprecipitator vill be sent to the grinding mill, if it is operational, andpumped to the homogenization silos if it is not.

The grinding department vill be fully automatic and vill run 16hours per day and 7 days per week.

VII. Homogenization

The ground raw meals will be stored in two homogenization silosvith a capacity of 5,000 m3 each, an inside diameter of 15 meters and a heightof 30 meters. Storage vill take place by means of one special feeder in eachsilo to spread the meals. Homogenization of the raw meals vill be continuousat the bottom of the silos, at a height of about 5 to 6 meters, by means ofthe Claudius Peters system. The homogenized raw meal vill be automaticallyremoved from the silos and fed to a one-kiln alimentation bin, the level ofwhich vill be maintained by an automatic level control. The raw meal villbe transported to the bin by air slides and a mechanical elevator. A bagdust filter is foreseen on top of each silo. The raw meal vill be takenfrom the constant level bin and automatically weighed and sampled before beingsent by pneumatic pumps to feed the kiln. The raw material flow vill beregulated by the central drive system.

VIII. Kiln

This vill consist of a dry-process, short rotary kiln with acapacity of 1.500 tons/h., a diameter of 4.5 m and a length of 75 m. Itvill be provided with an air-supended heat exchanger, consisting of fivesuperimposed cyclones. These five cyclones vill be superimposed in theform of four floors, with one each on the first three floors, and two onthe last. The botton one will have a diameter of 6.8 m; the second one adiameter of 6.4 m; the third, a diameter of 6.1 m; while the last two villhave diameters of 3.7 m each.

The kiln will be followed by a FOLAX system air-floated clinkercooler of 5 compartments of 3.36 m x 20.42 m. The kiln will burn Algeriannatural gas and will be driven by a fully automatic system. The safety ofthe burning zones of the kiln shell vill be ensured by a set of ventilators.For the safety of the cyclones, a vater-injection system is foreseen. The

ANNEX 5-2Page 6

burning zone of the kiln and the cooling zone of the clinker cooler will bothbe watched by means of industrial television sets placed on the centraldrive control board. The teperature of the clinker after the cooling processvill not be above 600C. After the cooler, there will be a crusher for thepurpose of reducing the oversized clinker. The output of the kiln will beautomatically weighed after which it vill be transported to either the clinkersilos or the cement mill bin by means of a chain conveyor and mechanicalelevator system. The dust of the clinker cooler vill be collected by a gravelfilter with an efficiency of 50 mg. per m3. The kiln department vill runwithout interruption.

Dumper loading facilities are foreseen between the automaticweighing system and the cooler to enable transportation of the kiln productin case of need.

IX. Clinker Storage

As described above, the cooled clinker will be stored in six siloswith a capacity of 5,000 tons each, 15 meters inside diameter and a height of27 meters. The total clinker storage capacity is 30,000 tons and meets thestorage needs for twenty days kiln production. The silos vill have automaticextraction devices providing for the possibility of mixing different kinds ofclinkers, and also for the purpose of mixing clinkers to improve or maintainthe quality of the cement. The extracted and mixed clinkers vill be trans-ported to the cement mill bin by means of rubber conveyors and mechanicalelevators.

The clinker dust from the storage department vill be collected inbag filters on the top of the silos, and by the one bag filter common toall six silos.

Clinker from open air storage will be taken by loader and dumpertrucks, using the gypsum and pozzolana storage and transporting system forthis purpose.

X. Cement Grinding

The clinker, gypsum and pozzolana vill be kept at a constant levelin their respective bins. The materials vill be fed to the KAWASAKI millwhich vill have a capacity of 100 tons/h and a diameter of 4.4 meters. Theoutput of the cement mill vill be sent to the KAWASAKI dynamic separatorby means of a mechanical elevator, and there the coarse particles cf cementvill be separatel and recycled to the mill. The resulting cement, of3,000 - 3,500 cm /gr Blaine, vill be transfered to storage silos by meansof pneumatic cement pumps. The circulation air of the grinding system willbe dedusted by means of a bag filter of 50mg/m3 efficiency. The departmentvill run 15 to 19 hours a day, and vill be fully automatic.

ANNEX 5-2Page 7

XI. Cement Storage and Bagging Department:

The pumped cement vill be stored in five silos of 5,000 tons each,each having an inside diameter of 15 meters and a height of 28 meters, witha total storage capacity of 25,000 tons. It is intended to reserve:

2 silos for CPA 350,1 silo for CPA 400,1 silo for ASTM IV, and1 silo for special cements.

The cement vill eventually be taken from the bottom of the silosand transported by air slide to:

Three truck-tanker loading stations vith a capacityof 250 tons per hour each;

- Two wagon tanker loading stations vith a capacity of350 tons per hour each;

- Two bagging installations vith a capacity of 50 tonsper hour each; and

- One bagging station of 100 tons per hour capacity.

The two bagging installations vill feed:

- Three truck and two wagon bag loading stations eachof 120 tons per hour capacity.

The lay-out is such that all loading stations can be fed from allsilos. Handling facilities are operated in 8-hour shifts, 5 days per week.

For dust protection, there vill be five bag filters at the top ofthe silos and three others in3the expedition pits. All these filters villhave an efficiency of 50 mg/mr

XII. Electrical Installation

Distribution of electrical power on the plant site is assured by5.5 and 0.4 kV installations. There vill be five sub-stations, one in thequarry and the others in the factory. An emergency generator of 450 kVA villinstalled. Close to the ACR motors, a manual local command board vill beinstalled for security and maintenance purposes. Regulation of the tensionunder charge vill be within limits of ±107.9.

XIII. Centralized Automatic Control System

Control of all the equipment between raw meal clinker fabrication(excluding the limestone crushing and storing system) and cement production

ANNEX 5-2Page 8

(excluding the bagging plant) will be manual, semi-manual or fully automaticfrom the centralized control board.

All the control device indicators, the ammeters on the motors, theindicators of temperatures, pressures and status, will be installed on theprocess panel of the centralized control board. The system will usecomputers the functions of which will include:

(i) automatic starting and stopping of all production lines, and

(ii) semi- or full automatic regulation of the raw meal - clinkerand cement lines by:

- maintaining adequate control devices;

- regulating the flow of material, as vell as theflow of circulating gas and air, for adequate rawmeal, clinker, and cement production (This willtake place by acting on the feeders of the materials,following the automatically analyzed sample results,and checking the condition of the air, gas and materialcirculating in the process Unes.);

- signalling defects in production lines; and

- keeping a conduct data jounal of each production line.

The operator will retain the possibility of taking manual controlof the production lines, entirely or sectionally.

The required computer program will be developed and implemented byKHI in close collaboration vith SNMC and SOCADEI after production start-upand preliminary acceptance of the installations.

XIV. The Laboratory

The laboratory will be adequately equipped for the performance ofphysical analyses and chemical tests on cements produced, in accordancewith international standards and norms.

XV. Mechanical and Electrical Workshops and Warehouse

The mechanical and electrical workshops will be equipped withlathes, as well as drilling, milling, shaping, plate curving, cutting andwelding machines, and light and heavy tools for use in preventive and repairpurposes. A crane suitable for the lifting of equipment is foreseen in eachdepartment. The warehouse will be situated near the workshop and will bebig enough to store all spare parts and consumables.

ANNEX 5-2Page 9

XVI. Administrative and Social Services Facilities

The central building will house all the administrative and technicaldepartments, the laboratory, the workshops, and the varehouse. The automaticcontrol unit and computer will be located in the same building. An infirmaryand sanitary installations are foreseen near the central building.

Other installations vill include: (i) A complete telephone andtelex system; (ii) A fire extinguishing system with a special vater distri-bution line; (iii) a lightening-conductor system for the whole plant; (iv)a canteen Mi) and (v) staff housiag.

D. Capacities, Contractual Guarantees and Penalties

4. Table 1 summarizes the capacity, specific pover and calorificconsumption, supplier guarantees and penalties for each major equipmentitem.

The plant has a guaranteed specific electrical consumption of130 KWh/ton of cement and a specific calorific consumption of 842.1 - 944.3kcal/kg/clinker.

From the turn-key contractor's point of view, project completionwill be attained when the production line reaches an average of 100% of theforeseen guarantees, with fully automatie drive, in 15 consecutive days.If the project is not realized within the fixed schedule and if the pro-duction lines do not reach the foreseen guarantees, penalty clauses willbe imposed vithin internationally agreed limits, i.e., the maximum penaltyrate vill not exceed 10% of the foreign exchange cost of the equipment.

5. Plant design includes ample security margins in all but the kilnand cooler installations. Possible doubling of capacity is allowed for inthe plant layout. If an expansion to 1 million tpy vere to take place, allexisting equipment and infrastructure would be adequate except for crudegrinding and homogenization facilities, the kiln, the cooler and the cementgrinding equipment. The incremental capital coet of such an expansion hasbeen estimated at $85 million in 1975 prices.

6. However, in addition to justifiable security margins and provisionsfor capacity extension, the plant includes overdesign of the raw materialquarrying and handling equipment, the limestone crusher and the dispatchingfacilities. Information on the extent of this overcapacity is given below:

(a) Limestone Crusher

The Saida plant complex requires crushed limestone tooperate the cement plant and limestone factory. Thequantities needed vary according to plant capacities asfollows:

ANNEX 5-2Page 10

Plant Capacities Crushed Limestone

(1) 1,500 tpd clinker300 tpd quicklime 2,900 tpd

(2) 20% capacity increase 3,580 tpd

(3) 100% capacity increase 6,800 tpd

The limestone crusher foreseen in the KHI-contract has amaximum capacity of 700 tons per hour and will average notless than 600 tons per hour. Depending on the number ofworking days and hours, this results in the followingavailable capacities:

Capacities(tpd)

Maximum Average RequirementWork Schedule (700 tph) (600 tph) (400 tph)

5 days/wk - 6 hr/day 4,200 3,600 2,4005 days/wk - 8 hr/day 6,600 4,800 3,2006 days/wk - 8 hr/day 6,300 5,400 3,6005 days/wk -12 hr/day 8,400 7,200 4,8007 days/wk -16 hr/day 12,600 10,800 7,200

As illustrated above, the proposed 600-700 tph crusher ismuch more than enough to meet the plant's requirements.Clearly a crusher of only 400 tph capacity, operated5 days per week for 8 hr per day, would be adequate forpresent plant. The same crusher operated (as the crudegrinding department currently operates) in 2 shiftsof 8 hr each for 6 days per week would also meet plantrequirements even after a 100% capacity expansion of thecement and lime plants.

(b) Dispatch Facilities

Over-capacity is even more pronounced in the bagging plantand bulk handling facilities. The total daily plantoutput could, as presently proposed, be handled--eitherbagged or in bulk by rail or truck--in a 6-hour workingday, clearly indicating a gross misallocation of resources.

ANNEX 5-2Page 11

CapacitiesWork Schedule Bagging Plant Bulk Handling

250 tph Trucks Rail250 tph 350 tph

5 days/wk - 6 hr/day 1,500 tpd 1,500 tpd 2,100 tpd

6 days/wk - 8 hr/day 2,250 tpd 2,250 tpd 3,150 tpd

7 days/wk -16 hr/day 4,500 tpd 4,500 tpd 7,100 tpd

One of the reasons for the overcapacity in the raw material crush-

ing, handling and cement dispatching facilities is the assumption of only

6 working hours for 5 days per week--comparable plants in Europe work crush-

ing and dispatching facilities either on two shifts or at least on a 6 days

per week, 8 hour per day schedule. Although manpower requirements are

relatively easy to meet since most of the personnel is unskilled labor,

SNMC's choice of working hours undoubtedly leads to a gross underutilization

of capacity.

Industrial Projects DepartmentJuly 1975

AILE!UA - S3MC EXPANSION PROJECT

Table 3.

CAPACITIES, CONTRACTUAL GUARANTEES AND PENALTIES FOR MAJOR EQUIPMENT ITEMS

POWER CONSUMPTION CALORIFICA CONSUMPTIONINLEr OUTLET PER TONI/ WORKING PERFORMAXCE TEST

EQUIPNENT CAPACITY SPECIFICATION SPECIFICATION EQUIPMENT CEMENT EQUIPFENI CLINKER HOURS DURATION PENALTIES

LINESTONE CRUSHER Max. 700 t/h Max. u/m Max. 25% big- 0.1 0.13 - 6 h per day 6 h per day For each 1% less production, 1% ofAverage 600 t/h 1200r1200x1200 ger than 20 u/m 5 day per week 5 consecutive days the department equipment cost.For each 1b more electrical consump-tion, 1% of the department equip. cosEt.

SANDSTONE-CLAY CRUSHER 130 t/h Max size n/n Max 10% big- 1/ 1/ 22.1 7.1 6 h per day 6 h per day600x600x600 ger than 10 u/n 5 day per week 5 consecutive days For each 1% lese production, 1% ofMax humidity Max humidity the department equipment cost

20% 16% For each 1% more electrical consump-tion, 1% of the department equip. cost.

CRUDE GRINDING EQUIPMENT 150 t/h Max hnmidity 15% at 8S 24.0 38.4 63.9 102.2- 16 h per day 8 h per day For each 1% less production, 1%. of8% 12% at 100 7 day per week 3 consecutive days the department equipment cost.

3% at 200 For each 1% more electrical consump-Max humidity at tien, 1% of the department equip. cost.

less than 1%

HOMOGENIZATION - - - - 3 4.8 - - 24 h per day 3 csacutive days -7 day per week

KILN 1500 t/d 96% clinker 60 MAX 35. 35. 835. 835. 24 h per day 3 testa of 3 days For each 1% less production, 1% ofCOOLER 1500 t/d 5% Gypenm -- 3/ 35. -- -- 7 day per week in department equipmant cost, For each

Max 40 u/m 15 consecutive days I % -oue electrical consumpetAn, 1% ofthe department equip. cost, For each10 KRl/kg of more consumption, 1% of thedepartment equipment coet.

CEMENT GRINDING 100 t/h 2900 3200 - 46.6 - - 19 h per day 19 h par day For each 1% lese production, 1% ofMax 800C cm

2/gr, BLAINE 7 day per week 15 consecutive days the departmant equipment cost,

Max 90°C For each 1% more electrical consump-tion, 17. of the department equip. cost.

CEMENT BAGGING 75 t/h bag - Stalin 50 +375150 t/h bag - Rotative -125 - - -- -- 6 h per day Chronometric check For each 1% lesa production, 1% of250 t/h bulk truck 5 day per week of 2 20 ton trucks the department section cost.350 t/h bulk wagon loading.

5 consecutive daya

1/ Will be egreed upn after the election of the Clay deposit.W When kiln ie not operational.

3/ Included in power consumption ef kilo.

Industriel Projects DepnrtmentNomember 1975

SNMC CEMENT EXPANSION PROJEOT MINZ 5-2PLEIN SECET COgK 1

12~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*

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SNMC CEMENT EXPANSION PROJECT 4 5-PLANT LAYOUT

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ANNEX 5-3Page 1

ALGERIA

SNMC EXPANSION PROJECT

SAIDA CEMENT PLANT - INFRASTRUCTURE AND UTILITIES

A. Introduction

1. The plant site is located about 1.5 km from the limestone depositof Oum el Djerane, vest of the departuental road from Oum el Djerane toManora, and about 25 km from Saida. The actual plant layout vill requireabout 34,000 m2 and SNNC las acquired land of 25 ha. On the same plant site,SNMC plans to build a lime factory vith a capacity of 100,000 tpy. Geotech-nical studies of the site have been completed and earth moving and sitepreparation works are underway. Details are given on the attached map (IBRDNo. 11669).

B. Infrastructure

Roads

2. In general, the road net-work in the Saida region is well developed.The site of the factory and all necessary raw material deposits are nearnational or departmental bitiminous surfaced roads, adequate for averagespeeds of 80 km/hr. Rehabilitation of the national road, Saida-Oum elDJerane-Manora, is underway.

3. The site vill be connected to the national Saida-Oum el DJerane-Manora road by a new road of about 1 km. To connect the plant site withthe clay deposit of Sidi Minoun North a road of 15 km will be constructed.This project may be abandoned if studies on the clay deposit at Ain elHadjar are positive. In this case a road of only 2 km vill be constructedto connect the deposit with the national road about 36 km from the plant site.

4. All new road construction vill be the responsibility of SNMC.

Railroad

5. A railway link vill be constructed between the plant site andSNCPA's 1/ narrow gauge railroad network near Ain el Hadjar to allow thedistribution of cement and lime by rail. The connection requires about 25 kmof rail, representing the single largest infrastructure investment forthis project.

1/ This rail link will be owned and operated by SNMC.

ANNEX 5-3Page 2

6. A French consulting firm, Jardin Billard, has been contracted bySNMC to undertake engineering design and execution supervision. The pre-liminary engineering results, determining the optimal route for the railvayline, have recently been completed. SNMC, and not SNCFA, vill be responsiblefor the construction of the link. SNMC plans to engage a local constructionfirm and vill procure on its own account the major materials and suppliesaccording to Bank guidelines.

Housing

7. As in many parts of Algeria, there is an acute housing shortagein the Saida area. Construction of SNMC's cement and lime plant complexat Saida vill require provision of housing, social, health and educationalfacilities for at least 300 families, of which 50-150 do not yet live inthe area. In Algeria, industrial enterprises are not supposed to constructhousing for their personnel since the Ministry of Housing coordinates andexecutes the country's housing expansion. Housing investment requirementshave therefore not been taken into account in the capital cost or financialand economic rate of return calculations.

C. Utilities

Water

8. Water vill be pumped from vells. The simmary hydrological studiesshow that the water sheet around the plant site is about 30 meters deep andis situated on a dolomitic formation. Its capacity is expected to meet theneeds of the cement and lime plants, estimated at 500 ton per day or 12 lb/sec.

