Tunisia - Export Development Project

Report No. PID7030 Project Name Tunisia-Export Development Project Region Middle East and North Africa Sector PSD Project ID TNPE55814 Borrower Republic of Tunisia Implementing Agency Ministry of Commerce PID Date October 30, 1998 Project Appraisal Date November 1998 Project Board Date March 30, 1999 Background Tunisia's export performance has been commendable in recent years, but traditional exports are facing severe competition in a changing global environment : manufactured exports growth rate in real terms has declined from 12.8t p.a. during 1987-91 to 4.0w p.a. during 1992-97. In addition, Tunisia's share in certain key export products has fallen in traditional export markets relative to that of new competitors. For example, in Men's and boy's clothing, Tunisia's share in the European Union (EU) imports has increased from 1.0t to 1.4t during 1988-97, while the same share for China has increased from 3.8w to 11.7t during the same period. Like many other countries in the 1970s and 1980s, Tunisia promoted its private sector by protecting it from internal and external competition, and by granting it tax and credit privileges. At the same time, it created the offshore sector to counter the anti-export bias of a protected domestic economy, that fueled the strong export performance during that period. The offshore sector accounts for about 80 percent of merchandise exports, but despite preferential access to the EU market, value added and profitability have been falling in the offshore sector. This has in part been due to the fact that Tunisian export manufacturers are increasingly being undercut by low-cost competitors in Asia and the Mediterranean. While this strategy has succeeded in facilitating Tunisia's entry into export markets, one consequence has been that the domestic manufacturing sector has not had the stimulus to competitiveness that normally results from external trade and competition, as the off-shore sector has few linkages to (except semi-skilled labor and some services), and takes virtually no tradable inputs from the domestic economy. Despite export incentives for partial and indirect exporters comparable to those for offshore firms, few onshore firms have entered into export market. There are two key concerns: (a) the success of the offshore sector exports is being undermined by intense competition from other emerging economies in Tunisia's traditional markets; and (b) the onshore sector has not developed export production and marketing capabilities, and will soon be exposed to severe competition from imports due to the free trade agreement (FTA) with the European Union (EU).  Project Objectives The major development objective is to enhance the ability of Tunisian private exporters, especially in the onshore sector, to integrate into the global economy. The proposed project would foster export competitiveness of Tunisian firms by mitigating some of the disadvantages they encounter relative to their foreign competitors (for example, export-related transactions costs and export financing constraints for small and medium exporters). Project Description The main components of the proposed project include: (a) improving access to export markets; (b) increasing access to preshipment export finance, especially for SMEs and first-time exporters; and (c) facilitating trade by reducing the number of import and export-related procedures and strengthening electronic commerce. The Bank assistance under the project would consist of financial and technical assistance to strengthen/develop enterprise support institutions, develop modern preshipment export finance guarantee mechanisms, and streamline trade procedures to expand exports. This assistance would be provided with a focus on promoting public-private partnership. Export Market Access Component. This component would possibly include (to be confirmed following the appraisal) a matching grant fund (Export Market Access Fund - EMAF) to cover on a temporary basis up to 50- of the cost of consultant services required to enable enterprises, especially small and medium enterprises in the onshore sector, to enter export markets. The EMAF would offer its services solely in response to private sector demand on a non- discriminatory and a first-come-first-served basis. The assistance would be provided once an export plan is developed by the enterprise and the entrepreneur has committed its own funds to implement it. The component also includes: (a) support for regulatory, procedural and institutional reforms to encourage the development of international trading companies; (b) support for a vendor development program to actively court vendor development managers, professional buyers and buying chains, and design companies; and (c) assistance to undertake design and viability study of trade service center to house commercial information facilities, advisory services, conferences, one- stop representation of trade support services, Centre de Promotion des Exportations (CEPEX) and international traders. Preshipment Export Finance Component. The project would support a Preshipment Export Finance Guarantee Facility (PEFG) whose purpose is to encourage financial institutions, through risk reduction, to lend (working capital finance) to emerging exporters holding confirmed overseas letters of credit or specified buyers' non-payment risk insurance for confirmed orders. The objective of the Export Finance Guarantee is to cover a portion of emerging exporters' non-performance risk in order to overcome a supply rigidity whereby the perceived risk of these exporters is greater than the actual risk. Eligible sub-loans financed by PEFG Facility would be guaranteed for 80- of the outstanding principal amount. Trade Facilitation Component. The project would provide support for investments and technical assistance required to reduce the number of procedures involved in trading activity with special emphasis on customs procedures and port and cargo handling. For this purpose a coordinating body ("TunisFaC" -- Tunisie Facilitation de Commerce) would be established to - 2-  implement a trade facilitation action plan. Existing projects such as the trade professional training study by UNCTAD, container storage survey by STAM, liasse unique and EDI message design/document redesign, Customs' SINDA redesign, plans for a training institute and plans for changes in container handling, in terms of operations, will all be integrated into this plan. Project Benefits The proposed project would assist private Tunisian exporters and non-exporters (specially SMEs and first-time exporters) through a package of micro-level interventions designed to put Tunisian exporters on equal footing with their international competitors. It would build on the GoT's trade reforms, initiated in the context of the Association Agreement with the EU. The interventions would be simple and quickly implementable, and the benefits would be measured in accordance with