Tunisia - Fourth Societe Nationale d'Investissement Project

RESTRICTED Report No. DB-81a This report Ls for official use only by the Bank Group and specificaUly authorized organizations or personL It nmy not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsbility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF SOCIETE NATIONALE D'INVESTISSEMENT TUNISIA December 28, 1971 Development Finance Companies  CURRENCY EQUIVALENTS Currency = Dinar (D) Exchange Rate at Par Value - before December 23, 1971 D t.525 = US$ 1 D I = US$ 1.905 - since December 23, 1971 D 0.o4o = US$ 1 D 1 = US$ 2.066  APPRAISAL OF SOCIETE NATIONALE D'I INVTISEMENT Table of Contents BASIC DATA SARY ~~~~~~~~~~i--ii. I. INTRODUCTION 1 1.01 II. SNI'S ROLE IN THE EONOMY 1 - 7 2.01 - 2.22 Background 1 - 2 2.01 - 2.03 Recent Economic Developments 2 - 3 2.04 - 2.07 SNI as a Source of Financing 3 - 4 2.08 - 2.12 SNI as a Mobilizer of Resources 4 - 5 2.13 - 2.16 Characteristics of SNI's Investments 5 - 7 2.17 - 2.22 III. INSTITUTIONAL ASPECTS OF SNI 7 - 10 3.01 - 3.17 Shareholders 7 3.01 Bbard and Executive Comrittee 7 - 8 3.02 - 3.03 Management and Organization 8 - 9 3.04 - 3.12 Policies 9 - 10 3.13 - 3.15 Relations with the Governments Commercial Banks and Other Institutions 10 3.16 - 3.17 IV. OPERATIONS. PORTFOLIO AND FINANCIAL POSITION 11 - 13 4.01 - 4.10 Operations 11 4.01 Evaluation of Loan and Equity Portfolio 11 - 13 4.02 - 4.08 Profitability and Financial Position 13 4.09 - 4.10 V. OUTLOOK 14 - 17 5.01 - 5.14 Business Proupects 14 5.01 - 5.03 Forecast of Operations 15 5.04 - 5.05 Resources Needed 1q - 16 5.06 - 5.10 Financial Projections 16 - 17 5.11 - 5.14 VI. CONCLUSIONS AND RECOMMENDATIONS 18 - 19 6.01 - 6.o6 This report is based on the findings of two missions to Tunisia in February and August 1971, staffed by Messrs. Coudol and Hidalgo from the Development Finance Companies Department and Mr. Gray from the Controllers' Department.   LIST OF ANNEXES TUNISIA 1. Developments and Prospects in Tourism, 1963-1972 2. Gross Fixed Capital Formation in Manufacturing, 1968-1970, and Projections for 1971 SOCIETE NATIONALE DrINVESTISSEMENT 3. Long-Term Resources as of October 31, 1971 4. Ownership Structure Before and After Share Capital Increase Completed January 29, 1971 5. Analysis of Investments Approved, 1966-1970 6. Comparison of Projects Authorized under Loans 449, 512 and 648 7. Board of Directors and Executive Committee 8. Proposed Organization Chart (to be effective January 1972) 9. Statement of General Policies and Operations Adopted by the Board of Directors on July 4, 1966 and Amended on June 7, 1969 10. Equity Portfolio as of December 31, 1970 11. Income Statements, 1967-1970 12. Balance Sheets, 1967-1970 13. Forecast of Operations, 1971-1976 14. Projected Sources and Application of Funds, 1971-1976 15. Projected Income Statements, 1971-76, Actual 1970 16. Projected Balance Sheets, December 31, 1971-76, Actual December 31, 1970 17. Estimated Disbursement Schedule for the Proposed Bank Loan DFCD December 7, 1971   SOCIETE NATIONALE DINVESTISSEMENT BASIC DATA Year of Establishment: 1959 Year of Reorganization: 1965 % of Ownership (as of December 1, 1971) No. of Shares Total (D 5/share) Government, direct and indirect 145,787 24.2 Tunisian private institutions 50,365 o.5 Tunisian individuals 203,876 34.0 Total Tunisian 400,030 66.7 Foreign financial institutions 79,970 13.3 IFC 120,000 20.0 Total Foreign 199,970 33.3 Total Capital 60o,o0o 100.0 Bank Group Financing I. IFC INVESTMENTS IN SNI's SHARE CAPITAL Date Number of Cost Per Total Investment Investment No. approved Shares Share at Cost T-TUS$) (US $) 106 May 10, 1966 60,000 9.60 575,926 177 June 2, 1970 60000 1054632305 Total 120,000 10.07 1,208,231 II. IBRD Loans Status of Loans as of November 30, 1971 (in US$ '000) Authorized for Date Rate of Net withdrawal or Loan No. Signed Interest Amount credited Disbursed 449-TUN May 16, 1966 Variable 4,722 4,722 4,722 512-TITN Sept. 14, 1967 Variable 10,000 9,b46 8,810 648-TUN Dec. 24, 1969 7h 10,000 8,676 4,739  ii OPERATIONS (D million) Loans 1967 1960 1969 1970 1971 - - ~~~~~~~~(fiimonths) Approvals 3.7 3.3 4 4 6.6 5.9 Commitments 2.6 2.d 3.0 4.2 5.0 Disbursements 2.1 2.5 2.9 4.2 j.5 Equity Investments Subscriptions 0.2 0.4 1.0 0.3 0.2 Sales 0.4 0.2 0.1 0.4 0.1 FINANCIAL PERFORMANCE 1967 1968 1969 1970 1971 (as of October 31) Financial Position (D million) 1. Total Assets 6.4 7.6 10.8 14.9 17.8 of which Loan Portfolio (1-4) (3.7) (6.1) (9.0) (11.3) Equity Portfolio (1.6) (1.6) (2.2) (1.9) ( 2.1) 2. Total Equity 2.4 2.6 2.6 2.8 4.4 3. Long Term Debt 1.9 3.5 6.o 5.5 10.2 of which Bank Loans (0.7) (2.3) (4.1) (6.5) ( 8.2) 4. Long Term Debt/Equity 0.8 1.5 2.3 3.0 2.3 5. Long Term Debt/Equity as defined in Bank