Tunisia - Rural Roads Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2303-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR A RURAL ROADS PROJECT June 2, 1978 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 authoriation. I  CURRENCY UNIT - Tunisia Dinar (D) The exchange rate of the Tunisian Dinar is floating. The rate used in the appraisal report, which approximates the current rate, is: D 1 - US$ 2,3 D 1,000 - US$ 2,300 D 1,000,000 - US$ 2,300,000 US$ 1 - D 0.435 Fiscal year January 1 to December 31 Abbreviations BNT - Banque Nationale de Tunisie (Tunisian National Bank) CRDA - Commissariat,Regional de Developpement Agricole (Regional Field Division) of MA DPA - Direction de la Production Agricole (Agricultural Production Department) of MA DPAEP - Direction du Plan, de l'Analyse Economique et des Projects (Planning Department) of MA DPC - Direction des Ponts et Chaussees (Highway Department) of MPW MA - Ministry of Agriculture MPW - Ministry of Public Works MTC - Ministry of Transport and Communications  FOR OFFICIAL USE ONLY TUNISIA RURAL ROADS PROJECT Loan and Project Summary Borrower: Republic of Tunisia Beneficiaries: Ministry of Public Works (MPW) Ministry of Agriculture (MA) Banque Nationale de Tunisie (BNT) Amount: US$32 million in various currencies. Terms: The loan would be repayable in 17 years, including a 4-year grace period, on a level principal payment basis; interest at 7.5 percent per year; commitment charge of 3/4 of one percent on the principal amount of the loan not withdrawn. Project Description: The project would establish a pilot scheme for raising tie agricultural production and standard of living in rural areas by improving about 1,000 km of rural roads togetlher with complementary agricultural investments. It would provide credit to farmers, improvements to extension servilces, purchases of rural road maintenance equipment, and technical assistance to the Ministries of Public Works and Agriculture. Main benefits from the project would be in the form of assured and less expensive transport of essential agricultural inputs and crops, and increases of farm income and employment. Realization of the expected benefits will depend heavily on the timely implementation of a variety of investments and activities by a number of agencies, on the pace of farmer acceptance of proposed improvements and innovations, and on access to credit by low income farmers. Estimated Cost: US$ Millions Foreign Local Total Rural roads improvements 20.2 30.3 50.5 Road maintenance equipment 4.4 1.0 5.4 Agricultural facilities and equipment 4.8 4.3 9.1 Investment credit 6.9 10.3 17.2 Short-term credit 2.0 5.2 7.2 Extension services 1.6 1.2 2.8 Technical assistance 1.0 0.4 1.4 40.9 52.7 93.6 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.  Financing Plan: US$ Millions Foreign Local Total Bank 35.3 /1 - 35.3 /1 Government - 36.4 36.4 BNT 5.6 8.5 14.1 Sub-borrowers - 7.8 7.8 40.9 52.7 93.6 /1 Including $3.3 m. to be financed under Second Agri- cultural Credit. (Loan No. 1340-TUN.) Estimated Disbursements: US$ Millions Bank FY 1979 1980 1981 1982 1983 1984 Annual 0.4 3.4 10.9 5.3 5.9 6.1 Cumulative 0.4 3.8 14.7 20.0 25.9 32.0 Rate of Return: Between 11 percent and 27 percent (for 18 road sections so far appraised). Staff Appraisal Report: Report No. 1990a-TUN dated June 2, 1978 EMENA CPIIB June 2, 1978  INTERNATIONAL ]BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EX]ECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR A RURAL ROADS PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Tunisia for the equivalent of US$32 million to help finance a rural road project. The loan would have a term of 17 years, includ- ing 4 years of grace, with interest at 7.5 percent per annum. PART I - THE ECONOMY 2. A special economic mission visited Tunisia in December 1976 to review the draft Tunisian Fifth Plan, 1977-1981. A special economic report entitled "Economic Position and Prospects of Tunisia, Review of the Fifth Development Plan, 1977-81" (No. 1539-TUN) was issued on May 2, 1977. Country data sheets are attached in Annex 1. 3. Tunisia is rather poorly endowed with natural resources, but it is close to European markets and has large untapped labor reserves and tourism potential. Much of the country is arid or semi-arid and there is an acute shortage of surface water. Most of the agricultural activity is concentrated along the coast, in Northern Tunisia and in a few oases. The main crop is wheat, which is subject to sharp year-to-year fluctuations because of irregular rainfall. The main export crop is olives, but good olive harvests are also subject to a natural output cycle. Tunisia's most important raw materials are phosphates, petroleum and natural gas. However, except for phosphates, proven deposits are relatively small. Tunisian phosphate rock is of low quality and exploitation costs are comparatively high. The production and export of petroleum have become increasingly important. Recently, deposits of natural gas were discovered off-shore in the Gulf of Gabes, which might become important for the future development of the country. Industrial development, albeit quite impressive, haLs been hampered by a shortage of industrial entre- preneurs and skilled labor. The service sector, a quarter of which consists of government administraticon, remains the most important one, generating about half of GDP in 1976. Tourism has developed rapidly and workers' remittances have become a significant item in the balance of payments. Tunisia has enjoyed a large amount of e!xternal aid and used it to expand economic and social infrastructure, broaden the industrial base, make available a wide range of social and welfare services to a large part of the population, and increase the rate of growth. 4. Tunisia's overal]L economic performance during 1970-76 has been excel- lent. Real GDP grew at an average annual rate of 9 percent, about twice as fast as during the 1960's. GNP per capita reached $840 in 1976, which in real  - 2 - terms is 60 percent above its level in 1969. The shift in policy orientation from the centrally controlled inward-looking investment strategy of the 1960's to a freer export-oriented economy and the drive towards industrial develop- ment proved highly beneficial for the country. Two other factors also contri- buted to this performance: favorable weather conditions resulted in good agricultural crops and the change in world commodity prices during 1973/74 brought sizable windfalls. National savings during 1970-76 were high and on average amounted to about 22 percent of GNP. Savings, however, originated mainly in the private sector and Government, and they were temporarily boosted by favorable changes in petroleum and phosphate prices since 1973. Public enterprises, as a group, did not make a contribution to national savings that was commensurate with their importance in the economy, primarily because their sale prices were not raised sufficiently to reflect cost increases. National savings financed about 85 percent of investment during the period. Tunisia's dependence on external financing declined sharply from about 32 percent of investment in 1969 to 21 percent in 1976. The balance of payments had been in continuous overall surplus since 1967, but in 1975 and 1976 this was no longer the case as the terms of trade deteriorated while imports continued to increase. 5. Tunisia has made impressive social gains. By 1976, primary school enrollment had reached 90 percent, and secondary enrollment 20 percent of the relevant age-groups. Public health services have been expanded with many pro- vided free. A family planning program has been introduced and has met with considerable success. Attempts have been made to tackle regional imbalances and to improve income distribution. Total social expenditures during 1970-76 increased by about 10 percent per annum and on average accounted for 9 percent of GDP and for 30 percent of total public expenditures. Nonetheless, major social issues remain. 6. The most important problem facing the Tunisian economy is widespread open and hidden unemployment. Employment creation was one of the main objec- tives of the Fourth Plan. Chiefly because of the Government's generous incen- tives to - and the consequent growth in - labor intensive private investment, the planned creation of new jobs was exceeded by 37 percent. However, some form of unemployment still affects close to one third of the labor force (about 22 percent of the non-agricultural labor force was unemployed in 1976 and about 40 percent of the agricultural labor force was under-employed). In 1976 there were some 265,000 people unemployed, 54 percent of whom were seek- ing employment for the first time. An increasing number of young people born during the high birth rate years are reaching working age. This is of major concern to the authorities, especially since the European outlets for Tunisian surplus labor have been all but closed, and an increasing number of women is joining the labor force. 