Tunisia - Fifth Societe Nationale d'Investissement Project

CIRCOLAIWNG-copy - RII rED To REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1167-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED FIFTH LOAN TO THE SOCIETE NATIONALE D'INVESTISSEMENT WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA January 10, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Unit Tunisian Dinar (D) US$ 1 D-o.48 D. 1 US$ 2.o8 D 1,000 - US$ 2,080 D 1,000,000 = US$ 2,000,000  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENIIATION OF THEI PRESII)ENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED FIFTH LOAN TO SOCIETE NATIONALE D'INVESTISSEMENT WITH THE GUARA4TEE OF THE REPUBLIC OF TUNISIA 1. I submit the following report and recommendation on a proposed loan to Societe Nationale d'Investissement S.A. (SNI) to be guaranteed by the Republic of Tunisia, for the equivalent of US$14 million to help finance lending for industry and tourism. Amortization would conform substantially to the aggregate of the amortization schedules applicable to the specific investment projects financed out of the proceeds of the loan, with a maxi- mum period of 20 years for individual investment projects. The interest rate would be 7-1/4 percent per annum. PART I - THE ECONOMY 2. A report entitled "Current Economic Position and Prospects of Tunisia" (EMA-51a) was distributed to the Executive Directors on August 14, 1972. A country Data Sheet (Annex I) and a map of Tunisia are attached. 3. Tunisia's development has been hampered by scarcity of natural re- sources. Agriculture, a major sector in the economy, is highly dependent on rainfall. Minerals, particularly phosphates, are mostly of low quality and have suffered from deteriorating world market conditions. Industrial development has been handicapped by the small size of the domestic market and in most sectors a lack of skills and experience has been a constraint. However, petroleum was discovered in the mid-sixties and has since become a relatively significant source of revenue. Tourism expanded rapidly, con- tributing to regional development, employment and foreign exchange earnings. Tunisia's traditional society is beginning to modernize owing largely to fast expanding education and social services. In the 1960s, development policies favored social objectives and assigned a major role to the public sector. Public investment concentrated heavily on long-term yielding proj- ects with little emphasis on immediate needs to increase production. Over- all economic performance remained disappointing. A new development strategy was introduced in 1970, whose main objectives are to increase production, exports and employment, and to achieve this mainly by encouraging private initiative, reducing direct Government involvement in economic decisions and relaxing administrative regulations. 4. Following a period of slow growth, barely 4% between 1960 and 1970, GDP in real terms increased by 9 percent in 1971, and may increase by as much as 19 percent in 1972, because of exceptional agricultural crops, a very good tourist season, higher oil prices and increased workers' remittances. The new Government policies have revived confidence in the private sector, which in turn appears to have benefited most sectors of the economy. Investment has been stepped up, increasing by 18% in 1971 to account for some 22% of  GDP. The balance of payments position improved considerably. Foreign exchange earnings in 1971 were substantially higher than in 1970, due to higher export prices for petroleum and the expansion of tourism and workers' remittances. The current deficit declined from $93.7 million to about $48.6 million despite rising imports. Since capital inflows remained at a high level, net foreign exchange assets increased by about $95 million to about $100 million at the end of 1971 and $147 million by mid 1972. The sharp rise in savings to a level equivalent to 20% of GDP (compared with an average of 16% in 1969-70) and 85% of investment (66% in 1969-70), was reflected in a decline in the resource gap to about 3% of GDP. 5. The improved economic and financial situation facilitated a con- tinued liberalization of economic policies. To stimulate competition, the Government further reduced import restrictions on spare parts and raw mate- rials for domestic manufacturers. Approval procedures for new investments were considerably eased and banks were given more responsibility in allocat- ing investment funds. The Government has undertaken a thorough review of the tax system, including customs tariffs, and is now introducing a number of reforms designed to stimulate production, encourage exports and achieve greater equity and simplicity in administrative procedures. These develop- ments have led to a sharp r:Lse in private investment projects submitted for official approval during 1971. 6. There has been less progress in relaxing price regulations and in reorganizing state-owned enterprises. In 1971/72 an inter-ministerial com- mittee recommended changes in the financial structure, operations and man- agement of six of these enterprises but the measures so far taken have been largely insufficient. 