Tunisia - El Borma - Gades Gas Pipeline Project

RESTRICTED rILE CAPY Report No. P - 8 9 2 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE TUNISIENNE DE L'ELECTRICITE ET DU GAZ WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA January 13, 1971   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE TUNISIENNE DE L'ELECTRICITE ET DU GAZ WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$7.5 million to Societe Tunisienne de l'Electricite et du Gaz (S.T.E.G.). PART I - HISTORICAL 2. S.T.E.G. is a state-owned electricity and gas company created in 1962 to take over and operate the assets of seven foreign utility com- panies which were nationalized in that year. Mr. Woods served as concilia- tor in the ensuing compensation dispute which was settled in 1967. Pay- ments of the agreed amounts were initially delayed, but are now being made on schedule. 3. The proposed loan would be the first Bank loan to S.T.E.G., the Bank having declined to consider a loan in the mid-sixties because of the compensation dispute. The Kuwait Fund for Arab Economic Development would make a loan to S.T.E.G. for the same project, equivalent to $2.5 million. It has made two previous loans to S.T.E.G., the first in 1963 for $11.2 million and the second in 1967, for $12.9 million. Both loans, which have been fully disbursed, were for the purchase and installation of electricity generating equipment and transmission lines. The Kuwait Fund was satisfied with S.T.E.G.'s performance under both loans. The Fund has participated in the appraisal of the project now proposed and negotiated its loan simul- taneously with the Bank. This would be the first operation undertaken to- gether by the Bank and the Kuwait Fund. 4. Negotiations took place in Washington from December 10 to 16, 1970. Mr. Sadok Bahroun, President and Managing Director of S.T.E.G., represented the Borrower together with Messrs. Kemal Rekik and Salem Tekaia. Mr. Zini Mestiri of the Planning Ministry and Mr. Ahmed Badra of the Tunisian Embassy represented the Guarantor. Messrs. Abdlatif Al-Hamad, Director- General, and Mr. Abdul Rahim Mirghani, Chief Economist, negotiated the Kuwait Fund's loan. 5. Following is a summary statement of loans and credits to Tunisia as of December 31, 1970:  -2- Loan or Amount (US$ Million) Credit Number Year Borrower Purpose Bank IDA Undisbursed 29 1962 Republic of Tunisia Education 4.9 - 380 1964 Republic of Tunisia Port Development 7.0 - 449 1966 Societe Nationale Development d'Investissement Finance Co. 5.0 .3 94 1966 Republic of Tunisia Education 13.0 4.4 484 1967 Republic of Tunisia Cooperative Farms 6.1 2.1 99 1967 Republic of Tunisia Cooperative Farms 3.1 1.1 512 1967 Societe Nationale Development d'Investissement Finance Co. 10.0 2.5 573 1968 Office des Ports Port Development 8.5 6.2 Nationaux Tunisiens 581 1969 SONEDE Water Supply 15.0 14.3 606 1969 SNCFT Railways 8.5 8.4 150 1969 Republic of Tunisia Railways 8.5 7.8 S2 1969 Republic of Tunisia Highway Engineer- ring .8 .4 648 1969 Societe Nationale Development d'Investissement Finance Co. 10.0 8.1 209 1970 Republic of Tunisia Water Supply 10.5 10.5 Total (less cancellations) 70.9 40.0 of which has been repaid to Bank and others 2.3 Total now outstanding 68.6 Amount sold 1.5 of which has been repaid .5 1.0 Total now held by Bank and IDA 67.6 40.0 -_ Total undisbursed 42.3 23.8 66.1 6. Implementation of subprojects under the first loan made to Societe Nationale d'Investissement (Loan 449) has proceeded satisfactorily, with the exception of a few subprojects for which imports have been delayed. How- ever, disbursements under the loan are now expected to be completed shortly. Commitments and disbursements under loans No. 512 and 648 to SNI are pro- ceeding satisfactorily. 7. Savings of about $1.5 million have been made on the Second Educa- tion Project (Credit No. 94), and the Government has requested a reallocation of these amounts and a postponement by two years of the Closing Date of Decem- ber 31, 1970. It has been postponed by four months as an interim measure to allow the Association time to examine the request. I will in due course pre- sent to the Executive Directors recommendations concerning the utilization of these funds.  