The vater vill be used: (a) in the general cooling system of theequipment; (b) in the conditioning towers of the electrostatic precipitatorfor humidifying and cooling the hot gas of the kiln; (c) in the cement millfor cooling; (d) in the kiln, in emergency cases, for protecting the cyclones;(e) for lime production; and (f) for sanitary purposes and human consumption.

In order to economize on water, the general cooling system villoperate on a closed circuit in both the cement and the lime plant. Onlyevaporated vater vill be compensated for by fresh vater.

9. SNMC is presently negotiating vith a vater research firm forthe drilling of deep wells.

Electricity

10. The Salda cement plant, rated at 500,000 tpy of clinker, vill havea total annual electricity consumption of 65.106 kwh, or a consumption ofabout 130 kwh per ton of cement. The Saida lime factory, vith a capacityof 100,000 tpy of lime, will have a total annual electrical energy consumptionof 2.5 106 kwh, which amounts to a consumption of 25 kwh per ton of lime.The total consumption therefore is estimated at 68.106 kwh.

ANNEX 5-3Page 3

il. Power requirements vill be met by SONELGAZ, 1/ the state elec-tricity and gas company. To meet SNMC's needs for the cement-lime complex,SONELGAZ has been asked to install a double energy line of 60 hw tensionand 2.20 MVA capacity between its substation in Saida and the plant site(30 km). Preliminary discussions between SNMC and SONELGAZ indicate noproblems; a supply contract should be signed shortly and pover availabilityvill be assured during the construction phase.

12. As part of the turnkey contract, a substation vill be installedon the plant site to distribute the required power. The substation (capac-ity: 2.175 KVA and 30/5.5 RV tension) vill operate vith 2 transformers of17.5 MVA and 60/5.5 KV tension each. One of these transformers acts as astandby since the capacity of one alone meets the pover needs of both thecement and lime plants.

. Gas

13. The cement and lime plants vill use Algerian natural gas as fuel.Estimated annual consumption of the cement plant is 53.106 m3 of naturalgas at 1 bar pressure. Specific consumption for the production of cementis about 900 kcl/kg of clinker. The lime factory vill have an annual con-sumption of 10.106 m3 of natural gas at 1 bar pressure. The specificconsumption for the production of lime is about 850 kcl/kg of lime. Thetotal annual gas consumption of both plants vill therefore be about 63.106 mof natural gas at 1 bar.

14. The gas vill be supplied by SONELGAZ from its distributioncenter currently under construction north of Saida. In principle, SONELGAZhas agreed to construet a pipeline between the distribution center and theplant site and provide the required quantity of gas at 5 bar pressure. Tocontrol the distribution of gas between the cement and lime factory, SONELGAZplans to install its own pressure reducing station at the site. SNMC hasrequested SONELGAZ to design its pipeline taking into account a possibledoubling of plant capacities.

15. SONELGAZ has already started to undertake topographical studiesfor the construction of the pipeline. A supply contract between SONELGAZand SNMC should be signed shortly.

IndustriaI Projects DeptrtmentNovember 1975

1/ Societe Nationale d'Electricrite et de Gaz.

ANNEX Page 4

ALGERIA - SNMC EXPANSION PROJECT

Table 1

NATURAL GAS ANALYSIS

Conposition Volumetric % Variations

N2 5,80 + 0,20C02 0,21 + 0,03He 0,19 ± 0,02CH4 83,00 + 0,30

C2H6 7,10 i 0,15

C3H8 2,25 i 0,10

CIIHîo iso o,4O 0,070

V4o normn o,60 0,80

C5H12 iso 0,12 + 0,03

norm 0,15 + 0,04

C6H14 0,18 0,05

High calorific value : 9400-9550 Ecl/in3

(150°C : 1 bar)Density : 0660 ± 0.003Sulphur/tenor ; Max 30 mg/m3Specific weight 0,809 kg/m 3

(15°C' - 760 mHgDynamic viscosity ; 1,9093 x 104 poisesCinematic viscosity : 13,477 StokesFeeding pressure 5 bars

Industrial Projects DepartmentNovember 1975

ALGERIA - SNMC EXPANSION PROJECT AMNEX 5- 3Page 5

Table 2

OUM EL DJERANE WEILS WAT3R ANA&LSIS

Ca 128 mg/iMg : 19 mg/iNa 35 mg/lK O mg/lCl 54 mg/lso4 75 mg/i

CO3H 263 mg/l

N03 88 mg/l

Conductivity in 1/10 mmhos at 250C 10Total dissolved solids 1000C in mg/i 659PH in 1/10 70Mineralization : 620 mg/iIons total : 661 mg/i

Industrial Projects DepartmentNovember 1975

ANNEX 5-4Page 1

ALGERIA

SNMC EXPANSION PROJECT

ECOLOGY

A. INTRODUCTION

The ecological problems posed by dry-process cement plants aregenerally (i) air pollution from dust and gases; (il) noise pollution fromcrushers and mills; and (iii) water pollution from the sewer drainage ofsanitary installations.

2. Algerian pollution control regulations for industrial enterprisesare being revised by the Ministry of Public Health and are scheduled to bepublished in the near future.

B. THE SAIDA CEMENT PLANT

3. SNMC's anti-pollution requirements for the design of the plant fitthe standards generally applied in Western Europe. SNMC follows these rela-tively strict pollution standards in all of its projects including the SaidaCement plant.

1) Dust Pollution

4. The design of the Saida plant avoids dust production from open-airstorage. The pre-homogenization pit will be covered and clinker storageprovided in silos. At the same time, each dust-producing location withinthe factory will be equipped with electrostatic precipitators, with gravelfilters, cyclones and bag-filters adapted to the physical condition of thedusty gases.

In3 all cases the maximum dust discharge into the air will be lessthan 50 mg/m under normal atmospheric conditions.

There will be an electrical precipitator for the kiln and claycrusher, a gravel filter at the clinker cooler, cyclones for primary coarseprecipitation needs and bag filters at all other dust producing places.

6. The total cost of the dust prevention equipment will account for6.9% of the total equipment cost, not including electrical motors, installationand civil engineering construction. With a good maintenance program theSaida plant should not have any dust pollution problem.

ANNEX 5-4Page 2

2) Gas Pollution

7. The Saida cement plant vill use Algerian natural ias as fuel. Thechemical composition of the natural gas shows 0.30 mg per m of sulphur at1 bar pressure.

After combustion of the natural gas in the kiln, the level of SO2

in the burnt gas will be about 5 mg/m3 under normal conditions.

In the kiln, sulphates from the SO 2 ill tend to combine withalkalis from the raw meal, so 3 the level of SO in the output of the chimneywill be much less than 5 mg/m

In the project, a 60 meter cn±ney is foreseen. The total outputof the gases will be about 2,500 m3 imin.

8. Taking into consideration the prevailing direction of the windand the site 2 of the factory, the dispersion of gas from the chimney will besuch that SO pollution will always be much lower than the maximum admissiblelevel of 1,000 micro rams per m3, and with have an arithmetic annual mean of100 micrograms per m.

3) Alkali Pollution

9d Alkali pollution in a cement plant usually comes from wasteslurries when the wet process is used and from cyclone by-passes of thekiln heat exchanger when the dry process is used with high alkali contentraw materials. A periodic discharge from the by-passes is necessary toprevent the cyclones forming by recrystalization.

10. The Saida cerent plant, a dry process plant, vill use raw materialsvithout a harmful level of alkalis, so that a by-pass system is not necessaryin the kiln. Consequently, the plant is not likely to have any alkalipollution problem.

4) Noise Pollution

il. All noise-producing equipment will be housed inside buildings.The noisiest part of the factory will be the grinding department. In con-ventional factories, when the mill is being fed with raw material, the noiselevel can reach 100 dB 1/, with a normal noise level of about 90 dB. Inthe Saida plant, all the grinding departments will be driven and controlledfrom the central command board far away from the installation.

1/ dB = decibel.

ANNEX 5-4Page 3

12. Mill equipment will be periodically checked by special teams andno permanent operating department personnel is foreseen. Any worker exposedto the noise, will, therefore, have to endure 90 dB for a few hours only.Normally, this noise can be endured for a period of about 8 hours.

5) Sewage

13. The sewage of the Saida plant, its main administrative buildingand social installations, will be collected in sewage pits. After beingasepticized by the usual biochemical process, it will either be dried ina dry-well, or will be evacuated into the main rain drainage system ofthe factory.

Industrial Projects DepartmentNovember 1975

ANNEX 5-5Page 1

ALGERIA

SNMC EXPANSION PROJECT

SAIDA CEMENT PLANTMANPOWER REQUIREMENTS, TRAINING AND TECHNICAL ASSISTANCE

A. Manpower Requirements of the Saida Cement Plant

1. SNMC estimates that 210 people--including directorial, administra-tive and technical personnel--will be required to operate the Saida cementplant. The breakdown by skill level for the production department is shownbelow; it does not include 27 administrative staff for the plant manager'soffice, accounting and general services department.

Production - Manpower Requirement by Qualification

Semi-Engineer/ Technician Skilled Skilled Unskilled Daily Work Weekly

Technicians Foremen Workers Workers Workers Hours Workday

Quarries 1 2 18 - 5 8 5Packing - 1 2 - 25 8 5Production 1 9 10 - 10 3x8 7Laboratory 1 2 4 2 - 8 7Mechanic Workshop 1 3 14 3 2 8 5Electric Workshop 1 3 5 7 2 8 5Garage 1 - 6 6 2 8 5Maintenance 1 8 4 0 0 3x8 7Procurement 1 - 1 - 2 8 7Software 1 1 - - - 8 5Hardware 1 1 - - - 8 5Spectometry 1 - - - - 8 5Security 1 - - 4 2 9 5Training 1 3 - - - 8 5Documentation 1 - - - - 8 5

Total 14 33 64 22 50 - -

2. The total manpower requirement is relatively high for a fullyautomated 500,000 tpy cement plant. It is due to:

(a) the additional labor needed to exploit and transportraw materials from 3 geographically dispersed quar-ries, and

ANNEX 5-5Page 2

(b) plant operation by a single team, working only 8 hoursper day, five days a week, in all but the kiln and main-tenance department.

B. Training Program for the Saida Plant

3. As part of the turnkey contract, Kawasaki Heavy Industries (KHI),is responsible for the training of all engineers and technicians for theSaida cement plant. KHI submitted a 3-phase training program (attachedchart, page 4) which foresees:

- first phase: SNMC engineers with experience inthe cement industry will be sent to KHI instal-lations or associated cement plants for a period of12 months, in order to be trained as instructors.Upon their return to Algeria, they will organizecourses, assisted by a KHI instructor, for thenewly-recruited engineers, technicians and oper-ators who are later to participate in the train-ing program at KHI or cement plants. The durationof this introductory course in Algeria will be sixmonths.

- second phase: the staff already trained in Algeriawill spend time at the turnkey contractor's workshopand plants. These courses vary from 3-9 monthsdepending on job specification.

- third phase: shortly before and after productionstartup, KHI's instructors will organize comple-mentary training courses in the Saida plant involvingall engineers, technicians and operators.

Most of the training in KHI workshops will be in Japan. Forinstruction in cement plants, KHI has made arrangements with European cementmanufacturers.

4. The training program appears to be adequate and is comparable toprograms followed by other cement producers. Its success, however, willdepend, not only on the quality of KHI training courses, but on the skill,motivation and continuity of the recruited Algerian staff.

C. SNMC General Training Program

5. SNMC is currently implementing an ambitious expansion of its dryprocess cement plants. By 1980, at least 12 plants are scheduled to be in oper-ation, all being run by local staff and only two having been Droducing for more than7 years. SNMC will require 55 engineers, 616 technicians and 300 skilledor semi-skilled workers to meet this target.

ANNEX 5-5Page 3

6. To train the required staff, all contracts for new cement plantsinclude substantial training components under the responsibility of theturnkey contractor. In 1974 SNMC decided to create a Permanent TechnicalTraining Center for the manufacture of building materials. The program ofthe institution should not try to substitute for the training conductedby the suppliers but (i) should supplement their program by on-the-jobinstruction in SNMC's existing units and classroom work; (ii) should offercourses for recyling and skill improvement for SNMC's existing staff; and(iii) should provide introductory instruction for newly-recruited personnel.

7. SNMC intends to start with a nucleus of courses by end 1976.Location of the center will be at one of the cement-brick-lime productioncomplexes at Hadjar-Soud or Meftah. SNMC has approached two cementmanufacturers and consulting firms (Asland, Spain and Lafarge, France)to design the curriculum of the center and to conduct its courses duringthe first 2-4 years. UNIDO has shown some interest in providing technicalassistance for the Training Center. Such technical assistance has stillto be defined in further discussions with SNMC and UNIDO representatives,but could include secondment of experts to elaborate the center's programor to conduct courses and granting of fellowships to Algerian instructorsor technicians for training abroad.

8. Independent of these programs, all plants offer their ownindependent training activities such as courses in promotion, maintenance,safety, Arab culture, etc.

D. Technical Assistance

9. As in SNMC's other new cement plants, in the case of Saida, theturnkey contractor's responsibility regarding training and operating endswith the successful completion of the performance tests and the finalacceptance of the plant by SNMC. In 1974 SNMC signed a frame technicalassistance contract with Lafarge. The contract stipulated that Lafargewill make available to SNMC, at the latter's request, qualified technicalpersonnel to assist in the operation of SNMC's cement plants. The agreementoffers SNMC a comfortable degree of technical backup. However, with 7 newcement plants coming on stream during the next 5 years, SNMC might needsubstantial outside expert assistance which Lafarge with its large butnevertheless limited pool of qualified personnel may not be able to provide.In view of this, SNMC has also regotiated similar technical assistancecontracts with Asland and COMSIP Automation.

10. Although SNMC's training program is commendable and the frameagreements provide some valuable assistance, SNMC ought to take affirmativeaction to assure the availability of outside technical assistance after thefinal acceptance of the plant. As foreseen under the loan, such assistancecan be provided, as it has been the first new SNMC plants, by a permanentteam from the Consulting engineer, or by recruiting experienced techniciansto fill the key positions and to continue training of staff.

Industrial Projects Department

November 1975

ALGERIASNMC EXPANSION PROJECT

SAIDA PLANT TRAINING SCHEDULE

uiifict Month 1 2 3 4 5 6 7 8 9 }10 l 12 113 114 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Engineer, Chief . ... neer ... ... ... ... ... .......

_--...~. .... 1......1.=--Engintenan,eChief

=== = lt*[*

Chexicai Engineer X X L --.. ........

ChiefCOperator iiiiiiur Start-

Ma--intFreina Countriefs... .

-- ~~~~~~~~~~~~~~~~~~ -

Electrical Engineer ... ...p...r.... .Moember1hant-r Engineer .... ....

Technician .............

Electrical Engineer - -~~~~~~~~~~~~~~~~~~~~~~......L.......

- - = -~~~~.. ........

L-Contract Signature atup-

............ in Foreign Countriesin Algeria>

Industrial Projects Department Wrd1ak91November 1975Bnk9191

ANNEX 5-6Page 1

ALGERIA

SNNC EXPANSION PROJECT

SAIDA CEMENT PLANT - PROJECT IMPLEMENTATION

Turn-key Approach

1. Since 1971, SNMC has signed contracts for the construction of 7cement plants. All but the two first plants are to be executed under theturn-key approach. The Algerian Government and SNMC realize that under normalcircumstances the construction of a cerent plant on the basis of procure-ment of individual packages offers certain economies, the advantage ofoptimal equipment choices and generally lower capital costs in comparisonwith a cement plant constructed under a turn-key arrangement. The extentof such economic and financial advantages is difficult to quantify. SNMCbelieves, however, that in the special case of Algeria at the present stageof its economic development, the execution of cement plants under turn-keycontracta offer certain advantages which outweigh possible savings in directcapital costs:

(a) SNMC has a motivated but small technical staff which isclearly insufficient to prepare and design - or even supervise- the parallel construction of more than 3 cement plants. Torealize the investment targets of the 4-Year Plans (1970-73) and(1974-77), SNMC had, therefore, to choose between heavyreliance on foreign consulting firms or adopting the turn-keyapproach. After its rather strained experiences with consultingfirms responsible for the construction of SNMC's two first dryprocess plants (Meftah and Hadjar Soud), SNMC opted for theturn-key concept.

(b) a turn-key contract offers the advantage of single contractorresponsibility. It eliminates day-to-day involvement in plantexecution and minimizes the coordination tasks for the sponsoringcompany, at the same time as it provides completion dates, per-formance guarantees and prices for which only a single partycan be held accountable.

2. Turn-key offers for the Saida cement plant were invited in November1973, following pre-qualification and ICB procedures according to the Bank'sguidelines and including 2-stage bidding. The lowest evaluated bidder -Kawasaki Heavy Industries (KHI) - was prepared to undertake only engineeringand supervision of the plant's civil works component without their actualexecution. SNMC therefore agreed to contract separately for the civilconstruction works.

ANNEX 5-6Page 2

Plant Design and Supervision of the Turn-key Contractor

3. Although the Saida cement plant is being implemented under aturn-key arrangement, in 1974 SNMC engaged the services of a French cementconsulting firm, SOCADEI, a Lafarge subsidiary. During the planning andpreliminary design phase, SOCADEI's main tasks vere (i) to analyze thegeological survey, (ii) to conduct all necessary physical, chemical, andsemi-production tests to determine the process choice for the variouscement manufacturing stages, (iii) to prepare procurement documents; and(iv> to evaluate the offers.

