Currency equivalents

B. Lessons Learned from the PSRE—The Predecessor of PCSC

1.9 Compared with the PCSC, the PSRE was a modest investment program. Originally, DA 525 million (US$7 billion) was to be disbursed in 2001–04. PSRE had three main objectives: (a) poverty reduction; (b) employment creation; and (c) regional equilibrium preservation and rural spaces reinvigoration (World Bank 2004d). Operationally, PSRE relied on centralized sectoral projects, also executed through de-concentrated ministerial entities and community development agencies receiving transfers. Large labor-intensive public projects predominated in the final selection. Neither monitoring indicators nor results were adopted, except for a vague reference to an employment creation target of 850,000.

1.10 In 2004, a World Bank study provided a midcourse evaluation of the PSRE (World Bank 2004d). Its main conclusions were as follows:

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  PSRE will have a modest impact on growth (1 percent annual increase on average).
  
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  Employment creation under PSRE projects will be temporary—850,000 as direct effect (170,000 on average) and 664,000 as indirect employment generation.
  
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  Imports (especially related to transport and public works projects) will grow faster than exports, reducing the current account surplus by 1 percent of GDP during 2001-05.
  
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  Projects had little reference to strategic sectoral objectives, their quality was weak and the technical preparation of staff implementing them was uneven in general.
  
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  Poor implementation also originated from the urgency that accompanied project preparation, the myriad of specific demands it was supposed to respond, and the multiplicity of actors (25 ministerial and 48 wilaya commissions).
  
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  Cost-benefit analysis shows that selected PSRE projects were extremely expensive.
  

1.11 The present PER neither does not constitute an evaluation of the PSRE, nor does it attempt to confirm whether or not the Bank’s 2004 macroeconomic projections were met. These tasks are neither practical nor accurate. They are impractical for two reasons—because, first, there is no centralized database to permit detailed financial and physical monitoring of projects receiving resources; and second, while programming the PCSC, authorities decided to merge ongoing and pending PSRE projects into the PCSC pipeline. As a result, the second pipeline absorbed many of the PSRE on-going projects. They are inaccurate because whether or not the macroeconomic projections were “right,” they did not take into account the extraordinary oil windfall of 2004 and 2005. In any event, in regard to the first three conclusions, the three salient facts stand out. First, between 2001 and 2005 exceptionally high hydrocarbon exports converted growth into rates that went significantly above original projections (see Chapter 2). Second, the open unemployment rate (as a percent of the labor force) dropped from 27.3 percent to 15.3 percent, thus confirming significant job creation expected.⁷ Third, the current account did not decrease by 1 percent, as projected; but became a surplus of 8.4 percent of GDP.

1.12 Remaining three latter conclusions from the midcourse evaluation of the PSRE are more directly relevant to the present PER. These refer to the limited strategic sectoral content of the selected projects, the low quality of projects and overlapping implementation agencies, and weaknesses in cost analysis. They are discussed briefly below.

Limited strategic sectoral content

1.13 Perhaps the most astonishing feature of the PCSC presentation is its absence of any explicit objectives. Unlike the PSRE, the original document describing the PCSC is simply a list of intended projects grouped by “programs,” which are accompanied by specific budget allocations (MoF 2005a,b).⁸ A disaggregated presentation later elaborated by the authorities modifies the original amounts. It regroups programs and introduces several physical benchmarks (see Annex A1). Nevertheless, no explicit objectives are introduced.

1.14 An interesting example comes from projects in the education sector. Their lack of strategic focus, which leads to severe misallocations and gaps in programmed resources. On the one hand, the PCSC proposes to expand school units assigned to secondary education, yet the rate of utilization—just 35 percent—reveals high underutilization of existing capacity. On the other hand, an additional 30,000 teachers with doctoral degrees would be required if the enrollment in tertiary education were to double, as implied by the PCSC construction program, and the current student-teacher ratio is maintained. In reality, it takes many years to produce highly qualified university teachers. Doubling of the number of qualified teachers is likely to present a considerable bottleneck to near-term expansion in higher education unless (a) teacher qualifications are lowered (which would affect quality), (b) the student-teacher ratio is allowed to rise (which would also affect quality), or (c) foreign teachers are recruited (the most likely outcome). Hence, tertiary education faces a tradeoff—further deterioration in quality or a significant increase in current spending in order to hire the additional professors.
1.15 In order to extract the implicit intersectoral priorities within the PCSC for 2005-07, it is highly relevant to compare them with those contained in the PSRE. Figure 1.2a and Figure 1.2b introduce the composition of both programs and leads to the following broad conclusions.

