Tunisia - Hotel Training Project

CIRCULATING COPY FILE COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOE'MENT Not For Public Use Report No. P-1430a-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR A HOTEL TRAINING PROJECT May 30, 1974 This report was prepared for official use only by the Baik 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 It may not be published, quoted or cited without Bank Group authorization.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 EQIVALENTS Currency Unit Tunisian Dinar (One Dinar Equals One Thousand Millimes) The exchange rate of the Tunisian Dinar is floating; the current rate is: US $ 1.00 D 0. 435 D 1.000 US $ 2.2'7 D 1,000.000 US $ 2,270.00 Fiscal Year January 1 to December 31 BDET - Banque de Developpement Feonomique de Tunisie COFITOUR - Compagnie Financiere et Touristique ONTT - Office National du Tourisme et du Thermalisme KfW - Kreditanstalt fur Wiederaufbau IID - International Labor Organization OlTiEHP - Office des Travailleurs Tunisiens a 1'Etranger, de l'Enploi et de la Formation Professionnelle (Tunisian kmployment Office and Vocational Training Agency)  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR A HOTEL TRAINING PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Tunisia for the equivalent of US$5.6 million to help finance a project for thie training of hotel personnel. The loani would have a term of 25 vears, including 5 vears of grace, with interest at 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 basic economic mission visited Tunisia in February and March 1973 and is now finalizing its report following discussions with the Government. The main conclusions of this report are reflected below. Country data sheets are attached (Annex I). 3. Tunisia's development has been hampered by scarcity of natural re- sources including water. Much of the country is arid or semi-arid, and agri- culture is highly dependent on rainfall. Minerals are mostly of low quality and, apart from phosphates, limited in quantity. In the mid-1960's, petro- leum was discovered and has since become an increasingly valuable source of revenue and export earnings. Industrial development has been handicapped by the small size of the domestic market, as well as a lack of skills and expe- rience. Tourism has developed rapidly and workers' remittances have become a significant item in the balance of payments. Real per capita income increased by 4.4 percent annually between 1961 and 1972 to reach a level of $379. Tunisia has enjoyed a large amount of external aid and has used this to expand economic and social infrastructure, broaden the industrial base, increase the rate of growth, and make available a wide range of social and welfare services to a large part of the population. Like most developing countries, however, it has not yet found a way to eliminate unemployment and poverty and to achieve a balanced distribution of consumption among income groups, between urban and rural areas, and among regions. 4. Government strategy in the 1960's relied heavily on central planning of investment and resource allocation, with the public sector playing a major role in production as well as providing infrastructure and services. Foreign exchange shortages and preoccupation with restraint of inflation led to re- course to a pervasive system of official price determination and administrative controls. An unusually long series of poor crop years due to shortage of rainfall slowed down growth of output. Many of the investments in public enterprises proved to be uneconomic and private initiative in most sectors except tourism and petroleum was discouraged. Growth was relatively slow through 1969, but was combined with a high degree of domestic price stability.  -2- 5. The Government9s present development strategy was introduced after 1969 and forms the basis of the current Fourth PlanP 1973-1976. The principal objectives are (a) accelerating growth based on export-oriented industries, mainly by encouraging private initiative, reducing direct Government involve- ment in production and relaxing admiinistrative regulations; (b) easing the country's unemployment problem by creating new jobs primarily in the expanding industrial sector, but also by encouraging worker emigration, reducing popula- tion growth and improving education and training; and (c) maintaining internal antl external financial stability. The target rate of GDP growth is 7.1 percent9 providing for a 5.4 percent growth rate in per capita private consumption. Investment is projected to increase by 70 percent above Third Plan levels. National savings are to finance three-quarters of investment. Exports of goods and services are projected to growJ at 8,8 percent per year at constant prices and imports at 12.2 percent. An increase in net external capital flows of almost 100 percent over 1969-1972 average levels wvould be required, with external capital providing 23,5 percent of total investment; the debt service ratio would be hAeld to below 20 percent. The Plan targets may be conservative in terms of botlh growth and savings potential, and are affected significantly