7. Agriculture is still the dominant sector in the economy. It pro- vides nearly half of the employment, 30 percent of merchandise exports and 17 percent of GDP; food processing industries account for another 5 percent of GDP and over a third of value added in manufacturing. Agricultural out- put stagnated during the second half of the 1960's, due to unfavorable weather, unsuccessful organizational changes introduced under land reforms, and tthe lack of modern skills and inputs. The new Government policies, since 1970, have renewed confidence of private farmers. Due to their revived initiative and better weather, agricultural output increased substantially in 1971 and further in 1972. Past investments, particularly in irrigation works, will permit expansion of production, and domestic and foreign markets could ab- sorb more than is presently produced. The sector's future development will depend on energetic efforts to improve methods and efficiency in production, and on increased training. 8. Tunisia's crude oil production (primarily from the El Borma fields in the South) was above four million tons in 1971 providing about 25 percent of merchandise exports. It has tended to level off since 1969, but recently intensified prospecting has led to the discovery of new deposits near Sfax and in the Gulf of Gabes, which are expected to raise production to about 6 million tons per year by 1974. On the other hand, prospects for increas- ing phosphate production beyond the present level of about 3 million tons  -3- per year are uncertain, primarily because of high production costs; the Government is trying to reorganize the industry and to put it on a competi- tive basis. 9. Manufacturing contributes about 15 percent to GDP. Up to 1969, sector development focussed primarily on import substitution by state enter- prises and processing of minerals for export. Because of the small domestic market and difficulty of increasing exports, output grew slowly. Tunisia's proximity to Europe, low cost and relatively abundant labor and the 1969 As- sociation Agreement with the EEC, which allows duty free access to the Com- munity for most Tunisian industrial exports, favor the development of export industries. Recent import liberalization has given larger scope to private initiative in industry and should help foster domestic competition; further- more, legislation providing substantial incentives for domestic and foreign investments in export-oriented industries has recently been passed. There appear to be good prospects for foreign investments and sub-contracting which could make a significant contribution to future industrial development. The Government now places high importance on the development of industry in its broadest sense as the main source of future growth and employment. 10. Tourism started from a low level and expanded rapidly in the 1960's. It has now become a major foreign exchange earner (about $110 million in 1971, corresponding to about 25 percent of total current foreign exchange earnings), source of employment and means of diversifying the economy. Demand is expected to expand further but hotel capacity is a major constraint on increased ac- tivity. 11. The current economic recovery should finally raise average annual growth of GDP during the current Plan period (1969-72) to a rate close to, or even larger than the Plan target of 6.5 percent. Total investment over the Plan period is expected to be about D670 million compared with the Plan target of D617 million. 12. The 1973/76 Plan is now under preparation. The GDP projected for 1976 would require an average growth rate of 5 percent per year with 1972 as a base year. As noted in paragraph 4 above, however, 1972 was an excep- tional year and after making adjustments for this, the Plan's targets are equivalent to an average 6-1/2 percent annual growth rate. To achieve this growth the Plan provides for investment totalling D1,000 million. This is an ambitious goal depending on the success of new efforts to identify and prepare production-oriented projects and give the private sector the re- sources required for its key role. The Government estimates the future capital inflow needed at about 20 percent of the cost of investment. This is not out of line with the present high level of external aid, but does not make adequate allowance for repayments on external debt which will preempt as much as 30 percent of gross external borrowing over the next few years. A further problem remains of mobilizing the increased volume of domestic savings required to finance the remaining 80 percent of investment cost.  13. The main sources of external aid have been the members of the Consultative Group for Tunisia. During 1962-1971, the country received (in terms of actual disbursements) external official aid in the amount of about US$789 million, about 90 percent of which was granted by bilateral donor countries and agencies (mainly USAID, France, Federal Republic of Germany, Canada, Italy, Sweden, and the Kuwait Fund for Arab Economic Development) and 10 percent by multilateral sources (primarily the Bank Group and, to a lesser extent, the U.N. and the African Development Bank). Hlowever, there has been a considerable increase in the proportion of multi- lateral aid over the period from about 3 percent in 1962-65 to 15 percent in 1966-71. Of total aid received, 28 percent was in the form of grants, including agricultural commodities and technical assistance, 30 percent in the form of non-project loans and 42 percent in project loans. The largest share of project loans was for irrigation infrastructure (about US$100 mil- lion), followed by transport and communications (about UJS$87 million) and tourism (about US$80 million). The average terms of borrowings in 1971 from public sources were 4% interest, 22 years maturity and 6 years of grace. Long term public debt outstanding at the end of 1971 was $917 million, of xwhich $610 million were disbursed. Of the total, bilateral aid amounted to $546 million, international organizations $154 million, private banks $117 million, suppliers credits $88 million, and the remainder $12 million was from miscellaneous sources. 