7. Income distribution seems to have improved since 1966 in the wake of increased employment creation, minimum wage legislation, tax exemptions and family allowances for low income earners. The real impact of these measures was safeguarded as domestic price inflation during 1966-76 was kept to an aver- age of 4.0 percent, mainly because of strict credit and price controls and  - 3- government subsidies for basic consumer goods, housing and services. The increased standard of living during the period is reflected in the reduced share of food expenditure in the average household budget and in the increased share of housing expenditure. The share of the population living in absolute poverty declined from 30 percent in 1966 to 18 percent in 1975. Because of great internal migration, the majority (55 percent) of the population below the absolute poverty line now lives in urban areas. Important disparities continue to exist between the income levels along the coast and in the interior. Per capita income in the poorest region amounts to about one third that of the richest region and that of the rural population to about half that of the urban. Existing efforts to distribute the fruits of development more evenly among regions are still embryonic and insufficient to overcome the attraction of the capital and the coast. 8. During 1970-76, agriculture provided about half of total employ- ment, 27 percent of merchandise exports and 21 percent of GDP. Food process- ing accounted for another 3 percent of GDP and over a third of value added in manufacturing. During this period agricultural production rose substantially, largely as a result of favorable weather. Large infrastructure investments were made during the last decade. Current policy emphasizes projects that make a rapid and direct contribution to production and recognizes various constraints on agricultural development: absentee ownership, insecurity of tenure, inadequate access to agricultural credit, inadequate extension ser- vices, insufficient agricultural education, and underutilization of irrigation investments. Under the Fourth Plan, about $140 million has been allocated to a rural development fund which has been executed by the provincial adminis- trations. 9. During the 1960's, manufacturing production in Tunisia increased by 8 percent annually. There has been a remarkable acceleration of growth in the 1970's due in part to record years for the olive oil processing industry and to favorable developments in the textile and chemical industries. The early thrust of industrialization was supplied by large import substitution projects. These suffered, however, from the limited domestic market and shortages of experienced staff and management. More emphasis has been put on export- oriented private industries since 1970. Under the Fourth Plan, private manufacturing investment, particularly in food processing, textiles, fertili- zers and metals transformation, was expected to average D 25 million per year, compared with D 12 million in 1972 and to account for two-thirds of total investment in manufacturing; these targets have been exceeded. Foreign and domestic private investment is now stimulated by a comprehensive incentive framework, and facilitated by the streamlined approval procedures of the investment promotion agency. Foreign investors are expected to contribute know-how and overseas marketing. A new agreement between Tunisia and the European Community was signed in April 1976. Although it provided for duty free entry into the countries of the Community of nearly all Tunisian industrial products, new restrictions have recently been imposed. The Govern- ment has established a special fund to encourage growth of small industries and industrial decentralization, and has started a program to establish industrial estates.  - 4 - 10. The development of tourism in Tunisia is relatively recent. Foreign- visitor arrivals reached 1 million in 1976, with an average annual rate of growth during 1970-1976 of 15 percent, -- sharply higher than that of the Mediterranean tourism market as a whole. Since 1970, earnings from tourism have been a major source of foreign exchange, having reached $338 million in 1976, more than twice the earnings from all manufacturing exports and slightly more than petroleum exports. The rapid development of tourism in Tunisia has unfortunately not been accompanied by adequate development of infrastructure (particularly recreational facilities), trained manpower and services. The Government is endeavoring to alleviate these constraints through a variety of measures, including revised investment incentives, increased marketing and training efforts, codes to enforce quality standards and more stringent zoning laws. 11. The main objectives of the current Fifth Development Plan (1977-81) are (i) full employment of the additional labor force, (ii) self-sufficiency in major foodstuffs, defined as a balanced trade account for agricultural goods, (iii) increases in the standard of living, and (iv) social stability through incomes policies and wage and price harmonization. To reach these objectives, the Plan foresees an average annual rate of real GDP growth of 7.6 percent, the same as the one achieved during the Fourth Plan. This growth is to be generated by investments projected at D 4.2 billion ($9.8 billion) in current prices during the Plan. In real terms average annual investment would be 54 percent greater during 1977-81 than during the preceding Plan, but owing to the high investment level reached in 1976, its annual growth would be 3 percent only in real terms. The Fifth Plan's strategy emphasizes in particular export-oriented industrial development and agricultural growth. Special atten- tion will be given to employment creation and to balance of payments considera- tions. Substantial investments are to be made in hydrocarbons, manufacturing, water development, transport and housing. The Plan prescribes increased domestic production and processing of Tunisia's mineral resources (phosphates, petroleum) to export as much as possible. Extraction and distribution of the newly discovered offshore gas deposits in the Gulf of Gabes rank prominently among the list of major projects. This gas is to be used to substitute for petroleum based fuels that would be freed for export. Eventually gas would also be used as an input for the chemical industry. Private sector initiative is expected to dominate investment in textiles, mechanical and electrical industries and tourism. In these activities the authorities primarily expect employment creation to take place. Education and training programs are to be expanded sharply to meet more adequately the economy's skilled manpower needs and workers' expectations for upgraded jobs. The strategy proposed for the Fifth Plan does not represent any major departure from the strategy pursued successfully during the preceding Plan. 12. Tunisia's existing resource base, its institutional and infrastruc- tural framework, its excellent performance in the earlier part of this decade, and the desire of the authorities to promote further development and to sup- port it with appropriate policy measures and institutions, are fundamental ingredients pointing towards continued rapid economic growth during the Fifth  - 5 - I-an. The 7.6 percent target set for the average annual real growth of GDP in the Plan is in line with the possibilities of the Tunisian economy. The investment priorities formi'lated in the Plan are considered necessary to sup- port the sectoral strategies. There are some less favorable signs, however. Tunisia's development recentLy benefited from the structural changes in world market prices and excellent weather conditions. It would be unreasonable to expect that these fortuitous factors will continue to work in Tunisia's favor to the same extent as in the past. Substantial efforts in domestic and ex- ternal resource mobilization will therefore be of crucial importance to finance the planned level of investmient. On the domestic side, there is a great need for increased savings and improved financial intermediation. The Government sector, in particular, will again be called upon to contribute substantially to the savings effort. The Plan suggests that this should be done by prudent expenditure policies and increased revenue collections (selective tax increases and better tax collection). In addition, the public enterprise sector will have to increase substantially its contribution to public savings through management improvements, and especially through cost-related increases in the sale prices of selected enterprises. Externally, Tunisia would have total financing requirements (disbursement basis) of some $3.5 billion during 1977-81. Given the country's creditworthiness, it seems reasonable to assume that Tunisia should be able to mobilize such an amount without putting undue strain on the country's debt servicing capacity (para. 14). 