bv the imrpact of the changed petroleum and pnosphates situations on the Tunisian economy (paragraphs 7 and 8), 6. The annual growth rate of the gross domestic product over the decade 1961-1970 was 5 percent0 A remarkable upsurge has taken place since 1970, with GDP growing in real terms by 9 percent in 1971, and 18 percent in 1972, The improvement can be attributed in part to exogenous factors such as good weather, leading to record cereal crops and a three-fold increase in olive pro- duction, in part to important growth in several areas (tourism, petroleum and emigrant workers' remittances) which previous policies had fostered, and in part to the general reorientation in Government policy since 1969, generating renewed self-confidence and initiative in the private sector, By 1972, the in- vestment rate was 23.6 percent of GDP compared to 20,8 percent in 1970; domestic savings were 21,1 percent of GDP compared to 16.3 percent in 1970. Tunisia's dependence on external borrowing declined from 31.6 to 13.6 percent of invest- ment. The balance of paymeats has improved steadily since 1967, with the current account deficit dropping from about $114 million up to 1967 to $44 million in 1972. Tle traditional negative net foreign exchange reserve posi- tion was reversed in 1968, and at the end of 1973 net foreign assets amounted to $256 million, covering 5.5 months of commodity imports. 7. Following the very rapid expansion of the economy in 1972, the growth rate slowed last year to an estimated 2.8 percent. Agricultural output fell by 11,6 percent from the very hiigh 1972 level, increases in production of cereals and livestock offsetting only part of the expected drop in olive pro- duction. Growth may be about 9 percent in 1974. The Government is attempting to maintain its past success in controlling inflation, though there will be increased pressures arising from the Iidgher level of investment, the build-up of foreign exchange reserves and the increased cost of imports. In the medium term, and assuming no major recession in developed countries, Tunisia's gain fronm the rise in petroleum and phosphate prices should more than offset the effects of foreseeable adverse external developments on tourism earnings, workers' remittances and other exports. Export earnings from petroleum are  -3- now projected to increase fourfold from $98 million in 1973 to some $368 mil- lion in 1976, and phosphate prices have also risen sharply. As a result, small surpluses in tlle current account of the balance of payments, and a rapid build- up of reserves, may be expected over the next several years. A substantial reduction in the net rate of enigration, originally projected at 20,000 per year, could have serious repercussions on unemploynent and income, particularly in rural areas, unless energetic measures are taken to increase labor absorp- tion in other sectors. 8. The increased foreign exchange reserves and Government surplus ex- pected from higher export prices and consequent tax revenue do not call for a basic revision in development strategy but suggest that Tunisia could step up its efforts to achieve higher investment and growth rates and increased employment, and to depend less on emigration and foreign aid. The main con- straints are likely to be the speed at which policies and institutions respond to the challenge and projects are prepared and executed. The new orientation since 1969 and the improved economic situation provide the Government with an opportunity to step up efforts to achieve its declared social objectives, including greater impact on employment., 9. Tunisia has made some impressive social gains. By 1971, primary school enrollment had reached 73 percent and secondary enrollment 42 percent of the relevant age-groups. Public health services have been greatly expanded with many provided free, a family planning program introduced and social secur- ity services provided to an increasing proportion of the labor force. Public social expenditure, both current and capital, has increased at the rate of 9.3 percent per year and accounted for 14.5 percent of GDP in 1970. Nonethe- less, major social issues remain. Further progress is needed in land reform. Wide regional and income disparities are persistent and there has been a growing concentration of productive activities in urban areas. Job creation has not kept pace with the growth of the labor force, and in 1972 the unemploy- ment rate was estimated at 14 percent. 10. Agriculture, the dominant sector in the economy, provides nearly half of total employment, 30 percent of merchandise exports and 17 percent o.' GDP. Food processing industries account for another 5 percent of GDP and over a third of value added in manufacturing. Agricultural production jumped in 1971 and again in 1972, largely as a result of favorable weather, and the potential for further growtlh is clear. While large infrastructure invest- ments were made during the last decade, current policy emphasizes projects that make a rapid and direct contribution to production and recognizes var- ious constraints on agricultural development: absentee ownership and insecur- ity of tenure, inadequate access to agricultural credit, the need to devote more resources to extension services and agricultural education, and under- utilization of irrigation investments. D 40 million has been allocated to a rural development program to be executed by the provincial administrations. 