14. Tunisia's foreign dlebt service burden ($74.3 million in 1971) is still relatively high; however, restraint in short and medium-term borrowing, substantial foreign aid on favorable conditions, and the marked improvement in foreign exchange earnings reduced the debt service ratio from 22 percent in 1970 to 19.4 percent in 1971. Tunisia's creditworthiness for borrowing on conventional terms continues to depend on her ability to attract a sub- stantial portion of external assistance on concessional terms. The Consul- tative Group for Tunisia, which met in October 1972, welcomed the improvement in Tunisia's economic performance and agreed that the country needs continued assistance on concessional terms which the members of the Group expressed their willingness to provide. PART II - BANK GROUP OPERATIONS 15. Beginning with a credit of $5 million for an education project in 1962, Tunisia has to date received a total of fifteen Bank loans and nine IDA credits amounting to, respectively, $141.6 million and $58.7 mil- lion, net of cancellations and refundings. The proposed loan would bring the total to $215.0 million. 16. The largest share of Bank Group lending has been for transport. Two lending operations for po1-t construction, one for the railway company, one for road construction and one for a gas pipeline account for 32 percent of the Bank Group's present commitment in Tunisia. Public utilities come second (18 percent) including two operations for water supply and one for  -5- power generation and distribution, followed by industrial and hotel finan- cing through Societe Nationale d'Investissement - SNI (17 percent), tourism infrastructure (12 percent), agriculture and fisheries (9 percent), educa- tion (9 percent), and family planning (3 percent). 17. IFC has invested in a fertilizer plant, in SNI, and in COFITOUR, a tourism development company. Its net commitments presently held in these enterprises total US$11.3 million. 18. Annex II contains a Summary Statement of Bank loans, IDA credits and IFC investments as of November 30, 1972, and notes on the execution of ongoing projects. While in the first years of cooperation with Tunisia the Bank Group's lending primarily aimed at investments in infrastructure, its focus is now on immediately productive investment in industry, tourism, and agriculture, with emphasis on increasing foreign exchange earnings and em- ployment. In agriculture, Bank Group assistance will help to put to full use existing irrigation infrastructure through financing of on-farm invest- ment programs, which will be combined with extension and marketing services; also it will support the Government's endeavors to improve rural living and employment conditions and to discourage rural migration. Continued lending for industrial and hotel credit through the proposed loan to SNI and other operations should help to build up the country's foreign exchange earning capacity and assist the Government's efforts to increase employment oppor- tunities in industry and tourism. The shift in the focus of Bank Group lending is in keeping with the Government's new economic policies and de- velopment strategy described in Part I of this report. 19. An urban transport project with an important technical assistance component for urban transport and land use planning is being prepared. Proj- ects in agriculture (irrigation rehabilitation, livestock and rural develop- ment in rainfed and irrigated areas), tourism training, industry (phosphates), and urbanization (urban sewerage) are also at varying stages of preparation for lending during the next two years. IFC is contemplating an equity in- vestment of about $1.0 million for the expansion of a phosphoric acid plant in Gabes. It is also interested in financing hotel investment possibly jointly with SNI and COFITOUR. PART III - THE SECTOR AND THE PROJECT Industry 20. Mlanufacturing contributes about 15 percent to GDP. The develop- ment of the sector has focussed, to a large extent, on import substitution and processing of minerals for export. Several reasons accounted for the slow growth of the manufacturing industry such as the small size of the domestic market; comprehensive government control over investment decisions, trade, foreign exchange transactions and prices; and poor management of public enterprises.  - 6 - 21. Until 1970, Tunisia chose to rely for its industrial development on the public sector and government initiatives. The industrial sector was virtually reserved to government enterprises and a large number of them were created. The Government extended its control over the sector by acquiring foreign-owned concerns through purchase or nationalization. The relative importance of the private sector declined and most of its activity became concentrated in small and medium-scale activities. Private sector confi- dence in its role was undernined and private initiative suffered accordingly. 