Tunisia - Third Societe Nationale d'Investissement Project

6 /A- b ,u RESTR ICTED A i FILE COPY Report No. P - 7 54 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE NATIONALE D'INVESTISSEMENT WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA November 13, 1969  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROFOSED THIRD LOAN TO THE SOCIETE NATIONALE DIINVESTISSEMENT OF TUNISIA WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US $ 10 million to Soci6te Nationale d'Investissement (SNI). PART I - HISTORICAL 2. During 1965-1966 SNI was reorganized with a resulting substantial decrease of the Government shareholding to the present minority position and an extension of its activity from equity investment to both equity investment and medium and long term loans. As part of this reorganization, IFC made an investment of Dinars 300,000 (about $570,000) in SNI shares in May 1966 and the Bank made a loan of $5 million. To keep pace with the increase of SNIts lending activity, the Bank made a second loan of $10 million in September 1967. At the same time, the Swedish Government made a loan of about $3 million, two-thirds of which was to finance part of the local currency needs of SNI. Since these resources will be fully committed by the begin- ning of 1970, SNI has requested a $10 million loan from the Bank (a small part of which to be used for local expenditures) and has applied to the Swedish Government for a new loan along the lines of the previous one. 3. As of October 31, 1969, outstanding Bank loans and IDA credits amounted to $99.3 million ($66.9 million Bank and $32.4 million IDA), as summarized below:  -2- Loan or Amount (US $million) Credit Number Year Borrower Purpose Bank IDA Undisburse, 29 1962 Republic of Tunisia Education - 4.9 - 380 1964 Republic of Tunisia Port Develop- 7.0 - - ment 449 1966 Societe Nationale Development 5.0 - .5 dlInvestissement Finance Co. 94 1966 Republic of Tunisia Education - 13.0 6.3 484 1967 Republic of Tunisia Cooperative 12.0 - 8.9 Farms 99 1967 Republic of Tunisia Cooperative - 6.0o 4.4 Farms 512 1967 Societe Nationale Development 10.0 6 6.5 d'Investissement Finance Co. 573 1968 Office des Ports Transportation 8.5 - 8.4 Nationaux Tunisiens 581 1969 SONEDE Water Supply 15.0 - 14.9 606 1969 SNCFT Railways 8.5 - 8.4 150 1969 Republic of Tunisia Railways - 8.5 8.5 S2 1969 Republic of Tunisia Highway .9 - .9 Ehgineering Total (less cancellations) 66.9 32.4 of which has been repaid to Bank and others .9 Total now outstanding 66.o Amount sold 1.2 of which has been repaid .4 .8 Total now held by Bank and IDA 65.2 32.4 Total undisbursed 48.5 19.2 67.7 4. The slow disbursement of the cooperative farm loan and credit (TUi-484 and TUN-99) reflects organizational difficulties encountered in the execution of the project. Recent major changes in the Government's agricultural policy promise to bring about a more effective concentratior of effort on the Bank/IDA project. The Bank and IDA are following closely the progress of the project and are working with the Government of Tunisia to accelerate the pace of execution. The Port Loan (TTJi-573) signed in November 1968, became effective in April 1969. One large contract has been let, others are being let, actual work is expected to start this month and substantial disbursements should start soon.  3 5. In May 1966, IFC invested the equivalent of $570,o0o in the share capital of SNI, and in 1969, it invested $9.9 million in COFITOUR, Compagnie Financiere et Touristique ($8 million loan and $1.9 million share capital investment), a holding company for the promotion of tourism. In addition IFC has invested $1.5 million and lent $2.0 million to NPK-Engrais, a phosphate fertilizer company. 6. It is planned to provide financing for a water supply project before the end of the current fiscal year. Over the longer term, operations in new sectors such as tourism infrastructure and family planning are contemplated. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: Soci6t6 Nationale dtInvestissement (SNI) Guarantor: Republic of Tunisia Amount: The equivalent in various currencies of $10 million Purpose: To provide SNI with funds to finance projects carried out by private and public enterprises Amortization: The initial amortization schedule provides for repayment over 15 years, in 31 semi-annual payments beginning November 1, 1971 and ending May 1, 1987, but is subject to change in order ulti- mately to conform substantially to the aggregate of the amortization schedules for subloans and investments financed from the proceeds of the loan. - Interest rate: Seven per cent per annum Commitment charge: Three-fourths of one per cent per annum.  - 4 - PART III - THE PROJECT 8. An appraisal report entitled "Appraisal of Societe Nationale dlInvestissement" (DB-53) is attached. 9. During the past two years SNIts investinent and lending opera- tions have been expanding, the total increasing from D 2 million in 1966 to D 3.8 million in each of the years 1967 and 1968. Much of the increase was due to the booming tourism sector, financing for which has accounted for about 42% of SNIts commitments. The privately-owned manufacturing and service firmis financed were mainly of the small or medium size, characteristic of Tunisian private industry, and any signi- ficant expansion of SNIvs industrial operations depended on its ability to finance public enterprises. Accordingly, at the end of 1968 SNI's board of directors, with the approval of the Bank, decided to finance public enterprises up to a limit of 25% of its portfolio. 