4. After the signing of the turn-key contract, SOCADEI remains incharge of supervising the turnkey contractor. It will provide 120 man-monthsof consulting services over 2-1/2 years. In particular, SOCADEI will under-take and make available the following staff for particular functions:

Construction Supervision

1 site engineer for 24 months2 construction engineers for 12 months1 mechanical engineer for 18 months1 electrical engineer for 9 months1 computer specialist for 6 months

Elaboration of Quarry Exploitation Plans

1 expert for 3 months

Supervision of Commissioning

a team of 6 specialists for a 6-month period,consisting of 2 operating engineers, 1 laboratoryspecialist, 1 mechanical engineer, 1 electricalengineer, 1 process control specialist.

The Role of SNMC

5. SNMC's responsibilities during project implementation will include:

(a) execution of geotechnical studies of the site,

(b) construction of roads from the site to the deposits,

(c) construction of the railroad link (Annex 5-3),

(d) drilling of wells for water supply (Annex 5-3),

(e) provision for power and gas supply (Annex 5-3),

ANNEX 5-6Page 3

(f) contracting for and execution of the civil vorks com-ponents of the project, 1/

(g) inspection of the main equipment in the contractor'sworkshops, and

(h) coordination with SOCADEI in supervision of the turn-keycontracts during start-up tests, the provisional accept-ance tests and in performance tests of the productionfacilities.

A Saida project team vas appointed in 1974 to develop the plant design incoordination with SOCADEI. It vill now be transferred to the plant site toparticipate in construction supervision. This team will be strengthened bythe recruitment of new staff as plant construction progresses and as teammembers are partly trained for production assignments in the plant.

Project Implementation Schedule

6. KHI prepared a preliminary time schedule for plant implementationwhich is shown in the attached chart. A detailed PERT program has also beenelaborated. Production start-up is scheduled for December 1978, i.e. 32months after contract effectiveness.

1/ Technical responsibility for engineering and superv ision, however,remains with KHI.

Industrial Projects DepartmentNovember 1975

ALGERIASNMC EXPANSION PROJECT

SAIDA PLANT IMPLEMENTATION SCHEDULE

1975 1976 1977 1978

2 _ 3 -4 5 6 7 8 9 10 11112 13 14 15 16 17 18119 20 21 22 23124125126 27 281291301 31 32 33 34 35 36 37 38 39 40 41

Genieral Planniing & Pert 45 L122L~222223333a3333a44Detailed Design M * m mSupply of Equipmenit MM

Civil Engineering & Construction a mi i 0

Erection of Mechanical Equipment 6 5 s m'luInstallation of Electrical Equipment

Off-Load Tests

Running Tests (85% of Production)Running Tests (100% of Production)

1976 1977

9 10 1l 12 113 14 15 16 17 18 19 1 20 21 22 23 24 25 26 27 28 29 30 31 32C| a andeSandstone Crushing L*W *-.- .- -wz - - - - -- - - -* I[IW.I l-ME--- - El F F E MLirnestone Crushing *a o um mu .... ..................

| Prehomogenization |u CjP, *uui:ut. -t-r t -* -F_ r .r 4 M c nCEP un- W ......Raw Meal Grinding a F Imm O 1 M

Homogenization a - -a O - -l.Kiln Department Preheater CEP LEF- ME El &Ià

Kiln Body Iloi.o m 1 a **, ' NP > _ El & RFbClinker cooler g g | L* g f RW

|Clinker Storage CEiqiais a _ I ma wlqul ..... $_ F E- - -- *Mi ..1 CEP CE F M El)Cement Grinding mmll t m a I m- 4 I I I ....... M I - -Cement Bagging and Handling CEF F E tC E El Utilities '''rC ........ .|_-Administrative and Social Building m a Ia ul E(Workshops, Warehouse, etc.) _ _ i i J |

5 Civil Engineering Foundation PilesMi à m - m - * - M Civil Engineering Foundations

Civil Engineering Silo Construction- --- -- Civil Engineering Building Construction

-. _ . . . . Refractories Works- _ - - _z_z_ - - s Framework Erection________ Equipments Erection

Industrial Projects DeppArtment .......................... Electrical Materials Installation World Bank-9918November 1975

o.n

ANNEX 5-7Page 1

ALGERIA - SNMC EXPANSION PROJECT

SAIDA CEMENT PLANT - SUMMARY OF CAPITAL COST ESTIMATES

Local Foreign Total----------- (DÀA=:rTn) _----------

Buildings and Civil Works

Buildings and Foundations 69.55 43.12 112.67Site Preparation and Civil Works 15.35 15.35Engineering 0.39 10.96 11.35

Sub-total Tn .9 5 .07 139.37

Equipment, Erection, Supervision

Equipment 0.83 198.81 199.64Spares - 18.28 18.28Erection 17.92 28.97 46.89Supervision and Commiissioning 10.10 - 10.10

Sub-total Z7W91

Infrastructure

Railway 17.66 21.75 39.41Others 12.47 - 12.47

Sub-total 30.13 2.75 51.UM

Freight and Insurance 2.56 35.05 37.61

Pre-operating Expenses 9.10 - 9.10

Engineering 1.01 17.80 18.81

Training and Technical Assistance 0.39 5.12 5.51

Duties and Taxes 20.02 - 20.02

BASE COST 177.35 379.86 557.21

Physical Contingencies 13.35 19.67 33.02Price Escalation 8.I48 13.16 22.09

TOTAL FIXED ASSETS 199.18 413.14 612.32

Industrial Projects DepartmentAugust 1975

ANNEX 5-7Page 2

1. The capital cost estimates summarized in Page 1 are based onMay 1, 1975 prices, with the exception of the turn-key contract signed withKHI for the supply of equipment and spare parts, erection of equipment,construction supervision and training of personnel and representing 65% ofcapital costs. The turnkey contract is a fixed price contract without priceescalation clauses and was signed in April 1975. All other items are estimatedon the basis of 1975 price quotations or actual costs for other cement projectsin Algeria.

Building and Civil Works (Item 1)

2. Detail of this item is as follows:

-------- (DA million) ---------Local Foreign Total

(a) Steel Structure - 19.94 19.94(b) Civil Engineering 0.39 10.96 11.35(c) Site Preparation 5.68 - 5.68(d) On Site Infrastructure 9.67 _ 9.67(e) Foundations and Main Buildings 8.80 2.93 11.73(f) Ancillary Buildings 60.75 20.25 81.00

TOTAL 85.29 54.08 139.37

3. Detailed design of building and civil works and supervision ofconstruction, as well as supply of the steel structure, will be provided forby Kawasaki as part of the turnkey contract. The actual execution of civilworks still has to be contracted under a separate contract and is shownabove as items (e) and (f). Site prepation includes geotechnical studiesand earthmoving on the plant site. These have been completed by DNCNP, anAlgerian civil constructor which has also been involved in the constructionof SNMC's Meftah and Hadjar Soud plants. The cost of DA5.68 million representsthe actual contract price as of May 1975. On-site infrastructure includes theinternal road network, sewage and drainings disposal, service ducts (electricalcables, water and gas pipes), drainage and fencing of the plant area.

5. Foundations, main and ancillary buildings include plant foundations,construction of production departments, storage areas, silos and administrativebuildings including warehouses and workshops. Estimates are based on compara-ble 1974 costs for the El Asnam and Setif cement plants and on the 1975 quota-tion of Five Lille-Babcock for the Saida cement plant. Specifications havebeen prepared by Kawasaki and ICB procurement procedures following Bank guide-lines have been initiated. The civil vorks construction contract should besigned shortly.

ANNEX 5-7Page 3

Equipment, Erection and Supervision (Item 2)

6. Prices for these items are fixed in the turnkey contract. Thefollowing table in based on the cost breakdown given in the contract:

- (DA million) ---------Local Foreign Total

Quarry Crushing and ConveyingEquipment - 28.76 28.76

Mechanical Equipment - 95.73 95.73Electrical Equipment - 34.15 34.15Control Equipment 0.83 27.56 28.39Maintenance Equipment - 12.61 12.61Spare Parts - 18.28 18.28Erection 17.92 28.97 46.89Supervision and Commissioning 10.10 - 10.10

TOTAL 28.85 246.06 274.91

Infrastructure (Item 3)

7. Off-site infrastructure costs are estimated as follows:

--------- (DA million) --------Local Foreign Total

Purchase of Land 0.25 - 0.25Rail 17.66 21.75 39.41Road 3.67 - 3.67Electricity 4.70 - 4.70Cas 2.55 - 1.55Water Supply 1.30 - 1.30

TOTAL 30.13 21.75 51.88

8. 25 ha of land have been purchased from private individuals for theplant site and possible housing site. Quarries are not to be acquired, butare made available by the Algerian Government.

9. Engineering of design of a 25 km railway link is being undertakenby Jardin Billard, a French consulting firm. SNMC plans to contract therailway construction to an Algerian construction firm and to procure majormaterials and supplies by ICB following the Bank's Guidelines. Cost esti-mates include DA 1.8 million for the engineering study and DA 37.6 millionfor the railway construction, thus assuming a cost of DA 1.44 million per kmof railway constructed, which is in line with estimates from actual cost ofa recent IBRD railway project in Algeria.

10. Road construction includes 15 km of road for connecting the clayquarry with the plant and 1 km of access road between the lime quarry andthe national roads. The cost estimate for roads is based on the most

ANNEX 5-7Page 4

pessimistic assumption. Geological studies for a clay quarry nearer the plantsite are under way. Exploitation of that quarry could decrease investmentcoste for roads by DA 2 million.

11. Electrical items designated as infrastructure consist of theconstruction of two 6OkV-20MVA lines over 30 km and the installation of atransformer station at the plant. Cost estimates have been provided bySONELGAZ which will be responsible for construction of the line and installa-tion of the substation. Supply of the transformers is included in the KHIturnkey contract. Gas connection includes a pressure reducing station (DA 0.5million) and pipeline connection over 30 km (DA 2.05 million).

12. Requirements for water supply to the plant include drilling of andequipment for 4 wells located near the plant site. Several constructors havebeen contacted for procurement of th«ae items and selection is under way.

Freight and Insurance (Item 4)

13. This item comprises DA 35.05 million for sea freight and insuranceas a part of the KHI turnkey contract and DA 2.56 million for transport over175 km from Oran to the plant site. Cost estimates for internal transportvere provided by SONATIMAT, 1/ an Algerian company which will be responsiblefor local transportation. KHI is obliged to insure itself locally with CAR,the Algerian State insurance enterprise.

Preoperating Expenses (Item 5)

14. Preoperating expenses include:

-----------(DA million)----------local Foreign Total

Temporary Installations 0.35 - 0.35Plant Staff 3.24 - 3.24Vehicles 0.65 - 0.65Office Furniture 1.00 - 1.00Overheads 0.76 - 0.76Start-up Costs 3.10 3.10

TOTAL 9.10 - 9.10

1/ SONATMAT: Sociele Nationale des Magasins Generaux et Transit.

ANNEX 5-7Page 5

Temporary installations cover water and electricity supply, telephone andtelex facilities during construction. Salaries covered under pre-operatingexpenses are the salaries paid to SNMC personnel assigned to the Saida projectduring the period mid-1975 to mid-1978. This estimate is based on an averagestaff of 45 people for three years. Overheads include miscellaneous adminis-trative costs and company car expenses; they are estimated to amount to 23%of salaries. Start-up costs cover gas, power, consumables and other materialused during the commissioning period of two months. Supervision of thecommissioning is part of the SOCADEI consulting contract and the KHI turnkeycontract.

Engineering (Item 6)

15. This item covers all engineering work for the design of plantequipment and other consulting services. The cost estimate includes thefirm price of the SOCADEI contract (DA 12.28 million) and engineering anddesign provided by Kawasaki (DA 6.53 million) under the turnkey contract,but excludes civil engineering and design included in the cost of buildingsand civil works.

Traininfi and Technical Assistance (Item 7)

16. An estimated DA 2.71 million for training and DA 2.80 million fortechnical assistance has been added. Training costs include training feespayable under the KHI turnkey contract and salaries and travelling expensesfor SNMC's staff. Details are given in Annex 5-5. A contract coveringtechnical assistance required after completion of the performance tests hasnot yet been signed. The cost estimate of such a contract is based on SNMC'srecent experience and includes the salaries and fees for 10 men years.

Duties and Taxes (Item 8)

17. Duties and Taxes have been calculated on the basis of prevaillingtariffs as follows:

Item Nature of Tax Tax Rate %

Equipment Import duty 3.00Steel Structure Import duty 14.00Erection, Supervision and

Kawasaki Engineering Forfaitary tax /1 8.00SOCADEI and RailwayEngineering Tax on Services /2

plus tax on non-commercial /3profits 21.95

Internal Transport Tax on Services /2 6.00

/1 Impot forfaitaire7- TUGPS75 BNC

ANNEX 5-7Page 6

Duty rates vary from item to item, and the 3% applied to equlpment is anaverage, taking into account the various natures of items included inequipment.

Physical Contingencies (Item 9)

18. To account for minor changes and omissions, a physical contingencyof 10% has been added to the base cost of all items except those for whichcontracts have been signed. For the latter category, the contingencyallowance has been reduced to 5% to take into account the advanced stageof-design and implementation.

Price Escalation (Item 10)

19. Price escalation has been estimated on the basis of expectedworld inflation rates for industrial construction and equipment, and ofthe projected evolution of prices in Algeria. During the constructionperiod (1976-1978) the following rates have been applied to capital costitems which are not based on already signed fixed price contracts.

Foreign equipment and construction .15% per yearForeign services ............................. 10% per yearLocal equipment and supply ....... ........... 5% per yearLocal salaries .............................. 7% per year

Price escalation provisions for this project total are only about 3% of total costssince nearly 70% of all cost items are covered by fixed price contracts.

Allocation of Capital Costs Between the Saida Cement and Lime Plant

20. The Saida cement plant is part of a cement-line production complexSNMC is constructing near Saida. The lime plant is still in an early plan-ning stage. The capital cost estimates detailed above have made no attemptto exclude the cost components which can directly or indirectly be attributedto the lime plant, since financing for the infrastructure equipment includedin the turn-key contract has to be provided during the implementation of thecement plant. However, for the purpose of financial and economic rate ofreturn calculations of the Saida cement plants, common costs have beenallocated as follows:

ANNEX 5-7Page 7

Commo / CementCost Items Lime Plant Plant

Site Preparation 6.25 1.38 4.87Land 0.28 0.07 0.21Railway 49.65 8.44 41.21Electricity 5.20 0.20 5.00Gas 1.70 0.23 1.47Quarry Equipment 8.20 1.80 6.40Mechanical Equipment 22.65 4.98 17.67Civil Engineering 0.80 0.17 0.63Beton Crusher 1.20 0.26 0.94

Total 95.93 17.53 78.40

/1 Include price and physical contingencies etc.

Industrial Projects DepartmentNovember 1975

ALGERIA - SNMC EXPANiSION P?OJEUT

SAIDA CEMENT PLANT - PROJECTED WORKING CAPITAL REWUIREMENTS

(DA MILLION)

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

A. CURRENT ASSETS:

1. Cash 1.64 2.15 2.79 3.29 3.50 3.70 3.91 4.13 4.37 4.62 4.882. Accounts Receivable 11.12 18.04 26.29 27.12 27.50 27.50 29.38 31.50 33.75 36.00 38.503. Inventories

Material Supplies 0.32 0.56 0.68 1.00 1.06 1.13 1.20 1.27 1.35 1.44 1.53Paper Bags 0.28 0.45 0.64 0.69 0.74 0.78 0.81 0.86 0.90 0.94 0.99Work in Progress 2.06 2.06 1.56 1.54 1.50 1.45 1.40 1.39 1.39 1.38 1.31Finished Goods 10.96 10.96 8.32 8.19 7.98 7.72 7.48 7.43 7.39 7.34 6.98

Sub-Total 13.62 14.03 11.21 11.42 11.28 1L07 10.89 10.95 11.03 11.09 10.81

TOTAL CURRENT ASSETS 26.38 34.22 40.29 41.82 42.29 42.27 44.18 46.59 49.15 51.71 54.19

B. LESS:ACCOUNTS PAYABLE 1.56 2.45 3.49 3.78 4.03 4.23 4.44 4.66 4.89 5.14 5.39

C. WORKING CAPITAL 24.81 31.77 36.80 38.04 38.26 38.05 39.74 41.93 44.25 46.57 48.80

D. CHANGE IN WORKING CAPITAL 24.81 6.95 5.04 1.24 0.22 (.21) 1.69 2.19 2.33 2.32 2.23

Assumptions

1. Cash: One month's operating costs only. SNMC provides all operating units with this amount to purchase immediate productioninputs. Working capital needs for debt service, receivables or inventories are dealt with directly by SNMC.

2. Accounts Receivables: Three months of sales; long delays are anticipated since 9070 of customers are other state enterprisesor Government Agencies. In the opinion of SNMC, however, it may be possible to cut this down to 2 months.

3. Inventories: a. Materials and Supplies: I month's requirement.b. Paper Bags: 1.5 months of requiremnents at DA 21 per ton of bagged cement.c. Work in Progress: 38,500 tons at 15% of production cost.d. Finished Goods: 38,500 tons of clinker as cement at 80% of production cost.

4. Accounts Payable: Two months payment delay for utilities, 3 months for paper bags.

Industrial Projects DepArtmentNovember 1975

ANNEX 5-9Page 1

ALGERIA

SNMC CEMENT EXPANSION PROJECT

SAIDA CEMENT PLANT - BANK FINANCED ITEMS

FOREIGN EXCHANGE COST

DA US$Million Million /1

1. Plant Supply & Erection30% of the foreign exchange cost of.the RLI turnkey contract includingdetailed engineering, supply of (cifcost) equipment, equipment erection &installation, civil construction design& supervision, training & conmissioning, 49.93 12.74but excluding downpayment already made.

