Tunisia - Sixth Societe Nationale d'Investissement Project

Report No. 962-TUN Appraisal of Banque De Developpement Economique De Tunisie Tunisia December 19, 1975 Industrial Credit and Development Finance Companies Division FILE COPY Projects Department Europe, Middle East and North Africa Region Not for Public Use Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALETTS (as of September 30, 1975) Currency = Dinar -- 1,OO0 millimes D 1= US$ 2.34 D 1,000 - US$ 2,335.90 D 1,000,000 = US$ 2,335,900.00 GLOSSARY OF ABBREVIATIONS API - Agence de Promotion des Investissements BDET - Banque de Developpement Economique de Tunisie CCCE - Caisse Centrale de Cooperation Econom_que COFITOUR - Compagnie Financiere et Touristique DFC - Development Finance Company ERR - Economic Rate of Return KfW - Kreditanstalt fur Wiederaufbau ONIT - Office National du Tourisme SIDA - Swedish Internabional Development Authority BANQUE DE DEVELOPPEMENT ECONONIQUE FISCAL YEAR: January 1 - December 31  APPRAISAL OF BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE TUNISIA Table of Contents Page No. SUIMARY ....o................................. i-ii I. INTRODUCTION ....................................... 1 II. THE ENVIRONMENT .................................... 1 Industry ........................................... 2 Tourism ............................................ 4 Financial Environment and BDET ..................... 6 III. BDET'S INSTITUTIONAL DEVELOPMENT ..... .............. 8 Statutes and Policy ................................ 8 Ownership and Control .............................. 8 Board and Committees ............................... 9 Management, Staff and Organization .... ............. 9 Interest Rates and Foreign Exchange Risk .... ....... 10 Procedures ......................................... 11 IV. BDET'S OPERATIONS .................................. 13 Characteristics .................................... 13 Economic Impact .................................... 14 Evaluation of Performance: A Summary .... .......... 15 V. BDET's FINANCIAL SITUATION ......................... 16 Resource Position .................................. 16 Auditors' Reports on BDET .......................... 16 Quality of Portfolio ............................... 18 Financial Performance and Position .... ............. 21 VI. PROSPECTS .......................................... 22 Economic Environment ............................... 22 Projected Operations and Resources .... ............. 23 Financial Projections .............................. 23 VII. THE LOAN--ITS OBJECTIVES AND PRINCIPAL FEATIJRES .... 25 VIII. AGREEMENTS REACHED AND RECOMMENDATION .... .......... 26 This report was prepared by Messrs. R. Storch and F. Batzella on the basis of their two-week mission in November, 1973 and on the basis of a number of subsequent visits of varying duration by Bank staff through September, 1975.  TABLE OF CONTENTS (Cont'd) BASIC DATA ANNEXES 1. Development of the Tunisian Tourism Industry, 1968-75 2. Selected Interest Rates in Financial Community (%) 3. Ownership Structure 4. Board of Directors and Executive Committee 5. Organization Chart 6. Characteristics of Operations and Economic Impact 7. Outstanding Loans and Equity Investments, December 31, 1974 8. Long-Term Resources as of December 31, 1974 9. Audited Income Statements, 1970-1974 10. Audited Balance Sheets, 1970-1974 11. Performance Indicators, 1971-1974 12. Assumptions Underlying Projected Operations, 1975-1979 13. Projected Operations, 1975-1979 14. Projected Resource Needs, 1975-77 15. Projected Income Statements, 1975-1979 16. Projected Cash Flow, 1975-1979 17. Projected Balance Sheets, 1975-1979 18. Estimated Schedule of Disbursements  TUNISIA APPRAISAL OF THE BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE Summary i. The Societe Nationale d'Investissement was formed in 1959 and re- organized with the help of the Bank Group. Its name was changed in 1973 to Banque de Developpement Economique de Tunisie (BDET). The purpose of BDET is to provide term financing for industry and tourism in Tunisia. BDET has so far received five Bank loans totalling $49 million, the last of which amounted to $14 million and was signed in February 1973. IFC holds 10% of the company's shares. All of the Bank loans have been fully committed, and BDET has re- quested a sixth loan. ii. Tunisia's GDP grew at an average annual rate of 9.7% in real tems during the 1971-74 period. The economic boom was the result of several major factors: changes in Government policies, high agricultural productivity, and increased prices for major exports (hydrocarbons, phosphates and oliver oil). The annual growth of manufacturing industry averaged 17% in real terms from 1971 through 1974; performance of the private manufacturing sector and the attraction of new investment to it was particularly