13. Since the early 1960's, Tunisia has obtained relatively large amounts of official aid. A Consultative Group chaired by the Bank has provided a forum for aid-coordination among major donors (see para. 22). During 1970-76, annual loan commitments from public sources averaged $177 million, or about $33 per capita. About 72 percent of these commitments came from bilateral public sources, chiefly from France, Canada, and the Federal Republic of Germany. About 20 percent came from oil-producing countries, whose share rapidly increased from 8 percent in 1970 to 21 percent in 1976. Commitments from the Bank Group during 1970-76 accounted for 24 percent of total public commitments. Most aid has been obtained on concessionary terms; during 1970-76, the average terms cf borrowing from bilateral sources were 3.5 percent interest and 23 years to maturity, including 6 years of grace; from multilateral sources, they were 6.0 percent interest and 26 years to maturity, including 5 years of grace. During the same period, Tunisia also received annually some $43 million in grants. Loan commitments from private sources averaged $35 million a year. Direct foreign private investment has been com- paratively small, but recently it has picked up momentum following increased activity in the petroleum sector and new incentives offered to foreign in- vestors in manufacturing. T'hus, net direct foreign investment increased from $19 million in 1970 to $63 million in 1976. 14. At the end of 1976, total foreign debt disbursed and outstanding was estimated at about $1.3 billion or 27 percent of GDP, compared with some 40 percent in 1970. The debt service ratio in 1976 was 8.3 percent, compared with 20 percent in 1970. This significant decline in the debt ser- vice ratio was mainly due to the sharp increase in export earnings following  the changes in world market prices in 1973/74. In the future, the external borrowing requirements of the 1977-81 Plan (para. 12) will again increase debt service obligations in relation to exports, to around 13.3 percent by 1981 and 16.9 percent by 1986 according to current Bank projections. While these are relatively high levels, debt service would be a manageable burden on the eco- nomy and balance of payments, particularly when considering Tunisia's long record of prudent and skillful external debt management. Tunisia is considered creditworthy for further Bank lending. PART II - BANK GROUP OPERATIONS IN TUNISIA 15. Since 1962, Tunisia has received a total of thirty-one loans and eleven credits amounting respectively to $439.4 million and $70.1 million, net of cancellations. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1978, and notes on the execution of ongoing projects. While disbursements of some loans and credits have been slower than foreseen at appraisal, on the whole, project execution has been satisfactory. As of December 31, 1977, total disbursements amounted to 71 percent of initial appraisal forecasts, and to 85 percent of revised forecasts. In a number of sectors, important institutional improvements have been achieved and independent agencies have been created or strengthened. 16. The Bank's lending strategy in Tunisia aims at supporting Government efforts to (a) increase employment, (b) encourage more balanced growth and distribution of income among regions and income groups, (c) promote export- oriented policies and investments, and (d) provide selective support for the development of infrastructure and for institution building in key public serv- ices. The main supporting feature of this lending strategy is to encourage the Tunisian authorities in timely and well-coordinated preparation of proj- ects, with emphasis on technical assistance. The Bank is also cooperating with the Government in its efforts to increase the mobilization of domestic and foreign resources, in part through encouraging project cofinancing; the latter is particularly important in view of the extent of Tunisia's external resource needs, the large size of many priority projects, and the limited availability of Bank resources relative to the country's needs. 17. Within this broad framework, past Bank Group lending has emphasized support for long-term investments in infrastructure and social development. Lending for urban and social development, including water supply, sewerage, education, family planning and the Tunis urban planning and public transport project has accounted for 30.4 percent of Bank/IDA commitments in Tunisia since 1971. Lending for transport, power and tourism infrastructure has accounted for 18.6 percent. Agriculture and fisheries have received 20.4 percent of total commitments. Industrial and hotel financing through the Banque de Developpement Economique de Tunisie (BDET) has accounted for 23.6 percent, and the Gafsa phosphate development project received 7 percent of total commitments.  - 7 - 18. The Bank has financed seven projects in the transportation and six projects in the agricultural sectors in Tunisia, totaling $92 million and $92.2 million respectively. In the transportation sector, these projects include two highway projects, a railway project, a pipeline project and two ports projects. With the exception of the last highway project still under execution, all have been completed satisfactorily. Bank financing of highway projects in Tunisia has so far aimed to modernize heavily travelled trunk roads, introduce institutional improvements, improve maintenance operations and strengthen the road user taxation system. In agriculture, Bank involve- ment has met in some cases with success, in other with difficulties. Funds for the Cooperative Farms project, and the First Agricultural Credit project have been fully disbursed. Disbursements on the credit for the Fisheries project have been slow because of slower than expected demand for project vessels attributable to construction and after sale services problems. The Irrigation Rehabilitation project and the Sidi Salem project are being imple- mented satisfactorily. The Bank has attempted, over the past three years, to play a more active role in rural development in Tunisia. The proposed project is a first step in this direction since about 60 percent of the population in the project areas belong to the target group. Efforts are being pursued with the Government to define rural development policies and to identify viable projects in this difficult but high priority sub-sector. 19. Lending in the next and subsequent fiscal years will emphasize projects promoting agricultural and industrial production, such as an irriga- tion project in Southern Tunisia, a second fisheries project and continued assistance for agricultural credit. Bank assistance to industry will focus on small-scale enterprises and will also include finance for the Miskar Project for the development of Tunisia's offshore gas resources. Complementary to this primary focus, the program would also finance selected priority urban and social development projects. Projects under discussion with the authorities include a second population project, a second sewerage project, an urban development project, a third port project and a fifth water supply project. 20. The Bank Group accounted for about 24 percent of total public com- mitments to Tunisia during 1970-76. The Bank Group's shares in total debt outstanding and disbursed at the end of 1976 (including loans from private sources) and in debt service during 1976 were 15 percent and 14 percent respectively. The Bank Group's share in Tunisia's disbursed external debt by 1981 is expected to remain unchanged from about 15 percent in 1976, and its share in debt service would amount to about 10 percent. 21. IFC has invested in NPK Engrais (a fertilizer plant), in BDET, in Compagnie Financiere et Touristique (COFIT, a company to promote and invest in tourism projects), in Societe Touristique et Hoteliere RYM (a large hotel development) and in Industries Chimiques du Fluor, which will produce alumin- ium fluoride from local fluorspar for export. IFC's most recent investment, in May 1975, was in the Sousse-Nord integrated tourism development project. IFC's net commitments in Tunisia total $16.5 million. IFC's Board has ap- proved the sale of IFC shares in NPK Engrais to the Tunisian Government.  - 8 - 22. Since 1962 the Bank has chaired a Consultative Group for Tunisia bringing together the principal donor countries and institutions concerned with the country's development. The most recent meeting of the Group, held in Paris in June 1975, welcomed new participants which included Saudi Arabia, Japan, the Arab Fund for Economic and Social Development and the Commission of the European Communities. Last year, a development conference was organized by the government in Tunis in early July, in lieu of a meeting of the Consul- tative Group. PART III - THE TRANSPORTATION AND AGRICULTURAL SECTORS General 23. Road transport is crucial for the development of agriculture, be- cause it is the dominant carrier of outputs and inputs as well as other supplies and services for the rural population. Whereas road transport is generally satisfactory on the principal highways it has serious deficiencies in rural areas, mainly because the rural roads are in poor condition. Rural roads are defined as roads outside urban areas carrying predominantly agricul- tural traffic, irrespective of their administrative classification. 