2. Civil Construction25% of the cost of construction forbuildings and foundation, equivalent tothe estimated foreign exchange cost(see p. 2 for details) 27.81 7.09

3. Railwaycif cost of materials and supplies forthe construction of the railway link 26.81 6.84

4. Consulting ServicesEngineering & Supervision (SOCADEIcontract) 8.73 2.23Technical Assistance afterConmissioning 3.49 0.89

12.22 3.12

5. Unallocated 3.96 1.01

SAIDA CEMENT PLANT TOTAL 120.74 30.80

/1 US$1.00 - DA 3.92

ANNEX 5-9Page 2

Computation of Probable Direct and Indirect Foreign Exchange Content ofInternationally-Bid Civil Works

The Bank is prepared to finance the indirectwand direct foreign exchange costof the civil construction contract for the Saida cement plant under thecondition that the contract is internationally bid according to the Bank'sprocurement guidelines. The contract includes construction of the plantfoundation, silos, main and ancillary buildings. It does not cover thesupply of steel and the detailed civil engineering design. The foreignexchange component has been derived as follows:

ESTIMATED COST COMPONENTS OF THE CIVIL CONSTRUCTION CONTRACT

Local Foreign Total----- (DA million) ------

Equipment 32.45 13.91 18.54Labor - 46.36Mlaterials and Supplies 18.56 9.27 27.83

69.55 23.18 92.73

All costs given on page 1 include 75% of the approximate price escalationand physical contingency allowance. The remaining 25% appears as anunallocated item. Thus, the civil construction cost listed on page 1,DA 27.81 million, is comparable with the DA 23.18 million shown above.

Industrial Projects DepartmentNovember 1975

ANNEx 5-1o

ALGERIA

SNMC EXPANSION PROJECT

SAIDA CEMENT PLANT - DISEURSEMENT SCHEDULE

Cumulative UndisbursedDisbursement Disbursement Amount

--------------------- -(us$000)----

1976

I Quarter 4,034 4,034 26,766II Quarter 4,034 8,068 22,732III Quarter 4,034 12,102 18,698IV Quarter 4,034 16,136 14,664

1977

I Quarter 3,450 19,586 11,214II Quarter 3,450 23,036 7,764III Quarter 3,450 26,486 4,314IV Quarter 3,450 29,936 864

1978

I Quarter 216 30,152 648II Quarter 216 30,368 432III Quarter 216 30,584 216IV Quarter 216 30,800

Industrial Projects DepartmentNovember 1975

ANNEX 5-11Page 1

ALGERIA

SNMC EXPANSION PROJECT

SAIDA CEMENT PLANT - OPERATING COST PROJECTIONS

(DA Million (1975) - Constant Terms)

1978 1979 1980 1981 1982 1983

PRODUCTION (000 Tons)

Clinker 112 337 457 472 480 480Ordinary Cement 117 352 478 493 500 500

OPERATING COSTS

Labor-irect 1.13 1.51 1.51 1.51 1.51 1.51

Maint. Support .37 .49 .49 .49 .49 .49Administration .83 1.11 1.11 1.11 1.11 1.11

Sub-Total 2.33 3.11 .11 3. -1 3.11 3.11

Material, Supply, SparesRefractories .09 .28 .38 .40 .40 .40Grinding Media .14 .43 .59 .61 .62 .62Sundries .27 .66 .77 .78 .78 .78Spares Maint. .55 2.18 2.18 3.97 3.97 3.97Gypsum Iron .36 1.10 1.49 1.54 1.56 1.56

Sub-Total T2¢ Z75E: 77.X 7.3T 77T3

UtilitiesGas 1.16 3.48 4.73 4.88 4.96 4.96Electricity 1.42 4.17 5.64 5.82 5.90 5.90

Sub-Total T.-M 7-75 10.37 10.70- TU.-86 M- 0.

Paper Bags .98 2.96 4.02 4.14 4.20 4.20

MiscellaneousAdmin. Expenses .35 .47 .47 .47 .47 .47Technical Assistance - - - - - -

Duties & Taxes .39 1.09 1.44 1.53 1.55 1.55Other Costs - - - - - -

Sub-Total 7W T357; 1.91 2.00 2 2. .02

TOTAL 8.05 19.93 24.81 2-7.24 27.52 27.52

Operating Cost per Ton 68.8 56.6 51.9 55.2 55.o 55.0

ANNEX 5-11Page 2

I. Production Build-Up

1. As outlined in Annexes 5-3 and 5-6, installation of the cementproduction lines are scheduled to be completed in February 1978. After acommissioning period of 4 months, provisionary acceptance of the plan isexpected for July 1978 and completion of performance guarantee tests byDecember 1978. For the purpose of financial projections, it vas assumedthat the plant vill reach its nominal capacity of 1500 tons of clinker perday gradually over the first 3 years of production start-up. During thefirst year the plant wiU produce at 50% of this capacity; thereafter, thenumber of operational days per year will increase from 300 to 320. Theseassumptions give the following production build-up:

1978 1979 1980 1981 1982

Number of Operation Days 75 225 300 315 320

Clinker (000 Tons) 112 337 457 472 480

Cement (000 Tons) 117 352 477 493 500

II. Operating Costs

2. Operating cost projections in constant 1975 terms are given inTable 1 of this Annex. They have been calculated by SNMC based on thedesign characteristics of the Saida cement plants and unit cost presentlyexperienced in SNMC's operating plants. At full production (1980), theSaida plant is projected to reach operating costs of 55DA/ton in constant1975 terms. These costs are 10-20% lover t.an those of comparable plants inEurope and North Africa. The competitive cost advantage is due to the avail-ability and the relative low price of fuel gas in Algeria. The compositionof SAIDA operating cost is as follows:

Average Production CostsDA Per Ton %

Labor 6.22 11.3Materials, Supplies, Spares 14.66 26.6Utilities 21.72 39.5Bags 8.40 17.1Miscellaneous Expenses 4.02 5.5

TOTAL 55.02 100

ANNEX 5-11Page 3

3. A low operating cost level is, however, a relatively unreliableindication for the competitiveness of a plant's ex-factory production cost.At the present, depreciation and financial charges of new plants account for50-70% of ex-factory production cost. A 10% increase in capital cost hasceteris paribus the same effect on the total production cost per ton as a70-90% fuel cost increase.

4. The following paragraphs discuss assumptions used for pro-jecting the individual operating cost items.

Labor

5. Labor cost estimates are based on 1975 salaries paid by SNMC forthe relevant jobs; they include 40% social benefits and bonus. The cost ofspecial training and recruitment of personnel (detailed in Annex 5-5) arescheduled to be completed before start of operations and are covered in thepre-operating expenses. Labor costs during operation can be split into thefollowing categories:

Persons Employed Labor cost(DA Million)

Direct Labor 115 1.51Maintenance & Support 54 0.49Administration 47 1.11

216 3.11

Materials, Supplies and Spares

6. A substantial amount of materials and supplies such as refracto-ries, grinding medias, tyres and explosives will be imported. Raw materialsand the basic additives such as iron ore and gypsum are available locally.The following base costs and average consumption rates have been assumed.

Consumption Unit Price

Refractories 400g/ton of clinker 2.10 DA/kg

Grinding Media 0.6kg/ton of clinker 2.15 DA/kg

Sundry

- Fuel 0.60 DA/ton of cement- Grease 0.25 DA/ton of cement- Tyres 0.46 DA/ton of cement- Explosives 0.24 DA/ton of cement

ANNEX 5-11Page 4

Iron 8.3 kg/ton of clinker 0.08 DA/kg

Gypsum 4.7% of clinker pro- 0.55 DA/kgduction.

7. The capital cost include DA 18.28 million for spare parts, a pro-vision which should cover the demand of at least 2 years. To cover annualcosts of spares and maintenance supplies, the following amounts were added:

1978 0.5% of Equipment Value1979 1% of Equipment Value1980 1% of Equipmeut Value1981 aud 1.5% of Equipment Value and 0.5% of Valuethereafter of Buildings and Civil Works

Utilities

8. Utility costs have been calculated as an average based on SONELGAZ'1975 split-rate tariff and on the expected consumption of the Saida cementplant. The specific calorie consumption of the kiln is relatively high becauseof the high projected humidity of the raw materials (15%).

Consumption Unit Price

Electricity 130 Kwh/ton of Cement 0.09 DA/Kwh

Gas 1000 kcal/kg of Clinkerwith Califoric Value of9500 kcal/m3

Water 100,000m 3 per Year 0.5 DA/m3

Paper Bags

9. 60% of plant output will be sold bulk and 40% in bags. SNMC doesnot directly import paper bags but purchases from SONIC, 1/ the state papermonopoly enterprise at DA 1.05 per bag or DA 21 per ton. This price,utilized in the case estimates, is high and reflects the start-up of papermaufacture in Algeria.

Miscellaneous Expenses

10. Administrative expenses include office expenses, audit fees, carexpenses and miscellaneous overheads but exclude salaries. They are esti-mated at 15% of labor costs based on the historical cost structure in otherSNMC cement plants.

1/ Societe Nationale des Industries Chimiques.

ANNEX 5-11Page 5

11. Duties and taxes include import duties (3% of the fob of impor-ted items such as refractories, grinding media, sundries and spares) and a1% sales tax.

Industrial Projects DepartmentNovember 1975

ANNEX 5-12Page 1

ALGERIA

SNMC EXPANSION PROJECT

Saida Cement Plant - Financial Projections

A. ASSUMPTIONS

1. The financial projections are based on the production plan ouXlinedin Annex 5-11. The plant is expected to start operating in the second half o:`1978 and to reach its full production capacity by 1982. To reflect the plant'sprojected cash flow positions all financial statements are in current prices.However, financial rates of return calculations are based on data expressed inreal value terms (Annex 5-14).

2. Net Sales: At present, Algeria's pricing policy for cement isbased on the 1973 average cost of domestic production, and imported cement plusa margin for distribution and profit. It entirely fails to take into accounteither the very sharp rise that has occurred in import prices or the changingcost structure of the domestic industry as new and more expensive plants comeon-stream. For the purposes of the financial projections, therefore, thispolicy has been replaced by that agreed upon during negotiations: viz thatSNMC will set cement prices at a level sufficient to cover full costs plus amargin to cover debt service obligations associated with the cement sector.However, to reflect likely world market prices, it has been assumed that, after1980, the cement price will not fall but, instead, will increase in line withworld inflation, i.e. at approximately 7% per annum. Thus prices will rise toabout DA 205/ton by 1978, fall to DA 180/ton in 1980 and will increase thereafterin current, though not in real, terms.

3. Operating Cost assumptions used in calculating these costs inconstant terms are elaborated in Annex 5-11. Projections in current termsare based on the following inflation rates;

Labor: 7% p.a.Local supplies: 5% p.a.Foreign supplies: 15% for 1975-77

10% for 19788% for 19797% thereafter

4. Depreciation: The depreciation schedule follows the legallyrequired rates, whereby assets have to be amortized or depreciated as follows:

Building and civil works : 20 yearsInfrastructure : 20 yearsQuarry equipment : 10 yearsRolling stock : 5 yearsOther equipment : 15 yearsSpares : 15 yearsPre-operating expenses : 5 yearsEngineering & Technical Assistance : 5 yearsInterest during construction : 10 years

ANNEX 5-12Page 2

5. Taxes: State enterprises in Algeria pay taxes on their consolidatedearnings and, hence, the Saida plant - which will be a separate accounting unitfor control purposes - will not be autonomous for tax purposes. The theoreticaltax rate is based on 50% of net profits and this rate has, therefore, been appliedin the financial projections. In addition, contributions may also be made tothe State budget (50% of profit after taxes) and to workers (25% of profit aftertaxes). However, these are extremely hypothetical payments and have, therefore,been excluded from the projections.

6. Financing Plan and Financial Charges: As outlined in Annex 2-1, inthe Algerian public enterprise system the notion of equity does not exist, andall new projects and replacement investments are financed by loans. Financialcharges are, therefore, capitalized during construction and charged to theincome statement as of start-up. They have been calculated on the basis ofthe following finaneing plan:

Supplier's Credit: SNMC has signed a supplier's credit agreement providingDA 224.4 million, or US$ 57.1 million, to cover 70%of the foreign exchange costs of the KHI turnkey con-tract. Terms and conditions of this credit are veryconcessionary: DA 29.4 million are lent at 8-1/2% p.a.interest for 8 years including 3 years of grace andDA 195 million at 8% p.a. interest with a repayment of13 years including 3 years of grace. Repayment is on thebasis of equal principal plus interest.

IBRD Loan: The Bank loan to SNMC includes a loan component ofDA 120.7 million (US$ 30.8 million) for financing of theSaida cement plant (Annex 5-9). The loan will be givenfor 15 years including a grace period of 4 years. Interestis assumed to be 10%, including the 1.5% guarantee fee payable toto the Government of Algeria. Repayment of the loan isassumed to be on equal principal plus interest.

Local Financing: It is assumed, on the basis of agreements reached with SNMCand the Government, that residual financing for the Saida plantwill be provided by BAD, BEA, or by Treasury advances whichwill cover working capital requirements of DA 31.8 million(US$ 8.1 million) through 1979. Terms of these loans will notbe less favorable than those of the IBRD loan. For thefinancial projections, it has been assumed that they willbe for 16 years, including 4 years of grace, at an interestrate of 5.5% p.a. , based on constant annunity.

7. Treasury Grants and Intra-SNMC Transfers: The projections also includeprovision for losses incurred by the Saida plant to be covered either by directTreasury grants or, in line with the proposed pricing policy, by intra-companytransfer. It has been assumed that treasury grants will be made until the plantls operating at full capacity and will be based on the difference between the actualunit cost in each start-up year and the unit cost in the first year of full production.The remainder of the plant's losses will be financed by SNMC funds. In addition, theprojections foresee further intra-SNMC transfers, if necessary, in order to maintaina debt service coverage of 1.1 times for the Saida plant. By 1987, it is expectedthat grants and transfers will total about DA 370 million (US$ 94 million).

Industrial Projects DepartmentNovember 1975

ANNEX 5-12Page 3

ALGERIA: SMIC EXPANSION PROJECT

S&IDA CEMENT PIANT - PRO FRMA FINANCIAL STATEMENTS

INCOME STATEMENT

(DA MILLION - CUIRRENT TERMS)

1975 1976 1977 1978 1979 1980 1981

Cement Production (000 tons) 117 352 478 493

Price DA/ton 205 200 180 180

Net Sales 23.99 70.40 86.04 88.74

Cost of Goods SoldDirect Labor 1.38 1.98 2.12 2.27

Materials, Supplies and Spares 1.94 6.77 8.19 12.00

Utilities 2.98 9.30 13.23 14.34

Maintenance Labor 0.45 0.64 0.69 0.74

Paper Bags 1.14 3.59 5.12 5.55

Subtotal 7.90 22.29 29.35 34.88

Gross Profit 16.09 48.11 56.69 53.86

Operating ExpensesAdministration 1.44 2.07 2.21 2.37

Duties and Taxes 0.49 1.40 1.93 2.19

Depreciation 26.67 51.73 51.73 51.73

Subtotal 28.60 55.20 55.87 56.29

Operating Profit (12.51) (7.09) 0.82 ( .4)

Financial Charges 13.71 50.08 46.55 42.93

Net Pretax Profit (26.22) (57.17) (45.73) (45.36)

Taxes

NET PROFIT AFTER TAXES ( .22 (57.17) (.73) 45.36)

1982 1983 1984 1985 1986 1987 1988

Cement Production (000 tons) 500 500 500 500 500 500 500

Price DA/ton 193 212 227 243 260 278 297

Net Sales 96.30 106.15 113.42 121.45 130.00 139.10 148.73

Cost of Goods SoldDirect Labor 2.42 2.59 2.78 2.97 3.18 3.40 3.64

Materials, Supplies and Spares 12.78 13.55 14.39 15.28 16.23 17.25 18.34

Utilities 15.29 16.05 16.85 17.70 18.58 19.51 20.48

Maintenance Labor 0.79 0.84 0.9; 0.96 1.03 1.10 1.18

Paper Bags 5.91 6.21 6.52 6.84 7.18 7.54 7.92

Subtotal 37.18 39.25 41.43 43.75 46.20 48.80 51.56

Gross Profit 59.12 66.90 71.99 77.70 83.80 90.30 97.17

Operating ExpensesAdministration 2.53 2.71 2.90 3.10 3.32 3.55 3.80

Duties and Taxes 2.34 2.50 2.60 2.75 2.90 3.05 3.23

Depreciation 51.73 48.00 46.00 46.00 46.00 46.00 43.50

Subtotal 56.60 54.02 51.47 52.17 52.85 53.23 47.83

Operating Profit ( 2.52) (12.88) 20.52 25.53 30.95 38.07 49.34

Financial Charges 38.73 34.68 30.78 26.22 21.78 17.01 12.83

Net Pretax Profit (36.21) (21.80) (10.26) ( 0.69) 9.17 21.06 36.51

Taxes - 4.59 10.53 18.26

NET PROFIT AFTER TAXES (36.21) Q21.0) ( ) (Q0.69 4 59 10.53 18.26

Industrial Projects DepartmentNovember 1975

ANie4 5-12

AIGERIA: SNMC EXPANSION PROJECT

SAIDA CFMENT PLANE - PRO FORMA FINANCIAL STATP2ENTs

SOURCE AND APPLICATION OF FONDS STATRMENIT

(DA MILLION - CERRENT TERRS)

1975 1976 1977 1978 1979 1980 1981

SOURCES OF FONDS

Cash fres OperatisusNet Profit Before T-x - - - (26.22) (57.17) (45.73) (45.36)Depreciatise -_ 26.67 51.73 51.73 51.73

Subtetal - - - 0.45 ( 5.44) 6.00 6.37

F-reignSupplier - 102.32 122.05 - - - -IBRD - 63.25 54.10 3.39 - - -

LocalRAD 95.33 164.16 52.73 62.94 - - -Treassry Adoances _ - - 24.81 6.95 - -

Subtetal 95.33 329.73 228.88 91.14 6.95 - -

Treassry Cr-at (leoses due te startup) - - - 19.20 34.29 5.10 -

Ietra-SNNC Transfer - - - 7.02 22.88 40.63 60.79

Total Sources 95.33 329.73 228.88 117.81 58.68 51.73 67.16

APPLICATIONS OF FONDS

Inveotstet in Fixed AssetsInitial 93.71 312.62 191.33 14.68 -Replaceent - - - -Intereat during Construction 1.62 17.11 37.55 42.51 - - -Change in Workirg Capital - - - 24.81 6.95 5.04 1.24

oan RepaymcntsSupplier - - - 13.00 26.00 26.00 26.00IDRD - - - - - 10.50 10.50Local - - - - - 5.83 16.17

Subtotal - - - 13.00 26.00 42.33 52.67

Payment f Taxes- .