10. Most of SNIts financing has been in the form of straight loans, although equity investments have been important and accounted for over 30% of the total portfolio at the end of 1968. SNIts loan portfolio has few arrears, and its equity portfolio has greatly improved in quality in the past two years. The book value of the share capital at the end of 1968 was 160 percent of par, and its reserves amounted to D 1,017,000 equivalent to almost 20 percent of the loan and equity portfolio out- standing. 11. SNI now has a sizeable backlog of projects and in the one and a half year period from November 1969 to May 1971 it plans to commit about $20.5 million equivalent, of which perhaps about $6 million would be required for local currency expenditures. Taking into account the amount which SNI can raise locally and its expected earnings over the period, there is likely to remain a gap of $15 million. It is proposed to cover the gap by a $5 million loan from the Swedish Government and $10 million from the Bank. Of these amounts, some $1 million out of the Bank loan and $2 - $2.5 million from Sweden would be available for financing local expenditure. 12. SNI will continue to direct the major thrust of its activities to the private sector, but with scope for expansion in the private sector being narrow, SNI's ability to finance public enterprises will enable it to increase its total lending while keeping its portfolio in balance between tourism and industry. SNI intends to scrutinize with particular care all requests for finance by public enterprises and decisions to finance projects in the public sector will require the unanimous approval of SNI's Board.  13. It is proposed that SNI debt limit be raised from three to four times its equity, which is justified in view of the good quality of SNIJs portfolio and its adequate debt service coverage. In view of SNIts good performance in project evaluation, SNIIs free limit on private sector loans made out of Bank loans is to be increased from $100,000 to $200,000. However, any use of the Bank loan for loans to public enterprises is subject to Bank approval and may not exceed in total 35 percent of the Bank loan. SNIIs lending rate is currently 8-1/2 percent. Any exchange loss resulting from a change in the value of the Tunisian dinar in terms of other currencies would be borne by the Tunisian Government. 14. Since its reorganization in 1965-1966, SNI has been strength- ening its organization and improving the capability of its staff. Despite some turnover in management and staff, SNI has raised its standards of project appraisal while handling an increasing volume of business. Further staff strengthening is planned by SNI. A few months ago SNI's first President, Mr. Abdelaziz Mathari, took over the presidency of COFITOUR, while continuing to hold the presidency of Societe Tunisienne de Banque, Tunisia's largest commercial bank, and relinquished his presidency of SNI. He was replaced by Mr. Moncef Belkhodja, previously Director of Credit at the Central Bank and a director of SNI, who, since becoming president, has devoted 6nergetic attention to Sta's operations. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Loan Agreement between the Bank and SNI, the draft Guarantee Agreement between the Republic of Tunisia and the Bank, the Report of the Committee provided for in Article III Section 4 (iii) of the Articles of Agreement, and the text of a Resolution approving the proposed Loan are being distributed to the Executive Directors separately. The agreements follow closely the forms currently in use for loans to development finance companies. PART V - THE ECONOMY 16. A report on the economy of Tunisia was distributed to the Executive Directors on September 9, 1969 (9i4A 12-a). The conclusions and recommendations of this report remain valid, although there are two significant developments which are expected to affect some aspects of the Bank1s work in Tunisia. For some time the Bank had been dis- cussing with the Tunisian Government the implications of a Ministerial  - 6 - decision of January 1969, which envisaged the transformation into cooperatives of the entire agricultural sector. In September 1969, the Tunisian Government took the important step of modifying the January decision by providing for individual, as well as cooperative and state-owned, farms. The second development was the rains of unprecedented severity in September, which caused heavy damage in central and southern Tunisia, both in terms of human lives and of property. Floods washed out bridges and rail tracks throughout the area. The repair of this damage is causing some strain on the balance of payments. In addition, the interruption of rail services has stopped exports of phosphate rock and iron ore, and if this situation persists for any length of time, the effects on the balance of payments will be serious. 17. Broadly speaking, Tunisia has a well formulated development plan and is making adequate development efforts. Funds for financing the direct foreign exchange needs of important projects in the plan have been forthcoming in reasonable amounts, thanks to the support of the countries belonging to the Consultative Group, as well as that from the Bank and IDA. The development plan, however, requires funds in excess of the funds which are likely to be obtained from this financing and from domestic savings, and there is, thus, a need for the Bank Group and other foreign lenders to provide some foreign exchange in respect of local expenditures for viable projects. PART VI - COMPLIANCE WITH THE ARTICLES OF AGREEMENT 18. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII- RECOMMENDATION 19. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara Attachment President Washington, D.C. by J. Burke Knapp November 13, 1969