24. Rural road improvements by themselves would have limited impact on agricultural output and would usually generate insufficient benefits to jus- tify the road investments. The principal reason is that farmers, especially the low income farmers need credit and other support services to raise agri- cultural production. The proposed project, therefore, provides for an integrated development package of rural road improvements and complementary agricultural investments, and other support measures. TRANSPORTATION 25. The Transport Sector. A detailed description of the transportation sector is contained in Bank Reports No. 930-TUN of December 1975 and No. 1539-TUN of May 1977. Since modes of transportation other than road transport have little direct impact on rural road development, no reference to them is made in this sector analysis. 26. Public road transport of passengers and freight is largely handled by state enterprises, because private operators are restricted to taxis and light trucks. Mainly due to lack of experience, some of the state enterprises suffered losses, which endangered the renewal of their fleets. However, as a result of the investments authorized by the Government in recent years and those provided for under the Fifth Plan, the vehicle fleet should be suffi- cient to meet current and forecast transport requirements. In addition, the Government is making efforts to improve the management of state enterprises.  -9- , 1. The ?rinrcipai highways are in reasonable condition, partly as a result of improvements introduced under the First and Second Highway Projects. 28. The rural network :Ls estimated to include approximately 18,000 km of unpaved roads, of which aboul: 50 percent are unclassified. Since most rural roads were originally built ito low design standards, and have not been main- tained during the past two decades, they are now practically impassable during the rainy season. Many areas are virtually isolated for several months each year. As a result, farmers are unable to obtain essential inputs and to sell their products at the best time and with reasonable transport costs. Also, the full benefits of existing extension and other support services cannot be realized, because experts cannot reach farmers without undue difficulties. Credit institutions are often reluctant to grant credit if they foresee diffi- culties in the transport of inputs and outputs. In sum, many of the areas served by rural roads have not been able to realize their full development potential. 29. Road Administration. The Highway Department (DPC) is responsible for the construction and maintenance of the main and rural road networks. It has almost its full complement of engineering assistants and technicians, but its staff of 46 engineers is below strength. Recruitment is difficult as civil service conditions are not attractive. Consultants, including 4 compe- tent Tunisian firms, provide highway design services to DPC. 30. Supervision of road works, including those in the Second Highway Project, is carried out by DPC. Supervision of road improvement works in the proposed project would normally be delegated to field divisions. However, in view of the recent establishment of some of the field divisions, some assistance will be given from headquarters divisions in the form of resident engineers and laboratory technicians so as to ensure competent administration and supervision of the road improvement works. During negotiations of the proposed project the Government has agreed to make available, on site, suffi- cient qualified personnel and other resources necessary to ensure satisfactory construction supervison (Draft Loan Agreement, Section 3.01(a)). 31. Policy and Plannirng. The Government exercises considerable control over road transport and the road network, especially through the Ministry of Transport and Communications (MTC) and the Ministry of Public Works (MPW). The main constraints in road transport identified under the Second Highway Project (Loan 1188-TUN of November 1976) are: (i) the absence of an effective road transport policy and planning machinery; (ii) an excessive degree of regulation; and (iii) distortions in passenger tariffs. These issues are being addressed under that project. In particular the Government has started to update the 1968 Transport Plan, with the assistance of consultants financed under the above project, and has recently abolished the regulation restricting owners of light trucks to the transport of only their own goods. Furthermore, the authorities are considering lifting the zonal restrictions on transport by trucks of state enterprises and the distance restrictions on the use of farmers' trailers.  - 10 - 32. Transport tariffs are set by Government to reflect the condition of specific roads. Therefore, the reduction in transport costs resulting from road improvements, including the proposed improvements on the rural roads, can be expected to be passed on to farmers, other producers, consumers and passengers. 33. The detailed planning, administration, construction and maintenance of the road network is the responsibility of the MPW's Highway Department (Direction des Ponts et Chaussees, DPC). Until 1974, the Ministry of Agri- culture was responsible for the unclassified roads. The MTC is responsible for the planning and overall administration of investments in state transport enterprises. Both MTC and MPW suffer from a shortage of qualified and expe- rienced staff. To help fill this gap, they have contracted the services of consultants, with Bank financing under the Second Highway Project, to update the 1968 Transport Plan. 34. The Fifth Plan (1977-81) envisages investments in the road network of D 126 million, in current prices ($289.8 million), which is adequate for the main highway network, and for the first time, includes a reasonable allocation for improving rural roads. AGRICULTURE 35. The Agricultural Sector. Agriculture plays an important role in the economy. In 1976, it employed 46 percent of the labor force, contributed 21 percent to Gross Domestic Product (GDP) and about 13 percent to the total value of exports. During 1973-76, the annual growth rate in agriculture was 5.5 percent, partly due to good weather, favorable prices for olive oil and renewed Government support of the private sector. About one-third of Tunisia s total land area, or about 5.3 million hectares, are classified as cultivable; the remainder is range land suitable for extensive sheep grazing, low-yielding forest and desert. The cropped area covers about 3.1 million ha, of which 1.3 million ha are under perennial crops, and 110.000 ha, or 3.5 percent, are equipped for irrigation. 36. At present, besides agro-ecological factors and the poor condition of the rural roads, the main constraints on agricultural development are: (i) limited investments made in water and soil conservation; (ii) inefficien- cies in extension services benefitting low income farmers; and (iii) limited access to credit for low income farmers. 37. Agricultural Institutions. The Ministry of Agriculture has overall responsibility for agricultural planning and development. Its Planning Department (Direction du Plan, de l'Analyse Economique et des Projets, DPAEP) prepared the agricultural component of the proposed project, with the assis- tance of consultants (para. 42). Several semi-autonomous public agencies assume responsibility for management and maintenance of irrigation infra- structure, extension services, production and marketing services for the main agricultural products, and equipment rental and maintenance services. There is a lack of coordination among these agencies, and duplication of effort  - 11 - between the departments of the Ministry of Agriculture on the one hand, and these agencies on the othe!r hand. 38. Several institutions are also involved in extension of shbrt-term credit. Credit in kind is extended by the semi-public autonomous agencies to farmers for seeds, fertilizers and herbicides. Short-term credit in cash is provided by the Banque Nationale de Tunisie (BNT) to commercial farmers and to cooperatives, under an agreement with Government which gives BNT access to rediscounting facilities with the Central Bank. The establishment in 1974 of Mutual Guarantee Associations (Societes de Caution Mutuelle, SCM) resulted in improving low-income farmers' access to short-term credit, by providing joint SCM liability for loans to individual farmers. Local credit cooperatives (Caisses Locales de Credit Mutuel, CLCMs) also provide short-term credit in cash to farmers; but they have rendered limited assistance to farmers because of poor management and continuing losses. Despite the creation of SCM's, existing short-term credit institutions have been ineffective in delivering credit to low income farmers. In 1977, only about 5 percent of low-income farmers had access to short-term credit. 