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  Every sector has benefited from the significant increase in the magnitude of absolute resources. Between the original PCSC and PSRE pipelines, the ratio of authorized resources is more than 7 times higher, and this ratio is still increasing with the latest budgetary supplements.
  
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  The latter observation is particularly true in regard to the education and health sectors. A minimum decrease of 12 and 2 percent happens in their authorized PCSC resources. But in absolute terms, their resources increased by 7 times (education) and 5 times (health).
  
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  Basic economic infrastructure—public works and roads—are the main beneficiaries of PCSC resources: Their share doubles and reaches more than half of total resources.
  
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  Water (proxied by agriculture and hydraulic) programs are the big loser of the PCSC distribution. Its share halves from 25 to 13 percent due to severe sector shortcomings.
  

Source: Bank staff estimates base on MoF data

Low quality in project design and poor implementation

16. 
    As discussed in several chapters of this report, extremely poor quality of projects and severe institutional shortcomings largely explain poor project implementation. Addressing these shortcomings is critical. Countries such as Algeria may generate future pressure for continuous current spending, poor project outcomes, and a loss of fiscal space in the medium term if they are too quick to finance badly designed large public investment programs (IMF/World Bank 2006). There is also an increased risk of waste and corruption. Several examples of sectoral shortcomings are briefly discussed below.
    

16. 
    Dams and transfer projects in the water sector provide an extreme example of the poor quality of projects and of severe institutional shortcomings. An old report by the Ministry of Water Resources (MRE) summarizes the status of 41 of the largest water projects. The outcomes are dramatically self-explanatory (Table A.5.1). As of the end of 2004,
    

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  Slightly less than half of them (18) were more than a decade old.
  
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  Significant underbudgeting is the rule rather than the exception. More than half (18 out of 32) already had costs of more than double their original budget (and counting!).
  
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  As measured by the share of spent resources, the level of project advancement varies considerably; but in general, it is very low.
  
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  Delays and cost overruns are caused by several factors, including weaknesses in the technical studies (if there were technical studies in the first place) and limited execution capacity (and according to authorities specially poor maîtrise d’ouvrage) of government agencies and the contractors. In a few cases with significant import components, change in exchange rates may also have contributed to cost overruns.
  

Poor cost analysis

16. 
    The health sector illustrates consequences of project implementation in the absence of cost considerations. Hospitals typically have very high rates of out-of-service equipment—in 2003, 24 percent of all sonographs, 34 percent of endoscopes, and 23 percent of incinerators (see Chapter 8). In general, broken machines are replaced rather than repaired. There are two main reasons. First, maintenance is simply not a priority, and its budget share within operating costs is extremely low (3 percent). Second and more important, there is no effective procurement policy, not many technicians, and few consulting firms specialized in bidding for hospital services and projects. As a result, bidding processes are seldom meaningful, and purchases are made with little actual consideration for budget constraints.
    

16. 
    The transport sector also provides examples to illustrate poor cost analysis. Over 2000–04, cost revaluations accounted, on average, for 15 percent of the initial appropriations,⁹ as much as 30 percent in several projects (see Table A.4.6).¹⁰ Project extensions (and costs) need to be forecasted far more accurately, and of course, kept under better control. For that to happen, project design must be sound and realistic in the first place. While it may be possible to badly execute a well-designed, well-costed project, it is not possible to well execute a badly designed, well-costed project.
    

16. 
    Deconcentrated investments replicate and magnify the acute implementation issues found at the central level. An article published in Al Watan provides a dramatic account of parallel problems reportedly found in 7 of the 23 wilayas receiving PSRE funds in the Southern region in 2002 and 2003. The list of major issues is endless: money spent on roads and electricity improvements in the communes of Ouled Slimane, Zerzour and Ben S’rorur, whose projects never initiated; money disbursed for a stadium in Sid M’Hamed that still remains to be seen and for a road, whose restoration “only lasted one day”; money provided to the commune of Bir El Fodha for an urban development program financing rehabilitation of a road of eight to ten kilometers “whose pavement only lasted one week”; and money given to seven rural communes for water projects that financed “exorbitants sums in pools never filled with water.”