Total Apolicationo 95.33 329.73 228.88 94.98 32.95 47.37 53.91

Asoual Surplus - - _ 22.83 25.73 4.36 13.25Cumulative Surplus _ - _ 22.83 48.56 52.92 66.17

1982 1983 1984 1985 1986 1987 1980

SOURCES OP FUNDS

Cash fron OperationsNet Profit Before Tax (36.21) (21.80) (10.26) ( 0.69) 9.17 21.06 36.51Depreciation 51.73 48.00 46.00 46.11 46.00 46.00 43.50

Subtotal 15.52 26.20 35.74 45.31 55.17 67.06 80.01

LoansSupplier - . - - - -IBRD - - - - - -LocalBAD - - - - - -Treasury Advasces - 9.91 _ 4.58 _ 13.85

Subtotal - 9.91 - 4.05 - - 13.05

Treasury Grant (losses due te startup) , - - -

Intra-SNMC Transfer 50.79 42.90 32.95 26.85 18.94 6.39

Total Sources 66.31 79.01 68.69 77.11 74.11 75.45 93.86

APPLICATION OF FUNDS

Invostment in Pixed AssotsInitialReplacenent - 9.91 - 4.85 - - 13.58Intreset during Construction . -Change in Workig Capital 0.22 ( 0.21) 1.69 2.19 2.33 2.32 2.23

Loan Repayste.tSupplier 26.00 21.50 21.50 21.50 21.50 21.40 -IbRD 10.50 10.50 10.50 10.50 10.50 10.50 10.50Local 20.28 26.76 27.65 31.22 33.39 35.14 36.98

Subtotal 56.76 58.76 59.65 63.22 65.39 67.04 47.48

Payment of Tases - - - - 4.59 10.53

Total Applications _ 68.46 61.34 72.26 67.72 73.95 73.82

Annual Surplus 9.31 10.55 7.35 6.75 6.39 1.50 20.04Cumulative Surplus 75.48 86.03 93.38 100.13 106.52. 108.02 128.06

Industrial ProJets DepartmentN-venber 1975

A-ce. 5-12

AIGERIA: SNMC EXPANSION PROJECT Page 5

SAIDA CEN_NT PLANT - PRO FORMA FINANCIAL STATMENTS

BALANCE SPEET

(DA MILLION -CERRENT TERMS)

1975 1976 1977 1978 1979 1980 1981Cotera

Correct RssetsCash at Bank 24.47 50.71 55.71 69.46Arcceuts Receivable 11.12 18.04 26.29 27.12Inventories 13.62 14.03 11.21 11.42

lob Total 49.21 82.78 93.21 108.00

Fixed Accota

GCosa Asseto 95.33 425.06 653.94 711.13 711.13 711.13 711.13Ltso Areeculated Depreciation - - - 26.67 78.40 130.13 181.86

Net Fixed Assets 95.33 425.06 653.94 684.46 632.73 581.00 529.27

Total Asoets 95.33 425.06 653.94 733.66 715.51 674.21 637.27

Liabilities

Correct LiabilitiesTaxes PayableAccounte Payable - _ - 1.56 2.45 3.49 3.78Correct Portion of Long Teoo Debt - _ 13.00 26.00 42.33 52.67 56.76

Slb Total - - 13.00 27.56 44.78 56.16 60.54

Long Tre- DebtForeign - 165,57 328.72 306.11 269.61 233.11 196.61Local 95.33 259,49 312.22 399.97 401.09 384.92 364.64

Sub Total 95.33 425.06 640.94 706.08 670.70 618.03 561.27

Reserves - - - (26.22) (83.39) (129.12) (174.48)Grooto & Soboidy _ 26.22 83.39 129.12 189.91

Total Liabilities 95.33 425.06 653.94 733.66 715.51 674.21 637.27

1982 1983 1984 1985 1986 1987 1988

Rocoto

Correct ARoetsCabh at Balk 78.96 89.73 97.29 104.26 110.69 112.64 132.94Accoocts R-ceivable 27.50 27.50 29.38 31.50 33.75 36.00 38.50Inventories 11.28 11.07 10.89 10.95 11.03 11.09 10.81

slb Total 117.76 128.30 137.56 146.71 155.67 159.73 182.25

Fixed ARsetsGroco Ascets 711.13 721.04 721.04 725.89 725.89 725.89 739.74Leco Accoculated Depreciatioc 233559 281.59 327.59 373.59 419.59 465.59 509.09

Net Fixed ARsets 477.54 439.45 393.45 352.30 306.30 260.30 230.65

Total Asetr 595.30 567.75 531.04 499.01 461.97 420.03 412.80

Liabilities

Curront Liabiliti-oTaxes Payable - - - - 4.59 10.53 18.26Accounts Payable 4.03 4.23 4.44 4.66 4.89 5.14 5.39Currect Portion of Loog Ter- Debt 58.76 59.65 63.22 65.39 67.04 47.48 50.50

Slb-Total 62.79 63.88 67.66 70.05 76.52 63.15 74.15

Long Teo, DebtForeign 164.61 132.61 100.61 68.61 36.71 26.21 15.71Local 337.88 320.14 288.92 260.28 225.24 188.26 162.11

Slb Total 502.49 452.75 389.53 328.89 261.95 214.47 177.82

Reserves (210.59) (232.39) (242.65) (243.34) (238.44) (227.91) (209.65)Grante & Subaidy 240.70 283.60 316.55 343.40 361.94 370.33 370.33

Total Liabilities 595.30 567.75 531.04 499.01 461.97 420.03 412.80

Industrial Projects DepartceotNovember 1975

ANNEX 5-12Page 6

ALGERIA

SNMC EXPANSION PROJECT

SAIDA CEMENT PLANT - PROJECTED FINANCIAL RATIOS

1978 1979 1980 1981 1982 1983

Current Ratio: 1.7 1.8 1.7 1.8 1.9 2.0Excluding Surplus Cash: 1.0 0.8 0.7 0.7 0.7 0.7

Debt Service Ratio: 1.1 1.1 1.1 1.1 1.1 1.1

Net Profit (Loss) afterTax as % of Net Sales (109) (81) (53) (51) (38) (21)

Ratio of Current Assets toShort-Term Liabilities:2/ 17.3 13.8 11.2 10.8 10.2 9.7

198h 1985 1986 1987 1988

Current Ratio: 2.0 2.1 2.0 2.5 2.5Excluding Surplus Cash: 0.7 0.7 0.6 0.8 0.7

Debt Service Ratio: 1.1 1.1 1.1 1.1 1.1

Net Profit (Loss)afterTax as % of Net Sales (9) (0) 4 8 12

Ratio of Current Assets 1 oShort-Term Liabilities:- 9.5 9.2 4.9 3.2 2.h

1/ Excluding current portion of long term debt;excluding surplus cash.

Industrial Projects DepartmentNovember 1975

ANNEX 5-13

Page 1

ALGERIA

SNMC EXPANSION PROJECT

SAIDA CEMENT PLANT - BREAK-EVEN POINT ANALYSIS

1. The break-even points of the Saida plant have been calculated based on costs in theyears 1980, 1982 (when the plant is assumed to operate at 100% of rated capacity), and 1986,

2. The following basic data were used to determine the break-even points:

1980 1982 1986

Cement Production (000 tons) 478 500 500

Net Sales (DA million) 86.04 85.00 112.50

Costs (DA million) Fixed Variable Total Fixed Variable Total Fixed Variable Total

Direct Labor 1.75 0.37 2.12 2.00 0.42 2.42 2.63 0.56 3.19Material Supplies 1.78 6.41 8.19 2.78 10.00 12.78 3.52 12.68 16.20Utilities 1.12 12.11 13.23 1.29 14.00 15.29 1.56 17.01 18.57Maintenance Labor 0.61 0.08 0.69 0.70 0.09 0.79 0.90 0.12 1.02Paper Bags - 5.12 5.12 - 5.91 5.91 - 7.17 7.17Admin. Expenses 2.21 - 2.21 2.53 - 2.53 3.32 - 3.32Duties & Taxes 1.02 0.91 1.93 1.24 1.10 2.34 1.52 1.36 2.88Depreciation 51.73 - 51.73 51.73 - 51.73 46.63 - 46.63Financial Charges 45.55 - 46.55 38.73 - 38.73 21.78 _ 21.78

TOTAL 106.77 25.00 131.77 101.00 31.52 132.52 81.23 38.90 120.13

Debt Repayment (DA million) - --------- 42.33 ------- -------- 56.78-- - --------- _65.39 ___-___

Profit Break-even Point(% of capacity) 174% 184% 114%

Cash Break-even Point(% of capacity) 159% 193% 142%

ANNEX 5-13Page 2

3. The very high break-even points are a function of (i) a pricingpolicy based on the .cost structure of-SNMC's cement sector as a whole ratherthan on that of the Sa:.da plant; (ii) financing entirely by long-term debt;and (iii) the high capital cost of the Saida plant. The impact of thepricing policy is illustrated in the following graphs:

360

340

160320

300

1201 Costs

280

Sdd^: Ttttl 'thvnue r ToalTotal

100ReT-

26C

n~~~~~~~~~~~~~~~~~Ui

240 ~~~~~~~~~~~~~~Cont

220UnitPrice

1978 1979 1980 1981 15F12 1;83 -1-784

16 1918 1279 i1980 1981 l98 I~b 133 17,8

S.jd,]t: T-,tai tevenun x Total C,t

S-kdif: llnlt R',ve.nn r Unlt C7st

Industrial Projects DepartmentNovember 1975

ANNEX 5-14Page 1

ALGERIA

SNMC CEMENT EXPANSION PROJECT

SAIDA CEMENT PLANT - FINANCIAL RATE OF RETURNAND SENSITIVITY ANALYSIS

Assumptions

i. Cost and benefit streams used in calculating the financial rate ofreturn were derived from the capital cost estimates and operating cost projections(Annex 5.9, 5.11) and exclude financial charges and depreciation. All costsand benefits are valuedinn real terms; i.e., they have been deflated to mid-1975 by the average world inflation rate which is assumed to be 10.8% in 1975,9.h% in 1976, 7.5% in 1977 and 7% thereafter.

2. Other basic assumptions used in the financial rate of return calcu-lations are as follows:

Construction period : 4 yearsOperating life 20 yearsWorking capital : Fully recovered at the

end of the projectScrap value : 20% of the initial value

in real 1975 terms

Industrial Projects DepartmentNovember 1975

ANNEX 5-14Page 2

ALGERIA

SAIDA CEMENT PLANT - SENSITIVITY TESTS ON THE FINANCIAL RATE OF RETURN

0~~~

4Operating3 cost vs

Co ~~~~~~~~~~~~~Retu -Revenue CaPital

2 vs Cost vsReturn Return

-30 -20 -10 0 +10 +20 +30Decrease Increase

Base CaseFinancialRate of

Capital Operating ReturnCase Cost Cost Revenue (

1 Base Case 100 100 100 3.72 115 100 100 2.73 85 100 100 4.94 100 115 100 2.95 100 85 100 4.46 100 100 125 6.67 100 100 75 0.3

Industrial Projects DepartmentNovember 1975

ANNEX 5-15Page 1

ALGERIA

SNMC CEMENT EXPANSION PROJECT

SAIDA CMENT PLANT - ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS

A. Assumptions

1. The economic cost/benefit streams shown on page 4 have been calcula-ted on the following basis: (a) all costs and revenues are expressed in real(i.e. mid-1975) prices; (b) the benefit stream is valued at the opportunitycost of importing cement, since it is assumed that without the Saida cementproduction, SNMC would have to import an equivalent amount of cement; (c)production costs are calculated by using shadow pricing or world marketprices for all tradeable inputs; and (d) all transfer payments are excluded.No shadow pricing of foreign exchange has been employed. Although, inAlgeria foreign exchange transactions are restricted and exchange rates arefixed by the Government, there appear to be only marginal differences betweenthe official and hypothetical free market foreign exchange rates.

2. The Benefit Stream. The economic benefit of this project is ex-pressed by the alternative cost to Algeria of importing 500,000 tpy ofcement. The opportunity cost of such imports has been estimated at US$58.1/ton of cement from 1978 through 1981 and US$49.7/ton thereafter.

Estimate of Opportunity Cost of Importing Cement into Algeria

(US$/ton - 1975 Prices)

1978-1981 1982 OnwardsBagged Bulk (60%) Bagged (40%)

Cement Price (FOB) 29 27 29Freight and insurance 10 7 10Bags 5 - 5Handling, transit,

storage, etc. 9 5 9Inland TransportPort-Saida: 5.1 5.1 5.1

Total 58.1 44.1 58.1

Weighted Average: 49.7

The FOB prices of US$29/ton and US$27/ton for bagged and bulk cement respectivelyare long-term estimates of real cement prices based on projected supply and demandin the Mediterranean Basin. The freight rate differential indicates, amongstother things, the higher charges for denurrage likely to be experienced at baghandling ports. Freight rates are based on likely supply sources for Algeria.

ANNEX 5-15Page 2

Paper bag costs are based on 5-ply bags for exports. It is not expected thatAlgeria will have any bulk handling facilities until Beni Saf comes on streamtowards the end of 1978. After that, it is assumed that 60% of imported cementwould be in bulk with the rest bagged. Port handling charges are currently2-3 times those prevailing in other comparable Mediterranean ports, but it isassumed that charges will be substantially lower at the new bulk facilities.The estimate for local transfer is based on the average transport cost and thedistance (250 km) between the coast and Saida. Taking into account thatthe market of the plant is located south of Saida, this estimate accountsfor the incremental transport cost in case of cement imports instead ofSaida plant output.

Capital Costs

3. The capital costs used for the calculation of the economic rateof return are similar to the capital costs used for the financial returncalculations (Annex 5-14). However, the following adjustments have beenmade:

a) To reflect the high rate of unemployment in the Saidaregion, unskilled labor has been shadow priced at 60%of market price and DA 17.15 million deducted from thecost of building civil works and infrastructure.

b) DA 17.53 million have been deducted which represent costsvhich can be accounted to the quicklime plant for purchaseof land, site preparation, the railway link, connectionsto gas and electricity, the clay quarry equipment and acrusher.

c) Duties and taxes equivalent to DA 20.02 million havebeen excluded from initial investment and subsequentreplacement costs.

d) Working capital has also been adjusted, taking intoaccount shadow pricing of labor and gas and theexclusion of transfer payments in the operatingcosts.

e) Scrap values for working capital, buildings, civil worksand infrastructure have been recalculated, reflectingchanges in the base values of these items.

Operating Costs

4. The economic operating costs are based on the operating costsin real value terms used for the financial rate of return calculations(Annex 5-14), but including the following adjustments:

ANNEX 5-15Page 3

a) Labor. As in the case of investment costs, the costof unskilled labor has been shadow priced at 60% of itsfinancial value, i.e. an amount of DA 0.42 million peryear has been deducted from labor costs. Social chargesamounting to 30% labor costs have also be excluded.

b) Gas. The cost of gas used for the project has beenvalued at the opportunity cost of exporting it. Thedate at which these benefits would occur is the dateat which the gas would be available for export, i.e.not at the time of usage of the gas for the project,but at the time the gas reserves are actually exploitedwithout the project. At the present time, Algeria'sexport capacities depend more on market prospects andpolitical considerations than availability of supply.Consistent with estimates of reserves aand rates ofexploitation shown in the recent IBRD-finance SONELGAZproject, it can be assumed that without the project thegas would not be exploited before the year 2000. There-fore, the economic cost of gas during the project life-time has been valued at its financial cost, but for theeconomic calculations, the incremental benefits whichwould have resulted from exporting the gas used for theproject have been added in year 2000 to the operatingcost stream. These incremental benefits have beenobtained by multiplying the quantities of gas consumedduring project life with the world market price of gas(US$1.5/million of BTU) less the financial well headand transport costs (US$0.66/million of BTU) alreadytaken into account and less the liquefaction costs(US$0.25) which would be incurred in the case ofexports.

c) Taxes and duties included in miscellaneous expenseshave been excluded.