8. The Executive Directors approved amendments to Loan No. 484 and Credit No. 99 (Cooperative Farm Project) on November 17, 1970. Dis- bursements are expected to resume as soon as these amendments become ef- fective. 9. Initial delays in the preparation of bidding documents accounted for slow disbursements under Loan No. 573 (Ports II). A number of con- tracts have now been awarded and an acceleration in disbursements can be expected. 10. After some delays in bidding for the First Water Supply Project (Loan No. 581), most of the contracts have now been awarded. Construction started last September and disbursements are increasing to a satisfactory level. Credit No. 209 for a Second Water Supply Project became effective on November 12, 1970. 11. Disbursements under the Railroad Project (Loan No. 606 and Credit No. 150) remain slow. Works were delayed by flood damage in the fall of 1969 and the need to give priority to flood damage repairs. 12. In 1962, IFC invested $2.0 million in NPK-Engrais, a phosphate fertilizer company. In 1966, IFC made an investment of D 300,000 (about $571,500) in the share capital of Societe Nationale d'Investissement (SNI), which in 1970, was increased by $630,000 allowing IFC to maintain its 20 percent participation when SNI doubled its share capital. In 1969 IFC made an investment of $9.9 million ($8 million as a loan and $1.9 million in share capital) in COFITOUR, a tourism development and holding company. 13. The Bank and IDA are at present considering projects in family planning, highway construction, agricultural credit, tourism infrastructure, fisheries as well as a fourth loan to Societe Nationale d'Investissement.  - 4 - PART II - DESCRIPTION OF THE PROPOSED CREDIT 14. BORROWER: Societe Tunisienne de 1'Electricite et du Gaz (S.T.E.G.) GUARANTOR: Republic of Tunisia AMOUNT: US$7.5 million in various currencies PURPOSE: To finance construction of the El Borma-Gabes gas pipeline AMORTIZATION: In 16 years, including a 3-year period of grace, through 26 semi-annual installments beginning May 15, 1974 and ending November 15, 1986. lNTEREST RATE: 7-1/4% per annum COMMrTMENT CHARGE: 3/4 of 1% per annum RATE OF RETURN: The economic rate of return is estimated at over 25% (see para. 21 below). 15. The Kuwait Fund will extend a loan of 900,000 Kuwaiti dinars ($2,520,000) on the same terms except that the rate of interest will be 3-1/2% per annum plus a service charge of 1/2 of 1% per annum, and that there will be no commitment charge. PART III - THE PROJECT 16. A report entitled "Appraisal of the Societe Tunisienne de l'Electricite et du Gaz - El Borma Gas Pipeline Project - Tunisia" (No. PTR-66a) is attached. 17. Tunisia's installed electric generating capacity is now about 258,000 KW, 83 percent of which is operated by S.T.E.G. Fuel oil, some of which is imported, is the principal energy source for the existing plant. Tunisia's domestic oil production ran at 4 million tons in 1969, of which 3.6 million tons were produced at El Borma. This oil field in the Tunisian part of the Sahara is being exploited by Societe Italo - Tunisienne d'Exploitation Petroliere (S.I.T.E.P.), a joint venture be- tween the Tunisian State and the Italian state owned ENI Group. There is at present no sizable commercial utilization of natural gas in runisia. Gas produced at the El Borma oil field in association with crude oil has up to now been flared.  18. S.T.E.G. was established by the Tunisian Government in 1962 to take over and operate the assets and liabilities of seven private utility companies which had been nationalized. While it is now an efficiently managed institution, it is still beset by long-standing problems relating to staffing and to accounting procedures. Excessive recruiting in the early years of its existence led to overstaffing. Inadequate records and account- ing hamper the management of the company's affairs. S.T.E.G.'s present man- agement is determined to resolve these problems. A recently developed pro- gram of retraining, early retirement and a change in recruitment policies is already showing results, although it will