11. During the 1960's manufacturing production in Tunisia increased by 7 percent annually. There was a remarkable 30 percent further increase in 1972 due in part to a record year for the olive oil processing industry.  - 4 - The early thrust of industrialization was supplied by large import substitu- tion projects in the state sector. These suffered, however, from the limited domestic market and shortages of experienced staff and management. Under the Fourth Plan, private manufacturing investment, particularly in textiles, fertilizers and metals transformation, is expected to average D 25 million per year between 1973 and 1976, compared with D 12 million in 1972, and to account for two-thirds of total investment in manufacturing. Foreign private investors have been offered incentives and are expected by Tunisia to contri- bute through finance, know-how and overseas marketing, to creating competitive industries producing a wide range of exports. Tunisia's preferential trade agreement with the EEC, currently being renegotiated, also gives it some advantages. Preinvestment work, and the preparation of programs for re- equipment and modernization in priority subsectors have been started. Tunisia aims to develop petroleum-based industries and production of phosphoric acid and other phosphate derivatives for export, while possibilities for metal manufacturing for export are being explored. The Plan further foresees the es- tablishment of a small-scale industry fund to encourage growth and decen- tralization of such industries. 12. Since the early 1960's Tunisia has received large amounts of ex- ternal capital. Official aid amounted to an average of US$19 per capita per annum, almost half from the United States, mostly in the form of program loans and PL 480 commodity aid. Other major lenders were France, the Federal Re- public of Germany, Italy, Kuwait and the Bank Group. Project loans, partic- ularly for public enterprises, accounted for 58 percent of total disbursements in 1969-1972. Most aid has been obtained on concessionary terms: from 1969- 1972, the average terms of borrowing from bilateral sources were 2.3 percent interest and 27 years to maturity, including 9 years of grace; from multi- lateral sources 5.4 percent interest and 28 years to maturity, including 6 years of grace. For private borrowing (about $40 million annually), average terms were 6.0 percent interest and 9 years to maturity. Direct foreign pri- vate investment in Tunisia has been limited. However, mainly as a result of increasing outlays on petroleum exploration and development, it has risen from an average of $19 million in the late 1960's to $40 million in 1972. 13. Tunisia's total public external debt was $1,108 million (of which $693 million were disbursed) at the end of 1972. Disbursed debt is estimated to have been $862 million at the end of 1973. The debt service in 1973 is estimated to have been 12.7 percent of exports of goods, non-factor services and workers' remittances. The ratio is expected to fall significantly by 1976, following recent petroleum and phosphate price increases. Government policy on future external borrowing in the light of its new balance of pay- nients position is still under review. Tunisia is capable of servicing substantial additional debt on harder terms than it has received in the past.  - 5 - PART II - BANK GROUP OPERATICNS IN TUNISIA 14. Starting in 1962, Tunisia has received a total of sixteen Bank loans and ten IDA credits amounting respectively to $166.6 million and $65.7 million, net of cancellations and refundings. A seventeenth loan, of $23 million, for a third water supply project, was approved by the Executive Directors on May 28, 1974. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of April 30, 1974, and notes on the execution of on- going projects. 15. While there have been problems in project execution, as in the rail- ways, agricultural credit and family planning projects, on the whole project implementation has been satisfactory. Important institutional improvements have been achieved. In both the transport and public utilities sectors, independent agencies have been created or strengthened. The main Tunisian development finance company, BDET, has been placed on a sound footing. 16. In accordance with Tunisian priorities, past Bank Group lending has emphasized support for long-term investments in infrastructure. Lending for transport, power and tourism infrastructure has accounted for 38 percent of Bank/IDA commitments in Tunisia. Lending for urban and social development, including water supply, education, family planning and the Tunis urban planning and public transport project, has accounted for a further 33 percent. Indus- trial and hotel financing through Banque de Developpement Economique de Tunisie (BDET, formerly Societe Nationale d'Investissement) comes third with 21 percent. Agriculture and fisheries have received 8 percent of total commitments. 