5. Based on the above mentioned assumptions, the project's economicrate of return is 10.25%.

ANNEX 5-15Page 4

ALGERIA

SAIDA CEMENT PLANT - ECONOMIC RATE OF RETURN

COST AND BENEFIT STREAMS(DA Million - 1975 terms)

CapitAl OperatingYear CostL' Cost Benefit

1975 85.70 0.00 0.001976 269.90 0.00 0.001977 151.00 0.00 0.001978 27.90 7.30 26.701979 5.20 17.90 80.20

1980 3.50 23.20 108.901981 0.80 25.70 112.301982 0.00 25.70 97.401983 5.70 25.70 97.401984 0.00 25.70 97.401985 2.50 25.70 97.401986 0.00 25.70 97.401987 0.00 25.70 97.401988 5.70 25.70 97.401989 0.00 25.70 97.40

1990 0.00 25.70 97.401991 0.00 25.70 97.401992 0.00 25.70 97.401993 0.00 25.70 97.401994 0.00 25.70 97.401995 0.00 25.70 97.401996 0.00 25.70 97.401997 0.00 25.70 97.401998 -132.40 25.70 97.40

I/ Including incremental working capital in the plant's first years ofproduction. All incremental vorking capital is recovered at the endof 1994.

Industrial Projects DepartmentNovember 1975

ANNEX 5-15Page 5~

SAIDA CEMENT PLANT - SENSITIVITY TESTS ON THE ECONOMIC RATE CF RETURN

X XangQg 10%CH Revenue vseurno Return

$ ~~~~~~ ~~Capita_œ: 5% ~ _ cost vs return

ri

-30 -20 -10 0 +10 +20 +30

<- Decrease Increase-+

Base Case

Economic------- % Variation in Input------ Rate ofCapital Operating Return

Case Cost Cost Revenue (%)

1 Base Case 100 100 100 10.252 110 100 100 9.153 100 110 100 9.854 100 100 90 8.655 100 100 110 11.756 100 100 125 13.857 90 100 100 11.558 100 90 100 10.659 115 100 100 8.6510 85 100 100 12.25il 100 115 100 9.6512 100 85 100 10.8513 100 100 75 6.05

Industrial Projects DepartmentNovember 1975

ALGERIA - SNC40 EXPANSION PROJECT

SAIDA CEMENT PLANT - FOREIGN EXCHANGE EFFECT

(DA million - 1975 real terms)-/

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

I. Foreign Exchange Effects with the Prolect

1. Foreign Exchange InflowSupplier's Loan 93.53 103.78 - - - - - - - - - -IBRD Loan 57.8 46^00 2.69 - - - -

TOTAL INFLOW - 151.35 149.78 2.69 - - - - - -

2. Foreign Exchange OutflowCapital Expenditures

Fixed Assets 62.22 196.94 110.18 5.75 - - - - 4.05 - 1.73 - -Change in Working Capital - - - 9.73 2.55 3.32 0.40 0.07 (0.06) 0.44 0.53 0.53 0.50Interest During Construction 0.81 7.24 16.63 11.72 - - - - - - - - -

Sub-Total 63.03 204.18 126.81 27.20 2.55 3.32 0.40 0.07 3.99 0.44 2.26 0.53 0.50

Operating ExpenseMaterials, Supplies and Spares2/ - - - 0.85 2.79 3.78 4.37 4.40 4.40 4.40 4.40 4.40 4.40Paper Bags - - - 0.98 2.96 4.02 4.14 4.20 4.20 4.20 4.20 4.20 4.20

Sub-Total - - - 1.83 5.75 7.80 8.51 8.60 8.60 8.60 8.60 8.60 8.60

Debt ServiceDebt Repayment - - - 23.94 33.62 33,62 33.62 33,62 27.13 27.13 27.13 26.13 27.13Interest - - - 10.62 18.74 15.57 12.74 10.20 7.98 6.15 4.23 3.08 1.81

Sub-Total - - - 34.56 52.36 49.19 46.36 43.82 35.11 33.28 31.36 30.21 28.94

TOTAL OUTFLOW 63.03 204.18 126.81 63.59 60.66 60.31 55.27 52.49 47.70 43.32 42.22 39.34 38.04

3. Foreign Exchange Surplus (Deficit) (63.03) (52.83) 22.97 (60.90) (60.66) (60.31) (55.27) (52.49) (47.70) (43.32) (42.22) (39.34) (38.04)

II. Foreign Exchange Coat withoutthe Project

1. Foreign Exchange Cost - 20.18 60.72 82.45 85.04 74.48 74.48 74.48 74.48 74.48 74.48

III. Incremental Exchange Surplus (Deficit)Due to the Project (63.03) (52.83) 22.97 (40.72) 0.06 22.14 29.77 21.99 26.78 32.16 32.26 35.14 36.44

l/ Assumed deflation rates are9.47. for 1976, 7.5% for 1977 and 7% annually thereafter.2/ 60% of total materials, supplies and spares cost.3/ Valued at the opportunity cost of importing cement, less local currency items, see Annex 5-15.

Industriel Projects DepArtmentNovember 1975

ANNEX 5-17Page 1

ALGERIA

SNNC EXPANSION PRDJECT

SAIDA PLAUT: REGIONAI DEVELOPMENT IMPACT

A. Introduction

1. In many ways, Algeria represents a chronic example of a dualisticsociety and the economic justification for the Saida project is closelyrelated to the Government's continuing policy of reducing regional differ-entials in terms both of income and economic opportunity.

2. At present, the modern, wage-earning sector is concentrated inthe major urban areas, which are themeelves restricted to the fertilenorthern coast. The three existing industrial development poles are: (i)

the region around Algiers; (ii) the Constantine-Annaba-Skikda triangle;and (iii) the area between Oran and Arzew. However, estimates provided by

the Secretariat d'Etat au Plan indicate that, out of a total resident popu-lation of 14.7 million in 1973, 9 million - or in excess of two-thirds ofthe population - lived in a non-urban environment and that, of these,6.5 million, or 70%, were engaged in predominantly traditional agriculture.In comparison, manufacturing, mining, construction, commerce, transport and

services, together, in 1966 only accounted for about 900,000 workers.

3. Agricultural employment, however, disguises rural underemployment.In 1973, it was estimated that only about 40% of the agriculturàl laborforce was permanently employed and that about 8% was "strongly underem-ployed". Thus income disparities between rural and urban areas and betweenagricultural and non-agricultural workers are considerable. In 1973, forexample, annual per capita consumption averaged DA 1860 (US$450) for theurban population and only DA 540 (US$130) for the rural population.

4. This income differential is further exacerbated by relativeaccess to education. Thus, for example, while approximately 82% of

children between the ages of 5 and 14 were enrolled in elementary educa-tion in the Wilaya of Algiers in 1971-1972, comparable figures for Saidaand Saoura - in the plateau and desert regions respectively - vere 40%and 55%.

5. A corollary to this is the marked lack of economic opportunityaway from the relatively developed coast. For example, in 1970, 55% ofconstruction workers were employed in Algiers alone, 7% in Oran, 6% inConstantine and only 0.1% in the Wilaya of Saida. A direct result ofthis economic imbalance is the drift from rural areas into the alreadyover-populated urban centers which brings with it urban unemployment anda widening gap between the migrant's aspirations and his actual achieve-ment. Thus, the population of the major Northern urban centers mare than

ANNEX 5-17Page 2

doubled from 1960 to 1966, putting an increasing strain on the Government'scapacity to meet demands for social services and amenities. One safety-valve - though one which brings with it its own problens - is emigration,particularly to France where about 600,000 Algerians now work. Withoutthis outlet, the strain on the urban areas would be even more intense. 1/

6. In 1966, at the Ouargla Conference, the Government adopted apolicy of regional development which led to regional devolution throughthe Wilaya system and to special programs for agriculture and socialservices in Batna, TiziOuzou, Titteri and Tlemcen. At the nationallevel, however, rapid industrialization - which was the key to the first4 Year Plan (1970-73) - inevitably aggravated the problens of uneven devel-opment, in spite of the Governnent's deliberate policy of eliminating wealth(as opposed to income) inequalities. Government policies, therefore, nowaim to minimize the rural urban cleavage: (i) by redirecting industrialgrowth into the outlying areas; (ii) by encouraging the stabilization ofthe predominantly nomadic rural population through the provision of per-manent social infrastructure, e.g. schools, hospitals and low-cost housing,in or near the small country towns; and (iii) by facilitating a shift tolarger-scale, perhaps cooperative, farming techniques through Governnent-financed irrigation works, wider accessibility of produce markets and col-lection centers and emphasis upon agricultural education.

7. In order to achieve these goals, the regions are given assistancethrough the transfer of funds from the central budget to the local author-ities, and the responsibility of local authorities for the preparation andexecution of investment plans has been expanded. Special integrated invest-ment programs have been prepared for certain regions. Four of these pro-grams, involving an expenditure of DA 2.3 billion, were included in the1967-1969 and 1970-73 Development Plans, and a total expenditure of DA 2.7billion was approved for Special Programs during 1972-75, in addition toexpenditures included in the 1974-77 4 Year Plan.

B. Economic Structure and Recent Development of the Saida Region

8. The Wilaya of Saida itself has a population of about 300,000,widely dispersed and predominantly nomadic. Agriculture is the mainactivity with about 80% drawing their income from this sector. Inline with general Governnent policy and the particular situation in theWilaya, the development effort is aimed at improving living conditionsprimarily by raising per capita income and settling the nomadic popula-tion of the south. Thus, the initial thrust of development has been inagriculture, education and housing, with the creation of an industrialinfrastructure still very much in the planning stage. A similar policyis being followed in the neighbouring Wilayas of Bechar, Laghouat andAdrar which are also characterized by low population density, pastoralnomadism and an embryonic industrial infrastructure.

1/ New emigration has been very strictly limited since 1973.

ANNEX 5-17Page 3

9. Under the first 4 Year Plan (1970-73), an ambitious special devel-opment program was authorized for the Saida region through which approxi-mately DA 1.4 billion (US$330 million) was allocated for disbursement duringthe 1972-75 period. A sectoral breakdown of this allocation is shown below.Although most of these planned investments will be realized eventually, notmore than 35% will be completed during the Plan period.

1972-75: Special Development Program for the Wilaya of Saida(DA million)

Sector Authorization

Agriculture

Rural Development 21 )Animal Husbandry 47 )Equipment 34 )Short-term Credit 38 )Forestry 54 )Agricultural Irrigation 134 )Others 15 )

Communications

Transport Vehicles 16 )Roads 60 ) 5%

Housing

Urban 90 )Rural 15 ) 8%

Industry /1 645 ) 46S

Education

Primary 55 )Secondary 37 ) 7%

Health 21 ) 2%

Administration 18 ) 2%

Others 57 ) 4%

TOTAL 1,357 100%

/1 Actual investment required in this sector will be at leastDA 1 billion.

ANNEX 5-17Page 4

10. Besides the Special Program, the first 4 Year Plan also includedinvestments of DA 106 million (US$25 million) for the Saida region, pre-dominantly in social services, infrastructure and education. These invest-ments, shown below, were approximately 95% achieved, though cost overrunsvere up to 20-30% on most items and about 40% of projects slipped into theSecond Plan period.

1970-73 4-Year Plan: Investments in the Saida ReRion

(DA million)

Sector Authorization

Rural Development 1.5Rural Housing 3.6Urban Planning 0.6Education 16.9Sport - 3.3Communal Services /1 28.4Infrastructure 39.5Administration 12.1

Total 106.1

/1 Including community buildings, wells, water distributionand purification.

11. Notwithstanding the impact of the Special Program and the 4 YearPlan (1970-73), the second 4-Year Plan (1974-77) represents the Government'smajor regional initiative to date. In March 1972 preparation of the Planwas launched at the Wilayate level and it includes provision for DA 5.3billion (US$1.3 billion) for disbursements by local Government.

12. Estimated non-industrial investments and projected cement use inthe Wilaya of Saida are illustrated in the table below. This includes bothlocally administered programs, and investments made by Central Governmentagencies in the region. It does not, however, include programs which haveslipped from the first Plan period, nor does it include provision for in-dustrial development under the region's Special Development Program.

ANNEX 5-17Page 5

Saida: 1974-77 4-Year Plan Non-Industrial Investments

Investment Cement Recuirement(DA million) % (000 tons)

Irrigation 23 2 9Agriculture 280 24 89Education 90 8 51Professional Training 38 3 21Health 9 1 3Youth & Sports Facilities 32 3 ilInfrastructure 31 3 10Administration & CommunityServices 655 57 308

Total 1157 100 503

13. Regional development and, hence, cement consumption in the longerterm is dependent upon the extent to which economic growth becomes self-sustaining and upon the extent to which economic linkages generate second-ary industry, the processing of agricultural goods and the development ofa local service sector.

<a) Agriculture: Regional agriculture has been charac-terized by poor soil and low productivity. However,coordinated action, under the two 4 Year Plans andthe Wilaya's Special Program is now being takento modernize the sector, to increase arable land,to establish collective equipment pools and to improveaccess to water. Improved seed strains have been dis-tributed, new plows have been made available, anddemonstration farms have been established. In addi-tion, animal husbandry is being developed - particu-larly beef and dairy cattle and sheep raising, althoughthe possibility of increased coimercial production ofpoultry and eggs is also being investigated. Mobileunits for sheep transportation have been introducedand a veterinary center and three dispensaries havebeen constructed along with a training center forlivestock raising. At the same time, an agricul-tural training center in the town of Saida itselfhas also been expanded. While the importance ofregional agriculture should not be overestimated, itis clear that expanded grain processing, meat packingand tanning all could develop greatly within the nextfew years.

(b) Industry: At the present time, Saida's industrialbase is very thin with only about 450 people employedin large scale enterprises. However, plans for the

ANNEX 5-17Page 6

region's industrial development are ambitious. Includ-ing projects inscribed in the 4 Year Plan (1974-77) andin the Special Program - but excluding SNMC's own in-vestments 1/ - industrial investment in the Wilaya ofSaida is expected to develop as shown in the followingtable:

Industrial Development in the Wilaya of Saida

Existing Facilities Employees

SNEMA Bottling Plant ( 60 permanent( 40 seasonal

SONITEX Shirt Manufacture 229SEMPAC Grain Milling 57SONIC Paper Bags 64

Planned or under Construction Employees(estimated)

SONIC Pulp & Paper 800SONATRACH Butane & Propane Plant 50SNEMA Plastic Containers 57SNMetal - Metal Furnishings 90SNMetal - Radiators & Reating Units 200SONIC Abrasives -SONITEX Extension of Shirt Factory 200SEMPAC Expansion of Grain Milling 190

Longer Term Plans include: Bottling of aerated water;manufacture of household utensils; extension of presentthermal center and construction of two new centers; twonew hotels, three camping sites and a saw manufacturingunit.

14. In addition to these investments, a comprehensive program ofsocialized villages and urbanization is foreseen. The number of such vil-lages is expected to grow from only one in 1973 to approximately 25 by1980, each of which will have an average of approximately 100 housingunits plus ancillary facilities.

Industrial Projects DepartmentNovember 1975

1/ Which besides the cement plant, include a quicklime plant, two brick-works, a tile works, and production of aggregates, stoneware, concreteand plaster.

ALGERIA ANNEx 6Page 1

SNMC EXPANSION PROJECT

SNC: TECHNICAL ASSISTANCE PROGRAM

A. BACKGROUND

1. Professional Accounting Education in Algeria

1. In 1971, the accouuting education system in Algeria vas reorganizedby the Goverument following a number of ordinances. Three levels of account-ants vere defined:

a. Accounting technicians (CAP): 1/ are equivalent to holders ofthe French CAP d'aide comptable degree. The degree is obtainedafter about 2-3 years of specialized training in accounting.Accounting technicians are restricted to positions equivalentto accounting clerk in accounting firms or in accounting depart-ments of commercial or industrial enterprises.

b. Medium level accountants (BP): have obtained a "Brevetprofessionnel" degree. This degree requires (i) a certifi-cate in accounting (CMTC), 21 (li) on-the-job training fortwo years and (iii) a certificate in economics and legalaffairs (CED). 3/ After finishing secondary school or afterhaving obtained a CAP qualification, students can enroll atthe Institut Financiere et Comptable of Algiers (ITFC) fora two-year course which prepares for the CMTC'examination.The institute (ITFC) vas created in 1970 to train a largenumber of accountants vithin a minimum time. Other insti-tutions such as "technicom" or "lycees techniques" whichare specialized secondary schools also prepare for the BPdegree. At present, these institutions graduate about500 medium level accountants per year.

c. High level accountants (expert comptable): students qualifyas "expert comptable": after (i) a four-year university coursein Finance (licence en science financiere), (ii) two yearsof practical training and (iii) passing a final State Exam.Legally the BP graduates may enter university and study fora Finance degree; in practice their access to universityhas been restricted so far, which constitutes a severeobstacle to professional promotion. The university degreein Finance vas created recently, and the first students

1/ CAP: Certificat d'Aptitude

2/ CMTC: Certificat de maitrise des techniques comptables.

3/ CED: Certificat d'economie et de droit.

ANNEX 6Page 2

vill be graduating in 1975. In 1975, about 20 receiveda diploma but this output should increase sharply over thenext five years. According to qualified accountants inAlgeria, these students have an excellent general back-ground in economics, but the practical accounting educa-tion offered at the University is poor and not vell coor-dinated. The regulations for "expert comptable" specify'that on the job training is part of his accounting educa-tion and has to be performed in SNC or, at the specificrequest of SNC, in a private accounting firm or temporarilyin a State Enterprise under the supervision of an "expertcomptable". As Algerian accounting firms other than theSNC are very small, many students are expected to vork for SNCSNC after graduation. The form cand content of the finalqualifying examination has not been defined, since nocandidates have yet reached this level.

2. Without being specialized in accounting, other degrees prepare forfinancial professions. For example, for two years the same courses are fol-lowed by students in Business Administration and in Finance. The EcoleSuperieure de Commerce d'Alger is a business school with 80 students grad-uating each year. It is comparable with the French system of "Grandes Ecoles",but the Government intends to abolish this school in order to avoid competi-tion vith the University. The Ministry of Industry has created a traininginstitute, INPED 1/. The institute is supposed to train people with work ex-perience. In the last two years, about 30 executives have studied at INPEDover a period of 15 months. Although it is the policy of Government to re-serve educational matters for the Ministry of Education, a multitude of train-ing courses in various accounting-related fields are organized by Minis triesor State Enterprises due to the severe lack of qualified staff and relevantcourses offered by the existing educational institutions.