22. The new economic policies adopted by the Government in 1970 to stimulate industrial growth through the private sector have begun to show positive results, although a major contributing factor to the increases in industrial output of 9% in 1971 and 26% in 1972 was the exceptional level of the agricultural harvest which led to marked increases in food process- ing. Opportunities exist for the modernization and expansion of existing industries (i.e. textiles, ]ight engineering and other light industries) as well as for the creation of new export-oriented ventures. However, progress in developing manufacturing industry will depend to a large extent on the success of the Government's policy of liberalizing the conditions affecting domestic and foreign investment and on its willingness to undertake an active promotion program. The creation of a suitable economic environment still calls for regulations on industrial activity to be further relaxed, invest- ment procedures simplified, the role of the banks in allocating credit strengthened and the list of liberalized imports extended. The present procedure for project identification and preparation and promotion also need strengthening. Nevertheless, the improved investment climate should help exploit the growth potential of the industrial sector and lead to an increasing demand for long-term industrial financing in the country. Tourism 23. The development of tourism is a recent phenomenon. Unusually fast growth over the period 1962-,71 has averaged 34%, to become the largest source of foreign exchange earnings ($100 million in 1971) as well as an important source of direct and indirect employment. The prospects for continued rapid expansion are bright and plars have been laid to expand hotel capacity accord- ingly. The Government actively supports tourism development through incentives to private hotel promoters and has recently embarked on a long-term tourism infrastructure program which is partly financed by German bilateral aid and by a Bank loan and an IDA credit approved by the Executive Directors last June. 24. SNI represents the major source of long-term local currency and untied foreign exchange funds for Tunisian private entrepreneurs in tourism and in the manufacturing sector which the Government is seeking to encourage. The proposed fifth Bank loan would enable SNI to continue this role. The Project 25. An appraisal report on Societe Nationale d'Investissement (No. 17a-TUN) dated December 29, 1972 is being distributed separately. A Loan and Project Summary is attached as Annex III.  -7- Establishment and Resources of SNI 26. Societe Nationale d'Investissement (SNI) was established in 1959 and reorganized in 1965 with the assistance of the Bank Group. After doubling its share capital in January 1971 to D3.0 million, ownership distribution is as follows: Tunisian public sector (government and state-controlled enter- prises) 22.2 percent, Tunisian private sector 42.7 percent, foreign share- holders 35.1 percent including IFC, which holds a 20 percent participation. The Bank has so far made four loans to SNI, $5 million in Mlay 1966 (No. 449). $10 million in September 1967 (No. 512), $10 million in December 1969 (No. 648), and $10 million in January 1972 (No. 798). The Swedish International Development Agency (SIDA) has made two long-term loans to SNI, totalling US$9 million. In addition, SNI obtained about D1.1 million from banks and the Government of Tunisia. In 1964/65, at the time of the reorganization, the Government also provided SNI with a DO.5 million grant, and in 1966 made an interest-free loan of D615,000 which is subordinated to all other debt. Local borrowing from other Tunisian institutions has amounted to D455,000. Objectives and Role of SNI 27. SNI's policies established at the time of its reorganization in 1965 provide that SNI is to stimulate industrialization and the development of tourism in Tunisia through the financing of sound and productive projects. SNI also seeks to help develop the capital market and, in particular, to broaden the securities market. 28. From 1966 to the end of 1970, SNI approved 211 loans and equity investments amounting to D21.6 million. SNI almost doubled the volume of its annual approvals from D3.7 million in 1968 to D6.7 million in 1970. Approvals slowed down during 1971 to D6.4 million due in part to the gen- erally high level of liquidity in the economy resulting from a bumper crop and increased tourism receipts; however, in 1972, loan approvals increased sharply to a record of over D10 million. 29. SNI's financial assistance has been mainly in the form of loans, with equity investments accounting for only 15% of total portfolio. Mlaturities have ranged up to fourteen years (which has proved too short for hotel finan- cing in some cases). In future, SNI proposes to extend loans to hotels for up to 20 years, including up to 5 years' grace, if justified in the individual case by the forecast financial position of the borrower and the expected life- time of the assets. SNI charges 9 percent interest. Interest rates of other Tunisian banks range from 6 to 8-1/2 percent for medium-term credits, yet, despite its 9 percent rate, SNI has been able to find a market because its loans are long-term and not tied to procurement from specific countries. Moreover, the foreign exchange risk on loans provided from Bank and SIDA resources has been borne by the Government. 30. SNI's equity investments total D2 million, which is well below the limit set forth in its Statement of Policies, i.e. the equivalent of its net worth. The most important single equity investment (D830,000) was SNI's subscription to COFITOUR (Compagnie Financiere et Touristique), in which also IFC is a principal investor.  - 8 - 31. SNI has been active in financing manufacturing and tourism. Its share in financing total industrial investment in the country increased from 5 percent in 1969 to an estimated 22 percent in 1972, while its share in tourism financing grew from 14 percent to an estimated 19 percent over the same period. 