noteworthy, due in part to Government incentives. Tourism, which provides 15-23% of foreign exchange receipts, had record years in 1971 and 1972 followed by declines in both 1973 and 1974. For 1975 the projected growth rate of the economy is 9.5%, in line with the 1971-74 average, and this rate of growth is expected to continue through 1976. iii. BDET's relative share in term lending by Tunisia's financial sector has almost doubled over a three year period. As of end 1974 BDET held approugi mately 40% of the outstanding term loans to manufacturing, 35% of term loans to tourism, and 11% of term loans to the construction industry. Quantitative performance has measured up to Government objectives and far surpassed BDET's own previous forecasts and the Bank's expectations. BDET's project financing has shown a healthy diversity in its characteristics, and the economic impact has been demonstrable. Although the quality of projects financed by BDET in the manufacturing sector has generally been good, this has sometimes not been the case in tourism where sectoral problems have hampered operations. BDET has played a significant role in the capital market through a variety of activities0 iv. Since the previous loan appraisal, in 1972, BDET's institutional and financial performance has been mixed. Good progress has been made in business promotion, appraisal work, and recruitment of qualified staff. However, super- vision of borrowers and efforts to validate mortgage security on loans have so far not been adequate. There has also been a tendency on occasion to assume greater financial exposure to single borrowers than BDET's own policy permits. Significant success has been achieved in mobilizing new resources, so essential in view of the increase in approvals of 63% in 1973 and 103% in 1974. Never- theless, BDET acquired more business than it could service with available funds, so commitments tc disburse could not always be met. This great increase in  business happened to occur at a time when problems in BDET's portfolio of hotel loans worsened. If BDET had made larger provisions against probable portfolio losses, as auditors and the Bank recommended, it would not have shown profits in 1973 and 1974; it woul'd also have had to cut back the rate of growth in"ffew business in order to keep within the debt/equity limit as defined by the Bank. v. During the lengthy negotiations for the proposed loan, agreements were reached o0l a broad spectrum of measures. Progress has been made to strengthen BDET's management. Operational strategy will now emphasize the consolidation of business, and approvals will therefore be kept at a constant level over the 1975-77 period. Priority will be given to collecting loan arrears, validating mortgages, reducing tourism exposure, making adequate provisions, writing off losses as necessary, and increasing profitability. Given the large volume of commitments built up and the maintenance of business at the new high level, BDET has to mobilize a large amount of resources. Pro- cedures applying to the next capital increase have been agreed upon, and some of the funds have already been mobilizedo BDET's recent success in raising funds domestically and from foreign aid agencies is expected to continue, and on a larger scale. In view of BDET's strategy of consolidation, it is credit- worthy for a sixth Bank loan. The proposed loan of $20 million would amount to about 10% of resources to be raised over the 1975-77 period. Principal justi- fication for the loan is that it will enable the Bank to continue exerting appropriate influence on BDET's performance and helping improve operational standards. vi. Proceeds of the Bank loan will be utilized to meet the foreign exchange costs of imported goods and services. The loan cannot be used for financing tourism sub-projects. The foreign exchange risk on BDET's sub-loans will continue to be borne by the Central Bank, in accordance with current practices in Tunisia. BDET will re-lend the proceeds of the loan at the rate of 9% and for a period no longer than fifteen years. The Bank has agreed to an increase in BDET's debt/equity ratio from 4:1 to 5:1. BDET's total exposure to any sub-project will not exceed 20% of BDET's equity, unless the Bank agrees to exceptions. The free limit will be increased from $400,000 to D 200,000 (equivalent to $467,000) in order to be in harmony with the limit of BDET's Executive Comm:Lttee. The aggregate free limit will be $5 million. The pro- posed loan will have a flexible amortization schedule, to conform substantially to the aggregate of sub-loan repayments to BDET. Other terms of the loan are those normally applied to DFC borrowers, including the standard commitment charge. vii. Agreement having been reached on the principal issues, subject to the condition of effectiveness, the project is suitable for a Bank loan of $20 million to Banque de Developpement Economique de Tunisie, to be re-lent to qualified sub-borrowers. In view of lending practices in Tunisia, an appro- priate term for the loan is 15 years including two years of grace.  