17. Future lending is expected to support the further reorieniation of the Government's economic policies towards rapid growth in a more open, ex- port-oriented economy, measures to create employment and to achieve a more equitable income distribution, and institutional change and reform. The proposed lending program will emphasize agriculture, including rural develop- m2nt, industry -- especially small-scale industry - and urban and social development. The most important impact is hoped for in agriculture, requir- ing substantial inputs of manpower and technical assistance to support the creation of new institutions which can reach the rural poor. Over the next several years, it is expected that a number of projects will be presented which address the problems of land reform, organization for agricultural and rural development, and integration of agricultural with other aspects of rural development in such areas as the Medjerda and Nebhana Valleys, Sedjenane and Central Tunisia. Lending to medium-size industrial companies through the development finance company, BDET, will continue, but at a declining rate as BDET diversifies its sources of funds. It will be supplemented by direct industrial lending first for a project in phosphate mining and, later, in other priority subsectors, now being studied with Bank technical assistance, in which Tunisia has a comparative advantage and a potential for promoting small-scale industries. Social development, particularly employment-oriented training, will be furthered by the present project, as well as by a first operation in the sewerage sector involving important organizational changes, while a third education project will also be presented. Present Bank Group commitments for tourism are substantial, but no further direct lending for tourism is presently anticipated by the Bank.  - 6 - 18. The Bank Group accounted for almost 20 percent of disbursements of official aid between 1969 and 1972 and is expected to maintain its share, with that of the US declining and that of other, particularly Arab, sources of funds rising. The Bank Group's shares in total debt outstanding at the end of 1972 and in debt service during 1972 were 18 percent and 7 percent respectively. Over the rest of the decade, the Bank Group's share in total external debt is not expected to vary much; its share in debt service will probably rise to approach the share of debt outstanding. 19. IFC has invested in a fertilizer plant, in BDET, in COFITOUR (a company to promote and invest in, tourism projects) and in RYM (a large hotel development). It has also made a small equity investment in the promotional company "Sousse Nord", which is to prepare plans for an integrated tourism resort development in the Sousse area, one of those in which tourism infra- structure is being financed jointly by the Bank, IDA and Kreditanstalt fur Wiederaufbau (KfW). On May 7, 1974 IFC's Board of Executive Directors approved an equity investment of $621,000 in Industries Chimiques du Fluor, which will produce aluminum fluoride from local fluorspar for export. IFC's net commitments in Tunisia total $14.0 million with the incluision of this investment. PART III - TOURISM AND TOURISM TRAINING IN TUNISIA 20. Centrally situated between the Eastern and Western basins of the Mediterranean, Tunisia is the nearest point on the African continent to the hub of the European tourist market in the London-Frankfurt-Paris triangle. The country's 1,050 kilometers of coastline hare some of the finest beaches of the Mediterranean with a pleasant climate prevailing for tne greater part of the year. 21. The development of tourism in Tunisia is relatively recent. However, between 1961 and 1972, tourist arrivals increased at an annual rate of 30 percent, rising from 46,000 to 780,000 - a performance unmatched by any other Mediterranean country. Although continuous throughout that period, the growth of foreign tourism slowed down in 1969 and 1970 as a result of a combination of factors including political uncertainty, floods and a few cases of cholera. The average growth rate of arrivals for these two years was only 11.5 percent. The growth trend regained impetus in 1971 and 1972 however, when foreign-visitor arrivals rose at an annual rate of 37 percent. The principal tourist-generating market for Tunisia is Western Europe, which, in 1972, accounted for 83 percent of total foreign arrivals; Germany, France and the U.K. are the three major suppliers within this market. According to provisional data, decreases of 7% in arr4vals and of 11% in visitor bednights were registered in 1973, largely as a result of new cases of cholera and ill-timed price increases. 