32. Through the projects it has financed in tourism and industry, SNI has helped to substantially enlarge Tunisia's foreign exchange earning ca- pacity. The tourism sector accounts for about 50 percent of SNI's loans outstanding. In the manufacturing sector, 20 percent of SNI's funds have gone to enterprises exporting over half of their production. As the Govern- ment increases its incentives for exports, SNI should be in a position to further expand its activity in this field. Until 1969, SNI did not finance public sector enterprises as a matter of policy. However, by 1971, public sector enterprises were receiving 32 percent of SMI's loans to industry, while for 1972 the percentage is forecast to decline slightly. SNI's policy statement limits the amount of such lending to 25 percent of total outstand- ing commitments. 33. Despite increasing operations and scarcity of experienced staff, SNI has assisted small and medium-sized industrial enterprises and is now giving increased attention to applications for loans to such enterprises. There is a growing number of small and medium-sized enterprises which, partly as a result of the Government's new economic policies, are looking to SNI for their investment financing needs. 34. A pressing issue facing the Tunisian economy is unemployment. SNI's operations have to some extent contributed to alleviating this prob- lem in manufacturing and tourism. SNI estimates that its industrial proj- ects financed since 1970 have added about 2,900 jobs at a cost of $14,300 per job. Another 4,400 jobs were created through tourism investments over the same period at a cost of about $13,500 per job. Organization 35. Board of Directors and Management. SNI's Board of Directors has 14 members. Mr. Habib Bourguiba Jr. was elected President-Director General in March 1971 to replace Mr. Moncef Belkodja, who stayed on as Director with special executive powers (Administrateur Delegue). At the June 1972 General Assembly the following changes were introduced in the Board: four directors, instead of three, were elected to represent SNI's private shareholders, while the number of Directors repretsenting the Government and public sector insti- tutions was reduced from six to five. Mr. Khosropur is representing IFC on SNI's Board since 1969. Mr. Bourguiba fell ill in December 1971 and since he is still convalescing, Mlr. Moncef Belkodja together with Mr. Fakfak, the Deputy General Director appointed in June 1971, are presently managing the company. 36. Staff and Procedures. SNI's weak organization and operational performance was a matter of concern when the last Bank loan was made in January 1972. At that time, it was decided to cover the foreign exchange  -9- needs of SNI for only one year while a number of corrective measures were proposed. Based primarily on the detailed recommendations of an expert from the International Executive Corps, and on considerable technical assistance from the Caisse Centrale de Cooperation Economique (a shareholder), and with advice from the Bank, SNI has since been carrying out a reorganization to improve its project appraisal work as well as its follow-up and promotional capacity. To that effect additional staff has been recruited and a more efficient division of work through new procedures and organizational struc- ture has been set up; it has also strengthened its follow-up division but more staff, particularly engineers, are still needed. The Bank continues to pay close attention to the effectiveness of these measures. 37. The quality of SNI's project appraisals has improved markedly since last year. Its project analysis deals satisfactorily with the tech- nical, financial, and economic aspects of industrial projects. Appraisals of large hotel projects still need improvement, and SNlI is planning to em- ploy jointly with COFITOUR experienced staff for tourism project appraisal work. The economic justification of SNIt's projects will also be reviewed in mid-1973 in the light of the findings of a Bank mission from the Opera- tions Evaluation Division, presently in the field. Financial Results 38. Net earnings for 1971 were about D253,O0O equivalent to 8.6 per- cent on the year-end shlare capital. 1971 profits alnost doubled those of 1970, mainly because interest earned on loans and deposits rose by 43 per- cent while interest expense increased only by 39 percent. SNI paid a 6 percent dividend on both 1970 and 1971 results. 39. Total assets grew steeply from D6 million in 1967 to nearly D15 million at the end of 1970 and D18 million in 1971. SNI's financial posi- tion at the end of 1971 was considered sound and its liquidity strong, with net working capital of over Dl million. SNI's debt/equity ratio as defined in the loan agreements with the Bank stood at the end of 1971 at about 2:1 against a limit of 4:1. 40. SNlI's portfolio of loans and investments is basically sound, but there are problems. The difficulty of validating mortgage security on cer- tain loans continues, though there has been progress in the past year. Principal and interest overdue three months or more represents 3.2 percent of loan portfolio at the end of 1971, and has dropped to 2.6 percent at the end of November 1972. Over three-fourths of the arrears are on hotel loans and reflect both the starting up difficulties of somewhat inexperienced hotel borrowers and relatively short grace and repayment periods of SNI's hotel loans hitherto. These arrears should diminish substantially given the very good results of the 1971 and 1972 tourist seasons and the bright prospects of this sector. 