not be until about 1975 that a satisfactory staffing position will have been reached. S.T.E.G. retained qualified auditors in 1969 and has made arrangements for the secondment of a senior accountant from Electricite de France. The draft Loan Docu- ments stipulate further improvements in manpower utilization and collection of management control data. 19. The project consists of constructing a 294 km. gas pipeline from the El Borma oil field to a power plant being built by S.T.E.G. near Gabes with French finance. It would comprise procurement and installation of: (a) compressors and a gas treatment station as well as ancillary facili- ties at the El Borma oil field; and (b) a transmission pipeline from El Borma to the Gabes power plant. The plant will consist of two 30 MW thermal generators, and is required to meet the increase in power demand ex- pected by the 1972-73 winter season. 20. The proposed Bank loan of $7.5 million would be made in con- junction with a loan of $2.5 million equivalent from the Kuwait Fund for Arab Economic Development under a joint financing arrangement with the Bank. The two loans of together $10 million would cover the foreign exchange cost of the project, whose total cost is estimated at $13.6 million. They would include retroactive financing of engineering studies with a foreign exchange cost of $380,000. 21. The economic return of the plant and pipeline taken together is estimated to be well in excess of 25 percent. The proposed project would permit almost entire reliance on natural gas as fuel until 1979, but the declining supply of natural gas and the growing electricity demand will necessitate a substantial use of fuel oil from 1981 onward. It is estimated that by 1986 the El Borma field will have reached its economic limit of production. This, in turn, defines the life of the project although it is possible that gas operation could continue beyond that date. Despite the expected limited period of use, the gas pipeline would provide the least costly method of supplying fuel to S.T.E.G.'s generating plant at Gabes. To ensure STEG's financial viability and an adequate contribution from its own resources toward future expansion, it has been agreed that STEG would maintain a ratio of operating surplus to net fixed assets of at least 10 percent (Section 5.06 (a) of Draft Loan Agreement) and a debt equity ratio not to exceed 45:55 (Section 5.07 (a) of Draft Loan Agreement). According to projections debt service would always be covered adequately by the oper- ating surplus, the coverage never falling below 1.7 during the life of the loan.  22. International competitive bidding is in progress. Bidding pro- cedures wer;; started last summer to have the pipeline in operation in time for the sta,! -uD of the power plant (mid-1972). Bids for most items have be2n receive7.' :ad are presently being evaluated. No local bidders par- ticipated. 23. The Barlk would disburse 75 percent on all foreign exchange ex- penditures, and the Kuwait Fund 25 p*rcent. They would share responsibil- ity for project supervision, and -C.J .(rk together in loan administra- tion. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 24. 'The draft Loan Agreement between the Bank and S.T.E.G., the draft Guarantee Agreement between the Republic of Tunisia and the Bank, the re- port of the Committee, provided for in Article III, Section 4 (iii) of tne Articles of Agreement of the Bank, and the text of a Resolution approving the propo-ed Loan are being distributed to the Executive 9irectors sep- arately. 