the key performance indicators for the project's development objectives and outputs. Export market access. Creating conditions for development of international trading companies and design and procurement offices, as well as establishing one or more trade service centers would help to assemble major buyers of Tunisian exports and to provide them with all the necessary information to conclude a purchase contract. As far as the proposed Export Market Access Fund (EMAF) is concerned, a review conducted by the OECD on a similar scheme in Britain found that about half of the firms from a sample of 420 firms that received cost-sharing grants over a 3-year period, were later able to use consultants at market prices, and 82t had begun implementing consultants' recommendations. Information from a sample of 36 matching grant supported activities in Indonesia shows that the first year of implementation achieved additional exports of US$ 36 for every US$1 of grant received. Export finance. The export guarantee scheme proposed under the project would help reduce credit risks of trade financing for small and first-time exporters, and would therefore enhance the willingness of the banking sector to expand the supply of trade finance. Trade facilitation. Trade simplification mechanisms proposed under the project would make trade-related transactions more efficient. Improving the information exchange between cargo handling and clearance activities (for example, electronic pre-clearance of imports and exports, pre-scheduling of transport, containers, ports and shipping facilitates) would help to simplify and streamline cargo clearance process, and therefore reduce the time taken in moving goods through ports and handling facilities. Project Implementation The overall responsibility for project implementation would be delegated to a "Project Coordination Unit" (PCU) within the Ministry of Commerce. The PCU would be in charge of coordinating the work of executing agencies for each of the project components, in accordance with the Project Implementation Plan, and with policies, criteria and methodologies specified in a Manual of Policies and Procedures, to be prepared and agreed upon during appraisal. The PIU would be headed by an experienced project coordinator and have administrative structures, processes, and staffing conducive to an efficient administration of the project. The organizational structure, processes, staffing and budgetary requirements for the PIU would be defined and agreed -3 -  upon prior to negotiations. Project Cost and Financing Total project costs are tentatively estimated at $ 44 million, with a Bank loan currently estimated at $31 million. The possibility of cofinancing for the project will be investigated from different sources (EU, EIB, bilateral donors) in the form of grants and/or loans. Lessons Learned from Past Operations in the Country/Sector The project's basic rationale is derived from cross-country experience showing that the simultaneous actions to facilitate market access to SME and potential exporters, reduce the barriers to access to working capital (preshipment) finance by SME and new exporters, and reduce and facilitate steps and procedures involved in trade transactions, are important to ensure success in export development. International experience has suggested that the effects of export development policies can be masked by the large one-time costs required to enter export markets - costs involved in finding information on export markets, upgrading product design and quality, adapting packaging and labeling to export markets, and establishing marketing channels. On the other hand, it is also found that once these market entry costs are met, such investments encourage a sustainable commitment to export markets by exporters as long as operating costs are covered. The proposed project, by addressing these market entry costs, would contribute to sustainable export development. Preshipment export finance. Many emerging economies have offered preshipment export finance guarantee (PEFG) schemes, to fill a gap in financial sector which would not willingly take SME's export manufacturing non-performance risks without PEFG schemes. PEFG schemes are even common in developed economies, such as the United States EXIM bank. However, like any other development policy instrument, the success or failure of a PEFG scheme has depended on its management efficiency. The lessons from successful cases (e.g., Korea, Taiwan, Mauritius) will be used in the design of the PEFG scheme under the project. The early lessons in some other economies, including Zimbabwe and South Africa, in which the Bank has recently helped put in place PEFG schemes, are also used in the design of this component of the project. Poverty Category Not applicable. Environmental Aspects Consistent with the requirements of OD 4.01, the project is proposed to be classified in environmental screening category "C". The project is not expected to have adverse environmental impacts. In addition, the environment component of an on-going Bank project (Private Industry Support Upgrading Project --PISUP) is expected to ensure that Tunisian exports meet the ISO- 14000 environmental standards. The progress under this component is satisfactory. The capacity of the existing and new technical centers developed under that project is expected to be available for the beneficiaries of the Export development Project to ensure compliance to environmental - 4 -  product standards in export markets. Project Risks Policy issues. The three key policy issues outlined in the export strategy note (in project files) should be addressed in parallel to the project: (a) reducing effective protection (resulting from the schedule of tariff reductions under the Association Agreement with the EU); (b) foreign investment regulations in the onshore sector; and (c) policies and measures complementary to trade liberalization. Institutional set up. Given the number of agencies and activities involved in the project, and the limited previous involvement in Bank projects by the Ministry of Commerce, there is a risk that institutional set up may become complicated and counter-productive. Program Objective Categories The proposed project, by enhancing the overall competitiveness of private industrial enterprises, directly addresses a wide array of private industry development issues. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending November 13, 1998. 1 / More than sixty percent of manufactured exports are textiles and garments, half of which are by offshore enterprises through subcontracting activities and are marketed overseas by foreign investors in offshore companies or foreign buyers. 2 / The recent currency depreciation and collapse of domestic demand in south east Asia is also adding to the competitive pressure in key export markets. 3 / Ninety percent of inputs of the offshore sector are sourced outside Tunisia (mainly through subcontracting). - 5 -