41. SNI's reorganization of its supervision and collection activities should result in an improvement of the portfolio. Moreover, in its 1972 accounts, SN1 plans to increase loan provisions and to continue to work in  - 10 - close collaboration with the Government to get adequate mortgage security on its loans. 42. In summary, in spite of a few problem cases for which SNI is seeking an adequate solution, SNI portfolio of loans and equity investments appears to be sound. It should also be recognized that SNI has a comfortable cushion of reserves and surplus amounting to D 1.1 million, of which D 800,000 are free reserves; in addition, there is the Government grant of D 500,000. Al- though this cushion is part of SNI's net worth and cannot be considered as provision against potential losses, these amounts nevertheless indicate that SNI is in a strong overall financial position and is creditworthy. Projected Operations and Resource Requirements 43. Forecast of Operat:Lons. Estimates of SNI's projected operations are based for the immediate future on projects already under preparation, and for the following years on general prospects for industry and tourism development as defined by the Government's objectives for the next Plan period (1973-1976). 44. SNI has good business prospects. Although approvals in 1973 are likely to be somewhat down from the exceptionally high record of 1972, ap- provals over the period 1974-77, are expected to increase by at least 5-6% per year. To finance this program, SNI will need fresh resources early in 1973. 45. The proposed loan would cover SNI's resource gap for two years. Presently available resources for import financing (D1.2 million) will be fully committed by February 1973. To meet import commitments through the end of 1974, SNI will need additional D8.5 million. Current negotiations of SNI with the Government for a share in bilateral aid available from Sweden (SIDA) and Germany (KFW) should provide SNI with D0.6 million and D1.4 million respectively, to finance imports. The remaining import finan- cing gap would amount to D6.5 million or about $14.0 million, which would be covered by the proposed Bank loan. SNI expects to meet its local currency financing needs from self-generated funds, a portion of SIDA funds available for local currency financing, the proceeds from a proposed domestic bond issue, and a possible share capital increase in 1974. 46. SNI's earnings prospects are reasonably good. Profits before taxes are projected to increase from 9.7 percent on average net worth in 1971 to 13.2 percent in 1977, which would make it possible for SNI, in a few years, to distribute dividends higher than the 6 percent paid out in the last two years. Terms of the Proposed Bank Loan 47. The proposed loan to SNI follows the terms and conditions of recent Bank loans to development finance companies, including the standard commit- ment charge. The free limit up to which no Bank approval of a sub-loan is required would be raised from US$200,000 to US$400,000, with an aggregate amount of US$4.0 million. This would be justified in view of SNI's improved  appraisal standards, the generally larger size of its sub-projects, higher costs resulting from price increases, and particularly higher costs of im- ports from Western Europe in terms of dollars following last year's currency realignment. The debt equity limit of 4:1 as defined in previous loan agree- ments would be retained. Loans to hotel projects financed out of the proposed Bank loan could if necessary be extended up to 20 years while financing of industrial projects would be limited, as in previous loans, to 15 years. 48. SNI is, with the Bank Group's assistance, continuing its important role in the Tunisian economy. It has experienced difficulties in its organ- ization and staff, but the remedial measures which were introduced or are being implemented should enable the company to cope with the growing tasks ahead. SNI is considered creditworthy for the additional financing proposed. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 49. The draft Loan Agreement between the Bank and SNI, the draft Guar- antee Agreement between the Republic of Tunisia and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agreements con- form to the normal pattern for loans for development finance companies. 50. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - RECOMMENDATION 51. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments January 10, 1973   ANNEX I Page 1 of 2 COUNTRY DATA - TUNISIA AREA 2/ POPULATION DENSITY 164,000 kmr 5.2 million (mid-1971 estimate) 31.9 per kmin Rate of Growth: 2.6% (from 1966to 1971) 99.8 per km?/of arable land POPULATION CHARACTERISTICS; 1971 HEALTH: 1968 Crude Birth Rate (per 1,000) 38 Population per physician 7650 Crude Death Rate (per 1,000) 13 Population per hospital bed 422 Infant Mortality (per 1,000 live births) 115 INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP % of national income, lowest quintile . % owned by top 10% of owners 48 highest quintile . 