25. Particular attention is drawn to (i) paragraph (b) of Sectiont 8.02 of the Loan Agreement which provides that in case the Kuwait Fund Loan becomes due and payable in advance of its agreed maturity the Bank can accelerate the maturity of its Loan; (ii) Section 8.03 of the Loan Agreement which specifies, as an event of suspension of the Pank Loan, that the right of the Borrower to withdraw the proceeds of the Kuwait Fund Loan shall have been suspended in whole or in part; (iii) para- graph (b) of Section 9.01 of the Loan Agreement which makes the ef- fectiveness of the Bank L-oan Agreement conditional upon fulfillment of conditions precedent to the effectiveness of the Kuwait Fund Loan Agree-- ment; and (iv) Section 3.02 of the Guarantee Agreement requiring the Guarantor to exercise its rights to purchase gas, under its agreement of December 7, 1970 with Societe Italo-Tunisienne d'Exploitation Petroliere which has the El Borma oil and gas concession, and not to terminate or amend any of the Guarantor's rights under the agreement without th.o prior appro-.'al of the Bank. PART V - THE ECONOMY 26. The most recent economic report on Tunisia dated May 4, 1970 (EMA-22a) was distributed to the Executive Directors on May 5, 1970., A basic data sheet is attached. 27. Tunisia's economic development during 1970 has, on the whole, been less favorable than had been forecast. GDP at constant prices, which at the 'beginning of thie year was expected to rise by 7.2 percent, grew by  not more than 4.5 percent. Agricultural production actually declined as a good grain harvest was more than offset by poor olive and vegetable crops, and a fall in livestock production. Output in most other sectorq also fell short of expectations partly because of disruptions caused by the disastrous floods in September/October 1969. Domestic demand, on the other hand, con- tinued to rise strongly with public expenditures leading the way. Invest- ment outlays increased by 12 percent while consumption expanded by 6 per- cent. The combination of low production and buoyant demand put pressure on prices and led to an 8 percent increase in imports. As exports grew only slowly, the current account deficit in the balance of payments rose by $24 million to an estimated $128 million. But the deficit was more than covered by increased foreign aid, and reserves continued to rise moderately. 28. Tunisia's economic development over the last few years had been affected by unfavorable weather conditions, severe marketing constraints especially for exports, and a number of organizational difficulties which resulted in slow production growth, deteriorating public savings, increasing inflationary pressures, and a high external debt burden. These factors have contributed to the recent political changes and led to a serious search for a more successful set of economic policies. The efforts culminated in a new economic strategy, presented by the Prime Minister last November, which aims at accelerating the growth of production and exports by reducing direct government interference in economic decisions; encouraging private initia- tive and entrepreneurship; and relying more extensively on market forces as guide for investment and production. More specifically, the Government has stated its intention to give priority to increasing agricultural output, and to the promotion of labor intensive small and medium scale industrial enterprises. Productivity and export orientatiou will be the principal criteria for investment allocation. Workers' emigration will be encouraged as an outlet for surplus labor, while efforts to control the increase in population will be intensified. 29. The new budget for 1971 which has just been presented to Parliament, reflects already to some extent the changes in overall policy. It offers incentives for private investors and reduces the amount of public capital expenditure. Government investments will focus on the completion of ongoing projects and on complementary works to raise the productivitv of existing facilities. The expansion of current spending will be more limited and selective than in previous years. Moreover, a major overhaul of the tax structure has been started with the objective of removing existing produc- tion and export disincentives. 30. Stimulated by the new budget, private investment is expected to rise substantially during 1971, particularly in the agricultural sector. Agricultural production is likely to recover somewhat, especially since favorable weather conditions are likely to produce a good olive crop. In- dustrial output is expected to continue its moderate rise, concentrated mainly in food processing and textiles. Crude oil production is unlikely to grow, but considerable gains may be expected from tourism. Overall pro- duction could be 6-8 percent higher than in 1970. This together with rising imports and the fiscal restraint should reduce the inflationary pressure.  