39. The Banque Nationale de Tunisie (BNT) is the main supplier of medium- and long-term credit. The Government's Special Fund for Agricultural Development (FOSDA) provides most of investment credit available to BNT for low income farmers. The lJnited States Agency for International Development (USAID), the Swedish International Development Agency (SIDA) and the World Food Program (WFP) also provide BNT with medium- and long-term resources. These resources are placed in special funds, each with different lending rules and procedures. The main problems of credit organization in Tunisia (namely lack of eligibility criteria for concessionary investment credit, low interest rates, Government subsidiies and risk coverage by the Government and the agri- cultural lending institutions) were addressed in the context of the Bank- financed Second Agricultural Credit project (Loan 1340-TUN). The terms and conditions agreed for that project will be applied to the medium- and long- term credit component of the proposed project (para. 49). 40. Policy Planning. Government strategy for the agricultural sector during the Fifth Plan emphasizes intensification of production through increased use of inputs, modernizing technology and irrigation. Further improvements in agricultural policies and support services are envisaged in the Plan to ensure an annual growth rate of 4.2 percent in output so as to acnieve equilibrium in the trade balance of agricultural products. Total investment is projected at D 500 million (or $1.15 billion equivalent) in current prices, or an average annual increase of 43 percent, in real terms, over the average of the previous Plan (1973-76). Major emphasis would be placed on water development projects (44 percent of total investments), but also on cereal, tree crop and livestock production. In addition to these investments, the Government has also allocated D 100 million ($230 million equivalent) to a special rural development fund, primarily to be used at the discretion of provincial administrators to finance small infrastructure (including some rural roads) projects in rural areas. Total agricultural investment during the Plan period is expected to generate about 30,000 permanent jobs in agriculture, or 12 percent of planned employment creation.  - 12 - 41. The main thrust of the Bank's program in agriculture is to help increase output through irrigation and credit projects, in support of the Government's strategy for the sector. Further institutional improvements in water resource development policies, price policies and credit organization would be pursued in the context of such projects. Emphasis would also be placed on defining a strategy and suitable policies for rural development projects and on improving income distribution through the appropriate location of Bank-financed agricultural and other projects. It is expected that the proposed project would support this strategy by improving low income farmers' access to credit and extension services and by improving the network of rural roads in areas of Tunisia that have received little assistance. IV. THE PROJECT Background 42. Following the transfer of responsibility of the rural road network from the Ministry of Agriculture to the Ministry of Public Works (para. 33), the Government asked the Bank in 1975 for assistance in developing a pilot scheme, as a first step for launching a comprehensive and longer-term program for the development and maintenance of rural roads. Thirty roads were ini- tially selected for preliminary evaluation and subsequent detailed prepara- tion. The roads are located in diverse areas in order to cover a range of traffic needs as well as different terrain, agro-ecological conditions, and production practices. Subsequently, at the request of the Government, which was concerned with reducing regional disparities, an additional thirty roads in Central Tunisia (provinces of Kasserine and Sidi Bouzid) were selected for analysis. The project was prepared by the Ministries of Public Works and Agriculture with the assistance of a joint-venture of local and French consul- tants. The methodology of project preparation follows a new approach for rural roads projects, involving a detailed analysis of each road and its zone of influence, including traffic needs, and agricultural potential. It also includes the preparation of an integrated development package for each road and its zone of influence, as well as the extension manuals specifying input and production targets, recommended actions to be taken and procedures for monitoring progress in implementation. Preparation of these development packages make it possible, from the outset, to identify key crops and to focus the attention of the extension and other support services on these crops. 43. The appraisal of the project combined the conventional highways appraisal methodology with that of a highways sector approach. It consisted of the detailed analyses and evaluations of 19 roads (about 400 km) and comple- mentary agricultural investments located in the provinces of Le Kef, Siliana and Kairouan, out of which 18 were considered economically justified and are included in the proposed project. This was followed by the identification of a further 40 roads (about 600 km) and related agricultural investments, which appeared prima facie economically justified and would be subjected to similar analyses and evaluations. Furthermore, the Government's capability to under- take these analyses and evaluations and to implement the proposed investments  - 13 - was assessed and found satisfactory. The latter 40 roads are located in the provinces of Nabeul, Gabes, Kasserine, Sidi Bouzid, and Gafsa. To ensure full utilization of the proceeds of the proposed loan, in case some of these roads are not economically justifiable, rural roads in other areas of Tunisia, from among the 2,500 km of roads for which project preparation based on the same methodology and criteria would start in late 1978 under the proposed project (para. 52), may be considered for financing. The additional 2,500 km roads will be studied on a province by province basis in the following order of priority: Jendouba, Beja, Mahdia, Monastir, Sousse and Zaghouan. 44. The proposed project was identified by a Bank mission in August 1975 and was appraised in November 1977. Negotiations were held in Washington in May 1978. The Tunisian delegation was headed by Mr. A. Zarrouk from the Ministry of Planning and included Messrs. A. Soula, R. Chamari, Ben Romdhane, Ben Zoubir and A. Tekaya. A report entitled "Tunisia Staff Appraisal Report of a Rural Roads Project" (No. 1190a-TUN), dated June 2, 1978 is being circu- lated separately to the Executive Directors. The main features of the Loan and the Project are mentioned in the Loan and Project Summary and in Annex III. A map showing the location of the roads to be improved under the project is also attached. Project Objectives 45. The proposed projetct would establish a pilot scheme to improve rural roads, raise agricultural production and improve the standard of living of the rural population through complementary agricultural investments in the zones of influence of each road. Better rural roads would also facilitate the provision of social and other administrative services, while the increase in economic activity would create additional employment opportunities. Once established, the pilot scheme would provide a consistent methodology for the development of the entire rural road network. Project Description 46. The project would consist of: (i) civil works to improve about 60 rural road sections totalling about 1,000 km; (ii) purchase of road maintenance equipment, spare parts and workshop machine tools; (iii) purchase of equipment and training for agricultural extension services; (iv) provision of agricultural credit; (v) purchase of agricultural equipment and construction of collection and equipment rental facilities and of workshops; and  - 14 - (vi) technical assistance for the Ministries of Public Works and Agriculture. 47. Improvements and Maintenance of Rural Roads. Improvements would consist of rehabilitation, upgrading or new construction, all with particular attention to drainage, and would conform to satisfactory design standards. Rehabilitation would generally involve road sections previously engineered but which are in poor condition due to lack of maintenance. Upgrading would generally improve the pavement structure and longitudinal profile on the existing alignment. The organizational structure necessary for rural road maintenance tasks has been established under the First Highway Project. These tasks would be handled by the subdivisions of the Ministry of Public Works. However, most subdivisions have insufficient road maintenance equipment. The proposed project therefore includes the purchase of road maintenance equipment which would be distributed to the subdivisions in charge of maintaining the project roads. Because of practical organization and job scheduling, the equipment would not be earmarked solely for maintaining the project roads; in some cases, it would be used on other roads and in other cases, project roads would be maintained with other equipment. It has been agreed with the Govern- ment during negotiations that all rural roads improved to an appropriate service level will be adequately maintained in accordance with sound engineer- ing and financial practices, and that the funds, facilities, services and other resources required for this will be promptly provided as needed (Draft Loan Agreement, Section 4.03). 