7 owned by smallest 10% of owners 2 ACCESS TO PIPED WATER ACCESS TO ELECTRICITY % of population - urban . % of population -urban - rural . - rural NUTRITION EDUCATION : 1971 Calorie intake as % of requirements . Adult literacy rate 7 55 Per capita protein intake Primary school enrollment %7 85 1/ GNP PER CAPITA in 1971 US $ 264 GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (%, constant prices) US $ Mln. ' % 1960-65 1965-70 1971 GNP at Market Prices 1416.4 100.0 4.4 3.7 8.5 Gross Domestic Investment 334,9 23.6 13-3 3.6 22.1 Gross National Saving 286.3 20.2 Current Account Balance 48.6 3.4 Exports of Goods, NFS 380.8 26.9 2.3 11.2 2l.4 Imports of Goods, NFS 422.9 29.9 4.2 4.7 12.4 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 197 Value Added Labor Force V. A. Per Worker U n. 1J % Mln. % US $ % Agriculture 220.4 17.8 *571 W 51.3 386.0 34.7 Industry 398.1 32.2 .237 21.3 1679.7 151-1 Services 618.8 5Q.0 .305 27.4 2028.9 182.5 Unallocated . Totai/Average 1237-3 100.0 1.113 100.0 1111.7 lO0.-o GOVERNMENT FINANCE General Government Central Government (Dina*llln.) % of GDP (DinarsMln.) % of GDP 1971 1971 1969-71 1971 1971 1969-71 Current Receipts 217.2 28.7 29.1 183.5 24.2 24.5 Current Expenditure 191.3 25.2 2.4 1_2.0 20.1 20.0 Current Surplus 25.9 3-4 3.7 31.5 4.2 4.4 Capital Expenditures 65.4 8.6 10.1 51.1 6.7 8.1 External Assistance (net) 34.2 4-5 5-3 15.8 2.1 2.6 11 World Baik Atlas conversion. / Estimate. J At 0.52 exchange rate. / Including unemployed.  ANNEX I Page 2 of 2 COUNTRY DATA - TUNISIA MONEY, CREDIT and PRICES 1965 1969 1970 1971 (Millions of Minars outstanding end period) Money and Quasi Money 161.8 232.7 254.3 307.1 Bank Credit to Public Sector 78.9 94.2 90.2 81.9 Bank Credit to Private Sector 149.5 241.0 264.1 296.8 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 32.6 37-3 38.2 40.5 General Price Index (1963 - 100) 111.1 126.8 128.1 135.4 Annual percentage changes in: General Price Index 6.6 4.2 1.0 5-7 Bank credit to Public Sector 9.6 7.6 -4-2 -9.0 Bank credit to Private Sector 15.5 5.4 9.6 12.4 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1969-71) 1969 1970 1971 US $ Mln % (Millions US $) Olive Oil 27.6 14.7 Other agricultural products 26.1 13.9 Exports of Goods, NFS 277.6 306.1 380.8 Phosphate rock 19.8 10.6 Imports of Goods, NFS 337.2 376.2 422.9 Superphosphates 16.8 8.9 Resource GaP (deficit , -) -59.6 -70.1 -42.1 Crude Oil 46.7 24.9 Interest Payments (net) -18.3 -21.0 -22.9 All other commodities 50.7 27.0 Workers' Remittances 21.7 29.0 43.8 Total 187.8 1OQ.0 Other Factor Payments (net) -47.8 -44.2 -47.6 Net Transfers 8.4 12.6 20.2 EXTERNAL DEBT, DECEMBER 31, 1971 Balance on Current Account -96.5 -93.7 -48.6 Direct Foreign Investment 20.0 19.4 24.8 Net MLT Borrowing 50.7 49.1 74.2 Public Debt, incl. guaranteed: 610.0 Disbursements (101.6) (98.1) (121.8) Non-Guaranteed Private Debt Amortization 50.9 (49.0) ( 47.6) Total outstanding & Disbursed Subtotal 70.7 68.5 99.0 Capital Grants 43.2 43.1 35.2 DEBT SERVICE RATIO for 1971 Other Capital (net) -4.0 0.8 9.7 % Other items n.e.i Increase in Reserves (+) 13.4 18.7 95.3 Public Debt. incl. guaranteed Tn Cnof Rynorts of Goods.-NFS, Gross Reserves (end year) 46.9 70.1 1537 In of ExDorts of Goods NFS, 174 Net Reserves (end year) -14-3 4.4 99.7 emigrants' remittances RATE OF EXCHANGE IBRD/IDA LENDING, November 30/72 (Million US $): Through December 20, 1971 IBRD IDA US $ 1.00 = 0.52 Dinars 1.00 = US $1.90 Outstanding & Disbursed 4 5.4 25.2 Undisbursed 87.6 33.5 Since December 20, 1971 Outstanding incl. ULndisbursed l77" 58.7 US $ 1.00 0.48 Dinars 1.00 = US $2.08 j Net of repayments and sales. not available not applicable Europe, Middle East and North Africa Region November 17, 1972  ANNEX II Page 1 of 4 THE STATUS OF BANK GROUP OPERATICNS IN TUNISIA A. STATEMENT OF BANK LOANS AND IDA CREIGTS (as at November 30, 1972) Loan or Amount in US$ millions Credit (less cancellations) Number Year Borrower Purpose Bank IDA Undis. 29 1962 Republic of Tunisia Education 4.9 - 380 1964 Republic of Tunisia Port Development 7.0 _ 449 1966 Societe Nationale d4Investissement Development Finance Co. 4.7 - 94 1966 Republic of Tunisia Education 11.9 2.1 484 1967 Republic of Tunisia Cooperative Farms 6.1 o.6 99 1967 Republic of Tunisia Cooperative Farms 3.1 0.3 512 1967 Societe Nationale d'Investissement Development Finance Co. 9.3 0.0 573 1968 Office des Ports Nationaux Tunisiens Port Development 8.5 2.1 581 1969 SONEDE Water Supply 15.0 8.7 606 1969 SNCFT Railways 8.5 8.2 150 1969 Republic of Tunisia Railways 8.5 1.9 S2 1969 Republic of Tunisia Highway Engineering 648 1969 Societe Nationale d'Investissement Development Finance Co. 10.0 3.9 209 1970 Republic of Tunisia Water Supply 10.5 10.5 724 1971 STEG Gas Pipeline 7.5 0.5 238 1971 Republic of Tunisia Population 4.8 4.8 746 1971 Republic of Tunisia Highway 24.0 23.0 779 1971 Banque Nationale de Tunisie Agricultural Credit 5.0 5.0 263 1971 Republic of Tunisia Agricultural Credit 3.0 1.9 270 1971 Republic of Tunisia Fisheries 2.0 2.0 798 1972 Societe Nationale d'Investissement Development Finance Co. 10.0 10.0 815 1972 STEG Power 12.0 11.6 858 1972 Republic of Tunisia Tourism Infrastructure 14.0* 14.0 329 1972 Republic of Tunisia Tourism Infrastructure 10.0* 10.0 Total 141.6 58.7 of which has been repaid 6.5 135 X1 Total now outstanding Amount sold 3.0 of which has been repaid .9 2.1 Total now held by Bank and IDA 133.0 58.7 Total undisbursed 87.6 33.5 121.1 * Not yet effective B. STATEMENT OF IFC INVESTMENTS IN TUNISIA (as at November 30, 1972) Amount in US$ millions Year Obligor Type of Business Loan Equity Total 1962 NPK Engrais Fertilizer 2.0 1.5 3.5 1966 Societe Nationale d'Investissement (SNI) Development Finance Co. .6 .6 1969 COFITOUR (Tourism) Development Finance Co. 8.o 2.0 10.0 1970 Societe Nationale d'Investissement (SNI) Development Finance Co. .6 .6 Total gross commitments 10.0 4.7 i4X7 Less cancellations, terminations, repayments