3. At the level of state enterprises, efforts are also made to improvethe professional competence of the accounting staff. Some state enterpriseshave set up training departments specialized in the field of accounting,aiming at assisting the existing staff in the fulfillment of its tasks.

4. The massive efforts made in the training of accountants have alreadyproduced significant results. However, if it is estimated that the need forbasic accountants has not yet been fully met, and that a critical shortagestill exists at the level of highly qualified accountants. The organizationof the expert-compatible education together with the growing experience ofthe existing staff in the state enterprises should progressively improve thissituation.

1/ INPED: Institut National de la Productivite et du Development.

ANNEX 6Page 3

Organization of the Accounting Profession in Algeria

5. Until 1970, no clear guidelines existed for the accouuting pro-fession. As a result, in addition to accountants working in commercialand industrial enterprises, a great number of small independent professionalaccountants established themselves. Although, according to Algerian authori-ties, the qualifications of these accountants vere often very poor due to theabsence of regulation over professional titles, they could post impressivetitles and charge high fees to the private sector. In addition, the numberof contracts with foreign firms for auditing and organization increased rapidly.The studies carried out by these firms were often too expensive, not adaptedto the Algerian context, and did not lmprove on the local situation. To meetits requirements and to enforce the orderly development of the accountingprofession in Algeria, in 1967, the Goverument created SNC, 1/ a State Enterprisefor accounting, with the objectives of providing accounting assistance t-o thepublic sector.

6. In 1971, the accounting profession in Algeria came under tighterregulation. The idea vas to maintain the private accounting sector but underGoverament control, and to enforce professional standards. In this respect,a "Conseil Superieur de la Comptabilite" vas created, presided over by theMinister of Finance, and composed of representatives of various ministries,training institutions, SNC and independent professional accountants. SNC vasgiven the responsibility for furnishing the Conseil with secretarial services.The Conseil's role is defined as (i) regulating the accounting profession byavarding licenses for practising, taking disciplinary sanctions and flxingtariffs; and (ii) establishing a code of accounting ethîcs.

7. The Conseil has already effectively succeeded in controlling theaccounting profession. Qualified accountants vere awarded licenses, whereasothers received only a temporary permit which can be extended ouly if theholder acquires an accounting degree. As a result of this action, about 30%of the private accountants may disappear. Foreign accounting firms withoffices in Algeria have also to be authorized, and about three of them verelicensed. Contracts with other foreign firms have to be approved by SNC,but due to the large number of these contracts, and to the overruling impor-tance of the Ministry of Industry which requests their involvement, theapproval given by SNC is often perfunctory. The Conseil, in collaboration withSNC, has also elaborated a Plan Comptable National (National accounting system)to replace the French system currently in use. The new system vill be enforcedas of January 1, 1976; it has the advantage of presenting accounting data(i) on a company level, to facilitate management decisions by showing grossprofit, distinct from operating and extraordinary profit and requiring perpet-ual inventory; and (il) on a national level after aggregation of all companies'accounts. The Conseil also helped to organize accounting education andtraining in Algeria.

1/ SNC: Societe Nationale de Comptabilite.

ANNEX 6Page 4

Accounting and Auditing in State Enterprises

8. In 1962, at the time of independence, Algeria faced a severe shortageof accountants. This resulted from the departure of the French who providedall the administrative and financial personnel and from the preference ofAlgerians for pprofessions such as law and medicine. In addition, the majorcommercial and industrial companies were nationalized and combined into about200 State enterprises, each of them monopolizing one sector of the economy.Many of these new enterprises had no unified accounting system and organiza-tion, but rather a multitude of different or non-existant systems with hardlyany qualified people to operate them.

9. Due to Algeria's massive training effort, the contribution of foreignaccounting firms and the work of SNC, the situation has much improved. Accord-ing to SNC: (i) 30% of the State Enterprises have reached acceptable standardsof accounting, which correspond to those forming the public sector whichexisted before independence and which was not reorganized substantially there-after (energy, railway, post office, etc.); (ii) 40% of State Enterpriseshave much improved their situation, producing within a reasonable time annualfinancial statements, whose quality however is not yet fully acceptable; and(iii) 30% establish none or very poor quality statements, mainly due to in-adequate interest by internal management for accounting matters. The contin-uous effort in training, the necessity of managing the massive investmentsalready made and the tightening of financial resources are expected to dictatea growing interest in financial and accounting matters in Algeria. In addi-tion, the accounting education system has already provided the basic accountantsand will provide in the future highly qualified accountants. Therefore, abasis exists for generating improvements of the existing accounting situationin the state enterprises.

10. Audits of accounts of State Enterprises can be categorized asfollows:

a. State audits by the "commissaires aux comptes".According to law, the commissaires aux comptes, whoare nominally in charge of judging the way StateEnterprises manage public funds, operate under theresponsibility of the Direction de l'Inspection inthe Ministry of Finance. While they are formally incharge of auditing accounts of state enterprises, infact, they are not in a position to carry out thisfunction efficiently. There are 60 - often poorlyqualified - commissaires aux comptes who have tosupervise 200 enterprises. This situation resultsfrom the shortage of qualified accountants in Algeria,from the low level of remuneration offered by theMinistry of Finance compared to salaries paid in

ANNEX 6Page 5

state enterprises, and to the rivalrybetween theMinistry of Industry (on which most State Enter-prises depend) and the Ministry of Finance whichcontrols the commissionaires aux comptes.

b. External audits by SNC or by foreign auditing firms.Most external auditing presently carried out by SNC isdone at the demand of internal management of State Enter-prises. However, in the past the Ministry of Finance hasalso asked SNC to make audits on behalf of the commissairesaux comptes. As SNC is placed under the control of theDirection de l'Inspection in the Ministry of Finance,a natural coordination therefore exists between the commissairesaux comptes and SNC, the role of the commissaires aux comptesbeing much more limited in the companies where SNC carriesout an audit. Furthermore, the proposed future statutesof SNC will specify that staff members of SNC may act ascommissaire aux comptes. External audits carried outby foreign accounting firms are also carried out at thedemand of internal management, very often under the pressureof the Ministry of Industry.

c. Internal audit. Only a very limited number of statecorporations have internal audit departments. Taking intoaccount the size of these corporations and their geographicdispersion, it is extremely desirable that they all developinternal audit capabilities.

11. In addition to usual justifications, external auditing has twospecifie justifications in the Algerian context: (a) as major decisionsin the areas of investment, financing and pricing are taken at a centrallevel by Ministries, there is a strong need for Ministries to be sure thatdecisions are taken on valid data provided by the state enterprises; (b)external auditing provides a diagnostic of a situation carried out by inde-pendent and highly qualified people, and therefore it is the starting pointfor improvements in the accounting situation of state enterprises, badlyneeded as pointed out previously.

B. SNC - SOCIETE NATIONALE DE COMPTABILITE

1. General

12. In 1967, SNC was estabiîshed by the Algerian Government as part ofa plan to reform and organize the practice of accountancy in Algeria. Inbroad terms, SNC exists for the triple purpose of acting as external auditor

ANNEX 6Page 6

to State Enterprises, offering management consulting services to them andproviding practical guidance to the accounting staff of these firms. Itwill be responsible for implementing the National Accounting System in statecorporations, commencing January 1, 1976. SNC also furnishes the ConseilSuperieur de la Comptabilite with secretarial services.

13. SNC is placed under the tutellage of the Minister of Finance, butit enjoys full autonomy in the acceptance and discharge of professionalobligations, the adoption and enforcement of standards, and the hiring andtraining of personnel. It adopts and administers its own budget and setsits own fees for professional engagements. At least in the last three years,it has managed to break even and even to realize a modest surplus.

2. Organization and Staffing

14. SNC is managed by a President-Directeur General (PDG), appointed bythe Minister of Finance. He is assisted by two Assistant General Managers,one responsible for Operations and the other for Special Studies and Research.While the latter has no professional staff, he acts in close liaison with theformer's staff, which consists of about 50 professionals including two highlyqualified expatriates, working in the area of auditing and consulting. SNCalso includes a legal and taxation department, composed of five people, and anadministrative and clerical staff of approximately 30. In total SNC employssome 80 people, with a professional staff of 50, 90% of whom work in theaccounting and auditing sector. SNC has its Head Office in Algiers and maintainsagencies in Oran, Constantine and Annaba. A fourth agency is about to be openedin Tizi-Ouzou.

15. SNC's accounting and auditing force can be categorized asfollows:15 people are accounting technicians, with a low level of general education,a medium level accounting degree (BP) and long work experience; another 15have a good level of general education (French DECS, 1/ Ecole Superieurede Commerce d'Alger) including accounting education, but they do not havework experience; the last 15 have the same level of education as the previouscategory, but with two to three years work experience.

16. Ever since its creation, SNC has experienced severe difficultiesin attracting and retaining competent professional manpower. Its professionalstaff actually receded from approximately 80 to the present level of 50, butthis trend now appears to have been checked. As explained to us, this constantdecline was due to a combination of factors including regorous selectionpolicies, elimination of the bookkeeping staff, difficult working conditionsand long hours, and stricter remuneration rules than applicable in other statecorporations. A further factor has been the lack of a university programspecifically aimed at training accountants.

1/ Diplome d'Etudes Comptables Superieures.

ANNEX 6Page 7

3. Scope of Activities

17. The typical SNC assignment differs substantially from a traditionalaudit engagement, reflecting the inadequacy of company records and lack ofcompetent personnel in the state corporations. As the situation improves,SNC will gradually limit its intervention to conventional audits. Althoughit varies considerably both in size and in nature, depending on the client,SNC's work typically comprise three phases at present:

a. Correction and completion of accounting records.Since most client corporations lack the skilled book-keepers and accountants needed to maintain proper andaccurate records, SNC has to undertake a meticulousexamination of all accounting entries and underlyingevidence, leading up to the preparation and recordingof entries and the providing of on-the-spot counsellingteo client staff. Although it is an extreme example, itwas reported to us that, it one case, no fewer than30,000 correcting entries had to be initiated by SNC.SNCts intervention at this level, therefore, has animportant training element since clients must beinstructed in the basics of financial accounting.

b. Preparation of financial statements.It might be assumed that at the conclusion of this thoroughexamination, SNC would be in a position to prepare a properset of financial statements for its clients. Such is,however, not always the case. Among the reasons for thisare: Si) the absence of generally recognized standardsof disclosure, resulting both from the inherent characteristicsof the Plan Comptable inherited from the colonial epoch andfrom its inadequacy in a centralized socialist economy; (il) theabsence of cost accounting systems, precluding the computationof accurate historical cost for self-manufactured stock-in-tradeand fixed assets; and (iii) the need, yet to be satisfied, forcareful inventory and pricing of fixed assets taken oversince nationalization of businesses. SNC nevertheless doesprepare financial statements for its clients at the conclusionof each engagement and at least such items as net profit andworking capital are arrived at with a measure of realiability.Once again, the continuing nature of SNC's relationship withclients, as their annual auditor, makes for a transfer ofaccounting skills and a gradual improvement in the client'sstandards as they reflect more closely SNC's advice.

c. Installation of accountinS systems.The logical result of the preceding two phases is therecommendation of better accounting systems and methods.Within its limited resources, SNC does present recommenda-tions to the management of client corporations in the field

ANNEX 6Page 8

Within its limited resources, SNC does present recommenda-tions to the management of client corporations in the fieldof general accounting. On recurring engagements, it oftenexperiences the gratification of noting an improvementresulting from the application of its earlier recommendations.

It can, therefore, be seen that - while ostensibly performing an auditfunction - SNC is in practice laying the foundations for a basic accountingsystem, vithout which a successful audit is impossible.

4. Methods of Operations

18. SNC's methods of operation can be qualified as old fashioned, withincomplete documentation of files. Yet in many ways they are careful,rigorous and ensure satisfactory quality in limited areas. The followingprocedures seem to be followed: reconciliation of bank balances; test countof inventory items and prices; test examination of extensions and additions;ageing of accounts receivable as a basis for computation of provision forbad debts; limited outside confirmation of receivables; limited physicalinspection of fixed assets; trial balance ofsubsidiary ledgers and recon-ciliation of controlling and reciprocal accounts; test of payroll rates,deductions, extensions and additions; verification of cut-offs with respectto stock records and cash operatiôns; and record of irregularities uncoveredand disposal thereof. These definitely show, on the part of the SNC staff,an awareness of traditional audit techniques. However, the work of SNCalso shows conspicuous deficiencies such as the absence of detailed auditprograms, internal control questionnaires, and detailed working papersrecording the nature and extent of test or other procedures applied. Inaddition there is only limited awareness of modern audit techniques such asstatistical sampling, flow-chart analysis, analytical auditing and computersoft-ware audit techniques and there is no standard audit report settingforth the scope of the audit, the procedures applied, the irregularitiesuncovered if any and the auditors' opinion as to the fairness of presenta-tion of the financial statements.

19. To compensate for technical deficiencies, of which SNC's topmanagement is well aware, SNC frequently resorts to the guidance of foreignaccountants. There is seldom an important audit where at least one suchexpert is not employed to plan and direct or supervise its accomplishment,in addition to the nominal SNC "chef de mission". At present, two foreignaccountants are working as permanent staff with SNC, and another three areprovided through specific contracts with a French accounting firm. 1/ Thisoutside assistance has been costly and, in view of its limited extent, littletechnology transfer has taken place.

1/ BEFEC and Audit Union.

ANNEX 6Page 9

5. Financial Situation

20. Financial statements for the last three years are given in Appendix 1.A summnry is given below:

SNC - SELECTED INCOME STATEMENT ITEMS(DA million)

1972 1973 1974

Revenue 4.43 5.32 6.12Net Income before Contributionto State Budget 0.60 0.55 0.27

Net Income as % of Revenue 13 10 4Working Capital (1.09) (0.63) (0.31)Current Ratio 0.80 0.90 0.95

Revenues have increased slowly (about 35% in three years) as a result ofSNC's difficulties in attracting and retaining competent professional man-power. After incurring substantial losses since its creation, SNC startedto show a profit, amounting to about 10% of revenue, and dropping to 5% in1974 due to an important provision for bad debts. Working capital has beennegative, as a result of past losses and nonrecovering of receivables (aver-age credit is 11 months). The financial viability of SNC has been maintainedtemporarily through non-payment of short-term debts mainly to the Government(taxes and social charges). The financial situation is currently improvingwith the achievement of profits and the reduction of receivables.

6. Future Development

21. In 1974, SNC worked on 28 contracts. Because of staff constraintsand the complexity of engagements, many requests had to be turned down. Itis estimated that SNC at present meets only 10% of the requirements of theState Enterprises, with the remaining 90% being serviced by North Americanand European consulting firms. As it is Government policy to graduallytake full control of this sector, SNC vill have substantial opportunitiesin the future.

22. Te satisfy the possible demand for its services, SNC must developits professional staff. As already noted, a program has been developed inthe University, specifically aiming at training accountants. The first 20students to be graduated vill come out of university in 1975, increasing to100 annually within a period of five years thereafter. It is expected thatmost of these students will seek the expert-comptable degree, and thereforewill have to do two years practical training in SNC. In addition, as acondition of being licensed for practising as privatp accountants. the

ANNEX 6Page 10

graduating "expert comptables" vill be subject to five years civil serv-ice which can only be served in an enterprise approved by the Ministry ofFinance. The education of these new students, with the possibility ofretaining them over a period of two to seven years, should considerablyease the staffing problems of SNC. Projections of the SNC staff are givenin Appendix 2. A summary is shown below:

SNC - NUMBER OF ALGERIAN STAFF(end of year)'

1975 1976 1977 1978 1979 1980

Level A (high school) 10 55 -- ---

Level B (UDF /a or equivalent) 25 37 51 72 98 126Level C (UDF or equivalentand 3 years experience) 15 25 38 40 39 44

Level D (UDF or equivalentand 5 years experience) - - - 8 17 27

Total 50 67 89 120 154 197

/a University degree in Finance.

SNC considers that a four-fold increase in its staff is realistic and evenconservative. It is based on the assunption that about 50% of the studentsgraduating in "Finance" would come to SNC, and that SNC would recruit 20 Clevel people during the next three years. The pattern of shifting the stafffrom category to category is based on experience. It assumes that only 70%of the staff at the upper limit of a category in any one year would be effec-tively promoted. It also assumes that 20% of the staff entering Level B and10% entering Level C in any one year would quit SNC after two years.

23. The future scope of SNC's activities have been identified throughvisits to clients and discussions with Algerian authorities. As a result,it seems that the major role of SNC vis-a-vis the State Enterprises shouldbe (i) to act as external auditors, (ii) to help in training internal staffaccountants, (ii) to assist in establishing modern cost-accounting and bud-geting methods and management informations systems, (iv) to assist withintroduction of modern data processing systems, (v) to assist in develop-ing internal audit departments, and (vi) to act as agents for the Ministryof Finance in the application of the new accounting system, and in thedevelopment of specific accounting subsystems for each economic sector.These roles, however, should not be thought of as mutually exclusive. Forexample, a successful audit is predicated upon a sound basic accounting

ANNEX 6Page 11

system which is also the foundation for cost control and budgeting. SNC -

as a Government agency supervising a wide range of state enterprises - pro-vides the best vehicle for implementing a general improvement in standards of

accounting since, by setting as a goal the production of satisfactory finan-

cial statements, it forces client companies to effect basic changes in

accounting procedures consistent with that goal.