Loan Agreement 0.4 1.0 1.9 2.6 2.0 Financial Results (in %) (10 months) 1. Earnings before interest, tax and provisions as % of average total assets 3.4 3.9 5 J4 5.2 5.2 2. Profit before tax as X of average equity 6.7 7.2 7.6 6.7 6.6 3. Profit after tax as A of year-end share capital 10.6 12.0 13.2 8.9 4.4 4. Administrative costs as X of average total assets 1.9 1.o 1.4 1.3 1.3 5. Reserves and provisions as % of total portfolio 29.6 20.8 13.7 11.1 10.9 6. Book value as X of par 160 173 175 18 6 140 7. Dividend as A of par 4 4 5 6 _  SUMMARY i. This report brings up-to-date the situation and prospects of SNI which were described in detail two years ago in Report DB-53a, November 10, 1969. ii. SNI's operations, which are mainly in the private sector, have grolwn considerably since 1968; loan approvals in 1970 were about twice 1968 approvals. This trend is likely to continue. SNI's share of total investment in the economy has increased from less than 1% in 1966 to nearly 3% in 1970; SNI is contributing at present about 12% of total industrial and hotel investment in Tunisia. iii. Although there has been some deterioration in SNI's project work in the past two years, as a result of loss of senior staff, and a consequent increase in arrears, SNI's financial position continues to be sound. The increase in arrears caused SNI's auditors to qualify their opinion on SNI's 1970 accounts. However, SNI has ample provisions, and the risk of losses is not such as to imperil SNI's financial position; SNI is creditworthy. iv. In March 1974 Mr. Habib Bourguiba Jr. became President of SNI, replacing Mr. Moncef Belkhodja. Mr. Bourguiba has started to play a useful role in SNI. He has shoiwn great understanding of SNI's problems and set in motion steps to improve SNI's capabilities. Mr. Bourguiba appointed a new Deputy Director General, who has experience in commercial banking and hotel development, to carry out day-to-day management tasks. In addition, SNI has adopted a plan to carry out organizational improve- ments and to strengthen SNI's technical expertise in appraisal techniques. It is working, in consultation with the Bank, on developing suitable methods for improving economic analysis of projects. v. SNI has good business prospects. Its business forecast, based on these prospects, implies an increase of annual commitments from D 4.4 million in 1970 to D 8.5 million in 1976. The most recent Bank loan is expected to be fully committed in January 1972, and SNI needs additional funds to maintain its operations. SNI is attempting to diversify its resources. The proposed fourth Bank loan of $10 million, together with the resources which SNI expects to obtain from other sources, should enable SNI to carry its estimated financing program through the end of 1972. In mid-1972, the Bank will review progress made in improving SNI's organization, prior to considering further lending.  vi. The proposed loan should be made on the same terms and con- ditions as recent Bank loans to development finance companies, including the standard commitment charge. The free limit above which Bank approval of a project is required, should be maintained at $200,000. The aggre- gate free limit should be $2.5 million. The debt limit as defined in the previous loan agreement should be retained. The financing of public sector enterprises should not exceed 25% of the amount of the proposed loan.  APPRAISAL OF SOCIETE NATIONALE D'INVESTISSEMENT I. INTRODUCTION 1.01 The Societe Nationale d'Investissement (SNI), established in 1959 and reorganized in 1965 with the assistance of the Bank Group, has so far received three loans from the Bank totaling $25 million. The most recent loan, signed on December 24, 1969, amounted to $10 million; of this amount, $9.4 million have already been authorized for withdrawal. It is expected that the balance of the loan will be fully committed in the next few weeks. SNI therefore needs fresh capital soon. This report appraises SNI for a new loan of $10 million. II. SNI'S ROLE IN THE ECONOMY Background 2.01 Industrial Development. Tunisian industrial policies during the 1960's favored the development of large state-owned enterprises, primarily for capital intensive projects in import substitution products such as steel, refined oil, vehicles, tools and appliances, and secondarily, in upgrading natural resources like phosphate rock and other mineral ores. Since 1960, there has been little foreign investment, the Government' s participation has been dominant and the private sector has accounted for less than one sixth of total investment in manufacturing and mining. The results of these policies have been disappointing: (i) cumulative gross fixed investment in mining and manufacturing totaling D 192 million from 1960 to 1970, contrib- uted only D 39 million in increased value added during the period 1/, (ii) the contribution of manufacturing to GNP increased only from 11.4% in 1960 to 13% in 1970, and (iii) several public enterprises were not well conceived and, despite heavy tariff protection, very unprofitable, posing a burden for the Government's budget. 