22. The tourism sector has contributed significantly to Tunisia's econ- omy. Between 1961 and 1972, gross foreign exchange receipts from tourism climbed from US$3 million to an estimated US$143 million. From 1965 through 1973, tourism was the single most important source of foreign exchange earnings  - 7 - for Tunisia. Average gross foreign exchange earnings per visitor rose from S133 in 1969 to over $200 in 1973. In 1973 total direct employment in tourism was about 19,500 (some 2 percent of total full--time employment); 17,000 of these persons were employed in hotels and the remainder in travel agencies and transportation. Indirect employment related to the tourist industry accounted for an estimated additional 19,000 jobs. 23. Tunisia's accommodation capacity has exceeded targets set by suc- cessive national development plans, expanding at an annual rate of 25 percent between 1961 and 1972. At the end of 1973 the total capacity was about 56,000 beds. Since 1965 the capacity created, almost entirely (90 percent) through private investments, has been in the main composed of hotels along the coast. Supplementary accommodations (rooms in private homes, private residences, camping sites, etc.), which make up a substantial share of other Mediterranean countries' supply, are generally lacking in Tunisia. The increase in average size of hotels from 56 beds in 1961 to 213 beds in 1973 has brought economies of scale. Medium-class hotels now represent 65 percent of the accommodation capacity, compared to 10 percent for first-class hotels. 24. The Government has actively encouraged and guided tourism development. The governmental organization responsible for tourism is an autonomous body, the "Office National du Tourisme et du Thermalisme," or ONTT, under the supervi- sion of the Ministry of the National Economy. ONTT is carrying out a major tourism infrastructure program with Bank Group and KfW support. Through generous fiscal incentives, the Government is promoting tourist hotel invest- ments. In cooperation with the Bank, ONTT is presently undertaking a study assessing the tourism investment incentive scheme and possibilities for re- structuring it. The infrastructure financed by the Bank Group and KfW falls within six priority development zones; these zones contain about 65 percent of the country's hotel accommodation capacity and receive more than 80 percent of foreign visitors. According to official estimates, 68 percent of hotel beds opened in 1973 and to be opened in 1974 will be in the six priority zones, as will 78 percent of future hotel projects. 25. Spurred by the 1972 tourism boom, the Tunisian authorities have advanced to 1976 the 1,300,000 foreign-visitor arrivals target set earlier for 1980. According to these revised projections, foreign-visitor arrivals as well as hotel bednights should increase at an annual rate of about 14 percent. The target of the Fourth Plan (1973-1976) is 84,000 beds by 1976, an annual increase of 8,500 beds. The occupancy rate of tourist accommodation was 32 percent in 1969, rose to 41 percent in 1972 and, on the basis of pro- visional data, appears to have fallen to 31 percent in 1973; although somewhat low, even the 1973 figure can be considered within the normal range for coun- tries dependent on seasonal tourism. 26. The adverse developments in 1973 mentioned above, and the effects of the energy crisis on Tunisian tourism may call for some revision of tar- gets set for the next two years, but are unlikely to affect the long-term trends,which justify the hotel training project. The effects of the energy  crisis are difficult to assess, but a leveling off of tourism demand, partic- ularly from Europe, could reasonably be expected in 1974 and 1975. by 1976 there would probably be a return to increased growth in line with long-term trends, but the decrease in demand might lead to a lower rate of occupancy of hotels in 1974 and 1975 and conceivably to a short-term reduction in hotel investments. Because of Tunisia's comparatively short distance from Europe, the country is likely to be at an advantage compared to competitor countries further away. 27. Tourism training in Tunisia is the responsibility of two agencies: The Office des Travailleurs Tunisiens a l'Etranger, de ltEmploi et de la Formation Professionnelle (OTTEEFP) and ONTT. OTTEEFP is in charge of the hotel apprenticeship program, as a part of the national apprenticeship pro- gram; potential apprentices enter the OTTEEFP program after primary school or up to two years of secondary school. ONTT is responsible for vocational training for middle and upper level hotel staff. Candidates for middle- level positions enter ONTT's hotel schools with from one to six years of secondary education, depending on the course te be followed. Middle manage- ment (e.g. personnel managers) and senior supervisory (e.g. maitre d'hotel) staff are trained at ONTT's Institut Superieur de Tourisme et d'Hotellerie; a baccalaureate or training abroad is normally required for admission to the Institut, which is soon to move from Monastir to modern facilities at Sidi Dhrif in the Tunis area. The combined output of ONTT and OTTEEFP programs was 720 in 1972, as against the annual requirement of the hotel industry for 2,500 trained staff. 