24. As for specific activities related to SNMC, it is proposed thatSNC would be responsible for the annual audit of SNMC. The report would be

addressed to SNMC's internal management, the commissaires aux comptes incharge of SNMC, and the Bank. In addition, as indicated in para 23, SNC

would assist SNMC (i) to establish a cost budgeting and control system for

all its cost centers, (ii) to apply the new accounting system and (iii) to

define the framework and methods for successful financial planning.

C. THE TECHNICAL ASSISTANCE PROGRAM

1. Objectives

25. The basic objective of the proposed program is to improve the

general standard of accounting, budgeting and cost control in Algerian

state enterprises, including - but not limited to - SNMC. In order to meet

the requirements of a successful audit, companies will have to carry out

basic improvements in their accounting systems without which cost control,budgeting and financial planning cannot be effective. SNC will assist in

implementing these basic improvements. Because it is a consulting firm andtherefore is in a position of acquiring a wide experience of various situa-

tions, SNC can be extremely efficient for assisting state enterprises in theachievement of these improvements. However, the implementation of improve-

ments will remain the responsibility of the state enterprises' staff and, as

already noted, due to the massive efforts made in the field of training, a

basis exists ready for implementing and operating recommendations made bySNC. At the level of SNC, therefore, the aims of the program are: (i) to

provide SNC staff with an adequate knowledge of modern management accountingto enable them to introduce basic accounting systems in client corporations;(ii) to introduce SNC's audit staff to modern auditing concepts and techniques;(iii) to enable SNC to set up internal audit departments in client corpora-tions; and (iv) eventually to enable SNC staff to replace the foreign

accountants currently operating in Algeria.

26. One of SNC's tasks will be the implementation of the new accountingsystem in the State Enterprises. An estimated 10 staff members will be neededfor a period of two years for this purpose. The Technical Assistance Programoutlined below does not include instruction related to this new accountingsystem.

ANNEX 6Page 12

2. Description

27. The followink chapter identifies possible components of a technicalassistance program which may meet the above objectives. The details of theprogram will have to be discussed between SNC and qualified accounting firms.The envisaged program would be implemented over a period of five years andwould comprise three distinct parts running simultaneously.

Part I: SEMINARS

28. The purpose of seminars would be to complement SNC staff's educationin accounting and auditing. The seminars should be designed in view of thebackground of new recruits who tend to have a general education in the economicand legal aspects of business rather than in practical application of account-ancy. These seminars should also broaden the knowledge of SNC's present staffwhich has limited experience in the area of general accounting. Therefore,in addition to courses attended by all staff members, more specialized coursesshould be offered. All in all, a staff member would take an average of 15weeks of seminars over a period of three years, or even over one to two yearsat the beginning, in order to meet SNC's urgent need for qualified staff.Outsiders, e.g. accountants from client corporations or individual commissairesaux comptes, will also attend these seminars. It is suggested that about 1/3of the participants should be from bodies other than SNC if the seminars areto have maximum impact on accounting standards.

29. A possible seminar program could comprise 10 courses totalling20 weeks, as shown in the table below. It will be seen that, of the suggestedcourses, only numbers 2, 3 and 4 deal exclusively with SNC's role as externalauditor:

1. Accounting & administrative systems 4 weeks new staff2. Basic auditing 3 weeks new & existing staff3. Advanced auditing 1 week " "I "4. Management of an audit 1 week " "i "5. Internal auditing 1 week " "

6. Basic cost accounting & financialplanning 2 weeks existing staff

7. Practical applications of costaccounting & financial planning 2 weeks new & existing staff

8. Basic data processing 2 weeks existing staff9. Data processing and internal controls 2 weeks new & existing staff

10. Financial management 2 weeks existing staff

A detailed suggested curriculum for each module will be found in Appendix III.

ANNEX 6Page 13

Part II: PRACTICAL TRAINING ABROAD

30. Participation in accounting operations in Europe or America shouldgive SNC staff members an opportunity to learn how a well-organized auditingfirm, as well as a well organized company, operates. Therefore, practicaltraining abroad should be provided for SNC staff with at least 2-3 years ofexperience in Algeria.

31. Although it would be desirable that all staff in this category(level C) have an opportunity to participate in an auditing operation inEurope or America, considerations of cost and time preclude such a massiveoperation. 'On the other hand, if a sufficient number of Algerian auditorscan participate in such outside training they, in turn, could provide theexample and leadership to their colleagues once they return to Algeria. Itis recommended that annually 10 staff members be employed in accounting firmsabroad for a period of one year. These trainees should become part of theauditing teams in the employing firms, and participate in regular audits inpreselected firms resembling Algerian enterprises. A ratio of 5:1 betweentrainees and supervisors in employing firms appears desirable for thispurpose. The inclusion of some trainees in management consulting activitieswould also be desirable.

Part III: SUPERVISION OF WORK

32. The main component of the technical assistance program will be theactual planning and supervision of audits executed by SNC staff, over a five-year period. As Algerlans acquire the necessary expertise, and as basicstandards of accounting in client enterprises lmprove, they vill graduallyreplace foreign supervisors. Appendix IV shows the staff projections on whichthe foreign supervisor requirements are predicated. A ratio of 3:1 betweentrainees (encadres) and supervisors (encadreurs) would be desirable, keepingin mind that a contingent of 10 foreign accountants in SNC at any one timeappears to be the practical upper limit. This ratio was strongly supportedby the foreign accounting staff presently employed by SNC, who feel they havetoo many staff to train effectively. As a result, five foreign supervisorsfrom September 1976 through 1977, 10 in 1978, five in 1979 and three in 1980will be needed.

3. Coordination and Procurement

33. Within SNC, a full-time, qualified program director will be appointedto coordinate and supervise the three parts of the program. SNC suggestedappointing to this position the Assistant General Manager responsible forspecial studies and research division. le should be assisted by a deputy whowould concentrate on the progranming and supervision of the seminars.

ANNEX 6Page 14

34. As already noted, this program should be considered as very tenta-tive. It is intended to provide SNC with guidelines for future developmentand to control the latitude which the consulting firm vould have to dictatethe terms and hence the profitability of its final contract with SNC. Theprogram should be considered as a seamless entity, but in view cf the neces-sity of introducing flexibility, it is felt that, should SNC sa choose, theinitial contract need be for only two and a half years (end 1978) with anoption to renew thereafter. 1/ It is suggested that a single accounting andauditing firm be engaged to provide the technical assistance program describedabove. Such a firm should have the following characteristics: large size,international reputation in its field, French-speaking staff available, andbig corporations as clients. Minor parts of the program could be sub-contractedif necessary. The idea of a single responsible firm is proposed in order tocreate a synergy effect which would result in a massive transfer of technology.Several firms operating separately, each of them with its own methodology, maycreate difficulties of coordination.

35. As a tentative time schedule it has been envisaged that teres ofreferences be prepared and sent to a short list of qualified auditing firmsby November 1975 with the objective of starting the technical assistanceprogram by mid-1976. The Bank is prepared to assist SNC in drafting termeof references and contract descriptions as far as feasible, and it has beenagreed that a Bank mission vill visit Algeria to discuss the terms of ref-erence, probably in December 1975 or January 1976.

4. Cost Estimates and Financing

36. A program of this magnitude cannot be priced accurately. The billingrates of potential firms vary from firm to firm depending on interest, experi-ence and availability. Although indicative capital cost estimates have beenprepared, no detailed breakdown of them is presented here since it is feltthat to do so would lead to the possibility that interested accounting firmsmight tailor bids to fit the figures estimated by the Bank. However, it isfelt that the total financing requirement - including price escalation based onon 9.4% for 1976, 7.5% for 1977 and 7% thereafter - vill be about US$7.4million for the full 5-year program and about US$3.7 million for the firstphase. The proposed Bank loan of US$5.1 million vould, therefore, cover about70% of total program costs or 100% of expected foreign exchange appenditures.

5. Justification and Risks

37. Assuming an average assignment duration of about 30 staff/monthsper client, SNC would be in a position to provide vithin five years 80 statecorporations vith its services. This vould increase its share in the account-ing market from 10% at present to 40% after five years. As a result, SNCcould satisfy a major portion of the demand for accounting and auditingservices in Algeria. The services SNC could render during and after theprogram is completed are very much needed in Algeria. Many state enterprises

1/ SNC has so far indicated a preference to sign a contract for the fullprogram (5 years).

ANNEX 6Page 15

show losses and have not kept account of their massive investments. Thegeneral accounting training which vould be an integral part of the programvould go a substantial way towards alleviating this problem. At a time whenAlgeria is encounterlng lîquidity problems, there is also a need for auditedfinancial statements on the basis of which management, as vell as ministries,can take appropriate decisions in the areas of investment decision, invest-ment follow-up, pricing and cost control. In addition, the foreign exchangesavings vould be.significant. If the cost of the five year program vas to bedepreciated over ten years, SNC vould have to increase its present fees by onethird, in order to break even. Nevertheless, the level of SNC's fees vouldstill remain much lover than those of the big international accounting firms(about one half), involving foreign exchange savings for Algeria.

38. The risks involved in this program are not negligible. In additiontO the problem of limposing changes on client enterprises, the success of theprogram depends on SNC's ability to recruit and keep qualified Algerianstaff. After two to five years training vithin SNC the staff may leave,being offered better remuneration or other advantages in other state enter-prises. At the same time, however, that such a staff los8 would be detrimen-tal to SNC, provided the skills are retained in Algeria there may vell bean overall net gain as the staff attracted to other enterprises implementthe techniques learned with SNC. Furthermore, general vorking conditions inAlgeria are not easy. There is a substantial risk that, after one or twoyears of initial cooperation, the relationship between SNC and the foreignconsultant will deteriorate. To minimize possible misunderstandings theresponsibilities of both parties should be defined in detail in the contract.

Industrial Projects DepartmentNovember 1975

ANNEx 6

APPENDIX IPage .

ALGERIA - SNMC EXPANSION PROJECT

SNC - FINANCIAL STATEMENTS

BALANCE SHEETS(DA million)

Fiscal Year Ending December 31

1972 1973 1974

Assets

I. Current Assets

Cash 0.02 0.03 -

Banks 1.29 2.23 2.13Receivables 5.39 5.65 4.52Inventory o.56 0.53 0.72

Sub-total 7 7

II. Fixed Assets

Gross fixed assets 0.69 0.78 0.94Less: Accumulated Depreciation 0.40 0.40 o.45

Net Fixed Assets ME2 U.-M D-77

III. Other Assets 0.01 0.02 0.02

TOTAL ASSETS 7.56 8.84 7.88

Liabilities

I. Current Liabilities 8.33 9.06 7.69

II. Capital

Equ.ity 1.25 1.25 1.25State Advances 1.25 1.25 1.25Retained Earnings (3.27) (2.72) (2.49)Others - - 0.18

Sub-total 7577) (U5!) 9I

TOTAL LIABILITIES 7.56 8.84 7.88

Industrial Projects DepartmentNovember 1975

ANNEX 6

APPENDIX IPage 2

SNC - INCOME STATEMENTS(DA million)

Fiscal Year Ending December 31

1972 1973 1974

I. Revenue

Services 3.65 4.10 4.69Other Y 0.78 1.22 1.43

TOTAL 3;7 7 .

II. Cost of Services and Goods Sold

Materials and Supplies 0.71 0.95 1.66Labor 2.74 3.00 3.32Inventory Changes (0.27) 0.04 (0.20)

III. Gross Profit 1.25 1.33 1.34

IV. Cperating Expenses

Overheads 0.26 0.27 0.25Depreciation and Provisions 0.08 0.08 0.63Duties and Taxes 0.59 0.59 0.90

V. Operating Profit 0.32 0.39 (0.44)

Financial Charges - _Other Income (0.05) (0.12) (0.21)Exceptional Profit/Loss _ (0.06) (0.51)Profit/Loss on Previous Years (0.23) 0.02 0.01

VI. Net Income before contribution to State Budget o.60 0.55 0.27

Contribution to State Budget 0.60 - -

VII. Net Income - 0.55 0.27

1/ Mainly sales of forms to state corporations, since SNC is responsible for thepreparation and printing of accounting forms in Algeria.

Industrial Projects DepartmentNovember 1975

ANNEX 6

APPENDIX Il

ALGERIA - SNMC EXPANSION PROJECT

SNC - STAFF DEVELOPMENT PRODOEAM

Staff Number1976 1977 1975 1979 1950

LEVEL A: Technician 1/

Opening 10 5 - -Transfer to Level B (5) (5) _Staff at end of Year 5 _ _ _ _

IEVEL B: Junior 2/

Opening 25 37 51 72 98Recruitment 10 20 30 40 50Transfer from Level A 5 5 - - -Transfer to Level C - ( 9) ( 6) ( 9) (16)Attrition (3) (2) (3) (5) ( 6)Staff at end of Year _7 __ 77 m I27

LEVEL C: Senior 31

Cpening 15 25 38 40 39Recruitment 10 5 5 - -Transfer from Level B - 9 6 9 16Transfer to Level D - - (8) (9) (10)Attrition _ (1) (1) (1) (1)Staff at end of Year 2-

LEVEL D: Manager 4

opening - - - 8 17Transfer - - 8 9 10Staff at end of Year - - _ 17 7

TOTAL STAFF

Staff at end of Year 67 89 120 154 197

ASSU1HPTIONS

a) 70% of the staff at the upper limit of a category in any one year is effectivelypromoted.

b) 20% of the staff entering Level B in any one year quits SNC after 2 years; 10%of those entering Level C also quit after 2 years.

1/ High school + long experience (i.e., 10 - 15 years experience).

2/ University degree in Finance, Ecole Superieure de Commerce, DECS.

3/ The same as Level B + 3 years experience.

V/ The same as Level B + 5 years experience.

Industrial Projects DepartmentNovember 1975

ANNEX 6Appendix IIIPage 1

ALGERIA - SNMC CEMENT EXPANSION PROJECT

SNC - POSSIBLE CONTENT OF SEMINARS

Accounting and Administrative Systems

Conventional accounting systems (subsidiary journal and ledgers,the voucher system, accounting machines, etc.).Structure and organization of an accounting department (organization chart,job description, responsibilities, manuals, etc.).Preparation and distribution of financial statements and sundry reports.Description and circulation of forms used in the purchasing, selling andstocking operations.

Basic Auditing

Nature and purpose of an audit.Verification of financial statements vs. detection of fraud.Rights and duties of the auditor, and attitude towards clients.Technical competence and professional independence.Organization of an audit (audit programs, time records, working papers).Auditing techniques (physical examination, confirmation, reconciliation,analysis, tests, comparison, etc.).Review of internal control (questionnaires, flow charts, reliance on internalaudit, etc.).Verification of individual items (cash, securities, receivables and payables,inventories, accruals, fixed assets, vages and salaries, cut-off, etc.).Auditor's report (qualified, unqualified, piecemeal, denial, etc.).

Advanced Auditing

Internal control questionnaires, flow charting, analytical auditing.Statistical sampling (selection of sample, interpretation of results).Auditing through and around the computer.

Management of an Audit

Planning the audit (evaluation of time, selection of procedures,allocation of work, instructions to subordinates, etc.).Control of execution (on-going review of work of subordinates, adjustmentand revision of procedures, disposal of problems, etc.).Consolidation of work of subordinates.Recommendations to management.Preparation of formal audit report.

ANNEX 6Appendix IIIPage 2

Internal Auditing

Nature of internal auditing and comparison with external auditing.Structure of an internal audit department, responsibility ot management.Selection of auditing techniques and operations to be audited.Planning, allocation and control of work.

Basic Cost Accounting and Financial Planning.

Definition and purposes of cost accounting.Elements of cost (materials, labor, and overhead).Cost accounting methods (process costing and job order costing).Departures from conventional costing models (full costing, direct costing.Breakeven analysis, marginal costs.Standard costing (establishment of standards, review of standards,analysis of variations).Budgeting and budgetary control.

Practical Applications of Cost Accounting and Financial Planning

Through a simulation case study.Definition of the system to implement (process or job order costing,direct or full costing).Identification of cost centers.Organization of the data collection (forms and circulation of formsfor materials, labor and overheads).Organization of the data processing (manual, mechanical, computerized).Reporting.

Basic Data Processing

Description (central processing unit, memory, input and output units).Programming and software.Accounting and management applications.

Data Processing and Internal Controls

Input controls.Processing controls.Output controls.Audit of the organization of the data processing department.

Financial Management

Ratio analysis.Source and application of funds, cash flow.Short-term and long-term financing.Return on investment (discounted cash flow, etc.).

ANNEI 6

APPENDIX IV

ALGERIA - SNMC EXPANSION PROJECT

SNC - REQUIREMENTS FOR FOREIGN STAFF

Beginning and course of year

1975 1976 1977 1978 1979 1980

Level C Staff 15 15 25 38 40 39

Less: on special assignnent forimplementation of PlanComptable National l/ ( 5) ( 5)

Less: training abroad ( 5) (10) (10) (10)

Net staff requiring supervision 15 10 15 28 30 29

Number of supervisors reqiired (1:3) 5 3 5 10 10 10

Less: Level D staff _( 8) (17)

Deficiency to be covered byforeign supervisors 5 3 5 10 2 -

Foreign supervisors to be financed - - 5 5 10 5 3

Duration of assignnent(number of months) 3/ 4 10 10 10 10

Number of foreign supervisors/months - 20 50 100 50 30

1/ Ten staff members during two years. Five in the Level B category and 5 in theLevel C category.

2/ Due to the starting of the program in mid-1976, 5 experts would be financed in1976 over a period of 4 months; in order to secure the success of the program,5 experts would be maintained in 1979 declining to 3 in 1980, assuming thepresence of the foreign assistance over 4 years.

3/ Assuming 1 month's vacation, l month's absence due to training of staff.

Industrial Projects DepartmentNovember 1975