48. Agricultural Extension Services. The effectiveness of agricultural extension services in the zones of influence of the rural roads would be improved through a gradual increase in the number of agents in the field. Extension agents now operating separately on behalf of various field organi- zations would be brought together into small units with one agent responsible for a given area, thereby ensuring consistency in advice to farmers. The mobility and expertise of extension agents would be improved with equipment, and with technical assistance for training them in the introduction of new cropping patterns to be made available under the project (para. 51). The extension manuals prepared or being prepared for each province in which rural roads of the proposed project are located, should provide a more effective extension system than at present. The Government has agreed to provide, promptly as needed, the resources required to strengthen the extension ser- vices in the zones of influence of the proposed project roads (Draft Loan Agreement, Sections 3.01(a) and 3.05). 49. Agricultural Credit. Long- and medium-term credit to farmers would be required to purchase agricultural machinery, dairy cows, and sheds for livestock; to plant cactus and medicago (a fodder crop); and to construct wells. Short-term credit would be needed, particularly by low-income farmers, to cover the recurrent costs of such inputs as fertilizers, pesticides and feed concentrates. The foreign costs of the 1979-80 investment credit needs (about $3.3 million equivalent) are expected to be financed under categories A and B of the Second Agricultural Credit project (Loan No. 1340-TUN, Closing Date: December 31, 1980), subject to availability of funds (Draft Loan Agree- ment, Recital (C)). The Government would cover any balance of the foreign  - 15 - costs during 1979-80 as well as all foreign costs beyond 1980. All short-term credit would be provided by Banque Nationale de Tunisie (BNT), partly from resources made available by Government (Draft Loan Agreement, Section 3.02(iv)). Thus, agricultural credit to farmers would not be financed under the proposed loan. 50. Agricultural Facilities and Equipment. Whereas the existing capac- ity of agro-industries such as canning factories is expected to be sufficient for the increased production resulting from the proposed project, the number and capacity of collection facilities and of workshops for the rental and maintenance of agricultural equipment are inadequate in some areas. For instance, project preparatiLon in the province of Le Kef indicates that increased production of milk and wheat would require the construction of a refrigerated milk collection center with a capacity of 9,000 liters along one of the roads and a simple grain collection facility with a capacity of 500 metric tons along another. The project therefore would provide $9.1 mil- lion for the establishment of necessary agricultural facilities and equipment in the project areas. 51. Technical Assistance. About 148 man-months of consulting services would be provided under the project for technical assistance, as follows: (a) 130 man-months over a period of about two years to assist the Ministries of Public Works and Agricu:Lture in the preparation of an additional 2,500 km of rural roads (para. 43); and (b) 18 man-months to assist the Ministry of Agriculture in the training of extension agents in the introduction of new cropping patterns, including 6 man-months for organizing and conducting seminars (para. 48). The itechnical assistance would also include comple- mentary short-term traineeships abroad. During negotiations the terms of reference of these consulting services were discussed and confirmed with the Government. Methodology of Sub-project Review 52. The criteria for the evaluation and approval of proposed sub- projects, covering the remaining 40 rural road sections (600 km) and comple- mentary agricultural investments, would be the same as those applied to the 19 road sections (400 km) already studied. The first step would be the submission by the Government to the Bank of a report showing that, based on an initial screening of the roads and their related agricultural investments, their further preparation and economic and financial analyses should be pursued. The next step woluld be the submission of (i) a report covering preliminary engineering anid cost estimates of construction and maintenance; (ii) a report covering present and future traffic in the zone of influence of each rural road and the related agricultural development package; (iii) an extension manual applicable to each zone of influence; and (iv) computer input and output data for each road. 53. The criteria for Bank-approval of subprojects are as follows: (i) the quality of the preparation and analysis of subprojects should be acceptable to the Bank (equivalent to that of the subprojects for the 19 road sections (400 km) already appraised);  - 16 - (ii) the economic return of the investment package is at least equal to the opportunity cost of capital in Tunisia, which is at present estimated at 10 percent; (iii) the financial rates of return based on representative farm models are sufficiently high to provide incentives to farmers to take advantage of the additional credit facili- ties for agricultural investments; and (iv) the implementation of an investment package will not be started before its optimal year. These criteria will be reviewed from time to time in the light of experience gained. During loan negotiations, assurances were obtained from the Govern- ment that the above procedures would be followed (Draft Loan Agreement, Section 3.06). 54. TIhe review of 40 further subprojects would constitute a part of - ,-- ~ In view of the capability of the Government in project pie.paratloti, which has been established during the appraisal of the 19 roads (400 km), a detailed review of all sub-project roads by the Bank is not considered necessary. A detailed review would only be made of those sub- Drojects with a Bank participation of at least $350,000 equivalent, provided o -- i~' ~- i 4 '-. >--kase related t' each agro-ecological zone in each itTn71,ict- it exarnL - Subprojects witr, Bank participation of below $350,006 would be reviewed in less detail without field inspection. Costs Estimates and FinancinR Plan 55. The total cost of the proposed project is estimated at $93.6 mil- lion, including a foreign cost of $40.9 million, and duties and taxes of $12.7 miiltuil. The estimated costs of the project components are $50.5 million for -ne .oad improvement works, $5.4 million for road maintenance equipment, $9.1 miliion for agricultural facilities and equipment, $17.2 million for invest- ment credit, $7.2 million for short-term credit, $2.8 million for equipment and training for extension services, $1.4 million for technical assistance to Ministries of Public Works and Agriculture. These costs, which are expressed in early 1978 prices, include a total of $22.6 million for physical contingen- cies (10 percent), and price escalation contingencies at the following rates: 8 percent, 7.5 percent and 7 percent for 1978, 1979 and 1980-83, respectively for civil works and consulting services, and 7 percent, 6.5 percent and 6 percent for the same periods for agricultural equipment. The costs are derived from detailed quantities and rates for the 18 road sections so far appraised and accepted for inclusion in the projects (para. 43) and, for the remainder, from estimates based on considerations of traffic, agro-ecological conditions, present and potential production, population density and certain assumptions about development, all based on preliminary review and reconnais- sance of most of the roads and areas involved. Final quantities and costs would depend on the detailed preparation and analysis of each subproject. Depending on these final costs, the total length of rural roads sections to be improved may, therefore, differ from the estimated 1,000 km. The foreign exchange costs for civil works are based on the assumption that one-third of  - 17 - the contracts will be awarded to Tunisian firms and two-thirds to foreign firms. The cost of technical assistance (para. 51) is based on consultants' rates pertaining in Tunisia in early 1978 ($7,700 per man-month, including overheads, fees and taxes). Detailed cost estimates and a financing plan are provided in the Loan and Project Summary. 