and sales 3-1 3 3.4 Total commitments now held by IFC 6.9 4.4 11.3 Total undisbursed 6.9 1.1 8.0  ANNEX II Page 2 of 4 C. PROJECTS IN EXEGUTION1/ Second Education Project; US$13 million credit of September 16, 1L966 Closing Date: December 5L971i Following approval of the memorandum to the Executive Directors of August 21, 1971 (IDA/R71-57) part of the remaining proceeds of this credit was allocated to finance additional equipment for a number of existing schools and technical assistance in educational planning. Procurement pro- cedures for equipment have already been initiated and recruitement of most educational planning experts is taking place. It is expected that the credit will be fully disbursed by the above Closing Date. Cooperative Farms Project: US$6 million credit and US$12 million loan both of February 21, 1967; Closing Date: December 31, 1973. A detailed account of the problems encountered in implementing this project was contained in a memorandium to the Executive Directors on November 5, 1970 (R70-213). The Executive Directors approved amendments to the original Loan and Credit Agreements on November 17, 1970. These amendments became effective on March 2h, 1971, and disbursements were resumed. The project is now nearing completion. The Closing Date for the technical assistance com)onent of the Project is December 31, 1973 and March 31, 1973 for the other categories. It is now expected that the Loan and Credit will be fully disbursed by December 31, 1973. Port Development Project; US$8.5 million loan of November 29, 196u; Closing Date: December 31, 1973. Execution of this project has been generally satisfactory. Total cost of the project is now estimated at $13.2 million, as compared to the appraisal estimate of $10.7 million although the foreign exchange component remains at $8.5 million. The increased cost is due mainly to unexpected price increases and to unforeseen soils conditions which also delayed cons- truction activities and required a one-year extension of the Closing Date. The loan is expected to be fully disbursed by the revised Closing Date of December 31, 1973. Water Supply I and II Projects; US$l1 million loan of January 16, 1969 and US$10.6 million credit of June 30, 1970, respectively; Closing Date: December 31, 1973 and December 31, 1974, respectively. The construction pace of the first project has accelerated after a late start and is now proceeding sa-tisfactorily. Total cost of project is expected to be $1.6 million less than the appraisal estimate and the foreign exchange component to be $2.) million lower; these savings may be applied to finance the foreign exchange component of further distribution works to be carried out by the water authority. The second project has now entered the phase of active bidding, and disbursements are expected to start shortly.  ANNEX II Page 3 of 4 Railways Project: US$8.5 million credit and US$8.5 million loan both of June h. 1969: Closing Date: December 31, 1973. Execution of this project is facing difficulties. The problems, mainly financial, are due to (a) non-payment of freight charges by the railway's largest customer, the state-controlled SFAX-GAFSA Phosphate Company; (b) operational deficits due to low rates and fares, and (c) higher than estimated purchase price of rolling stock. Government has agreed that the Phosphate Company's freight bills will be paid, and that it will revise rail tariffs on completion of a current transport cost and tariffs study. It is proposed that the additional costs of rolling stock will be absorbed by credit facilities offered by the Spanish Government. Because of procedural delays in calling tenders and awarding contracts for this procurement, as well as for needed replacement track, physical completion of the project will be delayed more than a year to early 1975, necessitating about 18 months post- ponement of the Closing date from December 31, 1973 to July 31, 1975. Gas Pipeline Pro.iect: US$7.5 million loan of February 25, 1971; Closing Date: December 31, 1973. Execution of this project has been satisfactory and all work is nearly completed. The increase in project costs from US$13.6 million (US$10 million foreign) to US$l14.7 million (US$10.4 million foreign) is due mainly to the effects of the US dollar devaluation, only US$0.4 million being caused by increased quantities of work. The loan should be fully disbursed well before the Closing Date. Population Project: US$4.8 million credit of April 5 1971; Closing Date: June 30, 1976. Execution of this project has had a slow start mostly due to difficulties encountered in setting up the project organization and to the inadequate coordi- nation among the various Government agencies involved. Most of these problems have recently been overcome and it is now hoped that the project will move ahead as planned. Expenditures for an amount of $0.7 million have been incurred and disbursement applications are being processed. Highways Project: US$24 million loan of June 9. 1971; Closing Date: June 30, 1976. Execution of this project is generally satisfactory. Disbursements are six months behind schedule due partly to delay in project execution and to lack of a provision to pay contractor mobilization costs. The foreign exchange costs of the project , payable mostly in French Francs, have increased in US dollar terms by about 5 percent as a result of the recent currency realignments.  ANNEX II Page I of 4i Agricultural Credit Project; US$3 million credib and US$5 million loan. both of July 12, 1971; Closing Date: September -0, 197'