I. INTRODUCTION 1.01 The Societe Nationale d'Investissement was formed in 1959 and reorganized in 1965 with the help of the Bank Group. Its name was changed in 1973 to Banque de Developpement Economique de Tunisie (BDET). The purpose of BDET is to provide term financing for industry and tourism in Tunisia. BDET has so far received five Bank loans totalling $49 million, the last of which amounted to $14 million and was signed in February, 1973. IFC's holdings in BDET are declining from 20% to 10% of capital by end 1975. A report ("Operations Evaluations Report: Development Finance Companies" - 774-529) was distributed to the Board on July 26, 1974 and contains, in part, an evaluation of BDET's role and operations up to 1971. 1.02 BDET requested a sixth Bank loan in the autumn of 1973. A Bank supervision/appraisal mission at the time considered that the need for another loan following so quickly after the fifth loan was not fully justified and that BDET had possibilities for raising funds from other sources which would help meet requirements during 1974. BDET succeeded in mobilizing new re- sources to carry out the unexpected surge in business which attended the boom in Tunisia's industrial sector. Several missions were undertaken in 1974 and the first six months of 1975 to continue the appraisal process and monitor BDET's progress. Negotiations started in January, 1975 and were concluded in September. The primary reasons for the protracted preparation of the sixth loan were the various problems which emerged during the appraisal/negotiation process and the difficulties in reaching agreement on remedies. The proposed loan of $20 million should meet about 10% of BDET's resource requirements over the 1975-77 period and constitutes a relative decrease in Bank assistance, as is appropriate for a maturing development finance company (DFC) which is now raising funds from other foreign sources on favorable terms. BDET plays a key role in providing term financing to industry and tourism in Tunisia, and its developmental objectives are appropriate. II. THE ENVIRONMENT 2.01 The most recent report on the economy of Tunisia, "Memorandum on the Economic Position of Tunisia" (May 23, 1975) was distributed to the Board under cover of Sec M 75-428 of June 4, 1975. The economic performance of Tunisia since BDET was last appraised has been characterized by a relatively fast growth of both production and investment through 1974 despite a slow- down of economic activities in the course of 1973. After having grown at an average annual rate of 4.5% during the 1960's, Tunisia's GDP grew in real terms by 9% in 1971, 18% in 1972, 2% in 1973, and almost 11% in 1974. 2.02 The Tunisian economic boom in the past few years was caused by sev- eral factors. The shift in 1970 in the Government's economic policies from central planning to more liberal economic policies greatly encouraged the private sector's initiative. The good crops harvested in 1971, 1972 and 1974, together with the increase in production and prices of the country's main  - 2 - export commodities (hydrocarbons, phosphates, and olive oil) greatly In- creased the momentum of economic expansion in those years. Good results in agriculture and in commodity exports, together with increased inflow of for- eign exchange from tourism and workers' remittances, boosted domestic income and consumption as well as investment demand. Conversely, the return of agricultural production to a normal level in 1973 (down 12% from the record harvest of 1972), together with the disappointing results ef 1973's tourism season, were the principal causes of the temporary slowdown of Tunisia's economic growth that year. 2.03 Tunisia's rate of inflation has traditionally been kept under control through the application of strict price controls and Government subsidies on basic commodities. The cost of living index from 1971 to 1974 shows an average increase of only 3.4% per annum. Through 1973 the general wholesale price index showed the same modest annual rate of increase, but in 1974 it jumped suddenly by about 20%, largely as a result of higher prices for imported raw materials and industrial products. The increase in the aver- age cost of construction from May, 1974 to May, 1975 is estimated at about 45-48%. Overall investment costs increased nearly 30% from 1972 to 1974, but this did not deter investments which rose 13% p.a. in real terms over the same period and amounted to 23% of GDP in 1974 at current prices, comparod with 21% on average in the previous three years. 2.04 Tunisia's terms of trade have substantially improved since 1971