28. Aside from the quantitative problems, both OTTEEFP and ONTT programs have a number of qualicative weaknesses: training facilities are inadequate and often located in unsuitable premises; curricula are inconsistent, and qualified, experienced teachers too few; diplomas granted have no legal re- cognition, which creates dissatisfaction among graduates and complicates the hiring process for hotel operators. Unless hotel training programs are sub- stantially improved and expanded, hotel service will decline and Tunisia's competitive position may be undermined. The shortage of trained middle level staff is expected to rise from 7,740 in 1973 to 12,050 at the end of thte Fourth Plan in 197;6. PART IV - TiE PROJECT iiis torv 29, During the appraisal of the Tourisii Infrastructure Project (Loan 856-TUN and Credit 329-TUN) in 1971, the Bank and the Tunisian authorities agreed that one of the major constraints to development of tourism in Tunisia was the shortage of trained hotel staff. Accordingly, funds were included in the Tourism Infrastructure Project to finance a study of ways to expand and rationalize the country's tourism training system. In 1973, the Tunisian Government engaged ILO to prepare the study. The study was completed in November 1973 and formed the basis for the appraisal, in January 1974, of the  -9- proposed Bank loan. Negotiations were held in Washington in May, 1974. The Republic of Tunisia and ONTT were represented by Mr. Sadok Bouraoui, Director- General of ONTT. The Project 30. A report entitled "Appraisal of a Hotel Training Project - Tunisia" (No. 41la-TUN, dated May 23, 1974) is being distributed separately to the Executive Directors. A loan and project summary is attached as Annex III. 31. The proposed project is designed to help meet manpower requirements in the hotel industry, to improve present approaches to hotel training by standardizing and upgrading methodology and curricula in all hotel schools, and to reduce, by over 50 percent, the cost of training of a qualified hotel worker by decreasing the training period from two years to one year or less. The project would include: (a) the construction of three hotel training centers each comprising a hotel school, a 100 bed practice hotel (3-star category), student dormitories, and staff housing for senior faculty; and (b) about 12.5 man-years of technical assistance for curriculum development and implementation and for teacher training. 32. At full development, project facilities would annually train about 1,000 persons for middle level positions in the hotel industry. In 1979, this would cover about 32 percent of middle level manpower requirements; an additional 42 percent would be met by other ONTT facilities. The expansion of the hotel training system should not aim at meeting 100 percent of projec- ted manpower requirements. A margin of flexibility is necessary to reduce the risk of underutilization of facilities and to permit the smooth develop- ment of the training system as teaching methods and courses evolve. 33. Each hotel school would include general purpose classrooms as well as facilities required for training in languages and hotel services. Train- ing programs would be offered at each center for about 325 students, in ac- counting and control, reception and front office work, restaurant and bar employment, kitchen work, and storekeeping. The practice hotels, specially designed for training purposes, would be open to the public and would func- tion commercially, with all the departments and services found in other Tunisian hotels. Construction of one of the practice hotels may involve renovation and conversion of an old palace in the Tunis Medina, and thus contribute to the preservation of the capital's rich architectural heritage. The practice hotel staff would be students in the hotel schools receiving mandatory practical training as part of their education, and (except for a few key permanent employees) the management would be their teachers. 34. The technical assistance program would include two components. The first would provide for assistance in the detailed planning of new courses and their introduction into existing and new schools. A chief of program planning, supported by two additional experts in training of hotel staff, would advise on curriculum development and implementation. The second, or teacher-training component of the program, would be executed by five expa- triate technical experts, each appointed for a period of 18 months. Tunisian counterpart staff would be assigned to both sections of the technical assist- ance program.  - 10 - 35. One important aspect of hotel training, the training of hotel main- tenance personnel, has not been included in the project; it can be given more properly in industrial vocational schools where demonstration and practice equipment is available. OTTEEFP, which already administers the hotel appren- ticeship scheme, is willing and able to expand its training of maintenance personnel. Under Section 2.11 of the Project Agreement, ONTT would enter into arrangements with OTTEEFP satisfactory to the Bank for the training of hotel maintenance personnel by OTTEEFP within one year of the signing of the loan. Project Execution 36. The project would be carried out by ONTT. ONTT is a well run, efficient agency, fully capable of carrying out the project with the support contemplated under the loan. ONTT's performance in executing the $55 mil- lion Tourism Infrastructure Project suggests that it would have no difficulty in carrying out the proposed project. 