2.02 The private sector's industrial activities are generally small- scale and concentrated in mechanical industries, wood, paper and printing, food processing and more recently textiles. While the agreement of associa- tion with the EEC, effective since September 1, 1969, provides for free entry of 90% of Tunisia's industrial products into the EEC, there are now very few private sector projects which are export oriented. There has been little incentive for Tunisian entrepreneurs to invest in industrial projects catering to exports. 1/ An unusually high capital/output ratio in comparison with most other countries.  - 2 - 2.03 Development of Tourism. Over the past ten years, Tunisia has fostered a rapidly growing tourist industry with substantial and rising benefit to the economy. In the early years of tourism development, the Government participated directly in hotel construction through a public corporation, Societe Hoteliere Tunisienne de Tourisme (SHTT), which erected a chain of luxury and first-class hotels. During the past six years, how- ever, the Government has stepped aside and encouraged domestic and foreign private investments in hotel construction through tax incentives, interest rebates, subsidization of infrastructure work related to hotels, and pro- vision of promotional and planning services. Annex 1 shows the impressive achievements by the Tunisian tourism sector from 1963 to 1970. During this period, the number of available beds increased from 5,743 to 37,185, the number of visitor bed nights by over 33% annually, and gross foreign ex- change receipts from D 3.7 million to D 29 million; tourism became the leading foreign exchange earning sector for Tunisia. Preliminary statistics indicate that 1971 should be a record year with an increase in tourist arrivals of over 30% and of bed nights of about 50%. Recent Economic Developments 2.04 An analysis of the present economic situation in Tunisia appeared in the report "Current Economic Position and Prospects of Tunisia", which was distributed to the Executive Directors under R71-210, dated August 25, 1971. 2.05 Tunisia's economy has recovered slowly from the floods in the Fall of 1969. The increase in GDP in 1970 was only 3.6%, much lower than forecast. Agricultural output was about the same as in 1969 and industrial production was marginally higher; food processing industries were affected by low agricultural production and construction materials by a sudden discontinuation of exports to Libya. Tourism was severely affected by the floods, by several cases of typhus (1969) and cholera (1970) in the country and by the bankruptcy of two Swedish travel agencies, on which a number of Tunisian hotels were depending for a large share of their occupan- cy. While in 1970 the number of hotel beds available increased by 15% (see Annex 1), tourist bed-nights increased by only 11% (against 25% forecast). Although some well established hotels were able to operate profitably, most hotels which opened in 1969 and 1970 experienced difficulties. 2.06 Overal4 gross fixed capital formation remained at high levels, amounting to D 145 million, or 23% of GNP. Tourism and manufacturing accounted for D 30 million of investments. In fact, in 1970 investment in manufacturing decreased by 10%: the main subsectors affected were con- struction materials, food processing and textiles, while investment in chem- icals doubled as a result of the construction of a large phosphoric acid plant. Annex 2 shows the subsectoral distribution of investment in manufac- turing for 1968-1970 and an estimate for 1971.  2.07 Eonomic growth accelerated substantially in 1971 and GDP is likely to increase by about 8 percent. Due to good weather conditions, agricultural crops were excellent and this allowed a recovery in industrial food processing. Tourism expanded by about 33 percent. The Tunisian Govern- ment anticipates a continuation of the rapid growth in 1972. SNI as a Source of Financing 2.08 SNI has been active in the financing of two sectors, manufactur- ing and tourism. It is the main source of medium and long-term financing for private industry in Tunisia. It has played a major role in the devel- opment of the tourism sector, where it has also been the main source of long-term funds in the country. SNI's role in financing tourism is now shared with Compagnie Financiere et Touristique (COFITOUR), a tourir