56. The proposed Bank loan would finance the entire foreign exchange costs, except those for credit to farmers. During 1979-80, the foreign exchange cost of investment credit estimated at $3.3 million, is expected to be covered from the Second Agricultural Credit Project (para. 49). During 1981-82, it would be provided by the Government in an amount equiv- alent to $3.6 million. All short-term credit needs would be met from BNT's own resources. The Government would ensure availability of the foreign and local funds necessary for all credit needs in the zones of influence of the project roads. Thus Bank financing under the proposed project would be $32 million. During negotiations, this arrangement was discussed and confirmed with both BNT and the Government. On-Lending Arrangements 57. Part of the loan proceeds would be made available to BNT for on- lending to semi-autonomous agencies and service cooperatives for constructing and equipping agricultural facilities. The Government would carry the foreign exchange risk and would also pay to BNT (para. 62) a commission of 3 percent per annum of the aggregate principal amount outstanding, to cover project- related administrative expenditures and a reserve against defaults. These would be reflected in an agreement between the Government and BNT, the signature of which would be a condition of effectiveness of the proposed loan (Draft Loan Agreement, Sections 3.02 and 6.02(a)). Implementation 58. Civil works and complementary agricultural investments are expected to be implemented over a period of about 5 years, starting early in 1979. Technical assistance to the Ministries of Public Works and Agriculture would run from early 1979 through mid-1980. The organization proposed for project implementation is based ulpon the organization which has satisfactorily under- taken project preparation. To ensure adequate impetus for the project and to provide guidance to the Coordination Committee which had been established during project preparation but without any legal status, the overall respon- sibility for the project will be vested in the Ministry of Public Works (MPW) since it is the major executing agency for the project. The Government has agreed to assign specific overall responsibility for project implementation to the MPW which will, in turn, administer the project through the Coordina- tion Committee to ensure that all of the project elements are carried out in a timely and coordinated manner (Draft Loan Agreement, Section 3.01). The membership of that Coordination Committee during the project implementation stage would include two representatives of the Ministry of Agriculture (MA), one from its Planning Department (DPAEP) and one from its Agricultural Pro- duction Department (Direction de la Production Agricole, DPA) since these  - 18 - departments cover the planning and operational functions respectively, a representative of the MPW, from the Highway Department (DPC) which covers planning, construction and maintenance functions and a representative of BNT. In view of the successful experience with the Coordination Committee and with the semi-autonomous agencies during project preparation, it is considered that the proposed project implementation organization would be effective. However, it is essential to constitute it formally. The formal establishment of the Coordination Committee in accordance with the Borrowers regulations, determin- ing its powers and terms of reference is a condition of loan effectiveness. 59. Responsibility for the execution of the various project investments and actions would remain with the existing agencies. The Coordination Com- mittee would function through the MA and MPW members, who have line authority over their regional offices. In the case of other agencies, the Coordination Committee would, under its terms of reference, make arrangements acceptable to the Bank with such agencies specifying their responsibilities with respect to project implementation (Draft Loan Agreement, Section 3.03). The Coordination Committee would meet at least once a quarter or more often if necessary. It would review quarterly progress reports and would determine appropriate action to be taken to resolve any problems. It would also review future work programs and budgets for each of the participating organizations to ensure that all necessary activities are coordinated (Draft Loan Agreement, Schedule 6). 60. At the central government level, the DPC would be responsible for: (i) implementing the rural road construction works; (ii) procurement of rural road maintenance equipment; and (iii) technical assistance for the preparation of the 2,500 km of rural roads. The Department of Agricultural Production of the Ministry of Agriculture would be responsible for implementing: (i) improvements of extension services including training of agents; (ii) construc- tion works related to collection and equipment facilities; (iii) agricultural equipment procurements; and (iv) technical assistance for the preparation of complementary agricultural investments for the aforementioned 2,500 km of rural roads. 61. Since the overall project covers a number of related activities, the timing and scope of which will require adjustment as experience is gained, a certain degree of flexibility in project execution will need to be maintained. Each participating agency would therefore review jointly with the Coordination Committee an annual plan detailing the activities and expenditures under the project for the following year. During negotiations assurances were obtained from the Government that those annual plans will be submitted to the Bank for review and comment by September 30 of each year, starting in 1979 (Draft Loan Agreement, Section 3.09(c)(ii)). 62. The Banque Nationale de Tunisie (BNT) would make both the investment and short-term credit available to farmers as well as medium and long-term credit to semi-autonomous agencies and service cooperatives for constructing and equipping agricultural facilities. The MA's regional field divisions (CRDA's) would assist BNT in appraising loan applications. For investment credit, lending policies and procedures, terms and conditions of project  - 19 - sub-loans, and the sharing of the default risk would be the same as under the Second Agricultural Credit Project; for short-term credit they would be the same as those in use for short-term credit by BNT. Assurances to this effect were obtained during negotiations (Draft Loan Agreement, Schedule 5). Assur- ances were also obtained from the Government during negotiations that it would cause BNT to provide funds, facilities, services and other resources for the strengthening of its branches in the zones of influence of rural roads (Draft Loan Agreement, Section 3.02 (vii)). Audit of Accounts 63. Government agencies maintain budgets and accounts which are under constant supervision by El financial controller appointed to each agency by the Ministry of Finance. The present system is satisfactory. Under the Second Agricultural Credit Project, BNT subjects its accounts to an audit by inde- pendent auditors acceptable to the Bank. It has been agreed with the Govern- ment that each executing agency would maintain separate accounts for its part of project work and that annual financial statements would be forwarded to the Bank, in a form acceptable to the Bank, within four months of the end of each fiscal year (Draft Loan Agreement, Section 4.02). Land Acquisition for Right-of-Way 64. During loan negotiations the Government has agreed to make available all right-of-way as needed for the timely implementation of the proposed project (Draft Loan Agreement, Section 3.10). Since the roads are located in rural areas, no delays inL land acquisition are expected. Procurement 65. For the road construction works, unit price contracts would be awarded after international competitive bidding in accordance with the Bank's Guidelines for Procurement. Works have been broken down into suitable lots to encourage participation in bidding from both local and foreign firms, and con- tracts would be awarded per lot or for a combination of lots with a total value of at least 2,500,000 Dinars (equivalent to about $5,750,000). Main- tenance equipment contracts would be awarded by the MPW after international bidding, also in accordance with these guidelines. The range of goods to be purchased by the MA or its associated semi-autonomous public agencies is varied and not suitable for bulk procurement, and individual contracts would be far too small to warrant full international advertisement. However, foreign suppliers of farm machinery and equipment are well represented in Tunisia; necessary service facilities are available; competition is keen, and prices are competitive. Machinery and equipment to be purchased by the MA or its associated agencies would be procured through local channels on the basis of the best offer out of no less than three. The construction of collection facilities and simple workshops would be carried out after local competitive bidding had been announced in the local press, which allows foreign firms to participate; copies of each contract would be sent to the Bank. The technical assistance parts of the project would be provided by consultants whose quali- fications, experience and terms and conditions of employment shall be satis- factory to the Bank (Draft Loan Agreement, Section 3.04).  - 20 - Disbursements 66. The proposed Bank loan of $32 million would be disbursed over about six years beginning in early 1979 as follows: (i) 40 percent of expenditures for rural road works; (ii) 100 percent of foreign expenditures or 80 percent of total expenditures in local currency, for rural road maintenance equipment; (iii) 55 percent of expenditures for equipment for extension services; (iv) 100 percent of foreign expenditures or 75 percent of amounts disbursed by BNT for construction of simple agricultural facilities and the purchase of agricultural equipment; and (v) 75 percent of expenditures for consulting services and training. Monitoring and Evaluation 67. The Highway Department (DPC), the Agricultural Production Depart- ment (DPA) and the Planning Department (DPAEP) of the Ministry of Agriculture would prepare quarterly progress reports on the rural road improvements, purchases of maintenance equipment, the strengthening of the extension ser- vices, the provision of credit, the construction of collection and equipment facilities and the purchase of agricultural equipment. These reports would be consolidated into a single report by the Coordination Committee. During negotiations, the Government has agreed to prepare quarterly progress reports on the above matters and to send them to the Bank regularly (the first one within six months of Loan effectiveness date), as well as a project completion report within six months of the Loan closing date (Draft Loan Agreement, Section 3.09(c)(i) and (d)). Environmental Impact 68. The project would improve the rural environment by providing infra- structure in the form of rural roads, storage facilities and workshops and better access to markets and administrative centers. Since the roads are located in rural terrain and most of the improvements would take place on existing alignments, there would be little, if any, need to displace dwellings and their inhabitants. Benefits and Risks 69. The proposed project would support the high priority the Government attaches to regional and rural development and self-sufficiency in major food products by 1981. It has been designed as a pilot project for developing a country-wide rural roads program. Thus, one of its main benefits would be  - 21 - tnat the Government would have a consistent methodology for and approach to such a program. Successful project implementation would raise farm incomes, including those of many farmers now with annual incomes below the Bank's estimated absolute poverty level of US$191 per capita, and would also generate important demonstration benefits to other farmers. In addition. it would benefit families in the project areas through increased mobility on the part of children (better school aLttendance), school inspectors, social workers and health officials. It is estimated that about 60% of the population in the project areas belong to the rural poverty target group. 70. Under the highway sector lending approach economic rates of return of the additional subprojects (about 40) would be calculated after loan approval, according to a methodology and criteria acceptable to the Bank (paras. 52-53). The methodology and criteria have been developed during the preparation of the proposed project and have already been applied to appraise 19 road sections (about 400 km) and their complementary agricultural invest- ments (see para. 43). The economic rates of return of 18 of the 19 investment packages appraised range between 11 percent and 27 percent and would be con- sidered acceptable. Financial rates of return, based on six typical farm budgets of households deriving their incomes entirely from livestock and/or crop production, range from 9 percent to 53 percent and would also be accept- able. 71. The project's success will depend on the timely implementation of a variety of investments and activities by various agencies. There is a risk, therefore, that not all the potential project benefits might be achieved because of insufficient coordination and agency participation. This risk should, however, be lessened by the existence of the Coordination Committee whose membership comprises high-level officials of the principal participating agencies. Another type of risk lies in the fact that the experience of some participating agencies carrying out programs directed more intensively at low-income farmers is relatively recent. However, the detailed provisions made for project implementation and monitoring should help diminish this risk. Overall, the potential of the proposed project, especially its benefits for low-income people, make the project risks well worth taking. PART V - LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between the Republic of Tunisia and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii), of the Articles of Agreement are being distributed to the Executive Directors separately. 73. Special conditions of the project are listed in Section III of Annex III. Special conditions of effectiveness include: (i) the agreement with BNT has been executed and duly author- ized (Section 6.01(a) of the Draft Loan Agreement); and (ii) the Coordination Committee has been formally established (Section 6.131(b) of the Draft Loan Agreement).  - 22 - 74. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 75. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 2, 1978 Washington, D.C.  Anmex I Page 1 of 4 pages TUNISIA - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) ------------------------------------------------- TUNISIA REFERENCE COUNTRIES (1970) TOTAL 164.2 MOST RECENT AGRIC. 76.1 1960 1970 ESTIMATE JORDAN IRAQ GREECE*** ______________________________ ------------ ------------ ------------ GNP PER CAPITA (US$) 230.0* 370.0* 840.0* /a 350.0* 640.0* 1360.04 POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR. MILLION) 4.1 5.0 5.7 /a 2.3 9.4 8.8 POPULATION DENSITY PER SQUARE KM. 25.0 30.0 35*0 in 24.0 22.0 67.0 PER SQ. KM. AGRICULTURAL LAND 54.0 67.0 75.0 165.0 92.0 96.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 46.6 44.7 40.0 47.5 49.1 18.1 CRUDE DEATH RATE (/THOU,AV) 21.5 16.9 13.8 17.8 17.9 8.0 INFANT MORTALITY RATE (/THOU) .. 125.0 62.6 lb 36.3 /abc 104.0 29.6 LIFE EXPECTANCY AT BIRTH (YRS) 46.1 51.6 54.1 50.7 50.2 70.9 GROSS REPRODUCTION RATE 3.1 3.4 3.4 3.5 3.5 1.0 POPULATION GROWTH RATE (%) TOTAL 1 .8* 2.3** 2.3** 3.1 3.2 O. URBAN .. 3.0/a 4.7 . 6.0 1.5 URBAN POPULATION (% OF TOTAL) 35.6/fa 40.1/b 47.0 .- 58.0 62.6 AGE STRUCTJRE (PERCENT) 0 TO 14 YEARS 42.4 46.3 42.1 47.0 /a 48.0 24.9 15 TO 64 YEARS 52.6 50.2 53.8 49.5 / 48.0 64.0 65 YEARS AND OVER 5.0 3.5 4.1 3.5 E 4.0 11.1 AGE DEPENDENCY RATIO 0.9 1.0 0.9 1.0 /a 1.1 0.6 ECONOMIC DEPENDENCY RATIO 1.3/_ 1.B8 1.4 2.4 7-ad 1.8 /a FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) .. 112.2 281.5 USERS (% OF MARRIED WOMEN) .. 12.0 .. .. . EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 1400.0/a 1300.0/b 1880.0 350.0 /a 2700.0 LABOR FORCE IN AGRICULTURE (%) 69.07a 57.07E 37.4 33.0 S S2.0 UNEMPLOYED (% OF LABOR FORCE) 10.07a 12.07W 14.0 14.0 70 6.0 INCOME OISTRIBUTION % OF PRIVATE INCOME RECOD BY- HIGHEST 5% OF HOUSEHOLDS .. .. .. .. HIGHEST 20% OF HOUSEHOLDS .. .. .. .. LOWEST 20X OF HOUSEHOLDS .. .. .. LOWEST 40% OF HOUSEHOLDS .. .. .. DISTRIBUTION OF LAND OWNERSHIP ._____________________________ % OWNED BY TOP 10% OF OWNERS .. 53.0 /d .. % OWNED BY SMALLEST 10% OWNERS .. O.STd .. * * HEALTH AND NUTRITION POPULATION PER PHYSICIAN 10000.0 /C 5950.0 5560.0 /eaf 2680.0 3270.0 620.0 POPULATION PER NURSING PERSON .. 730.0 /e 670.0 7mg 1050.0 S490.0 1140.0 POPULATION PER HOSPITAL BED 360.0 /d 410.0 7 410.0 960.0 520.0 160.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 86.0 94.0Oj 94.0 /i 94.0 93.0 116.0 PROTEIN (GRAMS PER DAY) 54.0 63.0JR 67.0 71 60.0 62.0 99.0 -OF WHICH ANIMAL AND PULSE 13.0 14.0 E .. 18.0/e 17.01b 52.o/a DEATH RATE (/THOU) AGES 1-4 .. 1.5 /bi .. 5.0/b EDUCATION ADjUSTED ENROLLMENT RATIO PRIMARY SCHOOL 67.0 100.0 95.0 73.0/a 67.0 106.0 SECONDARY SCHOOL 13.0 23.0 18.0 33.07ia 24.0 66.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 13.0 13.0 13.0 12.0 12.0 12.0 VOCATIONAL ENROLLMENT (% OF SECONDARY) 24.0 12.0/h 28.0 3.0/a f 3.0 20.0 ADULT LITERACY RATE (%) .. . 55.0 *- 26.0 82.0 HOUSING PERSONS PER ROOM (URBAN) .. 2.7/b OCCUPIED DWELLINGS WITHOUT PIPED WATER (%) 60.0/b ACCESS TO ELECTRICITY (% OF ALL DWELLINGS) .. 24.0/b .. .. . RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) .. .. .. .. . CON SUMPTION RADIO RECEIVERS (PER THOU POP) 41.0 77.0 74.0 160.0 180.0 111.0 PASSENGER CARS (PER THOU POP) 11.0 13.0 18.0 7.0 7.0 26.0 ELECTRICITY (KWH/YR PER CAP) 84.0 155.0 233.0 72.0 291.0 1072.0 NEWSPRINT (KG/YR PER CAP) 0.3 0.1 0.1 0.3 0.3 1.6