31. However, much remains to be done to carry out the structural reforms envisaged by the Government. Institutional changes will have to be made and the responsibilities of government agencies, banks, and enter- prises need to be newly defined in order to establish an efficient market economy. Adequate export incentives will have to be given and a more liberal exchange system is required. In addition, there is urgent need for a reappraisal of sectoral policies. The Fourth Plan (1973-76) which will soon be prepared, could play a leading role in the implementation of the necessary economic reforms. 32. Tunisia's external debt burden is high. In 1970, about 25 per- cent of gross foreign exchange earnings had to be spent on servicing external debt obligations, most of it for public and publicly-guaranteed debt. The structure of external debt, however, has been considerably im- proved in recent years by reducing the amount of new short and medium-term borrowing and,while payments on present debts will still remain large in coming years, there is scope for some additional borrowing on conventional terms. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 33. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 34. I recommend that the Executive Directors of the Bank approve the proposed loan. Robert S. McNamara President January 13, 1971  Basic Data Area 164,000 square kilometers 63,380 square miles Population (mid-1970 estimate) 5.1 million Annual Rate of Growth (1965-1970) 2.8 percent2 Density 31.0 per km Gross Domestic Product (1970) /1 D 559.3 million Per Capita (1970) /1 US$ 210 Annual Rate of Growth (1965-1970) /2 0.8 percent per capita Industrial Origin of GDP (1966 Prices) Annual Growth Percent Shares 1965-1970(X) /2 1970 Agriculture -L.5 lb.3 Mining, Water and Power 17.7 8.5 rianufacturing 5.2 15.2 Construction and Public Works 2.5 8.8 Transport and Communications 2.3 8.6 Services 2.7 25.3 Government Wages and Salaries 8.8 19.3 GDP at Factor Cost 3. 100.0 Indirect Taxes less Subsidies 5.0 17.7 GDP at Market Prices 3.8 117.7 Expenditure on GDP ( Current Prices) Private Consumption 4.3 62.2 Public Consumption 10.7 20.0 Gross Investment 5.0 2h.3 Exports of Goods and NFS 8.4 22.5 less: Imports of Goods and NFS h.0 -29.1 Expenditure on GDP 100.0 Gross Domestic Savings 11.7 17.8 Resource Gap as % of Investment (1970) 26.9 /1 At current market prices and at the official rate of exchange. /2 1970 compared to 3-year averages centered on 1965 to remove the effect of exceptionally good weather on agriculture in 1965.  Money, Credit and Prices Annual Growth End-1969 i964-1969 (X) (D. million) Total Money Supply 7.5 182.2 Time and Saving Deposits 17.2 50.5 Bank Credit to Government, Net 5.5 94.2 Bank Credit to Private Sector 13.3 2L1.0 Consumer Price Index (1962 100) Lh.0 130.2 Wholesale Price Index (1962 100) 4.8 139.8 General Government Operations Annual Growth 1970 1965-1970 (X) (D. million) Current Revenue 9.3 190.0 Current Expenditure 11.2 172.8 Current Surplus -2.7 18.1 Gross Fixed Capital Formation 2.0 52.1 Other Capital Expenditure 5.3 21.7 Overall Deficit 5.1 55.7 Domestic Financing, Net -10.7 6.1 External Financing, Net 8.5 49.6, Balance of Payments Exports of Goods and NFS 8.5 lh8.4 Imports of Goods and NFS 2.4 191.L4 Deficit on Factor Services 14.0 -?4.a Current Account Deficit -3.5 -57.2 Net Public Capital 5.2 59.3 Net Private Capital -15.0 12;.q Change in Reserves N/A -7.0 Net Foreign Assets (End-1970) -2.2 External Debt 1970 Public Debt Outstanding (end of year - i million) 750 /1 Total Debt Service Ratio (X) 25 - Foreign Reserves, gross ($ million) November 30, 1970 73 .L Exchange Rate UIS` 1 = 0.525 dinars (D.) lyiF Position (USu, million) October 31, 1970 Quota 35.0 Drawings Outstanding 19.5 Bank/IDA Position (US$ million) November 30, 1970 Bank Loans (less cancellations) 70.9 Repayments 2.3 Total Loans Outstanding -. IDA Credits (less cancellations) 40.0 Total Bank/IDA 177 of which disbursed 42.5 undisbursed 60.1 /1 Tentative estimate.