37. Under Section 3.01 (b) of the Project Agreement, ONTT would entrust the Project Unit, set up under the Tourism Infrastructure Project, with the following additional responsibilities for the execution of the works components of the project: coordination of architectural services; review of designs for project works and preparation of master lists and specifications of furniture and equipment; preparation of bidding and contract documents and subsequent evaluation of bids; supervision of construction; coordination of the work of various government ministries and other agencies concerned with the physical execution of the project; and preparation and submission of quarterly reports to the Bank. An additional architect or engineer, and appropriate supporting staff, would be assigned to the Project Unit for the hotel training project. Separate accounts would be maintained for the two projects. ONTT would retain consulting architects acceptable to the Bank for the design of the project training centers (Section 2.02 of the Project Agreement). 33. IW'hile the Director of the Project Unit would continue to report directly to the Director-General of ONTT, the technical assistance program would be supervised by ONTT's Department of Tourism Training. During appraisal and negotiations possibilities for arranging grant financing of the technical assistance program, by UNDP or bilateral sources, were explored. The UNDP Indicative Planning Figure for Tunisia of $15 million for 1972-1976 has already been over-programmed, and no other suitable source of finding has been found. Therefore, Bank financing of the technical assistance components of the proj- ect is recommended. The Tunisian authorities may contract with ILO for exec- ution of the teclnical assistance program. 39. It was agreed that ONTT would take all steps necessary to establish a teacher training section at the Institut Superieur de Tourisme et d'Hotellerie whien it moves to its new location at: Sidi Dhrif in October, 1975 (Project Agree- ment, Section 2.09). Measures would be taken to make teaching at ONTT's hotel training schools attractive both in status and salary, in order to recruit a competent and stable teaching staff. ONTT has agreed, within one year of the signing of the loan to take the action necessary to establish the rights, ob- ligations, salary and status of teachers in its hotel training schools (Project  - 11 - Agreement, Section 2.11). Wlithin the same period, the Covermnent would take all action necessary to grant legal recognition to diplomas and certificates issued by ONTT's hotel training schools (Loan Agreement, Section 3.03). 40. ONTT's Department of Tourismi Trainiing would continiue to be responsible for administration of the tourism training svstenm, including the three training centers. Within a year of thie signature of the Loan Agreement, a iNational Council for Tourism Training, consisting of representatives of interested public and private agencies, would be created to advise ONTT on all policy matters related to the training of tourism staff (Section 3.03 of the Loan Agreement). Simnilar functions would be carriecl out for the project training centers by advisory boards to be created for each center (Project Agreement, Section 2.10). To strengthien the presently inadequate staff of ONTT's Depart- ment of Tourism Training, a Deputy Director would be recruited, in consulta- tion with the Bank (Section 3.01 (b) (iii) of the Project Agreement). lie would supervise the work of a planning unit in charge of determining the number of teachers and pupils to be trained. The directors of the project training centers, the existing hotel schools and the Sidi Dlirif Institute, would report directly to the Deputy Director. Cost hstimates and Financing Plan 41. The total cost of the project is estimated at US$12.3 million equiv- alent, including allowances for physical and price contingencies, but excluding, the cost of land, which would be provided by the Tunisian Government. The cost estirnntes include the impact of recent developments in energy prices. Contin- gency allowances include: (a) price increases estimated at 10 percent per annum; and (b) physical contingencies amounting to 10 percent of the estimated cost of site development, construction, furniture and equipment. The foreign cost component is estimated at US$5.6 million, net of interest and other charges during construction. It represents 46 percent of total cost. The costs of operation of the project hotel schiools would be covered by the Gov- ernment under the ONTT budget. In 1933, the total net operating costs of the project centers are expected to be about $1.3 million (1974 prices). 42. The Bank loan of $5.6 rmillion would cover the total foreign exchange cost of the project. Since the objective of the project is educational rathcr than commercial, the proceeds of the Bank loan would be granited to ONTT rather than on-lent. The funds required to finance the local cost component (US$6.7 million equivalent) would also be provided bv the Government as a grant to ONTT. Thie practice hotels would generate income but would only be able to cover operating costs. Procurement 43. The agreed procurement arrangements are set out in Schedule 1 of the Project Agreement. For construction works, contracts would be awarded on tihe basis of international competitive bidding to pre-qualified contractors in accordance with Bank Guidelines. It is expected, however, that thile con- tracts would be won by Tunisian firms as the country has a competitive con- struction industry capable of carrying out the proposed project. Subject to  - 1t2 - case-bv-case approval bv tile liank, OUTT would he pernitted to follow its local procurement procedures for snall construction contracts estimated not to ex- ceed j100,000. Contracts for tiie suDplv of furniture and equipment would be awarded oni tile basis of international competitive bidding in accordance with Bian;k Guidelines. In the evaluation of hids, domestic -manufacturers would be accorded a preferential margin of 15 percent of thie C.I.F. price of competing imiports or thie rate of customs duty applicable, whichever is the lower. Fur- niture contracts would probablv be won by local manufacturers and most equip- ment contracts bv foreign manufacturers. Disbursement 44. The proposei loan of US$5.6 iililion would be disbursed to meet: 100 percent of foreign expencditures or 35 percent of the ex-factorv cost of locally manufactured furniture and eqlulipment; 39 percent of total expenditures for civil works anid associated services; 37 percent of tihe cost of project admin- istration representinc the estimated foreign exchange cost; aiid 100 percent of tlie foreil,n exchange cost of the technical assistance experts. 'r2J-ect Justification 45. The proposed ]loan would assist 1Tunisia to expand and substantially im,1prove its hiotel training system. Thie plivsical comiponent of the project wouild ;rovide three inodern, efficient facilities whose graduates, trained in a suitable educational environment, would Fleet 27 percent of the country's estimated total requirements for middle level liotel personnel in 1983. In tihat vear net operating cost of project facilities per trained studlent is ex- pected to be about US$914 (1974 prices), comipared to abotut IU,S$1 ,900 in 1974. Tile extension of carefullv conceived curricula and teaching method2s to both existing andl proposed schools under tile technical assistance program would rationailize the country's hotel training svstemii. The introduction of thle proposed legislation regulating the position of teachers, studlents and hotel employees waould give a new status to the hotel profession. 'lhe proposed in- stitutional arrangements, particularvly tile creacion of the National Council roi TouJrism 'training, wouldl improve cooperation between the Government and the private sector and would enable tite training svstem to respond more cui cklv to the needs of tlhe industrv. Thie project woul(d thius provide a rnodel for practical, eiiployment-oriented vocational training. 4 b. The impact of the project on thie hiotel induistrv would be felt througli hillier standards of service and increased labor productivitv, leadingt to sav- ingws in maintenance and operating costs. Impr-oved hotel service wotuld also result in greater guest comfort and satisfaction andi twould have favorable repercussions on repeat visitor traffic and1 possib)ly on occupancy levels; it would ultilimatelv be instrumental in enhancinfg the reputation of tile country as a tourist destination.  - 13 - PART V - LEGAL INSTRUMENTS 47. The draft Loan Agreement between the Republic of Tunisia and the Bank, the draft Project Agreement between the Bank and ONTT, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 48. Additional conditions of effectiveness (Section 6.01 of the Loan Agreement) include the appointment of the Deputy Director (referred to in Paragraph 40 of this report); the entrusting, to the Project Unit established under the Tourism Infrastructure Project, of additional responsibilities, for project execution (referred to in Paragraph 37); the appointment of the con- sulting architects (Paragraph 37); and the acquisition of the right of per- manent occupation and use of the land required for the construction of the facilities of all three hotel training centers to be built under the project. 49. I am satisfied that the proposed loan will comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 50. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 30, 1974   ANNEX I ODUNThT WAA- TUIbhLA AREA POPULATION DENSITY 96 l.Per Isniof arahie land SOCIAL INDICATDRS eferemncCuntries,., 71941515 Ftance 0Ago 'iOf __9_ 1590 YU 1970( 1990 ON? PER CAPIA 3$(TLS ASS /I 220 /.a. 280 Id 3,110 590 230 Crude 'o1tri rate (per thousand) 60 38 16L 53 Crude death rats (per thonsand) 19 14 11.9 13 1? Infant sortality rate (per thoucand lin birthe) *..1.11. 150, Life eapecteocy at birth (years) . 52 /n 71.5 58 5C Gomen reproduction rae